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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-13333
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DBT ONLINE, INC.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 85-0439411
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
5550 W. FLAMINGO ROAD, SUITE B-5
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(Address of Principal Executive Offices)
LAS VEGAS, NEVADA 89103
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(702) 257-1112
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter periods that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
The number of common shares outstanding as of September 30, 1999 was 19,084,486.
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DBT ONLINE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998...................................................................... 3
Consolidated Statements of Operations for the Three Months Ended September 30, 1999
and 1998................................................................................... 4
Consolidated Statements of Operations for the Nine Months Ended September 30, 1999
and 1998................................................................................... 5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999
and 1998................................................................................... 6
Notes to Consolidated Financial Statements.................................................... 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................ 11
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS........................................................................ 21
Item 2. CHANGES IN SECURITIES.................................................................... 21
Item 3. DEFAULTS UPON SENIOR SECURITIES.......................................................... 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................... 21
Item 5. OTHER INFORMATION........................................................................ 21
Item 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................... 21
Signature............................................................................................... 23
EXHIBIT
Exhibit 27.1 Financial Data Schedule.......................................................... E-1
</TABLE>
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Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
DBT Online, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
At September 30, At December 31,
1999 1998
---------------- ---------------
(As restated, see Note 7)
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,394 $ 21,324
Accounts receivable, less allowance: September 30, 1999 - $741
December 31, 1998 - $399 12,501 9,409
Short-term investments 18,773 25,840
Prepaid expenses and other current assets 3,247 2,422
Prepaid income taxes 229
--------- ---------
Total current assets 42,144 58,995
Property and equipment, net 23,329 18,806
Patents, less amortization: September 30, 1999 - $5,284
December 31, 1998 - $4,012 8,559 9,830
Goodwill, less amortization: September 30, 1999 - $1,883
December 31, 1998 - $1,170 29,112 4,637
Other assets 129 103
--------- ---------
TOTAL ASSETS $ 103,273 $ 92,371
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 5,839 $ 3,273
Due to other patent interest holders 1,780 1,394
Income taxes payable 406
--------- ---------
Total current liabilities 7,619 5,073
DEFERRED INCOME TAXES 3,026 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
19,084 shares and 18,906 shares issued and outstanding
at September 30, 1999 and December 31, 1998, respectively 1,909 1,890
Additional paid-in capital 74,907 69,559
Retained earnings 16,093 12,444
Accumulated other comprehensive loss (281)
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Total stockholders' equity 92,628 83,893
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 103,273 $ 92,371
========= =========
</TABLE>
See notes to consolidated financial statements.
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DBT Online, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
--------- ----------
(As restated, see Note 7)
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 17,933 $ 13,672
Patent royalties 1,532 1,693
-------- --------
Total revenues and royalties 19,465 15,365
-------- --------
Cost of revenues 7,775 6,146
Sales and marketing 3,443 1,802
Research and development 1,200 771
General and administrative 6,841 4,698
-------- --------
Total expenses 19,259 13,417
-------- --------
Income from operations 206 1,948
Interest income, net 419 714
-------- --------
Income before income taxes 625 2,662
Provision for income taxes 662 902
-------- --------
Net (loss) income $ (37) $ 1,760
======== ========
Net (loss) income per common share (basic) $ (0.00) $ 0.09
======== ========
Weighted average shares outstanding (basic) 19,043 18,906
======== ========
Net (loss) income per common share (diluted) $ (0.00) $ 0.09
======== ========
Weighted average shares outstanding (diluted) 19,043 19,487
======== ========
</TABLE>
See notes to consolidated financial statements.
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DBT Online, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1999 1998
-------- ----------
(As restated, see Note 7)
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $52,528 $39,073
Patent royalties 4,681 5,153
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Total revenues and royalties 57,209 44,226
------- -------
Cost of revenues 22,956 18,591
Sales and marketing 8,774 5,180
Research and development 3,401 2,068
General and administrative 16,491 12,479
Merger and acquisition costs 817
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Total expenses 52,439 38,318
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Income from operations 4,770 5,908
Interest income, net 1,322 1,818
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Income before income taxes 6,092 7,726
Provision for income taxes 2,524 2,606
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Net income $ 3,568 $ 5,120
======= =======
Net income per common share (basic) $ 0.19 $ 0.27
======= =======
Weighted average shares outstanding (basic) 18,979 18,899
======= =======
Net income per common share (diluted) $ 0.18 $ 0.26
======= =======
Weighted average shares outstanding (diluted) 20,039 19,667
======= =======
</TABLE>
See notes to consolidated financial statements.
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DBT Online, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------- ---------
1999 1998
--------- ---------
(As restated, see Note 7)
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,568 $ 5,120
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,568 5,315
Deferred taxes (379) (361)
Stock issued for employee benefit plan 307
Stock compensation expense 1,268
Changes in operating assets and liabilities:
Accounts receivable (2,193) (2,737)
Prepaid expenses and other current assets (818) (1,056)
Accounts payable and accrued liablities 2,445 728
Due to other patent interest holders 386 324
Income taxes payable (635) (203)
-------- --------
Net cash provided by operating activities 10,517 7,130
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchased (8,501) (12,009)
Cash paid for acquisition, net of cash acquired (25,436)
(Increase) decrease in other assets (23) 185
Proceeds from maturity of investments 6,786 31,686
-------- --------
Net cash (used in) provided by investing activities (27,174) 19,862
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 3,334 172
Payments on long-term debt (607)
-------- --------
Net cash provided by financing activities 2,727 172
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,930) 27,164
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,324 7,913
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,394 $ 35,077
======== ========
</TABLE>
See notes to consolidated financial statements.
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NOTES TO 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, which are included in the Company's
Annual Report on Form 10-K, as amended for the year ended December 31, 1998.
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of DBT Online, Inc. (the "Company") and its wholly owned subsidiaries. The
interim consolidated financial statements as of September 30, 1999 and for the
three and nine months ended September 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.
The weighted-average number of shares for stock options included in the
diluted weighted-average shares outstanding were 1,060,681 and 768,326 for the
nine months ended September 30, 1999 and 1998, respectively. The additional
1,136,000 weighted-average shares for stock options which would have been
included in the diluted weighted-average shares outstanding for the three
months ended September 30, 1999 were excluded from the calculation because
their inclusion would be antidilutive. The weighted-average number of shares
for stock options included in the diluted weighted-average shares outstanding
was 580,851 for the three months ended September 30, 1998.
NOTE 2. BUSINESS COMBINATIONS
On September 24, 1999, we acquired KnowX.com and Informed from
Information America, Inc. for $25,000 in cash and warrants to purchase 329,172
shares of common stock of the Company. The warrants have a strike price of
$52.50 per share and expire on March 24, 2001. KnowX.com is a leading
Internet-based public record research tool for consumers and small office users.
The Informed product line offers qualified users, including commercial lending
and leasing companies, access to public information through the Internet or
dial-up modems. The transaction was accounted for as a purchase and the
Company's results of operations include the results of KnowX.com and Informed
since the date of acquisition. Goodwill resulting from this transaction is
approximately $24,000 and is being amortized on a straight-line basis over ten
years.
Unaudited pro-forma results of operations, assuming the acquisition of
KnowX.com and Informed occurred as of the beginning of 1998, after giving effect
to certain adjustments such as interest and amortization of goodwill resulting
from the acquisition, are summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
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<S> <C> <C>
Net revenue $67,020 $49,998
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Income before income taxes $ 3,946 $ 6,448
======= =======
Net income $ 2,152 $ 4,277
======= =======
Earnings per share (diluted) $ 0.11 $ 0.22
======= =======
</TABLE>
On May 26, 1999, we 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, we 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.
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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 nine months ended September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Revenues:
Company $16,442 $39,040
IRSC 1,746 5,186
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Combined $18,188 $44,226
======= =======
Net income:
Company $ 1,871 $ 3,462
IRSC 79 106
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Combined $ 1,950 $ 3,568
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</TABLE>
NOTE 3. COMPREHENSIVE INCOME
Comprehensive (loss) income for the three and nine months ended
September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ (37) $ 1,760 $ 3,568 $ 5,120
Adjustment to reconcile net income
to total comprehensive income:
Unrealized loss on investments (58) (281)
------- ------- ------- -------
Comprehensive (loss) income $ (95) $ 1,760 $ 3,287 $ 5,120
======= ======= ======= =======
</TABLE>
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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 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>
Nine Months Ended
September 30,
-----------------------------
1999 1998
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<S> <C> <C>
Revenues:
Electronic information $ 52,528 $ 39,073
Patent enforcement 4,681 5,153
-------- --------
Consolidated revenues $ 57,209 $ 44,226
======== ========
Operating profit:
Electronic information $ 3,997 $ 3,854
Patent enforcement 2,611 3,056
-------- --------
Segment operating profit 6,608 6,910
Interest income 1,322 1,818
General corporate expense (1,838) (1,002)
-------- --------
Consolidated income before income taxes $ 6,092 $ 7,726
======== ========
Capital expenditures:
Electronic information $ 8,499 $ 12,002
Patent enforcement 2 7
-------- --------
Consolidated capital expenditures $ 8,501 $ 12,009
======== ========
Depreciation and amortization of identifiable assets:
Electronic information $ 5,288 $ 4,034
Patent enforcement 1,280 1,281
-------- --------
Consolidated depreciation and amortization $ 6,568 $ 5,315
======== ========
</TABLE>
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Identifiable assets:
Electronic information $ 65,992 $ 33,572
Patent enforcement 11,626 18,769
-------- --------
Total identifiable assets 77,618 52,341
General corporate assets 25,655 40,030
-------- --------
Consolidated assets $103,273 $ 92,371
======== ========
</TABLE>
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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 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.
NOTE 6. SUBSEQUENT EVENT
On October 7, 1999, the Company completed a secondary offering of
5,669,758 shares of its common stock. The offering consisted of 1,000,000 shares
sold by the Company, resulting in net proceeds to the Company of approximately
$23,400 (after deducting underwriting discounts and estimated offering expenses
payable by it) and 4,669,758 shares sold by selling shareholders, including all
of the 4,469,758 shares owned by the founder of the Company.
NOTE 7. RESTATEMENT
Subsequent to the issuance of the Company's September 30, 1999
financial statements, the Company's management determined that it had not
recorded charges that it had incurred during the third quarter of 1999 in
connection with a severance agreement related to the resignation of its former
CEO, as well as related stock compensation expense in connection with both the
resignation of the former CEO and a Director. As a result, the September 30,
1999 financial statements have been restated from the amounts previously
reported to reflect these charges for the severance agreement and related stock
compensation expense. A summary of the significant effects of the restatement is
as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
At September 30, 1999:
Prepaid income taxes $ 106 $ 229
Accounts payable and accrued liabilities 5,414 5,839
Additional paid-in capital 73,639 74,907
Retained earnings 17,663 16,093
For the three months ended September 30, 1999:
General and administrative expenses 5,148 6,841
Income before income taxes 2,318 625
Net income (loss) 1,533 (37)
Earnings per share (basic) .08 (.00)
Earnings per share (diluted) .08 (.00)
For the nine months ended September 30, 1999:
General and administrative expenses 14,798 16,491
Income before income taxes 7,785 6,092
Net income 5,138 3,568
Earnings per share (basic) .27 .19
Earnings per share (diluted) .26 .18
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following should be read in conjunction with the consolidated
financial statements and the notes thereto contained in the Company's 1998 Form
10-K, as amended. This information contains certain statements regarding future
trends, the accuracy of which is subject to many risks and uncertainties. Such
trends, and their anticipated impact upon the Company, could differ materially
from those presented in this Form 10-Q.
Subsequent to the issuance of the Company's September 30, 1999
financial statements, the Company's management determined that it had not
recorded charges that it had incurred during the third quarter of 1999 in
connection with a severance agreement related to the resignation of its former
CEO, as well as related stock compensation expense in connection with both the
resignation of the former CEO and a Director. As a result, the September 30,
1999 financial statements have been restated from the amounts previously
reported to reflect these charges for the severance agreement and related stock
compensation expense. The effects of the restatement are presented in Note 7 to
the consolidated financial statements and have been reflected herein.
OVERVIEW OF THE COMPANY
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 laser patents, generating
its revenues through patent royalties.
FACTORS AFFECTING OUR BUSINESS CONDITION
In addition to the factors discussed in the Overview and Liquidity and
Capital Resources sections of this Management's Discussion and Analysis of
Financial Condition and Results of Operations, the following additional factors
may affect our business condition and future results:
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.
DURING THE FIRST HALF OF 1999, SOME OF OUR LAW ENFORCEMENT CUSTOMERS
SUSPENDED USE OF OUR PRODUCTS AND SERVICES THOUGH ONE OF THESE LAW
ENFORCEMENT CUSTOMERS RECENTLY LIFTED ITS SUSPENSION, FURTHER
SUSPENSION OF USE OF OUR PRODUCTS AND SERVICES COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND REPUTATION.
During the first half of 1999, the Drug Enforcement Administration and
the FBI suspended their use of DBT's products and services. These agencies
expressed concern about whether the target and content of their searches on our
databases were accessible by current or former DBT employees. After completing
an analysis of our databases and operating procedures, the DEA recently lifted
its suspension of our products and services. However, the DEA has not yet
returned to its customary level of use prior to the suspension. The FBI
continues to analyze our databases and operating procedures. The failure of
these agencies to resume full use of our services, or any additional suspensions
of use by other 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 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.
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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 whom 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 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 December 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.
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 money 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.
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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
health care 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.
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 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
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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.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES
EIG's revenues increased 31.2% to $17,933 for the three months ended
September 30, 1999, from $13,672 for the same period in 1998. The increase in
EIG's revenues was attributable to increased revenue from existing customers and
revenue from new products. EIG's active customers (defined as customers
accessing the system in a given month) increased 4.3% to 13.4 thousand at
September 30, 1999, from 12.9 thousand at September 30, 1998. We imposed a
service fee in the first quarter of 1999, which eliminated a number of
unprofitable customers. PEG's revenues decreased 9.5% to $1,532 for the three
months ended September 30, 1999, from $1,693 for the same period in 1998. Total
consolidated revenues increased 26.7% to $19,465 for the three months ended
September 30, 1999, from $15,365 for the same period in 1998.
COST OF REVENUES
EIG's cost of revenues increased 28.5% to $7,348 for the three months
ended September 30, 1999, from $5,719 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 41.0% for the three months ended
September 30, 1999, from 41.8% for the same period in 1998. PEG's cost of
revenues remained the same at $427 for the three months ended September 30, 1999
and 1998 and consists solely of the amortization costs associated with the
purchase of the PEG's patents. Total consolidated cost of revenues increased
26.5% to $7,775 for the three months ended September 30, 1999, from $6,146 for
the same period in 1998.
SALES AND MARKETING
EIG's sales and marketing expenses increased 91.1% to $3,443 for the
three months ended September 30, 1999, from $1,802 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 19.2% for the three months ended September 30, 1999, from
13.2% 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 55.6% to $1,200 for
the three months ended September 30, 1999 from $771 for the same period in 1998.
As a percentage of EIG's revenues, research and development expenses increased
to 6.7% for the three months ended September 30, 1999, from 5.6% 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.
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GENERAL AND ADMINISTRATIVE EXPENSES
EIG's general and administrative expenses increased 47.5% to $6,576 for
the three months ended September 30, 1999, from $4,456 for the same period in
1998. This increase was due to increases in occupancy expenses, payroll, and
other expenses related to the reorganization of our administrative
infrastructure. In addition, EIG's general and administrative expenses for the
three months ended September 30, 1999 include $1,693 related to special charges
for a severance agreement and related stock compensation expense in connection
with the resignation of our former CEO and a Director. As a percentage of EIG's
revenues, general and administrative expenses increased to 36.7% for the three
months ended September 30, 1999, from 32.6% for the same period in 1998. PEG's
general and administrative expenses increased to $265 for the three months ended
September 30, 1999, from $242 for the same period in 1998. Total consolidated
general and administrative expenses increased 45.6% to $6,841 for the three
months ended September 30, 1999, from $4,698 for the same period in 1998.
OPERATING PROFIT
EIG reported an operating loss of $634 for the three months ended
September 30, 1999, compared to a $925 operating profit for the same period in
1998. This decrease was attributable to the continued growth in revenues offset
by increased cost of revenues and other operating expenses including the
severance and related compensation expense in connection with the resignation of
our former CEO and a Director. PEG's operating profit decreased 18.0% to $840
for the three months ended September 30, 1999, from $1,024 for the same period
in 1998 due to a decrease in PEG's revenues. Total consolidated operating profit
decreased 89.4% to $206 for the three months ended September 30, 1999, from
$1,949 for the same period in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES
EIG's revenues increased 34.4% to $52,528 for the nine months ended
September 30, 1999, from $39,073 for the same period in 1998. The increase in
EIG's revenues was attributable to increased revenue from existing customers and
revenue from new products. EIG's active customers (defined as customers
accessing the system in a given month) increased 4.3% to 13.4 thousand at
September 30, 1999, from 12.9 thousand at September 30, 1998. We imposed a
service fee in the first quarter of 1999, which eliminated a number of
unprofitable customers. PEG's revenues decreased 9.2% to $4,681 for the nine
months ended September 30, 1999, from $5,153 for the same period in 1998. Total
consolidated revenues increased 29.4% to $57,209 for the nine months ended
September 30, 1999, from $44,226 for the same period in 1998.
COST OF REVENUES
EIG's cost of revenues increased 25.2% to $21,676 for the nine months
ended September 30, 1999, from $17,310 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 41.3% for the nine months ended
September 30, 1999, from 44.3% 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 $1,280 for the nine months ended September 30, 1999,
compared to $1,281 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 23.5% to $22,956 for the nine months
ended September 30, 1999, from $18,591 for the same period in 1998.
SALES AND MARKETING
EIG's sales and marketing expenses increased 69.4% to $8,774 for the
nine months ended September 30, 1999, from $5,180 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 16.7% for the nine months ended September 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.
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RESEARCH AND DEVELOPMENT
EIG's research and development expenses increased 64.5% to $3,401 for
the nine months ended September 30, 1999, from $2,068 for the same period in
1998. As a percentage of EIG's revenues, research and development expenses
increased to 6.5% for the nine months ended September 30, 1999, from 5.3% 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 34.6% to $15,701
for the nine months ended September 30, 1999, from $11,663 for the same period
in 1998. This increase was due to increases in occupancy expenses, payroll, and
other expenses related to the reorganization of our administrative
infrastructure and the special charges from a severance agreement and related
stock compensation expense in connection with the resignation of our former CEO
and a Director. As a percentage of EIG's revenues, general and administrative
expenses remained relatively the same at 29.9% for the nine months ended
September 30, 1999, from 29.8% for the same period in 1998. PEG's general and
administrative expenses decreased to $790 for the nine months ended September
30, 1999, from $816 for the same period in 1998. Total consolidated general and
administrative expenses increased 32.2% to $16,491 for the nine months ended
September 30, 1999, from $12,479 for the same period in 1998.
OPERATING PROFIT
EIG's operating profit decreased 24.3% to $2,159 for the nine months
ended September 30, 1999, from $2,852 for the same period in 1998. This decrease
was attributable to the continued growth in revenues offset by increased cost of
revenues and other operating expenses and, in particular, the severance and
related stock compensation expense in connection with the resignation of our
former CEO and a Director. Operating profit for the nine months ended September
30, 1999 included one-time merger-related costs of $817 and severance and stock
compensation expense of $1,693. Excluding the one-time merger-related costs,
severance and stock compensation expense, EIG's operating profit increased 63.7%
to $4,669 for the nine months ended September 30, 1999. PEG's operating profit
decreased 14.6% to $2,611 for the nine months ended September 30, 1999, from
$3,056 for the same period in 1998 due to a decrease in PEG's revenues. Total
consolidated operating profit decreased 19.3% to $4,770 for the nine months
ended September 30, 1999, from $5,908 for the same period in 1998.
INTEREST INCOME
Net interest income was $1,322 the nine months ended September 30,
1999, compared to $1,818 for the same period in 1998. The decrease was due to
lower cash and investment balances as our capital expenditures increased
significantly throughout 1998, reducing our beginning cash balance in 1999.
INCOME TAXES
Our effective income tax rate was 41% for the nine months ended
September 30, 1999 compared to 34% for the same period in 1998. The effective
tax rates for both of these periods were favorably impacted by non-taxable
interest income and reduced state income taxes. The 1999 effective tax rate was
adversely affected by non-deductible stock compensation expense recorded in the
third quarter.
NET INCOME
Our net income decreased 30.3% to $3,568 for the nine months ended
September 30, 1999, from $5,120 for the same period in 1998. The decrease was
primarily due to the decrease in operating profit of EIG and PEG, reduced
interest income during the period, the occurrence of non-recurring,
merger-related and severance and stock compensation expense, and an increase in
the effective tax rate.
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LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations were $10,517 for the nine months ended
September 30, 1999, compared to $7,130 for the same period in 1998. We had
working capital at September 30, 1999 of $34,525 (including cash, cash
equivalents and marketable securities of $26,167) compared to $53,922 (including
cash, cash equivalents and marketable securities of $47,164) at December 31,
1998. We expect to fund future working capital requirements with our existing
cash and short-term investment balances and with cash generated from operations.
Capital expenditures were $8,501 for the nine months ended September
30, 1999, compared to $12,009 for the same period in 1998. 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 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.
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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:
o 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.
o 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.
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 ready.
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 the end of 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, or financial condition. We estimate that the total cost of
addressing our Year 2000 Issue 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 December
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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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 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.
We also have brought a lawsuit against High Tech Data Services and its
affiliates and principals, with whom we had a non-competition and non-disclosure
agreement. We believe, and our lawsuit alleges, that High Tech Data Services
violated the non-competition and non-disclosure agreement, infringed our trade
and service marks and misappropriated our trade secrets. On October 27, 1999,
the court issued a summary judgement in favor of the Defendants in the lawsuit.
The Company plans to file an appeal of the summary Judgement.
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 the IRSC and High Tech Data Services litigations discussed above, we are
not currently involved in, and do not know of, any material litigation against
us.
ITEM 2. CHANGES IN SECURITIES
None to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None to report.
ITEM 5. OTHER INFORMATION
None to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1* Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The Company has filed the following reports on Form 8-K during
the period covered by this report: (i) Form 8-K dated August 20, 1999
and filed on September 3, 1999 and (ii) Form 8-K dated August 12, 1999
and filed on August 13, 1999.
Page 21
<PAGE> 22
The 8-K filed on September 3, 1999, was filed to report the
purchase from Information America, Inc. ("Information America"), a
Georgia corporation, of its Online Public Records business unit and its
KnowX.com business unit pursuant to the Asset Purchase Agreement
entered into as of August 20, 1999, among West Publishing, Information
America and the Company.
The 8-K filed on August 13, 1999, was filed to report the
resignation of Charles A. Lieppe as President, Chief Executive Officer
and a Director of the Company due to personal reasons and the
appointment of Ronald Fournet, the Company's Chief Information and
Technology Officer, as President and Chief Executive Officer.
- -----------
* Filed herewith.
Page 22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DBT ONLINE, INC.
/s/ Judith D. Brown
----------------------------------------------
JUDITH D. BROWN
(Principal Accounting Officer)
/s/ J. Henry Muetterties
----------------------------------------------
J. HENRY MUETTERTIES
(Vice President General Counsel and Secretary)
Date March 7, 2000
Page 23
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