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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-1
FOR THE ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-13333
DBT ONLINE, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
PENNSYLVANIA 85-0439411
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5550 W. FLAMINGO ROAD, SUITE B-5
LAS VEGAS, NEVADA 89103
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (702) 257-1112
Securities Registered Pursuant to Section 12(b) of the Act:
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<CAPTION>
Title of Each Class Name of Each Exchange On Which Registered
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<S> <C>
COMMON STOCK,
PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
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Securities Registered Pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
The undersigned registrant amends the following items on its Annual Report
on Form 10-K for the year ended December 31, 1998:
Part II. Items 6, 7 and 8 and Part IV. Item 14 are hereby included in such
Annual Report previously filed on March 30, 1999.
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PART II
Part II is amended to include the following:
ITEM 6. SELECTED FINANCIAL 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 report 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
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.
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<CAPTION>
YEAR ENDED DECEMBER 31,
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1994 1995(1) 1996(2) 1997 1998
------ ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $6,493 $13,142 $22,607 $ 37,777 $54,103
Royalties................................................. -- -- 2,382 6,670 6,636
------ ------- ------- -------- -------
Total revenues and royalties...................... 6,493 13,142 24,989 44,447 60,739
------ ------- ------- -------- -------
Cost of revenues.......................................... 856 3,372 11,418 17,957 26,152
Sales and marketing....................................... 287 1,026 2,434 4,367 6,508
Research and development.................................. 553 1,017 2,052 2,364 3,078
General and administrative................................ 4,189 6,870 8,273 11,978 17,317
Loss on IRB transaction................................... -- 1,660 -- -- --
Merger and acquisition costs.............................. -- -- -- -- --
------ ------- ------- -------- -------
Total expenses.................................... 5,885 13,945 24,177 36,666 53,055
------ ------- ------- -------- -------
Income (loss) from operations............................. 608 (803) 812 7,781 7,684
Interest income (expense), net............................ (15) (76) (174) 1,491 2,330
------ ------- ------- -------- -------
Income (loss) before income taxes......................... 593 (879) 638 9,272 10,014
Provision for income taxes................................ 51 239 198 3,171 3,118
------ ------- ------- -------- -------
Net income (loss)......................................... $ 542 $(1,118) $ 440 $ 6,101 $ 6,896
====== ======= ======= ======== =======
Net income (loss) per common share:
Basic................................................... $ 0.07 $ (0.12) $ 0.04 $ 0.35 $ 0.36
====== ======= ======= ======== =======
Diluted................................................. $ 0.07 $ (0.12) $ 0.03 $ 0.33 $ 0.35
====== ======= ======= ======== =======
Weighted average shares outstanding:
Basic................................................... 8,308 9,268 12,561 17,568 18,900
====== ======= ======= ======== =======
Diluted................................................. 8,308 9,268 12,835 18,495 19,612
====== ======= ======= ======== =======
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<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
1994 1995 1996 1997 1998
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(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 337 $1,826 $7,149 $7,913 $ 21,324
Short term investments...................................... -- -- -- 44,207 25,840
Working capital............................................. 350 712 4,497 53,638 53,922
Total assets................................................ 2,421 7,663 30,821 86,355 92,371
Total debt.................................................. 993 2,859 3,073 -- --
Shareholders' equity........................................ 954 3,074 18,932 76,583 83,893
</TABLE>
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(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.
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ITEM 7. 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 report. The following discussion 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.
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. PEG exploits and enforces two partially-owned laser
patents, generating its revenues through patent royalties.
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 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.
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.
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
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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 $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.
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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.
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
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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 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.
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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 $9,170 for the year ended December 31,
1998, compared to $9,599 for the same period in 1997. We had working capital at
December 31, 1998 of $53,922 (including cash, cash equivalents and short-term
investments of $47,164). We expect to fund future working capital requirements
with our existing cash and short-term investment balances, together with cash
generated from operations.
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-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 have agreed to acquire 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
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substantially Year 2000 compliant. In addition, the agreement with Information
America contains a representation that all of the technology included in the
assets we are purchasing 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
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.
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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.
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.
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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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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO FINANCIAL STATEMENTS
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CONSOLIDATED FINANCIAL STATEMENTS OF DBT ONLINE, INC. AND
SUBSIDIARIES FOR THE
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Independent Auditors' Reports............................... 11
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... 13
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.......................... 14
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996...... 15
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... 16
Notes to Consolidated Financial Statements.................. 17
FINANCIAL STATEMENT SCHEDULE*:
II Valuation and Qualifying Accounts........................ 28
</TABLE>
* All other Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore not included
herein.
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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 (May 6, 1999 as to the effects of the
business combination described in Note 11)
11
<PAGE> 13
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
12
<PAGE> 14
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.
13
<PAGE> 15
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.
14
<PAGE> 16
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.
15
<PAGE> 17
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.
16
<PAGE> 18
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
17
<PAGE> 19
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
18
<PAGE> 20
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.
19
<PAGE> 21
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>
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
20
<PAGE> 22
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
21
<PAGE> 23
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.
22
<PAGE> 24
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
23
<PAGE> 25
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
24
<PAGE> 26
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.
25
<PAGE> 27
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>
26
<PAGE> 28
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 EVENT
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>
27
<PAGE> 29
DBT ONLINE, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED TO WRITE-OFFS
BEGINNING STATEMENT OF OTHER AND OTHER ENDING
DESCRIPTION BALANCE OPERATIONS INCREASES ADJUSTMENTS BALANCE
- ----------- --------- ------------ --------- ----------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowances for uncollectible
accounts.................... $ 17 $ 50 $200(1) $ (17) $250
==== ==== ==== ===== ====
Year ended December 31, 1997
Allowances for uncollectible
accounts.................... $250 $115 $ 25(2) $ (40) $350
==== ==== ==== ===== ====
Year ended December 31, 1998
Allowances for uncollectible
accounts.................... $350 $159 $ 0 $(110) $399
==== ==== ==== ===== ====
</TABLE>
(1) Represents the allowance established in connection with the acquisition of
Patlex Corporation.
(2) Represents the allowance established in connection with the acquisition of
The Information Connectivity Group, Inc.
28
<PAGE> 30
PART IV
Part IV is amended to include the following:
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
1. Financial Statements
The financial statements required by this item are included and
listed on the accompanying "Index to Financial Statements" in Part
Two, Item 8 of this Report.
2. Financial Statements Schedules
The Financial Statements Schedules required by this item are included
and listed in the accompanying "Index to Financial Statements" in
Part Two, Item 8 of this Report.
3. Exhibits
The following is a list of all exhibits filed as a part of this
Report:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
- ------------ -----------------------
<S> <C>
3(i)*** Amended and Restated Articles of Incorporation
3(ii)*** Amended and Restated Bylaws
10(i)* Employment Agreement dated March 11, 1990, between Patlex
and Frank Borman****
10(ii)++ Employment Agreement dated August 15, 1997, between DTB
Online, Inc. and Charles A. Lieppe***
10(iii)+ Employment Agreement dated September 14, 1992, between
Patlex and J. Henry Muetterties***
10(iv)+ Security and Escrow Agreement dated September 29, 1992,
between Patlex and NGN Acquisition Corporation
10(v)+ Standard Form of Licensing Agreement
10(vi)+ Purchase Agreement dated December 11, 1979, between Patlex
and Gordon Gould
10(vii)+ Agreement dated January 31, 1982, among Patlex, Refac
Technology Development Corporation, Refac International
Ltd., Gordon Gould, NGN Acquisition Corporation, and the
partnership of Lerner, David, Littenberg & Samuel
10(viii)+ Agreement dated October 1, 1984, among Patlex, Refac
Technology Development Corporation, East West Trade
Services, Ltd., and Refac International, Ltd.
10(ix)+ Agreement dated 1986 among Patlex and NGN Acquisition
Corporation, Gordon Gould, and Apollo Lasers, Inc.
10(x)+ Letter of Clarification dated January 31, 1990, among
Patlex, Gordon Gould, and NGN Acquisition Corporation
10(xi)+ Stock Purchase Agreement dated May 14, 1991, among Patlex,
Sydney M. Irmas, and certain other shareholders
10(xii)+++ Amended and Restated Stock Option Plan***
10(xiii)** Lease (For Boca Raton, Florida Location)
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
- ------------ -----------------------
<S> <C>
10(xiv)** Employment Agreement dated February 4, 1998, between DTB
Online, Inc. and Kevin Barr****
21** Subsidiaries
23.1* Consent and Report on Schedule of Deloitte & Touche LLP
23.2* Consent of Corbin & Wertz
27* Financial Data Schedule (for Securities and Exchange
Commission use only)
</TABLE>
- -------------------------
* Filed herewith.
** Previously filed.
*** Incorporated by reference to the Company's Registration Statement on Form
S-4 (File No. 333-2000).
**** Management contract or compensatory plan.
+ Incorporated by reference to the Form 10-KSB of Patlex Corporation for the
year ended June 30, 1995.
++ Incorporated by reference to the Company's Form 10-Q for the period ended
September 30, 1997.
+++ Incorporated by reference to the Company's Registration Statement on Form
S-8 (File No. 333-41313) filed with the Securities and Exchange Commission
on December 1, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter of
the period covered by this Report.
30
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DBT ONLINE, INC.
(Registrant)
By: /s/ TIMOTHY M. LEONARD
-----------------------------------
Timothy M. Leonard
Vice President, Finance, Treasurer
and
Chief Financial Officer
31
<PAGE> 33
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
23.1 -- Consent and Report on Schedule of Deloitte & Touche LLP
23.2 -- Consent of Corbin & Wertz
</TABLE>
32
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholders of DBT Online, Inc. and subsidiaries:
We consent to the incorporation by reference in Registration Statement No.'s
333-11235 and 333-41313 of DBT Online, Inc. on Form S-8 of our report dated
February 15, 1999 (May 6, 1999 as to the effects of the business combination
described in Note 11), appearing in this Annual Report on Form 10-K/A-1 of DBT
Online, Inc. for the year ended December 31, 1998.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the consolidated financial statement
schedule of DBT Online, Inc., and subsidiaries listed in Item 8. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
September 10, 1999
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors of
DBT Online, Inc.
We have issued our reports dated August 12, 1999 regarding the consolidated
financial statements of I.R.S.C., Inc. and subsidiaries for each of the three
years in the period ended December 31, 1998, appearing in this Annual Report on
Form 10-K/A of DBT Online, Inc. for the year ended December 31, 1998. We hereby
consent to the incorporation by reference of said reports in the Registration
Statements of DBT Online, Inc. on Form S-8 (Registration No.'s 333-11235 and
333-41313).
CORBIN & WERTZ
Irvine, California
September 10, 1999
