UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-20660
DIRECT INSITE CORP.
(F/K/A COMPUTER CONCEPTS CORP.)
(Exact name of registrant as specified in its charter)
Delaware 11-2895590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 Orville Drive, Bohemia, N.Y. 11716
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 244-1500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class Name of each exchange on which registered
-------------------- -----------------------------------------
Common Stock, par value $.0001 NASDAQ
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 26, 2001, there were 21,381,937 shares of the registrant's Common
Stock outstanding. The aggregate market value of the Common Stock held by
non-affiliates was approximately $6,014,000 based on the closing sale price of
the Common Stock as quoted on the NASDAQ on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - The Company's definitive proxy statement to be filed pursuant to
Regulation 14A of the Securities Exchange Act.
Direct Insite Corp. and Subsidiaries
Form 10-K for the Year Ended December 31, 2000
Table of Contents
-----------------
PAGE
----
PART I
ITEM 1 Business 3
ITEM 2 Properties 14
ITEM 3 Legal Proceedings 15
ITEM 4 Submission of Matters to a Vote of Security Holders 16
PART II
ITEM 5 Market for Registrant's Common Stock 17
ITEM 6 Selected Financial Data 18
ITEM 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
ITEM 7a Quantitative and Qualitative Disclosures About Market Risk 29
ITEM 8 Financial Statement 29
ITEM 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 29
PART IV
ITEM 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 30
SIGNATURE 33
2
PART I
Item 1. BUSINESS
- ------------------------
INTRODUCTION
The Company was organized under the name Unique Ventures, Inc. as a "blind pool"
public company, under the laws of the State of Delaware on August 27, 1987, and
changed its name to Computer Concepts Corp. in 1989. In March, 2000, in an
effort to allow the Company the opportunity to seek new management perspectives
and directions, the Chairman of the Board of Directors along with the President
/ Chief Executive Officer / Treasurer retired. Mr James A. Cannavino, was
elected a board member and Chairman of the Board. Shortly thereafter the three
remaining members of the Board of Directors resigned. Dr. Dennis Murray,
president of Marist College and Mr. Charles Feld, Chief Information Officer of
First Data Resources and the former Chief Information Officer of Delta Air
Lines, were elected to the Company's board. In April, 2000 Ms. Carla J. Stovall,
the attorney general of the state of Kansas was elected to serve as a member of
the Board. In August, 2000, the shareholders voted to approve to change the name
of the Company to Direct Insite Corp. which the Board of Directors believed was
more in line with the new direction of the Company.
Direct Insite Corp. and its subsidiaries (hereinafter referred to as " Direct
Insite" or the "Company"), operate primarily as an ASP (application service
provider) providing high volume data processing and analysis tools for our
customers. Direct Insite's core technology, d.b.Express(TM), is a management
information tool providing targeted access through the mining of large volumes
of transactional data. The Company operates fully redundant data centers located
at our main office in Bohemia, N.Y. and in Newark, NJ. Our facility in New
Jersey is space leased at the IBM e-business Hosting Center. This co-location /
redundancy feature enables the Company to offer virtually down time free
service.
Currently, IBM Global Services, the Company's largest customer, (representing
approximately 80% of year 2000 revenue) utilizes its core technology,
d.b.Express to allow their large enterprise customers to mine their respective
high volume telecommunications data uncovering call abuse, deliver cost
allocation by usage, provide for network planning, budgeting and the
identification of significant trends in calling patterns. During 2000, the
Company entered into two key strategic alliances, one with Solant, Inc which was
acquired by Avolent, Inc. ("Avolent") the other Moore Business Communication
Services, a division of Moore North America, Inc ("MooreBCS"). See the "Product"
and "Sales and Marketing" section of this Item for further information
pertaining to these new alliances.
Direct Insite provides a second product offering, which utilizes its patented
software. This offering, "Telecommunications Solutions" (also marketed under the
name Global Telecommunications Services or GTS), utilizes d.b.Express to analyze
long distance, data and wireless communication needs, assisting in the
negotiation of telecommunication contracts and monitoring ongoing carrier
contract compliance. Further, this service offers a time saving analysis tool
that finitely and accurately determines errors in reporting and positions that
company uniquely with desired cost and productivity savings in previously
unidentified areas. The Company began marketing this product offering in 2000
and has not yet recorded any revenue.
Historically, the most significant portion of the Company's operations had been
conducted through one of its subsidiaries, Softworks, Inc. ("Softworks").
Through Softworks, the Company developed, marketed and supported systems
management software products for corporate mainframe data centers. The Company
acquired Softworks in 1993, then a private Maryland company founded in 1977.
Softworks was wholly owned by the Company through June 29, 1998. Through a
series of transactions, as described in Note 3 to the Consolidated Financial
Statements, that included an initial public offering of Softworks in August,
1998, various exchanges of Softworks common stock owned by the Company to
consultants and employees for services rendered, a private placement of
Softworks common stock owned by the Company in December, 1998, and a second
3
public offering in June, 1999, the Company's ownership of Softworks was reduced
from 100% to 35% as of December 31, 1999. Accordingly, Softworks is accounted
for as a consolidated subsidiary through March 31, 1999, and commencing April 1,
1999, through January, 2000, Softworks' results are accounted for using the
equity method of accounting. Pursuant to a tender offer dated December 21, 1999,
the Company sold its remaining 35% interest in Softworks (a total of 6,145,767
shares) to EMC Corporation and its subsidiary ("EMC") for $10.00 per share. The
transaction, which was completed on January 27, 2000, provided aggregate cash
proceeds of $61,458,000, and resulted in a pre-tax gain, net of expenses, of
$47,813,000 recorded in the first quarter of 2000.
In 1997, the Company created a business unit, "professional services", which
primarily resells computer hardware and for a fee, will assist in the design,
construction and installation of technology systems. In 1999, this business unit
had one major contract, involving two customers, which was completed in 1999.
Historically, net margins generated from this business unit were extremely low.
The Company does not currently have any other sales contracts for this business
unit and is not actively pursuing new low margin contracts. In January, 2000,
the Company elected to significantly curtail the operations of this business
unit, and will only accept new contracts if it believes the contract will
generate significantly higher margins
In June 1998, the Company acquired certain software and related sales and
marketing rights. The acquired software technology, marketed under the trade
name Bo Dietl's One Tough ComputerCOP ("ComputerCOP"), is designed to inform non
computer literate parents, guardians and alike, what materials, or possible
threats to the safety and well being of their children or others has been
accessed over the Internet, such as objectionable web sites, text, pictures,
screens, electronic mail, etc. The Agreement also included the rights to the use
of Richard "Bo" Dietl's name in conjunction with the promotion and endorsement
of the software as well as appearances by Mr. Dietl in support of the software
in regional and national marketing campaigns. Mr. Dietl has been recognized as
one of the most decorated police officers of the city of New York. In February,
2000, the Company sold a newly created wholly owned subsidiary with assets
consisting primarily of $20.5 million cash, the above referenced technology and
remaining marketing rights, inventory and related receivables for 1,775,000
shares of NetWolves Corporation (Nasdaq: "WOLV"). The transaction was valued at
approximately $35.5 million and resulted in a pre-tax gain of $8,534,000
recorded in the first quarter of 2000.
During 1999, the Company began to develop a multi-media display station, which
combined Internet strategy and e-commerce with multi-media forms of delivery,
presentation and interaction with end-users. This Internet based
communications/advertising network was being designed by the Company to create a
means by which businesses could promote specific brand/product/service
awareness. The Company intended to market this technology in association with
owners and/or managers of high traffic venue areas (i.e., malls, airports, etc.)
to local, regional and national businesses. From inception through March 31,
2000, the Company invested approximately $7,000,000 in its marketing and
development efforts (charged to operations as incurred). As part of the
Company's restructuring plan (Note 13 to the Consolidated Financial Statements),
the Board of Directors determined that it was in the Company's best interest to
immediately cease all funding of this project, as additional funds would have
been required in order to complete development and bring the product to market.
As a result, in April 2000, the Company entered into a contractual arrangement
with an unrelated third party, whereby the Company transferred all of its
in-process research and development technology related to the multi-media
display station for the rights to 50% of the future profits (as defined), if
any, from the third party's operation or sale of this technology. The third
party agreed to utilize its contacts in the industry and also agreed to fund
substantially all future costs associated with the continued development and
marketing of the display station. There can be no assurances that the Company
will recognize any proceeds from this transaction.
4
Refer to Note 18 to the Consolidated Financial Statements for Segment
information.
The Company's present strategic plan is focused on becoming a preeminent
provider of innovative software products that break down barriers between people
and data thereby allowing corporate users to more easily access enterprise-wide
data. In addition, this plan includes, among other factors, the exploitation of
the Company's proprietary technology, d.b.Express, primarily through the
development of several vertical markets. Telecommunications is presently being
targeted as one of the first vertical markets. Additionally, during the second
quarter of 2000, the Company began offering a new consulting service.
We believe that Direct Insite is one of but a few companies that can provide
high volume visual analysis, reporting and Electronic Bill Presentment and
Payment ("EBPP") through an ASP model to the telecommunications industry. The
service offering is designed to allow Direct Insite to pursue other verticals
along with telecommunications. Moving forward, the challenge is simple, people
want to process, analyze, and view more and more data.
PRODUCTS
--------
Core Technology -- d.b.Express
-------------------------------
The Company's core technology, d.b.Express, is a management information tool
providing targeted access through the mining of large volumes of transactional
data. Unlike traditional database products, our software indexes all data
relationships, which eliminates the need to pre-determine what questions need to
be answered. This facilitates analysis to discover the information normally
hidden in summarized information and allows the user to "drill down" to the
individual records to produce results. This is accomplished with our unique
ability to visually present hundreds of millions of transaction records
processed into our proprietary database. The data is uniquely presented in raw
form visually and mining is accomplished through a simple graphicical user
interface that presents data correlations through graphs called histograms. Thus
allows the user a method to more easily obtain answers to any question about the
data without being an expert software user requiring sophisticated structured
query language ("SQL") statements. The data is delivered via the Internet with
simple browser technology thus allowing any remote user with basic Internet
access to manipulate huge databases in seconds. This enables our customers huge
efficiency gains, significant cost savings and it empowers their organization by
sharing the information and processing power via the Internet.
The traditional offering in place is the private branding of d.b.Express
software with channel partners providing bundled solutions to telecommunications
carriers and resellers with a primary emphasis on call detail analysis,
electronic bill payment and presentment EBPP as well as Internet Customer Care
("ICC"). At present, the traditional offering, is primarily marketed to
communication providers. Direct Insite currently has partnerships in place with
Moore BCS and Avolent Inc. The alliance with Avolent assists the Company in two
areas. Firstly, the reciprocal license agreements permit Avolent to market the
d.b.Express technology through its marketing force. Secondly, we now can offer
next-generation technology for Internet-based EBPP and Internet Customer care.
With their BizCast(TM) offering, the Company is able to offer a complete,
feature-rich solution that meets the needs of business-to-business billers,
service providers and payers. It includes the functionality required to import
invoice data, present, process, and pay invoices. The combined offering is
designed to provide billers with the capability to reach a wide array of payers.
Additionally, during 2000 the Company entered into an agreement with MooreBCS.
Through this relationship the Company seeks to gain access to MooreBCS' customer
base. MooreBCS, on the other hand sought to enhance its offering by addressing
the issue of scalability. Scalability crisis occurs at a certain point when data
files reach a size wherein it cannot be efficiently transmitted via the
Internet. The Server Farm / d.b.Express address this dilemma.
5
d.b.Express provides business with a simple, fast, low-cost method of finding,
organizing, analyzing and using information contained in databases over the
Internet. The software employs a graphical user interface "GUI" that enables
users to directly access and use information contained in relational and
pseudo-relational databases created by many database management systems DBMS on
the market. In addition, this proprietary software tool has the ability to
directly utilize information obtained from spreadsheets and data in the form of
American Standard Code for Information Interchange ASCII files. The technology
enables users to analyze millions of records over the Internet without the need
to first download the data being analyzed. Telecommunications industry specific
applications of the technology have been developed and are being marketed.
d.b.Express does not replace DBMS programs. Instead, it improves the
accessibility of databases created by DBMS by eliminating the need to write
queries in computer code and facilitates data searches through the use of
graphical query tools. Prior to the availability of d.b.Express, comparable
analytical and presentation capabilities were possible only through costly
executive information systems ("EIS") or customized programs developed and
supported by highly skilled MIS professionals. The need for Management
Information Systems ("MIS") professionals and programming effectively raises the
cost of access to information in terms of time and money. Ultimately, these
barriers result in less timely and lower quality business decision-making.
There are some DBMS access tools on the market that claim to eliminate the need
to use computer code and provide graphical query capability. All of these
programs, however, only simplify the writing of computer code, usually through
industry-standard SQL, by having users develop logic in a semi-procedural
facility. While reducing some problems associated with the writing of computer
code, such as "typographical errors", they do not eliminate the need for
knowledge of computer code or database structure and organization, and require
significant training of the user. d.b.Express enables the access and productive
use of complex databases without specific computer knowledge. d.b.Express
enables a broader population within an organization to visually and
interactively mine their data without the need or support from internal or
external MIS staff.
d.b.Express approaches database accessibility, enabling people at all levels of
an organization to analyze the data without any knowledge of programming.
d.b.Express achieves this in two steps. First, it utilizes proprietary
algorithms, accesses and automatically summarizes all of the records in the
required databases into its own format. Second, the software presents users with
an intuitive multi-dimensional picture of the data that the user can easily
customize to his need with a simple point-and-click interface. In addition to a
vast simplification of database access and analysis, d.b.Express performs these
tasks faster than any DBMS because the software does not reread the database for
each task; it only reads the summaries it has created.
Windows (R) Version 1.0 of d.b.Express was introduced in December, 1993, and the
DOS version was introduced in late 1992. Windows (R) Version 2.0, with
significantly enhanced functionality based on user feedback, was introduced in
the second quarter of 1994 and a Windows 95 Version was introduced in the third
quarter of 1995. Windows NT (R), Internet Server and JAVA Applet versions were
introduced in 1996 and 1997. Version 6.0 was released during the fourth quarter
of 1999; significant new features include increasing d.b.Express' ability to
interactively access, via the Internet, millions of records in a matter of
seconds. Additional features include ad-hoc reporting and integrated mapping
capabilities. The Company anticipates the release of Version 7.0 during the
second quarter of 2001. Key features of Version 7.0 are anticipated to include:
6
- -- Real time data input exposes the d.b.Express engine to many more potential
applications. Interactive mining session changes in real time as data is
being streamed in.
- -- New intuitive graphical user interface. 3-D perspective, pop-up tool tips
and multi-select capability.
- -- Rewritten JAVA applet - twice as fast and more functional than previous
applets.
- -- New rollup functionality provides the features of On-Line-Analytical-
Processing with the ease of d.b.Express. View several months of data,
multiple data files or any combination of the above.
- -- Infinite level hierarchy support. Any company hierarchy structure can be
created.
- -- Date / Time fields can now be visually mined down to one minute intervals.
- -- New ad hoc report writer supports calculated fields; i.e. top / bottom n
values, sorting and grouping. "If you can think it, d.b.Express can print
it."
- -- Mined data can now be viewed on full color maps of the United States.
- -- New d.b.Express report servers scale as needed. Hundreds or even thousands
of reports can be generated simultaneously.
- -- Context sensitive help now contains instructional videos of product use.
d.b.Express Internet Information Server
---------------------------------------
The d.b.Express Internet Information Server is an Internet database information
service. This service makes use of its proprietary data access technology by
providing its customers access to their detail telephone records anywhere in the
world, via the Internet. With this service, customers can access via the
Internet, numerous detail telephone call records. Data can be visually presented
using the Company's patented data visualization technology. The technology
provides users with a Filescape (TM) (an all encompassing picture of data
similar to a landscape picture) from which users are able to perform
point-and-click ad-hoc queries in order to discover anomalies, trends and misuse
of their data, and, if desired, infinite drill down to individual detail
records. This is accomplished within seconds, rather than hours, which the
Company believes could create cost savings and operational efficiencies.
Customers are able to review and analyze their telephone usage at the detail
level. They are able to review and, if desired, print standard pre-generated
reports, ad-hoc reports based on predefined templates, or define and
review/print their own ad-hoc reports, all without taking delivery of the large
volume of data required. In order to meet the archival requirements of
customers, the Company produces CDs of each month's billing details. In order to
provide this service, the Company has put into place a comprehensive data
center. The service is available 24 hours a day, 7 days a week, 365 days a year.
The advantages inherent to d.b.Express include the following:
- ------------------------------------------------------------
Ease of Use
-----------
Using the analogy of an automatic camera, d.b.Express simplifies data access and
analysis by providing a sophisticated, simple-to-use vehicle to take pictures of
complex data. By combining an intuitive point-and- click interface with a
powerful integration and retrieval engine in a low-cost product, d.b.Express
breaks down the barriers between people and data. After d.b.Express has read one
or more databases, the data is presented to the user in a Afilescape@ using a
common histogram metaphor. The user merely points to a bar in the chart and
clicks to view data from the highest summary level to the lowest level of
detail. d.b.Express provides powerful desktop functionality, via the Internet,
that allows the exploration of data patterns, trends, and exceptions. Data
earches, queries and analyses can be converted to sophisticated, simple to use
presentations providing integrated business graphics and report writing
capabilities.
7
Interfaces With Leading Databases and Other Tools
-------------------------------------------------
d.b.Express provides direct access to leading databases created by DBMS vendors,
including CA-Clipper, Microsoft Access, Foxbase and FoxPro, Lotus Approach,
Borland dBase and Paradox, Oracle, Informix, Sybase, Ingres, SQL Server, IBM DB2
and DB2/2, Netware SQL, Gupta SQL Base, Progress, XDB, SQL/DS, Teradata and
Btrieve and any other database with ODBC support. These DBMS's represent most of
the installed relational database management systems ("RDMS") worldwide. In
addition, d.b.Express is able to access data contained in spreadsheets and read
data in ASCII format, which further broadens the software's capability with
other DBMS products. d.b.Express results can be exported to popular
spreadsheets, report writers, graphics packages and word processors including
Lotus 1-2-3, Excel, Quattro Pro, ReportSmith, Crystal Reports, Harvard Graphics,
Power Point, WordPerfect and Word.
Ability To Integrate Data From Databases Created By Multiple Vendors
--------------------------------------------------------------------
When d.b.Express reads a database, it creates its own summaries of information
through its proprietary process. Information contained in databases is formatted
into d.b.Express' proprietary format. This permits users to access and compare
information contained in enterprise-wide databases created by different vendors
simultaneously in the d.b.Express' user-friendly environment.
Works in Common Operating Environments
--------------------------------------
d.b.Express operates in virtually all file server and peer-to-peer networking
environments providing data to Microsoft Windows7 and Windows NT workstations.
d.b.Express Internet Information Server provides secure visual data mining
functionality through Internet browsers such as Microsoft Internet Explorer and
Netscape Communicator.
High Processing Speed
---------------------
Once a database source has been processed, d.b.Express employs proprietary
matrix storage technology rather than rereading each data element in that
database. All packaged DBMS reread every single data element each time a task,
such as sorting or analysis, is performed. The elimination of the rereading step
through d.b.Express' proprietary process increases the speed of data access
enabling ad-hoc analysis at a rate we believe is far faster than possible with
any other system. The advantage of the d.b.Express process over other processes
increases with the size and complexity of the database. d.b.Express breaks down
barriers between people and data by eliminating the need for SQL expertise,
saving time by gaining decision-critical information through rapid data access
and analysis, and saving money through minimal training investment and
cost-effective product implementation.
Disadvantages in regard to d.b.Express include the following:
- ------------------------------------------------------------
Lack of Established User-base and Acceptance of the Product
-----------------------------------------------------------
d.b.Express is not yet widely used and is perceived as a new technology which
may defer acceptance. The Company believes its focus on large-scale users and
its new Internet Server Farm technology could help overcome the lack of
acceptance in the market place. There is no assurance that the Company will be
successful in reaching its sales plan to gain widespread usage of the
technology.
8
Limited Resources to Market and Promote d.b.Express
---------------------------------------------------
The Company has limited resources with which to market and promote d.b.Express.
Regardless of the unique patented aspects of the product, if the Company is not
able to effectively market and promote the usage of the product, the successful
dispersion of the product as a widely used access tool may not be achieved.
Alternative Methods Available to Access Data and Potential New Technologies
---------------------------------------------------------------------------
d.b.Express' access method is patented and innovative. However, alternative
methods for accessing data exist, primarily text based search engines. We
believe that many of the alternative methods require knowledge of specific
database query languages. The Company is not aware of any alternative technology
which can effect data searches with the speed, and without sophisticated
programming skills, which, d.b.Express provides; however, it is possible that
new technologies will be developed which may effectively compete with
d.b.Express. If such new technologies are developed, they could negatively
impact the Company's ability to successfully market and promote d.b.Express on
the Internet.
PRODUCTS -- Telecommunications Solutions
- ------------------------------------------
Direct Insite provides a second product offering, which utilizes its patented
software. This offering "Telecommunications Solutions", (also marketed under the
name Global Telecommunications Services or GTS) utilizes d.b.Express to analyze
long distance, data and wireless communication needs, assisting in the
negotiation of telecommunication contracts and monitoring ongoing carrier
contract compliance. This service best serves several groups, including the
Fortune 2000 companies, call centers, and buying consortiums. The Company is
combining this service with its Server Farm to create a unique, powerful
detailed customer profile. This new, enhanced profile will allow customers to
efficiently optimize all telecommunications contract compliance, establish
traffic metrics, monitor invoice accuracy and rate compliance as well as support
complex invoicing and reporting requirements, exception reporting and electronic
invoicing, all via the Internet.
The Company began marketing this product offering in 2000 and has not yet
recorded any revenue. Telecommunications consultants with over fifteen years of
combined experience spearhead this offering. The sell cycle of this offering
tends to be lengthy, are dependent on such factors as the choice of service
requested; size of the potential customer; response time from their
telecommunications carrier as well as unique facts and circumstances pertaining
to their telecommunications contract.
Descriptions of the services offered within this business are:
Contract Negotiation Services
-----------------------------
Contract Negotiation services ensure customers receive market-leading pricing
and flexible contractual language for comprehensive service agreements, as well
as, stand alone voice, data, local and wireless services.
9
These services include the following:
Pricing Negotiations and Amendment Updates
-- Data collection and development of traffic study:
- Outbound, 800 and Local Voice
- Data and Internet Services
- Dedicated Access and DSL
- Wireless
-- Identification of service and volume leverage
-- Contract, service and volume optimization
Requests for Proposal (RFPs)
-- Preparation and administration
-- Define strategy and host bidders conference
-- Evaluate proposals and coach carriers
-- Finalize pricing and negotiate contract
Flexible and Essential Contractual Language
-- Competitive pricing clauses
-- Sound business downturn and divestiture clauses
-- Technology migration clauses
-- Custom and meaningful Service Level Agreements that address:
- Network quality: latency, availability and restoration
- Provisioning; installation and conversion guarantees
- Billing: dispute, withholding of payment and back billing
- Problem escalation
Contract Compliance
-------------------
Contract Compliance service provides Internet based account management solutions
that save time, money and provide valuable information that assist corporations
with telecommunication cost management.
Attainment and Summary Reports
-- Monthly and annual usage versus existing commitments
-- Monthly and annual revenue contribution by product category
- Domestic and International Voice
- Data and Internet Services
- Local Services
- Wireless
-- Multi-vendor usage consolidation presented in a common format
-- Network Inventory
-- Jeopardy Reports
Pricing Verification
-- Domestic and International voice rates
-- Data network components
-- Circuit installations and cancellations
-- Surcharges
10
Fluctuation Analysis
-- Rate
-- Volume trending
-- Semi-annual trending reports
Account Management
-- Invoice: dispute management and resolution services
-- Proactively identify and utilize leverage to provide cost savings
-- Renegotiation recommendations
-- Contract optimization
Solutions Management
--------------------
Solutions Management services minimize the time and internal resources
corporations allocate toward managing telecommunication services while
maximizing the financial benefits. We design custom organizational and
management solutions and provide consolidated corporate information to enable
better control and analysis of cost and efficiencies
Customized Internet Management Solutions
-- Develop tools and procedures to budget and allocate costs by location
and division
-- Create invoice consolidation and corresponding invoice cycles for IXCs
(Inter-Exchange Carrier) and RBOCs (Regional Bell Operating Company)
-- Network inventory tracking solutions
Internet Based Reporting
-- Management Reports
- Corporate summaries: geographic, divisional and business group
- Trends identified by department and division
- Inbound call details by 800 number: # of calls, duration and
originating NPA/NXX (the first three digits of a local telephone
number (Numbering Plan Area) or area code
- Customer defined reporting
-- Traffic Reports
- International call summaries by country
- Call summaries by state and area code
- Number of calls by Week/Day/Hour
-- Focus and Exception Reports
- Frequently dialed numbers
- Long duration and expensive call summaries
- Calls to 900 numbers or other potential call abuse
Call Center and PBX (Private Branch Exchange) Solutions
-- Call Center system design and re-design
-- IVR ( Interactive Voice Response) design and scripting
-- PBX call polling and accounting
Commercial Law and Regulatory Solutions
-- Wireless station authorizations and license assignments
-- Negotiate equipment purchases and financial arrangements for cellular
ventures
-- Specialized solutions to address Federal Communications Commission
regulatory concerns
11
Professional Services
---------------------
The Company's professional services unit provides a wide array of information
technology, support and services which offer solutions, support, and strategies
to solve various business needs in such areas as hardware, network
determinations, help desk applications, wiring/cabling, LAN connections,
moves/adds/changes, and project management, as well as overseeing new
installations and offering on-site component repair. However, as noted above and
in Item 7 - Management's Discussion and Analysis of Financial Condition, the
operations of this business unit were significantly curtailed in January, 2000.
SALES AND MARKETING / DISTRIBUTION
----------------------------------
The Company utilizes an internal sales team as well as independent marketing
organizations and strategic partners. As discussed in "Products" the Company
entered into arrangements with Avolent and Moore BCS to market its offerings.
The Company and Avolant signed reciprocal license agreements, wherein both
companies have enhanced each other's product offerings and will market one
another's offerings as well as an integrated product. Additionally, Avolent
provides the Company with an expanded sales and marketing force. Moore is
recognized as a leader in the print and digital communications industry. Through
this relationship the Company seeks to gain access to MooreBCS' customer base.
The professional services business segment had been primarily marketed through
the efforts of an individual, formerly with I.B.M., who possessed the necessary
experience along with a small in-house support staff.
SEASONALITY AND BACKLOG
-----------------------
Revenue from the server farm generally is not subject to fluctuations or
seasonal flows. With respect to telecommunications solutions, this business has,
to date, no history on which to adequately report. However, we do anticipate
that it will report quarterly fluctuations.
Other factors including, but not limited to, new product introductions, domestic
and international economic conditions, customer budgetary considerations, the
timing of product upgrades, and fee recognition in connection with our
telecommunications services may create fluctuations. As a result of the
foregoing factors, the Company's operating results for any quarter are not
necessarily indicative of results for any future period.
RESEARCH AND DEVELOPMENT
------------------------
The computer software industry is characterized by rapid technological change,
which requires ongoing development and maintenance of software products. It is
customary for modifications to be made to a software product as experience with
its use grows or changes in manufacturers' hardware and software so require.
The Company believes that its research and development staff, many with
extensive experience in the industry, represents a significant competitive
advantage. As of December 31, 2000, the Company's research and development group
consisted of 18 employees (44%). Further, when needed, the Company frequently
retains the services of independent professional consultants. The Company seeks
to recruit highly qualified employees, and its ability to attract and retain
such employees will be a principal factor in its success in maintaining a
leading technological position. For the three years ended December 31, 2000,
1999, and 1998, research and development expenses were approximately $4,278,000,
$10,525,000, and $11,193,000, respectively. The Company's research and
development expenditures relating to its core technology, d.b.Express and the
server farm were approximately $2,600,000, $5,650,000 and $3,040,000 for the
three years ended December 31, 2000,1999 and 1998, respectively. The Company
believes that investments in research and development are required in order to
remain competitive.
12
COMPETITION
-----------
The Company's products and services are marketed in highly competitive
environments. These environments are characterized by rapid change, frequent
product introductions and declining prices. Further, the Company's PC products
have been designed specifically for use on the Intel X86 family of computers,
utilizing other well known database products.
The Company's traditional business faces competition from large carriers who
offer to their customers report presentation tools such as MCI which offers a CD
ROM based product called "Perspective", AT&T offers a similar product called
"Billing Edge" while Sprint offers "Fone View". All of these products provide
for standard reports along with call detail records. There are also smaller
companies that offer desktop versions of electronic bill presentment and payment
(" EBPP"). Of the small companies who offer EBPP both Call Vision and Filetek
offer desktop solutions while Interconnect is an Internet delivery company of
EBPP services.
The Telecommunications Solutions business unit faces competition from a
different group whose attributes include legal, ASP, negotiations and contract
compliance / auditing:
-- Deloite & Touche: Bundles services along with telecommunications to
provide the customer a solution that extends beyond our current
offering. They have name recognition and credibility and produce
extensive background research material. Their model is to provide fee
for service consultants; the technology applied is generally
traditional database tools.
-- Hank Levine / LB3: Mr. Levine is an attorney that specializes in
contract negotiation and pricing models. Levine is well known for his
extensive experience in preparing telecommunication contracts.
Currently his services are focused mainly on consulting fees related
to contract services.
-- Telwares: Also a negotiations services company, they have been
established for several years and have an established customer base
that includes Pepsi, Georgia Pacific, Safeway and other Fortune 1000
Companies.
-- Teletron: Audits and reviews telecommunications costs for its clients
as well as assists in negotiating telecommunication contracts.
Many of the Company's current and potential competitors have greater name
recognition, larger installed customer bases, longer operating histories, and
substantially greater financial, technical and marketing resources than the
Company. There can be no assurance that the Company's current and potential
competitors will not develop products that may be or may be perceived to be more
effective or responsive to technological change than are the Company's current
or future products or that the Company's technologies and products will not be
rendered obsolete by such developments. Increased competition could result in
price reductions, reduced margins or loss of market share, any of which could
have a material adverse effect on the Company's business, operating results and
financial condition.
13
EMPLOYEES
The Company had 41 employees, all in the United States, at March 3, 2001,
including 11 in marketing, sales and support services, 21 in technical support,
(including research and development) and 9 in corporate finance and
administration. The future success of the Company will depend in part upon its
continued ability to attract and retain highly skilled and qualified personnel.
Competition for such personnel is intense, and the Company has experienced
turnover in its management group. None of the Company's employees are
represented by a labor union. There are no employment agreements or contracts.
The Company believes that its relations with its employees are good.
PATENTS AND TRADEMARKS
The Company has two federally registered trademarks, which it relies upon:
"d.b.Express" and "dbACCEL(TM)". In addition, the Company received a patent for
the proprietary aspects of its d.b.Express technology in 1994, and a second,
expanded patent on that technology in 1995, which broadened the claims regarding
the product's graphical interface and indexing. No assurance can be given that
the Company's patents and copyrights will effectively protect the Company from
any copying or emulation of the Company's products in the future.
OFFICERS OF THE COMPANY
Served as Positions and
Name Age Officer Since Offices
- -------------------------------------------------------------------------------------------------
James A. Cannavino 55 March, 2000 Chairman of the Board of Directors
Warren Wright 41 December, 2000 Chief Executive Officer
Anthony Coppola 46 March, 2000 President
George Aronson 52 August, 1995 Chief Financial Officer, Secretary
Lawrence York 31 June, 2000 Vice President
Arnold Leap 33 November, 2000 Executive Vice President and Chief
Technology Officer
Item 2. PROPERTIES
- --------------------
The Company leases various facilities for its corporate headquarters and
operations. The Company's significant facilities include:
Description Location Square Footage Lease term Annual Rental Cost
- ----------- -------- -------------- ---------- ------------------
Corp Headquarters Bohemia, NY 10,000 7/1/94 - 6/30/02 $192,600
Co-location facility Newark, NJ Note 1 2/1/01 - 1/31/04 $226,800
________
<FN>
Note 1. The Company is obligated under the terms of an agreement with its major
customer to have its redundant / co-location IBM site. The redundant facility
provides the Company with, among other things, switches, routers, racks,
connections to Internet network access points, at a variety of bandwidths,
various levels on monitoring, and access to problem management support.
</FN>
14
Item 3. LEGAL PROCEEDINGS
- ----------------------------
In March, 1995, an action was originally commenced against the Company and a
number of defendants (Barbara Merkens v. Aval Guarantee Ltd., Walter Mennel, J.
Forror, A. Faehndreich-Braun, T&M Consulting AG, M. Schmidt, E.G. Baltruschat
and Computer Concepts Corp.; United States District Court, Eastern District of
New York). In early 1997, after a change in counsel, the plaintiff amended the
complaint for a second time, now naming as defendants only the Company and three
of its officers. The second amended complaint alleges that certain third
parties, unrelated to the Company, transferred certificates representing
1,000,000 shares of the Company's common stock to the plaintiff. The complaint
further alleges that such shares were endorsed in blank by the third parties and
became bearer securities, which were negotiated to the plaintiff by physical
delivery. The certificates had not been legally acquired from the Company and
the Company had reported the certificates to the Securities and Exchange
Commission as stolen certificates. Plaintiff has requested validation of the
transfer of the certificates and is seeking damages of an unspecified amount,
consisting of alleged diminution in market value of the subject shares from 1994
through the date of any judgment in the plaintiff's favor. The Company denied
plaintiff's allegations and filed a motion for summary judgment. On or about
November 8, 1999, the motion for summary judgment was granted in favor of the
Company and its officers. However, the plaintiff filed an appeal, which was
contested by the Company. Since that time the parties agreed to settle the
matter. Under the terms of the tentative settlement agreement the Company would
issue 250,000 shares of its common stock. The tentative settlement has been
remanded to the district court, which is required to review the fairness of the
settlement agreement pursuant to the Securities Act of 1933,as amended. The
Company believes this settlement is likely to be accepted by the district court.
Accordingly, during the fourth quarter the Company accrued $80,000 to cover the
value of the shares to be issued plus estimated legal fees.
During 1999, the Company and certain officers received notification that they
had been named as defendants in a class action (case # CV 99 1046, Kassouf, et
al v. Computer Concepts Corp., Daniel DelGiorno, Sr. and Daniel DelGiorno Jr.,
U.S. District Court, Eastern District of New York) alleging violations of
certain securities laws with respect to the content of certain Company
announcements. On January 30, 2001, the Court entered a judgment dismissing the
suit. The time to file an appeal has expired.
In August of 1999, the Company and its directors were served with a complaint
filed in the Chancery Court of Delaware, New Castle County Claude Nadef v.
Daniel DelGiorno, et al and Computer Concepts Corp. as Nominal Defendant; C.A.
No. 17376-NC). This is a derivative action, which is action brought by the
plaintiff on behalf of the Company, in which the Company, for technical reasons,
is named as a nominal defendant along with the real defendants in interest,
Daniel DelGiorno, Sr., Daniel DelGiorno, Jr., Russell Pellicano, Augustin
Medina, all former members of the Company's Board of Directors. The plaintiffs
alleges that the individual defendants breached their respective fiduciary
duties to the Company by awarding excess compensation and are requesting a
judgment in favor of the Company for such excess compensation. An answer to the
complaint was interposed, denying the material allegations of the Complaint.
Document discovery has commenced, although no depositions are scheduled. The
Company and defendants have denied the allegations and are vigorously defending
the matter; however, the Company is unable to predict the outcome of this claim
and, accordingly, no adjustments have been made in the consolidated financial
statements in regard to this matter.
15
In November, 1999, a Company subsidiary was added as a party in an amended
complaint (Outdoor Systems, Inc., et al v A. Esman and MallNet Media Corp.;
Superior Court, Arizona, Maricopa County; No. CV 99- 12185). The complaint
alleges that Esman (a consultant to the Company) violated a personal non-compete
agreement in performing services for MallNet (a Company subsidiary), and Outdoor
Systems contends that they have been compelled to offer terms more generous to
their customers than they otherwise would have offered. Plaintiffs did not
disclose the amount of their alleged damages and requested injunctive relief. In
September 2000, this matter was settled under a stipulation for dismissal
without any further cost to the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------
At the Company's annual shareholders' meeting, held on August 23, 2000, the
shareholders of the Company elected the individuals identified below as the
Company's Board of Directors. Their terms expire at the next annual shareholders
meeting.
The tabulation of the results of the shareholders' vote was:
For Against/Withheld/Abstain
--- ------------------------
James A Cannavino 19,784,498 173,840
Charles Feld 19,784,498 173,840
Dr. Dennis J. Murray 19,784,498 173,840
Carla Stovall 19,784,498 173,840
A proposal for the appointment by the Board of Directors of Hays & Co. as the
Company's independent certified public accountants for calendar year 2000 was
approved by a vote of: 19,832,233 - For; 63,767 - Against; with 49,194 -
Abstained.
A proposal to amend the Company's Certificate of Incorporation to change the
name to Direct Insite Corp was approved by a vote of: 19,747,816 - in favor;
141,170 - opposed; 79,256 - abstained.
16
PART II
- -------
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK
- ----------------------------------------------
The Company's Common Stock has been traded on NASDAQ since September 23, 1992.
The following table sets forth the high and low sales prices for the Company's
common stock by fiscal quarters for the last two years.
High Low
---- ----
1999:
First Quarter 2.375 1.406
Second Quarter 1.938 1.250
Third Quarter 2.000 1.093
Fourth Quarter 2.250 1.000
2000:
First Quarter 2.688 1.469
Second Quarter 1.500 0.688
Third Quarter 1.125 0.688
Fourth Quarter 1.063 0.313
2001
(Through March 22, 2001) 0.469 0.210
As of March 24, 2001, the there were 3,056 shareholders of record. The Company
estimates that there are approximately 14,767 shareholders whose shares are held
in the name of their brokers or stock depositories.
In February, 2000, the Company declared a dividend of $0.10 per share
(aggregating approximately $2 million) to its shareholders of record on March
15, 2000, and paid May 1, 2000.
In August, 1999, the Company declared a special dividend of $6 million
(approximately $0.29 per share), which was paid on November 15, 1999, to
shareholders of record as of September 30, 1999.
The Company does not presently anticipate declaring any dividends for the
foreseeable future.
17
Item 6. SELECTED FINANCIAL DATA
- ---------------------------------
The following selected consolidated financial data for the five fiscal years
ended December 31, 2000,1999,1998, 1997 and1996, are derived from the Company's
audited financial statements. To better understand the following financial
information, investors should also read the "Management's Discussion and
Analysis of Operations." This data should also be read in conjunction with the
consolidated financial statements of the Company, related notes, and other
financial information included elsewhere in this Form 10-K. All numbers are in
thousands, except per share amounts.
In August, 1998, Softworks completed a public offering, after which the
Company's ownership interest was reduced to approximately 72%. In April, 1999,
the Company's ownership of Softworks was reduced below 50%, and accordingly,
commencing April 1, 1999, Softworks' results are accounted for using the equity
method of accounting and are no longer consolidated. See Note 3 to the
Consolidated Financial Statements that provides pro forma consolidated financial
information as if the sale of Softworks was consummated as of the beginning of
the three years ended December 31, 2000, 1999 and 1998.
Consolidated Statement of Operations Data:
Year Ended December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenue $2,120 $24,640 $61,988 $29,738 $19,030
Cost of Revenue 322 13,044 21,018 3,663 2,043
------ ------- ------- ------- -------
Gross Margin 1,798 11,596 40,970 26,075 16,987
------ ------- ------- ------- -------
Research and Development 4,278 10,525 11,193 8,785 5,347
Sales and Marketing 4,644 17,417 28,496 17,033 13,038
General and Administrative 5,505 11,472 12,718 9,111 8,185
Amortization and Depreciation 871 4,738 4,207 2,386 3,550
Non-recurring Restructure Charge 15,176 - - - -
Unusual Charges - - - 686 2,590
Reduction in Carrying Values of
Long-Lived Assets - - - - 412
------------------------------------------------------------------
Total Operating Expenses 30,474 44,152 56,614 38,001 33,122
------------------------------------------------------------------
Operating loss (28,676) (32,556) (15,644) (11,926) (16,135)
Gain on Sale of Softworks 47,813 17,107 28,785 - -
Equity in Earnings of Softworks - 512 - - -
Gain on Sale of ComputerCOP in 2000
and Maplinx in 1997 8,534 - - 813 -
Other-Than-Temporary Decline in
Investment in NetWolves Corporation (29,737) - - - -
Interest Charge Pertaining to Discount
on Convertible Debentures (354) - - (1,288) (2,810)
Other Income (Expense), net 724 316 (485) 16 (8)
Minority Interest in Earnings of
Softworks - (46) (1,361) - -
------------------------------------------------------------------
(Loss) Income Before Provision for
Income Taxes (1,696) (14,667) 11,295 (12,385) (18,953)
(Provision For)/Benefit From Income
Taxes (10,040) 9,095 (1,748) - -
------------------------------------------------------------------
Net (Loss) Income $(11,736) $(5,572) $9,547 $(12,385) $(18,953)
==================================================================
Basic Net (Loss) Income per Share $ (0.55) $ (0.27) $ 0.58 $ (1.11) $ (2.66)
==================================================================
Diluted Net (Loss) Income per Share $ (0.55) $ (0.27) $ 0.56 $ (1.11) $ (2.66)
==================================================================
Cash Dividends Declared per Share $ 0.10 $ 0.29 $ 0 $ 0 $ 0
==================================================================
Basic Weighted Average Common Shares
Outstanding 21,395 20,455 16,523 11,163 7,130
==================================================================
Diluted Weighted Average Common
Shares Outstanding 21,395 20,455 17,031 11,163 7,130
==================================================================
Consolidated Balance Sheet Data:
December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Cash and Cash Equivalents $10,851 $1,852 $8,176 $778 $5,675
Working Capital 9,693 22,846 27,569 1,412 2,809
Total Assets 18,253 30,024 91,902 39,298 27,671
Long Term Debt, Less Current Portion 924 - 1,403 1,395 526
Minority Interest - - 8,503 - -
Shareholders Equity 10,538 24,486 34,016 9,667 9,524
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ---------------------------------------------------------------------
Forward-Looking Statements
--------------------------
All statements other than statements of historical fact included in this Form
10-K including, without limitation, statements under, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position, business strategy and the plans and objectives of
management for future operations, are forward-looking statements. When used in
this Form 10-K, words such as "anticipate," "believe," "estimate," "expect,"
"intend" and similar expressions, as they relate to the Company or its
management, identify forward-looking statements. Such forward - looking
statements are based on the beliefs of management, as well as assumptions made
by, and information currently available to, the Company's management. Actual
results could differ materially from those contemplated by the forward-looking
statements as a result of certain factors including but not limited to,
fluctuations in future operating results, technological changes or difficulties,
management of future growth, expansion of international operations, the risk of
errors or failures in the Company's software products, dependence on proprietary
technology, competitive factors, risks associated with potential acquisitions,
the ability to recruit personnel, and the dependence on key personnel. Such
statements reflect the current views of management with respect to future events
and are subject to these and other risks, uncertainties and assumptions relating
to the operations, results of operations, growth strategy and liquidity of the
Company. All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by this paragraph.
Overview
--------
The year 2000 witnessed major changes at the Company. During the first quarter
the then full slate of Board of Directors, and CEO either retired or resigned.
The newly appointed Board, with Mr. James A. Cannavino as its chairman and
interim CEO, directed the management to put in place a restructure plan. Their
primary objective was to streamline the Company's operations and overhead
structure. In March, 2000, the Company implemented a restructuring plan, its
primary objectives being: (i) to significantly reduce the number of employees,
expenses and commitments that supported the ComputerCOP technology (sold to
NetWolves, see Note 3 to the Consolidated Financial Statements), (ii) the
elimination of employees, expenses and commitments that supported the Company's
development project related to a multi-media display station (see Note 11 to the
Consolidated Financial Statements), and (iii) a general reduction of operating
expenses. In addition to reducing its overhead, the Company believes that the
restructuring has enabled management to concentrate on its core product. The
Company is now focused on exploiting its d.b.Express technology, which provides
the tools to analyze large volumes of data, currently marketed for
telecommunications analysis. In August 2000, the shareholders voted to approve
to change the name of the Company to Direct Insite Corp., which the Board of
Directors believed, was more in line with the new direction of the Company.
Direct Insite Corp. and its subsidiaries (hereinafter referred to as " Direct
Insite" or the "Company"), operate primarily as an ASP (application service
provider) providing high volume data processing and analysis tools for our
customers. Direct Insite's core technology, d.b.Express(TM), is a management
information tool providing targeted access through the mining of large volumes
of transactional data. The Company operates fully redundant data centers located
at our main office in Bohemia, N.Y. and Newark, NJ. Our facility in New Jersey
is space leased at the IBM e-business Hosting Center. This co-location /
redundancy feature enables the Company to offer virtually down time free
service.
19
Currently, IBM Global Services, the Company's largest customer, (representing
approximately 80% of year 2000's revenue) utilizes its core technology,
d.b.Express(TM) to allow their large enterprise customers to mine their
respective high volume telecommunications data uncovering call abuse, deliver
cost allocation by usage, provide for network planning, budgeting and the
identification of significant trends in calling patterns.
During 2000, the Company entered into two key strategic alliances, one with
Avolent, Inc the other Moore BCS. The alliance with Avolent assists the Company
in two areas. Firstly, the reciprocal license agreements permit Avolent to
market the d.b.Express technology through its marketing force. Secondly, we now
can offer next-generation technology for Internet-based EBPP and Internet
Customer care. With their BizCast(TM) offering, the Company is able to offer a
complete, feature-rich solution that meets the needs of business-to- business
billers, service providers and payers. It includes the functionality required to
import invoice data, present, process, and pay invoices. The combined offering
is designed to provide billers with the capability to reach a wide array of
payers. Additionally, during 2000 the Company entered into an agreement with
MooreBCS. Through this relationship the Company seeks to gain access to
MooreBCS' customer base. MooreBCS, on the other hand sought to enhance its
offering by addressing the issue of scalability. Scalability crisis occurs at a
certain point when data files reach a size wherein it cannot be efficiently
transmitted via the Internet. The Server Farm / d.b.Express addresses this
dilemma.
Direct Insite markets a second product offering which utilizes its patented
software. This offering "Telecommunications Solutions", (also marketed under the
name Global Telecommunications Services or GTS) utilizes d.b.Express to analyze
long distance, data and wireless communication needs, assisting in the
negotiation of telecommunication contracts and monitoring ongoing carrier
contract compliance. Further, this service offers a time saving analysis tool
that finitely and accurately determines errors in reporting and positions that
company uniquely with desired cost and productivity savings in previously
unidentified areas. The Company began marketing this product offering in 2000
and has not yet recorded any revenue.
Financial Condition and Liquidity
---------------------------------
The Company has incurred substantial operating losses and used substantial
amounts of cash in operating activities. However, as a result of the cost saving
measures implemented as part of the restructure plan put in affect in March
2000, the Company has and believes it should continue to see substantial
reductions in its operating costs and use of funds when compared to prior
periods. Historically, the most significant portion of the Company's operations
had been conducted through one of its subsidiaries, Softworks, Inc.
("Softworks"). During the past three years, cash requirements of the parent
company were primarily financed through the sale of Softworks common stock,
which included a series of separate transactions that included an initial public
offering of Softworks in 1998, a private placement of Softworks common stock
owned by the Company in December 1998, a second public offering of Softworks in
June 1999 and the sale of its remaining position in January 2000. The Company
liquidated its remaining position in Softworks pursuant to a tender offer made
by a wholly owned subsidiary of EMC Corporation in December, 1999, which offered
to purchase all of the outstanding shares of the common stock of Softworks. This
transaction, which closed in January 2000, resulted in the Company receiving
approximately $48,000,000, net of $3,000,000 of expenses, in January 2000. In
connection with the tender offer, the Company entered into an escrow agreement
whereby $10 million of the sales proceeds were placed into an interest bearing
escrow account to secure potential liabilities of the Company arising from an
indemnification agreement between the Company and EMC. In December 2000, the
escrow fund of $10,300,000, net of $160,000 of claims, was released to the
Company. See Note 3 to the Consolidated Financial Statements.
20
As discussed above, the Company implemented a restructure plan during the first
quarter of 2000 At December 31, 2000, the remaining cash requirement is
$2,450,000, $1,526,000 is payable over the next twelve months, and $924,000 is
payable through March 2005. See "Results of Operations" and Note 13 to the
Consolidated Financial Statements for further details.
Also during the first quarter of 2000, the Company sold its ComputerCOP Corp
subsidiary to NetWolves Corporation (NASDAQ: "WOLV") in exchange for 1,775,000
shares of NetWolves common stock. The assets of ComputerCOP included certain
technologies, inventory and $20,500,000 in cash. The Company also purchased
225,000 additional shares from certain NetWolves shareholders for $4,500,000.
The NetWolves shares were originally valued at $20, based upon the then current
quoted market price as well as the value obtained from an independent fairness
opinion.
In February 2000, the Company declared a dividend of $0.10 per share
(aggregating $2,184,000) to its shareholders of record on March 15, 2000 and
paid on May 1, 2000.
In an effort to increase shareholder value through the reduction of shares in
the open market, the Company, during the fourth quarter of 2000, pursuant to
board of directors authorization, acquired 365,569 shares of its common stock
for approximately $328,000 or an average of $0.896 per share.
On September 27, 2000, the Company entered into an agreement to sell an
aggregate principal amount of $3,000,000 of Convertible Debentures (the
"Debentures") bearing interest at a rate of 6% per annum. The Company sold a
$2,000,000 Debenture on September 27, 2000, a $500,000 Debenture on October 27,
2000 and, an additional $500,000 Debenture on December 21, 2000. The Company
received $3,000,000 less legal and other expenses aggregating $119,000.
Provisions within the Debentures stated that they could not be converted into
shares of the Company's common stock beginning February 25, 2001, subject to
certain limitations. The conversion price would be the lesser of $0.90 or 82% of
the average per share market value at the time of the conversion. The Company
had the right, exercisable at any time, to prepay all or any portion of the
outstanding principal amount of the Debentures for which conversion notices have
not previously been delivered. On January 30, 2001, the Company exercised its
prepayment rights and paid the holders $3,700,000, plus accrued interest. As a
result of the prepayment, the Company recorded a loss of $185,000 in the first
quarter 2001.
In connection with the sale of the Debentures, the Company would have been
required to file a Registration Statement prior to November 30, 2000 in which it
would have to register 4,384,000 shares of common stock for resale by the
Holders of the Debentures, if converted. The agreement provided for various
covenants and events of default, including: (i) failure by the Company to have
its Registration Statement declared effective by the SEC on or before February
24, 2001 and (ii) delisting or suspension of the Company's common stock from
trading on the Nasdaq SmallCap Market. The agreement imposed various penalties
including immediate conversion of the debentures into cash, as well as cash
penalties of 3% of the outstanding principal balance per month. The Company
elected to prepay these obligations with the funds recently received from the
release of the escrow account referred to above.
During the year, the Company purchased $602,000 of additional equipment,
approximately $503,000, to expand and improve the server farm. The $99,000
balance was for general equipment.
As discussed above and as detailed in the Consolidated Statement of Cash Flows,
during the year ended December 31, 2000, the Company received $58,142,000 from
the sale of Softworks and $3,000,000 (less expenses) from the sale of
Debentures, while utilizing $27,072,000 in the NetWolves/ComputerCOP
transaction, $22,767,000 in operating activities (including $10,246,000 toward
21
the restructuring) and paid a dividend to its stockholders totaling $2,184,000,
resulting in a cash balance of $10,851,000 as of December 31, 2000. In the first
quarter to date, the Company utilized $3,752,000 to repay the Debentures,
$965,000 toward the restructuring, $855,000 for income taxes and utilized
approximately $1,772,000 in other operating activities. In February 2001 the
Company made an equity investment of $500,000 in Voyant Corp.. The investment
will be reflected on the Company's balance sheet as a non-marketable security.
The Company's Chairman is also the Chairman of Voyant Corp. These activities
resulted in a cash balance of approximately $3,007,000 at March 16, 2001.
Management's current short-term plan is primarily focused on achieving operating
profit by successfully marketing innovative software products and services that
capitalize on the Company's patented technologies. To achieve its goals, the
Company has restructured its operations, which reduced its operating expenses,
while continuing to market the Server Farm. Additionally, the Company intends to
successfully market its new consulting service. The Company is continually
reviewing its long-term business strategy.
Management believes that its plan will ultimately enable the Company to achieve
positive cash flows from operations. Until such time, the Company believes that
its present cash on hand and the liquidation of a portion of its investment in
Netwolves should provide adequate funding.
The Company's primary market is Telecommunications. It has been estimated that
over $600 billion a year globally, and over $269 billion domestically was spent
last year, with the largest percentage growth occurring in the wireless arena
($37 to $48 billion ), which emphasizes that the telecommunications industry is
lucrative and attractive. The Company believes it can provide both the provider
as well as the end- user, with products and services which offer improved
service as well as valuable information. Internet and wireless communications
are introducing change to an industry that is already undergoing structural
change (fiber optic cable vs. copper), deregulation, globalization, and
technology. With the tremendous increase in call detail records (CDR) and data
packets (DP) that will travel over the networks both wired and wireless, the
Company believes that it is well positioned to benefit from these market
conditions with its software and services offerings.
The Company anticipates expanding the use of its Server Farm / data analysis
offering to other vertical markets by end of 2001.
The Company is deemed to be an affiliate of NetWolves Corporation. As such,
there are certain restrictions pursuant to SEC regulations that limit the amount
of shares that the Company may sell in the open market in a 90-day period.
Should the Company be required to liquidate shares in excess of the permitted
quantities, the Company may need to sell a portion of its investment in private
transactions. Private transactions would likely result in sales at a discount to
the quoted price. At December 31, 2000, the quoted market value of the 1,875,000
shares of NetWolves common stock was $4,922,000 ($2.625 per share). On March 22,
2001, the quoted market value of the NetWolves common stock was $4.125 per share
aggregating $7,734,375).
NetWolves is an Internet systems developer that has designed and developed a
multi-functional product that is a secure, integrated, modular Internet gateway.
The primary product, the FoxBox, supports secure access to the Internet for
multiple users through a single connection and, among other things, provides
electronic mail, firewall security and web site hosting and also contains a
network file server. Since inception, the Company has been developing its
business plan and building its infrastructure in order to effectively market its
products and shipped its first significant order in March 1999. Through
ComputerCOP Corporation, NetWolves sells software designed to provide non
computer literate owners the ability to identify threats as well as
objectionable material that may be viewed by users of the computer on the
Internet.
22
As discussed in Note 11, in April 2000, the Company entered into a contractual
arrangement with an unrelated third party, whereby the Company transferred all
of its in-process research and development technology related to the multi-media
display station for the rights to 50% of the future profits (as defined), if
any, from the third party's operation or sale of this technology. The third
party agreed to utilize its contacts in the industry and also agreed to fund all
future costs associated with the continued development and marketing of the
display station. There can be no assurances that the Company will recognize any
proceeds from this transaction.
The Company received a NASDAQ Staff Determination letter in November, 2000
stating that its closing bid price had been below one dollar for thirty
consecutive trading days thus not complying with the requirements for continued
listing set forth in Marketplace Rule 4310(c )(4) and that its securities are,
therefore subject to delisting from the Nasdaq Small Cap Market. The Company has
been granted an oral hearing set for March 29, 2001 with the Nasdaq Listing
Qualifications Panel ("Panel") at which time management intends to demonstrate
that it will be able to comply with Nasdaq's minimum bid price requirement.
There are no representations nor assurances the Panel will grant the Company's
request for continued listing. Additionally, the Company in March, 2001, filed a
preliminary proxy statement in which it stated that it intends to put before its
shareholders, at a special meeting, the matter of a reverse stock split. Since
the result of the hearing with the Panel is not yet known, the Company is unable
at this time to determine its course of action on how it intends to maintain a
listing on a major exchange.
Results of Operations
---------------------
Fiscal 2000 Compared to Fiscal 1999
-----------------------------------
Commencing April 1, 1999, Softworks' results were accounted for using the equity
method of accounting and were no longer consolidated. Under the equity method of
accounting, the Company's share of Softworks' earnings or losses was included in
the Company's consolidated operating results in a single line item. Pro forma
consolidated operating results as if Softworks were accounted for using the
equity method for the entire year ended December 31, 1999, on a consistent basis
with the actual results for 2000, is as follows:
Direct Insite Corp. and Subsidiaries
------------------------------------
Pro Forma Condensed Consolidated Statements of Operations
For the year ended December 31,
(in thousands)
2000 1999
(Actual) (Pro-forma)
-------- -----------
Revenue
Software licenses, net $31 $ 607
Maintenance 42 42
Server Farm 2,047 1,436
Professional services - 12,297
-------- --------
2,120 14,382
Cost of Revenue
Software licenses 11 242
Maintenance - -
Server Farm 311 317
Professional services - 11,721
-------- --------
322 12,280
-------- --------
Gross margin 1,798 2,102
-------- --------
23
2000 1999
(Actual) (Pro-forma)
-------- -----------
Research and development costs 4,278 8,025
Sales and marketing costs 4,644 12,476
General and administrative costs 5,505 10,281
Non-recurring restructuring charge 15,176 -
Amortization and depreciation 871 4,028
-------- -------
30,474 34,810
Operating loss (28,676) (32,708)
Gain on partial disposition of Softworks 47,813 17,107
Gain on sale of ComputerCOP 8,534 -
Other-than-temporary decline in
Investment in NetWolves (29,737) -
Other 370 874
Loss before income taxes (1,696) (14,727)
(Provision for) benefit from income taxes (10,040) 9,155
======== ========
Net loss $(11,736) $(5,572)
======== ========
The following discussion dealing with the results of operations for the two
years ended December 31, 2000 and December 31, 1999 are based on the operating
results as presented in the above table.
During 2000, the Company's primary source of revenue was generated from the
Server Farm. For the year ended December 31, 2000, total revenue decreased by
$12,262,000, as compared to the year ended December 31, 1999. In January, 2000,
the Company elected to significantly curtail operations of its business unit,
marketed as professional services, which primarily resold computer hardware and
assisted in the design, and installation of technology systems. For the year
ended December 31, 1999, this business unit had one major contract involving two
major customers, with combined revenue of $12,297,000. However, this business
unit generated low margins, and operated in a highly competitive and volatile
business arena. Accordingly, management elected to significantly curtail the
operations of this unit, as it does not coincide with its short and long-range
business plans. The Company currently does not have any other sales contracts.
In February 2000 the Company sold the ComputerCOP Corp subsidiary accounting for
a decrease in the software license revenue of $576,000. For the year ended
December 31, 2000 server farm revenue was $2,047,000,an increase of $611,000 or
43% over the prior year. At present, the server farm technology has been
developed to provide services solely for telecommunications analysis. The
Company is currently in discussion with several customers, which if consummated,
should continue to increase revenue growth. The Company remains optimistic that
it will begin to report revenue from its telecommunications solutions service.
24
The server farm generates higher gross margin than the hardware reselling
business. The server farm cost of revenue consists primarily of the direct labor
associated with processing call detail records. The cost of revenue related to
the resale of computer hardware consisted primarily of amounts paid to the
Company's suppliers for goods and services. While server farm revenue for 2000
increased 43% when compared to 1999, cost of revenue as a percentage of server
farm revenue, decreased to 15.2% in 2000 from 22.1% in 1999. The Company
believes that the cost of revenue associated with the server farm revenue is not
directly proportional. As such, as revenue increases, costs, as a percentage of
revenue, should decrease. The depreciation of the server farm's hardware is
included in "Amortization and depreciation."
Research and development expenses include costs for the development of the
multi-media display station (until the project was halted by the restructuring
plan), salaries and related costs for software developers, quality assurance and
documentation personnel involved in the Company's research, development and
maintenance efforts. Costs attributable to the development of the multi-media
display station was $3,826,000 for the year ended December 31, 1999, and
decreased by $2,033,000 to $1,793,000 for the year ended December 31, 2000.
Pursuant to the restructuring plan, the Company ceased development of this
project in the first quarter of 2000, thereby eliminating these development
costs. With respect to the server farm, when comparing 2000 and 1999, the
Company reduced its development costs by $1,714,000. However, costs attributable
to further enhancing product and services offerings, porting the technology to a
LINUX platform and development costs directly associated with the co-location
facility could result in increases to overall research and development expenses
during 2001.
Sales and marketing expenses include salaries and related costs, commissions,
travel, facilities, communications costs and promotional expenses for the
Company's direct sales organization and marketing staff. For the year ended
December 31, 2000, expenses decreased by $7,832,000 to $4,644,000 when compared
to $12,476,000 for the same period last year. Included in this decrease were
reductions pursuant to the restructuring plan including $3,151,000 related to
consultants' fees; $626,000 to reduced staffing levels; reductions of
approximately $3,696,000 due to the sale of ComputerCOP; $167,000 reduction in
travel and entertainment expenses; and $194,000 pertaining to efforts to market
the multi-media display station. Offsetting these decreases was $230,000 of
expenses attributable to the Company's new consulting service. Management
believes that, overall, this category will significantly decrease as a result of
the restructure plan.
General and administrative expenses include administrative and executive
salaries and related benefits, legal, accounting and other professional fees as
well as general corporate overhead. Expenses decreased $4,776,000 to $5,505,000
for the year ended December 31, 2000, when compared to the year ended December
31, 1999. Major factors contributing to the decrease include, among other
things, various savings directly attributable to the restructure plan, such as
staff reductions, reduced legal expenses and the reduction in the retention of
financial consultants. The Company anticipates recognizing additional reductions
during 2001.
As discussed above, the Company implemented a restructure plan during the first
quarter of 2000. As a result, for the year ended December 31, 2000, the Company
recorded a non-recurring restructuring charges of $15,176,000 related to the
termination of 53 employees, retirement packages for certain Company officers
and directors, and the termination of certain long-term consulting contracts and
operating leases. The Company's cost-saving initiatives will continue into 2001
and may result in additional charges.
25
Amortization and depreciation expenses decreased $3,157,000 when comparing the
years ended December 31, 2000 and 1999. The decrease is primarily attributable
to the elimination of purchased software and goodwill acquired in the
ComputerCOP transaction.
Gain on sale of Softworks of $47,813,000 represents the gain associated with a
successful tender offer for Softworks common stock made by EMC Corporation,
which was completed in January, 2000. Gain on sale of ComputerCOP assets held
for sale of $8,534,000 represents the gain associated with the sale in February
2000 of the ComputerCOP subsidiary to NetWolves Corporation.
During the fourth quarter of 2000, the Company, in accordance with Staff
Accounting Bulletin No. 59, determined that there was an other-than-temporary
decline in the carrying value of its investment in NetWolves. As such, the
Company recorded an unrealized loss of $29,737,000 in the Consolidated Statement
of Operations. See Note 3 to the Consolidated Financial Statements.
As a result of the Company's sale of its remaining interest in Softworks in
January 2000 and the sale of its ComputerCOP technology in February 2000, the
Company recognized a taxable gain in the first quarter of 2000 and utilized
approximately $36,000,000 of its net operating loss carryforwards. The Company's
tax provision for year ended December 31, 2000, of $10,040,000, consists of
deferred tax expense of $9,197,000 and current tax expense of $843,000, which is
primarily based upon the alternative minimum tax.
Fiscal 1999 Compared to Fiscal 1998
-----------------------------------
Commencing April 1, 1999, Softworks' results were accounted for using the equity
method of accounting and were no longer consolidated. Under the equity method of
accounting, the Company's share of Softworks' earnings or losses was included in
the Company's consolidated operating results in a single line item. Pro forma
consolidated operating results as if Softworks were accounted for using the
equity method for the years ended December 31, 1999, and 1998, is as follows:
Direct Insite Corp. and Subsidiaries
------------------------------------
Pro Forma Condensed Consolidated Statements of Operations
For the year ended December 31,
(in thousands)
1999 1998
---- ----
Revenue
Software licenses, net $ 607 $ 70
Maintenance 42 42
Server Farm 1,436 663
Professional services 12,297 17,464
------ ------
14,382 18,239
Cost of Revenue
Software licenses 242 133
Maintenance - -
Server Farm 317 259
Professional services 11,721 16,375
------- -------
12,280 16,767
------- -------
Gross margin 2,102 1,472
------- -------
Research and development costs 8,025 3,395
Sales and marketing costs 12,476 9,014
General and administrative costs 10,281 8,283
Amortization and depreciation 4,028 2,037
------- -------
34,810 22,729
------- -------
Operating loss (32,708) (21,257)
Gain on partial disposition of
Softworks 17,107 28,785
Other 874 2,376
(Loss) income before benefit for
income taxes (14,727) 9,904
------- -------
Benefit from (provision for)
income taxes 9,155 (357)
Net income (loss) $(5,572) $(9,547)
======= =======
26
The following discussion about the 1999 results of operations is based on the
operating results as presented in the above table
For the year ended December 31, 1999, total revenue decreased by $3,857,000,
when compared to the year ended December 31, 1998, primarily as a result of a
decrease in professional services revenue of $5,167,000. As noted above, as of
December 31, 1999, the Company had no open hardware contracts, and, in January
2000, elected to significantly curtail the operations of this business unit. For
the years ended December 31, 1999, and 1998, server farm revenue was $1,436,000
and $663,000, respectively. Substantially all of the revenue in the software
license category relates to ComputerCOP. The Company began shipping the initial
version of ComputerCOP during the last quarter of 1998 to various distributors,
retailers, and individuals. Since shipments were made with right of return, the
Company delayed the recognition of revenue until the requirements of Statement
of Financial Accounting Standards No. 48, "Revenue Recognition When Right of
Return Exists" were met. As noted above, during the first quarter of 2000, the
Company sold the ComputerCOP technology. As a result of these actions, the
Company's primary source of revenue is currently generated from the server farm.
The server farm generates higher gross margin than the reselling business unit.
The server farm cost of revenue consists primarily of the direct labor
associated with processing call detail records. The cost of revenue related to
the resale of computer hardware consists primarily of amounts paid to the
Company's suppliers for goods and services. The cost of revenue related to the
server farm, for the year ended December 31, 1999, was $317,000, or 22.1%. Cost
of revenue related to the server farm for the year ended December 31, 1998, was
$259,000, or 39.1% of revenue. The Company believes that the cost of revenue
associated with the Server Farm revenue is not directly proportional. As such,
as revenue increases, costs, as a percentage of revenue, should decrease. The
cost of revenue, related to the resale of computer hardware and related services
for the year ended December 31, 1999, of $11,721,000 or 96.0%, an increase, when
compared to 93.7% for this business unit for the year ended December 31, 1998.
The depreciation of the server farm's hardware is included in "Amortization and
depreciation." Cost of revenue with respect to ComputerCOP was currently running
at approximately 35%. The amortization costs of the purchased software
technology related to ComputerCOP are included in "Amortization and
depreciation."
27
Research and development expenses include salaries and related costs for
software developers, quality assurance and documentation personnel involved in
the Company's research and development efforts. Costs for the year ended
December 31, 1999, increased approximately $4,630,000 to $8,025,000 when
compared to the year ended December 31, 1998. Approximately $3,826,000 of
additional expense was incurred in connection with the development of the
multi-media technology during the year ended December 31, 1999. A portion of the
variance, approximately $700,000, is attributable to costs associated with the
initial concept and designs, early stage development and implementation of the
Internet multi-media technology. Additional increases were incurred in
expenditures relating to further development of server farm technology.
Sales and marketing expenses include salaries and related costs, commissions,
travel, facilities, communications costs and promotional expenses for the
Company's direct sales organization and marketing staff. Expenses increased
$3,462,000 to $12,476,000 for the year ended December 31, 1999, when compared to
$9,014,000 for the year ended December 31, 1998. A major portion of the variance
pertains to costs associated with ComputerCOP. The Company expensed non-cash
charges of approximately $2,909,000 related to the appearances and product
endorsements made on behalf of ComputerCOP during the year ended December 31,
1999, resulting in an increase of approximately $1,375,000, when compared to the
year ended December 31, 1998. The ComputerCOP acquisition occurred in mid 1998.
Additionally, the Company expended approximately $655,000 in its efforts to
market ComputerCOP (nominal expense for the year ended December 31, 1998, as the
Company commenced marketing the product late in the fourth quarter of that
year). Further, salaries and commissions related to ComputerCOP increased
approximately $275,000. The Company has also incurred an additional $320,000 of
sales and commission expenses related to the resale of computer hardware and
related services in its professional services division when compared to the same
period in 1998. Also, the Company incurred expenses of approximately $791,000 in
its effort to market the multi-media display still under development. The
balance of the sales and marketing costs, approximately $7,182,000, relate to
the Company's server farm (in the telecommunications industry as well as
exploring new vertical market applications) and marketing research for products
and services under development. While sales and marketing expenses increased,
the Company believed that its expenditures were necessary in order to maintain
and improve market position and product recognition.
General and administrative expenses include administrative and executive
salaries and related benefits, legal, accounting and other professional fees as
well as general corporate overhead. Expenses increased $1,998,000 to $10,281,000
for the year ended December 31, 1999, when compared to the year ended December
31, 1998. Major factors contributing to this increase include, among other
things, increased compensation and additional staffing, legal expenses incurred
in defending the Company from litigation and the retention of financial
consultants.
Amortization and depreciation expenses increased $1,991,000 when comparing the
years ended December 31, 1999, and December 31, 1998. The increase is primarily
attributable to the purchased software and goodwill acquired in the ComputerCOP
transaction.
Gain on partial disposition of Softworks of $17,107,000 represents the gain
associated with a public offering of Softworks as well as the sale and exchange
of additional Softworks common stock as further described in Note 3 to the
Consolidated Financial Statements.
28
The $9,155,000 benefit from income taxes represents the reduction of the
valuation allowance on the Company's deferred tax assets. As a result of the
Company's sale of its remaining interest in Softworks and the sale of
ComputerCOP, the Company recognized a taxable gain in the first quarter of 2000.
Accordingly, a portion of the Company's net operating loss carry-forwards and
other deferred tax assets have become utilizable.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------
Not applicable.
Item 8. FINANCIAL STATEMENTS
- ------------------------------------
The financial statements and exhibits to Form 10 - K are included beginning on
page F-1 and are indexed under Items 14(a), 14 (b) and 14(c), respectively.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
AND FINANCIAL DISCLOSURE
- --------------------------------------------------------------
On February 2, 2001 the Company filed a Form 8-K in which it disclosed that it
had terminated its professional relationship with the independent accounting
firm of Hays & Co and engaged the firm of Markum & Kliegman, LLP, to audit the
Company's financial statements for the fiscal year ended December 31, 2000. The
accountants report for the fiscal years ended December 31, 1999 and 1998
contained no adverse opinion, disclaimer thereof, nor were they qualified or
modified as for uncertainty, audit scope, or accounting principles. The decision
to change accountants was approved by the Audit Committee of the Board of
Directors. There were no disagreements between the Company and Hays & Co on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope of procedure.
29
PART IV
- ---------
Item 14. (a) 1. FINANCIAL STATEMENTS
- --------------------------------------
Page
----
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets
December 31, 2000 and 1999 F-2
Consolidated Statements of Operations
Years Ended December 31, 2000, 1999, and 1998 F-4
Consolidated Statement of Shareholders' Equity
Years Ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows
Years Ended December 31, 2000, 1999 and 1998 F-8
Notes To Consolidated Financial Statements F-10
14. (a). 2. - SCHEDULES
NONE
14. (a). 3. - EXHIBITS
2.1 Reorganization Agreement dated April 22, 1989. (Incorporated by reference
to Exhibit 2(a) to the Company's Form S-1 Registration Statement) (1).
2.2 Merger agreement between Computer Concepts Investment Corp. and RAMP
Associates Inc. dated October 31, 1990. (Incorporated by reference to
Exhibit 2(b) to the Company's Form S-1 Registration Statement)(1).
2.3 Merger agreement between Computer Concepts Corp. and Softworks, Inc.
(Incorporated by reference to Exhibit 2(a) to the Company's Form 8-K filed
on October 29, 1993).
3.1(i) (a) Certificate of Incorporation, as amended. (Incorporated by reference
to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(b) Certificate of Amendment (Change in Name) (Incorporated by reference to
Exhibit 3(a) of Form S-1 Registration Statement).(1)
(c) Certificate of Amendment (Change in Name) (Incorporated by reference to
Exhibit 3(a) of Form S-1 Registration Statement).(1)
(d) Certificate of Amendment (Authorizing Increase in Shares of Common Stock)
(Incorporated by reference to Exhibit 3 (i) (d) to Form 10-K for the year
ended 1995).
(e) Certificate of Amendment (Authorizing one for ten reverse-stock split as of
March 30, 1998).
30
3.2(ii) By-Laws. (Incorporated by reference to Exhibit 3(d) to the Company's
Form S-1 Registration Statement).(1)
4.1 Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4
to the Company's Form S-1 Registration Statement).(1)
4.2 Computer Concepts Directors, Officers and Consultants 1993 Stock Option
Plan (Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 filed on June 28, 1995).
4.3 Computer Concepts Employees 1993 Stock Option Plan (Incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on Form
S-8 filed on June 28, 1995).
4.4 Computer Concepts 1995 Incentive Stock Plan (Incorporated by reference to
Exhibit 5 to the Company's Proxy Statement filed on January 29, 1996).
9 Voting Trust Agreement among Computer Concepts Corp., Softworks, Inc. and
Trustees dated August 4, 1998 (Incorporated by reference to subsidiary
Softworks, Inc. Registration Statement filed on Form S-1, SEC File No.
333-53939 declared effective August 4, 1998).
10.1 Lease Extension Agreement between Atrium Executive Center and the Company
(Incorporated by reference to Exhibit 10 (g) (ii) to the Company's Annual
Report on Form 10 - K for the year ended December 31, 1993).
10.2 Agreement between Software Publishing Corp. and the Company dated June 14,
1994. (Incorporated by reference to Exhibit 10(a) to the Company's Form 8-K
filed on July 1, 1994). Asset Purchase Agreement dated June 30, 1998,
between the Company and Internet Tracking and Security Ventures, LLC.
(Incorporated by reference to Form 8-K dated July 15, 1998).
10.3 Offer to Purchase dated December 23, 1999, among Eagle Merger Corp., EMC
Corporation and Computer Concepts Corp. (Incorporated by reference to
Exhibit 1 to the Company's Form 8-K filed on February 9, 2000).
10.4 Indemnification Agreement dated December 21, 1999, among EMC Corporation,
Eagle Merger Corp. and Computer Concepts Corp. (Incorporated by reference
to Exhibit 2 to the Company's Form 8-K filed on February 9, 2000).
10.5 Indemnification Agreement dated December 21, 1999, between Softworks, Inc.
and Computer Concepts Corp. (Incorporated by reference to Exhibit 3 to the
Company's Form 8-K filed on February 9, 2000).
10.6 Escrow Agreement dated December 21, 1999, among EMC Corporation, Eagle
Merger Corp., Computer Concepts Corp. and State Street Bank and Trust
Company, Inc. as escrow agent (Incorporated by reference to Exhibit 4 to
the Company's Form 8-K filed on February 9, 2000).
31
10.7 Exchange Agreement, dated February 10, 2000, among Computer Concepts Corp.,
NetWolves Corporation and ComputerCOP Corp. (Incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K filed on March 2, 2000).
10.8 Voting Trust Agreement dated February 10, 2000, among Computer Concepts
Corp., NetWolves Corporation and Walter M. Groteke (Incorporated by
reference to Exhibit 10.2 to the Company's Form 8-K filed on March 2,
2000).
10.9 Registration Rights Agreement between Computer Concepts Corp. and NetWolves
Corporation (Incorporated by reference to Exhibit 10.3 to the Company's
Form 8-K filed on March 2, 2000).
16.1 Dismissal of Independent Auditors. (Incorporated by reference to Form 8-K
dated May 29, 1997).
16.2 Engagement of New Independent Auditors. (Incorporated by reference to Form
8- dated June 3, 1997).
23(a) Consent of Markum & Kliegman, LLP.
- ----------
(1) Filed with Form S-1, Registration Statement of Computer Concepts Corp.
Reg. No 3-47322 and are incorporated herein by reference.
14. (b) REPORTS ON FORM 8-K
None.
32
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the day of March, 2001.
DIRECT INSITE CORP.
By: ______________________________________
Warren Wright, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March , 2001 the following persons in the capacities
indicated:
________________________ Chairman of the Board
James A. Cannavino
________________________ Chief Executive Officer
Warren Wright
________________________ Chief Financial Officer
George Aronson
________________________ Director
Charles Feld
________________________ Director
Dennis J. Murray
________________________ Director
Carla J. Stovall
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2000, 1999 and 1998
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
CONTENTS
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITOR'S REPORT F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2 - F3
Consolidated Statements of Operations F-4
Consolidated Statement of Shareholders' Equity F-5 F-7
Consolidated Statements of Cash Flows F-8 F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10 F-49
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors and Shareholders
Direct Insite Corp.
Bohemia, New York
We have audited the accompanying consolidated balance sheets of Direct Insite
Corp. and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Direct Insite
Corp. and subsidiaries as of December 31, 2000 and 1999, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 2000 in conformity with generally
accepted accounting principles.
/s/ Marcum & Kliegman LLP
February 23, 2001
Woodbury, New York
F-1
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
ASSETS
------
2000 1999
-------------------------
CURRENT ASSETS
- --------------
Cash and cash equivalents $10,851 $ 1,852
Accounts receivable, net of allowance for sales returns and
doubtful accounts of $70 and $493 in 2000 and 1999,
respectively 260 443
Investment in Softworks, held for sale -- 10,329
Assets held for sale ComputerCOP -- 3,876
Investment in NetWolves Corporation 4,922 --
Prepaid expenses and other current assets 451 865
Advances to officers -- 1,822
Deferred tax assets, current -- 9,197
------- -------
Total Current Assets 16,484 28,384
PROPERTY AND EQUIPMENT, Net 1,140 1,345
- ----------------------
OTHER ASSETS 629 295
- ------------ ------- -------
TOTAL ASSETS $18,253 $30,024
======= =======
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
F-2
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
2000 1999
-------------------------
CURRENT LIABILITIES
- ------------------
Accounts payable and accrued expenses $ 1,715 $ 5,446
Restructuring costs payable, current portion 1,526 --
Convertible debentures, net of discount of $305 2,695 --
Deferred maintenance revenue -- 42
Income taxes payable 855 50
------- -------
Total Current Liabilities 6,791 5,538
OTHER LIABILITIES
- -----------------
Restructuring costs payable, long-term 924 --
------- -------
TOTAL LIABILITIES 7,715 5,538
------- -------
COMMITMENTS AND CONTINGENCIES
- -----------------------------
SHAREHOLDERS' EQUITY
- --------------------
Common stock, $.0001 par value; 150,000,000 shares
authorized; 21,747,506 and 20,765,825 shares issued in
2000 and 1999, respectively; and 21,381,937 and
20,529,245 shares outstanding in 2000 and 1999, respectively 2 2
Additional paid-in capital 103,567 102,868
Unearned compensation (115) --
Accumulated deficit (89,502) (77,766)
Accumulated other comprehensive loss (3,086) (225)
------- -------
10,866 24,879
Common stock in treasury, at cost; 365,569 and 236,580 shares
in 2000 and 1999, respectively (328) (393)
------- -------
TOTAL SHAREHOLDERS' EQUITY 10,538 24,486
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY $18,253 $30,024
======= =======
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
F-3
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------
REVENUE $ 2,120 $ 24,640 $61,988
COST OF REVENUE 322 13,044 21,018
--------- -------- -------
GROSS MARGIN 1,798 11,596 40,970
--------- -------- -------
OPERATING EXPENSES
- ------------------
Research and development 4,278 10,525 11,193
Sales and marketing 4,644 17,417 28,496
General and administrative 5,505 11,472 12,718
Amortization and depreciation 871 4,738 4,207
Non-recurring restructuring charge 15,176 -- --
--------- -------- -------
TOTAL OPERATING EXPENSES 30,474 44,152 56,614
--------- -------- -------
OPERATING LOSS (28,676) (32,556) (15,644)
OTHER INCOME (EXPENSE)
- ---------------------
Gain on sale of Softworks 47,813 17,107 28,785
Equity in earnings of Softworks -- 512 --
Minority interest in earnings of Softworks -- (46) (1,361)
Gain on sale of ComputerCOP 8,534 -- --
Other-than-temporary decline in Investment
in NetWolves (29,737) -- --
Interest income (expense), net 370 316 (485)
--------- -------- -------
(LOSS) INCOME BEFORE (PROVISION) BENEFIT FOR
- --------------------------------------------
INCOME TAXES (1,696) (14,667) 11,295
------------ --------- -------- -------
(PROVISION) BENEFIT FOR INCOME TAXES (10,040) 9,095 (1,748)
- ------------------------------------ --------- -------- -------
NET (LOSS) INCOME $ (11,736) $ (5,572) $ 9,547
- ----------------- ========= ======== ========
Basic net (loss) income per share $ (0.55) $ (0.27) $ 0.58
========= ======== ========
Diluted net (loss) income per share $ (0.55) $ (0.27) $ 0.56
========= ======== ========
Basic weighted average common shares
outstanding 21,395 20,455 16,523
========= ======== ========
Diluted weighted average common shares
outstanding 21,395 20,455 17,031
========= ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
F-4
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
- --------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Total
------------ Paid-in Unearned Accumulated Comprehensive Treasury Shareholders' Comprehensive
Shares Amount Capital Compensation Deficit Loss Stock Equity Income (Loss)
--------------------------------------------------------------------------------------------------------------
BALANCE January 1,
1998 12,745 $ 1 $ 91,641 $ -- $ (81,741) $ (234) $ -- $ 9,667
Net proceeds from
sales of common
stock and options
exercised 2,403 -- 5,228 -- -- -- -- 5,228
Common stock and
options issued for
services 2,090 1 3,462 -- -- -- -- 3,463
Common stock issued
for settlements 187 -- 484 -- -- -- -- 484
Common stock issued
for asset
acquisition 1,900 -- 5,700 -- -- -- -- 5,700
Currency translation
adjustment -- -- -- -- -- (13) -- (13) $ (13)
Marketable securities
valuation adjustment -- -- -- -- -- (60) -- (60) (60)
Net income -- -- -- -- 9,547 -- -- 9,547 9,547
------ ------ -------- ------- ---------- --------- ------- -------- -------
Total Comprehensive
Income $ 9,474
=======
BALANCE December
31, 1998 (Forward) 19,325 $ 2 $106,515 $ -- $ (72,194) $ (307) $ -- $ 34,016
====== ====== ======== ======= ========= ========= ======= ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
F-5
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, Continued
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
- --------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Total
------------ Paid-in Unearned Accumulated Comprehensive Treasury Shareholders' Comprehensive
Shares Amount Capital Compensation Deficit Loss Stock Equity Income (Loss)
--------------------------------------------------------------------------------------------------------------
BALANCE December 31,
1998 (Forward) 19,325 $ 2 $106,515 $ -- $ (72,194) $ (307) $ -- $ 34,016
Common stock and
options issued
for services 1,441 -- 2,353 -- -- -- -- 2,353
Dividend declared -- -- (6,000) -- -- -- -- (6,000)
Acquisition of treasury
stock (237) -- -- -- -- -- (393) (393)
Currency translation
adjustment -- -- -- -- -- 42 -- 42 $ 42
Marketable securities
valuation adjustment -- -- -- -- -- 40 -- 40 40
Net loss -- -- -- -- (5,572) -- -- (5,572) (5,572)
------ ----- -------- ------- --------- -------- ------ ------- ------
Total Comprehensive
Loss $(5,490)
=======
BALANCE December 31,
1999 (Forward) 20,529 $ 2 $102,868 $ -- $ (77,766) $ (225) $ (393) $24,486
====== ===== ======== ======= ========= ======== ====== =======
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
F-6
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, Continued
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
- --------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Total
------------ Paid-in Unearned Accumulated Comprehensive Treasury Shareholders' Comprehensive
Shares Amount Capital Compensation Deficit Loss Stock Equity Income (Loss)
--------------------------------------------------------------------------------------------------------------
BALANCE December 31,
1999 (Forward) 20,529 $ 2 $102,868 $ -- $ (77,766) $ (225) $ (393) $ 24,486
Common stock and
options issued for
services 1,629 -- 3,541 -- -- -- -- 3,541
Repayment of Officers'
Loans (410) (923) -- -- -- -- (923)
Dividend declared -- -- (2,184) -- -- -- -- (2,184)
Retirement of
treasury stock -- -- (393) -- -- -- 393 --
Acquisition of
treasury stock (366) -- -- -- -- -- (328) (328)
Discount on
convertible
debentures -- -- 658 -- -- -- -- 658
Unearned compensation
on option grants -- -- -- (115) -- -- -- (115)
Marketable securities
valuation adjustment -- -- -- -- -- (2,861) -- (2,861) $ (2,861)
Net loss -- -- -- -- (11,736) -- -- (11,736) (11,736)
------ ----- -------- ------- --------- -------- ------ -------- ---------
Total Comprehensive
Loss $ (14,597)
=========
BALANCE December 31,
2000 21,382 $ 2 $103,567 $ (115) $ (89,502) $ (3,086) $ (328) $ 10,538
====== ====== ======== ======= ========= ======== ====== ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
F-7
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net (loss) income $(11,736) $ (5,572) $ 9,547
Adjustments to reconcile net (loss) income to net
cash used in operating activities
Amortization and depreciation:
Property and equipment 807 1,020 1,226
Software costs -- 1,940 1,736
Excess of cost over fair value of net assets
acquired -- 1,951 1,762
Other 3 3 2
Non-cash interest charge pertaining to the discount on
convertible debentures 353 -- --
Provision for doubtful accounts 62 -- 324
Common stock and options exchanged for
services 3,426 2,353 3,463
NetWolves common stock exchanged for services
and for settlement of restructuring charges 2,000 -- --
Softworks common stock exchanged for services -- 4,814 5,551
Gain on disposition of Softworks (47,813) (17,107) (28,785)
Equity in earnings of Softworks -- (512) --
Minority interest in earnings of Softworks -- 46 1,361
Gain on sale of ComputerCop, net of $500,000
of NetWolves common stock exchanged for
legal services (8,534) -- --
Other-than-temporary decline in investment in
NetWolves Corporation 29,737 -- --
Deferred income tax expense (benefit) 9,197 (8,907) (790)
Other -- -- 75
Changes in operating assets and liabilities:
Accounts receivable 121 17,192 (26,276)
Inventories -- 169 (419)
Prepaid expenses and other current assets 483 1,786 947
Assets held for sale ComputerCop (18) -- --
Installments accounts receivable -- 149 (1,428)
Other assets (337) 144 (1,293)
Accounts payable and accrued expenses (3,731) (1,669) 4,411
Restructuring costs payable 2,450 -- --
Deferred revenue (42) (1,399) 8,508
Income taxes payable 805 (2,043) 2,207
-------- --------- ---------
NET CASH USED IN OPERATING
ACTIVITIES $(22,767) $ (5,642) $ (17,871)
======== ========= =========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
F-8
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(in thousands)
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Expenditures for property and equipment $ (602) $ (1,499) $ (2,721)
Software development and technology purchases -- (230) (900)
Proceeds from the license of technology -- 400 --
Reduction in cash resulting from excluding
Softworks from the consolidated financial
statements -- (6,759) --
Cash used in the ComputerCop/NetWolves
transaction (including $2,072 of cash expenses) (22,572) -- --
Investment in NetWolves Corporation (4,500) -- --
Advances from (to) officers, net 899 (821) 175
Additional consideration paid for Softworks and
MapLinx acquisitions -- -- (678)
Proceeds from the sale of Softworks common
stock, (net of $3,316 of expenses in 2000) 58,142 17,676 19,419
--------- ------- -------
NET CASH PROVIDED BY INVESTING
ACTIVITIES 31,367 8,767 15,295
--------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Net proceeds from sales of common stock and
options exercised -- -- 5,228
Net proceeds from sale of debentures 2,911 -- 1,925
Repayment of debenture -- -- (2,000)
Acquisition of treasury stock (328) (393) --
Payment of dividend (2,184) (6,000) --
(Repayments of) advances from long-term debt -- (3,056) 4,834
--------- ------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 399 (9,449) 9,987
--------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON
- ----------------------------------
CASH AND CASH EQUIVALENTS -- -- (13)
- ------------------------- --------- ------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 8,999 (6,324) 7,398
CASH AND CASH EQUIVALENTS - Beginning 1,852 8,176 778
- ------------------------- --------- ------- -------
CASH AND CASH EQUIVALENTS - Ending $ 10,851 $ 1,852 $ 8,176
- ------------------------- ========= ======= =======
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
F-9
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - Nature of Business
------------------
At the annual shareholders' meeting held in August 2000, the shareholders
elected to change the corporate name to Direct Insite Corp. (formerly
Computer Concepts Corp.) to better reflect the initiation of new business
strategies.
Direct Insite Corp. and subsidiaries (the "Company") operate primarily as
an Application Service Provider (generally referred to as an ASP, also
referred to as the Server Farm) providing high volume data processing and
analysis tools for their customers. The Company's core technology,
d.b.Express, is a management information tool providing targeted access
through the mining of large volumes of transactional data. This service
presently is being marketed solely for telecommunications analysis. The
Server Farm permits end users the ability to visually access and analyze
information through the Internet. Data can be visually presented using the
Company's patented data visualization technology. Additionally, in the
fourth quarter 2000, the Company entered into a license agreement that will
enable it to add to its suite of products and services, a complete
Electronic Bill Presentment and Payment ("EBPP"), as well as an Internet
Customer Care ("ICC") tool set.
The Company also provides a second product offering, "Telecommunications
Solutions" (also marketed under the name Global Telecommunications Services
or GTS). The Company is combining this service with its Server Farm to
create a unique, powerful detailed customer profile. This new, enhanced
profile will allow customers to efficiently optimize all telecommunications
contract compliance, establish traffic metrics, monitor invoice accuracy
and rate compliance as well as support complex invoicing and reporting
requirements, exception reporting and electronic invoicing, all via the
Internet. The Company began marketing this product offering in 2000 and has
not yet recorded any revenue.
The most significant portion of the Company's operations had historically
been conducted through one of its subsidiaries, Softworks, Inc.
("Softworks"). Through Softworks, the Company developed, marketed and
supported systems management software products for corporate mainframe data
centers. Softworks was wholly owned by the Company through June 29, 1998,
and majority owned through March 31, 1999. On January 27, 2000, the Company
sold its remaining interest to EMC Corporation for approximately $61
million in cash, before expenses (see Note 3).
In June 1998, the Company completed an acquisition of software (and related
sales and marketing rights), which is designed to provide non computer
literate owners (e.g. parents, guardians, schools, etc.) the ability to
identify threats as well as objectionable material that may be viewed by
users of the computer on the Internet (e.g. children). On February 14,
2000, the Company sold the ComputerCOP technology to NetWolves Corporation
(see Note 3).
F-10
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - Nature of Business, continued
-------------------
In 1997, the Company created a business unit, "professional services",
which primarily resells computer hardware and for a fee, will assist in the
design, construction and installation of technology systems. In 1999, this
business unit had one major contract, involving two customers, which was
completed in 1999. The Company does not currently have any other sales
contracts for this business unit and is no longer actively pursuing new
contracts.
NOTE 2 - Significant Accounting Policies
-------------------------------
Common Stock Split
------------------
On March 18, 1998, the Board of Directors declared a one-for-ten reverse
stock split effective for shareholders of record as of the close of
business on March 27, 1998. The effect of the stock split has been
retroactively reflected in the financial statements as of January 1, 1998.
Par value and authorized shares remain unchanged at $.0001 and 150,000,000
shares, respectively. Also see Note 20- Subsequent Events.
Principles of Consolidation and Equity Method
---------------------------------------------
The consolidated financial statements include the accounts of Direct Insite
Corp. and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Effective April 1, 1999, when the Company's ownership interest in
Softworks, Inc. ("Softworks") (see Note 3) was reduced below 50%, the
Company began accounting for Softworks using the equity method of
accounting. Under the equity method of accounting, the Company's
proportionate share of Softworks' earnings or losses was included in the
Company's consolidated operating results in a single line item, until
Softworks was sold in January 2000. The separate public ownership of
Softworks is reflected in the consolidated balance sheet and results of
operations as minority interest through March 31, 1999.
Revenue Recognition
-------------------
The Company records revenue in accordance with Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), issued by the American
Institute of Certified Public Accountants (as modified by Statement of
Position 98-9), which was adopted in 1998. The adoption of these
pronouncements was not material to the Company's revenue recognition policy
for software transactions. Revenue from the sale of perpetual and term
software licenses were recognized, net of provisions for returns, at the
time of delivery and acceptance of software products by the customer, when
collectibility was deemed probable. Through Softworks, the Company provided
customers with the option to pay for license
F-11
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Revenue Recognition, continued
-------------------
fees in one lump sum or generally in equal annual installments over
extended periods of time, generally three to five years. In such instances,
the Company did not consider sales contracts with amounts due for periods
greater than one year from delivery, fixed and determinable, and
accordingly recognized such amounts as revenue when they became due.
Maintenance revenue that was bundled with an initial license fee was
deferred and recognized ratably over the maintenance period. Amounts
deferred for maintenance were based on the fair value of equivalent
maintenance services sold separately.
Revenue from the services provided using the Company's d.b.Express Internet
Information Server are recognized monthly, as the services are performed.
Revenue from professional services, including the reselling of computer
hardware and systems management services were recognized as the units were
shipped or the services were performed.
Cost of Revenue
---------------
Cost of revenue in the consolidated statements of operations is presented
exclusive of amortization and depreciation shown separately.
Property and Equipment
----------------------
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the related assets, whichever is shorter.
Capitalized lease assets are amortized over the shorter of the lease term
or the service life of the related assets.
Software Costs
--------------
Costs associated with the development of software products are generally
capitalized once technological feasibility is established. Purchased
software technologies are recorded at cost and software technologies
acquired in purchase business transactions are recorded at their estimated
fair value. Software costs associated with technology development and
purchased software technologies are amortized using the greater of the
ratio of current revenue to total projected revenue for a product or the
straight-line method over its estimated useful life. Amortization of
software costs begins when products become available for general customer
release. Costs incurred prior to establishment of technological feasibility
are expensed as incurred and reflected as research and development costs in
the accompanying consolidated statements of operations.
F-12
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Excess of Cost Over Fair Value of Net Assets Acquired
-----------------------------------------------------
The excess of cost over the fair value of net assets acquired in purchased
business transactions was being amortized on a straight-line basis over
periods ranging from three to ten years.
Impairment of Long-Lived Assets
-------------------------------
The Company reviews its long-lived assets, including goodwill resulting
from business acquisitions, capitalized software costs and property and
equipment, for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully
recoverable. To determine if impairment exists, the Company compares the
estimated future undiscounted cash flows from the related long-lived assets
to the net carrying amount of such assets. Once it has been determined that
an impairment exists, the carrying value of the asset is adjusted to fair
value. Factors considered in the determination of fair value include
current operating results, trends and the present value of estimated
expected future cash flows.
Income Taxes
------------
The Company accounts for income taxes using the liability method. The
liability method requires the determination of deferred tax assets and
liabilities based on the differences between the financial statement and
income tax bases of assets and liabilities, using enacted tax rates.
Additionally, net deferred tax assets are adjusted by a valuation allowance
if, based on the weight of available evidence, it is more likely than not
that some portion or all of the net deferred tax assets will not be
realized.
Earnings per Share
------------------
The Company displays earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128").
SFAS 128 requires dual presentation of basic and diluted earnings per
share. Basic earnings per share includes no dilution and is computed by
dividing net income (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share include the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock.
Cash and Cash Equivalents
-------------------------
The Company considers all investments with original maturities of three
months or less to be cash equivalents.
F-13
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Marketable Securities
---------------------
Marketable securities, which are classified as "available for sale" (except
for the Company's investment in Softworks accounted for using the equity
method of accounting), are valued at fair market value. Unrealized gains or
losses are recorded net of income taxes as accumulated other comprehensive
income in shareholders' equity, whereas realized gains and losses are
recognized in the Company's statements of operations using the first-in,
first- out method. Other-than-temporary declines in the value of marketable
securities are also recognized in the consolidated statements of
operations. An immaterial amount of the marketable securities is included
in prepaid expenses.
Advertising and Promotional Costs
---------------------------------
Advertising and promotional costs are reported in "Sales and marketing"
expense in the consolidated statements of operations and are expensed when
incurred. Advertising expense for the years ended December 31, 2000, 1999
and 1998 was $90,000, $2,994,000 and $1,869,000, respectively. Advertising
expense in 1999 and 1998 included $2,746,000 and $1,404,000 of expense
related to ComputerCop.
Pre-Opening Expenses
--------------------
During 1998, the Company adopted Statement of Position 98-5, "Reporting on
the Cost of Start-Up Activities," issued by the American Institute of
Public Accountants. The adoption of this statement requires the expensing
of pre-opening costs as incurred. The Company expensed approximately
$300,000 for 1998 start-up activities associated with Softworks' German
subsidiary.
Research and Development
------------------------
Research and development is expensed as incurred.
Reclassifications
-----------------
Certain reclassifications have been made to the consolidated financial
statements shown for the prior years in order to have them conform to the
current year's classifications.
Concentrations and Fair Value of Financial Instruments
------------------------------------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and
accounts receivable. At December 31, 2000, the Company has cash investments
of approximately $10,851,000 at one bank. Concentrations of credit risk
with respect to accounts receivable are not material at December 31, 2000.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. Unless
otherwise disclosed, the fair value of financial instruments approximates
their recorded value.
F-14
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Use of Estimates
----------------
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the consolidated
financial statements, as well as the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
New Accounting Pronouncements
-----------------------------
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and related pronouncements,
as well as SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," became effective for the Company during 2000. These
pronouncements had no effect on the Company's financial statements.
Financial Accounting Standards Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" became effective for the
Company during 2000. The only provisions of this interpretation that are
applicable to the Company were implemented on a prospective basis as of
July 1, 2000.
NOTE 3 - Acquisitions and Dispositions
-----------------------------
Internet Tracking & Security Ventures, LLC and NetWolves Corporation
------------------------------------------------------------------------
On June 30, 1998, pursuant to an Asset Purchase and Sale Agreement, the
Company acquired certain software and related sales and marketing rights
from Internet Tracking & Security Ventures, LLC ("ITSV") in exchange for
1,900,000 restricted shares of the Company's common stock and 1,000,000
restricted shares of common stock of the Company's then wholly owned
subsidiary, Softworks.
The acquisition was valued at an aggregate of $12,210,000. The Agreement
also included the rights to the use of Richard "Bo" Dietl's name in
conjunction with the promotion and endorsement of the software as well as
appearances by Mr. Dietl in support of the software in regional and
national marketing campaigns.
The $12,210,000 purchase price was allocated to the fair value of the
assets acquired at June 30, 1998, based upon a written valuation from an
independent investment-banking firm. Accordingly, $2,700,000 was allocated
to "Software costs", $4,150,000 was recorded as prepaid advertising
expenses and $5,360,000 was recorded as "Excess of cost over fair value of
net assets acquired". The "assets held for sale ComputerCOP" at December
31, 1999 included $250,000 of inventories, $1,064,000 of software costs and
$2,562,000 of goodwill.
F-15
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 Acquisitions and Dispositions, continued
-----------------------------
Internet Tracking & Security Ventures, LLC and NetWolves Corporation,
--------------------------------------------------------------------------
continued
In March 1999, the Company sold certain rights to license ComputerCOP to a
marketing company (Bo-Tel, Inc.) for $400,000. The license rights were
limited to granting a specified original equipment manufacturer of personal
computers the right to embed the software in its computers for sale to the
general public. Bo-Tel, Inc. is an affiliate of ITSV, and accordingly, this
sale was accounted for as a reduction of the cost of the assets acquired
from ITSV.
Pursuant to an agreement dated February 10, 2000, on February 14th, the
Company sold its recently formed subsidiary, ComputerCOP Corp. to NetWolves
Corporation ("NetWolves", traded on the NASDAQ SmallCap Market under the
symbol "WOLV") in exchange for 1,775,000 shares of NetWolves common stock.
The assets of ComputerCOP Corp. included the ComputerCOP technology (and
certain related assets including inventory) and $20.5 million in cash. The
transaction was treated as a sale of the ComputerCOP technology for 750,000
shares valued at $15 million and the purchase of 1,025,000 shares from
NetWolves for $20.5 million. Additionally, the Company purchased 225,000
shares from certain NetWolves shareholders for $4.5 million. The sale of
the Company's ComputerCOP technology resulted in a pre-tax gain of
$8,534,000, net of $2,572,000 of expenses, recorded in the first quarter of
2000. The $40,000,000 value of the 2,000,000 shares of NetWolves stock was
determined based upon the quoted market price of the NetWolves stock at the
time the transaction was agreed to and announced ($20 per share) and was
also based on a fairness opinion obtained from the Company's investment
banker. In May 2000, the Company's Chairman of the Board was appointed to
the NetWolves Board of Directors.
All of the shares of NetWolves stock owned by the Company ("Trust Shares")
are subject to a Voting Trust Agreement wherein the Trustee, NetWolves'
Chief Executive Officer, has been granted the right to vote all Trust
Shares for a minimum period of six months to a maximum period of two years.
The Voting Trust terminates with respect to any shares sold pursuant to a
registration statement effected by NetWolves. The Voting Trust terminates
with respect to shares privately sold (if any) if aggregate sales are 25%
or less of the total Trust Shares. The Voting Trust also terminates at the
end of twelve months with respect to shares privately sold (if any), if
aggregate sales are 50% or less of the total Trust Shares. The Company also
received piggyback registration rights and a one-time demand registration
right effective after August 15, 2000, in regard to the NetWolves stock.
As of December 31, 2000, the Company owns 1,875,000 shares of NetWolves
common stock: 75,000 shares were exchanged as part of the restructuring
plan (Note 13), 25,000 shares were used to pay legal fees to the Company's
general counsel with respect to the NetWolves transaction, and 25,000
shares were issued as a bonus to an executive officer. All shares exchanged
were valued at $20. The Company accounts for its investment in NetWolves as
a marketable security available for sale in accordance with Statement of
Financial Standards No . 115 "Accounting for Certain Investments in Debt
and Equity
F-16
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 Acquisitions and Dispositions, continued
-----------------------------
Internet Tracking & Security Ventures, LLC and NetWolves Corporation,
---------------------------------------------------------------------
continued
Securities." In the fourth quarter of 2000, the Company determined
that there was an other- than-temporary decline in the value of the
NetWolves common stock to a value of $7,763,000 ($4.14 per share). At
December 31, 2000, the quoted market value of the 1,875,000 shares of
NetWolves common stock was $4,922,000 ($2.625 per share). The
unrealized loss was $32,578,000, of which, $29,737,000 was recorded as
a charge to operations and $2,841,000 was recorded as a charge to
"accumulated other comprehensive loss."
Softworks, Inc.
---------------
In October 1993, the Company completed the acquisition of all of the
common stock of Softworks. Softworks provided systems management
software products for mainframe data centers. The purchase price
approximated $5,700,000, which included $2,000,000 in cash and 100,000
shares of the Company's restricted common stock. The agreement also
required the Company to make additional contingent purchase
consideration payments of up to $2,000,000, which was paid through
December 31, 1998 and was treated as additional consideration in
connection with the acquisition.
Prior to June 30, 1998, Softworks was a wholly owned subsidiary of the
Company with 14,083,000 shares of common stock outstanding. On August
4, 1998, Softworks completed an initial public offering of 4,200,000
shares of its common stock at a price of $7.00 per share (less
underwriting fees and commissions of $0.49 per share) as follows:
1,700,000 shares of common stock were sold by Softworks; 1,000,000
shares were sold by ITSV and 1,500,000 shares were sold by the
Company.
In addition to the initial public offering discussed above, the
following transactions, with respect to Softworks common stock owned
by the Company, were recorded in 1998:
-- On July 1, 1998, the Company exchanged 100,000 restricted shares
of Softworks common stock to a member of its Internet Strategy
Committee, (who also served as Chairman of the Board of
Softworks) for services rendered, resulting in a charge to
operations of $525,000.
-- The Company exchanged 136,000 restricted shares of Softworks
common stock to the Company's general counsel for services
rendered, resulting in a charge to operations of $276,000.
-- The Company exchanged 768,100 restricted shares of Softworks
common stock to three of the Company's executive officers for
services rendered, resulting in a charge to operations of
$2,777,000.
F-17
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - Acquisitions and Dispositions, continued
----------------------------------------
Softworks, Inc., continued
---------------
-- The Company exchanged 133,000 restricted shares of Softworks
common stock to a consultant (who also has a financial interest
in ITSV) for business advisory services rendered, resulting in a
charge to operations of $270,000.
-- The Company exchanged 471,000 restricted shares of Softworks
common stock to various consultants and employees for services
rendered, resulting in a charge to operations of $1,068,000.
-- The Company exchanged 269,600 restricted shares of Softworks
common stock to two consultants (including 167,300 shares to S.J.
& Associates, Inc., "SJ" see Note 14) related to separate
contracts for services to be rendered over twelve months
commencing in October 1998. The $635,000 value of these shares
was expensed over the terms of the contracts.
-- In December 1998, the Company sold 1,000,000 restricted shares of
Softworks common stock in a private placement in exchange for a
$5,000,000 full recourse promissory note. The note, which is
included in "prepaid expenses and other current assets" at
December 31, 1998, was timely paid in full in the first quarter
of 1999.
The total value of the Softworks common stock exchanged by the Company
for the above-described services in 1998 was $5,551,000. As a result
of the ITSV asset acquisition, the Softworks initial public offering
and the various transactions described above, the Company's ownership
interest in Softworks was reduced to 54.5% as of December 31, 1998.
Accordingly, the Company recognized a gain of $28,785,000 representing
the difference between the fair value of the Softworks common stock
exchanged or sold, and the related adjusted carrying value of the
Company's investment in Softworks (pursuant to Staff Accounting
Bulletins 51 and 84).
The following additional transactions were recorded in 1999:
-- The Company exchanged 529,000 restricted shares of Softworks
common stock to three of the Company's executive officers for
services rendered in 1999 resulting in a charge to operations of
$2,117,000.
-- In exchange for services rendered by several consultants in 1999,
the Company granted options to acquire 80,000 restricted shares
of Softworks common stock owned by the Company that were
exercisable at $1.00 per share. These options were exercised in
1999. The $389,000 value of these options was charged to
operations in 1999.
F-18
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - Acquisitions and Dispositions, continued
--------------------------------
Softworks, Inc., continued
---------------
-- The Company exchanged 618,600 restricted shares of Softworks common
stock to various employees and consultants (including 117,000 shares
to a consultant with a financial interest in the ITSV) for services
rendered in 1999 resulting in a charge to operations of $2,608,000.
-- 125,000 shares of Softworks common stock, originally issued to a
consultant in 1998, were returned to the Company in 1999, because the
services were not satisfactorily performed. The original $300,000
value of these shares was credited to operating expenses in 1999.
-- In June, Softworks completed a second public offering of 3,900,000
shares of its common stock at a price of $10.50 per share (less
underwriting fees and commissions of $.63 per share) as follows:
1,000,000 shares were sold by Softworks, 1,256,933 shares were sold by
the Company, and 1,643,067 shares were sold by other existing
shareholders. In conjunction with the offering, the Company issued
200,000 contract options to acquire restricted shares of Softworks
common stock owned by the Company to a consultant, exercisable at
$1.00 per share, which vested upon completion of the offering. The
options were exercised in June 1999.
The total value of the Softworks common stock exchanged by the Company for
the above- described services (excluding the 200,000 contract options) in
1999 was $4,814,000. As a result of these transactions, the Company's
ownership in Softworks was further reduced to 35% at December 31, 1999.
Accordingly, the Company recognized a gain of $17,107,000 representing the
difference between the fair value of the Softworks common stock exchanged
or sold, and the related adjusted carrying value of the Company's
investment in Softworks (pursuant to Staff Accounting Bulletins 51 and 84).
Pursuant to a tender offer dated December 21, 1999, the Company sold its
remaining 35% interest in Softworks (a total of 6,145,767 shares) to EMC
Corporation and its subsidiary ("EMC") for $10.00 per share. The
transaction, which was completed on January 27, 2000, provided aggregate
cash proceeds of $61,458,000 and resulted in a pre-tax gain of $47,813,000,
net of $3,316,000 of expenses, recorded in the first quarter of 2000. In
connection with the tender offer, the Company entered into an
Indemnification Agreement that provides, in part, that the Company shall
indemnify EMC from all losses sustained by EMC as a result of any breach of
certain representations and warranties appearing in the Agreement and Plan
of Merger between Softworks and EMC. The term of the Indemnification
Agreement is two years from the date of closing. Pursuant to an Escrow
F-19
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 Acquisitions and Dispositions, continued
-----------------------------
Softworks, Inc., continued
---------------
Agreement, the Company deposited $10,000,000 of the sales proceeds into an
interest bearing escrow account to secure any potential liabilities arising
from the Indemnification Agreement. Through December 31, 2000, $159,000 has
been disbursed from the escrow account in settlement of a claim made by
EMC. The escrow funds were released to the Company on December 26, 2000.
In April 1999, the Company's ownership of Softworks was reduced below 50%,
and accordingly, commencing April 1, 1999, Softworks' results were
accounted for using the equity method of accounting and were no longer
consolidated. Under the equity method of accounting, the Company's share of
Softworks' earnings or losses was included in the Company's consolidated
operating results in a single line item. Summarized financial information
of Softworks for the entire year ended December 31, 1999 is as follows (in
thousands).
Softworks, Inc.
Summarized Financial Information
Condensed Consolidated
Statement of Operations Condensed Consolidated Balance Sheet
Year Ended December 31, 1999 December 31, 1999
---------------------------------------------------------------------------
Revenue $54,570 Current assets $46,593
Cost of revenue 3,325 Non current assets 27,436
------- -------
Gross margin 51,245 $74,029
Operating expenses 48,805 =======
-------
Operating income $ 2,440 Current liabilities $28,206
=======
Net income $1,456 Non current liabilities 16,506
=======
Shareholders' equity 29,317
-------
$74,029
=======
F-20
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - Acquisitions and Dispositions, continued
-----------------------------
Pro forma condensed consolidated statements of operations (unaudited)
--------------------------------------------------------------------
Pro forma condensed consolidated statements of operations as if the
transactions described above were consummated as of the beginning of each
of the three years in the period ended December 31, 2000, are as follows
(in thousands except per share data):
Year Ended December 31, 2000 Pro Forma Adjustments
- ---------------------------- ---------------------
NetWolves/
Softworks ComputerCOP
Actual Transaction Transaction Pro forma
-------------------------------------------------
Revenue $ 2,120 $ -- $ (31) $ 2,089
Cost of revenue 322 -- (11) 311
---------- ------------ ---------- ---------
Gross margin 1,798 -- (20) 1,778
Total Operating Expenses(1) 30,474 -- (229) 30,245
---------- ------------ ---------- ---------
Operating (loss) (28,676) -- 209 (28,467)
Other income (expense)
Gain on sale of Softworks 47,813 (47,813) -- --
Gain on sale of ComputerCOP 8,534 -- (8,534) --
Loss on write down of
Investment in NetWolves
Corporation (29,737) -- -- (29,737)
Other, net 370 -- -- 370
---------- ------------ ---------- ---------
Loss before provision
for income taxes (1,696) (47,813) (8,325) (57,834)
Provision for income taxes (10,040) 8,444 1,470 (126)
---------- ------------ ---------- ---------
Net loss $ (11,736) $ (39,369) $ (6,855) $ (57,960)
========= ============ ========== =========
Basic and diluted loss per share $(0.55) $(2.71)
====== ======
<FN>
(1) Operating expenses include a non-recurring restructuring charge of $15,176,000.
</FN>
F-21
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 Acquisitions and Dispositions, continued
-----------------------------
Pro forma condensed consolidated statements of operations (unaudited),
--------------------------------------------------------------------------
continued
Year Ended December 31, 1999 Pro Forma Adjustments
---------------------------- ---------------------
NetWolves/
Softworks ComputerCOP
Actual Transaction Transaction Pro forma
----------------------------------------------
Revenue $ 24,640 $ (10,258) $ (690) $ 13,692
Cost of revenue 13,044 (764) (241) 12,039
-------- --------- -------- --------
Gross margin 11,596 (9,494) (449) 1,653
Total Operating Expenses (1) 44,152 (9,342) (6,710) 28,100
-------- --------- -------- --------
Operating (loss) (32,556) (152) 6,261 (26,447)
Other income (expense)
Gain on sale of Softworks 17,107 (17,107) -- --
Other, net 782 (466) -- 316
-------- --------- -------- --------
Loss before provision
for income taxes (14,667) (17,725) 6,261 (26,131)
Benefit for income taxes 9,095 (9,137) -- (42)
-------- --------- -------- --------
Net loss $ (5,572) $ (26,862) $ 6,261 $(26,173)
======== ========= ======== ========
Basic and diluted loss per share $(0.27) $(1.28)
====== ======
<FN>
(1) The ComputerCop operating expense adjustment includes $5,616,000 of
amortization expense related to ComputerCop's intangible assets.
</FN>
F-22
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - Acquisitions and Dispositions, continued
-----------------------------
Pro forma condensed consolidated statements of operations (unaudited)
--------------------------------------------------------------------
Year Ended December 31, 1998 Pro Forma Adjustments
---------------------------- ---------------------
NetWolves/
Softworks ComputerCOP
Actual Transaction Transaction Pro forma
--------------------------------------------------------
Revenue $ 61,988 $(43,748) $ (8) $ 18,232
Cost of revenue 21,018 (4,251) (21) 16,746
-------- -------- ---------- ---------
Gross margin 40,970 (39,497) 13 1,486
Total Operating Expenses (1) 56,614 (33,884) (3,189) 19,541
-------- -------- ---------- ---------
Operating (loss) (15,644) (5,613) 3,202 (18,055)
Other income (expense)
Gain on sale of Softworks 28,785 (28,785) -- --
Other, net (1,846) 1,601 -- (245)
-------- -------- ---------- ---------
Income (loss) before provision
for income taxes 11,295 (32,797) 3,202 (18,300)
Provision for income taxes (1,748) 1,696 -- (52)
-------- -------- ---------- ---------
Net income (loss) $ 9,547 $(31,101) $ 3,202 $ (18,352)
======== ======== ========== =========
Basic net income (loss) per share $0.58 $(1.11)
===== ======
Diluted net income (loss) per
share $0.56 $(1.11)
===== ======
<FN>
(1) The ComputerCop operating expense adjustment includes $2,816,000 of
amortization expense related to ComputerCop's intangible assets.
</FN>
F-23
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - Prepaid Expense and Other Current Assets
----------------------------------------
Prepaid expenses and other current assets consist of the following:
December 31,
2000 1999
---------------------
(In thousands)
Prepaid expenses $332 $386
Notes and loans receivable 87 427
Marketable securities available for sale 32 52
---- ----
$451 $865
==== ====
NOTE 5 - Property and Equipment
----------------------
Property and equipment consist of the following:
December 31, Useful life
2000 1999 in Years
---------------------------------------
(in thousands)
Computer equipment and software $ 3,811 $ 3,211 3 - 7
Furniture and fixtures 392 390 5 - 7
-------- --------
4,203 3,601
Less: accumulated deprecation
and amortization (3,063) (2,256)
-------- --------
Property and Equipment, Net $ 1,140 $ 1,345
======== ========
NOTE 6 Software Costs
--------------
Software costs consist of the following:
December 31,
2000 1999
---------------------
(In thousands)
Capitalized software development costs $ 3,775 $ 3,775
Purchased and acquired software technologies -- --
------- -------
3,775 3,775
Less: accumulated amortization (3,775) (3,775)
------- -------
Software Costs, Net $ -- $ --
======= =======
F-24
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - Accounts Payable and Accrued Expenses
-------------------------------------
Accounts payable and accrued expenses consist of the following:
December 31,
2000 1999
----------------------
(in thousands)
Trade accounts payable $ 367 $1,194
Sales taxes payable 632 647
Accrued payroll and benefits 373 1,675
Other accrued expenses 343 1,930
------- ------
$ 1,715 $ 5,446
======= =======
NOTE 8 - Convertible Debentures
----------------------
On September 27, 2000, the Company entered into an agreement to sell an
aggregate principal amount of $3,000,000 of Convertible Debentures (the
"Debentures") bearing interest at a rate of 6% per annum, due September 27,
2002. The Company sold a $2,000,000 Debenture on September 27, 2000, a
$500,000 Debenture in October 2000 and a $500,000 debenture in December
2000, and incurred $119,000 of expenses.
The Debentures were convertible into shares of the Company's common stock
beginning February 25, 2001, subject to certain limitations. The conversion
price was to be the lesser of $0.90 or 82% of the average per share market
value at the time of the conversion. The Holders of the Debenture were also
granted certain registration rights to the underlying common stock. The
Company had the right, exercisable at any time, to prepay all or any
portion of the outstanding principal amount of the Debentures for which
conversion notices had not previously been delivered. On January 30, 2001,
the Company exercised its prepayment rights and paid the Holders
$3,700,000, plus accrued interest. As a result of the prepayment, the
Company recorded a loss of $185,000 in the first quarter 2001.
F-25
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - Convertible Debentures, continued
----------------------
The convertible debentures originally had a minimum assured discount of 18%
from the fair value of the Company's common stock, as defined. In
connection with that discount, the Company recorded debt discount of
$658,000 upon receipt of $3,000,000 in funds and was amortizing the
discount over the period the security was issued to the date it first
became convertible. Accordingly, the Company recorded a non-cash interest
charge of $353,000 in 2000. As a result of the prepayment, the discount,
which was originally credited to additional paid-in-capital, was reversed
in the first quarter 2001.
Additionally, in May 1998, the Company obtained approximately $1,925,000
(net of fees and commissions of approximately $75,000) from the sale of a
debenture. The debenture would have matured on August 28, 1998, and was
convertible into Company common stock upon a payment default. In August
1998, prior to maturity, the Company repaid the debenture plus interest
aggregating approximately $2,460,000.
NOTE 9 - Earnings per Share
------------------
For the years ended December 31, 2000 and 1999, outstanding stock options,
warrants and other potential stock issuances have not been considered in
the computation of diluted earnings per share amounts since the effect of
their inclusion would be antidilutive. For 1998, the Company's dilutive
instruments are "in the money" stock options with various exercise dates
and prices and certain contingent stock issuances. The Company uses the
treasury stock method to calculate the effect that the conversion of the
stock options would have on earnings per share ("EPS") and assumes that
convertible debentures were converted into common stock at the later of the
beginning of the period or the issuance date and makes adjustments with
respect to the related interest expense. The following table sets forth the
computation of basic and diluted EPS:
Year Ended December 31,
2000 1999 1998
-----------------------------
(in thousands, except per share data)
Numerator:
Net income (loss) $(11,736) $(5,572) $9,547
======== ======= ======
F-26
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - Earnings per Share, continued
------------------
Year Ended December 31,
2000 1999 1998
-----------------------------
(in thousands, except per share data)
Denominator:
Weighted average shares outstanding 21,395 20,455 16,523
(denominator for basic EPS)
Effect of dilutive securities
Stock options -- -- 477
Contingent stock issuances -- -- 31
------ ------ -----
Denominator for diluted EPS 21,395 20,455 17,031
====== ====== ======
Basic net (loss) income per share $(0.55) $(0.27) $0.58
====== ====== ======
Diluted net (loss) income per share $(0.55) $(0.27) $0.56
====== ====== ======
NOTE 10 - Shareholders' Equity
--------------------
Common Stock
------------
Year Ended December 31, 2000
----------------------------
In February 2000, the Company declared a dividend of $0.10 per share
(aggregating $2,184,000) to its shareholders of record on March 15, 2000
and paid on May 1, 2000.
Pursuant to a Board Resolution adopted in January 1999, the Company was
authorized to repurchase shares of its common stock at times and amounts
that would be in the best interest of the Company. During the fourth
quarter 2000, 365,569 shares of common stock were purchased at an average
price of $0.8494.
Year Ended December 31, 1999
------------------------------
Pursuant to a Board Resolution adopted in January 1999, the Company was
authorized to repurchase shares of its common stock at times and amounts
that would be in the best interest of the Company. During 1999, 236,580
shares of common stock were purchased at an average price of $1.66.
Pursuant to a Board Resolution adopted in August 1999, the Company paid on
November 15, 1999, a cash dividend of $6,000,000 (approximately $0.29 per
share) to shareholders of record as of September 30, 1999.
F-27
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - Shareholders' Equity, continued
--------------------
Common Stock, continued
------------
Year Ended December 31, 1998
----------------------------
In January 1998, the Company consummated the sale of restricted common
stock under a private placement to accredited investors pursuant to
Regulation D. Proceeds from this sale totaled $1,978,000, net of
commissions and fees of approximately $162,000. Originally, 496,232 shares
were sold at a price of $4.3125 per share. The closing bid price of the
Company's common stock, as stated on the NASDAQ Small Cap Market did not
exceed an average of $5.28 for any five consecutive trading days during the
thirty days immediately following the effective date of the Registration
Statement (effective February 6, 1998). Accordingly, under the terms of
this transaction, the Company issued approximately 281,000 additional
shares in April 1998.
Transactions with officers, employees and consultants
-----------------------------------------------------
During the year ended December 31, 2000, the Company issued 1,628,450
shares of its common stock valued at $2.00 per share based on the then
quoted price of the Company's common stock.
-- Issued 490,000 shares of its common stock (net of 100,000 shares
rescinded) as settlement of certain employee, director and consultant
liabilities in conjunction with its restructuring plan (Note 13). The
shares were valued at $980,000.
-- Issued 487,250 shares of its common stock (net of 46,250 shares
rescinded) as settlement of employee bonuses. The shares were valued
at $974,500, of which $468,000 was accrued in 1999.
-- Issued 660,000 shares of its common stock (net of 37,500 shares
rescinded) to various consultants for which it recorded a non-cash
charge to earnings of $1,320,000. S.J. & Associates, Inc. was issued
375,000 of these shares upon achieving certain performance goals
pursuant to its 1999 contract.
-- Cancelled 8,800 shares as collateral payment of outstanding
receivables.
Additionally, the Company's Chairman and Chief Executive Officer tendered
410,179 shares of the Company's common stock, valued at $923,000 based on
the quoted price at the time, towards the repayment of officers' loans.
F-28
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - Shareholders' Equity, continued
-------------------------------
Transactions with officers, employees and consultants, continued
-----------------------------------------------------
During the year ended December 31, 1999, the Company issued the following
restricted common stock:
-- As part of a bonus incentive compensation plan, the Company issued
665,500 shares to several non-executive employees for which it
recorded a non cash charge to operations of $1,010,000.
-- Issued 660,500 shares of its common stock to various consultants for
whom it recorded a non cash charge to operations of $1,050,000.
-- In lieu of cash, in January 1999, the Company issued 115,000 shares,
valued at $100,000, for an acquisition of a technology license. This
asset was fully amortized during the year ended December 31, 1999.
During 1998, the Company issued 2,090,000 restricted shares of common stock
to various officers, employees and consultants and recorded a non-cash
charge to operations of $2,208,000 as follows:
-- The Company issued 501,000 shares to SJ (Note 14) for services
rendered in connection with the initial public offering of Softworks,
resulting in a $478,000 charge against the "Gain on sale of
Softworks." SJ also received 224,000 shares for other services
rendered, resulting in a charge to operations of $378,000.
-- The Company issued 182,000 shares to a member of its Internet Strategy
Committee (who now also serves as the Company's Chairman of the Board)
for services rendered, resulting in a charge to operations of
$237,000.
-- The Company issued 181,000 shares to its general counsel for services
rendered, resulting in a charge to operations of $146,000.
-- The Company issued 80,000 shares to a consultant for services rendered
to the Company, resulting in a charge to operations of $63,000.
Subsequently, the consultant was elected to the Softworks Board of
Directors.
-- The Company issued 320,000 shares to a consultant (who also has a
financial interest in ITSV) for business advisory services rendered,
resulting in a charge to operations of $266,000.
F-29
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - Shareholders' Equity, continued
-------------------------------
Transactions with officers, employees and consultants, continued
-----------------------------------------------------
-- The Company issued 602,000 shares to various other employees and
consultants for services rendered, resulting in a charge to operations
of $640,000.
Stock Option Plans
------------------
Effective June 1, 2000, the Company's Board of Directors authorized and
adopted a plan for compensation, referred to as the 2000 Stock Option Plan,
which provides for the grant of non-qualified stock options, to officers,
employees and consultants to the Company, exercisable at the market price
on the date of grant. All grants, which have varying expiration dates,
shall be subject to various vesting conditions including specific
performance goals. There are 2,500,000 shares of common stock reserved for
issuance pursuant to the plan.
On February 19, 1998, the Company's Board of Directors authorized and
adopted a plan for compensation, referred to as the 98 Incentive Stock
Option Plan, which provides for the grant of non-qualified stock options,
to officers and employees of the Company and consultants to the Company,
exercisable at or above the market price on the date of grant. All grants,
which have varying expiration dates, shall be subject to various vesting
conditions including specific performance goals.
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). The Company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its
plans and recognizes non cash compensation charges related to the intrinsic
value of stock options granted to employees. If the Company had elected to
recognize compensation expense based upon the fair value at the date of
grant for awards under these plans, consistent with the methodology
prescribed by SFAS 123, the effect on the Company's net income (loss) and
net income (loss) per share would be as follows (in thousands, except per
share data):
Year Ended December 31,
2000 1999 1998
-------------------------------
Net income (loss)
As reported $(11,736) $(5,572) $9,547
======== ======= ======
Pro forma $(12,046) $(6,118) $2,968
======== ======= ======
Net income (loss) per share
As reported
F-30
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - Shareholders' Equity, continued
-------------------------------
Stock Option Plans, continued
------------------
Year Ended December 31,
2000 1999 1998
---------------------------------
Basic net loss per share $(0.55) $(0.27) $0.58
====== ====== =====
Diluted net loss per share $(0.55) $(0.27) $0.56
====== ====== =====
Pro forma
Basic net income (loss) per share $(0.56) $(0.30) $0.18
====== ====== =====
Diluted net income (loss) per share $(0.56) $(0.30) $0.17
====== ====== =====
The fair value of Company common stock options granted to employees during
2000, 1999 and 1998, approximated $310,000, $546,000 and $4,243,000,
respectively, are estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (1) expected
volatility of 70.6 to 73.1% in 2000, 62% to 66% in 1999 and 61% to 116% in
1998, (2) risk-free interest rates of 5.80% in 2000, 5.81% in 1999 and
4.09% to 5.56% in 1998, and (3) expected lives of 1.80 to 5.00 years in
2000, 2.00 to 3.53 years in 1999 and .28 to 4.23 years in 1998.
The fair value charged to the consolidated financial statements (net of
minority interest) related to Softworks common stock options granted to
employees during 1998, approximated $2,336,000, are estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: (1) expected volatility ranging from 72% to 130%, (2)
risk-free interest rates of 5.4% to 6.3%, and (3) expected lives ranging
from 1.1 to 4.4 years.
The Company grants options under multiple stock-based compensation plans
that do not differ substantially in the characteristics of the awards. The
following is a summary of stock option activity for 2000, 1999 and 1998,
relating to all of the Company's common stock plans (shares are in
thousands):
F-31
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - Shareholders' Equity, continued
--------------------
Stock Option Plans, continued
------------------
Weighted
Average
Exercise
Shares Price
-------------------------------
Outstanding at January 1, 1998 1,314 $ 7.83
Granted 6,369 $ 3.24
Exercised (1,103) $ 2.93
Forfeited (3,741) $ 4.68
------
Outstanding at December 31, 1998 2,839 $ 3.58
Granted 1,870 $ 1.25
Exercised -- --
Forfeited (306) $11.54
------ ------
Outstanding at December 31, 1999 4,403 $ 2.04
------ -------
Granted 2,296 $0.98
Exercised -- --
Forfeited (2,896) $1.83
------ -------
Outstanding at December 31, 2000 (3,803) $1.59
====== =======
At December 31, 2000, a total of 3,803,000 options are exercisable at
various exercise prices: 2,941,000 options are exercisable at prices
ranging from $0.75 to $1.34 per share, 762,000 options at $1.75 to $2.09
and 100,000 options at $6.25 to $25.60. The weighted- average remaining
contractual life of options outstanding at December 31, 2000 is 2.67 years.
A total of 3,803,000 shares of the Company's common stock are reserved for
options, warrants and contingencies at December 31, 2000.
At December 31, 1999, a total of 4,282,000 options are exercisable at
various exercise prices: 4,116,000 options are exercisable at prices
ranging from $1.25 to $2.00 per share, 66,000 options at $2.50 to $3.50 and
100,000 options at $6.25 to $25.60. The weighted- average remaining
contractual life of options outstanding at December 31, 1999 is 3.08 years.
A total of 4,403,000 shares of the Company's common stock are reserved for
options, warrants and contingencies at December 31, 1999.
F-32
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - Shareholders' Equity, continued
--------------------
Stock Option Plans, continued
------------------
At December 31, 1998, a total of 2,771,000 options are exercisable at
various exercise prices: 2,358,000 options are exercisable at prices
ranging from $1.75 to $2.00 per share, 196,000 options at $2.50 to $5.00,
and 217,000 options at $5.92 to $46.30. The weighted- average remaining
contractual life of options outstanding at December 31, 1998 is 3.79 years.
A total of 2,839,000 shares of the Company's common stock are reserved for
options, warrants and contingencies at December 31, 1998.
Total compensation costs recognized for stock option awards amounted to
$152,000, $193,000 and $1,255,000 for the years ended December 31, 2000,
1999 and 1998, respectively. Compensation cost represents the fair value of
options granted to non- employees and the intrinsic value of options
granted to employees. The total value of the 2000 options granted to
non-employees was $267,000. These options have vesting periods ranging from
immediate to two years. As of December 31, 2000, there was $115,000 of
unearned compensation relating to the unvested portion of these options.
During October 1998, the Company's Board of Directors authorized a
reduction of the exercise price of 2,234,235 outstanding options to
purchase common stock (issued to employees) to $2.00 per share ($0.25
higher than the fair market value at the date of the Board action), with an
expiration date of December 31, 2002. The substantial majority of such
options were previously issued at exercise prices ranging from $4.00 to
$5.00 per share.
Registration Statements/Restricted Securities
---------------------------------------------
The Company has used restricted common stock for the purchase of certain
companies (Note 3), as compensation to employees and consultants for
services rendered, and has sold restricted common stock in private
placements. At December 31, 2000, approximately 470,000 shares of
restricted common stock were issued and outstanding.
On March 24, 2000 the Company filed a registration statement on Form S-8
(No. 333- 33274) for 4,272,500 options and 384,800 shares of the Company's
common stock that was effective upon filing. The primary purpose of this
registration statement was to register options and shares issued to
employees and certain consultants.
On February 11, 1999 the Company filed a registration statement on Form S-8
(No.333-72203) for 2,262,235 options and 2,230,084 shares of the Company's
common stock that was effective upon filing. The primary purpose of this
registration statement was to register options, which were repriced in
October 1998, and shares issued to employees and certain consultants.
F-33
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - Shareholders' Equity, continued
--------------------
Registration Statements/Restricted Securities, continued
---------------------------------------------
On May 15, 1998 the Company filed a registration statement on Form S-8 (No.
333-52875) for 779,148 options and 122,500 shares of the Company's common
stock that was effective upon filing. The primary purpose of this
registration statement was to register shares issued to certain consultants
and non-officer employees.
On January 22, 1998, the Company filed a registration statement on Form S-1
(No. 333- 44683, effective February 6, 1998). The primary purpose of this
registration statement was to register shares issued in January 1998
pursuant to a private placement.
NOTE 11 Multi-Media Display Station
---------------------------
During 1999, the Company began to develop a unique multi-media display
station, which combines Internet strategy and e-commerce with multi-media
forms of delivery, presentation and interaction and end-users. This
Internet based communications/advertising network was being designed by the
Company to create a means by which businesses could promote specific
brand/product/ service awareness. The Company intended to market this
technology in association with owners and/or managers or high traffic venue
areas (i.e., malls, airports, etc.) to local, regional and national
businesses. From inception through March 31, 2000, the Company invested
approximately $7,000,000 in its marketing and development efforts (charged
to operations as incurred). Additional funds will be required in order to
complete development and bring the product to market. As part of the
Company's restructuring plan (Note 13), the newly appointed Board of
Directors agreed that it was the Company's best interest to immediately
cease all funding of this project, while maximizing its value. As a result,
in April 2000, the Company entered into a contractual arrangement with an
unrelated third party, whereby the Company transferred all of its
in-process research and development technology related to the multi-media
display station for the rights to 50% of the future profits (as defined),
if any, from the third party's operation or sale of this technology. The
third party agreed to utilize its contacts in the industry and also agreed
to fund all future costs associated with the continued development and
marketing of the display station. There can be no assurances that the
Company will recognize any proceeds from this transaction. The related
intangible assets continue to be recorded at their net book value of zero.
F-34
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - Income Taxes
------------
Through August 4, 1998, the results of the Company's U.S. operations
conducted through its Softworks subsidiary were included in the Company's
consolidated Federal income tax returns. Separate provisions for income
taxes were determined for Softworks' wholly owned foreign subsidiaries that
were not eligible to be included in the U.S. Federal income tax returns. As
a result of the initial public offering of Softworks, the Company's
ownership of Softworks was reduced below 80% and Softworks was no longer
eligible to be included in the Company's consolidated Federal income tax
returns. Accordingly, since the future realization of the Softworks'
component of the deferred tax asset ($902,000 as of August 4, 1998) was no
longer uncertain, the related valuation allowance (with respect to
Softworks domestic operations only) was eliminated as of December 31, 1998.
Additionally, as a result of the Company's sale of its remaining interest
in Softworks in January 2000 and the sale of its ComputerCOP technology in
February 2000 (Note 3), the Company recognized a taxable gain in the first
quarter of 2000. Accordingly, the Company reduced its valuation allowance
by $9,197,000 (approximately $7,000,000 of which relates to deferred tax
assets created in previous years) as of December 31, 1999.
The following table summarizes components of the (provision) benefit for
current and deferred income taxes for the years ended December 31, 2000,
1999 and 1998:
Year Ended December 31,
2000 1999 1998
-------------------------------
(in thousands)
Current
United States $ (718) $ 196 $(2,196)
Foreign -- -- (32)
State and other (125) (8) (306)
---------- ------- -------
Total (843) 188 (2,534)
---------- ------- -------
Deferred
United States (9,197) 8,950 632
State and other -- (43) 154
---------- ------- -------
Total (9,197) 8,907 786
---------- ------- -------
$ (10,040) $ 9,095 $(1,748)
========== ======= =======
F-35
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - Income Taxes
------------
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for
financial statement purposes for the years ended December 31, 2000, 1999
and 1998:
Year Ended December 31,
2000 1999 1998
--------------------------------
U.S. Federal statutory tax rate 35.0% 35.0% (34.0)%
State and local taxes, net of U.S.Federal tax
effect (7.4) -- (6.5)
Impact of Alternative Minimum Tax (42.3) -- --
Gain on sale of Softworks and ComputerCOP (90.1) -- 12.4
Other-than-temporary decline in Investment
in NetWolves (613.7) -- --
Restructuring costs not deductible until paid (33.4) -- --
Reduction of deferred tax asset valuation
reserve -- 47.9 7.4
Utilization of net operating loss carryforward 199.3 -- 7.1
Permanent differences compensation (50.5) (12.2) --
Amortization of intangible assets -- (6.0) --
Other 11.1 (2.7) (1.9)
----- ----- ----
(592.0)% 62.0% (15.5)%
===== ===== ====
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are summarized as follows:
December 31,
2000 1999
--------------------
(in thousands)
Deferred tax assets
Net operating loss carryforwards $10,080 $ 23,283
Tax credit carryforward 565 565
Fixed and intangible assets 135 1,710
Other-than-temporary decline in
Investment in NetWolves 12,490 --
Other 85 280
------- --------
23,355 25,838
Deferred tax liabilities
Investment in Softworks, held for sale -- (2,817)
------- --------
23,355 23,021
Valuation allowance (23,355) (13,824)
------- --------
Deferred tax assets, current $ -- $ 9,197
======= ========
F-36
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - Income Taxes, continued
------------
During 2000 and 1998, $36,000,000 and $4,700,000, respectively, of net
operating loss carryforwards were utilized to substantially reduce the
taxable income resulting from the gain on disposition of Softworks. At
December 31, 2000, the Company has net operating loss carryforwards
remaining of approximately $24,000,000 to reduce future taxable income, if
any. These losses, which expire through 2019, are subject to substantial
limitations as a result of IRC Section 382 rules governing changes in
control. Approximately $13,000,000 of these losses are available to be
utilized in the year 2001. After the year 2001, approximately $1,200,000 of
losses become available each year (subject to, among other things,
adjustment upon further changes in control) until the losses expire.
NOTE 13 - Restructuring
-------------
In the first quarter 2000, the Company's newly appointed Board of Directors
approved and the Company announced a restructuring plan to streamline the
Company's operations and overhead structure, including: (i) elimination of
employees, expenses and commitments that supported the ComputerCOP
technology (sold to NetWolves, Note 3), (ii) elimination of employees,
expenses and commitments that supported the Company's development project
related to a multi-media display station (Note 11), and (iii) general
reduction of operating expenses. As a result, the Company recorded a
non-recurring restructuring charge of $15,176,000 during the year ended
December 31, 2000, related to the termination of 53 employees, retirement
packages for certain Company officers and directors, and the termination of
certain long-term consulting contracts and operating leases. Cash
requirements of this plan are estimated at $12,696,000; $980,000 was
settled with Company stock; and $1,500,000 was settled with NetWolves
common stock. As of December 31, 2000, the remaining cash requirement is
$2,450,000, $1,526,000 is payable over the next twelve months, and $924,000
is payable through March 2005.
The restructuring charge includes costs directly related to the Company's
plan. EITF No. 94-3 and SEC Staff Accounting Bulletin No. 100 provide
specific requirements as to appropriate recognition of costs associated
with employee termination benefits and other exit costs. Employee
termination costs are recognized when details of the severance arrangements
are communicated to affected employees (all 53 employees were actually
terminated in March 2000). Other exit costs (such as contractual
obligations) that are not associated with or that do not benefit activities
that will be continued are recognized at the date of commitment to an exit
plan subject to certain conditions. Other costs directly related to the
restructuring that are not eligible for recognition at the commitment date
are expensed as incurred.
F-37
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 Restructuring, continued
-------------
The activity in the restructuring accrual through December 31, 2000 is
summarized below:
Officer/director
Employee retirement Consulting Operating
terminations packages contracts leases Other Total
------------------------------------------------------------------------------------
Restructuring charge
to operations,
quarter ended
March 31, 2000 $ 2,043,000 $ 7,535,000 $ 3,681,000 $ 369,000 $1,185,000 $14,813,000
Restructuring charges
to operations and
adjustments, after
March 31, 2000 45,000 131,000 -- (12,000) 199,000 363,000
------------ ----------- ----------- ---------- ---------- -----------
Subtotal 2,088,000 7,666,000 3,681,000 357,000 1,384,000 15,176,000
Cash expenditures (2,056,000) (5,508,000) (1,938,000) (140,000) (604,000) (10,246,000)
Company stock
issuances -- (100,000) (630,000) -- (250,000) (980,000)
Netwolves stock
exchanged -- (1,500,000) -- -- -- (1,500,000)
------------ ----------- ----------- ---------- ---------- -----------
Restructuring accrual,
December 31, 2000 $ 32,000 $ 558,000 $ 1,113,000 $ 217,000 $ 530,000 $ 2,450,000
============ =========== =========== ========== ========== ===========
-- Employee termination costs represent severance and related benefits
for the 53 employees that were terminated in March 2000: 18 employees
in sales and administration, 14 employees involved in the development
project related to a multi- media display station, 11 employees
related to ComputerCOP and 10 employees in general research and
development. Of these employees, 44 received severance benefits
generally payable over 3 to 9 months, commencing April 2000.
-- Officer/director retirement packages represent retirement packages for
the Company's Chairman, its Chief Executive Officer and other board
members aggregating $7,666,000. $1,500,000 was paid with 75,000 shares
of NetWolves common stock (valued at $20 per share), $100,000 was paid
with 50,000 shares of Company common stock, $5,508,000 was paid in
2000, $500,000 was paid in January 2001 and the $58,000 balance
relates to employee benefits payable over various time periods.
-- The Company settled 5 long-term consulting contracts that will no
longer be required for an aggregate of $3,681,000. The Company agreed
to pay off a 1999 consulting agreement with S.J. & Associates, Inc.
for $1,276,000. Additionally, the Company settled three consulting
agreements that were entered into during 2000 (originally totaling
$1,785,000) for an aggregate of $1,277,000 (one of the agreements,
settled for $524,000, is with a related party). Further, the Company
paid $1,128,000 as part of a retirement arrangement with the Company's
general counsel. These obligations are payable as follows: $630,000
was paid in the form of the Company's common stock; $1,938,000 was
paid in 2000; and the $1,113,000 balance is payable through March
2005.
F-38
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - Restructuring, continued
------------
-- Operating leases represent the settlement of the remaining lease
payments with respect to certain automobile and equipment leases that
are no longer required. Payments are expected to be paid over the
remaining terms of the leases, which range from 3 to 29 months.
-- Other costs include consulting fees related to the creation and
execution of the restructuring plan (including $250,000 to S.J. &
Associates, Inc. paid in the form of 125,000 shares of the Company's
common stock), legal fees and other exit costs.
NOTE 14 - Related Party and Other Transactions
------------------------------------
Three executive officers of the Company had received advances from time to
time, with such advances being payable upon demand and bearing interest at
the rate of 7% per annum. In the first quarter 2000, the officers repaid
$1,706,000 of these advances, consisting of $783,000 in cash and 410,179
shares of Company common stock valued at $923,000.
In 2000 and 1999, the Company granted 25,000 and 25,000 shares of common
stock (valued at $2.00 and $1.80 per share, respectively) to an outside
Director (who resigned in March 2000) for legal and consulting services
provided to the Company. In 2000, the Company also granted 20,000 options
with an exercise price of $2.09 per share, which were valued at $17,000 and
fully vested at December 31, 2000. Additionally, during the years ended
December 31, 2000, 1999 and 1998, the Company paid to such director
consulting fees of $52,000, $170,000 and $149,000, respectively.
In 2000, the Company granted 25,000 shares of common stock (valued at $2.00
per share) for consulting expenditures incurred in connection with the
restructuring plan (Note 13) to an outside Director (who resigned in March
2000). The Company paid such Director consulting fees of $13,000, $63,000
and $56,000 in each of the years ended December 31, 2000, 1999 and 1998,
respectively. In 1999 the Company granted 25,000 shares of common stock
(valued at $1.80 per share). Additionally, in 1999, 100,000 stock options
were granted to such Director, valued at $45,000.
In 2000, the Company granted to an outside Director (who resigned in March
2000) 25,000 shares of common stock (valued at $2.00 per share) for
consulting expenditures incurred in connection with the restructuring plan
(Note 13). In addition, the Company granted 20,000 options with an exercise
price of $2.09 for consulting services, which were valued at approximately
$21,000, and were fully vested at December 31, 2000.
F-39
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - Related Party and Other Transactions, continued
------------------------------------
In the first quarter 2000, the Company entered into a multi-year agreement
with a consultant that is a family member of one of the former officers.
Subsequently, the Company incurred a $524,000 restructuring charge for
terminating this agreement. At December 31, 2000, approximately $18,000 of
this settlement remains unpaid.
In 2000, the Company's general counsel received 25,000 shares of NetWolves
common stock, valued at $20.00 per share (Note 3), to pay legal fees with
respect to the NetWolves transaction and 62,500 shares of the Company's
common stock (valued at $2.00 per share) for consulting expenses incurred
in connection with the restructuring plan (Note 13). In addition, the
general counsel received $1,000,000 of cash compensation as part of a
retirement arrangement. In 1999, the Company's general counsel received
cash compensation of $689,000, and 75,000 shares of Softworks common stock
and 150,000 Company stock options valued at $395,000, for business and
financial consulting services rendered. In 1998, the Company's general
counsel received cash compensation of $207,000 and 180,000 Company stock
options (which were subsequently cancelled) valued at $171,000. Also in
1998 (in addition to the shares of Softworks and Company common stock as
discussed in Notes 3 and 10), related entities received 266,000 shares of
Softworks common stock, valued at $541,000, for business and financial
consulting services rendered.
In 1999, a consultant (who also has a financial interest in ITSV) received
cash compensation of $215,000 and 117,000 shares of Softworks common stock
valued at $423,000 for various consulting services. In 1998, the consultant
received cash compensation of $185,000 and 300,000 Company stock options
(which were subsequently cancelled) valued at $254,000 in addition to the
shares of Softworks and Company common stock (as discussed in Notes 3 and
10).
S.J. & Associates, Inc.
-----------------------
The Company has entered into various agreements with S.J. & Associates,
Inc. (including its affiliates are collectively referred to as "SJ") for
various services that provide for the following compensation:
-- In 2000, the Company issued 125,000 shares (valued at $2 per share),
for consulting fees related to the creation and execution of the
restructuring plan.
-- In 2000, the Company incurred $1,060,000 of consulting expenses with
SJ. The consulting expense was paid in the form of $274,000 in cash,
375,000 shares of Company common stock (valued at $2.00 per share) and
150,000 stock options with an exercise price of $.75 per share,
resulting in a charge of approximately $36,000.
F-40
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - Related Party and Other Transactions, continued
------------------------------------
S.J. & Associates, Inc., continued
-----------------------
-- SJ received minimum annual compensation pursuant to two agreements
aggregating $227,000 per annum through November 1999. Commencing in
December 1999, SJ was to receive minimum annual compensation pursuant
to two agreements aggregating $316,000 per annum. The agreements
expire in November 2004; however, one of the agreements was settled as
part of the 2000 Restructuring Plan for $1,276,000 (as discussed in
Note 13). SJ also consulted with Softworks in various capacities
throughout 1999 and received compensation directly from Softworks.
-- In 1999, the Company entered into an agreement with SJ to provide
assistance to the Company in locating, negotiating and ultimately
closing a transaction for the sale of the Company's entire remaining
holdings of Softworks, the sale of the Company's ComputerCOP
technology and related investment in NetWolves Corporation (Note 3).
The Company agreed to pay SJ 4.0% of the value of the transactions.
Accordingly, in the first quarter 2000, SJ earned $2,458,000 with
respect to the Softworks transaction and $1,420,000 with respect to
the transaction with NetWolves Corporation.
-- During 1998, SJ was granted 425,000 options to purchase the Company's
common stock at exercise prices ranging from $4.00 to $6.00 per share,
resulting in a charge to operations of $365,000; 275,000 of these
options were exercised and the remaining 150,000 options were
cancelled.
-- As discussed in Notes 3 and 10, SJ also received shares of the
Company's and Softworks common stock during 1998.
-- SJ also received 190,000 shares of Softworks common stock (issued
directly from Softworks) in conjunction with their initial public
offering in 1998.
-- In 1999, SJ was retained to assist the Company in its efforts to sell
shares in Softworks second public offering (Note 3). The Company
issued 200,000 contract options to acquire restricted shares of
Softworks common stock owned by the Company, exercisable at $1.00 per
share, which vested upon completion of Softworks second public
offering. The options were exercised in June 1999.
-- In November 1999, 100,000 shares of Softworks common stock and 80,000
shares of the Company's common stock were issued to SJ as payment for
various consulting matters. Additionally, SJ was awarded 75,000 fully
vested options of the Company's common stock exercisable at $1.25 per
share and expiring November 30, 2001. The stock and options were
valued at $621,000 and were charged to operations in 1999.
-- During 1999, the Company paid an affiliate of SJ $700,000 relating to
certain multi- media Internet technology.
F-41
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - Commitments and Contingencies
-----------------------------
Operating Leases
----------------
Operating leases are primarily for office space, equipment and automobiles.
At December 31, 2000, the future minimum lease payments under operating
leases are summarized as follows (in thousands):
Year Ending
December 31, Amount
------------------------------
(in thousands)
2001 $300
2002 132
Thereafter --
----
$432
====
Rent expense approximated $340,000, $592,000 and $1,285,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
Defined Contribution plan
-------------------------
The Company provides pension benefits to eligible employees through a
401(k) plan. Employer matching contributions to this 401(k) plan
approximated $41,000, $41,000 and $106,000 for the years ended December 31,
2000, 1999 and 1998, respectively.
Legal Matters
-------------
In March 1995, an action was commenced against the Company and a number of
defendants unrelated to the Company which action was later amended naming
only the Company and three of its officers as defendants. The complaint
alleges that certain third parties, unrelated to the Company, transferred
certificates representing 1,000,000 shares of the Company's common stock to
the plaintiff. The complaint further alleges that such shares were endorsed
in blank by the third parties and became bearer securities, which were
negotiated to the plaintiff by physical delivery. The certificates had not
been legally acquired from the Company and the certificates were reported
to the Securities and Exchange Commission by the Company as stolen
certificates. Plaintiff has requested validation of the transfer of the
certificates and is seeking damages of an unspecified amount, consisting of
alleged diminution in market value of the subject shares from 1994 through
the date of any judgment in the plaintiff's favor. The Company denied
plaintiff's allegations and filed a motion for summary judgment. In
November 1999, the motion for summary judgment was granted in favor of the
Company and its officers on the grounds that the purported endorsement on
the certificates was ineffective to transfer ownership of the certificates.
However, the plaintiff filed an appeal, which was contested by the Company.
Since that time the parties agreed to settle the matter. Under the terms of
the tentative settlement agreement the Company would issue 250,000 shares
of its common stock. The tentative settlement has been remanded to the
district court, which is required to
F-42
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - Commitments and Contingencies, continued
-----------------------------
Legal Matters, continued
-------------
review the fairness of the settlement agreement pursuant to the Securities
Act of 1933, as amended. The Company believes this settlement is likely to
be accepted by the district court. Accordingly, during the fourth quarter
2000, the Company accrued $80,000 to reflect the value of the shares
expected to be issued plus estimated legal fees. There can be no assurances
that the ultimate settlement will not differ materially from the amount
accrued.
During 1999, the Company and certain officers received notification that
they had been named as defendants in a class action alleging violations of
certain securities laws with respect to the content of certain Company
announcements. On January 30, 2001, the Court entered a judgment dismissing
the class action suit. The Plaintiffs had until March 1, 2001 to file an
appeal of the judgment, which none was filed.
In August 1999, The Company and its directors were served with a derivative
action complaint alleging awards of excess compensation and requesting a
judgment in favor of the Company for such excess compensation. The Company
and defendants have denied the allegations and are vigorously defending the
matter. Document discovery has commenced, although no depositions have been
scheduled. The Company is unable to predict the outcome of this claim and,
accordingly, no adjustments have been made in the consolidated financial
statements in regard to this matter.
In November 1999, the Company (through one of its subsidiaries) was added
as a party in an amended complaint. The complaint alleged that a Company
consultant violated a personal non-compete agreement in performing services
for the Company. The plaintiffs contended that they were compelled to offer
terms more generous to their customers than they otherwise would have
offered. Plaintiffs did not disclose the amount of their alleged damages
and requested injunctive relief. The Company denied the allegation and
vigorously defended the matter. In September 2000, this matter was settled
under a Stipulation for Dismissal without any further cost to the Company.
NOTE 16 - Management's Plans
------------------
The Company has continued to incur substantial operating losses and to use
substantial amounts of cash in operating activities, which were primarily
financed through sales and exchanges of Softworks common stock (Note 3).
However, as a result of the cost saving measures implemented as part of the
restructuring plan (Note 13), the Company has substantially reduced its
operating costs and use of cash subsequent to March 31, 2000, when compared
to prior periods. Management's current short-term plan is primarily focused
on achieving operating profit by successfully marketing innovative software
products and services that capitalize on the Company's patented
technologies. To achieve its goals, the Company has restructured its
operations, which reduced its operating expenses, while continuing to
market the Server Farm. Additionally, the Company intends to successfully
market its new consulting service, Telecommunications Solutions. The
Company is continually reviewing its long-term business strategy.
F-43
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 - Management's Plans, continued
------------------
Management believes that its plan will ultimately enable the Company to
achieve positive cash flows from operations. Until such time, the Company
believes that its present cash on hand and the liquidation of a portion of
its investment in Netwolves should provide adequate funding through at
least December 31, 2001.
The Company is deemed to be an Affiliate of NetWolves. As such, there are
certain restrictions pursuant to regulations of the Securities and Exchange
Commission that limit the amount of shares that the Company may sell in the
open market in a 90-day period. Should the Company be required to liquidate
shares in excess of the permitted quantities, the Company may need to sell
a portion of its investment in private transactions. Private transactions
would likely result in sales at a discount to the quoted market price.
NOTE 17 - Consolidated Statements of Cash Flows
-------------------------------------
Supplemental disclosure of cash flow information for the years ended
December 31, 2000, 1999 and 1998 is summarized as follows:
Year Ended December 31,
2000 1999 1998
--------------------------------
(in thousands)
Interest paid $8 $139 $541
== ==== ====
Net taxes paid (refunds received) $38 $102 $(23)
=== ==== ====
Non-cash investing and financing activities for the years ended December
31, 2000, 1999 and 1998 are summarized as follows:
-- In conjunction with the sale of ComputerCop Corp. (Note 3), the
Company received 1,775,000 shares of NetWolves common stock valued at
$35,500,000 in exchange for $24,394,000 of ComputerCop assets, which
included $20,500,000 cash.
-- The Company's chairman and Chief Executive Officer tendered 410,179
shares of the Company's common stock valued at $923,000 toward the
repayment of officers' loans.
F-44
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17 - Consolidated Statements of Cash Flows, continued
-------------------------------------
Year Ended December 31,
2000 1999 1998
----------------------------
(in thousands)
Exchange of the Company's and
Softworks common stock to ITSV
(Note 3)
Prepaid advertising $-- $-- $ 4,150
Goodwill -- -- 5,360
Software development costs -- -- 2,700
--- --- ---------
$-- $-- $ 12,210
=== === =========
Note receivable for the sale of
Softworks common stock by the
Company $-- $-- $ 5,000
=== === =========
Year Ended December 31,
2000 1999 1998
----------------------------
(in thousands)
Reduction in cash resulting from
excluding Softworks from the
consolidated financial statements:
Account and installment receivables $-- $ 33,942 $--
Prepaid expenses and other current
assets -- 2,282 --
Property and equipment, net -- 2,698 --
Intangible assets, net -- 6,653 --
Other non current assets -- 2,061 --
Accounts payable and accrued
expenses -- (4,468) --
Deferred revenue -- (26,787) --
Current and long-term debt -- (4,460) --
Minority interest -- (9,353) --
Investment in Softworks -- (9,327) --
--- ------- ---
$-- $(6,759) $--
=== ======= ===
F-45
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18 - Segment Information
-------------------
The Financial Accounting Standards Board issued Statement No. 131
"Disclosures about Segments of an Enterprise and Related Information",
which became effective for the Company in 1998 and has been implemented for
all periods presented. The Company and its subsidiaries operated in three
separate business segments: computer software, the Server Farm and
professional service. With the sale of Softworks and ComputerCOP in the
first quarter 2000 (Note 3) and the suspension of its professional services
business (the hardware reselling unit, see Note 1), the Company is focused
on its core technology and is currently operating in one business segment,
the Server Farm. The Server Farm segment includes all activities pertaining
to the utilization of the Company's patented d.b.Express technologies as
described in Note 1. The computer software segment, which operated
domestically, was primarily engaged in the design, development, marketing
and support of information delivery software products and software products
that were designed to provide non- computer literate owners the ability to
identify threats as well as objectionable material, which may be viewed by
users of the computer on the Internet. Until March 31, 1999, through
Softworks, the Company was also engaged in the systems management software
products for corporate mainframe data centers. International operations of
Softworks' foreign subsidiaries were located in the United Kingdom, France,
Brazil, Australia, Spain, Italy and Germany and several international
distributors primarily in Europe and Asia. The professional services
segment, which operated domestically, was primarily engaged in the design,
construction and installation of technology systems, including the
reselling of computer hardware.
Business Information
--------------------
Year Ended December 31,
2000 1999 1998
------------------------------
(in thousands)
Revenue
Computer Software (including $42, $3,570
and $10,503 of maintenance revenue in
2000, 1999 and 1998, respectively $ 73 $10,907 $42,298
Server Farm 2,047 1,182 663
Professional Services -- 12,551 19,027
--------- ------- -------
Total $ 2,120 $24,640 $61,988
========= ======= =======
Operating (loss) Income
Computer Software $ (204) $(33,215) $(17,193)
Server Farm (28,472) 245 268
Professional Services -- 414 1,281
--------- -------- --------
Total $(28,676) $(32,556) $(15,644)
======== ======== ========
F-46
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18 Segment Information, continued
-------------------
Business Information, continued
--------------------
Year Ended December 31,
2000 1999 1998
----------------------------------
(in thousands)
Identifiable Assets
Computer Software $ -- $28,762 $76,950
Server Farm 18,253 842 652
Professional Services -- 420 14,300
------- ------- -------
Total $18,253 $30,024 $91,902
======= ======= =======
In classifying business information into segments, the Company specifically
identifies revenue, expenses and identifiable assets of the computer
software and professional services segments; items not specifically
identified are included in the Server Farm segment.
Geographical Information
------------------------
Year Ended December 31,
2000 1999 1998
----------------------------------
(in thousands)
Revenue
Domestic $ 2,120 $ 21,383 $ 53,190
International -- 3,257 8,798
-------- -------- --------
Total $ 2,120 $ 24,640 $ 61,988
======== ======== ========
Operating (loss) Income
Domestic $(28,676) $(33,568) $(14,870)
International -- 1,012 (774)
-------- -------- --------
Total $(28,676) $(32,556) $(15,644)
======== ======== ========
Identifiable Assets
Domestic $ 18,253 $ 30,024 $ 82,377
International -- -- 9,525
-------- -------- --------
Total $ 18,253 $ 30,024 $ 91,902
======== ======== ========
F-47
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 19 - Major Customers
---------------
For the year ended December 31, 2000, the Company had one major customer
accounting for 80.5 % of the Company's revenue.
For the year ended December 31, 1999, the Company had one major contract
involving two customers, with combined revenue of $12,297,000 (49.9% of
total revenue). This amount is included in the Professional Services and
Domestic categories.
For the year ended December 31, 1998, the Company had one major customer
with revenue of $14,878,000 (24% of total revenue). This amount is included
in the Professional Services and Domestic categories.
NOTE 20 - Subsequent Events
-----------------
In February 2001, the Company made an equity investment of $500,000 in Voyant
Corp. ("Voyant"). Voyant is a privately held company, and accordingly, the
investment will be reflected on the Company's balance sheet as a non-marketable
security. The Company's Chairman is also the Chairman of Voyant.
The Company recently filed a preliminary proxy statement in which it stated that
it intends to put before its shareholders, at a special meeting, the matter of a
reverse stock split in order to attempt to comply with the continued listing
requirements of Nasdaq. The Company received a Nasdaq Staff Determination letter
in November 2000 stating that the closing bid price of its common stock had been
below one dollar for thirty consecutive trading days, thus not complying with
the requirements for continued listing set forth in Nasdaq's Marketplace Rules
and that its securities are, therefore subject to delisting from the Nasdaq
Small Cap Market. The Company has been granted an oral hearing set for March 29,
2001 with the Nasdaq Listing Qualifications Panel ("Panel"). There can be no
assurances the Panel will grant the Company's request for continued listing on
the Nasdaq Small Cap Market. Since the result of the hearing with the Panel is
not yet known, the Company is unable to determine its course of action on how it
intends to maintain its listing.
NOTE 21 - Quarterly Financial Data (Unaudited)
-----------------------------------
Year Ended December 31, 2000,
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------
(in thousands, except per share amounts)
Revenue $ 526 $ 500 $ 557 $ 537
Gross margin 437 420 493 448
Operating loss (24,194) (1,424) (1,324) (1,734)
Gain on sale of Softworks 47,813 -- -- --
Gain on sale of ComputerCOP 8,534 -- -- --
Other-than-temporary decline
in Investment in NetWolves -- -- -- (29,737)
Other income (expense) 332 212 131 (305)
(Provision for) benefit from
income taxes (12,812) 385 379 2,008
--------- ------- -------- ----------
Net (Loss) Income $ 19,673 $ (827) $ (814) $ (29,768)
========= ======= ======== ==========
Basic Net (Loss) Income
Per Share $0.93 $(0.04) $(0.04) $(1.39)
===== ====== ====== ======
Diluted Net (Loss)
Income Per Share $0.93 $(0.04) $(0.04) $(1.39)
===== ====== ====== ======
F-48
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 21 - Quarterly Financial Data (Unaudited), continued
-----------------------------------
The unaudited interim financial information reflects all adjustments, which
in the opinion of management, are necessary to a fair statement of the
results of the interim periods presented, all adjustments are of normal
recurring nature. 26
F-49
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 30th day of March, 2001.
DIRECT INSITE CORP.
By: /s/ Warren Wright
--------------------------------------
Warren Wright, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 30, 2001 the following persons in the capacities
indicated:
/s/ James A. Cannavino
________________________ Chairman of the Board
James A. Cannavino
/s/ Warren Wright
________________________ Chief Executive Officer
Warren Wright
/s/ George Aronson
________________________ Chief Financial Officer
George Aronson
/s/ Charles Feld
________________________ Director
Charles Feld
/s/ Dennis J. Murray
________________________ Director
Dennis J. Murray
/s/ Carla J. Stovall
________________________ Director
Carla J. Stovall