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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended JUNE 30, 1996
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 0-9111
DBT ONLINE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.)
Pennsylvania 85-0439411
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(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
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(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:
None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.10 per share
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days:
YES [X*] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for the most recent fiscal year ended June 30, 1996 were
$7,978,000.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of such stock as quoted on
September 19, 1996 was $88,356,802. For purposes of making this calculation
only, the registrant has defined affiliates as including all directors, senior
executive officers and beneficial owners of more than ten percent of the common
stock of the Company.
The number of shares of the registrant's common stock outstanding as of
September 19, 1996 was 7,723,474.**
* The Company was formerly a wholly-owned subsidiary of Patlex Corporation, a
Pennsylvania corporation ("Patlex"). On August 20, 1996, the former shareholders
of Patlex voted to approve a Plan of Merger and Reorganization (the
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"Reorganization") pursuant to which Patlex was reorganized into a holding
company structure and each share of Patlex common stock outstanding was
converted into one share of common stock of the Company. As a result of the
Reorganization, Patlex became a wholly-owned subsidiary of the Company. Pursuant
to Rule 12g-3 of the Securities Exchange Act of 1934, the Company is the
successor issuer to Patlex.
**On August 20, 1996, a wholly-owned subsidiary of the Company merged with
Database Technologies, Inc., a Florida corporation ("DBT") and DBT became a
wholly-owned subsidiary of the Company. In the merger, each share of DBT common
stock was converted into approximately 2.95 shares of common stock of the
Company.
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TABLE OF CONTENTS
PAGE
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PART I....................................................................... 1
Item 1. Description of Business............................................ 1
Item 2. Description of Property............................................ 6
Item 3. Legal Proceedings.................................................. 6
Item 4. Submission of Matters to a Vote of Security Holders................ 7
PART II...................................................................... 7
Item 5. Market for Common Equity and Related Stockholder Matters........... 7
Item 6. Management's Discussion and Analysis or Plan of Operation.......... 8
Item 7. Financial Statements...............................................10
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................10
PART III.....................................................................10
Item 9. Directors, Executive Officers, Promoters and
Control Persons, Compliance with Section 16(a) of the
Exchange Act.......................................................10
Item 10. Executive Compensation.............................................12
Item 11. Security Ownership of Certain Beneficial Owners and Management.....14
Item 12. Certain Relationships and Related Transactions.....................15
Item 13. Exhibits, and Reports on Form 8-K..................................16
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PART I
ITEM 1. Description of Business
The Company is organized in a holding company structure. The Company
was formerly a wholly-owned subsidiary of Patlex Corporation, a Pennsylvania
corporation ("Patlex"). On August 20, 1996, the shareholders of Patlex approved
a Plan of Reorganization pursuant to which the Company was reorganized into a
holding company and Patlex became a wholly-owned subsidiary of the Company (the
"Reorganization"). Also on August 20, 1996, a wholly-owned subsidiary of the
Company merged with Database Technologies, Inc., a Florida corporation ("DBT")
and DBT also became a wholly-owned subsidiary of the Company (the "Merger").
Pursuant to the terms of the Merger and the Reorganization, the former
shareholders of Patlex own approximately 33.5% of the Company and the former
shareholders of DBT own approximately 66.5% of the Company. The Company is the
successor registrant to Patlex. Although the Company was the surviving
corporation in the Merger, for accounting purposes the transaction was treated
as a purchase business acquisition of Patlex by DBT (a reverse acquisition) and
a recapitalization of DBT. Assets and liabilities of Patlex acquired in the
transaction will be recorded at their fair values as of August 20, 1996.
BUSINESS OF DBT
DBT is an electronic information content provider furnishing on-line,
immediate access to public records on individuals, businesses and assets. DBT
was established in 1992 by Hank Asher, its President, who led the development of
DBT's products. As of September 1996, DBT had approximately 9,200 customer
accounts, consisting of approximately 19,700 users, with new customer accounts
being added at a rate of over 700 per month. DBT's customer base is diverse in
terms of both size and information requirements.
DBT's strategy is to become a one-stop source of information provided
in a user-friendly format at reasonable costs. Its proprietary software allows
cross-referencing of the information. The linear architecture of its computer
systems allows for system increases in database size and capacity. To DBT's
knowledge, no other database is currently able to match the cross-referencing
capabilities of its system. DBT's reports are completely machine-generated,
using advanced technologies and algorithms to find, cross-reference and confirm
the accuracy of data.
DBT's products were initially used primarily by insurance companies
to investigate claims. Use of the database later expanded to law enforcement
agencies and investigation firms. In April 1996, insurance companies, law
enforcement agencies and investigation firms represented 13% and 28%,
respectively, of DBT's on-line usage, in minutes. See "--Customers."
To date, capital to support DBT's growth has been provided mainly by
private placements and cash provided from operations. In July 1993, and June
1995, DBT completed private placements of equity of $81,000 and $100,000,
respectively, and, in August 1995, completed a private placement of $3 million
of common stock.
Strategy
DBT's objective is to expand its technology, sources of data and user
base. To achieve this objective, DBT intends to (i) engage in research and
development activities to expand its existing technology, (ii) develop new
products, (iii) acquire additional information, (iv) access new sources of
information and (v) attract new customers.
DBT communicates with its customers on a regular basis both with
respect to their level of satisfaction with the existing products and their
needs for additional products.
DBT aggressively designs new products and enhances existing products,
creating new value for its customers. In addition, DBT's technical support
personnel are available 24 hours a day, 7 days a week to assist customers in
their use of the products. DBT believes that its responsiveness to customer
feedback and emphasis on customer service
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contributes to customer loyalty and usage of DBT's products.
Data Sources
DBT acquires its data from both governmental and commercial sources
and then formats the data for use with its products.
Costs for data are incurred in one of the following ways: (i) up
front at the time information is acquired, (ii) on a flat fee basis for updates
or (iii) at variable costs based on access. In the case of up front or flat
fees, additional costs to the supplier of such information are not generally
incurred as DBT's customers access the database. In the case of acquisitions of
real-time information, variable costs are incurred by DBT and are charged to
DBT's customers at a variable rate based upon usage by the customer.
Products
DBT's current product line includes the following:
DBT ONLINE. The Next Generation of AutoTrack Plus+. DBT Online
provides on-line access to billions of records relating to individuals and
companies, including, but not limited to, social security numbers, current and
past addresses, telephone numbers, neighbors, relatives, associates, assets and
corporations. It is a cross-referenced system that is easy to use and accessible
at all times. Users pay a per-minute rate for on-line usage. Set-up and
installation fees are not charged. DBT Online is currently used by law
enforcement agencies, insurance companies, licensed investigation firms,
financial institutions, attorneys and paralegals, among others.
Within the DBT Online database, users can also access "Faces of the
Nation." Faces of the Nation is a product used for, among other things, locating
individuals in the United States. With a name, address, social security number
or date of birth and first name, users can locate current and previous
addresses, relatives and associates, neighbors, date of birth or social security
number. Although the scope of this database is national, every individual in the
United States may not be included.
DBT expects to release the following products in 1996:
NEW YORK UNIFIED COURT SYSTEM. DBT entered into a definitive
agreement with the New York Unified Court System, effective as of February 8,
1996. Under the terms of the exclusive contract, DBT expects to provide on-line
access to the civil case management data of the New York Unified Court System.
This product will improve the efficiency of the search process for information
about the status of cases in the New York court system and is likely to be used
predominantly by New York attorneys.
CORPORATIONS OF THE NATION. This product is intended to provide
information on corporations in 45 states and will supply more expansive and
comprehensive investigative information than currently available sources.
CARLI (COMPUTER ASSISTED RADIO-LINKED INFOBASE). Law enforcement
agencies are expected to use this product which will access DBT Online and other
data sources by voice recognition and voice response systems that can be
activated while operating a vehicle. Advantages of this system include improved
officer safety and productivity for law enforcement personnel. This product is
currently in the research and development stage, including beta tests in law
enforcement vehicles.
Research and Development
DBT's aggressive research and development efforts include the
following categories:
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HARDWARE AND OPERATING SYSTEM DESIGN AND IMPLEMENTATION. Utilizing
the newest and most advanced micro based technologies, DBT regularly designs,
tests and implements upgrades to its existing computer infrastructure as well as
high speed intra and inter network communications. As of September 1996, DBT
maintained 7.0 terabytes of online data storage, which is being expanded.
DBT also develops enhancements to its open architecture mass storage
file system. The prominent advantages of DBT's file systems are unlimited file
size, fast index retrieval and real-time redundant fault tolerances, as well as
the ability to link dissimilar data elements through intelligent indexing. In
addition, DBT continues to refine its multi-tiered client server distributed
processing environment. DBT's systems utilize distributed processing via an open
architecture. Multi-tiered client server methodology affords the ability to
seamlessly address multiple file types and utilize idle processor resources
across DBT's system infrastructure.
DELIVERY METHODS. Additional research and development efforts focus
on DBT's delivery methods. DBT continues to develop and enhance its delivery of
products through its existing interactive session manager, providing new
products and capabilities to DBT's customers. DBT is currently developing and
testing its internet interface for users with high security requirements,
particularly law enforcement. DBT is also currently developing and testing
mobile computing solutions to DBT products. Included in this program is a
talking police car, CARLI (Computer Assisted Radio-Linked Infobase), which
affords voice activated, voice response access to DBT and other data sources.
See "--Products."
Customers
DBT's customer base has increased rapidly over the last two years,
from approximately 580 customer accounts in December 1993 to approximately 9,200
customer accounts in September 1996. As of September 1996, DBT's customers
included approximately 19,700 individual users.
DBT's current products are available only to law enforcement
agencies, attorneys, paralegals, licensed investigation firms, financial
institutions, insurance companies and other qualified entities. DBT reserves the
right to refuse, or withdraw without notice, access to its products. All
potential customers are screened by DBT prior to being given access to the
system. The screening process generally consists of a review of professional
licenses, if any, credit reports and other relevant information in order to
verify the intended use of information. Once an application has been approved,
the customer is asked to sign a subscription agreement with DBT which provides
the terms and conditions pursuant to which DBT grants access to its products. A
standard subscription agreement includes a disclaimer of any warranties on the
data and indemnification of DBT for inaccuracies contained in the data.
Once a customer is ready to go on-line, DBT delivers its software
with instructions for the customer to call DBT for a password and assistance on
the installation. DBT's technical support staff of approximately 15 people works
with the users to assure that the installation is performed properly and the
instructions for use of the database have been communicated. The technical
support staff is then available on an on-going basis, without charge, to assist
users as needed.
DBT does not charge an installation or monthly fee to its customers.
Users access the database by calling a toll free number by modem from their
computers. The cost ranges from $0.50 to $1.50 per minute. Users spend 8
minutes, on average, on-line each time they access a database. Some of DBT's
products are charged based on a fixed fee schedule per report generated.
Once customers subscribe to a DBT product, many expand their
subscription to include other available products.
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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 DBT does the most
significant amount of its business, access to records is relatively
unrestricted. In those 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. DBT cannot predict whether the degree of
regulation in any particular state will change, nor whether the federal
government will implement any regulations with respect to access to specific
information.
Marketing
During the quarter ended June30, 1996, DBT increased the size of its
sales and marketing staff to seventeen by adding five new employees. The added
staff has specific skills that will increase DBT's ability to develop and
implement dynamic marketing programs.
DBT 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 audiences. DBT also continues to
pursue its highly successful customer referral program.
BUSINESS OF PATLEX
Patlex Corporation has been engaged in the patent exploitation and
enforcement business since late 1979. Patlex owns a 64% interest in the royalty
income from, and a 42.86% ownership interest in, certain patents which relate to
basic technology used in certain types of commonly used lasers and certain uses
of laser technology (the "Laser Patents"). The patent enforcement business
includes the identification of laser products and laser applications which
infringe the Laser Patents and the execution of licensing agreements through
normal commercial negotiations or pursuant to settlements of litigation brought
against infringers of the Laser Patents. Patlex is also the exclusive licensing
agent for the Laser Patents. Patlex was incorporated in 1972 under the laws of
the Commonwealth of Pennsylvania.
On September 27, 1995, AutoFinance Group, Inc., a California
corporation ("AFG"), as the then sole shareholder of Patlex, effected the
distribution (the "Distribution") of 95.01% of the outstanding shares of
Patlex's Common Stock, par value $.10 per share (the "Patlex Common Stock"), to
the holders of shares of common stock, no par value, of AFG. On September 27,
1995, AFG merged with and into Key Auto Inc. ("Key Auto"), an Ohio corporation
and a wholly-owned subsidiary of KeyCorp (the "KeyCorp. Merger"). Key Auto, as
the successor to AFG, retained 4.99% of the outstanding shares of Patlex's
Common Stock which were not distributed in the Distribution. As a consequence of
the Distribution, Patlex became an independent, public company.
Laser Patent Interests
Patlex owns a 64% interest in the royalty income from, and a 42.86%
ownership interest in, the Laser Patents which derive from patent applications
originally filed by Dr. Gordon Gould in 1959. NGN Acquisition Corporation
("NGN"), a corporation owned by Dr. Gould and his family, holds the remaining
57.14% ownership interest in the Laser Patents. Other income interests in the
Laser Patents are held by NGN (20%) and Refac Financial Corporation
("REFAC")(16%). In addition to NGN's 20% income interest, Patlex is
contractually obligated to pay NGN an additional 1.5% of the first $198,800,000
of net royalty income. As of June 30, 1996, total royalties collected under the
Laser Patents were approximately $103,670,000, approximately $99,246,000 of
which constituted net royalty income from which other income interests payments
were calculated.
Patlex has the right to receive out of the laser patent royalty
revenues an amount equal to expenses incurred
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and paid by Patlex which are directly related to enforcing and litigating the
Laser Patents. Such expenses are deducted from the total laser patent royalty
revenues; the resultant royalty amount constitutes net laser patent royalties.
Royalty payments payable to the Laser Patent interest holders are computed on
the basis of net royalties. The method in which Patlex is reimbursed for
enforcement and litigation expenses is the subject of litigation initiated by
REFAC. See "Item 3. -- Legal Proceedings."
Patlex and NGN are parties to a Security and Escrow Agreement under
which Patlex will deposit, when requested by NGN, the amounts representing NGN's
income interest in Laser Patent revenues into a separate escrow account in order
to protect them from the claims of creditors.
Patlex's patent enforcement and exploitation activities involve the
Laser Patents described below.
Principal 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 Use Patent (U.S. Patent
No. 4,161,436), which covers certain common uses of many types of lasers, and
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
Optically Pumped Laser Patent (U.S. Patent No. 4,053,845) expired in October
1994. The Use Patent expired in July 1996, 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 believes that the decrease in royalty income as a result of
the expiration of the Optically Pumped Laser Patent may have been offset to some
extent by an increase in royalty income from the Use Patent and the Brewster
Angle Window Patent. However, the decrease in royalty income as a result of the
expiration of the Use Patent will not be offset by any increase in royalty
income from the Gas Patent or the Brewster Angle Window Patent.
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. Patlex believes that the major period of litigating the
validity and enforceability of the Laser Patents has passed. The "major period"
refers to the period of time (from October 11, 1977, the issue date of the
Optically Pumped Laser Patent, through 1988) in which the greatest number of
lawsuits were prosecuted representing the greatest challenge to the validity and
scope of the Laser Patents. However, the Laser Patents may be subject to
subsequent challenges. There can be no assurance that, if challenged, Patlex
would prevail in any subsequent proceedings or that such challenges may not
entail substantial litigation expenses. If there is an unappealable successful
challenge against the validity of the Gas Discharge Laser Patent, the impact
would be materially adverse to Patlex. See "Item 3. -- Legal Proceedings."
Expenses relating to litigation of the Laser Patents were
approximately $128,000 for the twelve-month period ending June 30, 1995, and
approximately $68,000 for the twelve-month period ended June 30, 1996.
Patent Licensing Agreements
Patlex is the exclusive licensing agent for the Laser Patents. As
licensing agent, Patlex actively pursues its patent licensing activities, which
require manufacturers and users who exploit the inventions claimed in the Laser
Patents to report and pay royalties to Patlex. Patlex then distributes these
royalties among itself and the other parties holding interests in the royalty
income. Patlex actively monitors the laser industry to identify infringers and
new laser applications which infringe the Laser Patents. The license agreements
generally fall into three categories: (i) license agreements with manufacturers
of lasers or laser systems that use the inventions claimed in the Laser Patents;
(ii) license agreements with users of lasers or laser systems that use the
inventions claimed in the Laser Patents; and (iii) settlement agreements which
require a payment of a specific sum of money for past infringement of certain of
the Laser Patents but do not include a grant of a license to make, use or sell
lasers or laser systems that use the inventions claimed in the
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Laser Patents. As of June 30, 1996, Patlex had agreements with a total of 225
companies which represent a cross-section of industries in the United States,
including users and manufacturers. Of such agreements, 190 were licensing
agreements with manufacturers who had an obligation to report and pay royalties
on the sale of lasers or laser systems which use the Laser Patents. Patlex
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 nonexclusive licenses
for certain applications of all of the Laser Patents and a release of all claims
for damages from past infringements. Substantially all of the licenses also
provide for future royalty payments if the licensee engages in the manufacture
or sale of lasers subject to the Laser Patents. In contrast, substantially all
of the licenses with licensees that use, but do not manufacture or sell products
covered by, the Laser Patents, provide 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 12.4% and 8.5% of the Laser Patent royalties during the
fiscal year ended June 30, 1996. Management 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
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 Patlex believes the laser technology
covered by the Laser Patents to be state of the art, any advance in technology
which would render one or more of the Laser Patents obsolete could have a
material adverse effect on Patlex's future patent royalty revenue.
Employees
At June 30, 1996, the Company had 104 full-time employees, 99 of
which were employed by DBT and 5 of which were employed by Patlex. 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. Description of Property
DBT leases an aggregate of approximately 18,730 square feet in two
buildings at its Pompano Beach, Florida, facility at an annual rent of $241,116.
Computer back-up files and servers are separated between the two buildings to
protect DBT from complete loss in the event of disaster.
Patlex leases approximately 2,600 square feet at 5550 West Flamingo
Road, Suite B-5, Las Vegas, Nevada 89103 for its principal executive offices.
The lease has a five-year term with a renewal option for four additional years
and has minimum monthly rent payments of $3,750. Patlex also leases
approximately 600 square feet of space located at 250 Cotorro Court, Las Cruces,
New Mexico 88005 used as an office for Frank Borman. The lease has a five-year
term with minimum monthly payments of $650.
ITEM 3. Legal Proceedings
The Company may be involved in litigation from time to time in the
ordinary course of its business. DBT is not currently involved in any
litigation, or to its knowledge, is any material litigation currently
threatened.
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Due to the nature of Patlex's business, and especially its
involvement in the enforcement of patent rights, Patlex is continually 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.
In July 1989, Patlex instituted a civil action in the United States
District Court, District of New Jersey, against JEC Lasers, Inc. ("JEC") its
first licensee. JEC was granted a license containing terms more favorable than
terms in licenses granted by Patlex to other licensees. Patlex's complaint
requested the court to declare the license agreement to be non-transferable,
based on JEC's historical financial condition and insolvency, and enjoin the
licensee from transferring the license agreement to another laser manufacturer.
The defendant-licensee filed several counterclaims against Patlex and a motion
for summary judgment on the issue of the transferability of the license
agreement. In November 1989, the court denied the defendant's motion for summary
judgment. A trial was held in April 1994. The court ruled that JEC had not been
"bankrupt in any manner" nor had they made an "assignment for the benefit of
creditors" as those terms are used in the license agreement, and therefore, JEC
is not barred from transferring the license agreement as part of a business
combination with a third party. JEC waived all damage claims and the only issue
that was tried was JEC's right to transfer the license. A judgment embodying the
court's ruling was entered in August 1994. Patlex appealed the decision to the
United States Court of Appeals. By an opinion dated September 6, 1995, the Court
of Appeals affirmed the lower court's ruling.
In November 1994, REFAC instituted a civil action in the United
States District Court, Eastern District of Pennsylvania, alleging that Patlex
improperly calculated the royalties due REFAC. The manner in which the royalties
due REFAC are calculated has been consistent for more than six years. Patlex
believes that the royalties due REFAC have been properly calculated, and that
REFAC's claim is both without merit and time-barred. On February 28, 1996, a
special verdict adverse to Patlex was returned. Post-trial motions have been
denied; a separate judgment has been entered and an appeal has been taken to the
United States Court of Appeals for the Third Circuit. The amount of the judgment
against Patlex in this action is less than $225,000.
ITEM 4. Submission of Matters to a Vote of Security-Holders
There were no matters submitted to a vote of security holders during
the quarter ended June 30, 1996.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
Prior to the Reorganization, there was no trading market for the
Company's Common Stock. On August 16, 1996, the Company received approval for
the listing of its Common Stock on the Nasdaq National Market under the symbol
"DBTO."
As a result of the Merger and Reorganization, the Company expects to
have approximately 700 shareholders
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of record and approximately 7,693,474 shares of common stock outstanding. There
can be no assurance that trading will be maintained or that the volume will be
sufficient for trading to occur with any frequency. As a result, it could be
difficult to make purchases or sales of the Company's common stock in the market
at any particular time. There can be no assurance either as to the price at
which the Company's common stock will trade or that such price will not be
significantly below the book value per share of the Company's common stock.
The Company does not anticipate paying any cash dividends in the
foreseeable future. Any future payment of dividends will depend upon the
financial condition, capital requirements and earnings of the Company, as well
as upon other factors that the Company's Board of Directors may deem relevant.
As a wholly-owned subsidiary of AFG, Patlex declared and paid to AFG
dividends totaling $2,500,000 for the fiscal year ended June 30, 1995. Patlex
did not declare or pay any dividends for the fiscal year ended June 30, 1996.
ITEM 6. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of Patlex is derived from
the financial statements of Patlex included elsewhere herein. The discussion
does not reflect the Merger and the Reorganization, each of which occurred on
August 20, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, Patlex had $ 7,648,000 in cash as compared to
$3,703,000 at June 30, 1995. Patlex did not hold, at either date, securities
considered to be cash equivalents.
Net working capital was $5,030,000 as of June 30, 1996 and
$1,382,000 as of June 30, 1995, an increase of $3,648,000. The increase was
primarily attributed to an increase in cash of approximately $3,945,000; an
increase in net accounts receivable of approximately $324,000 and an increase in
current liabilities of approximately $675,000.
Currently, Patlex does not have a credit facility.
Patlex's patent enforcement and exploitation activities do not
require significant amounts of capital and management believes that cash flow
from the net Laser Patent royalties, taking into account the loss of Laser
Patent royalties formerly generated under the Optically Pumped Laser Patent
which expired in October 1994, is sufficient to meet Patlex's liquidity
requirements.
RESULTS OF OPERATIONS
Year Ended June 30, 1996 Compared to the Year Ended June 30, 1995
Revenues from laser patent royalties increased to $7,978,000 from
$6,253,000, an increase of $1,725,000 or 27.59% for the year ended June 30, 1996
as compared to the year ended June 30, 1995. The increase is attributable to
higher royalty revenues reported by the laser industry as a whole and the
signing of three new licensees, which accounted for approximately $700,000 of
the increase.
General and administrative expenses for the year ended June 30,
1996 increased to $1,517,000 from $1,053,000 for the year ended June 30, 1995,
an increase of $464,000. The increase is due primarily to costs associated with
becoming a publicly held independent company such as: directors and officers
insurance in the amount of $95,000; filing fees of the Nasdaq Stock Market of
approximately $35,000; directors compensation of $45,000; additional legal
fees in connection with the REFAC litigation of approximately $78,000 and
relocation expenses in connection with moving the Company's executive offices
from New Mexico to Nevada.
Net earnings for the year ended June 30, 1996 were $2,196,000 as
compared to $1,700,000 for the
8
<PAGE> 12
corresponding period of the previous year, an increase of $496,000 or 29.18%.
The increase is primarily attributable to higher royalties, and a decrease of
the patent amortization expense in the amount of $166,000, which is attributed
to the expiration of the Optically Pumped Laser Patent in October 1994. The
provision for income taxes increased to $2,101,000 from $1,430,000 or $671,000
due to higher pretax earnings and the non-deductibility of expenses associated
with the merger with DBT.
DISCUSSION PERTAINING TO STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30,
1996 AND JUNE 30, 1995
Cash Flows From Operating Activities
Net cash provided by operating activities for the year ended June
30, 1996 in the amount of $4,857,000 consisted principally of net earnings in
the amount of $2,196,000 increased by non-cash charges against earnings in the
total amount of $1,800,000 for depreciation and amortization of intangibles.
Additional net positive cash flows from operations in the amount of $847,000
resulted from non-cash charges against earnings for income taxes and other
current liabilities in the amount of $1,533,000 and decreased by other non-cash
credits to earnings through decreases in current assets and current liabilities
in the amount of $686,000.
Net cash provided by operating activities for the year ended June
30, 1995 in the amount of $5,475,000 consisted principally of net earnings in
the amount of $1,700,000 increased by non-cash charges against earnings in the
total amount of $1,964,000 for depreciation and amortization of intangibles.
Additional positive cash flows from operations consisted of $1,823,000 net cash
collections of trade accounts receivable over the net accruals of receivables
for the year.
Cash Flows From Investing Activities
Net cash provided by and used in investing activities for the year
ended June 30, 1996 consisted of proceeds in the amount of $400,000 from the
sale of land and building, formerly used by Patlex as its corporate offices,
located in Las Cruces, New Mexico and acquisition of data processing equipment
in the amount of $11,000.
Net cash provided by investing activities for the year ended June
30, 1995 consisted primarily of proceeds of $100,000 from the sale of an asset
offset by acquiring data processing equipment in the amount of $15,000.
Cash Flows From Financing Activities
During the year ended June 30, 1996, cash, in the amount of
$1,301,000, was used for the retirement of all long-term debt.
Cash in the amount of $1,057,000 for the year ended June 30, 1995
was used for the repayment of long-term debt and cash dividends in the amount of
$2,500,000 were paid to AFG.
INFLATION
Patlex's royalty income is based on licensees' laser-based sales
and therefore royalty income is expected to reflect inflation adjustments, if
any, in licensees' industries. Patlex does not believe that inflation has
materially affected its operations during the fiscal years ended June 30, 1996
and 1995.
9
<PAGE> 13
ITEM 7. Financial Statements and Supplementary Data
The Financial Statements of the Company required by Item 7 are set
forth beginning on page F-3 of this Report. The Financial Statements and
accompanying notes do not reflect the Merger or the Reorganization, each of
which occurred on August 20, 1996.
ITEM 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Hank E. Asher 45 President and Chief Executive Officer
Frank Borman 68 Chairman of the Board of Directors
Richard Laitinen 51 Vice President, Chief Financial Officer and Treasurer
J. Henry Muetterties 43 Vice President, Secretary and General Counsel
Donald E. Shumate 58 Vice President, Controller
Charles A. Asher 44 Director
Gary E. Erlbaum 50 Director
Jack Hight 71 Director
Kenneth G. Langone 59 Director
Sari Zalcberg 43 Director
</TABLE>
The current directors, executive officers, along with their
backgrounds, are set forth below:
Mr. Hank E. Asher was elected President and Chief Executive Officer
of the Company on August 20, 1996. He has been the Chief Executive Officer and a
director of DBT since he founded the company in 1992. Prior to founding DBT, Mr.
Asher performed contract programming services for various computer companies.
Mr. Charles A. Asher was elected a director of the Company on August
20, 1996. He has been a director of DBT since 1994. He has practiced law in
South Bend, Indiana, since graduating from Indiana University School of Law in
1977. In addition to the bar of the State of Indiana, he is admitted to the Bar
of the U.S. Supreme Court as well as several other federal courts.
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 AFG from 1990 until September 27, 1995 and served as Chairman of
AFG's Board of Directors from December 1992 until September 27, 1995. From
1969-86, he served in various capacities for Eastern Airlines, including
President, Chief Executive Officer and Chairman of the Board of Directors. He
served as Vice Chairman of the Board of Directors of Texas Air Corporation from
1986-1991. Mr. Borman served in the United States Air Force from 1950-1970. Mr.
Borman currently serves as a member of the Board of Directors of The Home Depot,
Inc., Outboard Marine Corporation, Thermo Instruments Systems, American
Superconductor Corporation and is also a member of the Board of Trustees of the
National Geographic Society.
10
<PAGE> 14
Mr. Erlbaum was elected to the Company's Board of Directors on August
20, 1996. He was elected a director of Patlex in September 1995 and served as a
director of AFG from 1992 until September 27, 1995 and is also a director of
several privately-owned companies. He has been engaged since 1983 in real estate
and business ventures.
Mr. Hight was elected a director of the Company on August 20, 1996.
He has been Chairman of the Board of DBT since 1995. Prior to joining DBT in
1995, he was President, Chief Executive Officer and Chairman of the Board of
Intec Systems, Inc. which he founded in 1981. From 1978 to 1980, he was Chairman
of the Board, Chief Executive Officer and President of Information Science,
Inc., a public company. In the 1960s, Mr. Hight co-founded and was President of
Electronic Data Systems Federal Corporation before it merged with Electronic
Data Systems Corporation in 1968 prior to its initial public offering.
Mr. Laitinen was elected a Vice President of the Company on August
20, 1996. He served as Vice President of Patlex from May 1989 and as Treasurer
of Patlex from 1986. From 1985 to February 1987, Mr. Laitinen was also Vice
President, Finance and Administration of Geotek (formerly known as Apollo
Lasers, Inc.). He was Comptroller of Geotek from 1979 to 1985.
Mr. Langone was elected to the Company's Board of Directors on August
20, 1996. He was elected a director of Patlex in September 1995 and served as a
director of AFG from 1983 until September 27, 1995. For the past twenty years,
Mr. Langone has been Chairman of the Board, President and Managing Director of
Invemed Associates, Inc. ("Invemed"), a New York Stock Exchange member firm
engaged in investment banking and brokerage. He is one of the co-founders of The
Home Depot, Inc. and has been a director of that company since 1978. He serves
on the Board of Directors of Baby Superstore, Inc., GMIS, Inc., St. Jude
Medical, Inc., Unifi, Inc. and Geisinger Foundation, and is a member of the
Board of Trustees of Bucknell University where he is Chairman of its Investment
Committee and on the Board of Overseers of New York University, Stern School of
Business.
Mr. Muetterties was elected Vice President, General Counsel and
Secretary on August 20, 1996. Beginning in May 1989, he was the Vice President,
General Counsel and Secretary of Patlex and was the Corporate Licensing Counsel
for Patlex since March 1988. From 1983 to 1988, Mr. Muetterties was Senior
Patent Counsel for Allied-Signal Aerospace, a division of Allied-Signal, Inc.
Mr. Shumate was elected Vice President, Controller on August 20,
1996. Mr. Shumate is a Certified Public Accountant and has been Controller of
Patlex Corporation since April 1989. From 1982 to 1986, he served in various
management capacities, including President, for Dynarabia Company, Ltd, a
diversified contracting company located in Riyadh, Saudi Arabia.
Sari Zalcberg was elected a director of the Company on August 20,
1996. She has been a director of DBT since 1995. She is the Chief Executive
Officer and sole shareholder of La Grande Trunk, Inc., a retail concern with
locations in two states. Ms. Zalcberg is also a member of the Regional Board of
Directors of the Valparaiso Banking Center of Bank One Merrillville, N.A., an
Indiana chartered Bank. She holds a Bachelor of Science degree in biological
sciences from Indiana University.
Hank Asher, Charles Asher and Sari Zalcberg are siblings.
The Company's Bylaws divide the Company's Board of Directors into
three classes, with regular three-year staggered terms and initial terms of
three, two and one years for each of Class III, Class II and Class I Directors,
respectively. Accordingly, Mrs. Zalcberg and Mr. Langone will hold office until
the annual meeting of shareholders to be held in 1997, Messrs. Charles Asher,
Borman and Hight will hold office until the annual meeting of shareholders to be
held in 1998, and Messrs. Hank Asher and Erlbaum will hold office until the
annual meeting of shareholders to be held in 1999. Officers serve at the
discretion of the Board of Directors.
11
<PAGE> 15
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has an Executive Committee, Audit
Committee, Compensation and Nominating Committee. The Executive Committee is
authorized to approve certain actions by the Company. The members of the
Executive Committee are Messrs. Hank Asher, Borman, Erlbaum and Hight.
The Audit Committee is charged with the responsibility of reviewing
the Company's accounting policies, practice and controls. The members of the
Audit Committee are Mrs. Zalcberg and Messrs. Erlbaum and Hight.
The Compensation Committee reviews the compensation policies of the
Company and acts as Plan Administrator of the Company's Amended and Restated
Stock Option Plan. The members of the Compensation Committee are Messrs. Charles
Asher, Hight and Langone.
The Nominating Committee identifies and reviews the qualifications of
candidates to serve on the Board of Directors. All seven members of the Board
serve as members of the Nominating Committee.
COMPENSATION OF DIRECTORS
No compensation is currently paid for service on the Board of
Directors.
ITEM 10. Executive Compensation
The following table sets forth information concerning compensation
received by the chief executive officer and the three other most highly
compensated executive officers of Patlex for the three most recent fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
OTHER
NAME AND PRINCIPAL FISCAL ANNUAL
POSITION YEAR SALARY BONUS($) COMPENSATION
-------- ------ ------ -------- ------------
<S> <C> <C> <C> <C>
Frank Borman 1996 $140,000 $ -- $ 7,817(1)
Chairman of the Board, 1995 $136,328 $ -- $ 8,557(1)
President and Chief Executive 1994 $128,680 $ -- $ 2,557(1)
Officer
Richard Laitinen 1996 $ 95,135 $ 20,256 $ 23,744(2)
Vice President, Chief 1995 $ 89,318 $ 19,384 $ 22,767(2)
Financial Officer and 1994 $ 87,328 $ 15,055 $ 15,711(2)
Treasurer
J. Henry Muetterties 1996 $107,698 $ 22,931 $ 25,753(2)
Vice-President, Secretary and 1995 $100,593 $ 21,944 $ 24,588(2)
General Counsel 1994 $ 98,862 $ 17,044 $ 17,593(2)
Donald E. Shumate 1996 $ 78,980 $ 13,453 $ 20,323(2)
Vice-President, Controller 1995 $ 75,339 $ 12,873 $ 15,620(2)
1994 $ 66,839 $ 5,731 $ 11,480(2)
</TABLE>
12
<PAGE> 16
- --------------------
(1) Includes employer matching contribution under the AFG and Patlex
401(k) Savings Plans and amount paid by Patlex for life insurance
premium.
(2) Includes amounts received under Patlex's Deferred Compensation Plan,
employer matching contributions under the AFG and Patlex 401(k)
Savings Plans and amounts paid by Patlex for life insurance premiums.
Mr. Hank E. Asher received a salary of $123,270 and a bonus of
$90,000 from DBT during the fiscal year ended December 31, 1995.
AGGREGATED OPTIONS EXERCISED IN THE FISCAL YEAR ENDED JUNE 30, 1996 AND YEAR-END
OPTION VALUES
The following table sets forth certain information with regard to the
aggregated options to purchase DBT Online, Inc. common stock exercised in the
year ended June 30, 1996 and the option values as of the end of that year for
the chief executive officer and other named executive officers of Patlex.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
OPTIONS/SAR'S IN-THE-MONEY
HELD AT FISCAL OPTIONS AT FISCAL
SHARES YEAR END (#) YEAR END ($)
ACQUIRED ON VALUE UNEXER- UNEXER-
NAME EXERCISE(#) REALIZED($) EXERCISABLE CISABLE EXERCISABLE CISABLE
---- ----------- ----------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Frank Borman --- --- 100,000 --- $3,425,000 ---
Richard Laitinen --- --- 20,000 --- $ 685,000 ---
J. Henry Muetterties --- --- 20,000 --- $ 685,000 ---
Donald E. Shumate --- --- 10,000 --- $ 342,500 ---
</TABLE>
EMPLOYMENT AGREEMENTS
In March 1991, Patlex entered into an employment agreement with Mr.
Borman, which provided for an initial three-year employment period and automatic
extensions for additional one-year terms on the anniversary date unless either
Patlex or Mr. Borman gives notice to the other that the term of the agreement
will not be extended. The 1996 base compensation for Mr. Borman is $140,000. Mr.
Borman received other compensation in the amount of $7,817 for the fiscal year
ended June 30, 1996, representing amounts paid by Patlex for life insurance
premiums, $2,557, and employer matching contributions under the AFG and Patlex
401(k) Savings Plans, $5,260. Stock options representing the right to purchase
100,000 shares of Patlex's common stock were granted to Mr. Borman during the
fiscal year ended June 30, 1996.
During 1992, Patlex entered into employment agreements with Messrs.
Laitinen, Muetterties and Shumate. Each of the agreements has been extended
through December 1998. The 1996 base compensation for Messrs. Laitinen,
Muetterties and Shumate is $104,035, $117,775 and $86,368, respectively, plus
bonuses and other incentive compensation. Messrs. Laitinen, Muetterties and
Shumate received bonuses for the fiscal year ended June 30, 1996 of $20,256,
$22,931 and $13,453, respectively. During the fiscal year ended June 30, 1996
stock options representing the right to purchase 20,000 shares of the Company's
common stock were granted to Messrs. Laitinen and Muetterties and 10,000 shares
to Mr. Shumate. For the fiscal year ended June 30, 1996, Messrs. Laitinen,
Muetterties and Shumate received other compensation in the amount of $23,744,
$25,753 and $20,323, respectively, representing amounts paid by Patlex under the
Patlex Deferred Compensation Plan, $17,309, $19,594 and $13,865, respectively;
amounts
13
<PAGE> 17
representing employer matching contributions under the AFG and Patlex 401(k)
Savings Plan of $5,851, $5,952 and $5,545, respectively, and amounts
representing life insurance premiums of $584, $207 and $913, respectively.
STOCK OPTION PLAN
The 1996 Stock Option Plan (the "Plan") was approved by the Board of
Directors and by the shareholders of Patlex on August 20, 1996. In connection
with the Reorganization, the Company assumed the Plan from Patlex. The purpose
of the Plan is to recognize the contributions made to the Company by its
employees and certain consultants or advisors, to provide these individuals with
additional incentives to devote themselves to the Company's future success and
to improve the Company's ability to attract, retain and motivate individuals
upon whom the Company's sustained growth and financial success depend. The Plan
is also intended as an additional incentive to directors who are not employees
of the Company to serve on the Company's Board of Directors and to devote
themselves to the future success of the Company.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of September
19, 1996, regarding the beneficial ownership of the Company's Common Stock by
(i) each person known by the Company to own beneficially 5% or more of the
outstanding Common Stock, (ii) each director and executive officer of the
Company and (iii) all directors and executive officers as a group. Each person
named has sole voting and investment power with respect to the shares indicated
except as otherwise stated in the notes to the table.
<TABLE>
<CAPTION>
NAME NUMBER OF
---- COMMON SHARES PERCENT
------------- -------
<S> <C> <C>
HANK E. ASHER................................................................ 2,798,229 36.23
CHARLES A. ASHER............................................................. 984,411 12.75
FRANK BORMAN (1)............................................................. 114,200 1.46
GARY E. ERLBAUM(2)........................................................... 360,672 4.61
JACK HIGHT(3)................................................................ 135,001 1.74
KENNETH G. LANGONE(4)........................................................ 919,725 11.76
RICHARD LAITINEN............................................................. 15,157 *
J. HENRY MUETTERTIES(5)...................................................... 24,910 *
DONALD E. SHUMATE............................................................ 13,525 *
SARI ZALCBERG................................................................ 52,493 *
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP (10 PERSONS)................. 5,418,323 67.15
</TABLE>
- --------------------
*LESS THAN 1%
14
<PAGE> 18
(1) Includes 100,000 shares issuable upon exercise of presently exercisable
options.
(2) Includes (i) 21,933 shares owned by SPSP Corporation of which Mr.
Erlbaum is a director, President and 36.7% shareholder, (ii) 1,875
shares held by trusts for which Mr. Erlbaum serves as trustee or
co-trustee, (iii) 166,480 shares owned by Erlbaum Family L.P., of which
Mr. Erlbaum is President of the general partner, (iv) 1,890 shares
owned by Mr. Erlbaum's son, and (v) 100,000 shares issuable upon
exercise of presently exercisable options.
(3) Includes (i) 5,000 shares owned by Mr. Hight's wife and 25,000 shares
issuable upon exercise of presently exercisable options.
(4) Includes 349,228 shares owned by Invemed Associates, Inc. of which Mr.
Langone is Chairman of the Board and a majority owner and 100,000
shares issuable upon exercise of presently exercisable options.
(5) Includes 20,000 shares issuable upon exercise of presently exercisable
options.
ITEM 12. Certain Relationships and Related Transactions
Invemed, a company of which Mr. Langone is a majority owner, acted as a
financial advisor to AFG (the parent of Patlex at that time) in connection with
the AFG/KeyCorp. Merger and the Distribution and received a fee of approximately
$2,470,000 for its services from AFG in connection therewith. Mr. Langone is
also Chairman of the Board of Invemed.
In November 1995, DBT extended a loan to Hank Asher, DBT's President
and majority shareholder, in return for an unsecured demand note, bearing
interest at 8%, payable to DBT in the amount of $200,000. In addition, during
1995 advances totalling $54,100 were made to Mr. Asher, without interest, which
were repaid on January 12, 1996.
On February 7, 1994, DBT entered into a debt and royalty agreement with
a consortium of seven individuals including Jack Hight. During 1995, Mr. Hight
became a shareholder and director of DBT. The agreement provided the financing
necessary for DBT to enter the Texas market with its database services. The
agreement provided for a loan to DBT of $200,000, repayable without interest as
follows: for five months beginning May 1994, 50% of specified revenues from
Texas operations or $2,000, whichever is greater, then beginning October 1994,
50% of specified revenues rom Texas operations or $5,000, whichever is greater,
until the $200,000 note is repaid. During 1995 and 1994, $94,800 and $25,000,
respectively, was repaid. See Note 6 to DBT's Financial Statements. The
agreement also provided for DBT to grant to the consortium a royalty to share in
the revenues of the Texas expansion up to $800,000, computed as follows: after
the $200,000 note is repaid, the consortium will receive 10% of specified
revenues from Texas operations until $800,000 is paid.
Indar Corporation ("Indar"), a Florida corporation owned by Hank Asher,
provided management and other services to DBT under an agreement between Indar
and DBT from December 1994 until the agreement expired in November 1995.
DBT paid a total of $282,500 to Indar under the agreement.
In connection with the relocation of the corporate office from Las
Cruces, New Mexico to Las Vegas, Nevada and the relocation of three of its
corporate officers, which entailed, among other things, selling a personal
residence and purchase of new residences in Las Vegas, Patlex extended bridge
loans to Messrs. Laitinen and Shumate, dated April 25, 1996 and June 7, 1996 in
the amounts of $75,000 and $80,000, respectively. The loans are payable on
demand six-months after date with interest at 8.25% payable monthly.
Also in connection with the relocation of the corporate office, Patlex
sold its office facility situated in Las
15
<PAGE> 19
Cruces, New Mexico to a limited liability company owned by the two sons of Frank
Borman, Chairman and Chief Executive Officer of Patlex. The sale was an
arms-length transaction based on an independent appraisal of the property in the
amount of $400,000.
ITEM 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(A) An index to the Financial Statements included in this Report
appears on page F-1 hereof.
EXHIBITS
PAGE
----
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2** Merger Agreement dated February 7, 1996, as amended and
restated as of June 28, 1996, by and among the Company, Patlex
Corporation and DBT Acquisition Corp.
and Database Technologies.
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 September 15, 1992 between Patlex
and Richard Laitinen
10(iii)+ Employment Agreement dated September 14, 1992 between Patlex
and J. Henry Muetterties
10(iv)+ Security and Escrow Agreement dated September 29, 1992 between
Patlex and NGN Acquisition Corporation
10(v)+ Standard Form of Licensing Agreement
10(vi)+ Purchase Agreement dated December 11, 1979 between Patlex and
Gordon Gould
10(vii)+ Agreement dated January 31, 1982 among Patlex, Refac
Technology Development Corporation, Refac International
Limited, Gordon Gould, NGN Acquisition Corporation and the
partnership of Lerner, David, Littenberg & Samuel
10(viii)+ Agreement dated October 1, 1984 among Patlex, Refac Technology
Development Corporation, East West Trade Services, Ltd. and
Refac International, Ltd.
10(ix)+ Agreement dated 1986 among Patlex and NGN Acquisition
Corporation, Gordon Gould and Apollo Lasers, Inc.
10(x)+ Letter of Clarification dated January 31, 1990 among Patlex,
Gordon Gould and NGN Acquisition Corporation
10(xi)+ Stock Purchase Agreement dated May 14, 1991 among Patlex,
Sydney M. Irmas and certain other shareholders
16
<PAGE> 20
10(xii)** Amended and Restated Stock Option Plan
10(xiii)+ Registration Statement on Form S-8 of Patlex Corporation (No.
33-97312)
10(xiv)* Lease dated as of April __, 1996 between Patlex Corporation
and Walter L. Schwartz for the Company's offices in Las Vegas,
Nevada.
11* Computation of Earnings Per Share
21* Subsidiaries
23* Consent of Ernst & Young LLP
27* Financial Data Schedule
- -------------------------
* 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.
(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.
17
<PAGE> 21
PATLEX CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP, Independent Auditors............................F-2
Balance Sheets at June 30, 1996 and 1995.....................................F-3
Statements of Earnings for the years ended June 30, 1996 and 1995............F-4
Statements of Stockholder's Equity for the years ended June 30,
1996 and 1995................................... ............................F-5
Statements of Cash Flows for the years ended June 30, 1996 and 1995..........F-6
Notes to Financial Statements................................................F-7
F-1
<PAGE> 22
Report of Independent Auditors
The Board of Directors and Stockholders
Patlex Corporation
We have audited the accompanying balance sheets of Patlex Corporation (Patlex)
as of June 30, 1996 and 1995, and the related statements of earnings,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of Patlex'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, the financial statements referred to above present fairly, in
all material respects, the financial position of Patlex at June 30, 1996 and
1995, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
August 9, 1996
F-2
<PAGE> 23
Patlex Corporation
Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
JUNE 30
1996 1995
------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,648 $ 3,703
Accounts and notes receivable, net of allowance for doubtful
accounts of $200 1,240 916
Prepaid expenses 79 25
------------------------------------
Total current assets 8,967 4,644
Property and equipment, net 29 391
Investment in patents, less accumulated amortization 13,994 15,771
-------------------------------------
Total assets $22,990 $20,806
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable and other current liabilities $ 714 $ 369
Current portion of long-term debt - 1,044
Due to other laser patents interest holders 1,798 1,612
Income taxes payable 1,425 237
------------------------------------
Total current liabilities 3,937 3,262
Note payable to bank - 243
Deferred income taxes 3,728 4,172
------------------------------------
Total liabilities 7,665 7,677
Stockholders' equity:
Preferred stock, $.10 par value. Authorized 1,000,000 shares; no
shares issued or outstanding - -
Common stock, $.10 par value. Authorized 10,000,000 shares; issued
and outstanding 2,565,736 shares and 1,000 shares at June 30,
1996 and 1995, respectively 256 -
Capital in excess of par value 12,873 13,129
Retained earnings 2,196 -
------------------------------------
Total stockholders' equity 15,325 13,129
------------------------------------
Total liabilities and stockholders' equity $22,990 $20,806
====================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 24
Patlex Corporation
Statements of Earnings
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1996 1995
------------------------------------
<S> <C> <C>
REVENUE
Laser patents royalties $7,978 $6,253
COSTS AND EXPENSES
General and administrative 1,517 1,053
Amortization of patents 1,777 1,943
Depreciation 23 21
Merger and spin-off costs 618 200
------------------------------------
Total costs and expenses 3,935 3,217
------------------------------------
Operating income 4,043 3,036
OTHER INCOME (DEDUCTIONS)
Interest income 284 184
Interest expense (92) (182)
Other, net 62 92
------------------------------------
Total other income (deductions), net 254 94
------------------------------------
Earnings before income taxes 4,297 3,130
Provision for income taxes (2,101) (1,430)
------------------------------------
Net earnings $2,196 $1,700
====================================
Net earnings per common share $ .98 $ .67
====================================
Weighted-average number of common shares and common share
equivalents outstanding (In Thousands) 2,235 2,524
====================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 25
Patlex Corporation
Statements of Stockholders' Equity
Years ended June 30, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
CAPITAL IN
COMMON STOCK EXCESS OF RETAINED
-----------------------------
SHARES AMOUNT PAR VALUE EARNINGS TOTAL
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994 1,000 $ - $13,929 $ - $13,929
Net earnings - - - 1,700 1,700
Dividends paid, per common share
$.99 - - (800) (1,700) (2,500)
-----------------------------------------------------------------------
Balance, June 30, 1995 1,000 $ - 13,129 - 13,129
Common stock distributed in
connection with spin-off 2,523,388 252 (252) - -
Exercise of stock options 41,348 4 (4) - -
Net earnings - - - 2,196 2,196
=======================================================================
Balance, June 30, 1996 2,565,736 $256 $12,873 $2,196 $15,325
=======================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 26
Patlex Corporation
Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1996 1995
------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings from operations $2,196 $1,700
Adjustments to reconcile net earnings to net cash provided by
operations:
Depreciation 23 21
Amortization 1,777 1,943
Note discount 14 31
Gain on sale of assets (50) (75)
Decrease (increase) in receivables, net of increase (decrease)
in due to other laser patents interest holders
(138) 1,823
Decrease (increase) in prepaid expenses (54) 39
Increase (decrease) in income taxes payable 1,188 237
Increase (decrease) in all other current liabilities 345 240
(Decrease) increase in deferred income taxes (444) (484)
------------------------------------
Net cash provided by operating activities 4,857 5,475
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (11) (15)
Proceeds from sale of assets 400 100
------------------------------------
Net cash provided by investing activities 389 85
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt (1,301) (1,057)
Dividends paid to parent corporation - (2,500)
------------------------------------
Net cash used in financing activities (1,301) (3,557)
------------------------------------
Net increase in cash 3,945 2,003
Cash, beginning of period 3,703 1,700
Cash, end of period $7,648 $3,703
====================================
Supplemental cash flow information:
Interest paid $ 98 $ 169
====================================
Income taxes paid $1,363 $1,639
====================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 27
Patlex Corporation
Notes to Financial Statements
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On September 27, 1995, AutoFinance Group, Inc., a California corporation (AFG),
as the then sole shareholder of the Company, effected the distribution of 95.01%
of the outstanding shares of the Company's common stock to the holders of shares
of common stock of AFG. On September 27, 1995, AFG merged with and into Key Auto
Inc. (Key Auto), an Ohio corporation and a wholly owned subsidiary of KeyCorp
Key Auto, as the successor to AFG, and retained the 4.99% of the outstanding
shares of the Company's common stock which was not distributed in the
distribution. As a consequence of the distribution, the Company is an
independent, public company. The consummation of the distribution was a
condition to the merger because KeyCorp is not permitted under federal banking
law to acquire the assets and business of Patlex. Accounting for the
distribution of the assets and liabilities was based on the recorded amounts
which approximated net realizable value.
On December 11, 1992, Patlex Corporation (Patlex) merged with and became a
subsidiary of AutoFinance Group, Inc. (AFG). The merger was consummated by
exchanging each of the 5,180,863 common shares outstanding of Patlex at the time
of the merger for 1.4 shares of common stock of AFG. The fair values of the
assets acquired and liabilities assumed were fully allocated to Patlex.
ORGANIZATION
Patlex is engaged in enforcing and exploiting a group of laser related patents
(the Laser Patents), through litigation and a licensing program (the Patent
Business). The Patent Business includes the identification of infringers and
laser patent applications which infringe the Laser Patents and the execution of
licensing agreements through normal commercial negotiations or pursuant to
settlements of litigation brought against infringers of the patents. Patlex was
incorporated under the laws of the Commonwealth of Pennsylvania and has engaged
in the Patent Business since 1979.
Patlex conducts its patent enforcement and exploitation business in Las Vegas,
Nevada, with separate executive, legal, treasury, and accounting functions.
Management of Patlex believes that Patlex's general and administrative costs for
the periods prior to the distribution are those Patlex would incur as a separate
company.
F-7
<PAGE> 28
Patlex Corporation
Notes to Financial Statements (continued)
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Patlex owns a 64% income interest and a 42.86% ownership interest in several
patents, the most significant of which derive from patent applications
originally filed by Dr. Gordon Gould in 1959. NGN Acquisition Corporation (NGN),
a corporation owned by Dr. Gould and his family, holds the remaining 57.14%
ownership interest in the Laser Patents. Other income interests in the Laser
Patents are held by NGN (20%) and Refac Financial Corporation (REFAC) (16%). In
addition to NGN's 20% income interest, Patlex is contractually obligated to pay
NGN an additional 1.5% of the first $198,800,000 of net royalty income. As of
June 30, 1996, total royalties collected under the Laser Patents were
approximately $103,670,000, approximately $99,246,000 of which constituted net
royalty income from which other income interests payments were calculated.
Patlex has the right to receive out of the laser patent royalty revenues an
amount equal to expenses incurred and paid by Patlex which are directly related
to enforcing and litigating the Laser Patents. Such expenses are deducted from
the total laser patent royalty revenues; the resultant royalty amount
constitutes net laser patent royalties. Royalty payments payable to the Laser
Patent interest holders are computed on the basis of net royalties.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the Statement of Cash Flows, cash and cash equivalents include
highly liquid investments purchased with the original maturity of three months
or less.
PROVISION FOR INCOME TAXES
Patlex adopted Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes," during the year ended June 30, 1993. SFAS 109
requires a change from the deferred method of accounting for income taxes to the
liability method.
F-8
<PAGE> 29
Patlex Corporation
Notes to Financial Statements (continued)
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Under SFAS 109, deferred tax liabilities and assets are determined based on
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. As permitted under SFAS 109, prior years'
financial statements have not been restated. Because there was no significant
statement of earnings effect as a result of the adoption of SFAS 109, Patlex did
not recognize a cumulative effect change in accounting principle.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Betterments and major renewals are
capitalized and included in property and equipment accounts while expenditures
for maintenance and repairs and minor renewals are charged to expense. When
assets are retired or otherwise disposed of, the assets and related allowances
for depreciation are eliminated from the accounts, and any resulting gain or
loss is reflected in income.
Depreciation charges for financial reporting purposes are determined on the
straight-line basis. Accelerated depreciation is generally used for income tax
purposes.
REVENUE RECOGNITION
The basis of reporting royalty revenues is derived from Patent License
Agreements between Patlex and approximately 230 licensees. The licensees are
obligated to file periodic activity reports which reflect gross royalties due
Patlex. Included in the gross royalties reported by the licensees are amounts
due to others as explained in "Organization" herein above. Patlex reports as
royalty revenue only its share of the gross royalties reported by the licensees.
NET EARNINGS PER SHARE
Net earnings per common share for the year ended June 30, 1996, presented was
computed by dividing net income for the period by the weighted-average number of
common shares outstanding during the period plus common stock equivalent shares
issuable upon exercise of stock options using the treasury stock method. Pro
forma net earnings and dividends per share for the prior period presented are
computed by giving effect to the number of shares of Patlex's common stock which
would have been outstanding had the distribution occurred one year earlier with
no change in the number of shares outstanding occurring since that date.
F-9
<PAGE> 30
Patlex Corporation
Notes to Financial Statements (continued)
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-Based Compensation," which is effective for financial
statements of Patlex beginning with fiscal years ending after December 15, 1995.
The Statement allows Patlex to charge to expense the fair value of employee
stock options or to continue the current practice of recognizing no compensation
expense because the amount an employee must pay to acquire the Patlex's stock
(the option exercise price) is equal to the stock's market value at the grant
date. Patlex has elected to not charge to expense the fair value of employee
stock options and has disclosed the pro forma effect on operations had the fair
value of the options been charged to expense (see Note 7).
INVESTMENT IN PATENTS
Investment in Patents is recorded at the excess of the cost basis from the
merger with AFG over the fair values of net assets acquired by AFG at the time
of the merger. Investment in Patents costs are amortized on the straight-line
method over the remaining lives of the patents at the date of the merger (see
Note 4).
In accordance with FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," Patlex records
impairment losses on long-lived assets used in its operation when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets. No events or circumstances indicate that the Investment
in Patents might be impaired.
F-10
<PAGE> 31
Patlex Corporation
Notes to Financial Statements (continued)
2. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable at June 30, 1996 and 1995, consist of the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 30
1996 1995
------------------------------------
<S> <C> <C>
Amounts due on royalties earned $1,284 $1,008
Other receivables 1 82
Notes receivable from employees 155 26
------------------------------------
Accounts and notes receivable 1,440 1,116
Less: Allowance for doubtful accounts (200) (200)
Accounts and notes receivable, net of allowance
$1,240 $ 916
====================================
</TABLE>
Patlex has agreed to pay other Laser Patents interest holders their respective
portion of all royalties on the Laser Patents collected by Patlex. Accordingly,
Patlex has accrued liabilities due to other Laser Patents interest holders for
their share of the accounts and notes receivable listed above relating to Laser
Patents royalties.
3. PROPERTY AND EQUIPMENT
Asset costs, accumulated depreciation, and estimated useful lives at June 30,
1996 and 1995, are as follows (in thousands, except for years):
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIFE JUNE 30
(YEARS) 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
Land $ - $207
Office building 31 - 193
Furniture and equipment 5-7 42 45
------------------------------------
Total property and equipment, at
cost 42 445
Accumulated depreciation (13) (54)
------------------------------------
Property and equipment, net of
accumulated deprecation $29 $391
====================================
</TABLE>
F-11
<PAGE> 32
PATLEX CORPORATION
Notes to Financial Statements (continued)
3. PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation expense was $23,000 and $21,000 for the years ended June 30, 1996
and 1995, respectively.
Patlex leases office facilities under noncancelable operating leases. Aggregate
minimum lease commitments as of June 30, 1996, under long-term leases were as
follows:
<TABLE>
<S> <C>
1997 $ 49,050
1998 52,800
1999 52,800
2000 52,800
2001 52,800
------------------
Total minimum payments $260,250
==================
</TABLE>
4. INVESTMENT IN PATENTS
Investment in patents at June 30, 1996 and 1995, consists of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30
1996 1995
------------------------------------
<S> <C> <C>
Excess of cost over fair value of net assets
acquired resulting from merger with
AFG in 1992 $20,427 $20,427
Less: Accumulated amortization (6,433) (4,656)
------------------------------------
$13,994 $15,771
====================================
</TABLE>
Patlex owns a 64% income interest in laser patent revenue relating to certain
patents issued to Dr. Gordon Gould relating to laser technology.
The Laser Patents and their expiration dates are as follows:
U.S. PATENT EXPIRATION
NUMBER DESCRIPTION OF PATENT DATE
- -------------------------------------------------------------------------------
4,161,436 Use Patent July 1996
4,704,583 Gas Discharge Laser Patent November 2004
4,746,201 Brewster Angle Window Patent May 2005
F-12
<PAGE> 33
Patlex Corporation
Notes to Financial Statements (continued)
4. INVESTMENT IN PATENTS (CONTINUED)
The Optically Pumped Laser Patent (U.S. Patent No. 4,053,845) expired in October
1994. Prior to its expiration, the Optically Pumped Laser Patent accounted for
approximately 28% of the laser patent royalty revenues, the Gas Discharge Laser
patent accounted for approximately 62% of the laser patent royalty revenues, the
Use Patent accounted for approximately 10% of the laser patent royalty revenues
and the Brewster Angle Window Patent accounted for less than 0.25% of laser
patent royalty revenues. Patlex anticipates that the decrease in royalty
revenues as a result of the expiration of the Optically Pumped Laser Patent may
be offset to some extent by increased royalty revenues from the Use and/or
Brewster Angle Window Patents. Patlex's management has determined through its
review of royalty reports filed by its licensees and discussions with
representatives of, and counsel to such licensees, that certain of its licensees
are paying royalties under the Use Patent and/or the Brewster Angle Window
Patent with respect to laser products for which they had previously been paying
royalties under the Optically Pumped Laser Patent.
5. LONG-TERM DEBT
Long-term debt at June 30, 1995 consists of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Mortgage payable to bank, interest at New York
prime plus 1% (9.0% at June 30, 1996 and
June 30, 1995), adjusted daily, payable in
monthly installments of $4,151 secured by
land and building $ 270
Notes payable to individuals in the face amount
of $1,031,000, less unamortized discount of
$14,000 at June 30, 1995, with interest
paid semiannually on the unpaid principal
balance at the rate of 7% per annum (an
affective rate of 10% after discount)
1,017
-------
1,287
Less: Current maturities (1,044)
=======
$ 243
=======
</TABLE>
The aggregate maturities of long-term debt for the five years from June 30, 1995
are as follows (in thousands):
<TABLE>
<S> <C>
1996 $1,058
1997 29
1998 32
1999 35
2000 38
</TABLE>
F-13
<PAGE> 34
Patlex Corporation
Notes to Financial Statements (continued)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," requires
disclosure of information about the fair value of financial instruments for
which it is practicable to estimate a value, whether or not such value is
recognized in the balance sheet.
The carrying value and the estimated fair value of financial instruments are as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------
BOOK FAIR
VALUE VALUE
------------------------------------
<S> <C> <C>
Cash and cash equivalents $7,648 $7,648
</TABLE>
The carrying amounts of cash and cash equivalents approximate fair value.
7. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
Patlex has employment contracts with its officers and controller which provide
for minimum salary levels. One agreement automatically renews each year for a
three-year period. The other three agreements expire on December 31, 1998. The
aggregate minimum commitments at June 30, 1996, for future salaries under these
agreements are as follows (in thousands):
<TABLE>
<S> <C>
1997 $468
1998 468
1999 234
</TABLE>
Compensation expense is recorded over the term of these agreements in accordance
with the payment terms.
LITIGATION
Due to the nature of Patlex's business, especially its involvement in the
enforcement of patent rights, Patlex has been continually involved in litigation
with alleged infringers of patents in which Patlex owns an interest. Patlex
regards all such lawsuits as occurring in the regular course of business.
Furthermore, as a result of the involvement of the United
F-14
<PAGE> 35
Patlex Corporation
Notes to Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
States Patent and Trademark Office in granting and denying patent applications
and in conducting reexaminations of patents, the Company has in the past been
required to prosecute appeals of United States Patent and Trademark Office
rulings adverse to the Company's interest to the United States District Court.
No such appeals are pending at this time, and the Company 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 defendants' costs and attorneys' fees.
While such counterclaims have been filed against the Company, to date the
Company has not incurred liability with regard to such counterclaims. The
Company may also be required to file suits to enforce collection and compliance
under its patent license agreements with its current licensees.
In November 1994, REFAC Financial Corporation (REFAC) instituted a civil action
in the United States District Court, Eastern District of Pennsylvania, alleging
that Patlex improperly calculated the royalties due REFAC. The manner in which
the royalties due REFAC are calculated has been consistent for more than six
years. Patlex believes that the royalties due REFAC have been properly
calculated and that REFAC's claim is both without merit and time-barred. On
February 28, 1996, a special verdict adverse to Patlex was returned. Post-trial
motions have been denied but no separate judgment has been entered. The amount
of any judgment against Patlex in this action will be less than $225,000. When a
separate judgment is entered, Patlex intends to appeal this judgment. The amount
of the judgment that Patlex is appealing is not material to the Company's
operations.
STOCK OPTIONS
RIGHTS OF HOLDERS OF KEYCORP STOCK OPTIONS
Prior to the merger with AFG, Patlex had a qualified and nonqualified
employee-incentive stock option plan. Under the 1981 Incentive Stock Option
Plan, options to purchase common shares could be granted at prices not less than
fair market value on the date of grant for a period not exceeding 10 years and
were exercisable at the option of the holder. All options were assumed by AFG in
connection with that merger in 1992.
F-15
<PAGE> 36
Patlex Corporation
Notes to Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The merger agreement of KeyCorp and AFG provided that KeyCorp would assume each
AFG Option granted by AFG pursuant to its option plans (the 1989 Stock Option
and Performance Award Plan and the 1991 Stock Option Plan) which were
outstanding and unexercised, whether or not exercisable, and convert each AFG
Option into a KeyCorp Option. In addition, the distribution agreement provided
that the holder of each KeyCorp Option granted upon conversion of an AFG Option
would be entitled to receive upon exercise of such option, in addition to one
share of KeyCorp common stock, one share of Patlex common stock for every eight
shares of AFG common stock that would have been issuable except for the
conversion to the KeyCorp Option.
At June 30, 1996, a total of 31,978 shares of Patlex common stock, for which no
consideration will accrue to Patlex, is issuable upon the exercise of KeyCorp
stock options acquired by holders as a result of the merger of AFG and KeyCorp.
Each holder is entitled to receive one share of Patlex common stock for every
eight shares of KeyCorp common stock issuable upon exercise of such options.
PATLEX STOCK OPTION PLAN
Patlex has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that are not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of Patlex's employees stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The 1995 Stock Option Plan (the Plan), approved by the Patlex Board of Directors
as of March 31, 1995, and approved by AFG on September 8, 1995, provides for
incentive and nonqualified stock options for designated officers, directors,
employees, and key advisors of Patlex. The aggregate number of shares of common
stock that may be offered pursuant to the Plan amounts to 375,000.
Options to purchase shares of common stock can be granted at a price determined
by a committee appointed by the Board of Directors provided however, that the
purchase price of shares subject to incentive stock options shall be equal to or
greater than fair market value of shares of common stock at date of grant and a
nonqualified stock options shall
F-16
<PAGE> 37
Patlex Corporation
Notes to Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
not be less than 85% of fair market value of a share of common stock at date of
grant. Stock options are exercisable at the discretion of the committee. The
term of each stock option is ten years. At June 30, 1996, 350,000 shares have
been granted and are exercisable at $4.75 per share.
Pro forma information regarding net earnings and earnings per share is required
by Statement 123 and has been determined as if Patlex had accounted for its
employee stock options under the fair value method of the Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
options pricing model with the following assumptions: risk-free interest rate of
6.15%, dividend yields of 0%, volatility factors of the expected market price of
the Patlex's common stock of .10, and an expected life of the option of two
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
Patlex'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.
Patlex's pro forma information for the year ended June 30, 1996 is as follows:
<TABLE>
<S> <C>
Pro forma net earnings (in thousands) $2,089
Pro forma net earnings per common share $ .93
</TABLE>
8. INCOME TAXES
PROVISION FOR INCOME TAXES
Patlex adopted SFAS 109, "Accounting for Income Taxes," during 1993. SFAS 109
requires a change from the deferred method of accounting for income taxes to the
liability method. Concurrent with the accounting for the assets acquired and
liabilities assumed in the merger with AFG, a net deferred tax liability and an
increase in intangibles of $3,831,000 was recorded, principally as a result of
the difference between the financial and tax reporting basis of the investment
in patents.
F-17
<PAGE> 38
Patlex Corporation
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The SFAS 109 adjustments recognize the deferred tax liability allocated by AFG
in the purchase price accounting and were calculated giving recognition to AFG
net operating loss carryforwards. In 1993 and 1994, Patlex filed a consolidated
tax return with AFG. The carryforwards were utilized in 1993 and 1994 in the
consolidated tax return. Pursuant to a tax-sharing agreement, Patlex paid to its
parent the book income tax provision determined on a separate company basis.
Under the terms of the spin-off of Patlex (see Note 1), the financial statement
and the tax basis of assets and liabilities will carry over to Patlex. As these
temporary differences reverse, Patlex will pay additional current taxes.
Accordingly, deferred tax liabilities related to these temporary differences
have been provided for in the accompanying financial statements. Because in
prior years Patlex paid cash to AFG related to the deferred income tax
provision, such prior payments have been reflected as dividends in the
accompanying financial statements.
The provision for income taxes for the years ended June 30, 1996 and 1995
consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30
1996 1995
------------------------------------
<S> <C> <C>
Federal:
Current $2,107 $1,589
Deferred (368) (402)
------------------------------------
Total federal 1,739 1,187
State:
Current 438 325
Deferred (76) (82)
------------------------------------
Total state 362 243
------------------------------------
$2,101 $1,430
====================================
</TABLE>
F-18
<PAGE> 39
Patlex Corporation
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Patlex's deferred tax liability at June 30, 1996 and 1995 consist of the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 30
1996 1995
------------------------------------
<S> <C> <C>
Deferred tax assets:
Capital loss carryover $ - $ 868
Other 414 188
------------------------------------
Total deferred tax assets 414 1,056
Valuation allowance for deferred tax assets - (868)
------------------------------------
Net deferred tax assets 414 188
Deferred tax liabilities:
Patents 4,027 4,201
Other 115 159
------------------------------------
Total deferred tax liabilities 4,142 4,360
------------------------------------
Net deferred tax liability $3,728 $4,172
====================================
</TABLE>
Patlex had available capital loss carryovers for federal income tax purposes of
approximately $2,125,728, which expired unutilized in 1996. For financial
reporting purposes, a valuation allowance had been provided to reduce the
deferred tax asset to an amount the Company believes is realizable.
The provision for income taxes differed from the statutory federal income tax
rate for the years ended June 30, 1996 and 1995, as a result of the following:
<TABLE>
<CAPTION>
JUNE 30
1996 1995
------------------------------------
<S> <C> <C>
Statutory federal income tax rate 35.0% 35.0%
Capitalized merger costs 5.0 2.0
Patent amortization not deductible for tax
purposes 2.4 3.6
State income taxes and other 6.5 5.1
------------------------------------
48.9% 45.7%
====================================
</TABLE>
F-19
<PAGE> 40
Patlex Corporation
Notes to Financial Statements (continued)
9. SIGNIFICANT LICENSEES
Of the total laser patent royalties earned from all licensees, the following
reflects the highest percentage of the total that was contributed by two
licensees for each period. The two licensees are not necessarily the same for
the periods presented.
LICENSEE
NO. 1 NO. 2
------------------------------------
For the year ended June 30, 1995 9.9% 8.5%
For the year ended June 30, 1996 12.4 8.5
10. 401(K) SAVINGS PLAN
Patlex employees participated in the AFG 401(k) Savings Plan, which commenced
July 1, 1994, until the spin-off date of September 27, 1995. After the spin-off
date, no Patlex employees were participants in the plan. Another plan was
established effective April 1, 1996. Contributions to the plan are made at the
discretion of the Board of Directors. The total matching contribution expense of
Patlex for the years ended June 30, 1996 and 1995, was $14,143 and $20,423,
respectively.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED - FISCAL 1996 THREE MONTHS ENDED - FISCAL 1995
-------------------------------------------------------------------------------------
SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
-------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Laser patent royalties $1,457 $2,205 $1,810 $2,506 $1,384 $1,514 $1,454 $1,901
Operating income 588 1,320 805 1,330 545 811 737 943
Net earnings 273 760 398 765 290 448 405 557
Net earnings per
common share $ .11 $ .27 $ .14 $ .46 $ .11 $ .18 $ .16 $ .22
</TABLE>
12. PROPOSED ACQUISITION
On February 7, 1996, Patlex entered into a definitive merger agreement with
Database Technologies, Inc. (DBT), of Pompano Beach, Florida. The merger is
intended to be a tax-free reorganization in which the shareholders of DBT would
receive a number of shares of Patlex common stock equal to 65% of the sum of the
number of outstanding common shares plus one-half the number of Patlex options
and certain rights to receive Patlex common stock outstanding at the time of the
merger (see Note 7). Consummation of the merger is conditioned on, among other
things, receipt of the necessary shareholder and regulatory approvals.
F-20
<PAGE> 41
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.
/s/ J. Henry Muetterties
-----------------------------
J. Henry Muetterties
Vice President, Secretary and
General Counsel
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Frank Borman Chairman of the Board of Directors September 30, 1996
- -----------------------------
Frank Borman
/s/ Hank E. Asher President and Chief Financial Officer September 30, 1996
- -----------------------------
Hank E. Asher
/s/ Richard Laitinen Vice President, Treasurer and Chief
- ----------------------------- Financial Officer September 30, 1996
Richard Laitinen
- ----------------------------- Director September 30, 1996
Charles A. Asher
/s/ Gary E. Erlbaum Director September 30, 1996
- -----------------------------
Gary E. Erlbaum
- ----------------------------- Director September 30, 1996
Jack Hight
/s/ Kenneth G. Langone Director September 30, 1996
- -----------------------------
Kenneth G. Langone
- ----------------------------- Director September 30, 1996
Sari Zalcberg
</TABLE>
<PAGE> 1
OFFICE LEASE
THIS LEASE made and entered into this __________ day of April, 1996, by
and between Walter L. Schwartz as (Landlord) and PATLEX CORPORATION as
(Tenant).
SECTION 1. DEMISE
Upon the conditions, limitations, covenants and restrictions contained
herein, Landlord hereby leases to Tenant and Tenant leases from Landlord, a
total of approximately 2,600 S.F. square feet of floor space (hereinafter
"Leased Property"), in The Office Complex (hereinafter the "Complex") of
Flamingo Place Office Park ("Center") located on the north west corner of
Flamingo Road and Lindell Ave., Las Vegas, Clark County, Nevada, said Leased
Property being more specifically indicated on the site plan attached hereto as
Exhibit A and incorporated herein by reference. The mailing address of the
Leased Property is 5550 W. Flamingo Road, Suite B-5, Las Vegas, Nevada 89103.
Tenant acknowledges that Landlord may not own or control the use of other
portions of the Complex or the Center. Tenant also acknowledges that although
Tenant may have been shown renderings, plot plans or other data showing
additional portions of the Center other than the portion in which the Leased
Property is located, such additional portions are conceptual only and this
Lease shall not be affected by the construction or failure to construct any
improvements on the property constituting such additional portions nor by the
relationship of said portions to the portion in which the Leased Property is
located. Tenant also acknowledges that the site plan shown on Exhibit A is
tentative and that Landlord may change the shape, size, location, number and
extent of the improvements shown thereon and eliminate or add any improvement
thereto.
SECTION 2. TERM
The term of this Lease shall be for a period of SIXTY (60) MONTHS,
commencing on the first day of the month next succeeding the occupancy date,
as hereinafter defined as June 10, 1996, unless terminated earlier as
elsewhere herein provided. Landlord may not be held liable by Tenant for any
delays in delivering the leased premises later than the scheduled occupancy
date as listed above. However, Tenant shall not be inclined to pay rent until
said space is delivered unto Tenant for occupancy. In the event that Tenant
fails or refuses to open the Leased Property for and to commence this lease
within thirty (30) days after the occupancy date, then at the option of
Landlord, Landlord may treat such failure or refusal as an event of default,
and may terminate this lease.
The words "occupancy date" whenever used in this Lease shall be deemed to
refer to June 10, 1996. Should Tenant hold possession of the Leased Property
with the consent of Landlord after the expiration of the stated term of this
Lease, such holding over shall create a tenancy from month to month only, upon
the same terms and conditions as are hereinafter set forth, except that basic
rent shall be one hundred fifty percent (150%) of the amount set forth in
Section 3 hereof.
SECTION 3. RENT
3.01 Subject to adjustment as hereinafter provided, Tenant shall pay
Landlord as basic rent for the term of this lease, the total sum of TWO
HUNDRED & TWENTY FIVE THOUSAND DOLLARS ($225,000.00). Beginning on the
commencement date, Tenant shall pay to Landlord basic month rent of $3,750.00.
In the event that the occupancy date is prior to the commencement of the term
as aforesaid, Tenant shall pay to Landlord, on or before the occupancy date, a
sum equal to such monthly installment amount for the use and occupancy thereof
prorated (on the basis of a 30-day month) to the commencement date of this
Lease.
3.02 After each lease year, the basic rent of the succeeding year shall
be adjusted for any increases in the cost of living in the manner hereinafter
provided. No adjustment shall be made for decreases in the cost of living, if
any. Landlord shall compute the increase in the cost of living for the
preceding period based on the Los Angeles-LongBeach-Anaheim Consumer Price
Index for All Urban Consumers for all items (1967=100), published by the
Bureau of Labor Statistics of the U.S. Department of Labor. Landlord shall
compute the rent adjustment by multiplying the basic monthly rent for the
preceding lease year by a fraction, the numerator of which shall be the index
for the month immediately prior to the first month of the lease year for which
such adjustment is made and the denominator of which shall be the index
<PAGE> 2
number for the month immediately prior to the first month for the preceding
lease year. In case of the adjustment at the end of the first year, the
denominator shall be the index number for the calendar month immediately
preceding the commencement date hereof. The product so obtained shall be the
adjusted basic monthly rent. ** C.P.I. increases shall not exceed 5%
annually.
3.03 Landlord shall, within a reasonable time after obtaining the
appropriate data necessary for the computing of such increase, give Tenant
notice of any adjusted basic rent so determined, and Landlord's computation
thereof shall be conclusive and binding, but shall not preclude any adjustment
which may be required in the event of a published amendment of the index
figures upon which the computation was based, unless Tenant shall, within
thirty (30) days after the giving of such notice, notify Landlord in writing
of any claimed error therein.
3.04 The adjusted basic rent shall be due and payable for each month
commencing with the first month of the second lease year of this Lease.
However, pending the determination of the adjusted basic rent. Tenant shall
continue to pay basic rent in the same amount as the basis rent required for
the preceding lease year. When the adjusted basic rent has been determined,
Tenant concurrently with the next monthly basic rent payment due and payable
after the furnishing by Landlord to Tenant of the computation of the adjusted
basic rent, in addition to the adjusted basic rent for such month, shall pay
to Landlord a sum equal to the amount of the increase in the basic rent due
for each of the previous months in the lease year.
3.05 If at the time required for the determination of the adjusted basic
rent the above mentioned Consumer Price Index is no longer published or
issued, the parties shall use such index as Landlord reasonably determines to
be generally recognized and accepted for similar computations of purchasing
power.
3.06 The rent shall be paid to Landlord in advance on the first day of
each month during the term of this lease.
3.07 All rent and other monies payable under this Lease shall be paid
without prior demand therefor and without any deduction or offset whatsoever
in lawful money of the United States of America at such place or places as may
from time to time be designated in writing by Landlord.
3.08 "Lease year" shall mean the twelve (12) month calendar year. In the
event the commencement date occurs on a date other than January 1, the first
lease year shall be that fractional part of the calendar year from the
commencement date to December 31 of the same year and the final lease year
shall be that fractional part of the calendar year from January 1 to the
termination date.
3.09 If Tenant shall fail to pay, when the same is due and payable, and
basic rent, or any additional rent, or any other amount or charges to be paid
by Tenant hereunder, such unpaid amount shall be subject to a late charge in
an amount equal to ten percent (10%) of the amount overdue, which late charge
shall be payable as additional rent. In addition, if any basic rent,
additional rent, or any other amount or charges to be paid to Landlord by
Tenant hereunder, shall be more than thirty (30) days overdue, each such
unpaid amount shall bear interest from the due date thereof to the date of
payment at the rate of eighteen percent (18%) per annum, which interest shall
be payable as additional rent.
SECTION 4. SECURITY DEPOSIT
Tenant, concurrently with the execution of this Lease, has deposited with
Landlord the sum of $3,750.00, receipt of which is hereby acknowledged by
Landlord. Said deposit shall be held by Landlord as security for the faithful
performance by Tenant of all terms, covenants and conditions of this Lease by
said Tenant to be kept and performed during the term hereof, provided that
Tenant shall not be excused from the payment of any rent herein reserved or
any other charge herein provided. If Tenant defaults with respect to any
provision of this Lease, Landlord may, but shall not be required to, use or
retain all or any part of such security deposit for the payment of any rent,
to repair damages to the Leased Property, to clean the Leased Property or to
compensate Landlord for any other loss or damage which Landlord may suffer by
reason of Tenant's default. If any portion of said deposit is so used or
applied, Tenant shall, within five
2
<PAGE> 3
(5) days after written demand therefor, deposit cash with Landlord in an
amount sufficient to restore the security deposit to its original amount and
Tenant's failure to do so shall be a material breach of this Lease. Should
Tenant comply with all said terms, covenants and conditions and promptly pay
all the rents herein provided for as it falls due, and all other sums payable
by Tenant to Landlord hereunder, then the said deposit shall be returned in
full to Tenant thirty (30) days after end of the term of this Lease or after
the last payment due from Tenant to Landlord, whichever last occurs. No
beneficiary of any Deed of Trust encumbering the Leased Property or the Center
shall be or at any time become liable for the return of any security deposit
hereunder unless such deposit is actually held by such Beneficiary as
security for Tenant's performance hereunder.
SECTION 5. POSSESSION AND SURRENDER OF LEASED PROPERTY
Tenant shall by entering upon and occupying the Leased Property be deemed
to have accepted the Leased Property and Landlord shall be liable only for
latent defects discovered therein in the first ninety (90) days, provided that
written notice is given to Landlord by Tenant within ten (10) days after any
such defect is discovered by Tenant. In no event shall Landlord be liable for
consequential damages. Upon termination of this Lease, if, and only if,
Tenant has fully and faithfully performed all of its obligations hereunder,
Tenant shall, at its sole cost and expense, remove all personal property which
Tenant has installed or placed on the Leased Property ("Tenant's property")
from the Leased Property and repair all damage thereto resulting from such
removal and Tenant shall thereupon surrender the Leased Property in the same
condition as on the occupancy date, reasonable were and tear expected. If
Tenant has not fully and faithfully performed all of its obligations under
this Lease, Tenant shall nevertheless remove Tenant's property from the Leased
Property, upon Landlord's written direction, in the same manner, and upon the
same terms and conditions, as provided above. In the event Tenant shall fail
to remove any of Tenant's property as provided herein, Landlord may, but is
not obligated to, at Tenant's expense, remove all such property not so removed
and repair all damage to the Leased Property resulting from such removal, and
Landlord shall have no responsibility to Tenant for any loss or damage to said
property caused by or resulting from such removal, and Landlord shall have no
responsibility to Tenant for any loss or damage to said property caused by or
resulting from such removal or otherwise.
Tenant covenants to occupy and do business from the Leased Property
throughout the term hereof. Tenant expressly recognizes that Landlord will be
injured should Tenant not comply with this provision and that the amount of
Landlord's damages thereby are incapable of exact measurement and Tenant,
therefore, expressly covenants to pay the Landlord as liquidated damages for
breach of this covenant an amount, in addition to all other rents and other
monies due Landlord hereunder, equal to fifty percent (50%) of the rent due
for the remainder of the term after such breach, said amount representing
Landlord and Tenant's best estimate of Landlord's probable damages.
SECTION 6. USE OF LEASED PROPERTY
The Leased Property is leased to Tenant solely for use as OFFICE SPACE.
Tenant shall not use or suffer to be used the Leased Property, or any portion
thereof, for any other purpose or purposes whatsoever, without Landlord's
prior written consent. Tenant shall at all times during the term hereof
comply with all governmental rules, regulations, ordinances, statues and laws,
and the orders and regulations of the Insurance Services Leased Office or any
other body now or hereafter exercising similar functions, now or hereafter in
effect pertaining to the Complex, the Leased Property or Tenant's use thereof.
Tenant shall not do, or permit or suffer anything to be done or kept in, on or
about the Leased Property which will obstruct or interfere with the rights of
other tenants, Landlord or any of their agents, employees, servants,
contractors, subtenants, licensees, customers or business invitees, or which
will annoy any of them by unreasonable noise or otherwise, nor will Tenant
commit or permit any nuisance in, on, or about the Leased Property or permit
any immoral or illegal act to be committed in, on or about said Leased
Property. Except as provided for elsewhere herein, Tenant shall maintain the
Leased Property in good condition and repair. Tenant hereby covenants that
it, its agents, employees, servants, contractors, subtenants, customers,
licensees and business invitees shall abide by the rules and regulations
attached hereto as Exhibit B and incorporated herein by reference, and shall
abide by such other reasonable rules and regulations, including amendments and
modifications thereof, as Landlord may, for time to time, adopt for safety,
care and cleanliness of the Leased Property or of the Complex or the adjoining
grounds or for the
3
<PAGE> 4
preservation of good order thereon. Landlord shall not be liable for the
failure of any tenant or occupant of the Complex to comply with such rules and
regulations or with the terms of any lease of space in the Complex.
SECTION 7. IMPROVEMENTS
Prior to delivery of possession of the Leased Property by Landlord to
Tenant, tenant improvements, if required to the Leased Property shall be
compensated by Landlord in accordance with the improvement agreements as
stated in Exhibit C. The working drawings shall be prepared by Tenant and
submitted to Landlord for approval in the following manner: Tenant shall hire
a space planner (the "Space planner," at Tenant's sole expense. Tenant shall
submit all of Tenant's space and improvement requirements for the Leased
Property to the space planner. Tenant and the space planner shall have
prepared a space study, and shall have submitted it to Landlord for approval.
If Landlord disapproves the space study, Tenant and the space planner shall in
good faith make such revisions to the space study as are necessary to cure the
reasons for Landlord' disapproval, and after such disapproval shall submit the
revised space study to Landlord for approval. Said procedure shall be
repeated until Landlord and Tenant agree upon the space study. After Landlord
has approved the space study, Tenant and the space planner shall have prepared
working drawings based on the approved space study, and shall have submitted
the same to Landlord for approval. If Landlord does not approve the working
drawings, Tenant and the space planner shall in good faith make such revisions
thereto as may be necessary to cure the reasons for Landlord's disapproval,
and shall submit the revised working drawings to Landlord for approval. Said
procedure shall be repeated until Landlord and Tenant agree upon the working
drawings. If Tenant fails to meet any of the processes set forth in this
Section 7, Landlord may at Landlord's sole option terminate the Lease. When
Landlord has approved the working drawings, the approved parties may construct
improvements to the Leased Property in accordance to those prescribed in
Exhibit C (except for minor deviations and/or substitutions of similar
materials made necessary by factors outside of Landlord's control). Tenant
agrees and acknowledges that the improvement schedule, attached as Exhibit C
hereto and incorporated by this reference herein, sets forth the standard
improvements for the Complex, and that the space study and working drawings to
be prepared by Tenant and the space planner shall incorporate and be based
upon the standard improvements described in Exhibit C. Notwithstanding the
foregoing, so long as approved in advance by Landlord, Tenant's improvements
may contain additional items not shown on Exhibit C, upgraded materials and/or
substitutions; provided, however, that Tenant shall bear the additional cost
of purchasing and installing any additional items, upgraded materials Landlord
on demand, and Landlord may at Landlord's obligation for the completion of the
Leased Property shall be defined and limited by the working drawings, and
Landlord shall not be required to furnish or install any item not shown
thereon. Landlord shall not be held liable by Tenant for any delays in
construction.
Tenant shall observe and perform all of its obligations under this Lease
from the time Tenant takes occupancy to the commencement date; in the same
manner as though the Lease term began upon such occupancy.
Tenant shall not make any additional improvements to the Leased Property
without the written consent of Landlord first had and obtained therefor. All
improvements made by Tenant pursuant to this Section 7 shall be made promptly,
at Tenant's sole expense, in a good and workmanlike manner, by duly-licensed
contractors, and in compliance with all insurance requirements and with all
applicable permits and authorizations, and all other governmental rules,
regulations, ordinances, statutes and laws, and all rating bureau
recommendations, thereof, and such improvements shall be done by recognized
union labor if so required by Landlord. Prior to the commencement of such
work, Tenant shall give evidence to Landlord that appropriate insurance
satisfactory to Landlord has been obtained for the protection of Landlord and
its tenants and invitees from damage or injury resulting from the making of
such improvements. Landlord shall secure, at Tenant's expense, performance,
labor and materials bonds for the full cost of such work satisfactory to
Landlord.
Any improvements made by Tenant pursuant to this Section 7 shall, at
Landlord's option, become the property of Landlord upon the expiration or
sooner termination of this Lease. However, Landlord shall have the right to
require Tenant to remove any or all improvements, at Tenant's sole cost and
expense, upon such termination of this Lease and to surrender the Leased
Property in the same condition as it was prior to the making of any or all
such improvements, reasonable wear and tear excepted.
4
<PAGE> 5
At any time during the original or any extension term thereof, Landlord
shall have the right to relocate the Leased Property, to any other part of the
Complex, on the following terms and conditions: The new premises shall be
substantially the same in size and nature as the Leased Property, and, if the
relocation occurs after the commencement date hereof, shall be placed in such
condition by Landlord at Landlord's expense. Landlord shall give Tenant at
least thirty (30) days advance written notice of any such relocation. Tenant
agrees to cooperate in effectuating any such relocation. As nearly as
practicable, the physical relocation of the Leased Property shall take place
on a weekend and shall be completed before the following Monday. If the
physical relocation has not been completed in such time, and so long as Tenant
has not caused the delay, the monthly minimum rent required by this Lease
shall abate pro rata for all business days during which the relocation remains
uncompleted. If the new premises are smaller than the original Leased
Property, minimum rent shall be reduced proportionately. Upon the conclusion
of the relocation, the new premises shall automatically become the Leased
Property for all purposes under this Lease, and Tenant agrees to execute an
amendment to this Lease, setting forth the relocation of the Leased Property,
and any resulting reduction in minimum rent.
SECTION 8. PARKING AND COMMON AREAS
Tenant, its employees and business invitees shall have the nonexclusive
right, in common with Landlord and all others to whom Landlord has granted or
may hereafter grant rights, to use such common areas in the Complex (including
but not limited to, the parking lot, walkways and sidewalks) as are designated
from time to time by Landlord, subject to such reasonable rules and
regulations as Landlord may from time to time impose, including the
designation of specific areas in which cars operated by Tenant, its employees
and business invitees must be parked. Notwithstanding the foregoing, Landlord
expressly reserves the right to reserve and/or designate parking spaces for
the exclusive use of any tenant or tenants, or officers or employees thereof,
which Landlord may specify; and Landlord further reserves the right to charge
such tenants (separate from and in addition to rent) Landlord's current rate
for reserved parking. Landlord may at any time close any common area to make
repairs or changes, to prevent the acquisition of public rights in such area,
or to discourage non-customer parking. Landlord may do such other acts in and
to the common areas as in its parking. Landlord may do such other acts in and
to the common areas as in its judgment may be desirable, and Landlord shall
have the right to diminish the common areas and to dedicate portions of the
common areas for utility purposes. Tenant shall, upon request, furnish to
Landlord the license number of cars operated by Tenant and its employees.
Tenant hereby agrees to pay Landlord, upon written demand, the sum of $25.00
per car per day, for each car of Tenant, or any of its employees, agents or
contractors, which is parked in any area of the complex or the Center other
than the area designated by Landlord. Tenant shall not at any time interfere
with the right of Landlord, other tenants, its and their agents, employees,
servants, contractors, subtenants, licensees, customers and business invitees
to use the parking lot or other common areas. The use of the Leased Property
and all common areas whatsoever by Tenant, its employees, agents, customers,
licensees, invitees and contractors, shall, at all times, be in compliance
with all covenants, conditions and restrictions, easements, reciprocal
easement agreements and all other matters, presently of public record or which
may hereafter be placed of public record, which affect the Leased Property or
the Complex, or any part thereof. Landlord shall maintain the parking areas
in the Complex in a clean and neat condition. However, Landlord assumes no
responsibility to police the use of said parking areas and Landlord shall not
be liable for the use thereof by Landlord, Landlord's other tenants, its or
their agents, employees, servants, contractors, subtenants, customers and/or
business invitees or by any other person or persons, entity or entities
whomsoever.
SECTION 9. TAXES
Tenant shall be liable for and shall pay before delinquency (and, upon
demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence
of the payment thereof) all taxes and assessments of whatsoever kind or
nature, and penalties and interest thereon, if any, levied against Tenant's
personal property and any other personal property of whatsoever kind and to
whomsoever belonging situated or installed in or upon the Leased Property,
whether or not affixed to the realty. Any leasehold improvements in excess of
those provided for in Exhibit C shall be deemed Tenant's personal property for
the purposes of this Section 9. If at any time during the term of this Lease
any such taxes on Tenant's property are assessed as part of the tax on the
real property of which the Leased Property is a part, then in
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<PAGE> 6
such event Tenant shall pay to Landlord the amount of such additional taxes as
may be levied against the real property by reason thereof. Tenant shall use
its best efforts to have Tenant's property assessed separately from said real
property.
Tenant shall pay as additional rent that proportion of any increase in
Impositions, as hereinafter described, due and payable during the term of this
Lease, over and above the amount of such Impositions assessed for and
attributable to the base year ("base year," as hereinafter defined), which the
total number of square feet of floor space in the Leased Property bears to the
total number of square feet in the Complex. Any such increase due and payable
for the fiscal year in which this Lease terminates shall be prorated and
adjusted between Landlord and Tenant. The "base year" is hereby defined as
calendar 1996. Whenever Landlord shall receive any tax statement or bill
payable, in whole or in part, by Tenant hereunder, Tenant shall pay the amount
due within ten (10) days after demand therefor accompanied by delivery to
Tenant of a copy of the tax statements for 1996, a copy of the tax statement
for any year showing any increase in said taxes or assessments, and
Landlord's computations of Tenant's proportion of such increase in taxes.
For the purposes of this Section 9 "Imposition" means:
(a) Any real estate taxes, assessments or other charges assessed
against the Complex and related structures and parking facilities and the
land on which they are located.
(b) All personal property taxes on personal property used in
connection with the Complex and related structures other than taxes
payable by Tenant under the first paragraph of this Section 9 and taxes
of the same kind as those described in said paragraph payable by other
tenants in the Complex pursuant to corresponding provisions of their
leases.
(c) Any other taxes levied or assessed in addition to or in lieu of
such real or personal property taxes.
If at any time during the term of this Lease, under the laws of the
United States, Nevada or any political subdivision thereof, a tax or excise on
rents or other tax (except income tax), however described, is levied or
assessed by the United States, Nevada or said political subdivision against
Landlord on account of any rent reserved under this Lease, the Leased Property
or the use thereof, all such taxes or excise on rents or other taxes shall be
paid by Tenant. Whenever Landlord shall receive any statement or bill for any
such tax or shall otherwise be required to make any payment on account
thereof, Tenant shall pay the amount due hereunder within ten (10) days after
demand therefor accompanied by delivery to Tenant of a copy of such tax
statement, if any.
SECTION 10. SERVICES AND UTILITIES
Tenant shall be responsible for all utilities and services to the Leased
Premises, although individual utility may be under the Landlord's service.
All utilities shall be the responsibility of Tenant (including, without
limitation, the monthly charges for electricity, janitorial services, and all
sewer and sanitation fees for other costs charged by any utility company for,
or in connection with, the installation of service). Landlord receives the
billing for electrical, water, sewer, refuse and janitorial fees. Landlord
shall then bill unto Tenant on a monthly basis for the expenses of electricity
and janitorial services, based upon the total cost of services divided by
Tenant's leasable square footage. Sewer charges and sanitation fees will be
billed according to Tenant's obligation to pay rent shall not be affected by
any failure of Tenant to timely arrange for the commencement of service of
interior utilities. Tenant may contract, at Tenant's sole expense, for such
janitorial services as Tenant desires for the interior of the Leased Property,
with the janitorial company which Landlord shall from time to time designate
to service the Complex. Said janitorial company shall bill Tenant directly
for Tenant's interior janitorial service, and Tenant shall pay such invoices
directly to the janitorial company. Tenant may contract directly with a
janitorial service of Tenant's choice, so long as such janitorial service
complies with Landlord standard security procedures, and so long as Landlord
has previously approved said janitorial service in writing (which approval
shall not be unreasonably withheld). Landlord shall provide normal janitorial
services five (5) days a week, at Landlord's expense, to the common areas of
the Complex. In addition, Landlord shall at Landlord's expense provide
lighting and any other appropriate utilities to the common areas of the
Complex. Landlord shall have the right to reduce
6
<PAGE> 7
any utility service as required by any mandatory or voluntary fuel or energy
conservation program. Except as specifically provided herein, Tenant shall
pay, at its sole cost and expense, all charges for services and utilities used
in, upon or about the Leased Property. Landlord may, from time to time,
prescribe reasonable rules and regulations for implementation of the
paragraph.
Landlord shall not be obligated to perform any service or to repair or
maintain any structure or facility except as provided in this Section.
Landlord shall not furnish telephone facilities or service. Landlord shall
not be obligated to provide any service or maintenance or repair is made
necessary because of the negligence or misuse of Tenant, Tenant's agents,
employees, servants, contractors, subtenants, licensees, customers or business
invitees. Landlord reserves the right to stop any service when Landlord deems
such stoppage necessary, whether by reason of accident or emergency, or for
repairs or improvements or otherwise. Landlord shall not be liable under any
circumstances for loss or injury however occurring, through or in connection
with or incident to any stoppage of such services. Landlord shall have no
responsibility or liability for failure to supply any services or maintenance
or to make any repairs when prevented from doing so by any cause beyond
Landlord's control. Landlord shall not be obligated to make any repairs or
perform any maintenance hereunder unless first notified of the need thereof in
writing by Tenant. In the event that Landlord shall fail to commence such
repairs or maintenance within five (5) days after said notice, Tenant's sole
right and remedy for such failure shall be, after further notice to Landlord,
to make such repairs or perform such maintenance and to deduct the cost and
expenses thereof from the rent payable hereunder, provided, however, that the
amount of such deduction shall not exceed the reasonable value of such repairs
or maintenance. Landlord shall not be liable for any loss or damage to
persons or property sustained by Tenant or other persons, which may be caused
by the Complex or the Leased Property, or any appurtenances thereto, being out
of repair or by bursting or leakage of any water, gas, sewer pipe, or by
theft, or by any act or neglect of any tenant of occupant of the Complex, or
of any other person, by failure to furnish, or interruption of, service of any
utility, or by any other cause of whatsoever nature, unless caused by the
negligence of Landlord.
Tenant agrees to pay Tenant pro rata portion of any increase in Complex
Operating Costs over and above the amount of Complex Operating Costs incurred
during the base year (as defined in Section 9 hereof). Tenant's pro rata
portion of said Complex Operating Costs shall equal the percentage which the
number of square feet in the Leased Property bears to the total number of
square feet in the Complex. Complex Operating Costs shall include all costs
and expenses of every kind or nature incurred by Landlord in the operation,
maintenance and repair of the Complex and related structures in a manner
deemed by Landlord to be reasonable and appropriate and for the best interests
of the entire Complex, as determined in accordance with generally accepted
accounting principles. Without otherwise limiting the generality of the
foregoing, there shall be included in such costs and expenses premiums with
respect to public liability, property damage, workmen's compensation, fire and
other insurance carried on or with respect to the Complex and related
structures, payroll taxes, unemployment taxes, social security taxes,
management fees, cleaning of any facilities, common area janitorial costs,
landscape maintenance, signs, lighting, music systems, depreciation on or
rentals of machinery and equipment, reasonable replacement reserves, legal and
accounting expenses, supervising of attendants and employment of other
personnel used in such operations, maintenance and repairs, fuel, energy and
utilities (including without limitation all utilities specified in this
Section 10 to be provided at Landlord's expense), and providing for security
and fire protection services. In addition, after the base year, an
administrative fee equal to 10% of all Complex Operating Costs shall be added
to the total of increases in Complex Operating Costs, and Tenant shall also
pay its pro rata share of said administrative fee. Any costs which are not
involved are allocated separately to the retail and office portions of the
Center shall be allocated and apportioned by Landlord in a fair and equitable
manner. Tenant agrees and acknowledges that any allocation based on the
respective square footages of said office and retail portions shall be
conclusively deemed to be fair and equitable. In the event that the Complex
hereafter consists of more than one parcel, as shown on the Complex's parcel
map of record, Landlord may at Landlord's sole option compute "Complex's
Operating Costs" in such a manner as will exclude any or all parcels (a) not
owned by Landlord, or (b) wholly leased or ground leased by one or more
tenants, so that third parties who own any parcel within the Complex or
tenants who lease a complete parcel within the Complex may at Landlord's
option be required to separately pay all expenses attributable to any such
parcels.
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In the event of such an increase, as soon after each calendar quarter
(including the calendar quarter in which this Lease terminates) as such
information is available to Landlord, Landlord shall deliver to Tenant a
written statement, signed and certified by Landlord or any officer of Landlord
as being true and correct, setting forth the amount of such operating costs
during the previous calendar quarter, the increase, if any, over the base
amount, and Tenant's proportion of such increase. Said amount shall be paid
by Tenant to Landlord within five (5) days after Tenant's receipt of said
written statement. The additional rent due hereunder shall be prorated for
the calendar quarter in which this Lease terminates.
SECTION 11. INSURANCE
Tenant shall not use or occupy, or permit the Leased Property to be used
or occupied in a manner which will increase the rates of insurance for the
Leased Property or the Complex, which will make void or voidable any insurance
then in force with respect thereto, which would constitute a defense to any
action thereon, or which will make it impossible to obtain insurance with
respect thereto. If by reason of the failure of Tenant to comply herewith,
any insurance rates for the Leased Property or the Complex be higher than they
otherwise would be, Tenant shall reimburse Landlord, on the first day of the
calendar month next succeeding notice by Landlord to Tenant of said increase,
for the part of all insurance premiums thereafter paid by Landlord which shall
have been charged because of such failure of Tenant. Any policy of insurance
maintained by Tenant insuring against any risk in, upon, about or in any way
connected with the Leased Property or Tenant's use thereof shall contain an
express waiver of any and all rights of subrogation thereunder whatsoever
against Landlord, its officers, agents and employees.
Tenant agrees, at its sole expense to procure and maintain public
liability insurance from the Leased Property during the term of this Lease in
the minimum amount of $1,000,000.00, combined single limit, and such insurance
policy shall name Landlord as an additional insured. Prior to taking
occupancy of the Leased Property, Tenant shall furnish Landlord with a
certificate acceptable to Landlord, evidencing the existence of such
insurance, naming Landlord as an additional insured and certifying that such
insurance may not be canceled or coverage diminished without at least thirty
(30) days' prior written notice to Landlord. Thereafter, at least ten (10)
days prior to the expiration of any such insurance, Tenant shall furnish
Landlord with a certificate, in the form described above, evidencing the
renewal or replacement of such insurance.
SECTION 12. LIENS
Tenant shall at all times indemnify, save and hold Landlord and the
Leased Property free, clear and harmless from any claims, liens, demands,
charges, encumbrances, litigation and judgments arising directly or indirectly
out of any use, occupancy or activity of Tenant, or out of any work performed,
material furnished, or obligations incurred by Tenant in, upon, about or
otherwise in connection with the Leased Property. Tenant shall give Landlord
notice of at least ten (10) business days prior to the commencement of any
such work on the Leased Property to afford Landlord the opportunity to file
appropriate notices of non-responsibility. Tenant shall, at its sole cost and
expense, within fifteen (15) days after the filing of any lien for record,
obtain the discharge and release thereof. Nothing contained herein shall
prevent Landlord, at the cost and for the account of Tenant, from obtaining
said discharge and release in the event Tenant fails or refuses to do the same
within said fifteen (15) day period.
SECTION 13. INDEMNIFICATION
Tenant hereby covenants and agrees to indemnify, save and hold Landlord
and the Leased Property free, clear and harmless from any and all liability,
costs, expenses, including attorneys' fees, judgments, claims, liens and
demands of any kind whatsoever in connection with, arising out of, or by
reason of any act, omission or negligence of Tenant, its agents, employees,
servants, contractors, subtenants, licensees, customers or business invitees
while in, upon, about or in any way connected with the Leased Property or the
Center or arising from any accident, injury or damage, howsoever and by
whomsoever caused, to any person or property whatsoever, occurring in, upon,
about or in any way connected with the Leased Property, the Complex, or any
portion thereof other than as a result of the negligence of Landlord.
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SECTION 14. SUBORDINATION
Landlord reserves the right to encumber the Leased Property at any time,
including, but not limited to, sale-lease back transactions; and upon request
of Landlord or any mortgagee or beneficiary under a deed of trust, or ground
lease lessor, Tenant shall, in writing and within ten (10) days after request,
subordinate its rights hereunder to the lien of any mortgage or deed of trust
or any ground lease now or hereafter placed upon the land of which the Leased
Property is part and upon any buildings hereafter placed upon the land of
which the Leased Property is a part, and to all advances made or hereafter to
be made upon the security thereof. In the event that Tenant fails to execute
and/or deliver any such subordination to Landlord within said ten (10) days,
Tenant hereby irrevocably appoints Landlord as Tenant's duly authorized
attorney-in-fact for the purpose of executing and delivering any such
subordination, and Tenant hereby grants Landlord all power and authority
necessary to execute and deliver all such documents on behalf of Tenant.
Tenant acknowledges that the power of attorney granted hereby is coupled with
an interest.
In the event any proceedings are brought for foreclosure, or in the event
of the exercise of power of sale under any deed of trust, or upon termination
of any ground lease, Tenant shall attorn to the purchaser upon any such
foreclosure or sale, or ground lessor, and recognize such purchaser or ground
lessor as Landlord under this Lease.
SECTION 15. ASSIGNMENT AND SUBLETTING
Tenant shall not assign, mortgage, pledge, sublease or encumber the
Leased Property or any interest therein, except with the prior written consent
of Landlord (reference elsewhere herein to assignees notwithstanding). Tenant
acknowledges that Landlord shall have no implied duty whatsoever to consent to
any such assignment, mortgage, pledge, sublease or encumbrance, and that
Landlord may withhold its consent thereto for any reason or for no reason.
Any such sublease, assignment, mortgage, pledge, or encumbrance shall not
relieve Tenant for liability for payment of the rental herein provided or from
the obligation to keep and be bound by the terms, conditions and covenants of
this Lease. The acceptance of rent by Landlord from any other person shall
not be deemed to be a waiver of any of the provisions of this Lease or a
consent to the assignment or hypothecation of any stock or interest in such
corporation or partnership in the aggregate in excess of twenty-five percent
(25%) of such interests, as the same may be constituted as of the date of this
Lease, shall be deemed an assignment within the meaning of this Section 15.
In addition, Tenant agrees that if Tenant assigns or sublets this Lease with
Landlord's consent for a greater rent than Tenant is obligated to pay
hereunder, all rent payable to Tenant pursuant to such assignment or sublease,
including any increased rent or other cash consideration paid to Tenant by an
assignee or sublessee as consideration for such assignment or sublease, shall
be the property of Landlord and shall be paid to Landlord by Tenant (or, at
Landlord's option, shall be paid directly to Landlord by such assignee or
sublessee).
SECTION 16. INSOLVENCY
It is understood and agreed that neither this Lease nor any interest
herein or hereunder, nor any estate hereby created in favor of Tenant, shall
pass by operation of law under any state or federal insolvency or bankruptcy
act, or any similar law now or hereafter in effect, to any trustee, assignee
for the benefit of creditors, or any other person whomsoever.
SECTION 17. CONDEMNATION
Should the whole or any part of the Leased Property be condemned or taken
by a competent authority for any public or quasi-public purpose, all awards
payable on account of such condemnation and taking shall be payable to
Landlord, and Tenant hereby waives any and all interest herein. For the
purpose of this Section 17, a deed granted in lieu of condemnation shall be
deemed a taking.
If the whole of the Leased Property be condemned or taken, then this
Lease shall terminate upon such taking. If only part of the Leased Property
is so taken and if the remaining portion thereof will not be reasonably
adequate for the operation of Tenant's business after Landlord completes such
repairs or alterations as Landlord elects to make, either
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Landlord or Tenant shall have the option to terminate this Lease as of said
taking by notifying the other party hereto of such election in writing within
twenty (20) days after such taking. In no event shall a taking terminate this
Lease without such notification. If such partial taking does not terminate
this Lease, this Lease shall continue in full force and effect, but the rent
provided in Section 3 hereof shall be reduced by an amount equal to that
proportion of such basic rent which the rentable square footage of the portion
taken bears to the total rentable square footage of the Leased Property. If
any part of the Complex other than the Leased Property shall be so taken or
appropriated, Landlord shall have the right, at its option, to terminate this
Lease by notifying Tenant within six (6) months of such taking.
SECTION 18. DESTRUCTION OF PREMISES
If the Leased Property shall be destroyed or rendered untenantable,
either wholly or in part, by fire or other unavoidable casualty, Landlord may,
at its option, restore the Leased Property to its previous condition and in
the meantime basic monthly rent shall be abated in the same proportion as the
untenantable portion of the Leased Property bears to the whole thereof. This
Lease shall not terminate unless, within sixty (60) days after the happening
of such casualty, Landlord notifies Tenant of its election to terminate this
Lease. In the event Landlord does not elect to terminate this Lease, Landlord
shall repair the damage to the Leased Property caused by such casualty, any
other provision hereof to the contrary notwithstanding, should any casualty
have been the result of any act, omission or negligence of Tenant, its agents,
employees, servants, contractors, subtenants, licensees, customers or business
invitees, unless Landlord otherwise elects, this Lease shall not terminate,
Tenant shall repair such damage and rent shall not abate.
In the event of any damage not limited to, or not including, the Leased
Property, such that the Complex is damaged to the extent of twenty-five
percent (25%) or more the cost of replacement, or the buildings (taken in the
aggregate) in the Center owned by Landlord shall be damaged to the extent of
more than twenty-five percent (25%) of the aggregate cost of replacement,
Landlord may elect to terminate this Lease upon giving notice of such election
in writing to Tenant within ninety (90) days after the occurrence of the event
causing the damage.
Any other provision hereof to the contrary notwithstanding, Landlord
shall not be liable for any repair or restoration until, and then only to the
extent that, insurance proceeds are received therefor.
SECTION 19. RIGHT OF ACCESS
Landlord shall at all times have the right to enter the Leased Property
to inspect the same, to supply janitorial service and any other service to be
provided by Landlord to Tenant hereunder, to exhibit the Leased Property to
prospective purchasers or tenants, to post notices of nonresponsibility, and
to repair or construct any portion of the building of which the Leased
Property is a part or any other portion of the Center, without statement of
rent, and may keep and store tools, material and equipment upon the Leased
Property and may erect scaffolding and other necessary structures where
reasonably required by the character of the work to be performed, provided the
entrance to the Leased Property shall not be interfered with unreasonably.
Tenant hereby waives any claim for damages for any injury or interference with
Tenant's business, any loss of occupancy or quiet enjoyment of other Lease
Property, and any other loss occasioned by the exercise of Landlord's rights
hereunder. For each of the aforesaid purposes, Landlord shall, at all times,
have the right to retain a key with which to unlock all doors in an emergency.
Entry into the Leased Property obtained by Landlord by any such means shall
not be deemed to be forcible or unlawful entry into, or a detainer, of, the
Leased Property, or an eviction of Tenant from the Leased Property or any
portion thereof.
SECTION 20. EXPENDITURES BY LANDLORD
Whenever under any provision of this Lease, Tenant shall be obligated to
make any payments or expenditures, or to do any act or thing, or to incur any
liability whatsoever, and Tenant fails, refuses or neglects to perform as
herein required, Landlord shall be entitled, but shall not be obligated, to
make any such payment or expenditure or to do any such act or thing, or to
incur any such liability, all on behalf of and at the cost and for the account
of Tenant. In such
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event, the amount or cost thereof with interest thereon at the rate of
eighteen percent (18%) per annum, compounded monthly, shall constitute and be
collectible as additional rent upon demand.
SECTION 21. OFFSET STATEMENT
Tenant agrees that within ten (10) days of any demand therefor by
Landlord, Tenant will execute and deliver to Landlord or Landlord's designee a
recordable certificate stating that this Lease is in full force and effect,
such defenses or offsets as are claimed by Tenant, if any, the date to which
all rentals have been paid, and such other information concerning the Lease,
the Leased Property and Tenant as Landlord or said designee may reasonably
request. In the event that Tenant fails to execute and/or deliver any such
certificate or offset statement to Landlord within said ten (10) days, Tenant
hereby irrevocably appoints Landlord as Tenant's duly authorized
attorney-in-fact for the purpose of executing and delivering any such
certificate or offset statement, and Tenant hereby grants Landlord all power
and authority necessary to execute and deliver all such documents on behalf
of Tenant. Tenant acknowledges that the power of attorney granted hereby is
coupled with an interest.
SECTION 22. DEFAULT
Tenant's compliance with each and every one of its obligations hereunder
is a condition to each and every covenant and obligation of Landlord. In the
event that (a) Tenant shall default in the payment of any sum of money
required to be paid hereunder and such default continues for five (5) days
after receipt of written notice thereof, or (b) Tenant shall default in the
performance of any other of its obligations hereunder and such default
continues for ten (10) days after written notice thereof (except for defaults
which create a nuisance or illegal condition, or which cause or threaten
serious danger to life, limb or property, in which case there shall be no
requirement of written notice or right to cure); or (c) Tenant should vacate
or abandon the Leased Property during the term of this Lease; or (d) there is
filed by or against Tenant any petition in bankruptcy, or Tenant is
adjudicated as a bankrupt or insolvent, or there is appointed a receiver or
trustee to take possession of all or substantially all of the assets of Tenant
or of the Leased Property, or there is a general assignment by Tenant for the
benefit of creditors, or any such action is taken by or against Tenant under
any state or federal insolvency or bankruptcy, or any similar law now or
hereafter in effect, including without limitation, the filing of any petition
for or in reorganization or an arrangement, or should the Leased Property or
any portion thereof be taken or seized under levy of execution or attachment
against Tenant, then Landlord, at its sole option, shall, in addition to all
other rights and remedies hereunder or at law or in equity, have (i) the right
to declare the terms of this Lease ended and to re-enter the Leased Property
and take possession thereof, and to terminate all of the rights of Tenant in
and to the Leased Property; or (ii) the right without declaring the term of
this Lease ended, to re-enter the Leased Property and to occupy the same, or
any portion thereof, or to lease the whole or any portion thereof, for and on
account of Tenant as hereinafter provided, applying any monies received first
to payment of such expenses, including attorneys' fees and real estate
commissions paid, assumed or incurred by Landlord in or in connection with the
recovery, repairing or reletting of the Leased Property and then to the
fulfillment of the covenants of Tenant (any such reletting shall be for such a
term, at such a rent, and on such other conditions as Landlord in its
discretion deems advisable); or (iii) the right, even though it may have relet
all or any portion of the Leased Property as above-provided to thereafter at
any time terminate this Lease for such previous default on the part of the
Tenant. Pursuant to said rights of re-entry, Landlord may remove all persons
from the Leased Property and may, but shall not be obligated to, remove all
property therefrom, and may, but shall not be obligated to, enforce any rights
Landlord may have against said property, or store the same in any public or
private warehouse or elsewhere at the cost and for the account of Tenant or
the owner or owners thereof. Tenant agrees to hold Landlord free and harmless
of any liability whatsoever for the removal or storage of any such property,
whether of Tenant or any third part whomsoever. As security for Tenant's
compliance with all the terms of this Lease, Landlord is hereby given a lien
upon all of Tenant's property in, upon or about the Leased Property. Anything
contained herein to the contrary notwithstanding, Landlord shall not be deemed
to have terminated this Lease or any of Tenant's obligations hereunder by any
such re-entry, or by any action in unlawful detainer or otherwise to obtain
possession of the Leased Property, unless Landlord shall have notified Tenant
in writing that it has so elected to terminate this Lease.
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In any action brought by Landlord or Tenant to enforce or protect any of
its rights under or arising from this Lease, or related thereto, the
prevailing party shall be entitled to receive from the other party its costs
and legal expenses, including reasonable attorneys' fees, whether such action
is prosecuted to judgment or not. Landlord and Tenant hereby agree and
acknowledge, each for the benefit of the other, that for purposes of the
foregoing reciprocal attorneys' fees clause, they have bargained for attorneys
fees to be computed in the following manner: said attorneys' fees shall be
computed by multiplying the regular hourly fee rate of the attorney or
attorneys selected and utilized by the prevailing party by the number of hours
expended in such action by said attorney or attorneys. If such hourly rate or
rates, and the number of hours expended, are verified by the prevailing
party's attorney or attorneys in a sworn certificate accompanied by time
summaries, the resulting amount of such attorneys' fees shall be irrefutably
presumed to be reasonable.
The waiver by Landlord of any default or breach of any of Tenant's
obligations hereunder shall not be a waiver of any preceding or subsequent
breach of the same or any other of Tenant's obligations contained herein.
The subsequent acceptance of rent or any other payment or portion thereof so
accepted, regardless of Landlord's knowledge of such preceding breach at the
time of acceptance of such rental or other payment. No payment by Tenant or
receipt by Landlord of a lesser amount than the rent herein provided shall be
deemed to be other than on account of the earliest rent due and payable
hereunder, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment be deemed an accord and satisfaction, and
Landlord may accept any such check or payment without prejudice to Landlord's
right to recover the balance of such sums as are due or pursue any other
remedy provided in this Lease. The consent by Landlord to any matter or event
requiring Landlord's consent shall not constitute a waiver of the necessity
for such consent to any subsequent matter or event. Tenant acknowledges and
agrees that, in the event of any failure of Tenant to pay any rent or other
sums required to be paid by Tenant to Landlord pursuant to this Lease, Tenant
shall immediately be in the status of default such that, at Landlord's option,
the five (5) day written notice required by the first paragraph of this
Section 22 may be a five-day notice as contemplated by N.R.S. Section 40.250
or N.R.S. Section 40.253, or may be given simultaneously or may run currently
with any five-day notice given by Landlord pursuant to N.R.S. Section 40.253.
SECTION 23. QUIET POSSESSION
Tenant, upon paying the rentals and other payments herein required from
Tenant, and upon Tenant's performance of all the provisions, covenants and
conditions of this Lease on its part to be kept and performed, may quietly
have, hold and enjoy the Leased Property during the term of this Lease.
SECTION 24. SALE BY LANDLORD
In the event of any sale or exchange of the Leased Property, the Center,
the Complex or the building of which the Leased Property is a part by
Landlord, Landlord shall be and is hereby relieved of all liability under any
and all of its covenants and obligations contained in or derived from this
Lease, arising out of any act, occurrence or omission relating to the Leased
Property occurring after the consummation of such sale or exchange; provided,
however, that Landlord's successor agrees in writing to be bound by Landlord's
covenants and agreements herein. Tenant agrees to attorn to such purchaser or
grantee.
SECTION 25. DEFAULT BY LANDLORD
It is agreed that in the event Landlord fails or refuses to perform any
of its obligations hereunder, Tenant prior to exercising any right or remedy
it may have, shall give fifteen (15) days written notice to Landlord of such
default, specifying in said notice the default with which Landlord is charged.
However, if the default complained of is of such nature that the same can be
rectified or cured, but cannot with reasonable diligence be rectified or cured
within said fifteen (15) days, then such default shall be deemed to be
rectified or cured if Landlord within said fifteen (15) day period shall
commence the rectification and curing thereof and continue thereafter with all
due diligence to cause such rectification and curing to proceed.
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SECTION 26. FORCE MAJEURE
Whenever a day is appointed herein on which, or a period of time is
appointed in which, either party hereto is required to do or complete any act,
matter or thing, the time for the doing or completion thereof shall be
extended by a period of time equal to the number of days on or during which
such party is prevented from, or is unreasonably interfered with, the doing or
completion of such an act, matter or thing because of labor dispute, civil
commotion, war, warlike operation, sabotage, governmental regulations or
control, fire or other casualty, inability to obtain any materials, or to
obtain fuel or energy, weather or other acts of God, or other causes beyond
such party's reasonable control (financial inability excepted); provided,
however, that nothing contained herein shall excuse Tenant from the prompt
payment of any rent or charge required of Tenant hereunder, and nothing herein
shall excuse Tenant's default hereunder for creating any nuisance, illegal
condition, condition which causes or threatens serious injury to life, limb or
property.
SECTION 27. SERVICE OF NOTICES
Any and all notices and demands shall be in writing and shall be validly
given or made if served either personally or if deposited in the United States
mail, certified or registered, postage prepaid, return receipt requested. If
such notice or demand be served by mail, service shall be conclusively deemed
made five (5) days after mailing, or upon actual receipt, whichever is sooner.
Any notice or demand to Landlord shall be addressed to Landlord at P.O. Box
81225 Las Vegas, Nevada 89102. Any notice or demand to Tenant shall be
addressed to Tenant at the Leased Property. Any party hereto may change its
address for the purpose of receiving notices, payments or demands as herein
provided by written notice given in the manner aforesaid to the other party
hereto, which notice of change of address shall not become effective, however,
until the actual receipt thereof by the other party.
SECTION 28. MISCELLANEOUS
1. If this lease is terminated pursuant to any provision hereof and
Tenant is not in default hereunder, rent shall be prorated as of the date of
termination.
2. The various rights, options, elections and remedies of Landlord and
Tenant respectively contained in this Lease shall be cumulative and no one of
them shall be construed as exclusive of any other, or of any right, priority
or remedy allowed or provided for by law and not expressly waived in this
Lease.
3. The terms, provisions, covenants and conditions contained in this
Lease shall apply to, bind and inure to the benefit of the heirs, executors,
administrators, legal representatives, successors and assigns (where
assignment by Tenant is permitted) of Landlord and Tenant, respectively,
except as otherwise provided in this Lease.
4. If any term, provision, covenant or condition of this Lease, or any
application thereof, should be held by a court of competent jurisdiction to be
invalid, void or unenforceable, all provisions, covenants and conditions of
this Lease, and all applications thereof, not held invalid, void or
unenforceable, shall continue in full force and effect and shall in no way be
affected, impaired or invalidated thereby.
5. Time is of the essence of this Lease and all of the terms,
provisions, covenants and conditions hereof .
6. This Lease contains the entire agreement between the parties and
cannot be changed or terminated orally.
7. Tenant agrees that Landlord shall not be required to maintain any
security deposit given hereunder in a separate account, but that such security
deposit may be commingled with Landlord's other funds. Tenant further
acknowledges that no interest shall accrue or be payable to Tenant on account
of Tenant's security deposit.
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8. Notwithstanding that this Lease is a binding agreement, Landlord
may, at Landlord's sole option, terminate this Lease by written notice to
Tenant given within fifteen days after the execution hereof, if Landlord's
trust deed lender notifies Landlord that it has disapproved this Lease for any
reason.
9. Tenant acknowledges that Tenant has been advised by Landlord or
Landlord's agents to consult an attorney in connection with the negotiation
and execution hereof, and that neither Landlord nor Landlord's agents have
given Tenant any legal advice.
10. Tenant covenants and agrees to keep the terms and provisions of this
Lease confidential, and not to disclose said terms and provisions to any
person or entity whatsoever (except as may be required by law, or by any
governmental entity). Tenant acknowledges that Landlord may have made special
concessions to Tenant to induce Tenant to execute this Lease, which, if known,
could damage Landlord's future business and/or bargaining power. Tenant
therefore agrees that any breach of the covenant contained in this paragraph
by Tenant shall be an automatic and incurable default of this Lease.
11. The captions appearing at the commencement of the sections hereof
are descriptive only and for convenience in reference to this Lease and in no
way whatsoever define, limit or describe the scope or interest of this Lease,
nor in any way affect this Lease. In addition, in the event that a "Lease
Summary" or other cover sheet shall be attached to the front of this Lease,
such shall be for convenience only, and the same shall not in any way affect
the terms of this Lease nor shall it be used in limiting, construing or
defining any term, covenant or condition of this Lease.
12. Masculine and feminine pronouns shall be substituted for the neuter
form and vice versa, and the plural shall be substituted for the singular form
and vice versa, in any place or places herein in which the context requires
substitutions.
13. The laws of the State of Nevada shall govern the validity,
construction and effect of this Lease.
14. Whenever in this Lease any words of obligation or duty are used in
connection with either party, such words shall have the same force and effect
as though framed in the form of covenants on the part of such party.
15. Tenant acknowledges that, by entering into this Lease with Landlord,
Tenant has not become a third-party beneficiary of any lease between Landlord
and any other tenant, and that no part of the inducement to Tenant to enter
into this Lease was any promise or covenant of Landlord, express or implied,
to enforce any other lease for the benefit of Tenant.
16. In the event either party hereto now or hereafter shall consist of
more than one person, firm or corporation, then and in such event, such
persons, firms or corporations shall be jointly and severally liable as
parties hereunder; provided, however, nothing herein shall be deemed to impose
personal liability on any limited partner of Landlord or Tenant.
17. Tenant warrants that it has had no dealings with any broker or agent
in connection with this Lease except for TONY GREEN - SBO COMMERCIAL & FRANK
BRUNO - THE BRUNO GROUP and Tenant covenants to pay, hold harmless and
indemnify Landlord from and against any and all costs, expense or liability
for any compensation, commissions and charges claimed by any other broker or
agent with respect to this Lease or the negotiation thereof.
18. Nothing contained in this Lease shall be deemed or construed by the
parties hereto or by any third party to create the relationship of principal
and agent or of partnership or of joint venture or of any association between
Landlord and Tenant, except the relationship of Landlord and Tenant.
19. Tenant agrees that all amounts or charges, except for basic rent, to
be paid by Tenant to Landlord pursuant to the terms and provisions of this
Lease, shall be conclusively deemed to be additional rent.
14
<PAGE> 15
20. Tenant agrees and acknowledges that Landlord may, at Landlord's
discretion, install a conference room at a location within the Complex.
Landlord may, from time to time, change the location of the conference room,
and Landlord shall have the right to any time to reclaim the conference room
space and to utilize it for any other purpose. Tenant further agrees and
acknowledges that any such conference room shall not be deemed to be a portion
of the common areas, and that nothing in this Lease affords Tenant any claim
of right to use any such conference room, or to require that any such
conference room be construed or maintained. Any use of conference room
facilities by Tenant shall be by separate agreement with Landlord, and shall
be subject to such rules and regulations, and at such rates, as Landlord may
from time to time establish.
SECTION 29. RECORDATION PROHIBITED
Except upon the written consent of Landlord, neither Tenant nor anyone
acting on behalf of Tenant shall record this Lease or any memorandum or notice
thereof nor cause the same to be recorded.
SECTION 30. FINANCIAL STATEMENTS
Tenant agrees to prepare and keep (1) quarterly financial statements, and
(2) annual financial statements, both of which shall be prepared in accordance
with generally accepted accounting principles. Within the (10) days after
Landlord's written request therefor, Tenant shall furnish true and correct
copies of Tenant's most recent quarterly financial statement and Tenant's most
recent annual financial statement to Landlord. Said annual financial
statement shall be accompanied by a letter from a firm of Certified Public
Accountants, stating that it was prepared by them in accordance with generally
accepted accounting principles.
IN WITNESS WHEREOF, the parties hereto have executed this Lease the day
and year first above written.
TENANT LANDLORD
PATLEX CORPORATION MR. WALTER L. SCHWARTZ
BY: /s/ Richard Laitinen By: /s/ Walter Schwartz
----------------------- ------------------------
Mr. Richard Laitinen Mr. Walter Schwartz
President Landlord
Patlex Corp. Flamingo Place Office Park
15
<PAGE> 1
EXHIBIT 11
PATLEX CORPORATION
Statement of Computation of Per Share Earnings
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995
----------------------
(Note A)
<S> <C> <C>
Net income $2,196 $1,700
=======================
Earnings per share-primary $0.98 $0.67
=======================
Earnings per share-fully diluted $0.98 $0.67
=======================
Average number of common and common equivalent shares:
PRIMARY:
Weighted average common shares outstanding 1,896,817 2,254,388
Dilutive effect of exercise of certain stock options 338,605 --
-----------------------
Average common shares-Primary 2,235,422 2,524,388
=======================
FULLY DILUTED:
Weighted average common shares outstanding 1,896,817 2,524,388
Dilutive effect of exercise of certain stock options 338,605 --
-----------------------
Average common shares-Fully diluted 2,235,422 2,524,388
=======================
</TABLE>
Note A.
The calculations above, relating to the year ended June 30, 1995, are
presented on a proforma basis since Patlex Corporation was a subsidiary of AFG,
Inc. until the spin-off and distribution date of September 27, 1995.
Consequently, the presentation is based on the number of Patlex's common stock
which would have been outstanding had the distribution occurred one year
earlier with no change in the number of shares outstanding occurring since that
date.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. Patlex Corporation, a Pennsylvania corporation (as of August 20, 1996)
2. Database Technologies, Inc., a Florida corporation (as of August 20, 1996)
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated August 9, 1996 on the financial
statements of Patlex Corporation for the years ended June 30, 1996 and 1995
included in the Annual Report of DBT Online, Inc. on Form 10-KSB for the fiscal
year ended June 30, 1996.
/s/ ERNST & YOUNG LLP
------------------------
ERNST & YOUNG LLP
Chicago, Illinois
September 25, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 7,648
<SECURITIES> 0
<RECEIVABLES> 1,440
<ALLOWANCES> 200
<INVENTORY> 0
<CURRENT-ASSETS> 8,967
<PP&E> 42
<DEPRECIATION> 13
<TOTAL-ASSETS> 22,990
<CURRENT-LIABILITIES> 3,937
<BONDS> 0
0
0
<COMMON> 256
<OTHER-SE> 15,069
<TOTAL-LIABILITY-AND-EQUITY> 22,990
<SALES> 7,978
<TOTAL-REVENUES> 7,978
<CGS> 3,935
<TOTAL-COSTS> 3,935
<OTHER-EXPENSES> (346)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92
<INCOME-PRETAX> 4,297
<INCOME-TAX> 2,101
<INCOME-CONTINUING> 2,196
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,196
<EPS-PRIMARY> .98
<EPS-DILUTED> .98
</TABLE>
