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Filed Pursuant to Rule 424(b)(1)
Registration No. 333-85689
5,669,758 Shares
(DBT ONLINE LOGO)
Common Stock
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We are selling 1,000,000 shares of common stock and selling shareholders
are selling 4,669,758 shares of common stock. We will not receive any proceeds
from the shares of common stock sold by selling shareholders.
The underwriters have an option to purchase a maximum of 850,464 additional
shares from selling shareholders to cover over-allotments of shares.
Our common stock is traded on The New York Stock Exchange under the symbol
"DBT." On October 7, 1999, the last reported sale price of our common stock on
The New York Stock Exchange was $25.75 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 10.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS DBT SHAREHOLDERS
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Per Share............................ $25.00 $1.38 $23.62 $23.62
Total................................ $141,743,950 $7,824,266 $23,620,000 $110,299,684
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Delivery of the shares of common stock will be made on or about October 14,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON INVEMED ASSOCIATES
The date of this Prospectus is October 7, 1999.
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[GRAPHICS TO INCLUDE COMPUTER SCREEN IMAGES OF EACH
OF DBT'S FOUR KEY PRODUCTS: KNOWX.COM,
AUTOTRACK, INSIGHT AND INFORMED]
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY................ 5
RISK FACTORS...................... 10
FORWARD-LOOKING STATEMENTS........ 17
USE OF PROCEEDS................... 18
DIVIDEND POLICY................... 18
PRICE RANGE OF COMMON STOCK....... 19
CAPITALIZATION.................... 20
SELECTED CONSOLIDATED FINANCIAL
AND OTHER DATA.................. 21
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS...................... 23
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MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....... 29
BUSINESS.......................... 39
MANAGEMENT........................ 52
PRINCIPAL AND SELLING
SHAREHOLDERS.................... 57
DESCRIPTION OF CAPITAL STOCK...... 59
UNDERWRITING...................... 61
LEGAL MATTERS..................... 63
EXPERTS........................... 63
WHERE YOU CAN FIND MORE
INFORMATION..................... 63
INDEX TO FINANCIAL STATEMENTS..... F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION CONTAINED IN THIS DOCUMENT MAY ONLY BE
ACCURATE ON THE DATE OF THIS DOCUMENT.
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Our logo and certain titles and logos of our products mentioned in this
document are our service marks and trademarks. Each brand name and trademark
appearing in this prospectus is the property of its holder.
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(THIS PAGE INTENTIONALLY LEFT BLANK)
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It may not contain all of the information that is important to you. To
understand this offering fully, you should read the entire prospectus carefully,
including the risk factors and the financial statements. Unless otherwise
specified, all information contained in this prospectus assumes no exercise of
the underwriters' over-allotment option.
DBT ONLINE
We are a leading nationwide provider of organized online public records
data and other information. We believe that our database is one of the country's
largest depositories of public records and other public information, containing
more than 4 billion records and more than 25 terabytes of data storage capacity.
Our customers are able to access and search our database 24 hours a day, 365
days a year through our Internet websites or over a modem connection.
The information stored in our files includes:
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- - first and last names - corporation records
- - current and past addresses - real property records
- - known associates and relatives - motor vehicle records
- - telephone numbers - liens, judgments and bankruptcies
- - professional licenses - UCC filings
- other assets
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We have developed proprietary software that allows our customers to quickly
and cost-effectively search our database for information on people, businesses
and assets. Starting with very little information, such as a name or address,
our customers can locate and build an extensive profile which we are able to
generate into comprehensive, easy-to-read reports.
We currently have more than 14,000 customers, consisting primarily of
insurance companies, law firms, private investigators, law enforcement and
government agencies. Our customers use our online information services to detect
fraudulent activity, assist law enforcement efforts, locate people and assets
and verify information and identities.
From 1996 to 1998, our revenues increased from $25.0 million to $60.7
million, representing a compound annual growth rate of 55.8%, and our EBITDA
increased from $3.9 million to $15.7 million, representing a compound annual
growth rate of 100.6%. Since 1996, we have successfully introduced new services
and technologies to our customers and have completed several complementary
acquisitions.
Our business objective is to be the leading provider of organized online
public information to the corporate, consumer and governmental markets, while
enhancing proprietary customer data with public information in our database. To
achieve this objective, we intend to continue to develop long-term customer
relationships and maintain a high level of customer satisfaction, which we
believe will result in additional recurring
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revenues from our existing products and an enhanced ability to introduce new
products. Key elements of our strategy are to:
- develop new products and applications utilizing our large
information database
- expand our customer base by entering new markets
- develop more efficient product delivery methods to further penetrate
existing markets
- develop decisioning tools to help customers evaluate data
- pursue strategic acquisitions of complementary businesses
Historically, the primary users of public records have been law enforcement
and other governmental agencies, law firms, insurance companies and licensed
investigation companies. These entities use public records to assist them to
investigate fraudulent and criminal activity, to locate individuals and to
research businesses and assets. Recently, additional types of customers,
including small businesses, consumers and large corporations, are using public
records to verify personal information and to search for information related to
individuals or businesses. In addition to the growth opportunities in these new
markets, we believe that providers of online information services are well
positioned to participate in the significant growth associated with Internet
commerce. International Data Corporation projects that the total value of goods
and services purchased over the Internet worldwide will grow from $50.4 billion
in 1998 to $1.3 trillion by the end of 2003. We believe that this projected
growth in web-based activity combined with the increasing demand for public
records from both new and existing markets supports significant growth for
comprehensive and organized online methods for accessing public information.
RECENT EVENTS
On September 23, 1999, we acquired KnowX.com(sm) and Informed(sm) from
Information America, Inc. KnowX.com is a leading Internet-based public record
research tool for consumers and small office users. Its core product, Ultimate
People Finder(sm), provides a low-cost way to locate individuals using public
records. The Informed product line offers qualified users, including commercial
lending and leasing companies, access to public information through the Internet
or dial-up modems. We believe the acquisition of KnowX.com and Informed will
expand and diversify our customer base and allow us to further market our
existing products to the rapidly growing population of Internet users.
On August 12, 1999, we announced the appointment of Ronald A. Fournet as
our new President and Chief Executive Officer as well as the resignation of
Charles A. Lieppe from these offices due to personal reasons.
In July 1999, we signed a multi-year agreement to supply US SEARCH.com Inc.
with public records and other information on a non-exclusive basis. US SEARCH
will use this information to deliver its products and services to consumers and
businesses. The agreement requires US SEARCH to purchase a minimum of $20
million of information from us over the next five and one half years.
In May 1999, we acquired WinSHAPES, Inc., which developed CaseLINK(sm), a
Windows(R)-based analysis software that converts data into graphic illustrations
to help users visualize relationships among people, businesses, vehicles and
other assets. We intend to
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integrate CaseLINK with our other products and believe the technologies obtained
in the acquisition greatly enhance the presentation of our reports.
Also in May 1999, we merged with I.R.S.C., Inc., a leading provider of
court records and other public information used by businesses to conduct
pre-employment screening and other anti-fraud due diligence research. IRSC's key
product is Insight(TM), a Windows-based software that allows users to create
custom menus, custom combined searches and subject profiles. Our merger with
IRSC enables us to offer new products to existing customers and expand our
product offerings into the pre-employment screening market.
PATENT EXPLOITATION AND ENFORCEMENT BUSINESS
In addition to our core online public records business, we operate in the
patent exploitation and enforcement business through our Patlex subsidiary,
which exploits and enforces two partially-owned laser patents. Patlex identifies
laser products and laser applications that infringe the laser patents, executes
licensing agreements with third parties and enforces the laser patents. One of
the patents generates substantially all of Patlex's revenues and expires in
November 2004. The other patent expires in May 2005. Upon the expiration of the
laser patents, Patlex will lose its right to prevent others from exploiting
these inventions and to receive royalty payments. We do not expect to derive any
revenues from the patent enforcement business following the expiration of the
laser patents. For the year ended December 31, 1998, Patlex generated royalties
of approximately $6.6 million and had EBITDA of approximately $5.6 million.
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ABOUT US:
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ONLINE INFORMATION BUSINESS PRINCIPAL EXECUTIVE OFFICES
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4530 Blue Lake Road 5550 W. Flamingo Road, Suite B-5
Boca Raton, Florida 33431 Las Vegas, Nevada 89103
Telephone no.: (561) 982-5000 Telephone no.: (702) 257-1112
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WEBSITE: www.dbtonline.com
The information on our website is not part of this prospectus.
INCORPORATION: Pennsylvania in January 1996
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THE OFFERING
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Common stock offered.................... 1,000,000 shares by us
4,669,758 shares by selling shareholders
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5,669,758
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Common stock to be outstanding after
this offering......................... 20,002,663 shares
Use of proceeds......................... We intend to use the net proceeds of
this offering for general corporate
purposes and to fund future
acquisitions. We will not receive any
proceeds from the sale of shares by the
selling shareholders in this offering.
New York Stock Exchange Symbol.......... DBT
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This table excludes:
- 3,043,802 shares of common stock issuable upon the exercise of options
outstanding as of June 30, 1999, at a weighted average exercise price of
$18.61 per share; and
- 329,172 shares of common stock underlying warrants we granted in
connection with our acquisition of KnowX.com and Informed at an exercise
price of $52.50 per share.
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SUMMARY FINANCIAL DATA
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PRO FORMA
PRO FORMA SIX MONTHS SIX MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED JUNE 30, ENDED
------------------------------ DECEMBER 31, ------------------- JUNE 30,
1996(1) 1997 1998 1998(2) 1998 1999(3) 1999(2)(3)
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... $ 22,607 $ 37,777 $ 54,103 $ 62,494 $ 25,401 $ 34,595 $ 40,822
Royalties.............................. 2,382 6,670 6,636 6,636 3,460 3,149 3,149
-------- -------- -------- -------- -------- -------- --------
Total............................ 24,989 44,447 60,739 69,130 28,861 37,744 43,971
Gross Profit
Electronic Information Group........... 11,811 21,518 29,659 35,184 13,810 20,267 24,632
Patent Enforcement Group............... 1,760 4,972 4,928 4,928 2,606 2,296 2,296
-------- -------- -------- -------- -------- -------- --------
Total............................ 13,571 26,490 34,587 40,112 16,416 22,563 26,928
Income (loss) from operations
Electronic Information Group........... 97 4,688 5,252 3,895 2,534 3,186 2,711
Patent Enforcement Group............... 1,341 3,928 3,903 3,903 2,032 1,771 1,771
Corporate.............................. (626) (835) (1,471) (1,471) (606) (393) (393)
-------- -------- -------- -------- -------- -------- --------
Total............................ 812 7,781 7,684 6,327 3,960 4,564 4,089
Income before income taxes.............. 638 9,272 10,014 7,496 5,064 5,467 4,421
Net income.............................. 440 6,101 6,896 4,894 3,360 3,605 2,745
Net income per share:
Basic.................................. $ 0.04 $ 0.35 $ 0.36 $ 0.26 $ 0.18 $ 0.19 $ 0.14
Diluted................................ $ 0.03 $ 0.33 $ 0.35 $ 0.25 $ 0.17 $ 0.18 $ 0.14
Weighted average shares outstanding:
Basic.................................. 12,561 17,568 18,900 18,900 18,895 18,947 18,947
Diluted................................ 12,835 18,495 19,612 19,612 19,761 19,972 19,972
OTHER DATA:
Cash flows from operating activities.... $ 1,582 $ 9,599 $ 9,170 $ 10,270 $ 5,233 $ 7,296 $ 7,527
Cash flows from investing activities.... 3,183 (53,542) 4,069 5,571 (467) (4,834) (3,504)
Cash flows from financing activities.... 558 44,707 172 172 172 1,216 1,216
EBITDA(4)............................... 3,945 13,583 15,706 16,993 7,531 8,697 9,558
Capital expenditures.................... 5,371 6,949 14,537 14,537 8,014 5,231 5,377
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AS OF JUNE 30, 1999
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PRO PRO FORMA
ACTUAL FORMA(2) AS ADJUSTED(5)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 25,002 $ 2 $ 23,434
Short-term investments...................................... 24,651 24,651 24,651
Working capital............................................. 56,635 32,721 56,153
Total assets................................................ 100,624 101,231 124,663
Shareholders' equity........................................ 89,322 89,882 113,314
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(1) Our 1996 statement of operations data includes the results of Patlex, our
patent enforcement business, from August 20, 1996, the date of our
reorganization with Patlex, through December 31, 1996.
(2) The pro forma statement of operations data includes the pro forma effects of
our acquisition of KnowX.com and Informed as if this acquisition occurred on
January 1, 1998. The pro forma balance sheet data includes the pro forma
effects of our acquisition of KnowX.com and Informed as if this acquisition
had occurred as of June 30, 1999.
(3) Results include one-time merger-related expenses of $817.
(4) EBITDA represents earnings before interest and financial charges, income
taxes, depreciation and amortization. We have included information
concerning EBITDA (which is not a measure of financial performance under
generally accepted accounting principles) because we believe that it is used
by certain investors as one measure of financial performance. EBITDA should
not be construed as an alternative to operating income (as determined in
accordance with generally accepted accounting principles) or as a measure of
liquidity. EBITDA as measured by us may not be comparable to similarly
titled measures reported by other companies.
(5) As adjusted to reflect the sale by us of 1,000,000 shares of common stock
offered through this prospectus and the application of the estimated net
proceeds from this offering based on the price to the public of $25.00 per
share and after deducting underwriting discounts and commissions and
estimated offering expenses.
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RISK FACTORS
You should carefully consider the risks described below before purchasing
our common stock. Our most significant risks and uncertainties are described
below; however, they are not the only ones we face. If any of the following
risks actually occur, our business, financial condition or results of operations
could be materially adversely affected, the trading price of our common stock
could decline and you may lose all or part of your investment.
WE RELY HEAVILY ON ONE PRODUCT. WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS
OR ENHANCE OUR EXISTING PRODUCTS.
We rely heavily on AutoTrack(sm), our primary investigative search product.
For the year ended December 31, 1998, AutoTrack accounted for approximately 67%
of our revenues. AutoTrack competes in markets characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
Our success will depend to a substantial degree upon our ability to develop in a
timely fashion enhancements to AutoTrack and to introduce new products that meet
changing customer requirements and emerging industry standards. In order to meet
these demands, we continuously evaluate opportunities to enhance AutoTrack and
to develop or acquire new products that would utilize our supply of public
records information. We may not be able to identify, develop, produce, acquire,
market or support new products, or these new products may not gain market
acceptance. In addition, some of our new product introductions or enhancements
may shorten the life cycle of existing products, including AutoTrack. Failure to
introduce new products or product enhancements effectively and on a timely basis
could have a material adverse effect on our business, results of operations and
financial condition. Furthermore, the development by our competitors of products
that would make AutoTrack obsolete could materially adversely affect our
business, results of operations and financial condition.
SOME OF OUR LAW ENFORCEMENT CUSTOMERS HAVE SUSPENDED USE OF OUR PRODUCTS
AND SERVICES, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS AND
REPUTATION.
Federal, state and local law enforcement agencies are important customers
of ours. Recently, the Drug Enforcement Administration and the FBI suspended
their use of our products and services. These agencies expressed concern about
whether the target and content of their searches of our databases were
accessible by current or former DBT employees. Although the portion of our
revenues attributable to these agencies was approximately one percent during the
year ended December 31, 1998, we have experienced slower growth in the use of
our products and services by other law enforcement agencies since the
suspension, which we believe may be attributable to these concerns. In 1998, law
enforcement agencies generated approximately 10% of our revenues. We are
actively working with these federal agencies to assure them that their use of
our databases is completely confidential and that our systems prevent anyone,
including DBT employees, from determining the target or content of law
enforcement customers' database searches. However, there can be no assurance as
to whether or when these agencies will resume use of our services. The failure
of these agencies to resume use of our services, or the suspension of the use of
our services by additional customers, could have a material adverse effect on
our business, results of operations and reputation.
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EFFICIENT USE OF OUR DATABASES DEPENDS ON OUR ACCESS TO SOCIAL SECURITY
NUMBERS.
Social security numbers are the primary organizing principles that we use
to generate our reports. Social security numbers could become unavailable to us
in the future because of changes in the law or because our data suppliers decide
not to supply them to us. If we cannot obtain social security numbers in the
future, our ability to generate reports efficiently will be reduced. We can and
do use names, addresses and dates of birth to generate our reports. However,
without the use of social security numbers, we believe that those reports would
not be as complete or accurate as reports generated with social security
numbers. We also would incur significant expense to revise the software we use
to generate reports. Less complete or less accurate reports could adversely
affect our business, results of operations and financial condition.
WE RELY ON TWO SUPPLIERS FOR THE CREDIT HEADER DATA IN OUR DATABASE.
We obtain the credit header data in our database from two consumer credit
reporting agencies. The data consists of names, addresses, social security
numbers and dates of birth. The two consumer credit agencies are Experian
Information Solutions, Inc. and Trans Union Corporation. One or both of these
suppliers could stop supplying this data to us or could substantially increase
their prices. This would materially adversely affect our business, results of
operations and financial condition.
LEGISLATORS AND CONSUMERS ARE INCREASINGLY SCRUTINIZING EXISTING FEDERAL
AND STATE LAWS RELATING TO PRIVACY AND THE USE OF PERSONAL INFORMATION AND
PROPOSING NEW PRIVACY LAWS. IF THESE LAWS BECOME MORE RESTRICTIVE, WE COULD
HAVE LESS INFORMATION TO SUPPLY TO CUSTOMERS AND OUR BUSINESS COULD BE
HARMED.
Many privacy and consumer advocates and federal regulators have become
increasingly concerned with public access to or use of personal information,
particularly social security numbers and dates of birth. We use personal
information to search our databases and to access information in databases of
others. Various federal regulators and organized groups have lobbied and are
expected to continue to lobby for the adoption of new or additional federal and
state legislation to regulate the widespread dissemination or commercial use of
personal information. If federal or state laws are amended or enacted in the
future to further restrict access and use of personal information, we could have
less information to provide to our customers and our business and results of
operations could be adversely affected.
OUR ARRANGEMENTS WITH DATA SUPPLIERS ARE NON-EXCLUSIVE, WHICH MAKES US
VULNERABLE TO COMPETITION, AND GENERALLY SHORT-TERM, WHICH MAKES US
SUSCEPTIBLE TO PRICE INCREASES OR NON RENEWAL.
The ability of others to obtain the same data as us or our failure to
obtain the data necessary for our products at commercially reasonable costs or
at all could materially adversely affect our business and results of operations.
We obtain the raw data that we provide to customers from credit reporting
agencies, government agencies, data aggregators, competitors and other sole
source third party suppliers on a non-exclusive basis. Due to the non-exclusive
nature of these relationships, we cannot prevent others from making publicly
available the same information that we offer to our customers. Our agreements
with our suppliers are generally short-term agreements and some of our suppliers
directly compete with us, both of which make us vulnerable to unpredictable
price increases or non-renewal. Increases in the cost of obtaining information
from suppliers could force us to find alternative sources of information which
may not be available on suitable terms. Non-renewal of existing agreements by
suppliers, or our failure after non-renewal to enter into new agreements with
alternative third party suppliers, could decrease the amount of
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information we can offer to customers and, consequently, reduce customer use of
our products. In addition, some of the data we receive from governmental sources
is not available from other sources and therefore cannot be replaced.
OUR MARKETS ARE HIGHLY COMPETITIVE AND HAVE RELATIVELY LOW BARRIERS TO
ENTRY. OUR INABILITY TO RESPOND SUCCESSFULLY TO THE EFFORTS OF OUR
COMPETITORS MAY ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
Competition within our markets is intense and based mainly on price, speed,
the comprehensiveness of data and our ability to provide information in an
easy-to-read format. Although we believe that we maintain more historical
information than our competitors, our markets are highly fragmented and have
relatively few barriers to entry. As a result, new companies may enter into
direct competition with us, and existing competitors could increase their market
share within our customer markets. Either of these developments could adversely
affect our business and results of operations.
In addition, many of our competitors have greater financial and marketing
resources than we do. Our competitors may gain significant competitive
advantages by increasing efforts to further penetrate their existing client
bases and business relationships. These competitors and other potential
competitors may undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote more resources to developing public
record search services for individual or corporate clients than we are willing
or able to accomplish. Our competitors or potential competitors may develop
services that are superior to or less expensive than ours or create products
that achieve greater market acceptance than ours. In response to these
competitive pressures, we may make service or marketing decisions, such as
reducing our prices or increasing our advertising, which may affect our
operating results. If we are unsuccessful in responding to our competitors, our
business and results of operations may be materially adversely affected.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR
BUSINESS.
The Year 2000 issue is whether technology systems will be able to recognize
and process date sensitive information in the year 2000. If technology systems
with date sensitive functions are not Year 2000 compliant, they may recognize a
date using "00" as the year 1900 rather than the year 2000. The Year 2000 issue
could affect our internal technology systems, including our data storage files
or hardware, and, if not corrected, could cause system shutdowns, system
interruptions or delays in services to customers. As a technological company, we
rely heavily on information technology systems, including proprietary software,
microprocessors, operating systems, desktop computers and network hardware
equipment. These systems store and manage our data files, run our products and
perform a variety of administrative functions including accounting, financial
reporting, payroll and invoicing. Our inability to make the required Year 2000
modifications or conversions to our technology or our inability to identify and
remediate Year 2000 problems in a timely and cost-effective manner could have a
material adverse effect on our business and results of operations.
Year 2000-related issues of third parties on which we rely could also
adversely affect us. Our most significant Year 2000 issues relate to the Year
2000 readiness of our data suppliers and Internet connectivity service
providers. We depend on information contained primarily in electronic format in
databases and computer systems maintained by third parties, including
governmental agencies. We also rely on telecommunications service providers to
connect us to the Internet. The disruption of third-party systems or the failure
of our systems to properly interact with these third-party systems could prevent
us from receiving orders or delivering search results in a timely manner, or
could affect our ability
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to refresh our data. The failure of any of those systems could prevent us from
delivering our products and services, which could have a material adverse effect
on our business and results of operations.
Although we have undertaken substantial efforts to identify and remediate
Year 2000 issues material to our business and to develop contingency plans,
there can be no assurance that our efforts will be successful. We are currently
developing contingency plans to address any problems that may result if we are
unable to achieve Year 2000 readiness for our critical operations. We expect to
complete these contingency plans by October 1999. We may not be able to develop,
and, if necessary, implement a contingency plan that will adequately address all
of our Year 2000 issues. For more information about our Year 2000 readiness, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- The Year 2000 Issue."
WE FACE SECURITY RISKS RELATED TO OUR ELECTRONIC TRANSMISSION OF
CONFIDENTIAL INFORMATION. FRAUDULENT USE OF CREDIT CARD DATA COULD
ADVERSELY AFFECT OUR BUSINESS.
We rely on encryption and other technologies to verify customers'
identities and to effect secure transmission of confidential information.
Advances in computer capabilities, new discoveries in the field of cryptography,
or other events or developments may result in a compromise or breach of the
security measures used by us to protect customer transaction data. Breaches of
our security could harm our reputation and customers' willingness to use our
services. Security breaches could also cause interruptions in our operations and
force us to expend significant capital and other resources to alleviate any
resulting problems. Security breaches involving the storage and transmission of
our customers' proprietary information, including credit card numbers, could
expose us to risk of loss or litigation. We may also suffer losses as a result
of online customer orders placed with fraudulent credit card data even though
the associated financial institution approved payment of the orders. Under
current credit card practices, a merchant is liable for fraudulent credit card
transactions where, as is the case with transactions processed by KnowX.com,
that merchant does not obtain a cardholder's signature. We maintain business
interruption insurance to mitigate losses associated with operational
interruptions caused by any security breaches. Any breach of our security or
fraudulent use of credit card data could have a material adverse effect on our
business and results of operations.
WE MAY NOT BE SUCCESSFUL IN EXPANDING OUR INFRASTRUCTURE AND RECRUITING
QUALIFIED PERSONNEL, BOTH OF WHICH WE NEED TO MANAGE OUR RAPID GROWTH.
We are experiencing periods of rapid growth associated with the
implementation of our growth strategy. Rapid growth could significantly strain
our communication and networking infrastructure, management team and financial
resources. To manage our growth effectively, we will need to continuously
enhance our information and operational systems, including our operating
systems, database software and our financial systems and controls. We will also
need to attract, train and retain additional senior managers, technical
professionals, including programmers, and other employees. As we offer new
services and pursue new customer markets, such as the consumer, banking and
healthcare markets, we will need to increase our executive and sales and support
personnel. Our business and results of operations may be adversely affected if
we are unable to expand and continually improve our operational infrastructure
or to recruit and integrate appropriate personnel.
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OUR SERVICES ARE SUBJECT TO VARIOUS FEDERAL AND STATE LAWS AND LICENSING
REQUIREMENTS.
In connection with some services we provide, particularly pre-employment
background checks by our IRSC subsidiary, we are considered a "consumer
reporting agency," as this term is used in the Fair Credit Reporting Act. We are
therefore required to comply with the various consumer credit disclosure
requirements of the Fair Credit Reporting Act. Noncompliance with the Fair
Credit Reporting Act can result in enforcement actions and fines by both the
Federal Trade Commission and state attorneys general. Willful or negligent
noncompliance could result in civil liability. Similarly, there are a number of
states that have laws similar to the Fair Credit Reporting Act. Further, many
state laws limit the type of information that can be made available to the
public. In addition, some state laws may require us to be licensed in order to
conduct pre-employment background checks. Customers in these states can access
our websites, which may subject us to the laws of those states. Although we
believe we have obtained the necessary licenses in each state where appropriate
for our business, any failure to maintain required licenses could have a
material adverse effect on our business and results of operations. In the event
we are determined to have violated these federal or state laws, we could be
subject to substantial civil and criminal liability which could have a material
adverse effect on our business and results of operations.
WE HAVE A LIMITED OPERATING HISTORY ON THE INTERNET. BECAUSE OF OUR
RELATIVE NEWNESS TO THE INTERNET, ITS RAPIDLY CHANGING MARKETPLACE AND THE
UNPREDICTABLE GROWTH OF THE ELECTRONIC INFORMATION MARKET, IT IS DIFFICULT
TO EVALUATE OUR BUSINESS AND PROSPECTS.
We have recently launched and acquired Internet products and, consequently,
do not have a long operating history on the Internet. We may be unable to
effectively use Internet technology or adapt to its rapid changes. Furthermore,
we may be unable to accurately forecast customer behavior and recognize or
respond to emerging trends, changing preferences or competitive factors on the
Internet. Any evaluation of our business and prospects must be made in light of
the risks and difficulties frequently encountered by companies offering services
in new and rapidly evolving markets such as the Internet. The Internet
marketplace is characterized by rapidly changing consumer preferences, low
barriers to entry for competitors and rapidly changing technologies. Failure to
recognize or respond to these factors may result in a material adverse effect on
our business and prospects. Expanding the KnowX.com and AutoTrack Internet
products and increasing the market awareness of our Internet services may be
complicated, time-consuming and expensive. In addition, it is difficult to
predict the size and future growth rate, if any, of the electronic information
market. The market for electronic information services may not continue to
develop or may become unprofitable. New and evolving trends, including the trend
toward low-cost and enhanced access to public information on the Internet, may
hinder the growth of our market.
WE MAY HAVE DIFFICULTY IDENTIFYING, COMPLETING AND INTEGRATING
ACQUISITIONS, WHICH COULD DECREASE OUR EARNINGS.
Our growth depends in part on our ability to identify complementary
acquisition candidates and to effectively combine the operations of acquired
companies with our own. Complementary acquisition candidates may not be
available, or may be unwilling to complete acquisitions on suitable terms. We
may be unable to finance acquisitions. Using cash to finance acquisitions may
reduce the funds we have available for other corporate purposes. The issuance of
common stock to finance acquisitions could be substantially dilutive to existing
shareholders. Once we have acquired a business, the integration process
14
<PAGE> 15
may require changes in the operating technologies and strategies of the acquired
business. For example, we could have difficulty integrating KnowX.com and
Informed into our current business, including linking our databases to the newly
acquired products. The integration of acquired businesses may also divert
management's attention from its day to day responsibilities. Any difficulties we
encounter in the integration process could reduce the earnings we generate from
acquired businesses, which may have a material adverse effect on our business
and results of operations.
WE MAY EXPERIENCE SERVICE DISRUPTIONS AS A RESULT OF NATURAL DISASTERS.
Our ability to successfully receive and complete search requests and
provide high-quality client service largely depends on the efficient and
uninterrupted operation of our computer and communications hardware systems.
Substantially all of our computer and communications hardware is currently
located at facilities in Southern Florida, which is an area susceptible to
hurricanes. Although we have implemented measures to protect our facilities from
natural disasters, our systems and operations may be vulnerable to damage or
interruption from hurricanes, fire or flood, and any resulting power loss,
telecommunications failure, break-ins or similar events. In addition, events
such as hurricanes and floods could prevent our employees from attending work or
carrying out their work related responsibilities and could cause interruptions
to the computer and communication services and data provided to us by third
parties. Any of these events could have a material adverse effect on our
business and results of operations.
WE COULD BE HELD LIABLE FOR DISSEMINATING INACCURATE INFORMATION, OR FOR
THE MISUSE OF INFORMATION.
Under common law and, in some instances, by specific state and federal
statutes, we could be held liable to customers or to the subjects of background
reports for the dissemination of inaccurate information or for the misuse of
information. Liability from these claims could adversely affect our reputation
and financial condition. We maintain internal procedures designed to protect us
from liability, including the following:
- We do not alter any of the information we receive from our data
suppliers; therefore, the information we provide to our customers is
identical to that which appears in public records or which we
receive from our suppliers.
- We ensure that our customers sign our standard subscription
agreement, which disclaims any warranties on the information
provided to them and, other than governmental customers, provides
for indemnification of us for any harm resulting from the misuse of
the information.
- We maintain a liability insurance policy to cover claims by
customers or the subjects of reports.
Although these precautions are designed to protect us from liability, there
can be no assurance that claims for providing inaccurate information, or for the
misuse of information, will not have a material adverse effect on our financial
condition and results of operations.
SERVICE INTERRUPTIONS MAY NEGATIVELY IMPACT ON OUR REVENUES, DAMAGE OUR
REPUTATION AND DECREASE OUR ABILITY TO ATTRACT CUSTOMERS.
We depend on the satisfactory performance, reliability and availability of
our telecommunications infrastructure to attract customers and generate sales.
If we experience technical difficulties attributable to a high volume of
business or third party malfunctions that result in slower response times,
disruptions or unavailability of our services, our
15
<PAGE> 16
revenues, reputation and brand would be harmed and the value of our services to
clients would be reduced. Although we have not experienced significant system
interruptions in the past, there can be no assurance that these interruptions
will not occur in the future. Any interruptions in our services may have a
material adverse effect on our business and results of operations.
OUR STOCK PRICE IS VOLATILE AND MARKET FLUCTUATIONS MAY ADVERSELY AFFECT
THE MARKET PRICE OF OUR COMMON STOCK.
The trading price of our common stock has fluctuated significantly in the
past and it may continue to do so in the future. These fluctuations could be
attributable to many unpredictable factors, including low trading volume,
announcements of technological innovations, customer growth and usage, the
introduction of new products by us or our competitors, developments with respect
to our patents or proprietary rights, changes in financial estimates by
securities analysts and other events. In addition, the stock market has
experienced volatility that has particularly affected the market prices of
equity securities of high technology companies such as ours and that often has
been unrelated or disproportionate to the operating performance of these
companies.
OUR PATLEX SUBSIDIARY DEPENDS EXCLUSIVELY ON THE EXPLOITATION AND
ENFORCEMENT OF LASER PATENTS EXPIRING IN 2004 AND 2005.
Our Patlex subsidiary partially owns two significant laser patents, which
generated revenues of approximately $6.6 million for the year ended December 31,
1998. These laser patents are Patlex's only significant assets. As Patlex's
revenues are solely derived from the royalties it receives under its license
agreements, any advance in technology which would render the laser patents
obsolete could adversely affect Patlex's future revenues and could have an
adverse effect on our financial condition and results of operations. Although we
do not believe that any recent advances in laser technology exist that may
materially adversely affect Patlex's future patent royalty revenues, there has
been a gradual advancement in new laser technologies that has adversely affected
Patlex's revenues.
One of the patents generates substantially all of Patlex's revenues and
expires in November 2004 and the other patent expires in May 2005. Upon the
expiration of the laser patents, Patlex will lose its right to prevent others
from exploiting these inventions and to receive royalty payments. We do not
expect to derive any revenue from the patent exploitation and enforcement
business following the expiration of the laser patents.
16
<PAGE> 17
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. This information may involve
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from the
future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology.
This prospectus contains forward-looking statements that address, among
other things, the integration of acquisitions, limited experience with Internet
business, growth strategy, computer system capabilities, availability of data
and customer demand. These statements may be found under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as in this prospectus generally. Actual events or results
may differ materially from those discussed in forward-looking statements as a
result of various factors, including, without limitation, the risks outlined
under "Risk Factors" and matters described in this prospectus generally.
17
<PAGE> 18
USE OF PROCEEDS
We expect to receive approximately $23.4 million of net proceeds from the
sale of the 1,000,000 shares of common stock we are offering based on the price
to the public of $25.00 per share and after deducting underwriting discounts and
commissions and estimated offering expenses payable by us.
We intend to use the net proceeds of this offering primarily for general
corporate purposes, including working capital and capital expenditures. A
portion of the proceeds may also be used to acquire or invest in complementary
businesses or products. However, we have no present plans, agreements or
commitments and are not currently engaged in any negotiations with respect to
any transactions for which we would use the proceeds of this offering. We cannot
at this time specify with certainty the particular uses for the net proceeds to
be received upon the completion of this offering. Accordingly, we will have
broad discretion in applying the net proceeds.
We will not receive any proceeds from the sale of shares by the selling
shareholders.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock since
1996, and do not anticipate paying any cash dividends in the foreseeable future.
We currently intend to retain future earnings to finance operations and to
expand our business. Any future determination to pay cash dividends will be at
the discretion of the board of directors and will depend on our financial
condition, operating results and capital requirements.
18
<PAGE> 19
PRICE RANGE OF COMMON STOCK
Our common stock is listed on The New York Stock Exchange under the symbol
"DBT." Prior to September 1997, our common stock was quoted on the Nasdaq
National Market. The following table sets forth the high and low sales prices
per share of our common stock on the Nasdaq National Market and The New York
Stock Exchange for the indicated periods.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997
First Quarter.................................... $22.88 $14.88
Second Quarter................................... $29.00 $17.78
Third Quarter.................................... $32.88 $21.50
Fourth Quarter................................... $34.75 $24.75
1998
First Quarter.................................... $33.38 $21.50
Second Quarter................................... $28.25 $21.25
Third Quarter.................................... $28.50 $12.38
Fourth Quarter................................... $25.94 $12.63
1999
First Quarter.................................... $25.25 $18.75
Second Quarter................................... $39.94 $22.75
Third Quarter.................................... $33.56 $24.50
Fourth Quarter (through October 7, 1999)......... $26.38 $22.88
</TABLE>
On October 7, 1999, the last reported sale price of our common stock on the
NYSE was $25.75 per share.
The number of record holders of our common stock as of August 1, 1999 was
498. We believe that a larger number of beneficial owners hold shares of our
common stock in depository or nominee form.
19
<PAGE> 20
CAPITALIZATION
The following table sets forth our actual capitalization as of June 30,
1999, our pro forma capitalization as of June 30, 1999 giving effect to the
acquisition of KnowX.com and Informed and our pro forma capitalization as
adjusted to reflect the sale by us of 1,000,000 shares of common stock offered
by this prospectus, based on the price to the public of $25.00 per share, and
after deducting underwriting discounts and commissions and estimated offering
expenses payable by us. For a further discussion of our financial condition, you
should refer to the more complete information contained in the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Selected Consolidated Financial and Other Data" and "Unaudited Pro
Forma Condensed Consolidated Financial Statements" and the consolidated
financial statements and notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents............ $ 25,002 $ 2 $ 23,434
======== ======= ========
Total Shareholders' Equity:
Preferred Stock, $0.10 par value,
5,000 shares authorized, no
shares issued or outstanding.... -- -- --
Common Stock, $0.10 par value,
100,000 shares authorized,
19,003 issued and outstanding,
actual and pro forma, 20,003
shares issued and outstanding,
pro forma as adjusted........... 1,900 1,900 2,000
Additional paid-in capital...... 71,515 72,075 95,407
Retained earnings............... 16,130 16,130 16,130
Accumulated other comprehensive
loss.......................... (223) (223) (223)
-------- ------- --------
Total shareholders' equity......... 89,322 89,882 113,314
-------- ------- --------
Total capitalization....... $ 89,322 $89,882 $113,314
======== ======= ========
</TABLE>
This table is based on shares outstanding as of June 30, 1999. This table
excludes:
- 3,043,802 shares of common stock issuable upon the exercise of options
outstanding as of June 30, 1999, at a weighted average exercise price of
$18.61 per share; and
- 329,172 shares of common stock underlying warrants we granted in
connection with our acquisition of KnowX.com and Informed at an exercise
price of $52.50 per share.
20
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial and other data should be read
in conjunction with our consolidated financial statements and notes thereto
included elsewhere in this prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The consolidated financial
data presented below as of and for the fiscal years ended December 31, 1996,
1997 and 1998 have been derived from our audited consolidated financial
statements, which are included elsewhere in this prospectus and have been
restated for our acquisition of IRSC in May 1999, which was accounted for as a
pooling of interests. The consolidated financial data presented below as of and
for the fiscal years ended December 31, 1994 and 1995 have been derived from our
consolidated financial statements prior to the merger with IRSC and unaudited
financial statements of IRSC. The consolidated financial data for the six months
ended June 30, 1998 and 1999 and as of June 30, 1999 are derived from our
unaudited condensed consolidated financial statements included elsewhere in this
prospectus and reflect all adjustments (which consist of only normal recurring
adjustments) necessary for a fair presentation of interim periods. Operating
results for the six months ended June 30, 1999 are not necessarily indicative of
results for the full fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1994 1995(1) 1996(2) 1997 1998 1998 1999
------ ------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... $6,493 $13,142 $22,607 $ 37,777 $54,103 $25,401 $34,595
Royalties.............................. -- -- 2,382 6,670 6,636 3,460 3,149
------ ------- ------- -------- ------- ------- -------
Total revenues and royalties... 6,493 13,142 24,989 44,447 60,739 28,861 37,744
------ ------- ------- -------- ------- ------- -------
Cost of revenues....................... 856 3,372 11,418 17,957 26,152 12,445 15,181
Sales and marketing.................... 287 1,026 2,434 4,367 6,508 3,378 5,331
Research and development............... 553 1,017 2,052 2,364 3,078 1,297 2,201
General and administrative............. 4,189 6,870 8,273 11,978 17,317 7,781 9,650
Loss on IRB transaction................ -- 1,660 -- -- -- -- --
Merger and acquisition costs........... -- -- -- -- -- -- 817
------ ------- ------- -------- ------- ------- -------
Total expenses................. 5,885 13,945 24,177 36,666 53,055 24,901 33,180
------ ------- ------- -------- ------- ------- -------
Income (loss) from operations.......... 608 (803) 812 7,781 7,684 3,960 4,564
Interest income (expense), net......... (15) (76) (174) 1,491 2,330 1,104 903
------ ------- ------- -------- ------- ------- -------
Income (loss) before income taxes...... 593 (879) 638 9,272 10,014 5,064 5,467
Provision for income taxes............. 51 239 198 3,171 3,118 1,704 1,862
------ ------- ------- -------- ------- ------- -------
Net income (loss)...................... $ 542 $(1,118) $ 440 $ 6,101 $ 6,896 $ 3,360 $ 3,605
====== ======= ======= ======== ======= ======= =======
Net income (loss) per common share:
Basic................................ $ 0.07 $ (0.12) $ 0.04 $ 0.35 $ 0.36 $ 0.18 $ 0.19
====== ======= ======= ======== ======= ======= =======
Diluted.............................. $ 0.07 $ (0.12) $ 0.03 $ 0.33 $ 0.35 $ 0.17 $ 0.18
====== ======= ======= ======== ======= ======= =======
Weighted average shares outstanding:
Basic................................ 8,308 9,268 12,561 17,568 18,900 18,895 18,947
====== ======= ======= ======== ======= ======= =======
Diluted.............................. 8,308 9,268 12,835 18,495 19,612 19,761 19,972
====== ======= ======= ======== ======= ======= =======
OTHER DATA:
Cash flows from operating activities....................... $ 1,582 $ 9,599 $ 9,170 $ 5,233 $ 7,296
Cash flows from investing activities....................... 3,183 (53,542) 4,069 (467) (4,834)
Cash flows from financing activities....................... 558 44,707 172 172 1,216
EBITDA(3).................................................. 3,945 13,583 15,706 7,531 8,697
Capital expenditures....................................... 5,371 6,949 14,537 8,014 5,231
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
------- ------ ------ ------ -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 337 $1,826 $7,149 $7,913 $ 21,324 $ 25,002
Short term investments............................. -- -- -- 44,207 25,840 24,651
Working capital.................................... 350 712 4,497 53,638 53,922 56,635
Total assets....................................... 2,421 7,663 30,821 86,355 92,371 100,624
Total debt......................................... 993 2,859 3,073 -- -- --
Shareholders' equity............................... 954 3,074 18,932 76,583 83,893 89,322
</TABLE>
- ---------------
(1) Our results for 1995 were adversely affected by a loss of $1,660 relating to
our acquisition and disposition of International Research Bureau, Inc.
assets in 1995.
(2) Our 1996 statement of operations data includes the results of Patlex, our
patent enforcement business, from August 20, 1996, the date of our
reorganization with Patlex through December 31, 1996.
(3) EBITDA represents earnings before interest and financial charges, income
taxes, depreciation and amortization. We have included information
concerning EBITDA (which is not a measure of financial performance under
generally accepted accounting principles) because we believe that it is used
by certain investors as one measure of financial performance. EBITDA should
not be construed as an alternative to operating income (as determined in
accordance with generally accepted accounting principles) or as a measure of
liquidity. EBITDA as measured by us may not be comparable to similarly
titled measures reported by other companies.
22
<PAGE> 23
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements are based on the consolidated financial statements and unaudited
condensed consolidated financial statements of DBT Online, and the historical
financial statements of the Online Public Records Business, including the
KnowX.com and Informed product lines, which are included elsewhere in this
prospectus.
The unaudited pro forma condensed consolidated balance sheet gives effect
to the acquisition of KnowX.com and Informed as if it had occurred on June 30,
1999. The unaudited pro forma condensed consolidated statements of operations
give effect to the acquisition of KnowX.com and Informed as if it had occurred
as of January 1, 1998. The unaudited pro forma condensed consolidated financial
statements do not give effect to this offering. All of the pro forma adjustments
are described more fully in the accompanying notes. In our opinion, all
adjustments have been made that are necessary to present fairly the pro forma
data. Final amounts could differ from those set forth below.
The unaudited pro forma condensed consolidated financial statements give
effect to the acquisition under the purchase method of accounting and are based
on the assumptions and adjustments described in the accompanying notes to the
unaudited pro forma condensed consolidated financial statements. The fair value
of the consideration was allocated to the assets and liabilities acquired based
upon the fair values of such assets and liabilities at the acquisition date and
may be revised for a period of up to one year thereafter. The preliminary
estimates and assumptions as to the fair value of the assets and liabilities
acquired is based upon information available at the date of preparation of these
unaudited pro forma condensed consolidated financial statements and will be
adjusted upon the final determination of such fair values.
The unaudited pro forma condensed consolidated financial statements are
presented for informational purposes only and do not purport to be indicative of
the results of operations that actually would have been achieved had the
acquisition been consummated on the dates or during the periods indicated, or of
the results of operations as of any future date or for any future period. The
unaudited pro forma condensed consolidated financial statements should be read
in conjunction with the accompanying notes, the consolidated financial
statements and notes thereto of DBT Online and the Online Public Records
Business, including the KnowX.com and Informed product lines, all of which are
included elsewhere in this prospectus, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
23
<PAGE> 24
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET AS OF JUNE 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
ACQUISITION OF
DBT ONLINE PUBLIC
ACTUAL RECORDS BUSINESS(A) PRO FORMA
-------- ------------------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..................... $ 25,002 $(25,000) $ 2
Accounts receivable, less allowance........... 12,074 1,133 13,207
Short-term investments........................ 24,651 24,651
Prepaid expenses and other current assets..... 2,562 2,562
Prepaid income taxes.......................... 494 494
-------- -------- ---------
Total current assets................ 64,783 (23,867) 40,916
Property and equipment, net................... 21,283 500 21,783
Patents, less accumulated amortization........ 8,983 8,983
Goodwill, less accumulated amortization....... 5,335 23,974 29,309
Other assets.................................. 240 240
-------- -------- ---------
Total assets........................ $100,624 $ 607 $ 101,231
======== ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities...... $ 6,367 $ 47 $ 6,414
Due to other patent interest holders.......... 1,781 1,781
-------- -------- ---------
Total current liabilities........... 8,148 47 8,195
Deferred income taxes......................... 3,154 3,154
Shareholders' Equity:
Preferred stock, $0.10 par value; no shares
issued or outstanding.......................
Common stock, $0.10 par value; 19,003 shares
issued and outstanding...................... 1,900 1,900
Additional paid-in capital.................... 71,515 560 72,075
Retained earnings............................. 16,130 16,130
Accumulated other comprehensive loss.......... (223) (223)
-------- -------- ---------
Total shareholders' equity.......... 89,322 560 89,882
-------- -------- ---------
Total liabilities and shareholders'
equity............................ $100,624 $ 607 $ 101,231
======== ======== =========
</TABLE>
See Notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements
24
<PAGE> 25
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
ONLINE PUBLIC
DBT RECORDS PRO FORMA
ACTUAL ACTUAL(B) ADJUSTMENTS PRO FORMA
------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues.............................. $54,103 $ 8,391 $ $62,494
Royalties............................. 6,636 6,636
------- ------- -------- -------
Total....................... 60,739 8,391 69,130
------- ------- -------- -------
Cost of revenues...................... 26,152 4,608 100 (a) 29,018
(1,842)(c)
Sales and marketing................... 6,508 2,574 9,082
Research and development.............. 3,078 3,078
General administrative................ 17,317 3,353 2,397 (a) 21,625
(1,442)(d)
------- ------- -------- -------
Total expenses.............. 53,055 10,535 (787) 62,803
------- ------- -------- -------
Income (loss) from operations......... 7,684 (2,144) 787 6,327
Interest income (expense), net........ 2,330 (161) (1,000)(e) 1,169
------- ------- -------- -------
Income (loss) before income taxes..... 10,014 (2,305) (213) 7,496
Provision (benefit) for income
taxes............................... 3,118 (516)(f) 2,602
------- ------- -------- -------
Net income (loss)..................... $ 6,896 $(2,305) $ 303 $ 4,894
======= ======= ======== =======
Net income per share (basic).......... $ 0.36 $ 0.26
======= =======
Weighted-average shares outstanding
(basic)............................. 18,900 18,900
======= =======
Net income per share (diluted)........ $ 0.35 $ 0.25
======= =======
Weighted-average shares outstanding
(diluted)........................... 19,612 19,612
======= =======
</TABLE>
See Notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements
25
<PAGE> 26
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
ONLINE PUBLIC
DBT RECORDS PRO FORMA
ACTUAL ACTUAL(B) ADJUSTMENTS PRO FORMA
------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues.............................. $34,595 $ 6,227 $ $40,822
Royalties............................. 3,149 3,149
------- ------- -------- -------
Total....................... 37,744 6,227 43,971
------- ------- -------- -------
Cost of revenues...................... 15,181 2,948 50 (a) 17,043
(1,136)(c)
Sales and marketing................... 5,331 2,098 7,429
Research and development.............. 2,201 2,201
General administrative................ 9,650 2,282 1,199 (a) 12,392
(739)(d)
Merger and acquisition costs.......... 817 817
------- ------- -------- -------
Total expenses.............. 33,180 7,328 (626) 39,882
------- ------- -------- -------
Income (loss) from operations......... 4,564 (1,101) 626 4,089
Interest income (expense), net........ 903 (71) (500)(e) 332
------- ------- -------- -------
Income (loss) before income taxes..... 5,467 (1,172) 126 4,421
Provision (benefit) for income
taxes............................... 1,862 (186)(f) 1,676
------- ------- -------- -------
Net income (loss)..................... $ 3,605 $(1,172) $ 312 $ 2,745
======= ======= ======== =======
Net income per share (basic).......... $ 0.19 $ 0.14
======= =======
Weighted-average shares outstanding
(basic)............................. 18,947 18,947
======= =======
Net income per share (diluted)........ $ 0.18 $ 0.14
======= =======
Weighted-average shares outstanding
(diluted)........................... 19,972 19,972
======= =======
</TABLE>
See Notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements
26
<PAGE> 27
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND FOR THE YEAR ENDED
DECEMBER 31, 1998 AND THE SIX MONTHS ENDED
JUNE 30, 1999
(dollars in thousands)
(a) Represents the acquisition of KnowX.com and Informed. The purchase
price is composed of the following:
<TABLE>
<S> <C>
Cash...................................... $25,000
DBT Online warrants....................... 560
-------
$25,560
=======
</TABLE>
The acquisition agreement provided for the payment of $25,000 in cash,
as well as the issuance of warrants to purchase 329,172 shares of our
common stock at $52.50 per share. The warrants expire on March 23, 2001.
The estimated fair value of the warrants of $560 has been derived using
a standard option pricing model.
The purchase price allocation and related effects of such allocation on
the unaudited pro forma condensed consolidated statements of operations
are as follows:
<TABLE>
<CAPTION>
PRO FORMA
DEPRECIATION AND
AMORTIZATION
---------------------------------
SIX MONTHS
YEAR ENDED ENDED
ALLOCATION LIFE DECEMBER 31, 1998 JUNE 30, 1999
---------- -------- ----------------- -------------
<S> <C> <C> <C> <C>
Accounts receivable....... $ 1,133 --
Property and equipment.... 500 5 years $ 100 $ 50
Accrued expenses.......... (47) --
Trademarks and goodwill... 23,974 10 years 2,397 1,199
------- ------ ------
Total........... $25,560 $2,497 $1,249
======= ====== ======
</TABLE>
(b) Represents the historical statements of operations of KnowX.com and
Informed for the year ended December 31, 1998 and the six months ended
June 30, 1999.
(c) Cost of revenues reflected in the historical statements of operations
for KnowX.com and Informed includes allocations of costs from its
parent, a significant portion of which will not have a continuing
impact on us subsequent to the acquisition. Those costs which will have
a continuing impact on us are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
Royalties............................. $1,956 $1,447
Payroll and related expenses.......... 644 297
Telephone............................. 166 68
------ ------
$2,766 $1,812
====== ======
</TABLE>
27
<PAGE> 28
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS --(CONTINUED)
(dollars in thousands)
The pro forma adjustments to cost of revenues for the year ended
December 31, 1998 and the six months ended June 30, 1999 of $1,842 and
$1,136, respectively, reduce the cost of revenues amounts of $4,608 and
$2,948, respectively, to the historical amount detailed above which is
expected to have a continuing impact on us.
(d) Represents employee related expenses and administrative and management
fee allocations which are included in the historical statements of
operations of KnowX.com and Informed which will not have a continuing
impact on us subsequent to the acquisition. The pro forma adjustments
are derived as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
Compensation.......................... $1,195 $ 580
Travel and other employee benefits.... 77 71
Administrative and management fees.... 170 88
------ ------
$1,442 $ 739
====== ======
</TABLE>
(e) Represents the reduction in interest income to reflect the pro forma
effect of reduced investment balances as a consequence of using $25,000
of our interest earning investments to consummate the acquisition of
KnowX.com and Informed. The pro forma adjustment is derived using the
average rate of return of approximately 4.0% earned during both the
year ended December 31, 1998 and the six months ended June 30, 1999.
(f) Represents the tax benefit associated with the KnowX.com and Informed
loss before income taxes, as adjusted for the pro forma adjustments to
the unaudited pro forma condensed consolidated statements of
operations. The pro forma benefit for income taxes was derived using
our effective income tax rate of 34.0%. The effect of pro forma
adjustment (e) was not included in deriving the pro forma income tax
adjustment because the related interest income is tax-exempt.
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<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands)
You should read this discussion of our financial condition and results of
operations in conjunction with the consolidated financial statements and notes
thereto included elsewhere in this prospectus and with other financial
information incorporated by reference in this prospectus. This prospectus
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those discussed in the forward-
looking statements as a result of various factors, including without limitation,
those set forth in "Risk Factors" and the matters set forth in this prospectus
generally.
OVERVIEW
We are a leading nationwide provider of online public records data and
other publicly available information operating through our Electronic
Information Group (EIG). We also operate in the patent exploitation and
enforcement business through our Patent Enforcement Group (PEG). EIG provides
online integrated database services and related reports to law enforcement and
other government agencies, law firms, insurance companies, and licensed
investigation companies. As a result of our acquisition of the KnowX.com and
Informed businesses, EIG will also provide online information to the consumer,
small office and commercial lending and leasing markets. PEG exploits and
enforces two partially-owned laser patents, generating its revenues through
patent royalties.
In September 1999, we acquired the KnowX.com and Informed businesses from
Information America, Inc. in exchange for $25,000 in cash and warrants to
purchase 329,172 shares of our common stock. The KnowX.com and Informed
acquisitions allowed us to enter the consumer, small office and commercial
lending and leasing markets, and were accounted for as a purchase.
In May 1999, we merged with I.R.S.C., Inc., a private company based in
Fullerton, California and issued 432,346 shares of our common stock as merger
consideration. The IRSC business combination enabled us to enter the corporate
pre-employment screening and anti-fraud due diligence markets. The merger with
IRSC was accounted for as a pooling-of-interests. Therefore, we have restated
the financial information for each of the periods discussed below to reflect the
combined results of our company and IRSC.
In May 1999, we acquired WinSHAPES, a private company based in Seattle,
Washington, in exchange for approximately $442 in cash and the assumption of
approximately $704 in liabilities. The WinSHAPES acquisition, through its
CaseLINK product, allows us to convert data into graphic illustrations that
visualize relationships among people, businesses, vehicles and other assets. The
acquisition of WinSHAPES was accounted for as a purchase.
In August 1997, we acquired The Information Connectivity Group, Inc., or
ICON, a private company based in Norcross, Georgia. This acquisition increased
our penetration of the insurance company market, and was accounted for as a
purchase.
In August 1996, we were formed as part of the reorganization of Patlex.
Through the reorganization, we were established as a holding company and Patlex
and Database Technologies, Inc. became our wholly owned subsidiaries. The
reorganization combined the revenues and operations of the EIG and PEG groups.
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<PAGE> 30
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues
EIG's revenues increased 36.2% to $34,595 for the six months ended June 30,
1999, from $25,401 for the same period in 1998. The increase in EIG's revenues
was attributable to new products released by EIG. EIG's active customers
(defined as customers accessing the system in a given month) increased only
11.1% to approximately 14,000 at June 30, 1999, from approximately 12,600 at
June 30, 1998. We imposed a service fee in the first quarter of 1999, which
eliminated a number of unprofitable customers. PEG's revenues decreased 9.0% to
$3,149 for the six months ended June 30, 1999, from $3,460 for the same period
in 1998. Total consolidated revenues increased 30.8% to $37,744 for the six
months ended June 30, 1999, from $28,861 for the same period in 1998.
Cost of Revenues
EIG's cost of revenues increased 23.6% to $14,328 for the six months ended
June 30, 1999, from $11,591 for the same period in 1998. The increase in EIG's
cost of revenues was due primarily to increases in both data purchase costs and
depreciation expense as EIG continued to invest both in its computer facilities
and in the expansion of its databases. As a percentage of EIG's revenues, cost
of revenues decreased to 41.4% for the six months ended June 30, 1999, from
45.6% for the same period in 1998. The decrease in cost of revenues as a
percentage of EIG's revenues was due to the scale benefits associated with our
accelerated revenue growth. PEG's cost of revenues remained substantially
constant at $853 for the six months ended June 30, 1999, compared to $854 for
the same period in 1998, and consisted solely of the amortization of costs
associated with the purchase of PEG's patents. Total consolidated cost of
revenues increased 22.0% to $15,181 for the six months ended June 30, 1999, from
$12,445 for the same period in 1998.
Sales and Marketing
EIG's sales and marketing expenses increased 57.8% to $5,331 for the six
months ended June 30, 1999, from $3,378 for the same period in 1998. The
increase was primarily due to increases in advertising expenses and sales and
marketing personnel. As a percentage of EIG's revenues, sales and marketing
expenses increased to 15.4% for the six months ended June 30, 1999, from 13.3%
for the same period in 1998. This increase was attributable to a greater
emphasis on utilizing sales and marketing campaigns to increase revenue growth.
PEG did not have sales and marketing expenses.
Research and Development
EIG's research and development expenses increased 69.7% to $2,201 for the
six months ended June 30, 1999, from $1,297 for the same period in 1998. As a
percentage of EIG's revenues, research and development expenses increased to
6.4% for the six months ended June 30, 1999, from 5.1% for the same period in
1998. The increase was primarily due to an increase in both salaries and
personnel associated with our new product development efforts. PEG did not have
research and development expenses.
General and Administrative Expenses
EIG's general and administrative expenses increased 26.6% to $9,125 for the
six months ended June 30, 1999, from $7,207 for the same period in 1998. This
increase was
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<PAGE> 31
due to increases in occupancy expenses, payroll, and other expenses related to
the reorganization of our administrative infrastructure. As a percentage of
EIG's revenues, general and administrative expenses decreased to 26.4% for the
six months ended June 30, 1999, from 28.4% for the same period in 1998. PEG's
general and administrative expenses decreased to $525 for the six months ended
June 30, 1999, from $574 for the same period in 1998. Total consolidated general
and administrative expenses increased 24.0% to $9,650 for the six months ended
June 30, 1999, from $7,781 for the same period in 1998.
Operating Profit
EIG's operating profit increased 44.9% to $2,793 for the six months ended
June 30, 1999, from $1,928 for the same period in 1998. This increase was
attributable to the continued growth in revenues offset by increased cost of
revenues and other operating expenses. Operating profit for the six months ended
June 30, 1999 included one-time merger-related costs of $817. Excluding the
one-time merger-related costs, EIG's operating profit increased 87.2% to $3,610
for the six months ended June 30, 1999, from $1,928 in the same period in 1998.
PEG's operating profit decreased 12.8% to $1,771 for the six months ended June
30, 1999, from $2,032 for the same period in 1998. Total consolidated operating
profit increased 15.3% to $4,564 for the six months ended June 30, 1999, from
$3,960 for the same period in 1998.
Interest Income
Net interest income was $903 for the six months ended June 30, 1999,
compared to $1,104 for the same period in 1998. The decrease was due to lower
cash and investment balances as our capital expenditures increased significantly
in 1998, reducing our beginning cash balance in 1999.
Income Taxes
Our effective income tax rate was 34% for both the six months ended June
30, 1999 and 1998. The effective tax rates for both of these periods were
favorably impacted by non-taxable interest income and reduced state income
taxes.
Net Income
Our net income increased 7.3% to $3,605 for the six months ended June 30,
1999, from $3,360 for the same period in 1998. The increase was primarily due to
the increase in the operating profit of EIG, offset by the reduced operating
profit of PEG, reduced interest income during the period and the incurrence of
one-time, merger-related expenses of $817.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Revenues
EIG's revenues increased 43.2% to $54,103 for the year ended December 31,
1998, from $37,777 for the year ended December 31, 1997. The increase in EIG's
revenues was attributable to new products released by EIG. PEG's revenues
remained constant at $6,636 for the year ended December 31, 1998, compared to
$6,670 for the year ended December 31, 1997. Total consolidated revenues
increased 36.7% to $60,739 for the year ended December 31, 1998, from $44,447
for the year ended December 31, 1997.
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<PAGE> 32
Cost of Revenues
EIG's cost of revenues increased 50.3% to $24,444 for the year ended
December 31, 1998, from $16,259 for the year ended December 31, 1997. The
increase was due primarily to increases in both data purchase costs and
depreciation expense as EIG continued to invest both in its computer facilities
and in the expansion of its databases. The increase in cost of revenues was also
due in part to the full year effect of our acquisition of ICON. As a percentage
of EIG's revenues, cost of revenues increased to 45.2% for the year ended
December 31, 1998, from 43.0% for the year ended December 31, 1997. PEG's cost
of revenues remained substantially constant at $1,708 for the year ended
December 31, 1998, compared to $1,698 for the year ended December 31, 1997, and
consisted solely of the amortization of costs associated with the purchase of
PEG's patents. Total consolidated cost of revenues increased 45.6% to $26,152
for the year ended December 31, 1998, from $17,957 for the year ended December
31, 1997.
Sales and Marketing
EIG's sales and marketing expenses increased 49.0% to $6,508 for the year
ended December 31, 1998, from $4,367 for the year ended December 31, 1997. The
increase was primarily due to our acquisition of ICON and increases in
advertising, trade-show expenses and costs related to the expansion of our sales
force. As a percentage of EIG's revenues, sales and marketing expenses increased
to 12.0% for the year ended December 31, 1998, from 11.6% for the year ended
December 31, 1997. PEG did not have sales and marketing expenses.
Research and Development
EIG's research and development expenses increased 30.2% to $3,078 for the
year ended December 31, 1998, from $2,364 for the year ended December 31, 1997.
The increase was primarily due to an increase in payroll and related expenses.
As a percentage of EIG's revenues, research and development expenses decreased
to 5.7% for the year ended December 31, 1998, from 6.3% for the year ended
December 31, 1997. PEG did not have research and development expenses.
General and Administrative Expenses
EIG's general and administrative expenses increased 49.0% to $16,292 for
the year ended December 31, 1998, from $10,934 for the year ended December 31,
1997. This increase was due to increases in rent, public company expenses,
goodwill amortization and payroll and related expenses. As a percentage of EIG's
revenues, general and administrative expenses increased to 30.1% for the year
ended December 31, 1998, from 28.9% for the year ended December 31, 1997. PEG's
general and administrative expenses decreased to $1,025 for the year ended
December 31, 1998, from $1,044 for the year ended December 31, 1997. Total
consolidated general and administrative expenses increased 44.6% to $17,317 for
the year ended December 31, 1998, from $11,978 for the year ended December 31,
1997.
Operating Profit
EIG's operating profit was $3,781 for the year ended December 31, 1998,
compared to $3,853 for the year ended December 31, 1997. PEG's operating profit
remained constant at
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<PAGE> 33
$3,903 for the year ended December 31, 1998, compared to $3,928 for the year
ended December 31, 1997. Total consolidated operating profit modestly decreased
to $7,684 for the year ended December 31, 1998, from $7,781 for the year ended
December 31, 1997.
Interest Income
Net interest income increased to $2,330 for the year ended December 31,
1998, from $1,491 for the year ended December 31, 1997. The net interest income
in 1998 and 1997 resulted from investment earnings on proceeds from the sale of
our common stock in May 1997.
Income Taxes
Our effective income tax rate was 31% for the year ended December 31, 1998,
compared to 34% for the year ended December 31, 1997. The 1998 effective tax
rate was decreased by the effects of non-taxable investment income, a reduction
in our valuation allowance, and a research and development tax credit offset by
state income taxes. The 1997 effective tax rate was favorably affected by a
research and development tax credit.
Net Income
Our net income increased 13.0% to $6,896 for the year ended December 31,
1998, from $6,101 for the year ended December 31, 1997. The increase in net
income was primarily due to a significant increase in investment income and a
reduction in the effective tax rate in 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Revenues
EIG's revenues increased 67.1% to $37,777 for the year ended December 31,
1997, from $22,607 for the year ended December 31, 1996. The increase in EIG's
revenues was attributable to new products released by EIG. PEG's revenues were
$6,670 for the year ended December 31, 1997, compared to $2,382 for the year
ended December 31, 1996. This increase was due to the fact that our results of
operations in 1996 only included PEG's revenues after August 1996, the month in
which we acquired Patlex. Total consolidated revenues increased 77.9% to $44,447
for the year ended December 31, 1997, from $24,989 for the year ended December
31, 1996.
Cost of Revenues
EIG's cost of revenues increased 50.6% to $16,259 for the year ended
December 31, 1997, from $10,796 for the year ended December 31, 1996. The
increase in EIG's cost of revenues was primarily due to an increase in data
purchase costs. As a percentage of EIG's revenues, cost of revenues decreased to
43.0% for the year ended December 31, 1997, from 47.8% for the year ended
December 31, 1996. PEG's cost of revenues increased to $1,698 for the year ended
December 31, 1997, compared to $622 for the period from August 1996 through
December 31, 1996, and consisted solely of the amortization of costs associated
with the purchase of PEG's patents. Total consolidated cost of revenues
increased 57.3% to $17,957 for the year ended December 31, 1997, from $11,418
for the year ended December 31, 1996.
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<PAGE> 34
Sales and Marketing
EIG's sales and marketing expenses increased 79.4% to $4,367 for the year
ended December 31, 1997, from $2,434 for the year ended December 31, 1996. The
increase was primarily due to increases in payroll and trade-show expenses. As a
percentage of EIG's revenues, sales and marketing expenses increased to 11.6%
for the year ended December 31, 1997, from 10.8% for the year ended December 31,
1996. PEG did not have sales and marketing expenses.
Research and Development
EIG's research and development expenses increased 15.2% to $2,364 for the
year ended December 31, 1997, from $2,052 for the year ended December 31, 1996.
This increase was primarily due to increases in payroll and related expenses. As
a percentage of EIG's revenues, research and development expenses decreased to
6.3% for the year ended December 31, 1997, from 9.1% for the year ended December
31, 1996. PEG did not have research and development expenses.
General and Administrative Expenses
EIG's general and administrative expenses increased 39.2% to $10,934 for
the year ended December 31, 1997, from $7,854 for the year ended December 31,
1996. This increase was due to increases in rent, public company expenses,
goodwill amortization, and payroll and related expenses. As a percentage of
EIG's revenues, general and administrative expenses decreased to 28.9% for the
year ended December 31, 1997, from 34.7% for the year ended December 31, 1996.
PEG's general and administrative expenses increased to $1,044 for the year ended
December 31, 1997, from $419 for the period from August 1996 through December
31, 1996. Total consolidated general and administrative expenses increased 44.8%
to $11,978 for the year ended December 31, 1997, from $8,273 for the year ended
December 31, 1996.
Operating Profit
EIG's operating profit was $3,853 for the year ended December 31, 1997,
compared with an operating loss of $529 for the year ended December 31, 1996.
PEG's operating profit was $3,928 for the year ended December 31, 1997, compared
to $1,341 for the period from August 1996 through December 31, 1996. Total
consolidated operating profit increased to $7,781 for the year ended December
31, 1997, compared to $812 for the year ended December 31, 1996.
Interest Income
Net interest income was $1,491 for the year ended December 31, 1997,
compared to a net interest expense of $174 for the year ended December 31, 1996.
The net interest income in 1997 was due to investment earnings on proceeds from
the issuance and sale of our common stock in May 1997.
Income Taxes
Our effective income tax rate was 34% for the year ended December 31, 1997,
compared to 31% for the year ended December 31, 1996. This increase in our
effective tax
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<PAGE> 35
rate was attributable to a decrease in research and development tax credits and
a significant increase in our pre-tax profit due to our acquisition of Patlex
during the year ended December 31, 1996.
Net Income
Our net income was $6,101 for the year ended December 31, 1997, compared to
$440 for the year ended December 31, 1996. This increase was primarily due to
the inclusion of the Patlex results following its acquisition, a significant
increase in investment income and a significant increase in EIG's operating
profit.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations were $7,296 for the six months ended June 30,
1999, compared to $5,233 for the same period in 1998. Cash flows from operations
for the year ended December 31, 1998 were $9,170. We had working capital at June
30, 1999 of $56,635 (including cash, cash equivalents and short-term investments
of $49,653) compared to $53,922 (including cash, cash equivalents and short-term
investments of $47,164) at December 31, 1998. We expect to fund future working
capital requirements with our existing cash and short-term investment balances,
with cash generated from operations and with proceeds from the equity offering.
Capital expenditures were $5,231 for the six months ended June 30, 1999,
compared to $8,014 for the same period in 1998. Capital expenditures were
$14,537 for the year ended December 31, 1998, compared to $6,949 for the same
period in 1997. These expenditures were primarily attributable to the
acquisition of computer equipment and, in 1998, to leasehold improvements of our
new facility in Boca Raton, Florida. We anticipate additional capital
expenditures during the next two fiscal years related to the upgrade of our
database capabilities, which we intend to fund entirely through our cash flows
from operations.
We currently have no debt and believe that our existing cash and short-term
investment balances together with our cash flows from both EIG and PEG
operations will be sufficient to meet our anticipated cash and capital
requirements through 1999.
INFLATION
The rate of inflation has not had a material impact on our operations.
Moreover, if inflation remains at its recent levels, it is not expected to have
a material impact on our operations for the foreseeable future.
THE YEAR 2000 ISSUE
The Year 2000 Issue relates to whether information and non-information
technology systems will be able to recognize and process date-sensitive
information in the year 2000. We rely, directly and indirectly, on information
technology systems, such as microprocessors, proprietary operating systems,
desktop computers, network hardware equipment, and applications software, to
operate our products, manage our business data and perform a variety of
administrative services, including accounting, financial reporting, payroll
processing and invoicing. We also rely on non-information technology systems,
including office equipment, security systems, and telephone systems, to execute
our day-to-
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<PAGE> 36
day operations. In addition, third parties material to our operations, such as
suppliers, vendors, and customers, rely on information and non-information
technology systems to manage their businesses. Our most significant Year 2000
issues relate to the Year 2000 readiness of our data suppliers and Internet
connecting service providers. The Year 2000 Issue could affect our, or third
parties', technology systems.
The Year 2000 Issue could also affect the KnowX.com and Informed
businesses, which we acquired from Information America, Inc. In connection with
our acquisition of KnowX.com and Informed, we conducted a Year 2000 due
diligence review of these products. Based on our review, we believe KnowX.com
and Informed are substantially Year 2000 compliant. In addition, the agreement
with Information America contains a representation that all of the technology
included in the assets we purchased and necessary to operate the KnowX.com and
Informed businesses is Year 2000 compliant.
In order to minimize the risk of Year 2000-related losses, we began
conducting a comprehensive assessment of our Year 2000 Issues in August 1998.
The assessment focused on five areas that, if affected by the Year 2000 Issue,
could have a material adverse effect on our operations. These areas are: 1) data
storage; 2) product software used by our customers; 3) product software used
internally by us; 4) hardware; and 5) non-information technology systems. The
following is a Year 2000 status report for each of these areas, based upon the
phase of the assessment completed to date.
Data Storage
All of our data fields have been made Year 2000 compliant. We continually
review vendor-supplied data to ensure compliance is maintained. If any third
party fails to supply us with compliant data, we modify the data in order to
make it Year 2000 ready. If any third party data suppliers give us data that is
not Year 2000 compliant, it could take us longer to make the data suitable for
use in our databases.
Product Software Used by Our Customers
Our product software is divided into two types: software written by us and
commercial software written by third parties. The following is an update on the
Year 2000 status of each of these areas:
- Software Written by Us.
Preliminary date forward testing revealed that software written by us
is Year 2000 compliant. Two software programs important to our business and
operations, AutoTrackPLUS(SM) and AutoTrackXP(SM), have been successfully
tested for Year 2000 compliance.
- Commercial Software Written by Third Parties.
Version 8.0 of pcAnywhere, the software used to access AutoTrackPLUS,
has been certified as Year 2000 compliant by Symantec Corporation, its
manufacturer. Through testing, we have determined that earlier versions of
pcAnywhere (4.5 and 5.0 for DOS(R), 2.0 for Windows(R), and 7.5 for
Windows) are also Year 2000 compliant, except for one two-digit year
display, which does not affect the operation of these versions. However, we
expect that in the coming months, many of our customers, as part of their
Year 2000 remediation efforts, will be switching from the earlier versions
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<PAGE> 37
of pcAnywhere to more updated, Year 2000-certified software programs,
including AutoTrackXP.
Versions 4.0 and earlier of Microsoft Internet Explorer(R), which our
customers use to access our products, will not be tested for Year 2000
compliance by Microsoft, the manufacturer. We expect that customers using
these earlier versions will migrate their systems into Year 2000 compliance
through Microsoft's website, which provides online upgrades of Microsoft
Internet Explorer(R) at no cost.
Versions 3.x and 4.x of Netscape Navigator(R) are both Year 2000
compliant when used with Windows 95 or later operating systems. We expect
that customers using earlier versions of Netscape Navigator will migrate
their systems into Year 2000 compliance through Netscape's website, which
provides online upgrades at no cost.
Third party dialer applications used on the AutoTrackXP install disks
have been certified as Year 2000 compliant by the vendor.
Product Software Used Internally By Us
We have installed a real-time inventory system. We will postpone upgrading
commercial software used internally until late 1999, in order to ensure that we
obtain the most advanced versions possible.
Hardware
Desktop Machines. Most of our approximately 350 desktop machines have been
replaced with certified Year 2000 compliant Hewlett Packard desktops as
part of a company-wide computer upgrade program. Clocking for our computer
network has been centralized through a new Year 2000 compliant system. The
system controls timekeeping for all desktop machines and servers, and
ensures that all date- and time-related codes and functions used in
hardware throughout our network remain Year 2000 compliant.
Support Machines. Support machines used by us have been manually tested and
determined to be Year 2000 compliant.
Servers. Many of our computer servers have failed real-time clock testing.
However, successful date forward testing and manufacturer statements of
function have shown this failure will not materially affect the operation
of the servers. Further Year 2000 - related testing of the servers will be
conducted as a safeguard.
Network Hardware. Our network hardware includes routers, hubs, switches,
CD-ROM towers, print servers, and communication servers. Hewlett Packard,
our hardware vendor, has certified approximately 80% of this network
hardware as Year 2000 compliant. Cisco has certified the remaining 20% of
the network hardware. We have confirmed these results through successful
date forward testing.
Communications Hardware. Our communications hardware includes modems and
DSU/CSUs. These systems have all been successfully date forward tested.
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Non-Information Technology Systems
Internet Connectivity. We rely on telecommunications service providers to
connect us to the Internet. If our service providers' systems were not Year
2000 compliant and failed, we could be prevented from receiving orders or
delivering search results. By December 31, 1999, we intend to be working
with three internet service providers, each of whom could exclusively
service our business. We believe that at least one of our three
telecommunications service providers will be Year 2000 compliant, however,
there can be no assurance that all three or any of the three will be Year
2000 compliant.
Phone System. Siemens has certified our phone system as Year 2000
compliant.
Security System. Security software has been certified as Year 2000
compliant. The vendor is currently testing the security hardware for Year
2000 compliance.
Office Environmental System. Our office environmental system is currently
manually controlled and Year 2000 compliant. However, new automated
controls for the environmental system are being installed. We plan to test
these controls for Year 2000 compliance after they are installed.
Telephone and Utility System. The Year 2000 status of our telephone and
utility systems has not been assessed. We expect that these systems will be
made Year 2000 compliant by their providers.
Summary
We expect to be fully Year 2000 compliant by November 1999. Given our
efforts to identify and address our Year 2000 Issues, we do not believe that
Year 2000 Issues will have a material adverse effect on our business, results of
operations, and financial condition. We estimate that the total cost of
addressing our Year 2000 Issues will be approximately $300. All costs associated
with the remediation of the Year 2000 Issue will be expensed as incurred. We
will develop a contingency plan for dealing with Year 2000 Issues by October
1999.
Risks Associated with the Year 2000 Issue
Our failure to correct a material Year 2000-related problem in our
information or non-information technology systems could result in an
interruption in, or a failure of, our normal business activities or operations.
We depend on information contained primarily in electronic format in databases
and computer systems maintained by third parties, including governmental
agencies. We also rely on telecommunications service providers to connect us to
the Internet. The disruption of third-party systems or the failure of our
systems to properly interact with these third-party systems could prevent us
from receiving orders or delivering search results in a timely manner, or could
affect our ability to refresh our data. Our inability to bring historical data
files, date fields or information purchased from vendors into Year 2000
compliance could have a material adverse effect on our business, financial
condition, and results of operations. In addition, we are currently unable to
predict the effect that the Year 2000 Issue will have on our suppliers, or the
extent to which we would be vulnerable to our suppliers' failures to remediate
their Year 2000 Issues on a timely basis. The failure of a major supplier to
convert its systems on a timely basis or in a manner that is incompatible with
our systems could have a material adverse effect on us.
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BUSINESS
We are a leading nationwide provider of organized online public records
data and other information. We believe that our database is one of the country's
largest depositories of public records and other public information, containing
more than 4 billion records with more than 25 terabytes of data storage
capacity. Our customers are able to access and search our database 24 hours a
day, 365 days a year through our Internet websites or over a modem connection.
Our files store various kinds of information on individuals, businesses and
assets, including:
<TABLE>
<CAPTION>
INFORMATION ON INDIVIDUALS INFORMATION ON BUSINESSES AND ASSETS
- -------------------------- ------------------------------------
<S> <C>
- - first and last names - corporation records
- - current and past addresses - real property records
- - known associates and relatives - motor vehicles records
- - telephone numbers - liens, judgments and bankruptcies
- - professional licenses - UCC filings
- other assets
</TABLE>
Our proprietary software tools allow our customers to quickly and
cost-effectively search our large database for information. Starting with very
little information, such as a name or address, our customers can locate and
build an extensive profile which we are able to generate into comprehensive,
easy-to-read reports.
We currently have more than 14,000 customers, consisting primarily of
insurance companies, law firms, private investigators, law enforcement and
government agencies. Our customers use our online information services to detect
fraudulent activity, assist law enforcement efforts, locate people and assets
and verify information and identities. From 1996 to 1998, our revenues increased
from $25.0 million to $60.7 million, representing a compound annual growth rate
of 55.8%, and our EBITDA increased from $3.9 million to $15.7 million,
representing a compound annual growth rate of 100.6%. Since 1996, we have
successfully introduced new services and technologies to our customers and have
completed several complementary acquisitions.
In September 1999, we acquired KnowX.com and Informed from Information
America, Inc. KnowX.com is a leading Internet-based public record research tool
for consumers and small office users. Informed offers qualified users, including
commercial lending and leasing companies, access to public information through
the Internet or dial-up modems. We believe our acquisition of KnowX.com and
Informed will expand and diversify our customer base and allow us to further
market our products to the rapidly growing population of Internet users.
In July 1999, we signed a multi-year agreement to supply US SEARCH with
public records and other information on a non-exclusive basis. US SEARCH will
use this information to deliver its products and services to consumers and
businesses. The agreement requires US SEARCH to purchase a minimum of $20
million of information from us over the next five and one half years.
MARKET OVERVIEW
The market for public information includes both public records and publicly
available information. Public records primarily include information from
governmental entities or agencies, such as names and addresses of individuals
and corporations, driving records,
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court records, bankruptcy filings, lien filings and real property records.
Publicly available information includes data such as professional licenses and
residence directories. As the sources of this information are often
geographically dispersed and the information is available in many different
forms, locating and aggregating this information is a time-consuming, costly and
challenging task. Moreover, verifying the data and organizing it into a useful
format presents additional difficulty. We believe that, given the fragmented
nature of public records and other publicly available information, the ability
to effectively aggregate the data and generate easy to read reports in a timely
manner represents a high value-added service.
Historically, the primary users of public records have been law enforcement
and other governmental agencies, law firms, insurance companies and licensed
investigation companies. These entities use public records to assist them to
investigate fraudulent and criminal activity, locate individuals and research
businesses and assets. As an example of the significant amount of fraud that
occurs each year, according to a 1996 survey by The Conning Company, more than
$120 billion is lost through insurance fraud each year in the United States,
including $20 billion in property, casualty and life insurance fraud and $95
billion in healthcare insurance fraud. We believe that businesses will expand
their efforts to combat fraud, increasing the demand for public information
services in these markets and continuing to represent a significant growth
opportunity.
In recent years, additional types of customers, including small businesses,
consumers and larger corporate customers, have been using online public records
in the ordinary course of their business to verify personal information and to
search for information related to individuals or businesses. We believe these
new market opportunities will create additional demand for online public
information search and retrieval services.
We also believe that providers of online information services are well
positioned to participate in the significant growth associated with Internet
commerce. The growth of the Internet as a global medium for communication and
information exchange is expected to continue to increase demand for content and
services that are accessed and delivered through web-based media. According to
International Data Corporation, the number of Internet users worldwide is
expected to grow from 159 million at the end of 1998 to an estimated 510 million
in 2003. International Data Corporation also estimates that the total value of
goods and services purchased over the Internet worldwide will grow from
approximately $50.4 billion in 1998 to approximately $1.3 trillion by the end of
2003. This growth is due in part to a user's ability to efficiently and rapidly
search the Internet to access and manipulate information from a wide variety of
sources. Through electronic commerce, these information services can be accessed
and delivered online in a quick, easy, and inexpensive manner. We believe that
the growth in web-based activity combined with the increasing demand for public
records from both new and existing markets will support significant growth for
comprehensive and organized on-line methods for accessing public information.
STRATEGY
Our business objective is to be the leading provider of organized online
public information to the corporate, consumer and governmental markets, while
enhancing proprietary customer data with public information in our database. To
achieve this objective, we intend to continue to develop long-term customer
relationships and maintain a high level of customer satisfaction, which we
believe will result in additional recurring
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revenues from our existing products and an enhanced ability to introduce new
products. Key elements of our strategy are to:
Develop New Products and Applications Utilizing our Large Information Database
We believe that we maintain one of the largest databases of public
information in the United States, which is enhanced by proprietary technology
that makes data retrieval fast and efficient. Our existing database of public
records and information, which we continually update and expand, presents
opportunities to develop new products and services at a relatively low
incremental cost. We will seek to capitalize on our relatively fixed investment
in our existing database by continuing to develop new applications that use this
data to tailor services to the needs of particular customers. For example, the
Los Angeles County Sheriff's Department asked us to develop a tool for finding
up-to-date addresses of individuals who were the subject of arrest warrants. In
response, we developed the CLAWS(sm) system, which performs daily searches of
our large databases. We are currently marketing the CLAWS system to our other
law enforcement customers. Similarly, we recently completed a large project
designed to detect voter fraud for the state of Florida and are currently
marketing this service to other states. We will pursue similar additional
opportunities to fully utilize our existing database. In addition to developing
new applications, we believe that we can supply public records and information
on a wholesale basis to Internet-based businesses. For example, we recently
entered into an agreement to supply a minimum of $20 million of data to US
SEARCH over the term of the five and one half year agreement. We intend to
pursue other wholesale data supply arrangements that represent additional uses
for our data.
Expand Our Customer Base by Entering New Markets
We believe our existing product portfolio, including those products
obtained through recent acquisitions, will allow us to aggressively pursue new
market opportunities. We have specifically identified and intend to pursue
growth opportunities within the consumer, lending/leasing and pre-employment
screening markets. We believe that our acquisition of KnowX.com gives us a
significant presence in the large and rapidly growing consumer and small office
markets. KnowX.com provides these customers with a low cost method of
researching important purchases, such as checking the history and ownership of a
home, before making a purchase decision. We are also currently introducing
online screening and selection services to these markets which will allow
customers to instantly verify the identity of individuals with whom they are
conducting business on the Internet. Our acquisition of Informed provides us
with an established relationship with commercial lending and leasing companies.
Lastly, through our acquisition of Insight, we intend to vigorously pursue
customers in the pre-employment screening market, providing both detailed
verification and screening and selection services. We will continue to seek
additional opportunities to deliver our existing product offerings to new
markets.
Develop More Efficient Delivery Methods to Further Penetrate Existing Markets
We continually seek to enhance our relationships with existing customers by
developing more efficient methods for the delivery and presentation of our
products. We recently introduced AutoTrackXP, a Windows compatible product with
an HTML-based interface. AutoTrackXP allows customers to access our products
using off-the-shelf web browser technology commonly found on today's personal
computers. We believe that the improved efficiency and ease of access to our
products afforded by AutoTrackXP will
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significantly expand the number of customers using our products in industries we
presently serve. In addition to utilizing our browser technology, we expect to
utilize our recently-acquired CaseLINK technology to enhance the presentation of
our reports. CaseLINK converts our data into graphic illustrations that helps
users visualize relationships among people, businesses, vehicles and other
assets, creating user-friendly reports that we believe will contribute to
increased use of our products. We intend to continue to focus on improving the
delivery and presentation of our products, which we believe will increase usage
of our services by our customers.
Develop Decisioning Tools to Help Customers Evaluate Data
We are currently working to develop technologies that qualitatively and
quantitatively evaluate the records and information retrieved by our customers,
particularly in the insurance and health care industries. We believe that these
tools will assist customers in predicting patterns of behavior, which will allow
them to more effectively prevent fraudulent activity. We expect to use this
technology to link our products with customers' specific claims files or
databases to develop decision-making templates to identify potential fraudulent
claims before any payments are made with respect to those claims. We believe
these product development efforts will allow us to provide customized,
comprehensive solutions to our customers, complementing our current product
offerings and significantly increasing the value-added nature of our products.
Pursue Strategic Acquisitions of Complementary Businesses
We continuously monitor and consider opportunities to expand our customer
base and acquire new products and technologies through acquisitions of
complementary businesses or assets. We recently completed an acquisition of
WinSHAPES, through which we obtained the CaseLINK technology, and a merger with
IRSC, which provided us with pre-employment screening capabilities. We also
recently acquired KnowX.com and Informed, which we believe will enable us to
establish a significant presence in the consumer, small office and commercial
lending and leasing markets. We intend to continue to pursue additional
strategic acquisitions that enhance our products and technologies and expand our
customer base.
DATABASES AND OPERATIONS
Databases
With 25 terabytes of data storage capacity and over 4 billion records, our
databases contain public records, publicly available information and other
non-public information gathered from governmental and private data sources. The
information stored in our files includes first and last names, current and past
addresses, known associates and relatives, telephone numbers, professional
licenses, corporation records, liens, judgments, bankruptcies, UCC filings and
records for real estate, motor vehicles, and other assets. While each file or
source may contain information that is geographically or topically unique, we
have created proprietary software that links the files to each other. Our
proprietary software tools allow customers to perform searches starting with
very little information, and by cross-referencing our databases, generate an
extensive profile built into one comprehensive, easy-to-read report. Customers
conduct searches through all files, or through topical or geographical files, to
retrieve possible matches to the subject of the search. For example, in order to
perform a nationwide search for an individual who has a
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driver's license, our databases would search each state's driver's license file,
matching similar names in a matter of seconds. Our software then is able to
combine the retrieved information into an extensive profile on the subject of
the search by cross-referencing data received from the initial search with other
records regarding the same individual in our databases.
Customers can customize their search results in any number of ways. Some of
our customers provide us with their own proprietary data for the retrieval of
cross-referenced or similar data in our databases. Our software is able to build
a profile with information tailored to the customer's request. Using our
software, our databases will retrieve persons or assets associated with the
subject of the search, such as persons living at the same address, and add
associated information to a profile. Our software also has the ability to sort
through a comprehensive profile and generate a report which identifies, in
graphics or in writing, the relationships between people, assets or other
information which appears in a report. We have bundled many of our software
tools into specific products to facilitate frequently run searches. The
following represent our larger, more frequently accessed files, which we also
intend to use in conjunction with products we may acquire in the future.
- Records on Individuals. We maintain information on millions of
individuals throughout the United States, including current and
previous addresses, neighbors, dates of birth, and other
information.
- Records on Corporations. We maintain information on active and
inactive businesses, based on Secretary of State filings in 43
states, including officers, directors, registered agents, corporate
status and federal employment identification numbers.
- Property Records. Our property records include information on real
property in 42 states and the U.S. Virgin Islands, such as mailing
address, parcel number, assessed values, recent and prior sales
prices and property narratives.
- Vehicle Records. Our vehicle records include information on vehicle
registrations in 32 states, including the owner's name and address,
description, title information, vehicle identification number,
lienholder information, and historical data.
- Records on Drivers. We maintain information on drivers' licenses
issued in 23 states, including drivers' license numbers, addresses,
dates of birth and zip codes.
- Records on Liens, Judgments and Bankruptcies. We maintain
information on business and consumer bankruptcies in all 50 states
and we maintain files on federal and state tax liens and civil
judgments in 31 states.
- UCC Filings. We maintain UCC lien filing information for 44 states,
including debtor, secured party, address, state, assignee,
collateral and filing number.
- Professional Licenses. We maintain professional licensing records
from 43 states, including license categories, license numbers,
business and licensee names and addresses. We also have FAA pilots
licenses and DEA-controlled substance licenses in all 50 states.
We believe that the size and diversity of our databases are unmatched in
the industry and, combined with our ability to quickly cross-reference between
them, provide us with significant competitive advantages in the market place. We
believe we are the only major online public information provider that maintains
and continually refreshes historical information provided to us by our data
suppliers. In many cases, we have archives of data
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dating back more than 10 years. We also believe that we maintain superior
database quality in part because, while we do not revise data contents, we
format each data file we receive in order to make it useable on our databases.
Hardware Configuration
We designed and built our existing proprietary computer configuration to
create a mass-storage file system. While we currently use our proprietary
hardware configuration, we recently agreed to purchase an open-architecture,
complete mass-storage hardware and software system file system. Our new
configuration will feature database software designed by Oracle that will run on
a central processing unit produced by Sun Microsystems. EMC will provide the
mass storage file system to store the libraries of information contained in our
databases.
We will phase in our new hardware configuration over the next year in order
to minimize the risk of service disruption. The implementation of our new
hardware configuration will increase the speed of our data retrieval, the
storage capacity of our databases and the long-term serviceability of our
hardware, all of which will expand our capabilities to continue to service our
growing customer base. Our new computer configuration will continue to offer our
customers fast-index retrieval and real-time redundant fault tolerances.
Data Sources
We obtain our data from the federal and state governments and from third
party data aggregators. Many of our data suppliers send us computer diskettes,
tapes or other mediums for data storage. We convert and format all of these data
storage mediums for use with our products. We currently receive data from over
300 vendors, which include information from all 50 states, over 3,000 counties
and approximately 1,500 government agencies. Leading domestic credit bureaus are
our largest data suppliers. We also obtain site licenses and pay variable fees
based on the frequency of our customers' access to our suppliers' databases. Our
data costs are comprised of both fixed fee and variable fee arrangements.
In order to protect our databases and to minimize the risk of service
disruptions, we create daily back-up files of the raw data in our databases, our
customers' offline search inquiries and results, saved reports and logged
transactions. We also operate a second system that is redundant to our primary
data retrieval system. In addition, we house our primary and secondary databases
in separate buildings. Our building planners have advised us that our buildings
are substantially hurricane and tsunami proof. We protect our databases from
intruders with a state of the art active security system, and we record the
entry and exit of all employees and visitors at all times with a key card
system.
PRODUCTS
We currently have four principal products:
AutoTrack
Our AutoTrack products provide online access, from a customer's computer,
24 hours a day, seven days a week, to our databases. AutoTrack is able to search
a multitude of databases for information on specific search items and combine
the data into a single, easy to read report. As hundreds of databases can be
searched to build a report, we simultaneously compile information over several
internal distributed processes, which speed
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report compilation time dramatically. Comprehensive database searches and
in-depth report compilation are made possible by our proprietary indexing
techniques. We have implemented a pricing plan that seeks to attract new
subscribers and increase usage. The primary components of the AutoTrack pricing
structure are search and report fees, which cost $2.00 per search and range from
$7.00 to $18.00 per report. We offer AutoTrack through two main products,
AutoTrackXP and AutoTrackPlus(sm).
AutoTrackXP is our new Windows(R) compatible product that allows access to
our database warehouse using off-the-shelf Web browser technology commonly found
on today's personal computers. With an Internet browser such as Netscape
Navigator(R) or Microsoft Internet Explorer(R), customers can access our
database using Windows point-and-click technology. Customers connect to our
www.autotrackxp.com website using a modem and any standard dial-up software
designed for connecting to the Internet. In addition to the standardized
interface, the multi-tasking Windows environment permits browsing and running of
multiple reports simultaneously, as well as allowing the customer to cut and
paste information from the browser directly into other open documents. With its
HTML-based interface, we believe that anyone familiar with Internet browsers can
easily learn to use AutoTrackXP in just minutes. Introduced on May 1, 1999, we
expect that AutoTrackXP will represent approximately 40% of our AutoTrack
revenues by the end of 1999.
AutoTrackPlus is our original data retrieval product. Qualified subscribers
access AutoTrackPlus over a modem connection and are able to search either
national or state-specific databases. We are currently in the process of
converting our AutoTrackPlus customers to AutoTrackXP.
Our AutoTrack products are used by law enforcement, property and casualty
insurance companies and law firms in their day to day business. For example, an
investigator can run a search using AutoTrack to determine whether there is a
relationship between parties in an auto accident for which an insurance claim
has been filed to determine the likely validity of the claim. Similarly, an
investigator could research a suspected criminal's current and former addresses
as well as known associates and their addresses to assist in the apprehension of
a criminal.
KnowX.com
KnowX.com is a market leader of Internet-based public record research
targeting consumers and small office users. Its core product, Ultimate People
Finder, provides a low-cost way to locate individuals through public records,
while its other products provide summary and detailed public record information
on individuals and businesses. KnowX.com provides access to public records
databases that allow users to locate and research people, assets and companies.
We did not purchase any data in connection with the KnowX.com acquisition, but
we have entered into a transition services agreement with the seller which
allows us to use its databases for up to one year. Following this transition
period, we intend to use our databases to supply the public records and other
information for the KnowX.com products.
Reported instantaneously through its web interface, KnowX.com performs
searches on a real-time basis. The KnowX.com website generates its revenue
through transactions, as opposed to advertising, and enjoys repeat customer
usage of nearly 50% of all its traffic. The KnowX.com products have experienced
significant growth as Internet-accessed small businesses and consumers discover
the service and recognize its usefulness. KnowX.com
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reported 1998 revenues of $2.9 million, a 508% increase from 1997 revenues of
$0.5 million.
We acquired KnowX.com in September 1999 as a part of our purchase of
selected businesses from Information America. KnowX.com currently charges
customers from $1.00 to $1.50 per database search. Consumers and small office
customers use KnowX.com for a variety of purposes. For example, a consumer may
use KnowX.com to access information to locate a missing relative or to research
the history of a home which the consumer is thinking of purchasing.
Insight
InSight(TM) is a Windows(R) based software, obtained in May 1999 when we
merged with IRSC, that provides access to public and publicly available records
and permits users to order manual searches such as searches of court records and
employment, education and professional license verifications. Its flexible
interface enables users to create custom menus and custom combined searches. The
custom menu ability helps customers to focus on the specific services most often
used while the custom combined feature saves customers time in entering search
information. Using InSight's profile feature, customers can create subject
profiles, save them and use them at a later date to obtain updated reports.
InSight also allows users to capture information for integration into other
files and reports. InSight Plus(TM), which is currently under development, is an
enhanced browser-based version of InSight specifically designed for the human
resources market. Features of InSight Plus will include integrated reports,
flexible billing and the ability to obtain status information on orders through
the Internet. An important feature of Insight Plus is the back-end processing
system which we expect will improve turnaround time, reduce costs and increase
quality.
Through InSight, customers can conduct a Signal(TM) search, which is an
instant verification tool that analyzes subject data and produces warnings based
on inconsistencies in that data. For example, a warning would be issued if a
social security number was issued prior to a date of birth or if a telephone
number prefix did not match the city provided. An enhanced version of Signal is
in development, which will take advantage of data hosted by us and provided
through AutoTrack. Users of InSight are charged on a transaction basis with
prices ranging from $3.00 to $20.00 per search or verification.
While InSight is used for a variety of purposes, including loan evaluation
and vendor due diligence, nearly 50% of IRSC's revenues are generated from
pre-employment screening. For example, an employer could verify the accuracy of
the information contained on an applicant's employment application, as well as
review or investigate criminal records, driving history or education
credentials. InSight is subject to regulation under the Fair Credit Reporting
Act.
Informed
The Informed product line uses publicly available information and
high-speed search and retrieval technology to identify relationships between
people, assets and businesses. Customers use the product for a variety of
purposes, including lending and leasing transactions. The Informed software
platform enables users to access multiple databases and create easy-to-read
reports with a web-like interface. This platform simplifies the search process
for the customer, encouraging more frequent use. Currently, there are three
"packaged" Informed products: Informed Investigator, Informed Lender, and
Informed
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Credit Manager. We acquired the Informed product line in September 1999 as part
of our purchase of selected businesses of Information America.
Typical Informed users include banks and leasing companies, in addition to
insurance companies and corporate clients. For example, a loan officer may
verify the background information provided to him by a potential borrower using
the Informed product. The pricing structure for Informed products ranges from
$5.00 for relatively simple searches to $50.00 for more complex searches that
are national in scope.
RESEARCH AND DEVELOPMENT
We continually work to develop new products and services that respond to
our customers' needs. Our recent research and development efforts currently
include, among other things, the development of products designed to
quantitatively and qualitatively evaluate data to meet the needs of new and
existing customers.
As of June 30, 1999, our research and development staff included personnel
with special programming capabilities, including 37 people engaged in product
development and engineering, 7 people engaged in advanced technology
applications, 3 people engaged in quality assurance and testing, and 9 people in
purchasing, administrative and supporting functions.
SALES AND MARKETING
We believe that substantial opportunities exist to attract new customers
and increase our revenues from existing customers. Our marketing objective is to
stimulate demand for our products by targeting the needs of various market
segments, including law enforcement, governmental agencies, insurance companies,
banks, consumers, small businesses and leasing companies. We have divided our
sales and marketing staff into groups that concentrate on one or two industries
in order to focus our efforts. We also are expanding our sales and marketing
department in order to provide more individualized attention to our customers
and to monitor the quality and reliability of our products. Our current sales
force includes 40 people, an increase of 30 employees since 1996. We generally
target customers with higher spend profiles with the goal of entering into long-
term agreements to provide industry specific products to these customers. In
addition, we continue to solicit new customers through trade show
advertisements, direct mail and trade publications.
We intend to make significant investments in the advertising of the
KnowX.com brand to rapidly increase our consumer customer base.
CUSTOMER SUPPORT AND TECHNICAL ASSISTANCE
Our customer support staff provides technical assistance to all of our
customers, at no charge, 24 hours a day, 365 days per year. We dedicate
specialized operators to first-time users requiring log-in assistance, repeat
users with technical problems, such as connectivity or printing malfunctions,
and customers requiring additional or new products. Our sales and marketing
personnel have trained the customer support staff to offer customers products
that other customers in their industry use.
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REGULATION
Government Regulation
Regulation of access to information for public use varies from state to
state. Therefore, the amount of information available in particular states may
vary. In many states, all government records are specifically made public by law
unless excluded by a specific statutory exception. These exceptions exist
primarily with respect to private criminal history information, such as arrest
records, which generally may only be provided to law enforcement agencies for
specific purposes. The continued availability of public record data is also
subject to federal legislation. For example, the Driver's Privacy Protection Act
of 1994 places certain restrictions on the release and use of personal data
included in state motor vehicle records. Though legislators and consumers appear
to be increasingly scrutinizing privacy laws, we cannot predict whether state
regulation in any particular state will change, nor whether the federal
government will implement new regulations with respect to access to specific
information.
The Fair Credit Reporting Act obligates our IRSC subsidiary to provide
information to users only for permissible purposes, including credit, insurance
or employment purposes. If a creditor, insurer or employer denies an individual
credit, insurance or employment based in whole or in part on our report, then
the consumer must be notified of the basis for denial. Under the FCRA, the
consumer can ask for an opportunity to correct any inaccurate information in the
report. We are obligated to investigate any alleged inaccuracies in our reports
and correct them if necessary. In addition, along with other resellers of public
information, our IRSC subsidiary signed a consent decree with the Federal Trade
Commission. The consent decree regulates our customers' use of information. As a
result, we require that our customers specify their intended use of the
information sought from us.
Self-Regulation
Together with 13 other leading information industry companies, we formed
the Individual Reference Services Group, or IRSG, which worked closely with the
Federal Trade Commission and recently adopted self-regulatory principles
governing the dissemination and use of data that help identify, verify or locate
individuals. The IRSG Principles adopted by the IRSG members in December 1997
impose significant restrictions on the access and distribution of non-public
information. In addition, the IRSG Principles require that information from
non-public sources about persons identifiable as minors are not to be
disseminated to either the public, commercial or professional markets. The IRSG
Principles provide the enforcement mechanisms, including yearly compliance
reviews by qualified independent third party auditors. In the first quarter of
1999, PricewaterhouseCoopers reviewed our Database Technologies, Inc.
subsidiary's operations and certified our compliance with the IRSG Principles.
Also, in the first quarter of 1999, Corbin & Wertz certified our IRSC
subsidiary's compliance with the IRSG Principles, and PricewaterhouseCoopers LLP
certified Information America's business as compliant with the IRSG Principles.
We screen potential customers, process orders and verify the credentials
and references of each potential customer in accordance with the IRSG
Principles. We reserve the right to refuse, or withdraw without notice, access
to our products, and have established procedures designed to restrict access to
our system and certain products to qualified individuals. Once we approve an
application, the customer signs a subscription
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agreement and use certification which governs the use of and access to our
products. A standard subscription agreement includes a disclaimer of any
warranties on the data and, except for law enforcement and other government
customers, an indemnification for liabilities resulting from the customer's use
of the data.
COMPETITION
The electronic information industry is competitive, and is characterized by
rapid technological change and the entry into the field of large, well
capitalized companies, and smaller, niche competitors. Competition within our
markets is intense and based mainly on price, speed, the comprehensiveness of
data and the ability to provide information in an easy-to-read form. We
currently compete in the investigative, pre-employment and consumer markets.
- In the investigative market, we compete with local, regional and
national private investigation firms, such as LEXIS-NEXIS, West
Publishing, ChoicePoint, Kroll-O'Gara Company, the Pinkerton
division of Securities AB, the Proudfoot Reports Division of ASI
Solutions, Inc., and a significant number of companies operating on
either a national scale or a local or regional basis.
- In the pre-employment market, we compete with firms offering
comprehensive public record information, such as ChoicePoint and
Avert.
- In the consumer market, we compete with free individual locator and
information services, including services offered by Internet search
engines, telephone companies and other third parties who publish
free printed or electronic directories. We also compete with
companies that offer products similar to ours, such as US SEARCH.
Our competitors in these markets often offer a wide variety of information
services, ranging from news to legal databases, that allow them to offer their
products to similar customer bases.
PATENT EXPLOITATION AND ENFORCEMENT BUSINESS
In addition to our online public records business, we operate in the patent
exploitation and enforcement business through our Patlex subsidiary, which
exploits and enforces two partially owned laser patents. These laser patents
include a Gas Discharge Laser Patent and a Brewster Angle Window Patent.
Patlex's patent exploitation and enforcement business involves the
identification of laser products and laser applications that infringe the laser
patents, the execution of licensing agreements with third parties and the
enforcement of the laser patents. The Gas Discharge Laser Patent generates
substantially all of Patlex's revenues and expires in November 2004. The
Brewster Angle Window Patent expires in May 2005. Upon the expiration of the
laser patents, Patlex will lose its right to prevent others from exploiting
these inventions and to receive royalty payments. We do not expect to derive any
revenues from the patent exploitation and enforcement business following the
expiration of the laser patents.
49
<PAGE> 50
Patent Exploitation
Substantially all of Patlex's revenues consist of royalty income derived
from the licensing of the laser patents. As the exclusive licensing agent,
Patlex actively monitors the laser industry to identify manufacturers and users
who exploit the laser patents without Patlex's authorization. Patlex then enters
into agreements that compel the unauthorized manufacturers and users to report
and pay royalties. Generally, these agreements are either licensing agreements
or settlement agreements. The licensing agreements allow users and manufacturers
to use the laser patents on an ongoing basis. By contrast, settlement agreements
require payment of a lump sum of money for past infringement, but do not permit
the continued use of the laser patents. Manufacturers and sellers of products
that incorporate the laser patent technology typically enter into licensing
agreements while licensees that use, but do not manufacture or sell, the Laser
Patent technology, tend to enter into settlement agreements.
As of December 31, 1998, Patlex had agreements with a total of 189 laser
manufacturers representing a wide cross-section of industries. Of such
agreements, 184 were licensing agreements and the remaining 5 were settlement
agreements.
The market for Patlex's licensing agreements prior to the expiration of the
laser patents depends on the state of the commercial laser industry. Factors
contributing to fluctuation in the number of laser patent license agreements
include Patlex's 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. We believe that 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 to use the laser
patents. In addition, as a result of licensing efforts to date, royalties from
past infringement are expected to be minimal in the future.
Patent Enforcement
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. We believe that the major period of litigating the validity and
enforceability of the laser patents has passed. However, the laser patents may
be subject to subsequent challenges.
PROPERTY AND EQUIPMENT
We currently lease approximately 150,000 square feet of office space in
Boca Raton, Florida, to conduct our online public records business. Our patent
enforcement business currently leases approximately 3,000 square feet in Las
Vegas, Nevada. Our IRSC subsidiary currently leases 8,250 square feet of office
space in Fullerton, California. Our WinSHAPES subsidiary currently leases 2,500
square feet of office space in Seattle, Washington. We believe that these
facilities are adequate for our current needs.
EMPLOYEES
As of June 30, 1999, we had 359 full-time employees. We consider our
relationships with our employees to be good. None of our employees are covered
by collective-bargaining agreements.
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<PAGE> 51
LEGAL PROCEEDINGS
Along with our IRSC subsidiary, its former chairman and principal
shareholder, we are party to a lawsuit against a group of eight companies that
formerly conducted business with IRSC. These eight companies allege that IRSC
was obligated to enter into a merger agreement with them and that the former
chairman of IRSC was obligated to work for the company surviving the merger. The
companies also allege that we interfered with the obligations of IRSC and its
former chairman by acquiring IRSC. When these companies threatened to sue, we
filed a lawsuit against them in federal court in May 1999 to establish
jurisdiction of the action in Florida. We believe we have meritorious defenses
to these companies' claims.
We also have initiated a lawsuit against High Tech Data Services and its
affiliates and principals, with whom we had a non-competition and non-disclosure
agreement. Our lawsuit alleges that High Tech violated the non-competition and
non-disclosure agreement, infringed our trade and service marks and
misappropriated our trade secrets. The court has scheduled a trial in October
1999 to decide our lawsuit.
From time to time, we are involved in litigation in the ordinary course of
business, including litigation in connection with non-competition agreements our
employees sign and the alleged infringement of intellectual property rights.
Except for the IRSC and High Tech litigations discussed above, we are not
currently involved in, and do not know of, any material litigation against us.
ACQUISITION OF KNOWX.COM AND INFORMED
On September 23, 1999, we acquired KnowX.com and Informed for $25 million
in cash and warrants to acquire 329,172 shares of our common stock. The warrants
have an exercise price of $52.50 per share and are exercisable at any time until
March 23, 2001. The acquisition agreement contains customary representations and
warranties and indemnification provisions. In connection with our acquisition of
KnowX.com and Informed, West Publishing, the parent of Information America,
Inc., has entered into a non-competition agreement with us. Also in connection
with the acquisition, we have entered into employment agreements with certain
key employees of KnowX.com. In addition, we have entered into a transition
service agreement with West Publishing which will allow us to use their data to
support the KnowX.com and Informed products for a period of up to one year,
after which we will only use our databases. The transition services agreement
will also require West Publishing to provide us with technical support during
such transition period.
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<PAGE> 52
MANAGEMENT
KEY OFFICERS AND DIRECTORS
As of September 30, 1999 our key officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Frank Borman......................... 71 Chairman of the Board of Directors(1)
Ronald A. Fournet.................... 47 President and Chief Executive Officer
George A. Bruder, Jr................. 43 Senior Vice President
Andrew J. Perlmutter................. 39 Vice President, Business Development
James S. Milford..................... 51 Vice President, Law Enforcement,
Sales
Timothy M. Leonard................... 40 Vice President, Finance, Treasurer,
and Chief Financial Officer
Daniel Goodrich...................... 38 Chief Information and Technology
Officer
Richard T. Rogers.................... 55 Vice President, Marketing
Kevin A. Barr........................ 39 Vice President, Human Resources
Thomas J. Hoolihan................... 43 Vice President, General Counsel
Pam Rendine-Cook..................... 41 Vice President, Customer Services
Jack H. Reed......................... 66 Vice President, Governmental
Relations
Robin Platt Teincuff................. 43 President, I.R.S.C.
Jane Rafeedie........................ 40 General Manager, KnowX.com
Don R. Brown......................... 47 President, WinSHAPES
Charles G. Betty..................... 41 Director(2)
Gary E. Erlbaum...................... 54 Director(1)
Jerold E. Glassman................... 63 Director(2)
Kenneth G. Langone................... 63 Director(1)
Bernard Marcus....................... 70 Director(2)(3)
Andrall E. Pearson................... 73 Director(3)
Eugene L. Step....................... 70 Director(3)
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
FRANK BORMAN has been Chairman of DBT Online since August 1996. From
September 1995 until August 1996, he also served as Chief Executive Officer and
a director of Patlex. He served as Chairman and Chief Executive Officer of
Patlex from 1988 to December 1992, and as Chairman of AutoFinance Group, Inc.
from December 1992 to September 1995, during the period that Patlex was a
subsidiary of AutoFinance Group. He served as Vice Chairman of the Board of
Directors at Texas Air Corporation from 1986 to 1991. From 1969 to 1986, he
served in various capacities for Eastern Airlines, including President, Chief
Executive Officer and Chairman of the Board of Directors. Mr. Borman served in
the United States Air Force from 1950 to 1970. Mr. Borman currently serves as a
director of The Home Depot, Inc., Thermo Instruments Systems, Thermo Power and
American Superconductor Corporation and is also a member of the Board of
Trustees of the National Geographic Society.
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<PAGE> 53
RONALD FOURNET has been Chief Executive Officer and President of DBT Online
since August 1999. Mr. Fournet has served as Chief Information and Technology
Officer of DBT Online since December 1998. From 1996 to 1998, Mr. Fournet served
in various capacities for Equifax, Inc., most recently as Senior Vice President
and Chief Technology Officer of North American operations. Mr. Fournet held
various positions at US West, Inc. from 1986 to 1996. From 1980 to 1986, he
worked in various capacities with GTE Corporation. Mr. Fournet served in the
United States Army Special Forces Intelligence Operations from 1973 to 1980.
GEORGE A. BRUDER, JR. has been Senior Vice President of DBT Online since
November 1997. Since August 1994, Mr. Bruder has held various positions with DBT
Online. From June 1982 until August 1994, Mr. Bruder worked in various
capacities for the Broward Sheriff's office in Broward County, Florida.
ANDREW J. PERLMUTTER has been Vice President of DBT Online since August
1997. Prior to joining DBT Online, Mr. Perlmutter served as President of the
Information Connectivity Group, where he worked with the insurance community to
provide technology-based access to the high quality anti-fraud products and
services. From September through December 1993, Mr. Perlmutter served as
President of Joseph Hamerman & Associates. Prior to that, Mr. Perlmutter was
Director of Client Relationships for a New York insurance defense legal firm
from 1979 to 1993.
JAMES S. MILFORD has been Vice President of DBT Online since February 1998.
From 1971 to 1997, he served with the United States Department of Justice, Drug
Enforcement Administration, where most recently he held the position of Deputy
Administrator, and was a recipient of the U.S. Presidential Award of Excellence.
During his twenty-six years with the DEA, Mr. Milford's senior positions
included Executive Assistant to DEA's Administrator, Chief of International
Operations and Special Agent in Charge of Florida.
TIMOTHY M. LEONARD has been Vice President, Finance, Treasurer & Chief
Financial Officer of DBT Online since February 1997. From June 1994 until
January 1997, Mr. Leonard served in various capacities for GMIS Inc., including
Director of Finance from June 1994 through May 1995, and Vice President, Finance
and Chief Financial Officer from May 1995 through January 1997. Mr. Leonard
worked for Ernst & Young LLP from 1981 through June 1994.
DANIEL GOODRICH has been Chief Information and Technology Officer since
September 1999. From 1998 to 1999, Mr. Goodrich was the Vice President of
Technology for Information America, Inc. From 1993 to 1998, Mr. Goodrich was a
member of the Senior Technology Staff for Storage Technology Corp. From 1987 to
1993, he served in various capacities for Sceptre Corp.
RICHARD T. ROGERS has been Vice President, Marketing for DBT Online since
November 1998. From 1987 to October 1998, Mr. Rogers was a management consultant
for Business Development Resources and several companies directly, including DBT
Online, focusing on strategic planning and marketing. He served as Vice
President of Marketing for Stroh's Brewery from 1985 until 1986, and spent the
first fifteen years of his career in the marketing and management of consumer
packaged goods for such companies as Proctor & Gamble, Cheeseborough Ponds and
Mars.
KEVIN A. BARR has been Vice President, Human Resources of DBT Online since
February 1998. From 1995 to 1997, Mr. Barr served in various capacities for
Nabisco International, most recently as Vice President, Human Resources of Asia
Pacific
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<PAGE> 54
operations in Singapore. From 1991 through 1995, Mr. Barr served in several
positions for Dun & Bradstreet. Mr. Barr also served in various Human Resource
positions for Chase Manhattan Bank from 1981 to 1990.
PAM RENDINE-COOK has been Vice President, Customer Services since April
1999. From 1994 to 1999, Ms. Rendine-Cook served as Assistant Vice President,
Integrated Development Environments at Equifax, Inc. Ms. Rendine-Cook has also
served in various technical capacities for Southern Company Services, John H.
Harland, Co. and R.L. Polk & Co.
THOMAS J. HOOLIHAN has been Vice President and General Counsel of DBT
Online since November 1997. From January 1989 until November 1997, Mr. Hoolihan
served in various capacities at Unilever United States, Inc., most recently as
Associate General Counsel -- Corporate and Assistant Secretary.
JACK H. REED has been Vice President of Governmental Relations for DBT
Online since May 1999. Mr. Reed has been a licenced private investigator since
1964. He founded I.R.S.C., Inc. in 1979 and began selling public record and
non-public information to private investigators, corporations, insurance
companies and financial institutions in 1983. Mr. Reed is a member of the
California Association of Licensed Investigators and serves on the National Task
Force on Privacy, Technology and Criminal Justice Information. He was President
of the National Council of Investigation & Security Services and was a founder
of the IRSG, a consortium of leading companies within the information industry
formed to address privacy concerns of the public related to the dissemination
and commercial use of public information.
ROBIN PLATT TEINCUFF has been the President and Chief Executive Officer of
I.R.S.C., Inc. since July 1995. She has spent her 17 year career in the public
record information industry. Prior to her tenure with I.R.S.C., Inc., Ms.
Teincuff served in various capacities at Prentice Hall Online, a unit of
Prentice Hall Legal and Financial Services, from 1992 to 1995, most recently as
their Vice President and General Manager.
JANE RAFEEDIE has been the General Manager of the KnowX.com since 1997.
From 1997 to September 1999, she was the General Manager of KnowX.com when it
was owned by a subsidiary of the West Group, and in September 1999, she agreed
to continue to serve as General Manager when DBT Online acquired KnowX.com. Ms.
Rafeedie held various positions with the West Group subsidiary from 1989 through
1994 and 1995 through 1997, including Director of Market Development. During
1994 through 1995, Ms. Rafeedie was a product manager for VoiceCom Systems, Inc.
DON R. BROWN is President of WinSHAPES, one of our subsidiaries which he
founded in 1995. Prior to his tenure with WinSHAPES, Mr. Brown had a successful
record in starting and building technical corporations over the past fifteen
years. Mr. Brown formed Team Asia/America Solutions, a software consortium, in
1994 and CAD Institute, the largest technical education and training institute
in the world, in 1985. Mr. Brown also served as President of LandCADD
International, a leading Autodesk software developer, from 1992-1995.
CHARLES G. BETTY has been a director of DBT Online since August 1998. Mr.
Betty is President and Chief Executive Officer of EarthLink Network, Inc., a
national Internet service provider. From February 1994 until January 1996, Mr.
Betty was a strategic planning consultant advising Reply Corp., Perot Systems
Corporation and Microdyne, Inc. From 1989 to 1994, he was president and Chief
Executive Officer of Digital
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<PAGE> 55
Communications Associates, Inc. Mr. Betty is also a director of Physician's Data
Corporation and is a member of the national advisory board of the Georgia
Institute of Technology.
GARY E. ERLBAUM has been a director of DBT Online since August 1996. He has
been involved with Patlex since May 1972, serving as a director of Patlex from
1983 to December 1992, and as a director of AutoFinance Group, Inc. from
December 1992 to September 1995, during the period that Patlex was a subsidiary
of Auto Finance Group. Since 1983, he has been the President of Greentree
Properties Corporation, which is engaged in real estate and business ventures.
He is also a director of David's Bridal, Inc., a national retail chain, and
several privately owned companies.
JEROLD E. GLASSMAN has been a director of DBT Online since February 1999.
Since 1969, Mr. Glassman has served as Chairman of the law firm of Grotta,
Glassman & Hoffman, P.A. which specializes in labor, employment and employee
benefits law and related litigation. Mr. Glassman also serves as Special Labor
Counsel to the New Jersey Sports and Exposition Authority, Special Labor Counsel
to Governor Christine Todd Whitman of New Jersey, and Director of the DiGiorgio
Corporation of Carteret, NJ, a large wholesale grocery distribution company.
KENNETH G. LANGONE has been a director of DBT Online since August 1996, and
was a director of Patlex from September 1995 to August 1996. He has been
involved with Patlex since 1979, serving as a Patlex director from 1979 to
December 1992, and as a director of AutoFinance Group, Inc. from December 1992
to September 1995, during the period that Patlex was a subsidiary of AutoFinance
Group. Since 1974, Mr. Langone has been Chairman of the Board of Directors,
Chief Executive Officer and President of Invemed Associates LLC, a New York
Stock Exchange member firm engaged in investment banking and brokerage services.
He is one of the co-founders of The Home Depot, and has been a director of that
company since 1978. He also serves as a director of The New York Stock Exchange,
Inc., General Electric Company, Unifi, Inc., Tricon Global Restaurants, Inc.,
InterWorld Corporation and several private corporations.
BERNARD MARCUS has been a director of DBT Online since October 1997. Mr.
Marcus is one of the co-founders of The Home Depot, Inc., and has been its
Chairman of the Board of Directors since its inception in 1978. He also served
as Home Depot's Chief Executive Officer from 1978 to 1997. Mr. Marcus serves on
the Board of Directors of the National Service Industries, Inc., and Westfield
America, Inc. Mr. Marcus also serves on the Board of the National Foundation for
the Centers for Disease Control and Prevention and is Chairman of the Board of
The Marcus Center, which provides support services for persons with
developmental disabilities and their families. In addition, he is a member of
the Advisory Board of the Board of Directors of the Sheperd Center in Atlanta,
Georgia and Vice President and member of the Board of The City of Hope, a
charitable organization in Duarte, California.
ANDRALL E. PEARSON has been a director of DBT Online since June 1997. Since
June 1997, Mr. Pearson has also been Chairman and Chief Executive Officer for
Tricon Global Restaurants, Inc. Prior to joining Tricon Global Restaurants, he
served as Principal for Clayton, Dubilier & Rice, Inc., a management buy-out
firm in New York, specializing in leveraged acquisitions involving management
participation of large U.S. corporations. From 1985 until June 1993, he was the
Class of 1958 Professor of Business Administration at Harvard Business School.
Prior to joining Harvard Business School, Mr. Pearson spent 15 years at PepsiCo,
Inc., 14 years as President and Chief Operating Officer. Mr. Pearson serves as a
director of CitiGroup Inc. He is also a trustee of the New York University
Medical Center and the Good Samaritan Medical Center in Palm Beach, Florida.
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<PAGE> 56
EUGENE L. STEP has been a director of DBT Online since March 1997. From
1973 to 1992, Mr. Step served in various senior management positions with Eli
Lilly & Co., most recently as Executive Vice President, President of the
Pharmaceutical Division and a member of the Board of Directors and its Executive
Committee. Mr. Step is a past Chairman of the Board of the Pharmaceutical
Manufacturers Association and a past President of the International Federation
of Pharmaceutical Manufacturers Association. Mr. Step also serves as a director
of Cell Genesys, Inc., Scios, Inc., Medco, Inc., Pathogenesis, Inc. and Guidant
Corp.
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<PAGE> 57
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of September 9, 1999, and as adjusted to
reflect the sale of the shares of common stock offered in this prospectus, by:
- each person or entity that we know owns more than 5% of our common
stock;
- our chief executive officer and each of our other executive
officers;
- each of our directors;
- the selling shareholders; and
- all our current directors and executive officers as a group.
The number and percentage of shares beneficially owned exclude shares of
common stock issuable upon the exercise of warrants we granted in connection
with our acquisition of KnowX.com and Informed.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED NUMBER OF OWNED
BEFORE OFFERING SHARES AFTER OFFERING
------------------- BEING -------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED(2)(6) NUMBER PERCENT
- --------------------------- --------- ------- ------------- --------- -------
<S> <C> <C> <C> <C> <C>
Hank Asher(3)................................. 4,469,758 23.5% 4,469,758 -- --%
Kenneth G. Langone(4)......................... 1,900,200 10.0 1,900,200 9.5
The Equitable Companies Incorporated(5)....... 1,612,400 8.5 1,612,400 8.1
Charles A. Asher(6)........................... 1,563,008 8.2 200,000 1,363,008 6.8
Soros Fund Management LLC(7).................. 1,495,424 7.9 1,495,424 7.5
Gary E. Erlbaum(8)............................ 417,962 2.2 417,962 2.1
Frank Borman(9)............................... 200,000 1.1 200,000 1.0
Bernard Marcus(10)............................ 67,942 * 67,942 *
J. Henry Muetterties.......................... 49,820 * 49,820 *
George A. Bruder, Jr.(11)..................... 33,334 * 33,334 *
Andrall E. Pearson(10)........................ 30,000 * 30,000 *
Eugene L. Step(12)............................ 20,000 * 20,000 *
Kevin A. Barr(10)............................. 10,000 * 10,000 *
Charles G. Betty(10).......................... 10,000 * 10,000 *
Jerold E. Glassman............................ -- -- -- --
Ronald A. Fournet(13)......................... -- -- -- --
All executive officers and directors as a
group
(14 persons) (14)........................... 2,809,342 14.8% 14.0%
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In general, a person who has voting power or investment power
with respect to securities is treated as a beneficial owner of those
securities. Shares of common stock subject to options or warrants currently
exercisable or exercisable within 60 days count as outstanding for
computing the percentage beneficially owned by the holder. Except as
otherwise indicated by footnote, we believe that the persons named in this
table have sole voting and investment power with respect to the shares of
common stock shown.
(2) The number of shares being offered does not include shares to be sold by
some selling shareholders if the underwriters exercise their over-allotment
option. If the underwriters exercise their over-allotment option in full,
RFT Capital Ventures LP, which beneficially owns 358,293 shares (or 1.9%)
and whose general partner is Jack Reed, our Vice President of Governmental
Relations, will sell 107,488 shares in the over-allotment option, and will
own 250,805 shares (or 1.3%) after this sale. If the
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<PAGE> 58
underwriters exercise their over-allotment option in full, The Sharon L.
Guenther Revocable Living Trust, a shareholder who beneficially owns 71,660
shares, will sell 21,498 shares in the over-allotment option, and will own
50,162 shares (or less than one percent) after this sale. If the
underwriters do not exercise their over-allotment option in full, the
underwriters will purchase the first 128,986 shares of the over-allotment
from RFT Capital Ventures and The Sharon L. Guenther Revocable Living Trust
in proportion to the number of shares each is offering to sell.
(3) Includes 4,155,328 shares owned by Asher Investment Partners, of which Mr.
Asher is a partner and 7,205 shares owned by Asher Holdings Inc., of which
Mr. Asher is the sole shareholder. Mr. Asher's address is 6601 Park of
Commerce Blvd., Boca Raton, Florida 33487. Mr. Asher formerly served as
President, Chief Executive Officer and a director of DBT Online.
(4) Includes (i) 900,000 shares owned by Invemed Associates LLC, (ii) 200
shares owned by Mr. Langone's spouse and (iii) 200,000 shares issuable upon
exercise of currently exercisable options. Mr. Langone is Chairman of the
Board, Chief Executive Officer and President of Invemed and the principal
shareholder of Invemed's parent corporation, Invemed Securities, Inc. Mr.
Langone's address is 375 Park Ave., Suite 2205, New York, New York 10152.
(5) Based on our review of a Schedule 13G filed with the Commission on February
16, 1999, we believe these shares are held by The Equitable Companies
Incorporated.
(6) The number of shares being offered does not include 721,478 shares to be
sold by Charles A. Asher if the underwriters exercise their over-allotment
option in full. Consequently, the shares beneficially owned after the
offering include these 721,478 shares. The underwriters will purchase the
first 128,986 shares of the over-allotment from RFT Capital Ventures and
The Sharon L. Guenther Revocable Trust. Mr. Asher's address is 400 Trigon
Building, 224 W. Jefferson Blvd., South Bend, Indiana 46601.
(7) Based on our review of a Schedule 13G filed with the Commission on February
12, 1999, we believe these shares are held by George Soros, Stanley F.
Druckemuller, and Duquesne Capital Management LLC.
(8) Includes (i) 29,420 shares owned by SPSP Corporation of which Mr. Erlbaum
is President, director, and a 36.7% shareholder, (ii) 3,750 shares held by
trusts for which Mr. Erlbaum serves as trustee or co-trustee, (iii) 139,360
shares owned by Erlbaum Family L.P., whose general partner is a company for
which Mr. Erlbaum serves as President, (iv) 2,922 shares owned by Mr.
Erlbaum's son, and (v) 200,000 shares issuable upon exercise of currently
exercisable options.
(9) Includes 157,895 shares issuable pursuant to currently exercisable stock
options.
(10) Includes 10,000 shares issuable pursuant to currently exercisable stock
options.
(11) Includes 33,334 shares issuable pursuant to currently exercisable stock
options.
(12) Includes 20,000 shares issuable pursuant to currently exercisable stock
options.
(13) Mr. Fournet was recently named as our President and Chief Executive
Officer. The number of shares beneficially owned by Mr. Fournet does not
include 200,000 shares of common stock issuable pursuant to unvested stock
options.
(14) Includes 730,813 shares issuable pursuant to currently exercisable stock
options.
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<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common
stock, par value $0.10 per share, and 5,000,000 shares of preferred stock, par
value $0.10 per share. As of June 30, 1999, there were 19,002,663 shares of the
common stock outstanding held of record by 498 persons. No shares of preferred
stock have been issued and there is no present intention to issue any shares of
preferred stock.
COMMON STOCK
Holders of our common stock are entitled to receive, as, when and if
declared by the Board of Directors from time to time, dividends and other
distributions in cash, stock or property of ours out of assets or funds
available for such purposes, subject to any dividend preferences which may be
attributable to any issued and outstanding preferred stock. Holders of common
stock are entitled to one vote for each share held of record on all matters on
which shareholders may vote.
There are no preemptive, conversion, redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and non-assessable. In the event of the liquidation, dissolution or winding
up of us, holders of common stock are entitled to share ratably in the assets
available for distribution.
PREFERRED STOCK
Our board of directors, without further action by the shareholders, is
authorized to issue an aggregate of 5,000,000 shares of preferred stock. No
shares of preferred stock are outstanding and we have no plans to issue a new
series of preferred stock. Our board of directors may, without shareholder
approval, issue preferred stock with dividend rates, redemption prices,
preferences on liquidation or dissolution, conversion rights, voting rights and
any other preferences, each of which could adversely affect the voting power of
the holders of common stock. Issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions or other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging or delaying a third party from
acquiring, a majority of our outstanding stock.
ANTI-TAKEOVER MEASURES
Certain provisions of our Amended and Restated Articles of Incorporation
and Amended and Restated Bylaws may have the effect of making it more difficult
or discouraging a takeover attempt that is opposed by the board of directors.
These provisions include (1) a staggered board of directors; (2) restrictions on
the persons eligible to call a special meeting of shareholders; (3) limitations
on the size of our board of directors; and (4) the ability of the board of
directors to authorize the issuance of preferred stock in series.
Also, some provisions of Pennsylvania law could have the effect of
deterring takeovers. In our Bylaws, we have opted out of subchapters E, F, G, H,
I and J of Section 25 of the Pennsylvania Business Corporation Law. Generally,
these subchapters provide special protections against acquisitions of
publicly-held corporations subject to the Securities Exchange Act of 1934.
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REGISTRATION RIGHTS
Prior to December 22, 1999, we are required to file a registration
statement covering 329,172 shares of common stock underlying the warrants we
granted in connection with the KnowX.com and Informed acquisitions and to use
our best efforts to cause the registration statement to become effective as soon
as practicable. We have agreed to register on such registration statement any
shares beneficially owned by RFT Capital Ventures LP and The Sharon L. Guenther
Revocable Living Trust that are not sold in this offering pursuant to the
underwriters' over-allotment option. In connection with our merger with IRSC, we
may be required to register up to 300,967 shares of our common stock after May
6, 2001.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated October 7, 1999, we and the selling shareholders have agreed to
sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation and Invemed Associates LLC are acting as representatives, the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.................. 2,834,879
Invemed Associates LLC.................................. 2,834,879
---------
Total......................................... 5,669,758
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
Some of the selling shareholders have granted to the underwriters a 30-day
option to purchase on a pro rata basis up to 850,464 additional shares at the
public offering price less the underwriting discounts and commissions. The
option may be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $0.82 per share. The
underwriters and selling group members may allow a discount of $0.10 per share
on sales to other broker/dealers. After this offering, the price to public and
concession and discount to broker/dealers may be changed by the representatives.
The following table summarizes the compensation and estimated expenses we
and the selling shareholders will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us......... $1.38 $1.38 $1,380,000 $1,380,000
Expenses payable by us........... $0.16 $0.10 $ 187,688 $ 212,688
Underwriting discounts and
commissions paid by selling
shareholders................... $1.38 $1.38 $6,444,266 $7,617,906
Expenses payable by the selling
shareholders................... $0.16 $0.16 $ 699,102 $ 699,102
</TABLE>
We, our executive officers and directors and certain other shareholders
have agreed not to offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, or file with the Securities and Exchange Commission
a registration statement under the Securities Act of 1933 relating to, any
shares of our common stock or securities convertible into or exchangeable or
exercisable for any of our common stock, or publicly disclose the intention to
make any such offer, sale, pledge, disposition or filing, without the
61
<PAGE> 62
prior written consent of Credit Suisse First Boston Corporation for a period of
100 days after the date of this prospectus.
We and the selling shareholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make in that respect.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified
maximum.
- Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been completed
in order to cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock originally
sold by such syndicate member is purchased in a syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
New York Stock Exchange or otherwise and, if commenced, may be discontinued at
any time.
Invemed Associates LLC, one of the underwriters, has provided financial
advisory services to us in the past, for which customary compensation has been
received. Kenneth G. Langone, one of our directors and shareholders, is Chairman
of the Board, Chief Executive Officer and President of Invemed Associates and is
the principal shareholder of Invemed Associates' parent, Invemed Securities,
Inc. Invemed Associates is a shareholder of DBT Online. See "Principal and
Selling Shareholders." By virtue of Invemed Associates' beneficial ownership of
our voting securities, Invemed Associates may be deemed to be our affiliate
under the National Association of Securities Dealers, Inc. Conduct Rules. The
offering therefore is being conducted in accordance with the applicable
provisions of Rule 2720 of the National Association of Securities Dealers, Inc.
Conduct Rules. The underwriters do not intend to confirm sales to any account
over which they exercise discretionary authority.
Credit Suisse First Boston Corporation has provided financial advisory
services to us in the past, and acted as financial advisor to us in connection
with our acquisition of KnowX.com and Informed, for which customary compensation
has been, and will be, received.
62
<PAGE> 63
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered in this
prospectus will be passed upon for us by Morgan, Lewis & Bockius LLP,
Philadelphia, Pennsylvania. Certain legal matters in connection with the
offering will be passed upon for the underwriters by Dewey Ballantine LLP, New
York, New York.
EXPERTS
The consolidated financial statements of DBT Online, Inc. and subsidiaries
(except I.R.S.C., Inc. and subsidiaries) as of December 31, 1998 and 1997 and
for the three years ended December 31, 1998 included in this prospectus and the
related financial statement schedule included elsewhere in the registration
statement have been audited by Deloitte & Touche LLP, as stated in their reports
appearing in this prospectus and elsewhere in the registration statement. The
consolidated financial statements of I.R.S.C., Inc. and subsidiaries
(consolidated with those of DBT Online, Inc.) have been audited by Corbin &
Wertz as stated in their report included herein. The consolidated financial
statements of DBT Online, Inc. and subsidiaries are included in this prospectus
in reliance upon the respective reports of such firms in each case given upon
their authority as experts in accounting and auditing. Deloitte & Touche LLP and
Corbin & Wertz are independent auditors.
The financial statements of the Online Public Records Business (a division
of Information America, Inc., including the KnowX.com and Informed product
lines) as of December 31, 1998 and for the year then ended, included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form S-3
(Registration No. 333-85689) that we filed with the Securities and Exchange
Commission. The registration statement (including the attached exhibits and
schedules) contains additional relevant information about us and our common
stock. The rules and regulations of the Commission allow us to omit certain
information included in the Registration Statement from this prospectus. In
addition, the Commission permits us to "incorporate by reference" the
information we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus, and
information that we file with the Commission after the date of this prospectus
will automatically update and supersede this information. However, any
information contained herein shall modify or supersede information contained in
documents we filed with the Commission before the date of this prospectus.
We incorporate by reference our Annual Report on Form 10-K and Form
10-K/A-1 for the year ended December 31, 1998 filed by us with the Commission,
our Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1999 and on
Form 10-Q for the quarter ended June 30, 1999. We incorporate by reference
exhibit 10.2 to US SEARCH.com's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999. We incorporate by reference our Reports on Form 8-K dated
August 12, 1999 and September 3, 1999. We also incorporate by reference any
future filings made with the Commission under Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act until we sell all of the shares of common stock being
registered or until this offering is otherwise terminated.
63
<PAGE> 64
If you request a copy of any or all of the documents incorporated by
reference by written or oral request, then we will send to you the copies you
requested at no charge. However, we will not send exhibits to such documents,
unless such exhibits are specifically incorporated by reference in such
documents. You should direct requests for such copies to DBT Online, Inc., 4530
Blue Lake Road, Boca Raton, FL 33431, Attention: Timothy Leonard, (561)
982-5240.
In addition, we file reports, proxy statements and other information with
the Commission under the Exchange Act. You may read and copy this information at
the following locations of the Commission: (1) Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, (2) Midwest Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and (3) Northeast Regional
Office, Seven World Trade Center, New York, New York 10048.
You may also obtain copies of this information by mail from the Public
Reference Section of the Commission at 450 Fifth Street, NW, Washington, D.C.
20549, at prescribed rates. Further information on the operation of the
Commission's Public Reference Room in Washington, D.C. can be obtained by
calling the Commission at 1-800-SEC-0330.
The Commission also maintains an Internet world wide web site that contains
reports, proxy statements and other information about issuers, such as us, who
file electronically with the Commission. The address of that site is
http://www.sec.gov.
Our common stock is listed on The New York Stock Exchange under the symbol
"DBT". You may also obtain reports, proxy statements and other information
concerning our listing on the NYSE at the offices of the NYSE, 20 Broad Street,
New York, New York 10005.
64
<PAGE> 65
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF DBT ONLINE, INC. AND
SUBSIDIARIES FOR THE
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Independent Auditors' Reports............................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-5
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996...... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF DBT
ONLINE, INC. AND SUBSIDIARIES FOR THE SIX MONTH PERIODS
ENDED JUNE 30, 1999 AND 1998
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998..................................... F-20
Condensed Consolidated Statements of Operations for the six
month periods ended June 30, 1999 and 1998................ F-21
Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 30, 1999 and 1998................ F-22
Notes to Condensed Consolidated Financial Statements........ F-23
FINANCIAL STATEMENTS OF ONLINE PUBLIC RECORDS BUSINESS (A
DIVISION OF INFORMATION AMERICA, INC.) FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997 AND THE SIX MONTHS ENDED JUNE
18, 1999 AND JUNE 19, 1998
Report of Independent Accountants........................... F-27
Balance Sheets.............................................. F-28
Statements of Operations.................................... F-29
Statements of Cash Flows.................................... F-30
Notes to Financial Statements............................... F-31
</TABLE>
F-1
<PAGE> 66
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of DBT Online, Inc. and subsidiaries:
We have audited the consolidated balance sheets of DBT Online, Inc. and
subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements give retroactive effect to the
merger of the Company and I.R.S.C., Inc. and subsidiaries ("IRSC"), which has
been accounted for as a pooling of interests as described in Note 11 to the
consolidated financial statements. We did not audit the consolidated financial
statements of IRSC, which statements reflect total assets of 2% of consolidated
total assets as of December 31, 1998 and 1997, and total revenues of 12%, 16%
and 25% of consolidated total revenues for the years ended December 31, 1998,
1997 and 1996, respectively. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for IRSC, for 1998, 1997, and 1996 is based solely on the
report of such other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of DBT Online, Inc. and subsidiaries as of December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Fort Lauderdale, Florida
February 15, 1999 (September 23, 1999 as to the effects of the
business combinations described in Note 11)
F-2
<PAGE> 67
INDEPENDENT AUDITORS' REPORT
Board of Directors
I.R.S.C., Inc.
We have audited the consolidated balance sheets of I.R.S.C., Inc. and
subsidiaries ("IRSC") as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998 (not presented
separately herein). Those consolidated financial statements are the
responsibility of IRSC'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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IRSC as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Corbin & Wertz
Irvine, California
August 12, 1999
F-3
<PAGE> 68
DBT ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $21,324 $ 7,913
Accounts receivable, less allowance:
1998, $399; 1997, $350.................................... 9,409 5,189
Short-term investments...................................... 25,840 44,207
Prepaid expenses and other current assets................... 2,422 1,729
Prepaid income taxes........................................ -- 217
------- -------
Total current assets...................................... 58,995 59,255
Property and equipment, net................................. 18,806 9,770
Patents, less accumulated amortization:
1998, $4,012; 1997, $2,317................................ 9,830 11,525
Goodwill, less accumulated amortization:
1998, $1,170; 1997, $344.................................. 4,637 5,463
Other assets................................................ 103 342
------- -------
Total assets.............................................. $92,371 $86,355
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................... $ 3,273 $ 4,622
Due to other patent interest holders........................ 1,394 995
Income taxes payable........................................ 406 --
------- -------
Total current liabilities................................. 5,073 5,617
Deferred income taxes....................................... 3,405 4,155
Commitments and contingencies (Note 7)...................... -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $0.10 par value, 5,000 shares authorized;
no shares issued or outstanding........................... -- --
Common stock, $0.10 par value, 100,000 shares and 40,000
shares authorized at December 31, 1998 and 1997,
respectively; 18,906 shares and 18,821 shares issued and
outstanding at December 31, 1998 and 1997, respectively... 1,890 1,882
Additional paid-in capital.................................. 69,559 69,153
Retained earnings........................................... 12,444 5,548
------- -------
Total stockholders' equity................................ 83,893 76,583
------- -------
Total liabilities and stockholders' equity................ $92,371 $86,355
======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 69
DBT ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenues............................................. $54,103 $37,777 $22,607
Patent royalties..................................... 6,636 6,670 2,382
------- ------- -------
Total revenues and royalties....................... 60,739 44,447 24,989
------- ------- -------
Cost of revenues..................................... 26,152 17,957 11,418
Sales and marketing.................................. 6,508 4,367 2,434
Research and development............................. 3,078 2,364 2,052
General and administrative........................... 17,317 11,978 8,273
------- ------- -------
Total expenses..................................... 53,055 36,666 24,177
------- ------- -------
Income from operations............................... 7,684 7,781 812
Interest income (expense), net....................... 2,330 1,491 (174)
------- ------- -------
Income before income taxes........................... 10,014 9,272 638
Provision for income taxes........................... 3,118 3,171 198
------- ------- -------
Net income......................................... $ 6,896 $ 6,101 $ 440
======= ======= =======
Net income per share (basic)......................... $ 0.36 $ 0.35 $ 0.04
======= ======= =======
Weighted-average shares outstanding (basic).......... 18,900 17,568 12,561
======= ======= =======
Net income per share (diluted)....................... $ 0.35 $ 0.33 $ 0.03
======= ======= =======
Weighted-average shares outstanding (diluted)........ 19,612 18,495 12,835
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 70
DBT ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL RETAINED
NUMBER PAID-IN EARNINGS
OF SHARES PAR VALUE CAPITAL (DEFICIT) TOTAL
--------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
BALANCE at January 1, 1996............ 10,688 $ 11 $ 4,055 $ (993) $ 3,073
Change in par value................. -- 1,058 (1,058) -- --
Stock issued for acquisition........ 5,132 513 14,235 -- 14,748
Exercise of stock options........... 60 6 137 -- 143
Stock options issued for services,
net of income taxes.............. -- -- 528 -- 528
Net income.......................... -- -- -- 440 440
------ ------- ------- ------- -------
BALANCE at December 31, 1996.......... 15,880 1,588 17,897 (553) 18,932
Exercise of stock options........... 106 10 866 -- 876
Issuance of common stock for cash... 2,690 269 46,543 -- 46,812
Stock issued for acquisition........ 145 15 3,474 -- 3,489
Tax benefit of stock options........ -- -- 242 -- 242
Stock options issued................ -- -- 131 -- 131
Net income.......................... -- -- -- 6,101 6,101
------ ------- ------- ------- -------
BALANCE at December 31, 1997.......... 18,821 1,882 69,153 5,548 76,583
Exercise of stock options........... 75 7 165 -- 172
Stock issued for employee benefit
plan............................. 10 1 241 -- 242
Net income.......................... -- -- -- 6,896 6,896
------ ------- ------- ------- -------
BALANCE at December 31, 1998.......... 18,906 $ 1,890 $69,559 $12,444 $83,893
====== ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 71
DBT ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ 6,896 $ 6,101 $ 440
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 8,022 5,802 3,133
Deferred income taxes............................ (750) (146) (595)
Stock issued for Employee Benefit Plan........... 242 -- --
Tax benefit of stock options..................... -- 242 --
Stock options issued for services................ -- 131 661
Changes in operating assets and liabilities:
Accounts receivable.............................. (4,220) (1,916) (1,067)
Prepaid expenses and other current assets........ (693) (1,177) (220)
Accounts payable and accrued liabilities......... (1,349) 1,813 105
Due to other patent interest holders............. 399 (416) 121
Income taxes..................................... 623 (835) (996)
-------- -------- -------
Net cash provided by operating activities..... 9,170 9,599 1,582
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment purchased................... (14,537) (6,949) (5,371)
Cash (used) acquired in acquisition................ -- (2,488) 8,505
Decrease in other assets........................... 239 102 49
Proceeds from sales or maturities of investments... 18,367 -- --
Purchases of short-term investments................ -- (44,207) --
-------- -------- -------
Net cash (used in) provided by investing
activities.................................. 4,069 (53,542) 3,183
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock............. -- 46,812 --
Net change in bank line-of-credit.................. -- (200) 100
Proceeds from exercise of stock options............ 172 876 143
Proceeds from long-term debt borrowings............ -- -- 1,500
Repayments on long-term debt....................... -- (2,781) (1,385)
Repayment on note payable, shareholder, and
other............................................ -- -- 200
-------- -------- -------
Net cash provided by financing activities..... 172 44,707 558
-------- -------- -------
Net increase in cash and cash equivalents.......... 13,411 764 5,323
Cash and cash equivalents at beginning of year..... 7,913 7,149 1,826
-------- -------- -------
Cash and cash equivalents at end of year........... $ 21,324 $ 7,913 $ 7,149
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 72
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DBT Online, Inc. (with its subsidiaries, the "Company"), through its
subsidiaries Database Technologies, Inc. ("DBT"), The Information Connectivity
Group, Inc. ("ICON") and I.R.S.C., Inc. and subsidiaries ("IRSC"), is engaged in
the electronic information retrieval industry, which provides online, real-time
access to public records. The Company, through its Patlex Corporation ("Patlex")
subsidiary, is involved in the patent enforcement and exploitation business,
whereby the Company collects royalty fees from a group of laser patents.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of DBT Online, Inc. and its wholly owned subsidiaries. All
significant intercompany accounts and transactions are eliminated.
USE OF ESTIMATES. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and the accompanying Notes. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments with a remaining original maturity at the date of purchase of three
months or less to be cash equivalents.
PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost and
depreciated using accelerated methods over the estimated useful lives of the
assets. Useful lives range from three to 10 years. Expenditures for routine
maintenance and repairs are charged to expense as incurred.
PATENTS AND GOODWILL. The patent costs are amortized on a straight-line
basis over the remaining lives of the patents. Goodwill is amortized on a
straight-line basis over seven years.
CARRYING VALUE OF LONG-LIVED ASSETS. Management reviews long-lived assets
for possible impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. If there is an indication of
impairment, management prepares an estimate of future cash flows (undiscounted
and without interest charges) expected to result from the use of the asset and
its eventual disposition. If these cash flows are less than the carrying amount
of the asset, an impairment loss is recognized, to write down the asset to its
estimated fair value. Assets, if any, that management has committed to a plan to
dispose, whether by sale or abandonment, are reported at the lower of carrying
amount or fair value, less cost to sell. Preparation of estimated expected
future cash flows is inherently subjective and is based on management's best
estimate of assumptions concerning future conditions.
REVENUE RECOGNITION. The Company recognizes revenue at the time of
customer access. Accounts receivable are primarily with law enforcement
agencies, insurance companies, law firms, and other licensed investigation
companies. Patent royalties are recognized pursuant to license agreements that
require the licensees to periodically report
F-8
<PAGE> 73
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
activity to the Company. The Company's customers are numerous and spread over a
wide geographic area. As such, the Company believes that it does not have an
abnormal concentration of credit risk within any one market or any one
geographic area.
RESEARCH AND DEVELOPMENT COSTS. Costs for research and development
activities are expensed as incurred, and aggregated $3,078, $2,364, and $2,052
for years ended December 31, 1998, 1997, and 1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of cash and cash
equivalents, accounts receivable, and accounts payable approximate fair value
due to their short-term nature. Short-term investments are classified as
available-for-sale and are carried at fair value.
NET INCOME PER SHARE. Basic net income per share is determined by dividing
net income by the weighted-average shares outstanding. Diluted net income per
share is determined by dividing net income by the weighted-average shares
outstanding including the effect of stock options, if dilutive. The
weighted-average number of shares for stock options included in the diluted
weighted-average shares outstanding were 712,000, 927,000, and 274,000 in 1998,
1997, and 1996, respectively.
NEW ACCOUNTING PRONOUNCEMENT. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 130 (SFAS
No. 130), Comprehensive Income. This standard is effective for financial
statements for fiscal years beginning after December 15, 1997. Other
comprehensive income refers to revenue, expenses, gains, and losses that under
generally accepted accounting principles are included in comprehensive income
but are excluded from net income, as these amounts are recorded directly as an
adjustment to stockholders' equity. The components of comprehensive income are
not significant, individually or in the aggregate, and therefore, no separate
statement of comprehensive income has been presented.
RECLASSIFICATIONS. Certain amounts have been reclassified to conform with
the 1998 presentation.
2. ACQUISITIONS
On August 1, 1997, the Company acquired all of the stock of ICON. The
consideration paid included both cash of $2.5 million and common stock of the
Company valued at $3.5 million. For accounting purposes, the transaction was
treated as a purchase. The Company recorded goodwill of approximately $5.8
million in connection with this acquisition, which is being amortized over seven
years. Had the acquisition of ICON been consummated as of January 1, 1996, the
pro forma results of operations for the Company would not have been materially
affected.
On August 20, 1996, the former shareholders of Patlex approved a plan of
reorganization pursuant to which the Company was reorganized into a holding
company structure, and each share of Patlex was converted into a share of the
Company. Also on August 20, 1996, a wholly-owned subsidiary of the Company
merged with Database Technologies, Inc. Pursuant to the terms of the merger and
reorganization, the former shareholders of Patlex owned approximately 33.2% of
the Company, and the former owners
F-9
<PAGE> 74
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of Database Technologies, Inc. owned 66.8% of the Company, based on the shares
and options outstanding at August 20, 1996. For accounting purposes, this
transaction was treated as a purchase of Patlex, with DBT as the accounting
acquirer.
The purchase price was determined based on the 5,895,428 shares of Company
common stock and stock options issued (based on the number of shares of Patlex
common stock and options to purchase Patlex common stock outstanding immediately
prior to the merger, as prescribed by the merger agreement), which were valued
at $14,060, together with transaction costs of $689 and was allocated to
Patlex's assets and liabilities based upon their estimated fair values at August
20, 1996. A summary of such allocation follows:
<TABLE>
<S> <C>
Current assets, including cash of $8,505.................... $ 8,966
Investment in patents....................................... 13,844
Other assets................................................ 27
Current liabilities......................................... (3,715)
Other liabilities........................................... (4,373)
-------
Total purchase price...................................... $14,749
=======
</TABLE>
As a consequence of this transaction, the consolidated financial statements
include the results of operations for Patlex for the period from August 20,
1996, forward.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1998 1997
-------- -------
<S> <C> <C>
Computer equipment.......................................... $ 22,554 $16,255
Office furniture and equipment.............................. 1,599 989
Leasehold improvements...................................... 7,588 367
-------- -------
Total cost.................................................. 31,741 17,611
Less: Accumulated depreciation.............................. (12,935) (7,841)
-------- -------
Property and equipment, net............................... $ 18,806 $ 9,770
======== =======
</TABLE>
Depreciation expense was $5,501, $3,763, and $2,511 for the years ended
December 31, 1998, 1997 and 1996, respectively.
F-10
<PAGE> 75
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SHORT-TERM INVESTMENTS
At December 31, 1998 and 1997, short-term investments consisted of the
following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
State and municipal bonds (including accrued interest of
$1,000 and $544 as of December 31, 1998 and 1997,
respectively)............................................. $25,840 $37,027
Certificates of deposit (including accrued interest of $86
as of December 31, 1997).................................. -- 7,180
------- -------
Total..................................................... $25,840 $44,207
======= =======
</TABLE>
STATE AND MUNICIPAL BONDS. The Company has investments in state and
municipal bonds that are classified as available-for-sale and are carried at
fair value. There were gross unrealized gains of $52 and gross unrealized losses
of $78 as of December 31, 1998. There were approximately $66 of gross unrealized
gains and losses as of December 31, 1997, with respect to such securities.
During 1998, there were $276 in realized gains on the sale of securities. Cost
is determined based on specific identification. During 1997, there were no sales
of any of the Company's state and municipal bonds. At December 31, 1998, these
investments have contractual maturities as follows:
<TABLE>
<S> <C>
Within 1 year............................................... $ 4,166
After 1 through 5 years..................................... 17,969
After 5 through 10 years.................................... 1,542
After 10 years.............................................. 2,163
-------
Total..................................................... $25,840
=======
</TABLE>
Certain of the Company's state and municipal bonds are concentrated in
specific geographic regions. The states in which a significant component of
these investments resided at December 31, 1998 were as follows:
<TABLE>
<S> <C>
Florida..................................................... $10,408
Washington.................................................. 2,058
New Mexico.................................................. 1,315
Maryland.................................................... 1,088
Nevada...................................................... 1,067
Maine....................................................... 1,032
Texas....................................................... 1,030
Illinois.................................................... 1,016
Others...................................................... 6,826
-------
Total..................................................... $25,840
=======
</TABLE>
F-11
<PAGE> 76
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PATENTS
Patlex owns a 64% income interest in Laser Patent revenue relating to
certain patents relating to laser technology. The most commercially significant
of the Laser Patents is the Gas Discharge Laser Patent (U.S. Patent No.
4,704,583), which covers gas discharge lasers. In addition, the Laser Patents
consist of the Brewster Angle Window Patent (U.S. Patent No. 4,746,201), which
involves the use of an optical system, including optical elements, to polarize
light. The Gas Discharge Laser Patent expires in November 2004 and the Brewster
Angle Window Patent expires in May 2005. Upon the expiration of the applicable
patent, Patlex loses its right to exclude others from exploiting the inventions
claimed therein and, accordingly, the obligation of third parties to make
royalty payments to Patlex will cease.
6. INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Current
Federal............................................. $3,541 $3,051 $ 684
State............................................... 327 267 109
------ ------ -----
3,868 3,318 793
Deferred
Federal............................................. (718) (127) (543)
State............................................... (32) (20) (52)
------ ------ -----
(750) (147) (595)
------ ------ -----
Provision for income taxes....................... $3,118 $3,171 $ 198
====== ====== =====
</TABLE>
Deferred income taxes reflect the net income tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes, and the amounts used for income tax purposes. Annual changes
in these temporary differences constitute the principal reconciling items
between pretax accounting income and taxable income. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1998 and
1997, are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1998 1997
------ ------
<S> <C> <C>
Deferred tax liabilities
Patents................................................... $3,609 $4,121
Cash basis accounting..................................... 37 66
Purchased data............................................ 300 292
------ ------
3,946 4,479
Deferred tax assets
Depreciation.............................................. 62 73
IRB loss carry forward.................................... 308 400
Reserves and other........................................ 371 251
------ ------
741 724
Valuation allowance......................................... (200) (400)
------ ------
Net deferred income tax liability...................... $3,405 $4,155
====== ======
</TABLE>
F-12
<PAGE> 77
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a capital loss carry-over of approximately $900 for tax
purposes, which expires in 2000. The related deferred tax asset has been
partially offset by a valuation allowance, as the Company initiated certain
tax-planning strategies that may result in utilizing this loss carry-over.
The reconciliation of income tax computed at the federal statutory rate to
income tax expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate.................................... 34% 34% 34%
Non-deductible merger expenses............................ -- -- 8
Tax-exempt investment income.............................. (2) (1) --
Research and development credit........................... (1) (1) (15)
State income taxes, net of federal income tax benefit..... 2 1 6
Benefit of capital loss carry forward..................... (2) -- --
Other..................................................... -- 1 (2)
-- -- ---
31% 34% 31%
== == ===
</TABLE>
The Company paid income taxes of $3,238, $3,828 and $1,854 in 1998, 1997,
and 1996, respectively.
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
Due to the nature of Patlex's business, and especially its involvement in
the enforcement of patent rights, Patlex is from time to time involved in
litigation with alleged infringers of the Laser Patents. Patlex regards all such
lawsuits as occurring in the ordinary course of business. Furthermore, as a
result of the involvement of the United States Patent and Trademark Office in
granting and denying patent applications and in conducting reexaminations of
patents, Patlex has in the past been required to prosecute appeals to the United
States District Court from Patent and Trademark Office rulings adverse to
Patlex's interest. No such appeals are pending at this time, and Patlex does not
anticipate such appeals will be necessary in the future with regard to the Laser
Patents. In connection with suits filed against alleged patent infringers to
enforce a patent, defendants often file counterclaims seeking payment by the
plaintiffs of any damages suffered by the defendants on account of the lawsuit
and reimbursement by the plaintiffs of the defendant's costs and attorney's
fees. While such counterclaims have been filed against Patlex, to date Patlex
has not incurred liability with regard to such counterclaims. Patlex may also be
required to file suits to enforce collection and compliance under its patent
license agreements with its current licensees.
The Company may be involved in other litigation from time to time in the
ordinary course of its business. The Company is not currently involved in any
other litigation, or to its knowledge, is any litigation currently threatened
that could have a material effect on its financial position or results of
operations.
F-13
<PAGE> 78
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYMENT AGREEMENTS
In March 1991, Patlex entered into an employment agreement with its
chairman, Frank Borman, effective January 1, 1991. The agreement provides for
minimum annual compensation of $145 and provides for an initial three-year
employment period, which is automatically extended for an additional year on its
anniversary date unless the Company notifies him it does not wish to extend the
term of the agreement. This agreement has been extended for a three-year period
effective April 1, 1997. The 1998 annual compensation rate for Mr. Borman was
$160.
In August 1997, the Company entered into an employment agreement with its
President and Chief Executive Officer, Charles A. Lieppe, which provides for a
four-year term beginning August 15, 1997, and ending on August 14, 2001, unless
terminated earlier in accordance with certain circumstances. The 1998 annual
compensation rate for Mr. Lieppe was $250.
LEASES
The Company leases all of its office space under agreements expiring on
various dates through 2008. These leases contain renewal options ranging from
three to 10 years.
IRSC leases its facility under a non-cancelable operating lease agreement
with a related party. Under such lease, the Company is obligated to pay for
certain repairs, maintenance, taxes and insurance. The lease expires on December
31, 2000 and provides for monthly rental payments of $9, plus common area
maintenance charges.
Future minimum payments under operating leases that have non-cancelable
terms in excess of one year are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
1999........................................................ $ 529
2000........................................................ 1,131
2001........................................................ 1,136
2002........................................................ 1,145
2003........................................................ 1,195
Thereafter through 2008..................................... 5,723
-------
Total....................................................... $10,859
=======
</TABLE>
Rent expense was $1,054, $730, and $488, respectively, for the years ended
December 31, 1998, 1997, and 1996.
8. STOCK OPTIONS AND BENEFIT PLAN
STOCK OPTIONS
The Company has incentive and non-qualified stock option plans for
directors and key employees, and has 6,000,000 shares of common stock reserved
for issuance under these
F-14
<PAGE> 79
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plans. The incentive and non-qualified options become exercisable as determined
by the Board of Directors, and have a term of 10 years.
Option activity, segregated into ranges of exercise prices, is summarized
as follows:
<TABLE>
<CAPTION>
WTD.-AVG.
NUMBER WTD.-AVG. WTD.-AVG. NUMBER WTD.-AVG. NUMBER EXER.
OF EXER. PRICE NUMBER EXER. PRICE OF EXER. PRICE OF PRICE
SHARES PER SHARE OF SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
--------- ----------- --------- ----------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Acquired in
connection w/the
acquisition and
recognition........ 700,000 $ 2.38
Granted.............. 47,772 $0.01 1,032,000 $20.00
Exercised............ (60,000) $ 2.38
Cancelled............ (22,000) $20.00
------ ----- ------- ------ ---------- ------ ------- ------
Outstanding at
12/31/96........... 47,772 $0.01 640,000 $ 2.38 1,010,000 $20.00
Granted.............. 1,144,000 $21.76 220,000 $28.97
Exercised............ (9,500) $ 2.38 42,666 $20.00
Cancelled............ (186,333) $18.81
------ ----- ------- ------ ---------- ------ ------- ------
Outstanding at
12/31/97........... 47,772 $0.01 630,500 $ 2.38 1,925,001 $21.16 220,000 $28.97
Granted.............. 260,000 $20.84 86,000 $28.44
Exercised............ (72,605) $ 2.38
Cancelled............ (36,000) $20.00
------ ----- ------- ------ ---------- ------ ------- ------
Outstanding at
12/31/98........... 47,772 $0.01 557,895 $ 2.38 2,149,001 $21.16 306,000 $28.82
====== ===== ======= ====== ========== ====== ======= ======
Exercisable at
12/31/98........... 47,772 $0.01 557,895 $ 2.38 737,035 $21.76 55,417 $28.89
====== ===== ======= ====== ========== ====== ======= ======
</TABLE>
The options with a $0.01 weighted-average exercise price have a
weighted-average remaining contractual life of 7.5 years. The Company recorded
compensation expense associated with this stock option grant of $131 and $306 in
1997 and 1996, respectively.
The options with a $2.38 weighted-average exercise price have a
weighted-average remaining contractual life of 6.8 years; those with a
weighted-average exercise price of $21.16 (range of $16.00-$23.63) have a
weighted-average remaining contractual life of 8.4 years; and those with a
weighted-average exercise price of $28.82 (range of $26.00-$32.13) have a
weighted-average remaining contractual life of 8.9 years.
The Company accounts for stock options issued to employees in accordance
with Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for
Stock Issued to Employees. The Company's employee stock options are issued with
exercise prices that equal the market price of the Company's common stock on the
date of grant and, consequently, no compensation expense is recognized, except
for the compensation expense discussed above relating to the options with a
$0.01 exercise price issued by IRSC prior to the merger with the Company.
The Statement of Financial Accounting Standards No. 123 (SFAS No. 123)
requires entities that account for awards for stock-based compensation to
employees in accordance with APB No. 25 to present pro forma disclosures of net
income and earnings per share as
F-15
<PAGE> 80
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
if compensation cost was measured at the date of grant based on the fair value
of the award. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate............................... 6.5% 6.5% 6.5%
Dividend yield........................................ none none none
Volatility factors.................................... 57% 43% 47%
Weighted-average expected life........................ 5 years 5 years 5 years
</TABLE>
The weighted-average fair value per option granted during 1998, 1997, and
1996, was $16.79, $10.17, and $8.65, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
net income and net income per share (diluted) would have been reduced to the
following pro forma amounts for the years ended December 31, 1998, 1997, and
1996, as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Net income
As reported............................................ $6,896 $6,101 $ 440
Pro forma.............................................. 3,424 4,037 100
Net income per share (diluted)
As reported............................................ $ 0.35 $ 0.33 $0.03
Pro forma.............................................. 0.17 0.22 0.01
</TABLE>
The above pro forma amounts reflect the effect of stock options granted
subsequent to January 1, 1996. Accordingly, the pro forma amounts may not be
representative of the future effects on reported net income and earnings per
share that will result from the future granting of stock options, since the pro
forma compensation expense is allocated over the periods in which options become
exercisable and new option awards are granted each year.
BENEFIT PLAN
During 1997, the Company adopted a 401(k) plan that is available to
substantially all of its employees. The Company provides a match of 66% of the
employees' contribution, with a maximum benefit of up to 4% of eligible
compensation in the form of Company common stock. Contribution expense was $309
and $89 in 1998 and 1997, respectively.
F-16
<PAGE> 81
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE -- RELATED PARTY
IRSC has a note receivable from a related party. The note is non-interest
bearing and is due on demand. As of December 31, 1998, the outstanding balance
was $219. The note was subsequently paid in full on March 30, 1999.
CONSULTING FEES
IRSC has a consulting agreement with an affiliate. Pursuant to the
agreement, IRSC shall pay the affiliate $28 per month for consulting services.
Additionally, IRSC shall reimburse the affiliate for certain travel and
administrative expenses incurred on behalf of IRSC. During the years ended
December 31, 1998 and 1997 IRSC paid the affiliate $375 and $365, respectively.
10. BUSINESS SEGMENTS
The Company's reportable segments, namely electronic information and patent
enforcement, are organized based on their products and services. Information
concerning the segments in which the Company operates is shown in the table
below. Operating profit is derived as total revenues less operating expenses;
interest expense and general corporate expenses have not been considered.
Identifiable assets by segment are those assets that are used in the Company's
operations in each segment. General corporate assets consist primarily of cash
and cash equivalents and short-term investments. Substantially all revenues are
derived from, and its assets located in, the United States of America.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Electronic information............................... $54,103 $37,777 $22,607
Patent enforcement................................... 6,636 6,670 2,382
------- ------- -------
Consolidated revenues.............................. $60,739 $44,447 $24,989
======= ======= =======
OPERATING PROFIT:
Electronic information............................... $ 5,252 $ 4,688 $ 97
Patent enforcement................................... 3,903 3,928 1,341
------- ------- -------
Segment operating profit............................. 9,155 8,616 1,438
Interest income (expense)............................ 2,330 1,491 (174)
General corporate expense............................ (1,471) (835) (626)
------- ------- -------
Consolidated income before income taxes............ $10,014 $ 9,272 $ 638
======= ======= =======
</TABLE>
F-17
<PAGE> 82
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS:
Electronic information............................... $33,572 $23,405 $10,266
Patent enforcement................................... 18,769 17,689 20,292
------- ------- -------
Total identifiable assets.......................... 52,341 41,094 30,558
General corporate assets............................. 40,030 45,261 263
------- ------- -------
Consolidated assets................................ $92,371 $86,355 $30,821
======= ======= =======
CAPITAL EXPENDITURES:
Electronic information............................... $14,530 $ 6,942 $ 5,348
Patent enforcement................................... 7 7 23
------- ------- -------
Consolidated capital expenditures.................. $14,537 $ 6,949 $ 5,371
======= ======= =======
DEPRECIATION AND AMORTIZATION OF IDENTIFIABLE ASSETS:
Electronic information............................... $ 6,313 $ 4,107 $ 2,505
Patent enforcement................................... 1,709 1,695 628
------- ------- -------
Consolidated depreciation and amortization......... $ 8,022 $ 5,802 $ 3,133
======= ======= =======
</TABLE>
11. SUBSEQUENT EVENTS
On May 6, 1999, the Company entered into an Agreement and Plan of
Reorganization with IRSC and its shareholders pursuant to which the Company
merged with IRSC in a business combination accounted for as a pooling of
interests. The Company issued 432,346 shares of its common stock to effect the
merger which closed on May 6, 1999. The accompanying consolidated financial
statements and notes thereto have been restated to reflect the combined
financial condition, results of operations and cash flows of the Company and
IRSC. Results of operations for the separate companies prior to the combination
are as follows:
<TABLE>
<CAPTION>
COMPANY
PRIOR TO
YEAR ENDED DECEMBER 31: COMBINATION IRSC COMBINED
- ----------------------- ----------- ------ --------
<S> <C> <C> <C>
1998:
Total revenues and royalties...................... $53,549 $7,190 $60,739
Net income........................................ 6,702 194 6,896
1997:
Total revenues and royalties...................... $37,546 $6,901 $44,447
Net income........................................ 5,998 103 6,101
1996:
Total revenues and royalties...................... $18,703 $6,286 $24,989
Net income (loss)................................. 519 (79) 440
</TABLE>
On September 23, 1999, the Company acquired KnowX.com and Informed for $25
million in cash and warrants to acquire 329,172 shares of the Company's common
F-18
<PAGE> 83
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock. The warrants have an exercise price of $52.50 per share and are
exercisable at any time until March 23, 2001. The acquisition agreement contains
customary representations and warranties and indemnification provisions. The
transaction was accounted for using the purchase method. In connection with the
Company's acquisition of KnowX.com and Informed, West Publishing (the parent of
the seller) has entered into a non-competition agreement with the Company. Also
in connection with the acquisition, the Company entered into employment
agreements with certain key employees of KnowX.com. In addition, the Company
entered into a transition service agreement with West Publishing which will
allow the Company to use West Publishing's data to support the KnowX.com and
Informed products for a period of up to one year, after which the Company will
only use its databases. The transition services agreement will also require West
Publishing to provide the Company with technical support during such transition
period.
F-19
<PAGE> 84
DBT ONLINE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
1999 1998
----------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 25,002 $21,324
Accounts receivable, less allowance: June 30,
1999 -- $405
December 31, 1998 -- $399.......................... 12,074 9,409
Short-term investments............................... 24,651 25,840
Prepaid expenses and other current assets............ 2,562 2,422
Prepaid income taxes................................. 494 --
-------- -------
Total current assets............................... 64,783 58,995
Property and equipment, net.......................... 21,283 18,806
Patents, less amortization: June 30, 1999 -- $4,860
December 31, 1998 -- $4,012........................ 8,983 9,830
Goodwill, less amortization: June 30, 1999 -- $1,597
December 31, 1998 -- $1,170........................ 5,335 4,637
Other assets......................................... 240 103
-------- -------
Total Assets....................................... $100,624 $92,371
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities............. $ 6,367 $ 3,273
Due to other patent interest holders................. 1,781 1,394
Income taxes payable................................. -- 406
-------- -------
Total current liabilities.......................... 8,148 5,073
Deferred income taxes................................ 3,154 3,405
Commitments and contingencies........................ -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value. 5,000 shares
authorized; no shares issued or outstanding........ -- --
Common stock, $.10 par value. 100,000 shares
authorized; 19,003 shares and 18,906 shares issued
and outstanding at June 30, 1999 and December 31,
1998, respectively................................. 1,900 1,890
Additional paid-in capital........................... 71,515 69,559
Retained earnings.................................... 16,130 12,444
Accumulated other comprehensive loss................. (223) --
-------- -------
Total stockholders' equity......................... 89,322 83,893
-------- -------
Total Liabilities and Stockholders' Equity......... $100,624 $92,371
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
F-20
<PAGE> 85
DBT ONLINE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues.............................................. $34,595 $25,401
Patent royalties...................................... 3,149 3,460
------- -------
Total revenues and royalties........................ 37,744 28,861
------- -------
Cost of revenues...................................... 15,181 12,445
Sales and marketing................................... 5,331 3,378
Research and development.............................. 2,201 1,297
General and administrative............................ 9,650 7,781
Merger and acquisition costs.......................... 817 --
------- -------
Total expenses...................................... 33,180 24,901
------- -------
Income from operations................................ 4,564 3,960
Interest income, net.................................. 903 1,104
------- -------
Income before income taxes............................ 5,467 5,064
Provision for income taxes............................ 1,862 1,704
------- -------
Net income.......................................... $ 3,605 $ 3,360
======= =======
Net income per common share (basic)................... $ 0.19 $ 0.18
======= =======
Weighted average shares outstanding (basic)........... 18,947 18,895
======= =======
Net income per common share (diluted)................. $ 0.18 $ 0.17
======= =======
Weighted average shares outstanding (diluted)......... 19,972 19,761
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
F-21
<PAGE> 86
DBT ONLINE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 3,605 $ 3,360
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 4,133 3,571
Deferred taxes...................................... (251) (251)
Stock issued for employee benefit plan.............. 142 242
Changes in operating assets and liabilities:
Accounts receivable................................. (2,660) (1,585)
Prepaid expenses and other current assets........... (133) (533)
Accounts payable and accrued liabilities............ 2,973 383
Due to other patent interest holders................ 387 285
Income taxes payable................................ (900) (239)
------- -------
Net cash provided by operating activities........ 7,296 5,233
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchased...................... (5,231) (8,014)
Cash paid for acquisition, net of cash acquired....... (436) --
(Increase) decrease in other assets................... (133) 238
Proceeds from maturity of investments................. 966 7,309
------- -------
Net cash used in investing activities............ (4,834) (467)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options............... 1,823 172
Payments on long-term debt............................ (607) --
------- -------
Net cash provided by financing activities........ 1,216 172
------- -------
Net increase in cash and cash equivalents........ 3,678 4,938
Cash and cash equivalents at beginning of period...... 21,324 7,913
------- -------
Cash and cash equivalents at end of period............ $25,002 $12,851
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
F-22
<PAGE> 87
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
The following should be read in conjunction with the consolidated financial
statements and the notes thereto, for the year ended December 31, 1998.
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
DBT Online, Inc. and its wholly owned subsidiaries (the "Company"). The interim
consolidated financial statements as of June 30, 1999 and for the six months
ended June 30, 1999 and 1998 are unaudited. All significant intercompany
accounts and transactions have been eliminated. The accompanying consolidated
financial statements reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods presented. Such adjustments
consist solely of normal recurring accruals. Results for the interim periods are
not necessarily indicative of results for a full year.
NOTE 2. BUSINESS COMBINATIONS
On May 26, 1999, the Company acquired all of the common stock of WinSHAPES
for approximately $442 in cash plus the payment of liabilities in the amount of
$704. WinSHAPES is a company engaged in the development of software that
converts data into graphic illustrations that visualize interrelationships among
people, businesses, vehicles and other assets. The transaction was accounted for
as a purchase and the Company's results of operations include the results of
WinSHAPES since the date of acquisition. Goodwill resulting from this
transaction is $1,125, and is being amortized on a straight-line basis over
seven years. Pro forma operating information is not provided for this
acquisition because its effects on the results of operations are not material.
On May 6, 1999, the Company acquired I.R.S.C., Inc. ("IRSC") pursuant to
the merger (the "IRSC Merger") of a wholly owned subsidiary of the Company, with
and into IRSC. Upon consummation of the IRSC Merger, IRSC became a wholly owned
subsidiary of the Company. IRSC is a provider of court records and other public
information used to conduct pre-employment screening and other anti-fraud due
diligence services for business customers.
F-23
<PAGE> 88
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
As a result of the IRSC Merger, each share of IRSC common stock was
converted into the right to receive approximately 1.43 shares of Company common
stock or 432,346 common shares of the Company in the aggregate. The IRSC Merger
was accounted for as a pooling-of-interests and, accordingly the Company's
financial statements for periods prior to the IRSC Merger have been restated to
include the results of IRSC for all periods presented. Details of the results of
operations of the Company and IRSC for the three months ended March 31, 1999
(the end of the interim period nearest the date that the combination was
consummated) and the six months ended June 30, 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, 1999 JUNE 30, 1998
-------------- -------------
<S> <C> <C>
Revenues:
Company.................................................. $16,442 $25,470
IRSC..................................................... 1,746 3,391
------- -------
Combined....................................... $18,188 $28,861
======= =======
Net income:
Company.................................................. $ 1,871 $ 3,308
IRSC..................................................... 79 52
------- -------
Combined....................................... $ 1,950 $ 3,360
======= =======
</TABLE>
NOTE 3. COMPREHENSIVE INCOME
Comprehensive income for the three and six months ended June 30, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income.......................................... $1,655 $1,781 $3,605 $3,360
Adjustment to reconcile net income to total
comprehensive income:
Unrealized loss on investments...................... (194) (223)
------ ------ ------ ------
Comprehensive income................................ $1,461 $1,781 $3,382 $3,360
====== ====== ====== ======
</TABLE>
NOTE 4. BUSINESS SEGMENTS
The Company's reportable segments, namely electronic information and patent
enforcement, are organized based on their products and services. Information
concerning the segments in which the Company operates is shown in the table
below. Operating profit is derived as total revenues less operating expenses;
interest expense and general corporate expenses have not been considered.
Identifiable assets by segment are those assets that are used in the Company's
operations in each segment. General corporate assets consist
F-24
<PAGE> 89
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
primarily of cash and cash equivalents and short-term investments. Substantially
all revenues are derived from, and its assets located in, the United States of
America.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
-------- ------------
<S> <C> <C>
REVENUES:
Electronic information.................................. $ 34,595 $25,401
Patent enforcement...................................... 3,149 3,460
-------- -------
Consolidated revenues................................. $ 37,744 $28,861
======== =======
OPERATING PROFIT:
Electronic information.................................. $ 3,186 $ 2,534
Patent enforcement...................................... 1,771 2,032
-------- -------
Segment operating profit................................ 4,957 4,566
Interest income......................................... 903 1,104
General corporate expense............................... (393) (606)
-------- -------
Consolidated income before income taxes............... $ 5,467 $ 5,064
======== =======
CAPITAL EXPENDITURES:
Electronic information.................................. $ 5,229 $ 8,007
Patent enforcement...................................... 2 7
-------- -------
Consolidated capital expenditures..................... $ 5,231 $ 8,014
======== =======
DEPRECIATION AND AMORTIZATION OF IDENTIFIABLE ASSETS:
Electronic information.................................. $ 3,280 $ 2,717
Patent enforcement...................................... 853 854
-------- -------
Consolidated depreciation and amortization............ $ 4,133 $ 3,571
======== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
IDENTIFIABLE ASSETS:
Electronic information.................................. $ 38,668 $33,572
Patent enforcement...................................... 16,065 18,769
-------- -------
Total identifiable assets............................. 54,733 52,341
General corporate assets................................ 45,891 40,030
-------- -------
Consolidated assets................................... $100,624 $92,371
======== =======
</TABLE>
NOTE 5. LITIGATION
Our IRSC subsidiary, its former chairman and principal shareholder and DBT
Online are parties to a lawsuit against a group of eight companies that used to
do business with
F-25
<PAGE> 90
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
IRSC. These eight companies allege that IRSC was obligated to enter into a
merger agreement with them and that the former chairman of IRSC was obligated to
work for the company surviving the merger. The companies also allege that we
interfered with the obligations of IRSC and its former chairman by acquiring
IRSC. When these companies threatened to sue, we filed a lawsuit against them in
federal court to establish jurisdiction of the action in Florida. We believe we
have meritorious defenses to these companies' claims.
F-26
<PAGE> 91
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of Information America, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations and of cash flows present fairly, in all material respects, the
financial position of the Online Public Records Business (a division of
Information America, Inc. including the KnowX.com and Informed product lines) at
December 31, 1998 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
The Online Public Records Business is a member of a group of affiliated
companies and, as disclosed in the financial statements, has extensive
transactions and relationships with members of the group. Because of these
relationships, it is possible that the terms of these transactions are not the
same as those that would result from transactions among wholly unrelated
parties.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 9, 1999
F-27
<PAGE> 92
ONLINE PUBLIC RECORDS BUSINESS
(A DIVISION OF INFORMATION AMERICA, INC.)
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 18, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash................................................... $ -- $ --
Accounts receivable, less an allowance for doubtful
accounts of $274 and $91 as of June 18, 1999 and
December 31, 1998, respectively...................... 1,133 598
Prepaids............................................... 112 --
------ ----
Total current assets................................. 1,245 598
Property and equipment, net (Note 2)................... 234 175
------ ----
Total assets......................................... $1,479 $773
====== ====
LIABILITIES AND NET INVESTMENT OF PARENT
Accrued advertising expenses........................... $ 778 $488
Accrued royalties...................................... 294 160
Accrued workforce related costs (Note 5)............... 47 69
------ ----
Total current liabilities............................ 1,119 717
Net investment of Parent (Note 3)...................... 360 56
------ ----
Total liabilities and net investment of Parent....... $1,479 $773
====== ====
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE> 93
ONLINE PUBLIC RECORDS BUSINESS
(A DIVISION OF INFORMATION AMERICA, INC.)
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED FOR THE
------------------- YEAR ENDED
JUNE 18, JUNE 19, DECEMBER 31,
1999 1998 1998
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Online Public Records (Informed)................. $ 2,742 $ 2,678 $ 5,507
KnowX............................................ 3,485 823 2,884
------- ------- -------
Total revenues.............................. $ 6,227 $ 3,501 $ 8,391
------- ------- -------
EXPENSES (NOTE 4):
Cost of revenue:
Online Public Records (Informed)............... 1,665 1,472 3,034
KnowX.......................................... 1,283 674 1,574
Selling and marketing............................ 2,098 1,075 2,574
General and administrative....................... 2,282 1,150 3,353
------- ------- -------
Total expenses.............................. 7,328 4,371 10,535
------- ------- -------
Operating loss................................... $(1,101) $ (870) $(2,144)
Interest expense (Note 4)........................ 71 86 161
------- ------- -------
Loss before income taxes......................... (1,172) (956) (2,305)
Income taxes..................................... -- -- --
------- ------- -------
Net loss.................................... $(1,172) $ (956) $(2,305)
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE> 94
ONLINE PUBLIC RECORDS BUSINESS
(A DIVISION OF INFORMATION AMERICA, INC.)
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED FOR THE
------------------- YEAR ENDED
JUNE 18, JUNE 19, DECEMBER 31,
1999 1998 1998
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(1,172) $ (956) $(2,305)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation expense........................... 87 71 147
Provision for doubtful accounts................ 272 -- 95
Changes in working capital:
Increase in accounts receivable................ (807) (257) (153)
Increase in prepaids........................... (112) -- --
Increase/(decrease) in accrued workforce
related costs............................... (22) 80 38
Increase in accrued royalties.................. 134 105 65
Increase/(decrease) in accrued advertising
expense..................................... 290 (5) 413
------- ------- -------
NET CASH USED BY OPERATING ACTIVITIES....... (1,330) (962) (1,700)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............... (146) -- --
------- ------- -------
NET CASH USED BY INVESTING ACTIVITIES....... (146) -- --
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions, net (Note 3).............. 1,476 1,268 1,502
------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES... 1,476 1,268 1,502
------- ------- -------
Net change in cash............................... -- 306 (198)
Cash -- beginning of period...................... -- 198 198
------- ------- -------
CASH -- END OF PERIOD............................ $ -- $ 504 $ --
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE> 95
ONLINE PUBLIC RECORDS BUSINESS
(A DIVISION OF INFORMATION AMERICA, INC.)
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Online Public Records Business (the Business) is a division of
Information America, Inc. (the Parent) which in turn is a wholly owned
subsidiary of the ultimate parent, The Thomson Corporation. Information America,
Inc. is currently negotiating the sale of the Business.
The Business offers its customers two core product lines: Online Public
Records, a comprehensive online search service that identifies relationships
between people, assets and businesses focused on corporate customers accessible
through the Informed interface; and KnowX, a service which provides Internet
delivery of public records to the small business and the consumer market.
BASIS OF PRESENTATION
These financial statements present the financial position and results of
operations of Online Public Records and KnowX as they operated as units of
Information America, Inc., including adjustments necessary for a fair
presentation of the Business. All significant intercompany transactions and
balances have been eliminated. The financial statements presented may not be
indicative of the results that would have been achieved had the Business
operated as an unaffiliated entity. Refer to Note 4, Related Party Transactions.
INTERIM FINANCIAL DATA (UNAUDITED)
The financial information presented as of June 18, 1999, and for each of
the six month periods ended June 18, 1999 and June 19, 1998, including related
information set forth in the notes to financial statements, is unaudited. In the
opinion of management, this financial information reflects the adjustments
necessary for a fair presentation of the financial information for such periods.
These adjustments consist of normal, recurring items. The results of operations
for the six month period ended June 18, 1999 should not necessarily be taken as
indicative of the results of operations that may be expected for the entire
year.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
F-31
<PAGE> 96
ONLINE PUBLIC RECORDS BUSINESS
(A DIVISION OF INFORMATION AMERICA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Business' financial instruments consist primarily of short-term trade
receivables and payables for which the current carrying amount approximates fair
market value.
REVENUE RECOGNITION
Online Public Records utilizes high speed search and retrieval technology
to provide its customers with access to public record information. The service
is available to customers through dial-up interfaces or through the Internet
using the Informed interface. Customers are charged on a monthly basis for their
usage of the service.
KnowX is an Internet-based public information service targeting
small-office/home office users and consumers. Reported instantaneously via its
Web interface, searches are conducted in real time and sold via credit card.
In both cases, revenue is recognized at the time of delivery of online
information.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
The costs of additions and improvements are capitalized while maintenance and
repairs are charged to expense when incurred. Depreciation is provided using the
straight-line method, principally over the estimated useful lives of the related
assets ranging from three to five years.
Management reviews the carrying value of property and equipment for
impairment whenever events or changes in circumstances indicate that it may not
be recoverable. When events or circumstances so indicate, the associated
long-term assets are assessed for recoverability in accordance with FAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and adjusted accordingly.
ADVERTISING COSTS
Advertising costs, primarily consisting of Internet banner advertising,
sales brochures and direct marketing are expensed as incurred or the first time
the advertising takes place. These costs, recorded with selling and marketing
expense, amounted to approximately $845 for the year ended December 31, 1998.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which potentially subject the Business to
concentrations of credit risk consist principally of trade accounts receivables;
however, this risk is limited by the large number of customers in the Business'
customer base. One corporate customer accounted for approximately $880 or 10.5%
of total revenues in 1998. There are no other individual customers which
represent more than 10% of revenue.
F-32
<PAGE> 97
ONLINE PUBLIC RECORDS BUSINESS
(A DIVISION OF INFORMATION AMERICA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
COMPREHENSIVE INCOME
The Business does not have any items that would be classified as other
comprehensive income.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1998 consists of the following:
<TABLE>
<S> <C>
Computer hardware and software.............................. $ 413
Office furniture and equipment.............................. 73
-----
486
Less: Accumulated depreciation.............................. (311)
-----
Total Property and equipment, net......................... $ 175
=====
</TABLE>
NOTE 3. NET INVESTMENT OF PARENT
Net operating losses funded by the Parent are invested in the Business and
have been reflected as Net Investment of Parent in the Balance Sheet. Net
contributions from the Parent consist of both cash and non-cash amounts. Changes
in the net investment of Parent (divisional equity) were as follows:
<TABLE>
<S> <C>
Net investment of parent -- December 31, 1997............... $ 859
Net loss.................................................... (2,305)
Net contributions from parent............................... 1,502
-------
Net investment of parent -- December 31, 1998............... 56
-------
Net loss (unaudited)........................................ (1,172)
Net contributions from parent (unaudited)................... 1,476
-------
Net investment of parent -- June 18, 1999 (unaudited)....... $ 360
=======
</TABLE>
The Parent confirmed their present intention to provide sufficient
financial resources to the Business to enable it to meet its obligations as they
fall due and carry on its business without significant curtailment of operations
as long as it continues to be a wholly owned division of Information America,
Inc.
NOTE 4. RELATED PARTY TRANSACTIONS
Services provided to the Business by the Parent include expenses incurred
and paid by the Parent on the Business's behalf, charges for periodic Parent
services provided at rates which management considers to reflect the incremental
cost of providing these services and allocations of costs based on relative
activity levels. These cost allocations including corporate management, data
center costs, sales and marketing and other general and administrative expenses
are based on a variety of factors including sales volume, and time and effort.
F-33
<PAGE> 98
ONLINE PUBLIC RECORDS BUSINESS
(A DIVISION OF INFORMATION AMERICA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
The Business uses a centralized approach to cash management and financing
of the operations. There is no specific debt related to the Business; the
Business' financing requirements are met by cash transactions with the Parent
and are reflected in the Net Investment of Parent on the balance sheet. The
Parent charges interest on its net investment in the Business based on
reasonable cost of capital. Total allocated interest charges for the year ended
December 31, 1998 approximated $161.
The Business is part of a consolidated group and as such has extensive
dealings with related entities. Management considers the intercompany charges,
including the allocation of common costs from the Parent, to be reasonable.
However, the terms of transactions were determined between related parties and
may, therefore, differ from terms which would have occurred between wholly
unrelated parties and may also differ from the costs which would have been
incurred had the Business operated as a completely autonomous entity.
Costs related to functions performed by the Parent and certain other costs
which are attributable to the Business are included in the financial statements
of the Business as follows:
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED FOR THE
------------------- YEAR ENDED
JUNE 18, JUNE 19, DECEMBER 31,
1999 1998 1998
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
COST OF REVENUE:
Royalties........................................ $ 794 $ 732 $1,501
Database center and office facilities............ 1,416 1,210 2,505
------ ------ ------
Total cost of revenue.......................... $2,210 $1,942 $4,006
====== ====== ======
OPERATING EXPENSES:
Sales and marketing.............................. $ 582 $ 819 $1,562
Executive management, finance, human resources
and other administrative support services...... 793 536 1,178
------ ------ ------
Total operating expenses....................... $1,375 $1,355 $2,740
====== ====== ======
</TABLE>
Revenues from related parties for the year ended December 31, 1998 total
approximately $168.
NOTE 5. WORKFORCE
The Business has no legal employees. Employees of Information America, Inc.
provide services to the Business. The associated salary, commission, and bonus
amounts incurred by these related parties are charged to the Business based upon
actual amounts incurred. The costs of any fringe benefits provided to the
workforce by their employer,
F-34
<PAGE> 99
ONLINE PUBLIC RECORDS BUSINESS
(A DIVISION OF INFORMATION AMERICA, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
including any related workforce taxes, are charged to the Business based upon
estimates of actual amounts incurred. Workforce charges have been included in
the allocated costs in Note 4 above.
NOTE 6. INCOME TAXES
The Business is part of a consolidated tax group with its Parent. Under the
intergroup tax sharing arrangements, taxes are generally allocated as if the
Business filed a separate tax return. No taxes have been provided on the
Business' results for the year ended December 31, 1998 due to the loss for the
year.
Additionally, any deferred tax asset which would arise if the Business was
a separate legal entity would be fully provided for as of December 31, 1998.
This is based upon management's best estimate, based upon the weight of
available evidence as prescribed in FAS 109, of the amounts of deferred tax
assets which, more likely than not (a likelihood of slightly more than 50%) will
not be realized.
F-35
<PAGE> 100
(DBT ONLINE LOGO)
