As filed with the Securities and Exchange Commission on September 1, 2005
Registration No. 333-_______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
Form SB-2
Registration Statement Under The Securities Act of 1933
DIRECT INSITE CORP.
-------------------
( Name of small business issuer as specified in its charter)
Delaware 7373 11-2895590
-------- ---- ----------
(State or other Jurisdiction (Primary Standard Industrial (IRS Employer
of Incorporation or Classification Code Identification
Organization) Number) Number)
80 Orville Drive, Bohemia, New York 11716 (631) 244-1500
(Address and Telephone Number of Principal Executive Offices)
80 Orville Drive, Bohemia, New York 11716 (631) 244-1500
(Address of Principal Place of Business or Intended Principal Place of
Business)
James A. Cannavino
80 Orville Drive
Bohemia, New York 11716 (631) 244-1500
(Name, Address and Telephone Number of Agent for Service)
Copies to:
David H. Lieberman, Esq.
Beckman, Lieberman & Barandes, LLP
100 Jericho Quadrangle, Suite 329
Jericho, New York 11753
(516) 433-1200
(516) 433-5858 Facsimile
Approximate Date of Proposed Sale to the Public: As soon as practicable after
this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering [ ].
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [ ].
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [ ].
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box [ [ ].
CALCULATION OF REGISTRATION FEE
======================================= ================= ===================== ======================== ======================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Per Aggregate Offering Amount of
Securities to be Registered (1) Registered(1) Security(2) Price (2) Registration Fee
- --------------------------------------- ----------------- --------------------- ------------------------ ----------------------
Common Stock, $0.0001 par value,
issuable as interest in lieu of cash
on our March 29, 2005 5% Senior
Subordinated Secured Notes 80,005 $0.72 $57,603.60 $6.78
- --------------------------------------- ----------------- --------------------- ------------------------ ----------------------
Common Stock, $0.0001 par value,
issuable upon exercise of Common
Stock Purchase Warrants dated March
29, 2005 (3) $0.72 $540,000.00 $63.55
750,000
- --------------------------------------- ----------------- --------------------- ------------------------ ----------------------
Common Stock, $0.0001 par value,
issuable upon exercise of Common
Stock Purchase Warrants dated July
12, 2005 (3) 250,000 $180,000.00 $21.19
$0.72
- --------------------------------------- ----------------- --------------------- ------------------------ ----------------------
Total $777,603.60 $91.52
======================================= ================= ===================== ======================== ======================
<FN>
(1) Relates to the resale of these shares of common stock by certain selling
securityholders.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933, as amended (the
"Securities Act"). Pursuant to Rule 457(c) under the Securities Act, the
proposed maximum offering price of each share of the Registrant's common
stock is estimated to be the average of the high and low sales price of a
share as of a date five business days before the filing of this
registration statement. Accordingly, the Registrant has used $0.72 as such
price per share, which is the average of the high and low of $0.72 reported
by the OTC Bulletin Board on August 30, 2005.
(3) Pursuant to Rule 416 under the Securities Act, this registration statement
also relates to such indeterminate number of shares of common stock as may
become issuable by reason of stock splits, stock dividends, anti- dilution
adjustments and similar transactions in accordance with the provisions of
the common stock purchase warrants.
</FN>
We hereby amend this Registration Statement on such date or dates as may be
necessary to delay its effective date until we have filed a further amendment
which specifically states that this Registration Statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933,
as amended, or until this Registration Statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell or a solicitation of an offer to buy these securities in any state where
the offer is not permitted.
SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 2005
Preliminary Prospectus
1,080,005 Shares
DIRECT INSITE CORP.
Common Stock
This prospectus relates to the resale shares of common stock of Direct
Insite Corp. by certain of our securityholders, referred to as selling
securityholders throughout this document. The selling securityholders are
offering to sell 1,080,005 shares of our common stock. We will not receive any
proceeds from the resale of shares by the selling securityholders, which
include:
up to 80,005 shares are issuable as interest in lieu of cash on our March
29, 2005 Senior Subordinated Secured Notes
up to 750,000 shares are issuable upon the exercise of our common stock
purchase warrants dated March 29, 2005
up to 250,000 shares are issuable upon the exercise of our common stock
purchase warrants dated July 12, 2005
All of the shares being offered by this prospectus are being offered by the
selling securityholders named in this prospectus. This offering is not being
underwritten. We will not receive any of the proceeds from the sale of the
shares of our common stock in this offering. If the March 29, 2005 warrants are
exercised so that the underlying shares may be sold, we will receive the
exercise price of the warrants, which is $.01 per share. If the July 12, 2005
warrants are exercised so that the underlying shares may be sold, we will
receive the exercise price of the warrants, which is $1.00 per share. The
selling securityholders identified in this prospectus, or their pledgees,
donees, transferees or other successors-in- interest, may offer the common stock
or interests therein from time to time through public or private transactions at
prevailing market prices, at prices related to prevailing market prices, or at
privately negotiated prices. We will pay all expenses of registering this
offering of securities.
The common stock is traded in the over-the-counter market and prices are
quoted on the over-the- counter Bulletin Board under the symbol "DIRI.OB." On
August 30, 2005 the closing price per share of our common stock was $0.72.
Except under certain circumstances, the selling securityholders will sell the
shares from time to time through independent brokerage firms in the
over-the-counter at market prices prevailing at the time of sale.
INVESTING IN OUR COMMON STOCK INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATIONS MADE TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is ___________ , 2005.
Table of Contents
SUMMARY 3
RISK FACTORS 4
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS 7
USE OF PROCEEDS 7
SELLING SECURITYHOLDERS 8
PLAN OF DISTRIBUTION 9
LEGAL PROCEEDINGS 10
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 10
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 12
DESCRIPTION OF SECURITIES 12
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES 15
DESCRIPTION OF BUSINESS 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 25
DESCRIPTION OF PROPERTY 35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 36
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 37
EXECUTIVE COMPENSATION 38
EXPERTS 40
LEGAL MATTERS 40
WHERE YOU CAN FIND MORE INFORMATION 40
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
2
SUMMARY
This summary highlights information contained elsewhere in the
prospectus. You should read the entire prospectus carefully; especially the
risks of investing in the securities discussed under "Risk Factors" and the
financial statements and related notes included elsewhere in this prospectus
before deciding to invest in our common stock.
Our Company
Direct Insite Corp. was organized under the name Unique Ventures, Inc.
under the laws of the State of Delaware on August 27, 1987. In August, 2000, we
changed our name to Direct Insite Corp. which the Board of Directors believed
was more in line with our business plans. Our principal executive offices are
located at 80 Orville Drive, Bohemia, New York. Our telephone number is (631)
244-1500. Unless the context requires otherwise, all references to "we," "our,"
"us," "company," "registrant," "Direct Insite" or "management" refers to Direct
Insite Corp. and its subsidiaries.
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 presentment and payment
("EBP&P") as well as visual data analysis and reporting tools delivered via the
Internet for our customers. Our core technology is dbExpressTM, a proprietary
and patented management information tool, which provides targeted access through
the mining of large volumes of transactional data via the Internet and our
Invoices-on-Line (IOL) products. Our IOL service is an electronic invoice
presentment and payment system ("EIP&P"). Further, since 2001, we have been
providing custom engineering services for our customers. These services have
increasingly become a significant source of revenue for us and we believe will
continue to increase. Additionally, we believe that this type of service leads
to recurring revenue streams similar to our ASP products.
This 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, New York and in Newark, New Jersey . Our facility in New Jersey is
space leased at an International Business Machines ("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 approximately 70%, 92%
and 97% of our revenue for the six months ended June 30, 2005 and for the years
ended December 31, 2004 and 2003, respectively, utilizes our suite of IOL
products and services to allow their customers from around the globe to receive,
analyze, dispute and cost allocate all of their invoice related information in
their local language and currency via the Internet 24 hours a day, 7 days a
week, 365 days a year. Also in 2004 we added our second Fortune 100 company to
our customer base and this customer accounted for approximately 28% of revenue
for the six months ended June 30, 2005.
The Offering
The selling securityholders may offer and sell up to 1,080,005 shares of
common stock, an amount equal to 21.9% of our currently outstanding common
stock. For a list of selling securityholders and the amount of shares that each
of them expects to sell, see "Selling Securityholders."
The offering is made by the selling securityholders for their benefit. We
will not receive any of the proceeds of their sale of common stock.
3
RISK FACTORS
You should carefully consider the factors described below and other
information contained in this prospectus. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us, which we currently deem immaterial or which are similar
to those faced by other companies in our industry or business in general, may
also impair our business operations. If any of the following risks actually
occurs, our business, financial condition or results of operations could be
materially and adversely affected. In such case, the trading price of our common
stock could decline, and you may lose all or part of your investment. This
prospectus also contains forward-looking statements that involve risks and
uncertainties. Please refer to "Special Note Regarding Forward-Looking
Statements" included elsewhere in this prospectus.
Historically, our operations have not been profitable and we cannot guarantee
that they will become profitable in the future.
For the six months ended June 30, 2005, and the years ended December 31,
2004 and December 31, 2003, we sustained net losses of $590,000, $1,283,000 and
$5,182,000, respectively. We continue to sustain losses in the current fiscal
year, and we cannot guarantee that we will achieve profitability in the future.
We may not be able to obtain funds necessary for the ongoing operation of our
business on terms which are acceptable to us.
At June 30, 2005, we had a negative working capital position of $3,745,000.
Based on our current levels of operations and commitments, we believe we will
need to generate positive cash flows from operations in order to decrease our
dependence on outside financing. If we do not generate sufficient cash flow from
operations, adequate funds for us to operate our business on terms which we find
acceptable, whether equity financing, debt financing or from other sources, may
not be available when we need it and may result in significant dilution to our
existing securityholders. We have no additional bank or other credit facility or
other readily available access to debt financing. If we are unable to secure
additional funding when needed, we may be forced to decrease or eliminate
certain current or expansion activities. Ultimately, our inability to obtain
sufficient funds from operations or external sources would have a material
adverse effect on our financial condition and viability.
The large number of shares available for future sale may adversely effect the
market price of our stock.
We have 4,926,232 shares of common stock outstanding as of August 29, 2005,
of which approximately 2,500,000 shares are freely tradable. We also have
9,517,556 shares issuable upon the conversion of preferred stock, exercise of
options and exercise of warrants, including 1,000,000 of the shares being
registered for resale pursuant to the registration statement of which this
prospectus is a part. We are registering 1,080,005 shares under this prospectus.
If all of our outstanding options, warrants and convertible securities were
exercised or converted, including the shares registered under this prospectus,
we would have 14,523,793 shares outstanding. The issuance of such a large number
of shares could have a significant adverse effect on the market for, as well as
the price of, our common stock. A decline in the market price also may make the
terms of future financings using our common stock or using convertible debt more
burdensome.
4
Our planned growth may cause a strain on our management and other resources.
We are pursuing a business strategy that has involved and is expected to
continue to involve significant growth over at least the next twelve months. We
cannot guarantee that we will be able to achieve our planned growth.
Accomplishing our objectives will depend upon a number of factors, including our
ability to develop products internally with emphasis on the exploitation of our
IOL products and d.b.Express products. We may also incur development,
acquisition or expansion costs that represent a higher percentage of total
revenues than larger or more established companies, which may adversely affect
our results of operations.
We may not be able to compete favorably in the competitive information solutions
industry.
The market for our information solutions is intensely competitive. We face
competition from a broad range of competitors, many of whom have greater
financial, technical and marketing resources than we do. There can be no
assurance that we will be able to compete effectively with such entities.
Our operations are dependent upon key management personnel.
We believe that our continued success depends to a significant extent upon
the efforts and abilities of our senior management. In particular, the loss of
James Cannavino, our Chairman and Chief Executive Officer, or any of our other
executive officers or senior managers, could have a material adverse effect on
our business.
Two customers account for a significant percentage of our revenue.
We have one customer, IBM, that accounted for approximately 70% , 98%, 92%
and 97% of our revenue for the six months ended June 30, 2005 and 2004 and for
the years ended December 31, 2004 and 2003, respectively. Another Fortune 100
customer accounted for 28% of revenue for the six months ended June 30, 2005.
The loss of either of these customers would have a material adverse effect on
our business, financial condition and results of operations.
Our success depends upon protecting our intellectual property.
The computer software industry is characterized by extensive use of
intellectual property protected by copyright, patent and trademark laws. While
we believe that we do not infringe on the intellectual property rights of any
third parties in conducting our business, any allegations of infringement, or
disputes or litigations relating to infringement, could have a material adverse
affect on our business, financial condition and results of operations. If we
cannot prevent third parties from using our proprietary technology without our
consent or without compensating us for the use of the technology, we believe
that it could adversely effect our ability to compete. We cannot guarantee that
our patents and copyrights will effectively protect us from any copying or
emulation of our products in the future.
Our common stock is quoted on the OTC Bulletin Board, which may limit the
liquidity and price of those securities more than if our securities were quoted
or listed on the Nasdaq Stock Market or a national exchange.
Our common stock is currently quoted and traded on the OTC Bulletin Board
("OTCBB"), an NASD-sponsored and operated inter-dealer automated quotation
system for equity securities not included in the Nasdaq Stock Market or national
exchange. Quotation of our securities on the OTC Bulletin Board may limit the
liquidity and price of our securities more than if our securities were quoted or
5
listed on the Nasdaq Stock Market or a national exchange. Some investors may
perceive our securities to be less attractive because they are traded in the
over-the-counter market. Institutional and other investors may have investment
guidelines that restrict or prohibit investing in securities traded in the
over-the-counter market. The factors may have an adverse impact on the trading
and price of our securities.
Trading in our common stock has been limited, so investors may not be able
to sell as many of their shares as they want at prevailing prices.
The average daily volume of trading in our common stock for the three month
period ended August 17, 2005 was 2,155 shares. If limited trading in our common
stock continues, it may be difficult for investors who purchase shares of common
stock to sell such shares in the public market at any given time at prevailing
prices. Also, the sale of a large block of our common stock could depress the
market price of our common stock to a greater degree than a company that
typically has a higher volume of trading of its securities.
We cannot predict whether an active market for our common stock will
develop in the future. In the absence of an active trading market:
-- Investors may have difficulty buying and selling or obtaining market
quotations;
-- Market visibility for our common stock may be limited; and
-- Lack of visibility for our common stock may have a depressive effect
on the market price for our common stock.
Our common stock is subject to the SEC's penny stock rules, broker-dealers may
experience difficulty in completing customer transactions and trading activity
in our securities may be severely limited.
Currently, we have net tangible assets less than $5,000,000 and our common
stock has a market price per share of less than $5.00. Therefore, transactions
in our common stock are subject to the "penny stock" rules promulgated under the
Securities Exchange Act of 1934. Under these rules, broker-dealers who recommend
such securities to persons other than institutional investors:
-- Must make a special written suitability determination for the
purchaser;
-- Receive the purchaser's written agreement to a transaction prior to
sale;
-- Provide the purchaser with risk disclosure documents which identify
risks associated with investing in "penny stocks" and which describe
the market for these "penny stocks" as well as a purchaser's legal
remedies; and
-- Obtain a signed and dated acknowledgment from the purchaser
demonstrating that the purchaser has actually received the required
risk disclosure document before a transaction in a "penny stock" can
be completed.
As a result of these requirements, broker-dealers may find it difficult to
effectuate customer transactions and trading activity in our stock will be
significantly limited. Accordingly, the market price of our stock and other
publicly traded securities may be depressed, and it may be more difficult to
sell our shares.
6
Our stock price may be volatile.
The stock market in general, and the market for shares of technology
companies in particular, have experienced extreme price fluctuations, often
unrelated to the operating performance of the affected companies. Many
technology companies, including us, have experienced dramatic volatility in the
market prices of their common stock. If our future operating results are below
the expectations of stock market analysts and investors, our stock price may
decline. We cannot be certain that the market price of our common stock will
remain stable in the future. Our stock price may undergo fluctuations that are
material, adverse and unrelated to our performance.
Our charter provisions and statutory law may inhibit changes in control of our
company.
Our certificate of incorporation and bylaws contain provisions which may
discourage takeover attempts and hinder a merger, tender offer or proxy contest
targeting us, including transactions in which securityholders might receive a
premium for their shares. This may limit your ability as a stockholder to
approve a transaction that you may think is in your best interests. These
provisions could reduce the price that certain investors might be willing to pay
in the future for shares of common stock or preferred stock. Moreover, although
our ability to issue preferred stock may provide flexibility in connection with
possible acquisitions and other corporate purposes, such issuance may make it
more difficult for a third party to acquire, or may discourage a third party
from acquiring, a majority of our voting stock. Furthermore, we may in the
future adopt other measures that may delay, defer or prevent a change in
control. We may adopt some of these measures without any further vote or action
by securityholders.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
All statements other than statements of historical fact included in this
prospectus including, without limitation, statements under, "Management's
Discussion and Analysis or Plan of Operation" regarding our financial position,
business strategy and the plans and objectives of management for future
operations, are forward-looking statements. When used in this prospectus, words
such as "anticipate," "believe," "estimate," "expect," "intend" and similar
expressions, as such words or expressions 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.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling securityholders. We will not receive
any of the proceeds from the sale of shares of common stock in this offering. If
the selling securityholders exercise their warrants, we will receive the
exercise price of the warrants, which is currently $0.01 per share for the
warrants dated March 29, 2005 (750,000 warrants) and $1.00 per share for the
7
warrants dated July 12, 2005 (250,000 warrants). We intend to use the net
proceeds from the exercise of the warrants for our general working capital
needs. There can be no assurance that all, or any, of the warrants will be
exercised.
SELLING SECURITYHOLDERS
The following table sets forth information concerning the resale of the
shares of common stock by the selling securityholders. We will not receive any
proceeds from the resale of the common stock by the selling securityholders. We
will receive proceeds from the exercise of warrants. The table below assumes
that all the shares registered below are sold by the selling securityholders.
The following table sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
being offered. Unless otherwise indicated, each of the following persons has
sole voting and investment power with respect to the shares of common stock set
forth opposite their respective names. None of the selling securityholders is an
affiliate of a registered broker-dealer.
- ------------------------------ ------------------- --------------- ----------------- ---------------- --------------
Number of
Number of shares shares
beneficially Number of beneficially
owned before shares being owned after
Selling Securityholder the offering Percentage offered the offering Percentage
- ------------------------------ ------------------- --------------- ----------------- ---------------- --------------
Sigma Opportunity
Fund, LLC 719,338 (1) 12.7% 719,338 (1) 0 0
- ------------------------------ ------------------- --------------- ----------------- ---------------- --------------
Metropolitan Venture
Partners II, L.P. 1,612,631 (2) 24.8% 110,667 (3) 1,501,964 20.1%
- ------------------------------ ------------------- --------------- ----------------- ---------------- --------------
Tall Oaks Group LLC 1,093,187(4) 18.4% 250,000(5) 843,187 12.5%
- ------------------------------ ------------------- --------------- ----------------- ---------------- --------------
<FN>
(1) Includes 650,000 shares issuable upon the exercise of warrants and 69,338
shares potentially issuable as interest in lieu of cash on senior subordinated
secured note. The registered shares included in the beneficial ownership
representing shares that may be issued as interest, are included solely for
calculation purposes of this registration statement.
(2) Includes 1,346,800 shares issuable upon the conversion of Series A
Convertible Preferred Stock, 213,000 shares issuable upon exercise of options
and warrants and 10,667 shares potentially issuable as interest in lieu of cash
on senior subordinated secured note. The registered shares included in the
beneficial ownership representing shares that may be issued in lieu of cash, are
included solely for calculation purposes of this registration statement.
(3) Includes 100,000 shares issuable upon exercise of warrants and 10,667 shares
potentially issuable as interest in lieu of cash on senior subordinated secured
note. The registered shares included in the beneficial ownership representing
shares that may be issued in lieu of interest, are included solely for
calculation purposes of this registration statement.
(4) Includes 1,015,000 shares issuable upon exercise of options and warrants.
(5) Represents shares underlying warrants.
</FN>
8
PLAN OF DISTRIBUTION
We are registering shares of common stock for resale, , including common
stock underlying certain warrants, and payable as interest on certain notes, on
behalf of the selling securityholders. The common stock may be sold in one or
more transactions at fixed prices, at prevailing market prices at the time of
sale, at prices related to the prevailing market prices, at varying prices
determined at the time of sale, or at negotiated prices. These sales may be
effected at various times in one or more of the following transactions, or in
other kinds of transactions:
-- in the over-the-counter market;
-- in private transactions and transactions otherwise than on these
exchanges or systems or in the over-the-counter market;
-- in connection with short sales of the shares;
-- by pledge to secure or in payment of debt and other obligations;
-- through the writing of options, whether the options are listed on an
options exchange or otherwise;
-- in connection with the writing of non-traded and exchange-traded call
options, in hedge transactions and in settlement of other transactions
in standardized or over-the-counter options;
-- on any national exchange on which the shares are listed or any
automatic quotation system through which shares are quoted;
-- through put and call transactions; or
-- through a combination of any of the above transactions.
The selling securityholders may sell their shares at prevailing market
prices, prices relataed to prevailing market prices or at privately negotiated
prices. The selling securityholders and their successors, including their
transferees, pledgees or donees or their successors, may sell the common stock
directly to the purchasers or through underwriters, broker-dealers or agents,
who may receive compensation in the form of discounts, concessions or
commissions from the selling securityholders or the purchasers. These discounts,
concessions or commissions as to any particular underwriter, broker-dealer or
agent may be in excess of those customary in the types of transactions involved.
Negotiated transactions may include:
-- purchases by a broker-dealer as principal and resale by such
broker-dealer for its account pursuant to this prospectus;
-- ordinary brokerage transactions and transactions in which a broker
solicits purchasers; or
-- block trades in which a broker-dealer so engaged will attempt to sell
the shares as agent but may take a position and resell a portion of
the block as principal to facilitate the transaction.
9
We entered into registration rights agreements for the benefit of certain
of the selling securityholders to register the common stock under applicable
federal and state securities laws. The registration rights agreements provide
for cross-indemnification of the selling securityholders and us and our
respective directors, officers and controlling persons against specific
liabilities in connection with the offer and sale of the common stock, including
liabilities under the Securities Act. We will pay substantially all of the
expenses incurred by the selling securityholders incident to the registration of
the offering and sale of the common stock.
During such time as the selling securityholders may be engaged in a
distribution of the securities we are registering by this registration
statement, they are required to comply with the applicable provisions of the
Securities Exchange Act and the rules and regulations thereunder, including
Regulation M. Regulation M may limit the timing of purchases and sales of our
securities. These restrictions may affect the marketability of our common stock
and the ability of any person to engage in market-making activities witih
respect to our common stock. The selling securityholders may, however, engage in
short sales in accordance with Rule 104 of Regulation M. Short sales, if engaged
in by the selling securityholders, may effect the market price of our common
stock. Regulation M specifically prohibits short sales that are the result of
fraudulent, manipulative or deceptive practices. Selling securityholders are
required to consult with their own legal counsel to ensure compliance with
Regulation M.
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.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
As of August 15, 2005, the names, ages and positions of the directors and
executive officers of the Company are as follows:
Name Age Position Committee Member
---- --- -------- ----------------
James A. Cannavino 60 Chairman of the Board of Directors
and Chief Executive Officer
Bernard Puckett 60 Member of the Board of Directors Audit, Compensation
Dennis Murray 59 Member of the Board of Directors Audit, Compensation
Carla Steckline 48 Member of the Board of Directors Audit, Compensation
Michael Levin 32 Member of the Board of Directors
Michael J. Beecher 60 Chief Financial Officer and Secretary
James A. Cannavino has been our Chairman of the Board and a director since
March 2000, and Chief Executive Officer since December 2002. From September of
1997 to April of 2000 he was the non-executive Chairman of Softworks, Inc (a
then wholly owned subsidiary of the Company), which went public and was later
sold to EMC. Mr. Cannavino was also the Chief Executive Officer and Chairman of
the Board of Directors of CyberSafe, Inc., a corporation specializing in network
security from April 1998 to July 2001. In August, 1995, he was appointed as
President and Chief Operating Officer of Perot Systems Corporation and in 1996
was elected to serve as Chief Executive Officer through July 1997. During his
tenure at Perot he was responsible for all the day-to-day global operations of
10
the company, as well as for strategy and organization. Prior to that he served
as a Senior Vice President at IBM, responsible for strategy and development. Mr.
Cannavino held various positions at IBM for over thirty years beginning in 1963.
Mr. Cannavino led IBM's restructuring of its $7 billion PC business to form the
IBM PC Company. He also served on the IBM Corporate Executive Committee and
Worldwide Management Council, and on the board of IBM's integrated services and
solutions company. Mr. Cannavino presently serves on the Boards of the National
Center for Missing and Exploited Children, the International Center for Missing
and Exploited Children, and Verio. He recently was Chairman of the Board of
Marist College in Poughkeepsie, New York and continues to serve on the board.
Bernard Puckett is Chairman of the Board of Openwave Systems, Inc., a
leading provider of open IP-based communication infrastructure software and
applications. Mr. Puckett was formerly the President and Chief Executive Officer
of Mobile Telecommunications Technology Corp. ("Mtel"). Prior to joining Mtel,
Mr. Puckett spent 26 years with IBM where he was Senior Vice-president --
Corporate Strategy and Development. He also held positions in marketing,
finance, product development, manufacturing and new business development during
his tenure at IBM. He also serves on the board of directors of IMS Health
(NYSE:RX). Mr. Puckett was appointed to our Board of Directors in February 2004.
Dr. Dennis J. Murray has been President of Marist College since 1979. Early
in his tenure, he identified the importance of technology in higher education
and made it one of the central themes of his administration. He developed an
innovative joint study with the IBM Corporation, which resulted in Marist
becoming one of the nations most technologically advanced liberal arts colleges.
Marist was one of the first colleges or universities in the country to have a
fully networked campus, and currently operates on an IBM e-server zSeries 900
processor with a z/OS operating system. Dr. Murray has been a strong supporter
of the Linux operating system and recently initiated a Linux Research and
Development Center at Marist. Dr. Murray serves on the boards of the Franklin
and Eleanor Roosevelt Institute, McCann Foundation, and the New York State
Greenway Conservancy, which oversees the Hudson River Valley National Heritage
Area. He is also the author of two books on nonprofit management, editor of
three books on government and public affairs, and co-author of a guide to
corporate-sponsored university research in biotechnology. Dr. Murray has been a
member of the Board of Directors since March 2000.
Carla J. Steckline was the Attorney General for the State of Kansas from
1994 through January 2003. Attorney General Stovall also served as Vice
President of the National Association of Attorneys General. She is also a member
of the Board of Directors of the American Legacy Foundation, the national Center
for Missing and Exploited Children, the National Crime Prevention Council and
the Council of State Governments. In addition, she is a member of the Board of
Governors of the University of Kansas School of Law and a member of the Kansas
Children's Cabinet. Attorney General Steckline recently was honored with the
Distinguished Service to Kansas' Children Award. Ms. Steckline has been a member
of the Board of Directors since April 2000.
Michael Levin is a Managing Director of Metropolitan Venture Partners II,
L.P. a venture capital firm he co-founded in 1999. In his role, Mr. Levin
negotiates and manages investments, as well as oversees the financial and
operational management of the firm. He also serves as an active Board member and
works closely with portfolio companies on strategic growth and ensuring proper
fiscal discipline. Prior to MetVP, Mr. Levin developed and managed hedge funds
for the Man Group plc and Larry Hite. Mr. Levin graduated Magna Cum Laude from
The Wharton School at the University of Pennsylvania with a concentration in
Finance. He is also an alumnus of Phillips Exeter Academy.
Michael J. Beecher, CPA, joined the Company as Chief Financial Officer in
December 2003. Prior to joining Direct Insite, Mr. Beecher was Chief Financial
Officer and Treasurer of FiberCore, Inc., a publicly held company in the
fiber-optics industry. From 1989 to 1995 he was Vice-President Administration
and Finance at the University of Bridgeport. Mr. Beecher began his career in
public accounting with Haskins & Sells, an international public accounting firm.
11
He is a graduate of the University of Connecticut, a Certified Public Accountant
and a member of the American Institute of Certified Public Accountants.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of shares of our
voting stock, as of August 29, 2005 of (i) each person known by us to
beneficially own 5% or more of shares of our outstanding common stock, based
solely on filings with the Securities and Exchange Commission, (ii) each of our
executive officers and directors and (iii) all of our executive officers and
directors as a group. Except as otherwise indicated, all shares are beneficially
owned, and the persons named as owners hold investment and voting power.
- ---------------------------------------- ------------------------------------ -------------------------------
Common Stock Beneficially Total Beneficially Owned as %
Name of Beneficial Owner (1)(2) Owned of Outstanding Shares
- ---------------------------------------- ------------------------------------ -------------------------------
Metropolitan Venture
Partners II, L.P. (3) 1,601,964 (5) 24.7%
- ---------------------------------------- ------------------------------------ -------------------------------
Sigma Opportunity Fund, LLC (4) 650,000 (6) 11.7%
- ---------------------------------------- ------------------------------------ -------------------------------
James A. Cannavino 1,455,408 (7) 25.0%
- ---------------------------------------- ------------------------------------ -------------------------------
Bernard Puckett 76,955 (8) 1.6%
- ---------------------------------------- ------------------------------------ -------------------------------
Dennis Murray 233,709 (9) 4.7%
- ---------------------------------------- ------------------------------------ -------------------------------
Carla Steckline 166,529 (10) 3.3%
- ---------------------------------------- ------------------------------------ -------------------------------
Anthony Coppola 288,607 (11) 5.7%
- ---------------------------------------- ------------------------------------ -------------------------------
Robert Carberry 553,010 (12) 10.5%
- ---------------------------------------- ------------------------------------ -------------------------------
Michael Levin (3) 2,000 *
- ---------------------------------------- ------------------------------------ -------------------------------
Michael J. Beecher 76,590 (13) 1.5%
- ---------------------------------------- ------------------------------------ -------------------------------
All Officers and Directors as a Group 2,852,808 44.0%
(8 persons)
- ---------------------------------------- ------------------------------------ -------------------------------
* = Less than 1%
- ---------------------------------------- ------------------------------------ -------------------------------
<FN>
Footnotes
(1) The address of each person, except as otherwise noted, is 80 Orville Drive,
Suite 200, Bohemia, New York 11716.
(2) Except as otherwise noted, each individual or entity has sole voting and
investment power over the securities listed. Pursuant to the rules and
regulations of the Securities and Exchange Commission, shares of common
stock that an individual or group has a right to acquire within 60 days
pursuant to the exercise of options or warrants are deemed to be
outstanding for the purposes of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person shown in the
table.
(3) The address of Metropolitan Venture Partners II, L.P. and Michael Levin is
432 Park Avenue South, 12th Floor, New York, NY 10016.
(4) The address of Sigma Opportunity Fund, LLC.is 800 Third Avenue, New York,
NY 10022.
(5) Includes 1,559,800 shares of common stock issuable upon the conversion of
Series A Convertible Preferred Stock and options and warrants.
(6) Consists of 650,000 shares of common stock issuable upon the exercise of
warrants.
(7) Includes 897,333 shares of common stock issuable upon the exercise of
options and warrants.
(8) Includes 23,596 shares of common stock issuable upon the exercise of
options.
(9) Includes 61,667 shares of common stock issuable upon the exercise of
options.
(10) Includes 56,667 shares of common stock issuable upon the exercise of
options.
(11) Includes 163,100 shares of common stock issuable upon the exercise of
options.
(12) Includes 320,800 shares of common stock issuable upon the exercise of
options.
(13) Includes 40,000 shares of common stock issuable upon the exercise of
options.
</FN>
12
DESCRIPTION OF SECURITIES
Our authorized capital consists of 50,000,000 shares of common stock
$0.0001 par value, of which 4,926,232 shares were outstanding as of August 15,
2005. In addition, our authorized capital includes 2,000,000 shares of preferred
stock of which we are authorized to issue 134,680 shares of Series A Convertible
Preferred Stock, 1,000 shares of Series B Redeemable Preferred Stock, 2,000
shares of Series C Redeemable Preferred Stock and 1,500 shares of Series D
Redeemable Preferred Stock. As of August 15, 2005, there were 134,680 shares of
our Series A Convertible Preferred outstanding, 974 shares of our Series B
Redeemable Preferred Stock outstanding, 2,000 shares of our Series C Redeemable
Preferred outstanding and 100 shares of our Series D Redeemable Preferred
outstanding.
Set forth below is a summary description of certain provisions relating to our
capital stock contained in and qualified in its entirety by our Articles of
Incorporation and by-laws and under the Delaware Law.
Common Stock
Holders of common stock are entitled to one vote for each share of common
stock owned of record on all matters to be voted on by securityholders. Our
Articles of Incorporation do not contain any special voting provisions, and no
corporate action requires a greater than majority vote of securityholders.
Cumulative voting is not permitted in the election of directors.
The holders of common stock are entitled to receive such dividends, if any,
as may he declared from time to time by the Board of Directors, in its
discretion, from funds legally available therefor.
The common stock has no preemptive or other subscription rights, and there
are no conversion rights or redemption provisions. All outstanding shares of
common stock are validly issued, fully paid, and non-assessable.
Series A Convertible Preferred
The board of directors has designated and authorized the issuance of
134,680 shares of Series A Convertible Preferred Stock of which 134,680 shares
are outstanding.
Conversion
Each share of Series A Convertible Preferred is convertible into 10 shares
of our common stock.
Voting Rights
Series A Convertible Preferred shares shall vote together with all other
classes on all actions to be taken by our securityholders. Each share of Series
A Convertible Preferred shall entitle the holder to such number of votes as
shall equal the number of shares of common stock into which each share of Series
A Convertible Preferred is then convertible.
Liquidation
Upon any liquidation or dissolution, holders of Series A Convertible
Preferred shall be entitled to receive $2,750,000 plus an amount equal to all
dividends accrued but unpaid.
13
Rank
Series A Convertible Preferred shall rank senior to all classes of capital
stock other than the Series B Redeemable Preferred Stock.
Dividends
Holders of Series A Convertible Preferred shares are entitled to dividends
at the rate of 9-1/2% per annum.
Series B Preferred
The board of directors has designated and authorized the issuance of 1,000
shares of Series B Redeemable Preferred Stock of which 974 shares are
outstanding.
Redemption
The Series B Redeemable Preferred shares are redeemable by us at any time.
The redemption price is $1,000 per share plus accrued and unpaid dividends.
Voting Rights
The holders of Series B Redeemable Preferred Stock have no voting rights.
Dividends
Holders of Series B Redeemable Preferred are entitled to dividends at the
rate of 12% per year, payable quarterly.
Rank
Series B Redeemable Preferred shares shall rank senior to all classes of
capital stock.
Series C Preferred
The board of directors has designated and authorized the issuance of 2,000
shares of Series C Redeemable Preferred Stock of which 2,000 shares are
outstanding.
Redemption
The Series C Redeemable Preferred shares are redeemable by us at anytime.
The redemption price is $1,000 per share plus accrued and unpaid dividends.
Voting Rights
The holders of Series C Redeemable Preferred have no voting rights.
14
Dividends
The holders of Series C Redeemable Preferred are entitled to dividends at
the rate of 9-1/2% per annum.
Rank
Holders of Series C Redeemable Preferred are entitled to preference in the
payment of dividends and distribution of assets upon liquidation to all classes
of capital stock except for the Series B Preferred.
Series D Redeemable Preferred
The board of directors has designated and authorized the issuance of 1,500
shares of Series D Redeemable Preferred Stock, of which 100 shares are
outstanding.
Redemption
The Series D Redeemable Preferred shares are redeemable by us at any time.
The redemption price is $1,000 per share plus accrued and unpaid dividends.
Voting Rights
The holders of Series D Redeemable Preferred have no voting rights.
Dividends
The holders of Series D Redeemable Preferred are entitled to dividends at
the rate of 9-1/2% per year, payable quarterly commencing April 1, 2006.
Rank
The holders of Series D Redeemable Preferred have preference in the payment
of dividends and distribution of assets upon liquidation to all classes of
capital stock except for the Series A, B and C Preferred Stock.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
Our Certificate of Incorporation and By-Laws provide our directors with
protection for breaches of their fiduciary duties to us and our securityholders.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers or persons controlling us, we have been
advised that it is the SEC's opinion that such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
15
DESCRIPTION OF BUSINESS
Overview
Direct Insite Corp. was organized under the name Unique Ventures, Inc.
under the laws of the State of Delaware on August 27, 1987. In August, 2000, we
changed our name to Direct Insite Corp. which the Board of Directors believed
was more in line with our new direction.
In March, 2000, Mr. James A. Cannavino was elected a board member and
Chairman of the Board. Shortly thereafter, Dr. Dennis Murray, president of
Marist College and Mr. Charles Feld, Founder and Chief Executive Officer of the
Feld Group, and Chief Information Officer of First Data Resources and the former
Chief Information Officer of Delta Air Lines, were elected to our Board of
Directors. 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., a private equity investment firm, ("MetVP "), Mr. Peter
Yunich, their managing partner, was elected to our Board in September, 2002. In
February 2004, Mr. Bernard Puckett, Chairman of the Board of Openwave Systems,
Inc. and former Senior Vice President of Strategy and Business Development at
IBM, was appointed to our Board, replacing Mr. Feld, who had previously resigned
to assume new responsibilities at Electronic Data Systems ("EDS"). In February
2005, Mr. Michael Levin, Managing Director of MetVP, was appointed to the board
to succeed Mr. Yunich. Our Current Business
We primarily operate as an application service provider ("ASP"), providing
an integrated transaction based "fee for service" offering called Invoices
On-Line (IOL), an electronic invoice presentment and payment (EIP&P) service
that processes high volumes of transactional data for invoice presentment
purposes delivered via the Internet on a global basis on behalf of our
customers. IOL is our primary offering and it is a globally delivered service
that provides electronic invoice presentation in the Americas, Europe and Asia,
including 28 different countries around the globe and in more than 13 languages
and currencies. We currently host several million invoices that are accessible
"on-line" via the Internet 24 hours per day, seven days per week, 365 days per
year. IOL is a uniquely positioned service offering in the industry, the service
is designed to handle the complex invoicing found in today's global business
environment. The solution allows Global 1000 companies to receive, route,
approve and pay invoices on-line in the local language and currency. By
automating the traditional paper-based invoicing process, customers now have
easy and quick access to line-item billing information, reporting and analytics.
With the enhanced level of accuracy provided by IOL, invoice disputes are
greatly reduced and overall customer satisfaction is substantially increased.
We also provide additional service offerings in the form of our patented
dbExpressTM technology, a management information tool that allows users to
visually data mine large volumes of transactional data via the Internet. A
complete Internet Customer Care tool set integrated with the EIP&P product set
is also available. We operate fully redundant data centers located at our main
office in Bohemia, New York and in Newark, New Jersey. Our facility in New
Jersey is space leased at an International Business Machines ("IBM"), e-business
Hosting Center. This co-location / redundancy feature enables us to offer
virtually down time free service.
This suite of services enables us to provide a comprehensive Internet
delivered service including the processing and consolidation of invoice related
transaction records and supporting information through all of the internal
workflow management processes including an electronically delivered invoice with
customer analytics including the ability to dispute any line item of any invoice
and pay the invoice through multiple electronic payment options. This
comprehensive service offering provides back office operations, reduces our
customers' costs and provides for improved customer service by providing our
customer's customer with easy access to all of the detailed information about
their invoice.
16
Currently, IBM, our largest customer, representing approximately 70%, 98%,
92% and 97% of our revenue for the six months ended June 30, 2005 and 2004 and
for the years ended December 31, 2004 and 2003, respectively, utilizes our suite
of IOL products and services to allow their customers from around the globe to
receive, analyze, dispute and cost allocate all of their invoice related
information in their local language and currency via the Internet 24 hours a
day, 7 days a week, 365 days a year. Also in 2004 we added our second Fortune
100 company to our customer base and this customer accounted for approximately
28% of revenue for the six months ended June 30, 2005.
Recent Financings
On June 30, 2005, we concluded a new line of credit in the principal amount
of $500,000 with JPMorgan Chase Bank evidenced by a Grid Demand Promissory Note
(the "Credit Facility) replacing a prior credit facility dated June 27, 2003,
under substantially similar terms, but extending the original Maturity Date to
June 30, 2007. As a condition precedent to providing the Credit Facility, the
JPMorgan Chase Bank required guarantees of our obligations and a collateral
agreement. In consideration of the issuance of such guarantee and delivery of
the collateral agreement, on July 12, 2005, Company issued and delivered to Tall
Oaks Group L.L.C. warrants with an initial exercise price of $1.00 per share to
purchase an aggregate of 500,000 shares of the common stock of Company.
On March 29 2005 we entered into a Securities Purchase Agreement with Sigma
Opportunity Fund LLC ("Sigma") and Metropolitan Venture Partners II, L.P.
("MetVP"), collectively the "Buyers", whereby the Buyers purchased Senior
Subordinated Secured notes (the "Note Purchase") in the aggregate amount of
$750,000. The notes bear interest at the rate of five percent (5%) per year
beginning June 28, 2005 and mature on the earlier to occur of (i) September 29,
2006 or (ii) the date on which demand for payment of the Grid Demand Promissory
Note, dated as of June 27, 2005 payable to JPMorgan Chase Bank is made. In
connection with the note purchase the Buyers were issued warrants to purchase
750,000 of our common shares. The exercise price of the warrants is $0.90 per
share of common stock subject to adjustment on the occurrence of certain events.
Sigma had the right to lead a "Follow-on Financing." In the event that the
Follow-on-Financing did not occur, the exercise price of the warrants would be
$0.01 per common share. As of the date hereof, we have elected not to pursue the
Follow-on-Financing with Sigma.
In November 2004 the Board of Directors authorized us to sell up to 1,500
shares of Series D Redeemable Preferred Stock (at $1,000 per share. The holders
of Series D Redeemable Preferred are entitled to dividends, on a cumulative
basis, at the rate of 9-1/2% per year, compounded and payable quarterly
beginning on April 1, 2006. The holders of Series D Redeemable Preferred have
preference in the payment of dividends and, in the event of liquidation, to all
classes of our capital stock except for the Series A, B and C Preferred Stock.
As of December 31, 2004 we had sold 100 shares of Series D Redeemable Preferred
and received proceeds of $100,000. The buyer was issued warrants to purchase
90,909 common shares at an exercise price of $2.03 per share in conjunction with
the sale.
In December 2003 the Board of Directors authorized us to sell up to 1,500
shares of Series C Redeemable Preferred Stock ("Series C Preferred") at $1,000
per share and in April 2004 the Board authorized the sale of an additional 500
shares. The holders of Series C Redeemable Preferred are entitled to dividends,
on a cumulative basis, at the rate of 9-1/2% per year, compounded and payable
quarterly beginning on October 1, 2005. The holders of Series C Redeemable
Preferred have preference in the payment of dividends and, in the event of
liquidation, to all classes of capital stock of the Company except for the
Series B Redeemable Preferred Stock. As of December 31, 2004 we had sold 2000
shares of Series C Redeemable Preferred and received proceeds of $2,000,000 less
expenses of $140,000. Of the total shares sold MetVP has purchased 540 shares,
17
our Chairman and Chief Executive Officer of the Company purchased 200 shares and
certain Directors purchased 105 shares. The proceeds were used for working
capital purposes.
In June 2003, the Company's Board of Directors approved the exchange of the
then outstanding obligations to our Chairman and Chief Executive Officer, Markus
& Associates and Tall Oaks Group, LLC for 974 shares of Series B Redeemable
Preferred Stock at an exchange ratio of $1,000 of debt per share ("Price Per
Share"). The Series B Redeemable Preferred was issued as follows:
-- 266 shares were exchanged for $266,000 of debt obligation to our
Chairman and Chief Executive Officer;
-- 208 shares were exchanged for $208,000 of debt obligation to Markus &
Associates; and
-- 500 shares were exchanged for $500,000 of debt obligation to Tall Oaks
Group, LLC.
Each of the Series B Redeemable Preferred shares is entitled to mandatory
dividends, payable quarterly, commencing on the first day of the calendar
quarter after the date of issuance, at the rate of 12% per annum. Additionally,
the Series B Redeemable Preferred shares are redeemable, at the sole option of
the Company, on or after March 31, 2005. Upon redemption, the holders of the
Series B Redeemable Preferred shall be entitled to receive, for each share of
Series B Redeemable Preferred outstanding, an amount equal to the Price Per
Share plus accrued and unpaid dividends.
Between September 2002 and June 2003, the Company sold a total of 134,680
shares of Series A Convertible Preferred Stock, ("Series A Preferred") in
consideration for the gross amount of $2,750,000 to Metropolitan Venture
Partners II, L.P. Each share of Series A Convertible Preferred is convertible
into 10 shares of common stock of the Company. The holders of the Series A
Convertible Preferred ("the Holders") are entitled to dividends, on a cumulative
basis, at the rate of 9-1/2% per annum, compounded quarterly and payable on
February 1, 2005 and September 25, 2005. The payment of the first dividend was
originally scheduled for September 25, 2004, however, the Company and the
Holders agreed to defer this payment until February 1, 2005. As consideration
for the deferral of the dividend payment, the Company agreed to pay the Holders
a premium of 7.5% of the dividend. In May 2004 the Company and the Holders
further agreed to grant the Company the right, in its sole discretion, to defer
the payment of the dividend scheduled to be paid on February 1, 2005 until
February 1, 2006. In the event the Company elects to pay the dividend on
February 1, 2006 the Holders would receive a premium of $129,000. In December
2004 the Company exercised its right to defer payment of this dividend until
February 1, 2006. Also, the Company and the Holders further agreed to grant the
Company the right, in its sole discretion, to defer the payment of the dividend
scheduled to be paid on September 25, 2005 until February 1, 2006. In the event
the Company elects to pay this dividend on February 1, 2006 the Holders would
receive a premium of $41,000. In the event the Company does not elect to defer
the payment of the dividend the Company agreed to pay the Holders a premium of
$13,000.
Discontinued Products and Services
In 2001 we acquired Platinum Communications, Inc. ("Platinum"), a Dallas,
Texas based company, which marketed 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.
As a result of the lack of development of the Platinum business and to focus our
resources on our core business, in December 2003, we decided to close the
operations of Platinum. For the year ended December 31, 2003 Platinum incurred a
loss of $1,912,000, including a provision for closing costs of $220,000 and
impairments of long-lived assets of $352,000. For the year ended December 31,
2004 the Company recognized income from the discontinued operations of $288,000
as a result of settling certain liabilities of the Platinum operation for less
than the original obligation.
18
Products and Services
We currently operate in one business segment, the Electronic Billing
Presentment and Payment ("EBP&P") sector, and, during the years 2004 and 2003,
have provided three primary forms of service offerings: EBP&P Application
Service Provider ("ASP") Services, AMS or TAMS Services (which have been
reclassified to discontinued operations) and professional engineering services.
Within the ASP offering we provide two primary services:
- -- Invoices On Line, an EBP&P offering; and
- -- dbExpress, a data visualization and mining service.
Invoices On Line
IOL is an advanced web-based electronic invoice presentment, workflow
management, reporting and data interrogation/analysis platform designed for
large enterprise customers conducting business internationally. Our web-based
service offering has been operational since 2002 and is currently delivering
invoices to users in the Americas, Europe, the Middle East and Africa (EMEA) and
the Asia Pacific geographic regions. We are planning on supporting additional
geographies and languages throughout the course of 2005.
From a system user perspective, IOL is operated on behalf of an enterprise
that delivers goods and services to a customer. Subsequent to delivery, IOL
would be the vehicle for the service provider or "Biller" to present an invoice
to the customer, who would become the "Payer" of an invoice. IOL provides the
following functions on behalf of the Biller to the customer or Payer:
-- Summary View of Invoice. IOL enables the Payer to view a collection of
all invoices being presented to the Payer and further allows the payer to view a
summary of the amount due for goods and services. This allows the Payer to view
the total amount due as well as a summary of the collection of goods and
services delivered.
-- Complex Presentment. (Data centric views). Historically, paper invoices
have been used by Billers as the primary vehicle to communicate the types of
goods and services delivered to customers. Because of the fundamental
limitations of the amount of detail that could be present in a "single sheet"
paper invoice, there was a general lack of detail provided to the customers. The
result of the absence of detail resulted in calls to the biller in order to
obtain more information. IOL is based on a hierarchical data structure that
allows the user the convenience of seeing a high level summary of all invoices
or to "drill down" on any given invoice or any line item of an invoice. This
"Data-centric" model conveniently supports high level summary or low level
explanatory information to satisfy the customers needs to understand, verify and
pay the invoice..
-- Data Mining and Visualization. Another benefit of data-centricity is the
ability to utilize the dbExpress 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, IOL 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 to provide invoice alerts,
disputes, workflow, administration, invoice status and payment timing.
19
-- Multi-tiered Accounts. This capability is 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.
-- Workflow 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..
-- Dispute Management. This capability supports the ability of the
customer/payer to dispute a charge at the invoice level of at the level of any
line time within the invoice. Once invoked, the billing dispute function
provides for automatic "forms fill" of the information related to the dispute
and automatically routes the dispute to the appropriate customer support
organization.
-- Payment and Remittance. This facility 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). The process of customer or payer
registering a disagreement with a given line item of the invoice or simply
needing to require a clarification of additional supporting data is supported
through the Billing Inquiry function.
-- 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 dbExpress data-mining tool.
dbExpress
Background
dbExpress has been in use in various forms for more than ten years.
dbExpress 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 information quickly and easily. With the patented data mining
technology found in dbExpress, high volumes of detailed information is presented
in our unique interface known as a "Filescape". With dbExpress, the customer may
create graphs or reports, or simply list the customer information for easy
viewing. dbExpress simplifies the preparation of traditional reports by giving
the customer the ability to view billing data interactively using simple
point-and-click mouse operation. With dbExpress, the customer is given the
ability to drill down into detail information allowing the customer to identify
data trends and "cause and effect" relationships in an interactive, graphical
format.
Addresses Internet Bandwidth Limitations
dbExpress is a data analysis tool that addresses a major Internet problem,
that of high data volume and limited bandwidth. This limitation is currently
responsible for the lengthy delays associated with data downloading. dbExpress
is a web based reporting and analysis system that was introduced to deliver all
of the functionality of traditional data mining systems with the added advantage
of managing large volumes of detailed transactions on a centralized information
server that is accessible via the Internet. dbExpress runs in common web
browsers such as Internet Explorer 5.X (and newer versions) plus Netscape
Navigator 4.X (and newer versions). Customers may interact with and report on
large monthly billing period data via remote Internet access.
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Advantages of dbExpress
All Data Indexed - Unlike traditional database products, dbExpress
pre-computes data access indexes associated with all data relationships of
interest. This eliminates the need to compute such access mechanisms on a case
by case basis. The users of dbExpress are free to "question" the database across
a wide range of relationships and massive amounts of data with far less time
delay as compared to the standard database query systems. Furthermore, the
presentment of the "search results" is in the form of graphical "filescapes"
that can be "visually drilled down" to further understand the information
relationships.
Graphics Driven - The data is delivered via the Internet with simple
browser technology thereby allowing an authorized Internet user to manipulate
huge databases in seconds.
High Power / Low Cost - dbExpressTM enables users to analyze millions of
records over the Internet without the need to first download the data being
analyzed.
Better Access to Information - dbExpressTM improves the accessibility to
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. - dbExpressTM enables a broader population
within an organization to visually and interactively mine data without the need
or support from internal or external management information system (MIS)
professionals. dbExpressTM performs these tasks faster than conventional
database systems.
Ease of Use - dbExpressTM utilizes a simple "point-and-click" navigation
approach, which enables the user to view and analyze data down to the lowest
level of detail. dbExpressTM provides powerful 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 - dbExpressTM provides
direct access to leading databases and can be exported to popular spreadsheets,
report writers, graphics packages and word processors.
Integrates Data From Multiple Vendors - When dbExpressTM reads a database,
it creates its own summaries of information through a proprietary process. This
permits users to access and compare information contained in enterprise-wide
databases created by different vendors simultaneously in the d.b.Express'
user-friendly environment.
Works in Common Operating Environments - dbExpressTM 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,
dbExpressTM employs proprietary matrix storage technology rather than rereading
each data element in that database. The elimination of this rereading step
increases the speed of data access, enabling ad-hoc analysis at a rate that has
been demonstrated to be far faster than possible with any other system.
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Security, Access and Storage - In order to meet the archival requirements
of customers, the Company produces CDs of each month's billing details. In order
to provide this service, the Company has put into place a fully redundant data
center. The archive service is available 24 hours a day, 7 days a week, 365 days
a year.
Historically, our primary product offering was dbExpress, the visual data
analysis platform described for use by Fortune 500 companies to consolidate
communications traffic for the purpose of system analysis and contract
compliance. The telecommunication offerings were expanded with the acquisition
of a telecommunications asset management system suite of back office
communications management software products. This suite of offerings provided
the capability to manage 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 our service offerings by combining electronic
invoice presentment and payment functionality with dbExpress. This combination
provides Internet-based services to customers in the form of an electronic
invoice capable of delivering both summary and detailed billing information with
the ability to data mine high volume of internet transactions that large
companies generate. This "data centric" approach is 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 approach, and the
addition of payment capabilities, formed the basis for our enhanced Electronic
Bill Presentment and Payment offering referred to as Invoices on Line which was
brought to market in 2002. This combined set of services has allowed us to
significantly expand its market opportunities to include any large enterprise in
a given industry sector that seeks to provide their customers with an electronic
invoice with the associated line item detail information and with the associated
reports and data mining capabilities.
Previously, all of the electronic reporting and analysis capabilities of
dbExpress were being delivered in support of the traditional paper-based billing
system. For simple or low volume detail accounts, electronically delivered
invoices are primarily a reproduction of the print stream. We believe that
electronic invoices delivered to large enterprise customers 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. IOL offers to this
market 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. Because the
supporting detail information, analysis and reporting tools are made available
to the end user, costs are reduced for both the 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 potential customers to
adopt our electronic invoice presentment and payment service.
Sales and Marketing Channels to Market
We have two primary channels to market -- direct through our sales
representatives and indirect through channel and strategic partners. These
channels are supported by a technical sales support group.
Direct
We have recently employed a new sales executive and independent agents. In
addition, our directors and executives are involved in new client development
and the establishment of channel partnerships.
22
Indirect
We are pursuing both reseller and strategic partner relationships to
further develop existing account relationships and to increase market coverage.
These relationships can also expand our offerings, therefore we are seeking to
establish partnerships with other companies that offer complementary products
and services such as supply chain management and payment services. The use of
the indirect channel provides access to additional engineering and professional
resources to implement our EBP&P service offering.
IBM Reseller Agreement
The Company signed a reseller agreement with IBM on August 4, 2003. This
agreement provides IBM with the ability to sell the Invoice on Line service
offering to its customers. The Company supports this sales activity by providing
Subject Matter Experts (SME's) to assist the IBM sales organization.
Technical Sales Support and Post-Sales Account Management
We have a pre-sales support staff 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 August 15, 2005, our research and development group consists of 41 employees.
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 is expected to be a principal factor in our
success in maintaining a leading technological position. For the two years ended
December 31, 2004 and 2003, research and development expenses were approximately
$2,227,000, and $3,201,000, respectively, including $561,000 for 2003 that is
included in Loss from Discontinued Operations in the accompanying Consolidated
Statements of Operations. We believe that investments in research and
development are required in order to remain competitive.
Competition
We believe 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
Business to Business ("B2B") EBPP solution, primarily to financial institutions
and the legal services markets. The company's products include software designed
23
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.
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.
Velosant (formerly BillingZone), established as a joint venture between PNC Bank
and Perot Systems, was acquired by e-One Global. Velosant is an information
technology services firm that serves the B2B EBP&P market with a consolidator
model that is focused on the B2B EBP&P 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., a subsidiary of Siebel Systems, Inc., 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 Direct
Insite. 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.
24
Employees
We had 60 employees, all in the United States, at August 15, 2005,
including 41 in research, development and technical support, 9 in marketing,
sales and support services, and 10 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.
Intellectual Property
We have two federally registered trademarks, which we rely upon:
"dbExpressTM" and "dbACCEL TM". In addition, we received a patent for the
proprietary aspects of our dbExpress 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
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 dbExpressTM, the
proprietary and patented management information tool, which provides targeted
access through the mining of large volumes of transactional data via the
Internet. Further, in 2001, we began to provide custom engineering services for
our customers. These services have increasingly become a significant source of
revenue for us and we believe will continue to increase. Additionally, we
believe that this type of service leads to recurring revenue streams similar to
our ASP products.
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, New York and in Newark, New Jersey . Our facility in
New Jersey is space leased at an International Business Machines ("IBM"),
e-business Hosting Center. This co-location / redundancy feature enables us to
offer virtually down time free service.
25
Currently, IBM, our largest customer, representing approximately 70%, 98%,
92% and 97% of our revenue for the six months ended June 30, 2005 and 2004 and
for the years ended December 31, 2004 and 2003, respectively, utilizes our suite
of IOL products and services to allow their customers from around the globe to
receive, analyze, dispute and cost allocate all of their invoice related
information in their local language and currency via the Internet 24 hours a
day, 7 days a week, 365 days a year. Also in 2004 we added our second Fortune
100 company to our customer base and this customer accounted for approximately
28% of revenue for the six months ended June 30, 2005.
Discontinued Operations
In 2001 we acquired Platinum Communications, Inc. ("Platinum"), a Dallas,
Texas based company, which marketed 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.
As a result of the lack of development of the Platinum business and to focus our
resources on our core business, in December 2003 we decided to close the
operations of Platinum. For the year ended December 31, 2003 Platinum incurred a
loss of $1,912,000, including a provision for closing costs of $220,000 and
impairments of long-lived assets of $352,000. For the year ended December 31,
2004 we recognized income from the discontinued operations of $288,000 as a
result of settling certain liabilities of the Platinum operation for less than
the original obligation. The income (loss) is reflected as Income (Loss) from
Discontinued Operations in the accompanying Consolidated Statements of
Operations.
Recent Financings
On June 30, 2005, we concluded a new line of credit in the principal amount
of $500,000 with JPMorgan Chase Bank evidenced by a Grid Demand Promissory Note
(the "Credit Facility) replacing a prior credit facility dated June 27, 2003,
under substantially similar terms, but extending the original Maturity Date to
June 30, 2007. As a condition precedent to providing the Credit Facility, the
JPMorgan Chase Bank required guarantees of our obligations and a collateral
agreement. In consideration of the issuance of such guarantee and delivery of
the collateral agreement, on July 12, 2005, we issued and delivered to Tall Oaks
Group L.L.C. warrants with an initial exercise price of $1.00 per share to
purchase an aggregate of 500,000 shares of the common stock of Company.
On March 29 2005 we entered into a Securities Purchase Agreement with Sigma
Opportunity Fund LLC ("Sigma") and Metropolitan Venture Partners II, L.P.
("MetVP"), collectively the "Buyers", whereby the Buyers purchased Senior
Subordinated Secured notes (the "Note Purchase") in the aggregate amount of
$750,000. The notes bear interest at the rate of five percent (5%) per year
beginning June 28, 2005 and mature on the earlier to occur of (i) September 29,
2006 or (ii) the date on which demand for payment of the Grid Demand Promissory
Note, dated as of June 27, 2005 payable to JPMorgan Chase Bank is made. In
connection with the note purchase the Buyers were issued warrants to purchase
750,000 of our common shares. The original exercise price of the warrants was
$0.90 per share of common stock subject to adjustment on the occurrence of
certain events. Sigma had the right to lead a "Follow-on Financing." In the
event that the Follow-on-Financing did not occur, the exercise price of the
warrants would be $0.01 per common share. As of the date hereof, we have elected
not to pursue the Follow-on- Financing with Sigma and as a result the exercise
price of the warrants is $.01 per common share.
In November 2004 the Board of Directors authorized us to sell up to 1,500
shares of Series D Redeemable Preferred Stock at $1,000 per share. The holders
of Series D Redeemable Preferred are entitled to dividends, on a cumulative
basis, at the rate of 9-1/2% per year, compounded and payable quarterly
beginning on April 1, 2006. The holders of Series D Redeemable Preferred have
26
preference in the payment of dividends and, in the event of liquidation, to all
classes of our capital stock except for the Series A, B and C Preferred Stock.
As of December 31, 2004 we had sold 100 shares of Series D Redeemable Preferred
and received proceeds of $100,000. The buyer was issued warrants to purchase
90,909 common shares at an exercise price of $2.03 per share in conjunction with
the sale.
In December 2003 the Board of Directors authorized us to sell up to 1,500
shares of Series C Redeemable Preferred Stock ("Series C Preferred") at $1,000
per share and in April 2004 the Board authorized the sale of an additional 500
shares. The holders of Series C Redeemable Preferred are entitled to dividends,
on a cumulative basis, at the rate of 9-1/2% per year, compounded and payable
quarterly beginning on October 1, 2005. The holders of Series C Redeemable
Preferred have preference in the payment of dividends and, in the event of
liquidation, to all classes of capital stock of the Company except for the
Series B Redeemable Preferred Stock. As of December 31, 2004 we had sold 2000
shares of Series C Redeemable Preferred and received proceeds of $2,000,000 less
expenses of $140,000. Of the total shares sold MetVP has purchased 540 shares,
our Chairman and Chief Executive Officer of the Company purchased 200 shares and
certain Directors purchased 105 shares. The proceeds were used for working
capital purposes.
In June 2003, our Board of Directors approved the exchange of the then
outstanding obligations to our Chairman and Chief Executive Officer, Markus &
Associates and Tall Oaks Group, LLC for 974 shares of Series B Redeemable
Preferred Stock at an exchange ratio of $1,000 of debt per share ("Price Per
Share"). The Series B Redeemable Preferred was issued as follows:
-- 266 shares were exchanged for $266,000 of debt obligation to our
Chairman and Chief Executive Officer;
-- 208 shares were exchanged for $208,000 of debt obligation to Markus &
Associates; and
-- 500 shares were exchanged for $500,000 of debt obligation to Tall Oaks
Group, LLC.
Each of the Series B Redeemable Preferred shares is entitled to mandatory
dividends, payable quarterly, commencing on the first day of the calendar
quarter after the date of issuance, at the rate of 12% per annum. Additionally,
the Series B Redeemable Preferred shares are redeemable, at our sole option, on
or after March 31, 2005 (or prior to March 31, 2005 with the consent of
majority-in-interest holders of Series B Redeemable Preferred shares). Upon
redemption, the holders of the Series B Redeemable Preferred shall be entitled
to receive, for each share of Series B Redeemable Preferred outstanding, an
amount equal to the Price Per Share plus accrued and unpaid dividends.
Between September 2002 and June 2003, we sold a total of 134,680 shares of
Series A Convertible Preferred Stock, in consideration for the gross amount of
$2,750,000 to Metropolitan Venture Partners II, L.P. Each share of Series A
Convertible Preferred is convertible into 10 shares of our common stock. The
holders of the Series A Convertible Preferred ("the Holders") are entitled to
dividends, on a cumulative basis, at the rate of 9-1/2% per annum, compounded
quarterly and payable on February 1, 2005 and September 25, 2005. The payment of
the first dividend was originally scheduled for September 25, 2004, however, we
and the Holders agreed to defer this payment until February 1, 2005. As
consideration for the deferral of the dividend payment, we agreed to pay the
Holders a premium of 7.5% of the dividend. In May 2004 we and the Holders
further agreed to grant us the right, in our sole discretion, to defer the
payment of the dividend scheduled to be paid on February 1, 2005 until February
1, 2006. In the event we elect to pay the dividend on February 1, 2006 the
Holders would receive a premium of $129,000. In December 2004 we exercised its
right to defer payment of this dividend until February 1, 2006. Also, we and the
Holders further agreed to grant us the right, in our sole discretion, to defer
the payment of the dividend scheduled to be paid on September 25, 2005 until
February 1, 2006. In the event we elect to pay this dividend on February 1, 2006
the Holders would receive a premium of $41,000. In the event we do not elect to
defer the payment of the dividend we agreed to pay the Holders a premium of
$13,000.
27
Seasonality/Quantity Fluctuations
Revenue from ASP ongoing services generally is not subject to fluctuations
or seasonal flows. However, we believe that revenue derived from custom
engineering services will have a significant tendency to fluctuate based on
customer demand.
Other factors including, but not limited to, new product introductions,
domestic and international economic conditions, customer budgetary
considerations, and the timing of product upgrades 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.
Years ended December 31, 2003 and 2004
Financial Condition and Liquidity
For the year ended December 31, 2004, we incurred a loss from continuing
operations of $1,571,000 compared to a loss from continuing operations of
$3,270,000 for the year ended December 31, 2003, an improvement of $1,699,000 or
52%. We used $1,050,000 in cash for continuing operations in 2004 compared to
$1,432,000 in 2003, an improvement of $382,000 or 27%. Cash used for
discontinued operations was $221,000 for the year ended December 31, 2004
compared to $1,012,000 in 2003. We funded the shortfall in cash from operations
through the sale of preferred stock totaling $1,510,000 less fees and expenses
of $80,000.
Cash used in operations (including cash used for discontinued operations)
for the year ended December 31, 2004 was $1,271,000, consisting of the net loss
from continuing operations of $1,571,000, offset by non-cash expenses of
$712,000, including depreciation and amortization of $534,000 and common stock
and options issued for services valued at $165,000. Cash from operations was
reduced by an increase in accounts receivable of $803,000 and increases in other
assets, net, of $10,000, offset by an increase in accounts payable and accrued
expenses of $95,000 and an increase in deferred revenue of $527,000.
Additionally, net cash used in discontinued operations was $221,000.
Cash used in investing activities was $114,000 for the year ended December
31, 2004, compared to $349,000 for the previous year. This was principally
expenditures for equipment in 2004 and 2003. Cash from financing activities
totaled $1,616,000 for the year ended December 31, 2004, compared to $2,248,000
in the prior year. We received net proceeds from the sale of Series C and Series
D Redeemable Preferred stock of $1,430,000 during the year ended December 31,
2004. Advances from credit lines for receivable financing increased $427,000 for
the year ended December 31, 2004. This included $250,000 in advances from DIRI
Rec Fund LLC, under a new receivables financing agreement established in 2004.
In addition, we repaid $241,000 in principal on loans and equipment financing
leases.
As a result of these operating, investing and financing activities cash
increased by $231,000 to $306,000 at December 31, 2004.
Management's Liquidity and Financing Plan
In order to meet our cash needs and to achieve positive operating cash flows we
have and will continue to take various actions and steps that we believe will
enable us to attain these goals. These actions include:
28
In the second half of 2003 we embarked on a major cost reduction program,
including among other things, staff reductions, pay rate reductions, and
elimination of non-essential expenses. Principally as a result of this cost
reduction program we reduced our operating costs for continuing operations by
$1,599,000 in 2004 compared to 2003, excluding costs for depreciation and
amortization,. We believe these cost reductions will continue to have a positive
impact on our operating results. We note that during 2004 we partially restored
the pay rate reductions and we further restored pay rate reductions in January
2005.
-- As discussed above in December 2003 we closed the operations of our
Platinum subsidiary. Platinum had experienced losses and had
significant cash needs. This action has reduced our operating costs by
approximately $1,700,000 from 2003 to 2004.
-- In 2004 we received net proceeds from the sale of Preferred Stock of
$1,430,000. Also in 2004 we entered into an agreement with DIRI Rec
Fund LLC, a corporation formed and funded to loan funds to the Company
against accounts receivable, and received advances totaling $250,000
from DIRI Rec Fund. In March 2005 we closed a Bridge Loan financing
with Sigma Capital Partners LLC and Metropolitan Venture Partners II,
L.P. and received proceeds of $750,000 less legal fees of $55,000. On
June 30, 2005, we concluded a new line of credit in the principal
amount of $500,000 with JPMorgan Chase Bank evidenced by a Grid Demand
Promissory Note (the "Credit Facility) replacing a prior credit
facility dated June 27, 2003, under substantially similar terms, but
extending the original Maturity Date to June 30, 2007.
-- We continue to strive to increase our revenue through offering custom
engineering services, expanding and enhancing our existing product
offerings such as IOL, and introducing new product offerings. In 2004
our revenues from continuing operations increased $119,000 or 1.6%
over revenues in 2003. In 2004 we entered into a new agreement to
provide IOL services to a Fortune 500 company. We anticipate that
revenue from this new customer will continue to increase in 2005 and
beyond and we expect to further broaden our customer base in 2005.
-- We continue to expand our marketing efforts in order to increase our
customer base. In this regard, in 2003, we became a business partner
with IBM and through this relationship will work with IBM to achieve
sales to new customers. We will continue to pursue similar channel
partner opportunities. Also in the fourth quarter 2004 we employed a
new sales and marketing executive and engaged an independent sales
agent to further expand our sales efforts.
We believe that our plans and new initiatives as discussed above will lead
to positive cash flows and profitability. While we pursue these goals we also
believe that our ability to raise additional capital through equity and debt
placements will provide sufficient cash to meet our requirements at least
through December 31, 2005. There can be no assurance, however, that we will
achieve our cash flow and profitability goals, or that we will be able to raise
additional capital sufficient to meet our operating expenses or implement our
plan. In such event, we may have to revise our plans and significantly reduce
our operating expenses, which could have an adverse effect on revenue and
operations in the short term.
Results of Operations
IBM continues to be our largest customer accounting for 92% and 97% of
total revenue for the years ended December 31, 2004 and 2003, respectively. We
derive revenue from IBM from the sale of our Invoices On Line ("IOL") managed
services (ASP) as well as custom engineering services. During the second half of
29
2001, we entered into an agreement with IBM wherein for a per transaction fee,
we enable IBM to present invoices to their customers via the Internet. Our IOL
service is an electronic invoice presentment and payment system ("EIP&P")
offering and has been expanded to include additional functionality. In March
2002, the parties signed a new agreement, which allows IBM to expand this EIP&P
offering to more of its customers, both domestic and international. We are
actively pursuing new sales opportunities to reduce sales concentration and in
this regard in 2004 we added a second Fortune 500 company to our customer base.
For the year ended December 31, 2004 revenue from continuing operations
increased by $119,000 or 1.6% to $7,558,000 compared to revenue from continuing
operations of $7,439,000 in 2003. The increase is primarily due to an increase
in engineering services of $710,000, an increase in IOL and Customer Presentable
Invoice ("CPI") services, our ASP service offerings, of $201,000, offset by a
decrease of $792,000 in telecommunications management services ("TAMS"). The
increase in revenue from ASP services was the result of further deploying our
ASP services in Europe and the Asia Pacific regions and IOL services to a new
customer. The increase in engineering fees resulted from completing certain
engineering projects that resulted in the increase in ASP services and
engineering fees from implementing our service at a new customer. The decrease
in the TAMS services resulted from a decrease in demand and our focus on our
EIP&P ASP services.
Costs of operations, research and development decreased by $708,000 (16.4%)
to $3,620,000 for the year ended December 31, 2004 compared to the costs in
2003. These costs consist principally of salaries and related expenses for
software developers, programmers, custom engineers, network services, and
quality control and assurance. Also included are network costs, costs of the
production co-location facility and other expenses directly related to our
custom engineering and ASP production services. The decrease in costs is
principally due to decreases in staffing costs of $529,000, professional fees of
$155,000, offset by an increase in rent for our co-location production facility
of $81,000. All other operating expenses combined decreased approximately
$105,000 net. These decreases are the result of the planned cost reductions
discussed above.
Sales and marketing costs were $1,676,000 for the year ended December 31,
2004, a decrease of $546,000 or 24.6% compared to the same costs in 2003.
Salaries and related costs decreased by $275,000 primarily due to staff and
salary reductions. Consulting costs decreased by $321,000 principally from
elimination of certain consulting services and reassignment of other consulting
fees to other departments. These decreases were offset by an increase in
professional fees of $33,000 and travel costs of $40,000 as a result of our
increasing our sales and marketing efforts. Other sales and marketing costs
combined decreased approximately $23,000.
General and administrative costs decreased $345,000 or 10.5% to $2,940,000
for the year ended December 31, 2004 compared to costs of $3,285,000 in 2003.
Salaries and related costs decreased $307,000 principally due to a reduction in
staff and payroll reductions. This was partially offset by an increase in
professional fees of $83,000 as the company outsourced certain accounting
functions. Legal costs decreased $106,000. This decrease was the result of
higher costs incurred in 2003 related to financial reporting and employee
related matters. Accounting fees were reduced by $28,000 and Director's fees and
expenses decreased by $51,000. All other general and administrative costs had a
net increase of $64,000.
Depreciation and amortization expense decreased by $151,000 (22%) primarily
due to fully amortizing certain software costs and other computer equipment.
Interest expense increased by $31,000 due to the increase in borrowings in
June of 2003 under two new lines of credit and an increase in borrowings through
the assignment of accounts receivable under the agreement with a bank.
30
Net Operating Loss Carry Forwards
At December 31, 2004, we had net operating loss carryforwards ("NOLs")
remaining of approximately $78 million, which may be available to reduce taxable
income, if any. These NOLs expire through 2024. However, Internal Revenue Code
Section 382 rules limit the utilization of NOLs upon a change in control of a
company. If it is determined that a change in control has taken place,
utilization of its NOLs will be subject to severe limitations in future periods,
which would have the effect of eliminating substantially all of the future
income tax benefits of the NOLs. We recently completed an evaluation, through
December 31, 2004, of whether a change in control had taken place and have
concluded that as of December 31, 2004, no change in control had occurred that
would limit the utilization of NOLs. Future stock issuances, however, could have
the effect of a change of control and limit the utilization of the NOLs.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123R, "Share-Based Payment." SFAS No. 123R eliminates the alternative
to use APB No. 25's intrinsic value method of accounting that was provided in
SFAS No 123 as originally issued. SFAS No. 123R requires entities to recognize
the cost of employee services in exchange for awards of equity instruments based
on the grant-date fair value of those awards (with limited exceptions). That
cost will be recognized over the period during which the employee is required to
provide the service in exchange for the award. No compensation cost is
recognized for equity instruments for which employees do not render the
requisite service. SFAS No. 123R requires entities to initially measure the cost
of employee services received in exchange for an award of liability instruments
based on its current fair value; the fair value of the award will be remeasured
at each reporting date through the settlement date. Changes in fair value during
the requisite service period will be recognized as compensation cost over that
period. The grant date fair value of employee share options and similar
instruments will be estimated using option-pricing models adjusted for the
unique characteristics of those instruments. SFAS No. 123R is effective as of
the beginning of our fiscal year following December 15, 2005 (January 1, 2006).
The adoption of SFAS No. 123R will have no effect on our consolidated cash flows
or financial position but will have an adverse effect on our consolidated
results of operations.
In December 2004, the FASB issued FAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." This Statement eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion No. 29 and replaces it with
an exception for exchanges that do not have commercial substance. This Statement
specifies that a nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. The provisions of this Statement are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The
adoption of SFAS No. 153 is not expected to have a material impact on our
consolidated financial position, liquidity, or results of operations.
In April 2004, the EITF issued Statement No. 03-06 "Participating
Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per
Share" ("EITF 03-06"). EITF 03-06 addresses a number of questions regarding the
computation of earnings per share by companies that have issued securities other
than common stock that contractually entitle the holder to participate in
dividends and earnings of the company when, and if, it declares dividends on its
common stock. The issue also provides further guidance in applying the two-class
method of calculating earnings per share, clarifying what constitutes a
participating security and how to apply the two-class method of computing
earnings per share once it is determined that a security is participating,
31
including how to allocate undistributed earnings to such a security. EITF 03-06
is effective for fiscal periods beginning after March 31, 2004. The adoption of
this statement did not have any effect on our calculation of EPS.
In September 2004, the EITF issued statement EITF Issue No. 04-08, "The
Effect of Contingently Convertible Debt on Diluted Earnings per Share" ("EITF
04-08"). Contingently convertible debt instruments are generally convertible
into common shares of an issuer after the common stock price has exceeded a
predetermined threshold for a specified period of time (the "market price
contingency"). EITF 04-08 requires that shares issuable upon conversion of
contingently convertible debt be included in diluted earnings per share
computations regardless of whether the market price contingency contained in the
debt instrument has been met. EITF 04-08 is effective for reporting periods
ending after December 15, 2004 and requires restatement of prior periods to the
extent applicable. The adoption of this statement is not expected to have an
effect on our calculation of EPS.
FOR THE SIX MONTHS ENDED JUNE 30, 2005
Overview
We primarily operate as an application service provider ("ASP"), providing
an integrated transaction based "fee for service" offering called Invoices
On-Line ("IOL"), an electronic invoice presentment and payment ("EIP&P") service
that processes high volumes of transactional data for invoice presentment
purposes delivered via the Internet on a global basis on behalf of our
customers. IOL is our primary offering and it is a globally delivered service
that provides electronic invoice presentation in the Americas, Europe and Asia,
including 28 different countries around the globe and in more than 13 languages
and currencies. We currently host several million invoices that are accessible
"on-line" via the Internet 24 hours per day, seven days per week, 365 days per
year. IOL is a uniquely positioned service offering in the industry, the service
is designed to handle the complex invoicing found in today's global business
environment. The solution allows Global 1000 companies to receive, route,
approve and pay invoices on-line in the local language and currency. By
automating the traditional paper-based invoicing process, customers now have
easy and quick access to line-item billing information, reporting and analytics.
With the enhanced level of accuracy provided by IOL, invoice disputes are
greatly reduced and overall customer satisfaction is substantially increased.
We also provide additional service offerings in the form of our patented
dbExpressTM technology, a management information tool that allows users to
visually data mine large volumes of transactional data via the Internet. A
complete Internet Customer Care tool set integrated with the EIP&P product set
is also available. 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"), e-business Hosting Center.
This co-location / redundancy feature enables us to offer virtually down time
free service.
This 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, reduces our customers' 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"), e-business
Hosting Center. This co-location / redundancy feature enables us to offer
virtually down time free service.
32
Currently, IBM, our largest customer, representing approximately 70% and
98% of our revenue for the six month periods ended June 30, 2005 and 2004,
respectively, utilizes our suite of IOL products and services to allow their
customers from around the globe to receive, analyze, dispute and cost allocate
all of their invoice related information in their local language and currency
via the Internet 24 hours a day, 7 days a week, 365 days a year. A second
Fortune 100 customer accounted for 28% of total revenue for the first six months
of 2005.
As disclosed in Note 6 to the accompanying Condensed Consolidated Financial
Statements, during the six months ended June 30, 2005, we received proceeds from
the issuance of Senior Subordinated Secured Notes of $750,000 less expenses of
$55,000.
Results of Operations
For the three and six month periods ended June 30, 2005 we had losses from
continuing operations of $296,000 and $581,000, respectively, compared to losses
from continuing operations of $567,000 and $629,000, in the same periods in
2004, respectively. The decrease in the losses is principally due to an increase
in revenue for the three and six months ended June 30, 2005, partially offset by
an increase in operating costs as discussed below. Net loss for the three and
six month periods ended June 30, 2005 was $305,000 and $590,000, respectively,
compared to net losses of $508,000 and $366,000 for the same periods in 2004,
respectively. This includes income from discontinued operations of $59,000 and
$263,000 in the three and six month periods ended June 30, 2004 and was
principally the result of recognizing income related to deferred revenue of
$180,000 included in other income of the discontinued operation in the first
half of 2004.
For the three months ended June 30, 2005 revenue from continuing operations
increased $602,000 (35.1%) to $2,318,000 compared to revenue of $1,716,000 for
the same period in 2004. For the six months ended June 30, 2005, revenue from
continuing operations increased $576,000 (15.1%) to $4,398,000 compared to
revenue from continuing operations of $3,822,000 for the same period in 2004.
The increase is primarily the result of an increase in revenue from our core
business, the ASP IOL services, of $468,000 (48.2%) and $628,000 (32.0%) for the
three and six month periods ended June 30, 2005. Additionally, revenue from
engineering services increased $221,000 for the six months ended June 30, 2005.
These increases are principally due to expanded services to a second major
customer added in 2004, further deployment of our IOL services to IBM and an
additional new customer. These increases were offset by a decrease of $273,000
in revenue from telecommunications services for the six months ended June 30,
2005. The decrease in the telecommunications services, which accounted for less
than 1% of total revenue in the first half of 2005 compared to 7.8% for the same
period in 2004, is the result of decreased demand for such services.
Costs of operations, research and development increased by $188,000 (22.2%)
and $283,000 (16.0%) to $1,034,000 and $2,047,000 for the three and six month
periods ended June 30, 2005, respectively, compared to costs of $846,000 and
$1,764,000 for the same periods in 2004. These costs consist principally of
salaries and related expenses for software developers, programmers, custom
engineers, network services, and quality control and assurance. Also included
are network costs, costs of the production co-location facility and other
expenses directly related to our custom engineering and ASP production services.
The increase in costs for the six months ended June 30, 2005 is principally due
to increases in personnel wages and benefit costs of $180,000 from wage
increases and staff additions, an increase in professional fees of $49,000
resulting from engaging temporary technical staff, and an increase in software
purchases of $22,000. All other operating expenses increased $32,000, net.
Sales and marketing costs were $559,000 and $1,031,000 for the three and
six month periods ended June 30, 2005, respectively, an increase of $137,000
(32.5%) and $217,000 (26.7%) compared to costs for the same periods in 2004.
33
Professional fees, including personnel recruiting costs, increased $81,000,
consulting fees increased $111,000 due to engaging an independent sales
representative and promotional costs increased $31,000, while all other costs
decreased by $6,000, net. We intend to continue increasing our sales and
marketing efforts to achieve further growth in our IOL services.
General and administrative costs increased $25,000 (3.3%) and $68,000
(4.8%) to $780,000 and $1,472,000 for the three and six month periods ended June
30, 2005, respectively, compared to costs of $755,000 and $1,404,000 for the
same periods in 2004. For the six months ended June 30, 2005, salaries and
related costs increased $145,000 principally due to the restoration of salary
reductions taken in 2004. Costs for directors meetings increased by $30,000 and
legal fees increased $34,000. Insurance costs decreased $48,000 primarily due to
rate decreases, while professional fees decreased $50,000 and travel and
entertainment costs decreased $29,000. All other administrative costs decreased
$14,000.
Depreciation and amortization expense decreased by $27,000 (19.0%) and
$57,000 (20.0%) for the three and six month periods ended June 30, 2005,
respectively, compared to the same periods in 2004, primarily due to fully
amortizing certain software costs and other computer equipment.
Financial Condition and Liquidity
For the six months June 30, 2005, we had a loss from continuing operations
of $581,000 compared to a loss from continuing operations of $629,000 for the
same period in 2004. We used $472,000 in cash for continuing operations in the
first six months of 2005 compared to $1,000,000 for the same period in 2004, an
improvement of $528,000 or 52.8%. Cash used in discontinued operations was
$47,000 for the six months ended June 30, 2005. We funded the shortfall in cash
from operations primarily through the new borrowing noted above.
Cash used in operations, including cash used for discontinued operations,
for the six months ended June 30, 2005 was $519,000, consisting of the net loss
of $581,000, reduced by non-cash expenses of $421,000, including depreciation
and amortization of $229,000 and stock and options issued for services of
$113,000. In addition, accounts receivable decreased by $172,000 and prepaid
expenses and other assets decreased $82,000. Accounts payable and accrued
expenses increased $57,000 and deferred revenue decreased $623,000.
Cash used in investing activities was $127,000 for the six months ended
June 30, 2005, compared to $31,000 for same period in 2004. This was principally
expenditures for equipment.
Cash provided by financing activities totaled $468,000 for the six months
ended June 30, 2005, compared to $1,311,000 for the six months ended June 30,
2004. As noted above, we received proceeds from a new loan financing of
$750,000. We also repaid $94,000 of long-term debt and capital lease obligations
in the first half of 2005. The balance outstanding under short term revolving
loans for receivables financing decreased by $188,000 in 2005.
Management's Liquidity and Financing Plans
In order to meet our cash needs and to achieve positive operating cash
flows we have and will continue to take various actions and steps that we
believe will enable us to attain these goals. These actions include:
-- In March 2005 we closed a Bridge Loan financing with Sigma Capital
Partners LLC and Metropolitan Venture Partners II, L.P. and received
proceeds of $750,000 less legal fees of $55,000 (see Note 6).
34
-- We and the holders of the Series A and Series B Redeemable Preferred
stock have previously agreed to defer payment of dividends. We may
seek to defer these dividends further.
-- We intend to raise additional capital through private equity offerings
and borrowing. In 2004, we received net proceeds from the sale of
Preferred Stock of $1,430,000. Also in 2004 we entered into an
agreement with DIRI Rec Fund LLC, a corporation formed and funded to
loan funds to us against accounts receivable, and may receive advances
up to $250,000 from DIRI Rec Fund (see Note 5). Further, in June 2005
we renewed for a period of two years the $500,000 loan previously
scheduled to mature on June 30, 2005 and the guarantors of this loan
have consented to this extension (see Note 6).
-- We continue to strive to increase revenue through offering custom
engineering services, expanding and enhancing existing product
offerings such as IOL, and introducing new product offerings. In 2004
we entered into a new agreement to provide IOL services to a Fortune
100 company. Revenue from this new customer accounted for 27.6% of
total revenue for the six months ended June 30, 2005. In the first
quarter 2005, we added an additional customer as the result of the
sale of a part of the business of an existing customer. Management
anticipates that revenue from these new customers will continue to
increase in 2005 and beyond and expects to further broaden our
customer base in 2005.
-- We continue to expand our marketing efforts in order to increase the
customer base. In this regard, in 2003, we became a business partner
with IBM and through this relationship will work with IBM to achieve
sales to new customers. We will continue to pursue similar channel
partner opportunities. Also, in the fourth quarter 2004 we employed a
new sales and marketing executive and engaged an independent sales
agent to further expand our sales efforts.
We believe that these plans and new initiatives as discussed above will
lead to positive cash flows and profitability. While we pursue these goals we
also believe that our ability to raise additional capital through equity and
debt placements will provide sufficient cash to meet cash requirements at least
through June 30, 2006. There can be no assurance, however, that we will achieve
the cash flow and profitability goals, or that we will be able to raise
additional capital sufficient to meet our operating expenses or implement our
plan. In such event, we may have to revise our plans and significantly reduce
our operating expenses, which could have an adverse effect on revenue and
operations in the short term.
DESCRIPTION OF PROPERTY
We currently maintain leased facilities in the locations listed below:
------------------------- ------------------ -------------------- -------------------- --------------------------
Description Location Square Footage Lease term Annual Rental Cost
Corporate offices Bohemia, NY 10,000 7/1/04 - 6/30/05 $206,136
Co-location facility Newark, NJ Note 1 10/1/03 - 9/30/08 $257,280
<FN>
Note 1. We are obligated under the terms of an agreement with our major customer
to maintain a co- location site at an IBM eHosting facility in Newark, New
Jersey or an agreed on alternative location. 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. The lease expires on September 30,
2008.
</FN>
35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1999, we entered into various agreements with S.J. &
Associates, Inc. (including its affiliates are collectively referred to as
"SJ"), an advisor to Direct Insite and our Board of Directors, for various
services that provide for the following compensation:
-- We 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. We 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 our stock, (iii) an acquisition
made by us, and (iv) the sale of Direct Insite or merger with another
entity. SJ is also entitled to an annual bonus at the discretion of
our 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. Under
this agreement, we incurred consulting expenses of $108,000 and
$144,000 in 2004 and 2003, respectively. In addition, SJ earned
$80,000 of fees related to the sales and issuance of Series C
Redeemable Preferred stock and was reimbursed for other expenses in
accordance with the consulting agreement.
36
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. Our common stock is traded on the Over-The-Counter
Bulletin Board since October 24, 2003. Previously our stock was 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:
High Low
---- ---
2003
First Quarter 2.430 1.370
Second Quarter 1.850 1.040
Third Quarter 1.480 0.590
Fourth Quarter 1.050 0.520
2004
First Quarter 1.200 0.560
Second Quarter 2.450 0.780
Third Quarter 2.500 1.500
Fourth Quarter 2.400 1.600
2005
First Quarter 1.750 0.760
Second Quarter 0.970 0.620
Third Quarter (to August 18, 2005) 0.930 0.530
(b) Holders. As of August 1, 2005, there were 2,570 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) Dividends. There were no cash dividends or other cash distributions made by
us during the year ended December 31, 2004 to common shareholders. In 2003, we
paid dividends of $30,000 to Series B Redeemable Preferred shareholders. 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) Equity Compensation Plan Information. The following table shows Equity
Compensation Plan information as of December 31, 2004:
37
Equity Compensation Plan Information
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Number of securities
remaining available for
Number of securities to be future issuance under
issued upon exercise of Weighted-average exercise equity compensation plans
outstanding options, price of outstanding (excluding securities
Plan category warrants and rights (a) options, warrants and reflected in column
rights (b) (a)) (c)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by securityholders 2,172,073 $1.48 60,471
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by securityholders 2,473,245 $1.74 1,069,142
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 4,645,318 $1.63 1,129,613
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation with
respect to the Chief Executive Officer and each of the other executive officers
of the Company who received more than $100,000 for services rendered for the
year ended December 31, 2004.
Summary Compensation Table
Annual Compensation Long-Term Compensation
--------------------------------- ---------------------------------
Restricted Securities
Name and Fiscal Other Annual Stock Awards Underlying
Principal Position Year Salary Bonus Compensation Options/Warrants
- -------------------------------------------------------------------------------------------------------------
James A. Cannavino (1) 2004 $96,000 $ -- $ -- $ 4,000 --
Chief Executive Officer 2003 $156,000 -- -- 54,000 708,000
2002 -- -- -- 210,000 314,000
Robert Carberry (2) 2004 $192,000 $ -- $ -- $ -- --
President 2003 $177,000 -- -- -- 203,000
2002 78,000 -- 72,000 139,000 57,500
Anthony Coppola (3) 2004 $145,000 $ -- $ -- -- --
President/V.P. Program 2003 $157,000 4,000 26,000 -- 3,000
Management 2002 166,000 50,000 -- -- 137,500
Arnold Leap (4) 2004 $145,000 $ -- $ -- $ -- --
Chief Technology Officer 2003 $158,000 $26,000 $ -- $ -- 103,000
2002 161,000 20,000 -- -- 113,500
Michael Beecher (5) 2004 $106,000 $ -- $ -- $ -- 30,000
Chief Financial Officer 2003$ 3,000 $ -- $ -- $ -- 30,000
and Secretary
<FN>
Footnotes
(1) Mr. Cannavino was appointed CEO December 7, 2002. Pursuant to his January
2002 two-year services agreement, Mr. Cannavino received 180,000 shares of
common stock valued at $180,000. In addition, Mr. Cannavino received 17,650
shares of common stock valued at $30,000 in connection with his duties as
Chairman of the Board of Directors. Pursuant to his January 2003 employment
agreement, Mr. Cannavino received 45,000 shares of common stock valued at
$54,000. In December 2003, we extended the employment agreement to expire
on August 24, 2007. The extended agreement calls for compensation of
$15,000 per month and 360,000 options, vesting 7,500 per month over the
term of the agreement, to purchase our common stock at an exercise price of
$1.16 per share, the closing price of our common stock on the date the
agreement was effective. The agreement further provides for reimbursement
of reasonable out of pocket business expenses and further provides for
living and travel expenses not to exceed $11,000 per month.
38
(2) Mr. Carberry, President since December 2002, resigned as President on June
30, 2005 and is currently a consultant to the Company. During 2002, Mr.
Carberry received 111,665 shares of common stock valued at $139,000 in lieu
of cash for services rendered.
(3) Mr. Coppola served as President from March 2000 to December 2002. During
2002, the Company paid a $50,000 sales commission earned by a sales
consulting firm that is wholly owned by Mr. Coppola. In 2003 the Company
paid $26,000 for services rendered by this same consulting firm. Mr.
Coppola also earned a $4,000 cash performance bonus in 2003.
(4) Mr. Leap earned cash performance bonuses totaling $26,000 and $20,000 for
years 2003 and 2002, respectively.
(5) Mr. Beecher was appointed Chief Financial Officer and Secretary effective
December 16, 2003.
</FN>
Option/SAR Grants in Last Fiscal Year
During 2004 the following options grants were made to the named executive
officers:
% of Total
Options
Number of Granted Hypothetical
Options Employees Exercise Expiration Value at
Name Granted in Fiscal Year Price Date Grant Date
- --------------------------------------------------------------------------------------------------
Michael Beecher 30,000 8.6% $ 1.60 07/31/09 $30,000
The hypothetical value of the options as of their date of grant has been
calculated using the Black-Scholes option-pricing model, as permitted by SEC
rules, based upon various assumptions, which include: expected volatility of
69.5%, risk free interest rate of 4.8% and expected lives of 5.00 years. The
approach used in developing the assumptions upon which the Black-Scholes
valuations were calculated is consistent with the requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." It should be noted that this model is only one method of valuing
options, and the Company's use of the model should not be interpreted as an
endorsement of its accuracy. The actual value of the options may be
significantly different, and the value actually realized, if any, will depend
upon the excess of the market value of the common stock over the option exercise
price at the time of exercise.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table set forth certain information with respect to stock
option exercises by the named executive officers during the fiscal year ended
December 31, 2004, and the value of unexercised options held by them at fiscal
year-end.
Number of Unexercised Options Value of Unexercised In-the
at Fiscal Year End -Money Options at Fiscal Year
End (1)
Shares Acquired
Name On Exercise (#) Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------------- ----------- ------------- ----------- -------------
($)
-
JamesCannavino -- -- 897,333 195,000 $ 270,000 $ 105,000
Robert Carberry -- -- 260,500 -- 109,000 --
Anthony Coppola -- -- 163,100 -- 62,000 --
Michael Beecher -- -- 40,000 20,000 30,000 2,000
Arnold Leap -- -- 207,166 33,334 76,000 17,000
39
<FN>
Footnotes
- ---------
(1) Market Value of the Company's common stock on December 31, 2004, was $1.70.
There were 1,134,666 in-the-money options at year end, valued at $671,000.
</FN>
EXPERTS
The financial statements of Direct Insite Corp. as of December 31, 2004 and
2003, and for each of the two years in the period ended December 31, 2004,
included in this prospectus have been audited by Marcum & Kliegman LLP, an
independent registered public accounting firm, as stated in its reports
appearing herein. These financial statements have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of common
stock being offered hereby will be passed on for us by Beckman, Lieberman &
Barandes, LLP.
WHERE YOU CAN FIND MORE INFORMATION
The effectiveness of this registration statement will render us subject to
the informational requirements of the Exchange Act, and, we will file reports,
proxy statements and other information with the Securities and Exchange
Commission as required by federal law. These reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Securities Exchange Commission Investors may read and copy any
of these reports, statements, and other information at the SEC's public
reference room located at 100 F. Street, N.E,, , Washington, D.C., 20549, or any
of the SEC's other public reference rooms. Investors should call the SEC at
l-800-SEC-0330 for further information on these public reference rooms upon
payment of the fees prescribed by the Securities Exchange Commission. These SEC
filings are also available free at the SEC's web site at www.sec.gov.
This prospectus does not contain all of the information set forth in the
registration statement, parts of which are omitted to comply with the rules and
regulations of the Securities Exchange Commission. For further information,
please see the registration statement in its entirety.
40
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
DIRECT INSITE CORP. AND SUBSIDIARIES
CONTENTS
- --------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
FINANCIAL STATEMENTS
- --------------------
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-4
Consolidated Statement of Shareholders' Equity (Deficiency) F-5
Consolidated Statements of Cash Flows F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Audit Committee of the
Board of Directors and Shareholders of
Direct Insite Corp. and Subsidiaries
Bohemia, New York
We have audited the accompanying consolidated balance sheets of Direct Insite
Corp. and Subsidiaries (the "Company") as of December 31, 2004 and 2003 and the
related consolidated statements of operations, shareholders' equity
(deficiency), and cash flows for each of the two years in the period ended
December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, 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 the Company as of
December 31, 2004 and 2003 and the consolidated results of its operations and
its cash flows for each of the two years in the period ended December 31, 2004
in conformity with accounting principles generally accepted in the United States
of America.
Marcum & Kliegman LLP
New York, NY
April 7, 2005
F-1
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
ASSETS
2004 2003
---------------- -----------------
CURRENT ASSETS
- --------------
Cash and cash equivalents $ 306 $ 75
Accounts receivable, net of allowance for doubtful accounts of
$2 in 2004 and 2003 1,871 1,068
Prepaid expenses and other current assets 262 215
Assets from discontinued operations -- 47
----------- ----------
Total Current Assets 2,439 1,405
PROPERTY AND EQUIPMENT, Net 577 771
- ---------------------
OTHER ASSETS 285 335
- ------------ ----------- ----------
TOTAL ASSETS $ 3,301 $ 2,511
========== ==========
See notes to consolidated financial statements.
F-2
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
----------------------------------------
2004 2003
--------------- ---------------
CURRENT LIABILITIES
- -------------------
Current portion of long-term debt $ 782 $ 880
Short-term revolving loans 1,012 585
Accounts payable and accrued expenses 2,086 2,248
Deferred revenue 623 96
Dividends payable, current 376 0
Liabilities from discontinued operations, current portion 112 581
--------------- ---------------
Total Current Liabilities 4,991 4,390
OTHER LIABILITIES
- -----------------
Long-term debt, net of current portion 125 42
Dividends payable, net of current portion 722 382
Liabilities from discontinued operations, long-term -- 87
--------------- ---------------
TOTAL LIABILITIES 5,838 4,901
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
- -----------------------------
SHAREHOLDERS' DEFICIENCY
- ------------------------
Preferred stock, $0.0001 par value; 2,000,000 shares authorized;
Series A Convertible Preferred, 134,680 issued
and outstanding in 2004 and 2003; liquidation
preference of $2,750,000 in 2004 and 2003; -- --
Series B Redeemable Preferred, 974 issued and outstanding in
2004 and 2003; liquidation preference of $974,075; -- --
Series C Redeemable Preferred, 2,000 and 590 issued and
outstanding in 2004 and 2003, respectively; liquidation preference of
$2,000,000 and $590,000 in 2004 and 2003, respectively;
Series D Redeemable Preferred, 100 shares issued and outstanding,
liquidation preference of $100,000 in 2004;
Common stock, $.0001 par value; 50,000,000 shares
authorized; 4,547,013 and 4,080,402 shares issued in
2004 and 2003, respectively; and 4,507,086 and 4,040,475
shares outstanding in 2004 and 2003, respectively -- --
Additional paid-in capital 112,484 110,582
Unearned compensation (50) --
Accumulated deficit (114,643) (112,644)
--------------- ---------------
(2,209) (2,062)
Common stock in treasury, at cost; 24,371 shares in 2004
and 2003 (328 (328
--------------- ---------------
TOTAL SHAREHOLDERS' DEFICIENCY (2,537) (2,390)
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 3,301 $ 2,511
=============== ===============
See notes to 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, 2004 and 2003
- --------------------------------------------------------------------------------
2004 2003
-------------- ----------------
REVENUES $ 7,558 $ 7,439
- --------
-------------- ----------------
COSTS AND EXPENSES
- ------------------
Operations, research and development 3,620 4,328
Sales and marketing 1,676 2,222
General and administrative 2,940 3,285
Amortization and depreciation 537 688
-------------- ----------------
TOTAL OPERATING EXPENSES 8,773 10,523
-------------- ----------------
OPERATING LOSS (1,215) (3,084)
-------------- ----------------
OTHER EXPENSE
- -------------
Interest expense, net 318 287
Other expense 33 7
-------------- ----------------
TOTAL OTHER EXPENSE 351 294
-------------- ----------------
LOSS BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES (1,566) (3,378)
- -----------------------------------------------------
PROVISION FOR (BENEFIT FROM) INCOME TAXES 5 (108)
- ------------------------------------------ -------------- ----------------
LOSS FROM CONTINUING OPERATIONS (1,571) (3,270)
- -------------------------------
(1,912)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 288
- ------------------------------------------ -------------- ----------------
NET LOSS (1,283) (5,182)
- --------
PREFERRED STOCK DIVIDENDS (716) (356)
- ------------------------- -------------- ----------------
NET LOSS ATTRIBUTABLE TO COMMON
- -------------------------------
SHAREHOLDERS $ (1,999) $ (5,538)
------------ ============== ================
BASIC AND DILUTED LOSS PER SHARE:
- --------------------------------
Loss from continuing operations attributable to common shareholders $(0.53) $(0.91)
Income (Loss) from discontinued operations 0.07 (0.48)
-------------- ----------------
Net loss attributable to common shareholders $(0.46) $(1.39)
============== ================
BASIC AND DILUTED WEIGHTED AVERAGE
- ----------------------------------
COMMON SHARES OUSTANDING 4,285 3,974
------------------------ ============== ================
See notes to consolidated financial statements.
F-4
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
For the Years Ended December 31, 2004 and 2003 (in thousands)
- --------------------------------------------------------------------------------
Preferred Stock
-----------------------------------------------
Accumulated
Other
Series A Series B Series C Cmmon Stock Additional Stock Accum- Compren- Comprehensive
Paid-in Subscription ulated sive Treasury Income
Shares Amount Shares Amount Shares Amount Shares Amount Capital Receivable Deficit Loss Stock Total (Loss)
--------------------------------------------------------------------------------------------------------------------------
BALANCE - 117 $ -- -- $ -- -- $ -- 3,926 $ -- $108,708 $ (62) $(107,081) $ (25) $(328) $1,212 $ --
January
1, 2003
Common
stock
and
options
issued
for
services -- -- -- -- -- -- 114 -- 135 -- -- -- -- 135 --
Payment
of stock
subscrip-
tion
receivable -- -- -- -- -- -- -- -- -- 62 -- -- -- 62 --
Preferred
stock
issued
for cash,
net of
fees
of $15 18 -- -- -- -- -- -- -- 235 -- -- -- -- 235 --
Conversion
of long-
term debt
to pre-
ferred
stock -- -- 1 -- -- -- -- -- 974 -- -- -- -- 974 --
Preferred
stock
issued
for cash,
net of
fees of
$60 -- -- -- -- 1 -- -- -- 530 -- -- -- -- 530 --
Dividends
declared,
preferred
stock -- -- -- -- -- -- -- -- -- -- (356) -- -- (356) --
Other
compre-
hensive
loss -- -- -- -- -- -- -- -- -- -- (25) 25 -- -- 25
Net loss -- -- -- -- -- -- -- -- -- -- (5,182) -- -- (5,182) (5,182)
---- ----- ----- ------ ------ ------- ------- ----- --------- ---------- ---------- ------- ------ -------- -------
Total
Compre-
hensive
Loss $(5,157)
=======
BALANCE -
December
31,
2003 135 $ -- 1 $ -- 1 $ -- 4,040 $ -- $ 110,582 $ -- $(112,644) $ -- $(328) $(2,390)
==== ===== ===== ====== ===== ======== ====== ====== ========== ========== ========== ======= ====== ========
See notes to consolidated financial statements.
F-5
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY), Continued
For the Years Ended December 31, 2004 and 2003 (in thousands)
- --------------------------------------------------------------------------------
Preferred Stock
-----------------------------------------------
Additional Accum-
Paid-in Deferred ulated Treasury
Series A Series B Series C Series D Common stock Capital Compen- Deficit Stock Total
sation
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Amount
--------------------------------------------------------------------------------------------------------------------------
BALANCE -
December
31, 2003 135 $ -- 1 $ -- 1 $ -- -- $ -- 4,040 $ -- $110,582 $ -- $(112,644) $(328) $(2,390)
Common
stock
and
options
issued
for
services -- -- -- -- -- -- -- -- 157 -- 215 (50) -- -- 165
Common
stock
and
options
issued
in
settle-
ment of
liabil-
ities -- -- -- -- -- -- -- -- 310 -- 257 -- -- -- 257
Series C
Preferred
stock
issued for
Cash, net
of fees
of $80 -- -- -- -- 1 -- -- -- -- -- 1,330 -- -- -- 1,330
Series D
Preferred
stock
issued for
Cash -- -- -- -- -- -- -- -- -- -- 100 -- -- -- 100
Dividends
declared,
preferred
stock -- -- -- -- -- -- -- -- -- -- -- -- (716) -- (716)
Net loss -- -- -- -- -- -- -- -- -- -- -- -- (1,283) -- (1,283)
---- --- ----- ------ ---- ------- ------ ----- ------ ---------- ---------- ---- ------ ----- -------
BALANCE -
December
31, 2004 135 $ -- 1 $ -- 2 $ -- -- $ -- 4,507 $ -- $ 112,484 $(50) $(114,643) $(328) $(2,537)
==== === ===== =====- ==== ======= ====== ===== ====== ========== ========== ==== ====== ===== =======
See notes to consolidated financial statements.
F-6
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31, 2004 and 2003
- --------------------------------------------------------------------------------
2004 2003
------------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Loss from continuing operations $ (1,571) $ (3,270)
Adjustments to reconcile loss from continuing operations
to net cash used in continuing operations:
Amortization and depreciation:
Property and equipment 534 686
Other 3 2
Common stock and options issued for services 165 135
Other 10 50
Changes in operating assets and liabilities:
Accounts receivable (803) 63
Prepaid expenses and other current assets (47) 24
Other assets 37 93
Accounts payable and accrued expenses 95 755
Restructuring costs payable -- (66)
Deferred revenue 527 96
------------------------ ------------------
Net cash used in continuing operations (1,050) (1,432)
------------------------ ------------------
Income (loss) from discontinued operations 288 (1,912)
Change in:
Assets and liabilities from discontinued operations (509) 900
------------------------ ------------------
Net cash used in discontinued operations (221) (1,012)
------------------------ ------------------
NET CASH USED IN OPERATING ACTIVITIES $ (1,271) $ (2,444)
------------------------ ------------------
See notes to consolidated financial statements.
F-7
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(in thousands)
For the Years Ended December 31, 2004 and 2003
- --------------------------------------------------------------------------------
2004 2003
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Expenditures for property and equipment $ (114) $ (349)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Proceeds from common stock and subscription receivable -- 22
Proceeds from sales of preferred stock, net 1,430 1,257
Advances from (repayment on) Short-term revolving loans, net 427 (105)
Proceeds from long-term debt, net of fees -- 496
Proceeds from line of credit -- 750
Payment of dividend -- (30)
Repayments of long-term debt (241) (142)
----------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,616 2,248
----------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 231 (545)
CASH AND CASH EQUIVALENTS - Beginning 75 620
----------------- -----------------
CASH AND CASH EQUIVALENTS - Ending $ 306 $ 75
================= =================
See notes to consolidated financial statements.
F-8
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"), that markets an integrated
transaction based "fee for service" offering called Invoices On-Line (IOL),
an electronic invoice presentment and payment (EIP&P) service that
processes high volumes of transactional data for invoice presentment
purposes delivered via the Internet on a global basis.
The Company also provides additional service offerings in the form of its
patented dbExpress TM technology, a management information tool that allows
users to visually data mine large volumes of transactional data via the
Internet. A complete Internet Customer Care tool set integrated with the
EIP&P product set is also available. The Company operates fully redundant
data centers located at its main office in Bohemia, N.Y. and in an IBM
co-location facility in Newark, NJ.
Management's liquidity plans are discussed in Note 13. Also, as described
in Note 16, the Company has one major customer that accounted for
approximately 92% and 97% of the Company's revenue for the years ended
December 31 2004 and 2003, respectively. Loss of this customer would have a
material adverse effect on the Company.
NOTE 2 - Significant Accounting Policies
-------------------------------
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.
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 Topic 13 "Revenue Recognition in
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;
F-9
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
-- 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 Services
------------
The Company provides transactional data processing services to its
customers. Revenue is recognized as the services are 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.
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. 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 $2,227,000 and $2,640,000 for the years 2004 and 2003,
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 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.
F-10
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 anti-dilutive.
Securities that could potentially dilute basic earnings per share ("EPS")
in the future, that were not included in the computation of diluted EPS
because to do so would have been anti-dilutive for the periods presented,
consist of the following (shares are in thousands):
December 31,
--------------------------------
2004 2003
---------------- ---------------
Options to purchase common stock 4,645 4,442
Warrants to purchase common stock 2,082 631
Series A Convertible Preferred Stock 1,347 1,347
---------------- ---------------
Total Potential Common Shares as of December 31, 8,074 6,420
---------------- ---------------
Issuances after December 31, 2004 through
March 31, 2005
Common stock 10
Options to purchase common stock 60
Warrants to purchase common stock 750
----------------
8,894
================
Cash and Cash Equivalents
-------------------------
The Company considers all investments with original maturities of three
months or less to be cash equivalents.
Allowance For Doubtful Accounts
-------------------------------
The allowance for doubtful accounts reflects management's best estimate of
probable losses inherent in the account receivable balance. Management
determines the allowance based on known troubled accounts, historical
experience, and other currently available evidence.
F-11
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
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 and promotional costs for the years ended December
31, 2004 and 2003 was $31,000 and $4,000, respectively.
Reclassifications
-----------------
Certain reclassifications have been made to the consolidated financial
statements shown for the prior year 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, 2004, the Company has cash investments of
approximately $208,000 at one bank. Concentrations of credit risk with
respect to accounts receivable are disclosed in Note 16. 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.
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 13. Actual results could differ
from those estimates.
New Accounting Pronouncements
-----------------------------
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123R, "Share-Based Payment." SFAS No. 123R eliminates the
alternative to use APB No. 25's intrinsic value method of accounting that
was provided in SFAS No 123 as originally issued. SFAS No. 123R requires
entities to recognize the cost of employee services in exchange for awards
of equity instruments based on the grant-date fair value of those awards
(with limited exceptions). That cost will be recognized over the period
during which the employee is required to provide the service in exchange
for the award. No compensation cost is recognized for equity instruments
for which employees do not render the requisite service. SFAS No. 123R
requires entities to initially measure the cost of employee services
received in exchange for an award of liability instruments based on its
current fair value; the fair value of the award will be remeasured at each
reporting date through the settlement date. Changes in fair value during
the requisite service period will be recognized as compensation cost over
that period. The grant date fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted
for the unique characteristics of those instruments. SFAS No. 123R is
effective as of the beginning of the Company's fiscal year following
December 15, 2005 (January 1, 2006). The adoption of SFAS No. 123R will
have no effect on the Company's consolidated cash flows or financial
position but will have an adverse effect on the Company's consolidated
results of operations.
F-12
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
New Accounting Pronouncements, continued
-----------------------------
In December 2004, the FASB issued FAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." This Statement eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion No. 29 and replaces it
with an exception for exchanges that do not have commercial substance. This
Statement specifies that a nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as
a result of the exchange. The provisions of this Statement are effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. The adoption of SFAS No. 153 is not expected to have a
material impact on the Company's consolidated financial position,
liquidity, or results of operations.
In April 2004, the EITF issued Statement No. 03-06 "Participating
Securities and the Two-Class Method Under FASB Statement No. 128, Earnings
Per Share" ("EITF 03-06"). EITF 03-06 addresses a number of questions
regarding the computation of earnings per share by companies that have
issued securities other than common stock that contractually entitle the
holder to participate in dividends and earnings of the company when, and
if, it declares dividends on its common stock. The issue also provides
further guidance in applying the two-class method of calculating earnings
per share, clarifying what constitutes a participating security and how to
apply the two-class method of computing earnings per share once it is
determined that a security is participating, including how to allocate
undistributed earnings to such a security. EITF 03-06 is effective for
fiscal periods beginning after March 31, 2004. The adoption of this
statement did not have any effect on the Company's calculation of EPS.
In September 2004, the EITF issued statement EITF Issue No. 04-08, "The
Effect of Contingently Convertible Debt on Diluted Earnings per Share"
("EITF 04-08"). Contingently convertible debt instruments are generally
convertible into common shares of an issuer after the common stock price
has exceeded a predetermined threshold for a specified period of time (the
"market price contingency"). EITF 04-08 requires that shares issuable upon
conversion of contingently convertible debt be included in diluted earnings
per share computations regardless of whether the market price contingency
contained in the debt instrument has been met. EITF 04-08 is effective for
reporting periods ending after December 15, 2004 and requires restatement
of prior periods to the extent applicable. The adoption of this statement
is not expected to have an effect on the Company's calculation of EPS.
Stock Options and Similar Equity Instruments
--------------------------------------------
At December 31, 2004, the Company had five stock-based employee plans,
which are described more fully in Note 10. As permitted under SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure", which
amended SFAS No. 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. 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 No. 123 to
stock-based employee compensation (in thousands, except per share data):
F-13
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Stock Options and Similar Equity Instruments, continued
---------------------------------------------
As discussed in Note 2, FAS No. 123R will require the Company to expense
stock options based on grant date fair value in its financial statements.
The effect of expensing stock options on the Company's results of
operations using a Black-Scholes option-pricing model is presented in the
following pro forma table:
2004 2003
---------------- -----------------
Net loss attributable to common shareholders
As reported $(1,999) $(5,538)
Add: Stock-based employee compensation expense included in
reported net loss -- 4
Less: Stock-based employee compensation expense determined
under fair value-based method for all awards (929) (1,513)
---------------- -----------------
Pro forma $(2,928) $(7,047)
================ =================
Basic and diluted net loss per share
As reported $(0.46) $(1.39)
================ =================
Pro forma $(0.68) $(1.77)
================ =================
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 68.1% to 75.5%
in 2004 and 62.7% to 72.3% in 2003 (2) risk-free interest rates of 4.8% in
2004 and 2003 and (3) expected lives of 5.0 years in 2004 and 2003.
NOTE 3 - Discontinued Operations
-----------------------
Platinum Communications, Inc.
-----------------------------
In 2001, the Company and Platinum Communications, Inc. ("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 were scheduled 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
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. In conjunction with the closing of the Platinum
operations these employment agreements were terminated.
F-14
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Discontinued Operations, continued
-----------------------
Platinum Communications, Inc., continued
-----------------------------
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 were included in the consolidated financial statements of the
Company, commencing May 1, 2001.
As a result of the lack of development of the Platinum business and to
focus the Company's resources on its core business, in December 2003, the
Company decided to close the operations of Platinum.
Accordingly, the results of operations and the assets and liabilities of
Platinum are presented as discontinued operations for both the current and
prior period. The losses are reflected as loss from discontinued operations
in the accompanying consolidated statements of operations. The following
table reflects the results of the discontinued operations of Platinum for
the years ended December 31, 2004 and 2003, respectively:
2004 2003
---------------- -----------------
(In thousands)
Revenue $ -- $ 441
---------------- -----------------
Income and (Costs and Expenses)
-------------------------------
Operations, research and development -- (656)
Sales and marketing -- (717)
General and administrative -- (201)
Amortization and depreciation -- (187)
Other income - net 297 --
Costs associated with shut-down of operations:
Impairment of fixed assets, net -- (41)
Impairment of software costs, net -- (311)
Continuing lease obligations, net -- (220)
Interest expense, net (9) (20)
---------------- -----------------
Total income and (costs and expenses) 288 (2,353)
---------------- -----------------
Income (loss) from discontinued operations $ 288 $ (1,912)
================ =================
For the year ended December 31, 2004 the Company recognized income from the
discontinued opeartions of $288,000 as a result of settling certain
liabilities of the Platinum operation for less than the original
obligation.
Platinum has 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 (4.75% at
December 31, 2004) plus 1%, is collateralized by substantially all the
assets of Platinum, and is personally guaranteed by one of the former
officers of Platinum. The second line expired in May 2003 and bears an
interest rate of 10%. The third line contains no expiration date and bears
F-15
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 Discontinued Operations, continued
-----------------------
Platinum Communications, Inc., continued
-----------------------------
an interest rate of 16.74%. The total obligation under these three lines of
credit as of December 31, 2004 is $71,000.
The following table reflects the assets and liabilities from the
discontinued operations of Platinum as of December 31, 2004 and 2003:
December 31,
2004 2003
---------------- -----------------
(In thousands)
ASSETS
------
Accounts receivable, net of allowance of $-- and $46 in 2004 and 2003,
respectively $ -- $ 5
Other assets -- 42
---------------- -----------------
Total Current Assets From Discontinued Operations -- 47
---------------- -----------------
Total Assets From Discontinued Operations $ -- $47
---------------- -----------------
LIABILITIES
-----------
Accounts payable and accrued expenses $ 41 $390
Deferred revenue -- 180
Current portion of long-term debt 71 11
---------------- -----------------
Total Current Liabilities from Discontinued
Operations 112 581
Long-Term Debt, Net of Current Portion -- 87
---------------- -----------------
Total Liabilities From Discontinued Operations $ 112 $668
================ =================
F-16
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Accounts Receivable and Short-term Revolving Loans
--------------------------------------------------
The Company has 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. Under the Agreement, 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, 2004, the Company
had assigned approximately $952,000 of accounts receivable to the Bank and
received advances of $762,000 from the Bank.
In May 2004, the Company entered into an Agreement with DIRI Rec Fund LLC
(the "Rec Fund") whereby the Company may assign certain accounts receivable
on a full recourse basis to the Rec Fund as security for advances (loans).
The Rec Fund was established solely to advance funds to the Company upon
the assignment of receivables. The Rec Fund is administered by a third
party trustee. Certain shareholders of the Company and a Director of the
Company, are the principal investors in the Rec Fund. Under the Agreement,
the Company pays interest at the rate of one (1) percent per month on the
maximum purchase amount (as defined in the agreement) of the Rec Fund and
pays the administrative costs of the Rec Fund which approximate $12,000 per
year. At December 31, 2004 the Company had outstanding advances of
$250,000.
NOTE 5 - Prepaid Expenses and Other Current Assets
-----------------------------------------
Prepaid expenses and other current assets consist of the following:
December 31,
2004 2003
---------------- -----------------
(In thousands)
Prepaid expenses $ 239 $ 181
Employee notes and loans receivable 23 34
---------------- -----------------
$ 262 $ 215
================ =================
F-17
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Property and Equipment
----------------------
Property and equipment consist of the following:
December 31, Useful life
in Years
2004 2003
-------------- --------------- --------------
(in thousands)
Computer equipment and purchased software $ 6,078 $ 5,738 3
Furniture and fixtures 446 446 5 - 7
Automobile 30 30 3
-------------- --------------- --------------
6,554 6,214
Less: accumulated deprecation and amortization (5,977) (5,443)
-------------- --------------
Property and Equipment, Net $ 577 $ 771
============== ==============
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 2004 and 2003 was $534,000 and $686,000,
respectively.
NOTE 7 - Accounts Payable and Accrued Expenses
-------------------------------------
Accounts payable and accrued expenses consist of the following:
December 31,
2004 2003
----------------- ----------------
(in thousands)
Trade accounts payable $ 809 $ 862
Sales taxes payable 539 539
Accrued payroll and benefits 253 242
Other accrued expenses 485 605
----------------- ----------------
$2,086 $2,248
================= ================
NOTE 8 - Long-term Debt
--------------
Long-term debt consists of the following:
December 31,
2004 2003
----------------- ----------------
(in thousands)
Lines of credit (a) $ 668 $ 736
Capitalized lease obligations (b) 239 186
----------------- ----------------
907 922
Less: current portion (782) (880)
----------------- ----------------
Long-term debt, net of current portion $ 125 $ 42
================= ================
F-18
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Long-term Debt, continued
--------------
<FN>
(a) In June 2003, the Company obtained a discretionary Line of Credit
("LoC") in the amount of $500,000 from JP Morgan Private Bank
("JPMC"). The LoC is guaranteed by Tall Oaks Group, LLC (an affiliate
of Metropolitan, Note 9) and is repayable the earlier of demand or
June 30, 2005. The LoC permitted two forms of draw down; one based
upon prime rate, the second based upon LIBOR. In July 2003, the
Company elected to draw down $500,000 applying the terms and
conditions set forth for LIBOR. The interest rate is the JPMC reserve
adjusted LIBOR plus 2.30%. As of December 31, 2004, the balance
outstanding was $500,000 and the applied interest rate was 4.15%.
Also in 2003, the Company obtained, and fully drew upon, a second line
of credit from Sterling National Bank ("Sterling") in the amount of
$250,000. The line is guaranteed by the Company's chairman, secured by
the assets of the Company and carries an interest rate of 7%.
Repayments are calculated monthly at 2.778% of the outstanding
balance, plus finance charges, and continue until the line is fully
paid. At December 31, 2004, the Company had an outstanding balance of
approximately $168,000 under the line of credit.
(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.
</FN>
As of December 31, 2004 minimum future lease payments under these
capital leases are:
Year Ending
December 31, Amount
----------------------------------------------- ---------------------
(in thousands)
2005 $ 137
2006 92
2007 36
2008 11
-------
Total minimum lease payments 276
Less: amounts representing interest (37)
-------
Net minimum lease payments $ 239
=======
The interest rates pertaining to these capital leases range from 5.0%
to 17.2%, and the net book value of the related assets is
approximately $207,000 as of December 31, 2004.
NOTE 9 - Shareholders' Equity (Deficiency)
---------------------------------
Preferred Stock
- ---------------
Year Ended December 31, 2004
- ----------------------------
In 2004 the Board of Directors authorized the sale of up to 1,500
shares of Series D Redeemable Preferred Stock ("Series D Preferred")
at $1,000 per share. The holders of Series D Preferred are entitled to
dividends, on a cumulative basis, at the rate of 9-1/2% per year,
compounded and payable quarterly beginning on April 1, 2006. The
holders of Series D Preferred have preference in the payment of
dividends and, in the event of liquidation, to all classes of capital
stock of the Company except for the Series A, B and C Preferred Stock.
As of December 31, 2004, 100 shares of Series D Preferred had been
F-19
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Shareholders' Deficiency, continued
------------------------
Preferred Stock, continued
- ---------------
Year Ended December 31, 2004, continued
- ----------------------------
sold and the Company received proceeds of $100,000. The buyer was issued
warrants to purchase 90,909 common shares at an exercise price of $2.03 per
share in conjunction with the sale. At December 31, 2004 there were $2,000
of dividends accrued and unpaid for Series D Preferred Holders.
In 2004, the Board authorized the sale of an additional 500 shares of its
non-voting Series C Redeemable Preferred Stock ("Preferred Stock - C"). The
holders of Preferred Stock - C are entitled to dividends at the rate of 9-%
per annum, payable quarterly in arrears beginning October 1, 2005. The
Company has the option to redeem issued shares of Preferred Stock - C, in
whole or in part, at any time, with the redemption price equal to the
purchase price plus accrued and unpaid dividends. For each share of
Preferred Stock - C purchased, each investor received a Warrant to purchase
the number of shares of the Company's common stock equal to the exchange
ratio of $1,000 of price per share ("Price Per Share") divided by 123% of
the closing price per share of the Company's common stock on the trading
day immediately prior to the date of issuance of the Warrant. During 2004
the Company sold 1,410 shares of Preferred Stock C for proceeds of
$1,410,000, and issued 1,159,629 warrants in connection with the issuance.
Metropolitan was issued 200,000 warrants with an exercise price of $2.125
to purchase common stock of the Company for services in connection with the
transaction. As of December 31, 2004, 1,990,779 warrants are outstanding in
connection with the issuances of Preferred Stock C. The warrants expire in
2008 and 2009 and have exercise prices ranging from $0.86 to $2.13 per
common share. The proceeds were used for working capital purposes. As of
December 31, 2004, approximately $158,000 in dividends is accrued for the
Preferred Stock - C holders.
During 2002 and 2003, the Company sold Series A Convertible Preferred Stock
("Series A Preferred") to Metropolitan Venture Partners II, L.P.
("Metropolitan"), a private equity investment firm. Each share of Series A
Preferred is convertible into 10 shares of common stock of the Company. The
holders of the Series A Preferred ("the Holders") are entitled to
dividends, on a cumulative basis, at the rate of 9-% per annum, compounded
quarterly and payable on February 1, 2005 and September 25, 2005. Holders
have certain demand and piggyback registration rights for the Common Stock
issuable upon conversion of the Series A Preferred. The payment of the
first dividend was originally scheduled for September 25, 2004, however,
the Company and the Holders agreed to defer this payment until February 1,
2005. As consideration for the deferral of the dividend payment, the
Company agreed to pay the Holders a premium of 7.5% of the dividend. In May
2004, the Company and the Holders further agreed to grant the Company the
right, in its sole discretion, to defer the payment of the dividend
scheduled to be paid on February 1, 2005 until February 1, 2006. In the
event the Company elects to pay the dividend on February 1, 2006 the
Holders would receive a premium of $129,000. Also, the Company and the
Holders further agreed to grant the Company the right, in its sole
discretion, to defer the payment of the dividend scheduled to be paid on
September 25, 2005 until February 1, 2006. In the event the Company elects
to pay this dividend on February 1, 2006 the Holders would receive a
premium of $41,000. In the event the Company does not elect to defer the
payment of the dividend the Company agreed to pay the Holders a premium of
$13,000. At December 31, 2004 there were $781,000 of dividends accrued and
unpaid for Series A Preferred Holders.
F-20
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Shareholders' Equity (Deficiency), continued
----------------------------------
In 2003, the Company's Board of Directors approved the exchange of certain
outstanding debt for Non- Voting Series B Redeemable Preferred Stock
("Preferred Stock - B") at the Price Per Share (see discussion below). As
of December 31, 2004, approximately $157,000 in dividends are payable to
the Preferred Stock - B holders.
Year Ended December 31, 2003
----------------------------
In December 2003, the Company's Board of Directors authorized the sale of
up to 1,500 shares of its Preferred Stock - C. During December 2003, the
Company sold 590 shares of the Preferred Stock - C in consideration for
$590,000 less fees and expenses of $60,000 to Metropolitan and certain
board members and an executive officer of the Company. As of December 31,
2003, approximately $3,000 in dividends was accrued for the Preferred Stock
- C holders. As of December 31, 2003, 631,151 warrants were outstanding in
connection with the issuances of Preferred Stock C. The warrants expire in
2008 and 2009 and have exercise prices ranging from $0.93 to $1.11 per
common share. The proceeds were used for working capital purposes.
In June 2003, the Company's Board of Directors approved the exchange of
$974,000 of outstanding debt owed to its Chairman and current Chief
Executive Officer, Markus & Associates (an affiliate of SJ, Note 12) and
Tall Oaks Group, LLC (an affiliate of Metropolitan) for 974 shares of
Preferred Stock - B at the Price Per Share. The Preferred Stock - B was
issued as follows:
-- 266 shares were exchanged for $266,000 of debt obligation to the
Company's Chairman and current Chief Executive Officer;
-- 208 shares were exchanged for $208,000 of debt obligation to Markus &
Associates; and
-- 500 shares were exchanged for $500,000 of debt obligation to Tall Oaks
Group, LLC.
Each of the Preferred Stock - B shares is entitled to mandatory dividends,
payable quarterly, commencing on the first day of the calendar quarter
after the date of issuance, at the rate of 12% per annum. Additionally, the
Preferred Stock - B shares are redeemable, at the sole option of the
Company, on or after March 31, 2005 (or prior to March 31, 2005 with the
consent of majority-in-interest holders of Preferred Stock - B shares).
Upon redemption, the holders of the Preferred Stock - B shall be entitled
to receive, for each share of Preferred Stock - B outstanding, an amount
equal to the price per share plus accrued and unpaid dividends. As of
December 31, 2003, approximately $29,000 in dividends were payable to the
Preferred Stock - B holders.
In June 2003, the Company sold 17,857 shares of its Preferred Stock - A in
consideration for $250,000 less fees and expenses of $5,000 to
Metropolitan. As of December 31, 2003, $350,000 in dividends were payable
to the Holders.
Common Stock
------------
Year Ended December 31, 2004
----------------------------
During 2004, the Company issued 466,611 unregistered shares of common stock
as follows:
F-21
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Shareholders' Equity (Deficiency), continued
---------------------------------
Common Stock, continued
-------------
Year Ended December 31, 2004, continued
----------------------------
-- 15,000 shares of common stock valued at $12,000 pursuant to an
employment agreement with the Company's Chief Executive Officer as
follows: 5,000 shares valued at $4,000 for services for the quarter
ended March 31, 2004, and 10,000 shares valued at $8,000 for services
rendered and costs recorded in the year 2003.
-- 82,509 shares valued at $75,000 to directors for service on the Board
of Directors and Committees of the Board for services rendered and
accrued during 2003.
-- 111,752 shares valued at $139,000 to directors for service on the
Board of Directors and Committees of the Board for the year 2004;
-- 35,000 shares valued at $26,000 to an employee for services rendered
and accrued during 2003;
-- 27,027 shares of non-vested common stock valued at $50,000 to an
employee of the Company pursuant to an employment agreement. The
shares vest ratably through November 29, 2005;
-- 182,700 shares valued at $148,000 to consultants for services rendered
and accrued in 2003.
-- 6,666 shares valued at $13,000 to consultants for services rendered in
2004;
-- 5,957 shares valued at $10,000 to employees for services rendered in
2004;
Year Ended December 31, 2003
----------------------------
During the year ended December 31, 2003, the Company issued 114,347 shares
of its common stock and compensatory options to purchase 9,000 shares of
its common stock as detailed below:
-- Issued 69,347 net shares of its common stock as payment of certain
consulting expenses, valued at $77,000.
-- The Company granted 9,000 options to purchase shares of its common
stock to three employees of the Company. The options vest in one-third
increments on the date of issuance, December 31, 2003 and June 30,
2004. The options have an exercise price of $1.30 per share and have
an intrinsic value of $4,000.
-- In January 2003, the Company entered into an employment agreement with
its Chief Executive Officer, which expires in January 2005. As part of
the compensation, the Chief Executive Officer will receive 60,000
shares of the Company's common stock that vest ratably over the first
twelve months of the agreement. During 2003, the Company issued 45,000
shares of its common stock valued at $54,000 under this agreement.
F-22
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Shareholders' Equity (Deficiency), continued
---------------------
Stock Option Plans
------------------
In April 2003, the Company's Board of Directors authorized and adopted the
2003-A Stock / Stock Option Plan whereby 975,000 shares of its common stock
were reserved for issuance under the Plan. The plan was adopted by the
stockholders at our annual meeting in May 2003. The 2003-A Plan is also
divided into two separate equity programs: an option grant program and a
stock issuance program. As with the 2003 Plan, under the stock issuance
program of the 2003-A Plan, the purchase price per share is fixed by the
Board of Directors or compensation committee but cannot be less than the
fair market value of the common stock on the issuance date. As of December
31, 2004, there are 16,000 shares available to be issued pursuant to this
plan.
In 2004, the Company's Board of Directors authorized and adopted the 2004
Stock / Stock Option Plan whereby 1,200,000 shares of its common stock were
reserved for issuance under the Plan. The 2004 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 compensation committee but cannot be
less than the fair market value of the common stock on the issuance date.
As of December 31, 2004, there are 1,030,000 shares available to be issued
pursuant to this plan.
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 2004 and 2003, relating
to all of the Company's common stock plans (shares are in thousands):
Weighted
Average
Exercise
Shares Price
------------------ ------------------
Outstanding at January 1, 2003 2,259 $ 2.13
Granted 2,327 1.15
Exercised -- --
Forfeited (144) 1.93
Outstanding at December 31, 2003 4,442 1.63
Granted 350 1.63
Exercised -- --
Forfeited (147) 1.60
-----------
Outstanding at December 31, 2004 4,645 1.63
===========
Exercisable at December 31, 2004 3,692 1.65
===========
F-23
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Shareholders' Equity (Deficiency), continued
--------------------
Stock Option Plans, continued
-------------------
The following table summarizes stock option information as of December 31,
2004.
Options Outstanding
------------------------- ------------------------------ ----------------------- ---------------------------
Exercise Prices Number Outstanding Contractual Life Options Exercisable
------------------------- ------------------------------ ----------------------- ---------------------------
$0.75 665,000 3.97 years 665,000
$0.76 to $1.10 598,000 2.93 years 508,000
$1.16 800,000 3.16 years 560,000
$1.20 to $1.63 901,000 1.77 years 762,000
$1.75 to $2.19 1,575,000 2.67 years 1,091,000
$11.25 106,000 0.41 years 106,000
--------- ---------- ----------
Total 4,645,000 2.75 years 3,692,000
========= ========== =========
A total of 1,130,000 and 23,000 shares of the Company's common stock are
reserved for options, warrants and contingencies at December 31, 2004 and
2003, respectively.
Total compensation costs recognized for stock option awards amounted to $ 0
and $4,000 for the years ended December 31, 2004 and 2003, respectively.
Compensation cost represents the fair value of options granted to
non-employees and the intrinsic value of options granted to employees.
NOTE 10 - Income Taxes
------------
The following table summarizes components of the provision for (benefit
from) current and deferred income taxes for the years ended December 31,
2004 and 2003:
December 31,
2004 2003
---------------- -----------------
(in thousands)
Current
Federal $ -- $( 108)
State and other 5 --
---------------- -----------------
Total 5 ( 108)
---------------- -----------------
Federal -- --
State and other -- --
---------------- -----------------
Total -- --
---------------- -----------------
Provision for (benefit from) from Income Taxes $ 5 $( 108)
================ =================
F-24
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - Income Taxes, continued
------------
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, 2004 and 2003:
December 31,
2004 2003
----------------- --------------
U.S. Federal statutory tax rate 35.0% 35.0%
Permanent items (2.7) (0.8)
Other 0.7 6.1
Increase in valuation allowance (33.4) (38.3)
----------------- --------------
(0.4)% 2.0%
================= ==============
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are summarized as follows:
December 31,
2004 2003
----------------- ----------------
(in thousands)
Deferred tax assets
Net operating loss carryforwards $ 28,465 $ 27,966
Tax credit carryforward 733 733
Fixed and intangible assets 130 200
Deferred revenue 262 116
Unrealized loss on securities 577 577
Discontinued operations accruals -- 156
Other 104 96
----------------- ----------------
30,271 29,844
Valuation allowance (30,271) (29,844)
----------------- ----------------
Deferred tax assets $ 0 $ 0
================= ================
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are summarized as follows:
At December 31, 2004, the Company has federal and state net operating loss
carryforwards ("NOLs") remaining of approximately $78 million and $33
million, respectively, which may be available to reduce taxable income, if
any. These NOLs expire through 2024. However, Internal Revenue Code Section
382 rules limit the utilization of NOLs upon a change in control of a
company. During 2004, the Company performed a preliminary evaluation as to
whether a change in control had taken place. Management believes that there
has been no change in control as such applies to Section 382. However, if
it is determined that a change in control has taken place, either
historically or in the future, utilization of its NOLs could be subject to
severe limitations which could have the effect of eliminating substantially
all of the future income tax benefits of the NOLs.
F-25
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 Related Party and Other Transactions, continued
------------------------------------
S.J. & Associates, Inc., continued
-----------------------
In December 1999, the Company entered into an agreement 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 Company's 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 year period. Minimum compensation during this additional
period is approximately $5,500 per month. During 2004 and 2003, the
Company incurred $108,000 and $144,000, respectively, of consulting
expenses with SJ. The consulting expense was paid in cash. In
addition, SJ earned $80,000 of fees related to the sales and issuance
of Series C Preferred stock and was reimbursed for other expenses in
accordance with the consulting agreement.
-- In 2003, the Company reduced its obligation to SJ relating to a
restructuring plan from March of 2000 by $60,000. The amount was paid
in cash.
NOTE 12 - Commitments and Contingencies
-----------------------------
Operating Leases
----------------
Operating leases are primarily for office space, co-location, equipment and
automobiles. At December 31, 2004, the future minimum lease payments under
operating leases are summarized as follows:
Year Ending
December 31, Amount
------------------------------ ----------------
(in thousands)
2005 $ 499
2006 335
2007 308
2008 219
-------
Total $1,361
=======
Rent expense approximated $872,000 and $756,000 for the years ended
December 31, 2004 and 2003, respectively.
Employment Agreements
---------------------
In December 2002, the Company's Chairman became the Company's Chief
Executive Officer. In January 2003, the Company entered into an employment
agreement with its Chief Executive Officer, which expires in January 2005.
F-26
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - Commitments and Contingencies, continued
------------------------------
Employment Agreements, continued
---------------------
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. The Company extended its services agreement with its Chief Executive
Officer on December 5, 2003. The agreement now expires August 24, 2007. The
extended agreement calls for compensation of $15,000 per month and 360,000
options, vesting 7,500 per month for the term of the agreement (48 months),
to purchase the Company's common stock at an exercise price of $1.16, the
closing price of the Company's common stock on the date the agreement was
effective. The agreement provides for reimbursement of reasonable out of
pocket business expenses and further provides for living and travel
expenses not to exceed $11,000 per month.
The Company entered into an employment and consulting agreement with its
President effective January 1, 2003. The agreement was amended on January
1, 2005. The employment term of the agreement expires June 30, 2005 and is
followed by a consulting period which ends December 31, 2007. During the
employment term compensation is based on an annual salary of $240,000. In
addition the President received options to purchase 100,000 shares of the
Company's common stock at $0.50 per share which vest ratably over a period
of 26 months and an additional option to purchase 100,000 shares of the
Company's common stock at market price on the date of grant which vest on
an equal monthly basis over a period of 36 months. During the employment
term and for 90 days thereafter the President may be reimbursed for
reasonable out-of-pocket expenses and temporary living accommodations not
to exceed $2,500 per month. During the employment term he also receives a
transportation allowance of $600 per month and the cost for transportation
to his home. During the consulting term of the agreement compensation will
be $12,000 per month and duties during the consulting term include
consultation with senior executives concerning the Company's respective
businesses and operations.
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 $0 and $38,000 for the years ended December 31, 2004 and 2003,
respectively.
NOTE 13 - Management's Liquidity Plans
----------------------------
In order to meet cash needs and to achieve positive operating cash flows
the Company has and will continue to take various actions and steps that we
believe will enable us to attain these goals. These actions include:
In the second half of 2003 the Company embarked on a major cost reduction
program, including among other things, staff reductions, pay rate reductions,
and elimination of non-essential expenses. Principally as a result of this cost
F-27
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - Management's Liquidity Plans, continued
-----------------------------
reduction program the Company reduced its operating costs for continuing
operations, excluding costs for depreciation and amortization, in 2004 compared
to 2003 by $1,594,000. The Company believes these cost reductions will continue
to have a positive impact on its operating results. The Company notes that
during 2004 it partially restored the pay rate reductions and further restored
pay rate reductions in January 2005.
-- As discussed above in December 2003 the Company closed the operations
of its Platinum subsidiary. Platinum had experienced losses and had
significant cash needs. This action has reduced operating costs
approximately $1,700,000 from 2003 to 2004.
-- The Company intends to raise additional capital through private equity
offerings and borrowing. In 2004 the Company received net proceeds
from the sale of Preferred Stock of $1,430,000. Also in 2004 the
Company entered into an agreement with DIRI Rec Fund LLC, a
corporation formed and funded to loan funds to the Company against
accounts receivable, and received advances totaling $250,000 from Diri
Rec Fund. Further, the Company intends to renew for a minimum of one
year the $500,000 loan scheduled to mature on June 30, 2005 and the
guarantors of this loan have consented to this extension (see Note 8).
-- In March 2005 the Company closed a Bridge Loan financing with Sigma
Capital Partners LLC and Metropolitan Venture Partners II, L.P. and
received proceeds of $750,000 less legal fees of $55,000. (See Note
18).
-- The Company continues to strive to increase its revenue through
offering custom engineering services, expanding and enhancing its
existing product offerings such as IOL, and introducing new product
offerings. In 2004 revenues from continuing operations increased
$119,000 or 1.6% over revenues in 2003. In 2004 the Company entered
into a new agreement to provide IOL services to a Fortune 500 company.
Management anticipates that revenue from this new customer will
continue to increase in 2005 and beyond-and expects to further broaden
our customer base in 2005.
-- The Company continues to expand its marketing efforts in order to
increase its customer base. In this regard, in 2003, the Company
became a business partner with IBM and through this relationship will
work with IBM to achieve sales to new customers. The Company will
continue to pursue similar channel partner opportunities. Also in the
fourth quarter 2004 the Company employed a new sales and marketing
executive and engaged an independent sales agent to further expand our
sales efforts.
Management believes that our plans and new initiatives as discussed above will
lead to positive cash flows and profitability. While the Company pursues these
goals we also believe that our ability to raise additional capital through
equity and debt placements will provide sufficient cash to meet cash
requirements at least through December 31, 2005. There can be no assurance,
however, that the Company will achieve its cash flow and profitability goals, or
that it will be able to raise additional capital sufficient to meet its
operating expenses or implement its plan. In such event, the Company may have to
revise its plans and significantly reduce its operating expenses, which could
have an adverse effect on revenue and operations in the short term.
F-28
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - Consolidated Statements of Cash Flows
-------------------------------------
Supplemental disclosure of cash flow information for the years ended December
31, 2004 and 2003 is summarized as follows:
Year ended December 31,
2004 2003
----------------- ------------------
(in thousands)
Interest paid $308 $267
===== =====
Income taxes paid $ 5 $ 1
===== =====
Non-cash investing and financing activities for the years ended December
31, 2004 and 2003 are summarized as follows:
Year Ended December 31,
2004 2003
--------------- ------------------
(in thousands)
Dividends accrued and unpaid $ 716 $ 326
====== ======
Capitalized leases incurred $ 226 $ 38
====== ======
Conversion of long-term debt into 974 shares of Series B
Redeemable Preferred Stock $ -- $974
====== ======
Issuance of 310,209 common shares in 2004
for services and fees incurred in 2003 $ 257 $ --
====== ======
NOTE 15 - Products and Services
---------------------
The Company and its subsidiaries currently operate in one business segment
and have, during the years 2004 and 2003, provided two separate products:
ASP Services and custom engineering services. Refer to Note 1 for a
detailed description of these products and services.
Year Ended December 31,
2004 2003
-------------- ----------------
(in thousands)
ASP fees $4,580 $5,171
Custom Engineering fees 2,978 2,268
------ ------
Total Revenue $7,558 $7,439
====== ======
F-29
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - Major Customers
---------------
For the years ended December 31, 2004 and 2003, IBM accounted for 92.1% and
97.1% of theCompany's revenue, respectively. Accounts receivable from IBM
amounted to $1,516,000 and $1,065,000, at December 31, 2004 and 2003,
respectively. Loss of IBM as a customer would have a material adverse
effect on the Company.
NOTE 17 Net Loss Per Share
------------------
The following chart provides a reconciliation of information used in
calculating the per share amounts:
(in thousands, except per share data)
Year Ended December 31,
2004 2003
----------------- ----------------
Numerator for loss per share:
Loss from continuing operations before discontinued operations $ (1,571) $ (3,270)
Preferred stock dividends (716) (356)
----------------- ----------------
Loss from continuing operations attributable to common
Shareholders before discontinued operations $ (2,287) $ (3,626)
================= ================
Denominator for loss per share*: 4,285 3,974
================= ================
Basic and diluted income (loss) per share:
Loss from continuing operations attributable to common
shareholders before discontinued operations $(0.53) $(0.91)
Income (loss) from discontinued operations 0.07 (0.48)
----------------- ----------------
Net loss attributable to common shareholders $(0.46) $(1.39)
================= ================
<FN>
* The effect of dilutive securities (stock options, Series A convertible
preferred stock and warrants) have not been included herein as their
inclusion would be anti- dilutive.
</FN>
NOTE 18 - Subsequent Events
-----------------
In March 2005, the Company entered into a Securities Purchase Agreement (the
"Agreement") with Sigma Opportunity Fund LLC ("Sigma") and Metropolitan Venture
Partners II, L.P. ("MetVP"), collectively the "Buyers", whereby the Buyers
purchased Senior Subordinated Secured Notes (the "Note Purchase") in the
aggregate amount of $750,000. The notes bear interest at the rate of five
percent (5%) per year beginning June 28, 2005, and payable quarterly in cash or
common stock at the option of the Buyers. The Notes mature on the earlier to
occur of (i) September 29, 2006, (ii) the date on which demand for payment of
the loan payable to JPMorgan Chase Bank is made, and (iii) commencing May 13,
2005, the due date of the loan payable to JPMorgan Chase Bank pursuant to the
Grid Demand Promissory Note, dated as of June 27, 2003, including if due on
demand and whether or not demand for payment is actually made, as such due date
may be extended. In connection with the note purchase the Buyers were issued
warrants to purchase 750,000 common shares of the Company. The exercise price of
the warrants is $0.90 per share of common stock subject to adjustment on the
occurrence of certain events as defined. Under the terms of the agreement, not
later than August 30, 2005, the Company is required to file with the Securities
and Exchange Commission a Registration Statement to register a number of common
shares equal to the number of shares that would be issuable to the Buyers in
payment of interest on the notes through the maturity date plus a number of
F-30
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - Subsequent Events (continued)
-----------------
common shares issuable upon exercise of the warrants. Sigma has the right to
lead a "Follow-on Financing" which is expected to be consummated within 45 days
of the closing of the Note purchase. In the event that the Follow-on- Financing
does occur the exercise price of the warrants issued in conjunction with the
Note Purchase will be adjusted as agreed between the Company and the buyers. In
the event the Follow-on- Financing is not consummated the exercise price of the
warrants shall be $0.01 per common share.
F-31
DIRECT INSITE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
(In thousands, except share data)
June 30, December 31,
2005 2004
--------------------- --------------------
(Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents $ 128 $ 306
Accounts receivable, net of allowance for doubtful accounts of
$2 in 2005 and 2004 1,699 1,871
Prepaid expenses and other current assets 160 262
Assets from discontinued operations 2 --
----------------- -----------------
Total current assets 1,989 2,439
Property and equipment, net 519 577
Other assets 305 285
----------------- -----------------
TOTAL ASSETS $ 2,813 $ 3,301
================= =================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Accounts payable and accrued expenses $ 2,131 $ 2,086
Short-term revolving loans 824 1,012
Notes payable, net of discount 535 --
Dividends payable, current 1,417 376
Current portion of long-term debt 751 782
Deferred revenue -- 623
Liabilities from discontinued operations 76 112
----------------- -----------------
Total current liabilities 5,734 4,991
Long term debt, net of current portion 105 125
Dividends payable, net of current portion 7 722
----------------- -----------------
Total liabilities 5,846 5,838
----------------- -----------------
Commitments and contingencies
Shareholders' deficiency
Preferred stock, $0.0001 par value; 2,000,000 shares authorized;
Series A Convertible Preferred, 134,680 issued and outstanding
in 2005 and 2004; liquidation preference of $2,750,000 in 2005 and
2004 - -
Series B Redeemable Preferred, 974 shares issued and outstanding
in 2005 and 2004; liquidation preference of $974,075 in 2005 and 2004 - -
Series C Redeemable Preferred, 2,000 shares issued and outstanding
in 2005 and 2004; liquidation preference of $2,000,000 in 2005 and 2004
Series D Redeemable Preferred, 100 shares issued and outstanding
in 2005 and 2004; liquidation preference of $100,000 in 2005 and 2004
Common stock, $0.0001 par value; 50,000,000
shares authorized in 2005 and 2004;
4,680,583 and 4,547,013 shares issued in 2005 and 2004,
respectively; and 4,640,656 and 4,507,086 shares outstanding
in 2005 and 2004, respectively - -
Additional paid-in capital 112,867 112,484
Unearned compensation (14) (50)
Accumulated deficit (115,558) (114,643)
----------------- -----------------
(2,705) (2,209)
Common stock in treasury, at cost - 24,371 shares (328) (328)
----------------- -----------------
Total shareholders' deficiency (3,033) (2,537)
----------------- -----------------
TOTAL LIABILITIES AND SHAREHODERS' DEFICIENCY $ 2,813 $ 3,301
================= =================
F-32
See notes to condensed consolidated financial statements.
DIRECT INSITE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(In thousands, except share data)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
--------------- -------------- --------------- --------------
Revenue from continuing operations $ 2,318 $ 1,716 $ 4,398 $ 3,822
------------- ------------- ------------- -------------
Costs and expenses
Operations, research and development 1,034 846 2,047 1,764
Sales and marketing 559 422
General and administrative 780 755 1,472 1,404
Amortization and depreciation 115 142 228 285
------------- ------------- ------------- -------------
2,488 2,165 4,778 4,267
------------- ------------- ------------- -------------
Operating loss (170) (449) (380) (445)
Other expenses
Interest expense, net (125) (82) (200) (147)
Other expense -- (33) -- (33)
------------- ------------- ------------- -------------
Loss before provision for income taxes (295) (564) (580) (625)
Provision for income taxes 1 3 1 4
------------- ------------- ------------- -------------
Loss from continuing operations (296) (567) (581) (629)
(Loss) income from discontinued operations (9) 59 (9) 263
------------- ------------- ------------- -------------
Net loss (305) (508) (590) (366)
Preferred stock dividends (171) (170) (325) (298)
------------- ------------- ------------- -------------
Net loss attributable to
common shareholders $ (476) $ (678) $ (915) $ (664)
============= ============= ============= =============
Basic and diluted loss per share:
Basic and diluted loss from continuing operations $ (0.10) $ (0.17) $ (0.20) $ (0.22)
Basic and diluted income from discontinued operations -- 0.01 -- 0.06
------------- ------------- ------------- -------------
Basic and diluted loss per share $ (0.10) $ (0.16) $ (0.20) $ (0.16)
============= ============= ============= =============
Basic and diluted weighted average common shares
outstanding 4,600 4,288 4,560 4,186
============= ============= ============= =============
F-33
See notes to condensed consolidated financial statements.
DIRECT INSITE CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(In thousands, except share data)
For the six months ended
June 30,
2005 2004
----------------- ------------------
Cash flows from operating activities
Loss from continuing operations $ (581) $ (629)
Adjustments to reconcile loss from continuing operations
to net cash used in continuing operations:
Amortization and depreciation:
Property and equipment 229 285
Discount on debt 43
Common stock and options issued for services 113 4
Unearned compensation 36 --
Changes in operating assets and liabilities:
Accounts receivable 172 (233)
Prepaid expenses and other current assets 102 34
Other assets (20) 14
Accounts payable and accrued expenses 57 (379)
Deferred revenue (623) (96)
------------- -------------
Net cash used in continuing operations (472) (1,000)
------------- -------------
Cash flows from discontinued operations:
Income (loss) from discontinued operations (9) 263
Change in:
Assets and liabilities from discontinued operations (38) (429)
------------- -------------
Net cash used in discontinued operations (47) (166)
------------- -------------
Net cash used in operating activities (519) (1,166)
------------- -------------
Cash flows from investing activities
Expenditures for property and equipment (127) (31)
------------- -------------
Net cash used in investing activities (127) (31)
------------- -------------
Cash flows from financing activities
Proceeds from sales of preferred stock -- 1,410
(Repayments) advances from revolving loans, net (188) 16
Proceeds from short-term notes 750 --
Repayments of long-term debt (94) (115)
------------- -------------
Net cash provided by financing activities 468 1,311
------------- -------------
Net (decrease) increase in cash and cash equivalents (178) 114
Cash and cash equivalents - beginning of period 306 75
------------- -------------
Cash and cash equivalents - end of period $ 128 $ 189
============= =============
Cash paid for interest $ 149 $ 145
Non-cash investing and financing activities:
Debt discount on loans $ 258 $ --
============= =============
Equipment acquired with lease financing $ 43 $ --
Issuance of common shares and options to purchase ============= =============
common shares for services and fees $ 12 $ 257
============= =============
F-34
See notes to condensed consolidated financial statements.
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
1. Interim Financial Information
The condensed consolidated balance sheet as of June 30, 2005, and the
condensed consolidated statements of operations and cash flows for the
three and six month periods ended June 30, 2005 and 2004, have been
prepared by the Company and are not audited. These interim financial
statements include all adjustments which management considers necessary for
a fair presentation of the financial statements and consist of normal
recurring items. The results of operations for the three and six month
periods ended June 30, 2005, are not necessarily indicative of results that
may be expected for any other interim period or for the full year.
These unaudited condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
for the year ended December 31, 2004 included in the Company's Form-10KSB.
The accounting policies used in preparing these unaudited condensed
consolidated financial statements are consistent with those described in
the December 31, 2004 consolidated financial statements.
2. The Company
Direct Insite Corp. and subsidiaries (the "Company"), primarily operate as
an application service provider ("ASP"), that markets an integrated
transaction based "fee for service" offering called Invoices On-Line (IOL),
an electronic invoice presentment and payment (EIP&P) service that
processes high volumes of transactional data for invoice presentment
purposes delivered via the Internet on a global basis.
The Company also provides additional service offerings in the form of its
patented dbExpress TM technology, a management information tool that allows
users to visually data mine large volumes of transactional data via the
Internet. A complete Internet Customer Care tool set integrated with the
EIP&P product set is also available. The Company operates fully redundant
data centers located at its main office in Bohemia, N.Y. and in an IBM
co-location facility in Newark, NJ.
Management's liquidity plans are discussed in Note 9. Also, as described in
Note 8, the Company has two customers that accounted for approximately 70%
and 28% of the Company's revenue for the six month period ended June 30,
2005. Loss of either of these customers would have a material adverse
effect on the Company.
Stock Options and Similar Equity Instruments
--------------------------------------------
As permitted under Statement of Financial Accounting Standards ("SFAS") No.
148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure", which amended SFAS No. 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 ("FIN") No. 44, "Accounting for Certain
Transactions Involving Stock Compensation", an interpretation of APB No.
25. 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 No. 123 to stock-based employee compensation (in thousands, except per
share data):
F-35
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
2. The Company (continued)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -------------------------
2005 2004 2005 2004
------------ -------------- ------------- -----------
Net loss attributable to common shareholders
As reported $ (476) $ (678) $ (915) $ (664)
Less: Stock-based employee compensation
expense determined under fair value-based
method for all awards (161) (400) (317) (445)
-------- -------- -------- --------
Pro forma $ (637) $ (1,078) $ (1,232) $ (1,109)
======== ======== ======== ========
Basic and diluted net loss per share
As reported $ (0.10) $ (0.16) $(0.20) $(0.16)
======== ======== ======== ========
Pro forma $ (0.14) $ (0.25) $(0.27) $(0.26)
======== ======== ======== ========
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 ranging from 71.4%
to 71.9% in 2005 and 68.1% in 2004, (2) risk-free interest rates ranging
from 4.00% to 4.50% in 2005 and 4.00% in 2004 and (3) expected lives of
4.50 years in 2005 and 5.50 years in 2004.
3. Reclassifications
Certain reclassifications have been made to the condensed consolidated
financial statements shown for the prior period in order to have it conform
to the current period's classifications.
4. Discontinued Operations
In 2001, the Company and Platinum Communications, Inc. ("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. As a result of the lack of development of the Platinum business
and to focus the Company's resources on its core business, in December
2003, the Company decided to close the operations of Platinum. Accordingly,
the results of operations and the assets and liabilities of Platinum are
presented as discontinued operations for both the current and prior period.
The income is reflected as income from discontinued operations in the
accompanying condensed consolidated statements of operations. The following
table reflects the results of the discontinued operations of Platinum for
the three and six month periods ended June 30, 2005 and 2004, respectively:
F-36
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Three Months Ended Six Months Ended
June 30 June 30
2005 2004 2005 2004
---- ---- ---- ----
Costs and Expenses
General and administrative (5) -- (5) --
Other income - net -- 61 -- 268
Interest expense, net (4) (2) (4) (5)
---------- ---------- -------- ---------
(Loss) income from
discontinued operations $ (9) $ 59 $ (9) $ 263
========== ========== ======== =========
At June 30, 2005, the discontinued operation had $2,000 in assets. The
liabilities of the discontinued operation at June 30, 2005 include loans payable
totaling $56,000, and accounts payable and accrued liabilities of $20,000.
5. Accounts Receivable and Revolving Loans
The Company has 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 1-1/2% 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 initial term of the agreement was for one year, and continues until due
notice of termination is given at any time by either party to the
agreement. At June 30, 2005, the Company had assigned approximately
$839,000 of accounts receivable to the Bank and received advances of
$671,000.
In May 2004, the Company entered into an Agreement with DIRI Rec Fund LLC
(the "Rec Fund") whereby the Company may assign certain accounts receivable
on a full recourse basis to the Rec Fund as security for advances (loans).
The Rec Fund was established solely to advance funds to the Company upon
the assignment of receivables. The Rec Fund is administered by a third
party trustee. Certain shareholders of the Company and a Director of the
Company, are the principal investors in the Rec Fund. Under the Agreement,
the Company pays interest at the rate of one (1) percent per month on the
maximum purchase amount (as defined in the agreement) of the Rec Fund and
pays the administrative costs of the Rec Fund which approximate $12,000 per
year. At June 30, 2005 the Rec Fund had a total principal available for
assignment of $250,000 and the Company had outstanding advances from the
Rec Fund of $153,000 resulting in $97,000 availability under the agreement.
F-37
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
6. Debt
Notes payable
-------------
At June 30, 2005 notes payable consist of the notes as described below
of $750,000 less debt discount of $215,000.
In March 2005, the Company entered into a Securities Purchase
Agreement (the "Agreement") with Sigma Opportunity Fund LLC ("Sigma")
and Metropolitan Venture Partners II, L.P. ("MetVP"), collectively the
"Buyers", whereby the Buyers purchased Senior Subordinated Secured
Notes (the "Note Purchase") in the aggregate amount of $750,000. The
notes bear interest at the rate of five percent (5%) per year
beginning June 28, 2005, and are payable quarterly in cash or common
stock at the option of the Buyers. The Notes mature on the earlier to
occur of (i) September 29, 2006, or (ii) the date on which demand for
payment of the loan payable to JPMorgan Chase Bank is made and are
collateralized by all the assets of the Company excluding accounts
receivable as defined under the Accounts Receivable Purchase Agreement
(see Note 5). In connection with the note purchase the Buyers were
issued warrants to purchase 750,000 common shares of the Company. The
exercise price of the warrants is $0.90 per share of common stock
subject to adjustment on the occurrence of certain events as defined.
The Company recorded a debt discount of $258,000 for the value of the
warrants. Under the terms of the agreement, not later than August 30,
2005, the Company is required to file with the Securities and Exchange
Commission a Registration Statement to register a number of common
shares equal to the maximum number of shares that would be issuable to
the Buyers in payment of interest on the notes through the maturity
date plus a number of common shares issuable upon exercise of the
warrants. Sigma had an exclusive right to lead a "Follow-on-Financing"
for 45 days following the closing and the Company has granted Sigma
additional time. In the event that the Follow-on-Financing does occur
the exercise price of the warrants issued in conjunction with the Note
Purchase will be adjusted as agreed between the Company and the
buyers. In the event the Follow-on- Financing is not consummated the
exercise price of the warrants shall be $0.01 per common share.
Long-term debt
--------------
Long-term debt consists of the following (in thousands):
June 30, December 31,
2005 2004
-------------------- --------------------
Lines of credit (a) $ 642 $ 668
Capitalized lease obligations (b) 214 239
--------- ----------
856 907
Less current portion (751) (782)
--------- ----------
Long-term debt, net of current portion $ 105 $ 125
========= ==========
F-38
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
6. Debt (continued)
(a) In June 2003, the Company obtained a discretionary Line of Credit
("LoC") in the amount of $500,000 from JP Morgan Private Bank ("JPMC") and
this LoC was renewed in June 2005. The LoC is guaranteed by Tall Oaks
Group, LLC, an affiliate of MetVP, and is repayable on the earlier of
demand or June 30, 2007. Subsequent to June 30, 2005, the guarantors were
issued 500,000 warrants to purchase common shares of the Company at an
exercise price of $1.00 per share. The warrants were valued at $148,000 and
will be amortized as compensation expense over the life of the loan. The
LoC permitted two forms of draw down; one based upon prime rate, the second
based upon LIBOR. In July 2003, the Company elected to draw down $500,000
applying the terms and conditions set forth for LIBOR. The interest rate is
the JPMC reserve adjusted LIBOR plus 2.30%. As of June 30, 2005, the
applicable interest rate was 5.74%.
Also in 2003, the Company obtained, and fully drew upon, a second line of
credit from Sterling National Bank ("Sterling") in the amount of $250,000.
The line is guaranteed by the Company's CEO, secured by the assets of the
Company, and carries an interest rate of 7%. Repayments are calculated
monthly at 2.778% of the outstanding balance, plus interest, and continue
until the line is fully paid. At June 30, 2005, the Company had an
outstanding balance of approximately $142,000 under the line of credit.
(b) The Company has equipment under capital lease obligations expiring at
various times through 2008. 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.
7. Shareholders' Deficiency
Common Stock and Option Issuances
---------------------------------
During the six months ended June 30, 2005, the Company issued 133,570
unregistered shares of common stock and options to purchase 265,000 shares
of its common stock as follows:
-- The Company issued 133,570 shares, valued at $119,000, to employees
and consultants for services;
-- The Company issued 5,000 options to purchase common stock to an
employee. The options vested upon issuance and have an exercise price
of $1.65 per share. The options had a fair value of $5,000 at the date
of the grant.
-- The Company issued 60,000 options to purchase common stock to a sales
consultant. The options vest ratably over 3 years and have an exercise
price of $1.50 per share. The options had a fair value of $57,000 at
the date of the grant.
-- Under the terms of an employment agreement, the Company issued to its
president 100,000 options to purchase common shares at an exercise
price of $0.50 per share. These options have an intrinsic value of
$20,000 and will be amortized over 26 months. The options had a fair
value of $48,000 at the date of the grant. In addition, the Company
issued to its president 100,000 options to purchase common shares at
the market price on the date of the grant. The options had a fair
value of $43,000 at the date of the grant.
F-39
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
7. Shareholders' Deficiency (continued)
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 ("EPS"). Basic EPS 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 EPS includes 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 EPS amounts since the effect of their inclusion would be
antidilutive.
F-40
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
7. Shareholders' Deficiency (continued)
Securities that could potentially dilute basic EPS in the future, that were
not included in the computation of the diluted EPS because to do so would
have been antidilutive for the periods presented, consist of the following
(in thousands):
Options to purchase common stock 4,839
Convertible preferred stock and warrants to acquire common stock 4,178
-----
Total potential common shares as of June 30, 2005 9,017
=====
8. Products and Services
The Company and its subsidiaries currently operate in one business segment
and provide two separate products: ASP services and custom engineering
services.
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---------------- -------------- ------------- --------------
ASP IOL fees $1,439 $ 971 $2,589 $ 1,961
ASP telecommunications fees 12 143 26 299
Custom engineering fees 867 602 1,783 1,562
------ ------ ------ ------
Total Revenue $2,318 $1,716 $4,398 $3,822
====== ====== ====== ======
Major Customers
---------------
For the three months ended June 30, 2005 the Company had two major
customers that accounted for 66.2% and 30.4% of the Company's total
revenue. These two customers accounted for 69.9% and 27.6% of revenue for
the six months ended June 30, 2005. In 2004 the Company had one major
customer that accounted for 96.2% and 97.5% of revenue for the three and
six months ended June 30, 2004, respectively. Accounts receivable from
these customers amounted to $1,656,000 at June 30, 2005.
F-41
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
9. Management's Liquidity Plans
In order to meet cash needs and to achieve positive operating cash flows
the Company has and will continue to take various actions and steps that we
believe will enable us to attain these goals. These actions include:
-- In March 2005 the Company closed a Bridge Loan financing with Sigma
Capital Partners LLC and Metropolitan Venture Partners II, L.P. and
received proceeds of $750,000 less legalfees of $55,000 (see Note 6).
Sigma had an exclusive right to lead a follow-on- financing for 45
days following the closing of the Bridge Loan and the Company has
granted Sigma additional time. The Company anticipates that this
follow-on-financing will provide the working capital to sustain and
expand the operations of the Company.
-- The Company and the holders of the Series A and Series B Preferred
stock have previously agreed to defer payment of dividends. The
Company may seek to defer these dividends further.
-- The Company intends to raise additional capital through private equity
offerings and borrowing. In 2004, the Company received net proceeds
from the sale of Preferred Stock of $1,430,000. Also in 2004 the
Company entered into an agreement with DIRI Rec Fund LLC, a
corporation formed and funded to loan funds to the Company against
accounts receivable, and may receive advances up to $250,000 from Diri
Rec Fund (see note 5). Further, in June 2005 the Company renewed for a
period of two years the $500,000 loan previously scheduled to mature
on June 30, 2005 and the guarantors of this loan have consented to
this extension (see Note 6).
-- The Company continues to strive to increase revenue through offering
custom engineering services, expanding and enhancing existing product
offerings such as IOL, and introducing new product offerings. In 2004
the Company entered into a new agreement to provide IOL services to a
Fortune 100 company. Revenue from this new customer accounted for
27.6% of total revenue for the six months ended June 30, 2005. In the
first quarter 2005, the Company added an additional customer as the
F-42
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
9. Management's Liquidity Plans (continued)
result of the sale of a part of the business of an existing customer.
Management anticipates that revenue from these new customers will
continue to increase in 2005 and beyond and expects to further broaden
the Company's customer base in 2005.
-- The Company continues to expand its marketing efforts in order to
increase the customer base. In this regard, in 2003, the Company
became a business partner with IBM and through this relationship will
work with IBM to achieve sales to new customers. The Company will
continue to pursue similar channel partner opportunities. Also, in the
fourth quarter 2004 the Company employed a new sales and marketing
executive and engaged an independent sales agent to further expand our
sales efforts.
Management believes that these plans and new initiatives as discussed above will
lead to positive cash flows and profitability. While the Company pursues these
goals management also believes that the Company's ability to raise additional
capital through equity and debt placements will provide sufficient cash to meet
cash requirements at least through June 30, 2006. There can be no assurance,
however, that the Company will achieve the cash flow and profitability goals, or
that the Company will be able to raise additional capital sufficient to meet its
operating expenses or implement its plan. In such event, the Company may have to
revise its plans and significantly reduce its operating expenses, which could
have an adverse effect on revenue and operations in the short term.
10. New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123R, "Share-Based Payment." SFAS No. 123R eliminates the
alternative to use APB No. 25's intrinsic value method of accounting that
was provided in SFAS No 123 as originally issued. SFAS No. 123R requires
entities to recognize the cost of employee services in exchange for awards
of equity instruments based on the grant-date fair value of those awards
(with limited exceptions). That cost will be recognized over the period
during which the employee is required to provide the service in exchange
for the award. No compensation cost is recognized for equity instruments
for which employees do not render the requisite service. SFAS No. 123R
requires entities to initially measure the cost of employee services
received in exchange for an award of liability instruments based on its
current fair value; the fair value of the award will be re-measured at each
reporting date through the settlement date. Changes in fair value during
the requisite service period will be recognized as compensation cost over
that period. The grant date fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted
for the unique characteristics of those instruments. SFAS No. 123R is
effective as of the beginning of the Company's fiscal year following
December 15, 2005 (January 1, 2006). The adoption of SFAS No. 123R will
have no effect on the Company's consolidated cash flows or financial
position but will have an adverse effect on the Company's consolidated
results of operations.
In December 2004, the FASB issued FAS No. 153, "Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29." This Statement eliminates the
exception from fair value measurement for non-monetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion No. 29 and replaces it
F-43
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
10. New Accounting Pronouncements (continued)
with an exception for exchanges that do not have commercial substance. This
Statement specifies that a non-monetary exchange has commercial substance
if the future cash flows of the entity are expected to change significantly
as a result of the exchange. The provisions of this Statement are effective
for non-monetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a
material impact on the Company's consolidated financial position,
liquidity, or results of operations.
In April 2004, the EITF issued Statement No. 03-06 "Participating
Securities and the Two-Class Method Under FASB Statement No. 128, Earnings
Per Share" ("EITF 03-06"). EITF 03-06 addresses a number of questions
regarding the computation of earnings per share by companies that have
issued securities other than common stock that contractually entitle the
holder to participate in dividends and earnings of the company when, and
if, it declares dividends on its common stock. The issue also provides
further guidance in applying the two-class method of calculating earnings
per share, clarifying what constitutes a participating security and how to
apply the two-class method of computing earnings per share once it is
determined that a security is participating, including how to allocate
undistributed earnings to such a security. EITF 03-06 is effective for
fiscal periods beginning after March 31, 2004. The adoption of this
statement did not have any effect on the Company's calculation of EPS.
In September 2004, the EITF issued statement EITF Issue No. 04-08, "The
Effect of Contingently Convertible Debt on Diluted Earnings per Share"
("EITF 04-08"). Contingently convertible debt instruments are generally
convertible into common shares of an issuer after the common stock price
has exceeded a predetermined threshold for a specified period of time (the
"market price contingency"). EITF 04-08 requires that shares issuable upon
conversion of contingently convertible debt be included in diluted earnings
per share computations regardless of whether the market price contingency
contained in the debt instrument has been met. EITF 04-08 is effective for
reporting periods ending after December 15, 2004 and requires restatement
of prior periods to the extent applicable. The adoption of this statement
did not have an effect on the Company's calculation of EPS.
In March 2005, the FASB issued FIN 47, which is effective for the company
on December 31, 2005. FIN 47 clarifies that the phrase "conditional asset
retirement obligation," as used in FASB Statement No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS No.143"), refers to a legal obligation
to perform an asset retirement activity for which the timing and/or method
of settlement are conditional on a future event that may or may not be
within the control of the company. The obligation to perform the asset
retirement activity is unconditional even though uncertainty exists about
the timing and/or method of settlement. Uncertainty about the timing and/or
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. SFAS No. 143 acknowledges that in some cases, sufficient
information may not be available to reasonably estimate the fair value of
an asset retirement obligation. FIN 47 also clarifies when an entity would
have sufficient information to reasonably estimate the fair value of an
asset retirement obligation. The company does not expect that adoption of
FIN 47 will have a significant effect on its financial position or results
of operations.
F-44
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
10. New Accounting Pronouncements (continued)
In May 2005, FASB issued SFAS No. 154, " Accounting Changes and Error
Corrections " ("SFAS No. 154"). SFAS No. 154 requires retrospective
application to prior periods' financial statements of changes in accounting
principle. It also requires that the new accounting principle be applied to
the balances of assets and liabilities as of the beginning of the earliest
period for which retrospective application is practicable and that a
corresponding adjustment be made to the opening balance of retained
earnings for that period rather than being reported in an income statement.
The statement will be effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. We do not
expect the adoption of SFAS No. 154 to have a material effect on our
financial position or results of operations.
In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements ("EITF 05-6"). EITF 05-6
provides guidance on determining the amortization period for leasehold
improvements acquired in a business combination or acquired subsequent to
lease inception. The guidance in EITF 05-6 will be applied prospectively
and is effective for periods beginning after June 29, 2005. EITF 05-6 is
not expected to have a material effect on the Company's financial position
or results of operations.
F-45
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. Indemnification of Directors
Under the provisions of the Certificate of Incorporation and By-Laws of
Registrant, each person who is or was a director or officer of Registrant
shall be indemnified by Registrant as of right to the full extent permitted
or authorized by the General Corporation Law of Delaware.
Under such law, to the extent that such person is successful on the merits
in the defense of a suit or proceeding brought against him by reason of the
fact that he is a director or officer of Registrant, he shall be
indemnified against expenses (including attorneys' fees) reasonably
incurred in connection with such action.
If unsuccessful in defense of a third-party civil suit or a criminal suit
is settled, such a person shall be indemnified under such law against both
(1) expenses (including attorneys' fees) and (2) judgments, fines and
amounts paid in settlement if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of
Registrant, and with respect to any criminal action, had no reasonable
cause to believe his conduct was unlawful.
If unsuccessful in defense of a suit brought by or in the right of
Registrant, or if such suit is settled, such a person shall be indemnified
under such law only against expenses (including attorneys' fees) incurred
in the defense or settlement of such suit if he acted in good faith and in
a manner he reasonably believed to be in, or not opposed to, the best
interests of Registrant, except that if such a person is adjudicated to be
liable in such suit for negligence or misconduct in the performance of his
duty to Registrant, he cannot be made whole even for expenses unless the
court determines that he is fairly and reasonably entitled to be
indemnified for such expenses.
The officers and directors of registrant are covered by officers' and
directors' liability insurance. The policy coverage is $10,000,000, which
includes reimbursement for costs and fees. There is a maximum aggregate
deductible for each loss under the policy of $200,000.
Item 25. Other Expenses of Issuance and Distribution
The estimated expenses of the distribution, all of which are to be borne by
us, are as follows. All amounts are estimates except the Securities and Exchange
Commission registration fee:
Registration Fee $ 92
Accounting Fees and Expenses 20,000
Legal Fees and Expenses 50,000
Miscellaneous 4,908
---------
Total $ 75,000
=========
Item 26. Recent Sales of Unregistered Securities
On June 30, 2005, we concluded a new line of credit in the principal amount
of $500,000 with JPMorgan Chase Bank evidenced by a Grid Demand Promissory Note
(the "Credit Facility) replacing a prior credit facility dated June 27, 2003,
under substantially similar terms, but extending the original Maturity Date to
June 30, 2007. As a condition precedent to providing the Credit Facility, the
II-1
JPMorgan Chase Bank required guarantees of our obligations and a collateral
agreement. In consideration of the issuance of such guarantee and delivery of
the collateral agreement, on July 12, 2005, Company issued and delivered to Tall
Oaks Group L.L.C. warrants with an initial exercise price of $1.00 per share to
purchase an aggregate of 500,000 shares of the common stock of Company.
On March 29 2005 we entered into a Securities Purchase Agreement with Sigma
Opportunity Fund LLC ("Sigma") and Metropolitan Venture Partners II, L.P.
("MetVP"), collectively the "Buyers", whereby the Buyers purchased Senior
Subordinated Secured notes (the "Note Purchase") in the aggregate amount of
$750,000. The notes bear interest at the rate of five percent (5%) per year
beginning June 28, 2005 and mature on the earlier to occur of (i) September 29,
2006 or (ii) the date on which demand for payment of the Grid Demand Promissory
Note, dated as of June 27, 2005 payable to JPMorgan Chase Bank is made. In
connection with the note purchase the Buyers were issued warrants to purchase
750,000 of our common shares. The exercise price of the warrants is $0.90 per
share of common stock subject to adjustment on the occurrence of certain events.
Sigma had the right to lead a "Follow-on Financing." In the event that the
Follow-on-Financing did not occur, the exercise price of the warrants would be
$0.01 per common share. As of the date hereof, we have elected not to pursue the
Follow-on-Financing with Sigma.
In November 2004 the Board of Directors authorized us to sell up to 1,500
shares of Series D Redeemable Preferred Stock ("Series D Preferred") at $1,000
per share. The holders of Series D Preferred are entitled to dividends, on a
cumulative basis, at the rate of 9-1/2% per year, compounded and payable
quarterly beginning on April 1, 2006. The holders of Series D Preferred have
preference in the payment of dividends and, in the event of liquidation, to all
classes of capital stock of the Company except for the Series A, B and C
Preferred Stock. As of December 31, 2004 we had sold 100 shares of Series D
Preferred and received proceeds of $100,000. The buyer was issued warrants to
purchase 90,909 common shares at an exercise price of $2.03 per share in
conjunction with the sale.
In December 2003 the Board of Directors authorized us to sell up to 1,500
shares of Series C Redeemable Preferred Stock ("Series C Preferred") at $1,000
per share and in April 2004 the Board authorized the sale of an additional 500
shares. The holders of Series C Preferred are entitled to dividends, on a
cumulative basis, at the rate of 9-1/2% per year, compounded and payable
quarterly beginning on October 1, 2005. The holders of Series C Preferred have
preference in the payment of dividends and, in the event of liquidation, to all
classes of capital stock of the Company except for the Series B Preferred Stock.
As of December 31, 2004 we had sold 2000 shares of Series C Preferred and
received proceeds of $2,000,000 less expenses of $140,000. Of the total shares
sold Metropolitan has purchased 540 shares, our Chairman and Chief Executive
Officer of the Company purchased 200 shares and certain Directors purchased 105
shares. The proceeds were used for working capital purposes.
In June 2003, the Company's Board of Directors approved the exchange of the
then outstanding obligations to our Chairman and Chief Executive Officer, Markus
& Associates and Tall Oaks Group, LLC for 974 shares of Series B Preferred Stock
at an exchange ratio of $1,000 of debt per share ("Price Per Share"). The Series
B Preferred was issued as follows:
-- 266 shares were exchanged for $266,000 of debt obligation to our
Chairman and Chief Executive Officer;
-- 208 shares were exchanged for $208,000 of debt obligation to Markus &
Associates; and
-- 500 shares were exchanged for $500,000 of debt obligation to Tall Oaks
Group, LLC.
Each of the Series B Preferred shares is entitled to mandatory dividends,
payable quarterly, commencing on the first day of the calendar quarter after the
date of issuance, at the rate of 12% per annum. Additionally, the Series B
II-2
Preferred shares are redeemable, at the sole option of the Company, on or after
March 31, 2005. Upon redemption, the holders of the Series B Preferred shall be
entitled to receive, for each share of Series B Preferred outstanding, an amount
equal to the Price Per Share plus accrued and unpaid dividends.
Between September 2002 and June 2003, the Company sold a total of 134,680
shares of Series A Convertible Preferred Stock, ("Series A Preferred") in
consideration for the gross amount of $2,750,000 to Metropolitan Venture
Partners II, L.P. Each share of Series A Preferred is convertible into 10 shares
of common stock of the Company. The holders of the Series A Preferred ("the
Holders") are entitled to dividends, on a cumulative basis, at the rate of
9-1/2% per annum, compounded quarterly and payable on February 1, 2005 and
September 25, 2005. The payment of the first dividend was originally scheduled
for September 25, 2004, however, the Company and the Holders agreed to defer
this payment until February 1, 2005. As consideration for the deferral of the
dividend payment, the Company agreed to pay the Holders a premium of 7.5% of the
dividend. In May 2004 the Company and the Holders further agreed to grant the
Company the right, in its sole discretion, to defer the payment of the dividend
scheduled to be paid on February 1, 2005 until February 1, 2006. In the event
the Company elects to pay the dividend on February 1, 2006 the Holders would
receive a premium of $129,000. In December 2004 the Company exercised its right
to defer payment of this dividend until February 1, 2006. Also, the Company and
the Holders further agreed to grant the Company the right, in its sole
discretion, to defer the payment of the dividend scheduled to be paid on
September 25, 2005 until February 1, 2006. In the event the Company elects to
pay this dividend on February 1, 2006 the Holders would receive a premium of
$41,000. In the event the Company does not elect to defer the payment of the
dividend the Company agreed to pay the Holders a premium of $13,000.
Item 27.
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)
(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). (1)
(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).
(i) Certificate of Designation, Preferences and Rights of Series B
Redeemable Preferred Stock filed December 10, 2003 (Incorporated by
reference to Exhibit 3(i) of the Company's Annual Report on Form
10-KSB filed April 14, 2004).
II-3
(j) Certificate of Designation, Preferences and Rights of Series C
redeemable Preferred Stock filed December 16, 2003 (Incorporated by
reference to Exhibit 3(j) of the Company's Annual Report on Form
10-KSB filed April 14, 2004).
(k) Certificate of Amendment of Certificate of Designation, Preferences
and Rights of Series C Preferred Stock filed March 29, 2005
(Incorporated by reference to Exhibit 3(k) of the Company's Annual
Report on Form 10-KSB filed April 29, 2005).
(l) Certificate of Designation, Preferences and Rights of Series D
Redeemable Preferred Stock filed October 7, 2004.
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.
4.3 Securities Purchase Agreement between the Company, Sigma Opportunity Fund,
LLC and Metropolitan Venture Partners II, L.P. (Incorporated by reference
to Exhibit 4.1 of the Current Report on Form 8-K filed March 31, 2005).
5 Opinion of Beckman, Lieberman & Barandes, LLP(4)
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. (2)
10.9 Lease Extension Agreement between Atrium Executive Center and the Company
II-4
(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).
10.10Offer 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).
10.11Indemnification 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. (2)
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
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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.(2)
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. (2)
10.24 Form of Subscription Agreement for Series C Redeemable Preferred Stock (3)
10.25Employment and Consulting Agreement between the Company and Robert L.
Carberry (Incorporated by reference to Exhibit 10.2 of registrant's Current
Report on Form 8-K dated December 5, 2003).
23.1 Consent of Marcum & Kliegman, LLP.
23.2 Consent of Beckman, Lieberman & Barandes, LLP (included in Exhibit 5
hereof)
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(1) Filed with Form S-1, Registration Statement of the Company Reg. No 3-47322
and are incorporated herein by reference.
(2) Incorporated by reference to the Company's Annual Report on Form-10K filed
April 15, 2003.
(3) Incorporated by reference to the Company's Annual Report on Form-10K filed
April 14, 2004. (4) To be filed by amendment.
Item 28. Undertakings
A. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities, other than the payment by us of expenses incurred or paid by
our director, officer or controlling person in the successful defense of any
action, suit or proceeding, is asserted by such director, officer or controlling
person in connection with the securities being registered, we will, unless in
the opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
B. We hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
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(i) To include any prospectus required by Section 10(a) (3) of the
Securities Act of 1933;
(ii) To specify in the prospectus any facts or events arising after
the effective date of the Registration Statement or most recent
post-effective amendment thereof which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered, if the total dollar value of
securities offered would not exceed that which was registered, and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424(b), Section 230.424(b) of
Regulation S-B, if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
Registration Statement; and
(iii) To include any additional or changed material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned in the city
of Bohemia, State of New York on the 31st day of August, 2005.
DIRECT INSITE CORP.
By: /s/ James A. Cannavino
James A. Cannavino
Chairman of the Board,
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on August 31, 2005 by the following
persons in the capacities indicated. Each person whose signature appears below
also constitutes and appoints James A. Cannavino, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto and all other
documents in connection therewith, with the Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
/s/ James A. Cannavino Chairman of the Board,
James A. Cannavino Chief Executive Officer
/s/Michael J. Beecher
Michael J. Beecher Chief Financial Officer and Secretary
______________________________
Bernard Puckett Director
/s/ Dennis J. Murray
Dennis J. Murray Director
______________________________
Carla J. Steckline Director
/s/ Michael Levin
Michael Levin Director