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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, 1998
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 $0.10 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 Securities 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 19, 1999, the aggregate market value of the voting stock of
the Registrant held by non-affiliates of the Registrant was $168,917,578.
As of March 19, 1999, the number of outstanding shares of Common Stock,
par value $0.10 per share, of the Registrant was 18,482,118.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III is incorporated by reference to
portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission
within 120 days after the close of the 1998 fiscal year.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security-Holders 7
Item 4a. Executive Officers of the Registrant 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk 16
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
PART III
Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management 31
Item 13. Certain Relationships and Related Transactions 31
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 31
Signatures 36
This Report contains forward-looking statements, within the meaning of
Section 27A of the Securities Exchange 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.
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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 online providers of integrated database services and
related reports primarily to government and corporate markets. Government
customers include law enforcement and other government agencies. Corporate
customers include insurance companies, law firms, licensed investigation
companies, and other qualified entities. 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. (DBT) and The Information Connectivity
Group, Inc. (ICON), that comprise the Electronic Information Group (EIG). The
EIG is a national provider of online integrated database services and related
reports primarily to government and corporate markets. Government customers
include law enforcement and other government agencies. Corporate customers
include insurance companies, law firms, licensed investigation companies, and
other qualified entities. The EIG has developed proprietary software that
contains unique algorithms and utilizes advanced microprocessor-based technology
to search, locate, cross-reference, and retrieve current and historical public
records and publicly available information from multiple data sources. The EIG
allows its restricted customer base to access its system from desktop computers
through direct telephone modem connections or secure Internet connections to
generate reports that are delivered in an organized, comprehensive, and
easy-to-read format. The system simultaneously accesses a multitude of data
sources containing billions of records, as if they were part of a single
database, in preparing the computer-generated reports.
The EIG also develops custom solutions for its customer base to
automate specific database searches to generate reports.
Customers typically use EIG reports to help solve law enforcement
investigations; to find missing assets and persons, including children; to
detect and prevent criminal and civil fraud; and to assist in other consumer
protection services.
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(SM) products provide online access, from an investigator's
computer, 24 hours a day, seven days a week, to over 4 billion records composed
primarily of public records and publicly available information. Housed in two
separate data centers with a storage capacity of over 23 terabytes, EIG believes
this to be the largest collection of databases of its kind in the country. The
proprietary design of EIG's software
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allows investigators to undertake highly versatile searches starting with very
little information, and by cross-referencing massive databases, finish with an
extensive profile built into one comprehensive, easy-to-read report. Available
information includes, but is not limited to, first and last names, current and
past addresses, known associates, telephone numbers, professional liscenses,
birth dates, business profile reports, real estate, motor vehicles, and other
assets.
AUTOTRACKXP(SM) is EIG's new Windows(R) compatible product that allows
access to EIG's database warehouse using off-the-shelf Web browser technology
commonly found on today's personal computers. With an Internet browser such as
Netscape Navigator(R) or Microsoft Internet Explorer(R), qualified investigators
can access the information they need using Windows point-and-click technology.
Connection to AutoTrackXP is made by using a modem and any standard dial-up
software designed for connecting to the Internet. In addition to the
standardized interface, the multi-tasking Windows environment permits browsing
and running of multiple reports simultaneously, as well as allowing the
investigator to cut and paste information from the browser directly into other
open documents. With its HTML-based interface, anyone familiar with Internet
browsers can easily use and install AutoTrackXP in just minutes.
AUTOTRACKPLUS(SM) is EIG's original product. Qualified subscribers
access AutoTrackPLUS by "thin client" technology over an asynchronous modem
connection, and are able to search either national or state-specific databases.
Once an individual or corporation is located by EIG's system, the system will
automatically search other databases for information on the subject and combine
the data into a single report Since hundreds of databases could be searched to
build a report, compilation is conducted over several internal simultaneous
distributed processes, which speed report compilation dramatically.
Comprehensive database searches and in-depth report compilation are made
possible by EIG's proprietary indexing techniques.
AutoTrack 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, dates 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, 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
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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.
UCCS OF THE NATION. UCCs 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.
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 1998, the EIG maintained over 23
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 maximize 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.
CUSTOMERS
EIG has increased its customer base rapidly over the past four years,
from approximately 1,000 active customers in December 1994 to approximately
14,000 active customers in December 1998. An active customer is one who used
their system during the month.
Initially, EIG's products were used primarily by insurance companies to
investigate claims, and later were 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, 1998, the Company had
approximately 90 employees dedicated to receiving phone calls from potential
customers; 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
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governing use of and access to the EIG's products. A standard subscription
agreement includes a disclaimer of any warranties on the data and, except for
law enforcement and other government customers, an 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. The EIG
provides customers with any needed assistance on an ongoing basis, without
charge. This service is available 24 hours a day, seven 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 components of the AutoTrackXP
pricing structure are search and report fees, which range from $7.00 to $18.00.
The primary component of the AutoTrackPLUS pricing structure is a per-minute
connection fee. The per-minute fee currently ranges from $0.50 to $1.50 per
minute. The EIG does not currently charge an installation 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. Any regulations that limit access to information could have a
material adverse effect on the business, financial condition, and results of
operations of the Company.
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
balance 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
adopted 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.
PATENT ENFORCEMENT BUSINESS
The Company operates in the patent enforcement business through its
Patlex Corporation (Patlex) subsidiary, which has been engaged in the patent
exploitation and
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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" issued 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
that 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 time (from October 11, 1977, the issue date of the Optically
Pumped Laser Patent, through 1988) in which the most significant numbers 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 were an unappealable successful
challenge against the validity of the Gas Discharge Laser Patent, the impact
would be materially adverse to Patlex and the Company. See "Item 3. Legal
Proceedings."
There were no expenses relating to litigation of the Laser Patents
during 1998.
PATENT LICENSING AGREEMENTS
Patlex is the exclusive licensing agent for the Laser Patents. As
licensing agent, Patlex actively pursues its patent licenses, that 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 that 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 that 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, 1998, Patlex had agreements with a
total of 196 companies, including users and manufacturers representing a
cross-section of industries in the United States. Of such agreements, 149 were
licensing agreements with manufacturers
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who had an obligation to report and pay royalties on the sale of lasers or laser
systems that use the inventions claimed in the Laser Patents. The Company
believes the majority of the commercial laser 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 non-exclusive 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 11.6% and 9.0% of the Laser Patent royalties during the
fiscal year ended December 31, 1998. 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 is
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, that allows them to offer their products 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
that 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, 1998, the Company had 247 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.
ITEM 2. PROPERTIES
The Company's Electronic Information Group currently leases
approximately 150,000 square feet of office space in Boca Raton, Florida, to
conduct its business. The Company's patent enforcement business currently leases
approximately 3,000 square
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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, nor, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security-holders during the
quarter ended December 31, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Frank Borman 71 Chairman of the Board of Directors
Charles A. Lieppe 54 President and Chief Executive Officer
and Director
George A. Bruder, Jr. 43 Senior Vice President, Operations
Kevin A. Barr 39 Vice President, Human Resources
Thomas J. Hoolihan 42 Vice President and General Counsel
Timothy M. Leonard 40 Vice President, Finance,
Treasurer & Chief Financial Officer
J. Henry Muetterties 44 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, and American
Superconductor Corporation, and is also a member of the Board of Trustees of the
National Geographic Society.
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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. Lieppe spent the first 21
years of his career at the Proctor & Gamble Company.
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
Sheriff's office, from June 1982 to August 1994.
Mr. Barr was elected Vice President, Human Resources on February 18,
1998. From 1995 to 1997, Mr. Barr served in various capacities of Nabisco
International, most recently as Vice President, Human Resources of their Asia
Pacific operations in Singapore. From 1991 through 1995, Mr. Barr served in
various capacities for Dun & Bradstreet.
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., most recently as
Associate General Counsel - Corporate and Assistant Secretary.
Mr. Leonard was elected Vice President, Finance, Treasurer & 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 LLP 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 had been the Corporate Licensing Counsel for Patlex
since March 1988.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 Common Stock, for the indicated quarters of 1997 and 1998, as
reported on the Nasdaq Stock Market and the New York Stock Exchange.
HIGH LOW
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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
1998
First Quarter $33.38 $21.50
Second Quarter 28.25 21.44
Third Quarter 28.50 12.38
Fourth Quarter 25.94 12.63
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The number of record-holders of the Company's Common Stock as of March
19, 1999, was 507. 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.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company as of and for the
fiscal years ended December 31, 1998, 1997, 1996, 1995, and 1994, 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,
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1998 1997(2) 1996(1) 1995 1994
----------- ----------- ----------- ---------- ----------
STATEMENT OF OPERATIONS DATA
Revenues $46,913,000 $30,876,100 $16,321,300 $8,076,300 $2,751,100
Patent royalties 6,636,400 6,669,700 2,382,000
----------- ----------- ----------- ---------- ----------
Total revenues and
royalties 53,549,400 37,545,800 18,703,300 8,076,300 2,751,100
Cost of revenues 23,543,500 15,376,200 8,996,300 3,372,300 856,200
Selling and promotion 5,518,000 3,467,100 1,930,400 1,025,700 287,100
Research and development 3,077,600 2,364,000 2,052,300 1,017,000 552,700
General and administrative 14,029,600 8,716,800 4,814,800 1,908,100 609,900
Loss on IRB transaction 1,660,100
----------- ----------- ----------- ---------- ----------
Total expenses 46,168,700 29,924,100 17,793,800 8,983,200 2,305,900
----------- ----------- ----------- ---------- ----------
Income (loss) from
operations 7,380,700 7,621,700 909,500 (906,900) 445,200
Interest income
(expense), net 2,332,000 1,467,400 (159,100) (76,100) (15,400)
----------- ----------- ----------- ---------- ----------
Income (loss) before
income taxes 9,712,700 9,089,100 750,400 (983,000) 429,800
Provision for income taxes 3,010,900 3,090,900 231,000 208,700
----------- ----------- ----------- ---------- ----------
Net income (loss) $ 6,701,800 $ 5,998,200 $ 519,400 $(1,191,700) $ 429,800
=========== =========== =========== ============ ==========
Basic net income (loss)
per share $ .36 $ 0.35 $ 0.04 $ (0.13) $ 0.05
=========== =========== =========== =========== ==========
Basic weighted-average
shares outstanding 18,468,100 17,135,600 12,128,400 8,835,600 7,875,200
=========== =========== =========== =========== ==========
Diluted net income (loss)
per share $ 0.35 $ 0.33 $ 0.04 $ (0.13) $ 0.05
=========== =========== =========== =========== ==========
Diluted weighted-average
shares outstanding 19,132,300 18,015,100 12,354,600 8,835,600 7,875,200
=========== =========== =========== =========== ==========
AS OF DECEMBER 31,
---------------------------------------------------------------------------------
BALANCE SHEET DATA 1998 1997 1996 1995 1994
----------- ----------- ----------- ---------- ----------
Working capital (deficit) $53,393,900 $53,482,600 $ 4,207,500 $ 508,500 $ (4,400)
Total assets 90,513,100 84,608,500 29,556,000 6,557,200 1,524,500
Total debt 2,981,300 2,641,600 684,700
Stockholders' equity 82,763,900 75,647,100 18,230,500 2,598,400 552,300
- ----------------
(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.
10
13
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 online 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
Revenues of the Electronic Information Group (EIG) increased 51.9% to
$46,913,000 for the year ended December 31, 1998, from $30,876,100 for 1997. The
increase in EIG's revenues was attributable to an increase in the number of
active customers and new products EIG released. During 1998, active customers
(defined as customers accessing the system in a given month) increased 45.8% to
approximately 14,000 as of December 31, 1998, from 9,600 as of December 31,
1997. During 1997, active customers increased 62.7% to 9,600 active customers,
from 5,900 active customers as of December 31, 1996. In 1998, EIG's average
revenue per average active customer was approximately $3,100. By comparison, in
1997 and 1996, the average revenue per average active customer was $3,100 and
$3,000, respectively.
EIG's cost of revenues increased 59.6% to $21,835,000 in 1998, from
$13,678,100 in 1997. As a percentage of EIG revenues, cost of revenues increased
to 46.5% from 44.3% in 1997. In addition to the full-year effect of the
acquisition of The Information Connectivity Group, Inc. (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.
EIG's cost of revenues increased 63.3% to $13,678,100 in 1997, from
$8,374,300 in 1996, and decreased to 44.3% as a percentage of total EIG
revenues, from 51.3% in 1996. The increase was due primarily to increases in
both purchased data costs and depreciation expense.
EIG's selling and promotion expenses increased 59.2% to $5,518,000 in
1998, from $3,467,100 in 1997. The increase was primarily due to the acquisition
of ICON and increases in advertising, trade-show expenses, and costs related to
expanding the sales force. As a percentage of EIG revenues, selling and
promotion increased to 11.8% in 1998, from 11.2% in 1997.
EIG's selling and promotion expenses increased 79.6% to $3,467,100 in
1997, from $1,930,400 in 1996. The increase was primarily due to increases in
payroll and trade-show expenses. As a percentage of total EIG revenues, selling
and promotion decreased to 11.2% in 1997, from 11.8% in 1996.
11
14
The EIG's research and development expenses increased 30.2% to
$3,077,600 in 1998, from $2,364,000 in 1997. The EIG's research and development
expenses increased 15.2% in 1997 to $2,364,000, from $2,052,300 in 1996. 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 6.6% in 1998, from 7.7% in 1997 and 12.6% in 1996.
EIG's general and administrative expenses increased 69.5% in 1998 to
$13,004,300, from $7,673,300 in 1997. EIG's general and administrative expenses
increased 74.6% in 1997 to $7,673,300, from $4,395,800 in 1996. 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 increased to 27.7% in 1998, from 24.9% in
1997 and 26.9% in 1996.
PATENT ENFORCEMENT GROUP
Revenues of the Patent Enforcement Group (PEG) remained consistent at
$6,636,400 for the year ended December 31, 1998, compared to $6,669,700 for 1997
and $2,382,000 for the year ended December 31, 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 $1,708,500 in 1988, from $1,698,100 in 1997 and
$622,000 for the period from August 1996 through December 31, 1996, and
consisted solely of the amortization of its patents. The PEG's general and
administrative expenses decreased to $1,025,300 for the year ended December 31,
1998, from $1,043,500 in 1997 and $419,000 for the period from August 1996
through December 31, 1996.
OPERATING PROFIT
The EIG contributed $3,478,100 in operating profit for the year ended
December 31, 1998, compared to $3,693,600 in operating profit for the year ended
December 31, 1997, and with an operating loss of $431,500 for 1996. PEG
contributed $3,902,600 in operating profit for the year ended December 31, 1998,
compared to $3,928,100 and with $1,341,000 in 1997 and 1996, respectively.
On a consolidated basis, the Company's operating profit was $7,380,700
for the year ended December 31, 1998 compared to $7,621,700 and $909,500 for
1997 and 1996, respectively.
NET INTEREST INCOME (EXPENSE)
Net interest income was $2,332,000 in 1998, compared with $1,467,400 in
1997 and net interest expense of $159,100 in 1996. The net interest income in
1998 and 1997 was 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 31% in 1998, compared to
34% in 1997 and 32% in 1996. The 1998 effective tax rate was favorably impacted
by the effects of non-taxable investment income, a reduction in the Company's
valuation allowance, and a research and development tax credit offset by state
income taxes. 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.
12
15
NET INCOME
In 1998, the Company had net income of $6,701,800, compared with
$5,998,200 in 1997 and $519,400 in 1996. The increase in net income from 1997 to
1998 was due to significant increase in investment income and a reduction in the
effective tax rate in 1998. The increase in net income from 1996 to 1997 was due
to the acquisition of Patlex Corporation, a significant increase in investment
income, and a significant increase in EIG's operating profit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operations was $9,280,700 and $9,031,600
in 1998 and 1997, respectively. The Company's capital expenditures of
$14,433,700 and $6,421,100 in 1998 and 1997, respectively, were primarily
attributable to the acquisition of computer equipment for EIG and, in 1998,
related to the leasehold improvements and furniture and fixtures acquired in
connection with the relocation of the Company to its new headquarters in Boca
Raton, Florida. The Company had working capital at December 31, 1998, of
$53,393,900 (including cash and cash equivalents of $21,314,400), 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. 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.
THE YEAR 2000 ISSUE
The Year 2000 Issue is the issue of whether information and
non-information technology systems will be able to recognize and process
date-sensitive information in the year 2000. The Company relies, directly and
indirectly, on information technology systems--such as microprocessors,
proprietary operating systems, desktop computers, network hardware equipment,
and applications software--to operate its products; manage its business data;
and perform a variety of administrative services, including accounting,
financial reporting, payroll processing, processing, and invoicing. The Company
also relies on non-information technology systems, including office equipment,
security systems, and telephone systems, to carry out its day-to-day operations.
In addition, third parties material to the Company's operations, such as
suppliers, vendors, and customers, rely on information and non-information
technology systems to manage their businesses. All of these technology systems
could be affected by the Year 2000 Issue.
In order to obtain Year 2000 compliance certification from the
Information Technology Association of America, an independent industry
consortium, and minimize the risk of Year 2000-related losses, the Company began
conducting a comprehensive assessment of its Year 2000 Issues in August 1998.
The assessment has focused on five areas that, if affected by the Year 2000
Issue, could have a material adverse effect on the Company's operations. These
areas are: data storage, product software used by the Company's customers,
product software used internally by the Company, hardware, and non-information
technology systems. The following is a Year 2000 status report for each of these
areas, based upon the phase of the assessment completed to date.
13
16
DATA STORAGE
Of the Company's 15 data fields initially identified as not Year 2000
compliant, eight fields have been made Year 2000 compliant, and the remaining
seven fields will be brought into Year 2000 compliance prior to the original
target date of June 1999.
The Company has 115 historical data storage files containing date
codes. At least two of these files are not Year 2000 compliant. The
Company estimates that all of these files, along with the Company's
other historical data storage files, will be made Year 2000 compliant
by June 1999.
The Company has determined that some of its data files have been
incorrectly modified for Year 2000 compliance, which could cause
date-related errors. The Company is currently in the process of
producing DataLinks, a database that will allow it to identify those
files which were incorrectly modified. The Company expects to make all
of the improperly modified files Year 2000 compliant by June 1999. Once
operational, DataLinks will serve as the central Year 2000
information-gathering system for the Company, and will be used to
identify Year 2000 problems and to monitor adherence to the Company's
Year 2000 policies and procedures.
The Company is evaluating the necessity of reconfiguring all of the
date fields contained within its data storage files to make them Year
2000 compliant. If undertaken, this project would be completed by June
1999.
The Company is currently in the process of determining the time frame
and format in which vendors will begin supplying Year 2000-compliant
data to the Company. The Company estimates that data obtained from its
vendors will be Year 2000 compliant by September 1999.
PRODUCT SOFTWARE USED BY THE COMPANY'S CUSTOMERS
The Company's product software is divided into two types: software
written by the Company and commercial software written by third parties. The
following is an update on the Year 2000 status of each of these areas:
SOFTWARE WRITTEN BY THE COMPANY. Preliminary assessment has revealed
that the date-related codes contained in the software written by the
Company are generally Year 2000 compliant. Two software programs,
important to the Company's business and operations, AutoTrackPLUSSM and
AutoTrackXPSM, will be fully tested for Year 2000 compliance by June
1999. Any Year 2000 remediation efforts necessary in connection with
these programs will be completed by September 1999.
SOFTWARE WRITTEN BY THIRD PARTIES.
Version 8.0 of pcAnywhere, the software used to access AutoTrackPLUS,
has been certified as Year 2000 compliant by Symantec Corporation, its
manufacturer. Through testing, the Company has determined that earlier
versions of pcAnywhere (4.5 and 5.0 for DOS(R), 2.0 for Windows(R), and
7.5 for Windows) are also Year 2000 compliant, except for one two-digit
year display, which does not affect the operation of these versions.
However, the Company expects that in the coming months, many of its
customers, as part of their Year 2000 remediation efforts, will be
switching from the earlier versions of pcAnywhere to more updated, Year
2000-certified software programs, including AutoTrackXP.
Versions 4.0 and earlier of Microsoft Internet Explorer(R), also used
by the Company's customers, will not be tested for Year 2000 compliance
by Microsoft, the manufacturer. The Company expects that customers
using these earlier versions will bring their systems into Year 2000
compliance through Microsoft's
14
17
Website, which provides online upgrades of Microsoft Internet Explorer
at no cost.
Versions 3.x and 4.x of Netscape Navigator(R) are both Year 2000
compliant when used with the Windows 95 or later operating system,
according to Netscape. The Company expects that customers using earlier
versions of Netscape Navigator will bring their systems into Year 2000
compliance through Netscape's Website, which provides online upgrades
at no cost.
Third Party dialer applications used on the AutoTrackXP install disks
have been certified as Year 2000 compliant by the vendor.
PRODUCT SOFTWARE USED BY THE COMPANY
The Company has installed a real-time inventory system. The Company
will postpone upgrading commercial software used internally until late 1999, in
order to ensure that it obtains the most advanced versions possible.
HARDWARE
DESKTOP MACHINES. Most of the Company's 350 desktop machines are being
replaced with certified Year 2000 compliant Hewlett Packard desktops,
as part of a Company-wide computer upgrade program. Clocking for the
Company's computer network will be centralized through a new, Year
2000-compliant system. The system will control timekeeping for all
desktop machines and servers, and ensure that all date- and
time-related codes and functions used in hardware throughout the
Company's network remain Year 2000 compliant.
SUPPORT MACHINES. Support machines used by the Company are being
manually tested for Year 2000 compliance. The Company expects to
complete its Year 2000 assessment of these machines by March 1999.
SERVERS. Many of the Company's 373 computer servers have failed
real-time clock testing. However, results of the Company's
investigation indicate that this failure will not materially affect the
operation of the servers. Further Year 2000-related testing of the
servers will be conducted as a safeguard.
NETWORK HARDWARE. The Company's network hardware includes routers,
hubs, switches, CD-ROM towers, print servers, and communication
servers. Approximately 80% of this network hardware has been certified
as Year 2000 compliant by Hewlett Packard, its vendor. The remaining
20% has been certified as Year 2000 compliant by Cisco Systems.
COMMUNICATIONS HARDWARE. The Company's communications hardware includes
modems and DSU/CSUs. Modems do not perform date processing and,
therefore, do not have Year 2000-related problems. The DSU/CSUs are
digital modems that perform data processing for administrative purposes
only. The Year 2000 status of these digital modems will be evaluated
after other Year 2000 priority areas have been addressed.
NON-INFORMATION TECHNOLOGY SYSTEMS
PHONE SYSTEM. The Company's phone system has been certified as Year
2000 compliant by Siemens.
SECURITY SYSTEM. Security software has been certified as Year 2000
compliant. The vendor is in the process of testing the security
hardware for Year 2000 compliance.
15
18
OFFICE ENVIRONMENTAL SYSTEM. The Company's office environmental system
is currently manually controlled and Year 2000 compliant. However, new
automated controls for the environmental system are being installed.
The Company plans to test these controls for Year 2000 compliance.
TELEPHONE AND UTILITY SYSTEM. The Year 2000 status of the Company's
telephone and utility systems has not been assessed. The Company
expects that these systems will be made Year 2000 compliant by their
providers.
SUMMARY
The Company expects to be fully Year 2000 compliant and to obtain
certification of Year 2000 compliance from the Information Technology
Association of America by September 1999. Given the Company's plans to identify
and address its Year 2000 Issue, the Company does not believe that the Year 2000
Issue will have a material adverse effect on its business, results of
operations, or financial condition. The Company estimates that the total cost of
addressing its Year 2000 Issue will be approximately $300,000. All costs
associated with the remediation of the Year 2000 Issue will be expensed as
incurred. The Company will develop a contingency plan for dealing with Year 2000
Issues by September 1999.
RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE
The Company's failure to correct a material Year 2000-related problem
in its information or non-information technology systems could result in an
interruption in, or a failure of, certain normal business activities or
operations of the Company. Specifically, the Company's inability to bring
historical data files, date fields or information purchased from vendors into
Year 2000 compliance could have a material adverse effect on the business,
financial condition, and results of operations of the Company. In addition, the
Company is currently unable to predict the effect that the Year 2000 Issue will
have on its suppliers, or the extent to which the Company would be vulnerable to
its suppliers' failures to remediate their 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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, 1998 and 1997 18
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 19
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996 20
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Fort Lauderdale, Florida
February 15, 1999
17
20
DBT ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31,
-----------------------------------
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $21,314,400 $ 7,689,800
Accounts receivable, less allowance:
1998, $384,200; 1997, $330,000 8,401,000 4,448,800
Short-term investments 25,840,200 44,207,200
Prepaid expenses and other current assets 2,139,900 1,681,300
Prepaid income taxes 217,300
----------- -----------
Total current assets 57,695,500 58,244,400
Property and equipment, net 18,247,100 9,034,000
Patents, less accumulated amortization:
1998, $4,012,400; 1997, $2,317,300 9,830,400 11,525,400
Goodwill, less accumulated amortization:
1998, $1,170,200; 1997, $344,200 4,637,000 5,463,100
Other assets 103,100 341,600
----------- -----------
TOTAL ASSETS $90,513,100 $84,608,500
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 2,501,200 $ 3,766,600
Due to other patent interest holders 1,394,500 995,200
Income taxes payable 405,900 --
----------- -----------
Total current liabilities 4,301,600 4,761,800
DEFERRED INCOME TAXES 3,447,600 4,199,600
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.10 par value,
5,000,000 shares authorized; no
shares issued or outstanding
Common stock, $0.10 par value, 100,000,000 shares and
40,000,000 shares authorized at December 31, 1998
and 1997, respectively. 18,473,416 shares and
18,388,626 shares issued and outstanding at
December 31, 1998 and 1997, respectively. 1,847,300 1,838,900
Additional paid-in capital 68,971,200 68,564,600
Retained earnings 11,945,400 5,243,600
----------- -----------
Total stockholders' equity 82,763,900 75,647,100
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $90,513,100 $84,608,500
=========== ===========
See Notes to Consolidated Financial Statements.
18
21
DBT ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenues $46,913,000 $30,876,100 $16,321,300
Patent royalties 6,636,400 6,669,700 2,382,000
----------- ----------- -----------
Total revenues and royalties 53,549,400 37,545,800 18,703,300
----------- ----------- -----------
Cost of revenues 23,543,500 15,376,200 8,996,300
Selling and promotion 5,518,000 3,467,100 1,930,400
Research and development 3,077,600 2,364,000 2,052,300
General and administrative 14,029,600 8,716,800 4,814,800
----------- ----------- -----------
Total expenses 46,168,700 29,924,100 17,793,800
----------- ----------- -----------
Income from operations 7,380,700 7,621,700 909,500
Interest income (expense), net 2,332,000 1,467,400 (159,100)
----------- ----------- ----------
Income before income taxes 9,712,700 9,089,100 750,400
Provision for income taxes 3,010,900 3,090,900 231,000
----------- ----------- ----------
Net income $ 6,701,800 $ 5,998,200 $ 519,400
=========== =========== ==========
Net income per share (basic) $ 0.36 $ 0.35 $ 0.04
=========== =========== ==========
Weighted-average shares
outstanding (basic) 18,468,100 17,135,600 12,128,400
=========== =========== ===========
Net income per share (diluted) $ 0.35 $ 0.33 $ 0.04
=========== =========== ===========
Weighted-average shares
outstanding (diluted) 19,132,300 18,015,100 12,354,600
=========== =========== ===========
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, 1996 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
Exercise of stock options 75,105 7,500 164,600 172,100
Stock issued for employee
benefit plan 9,685 900 242,000 242,900
Net income 6,701,800 6,701,800
----------- ----------- ----------- ----------- -----------
BALANCE at December 31, 1998 18,473,416 $1,847,300 $68,971,200 $11,945,400 $82,763,900
=========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
20
23
DBT ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996
----------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,701,800 $ 5,998,200 $ 519,400
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 7,741,700 5,586,600 3,016,500
Deferred income taxes (752,000) (139,600) (536,000)
Stock issued for employee benefit plan 242,900
Tax benefit of stock options 242,100
Stock options issued for services 355,000
Changes in operating assets and liabilities:
Accounts receivable (3,952,200) (1,866,300) (922,000)
Prepaid expenses and other current assets (458,600) (1,193,800) (159,300)
Accounts payable and accrued liabilities (1,265,400) 1,656,000 (11,700)
Due to other patent interest holders 399,300 (416,100) 120,800
Income taxes 623,200 (835,500) (996,200)
----------- ----------- ----------
Net cash provided by
operating activities 9,280,700 9,031,600 1,386,500
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment purchased (14,433,700) (6,421,100) (5,300,700)
Cash (used) acquired in acquisition (2,487,300) 8,505,100
Decrease in other assets 238,500 101,600 49,300
Proceeds from sales or maturities
of investments 18,367,000
Purchases of short-term investments (44,207,200)
----------- ----------- ----------
Net cash (used in) provided by
investing activities 4,171,800 (53,014,000) 3,253,700
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 46,812,000
Net change in bank line-of-credit (200,000) 100,000
Proceeds from exercise of stock options 172,100 875,900 143,000
Proceeds from long-term debt borrowings 1,500,000
Repayments on long-term debt (2,781,300) (1,260,300)
Repayment on note payable, shareholder,
and other 200,000
Net cash provided by
financing activities 172,100 44,706,600 682,700
----------- ----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,624,600 724,200 5,322,900
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 7,689,800 6,965,600 1,642,700
----------- ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $21,314,400 $ 7,689,800 $ 6,965,600
=========== =========== ===========
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 online,
real-time access to public records. The Company, through its Patlex Corporation
(Patlex) subsidiary, is involved in the patent enforcement and exploitation
business, whereby the Company collects royalty fees from a group of laser
patents.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The Consolidated Financial Statements
include the accounts of 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 three to 10 years. Expenditures
for routine maintenance and repairs are charged to expense as incurred.
PATENTS AND GOODWILL. The patent costs are amortized on a straight-line
basis over the remaining lives of the patents. Goodwill is amortized on
a straight-line basis over 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, that management has committed
to a plan to dispose, whether by sale or abandonment, are reported at
the lower of carrying amount or fair value, less cost to sell.
Preparation of estimated expected future cash flows is inherently
subjective and is based on management's best estimate of assumptions
concerning future conditions.
REVENUE RECOGNITION. The Company recognizes revenue at the time of
customer access. Accounts receivable are primarily with law enforcement
agencies, insurance companies, law firms, and other licensed
investigation companies. Patent royalties are recognized pursuant to
license agreements that require the licensees to periodically report
activity to the Company. The Company's customers are numerous and
spread over a wide geographic area. As such, the
22
25
Company believes that it does not have an abnormal concentration of
credit risk within any one market or any one geographic area.
RESEARCH AND DEVELOPMENT COSTS. Costs for research and development
activities are expensed as incurred, and aggregated $3,077,300,
$2,364,000, and $2,052,300 for years ended December 31, 1998, 1997, and
1996, 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. Short-term investments are
classified as available-for-sale and are carried at fair value.
NET INCOME PER SHARE. Basic net income per share is determined by
dividing net income by the weighted-average shares outstanding. Diluted
net income per share is determined by dividing net income by the
weighted-average shares outstanding including the effect of stock
options, if dilutive. The weighted-average number of shares for stock
options included in the diluted weighted-average shares outstanding
were 664,200, 879,500, and 226,200 in 1998, 1997, and 1996,
respectively.
NEW ACCOUNTING PRONOUNCEMENT. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No.
130 (SFAS No. 130), Comprehensive Income. This standard is effective
for financial statements for fiscal years beginning after December 15,
1997. Other comprehensive income refers to revenue, expenses, gains,
and losses that under generally accepted accounting principles are
included in comprehensive income but are excluded from net income, as
these amounts are recorded directly as an adjustment to stockholders'
equity. The components of comprehensive income are not significant,
individually or in the aggregate, and therefore, no separate statement
of comprehensive income has been presented.
RECLASSIFICATIONS. Certain amounts have been reclassified to conform
with the 1998 presentation.
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
23
26
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.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
AT DECEMBER 31,
-------------------------------
1998 1997
------------ ------------
Computer equipment $ 21,412,100 $ 15,209,300
Office furniture and equipment 1,406,300 795,500
Leasehold improvements 7,497,900 277,300
------------ ------------
Total cost 30,316,300 16,282,100
Less: Accumulated depreciation (12,069,200) (7,248,100)
------------ ------------
Property and equipment, net $ 18,247,100 $ 9,034,000
============ ============
Depreciation expense was $5,220,600, $3,547,300, and $2,394,200 for the
years ended December 31, 1998, 1997 and 1996, respectively.
4. SHORT-TERM INVESTMENTS
At December 31, 1998 and 1997, short-term investments consisted of the
following:
AT DECEMBER 31,
----------------------------
1998 1997
----------- -----------
State and municipal bonds (including accrued
interest of $1,000,200 and $544,300 as of
December 31, 1998 and 1997, respectively) $25,840,200 $37,026,500
Certificates of deposit (including accrued
interest of $85,700 as of December 31, 1997) 7,180,700
----------- -----------
Total $25,840,200 $44,207,200
=========== ===========
STATE AND MUNICIPAL BONDS. The Company has investments in state and
municipal bonds that are classified as available-for-sale and are
carried at fair value. There were gross unrealized gains of $51,800 and
gross unrealized losses of $78,500 as of December 31, 1998. There were
approximately $66,000 of gross unrealized gains and losses as of
December 31, 1997, with respect to such securities. During 1998, there
were $276,000 in realized gains on the sale of securities. Cost is
determined based on specific identification. During 1997,
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27
there were no sales of any of the Company's state and municipal bonds.
At December 31, 1998, these investments have contractual maturities as
follows:
Within 1 year $ 4,165,700
After 1 through 5 years 17,969,300
After 5 through 10 years 1,542,000
After 10 years 2,163,200
-----------
Total $25,840,200
===========
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, 1998 were as
follows:
Florida $10,408,300
Washington 2,057,600
New Mexico 1,315,300
Maryland 1,088,100
Nevada 1,066,700
Maine 1,032,100
Texas 1,030,500
Illinois 1,016,000
Others 6,825,600
-----------
Total $25,840,200
===========
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.
6. INCOME TAXES
Significant components of the provision for income taxes are as
follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
----------- ----------- -----------
Current
Federal $ 3,451,800 $ 2,980,500 $ 667,000
State 311,100 250,000 100,000
----------- ----------- -----------
3,762,900 3,230,500 767,000
Deferred
Federal (718,600) (121,000) (492,700)
State (33,400) (18,600) (43,300)
----------- ----------- -----------
(752,000) (139,600) (536,000)
----------- ----------- -----------
Provision for income taxes $ 3,010,900 $ 3,090,900 $ 231,000
=========== =========== ===========
Deferred income taxes reflect the net income tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
25
28
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, 1998 and
1997, are as follows:
AT DECEMBER 31,
-----------------------------
1998 1997
----------- -----------
Deferred tax liabilities
Patents $ 3,608,500 $ 4,120,900
Cash basis accounting 36,700 66,300
Purchased data 300,400 291,800
----------- -----------
3,945,600 4,479,000
Deferred tax assets
Depreciation 62,100 90,100
IRB loss carry forward 308,100 400,000
Reserves and other 327,900 189,300
----------- -----------
698,100 679,400
Valuation allowance (200,100) (400,000)
----------- -----------
Net deferred income tax liability $ 3,447,600 $ 4,199,600
=========== ===========
The Company has a capital loss carry-over of approximately $900,000 for
tax purposes, which expires in 2000. The related deferred tax asset has been
partially offset by a valuation allowance, as the Company initiated certain
tax-planning strategies that may result in utilizing this loss carry-over.
The reconciliation of income tax computed at the federal statutory rate
to income tax expense is as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
---- ---- ----
Federal statutory rate 34% 34% 34%
Non-deductible merger expenses 7
Tax-exempt investment income (2) (1)
Research and development credit (1) (1) (15)
State income taxes, net of federal income tax benefit 2 1 6
Benefit of capital loss carry forward (2)
Other 1
--- --- ---
31% 34% 32%
=== === ===
The Company paid income taxes of $3,155,200, $3,823,500, and $1,809,200
in 1998, 1997, and 1996, respectively.
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company may be involved in litigation from time to time in the
ordinary course of its business. The Company is not currently involved in any
litigation, or to its knowledge, is any litigation currently threatened that
could have a material effect on its financial position or results of operations.
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
26
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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
effective April 1, 1997. The 1998 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 1998
annual compensation rate for Mr. Lieppe was $250,000.
LEASES
The Company leases all of its office space under agreements expiring on
various dates through 2007. These leases contain three-year renewal options
ranging from three to 10 years.
Future minimum payments under operating leases that have non-cancelable
terms in excess of one year are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
1999 $ 421,000
2000 1,022,600
2001 1,028,300
2002 1,037,200
2003 1,086,700
Thereafter through 2009 5,723,000
-----------
Total $10,318,800
===========
Rent expense was $896,400, $568,000, and $327,700, respectively, for
the years ended December 31, 1998, 1997, and 1996.
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8. STOCK OPTIONS AND BENEFIT PLAN
STOCK OPTIONS
The Company has incentive and non-qualified stock option plans for
directors and key employees, and has 6,000,000 shares of common stock reserved
for issuance under these plans. The incentive and non-qualified options become
exercisable as determined by the Board of Directors, and have a term of 10
years.
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
Canceled (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
Canceled (186,333) $ 18.81
---------- --------- ----------
Outstanding at Dec. 31, 1997 630,500 $ 2.38 1,925,001 $ 21.16 220,000 $ 28.97
Granted 260,000 $ 20.84 86,000 $ 28.44
Exercised (72,605) $ 2.38
Canceled (36,000) $ 20.00
---------- --------- ---------- --------- ---------- ---------
Outstanding at Dec. 31, 1998 557,895 $ 2.38 2,149,001 $ 21.16 306,000 $ 28.82
========== ========= ========== ========= ========== =========
Exercisable at Dec. 31, 1998 557,895 $ 2.38 737,035 $ 21.76 55,417 $ 28.89
========== ========= ========== ========= ========== =========
The options with a $2.38 weighted-average exercise price have a
weighted-average remaining contractual life of 6.8 years; those with a
weighted-average exercise price of $21.16 (range of $16.00-$23.63) have a
weighted-average remaining contractual life of 8.4 years; and those with a
weighted-average exercise price of $28.82 (range of $26.00-$32.13) have a
weighted-average remaining contractual life of 8.9 years.
In addition, there were 6,768 options outstanding at December 31, 1998
(all exercisable), for which no consideration will accrue to the Company. A
total of 2,500, 54,024, and 664 of such options were exercised in 1998, 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 that equal the market price of the Company's
common stock on the date of grant and, consequently, no compensation expense is
recognized.
The Statement of Financial Accounting Standards No. 123 (SFAS No. 123)
requires entities that account for awards for stock-based compensation to
employees in accordance with APB No. 25 to present pro forma disclosures of net
income and earnings per share as if compensation cost was measured at the date
of grant based on the fair value of the award. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions:
1998 1997 1996
---- ---- ----
Risk-free interest rate 6.5% 6.5% 6.5%
Dividend yield none none none
Volatility factors 57% 43% 47%
Weighted-average expected life 5 years 5 years 5 years
28
31
The weighted-average fair value per option granted during 1998, 1997,
and 1996, was $16.79, $10.17, and $8.65, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the 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, 1998, 1997, and
1996, as follows:
1998 1997 1996
---- ---- ----
Net income
As reported $6,701,800 $5,998,200 $ 519,400
Pro forma 3,230,300 3,933,800 179,400
Net income per share (diluted)
As reported $ 0.35 $ 0.33 $ 0.04
Pro forma 0.17 0.22 0.01
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 that is available to
substantially all of its employees. The Company provides a match of 66% of the
employees' contribution, with a maximum benefit of up to 4% of eligible
compensation in the form of Company common stock. Contribution expense was
$303,300 and $81,800 in 1998 and 1997, respectively.
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9. BUSINESS SEGMENTS
The Company's reportable segments, namely electronic information and
patent enforcement, are organized based on their products and services.
Information concerning the segments in which the Company operates is shown in
the table below. Operating profit is derived as total revenues less operating
expenses; interest expense and general corporate expenses have not been
considered. Identifiable assets by segment are those assets that are used in the
Company's operations in each segment. General corporate assets consist primarily
of cash and cash equivalents and short-term investments. Substantially all
revenues are derived from, and its assets located in, the United States of
America.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenues:
Electronic information $46,913,000 $30,876,100 $16,321,300
Patent enforcement 6,636,400 6,669,700 2,382,000
----------- ----------- -----------
Consolidated revenues $53,549,400 $37,545,800 $18,703,300
=========== =========== ===========
Operating profit:
Electronic information $ 4,948,700 $ 4,529,100 $ 194,700
Patent enforcement 3,902,600 3,928,100 1,341,000
----------- ----------- -----------
Segment operating profit 8,851,300 8,457,200 1,535,700
Interest income (expense) 2,332,000 1,467,400 (159,100)
General corporate expense (1,470,600) (835,500) (626,200)
----------- ----------- -----------
Consolidated income before income taxes $ 9,712,700 $ 9,089,100 $ 750,400
=========== =========== ===========
Identifiable assets:
Electronic information $31,713,500 $21,658,600 $ 9,000,900
Patent enforcement 18,769,000 17,688,600 20,292,500
----------- ----------- -----------
Total identifiable assets 50,482,500 39,347,200 29,293,400
General corporate assets 40,030,600 45,261,300 262,600
----------- ----------- -----------
Consolidated assets $90,513,100 $84,608,500 $29,556,000
=========== =========== ===========
Capital expenditures:
Electronic information $14,426,800 $ 6,414,600 $ 5,277,400
Patent enforcement 6,900 6,500 23,300
----------- ----------- -----------
Consolidated capital expenditures $14,433,700 $ 6,421,100 $ 5,300,700
=========== =========== ===========
Depreciation and amortization of
identifiable assets:
Electronic information $ 6,033,200 $ 3,891,500 $ 2,388,200
Patent enforcement 1,708,500 1,695,100 628,300
----------- ----------- -----------
Consolidated depreciation and
amortization $ 7,741,700 $ 5,586,600 $ 3,016,500
=========== =========== ===========
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12, AND 13.
The information required under these items is contained in the
Company's 1999 Proxy Statement, which will be filed with the Securities and
Exchange Commission within 120 days after the close of the Company's fiscal
year. 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 STATEMENTS SCHEDULES
SCHEDULE II--Valuation and Qualifying Accounts
DBT ONLINE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE
----
Report of Deloitte & Touche LLP, Independent Auditors 32
Schedule II--Valuation and Qualifying Accounts 33
Schedules I, III, and IV are not required to be filed.
31
34
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, 1998 and 1997, and for each of
the three years in the period ended December 31, 1998, and have issued our
report thereon dated February 15, 1999; 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
February 15, 1999
32
35
DBT ONLINE, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
CHARGED TO WRITE-OFFS
BEGINNING STATEMENT OF OTHER AND OTHER ENDING
DESCRIPTION BALANCE OPERATIONS INCREASES ADJUSTMENTS BALANCE
- ----------- ------- ---------- --------- ----------- -------
Year ended December 31, 1996
Allowances for uncollectible (1)
accounts $ 17,500 $ 49,900 $200,000 $ (17,400) $250,000
======== ======== ======== ========= ========
Year ended December 31, 1997
Allowances for uncollectible (2)
accounts $250,000 $ 95,000 $ 25,000 $ (40,000) $330,000
======== ======== ======== ========= ========
Year ended December 31, 1998
Allowances for uncollectible
accounts $330,000 $144,300 $ 0 $ (90,100) $384,200
======== ======== ======== ========= ========
- ----------------
(1) Represents the allowance established in connection with the acquisition
of Patlex Corporation.
(2) Represents the allowance established in connection with the acquisition
of The Information Connectivity Group, Inc.
33
36
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 Ltd.,
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***
10(xiii)* Lease (For Boca Raton, Florida Location)
10(xiv)* Employment Agreement dated February 4, 1998, between DBT
Online, Inc. and Kevin Barr***
21* Subsidiaries
23.1* Consent of Deloitte & Touche LLP
27* Financial Data Schedule (for Securities and Exchange
Commission 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.
34
37
(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.
35
38
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 26, 1999
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 report 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 re-substitution,
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 26, 1999
Frank Borman Directors
/s/ Charles A. Lieppe President, Chief Executive March 26, 1999
Charles A. Lieppe Officer and Director
/s/ Timothy M. Leonard Vice President, Finance March 26, 1999
Timothy M. Leonard (Principal Financial
and Accounting Officer)
/s/ Charles G. Betty Director March 26, 1999
Charles G. Betty
/s/ Jerold E. Glassman Director March 26, 1999
Jerold E. Glassman
/s/ Gary E. Erlbaum Director March 26, 1999
Gary E. Erlbaum
/s/ Jack Hight Director March 26, 1999
Jack Hight
/s/ Ken Langone Director March 26, 1999
Ken Langone
/s/ Bernard Marcus Director March 26, 1999
Bernard Marcus
/s/ Andrall E. Pearson Director March 26, 1999
Andrall E. Pearson
36
39
/s/ Thomas J. Quarles Director March 26, 1999
Thomas J. Quarles
/s/ Eugene L. Step Director March 26, 1999
Eugene L. Step
/s/ Sari Zalcberg Director March 26, 1999
Sari Zalcberg
37