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, 2002
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.
(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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) NO [X]
As of April 16, 2003, there were 3,945,821 shares of the registrant's Common
Stock outstanding. The aggregate market value of the Common Stock held by
non-affiliates was approximately $6,901,000 based on the closing sale price of
the Common Stock as quoted on the NASDAQ on such date.
DOCUMENTS INCORPORATED BY REFERENCE: Part III - Items 10, 11, 12 and 13).
Registrant's definitive proxy statement to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934.
Direct Insite Corp. and Subsidiaries
Form 10-K for the Year Ended December 31, 2002
Table of Contents
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PART I PAGE
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ITEM 1 Business 1
ITEM 2 Properties 10
ITEM 3 Legal Proceedings 11
ITEM 4 Submission of Matters to a Vote of Security Holders 11
PART II
ITEM 5 Market for Registrant's Common Stock 12
ITEM 6 Selected Financial Data 13
ITEM 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
ITEM 7a Quantitative and Qualitative Disclosures About Market Risk 19
ITEM 8 Financial Statement 19
ITEM 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 19
PART IV
ITEM 14 Controls and Procedures 23
ITEM 15 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 23
SIGNATURE 26
PART I
Item 1. BUSINESS
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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 our 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 us or our 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, our 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 our 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. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by this paragraph.
OVERVIEW
Direct Insite Corp. and its subsidiaries (hereinafter referred to at times
as "Direct Insite" or 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 August, 2000, the shareholders voted to approve to change our name to
Direct Insite Corp. which the Board of Directors believed was more in line with
our new direction.
In March, 2000, in an effort to allow us 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 our board. In April, 2000, Mrs.
Carla J. Steckline, the then attorney general of the state of Kansas was elected
to serve as a member of the Board. As part of the terms and conditions of our
financing transaction with Metropolitan Venture Partners II, L.P.
("Metropolitan"), Mr Peter Yunich, their managing partner was elected to our
Board in September, 2002.
In September 2002, we sold 93,458 shares of our Series A Convertible
Preferred Stock, ("Preferred Stock") in consideration for $2,000,000 less fees
and expenses of $178,000 to Metropolitan, a private equity investment firm. In
December 2002, we sold 23,365 shares of our Preferred Stock in consideration for
$500,000 less fees and expenses of $61,000, to Metropolitan. The proceeds from
this December transaction were received January 3, 2003, and the principal sum
is reflected on the accompanying Balance Sheet as stock subscription receivable.
The holders of Preferred Stock ("the holders") are entitled to dividends, on a
cumulative basis at a rate of 9-1/2% per annum, compounded quarterly and payable
on September 25, 2004 and September 25, 2005. Dividends are payable, at the
option of the holders, in cash or in our common stock. The holders have certain
demand and piggyback registration rights, have preference in the event of
liquidation, and are entitled to ten votes for each share of Preferred Stock on
all matters as to which holders of common stock are entitled to vote. As of
December 31, 2002, $56,000 in dividends are payable to the holders.
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Our Current Business
We primarily operate as an application service provider ("ASP") and, market
an integrated "fee for services" offering providing high volume processing of
transactional data for billing purposes, electronic bill presentation and
payment ("EBP&P") as well as visual data analysis and reporting tools delivered
via the Internet for our customers. Our core technology is d.b.Express?, the
proprietary and patented management information tool, which provides targeted
access through the mining of large volumes of transactional data via the
Internet. In 2001 we acquired, Platinum Communications, Inc. ("Platinum"), a
Dallas, Texas based company, which markets its integrated proprietary back
office software solutions, Account Management Systems ("AMS" or sometimes
referred to as "TAMS") to the telecommunications industry either as a license or
as an ASP. We completed a merger with Platinum under an Agreement and Plan of
Merger ("Merger Agreement"). Under the Merger Agreement, our newly formed wholly
owned subsidiary acquired all of the outstanding common stock of Platinum.
Further, as an added source of revenue in 2001, we began to provide custom
engineering services for our customers.
This newly assembled suite of services enables us to provide a
comprehensive Internet delivered service from the raw transaction record through
all of the internal workflow management processes including an electronically
delivered invoice with customer analytics. This comprehensive service offering
provides back office operations, cuts costs and provides for improved customer
service by providing the end customer with easy access to all of the detailed
information about their bill. We operate 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 an International Business Machines ("IBM"), IBM e-business
Hosting Center. This co-location / redundancy feature enables us to offer
virtually down time free service.
Currently, IBM, our largest customer, representing more than 80% of our
revenue in each of the three years in the period ended December 31, 2002,
utilizes our products and services to allow their large enterprise customers to
mine their respective high volume telecommunications data to determine cost
allocation by usage, provide for network planning, budgeting and the
identification of significant trends in calling patterns. In addition, we added
electronic invoice presentment, payment and analysis capabilities to our
services offering all based on our d.b.Express(TM) platform.
Discontinued Products and Services
Historically, the most significant portion of our operations had been
conducted through one of our subsidiaries, Softworks, Inc. ("Softworks").
Through Softworks, we developed, marketed and supported systems management
software products for corporate mainframe data centers. Through a series of
transactions, our ownership of Softworks was reduced from 100% to 35% as of
December 31, 1999. Pursuant to a tender offer made in December 1999, we sold our
remaining interest in Softworks (a total of 6,145,767 shares) to EMC Corporation
for $10.00 per share. The transaction, which was completed in January 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 2000, we began a marketing initiative known as Global Telecommunications
Services ("GTS"). For a fee, this offering utilizing d.b.Express would analyze
long distance, data and wireless communication needs; assist in the negotiation
of telecommunication contracts and monitor ongoing carrier contract compliance.
During the fourth quarter of 2001, as a result of minimal revenue, we decided we
would no longer market these services.
In June 1998, we 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. In February, 2000, we sold a newly created wholly
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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, we 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 us to create a means by
which businesses could promote specific brand/product/service awareness. We
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, we invested
approximately $7,000,000 in its marketing and development efforts (charged to
operations as incurred). As part of our restructuring plan (Note 14 to the
Consolidated Financial Statements), the Board of Directors determined that it
was in our best interest to immediately cease all funding of this project. As a
result, in April 2000, we entered into a contractual arrangement with an
unrelated third party, whereby wetransferred 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. All future costs associated with any
continued development and marketing of the display station would be absorbed by
the third party. To date, we have not received revenue from this transaction.
In 1997, we created a business unit, "professional services", which
primarily resold computer hardware and for a fee, assisted 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.
As a result, in January, 2000, we elected to significantly curtail the
operations of this business unit, and has further decided to completely refrain
from any marketing of this business unit.
PRODUCTS AND SERVICES
We currently operate in one business segment and have, during the years
2002, 2001 and 2000, provided three separate offerings: ASP Services, AMS
Services and custom engineering fees.
Currently, within the ASP offering we provide two key services:
-- Invoices On Line ("IOL"), an EBP&P, offering,
and;
-- d.b.Express, a data visualization and mining service
IOL
---
LOL is an advanced web-based electronic invoice presentment, workflow
management, reporting and data interrogation/analysis platform designed for
large enterprise customers doing business internationally. Our web-based network
is operational and is currently hosting millions of invoices and is actively
serving invoices in the US, Canada, England, Ireland, Germany, Italy and France.
We are planning on adding additional geographies and languages throughout the
course of 2003.
IOL provides the following features and functions for the end user:
-- Summary View of Invoice. IOL enables the "payer" to view invoices from
an aggregate level, thereby making it easier to see the total amount due and to
download information.
-- Complex Presentment. (Data centric views). Data-centricity is the main
selling point of this solution. Not only does the system offer summary views, it
also provides users with in-depth itemizations, single data points, and the
consolidation of multiple products and/or services in one electronically
delivered invoice.
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-- Data Mining and Visualization. Another benefit of data-centricity is the
ability to utilize the d.b.Express data mining technology across the entire
enterprise to analyze line item detail information - not just a single operating
unit or limited geographical area of the business. Additionally, the system
provides a significant archiving capability such that 12 to 24 months of
historical invoicing/charges can be data mined for trend and optimization
opportunities. The results of the mining activity are presented in a highly
visualized manner to the user.
-- Notification. Email notification is used for invoice alerts, disputes,
workflow, administration, invoice status and payment timing.
-- Multi-tiered Accounts. Used for allocating portions of an invoice across
complex, payer organizational structures with multiple levels of management and
associated viewing rights and/or privileges often found in large enterprise
accounts.
-- Invoice Management. Enables the user to electronically route the invoice
through the approval chain; passing the designated portions of an invoice to
necessary parties for approval. This will also assist the user's ability to
verify whether the approving parties have received the invoice and if the
portion has been reviewed, approved or disputed. We believe this to be a
cost-saving feature.
-- Dispute Management. Includes automatic dispute resolution enabling the
biller to establish a threshold below which a dispute is automatically cleared.
-- Payment and Remittance. Supports multiple payment options such as full
payment, schedule payment and auto payment. The system also supports
balance-forward accounting or open invoice accounting. Pre-scheduled payments
are also supported by the system.
-- Billing Inquiry (or Trouble Ticket). Acts as a complaint service
allowing customers to communicate line item level problems to the "biller".
-- Report Capabilities. Users can track orders, disputes, billing inquires,
payments and system usage. This reporting function is driven by an online
analytical processing (OLAP) tool that plugs into the user's database. This text
reporting capability complements the graphical representation of results that is
the output of the d.b.Express data-mining tool.
d.b.Express
Background
d.b.Express has been in development for more than ten years. The Windows
Version 1.0 of d.b.Express? was introduced in December, 1993, and the DOS
version was introduced in late 1992. Windows Version 2.0, with significantly
enhanced functionality based on user feedback, was introduced in the second
quarter of 1994 and a Windows 95(R) 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 the ability to interactively access,
via the Internet, millions of records in a matter of seconds.
d.b.Express is a software tool which assists end users in the retrieval and
visualization of all types of data. It allows customers to access and analyze
high volumes of technical and account information. With the patented data mining
technology found in d.b.Express, high volumes of detailed information is
presented in our unique interface known as a "Filescape". With d.b.Express, you
may create a graph, report, or simply list your information for easy viewing.
d.b.Express simplifies the preparation of traditional reports by giving you the
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ability to view the billing data interactively using simple point-and-click
mouse operation. With d.b.Express, you are given the ability to drill down into
the call detail information allowing you to identify data trends and "cause and
effect" relationships in an interactive, graphical format.
For the Internet
d.b.Express has overcome a major Internet problem, that of high data volume
and limited bandwidth, currently responsible for the lengthy delays associated
with data downloading. This web based reporting and analysis system was
introduced to deliver all of the functionality of d.b.Express for the desktop
with the advantages of managing the monthly call detail records on a centralized
information server that is accessible via the World Wide Web. The Web based
information delivery via the Internet is preferable to CD-ROM because, in most
instances, large volumes of hard drive space are required. d.b.Express runs in
common web browsers such as Internet Explorer 5.X (and newer versions) plus
Netscape Navigator 4.X (and newer versions). This enables the ability to
interact with and report on large monthly billing period data via remote
Internet access.
Advantages of d.b.Express
All Data Indexed - Unlike traditional database products, our software
indexes all data relationships, this 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.
Graphics Driven - The data is delivered via the Internet with simple
browser technology thus allowing any Internet user to manipulate huge databases
in seconds.
High Power / Low Cost - d.b.Express(TM) enables users to analyze millions
of records over the Internet without the need to first download the data being
analyzed.
Better Access to Information - d.b.Express(TM) improves the accessibility
of databases created by database management systems (DBMS) by eliminating the
need to write queries in computer code and facilitates data searches through the
use of graphical query tools. We believe that this results in more timely and
better quality business decision-making.
Broader Access to Information. - d.b.Express(TM) enables a broader
population within an organization to visually and interactively mine their data
without the need or support from internal or external management information
system (MIS) professionals. 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.
Ease of Use - d.b.Express(TM) utilizes simple point and click technology,
which enables the user to view and analyze data 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 searches,
queries and analyses can be converted to sophisticated, simple to use
presentations providing integrated business graphics and report writing
capabilities.
Interfaces With Leading Databases and Other Tools - d.b.Express(TM)
provides direct access to leading databases created by DBMS vendors and can be
exported to popular spreadsheets, report writers, graphics packages and word
processors.
Integrates Data From Multiple Vendors - When d.b.Express(TM) reads a
database, it creates its own summaries of information through its proprietary
process. Information contained in databases is formatted into d.b.Express's
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.
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Works in Common Operating Environments - d.b.Express? operates in virtually
all file server and peer-to-peer networking environments providing secure visual
data mining functionality through Internet browsers.
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. 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.
Security, Access and Storage - In order to meet the archival requirements
of customers, we produce CDs of each month's billing details. In order to
provide this service, we have has put into place two fully redundant data
centers. The service is available 24 hours a day, 7 days a week, 365 days a
year.
Disadvantages in regard to d.b.Express(TM) include the following:
Lack of Established User-base and Acceptance of the Product - d.b.Express?
is not yet widely used, which may defer acceptance. We believe our focus on
large-scale users and its low capital and deployment cost could help overcome
the lack of acceptance in the market place. There is no assurance that we will
be successful in reaching our sales plan to gain adoption of the technology.
Limited Resources to Market and Promote d.b.Express(TM) - We have limited
resources with which to market and promote d.b.Express(TM). Regardless of the
unique patented aspects of the product, if we are 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. We are 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(TM). If such new technologies are developed, they could negatively
impact our ability to successfully market and promote d.b.Express(TM) on the
Internet.
Both IOL and dbExpress applications are managed service offerings and are
priced on a per transaction basis ranging from fees per invoice to fees per line
item of detail processed and by information archived and made accessible via the
Internet by either of our two data centers.
In addition, we also generate revenue from custom engineering services. This
form of engineering work also known as non recurring engineering ("NRE"), quite
often leads to recurring sources of revenue. It can be in the form of custom
application development or changes made at the request of a customer.
Account Management System - "AMS" & "TAMS"
We also market AMS, which is marketed to communications carriers as an
end-to-end Integrated Management System ("IMS") supporting most aspects of a
carriers' relationship with its customers. The primary functionalities of AMS
fall into two major aspects; Billing -(the accumulation of detail transactions
and service items that bill on a recurring basis, the pricing of those items and
the generation of an invoice, paper or electronic, for those items), and
Provisioning (the generation of information utilized to enable or disable
services to specific customers in coordination with a customer order, available
communications assets and network devices or other carriers which are utilized
to provide a communications service).
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Within AMS, there is a secondary offering, TAMS, which is marketed to
enterprises which are large consumers of communications services. Utilizing
substantially the same software assets in a modified presentation environment,
TAMS allows the enterprise customer to maintain an inventory of its
communications assets, manage and audit its relationship with the carriers it
purchases service from, allocate those costs throughout its organization and
deliver that cost allocation via Web based reporting tools. These products are
the result of integrating and upgrading the software assets of Platinum with db
Express data visualization products and the electronic invoicing products.
Upgrades and enhancements are being developed, which we expect will permit all
aspects of each product to be accessible via the World Wide Web as well as
standardize the "look and feel" within the product line. These efforts are
scheduled for completion
The AMS software is arranged in Modules, a listing of each module and its
primary feature sets follows:
Carrier Business Support Systems & Operations Support Systems BSS/OSS
AMS is an internally developed and maintained system for the enterprise
management of a Telecommunications Carrier. It is comprised of 10 major modules.
AMS is a truly scaleable system with the capability of the RDBMSs, which are
available for Novell NetWare, WindowsNT Server, UNIX operating systems, and
Mainframe operating systems.
Telecommunications Asset Management System -- the Large Enterprise Solution
TAMS provides Enterprises with the command and control over their own
telecom services to place the Enterprise at an advantage over their service
providers. TAMS not only provides control of the invoice collection, it also
provides end-user customer information including provisioning of new products
and services, presentment of invoices electronically for manager level approval
and interrogation, automatic general ledger integration and payment of invoices.
TAMS also provides the capability to allow Enterprises to gain the advantage
over their suppliers by utilizing telecommunication usage information to obtain
better pricing and terms of service from all suppliers. The TAMS suite of
products is designed to assist our customers in managing their telecom usage and
related information.
TAMS provides control over the monthly validation and approval process
related to telecommunications services. By capturing the standard charges as a
baseline inventory of services directly from the service providers prior to
billing, Enterprises can identify overcharging and miss charging, before the
monthly invoice is approved for payment. The added level of financial control
provides the Enterprise with the systematic methodology to aggressively manage
financial health as it relates to telecommunications cost components. The "TAMS"
application layer provides the systematic means to link invoiced services to
budgeted expenditure levels.
TAMS also allows:
-- Access to all end-user information via a Web based interface
-- Delivery of invoices electronically to approving managers via a Web
based interface
-- Approval or "Payment" of invoices electronically via a Web based
interface
Historically, our dominant product offering was dbExpress, a visual data
analysis platform for use by Fortune 500 companies to consolidate communications
traffic for the purpose of system analysis and contract compliance. We added to
that telecommunication services capability with the acquisition of Platinum and
their asset management system , suite of back office communications management
software products. The resulting Telecommunication Asset Management Software was
derived from the integration of AMS with dbExpress to create an end-to-end
communications management system designed for large enterprise customers. The
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TAMS service offering provides the following processes critical to managing
complex high volume communications services within the large enterprise; work
flow management, service provisioning, transaction rating, billing and analysis,
A/R and cash application and electronic intra/inter company invoicing.
During 2001, we enhanced the service offering by combining electronic
invoice presentment and payment functionality with dbExpress to provide Internet
services customers with an electronic invoice that is capable of delivering and
data mining the high volume of internet transactions that large companies
generate. This "data centric" approach was a significant departure from the
industry standard "document centric" approach that delivered print stream images
over the Internet and not the line item detail. This "data centric" approach
formed the basis of our enhanced EBP&P offering IOL that was completed in 2002.
This combined set of services has allowed us to significantly expand our market
opportunities to include any large enterprise in any industry that seeks to
provide their customers with an electronic invoice with the associated line item
detail information with the associated reports and data mining capabilities.
Previously, all of the electronic reporting and analysis capability of
d.b.Express was being delivered in support of the incumbent paper based billing
system. For simple or low volume detail accounts, electronically delivered
invoices are mostly a reproduction of the print stream, a system that is not
designed to handle high volume detail accounts. We believe that electronic
invoices delivered to large enterprise customers will require the ability to
deliver all of the line item detail to support the summary billing information
as well as the tools necessary to mine that data. Our offering to this market
includes the electronic presentation of invoices along with the tools to verify
the detail behind the invoice. The Direct Insite offering is a "data centric"
solution built on delivering summary billing information constructed from the
underlying detail data contained in an underlying database. Thus the supporting
detail information, analysis and reporting tools are made available to the end
user thus reducing costs for both provider and customer while improving customer
service through customer self care. We believe that this is a critical component
and a compelling reason to encourage companies to adopt our electronic invoice
presentment and payment service.
We now have a complete systems management solution called TAMS or
telecommunications asset management system based on the control of a single
database, all of the functionality required to manage the back office workflow
and the high volume information delivery system for demanding enterprise
accounts that includes EBP&P. The acquisition of Platinum and their AMS carrier
management system in May 2001 provide us with the complementary software
products and telecommunications industry management experience to offer the
necessary software tools to process the high volume of telecommunication switch
data to the electronically presented invoice complete with data mining - all on
an outsourced business model.
SALES AND MARKETING
CHANNELS TO MARKET
We have two primary channels to market - direct through our sales
representatives and contract sales agents, and, indirect through channel and
strategic partners. These channels are supported by a technical sales support
group.
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Direct
------
We have increased our direct sales resources to include three full time
sales reps and two sales agents. In addition, our directors and executives are
involved in new client development and the establishment of channel partners.
Indirect
--------
We are pursuing both reseller and strategic partner relationships to gain
greater access to existing account relationships and to align our marketing with
complementary products and services. This provides access to the additional
engineering and professional resources required to implement our EBP&P service
offering.
Technical Sales Support and Post-Sales Account Management
---------------------------------------------------------
We have a pre-sales support team and add post sales support to the existing
account management group as we secure new business. This group is responsible
for technical sales presentations, developing proposals and pricing, contract
administration and then account management upon completion.
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.
We believe that our research and development staff, many with extensive
experience in the industry, represents a significant competitive advantage. As
of December 31, 2002, our research and development group consisted of 40
employees (52%). Further, when needed, we retain the services of independent
professional consultants. We seek to recruit highly qualified employees, and our
ability to attract and retain such employees will be a principal factor in our
success in maintaining a leading technological position. For the three years
ended December 31, 2002, 2001, and 2000, research and development expenses were
approximately $3,903,000, $2,814,000 and $4,278,000, respectively We believe
that investments in research and development are required in order to remain
competitive.
COMPETITION
We believe that our primary competitors are:
Avolent is a privately held San Francisco based provider of enterprise software
for Financial Relationship Management (FRM) that include electronic invoice
presentment and payment (EIPP), online account management, process management,
enterprise employee access, and decision support. Founded in 1995, Avolent has
primarily focused on the financial services, healthcare, technology and utility
markets.
Bottomline Technologies (Nasdaq: EPAY) was established in 1989 and provides
a B2B EBPP solution, primarily to financial institutions and the legal services
markets. The company's products include software designed to automate the
disbursement process for banks and their corporate customers anti-fraud and
electronic commerce payment software. Bottomline focuses on cash management and
financial-related remittance, reporting and audit data. The company has over 500
employees and is based in Portsmouth, NH.
9
BCE Emergis (TSE: IFM) is an ecommerce solutions and service provider, primarily
focused on the healthcare and financial services industries. The company, based
in Toronto, Canada, was acquired by Bell Canada's electronic commerce unit and
subsequently changed its name to BCE Emergis. The company has focused primarily
on the Canadian B2C EBPP marketplace but is expanding in the US through banking
relationships.
BillingZone was established as a joint venture between PNC Bank and Perot
Systems was recently acquired by e-One Global. BillingZone is an information
technology services firm that serves the B2B EBPP market with a consolidator
model that is focused on the B2B EBPP industry and is primarily payer-centric.
CheckFree Corporation (Nasdaq:CKFR) provides online billing and payment for
companies on the Web. Primarily focused on the B2C market, consumers receive and
pay bills online through CheckFree-managed services. CheckFree was founded in
1981 in Columbus, Ohio. The company is now headquartered in Atlanta, GA with
offices across the U.S,, in Canada and in the UK.
Docucorp International, Inc.,(Nasdaq: DOCC) is based in Dallas Tx, and provides
enterprise software products and professional services related to its
information software products. They also provides application service provider
(ASP) hosting service to provide processing, print, mail, archival and Internet
delivery of documents for insurance, utilities, bank and mutual fund statements,
invoices, call center correspondence and EBP&P.
DST Systems Inc., is a Kansas City based provider of integrated paper and
electronic statements, bills, marketing and compliance pieces, and other
documents, that primarily service the communications, financial, insurance and
utility markets for B2C and B2B applications.
Edocs, Inc. is a privately held company based in Natick NH with its primary
business model focused on providing online account management and billing
software to the global large enterprise market. The company has approximately
250 employees and is focused on providing their B2B and B2C products to the
telecommunications, utility, healthcare, transportation, security, real estate,
retail and leasing industries, as well as financial services firms with B2B
electronic statement and presentment needs.
Pitney Bowes docSense (docSense) is a wholly-owned subsidiary of Pitney Bowes
(NYSE: PBI). docSense targets the B2C, B2B and internal messaging markets and
provides solutions for the creation and distribution of documents in paper and
digital forms. Pitney Bowes provides solutions for government, utility, and
insurance markets. It focuses on bills and primarily the B2C market.
Many of our current and potential competitors have greater name
recognition, larger installed customer bases, longer operating histories, and
substantially greater financial technical and marketing resources than us. We
cannot assume that 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 our current or future products or that our
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 our
business, operating results and financial condition.
EMPLOYEES
We had 78 employees, all in the United States, at March 31, 2003, including
18 in marketing, sales and support services, 46 in technical support, (including
research and development) and 14 in corporate finance and administration. Our
future success will depend in part upon our continued ability to attract and
retain highly skilled and qualified personnel. We believe that our relations
with our employees are good, and we have no collective bargaining agreements
with any labor unions.
10
INTELLECTUAL PROPERTY
We have two federally registered trademarks, which we rely upon:
"d.b.Express(TM) and "dbACCEL(TM). In addition, we 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
our patents and copyrights will effectively protect us from any copying or
emulation of our products in the future.
We also rely on proprietary knowledge and employ various methods, including
confidentiality agreements, to protect our software codes, concepts, ideas and
documentation of our proprietary technology.
Despite these efforts, unauthorized parties may attempt to copy aspects of
our products, obtain and use information that we regard as proprietary or
misappropriate our copyrights, trademarks, trade dress and similar proprietary
rights. In addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate. In addition,
our competitors might independently develop similar technology or duplicate our
products or circumvent any patents or our other intellectual property rights.
OUR OFFICERS
Name Age Positions and Offices
James A Cannavino 58 Chairman of the Board of Directors
Chief Executive Officer
Robert Carberry 60 President
George Aronson 54 Chief Financial Officer, Secretary
Item 2. PROPERTIES
- ------------------
We currently maintain leased facilities in the locations listed below:
Description Location Square Footage Lease term Annual Rental Cost
- ----------- -------- -------------- ---------- ------------------
Corp Headquarters Bohemia, NY 10,000 7/1/02 - 6/30/03 $201,600
Texas office Dallas, TX 3,000 8/15/01 - 8/31/06 $74,000
Co-location facility Newark, NJ Note 1 2/1/01 - 1/31/04 $235,200
Note 1. We are obligated under the terms of an agreement with our major
customer to maintain a redundant/co-location IBM site. The redundant facility
provides us 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.
We have an option to extend our lease in Bohemia, New York for two years.
Item 3. LEGAL PROCEEDINGS
- -------------------------
We are not currently involved in any legal or regulatory proceeding, or
arbitration, the outcome of which is expected to have a material adverse effect
on our business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
No matters were submitted to a vote of shareholders during the fourth
quarter ended December 31, 2002.
11
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
- ----------------------------------------------------------
STOCKHOLDER MATTERS.
-------------------
(a) Our common stock has been traded on NASDAQ SmallCap market since
September 23, 1992. The following table sets forth the high and low sales prices
for our common stock by the quarters indicated, as adjusted to reflect our
one-for-fifteen reverse stock split on May 7, 2001.
High Low
--------- -----------
2001:
First Quarter 7.035 3.285
Second Quarter 5.140 1.633
Third Quarter 2.840 1.900
Fourth Quarter 1.990 0.990
2002:
First Quarter 1.690 1.000
Second Quarter 3.160 1.200
Third Quarter 2.950 2.000
Fourth Quarter 2.500 1.600
2003
First Quarter 2.430 1.370
(b) As of March 31, 2003, there were 3,149 shareholders of record. We
estimate that there are approximately 10,700 shareholders, including
shareholders whose shares are held in the name of their brokers or stock
depositories.
(c) There were no cash dividends or other cash distributions made by us
during the year ended December 31, 2002. Further dividend policy will be
determined by our Board of Directors based on our earnings, financial condition,
capital requirements and other then existing conditions. It is anticipated that
cash dividends will not be paid to the holders of our common stock in the
foreseeable future.
(d) During the fourth quarter of 2002, we issued unregistered shares of our
common stock as follows:
-- 13,000 shares of common stock were issued in connection with the sale
of preferred stock;
-- 7,516 shares of common stock were issued to a consultant for services
rendered.
-- Pursuant to the Platinum agreement, 15,555 shares of common stock were
issued to the former shareholders of Platinum.
The foregoing shares were issued in reliance on the exemption provided
by Section (4)(2) of the Securities Act as transactions not involving
a public offering. All prior issuances of equity securities during the
past three years have been previously reported.
12
Item 6. SELECTED FINANCIAL DATA
- --------------------------------
The following selected consolidated financial data for the five fiscal
years ended December 31, 2002, 2001, 2000, 1999, and 1998 are derived from our
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 our
consolidated financial statements, 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 our
ownership interest was reduced to approximately 72%. In April 1999, our
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.
Consolidated Statement of Operations Data:
Year Ended December 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Revenue $7,416 $3,785 $2,120 $24,640 $61,988
Cost And Expenses
- -----------------
Operations, Research and Development 4,721 3,620 4,600 23,569 32,211
Sales and Marketing 2,467 2,532 4,644 17,417 28,496
General and Administrative 3,881 3,778 5,505 11,472 12,718
Amortization and Depreciation 957 985 871 4,738 4,207
Non-recurring Restructure Charge - - 15,176 - -
---------------------------------------------------------
Total Operating Expenses 12,026 10,915 30,796 57,196 77,632
---------------------------------------------------------
Operating loss (4,610) (7,130) (28,676) (32,556) (15,644)
Gain on Sale of Softworks - - 47,813 17,107 28,785
Equity in Earnings of Softworks - - - 512 -
Equity in loss of Voyant and Valuation Adjustment (1,330) - - - -
Gain on Sale of ComputerCOP in 2000 - - 8,534 - -
Other-Than-Temporary Decline in Investment in NetWolves (457) (150) (29,737) - -
Corporation
Interest Charge Pertaining to Discount on Convertible - - (354) - -
Debenture
Loss on sales of NetWolves common stock (375) (3,666) - - -
Other (Expense) Income, net (139) (288) 724 316 (485)
Minority Interest in Earnings of Softworks - - - (46) (1,361)
---------------------------------------------------------
(Loss) Income Before Provision for Income Taxes (6,911) (11,234) (1,696) (14,667) 11,295
Benefit From/(Provision For) Income Taxes - 622 (10,040) 9,095 (1,748)
---------------------------------------------------------
Net (Loss) Income $ (6,911) $(10,612) $(11,736) $ (5,572) $9,547
=========================================================
Basic Net (Loss) Income per Share $(1.91) $(5.88) $(8.23) $(4.08) $8.70
=========================================================
Diluted Net (Loss) Income per Share $(1.91) $(5.88) $(8.23) $(4.08) $8.40
=========================================================
Cash Dividends Declared per Share $0 $0 $1.50 $4.35 $0
=========================================================
Basic Weighted Average Common Shares Outstanding 3,643 1,804 1,426 1,364 1,102
=========================================================
Diluted Weighted Average Common Shares Outstanding 3,643 1,804 1,426 1,364 1,135
=========================================================
December 31,
Consolidated Balance Sheet Data 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Cash and Cash Equivalents $ 700 $1,359 $10,851 $ 1,852 $ 8,176
Working (Deficit)/Capital (218) 1,673 9,693 22,846 27,569
Total Assets 4,891 7,790 18,253 30,024 91,902
Long Term Debt, Less Current Portion 616 595 924 - 1,403
Minority Interest - - - - 8,503
Shareholders' Equity 1,212 4,106 10,538 24,486 34,016
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Overview
Direct Insite Corp. and its subsidiaries (hereinafter referred to at times
as "Direct Insite" or 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 August, 2000, the shareholders voted to approve to change our name to
Direct Insite Corp. which the Board of Directors believed was more in line with
our new direction.
In March, 2000, in an effort to allow us 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 our board. In April, 2000, Mrs.
Carla J. Steckline, the then attorney general of the state of Kansas was elected
to serve as a member of the Board. As part of the terms and conditions of our
financing transaction with Metropolitan Venture Partners II, L.P.
("Metropolitan"), Mr Peter Yunich, their managing partner was elected to our
Board in September, 2002.
In September 2002, we sold 93,458 shares of our Series A Convertible
Preferred Stock, ("Preferred Stock") in consideration for $2,000,000 less fees
and expenses of $178,000 to Metropolitan, a private equity investment firm. In
December 2002, we sold 23,365 shares of our Preferred Stock in consideration for
$500,000 less fees and expenses of $61,000, to Metropolitan. The proceeds from
this December transaction were received January 3, 2003, and the principal sum
is reflected on the accompanying Balance Sheet as stock subscription receivable.
The holders of Preferred Stock ("the holders") are entitled to dividends, on a
cumulative basis at a rate of 9-1/2% per annum, compounded quarterly and payable
on September 25, 2004 and September 25, 2005. Dividends are payable, at the
option of the holders, in cash or in our common stock. The holders have certain
demand and piggyback registration rights, have preference in the event of
liquidation, and are entitled to ten votes for each share of Preferred Stock on
all matters as to which holders of common stock are entitled to vote. As of
December 31, 2002, $56,000 in dividends are payable to the holders.
We primarily operate as an application service provider ("ASP") and, market
an integrated "fee for services" offering providing high volume processing of
transactional data for billing purposes, electronic bill presentation and
payment ("EBP&P") as well as visual data analysis and reporting tools delivered
via the Internet for our customers. Our core technology is d.b.Express(TM), the
proprietary and patented management information tool, which provides targeted
access through the mining of large volumes of transactional data via the
Internet. In 2001 we acquired, Platinum Communications, Inc. ("Platinum"), a
Dallas, Texas based company, which markets its integrated proprietary back
office software solutions, Account Management Systems ("AMS" or sometimes
referred to as "TAMS") to the telecommunications industry either as a license or
as an ASP. We completed a merger with Platinum under an Agreement and Plan of
Merger ("Merger Agreement"). Under the Merger Agreement, our newly formed wholly
owned subsidiary acquired all of the outstanding common stock of Platinum.
Further, as an added source of revenue, we began in 2001 to provide custom
engineering services for our customers.
This newly assembled suite of services enables us to provide a
comprehensive Internet delivered service from the raw transaction record through
all of the internal workflow management processes including an electronically
delivered invoice with customer analytics. This comprehensive service offering
provides back office operations, cuts costs and provides for improved customer
service by providing the end customer with easy access to all of the detailed
information about their bill. We operate fully redundant data centers located at
our main office in Bohemia, N.Y. and in Newark, NJ. Our facility in New Jersey
is leased at an International Business Machines ("IBM"), IBM e-business Hosting
Center. This co-location / redundancy feature enables us to offer virtually down
time free service.
14
Currently, IBM, our largest customer, (representing more than 80% of our
revenue in each of the three years in the period ended December 31, 2002)
utilizes our products and services to allow their large enterprise customers to
mine their respective high volume telecommunications data to determine cost
allocation by usage, provide for network planning, budgeting and the
identification of significant trends in calling patterns. In addition, we added
electronic invoice presentment, payment and analysis capabilities to our
services offering all based on our d.b.Express(TM) platform.
Discontinued Products and Services
Historically, the most significant portion of our operations had been
conducted through one of our subsidiaries, Softworks, Inc. ("Softworks").
Through Softworks, we developed, marketed and supported systems management
software products for corporate mainframe data centers. Through a series of
transactions, our ownership of Softworks was reduced from 100% to 35% as of
December 31, 1999. Pursuant to a tender offer made in December 1999, we sold our
remaining interest in Softworks (a total of 6,145,767 shares) to EMC Corporation
for $10.00 per share. The transaction, which was completed in January 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 2000, we began a marketing initiative known as Global Telecommunications
Services ("GTS"). For a fee, this offering, which utilized d.b.Express would
analyze long distance, data and wireless communication needs; assist in the
negotiation of telecommunication contracts and monitor ongoing carrier contract
compliance. During the fourth quarter of 2001, as a result of minimal revenue,
we decided to no longer market these services.
In June 1998, we 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. In February, 2000, we 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, we 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 us to create a means by
which businesses could promote specific brand/product/service awareness. We
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, we invested
approximately $7,000,000 in its marketing and development efforts (charged to
operations as incurred). As part of our restructuring plan (Note 14 to the
Consolidated Financial Statements), our Board determined that it was in our best
interest to immediately cease all funding of this project. As a result, in April
2000, we entered into a contractual arrangement with an unrelated third party,
whereby we 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. All future costs associated with any continued development and
marketing of the display station would be absorbed by third party. To date, we
have has not received revenue from this transaction.
15
Seasonality/Quantity Fluctuations
Revenue from managed services generally is not subject to fluctuations or
seasonal flows. However, we believe that revenue derived from custom
engineering, will have a significant tendency to fluctuate.
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, our operating results for any quarter are not
necessarily indicative of results for any future period.
Financial Condition and Liquidity
During 2002, we incurred an operating loss of $4,610,000 and used
$2,675,000 of cash in operating activities, an improvement from the prior year's
operating loss of $7,130,000 and use of cash in operating activities of
$8,007,000.
In February 2001 we made an equity investment of $500,000 in Voyant Corp
("Voyant"). The investment was reflected on our balance sheet as a
non-marketable security. Additionally, in November 2001, we acquired 15,680,167
shares of Voyant in exchange for 60,000 shares of NetWolves common stock fair
valued at $156,000. During 2002 we invested an additional $674,000 for which we
received 67,400,000 shares of Voyant common stock. We also began providing
administrative services to Voyant, for which we received 12,300,000 shares of
Voyant common stock. At December 31, 2002, we determined that the estimated fair
value of our investment was nominal, and accordingly eliminated the entire
carrying value. Our Chairman was also the Co-Chairman of Voyant until November
2002 at which time he resigned his position as their Co-chairman. Our Chairman
beneficially owns approximately 19% of Voyant's outstanding common stock and
holds $1,750,000 of approximately $2,800,000 of Voyant's notes which are
convertible into Voyant's common stock at the rate of $.25 per share.
In order to fund operating losses during 2002, we:
-- received $2,500,000 (including $500,000 sold in December 2002 and
received in January 2003), from the sale of Preferred Stock, less fees
and expenses of $239,000, which were paid in a combination of cash and
the Company's common stock;
-- received $588,000 from the sale of our common stock;
-- received a loan from our Chairman in the amount of $250,000;
-- liquidated our holdings of NetWolves common stock by selling our
remaining 298,500 shares for approximately $377,000;
-- continue to make use of the financing arrangement with an asset based
lending institution.
We have utilized $2,675,000 in operating activities, which includes, among other
items:
-- a net loss of $6,911,000; o an increase in accounts receivable of
$308,000;
-- $420,000 paid in restructuring, as previously reported;
-- reductions in payables and accrued expenses of $429,000.
The items above were partially offset by:
-- non-cash expenses totaling $4,193,000;
-- an increase in deferred revenue of $252,000;
-- decreases in prepaid expenses and other current assets of $857,000,
primarily resulting from the collection of an income tax refund of
$615,000.
16
During 2002, we expended approximately $456,000 for capital expenditures,
which included $277,000 of additional data processing and Internet connectivity
equipment for our co-location facility.
Our current short-term plan is primarily focused on achieving operating
profit by successfully marketing innovative software products and services that
capitalize on our patented technologies. To achieve these goals, we continually
review our overall operating costs, while continuing to market managed services,
as well as continue to expand our custom engineering service. Additionally, we
intend to increase revenue from the products and services acquired from
Platinum. We are continually reviewing our long-term business strategy.
We will continue to take steps that we believe will result in positive
operating cash flow. These measures will include:
-- Expanding our products and services:
-- We continually expand our suite of products and services. During
2003 we are scheduled to release an enhanced version of IOL which
will enable the user the ability to electronically attach all
forms of supporting documentation to an electronic invoice. We
believe this functionally is novel to the EBP&P industry. Further
we expect to release a version later in 2003 with enhanced
electronic payment functionality.
-- The acquisition of Platinum in 2001 expanded our product
offerings. We believe this acquisition significantly enhances our
current market strategy by allowing us to capitalize on the
growing trend for outsource services within the communications
sector.
-- Expanding custom engineering / development services:
-- We generated custom engineering fees of $2,511,000 during 2002,
more than three-fold 2001's total of $814,000. We believe
engineering fees will continue to be a significant source of
revenue throughout 2003.
-- Our current plan will require, expense reductions, expanded sources of
revenue, as well as obtaining additional debt and/or equity financing.
As such, in January 2003 we received $500,000, from the December 2002
sale of 23,365 shares of preferred stock to Metropolitan, with terms
similar to those included in the transaction with Metropolitan dated
September 25, 2002. Also in January 2003, Tall Oaks Group, LLC loaned
us $500,000. The loan matures March 31, 2005, bears interest at 9
1/2%, with the entire unpaid principal amount and all accrued interest
payable on the maturity date. In April, 2003 we obtained a firm
commitment from Metropolitan to purchase $250,000 of our preferred
stock, with terms similar to their previous transactions ( Note 21).
Further, we have firm commitments totaling $750,000 ($500,000 from
Tall Oaks and $250,000 from our chairman) to guarantee a line of
credit expected to be obtained from a major bank. Additionally, the
senior executives have pledged an aggregate of $250,000 in the event
we require capital in excess of the $1,000,000 described above. These
commitments and pledges extend though at least December 31, 2003
We believe that our plan should provide adequate funding through at least
December 31, 2003. However, there can be no assurances that we will be
successful in achieving this plan. In such an event, we could be forced to
significantly alter our long-term plan by further reducing operating expenses,
which could have an adverse effect on future operations.
17
Cash Obligations
As of December 31, 2002, our obligations and the periods in which they are
scheduled to become due are set forth in the following table (in thousands):
December 31,
----------------------------------------------------------------------------
Total 2003 2004 2005 2006 2007 Thereafter
----------------------------------------------------------------------------
Lines of credit (a) $ 133 $ 133 $ - $ - $ - $ - $ -
Capitalized lease obligations (b) 336 174 132 27 - - -
Due to bank (c) 690 690 - - 3 - -
Dividends payable (d) 644 - 503 141 50 - -
Operating leases (e) 832 526 152 104 - - -
Other (f) 561 132 132 297 - - -
Employment&Consulting Agreements (g) 2,963 1,259 760 388 380 176 495
------ ------ ------ ------ ------ ------ ------
Total cash obligations $6,159 $2,914 $1,679 $ 957 $ 433 $ 176 $ 495
====== ====== ====== ====== ====== ====== ======
a. We have three lines of credit which were assumed in connection with the
Platinum acquisition. These lines have various expiration dates. One line has no
expiration date and bears an interest rate of prime (4.25% at December 31, 2002)
plus 1%, is collateralized by substantially all the assets of Platinum, is
personally guaranteed by one of the former officers of Platinum and has an
unused balance of approximately $23,000 at December 31, 2002. The second line
expires in May 2003, bears an interest rate of 10% and has no available balance
as of December 31, 2002. The third line contains no expiration date, bears an
interest rate of 16.25% and has no available balance as of December 31, 2002.
The amounts in the table exclude interest payments, since the amount of interest
cannot be determined.
b. We have equipment under capital lease obligations expiring at various
times through 2006. The assets and liabilities under capital leases are recorded
at the lower of the present values of the minimum lease payments or the fair
values of the assets. The assets are included in property and equipment. The
amounts in the table include payments representing interest charges.
c. We have an accounts receivable purchase agreement with a Bank, whereby
from time to time we may assign some of our accounts receivable to the Bank on a
full recourse basis. The maximum amount of all assigned receivables outstanding
at any time shall not exceed $1.5 million. At December 31, 2002, we assigned
approximately $851,000 of accounts receivable to the Bank and received advances
of $690,000 from the Bank. The amounts in the table exclude interest payments,
since the amount of interest cannot be determined
d. During 2002, we sold 116,823 shares of our Series A Convertible
Preferred Stock ("Preferred Stock"). The holders of the Preferred Stock are
entitled to accrue dividends of 9-1/2% per annum, compounded quarterly and
payable on September 25, 2004 and September 25, 2005. Dividends are payable, at
the option of the holders, in cash or in common stock.
e. Operating leases are primarily for office space, equipment and
automobiles.
f. In January 2002, our Chairman loaned the Company $250,000. The loan has
a term of three years and bears interest at 5%, payable quarterly in arrears.
Additionally, in December 2002, we executed a $250,000 note payable to Markus &
Associates (an affiliate of S.J.& Associates, Inc.), pursuant to the terms of
its termination agreement included in restructuring costs payable. The note has
a term of twenty-eight months and bears interest at 9-1/2%, payable in monthly
installments. The amounts in the table include expected interest payments.
g. Employment and consulting agreements is comprised of the following: five
employment agreements (including our CEO, president and vice-president of
program management, and two former executives of Platinum) that include
compensation and allowable expenses, and one consulting agreement that includes
compensation and allowable expenses. Certain allowable expenses included in the
table assume the maximum potential obligation.
18
New Accounting Pronouncements
-----------------------------
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets" became effective for the Company during 2002. The
provisions of this statement that are applicable to us were implemented on a
prospective basis as of January 1, 2002, which had no material effect on our
financial statements.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" is effective for transactions
occurring after May 15, 2002. SFAS No. 145 eliminates the requirement that gains
and losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect and
eliminates an inconsistency between the accounting for sale-leaseback
transactions and certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. The adoption of this statement has had
no material effect on our financial statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" provides guidance on the recognition and measurement of liabilities
for cost associated with exit or disposal activities. The provisions of this
statement are effective for exit or disposal activities that are initiated after
December 31, 2002. We do not expect the adoption of SFAS No.146 to have a
material effect on our financial statements.
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, ("FIN 45") "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires a company, at the time it issues a guarantee, to
recognize an initial liability for the fair value of obligations assumed under
the guarantee and elaborates on existing disclosure requirements related to
guarantees and warranties. The initial recognition requirements of FIN 45 are
effective for guarantees issued or modified after December 31, 2002 and adoption
of the disclosure requirements are effective for us as of December 31, 2002. We
do not expect that the adoption of the recognition requirements of FIN 45 will
have a material effect on our consolidated financial position or results of
operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. We do not expect the adoption of FIN 46 will have
a material effect on our consolidated financial position or results of
operations.
19
Stock Options and Similar Equity Instruments
- --------------------------------------------
At December 31, 2002, we had five stock-based employee plans, which are
described more fully in Note12. As permitted under SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure", which amended SFAS No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation", we have elected to
continue to follow the intrinsic value method in accounting for its stock-based
employee compensation arrangements as defined by Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related
interpretations including FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation", an interpretation of APB No. 25. No
stock-based employee compensation cost is reflected in operations, as all
options granted under those plans have an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net loss and net loss per share if we applied the fair
value recognition provisions of SFAS 123 to stock-based employee compensation
(in thousands, except per share data):
Year Ended December 31,
2002 2001 2000
---- ---- ----
Net loss attributable to common shareholders
As reported $(6,967) $(10,612) $(11,736)
Less: Stock-based employee compensation
expense determined under fair value-based
method for all awards (866) (308) (310)
-------- ---------- ---------
Pro forma $(7,833) $(10,920) $(12,046)
======== ========== =========
Basic and diluted net loss per share
As reported $(1.91) $(5.88) $(8.23)
====== ====== ======
Pro forma $(2.15) $(6.05) $(8.40)
====== ====== ======
The fair value of our common stock options granted to employees are
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: (1) expected volatility of 67.7% to 74.5%
in 2002, 69.0% to 74.1% in 2001 and 70.6 to 73.1% in 2000 (2) risk-free
interest rates of 4.8% in 2002, 5.79% in 2001 and 5.80% in 2000 and (3)
expected lives of 2.3 years to 5.0 years in 2002, 1 to 4.5 years in 2001
and 1.80 to 5.00 years in 2000.
Net Operating Loss Carry Forwards
As of December 31, 2002, we had a net operating loss carry forward of
approximately $68 million, which expires beginning in the year 2008. The
issuance of equity securities in the future, together with our earlier financing
could result in an ownership change and, thus could limit our use of our prior
net operating losses. If we achieve profitable operations, any significant
limitation on the utilization of our net operating losses would have the effect
of increasing our tax liability and reducing net income and available cash
reserves. We are unable to determine the availability of these net operating
losses since this availability is dependent upon profitable operations, which we
have not achieved in prior periods; therefore, we have recorded a full valuation
allowance for the benefit from the net operating losses.
Results of Operations
Fiscal 2002 Compared to Fiscal 2001
Total revenue increased $3,631,000 or 96% from $3,785,000 for fiscal year
2001 to $7,416,000 for fiscal year 2002. When compared to 2001, the current year
reflected the following growth in its three product offerings: ASP increased 64%
to $4,101,000 in 2002 from $2,506,000 in 2001; engineering fees increased by
20
more than three-fold; and AMS fees increased73% to $804,000 in 2002 from
$465,000 in 2001. Significant factors contributing to the overall growth include
expansion of our product offerings as well as increases in our customer base. We
believe that revenue generated from engineering services is the precursor to
added recurring revenue sources.
IBM continues to be our largest customer accounting for 87.7%, or
$6,505,000, of total revenue for 2002, up from 82.2%, or $3,110,000 of total
revenue for 2001. We derive revenue from IBM from the sale of managed services
(ASP) as well as custom engineering. During the second half of 2001, we entered
into a new agreement with IBM wherein for a per transaction fee, we enable IBM
to present invoices to a portion of its customers via the Internet. This EBP&P
offering has since been expanded to include additional functionality. In March
2002, the parties signed a new agreement, which allows IBM to expand this EBP&P
offering to more of its customers, both domestic and international. We continue
to provide data analysis and reporting services for IBM's telecommunications
customers.
During 2001, we began providing custom integration / engineering services.
For 2002, revenue generated from this offering aggregated $2,511,000. We believe
that revenue generated from custom engineering services should continue into
2003. We further believe that revenue generated from engineering services is the
precursor to added recurring revenue sources. In an effort to better serve our
customers, we built a fully redundant facility within an IBM co-location center,
the purpose of which is to ensure virtual zero down time.
AMS revenue increased $339,000 to $804,000 from the year 2001 results of
$465,000. It should be noted that AMS revenue for 2001 is for the eight-month
period May 1, 2001, the effective date of the acquisition, through December 31,
2001.
During the third quarter of 2002, we entered into two separate multi year
agreements with Fortune 1000 companies, for which it received and reported as
deferred revenue $240,000. We are actively pursuing new sales opportunities to
further reduce sales concentration.
Operations, research and development expenses consist primarily of salaries
and related costs (benefits, travel, training) for developers, programmers,
custom engineers, network services, quality control / quality assurance and
documentation personnel, applicable overhead allocations, as well as co-location
facilities expenses and all costs directly associated with the production and or
development of our services. When comparing 2002 and 2001, we increased our
operations, research and development expenses by $1,101,000 or 30% of
incremental revenue growth of $3,631,000 achieved during the same period. We
continue to upgrade, improve and enhance our current products and services. As a
result, the most significant items contributing to this increase was additional
staffing costs and professional fees totaling $596,000 or 56% of the increase.
We believe that it is critical to maintain a qualified personnel staff and,
further to continue to enhance as well as develop new and innovative services
and products. As such, it is likely that these costs could increase in future
periods. Additionally, operations, research and development expenses incurred,
increased $425,000 as a result of including Pl atinum for the full year. Other
expenses showed a net increase of $80,000.
Sales and marketing expenses include salaries and related costs,
commissions, travel, facilities, communications costs and promotional expenses
for our direct sales organization and marketing staff. Sales and marketing
expenses decreased $65,000 to $2,467,000 for 2002 when compared to $2,532,000
for 2001. The acquisition of Platinum increased expenses by $10,000. Further, we
paid $102,000 in commissions during 2002, including $50,000 earned by a sales
consulting firm, which is wholly owned by our executive vice-president of
program development. Additionally, wages and benefits increased $101,000, and
rent expense, travel expense and telephone expense increased $86,000, $15,000
and $21,000, respectively. Offsetting these additions, among other things, was a
reduction in consulting fees of $10,000, advertising expense of $39,000 and the
elimination of the Global Technology Services product offering which totaled
$366,000 for 2001.
21
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 $103,000 to $3,881,000
for 2002 when compared to $3,778,000 for 2001. Major factors contributing to
this increase include, among other things, increases in consulting fees of
$264,000, rent expense of $66,000 and insurance expense of $55,000, as well as
$67,000 of expenses attributable to Platinum, offset by decreases in wages, bad
debts and legal expenses of $75,000, $44,000 and $192,000, respectively, and the
elimination of the Global Technology Services product offering of $98,000.
Amortization and depreciation expenses decreased by $28,000, primarily due
to an increase of $65,000 related to the acquisition of Platinum, offset by
general reductions in amortization and depreciation expense relating to fixed
assets of $93,000.
During 2002, we sold 208,500 shares of NetWolves common stock in the open
market and 90,000 shares in a private transaction. As a result, we realized a
loss of $375,000. At June 30, 2002, we wrote down our investment in NetWolves,
resulting in a loss of $457,000 that was included in "Other-than-temporary
decline in Investment in NetWolves." At December 31, 2002, we held no common
shares of Netwolves (See Note 8).
During the year ended December 31, 2002, we directly and indirectly
advanced approximately $674,000 to Voyant Corporation; we did not increase the
carrying value of our investment in Voyant and has therefore recognized an
additional loss in Voyant during 2002 of $674,000. Additionally, at December 31,
2002, we eliminated the remaining carrying value of our investment of
approximately $500,000. As a result, we have recorded an "Equity in Loss of
Voyant and Valuation Adjustment" aggregating $1,330,000 for 2002 (See Note 8).
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments that would
require disclosure under this item.
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 15(a), and 15 (b) respectively.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------------
Previously disclosed.
22
PART III
The information required by Part III (Items 10, 11, 12 and 13) is
incorporated by reference to our definitive proxy statement in connection with
our annual meeting of stockholders scheduled to be held in May 2003, to be filed
with the Securities and Exchange Commission within 120 days following the end of
our fiscal year ended December 31, 2002. Information relating to our officers
appears under Item 1 of this Report.
PART IV
Item 14. Controls and Procedures
- ---------------------------------
Our chief executive officer and chief financial officer have supervised and
participated in an evaluation of the effectiveness of our disclosure controls
and procedures as of a date within 90 days of the date of this report, and,
based on their evaluations, they believe that our disclosure controls and
procedures (as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934,
as amended) are designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported, within the time periods
specified in the Commission's rules and forms. As a result of the evaluation,
there were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.
Item 15. (a) 1. FINANCIAL STATEMENTS Page
- -------------------------------------- ----
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets
December 31, 2002 and 2001 F-2
Consolidated Statements of Operations
Years Ended December 31, 2002, 2001 and 2000 F-4
Consolidated Statement of Shareholders' Equity
Years Ended December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000 F-8
Notes To Consolidated Financial Statements F-10
14. (a). 2. - SCHEDULES
- ---------------------------
NONE
- ----
4. (a). 3. - EXHIBITS
- --------------------------
3.1 (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)
23
(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).
(f) Certificate of Designation, Preferences and Rights of Series A
Convertible Preferred Stock filed October 3, 2002 (Incorporated by
reference to Exhibit 3.1 to the Company's Current Report on Form 8-K
dated September 25, 2002).
(g) Certificate of Amendment of Certificate of Designation, Preferences
and Rights of Series A Convertible Preferred Stock filed December 20,
2002 (Incorporated by reference to Exhibit 3.2 of Company's Current
Report on Form 8-K dated December 24, 2002).
(h) Certificate of Amendment of Certificate of Designation, Preferences
and Rights of Series A Convertible Preferred Stock filed January 2,
2003 (Incorporated by reference to Exhibit 3.3 of Company's Current
Report on Form 8-K dated January 2, 2003).
3.2 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 Rights Agreement dated as of August 28, 2001 between the Company and
Manhattan Transfer Registrar Company, as Rights Agent. (Incorporated by
reference to Exhibit 4 to the Company's Form 8-K dated August 28, 2001).
10.1 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).
10.2 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).
10.3 1995 Incentive Stock Plan (Incorporated by reference to Exhibit 5 to the
Company's Proxy Statement filed on January 29, 1996).
10.4 2000 Stock Option Plan (Incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2001).
10.5 2001 Stock Option/Stock Issuance Plan (Incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.6 2001-A Stock Option/Stock Issuance Plan. (Incorporated by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.7 2002 Stock Option/Stock Issuance Plan (Incorporated by reference to Exhibit
10.7 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.8 2003 Stock Option /Stock Issuance Plan.
10.9 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).
10.10 Offer to Purchase dated December 23, 1999, among Eagle Merger Corp.,
EMC Corporation and the Company (Incorporated by reference to Exhibit 1 to
the Company's Form 8-K filed on February 9, 2000).
24
10.11 Indemnification Agreement dated December 21, 1999, among EMC
Corporation, Eagle Merger Corp. and the Company (Incorporated by reference
to Exhibit 2 to the Company's Form 8-K filed on February 9, 2000).
10.12Indemnification Agreement dated December 21, 1999, between Softworks, Inc.
and the Company (Incorporated by reference to Exhibit 3 to the Company's
Form 8-K filed on February 9, 2000).
10.13Escrow Agreement dated December 21, 1999, among EMC Corporation, Eagle
Merger Corp., the Company 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).
10.14Exchange Agreement, dated February 10, 2000, among the Company, NetWolves
Corporation and ComputerCOP Corp. (Incorporated by reference to Exhibit
10.1 to the Company's Form 8-K filed on March 2, 2000).
10.15Agreement and Plan of Merger by and among Platinum Acquisition Corp., the
Company, Platinum Communications, Inc., Kevin Ford and Ken Tanoury dated
May 10, 2001 (Incorporated by reference to Exhibit 10.1 to the Company's
Report on Form 10-Q for the quarter ended June 30, 2001).
10.16Employment Agreement between the Company and Kevin Ford dated May 10, 2001
(Incorporated by reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended June 30, 2001).
10.17Employment Agreement between the Company and Ken Tanoury dated May 10,
2001 (Incorporated by reference to Exhibit 10.3 to the Company's Report on
Form 10-Q for the quarter ended June 30, 2001).
10.18Employment Agreement between the Company and Anthony Coppola dated
December 1, 2001 (Incorporated by reference to Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2001).
10.19Services Agreement between the Company and James A. Cannavino dated
January 25, 2003.
10.20Stock Purchase and Registration Rights Agreement between the Company and
Metropolitan Venture Partners II, L.P. dated as of September 25, 2002
(Incorporated by reference to Exhibit 10.1 of Registrant's Current Report
on Form 8-K dated September 25, 2002).
10.21Stock Purchase and Registration Rights Agreement between the Company and
Metropolitan Venture Partners II, L.P. dated as of December 24, 2002
(Incorporated by reference to Exhibit 10.1 of Registrant's Current Report
on Form 8-K dated December 24, 2002).
10.22Promissory Note between the Company and Tall Oaks Group LLC dated January
13, 2003.
10.23Amendment and Notice dated January 13, 2003 by and among the Company,
Metropolitan Venture Partners II, L.P. and Tall Oaks Group L.L.C.
23 Consent of Markum & Kliegman, LLP.
99.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of Sarbanes-Oxley Act.
- ----------
(1)Filed with Form S-1, Registration Statement of the Company Reg. No 3-47322
and are incorporated herein by reference.
14. (b). - REPORTS ON FORM 8-K
- ------------------------------------
None
25
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 14th day of April 2003.
DIRECT INSITE CORP.
By: /s/ James A. Cannavino
------------------------------------------
James A. Cannavino, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on April 14, 2003 the following persons in the capacities
indicated:
/s/ James A. Cannavino Chairman of the Board
- ---------------------- Chief Executive Officer
James A. Cannavino
/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
Director
- --------------------
Peter Yunich
26
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James A. Cannevino, certify that:
1. I have reviewed this Form 10-K of Direct Insite Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 12a- 14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 14, 2003
/s/ James A. Cannavino
Name: James A. Cannevino
Title: Chief Executive Officer
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, George Aronson, certify that:
1. I have reviewed this Form 10-K of Direct Insite Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 12a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 14, 2003
/s/ George Aronson
Name: George Aronson
Title: Chief Financial Officer
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
DIRECT INSITE CORP. AND SUBSIDIARIES
CONTENTS
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS
- --------------------
Consolidated Balance Sheets F-2 - F3
Consolidated Statements of Operations F-4
Consolidated Statement of Shareholders' Equity F-5 - F7
Consolidated Statements of Cash Flows F-8 - F9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10 - F-41
INDEPENDENT AUDITORS' 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, 2002 and 2001, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and 2001, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
April 9, 2003
Woodbury, New York
F-1
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
ASSETS
------
2002 2001
---------------- -----------------
CURRENT ASSETS
- --------------
Cash and cash equivalents $ 700 $1,359
Stock subscription receivable 500 --
Accounts receivable, net of allowance for doubtful accounts of
$42 and $53 in 2002 and 2001, respectively 1,350 1,098
Investment in NetWolves Corporation -- 1,209
Prepaid expenses and other current assets 239 1,096
------- ------
Total Current Assets 2,789 4,762
PROPERTY AND EQUIPMENT, net 1,166 1,278
- ----------------------
SOFTWARE COSTS, net 444 508
- --------------
INVESTMENT IN NON-MARKETABLE SECURITIES -- 656
- ---------------------------------------
OTHER ASSETS 492 586
- ------------ ------- ------
TOTAL ASSETS $4,891 $7,790
======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
2002 2001
----------------- ------------------
CURRENT LIABILITIES
- -------------------
Accounts payable and accrued expenses $ 1,663 $ 2,057
Restructuring costs payable, current portion 6 294
Due to Bank 690 448
Deferred revenue 252 --
Current portion of long-term debt 396 290
---------- ----------
Total Current Liabilities 3,007 3,089
OTHER LIABILITIES
- -----------------
Long-term debt, net of current portion 556 103
Dividends payable 56 --
Restructuring costs payable, long-term 60 492
---------- ----------
TOTAL LIABILITIES 3,679 3,684
---------- ----------
COMMITMENTS AND CONTINGENCIES
- -----------------------------
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock, $.0001 par value; 2,000,000 shares authorized;
116,823 shares issued and outstanding in 2002, liquidation
preference of $2,500,000 -- --
Common stock, $.0001 par value; 150,000,000 shares
authorized; 3,966,055 and 2,472,866 shares issued in
2002 and 2001, respectively; and 3,926,128 and 2,401,828
shares outstanding in 2002 and 2001, respectively -- --
Additional paid-in capital 108,708 104,573
Accumulated deficit (107,081) (100,114)
Stock subscription receivable (62) --
Accumulated other comprehensive loss (25) (25)
---------- ----------
1,540 4,434
Common stock in treasury, at cost; 24,371 shares in 2002
and 2001 (328) (328)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 1,212 4,106
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY $ 4,891 $ 7,790
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2002 2001 2000
---------------- ----------------- ----------------
REVENUE $ 7,416 $ 3,785 $ 2,120
- ------- --------- --------- ---------
COSTS AND EXPENSES
- ------------------
Operations, research and development 4,721 3,620 4,600
Sales and marketing 2,467 2,532 4,644
General and administrative 3,881 3,778 5,505
Amortization and depreciation 957 985 871
Non-recurring restructuring charge -- -- 15,176
--------- --------- ---------
TOTAL OPERATING EXPENSES 12,026 10,915 30,796
--------- --------- ---------
Operating Loss (4,610) (7,130) (28,676)
OTHER INCOME (EXPENSE)
- ---------------------
Gain on sale of Softworks -- -- 47,813
Gain on sale of ComputerCOP -- -- 8,534
Equity in loss of Voyant and Valuation
Adjustment (1,330) -- --
Loss on sales of NetWolves common stock (375) (3,666) --
Other-than-temporary decline in Investment in
NetWolves (457) (150) (29,737)
Interest (expense) income, net (232) (363) 370
Other income 93 75 --
--------- --------- ---------
LOSS BEFORE BENEFIT FROM (PROVISION
- -----------------------------------
FOR) INCOME TAXES (6,911) (11,234) (1,696)
-----------------
BENEFIT FROM (PROVISION FOR) INCOME
- -----------------------------------
TAXES -- 622 (10,040)
----- --------- --------- ---------
NET LOSS (6,911) (10,612) (11,736)
- --------
PREFERRED STOCK DIVIDENDS 56 -- --
- ------------------------- --------- --------- --------
NET LOSS ATTRIBUTABLE TO COMMON
- -------------------------------
SHAREHOLDERS $ (6,967) $(10,612) $(11,736)
------------ ========= ========= ========
BASIC AND DILUTED NET LOSS PER SHARE $(1.91) $(5.88) $(8.23)
- ------------------------------------ ====== ====== ======
BASIC AND DILUTED WEIGHTED AVERAGE
- ----------------------------------
COMMON SHARES OUSTANDING 3,643 1,804 1,426
------------------------ ====== ===== =====
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands)
- --------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Total Comprehensive
Paid-in Unearned Accumulated Comprehensive Treasury Shareholders' Income
Shares Amount Capital Compensation Deficit Loss Stock Equity (Loss)
------ -------- --------- ------------ ----------- ------------- --------- ------------ -----------
BALANCE - January 1, 1,369 $ -- $102,870 $ -- $(77,766) $ (225) $(393) $ 24,486
2000
Common stock and options
issued for services 108 -- 3,541 -- -- -- -- 3,541
Repayment of Officers' Loans (28) -- (923) -- -- -- -- (923)
Dividend declared -- -- (2,184) -- -- -- -- (2,184)
Retirement of treasury stock -- -- (393) -- -- -- 393 --
Acquisition of treasury stock (24) -- -- -- -- -- (328) (328)
Discount on convertible
debentures -- -- 658 -- -- -- -- 658
Unearned compensation on
option grants -- -- -- (115) -- -- -- (115)
Marketable securities
reclassification
adjustment -- -- -- -- -- (2,861) -- (2,861) $ (2,861)
Net loss -- -- -- -- (11,736) -- -- (11,736) (11,736)
----- ----- -------- ------ -------- --------- ------ -------- ---------
Total Comprehensive Loss
BALANCE - December 31,
2000 (Forward) 1,425 $ -- $103,569 $ (115) $(89,502) $ (3,086) $ (328) $ 10,538 $ (14,597)
===== ===== ======== ====== ======== ========= ====== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, Continued
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands)
- --------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Total Comprehensive
Paid-in Unearned Accumulated Comprehensive Treasury Shareholders' Income
Shares Amount Capital Compensation Deficit Loss Stock Equity (Loss)
------ -------- --------- ------------ ----------- ------------- --------- ------------ -----------
BALANCE - December 31,
2000 (Forward) 1,425 $ -- $103,569 $(115) $(89,502) $ (3,086) $(328) $ 10,538
Common stock issued for services 571 -- 797 -- -- -- -- 797
Common stock issued for cash 212 -- 500 -- -- -- -- 500
Common stock issued for Platinum
acquisition 66 -- 137 -- -- -- -- 137
Common stock issued for
settlement of restructuring
liabilities 110 -- 181 -- -- -- -- 181
Common stock issued for
settlement of litigation 17 -- 47 -- -- -- -- 47
Unearned compensation on
option grants -- -- -- 115 -- -- -- 115
Discount on convertible
debentures settled with cash -- -- (658) -- -- -- -- (658)
Marketable securities valuation
adjustment -- -- -- -- -- 3,061 -- 3,061 $ 3,061
Net loss -- -- -- -- (10,612) -- -- (10,612) (10,612)
----- ----- -------- ------ -------- --------- ----- ------- ---------
Total Comprehensive Loss
BALANCE - December 31,
2001 (forward) 2,401 $ -- $104,573 $ -- $(100,114) $ (25) $(328) $ 4,106 $ (7,551)
===== ===== ======== ====== ======== ========= ===== ======= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, Continued
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands)
- --------------------------------------------------------------------------------
Preferred Stock Common Stock Accumulated Compre-
Additional Stock Other Total hensive
Paid-in Subscription Accumulated Comprehensive Treasury Shareholders' Income
Capital Receivable Deficit Loss Stock Equity (Loss)
Shares Amount Shares Amount
-------------------------------------------------------------------------------------------------------------
BALANCE - December 31,
2001 (Forward) -- $-- 2,401 $-- $104,573 $ -- $(100,114) $(25) $ (328) $ 4,106
Common stock and options
issued for services,
including $101 for
fundraising commissions -- -- 878 -- 1,119 -- -- -- -- 1,119
Common stock subscribed -- -- 97 -- 116 (62) -- -- -- 54
Common stock issued for
Platinum acquisition -- -- 31 -- 59 -- -- -- -- 59
Preferred stock issued
for cash, net of fees
of $239 117 -- -- -- 2,261 -- -- -- -- 2,261
Common stock issued for
cash, net of fees of $4 -- -- 479 -- 530 -- -- -- -- 530
Common stock issued for
settlement of restruct-
uring liabilities -- -- 40 -- 50 -- -- -- -- 50
Dividends declared,
preferred
stock -- -- -- -- -- -- (56) -- -- (56)
Net loss -- -- -- -- -- -- (6,911) -- -- (6,911) $(6,911)
----- --- ----- --- -------- ---- --------- ---- ----- ------ -------
Total Comprehensive Loss
BALANCE - December 31,
2002 117 $-- 3,926 $-- $108,708 (62) $(107,081) $(25) $(328) $ 1,212 $(6,911)
===== === ===== === ======== ==== ========= ==== ===== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2002 2001 2000
----------------- ---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net loss $(6,911) $(10,612) $(11,736)
Adjustments to reconcile net loss to net cash used in
operating activities
Amortization and depreciation:
Property and equipment 831 929 807
Software costs 123 77 --
Other 3 3 3
Non-cash interest charge pertaining to the discount on
convertible debentures -- 346 353
Provision for doubtful accounts 56 74 62
Common stock and options issued for services 1,018 912 3,426
NetWolves common stock exchanged for services and
for settlement of restructuring charges -- -- 2,000
Equity in Loss of Voyant and Valuation Adjustment 1,330 -- --
Gain on disposition of Softworks -- -- (47,813)
Gain on sale of ComputerCop, net of $500,000 of
NetWolves common stock exchanged for legal
services -- -- (8,534)
Loss on sale and other-than-temporary decline in
investment in NetWolves Corporation 832 3,816 29,737
Deferred income tax expense -- -- 9,197
Changes in operating assets and liabilities:
Accounts receivable (308) (824) 121
Prepaid expenses and other current assets 857 (680) 465
Other assets 91 43 (337)
Accounts payable and accrued expenses (429) 247 (3,731)
Restructuring costs payable (420) (1,483) 2,450
Deferred revenue 252 -- (42)
Income taxes payable -- (855) 805
-------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES $ (2,675) $ (8,007) $(22,767)
-------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(in thousands)
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Expenditures for property and equipment $ (456) $ (790) $ (602)
Net cash paid in the acquisition of Platinum
(net of $15 cash acquired) -- (109) --
Cash used in the ComputerCop/NetWolves
transaction (including $2,072 of cash expenses) -- -- (22,572)
Investment in NetWolves Corporation -- -- (4,500)
Advances to and investment in Voyant (674) (500)
Advances from officers, net -- -- 899
Proceeds from the sale of NetWolves common
stock 377 2,834 --
Proceeds from the sale of Softworks common
stock -- -- 58,142
------------- ------------ ----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (753) 1,435 31,367
------------- ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Proceeds from sales of common stock 588 500 --
Proceeds from sales of preferred stock 2,000 -- --
Consideration paid in connection with the sales of
preferred and common stock (107) -- --
(Repayments of) net proceeds from convertible
debentures -- (3,751) 2,911
Advances from Bank, net 242 448 --
Proceeds from long-term debt 250 -- --
Acquisition of treasury stock -- -- (328)
Payment of dividend -- -- (2,184)
Repayments of long-term debt (204) (117) --
------------- ------------ ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 2,769 (2,920) 399
------------- ------------ ----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (659) (9,492) 8,999
CASH AND CASH EQUIVALENTS - Beginning 1,359 10,851 1,852
- ------------------------- ------------- ------------ ----------
CASH AND CASH EQUIVALENTS - Ending $ 700 $ 1,359 $ 10,851
- ------------------------- ============= ============ ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - Nature of Business
------------------
Direct Insite Corp. and subsidiaries (the "Company"), primarily operate as
an application service provider ("ASP"), which markets an integrated "fee
for services" offering providing high volume processing of transactional
data for billing purposes, electronic bill presentation and payment as well
as visual data analysis and reporting tools delivered via the Internet for
its customers. The Company's core technology is d.b.Express?, the
proprietary and patented management information tool, which provides
targeted access through the mining of large volumes of transactional data
via the Internet. In 2001, the Company acquired Platinum Communications,
Inc. ("Platinum", see Note 3), a Dallas, Texas based company which markets
integrated business and operational support systems to the
telecommunications industry primarily as an ASP; marketed as Account
Management Systems ("AMS"). Further, as an added source of revenue, the
Company, during 2001, began providing custom engineering services to its
customers. These newly assembled product offerings enable the Company to
provide comprehensive services from the raw transaction record through all
of the internal workflow management processes including an electronically
delivered invoice with customer analytics. The Company operates fully
redundant data centers located at its main office in Bohemia, N.Y. and in
Newark, NJ.
Management's liquidity plans are discussed in Note 17. Also, as described
in Note 20, the Company has one major customer that accounted for more than
80% of the Company's revenue for each of the three years in the period
ended December 31, 2002. Loss of this customer would have a material
adverse effect on the Company.
NOTE 2 - Significant Accounting Policies
-------------------------------
Common Stock Split
------------------
On May 4, 2001, a one-for-fifteen reverse stock split was declared
effective for shareholders of record as of the close of business on May 7,
2001. The effect of the stock split has been retroactively reflected in the
financial statements and notes thereto. Par value and authorized shares
remain unchanged at $.0001 and 150,000,000 shares, respectively.
Principles of Consolidation
---------------------------
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.
F-10
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Revenue Recognition
-------------------
The Company records revenue in accordance with Statement of Position 97-2
"Software Revenue Recognition", issued by the American Institute of
Certified Public Accountants (as modified by Statement of Position 98-9)
and SEC Staff Accounting Bulletin No. 101, regarding revenue recognition in
the financial statements. In some circumstances, the Company enters into
arrangements whereby it is obligated to deliver to its customer multiple
products and/or services (multiple deliverables). In these transactions, in
accordance with the Emerging Issues Task Force Issue No. 00-21, the Company
allocates the total revenue to be earned among the various elements based
on their relative fair values. The Company recognizes revenue related to
the delivered products or services only if:
-- Any undelivered products or services are not essential to the
functionality of the delivered products or services;
-- Payment for the delivered products or services is not contingent
upon delivery of the remaining products or services;
-- The Company has an enforceable claim to receive the amount due in
the event it does not deliver the undelivered products or
services and it is probable that such amount is collectible;
-- There is evidence of the fair value for each of the undelivered
products or services;
-- Delivery of the delivered element represents the culmination of
the earnings process.
The following are the specific revenue recognition policies for each major
category of revenue.
ASP and AMS Services
The Company provides transactional data processing services to its
customers. Revenue from these services is recognized as performed.
Custom Engineering Services
The Company recognizes revenue for custom engineering services using the
percentage of completion method. Progress is measured using the relative
fair value of specifically identifiable output measures (milestones).
Revenue is recognized when the customer accepts such milestones. Costs
related to uncompleted milestones are deferred and included in other
current assets, when applicable.
F-11
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Cost of Revenue
---------------
Cost of revenue in the consolidated statements of operations is presented
along with research and development costs and 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 terms 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 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. The useful life of the
software acquired in the Platinum acquisition is 5 years. 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 are included in "operations, research and
development" in the accompanying consolidated statements of operations, and
amount to $3,903,000, $2,814,000 and $4,278,000 for the years 2002, 2001
and 2000, respectively.
Impairment of Long-Lived Assets
-------------------------------
The Company reviews its long-lived assets, including 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. Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" became effective for the Company during 2002. The
provisions of this statement that are applicable to the Company were
implemented on a prospective basis as of January 1, 2002, which had no
material effect on the Company's financial statements.
F-12
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
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 SFAS No. 128,
"Earnings Per Share". SFAS No. 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) attributable 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. 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.
Securities that could potentially dilute basic earnings per share ("EPS")
in the future, that were not included in the computation of the diluted EPS
because to do so would have been anti-dilutive for the periods presented,
consist of the following (shares are in thousands):
Options to purchase common stock 2,259
Redeemable Convertible Preferred Stock 1,168
-----
Total Potential Common Shares as of December 31, 2002 3,427
=====
Issuances after December 31, 2002 through
March 31, 2003 20
--
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Accounts receivable
-------------------
Accounts receivable is shown net of allowance for doubtful accounts of
$42,000 and $53,000 at December 31, 2002 and 2001, respectively. The
changes in the allowance for doubtful accounts are summarized as follows:
Year Ended December 31,
2002 2001 2000
---------------- ------------------- ------------------
(in thousands)
Beginning balance $ 53 $ 70 $ 8
Provision for doubtful accounts 56 74 62
Write-offs (67) (91) --
---- ---- -----
Ending balance $ 42 $ 53 $ 70
==== ==== =====
Marketable Securities
---------------------
Marketable securities, which are classified as "available for sale", 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
consolidated statements of operations using the first-in, first- out
method. Other-than-temporary declines in the value of marketable securities
are also recognized as a loss in the consolidated statements of operations.
Advertising and Promotional Costs
---------------------------------
Advertising and promotional costs are reported in "Sales and marketing"
expense in the consolidated statements of operations and are expensed as
incurred. Advertising expense for the years ended December 31, 2002, 2001
and 2000 was None, $37,000 and $90,000, respectively.
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 and accounts
receivable. At December 31, 2002, the Company has cash investments of
approximately $467,000 at one bank. Concentrations of credit risk with
respect to accounts receivable are disclosed in Note 20. 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Use of Estimates
----------------
In preparing consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
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. Disclosures that are particularly sensitive to estimation include
management's plans, as disclosed in Note 17. Actual results could differ
from those estimates.
New Accounting Pronouncements
-----------------------------
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets" became effective for the Company during 2002. The
provisions of this statement that are applicable to the Company were
implemented on a prospective basis as of January 1, 2002, which had no
material effect on the Company's consolidated financial statements.
New Accounting Pronouncements, continued
-----------------------------
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" is effective for
transactions occurring after May 15, 2002. SFAS No. 145 eliminates the
requirement that gains and losses from the extinguishment of debt be
aggregated and, if material, classified as an extraordinary item, net of
the related income tax effect and eliminates an inconsistency between the
accounting for sale-leaseback transactions and certain lease modifications
that have economic effects that are similar to sale-leaseback transactions.
The adoption of this statement has had no material effect on the Company's
consolidated financial statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" provides guidance on the recognition and measurement of
liabilities for cost associated with exit or disposal activities. The
provisions of this statement are effective for exit or disposal activities
that are initiated after December 31, 2002. The Company does not expect the
adoption of SFAS No.146 to have a material effect on its consolidated
financial statements.
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, ("FIN 45") "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others." FIN 45 requires a company, at the time it issues a guarantee,
to recognize an initial liability for the fair value of obligations assumed
under the guarantee and elaborates on existing disclosure requirements
related to guarantees and warranties. The initial recognition requirements
of FIN 45 are effective for guarantees issued or modified after December
31, 2002 and adoption of the disclosure requirements are effective for the
Company as of December 31, 2002. The Company does not expect that the
adoption of the recognition requirements of FIN 45 will have a material
effect on its consolidated financial statements.
F-15
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
New Accounting Pronouncements, continued
-----------------------------
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51." FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional financial support from other parties. FIN 46
is effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired
prior to February 1, 2003, the provisions of FIN 46 must be applied for the
first interim or annual period beginning after June 15, 2003. The Company
does not expect the adoption of FIN 46 will have a material effect on its
consolidated financial statements.
Stock Options and Similar Equity Instruments
--------------------------------------------
At December 31, 2002, the Company had five stock-based employee plans,
which are described more fully in Note12. As permitted under SFAS No. 148,
"Accounting for Stock-Based CompensationTransition and Disclosure", which
amended SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", the Company has elected to continue to follow the intrinsic
value method in accounting for its stock-based employee compensation
arrangements as defined by Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees", and related interpretations
including FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation", an interpretation of APB No. 25. No
stock-based employee compensation cost is reflected in operations, as all
options granted under those plans have an exercise price equal to the
market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net loss and net loss per share
if the Company had applied the fair value recognition provisions of SFAS
123 to stock-based employee compensation (in thousands, except per share
data):
Year Ended December 31,
2002 2001 2000
----------------- ---------------- ---------------
Net loss attributable to common shareholders
As reported $(6,967) $(10,612) $(11,736)
Less: Stock-based employee compensation
expense determined under fair value-based
method for all awards (866) (308) (310)
------- -------- --------
Pro forma $(7,833) $(10,920) $(12,046)
======= ======== ========
Basic and diluted net loss per share
As reported $(1.91) $(5.88) $(8.23)
====== ====== ======
Pro forma $(2.15) $(6.05) $(8.40)
====== ====== ======
F-16
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Stock Options and Similar Equity Instruments, continued
--------------------------------------------
The fair value of Company common stock options granted to employees are
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: (1) expected volatility of 67.7% to 74.5%
in 2002, 69.0% to 74.1% in 2001 and 70.6 to 73.1% in 2000 (2) risk-free
interest rates of 4.8% in 2002, 5.79% in 2001 and 5.80% in 2000 and (3)
expected lives of 2.3 years to 5.0 years in 2002, 1 to 4.5 years in 2001
and 1.80 to 5.00 years in 2000.
NOTE 3 - Acquisitions and Dispositions
-----------------------------
Platinum Communications, Inc.
-----------------------------
On May 10, 2001, the Company and Platinum completed a merger under an
Agreement and Plan of Merger ("Merger Agreement"). Under the Merger
Agreement, a newly formed wholly owned subsidiary of the Company acquired
all of the outstanding common stock of Platinum.
The purchase price of Platinum approximated $340,000, which consisted of
$50,000, and 66,667 shares of common stock (valued at $138,000, based on
the quoted market price at the time of the acquisition) and $93,000 of
acquisition costs. The Company issued an additional 46,667 shares of its
common stock and placed them in escrow (a portion of which is not reflected
as outstanding common stock), that are to be released to the former
shareholders of Platinum, subject to certain performance provisions (as
defined), in various increments through April 2004; 15,556 shares were
earned and were issued effective December 31, 2001, valued at $20,000, and
15,556 shares were earned and were issued effective December 31, 2002,
valued at $39,000. Both issuances are additive to the cost of the
acquisition. In addition, two key employees of Platinum have entered into
three-year employment agreements with the Company, with an aggregate base
compensation of $300,000 per annum and options to purchase an aggregate of
20,000 shares of the Company's common stock vesting over three years, with
an exercise price of $2.06, the fair market value on the date of the grant.
The acquisition was accounted for as a purchase and, accordingly, assets
and liabilities were fair valued at the date of acquisition and the results
of operations are included in the consolidated financial statements of the
Company, commencing May 1, 2001.
F-17
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Internet Tracking & Security Ventures, LLC and NetWolves Corporation
--------------------------------------------------------------------
On June 30, 1998, the Company acquired certain software (known as
"ComputerCop") and related sales and marketing rights from Internet
Tracking & Security Ventures, LLC ("ITSV"). In February 2000, the Company
sold its recently formed subsidiary, ComputerCOP Corp. to NetWolves
Corporation ("NetWolves"), 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 (also see Note 8).
Softworks, Inc.
---------------
In October 1993, the Company completed the acquisition of all of the common
stock of Softworks, Inc. ("Softworks"). Softworks provided systems
management software products for mainframe data centers. The purchase price
approximated $5,700,000. Prior to June 30, 1998, Softworks was a wholly
owned subsidiary of the Company and majority owned through March 31, 1999.
Pursuant to a tender offer dated December 21, 1999, the Company sold its
remaining 35% interest in Softworks to EMC Corporation and its subsidiary.
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. The Company deposited $10,000,000 of the sales proceeds into an
interest bearing escrow account to secure any potential liabilities arising
from certain indemnifications. The escrow funds were released to the
Company in December 2000.
F-18
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - Accounts Receivable and Due to Bank
-----------------------------------
During October 2001, the Company entered into an Accounts Receivable
Purchase Agreement with a Bank, whereby the Company from time to time may
assign some of their accounts receivable to the Bank on a full recourse
basis. Upon specific invoice approval, an advance of 80% of the underlying
receivable is provided to the Company. The remaining balance (20%), less an
administrative fee of approximately 0.5% plus interest at the rate of 1 %
per month, is paid to the Company once the customer has paid. The maximum
amount of all assigned receivables outstanding at any time shall not exceed
$1.5 million. The primary term of the agreement was for one year beginning
October 2001, and continues until due notice of termination is given at any
time by either party to the agreement.
At December 31, 2002, the Company had assigned approximately $851,000 of
accounts receivable to the Bank and received advances of $690,000 from the
Bank.
NOTE 5 - Prepaid Expense and Other Current Assets
----------------------------------------
Prepaid expenses and other current assets consist of the following:
December 31,
2002 2001
---------------- -----------------
(In thousands)
Prepaid expenses $ 197 $ 369
Tax refund receivable -- 615
Notes and loans receivable 42 112
------- -------
$ 239 $ 1,096
======= =======
NOTE 6 - Property and Equipment
----------------------
Property and equipment consist of the following:
December 31, Useful life
2002 2001 in Years
-------------- --------------- -------------
(in thousands)
Computer equipment and purchased software $ 5,594 $ 4,928 3
Furniture and fixtures 444 421 5 - 7
Automobile 30 -- 3
------- -------
6,068 5,349
Less: accumulated deprecation and amortization (4,902) (4,071)
------- -------
Property and Equipment, Net $ 1,166 $ 1,278
======= =======
F-19
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - Property and Equipment, continued
----------------------
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 2002, 2001 and 2000 was $831,000, $929,000 and
$807,000, respectively.
NOTE 7 - Software Costs
--------------
Software costs consist of the following:
December 31,
2002 2001
---------------- -----------------
(in thousands)
Capitalized software development costs $4,420 $ 4,361
Less: accumulated amortization (3,976) (3,853)
------ -------
Software Costs, Net $ 444 $ 508
====== =======
Amortization expense related to software development costs for the years
ended December 31, 2002, 2001 and 2000 was $123,000, $77,000 and None,
respectively.
NOTE 8 - Investment in Securities
------------------------
Non-Marketable
--------------
In February 2001, the Company acquired 2,000,000 shares of Voyant
Corporation ("Voyant") through an equity investment of $500,000.
Additionally, in November 2001, the Company acquired 15,680,167 shares in
exchange for 60,000 shares of NetWolves common stock, with a value of
$156,000. Further, as part of an anti-dilution protection clause in the
initial investment agreement, the Company is entitled to approximately
48,000,000 additional shares, which brought the Company's ownership in
Voyant to approximately 10.5%. Voyant is a privately held company, and
accordingly, through December 31, 2001, the investment had been reflected
on the Company's balance sheet as a non-marketable security, at cost.
However, the Company had achieved a level of influence such that the
Company began to account for its investment in Voyant utilizing the equity
method of accounting commencing January 1, 2002. As a result, the Company
recorded a $157,000 non-operating loss for its pro rata share of Voyant's
operations for the year ended December 31, 2002.
The Company's Chairman was also the Co-Chairman of Voyant until November
2002 at which time he resigned his position at Voyant. The Company's
Chairman beneficially owns approximately 19% of Voyant's outstanding common
stock and holds $1,750,000 of approximately $2,800,000 of Voyant's notes
which are convertible into Voyant's common stock at the rate of $.25 per
share.
F-20
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - Investment In Securities, continued
-----------------------------------
Non-Marketable, continued
--------------
The Company began providing various administrative services for Voyant
during the second quarter of 2002, continuing through December 2002. The
Company agreed to accept 12,300,000 shares of Voyant common stock as
payment for these services. Additionally, throughout the year ended
December 31, 2002, the Company directly and indirectly advanced
approximately $674,000 to Voyant (including $208,000 in the fourth quarter)
for which it is to receive an aggregate of 67,400,000 shares of Voyant
common stock in settlement thereof, increasing to ownership in Voyant to
approximately 40%. At December 31, 2002, the Company determined that the
estimated fair value of its investment is nominal, and accordingly,
eliminated the remaining carrying value of approximately $1,173,000. As a
result, the Company recorded an "Equity in Loss of Voyant and Valuation
Adjustment" aggregating $1,330,000 for the year ended December 31, 2002.
Marketable - Available for Sale
-------------------------------
As discussed in Note 3, the Company obtained 2,000,000 shares of NetWolves
common stock in February 2000. During the year ended December 31, 2000,
75,000 shares were exchanged as part of the restructuring plan (Note 14),
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, resulting in a balance of 1,875,000 shares
at December 31, 2000. All shares exchanged were valued at $20. 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."
During the year ended December 31, 2001, the Company sold 466,500 shares in
the open market at prices ranging from $2.29 to $5.30, aggregating proceeds
of approximately $1,434,000. Additionally, the Company sold 1,000,000
shares in a private transaction resulting in proceeds of approximately
$1,400,000 and exchanged 50,000 shares valued at $130,000 in settlement of
related expenses. Further, the Company exchanged 60,000 shares for an
additional investment in Voyant.
During the year ended December 31, 2002, the Company sold 208,500 shares in
the open market at prices ranging from $0.75 to $2.06, aggregating proceeds
of approximately $323,000. Additionally, the Company sold 90,000 shares in
a private transaction resulting in proceeds of approximately $54,000. As a
result of these transactions, the Company realized a loss of $375,000.
Further, at June 30, 2002, the Company wrote down its investment in
NetWolves to the then current market value of $1.49 per share, resulting in
a loss of $457,000 that was included in "Other-than-temporary decline in
Investment in NetWolves." At December 31, 2002, the Company held no common
shares of Netwolves.
F-21
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - Accounts Payable and Accrued Expenses
-------------------------------------
Accounts payable and accrued expenses consist of the following:
December 31,
2002 2001
----------------- ----------------
(in thousands)
Trade accounts payable $ 511 $ 672
Sales taxes payable 539 633
Accrued payroll and benefits 255 255
Other accrued expenses 358 497
------- -------
$ 1,663 $ 2,057
======= =======
NOTE 10 - 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 in September 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 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. In January 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 during 2001.
The 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 2001.
F-22
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - Long-term Debt
--------------
Long-term debt consists of the following (in thousands):
December 31,
2002 2001
----------------- ----------------
Lines of credit (a) $ 133 $ 174
Capitalized lease obligations (b) 319 210
Other (c) 500 9
----- -----
952 393
Less current portion (396) (290)
----- -----
Long-term debt, net of current portion $ 556 $ 103
===== =====
(a) The Company has three lines of credit, which were assumed in
connection with the Platinum acquisition (Note 3). These lines have
various expiration dates. One line has no expiration date and bears an
interest rate of prime (4.25% at December 31, 2002) plus 1%, is
collateralized by substantially all the assets of Platinum, is
personally guaranteed by one of the former officers of Platinum and
has an unused balance of approximately $23,000 at December 31, 2002.
The second line expires in May 2003, bears an interest rate of 10% and
has no available balance as of December 31, 2002. The third line
contains no expiration date, bears an interest rate of 16.25% and has
no available balance as of December 31, 2002.
(b) The Company has equipment under capital lease obligations expiring at
various times through 2006. The assets and liabilities under capital
leases are recorded at the lower of the present values of the minimum
lease payments or the fair values of the assets. The assets are
included in property and equipment.
As of December 31, 2002 minimum future lease payments under these
capital leases are:
Year Ending December 31, Amount
----------------------------------------------- -----------------
(in thousands)
2003 $174
2004 132
2005 27
2006 3
----
Total minimum lease payments 336
Less: amounts representing interest (17)
----
Net minimum lease payments $319
====
F-23
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - Long-term Debt, continued
--------------
The interest rates pertaining to these capital leases range from 1.7%
to 12.5%, and the net book value of the related assets is
approximately $317,000 as of December 31, 2002.
(c) In January 2002, the Company's Chairman loaned the Company $250,000.
The loan has a term of three years and bears interest at 5%, payable
quarterly in arrears. Additionally, in December 2002, the Company
executed a $250,000 note payable to Markus & Associates (an affiliate
of S.J. & Associates, Inc., see Note 15) pursuant to the terms of its
termination agreement included in Restructuring costs payable (see
Note 14). The note has a term of twenty-eight months and bears
interest at 9 %, payable in monthly installments. Maturities of this
loan and note are as follows:
Year Ending December 31, Amount
----------------------------------------------- -----------------
(in thousands)
2003 $ 107
2004 107
2005 286
---------
$ 500
=========
NOTE 12 - Shareholders' Equity
--------------------
Preferred Stock
---------------
Year Ended December 31, 2002
----------------------------
At the Annual Meeting of Shareholders held in August 2002, a proposal
to amend the Certificate of Incorporation to authorize 2,000,000
shares of preferred stock, par value $0.0001 was approved.
In September 2002, the Company sold 93,458 shares of its Series A
Convertible Preferred Stock, ("Preferred Stock") in consideration for
$2,000,000 less fees and expenses of $178,000, to Metropolitan Venture
Partners II, L.P. ("Metropolitan"), a private equity investment firm.
In December 2002, the Company sold 23,365 shares of its Preferred
Stock in consideration for $500,000 less fees and expenses of $61,000,
to Metropolitan. The proceeds from this transaction were received
January 3, 2003, and the principal sum is reflected on the
accompanying Balance Sheet as Stock subscription receivable. The
holders of Preferred Stock ("the holders") are entitled to dividends,
on a cumulative basis, at the rate of 9-1/2% per annum, compounded
quarterly and payable on September 25, 2004 and September 25, 2005.
Dividends are payable, at the option of the holders, in cash or in the
Company's common stock. The holders have certain demand and piggyback
registration rights, have preference in the event of liquidation, and
are entitled to ten votes for each share of Preferred Stock on all
matters as to which holders of common stock are entitled to vote. As
of December 31, 2002, $56,000 in dividends are payable to the holders.
F-24
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - Shareholders' Equity, continued
--------------------
Preferred Stock, continued
---------------
Year Ended December 31, 2002, continued
----------------------------
The managing partner of Metropolitan was appointed as a member of the
Company's Board of Directors in September 2002.
Common Stock
------------
Year Ended December 31, 2002
----------------------------
During the year ended December 31, 2002, the Company issued 1,524,300
shares and granted 50,000 options to purchase its common stock as detailed
below:
-- Issued 877,665 shares of its common stock and granted 50,000
options to purchase its common stock for services valued at
$1,119,000 as follows:
-- 180,000 shares to its Chairman of the Board of Directors as
part of a two-year services agreement, valued at $180,000.
-- 60,000 shares to its Board of Directors as compensation for
serving on various committees, valued at $106,000.
-- 431,032 shares to consultants as payment of certain
liabilities valued at $585,000.
-- 206,633 shares for employee bonuses, valued at $217,000.
-- Granted options to purchase 50,000 shares of its common
stock as payment of certain consultant liabilities, valued
at $31,000 using the Black-Scholes option- pricing model.
-- Sold 26,191 shares of its common stock on a subscription basis at
the market price on the date of issuance of $1.05 to four key
executives for $27,000. All subscribed shares were fully paid as
of December 31, 2002.
-- Sold an additional 71,000 shares of its common stock on a
subscription basis at the market price on the date of issuance of
$1.25 to four key executives for $89,000. All subscriptions are
paid by July 1, 2003.
-- Issued 31,111 shares of its common stock to the former
shareholders of Platinum as part of the Merger Agreement, valued
at $59,000 (see Note 3).
-- Sold 318,333 shares of its common stock at the market price on
the date of issuance of $1.05 to members of the Board of
Directors of the Company, key executives and various accredited
investors for $334,000.
F-25
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - Shareholders' Equity, continued
Common Stock, continued
------------
Year Ended December 31, 2002, continued
---------------------------
-- Sold 160,000 shares of its common stock at the market price on the
date of issuance of $1.25 to various accredited investors for
$200,000.
-- Issued 40,000 shares of its common stock as payment of certain
restructuring liabilities, valued at $50,000 (see Note 14).
Common Stock
------------
Year Ended December 31, 2001
----------------------------
In September 2001, the Board of Directors approved a shareholder rights
plan under which shareholders of record as of August 28, 2001 received a
right, upon the occurrence of a Triggering Event, as defined, to purchase
one share of the Company's common stock at an exercise price of $2.50,
subject to adjustment. The rights attached to the shares expire on the
earlier of (i) August 27, 2006 or (ii) redemption or exchange of the
rights. The rights have certain anti-takeover effects and would cause
substantial dilution to a person who attempts to acquire the Company
without the consent of the Board of Directors.
During the year ended December 31, 2001, the Company issued 976,328 shares
of its common stock as detailed below:
-- Issued 570,512 shares of its common stock for services valued at
$797,000 as follows:
-- 63,785 shares to its Board of Directors as compensation for
serving on various committees, valued at $108,000.
-- 442,727 shares to consultants as payment of certain liabilities
valued at $584,000.
-- 64,000 shares for employee bonuses, valued at $105,000.
-- Sold 212,766 shares of its common stock at $2.35, a premium to the
quoted market price, to the Chairman of the Board of Directors of the
Company for $500,000.
-- Issued 66,667 shares of its common stock to the former shareholders of
Platinum as part of the Merger Agreement, valued at $137,000 (see Note
3).
-- Issued 109,715 shares of its common stock as payment of certain
restructuring liabilities, valued at $181,000.
-- Issued 16,668 shares of its common stock valued at $47,000 as
settlement of a certain legal matter.
F-26
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - Shareholders' Equity, continued
--------------------
Common Stock
------------
Year Ended December 31, 2000
----------------------------
In February 2000, the Company declared a dividend of $1.50 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, 24,371 shares of common stock were purchased at an average
price of $12.74.
During the year ended December 31, 2000, the Company issued 108,563 shares
of its common stock valued at $30.00 per share based on the then quoted
price of the Company's common stock as follows:
-- Issued 32,667 shares of its common stock (net of 16,667 shares
rescinded) as settlement of certain employee, director and consultant
liabilities in conjunction with its restructuring plan (Note 14). The
shares were valued at $980,000.
-- Issued 32,483 shares of its common stock (net of 3,083 shares
rescinded) as settlement of employee bonuses. The shares were valued
at $974,500, of which $468,000 was accrued in 1999.
-- Issued 44,000 shares of its common stock (net of 2,500 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
25,000 of these shares upon achieving certain performance goals
pursuant to its 1999 contract.
-- Cancelled 587 shares as collateral payment of outstanding receivables.
Additionally, the Company's Chairman and Chief Executive Officer tendered
27,345 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.
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 166,667 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 9,099 shares available to be issued
pursuant to this plan.
F-27
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - Shareholders' Equity, continued
--------------------
Stock Option Plans, continued
------------------
During May 2001, the Board approved the 2001 Stock Option/Stock Issuance
Plan whereby 330,000 shares of its authorized but unissued common stock
were reserved. The Plan is divided into two separate equity programs: an
option grant program and a stock issuance program. Under the stock issuance
program, the purchase price per share is fixed by the Board of Directors or
committee but cannot be less than the fair market value of the common stock
on the issuance date. There are 2,160 shares available to be issued
pursuant to this plan.
At the Company's annual meeting of stockholders held on September 17, 2001,
the Company's shareholders ratified the 2001-A Stock Option/Stock Issuance
Plan whereby 600,000 shares of its authorized but unissued or reacquired
common stock were reserved. Similar to the 2001 Plan, the 2001-A Plan is
divided into two separate equity programs: an option grant program and a
stock issuance program. Under the stock issuance program, the purchase
price per share is fixed by the Board of Directors or committee but cannot
be less than the fair market value of the common stock on the issuance
date. As of December 31, 2002, 25,642 shares remained available pursuant to
this plan.
In January 2002, the Company's Board of Directors authorized and adopted
the 2002 Stock / Stock Option Plan whereby 625,000 shares of its common
stock were reserved. The 2002 Plan is divided into two separate equity
programs: an option grant program and a stock issuance program. Under the
stock issuance program, the purchase price per share is fixed by the Board
of Directors or committee but cannot be less than the fair market value of
the common stock on the issuance date. During 2002, all 625,000 reserved
shares were utilized under the option grant program.
At the Company's annual meeting of stockholders held on August 5, 2002, a
proposal to ratify and approve the Company's 2002-A Stock Option / Stock
Issuance Plan granting the Board of Directors authority to grant up to
875,000 shares of stock or stock options was passed. The 2002-A Plan is
also divided into two separate equity programs: an option grant program and
a stock issuance program. As with the 2002 Plan, under the stock issuance
program of the 2002-A Plan, the purchase price per share is fixed by the
Board of Directors or committee but cannot be less than the fair market
value of the common stock on the issuance date. During 2002, 815,000
options (of which 615,000 are Incentive Stock Options) and 60,000 shares
were issued under this plan. As of December 31, 2002, there are no shares
available to be issued pursuant to this plan.
F-28
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - Shareholders' Equity, continued
--------------------
Stock Option Plans, continued
------------------
In December 2002, the Company's Board of Directors authorized and adopted
the 2003 Stock / Stock Option Plan whereby 725,000 shares of its common
stock were reserved. The 2003 Plan is divided into two separate equity
programs: an option grant program and a stock issuance program. Under the
stock issuance program, the purchase price per share is fixed by the Board
of Directors or committee but cannot be less than the fair market value of
the common stock on the issuance date. During 2002, 240,000 reserved shares
were utilized under the option grant program.
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 2002, 2001 and 2000,
relating to all of the Company's common stock plans (shares are in
thousands):
Weighted
Average
Exercise
Shares Price
------------------- -------------------
Outstanding at January 1, 2000 294 $30.60
Granted 153 14.70
Exercised -- --
Forfeited (193) 27.45
-----
Outstanding at December 31, 2000 254 23.85
Granted 277 1.66
Exercised -- --
Forfeited (103) 36.73
-----
Outstanding at December 31, 2001 428 6.55
Granted 1,896 1.69
Exercised -- --
Forfeited (65) 17.07
-----
Outstanding at December 31, 2002 2,259 2.13
=====
F-28
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - Shareholders' Equity, continued
--------------------
Stock Option Plans, continued
------------------
At December 31, 2002, a total of 1,064,000 options are exercisable at
various exercise prices: 385,000 options are exercisable at $1.05, 573,000
options are exercisable at prices ranging from $1.25 to $2.19 and 106,000
options at $11.25. The weighted-average remaining contractual life of
options outstanding at December 31, 2002 is 4.21 years. A total of
2,259,000 shares of the Company's common stock are reserved for options,
warrants and contingencies at December 31, 2002.
F-29
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - Shareholders' Equity, continued
--------------------
Stock Option Plans, continued
------------------
At December 31, 2001, a total of 250,000 options were exercisable at
various exercise prices: 129,000 options were exercisable at $1.63, 87,000
options were exercisable at prices ranging from $11.25 to $20.16 and 34,000
options at $26.25 to $30.00. The weighted- average remaining contractual
life of options outstanding at December 31, 2001 was 2.43 years.
At December 31, 2000, a total of 254,000 options were exercisable at
various exercise prices: 196,000 options were exercisable at prices ranging
from $11.25 to $20.16 per share, 51,000 options at $26.25 to $31.35 and
7,000 options at $93.75 to $384.00. The weighted- average remaining
contractual life of options outstanding at December 31, 2000 was 2.67
years.
Total compensation costs recognized for stock option awards amounted to
$31,000, $115,000 and $152,000 for the years ended December 31, 2002, 2001
and 2000, respectively. Compensation cost represents the fair value of
options granted to non- employees and the intrinsic value of options
granted to employees.
NOTE 13 - Income Taxes
------------
The following table summarizes components of the (provision) benefit for
current and deferred income taxes for the years ended December 31, 2002,
2001 and 2000.
Year Ended December 31,
2002 2001 2000
---------------- ----------------- ----------------
(in thousands)
Current
Federal $ -- $ 565 $ (718)
State and other -- 57 (125)
----- --------- ----------
Total -- 622 (843)
----- --------- ----------
Deferred
Federal -- -- (9,197)
State and other -- -- --
----- --------- ----------
Total -- -- (9,197)
----- --------- ----------
-- $ 622 $(10,040)
===== ========= ==========
F-30
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 2002, 2001
and 2000:
Year Ended December 31,
2002 2001 2000
---------------- --------------- --------------
U.S. Federal statutory tax rate 35.0% 35.0% 35.0%
State and local taxes, net of U.S. Federal tax
effect -- -- (7.4)
Impact of Alternative Minimum Tax -- (5.0) (42.3)
Gain on sale of Softworks and ComputerCOP -- -- (90.1)
Loss and other-than-temporary decline in
investment in NetWolves (1.9) (11.9) (613.7)
Restructuring costs timing difference 2.0 2.8 (33.4)
Utilization of net operating loss carryforward -- -- 199.3
Permanent differences - compensation -- -- (50.5)
Increase in valuation allowance (35.0) (24.5) --
Other (0.1) (1.9) 11.1
---- ----- -----
0.0% 5.5% (592.0)%
==== ===== =====
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are summarized as follows:
December 31,
2002 2001
---------------- -----------------
(in thousands)
Net operating loss carryforwards $ 31,205 $ 25,851
Tax credit carryforward 577 --
Fixed and intangible assets 47 237
Other-than-temporary decline in investment in
NetWolves -- 50
Restructure accrual 133 302
Other 125 103
--------- ---------
32,087 26,543
Valuation allowance (32,087) (26,543)
--------- ---------
Deferred tax assets $ -- $ --
======== =========
F-31
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - Income Taxes, continued
------------
At December 31, 2002, the Company has net operating loss carryforwards
remaining of approximately $68 million to reduce future taxable income, if
any. These losses, which expire through 2022, are subject to substantial
limitations as a result of IRC Section 382 rules governing changes in
control. Approximately $58 million these losses are available to be
utilized in the year 2003. After the year 2003, approximately $1.2 million
of losses become available each year (subject to, among other things,
adjustment upon further changes in control) until the losses expire.
NOTE 14 - 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, 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 were 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, 2002, the remaining cash requirement is $66,000, $6,000
payable over the next twelve months, and $60,000 is payable subsequent to
the satisfaction of the note to Markus & Associates (see Note 11).
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-32
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - Restructuring, continued
-------------
The activity in the restructuring accrual through December 31, 2002 is
summarized below:
Officer/director
Employee retirement Consulting Operating
terminations packages contracts leases Other Total
-------------------------------------------------------------------------------------------
Restructuring charges to $ 2,088,000 $ 7,666,000 $ 3,681,000 $ 357,000 $1,384,000 $ 15,176,000
operations, during 2000
Company stock Issuances -- (100,000) (630,000) -- (250,000) (980,000)
NetWolves stock exchange -- (1,500,000) -- -- (1,500,000)
Cash expenditures (2,056,000) (5,508,000) (1,938,000) (140,000) (604,000) (10,246,000)
------------ ----------- ----------- ---------- ---------- ------------
Restructuring accrual,
December 31, 2000 32,000 558,000 1,113,000 217,000 530,000 2,450,000
Company stock Issuances -- -- (131,000) -- (50,000) (181,000)
Cash expenditures (30,000) (548,000) (296,000) (129,000) (480,000) (1,483,000)
------------ ----------- ----------- ---------- ---------- ------------
Restructuring accrual,
December 31, 2001 2,000 10,000 686,000 88,000 -- 786,000
Company stock Issuances -- -- (50,000) -- -- (50,000)
Converted to note payable -- -- (250,000) -- -- (250,000)
Cash expenditures (2,000) (10,000) (326,000) (82,000) -- (420,000)
------------ ----------- ----------- ---------- ---------- ------------
Restructuring accrual,
December 31, 2002 $ -- $ -- $ 60,000 $ 6,000 $ -- $ 66,000
============ =========== =========== ========== ========== ============
-- 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, and $5,508,000, $548,000
and $10,000 cash payments were paid in 2000, 2001 and 2002,
respectively.
F-33
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - Restructuring, continued
-------------
-- 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: $811,000
was paid in the form of the Company's common stock; $2,560,000 was
paid through 2002; $250,000 was converted to a 9-1/2% twenty-eight
month note; and the $60,000 balance is payable subsequent to the
satisfaction of the note.
-- 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 end by June 2003.
-- Other costs included 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 15 - Related Party and Other Transactions
------------------------------------
Three former 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 27,345 shares of Company common stock valued at $923,000.
In 2000, the Company granted 1,667 shares of common stock (valued at $30.00
per share) to an outside Director (who resigned in March 2000) for legal
and consulting services provided to the Company. In 2000, the Company also
granted 1,333 options with an exercise price of $31.35 per share, which
were valued at $17,000 and fully vested at December 31, 2000. Additionally,
during the year ended December 31, 2000, the Company paid to such director
consulting fees of $52,000.
In 2000, the Company granted 1,667 shares of common stock (valued at $30.00
per share) for consulting expenditures incurred in connection with the
restructuring plan (Note 14) to another outside Director (who resigned in
March 2000). The Company paid such Director consulting fees of $13,000 for
the year ended December 31, 2000.
F-34
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - Related Party and Other Transactions, continued
------------------------------------
In 2000, the Company granted to a third outside Director (who resigned in
March 2000) 1,667 shares of common stock (valued at $30.00 per share) for
consulting expenditures incurred in connection with the restructuring plan
(Note 14). In addition, the Company granted 1,333 options with an exercise
price of $31.35 for consulting services, which were valued at approximately
$21,000, and were fully vested at December 31, 2000.
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, 2002, approximately $6,000 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 4,167 shares of the Company's
common stock (valued at $30.00 per share) for consulting expenses incurred
in connection with the restructuring plan (Note 14). 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 10,000 Company stock options valued at $395,000, for business and
financial consulting services rendered.
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"), an
advisor to the Company and its' Board of Directors, for various services
that provide for the following compensation:
-- The Company entered into a consulting agreement with SJ initially
terminating on May 31, 2007. Pursuant to the agreement, SJ is entitled
to monthly compensation of $15,000. The Company will supply SJ an
office/temporary living accommodations and reimbursement for auto
leases at a cost not to exceed $9,900 per month. Pursuant to the
agreement, SJ is entitled to a financing fee equal to 4% of the gross
proceeds (or the gross transaction value) of any of the following
events: (i) financing(s) (either debt or equity), (ii) sale of the
Company's stock, (iii) an acquisition made by the Company, and (iv)
the sale of the Company or merger of the Company with another entity.
SJ is also entitled to an annual bonus at the discretion of the
Companies Board of Directors. With no further approval, SJ is entitled
to be reimbursed for other expenses not to exceed $2,000 per month,
plus other reasonable expenses upon approval. Upon completion of the
initial term of the agreement, SJ will continue to provide consulting
services for an additional 7 1/2 year period. Minimum compensation
during this additional period is approximately $5,500 per month.
F-35
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - Related Party and Other Transactions, continued
------------------------------------
S.J. & Associates, Inc., continued
-----------------------
-- In 2002, the Company incurred $153,000 of consulting expenses with SJ.
The consulting expense was paid in cash.
-- In 2002, the Company reduced its obligation to SJ relating to the
restructure plan by $609,000. The amount was paid in the form of
40,000 shares (valued at $50,000), the issuance of a $250,000 note
(see Note 11) and $309,000 in cash.
-- In 2001, the Company incurred $292,000 of consulting expenses with SJ.
The consulting expense was paid in the form of $152,000 in cash,
82,858 shares of Company common stock (valued at $87,000) and $53,000
in expense related to 2000 option grants vesting in 2001.
-- In 2001, the Company reduced its obligation to SJ relating to the
restructure plan by $406,000. The amount was paid in the form of
109,715 shares (valued at approximately $181,000), and $225,000 in
cash.
-- In 2001, the Company settled prior year obligations to SJ (valued at
approximately $36,000) with 22,285 shares of Company common stock.
-- In 2000, the Company issued 8,333 shares (valued at $30.00 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,
25,000 shares of Company common stock (valued at $30.00 per share) and
10,000 stock options with an exercise price of $11.25 per share,
resulting in a charge of approximately $36,000.
-- As part of the 2000 restructure plan (Note 14) a long-term consulting
contract was settled.
F-36
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 - Commitments and Contingencies
-----------------------------
Operating Leases
----------------
Operating leases are primarily for office space, equipment and automobiles.
At December 31, 2002, the future minimum lease payments under operating
leases are summarized as follows (in thousands):
Year Ending
December 31, Amount
------------------------------ ----------------
(in thousands)
2003 $526
2004 152
2005 104
2006 50
----
Total $832
====
Rent expense approximated $474,000, $499,000 and $340,000 for the years
ended December 31, 2002, 2001 and 2000, respectively.
Employment Agreements
---------------------
In December 2002, the Company's Chairman became the Company's Chief
Executive Officer. Subsequently, in January 2003, the Company entered into
an employment agreement with its Chief Executive Officer, which expires in
January 2005. Compensation is as follows: 60,000 shares of the Company's
common stock which vest ratably over the first year of the agreement,
240,000 options to purchase common stock of the Company at $2.02, vesting
50% on execution of the agreement and 50% ratably over the life of the
contract, and $180,000 per annum plus a bonus at the discretion of the
Board. Additionally, the Chief Executive Officer is entitled to be
reimbursed for (1) all out-of-pocket expenses reasonably incurred by him in
the performance of his duties, and (2) housing and office expenses not to
exceed $10,000 per month.
In December 2001, the Company entered into an employment agreement with an
executive of the Company, which expires January 2004. Compensation is
$175,000 per annum plus a bonus at the discretion of the board.
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 $65,000, $46,000 and $41,000 for the years ended December 31,
2002, 2001 and 2000, respectively.
F-37
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17 - Management's Liquidity Plans
----------------------------
For the year ended December 31, 2002, the Company continued to incur net
losses and use substantial amounts of cash in operating activities. The
Company has been dependent upon debt and equity financing as well as the
liquidation of NetWolves common stock to fund its operations.
The Company's management has and will continue to take numerous steps which
it believes will create positive operating cash flow for the Company. Key
measures are as follows:
-- Expanding the Company's products and services;
-- Materially improve its sales efforts through expanding its marketing
staff;
-- Continue to expand customer engineering fees. The Company generated in
excess of $2,500,000 in custom engineering fees in 2002 and believes
that this revenue should continue into 2003;
-- Increase revenue as a result of the agreement entered into in 2002
between the Company and International Business Machines Corporation
("IBM"), which allows IBM the ability to electronically attach
supporting documentation to an electronic invoice, all submitted via
the Internet to their customers;
-- Capitalize on the growing trend for outsource services within the
communications sector. The acquisition of Platinum broadened the
Company's product offerings in this market sector. The Company
believes the increase in revenue during 2002 generated from Platinum
should continue in 2003.
-- A reduction of the Company's overhead costs, including staff
reductions, as deemed necessary.
-- In January 2003, the Company raised an additional $500,000 through the
issuance of long-term debt to Tall Oaks Group, LLC (Note 21).
-- We have obtained a firm commitment from Metropolitan to purchase
$250,000 of our preferred stock, with terms similar to their previous
transactions (Note 12). Further, we have firm commitments totaling
$750,000 ($500,000 from Tall Oaks and $250,000 from our chairman) to
guarantee a line of credit expected to be obtained from a major bank.
Additionally, the senior executives have pledged an aggregate of
$250,000 in the event we require capital in excess of the $1,000,000
described above. These commitments and pledges extend though at least
December 31, 2003
Management believes that its plan will ultimately enable the Company to
generate positive cash flows from operations. Until such time, the Company
believes that its present cash on hand as well as obtaining additional debt
and/or equity financing should provide adequate funding through at least
December 31, 2003. However, there can be no assurances that the Company
will have sufficient funds to implement its current plan. In such an event,
the Company could be forced to significantly alter its plan and reduce its
operating expenses, which could have an adverse effect on revenue
generation and operations in the near term.
F-38
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18 - Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information for the years ended
December 31, 2002, 2001 and 2000 is summarized as follows:
Year Ended December 31,
2002 2001 2000
---------------- ------------------- ----------------
(in thousands)
Interest paid $171 $467 $ 8
==== ==== ====
Net taxes paid $ - $849 $38
==== ==== ====
Non-cash investing and financing activities for the years ended December
31, 2002, 2001 and 2000 are summarized as follows:
Year Ended December 31,
2002 2001 2000
------------ ------------ ----------
(in thousands)
Net cash paid in Platinum acquisition in
2001 (in thousands):
Account and installment receivables $ -- $ (88) $ --
Property and equipment, net -- (104) --
Intangible assets, net -- (585) --
Accounts payable and accrued Expenses -- 194 --
Current and long-term debt -- 337 --
Common stock issued in acquisition -- 137 --
------- ------ -------
Decrease in cash and cash equivalents $ -- $ (109) $ --
======= ====== =======
Capitalized leases incurred $ 263 $ 173 $ --
======= ====== =======
Additional non-cash investing and financing activities for the years ended
December 31, 2002 and 2000 are summarized as follows:
2002
----
-- In connection with the sales of preferred stock (see Note 12), the
Company recorded a stock subscription receivable of $500,000 and incurred
dividend liabilities of $56,000.
-- Accrued restructure cost of $250,000 were converted to a note payable
pursuant to terms of a restructuring agreement (see Notes 11 and 15).
F-39
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18 - Consolidated Statements of Cash Flows, continued
2000
----
-- 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 former chairman and Chief Executive Officer tendered
27,345 shares of the Company's common stock valued at $923,000 toward
the repayment of officers' loans.
NOTE 19 - Products and Services
---------------------
The Company and its subsidiaries currently operate in one business segment
and have, during the years 2002, 2001 and 2000, provided three separate
products: ASP Services, custom engineering fees and AMS Services. Refer to
Note 1 for a detailed description of these products and services.
Year Ended December 31,
2002 2001 2000
---------------- ---------------- ----------------
(in thousands)
ASP fees $4,101 $2,506 $2,047
Custom Engineering fees 2,511 814 --
AMS fees 804 465 --
Other -- -- 73
------ ------ ------
Total Revenue $7,416 $3,785 $2,120
====== ====== ======
NOTE 20 - Major Customers
---------------
For the years ended December 31, 2002, 2001 and 2000, IBM accounted for
87.7%, 82.2% and 80.5% of the Company's revenue, respectively. Accounts
receivable from IBM amounted to $1,127,000 and $850,000, at December 31,
2002 and 2001, respectively. Loss of IBM as a customer would have a
material adverse effect on the Company.
NOTE 21 - Subsequent Events
-----------------
In January 2003, Tall Oaks Group, LLC provided the Company with an
unsecured $500,000 loan. The loan matures March 31, 2005, bears interest at
9 1/2%, with the entire unpaid principal amount and all accrued interest
payable on the maturity date.
F-40
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 22 - Quarterly Financial Data (Unaudited)
------------------------
Year Ended December 31, 2002,
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- ----------------- -------------- ---------------
(in thousands, except per share amounts)
Revenue $ 1,514 $ 1,982 $ 1,851 $ 2,069
Operating loss (1,278) (950) (1,180) (1,202)
Loss on sales of NetWolves common
stock (250) -- (14) (111)
Other-than-temporary decline in
Investment in Netwolves -- (457) -- --
Equity in Loss of Voyant and Valuation
Adjustment -- (259) (281) (790)
Other (expense) income (100) (51) (12) 24
(Provision for) benefit from income
taxes -- -- -- --
------- ------- ------- -------
Net Loss $(1,628) $(1,717) $(1,487) $(2,079)
======= ======= ======= =======
Basic and Diluted Net Loss
Per Share $(0.53) $(0.46) $(0.39) $(0.53)
====== ====== ====== ======
Year Ended December 31, 2001,
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- ----------------- -------------- ---------------
(in thousands, except per share amounts)
Revenue $ 517 $ 677 $ 1,153 $ 1,438
Gross margin 428 521 847 1,183
Operating loss (1,701) (2,267) (1,783) (1,379)
Loss on sales of NetWolves common
stock -- (98) -- (3,718)
Other (expense) income (317) 10 16 3
(Provision for) benefit from income
taxes (33) (13) -- 668
------- ------- ------- -------
Net Loss $(2,051) $(2,368) $(1,767) $(4,426)
======= ======= ======= =======
Basic and Diluted Net Loss
Per Share $(1.44) $(1.44) $(0.90) $(2.10)
====== ====== ====== ======
F-41
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 22 - 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.
F-42