UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______ to _______
Commission File No. 0-20660
DIRECT INSITE CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2895590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 Orville Drive, Bohemia, N.Y. 11716
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 244-1500
Securities registered pursuant to Section 12(b) of the Act: None Securities
registered pursuant to Section 12 (g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $.0001 NASDAQ
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of April 12, 2002, there were 3,259,932 shares of the registrant's Common
Stock outstanding. The aggregate market value of the Common Stock held by
non-affiliates was approximately $4,563,905 based on the closing sale price of
the Common Stock as quoted on the NASDAQ on such date.
Direct Insite Corp. and Subsidiaries
Form 10-K for the Year Ended December 31, 2001
Table of Contents
PART I PAGE
----
ITEM 1 Business 1
ITEM 2 Properties 11
ITEM 3 Legal Proceedings 11
ITEM 4 Submission of Matters to a Vote of Security Holders 11
PART II
ITEM 5 Market for Registrant's Common Stock 12
ITEM 6 Selected Financial Data 13
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
ITEM 7a Quantitative and Qualitative Disclosures About Market Risk 24
ITEM 8 Financial Statement 24
ITEM 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 24
PART III
ITEM 10 Directors and Executive Officers of Registrant 25
ITEM 11 Executive Compensation 27
ITEM 12 Security Ownership of Certain Beneficial Owners and Management 28
ITEM 13 Certain Relationships and Related Transactions 29
PART IV
ITEM 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 30
SIGNATURE 33
PART I
Item 1. BUSINESS
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact included in this
Form 10-K including, without limitation, statements under, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's financial position, business strategy and the plans and
objectives of management for future operations, are forward-looking statements.
When used in this Form 10-K, words such as "anticipate," "believe," "estimate,"
"expect," "intend" and similar expressions, as they relate to the Company or its
management, identify forward-looking statements. Such forward - looking
statements are based on the beliefs of management, as well as assumptions made
by, and information currently available to, the Company's management. Actual
results could differ materially from those contemplated by the forward-looking
statements as a result of certain factors including but not limited to,
fluctuations in future operating results, technological changes or difficulties,
management of future growth, expansion of international operations, the risk of
errors or failures in the Company's software products, dependence on proprietary
technology, competitive factors, risks associated with potential acquisitions,
the ability to recruit personnel, and the dependence on key personnel. Such
statements reflect the current views of management with respect to future events
and are subject to these and other risks, uncertainties and assumptions relating
to the operations, results of operations, growth strategy and liquidity of the
Company. All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by this paragraph.
OVERVIEW
The Company was organized under the name Unique Ventures, Inc. as a "blind
pool" public company, under the laws of the State of Delaware on August 27,
1987, and changed its name to Computer Concepts Corp. in 1989. In March, 2000,
in an effort to allow the Company the opportunity to seek new management
perspectives and directions, the Chairman of the Board of Directors along with
the President / Chief Executive Officer / Treasurer retired. Mr James A.
Cannavino, was elected a board member and Chairman of the Board. Shortly
thereafter the three remaining members of the Board of Directors resigned. Dr.
Dennis Murray, president of Marist College and Mr. Charles Feld, Chief
Information Officer of First Data Resources and the former Chief Information
Officer of Delta Air Lines, were elected to the Company's board. In April, 2000,
Ms. Carla J. Stovall, the attorney general of the state of Kansas was elected to
serve as a member of the Board. In August, 2000, the shareholders voted to
approve to change the name of the Company to Direct Insite Corp. which the Board
of Directors believed was more in line with the new direction of the Company.
Direct Insite Corp. and its subsidiaries (hereinafter referred to as
"Direct Insite" or the "Company"), primarily operate as an application service
provider ("ASP") which today, markets 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.
Direct Insite's core technology is d.b.Express?, the proprietary and patented
management information tool, which provides targeted access through the mining
of large volumes of transactional data via the Internet. In 2001 the Company
acquired, Platinum Communications, Inc. ("Platinum"), a Dallas, Texas based
company, which markets its integrated proprietary back office software
solutions, Account Management Systems ("AMS") to the telecommunications industry
either as a license or as an ASP. The Company and Platinum completed a merger
under an Agreement and Plan of Merger ("Merger Agreement"). Under the Merger
Agreement, a newly formed wholly owned subsidiary of the Company acquired all of
the outstanding common stock of Platinum. Further, as an added source of
revenue, the Company, during 2001 began providing custom engineering services
for its customers.
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This newly assembled suite of services enables Direct Insite 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. The Company operates fully redundant data centers
located at our main office in Bohemia, N.Y. and in Newark, NJ. Our facility in
New Jersey is space leased at the IBM e-business Hosting Center. This
co-location / redundancy feature enables the Company to offer virtually down
time free service.
Currently, IBM Global Services, the Company's largest customer,
(representing approximately 82.2% of year 2001 revenue) utilizes our products
and services to allow their large enterprise customers to mine their respective
high volume telecommunications data to determine cost allocation by usage,
provide for network planning, budgeting and the identification of significant
trends in calling patterns. In addition, we added electronic invoice
presentment, payment and analysis capabilities to our services offering all
based on our d.b.Express? platform.
Historically, the most significant portion of the Company's operations had
been conducted through one of its subsidiaries, Softworks, Inc. ("Softworks").
Through Softworks, the Company developed, marketed and supported systems
management software products for corporate mainframe data centers. The Company
acquired Softworks in 1993. Softworks was wholly owned by the Company through
June 29, 1998. Through a series of transactions, as described in Note 3 to the
Consolidated Financial Statements, the Company's ownership of Softworks was
reduced from 100% to 35% as of December 31, 1999. Pursuant to a tender offer
made in December 1999, the Company sold its remaining interest in Softworks (a
total of 6,145,767 shares) to EMC Corporation and its subsidiary ("EMC") for
$10.00 per share. The transaction, which was completed in January 2000, provided
aggregate cash proceeds of $61,458,000, and resulted in a pre-tax gain, net of
expenses, of $47,813,000 recorded in the first quarter of 2000.
In 2000, the Company began a marketing initiative known as Global
Telecommunications Services ("GTS"). For a fee, this offering, which utilized
d.b.Express would analyze long distance, data and wireless communication needs;
assist in the negotiation of telecommunication contracts and monitor ongoing
carrier contract compliance. During the fourth quarter of 2001, as a result of
minimal revenue, the Company decided it would no longer market these services.
In June 1998, the Company acquired certain software and related sales and
marketing rights. The acquired software technology, marketed under the trade
name Bo Dietl's One Tough ComputerCOP ("ComputerCOP"), is designed to inform non
computer literate parents, guardians and alike, what materials, or possible
threats to the safety and well being of their children or others has been
accessed over the Internet, such as objectionable web sites, text, pictures,
screens, electronic mail, etc. The Agreement also included the rights to the use
of Richard "Bo" Dietl's name in conjunction with the promotion and endorsement
of the software as well as appearances by Mr. Dietl in support of the software
in regional and national marketing campaigns. Mr. Dietl has been recognized as
one of the most decorated police officers of the city of New York. In February,
2000, the Company sold a newly created wholly owned subsidiary with assets
consisting primarily of $20.5 million cash, the above referenced technology and
remaining marketing rights, inventory and related receivables for 1,775,000
shares of NetWolves Corporation (Nasdaq: "WOLV"). The transaction was valued at
approximately $35.5 million and resulted in a pre-tax gain of $8,534,000
recorded in the first quarter of 2000.
During 1999, the Company began to develop a multi-media display station,
which combined Internet strategy and e-commerce with multi-media forms of
delivery, presentation and interaction with end-users. This Internet based
communications/advertising network was being designed by the Company to create a
means by which businesses could promote specific brand/product/service
awareness. The Company intended to market this technology in association with
owners and/or managers of high traffic venue areas (i.e., malls, airports, etc.)
to local, regional and national businesses. From inception through March 31,
2000, the Company invested approximately $7,000,000 in its marketing and
development efforts (charged to operations as incurred). As part of the
Company's restructuring plan (Note 14 to the Consolidated Financial Statements),
the Board of Directors determined that it was in the Company's best interest to
immediately cease all funding of this project. As a result, in April 2000, the
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Company entered into a contractual arrangement with an unrelated third party,
whereby the Company transferred all of its in-process research and development
technology related to the multi-media display station for the rights to 50% of
the future profits (as defined), if any, from the third party's operation or
sale of this technology. All future costs associated with any continued
development and marketing of the display station would be absorbed by third
party. To date, the Company has not received revenue from this transaction.
In 1997, the Company created a business unit, "professional services",
which primarily resold computer hardware and for a fee, assisted in the design,
construction and installation of technology systems. In 1999, this business unit
had one major contract, involving two customers, which was completed in 1999.
Historically, net margins generated from this business unit were extremely low.
As a result, in January, 2000, the Company elected to significantly curtail the
operations of this business unit, and has further decided to completely refrain
from any marketing of this business unit.
PRODUCTS AND SERVICES
The Company generates revenue from three primary offerings: ASP- managed
services, which includes d.b.Express and EBP&P, custom engineering and its AMS
suite of services.
The Company offers, through its ASP - managed services, on fee for services
model, its customer's analysis and reporting tools, which in turn enabled their
customers to "mine" their own data. This service was primarily marketed to the
telecommunications sector. During 2001 the Company enhanced this service by
permitting its customers to ability to provide Internet customer care. It
completed this suite of services by adding EBP&P. This combined set of services
has allowed the Company to significantly expand its market, to include any large
enterprise in any industry that wishes to provide their own customer with an
electronic invoice as well as the ability to obtain reports and analysis
Previously, all of the electronic reporting and analysis capability of
d.b.Express was being delivered in support of the incumbent paper based billing
system. For simple or low volume detail accounts, electronically delivered
invoices are mostly a reproduction of the print stream or what is called a
"document centric" approach. This system is not designed to handle high volume
detail accounts. We believe that electronic invoices delivered by the
telecommunications carrier to its large enterprise customers will require the
ability to deliver all of the line item detail to support the summary billing
information as well as the tools necessary to mine that data. Direct Insite's
offering to this niche market includes the electronic presentation of invoices
along with the tools to verify the detail behind the invoice. The Direct Insite
offering is a "data centric" solution built on delivering summary billing
information constructed from the underlying detail data contained in our
d.b.Express database. Thus the supporting detail information, analysis and
reporting tools are made available to the end user thus reducing costs for both
provider and customer while improving customer service through customer self
care. We believe that this is a critical component and a compelling reason to
encourage companies to adopt electronic invoice presentment
With respect to this ASP - managed services offering, Direct Insite
generates revenue on a per- invoice basis, plus archiving and other added
charges. The Company believes this should create a stable, recurring revenue
stream in the future. As previously noted, the Company, during 2001 began
providing custom engineering services for its customers.
With respect to AMS, the company currently markets to the
telecommunications industry as the initial and primary market for this suite of
services. We believe we have identified an opportunity at the intersection of
telecommunications back-office software and business intelligence software: the
need to provide better information management tools for both carriers and their
large enterprise customers. Direct Insite developed a front end product to
integrate a presentment front end with d.b.Express, our high volume detail
processing, reporting and analysis backend, to deliver a high volume "data
centric" solution. With the acquisition of Platinum and the inclusion of the
extensive line of software (AMS) that automate all back office functions
including the important billing and rating function, Direct Insite now has a
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complete systems management solution based on the control of a single database,
all of the functionality required to manage the back office workflow and the
high volume information delivery system for demanding enterprise accounts that
includes EBP&P.
The acquisition of Platinum and their AMS carrier management system in May
2001 provides the Company with the complementary software products and
telecommunications industry management experience to offer the necessary
software tools to process the high volume of raw switch data to the
electronically presented invoice complete with data mining - all on an outsource
business model.
ASP - Managed Services
Direct Insite offers a number of software applications, which are marketed
as "managed services", formerly known as the server farm. The Company's
competency is in the area of data mining in large, complex databases with
hierarchical structures and the presentment of results in a highly visualized
manner. The core technology to its suite of services is d.b.Express?. Our
patented data base access technology is the host platform for the EBP&P, data
mining and visualization, as well as call rating and billing applications.
d.b.Express
Background
d.b.Express has been in development for more than ten years. The Windows
Version 1.0 of d.b.Express? was introduced in December, 1993, and the DOS
version was introduced in late 1992. Windows Version 2.0, with significantly
enhanced functionality based on user feedback, was introduced in the second
quarter of 1994 and a Windows 95(R) Version was introduced in the third quarter
of 1995. Windows NT(R), Internet Server and JAVA Applet versions were introduced
in 1996 and 1997. Version 6.0 was released during the fourth quarter of 1999;
significant new features include increasing the ability to interactively access,
via the Internet, millions of records in a matter of seconds.
d.b.Express is a software tool which assists end users in the retrieval and
visualization of all types of data. It allows customers to access and analyze
high volumes of technical and account information. With the patented data mining
technology found in d.b.Express, high volumes of detailed information is
presented in our unique interface known as a "Filescape". With d.b.Express, you
may create a Graph, Report, or simply List your information for easy viewing.
d.b.Express simplifies the preparation of traditional reports by giving you the
ability to view the billing data interactively using simple point-and-click
mouse operation. With d.b.Express, you are given the ability to drill down into
the call detail information allowing you to identify data trends and "cause and
effect" relationships in an interactive, graphical format.
For the Internet
d.b.Express has overcome a major Internet problem, that of high data volume
and limited bandwidth, currently responsible for the lengthy delays associated
with data downloading. This web based reporting and analysis system was
introduced to deliver all of the functionality of d.b.Express for the desktop
with the advantages of managing the monthly call detail records on a centralized
information server that is accessible via the World Wide Web. The Web based
information delivery via the Internet is preferable to CD-ROM because, in most
instances, large volumes of hard drive space are required. d.b.Express runs in
common web browsers such as Internet Explorer 5.X (and newer versions) plus
Netscape Navigator 4.X (and newer versions). This enables the ability to
interact with and report on large monthly billing period data via remote
Internet access.
Direct Insite provides an online, Internet based service offering that
provides the following features and functions for the end user:
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- Summary View of Invoice. Enables the payer to view invoices from an
aggregate level, thereby making it easier to see the total amount due and to
download information.
- Complex Presentment. (Data centric views). Data-centricity is the main
selling point of this solution. Not only does the system offer summary views, it
also provides users with in-depth itemizations, single data points, and
consolidation of multiple products and services.
- Data Mining and Visualization. Another benefit of data-centricity is the
ability to apply d.b.Express data mining technology across the entire enterprise
line item detail information not just a single operating unit or limited
geographical area of the business. Additionally, the system provides a
significant archiving capability such that 12 to 24 months of historical
invoicing/charges can be data mined for trend and optimization opportunities.
The results of the mining activity are presented in a highly visualized manner
to the user.
- Notification. Email notification is used for invoice alerts, disputes,
workflow, administration, invoice status and payment timing.
- Multi-tiered Accounts. Used for allocating portions of an invoice across
complex, payer organizational structures.
- Invoice Management. Enables the user to electronically route the invoice
through the approval chain; passing the designated portions of an invoice to
necessary parties for approval. This will also assist the user's ability to
verify whether the approving se parties have received the invoice and if the
portion has been reviewed, approved or disputed. We believe this to be a
cost-saving feature.
- Dispute Management. Includes automatic dispute resolution enabling the
biller to establish a threshold below which a dispute is automatically cleared.
- Payment and Remittance. Supports multiple payment options such as full
payment, schedule payment and auto payment. The system also supports
balance-forward accounting or open invoice accounting. Pre-scheduled payments
are also supported by the system.
- Billing Inquiry (or Trouble Ticket). Acts as a complaint service allowing
customers to communicate problems to the biller.
- Report Capabilities. Users can track orders, disputes, billing inquires,
payments and system usage. This reporting function is driven by an online
analytical processing (OLAP) tool that plugs into the user's database. This text
reporting capability complements the graphical representation of results that is
the output of the d.b.Express data-mining tool.
- Invoice Format Support. Payers can choose how they would like to receive
their invoices, via paper (PDF format) or electronically. From a usability and
adoption rate perspective, the electronic form of the invoice is presented in a
format that has a "look-n-feel" that is identical to that the customer may have
been receiving in hard copy format. Options for electronic delivery include
spreadsheet format such as Microsoft Excel. This functionality also applies to
payments since the system allows for paper or electronic receipts.
Advantages of d.b.Express
All Data Indexed - Unlike traditional database products, our software
indexes all data relationships, this eliminates the need to pre-determine what
questions need to be answered. This facilitates analysis to discover the
information normally hidden in summarized information and allows the user to
"drill down" to the individual records to produce results. This is accomplished
with our unique ability to visually present hundreds of millions of transaction
records processed into our proprietary database.
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Graphics Driven - The data is delivered via the Internet with simple
browser technology thus allowing any Internet user to manipulate huge databases
in seconds.
High Power / Low Cost - d.b.Express? enables users to analyze millions of
records over the Internet without the need to first download the data being
analyzed.
Better Access to Information - d.b.Express? improves the accessibility of
databases created by database management systems (DBMS) by eliminating the need
to write queries in computer code and facilitates data searches through the use
of graphical query tools. The Company believes that this results in more timely
and better quality business decision-making.
Broader Access to Information. - d.b.Express? enables a broader population
within an organization to visually and interactively mine their data without the
need or support from internal or external management information system (MIS)
professionals. d.b.Express? performs these tasks faster than any DBMS because
the software does not reread the database for each task; it only reads the
summaries it has created.
Ease of Use - d.b.Express? utilizes simple point and click technology,
which enables the user to view and analyze data to the lowest level of detail.
d.b.Express? provides powerful desktop functionality, via the Internet, that
allows the exploration of data patterns, trends, and exceptions. Data searches,
queries and analyses can be converted to sophisticated, simple to use
presentations providing integrated business graphics and report writing
capabilities.
Interfaces With Leading Databases and Other Tools - d.b.Express? provides
direct access to leading databases created by DBMS vendors and can be exported
to popular spreadsheets, report writers, graphics packages and word processors.
Integrates Data From Multiple Vendors - When d.b.Express? reads a database,
it creates its own summaries of information through its proprietary process.
Information contained in databases is formatted into d.b.Express's proprietary
format. This permits users to access and compare information contained in
enterprise-wide databases created by different vendors simultaneously in the
d.b.Express' user-friendly environment.
Works in Common Operating Environments - d.b.Express? operates in virtually
all file server and peer-to-peer networking environments providing secure visual
data mining functionality through Internet browsers.
High Processing Speed - Once a database source has been processed,
d.b.Express? employs proprietary matrix storage technology rather than rereading
each data element in that database. The elimination of the rereading step
through d.b.Express' proprietary process increases the speed of data access
enabling ad-hoc analysis at a rate we believe is far faster than possible with
any other system.
Security, Access and Storage - In order to meet the archival requirements
of customers, the Company produces CDs of each month's billing details. In order
to provide this service, the Company has put into place two fully redundant data
centers. The service is available 24 hours a day, 7 days a week, 365 days a
year.
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Disadvantages in regard to d.b.Express(TM) include the following:
Lack of Established User-base and Acceptance of the Product - d.b.Express?
is not yet widely used, which may defer acceptance. The Company believes its
focus on large-scale users and its low capital and deployment cost could help
overcome the lack of acceptance in the market place. There is no assurance that
the Company will be successful in reaching its sales plan to gain adoption of
the technology.
Limited Resources to Market and Promote d.b.Express? - The Company has
limited resources with which to market and promote d.b.Express?. Regardless of
the unique patented aspects of the product, if the Company is not able to
effectively market and promote the usage of the product, the successful
dispersion of the product as a widely used access tool may not be achieved.
Alternative Methods Available to Access Data and Potential New Technologies
- - d.b.Express' access method is patented and innovative. However, alternative
methods for accessing data exist, primarily text based search engines. We
believe that many of the alternative methods require knowledge of specific
database query languages. The Company is not aware of any alternative technology
which can effect data searches with the speed, and without sophisticated
programming skills, which, d.b.Express? provides; however, it is possible that
new technologies will be developed which may effectively compete with
d.b.Express?. If such new technologies are developed, they could negatively
impact the Company's ability to successfully market and promote d.b.Express? on
the Internet.
Electronic Bill Presentment and Payment - An Added Feature
A significant feature within the managed services offering is EBP&P. In
2001 the Company entered into the Electronic Bill Presentment & Payment services
business for the Business-to-Business ("B2B") market place with technology built
upon our d.b.Express platform. This extension to our core product offering is
well positioned to solve the two critical success factors/problems as defined by
the Gartner Group that are inhibiting growth of this market - (1) complexity of
deployment of such systems and (2) ability to integrate with a diversity of
Accounts Payable systems. We believe that our system meets or exceeds all of the
key market requirements to address the opportunity.
Market research data published by the Gartner Group shows the worldwide
market opportunity for EBP&P spending and the number of enterprise collectively
associated with such spending. This is projected to be a high growth industry
for the next several years and our product offering is targeted toward large
enterprise "billers" that do business with large enterprise "payers" that
require a system capable of delivering large numbers of invoices monthly along
with the associated line item detail and not summary information.
Account Management System - "AMS"
Direct Insite also markets Account Management System ("AMS"), which is
marketed to communications carriers as an end-to-end Integrated Management
System ("IMS") supporting most aspects of a Carriers' relationship with its
customers. The primary functionalities of AMS fall into two major aspects;
Billing -(the accumulation of detail transactions and service items that bill on
a recurring basis, the pricing of those items and the generation of an invoice,
paper or electronic, for those items), and Provisioning (the generation of
information utilized to enable or disable services to specific customers in
coordination with a customer order, available communications assets and network
devices or other carriers which are utilized to provide a communications
service). Within AMS is a secondary offering, Telecommunications Asset
Management System ("TAMS"). TAMS is marketed to enterprises which are large
consumers of communications services. Utilizing substantially the same software
assets in a modified presentation environment, TAMS allows the enterprise
customer to maintain an inventory of its communications assets, manage and audit
its relationship with the Carriers it purchases service from, allocate those
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costs throughout its organization and deliver that cost allocation via Web based
reporting tools.These products are the result of integrating and upgrading the
software assets of Platinum with db Express data visualization products and the
electronic invoicing products. Upgrades and enhancements are being developed,
which we expect will permit all aspects of each product to be accessible via the
World Wide Web as well as standardize the "look and feel" within the product
line. These efforts are scheduled for completion during the second quarter of
2002 and with substantial components already completed and generating revenue in
2001.
The AMS software is arranged in Modules, a listing of each module and its
primary feature sets follows:
Carrier Business Support Systems & Operations Support Systems BSS/OSS
AMS is an internally developed and maintained system for the enterprise
management of a Telecommunications Carrier. It is comprised of 10 major modules
covering: 1) Customer Service (CSS), 2) Call Rating (CRS), 3) Activation
Tracking (ATS), 4) Receivables Management (RMS), 5) Batch Processing (BPS), 6)
Commission Tracking (CTS), 7) Database Management (DMS), 8) Cycle Billing (CBS),
9) Debit Card Management (DCS), and 10) Product Configuration (PCS). These
systems each have an end-user interface and are supported by back-end processing
programs, reports and utilities. All system data is maintained in a Relational
Database Management System (RDBMS) such as Microsoft SQL Server, Oracle, or
Sybase. The database independent AMS system utilizes a client/server approach
operating on many different types of server operating systems and utilizing
Windows based Personal Computers for the desktop. AMS is a truly scaleable
system with the capability of the RDBMSs, which are available for Novell
NetWare, WindowsNT Server, UNIX operating systems, and Mainframe operating
systems.
Telecommunications Asset Management System -- the Large Enterprise Solution
TAMS provides Enterprises with the command and control over their own
telecom services to place the Enterprise at an advantage over their service
providers. TAMS not only provides control of the invoice collection, it also
provides end-user customer information including provisioning of new products
and services, presentment of invoices electronically for manager level approval
and interrogation, automatic general ledger integration and payment of invoices.
TAMS also provides the capability to allow Enterprises to gain the advantage
over their suppliers by utilizing telecommunication usage information to obtain
better pricing and terms of service from all suppliers. The TAMS suite of
products is designed to assist our customers in managing their telecom usage and
related information.
TAMS provides control over the monthly validation and approval process
related to telecommunications services. By capturing the standard charges as a
baseline inventory of services directly from the service providers prior to
billing, Enterprises can identify overcharging and miss charging, before the
monthly invoice is approved for payment. The added level of financial control
provides the Enterprise with the systematic methodology to aggressively manage
financial health as it relates to telecommunications cost components. The TAMS
application layer provides the systematic means to link invoiced services to
budgeted expenditure levels.
TAMS also allows:
- - Access to all end-user information via a Web based interface
- - Delivery of invoices electronically to approving managers via a Web based
interface
- - Approval or "Payment" of invoices electronically via a Web based interface
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SALES AND MARKETING
In addition to the Company's internal sales staff, it has three major
channels to market: direct sales, partners and agents. A technical sales support
group supports these channels.
Direct Sales
In January 2001, the Company began to increase its direct and channel sales
resources. As a result it employed a seasoned executive formerly with IBM, who
has more than 20 years of sales and management expertise in managing internal
sales as well as developing new sales channels. The Company now employs three
full-time sales people. In addition, Company executives are heavily involved in
both new client development and expansion of existing accounts.
Partners
Direct Insite will pursue relationships with companies who either provides
complementary products and services to the carriers, integrated services
providers and enterprises targeted by Direct Insite or provide a means for the
Company to enter new vertical markets.
Agents
Direct Insite has two agents on contract and anticipates expanding this
network with experienced organizations in the telecommunications industry, who
will assist the Company in its ongoing efforts to prospect and qualify
opportunities with integrated services providers and carriers for the
telecommunications solutions offering.
RESEARCH AND DEVELOPMENT
The computer software industry is characterized by rapid technological
change, which requires ongoing development and maintenance of software products.
It is customary for modifications to be made to a software product as experience
with its use grows or changes in manufacturers' hardware and software so
require.
The Company believes that its research and development staff, many with
extensive experience in the industry, represents a significant competitive
advantage. As of December 31, 2001, the Company's research and development group
consisted of 29 employees (45%). Further, when needed, the Company frequently
retains the services of independent professional consultants. The Company seeks
to recruit highly qualified employees, and its ability to attract and retain
such employees will be a principal factor in its success in maintaining a
leading technological position. For the three years ended December 31, 2001,
2000, and 1999, research and development expenses were approximately $2,734,000
$4,278,000, and $10,525,000, respectively. The Company's research and
development expenditures relating to its core technology, d.b.Express and
managed services were approximately $2,450,000, $2,600,000, and $5,650,000 for
the three years ended December 31, 2001, 2000 and 1999, respectively. The
Company believes that investments in research and development are required in
order to remain competitive.
COMPETITION
Many of the Company's current and potential competitors have greater name
recognition, larger installed customer bases, longer operating histories, and
substantially greater financial, technical and marketing resources than the
Company. The Company 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 the Company's current or future
9
products or that the Company's technologies and products will not be rendered
obsolete by such developments. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company believes that its primary competitors are Amdocs, Lucent
Technologies, Daleen Technologies, ADC, InfoDirections, Profitec, Data Beacon,
Callvision and DigiMine.
In the area of business intelligence software its primary competitors are
Business Objects, Cognos and MicroStrategy.
EMPLOYEES
The Company had 65 employees, all in the United States, at December 31,
2001, including 18 in marketing, sales and support services, 34 in technical
support, (including research and development) and 13 in corporate finance and
administration. The future success of the Company will depend in part upon its
continued ability to attract and retain highly skilled and qualified personnel.
Competition for such personnel is intense, and the Company has experienced
turnover in its management group. None of the Company's employees are
represented by a labor union. The Company believes that its relations with its
employees are good.
PATENTS AND TRADEMARKS
The Company has two federally registered trademarks, which it relies upon:
"d.b.Express? and "dbACCEL?. In addition, the Company received a patent for the
proprietary aspects of its d.b.Express technology in 1994, and a second,
expanded patent on that technology in 1995, which broadened the claims regarding
the product's graphical interface and indexing. No assurance can be given that
the Company's patents and copyrights will effectively protect the Company from
any copying or emulation of the Company's products in the future.
Notwithstanding the efforts the Company takes to protect its proprietary
rights, existing trade secret, copyright, and trademark laws afford only limited
protection. Despite our efforts to protect our proprietary rights and other
intellectual property, 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.
Item 2. PROPERTIES
The Company currently maintains leased facilities in the locations listed
below:
Description Location Square Footage Lease term Annual Rental Cost
- ----------- -------- -------------- ---------- ------------------
Corp Headquarters Bohemia, NY 10,000 7/1/94 - 6/30/02 $201,600
Texas office Dallas, TX 3,000 8/15/01 - 8/31/06 $74,000
Co-location facility Newark, NJ Note 1 2/1/01 - 1/31/04 $235,200
Note 1. The Company is obligated under the terms of an agreement with its major
customer to maintain its redundant / co-location IBM site. The redundant
facility provides the Company with, among other things, switches, routers,
racks, connections to Internet network access points, at a variety of
bandwidths, various levels on monitoring, and access to problem management
support.
The Company has an option to extend its lease in Bohemia, New York for two
years.
10
Item 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or of which any of its property is the subject.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the quarter
ended December 31, 2001.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK
The Company's common stock has been traded on NASDAQ SmallCap market
since September 23, 1992. The following table sets forth the high and low sales
prices for the Company's common stock by the fiscal quarters indicated, as
adjusted to reflect our one-for-fifteen reverse stock split on May 7, 2001.
High Low
---- ---
2000:
First Quarter $40.310 $22.035
Second Quarter 22.500 10.320
Third Quarter 16.875 10.320
Fourth Quarter 15.938 4.699
2001:
First Quarter 7.035 3.285
Second Quarter 5.140 1.633
Third Quarter 2.840 1.900
Fourth Quarter 1.990 0.990
2002
First Quarter 1.690 1.000
As of February 28, 2002, there were 3,083 shareholders of record. The
Company estimates that there are approximately 10,700 shareholders whose shares
are held in the name of their brokers or stock depositories.
In February 2000, the Company declared a dividend of $1.50 per share
(aggregating approximately $2 million) to its shareholders of record on March
15, 2000, and paid May 1, 2000.
The Company does not presently anticipate declaring any dividends for the
foreseeable future.
The following securities of the Company were issued during the fiscal
quarter ended December 31, 2001:
Recent Sale of Unregistered Securities
During the fourth quarter, the Company issued shares of its common stock as
follows:
- - Its Board of Directors agreed to accept in lieu of cash compensation for
services on various committees, a total 17,380 shares of common stock,
valued at $18,250;
- - Fees to several consultants aggregating 193,334 shares valued at $203,000;
- - The Company settled obligations to several of its vendors with 82,572
shares of common stock valued at $84,500.
12
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the five fiscal
years ended December 31, 2001,2000,1999, 1998 and 1997 are derived from the
Company's audited financial statements. To better understand the following
financial information, investors should also read the "Management's Discussion
and Analysis of Operations." This data should also be read in conjunction with
the consolidated financial statements of the Company, related notes, and other
financial information included elsewhere in this Form 10-K. All numbers are in
thousands, except per share amounts.
In August, 1998, Softworks completed a public offering, after which the
Company's ownership interest was reduced to approximately 72%. In April, 1999,
the Company's ownership of Softworks was reduced below 50%, and accordingly,
commencing April 1, 1999, Softworks' results are accounted for using the equity
method of accounting and are no longer consolidated. See Note 3 to the
Consolidated Financial Statements that provides pro forma consolidated financial
information as if the sale of Softworks was consummated as of the beginning of
the two years ended December 31, 2000, and 1999.
Consolidated Statement of Operations Data:
Year Ended December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenue $3,785 $2,120 $24,640 $61,988 $29,738
Cost of Revenue 806 322 13,044 21,018 3,663
------ ------ ------- ------- -------
Gross Margin 2,979 1,798 11,596 40,970 26,075
------ ------ ------- ------- -------
Research and Development 2,814 4,278 10,525 11,193 8,785
Sales and Marketing 2,532 4,644 17,417 28,496 17,033
General and Administrative 3,778 5,505 11,472 12,718 9,111
Amortization and Depreciation 985 871 4,738 4,207 2,386
Non-recurring Restructure Charge - 15,176 - - -
Unusual Charges - - - - 686
--------------------------------------------------
Total Operating Expenses 10,109 30,474 44,152 56,614 38,001
--------------------------------------------------
Operating loss (7,130) (28,676) (32,556) (15,644) (11,926)
Gain on Sale of Softworks - 47,813 17,107 28,785 -
Equity in Earnings of Softworks - - 512 - -
Gain on Sale of ComputerCOP in 2000
and Maplinx in 1997 - 8,534 - - 813
Other-Than-Temporary Decline in
Investment in NetWolves (150) (29,737) - - -
Corporation
Interest Charge Pertaining to Discount
on Convertible - (354) - - (1,288)
Debenture
Loss on sales of NetWolves common stock (3,666) - - - -
Other (Expense) Income, net (288) 724 316 (485) 16
Minority Interest in Earnings of Softworks - - (46) (1,361) -
--------------------------------------------------
(Loss) Income Before Provision for
Income Taxes (11,234) (1,696) (14,667) 11,295 (12,385)
Benefit From/(Provision For) Income Taxes 622 (10,040) 9,095 (1,748) -
--------------------------------------------------
Net (Loss) Income $(10,612) $(11,736) $(5,572) $9,547 $(12,385)
==================================================
Basic Net (Loss) Income per Share $(5.88) $(8.23) $(4.08) $8.70 $(16.65)
==================================================
Diluted Net (Loss) Income per Share $(5.88) $(8.23) $(4.08) $8.40 $(16.65)
==================================================
Cash Dividends Declared per Share $0 $1.50 $4.35 $0 $0
==================================================
Basic Weighted Average Common Shares
Outstanding 1,804 1,426 1,364 1,102 744
==================================================
Diluted Weighted Average Common
Shares Outstanding 1,804 1,426 1,364 1,135 744
==================================================
Year Ended December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Consolidated Balance Sheet Data:
Cash and Cash Equivalents $1,359 $10,851 $ 1,852 $ 8,176 $ 778
Working Capital 1,673 9,693 22,846 27,569 1,412
Total Assets 7,790 18,253 30,024 91,902 39,298
Long Term Debt, Less Current Portion 595 924 - 1,403 1,395
Minority Interest - - - 8,503 -
Shareholders' Equity 4,106 10,538 24,486 34,016 9,667
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Direct Insite Corp. and its subsidiaries (hereinafter referred to as
"Direct Insite" or the "Company"), primarily operate as an application service
provider ("ASP") which today, markets 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.
Direct Insite now has integrated with its core technology, d.b.Express?, the
proprietary and patented management information tool, which provides targeted
access through the mining of large volumes of transactional data via the
Internet, Platinum Communications, Inc. ("Platinum"), a Dallas, Texas based
company which markets its integrated proprietary back office software solutions,
Account Management Systems ("AMS") to the telecommunications industry either as
a license or as an ASP. The Company and Platinum completed a merger under an
Agreement and Plan of Merger ("Merger Agreement"). Under the Merger Agreement, a
newly formed wholly owned subsidiary of the Company acquired all of the
outstanding common stock of Platinum. Further, as an added source of revenue,
the Company, during 2001, began providing custom engineering services for its
customers.
Currently, IBM Global Services, the Company's largest customer,
(representing approximately 82.2% of year 2001's revenue) utilizes its core
technology, d.b.Express? to allow their large enterprise customers to mine their
respective high volume telecommunications data uncovering call abuse, deliver
cost allocation by usage, provide for network planning, budgeting and the
identification of significant trends in calling patterns.
During the year 2001, due to negligible revenue and as part of its
continuing effort to reduce costs and strive towards achieving operating
profitability, the Company halted all marketing efforts of its Global
Telecommunications Services ("GTS") offering.
Seasonality/Quantity Fluctuations
Revenue from managed services generally is not subject to fluctuations or
seasonal flows. However, the Company believes that revenue derived from custom
engineering, will have a significant tendency to fluctuate.
Other factors including, but not limited to, new product introductions,
domestic and international economic conditions, customer budgetary
considerations, the timing of product upgrades, and fee recognition in
connection with our telecommunications services may create fluctuations. As a
result of the foregoing factors, the Company's operating results for any quarter
are not necessarily indicative of results for any future period.
Financial Condition and Liquidity
During the year 2001, the Company incurred an operating loss of $7,130,000
and used $8,007,000 in operating activities. However, as a result major
reductions in spending, due in large part through the implementation of the
restructure plan put in affect in 2000, the Company was able to reduce its
operating loss by $21,546,000 from year 2000's loss of $28,676,000 as well as
reduce cash used in operating activities approximately $14,760,000 from a year
ago.
14
Cash requirements of the Company have, in the past, been primarily funded
through the sale of Softworks common stock, which included a series of separate
transactions that included an initial public offering of Softworks in 1998, a
private placement of Softworks common stock owned by the Company, a second
public offering of Softworks in June 1999 and the sale of its remaining position
in January 2000. Additional cash requirements for years 2001 and 2000 were
derived from the sale of Netwolves common stock and the sales of Convertible
Debentures in 2000. Further, during 2001 the Company raised $500,000 from the
sale of its own common stock to its Chairman.
As discussed above, the Company implemented a restructure plan during the
first quarter of 2000. At December 31, 2001, the remaining cash requirement is
$786,000, $294,000 is payable over the next twelve months, and $492,000 is
payable thereafter through March 2005. See "Results of Operations" and Note 14
to the Consolidated Financial Statements for further details.
On September 27, 2000, the Company entered into an agreement to sell an
aggregate principal amount of $3,000,000 of Convertible Debentures (the
"Debentures") bearing interest at a rate of 6% per annum. The Company sold a
$2,000,000 Debenture on September 27, 2000, a $500,000 Debenture on October 27,
2000 and, an additional $500,000 Debenture on December 21, 2000. The Company
received $3,000,000 less legal and other expenses aggregating $119,000. On
January 30, 2001, the Company exercised its prepayment rights and paid the
holders $3,700,000, plus accrued interest. As a result of the prepayment, the
Company recorded a loss of $185,000 in the first quarter 2001.
During 2001, the Company purchased $790,000 of additional equipment,
predominantly for use in the Company's data centers. Additionally, the Company
obtained the AMS technology through its acquisition of Platinum; the Company
expended approximately $109,000 of net cash for this acquisition.
In February 2001 the Company made an equity investment of $500,000 in
Voyant Corp. The investment is reflected on the Company's balance sheet as a
non-marketable security. Additionally, in November 2001, the Company acquired
15,680,167 shares of Voyant in exchange for 60,000 shares of NetWolves common
stock fair valued at $156,000. Further, as part of an anti-dilution protection
clause in the initial investment agreement, the Company is entitled to
approximately 46,000,000 additional shares, which will increase the Company's
ownership in Voyant to approximately 10.5%. Voyant is a privately held company,
and accordingly, through December 31, 2001, the investment has been reflected on
the Company's balance sheet as a non-marketable security, at cost. The Company
recently began providing administrative services to Voyant and will begin
charging Voyant $5,000 per month effective January 1, 2002; the value of these
services is not readily determinable. The Company's Chairman is also the
Chairman of Voyant. As a result of the foregoing, the Company believes that it
has achieved a level of influence such that the Company expects to account for
Voyant using the equity method commencing January 1, 2002.
At December 31, 2001, the Company owned 298,500 shares of NetWolves common
stock with a quoted market value $1,209,000 ($4.05 per share). During March and
April 2002 the Company sold 120,000 shares receiving net proceeds of
approximately $236,000. On April 5, 2002 the Company owned 178,500 shares, the
quoted market value of the NetWolves common stock was $2.40 per share,
aggregating $428,400.
As discussed above and as detailed in the Consolidated Statement of Cash
Flows, during the year ended December 31, 2001, the Company received net
proceeds of $2,834,000 from the sale of NetWolves common stock and $500,000 from
the sale of the Company's common stock, while utilizing $3,751,000 to repay the
Debentures, $8,007,000 in operating activities (including $1,483,000 toward the
restructuring), resulting in a cash balance of $1,359,000 as of December 31,
2001.
Management's current short-term plan is primarily focused on achieving
operating profit by successfully marketing innovative software products and
services that capitalize on the Company's patented technologies. To achieve its
goals, the Company has restructured its operations, which reduced its operating
expenses, while continuing to market managed services, as well as continue to
expand its custom engineering service. Additionally, the Company intends to
increase revenue from the products and services acquired from Platinum. The
Company is continually reviewing its long-term business strategy.
15
The Company is continually striving to achieve positive cash flows from
operations. Significant components within the Company's plan include but are not
limited to:
- - The March 2000 restructure plan, which significantly reduced operating
expenses;
- - Expanding the Company's products and services;
- - Materially improving its sales efforts through expanding its marketing
staff;
- - In 2002, the Company entered into a new ASP agreement with International
Business Machines Corporation ("IBM"), which will enable IBM to provide an
electronic invoice to their customers;
- - The Company generated in excess of $800,000 in custom engineering fees in
2001 and believes that this revenue should continue into 2002;
- - The Company also acquired Platinum Communications, Inc. (Note 3), which
broadened the Company's product offerings. Management believes this
acquisition significantly enhances the Company's current market strategy by
allowing it to capitalize on the growing trend for outsource services
within the communications sector;
- - As an additional measure to reduce the Company's use of cash, a payroll
rate reduction program was in effect October 1, 2001 through March 31,
2002. This plan reduced executive compensation 20% and the remainder of the
work force incurred a 10% reduction;
- - The Company was unable to generate revenue from its GTS product offering
and ceased marketing this product offering and eliminated all associated
costs;
- - In October 2001, the Company also entered into an Accounts Receivable
Purchase Agreement, which has provided an additional source of liquidity;
- - In January, 2002, the Company's Chairman loaned $250,000 to the Company.
This loan is due January, 2005 and bears interest at 5.0% annually.
- - Subsequent to year-end the Company raised an additional $362,000 through
the sale of its common stock to members of its Board of Directors, senior
management and other non-related parties. Additionally, the Company has
obtained a commitment from its Chairman, other members of the Board of
Directors as well as its executive officers, in which they will provide up
to $750,000 for working capital purposes, if needed.
Management believes that its plan will ultimately enable the Company to
generate positive cash flows from operations. Until such time, the Company
believes that its present cash on hand, the sale of the remainder of its
NetWolves common stock, as well as obtaining additional debt and/or equity
financing should provide adequate funding through at least December 31, 2002.
However, there can be no assurances that the Company will have sufficient funds
to implement its current plan. In such an event, the Company would be forced to
significantly reduce its operating expenses, which could have an adverse effect
on future revenue generation.
The Company's primary market is Telecommunications. It has been estimated
that over $600 billion a year globally, and over $269 billion domestically was
spent last year, with the largest percentage growth occurring in the wireless
arena ($37 to $48 billion), which emphasizes that the telecommunications
industry is lucrative and attractive. The Company believes it can provide both
the provider as well as the end- user, with products and services that offer
improved service as well as valuable information. Internet and wireless
communications are introducing change to an industry that is already undergoing
structural change (fiber optic cable vs. copper), deregulation, globalization,
and technology. With the tremendous increase in call detail records (CDR) and
data packets (DP) that will travel over wired and wireless networks, the Company
believes that it is well positioned to benefit from these market conditions with
its software and services offerings.
Results of Operations
Fiscal 2001 Compared to Fiscal 2000
For the year ended December 31, 2001, total revenue increased 78.5% or
$1,665,000, to $3,785,000 when compared to the year ended December 31, 2000.
During 2001, revenue from ASP fees for its managed services offering amounted to
16
$2,506,000 or nearly two-thirds (66.2%) of the Company's revenue, a $459,000
(22.4%) increase in same source revenue over the prior year. This increase is
primarily the result of new / expanded services with International Business
Machines Corporation ("IBM"). During the second half of 2001, the Company
entered into a new agreement with IBM wherein for a per transaction fee, the
Company enables IBM to present invoices to a portion of its customers via the
Internet. This EBP&P offering has since been expanded to include additional
functionality. In March 2002, the parties signed a new agreement, which allows
IBM to expand this EBP&P offering to more of its customers, both domestic and
international. The Company continues to provide data analysis and reporting
services for IBM's telecommunications customers.
During 2001, the Company began providing custom integration / engineering
services. Revenue generated from this offering aggregated $814,000 for the year
ended December 31, 2001. Management believes that revenue generated from custom
engineering services should continue into 2002. The Company further believes
that revenue generated from engineering services is the precursor to added
recurring revenue sources. In an effort to better serve its customers, the
Company built a fully redundant facility within an IBM co-location center, the
purpose of which is to ensure virtual zero down time.
IBM is currently the Company's largest customer, accounting for
approximately 82.2% of total revenue or $3,110,000 and $1,707,000, or 80.5% of
total revenue for 2001 and 2000, respectively. Further, the Company is presently
investigating entry into new specific markets for these managed services.
Included in total revenue for 2001, is $465,000 generated by Platinum. (See
Note 3). In May 2001 the Company completed the acquisition of Platinum, which
developed and markets an integrated proprietary suite of back office software
solutions, known as AMS to the telecommunications industry as an ASP.
Included in revenue for 2000, is $31,000 related to ComputerCOP, which was
sold during the first quarter of 2000. (See Note 3)
For the year ended December 31, 2001, cost of revenue attributable to
managed services was $406,000 or 16.2% on respective revenue, approximately one
percentage point higher than the previous year. Cost of revenue, associated with
recently acquired AMS revenue was 16% or approximately $74,000. The most
significant components of managed services cost of revenue and AMS cost of
revenue include direct labor associated with processing call detail records,
Internet connectivity costs and various overhead allocations, rent, utilities
and telephones. Costs relating to custom engineering fees aggregated to $326,000
or 40.0% and consisted primarily of direct labor plus related employee benefits,
travel and consulting fees. The Company believes that it will be able to
maintain the cost to revenue ratio during the coming year. For the year ended
December 31, 2000, the Company also incurred cost of revenue of $46,000 relating
to ComputerCOP. There is no depreciation or amortization included in cost of
revenue.
Research and development expenses consist primarily of salaries and related
costs (benefits, travel, training) for developers, sales application engineers,
quality control / quality assurance and documentation personnel. It also
includes consultants as well as applicable overhead allocations. Overall, when
comparing the full year 2001 with full year 2000, the Company reduced its
research and development expenses by $1,464,000. However, included in 2000 were
costs associated with the development of a multi-media display station. Pursuant
to the restructuring plan put in place during March 2000, the Company ceased
development of the multi-media display station. As a result, there are no
expenses attributable to this project in 2001, thereby creating a reduction of
$1,793,000 when compared to 2000. Offsetting this decrease was $284,000 incurred
as a result of the acquisition of Platinum. With respect to ASP- managed
services, the Company continues to upgrade, improve and enhance its current
products and services. As a result, development expenses directly attributable
to managed services increased over prior year by $45,000. Management believes
that it is critical to maintain a qualified personnel staff and, further to
continue to enhance as well as develop new and innovative services and products.
As such, it is likely that these costs could increase in future periods.
17
Sales and marketing expenses include salaries and related costs,
commissions, travel, facilities, communications costs and promotional expenses
for the Company's direct sales organization and marketing staff. Sales and
marketing expenses decreased $2,112,000 to $2,532,000 for the year ended
December 31, 2001, when compared to $4,644,000 for the year ended December 31,
2000. The major factor for this decrease was the restructure plan, which
included, among other items, the elimination of $690,000 related to consultants'
fees, $333,000 reduction in travel and entertainment expenses, and $397,000 in
reduced staffing levels. Further, as part of the restructure plan, there was a
reduction of expenses of $597,000 as a result of a contractual arrangement
wherein the Company no longer is responsible for the marketing efforts relating
to the multi-media display station. The Company has also reduced by nearly
$124,000 its advertising and promotional costs and $55,000 and $40,000 related
to auto expense and telephone expense, respectively. An additional component of
the reduction is the sale of ComputerCOP in the first quarter 2000, which
created a savings of $210,000. These reductions were offset by an increase of
$136,000 of expenses attributable to the sales and marketing efforts of the
Company's GTS offering as well as $410,000 to the Company's newly acquired
subsidiary, Platinum. As a result of minimal revenue generated by GTS, we have
decided to no longer market this product offering. As such, sales and marketing
costs associated to the GTS product offering which totaled $366,000 during 2001
will not reoccur in future periods.
General and administrative expenses include administrative and executive
salaries and related benefits, legal, accounting and other professional fees as
well as general corporate overhead. Expenses decreased $1,727,000 to $3,778,000
for year ended December 31, 2001, when compared to the year ended December 31,
2000. Major factors contributing to this decrease include, among other things,
the cost savings generated by the implementation of the restructure plan in
2000, which resulted in net reductions in wages and related benefits of
approximately $928,000. In additional the Company was able to reduce legal
expenses $479,000, reduced its travel and entertainment by $147,000, and
eliminated or reduced its dependency on financial consultants by $196,000. These
reductions were offset by $113,000 attributable to the Company's newly acquired
subsidiary, Platinum. It should be noted that general and administrative costs
associated to the GTS product offering, which totaled $104,000 for the year
ended December 31, 2001 will not reoccur in future periods as a result of
management's decision to no longer market this product offering.
Amortization and depreciation expenses increased $114,000 when comparing
the years ended December 31, 2001 and 2000, respectively. The increase is
primarily attributable to the purchase of property and equipment during the
respective periods and amortization of intangibles associated with Platinum.
Gain on sale of Softworks of $47,813,000 during 2000 represents the gain
associated with a tender offering for the purchase of Softworks common stock
made by EMC Corporation, which was completed on January 27, 2000. (See Note 3)
Gain on sale of ComputerCOP assets held for sale of $8,534,000 during 2000
represents the gain associated with an agreement dated February 10, 2000 for the
sale of the ComputerCOP subsidiary to NetWolves Corporation. (See Note 3).
During the year ended December 31, 2001, the Company sold 466,500 shares of
NetWolves common stock in the open market, 1,000,000 shares in a private
transaction, and exchanged 110,000 shares for various services, resulting in a
net loss on sales of approximately $3,666,000. During 2001 and 2000, the Company
determined that there was an other-than-temporary decline in the carrying value
of its investment in NetWolves. As such, the Company recorded an unrealized loss
of $150,000 and $29,737,000, respectively, in the Consolidated Statements of
Operations (See Note 8).
As a result of the Company's sale of its remaining interest in Softworks in
January 2000 and the sale of its ComputerCOP technology in February 2000, the
Company recognized a taxable gain in the first quarter of 2000 and utilized
approximately $36,000,000 of its net operating loss carryforwards ("NOLs"). The
Company's tax provision for year ended December 31, 2000, of $10,040,000,
consisted of deferred tax expense of $9,197,000 and current tax expense of
$843,000, which was primarily based upon the alternative minimum tax. The
18
Company's tax benefit for the year ended December 31, 2001 was approximately
$622,000. The tax benefit is generated from the Company's ability to carryback
capital losses to obtain a refund of a portion of the alternative minimum taxes
paid for 2000. The Company currently has $49 million of NOLs available to be
utilized in 2002 that expire through 2021. While usage of these NOLs could be
limited pursuant to Internal Revenue Code Section 382 as a result of future
changes in control (if any), the Company currently expects that usage of its
NOLs will result in nominal current income tax expense in the foreseeable
future. The Company has not recorded a deferred income tax benefit from these
NOLs, since it has provided a valuation allowance due to the uncertainty of
their realization.
Fiscal 2000 Compared to Fiscal 1999
Commencing April 1, 1999, Softworks' results were accounted for using the
equity method of accounting and were no longer consolidated. Under the equity
method of accounting, the Company's share of Softworks' earnings or losses was
included in the Company's consolidated operating results in a single line item.
Pro forma consolidated operating results as if Softworks were accounted for
using the equity method for the entire year ended December 31, 1999, on a
consistent basis with the actual results for 2000, is as follows:
20
Direct Insite Corp. and Subsidiaries
Pro Forma Condensed Consolidated Statements of Operations
For the year ended December 31,
( in thousands)
2000 1999
---- ----
(Actual) (Pro-forma)
Revenue
Software licenses, net $ 31 $ 607
Maintenance 42 42
Managed services 2,047 1,436
Professional services - 12,297
------- -------
2,120 14,382
Cost of Revenue
Software licenses 11 242
Maintenance - -
Managed services 311 317
Professional services - 11,721
------- -------
322 12,280
------- -------
Gross margin 1,798 2,102
------- -------
Research and development costs 4,278 8,025
Sales and marketing costs 4,644 12,476
General and administrative costs 5,505 10,281
Non-recurring restructuring charge 15,176 -
Amortization and depreciation 871 4,028
------- -------
30,474 34,810
------- -------
Operating loss (28,676) (32,708)
Gain on partial disposition of Softworks 47,813 17,107
Gain on sale of ComputerCOP 8,534 -
Other-than-temporary decline in Investment in
NetWolves (29,737) -
Other 370 874
------- -------
Loss before income taxes (1,696) (14,727)
(Provision for) benefit from income taxes (10,040) 9,155
------- -------
Net loss $(11,736) $(5,572)
======= =======
20
The following discussion dealing with the results of operations for the two
years ended December 31, 2000 and December 31, 1999 are based on the operating
results as presented in the above table.
During 2000, the Company's primary source of revenue was generated from
managed services. For the year ended December 31, 2000, total revenue decreased
by $12,262,000, as compared to the year ended December 31, 1999. In January,
2000, the Company elected to significantly curtail operations of its business
unit, marketed as professional services, which primarily resold computer
hardware and assisted in the design, and installation of technology systems. For
the year ended December 31, 1999, this business unit had one major contract
involving two major customers, with combined revenue of $12,297,000. However,
this business unit generated low margins, and operated in a highly competitive
and volatile business arena. Accordingly, management elected to significantly
curtail the operations of this unit, as it does not coincide with its short and
long-range business plans. The Company did not have any other sales contracts.
In February 2000 the Company sold the ComputerCOP Corp subsidiary accounting for
a decrease in the software license revenue of $576,000. For the year ended
December 31, 2000 managed services revenue was $2,047,000,an increase of
$611,000 or 43% over the prior year.
Managed services generates higher gross margin than the hardware reselling
business. Managed services cost of revenue consists primarily of the direct
labor associated with processing call detail records. The cost of revenue
related to the resale of computer hardware consisted primarily of amounts paid
to the Company's suppliers for goods and services. While managed services
revenue for 2000 increased 43% when compared to 1999, cost of revenue as a
percentage of managed services revenue, decreased to 15.2% in 2000 from 22.1% in
1999. The Company believes that the cost of revenue associated with managed
services revenue is not directly proportional. As such, as revenue increases,
costs, as a percentage of revenue, should decrease. The depreciation of managed
services's hardware is included in "Amortization and depreciation."
Research and development expenses include costs for the development of the
multi-media display station (until the project was halted by the restructuring
plan), salaries and related costs for software developers, quality assurance and
documentation personnel involved in the Company's research, development and
maintenance efforts. Costs attributable to the development of the multi-media
display station was $3,826,000 for the year ended December 31, 1999, and
decreased by $2,033,000 to $1,793,000 for the year ended December 31, 2000.
Pursuant to the restructuring plan, the Company ceased development of this
project in the first quarter of 2000, thereby eliminating these development
costs. With respect to managed services, when comparing 2000 and 1999, the
Company reduced its development costs by $1,714,000. However, the Company
believed that costs attributable to further enhancing product and services
offerings, porting the technology to a LINUX platform and development costs
directly associated with the co-location facility could result in increases to
overall research and development expenses during 2001.
Sales and marketing expenses include salaries and related costs,
commissions, travel, facilities, communications costs and promotional expenses
for the Company's direct sales organization and marketing staff. For the year
ended December 31, 2000, expenses decreased by $7,832,000 to $4,644,000 when
compared to $12,476,000 for the same period last year. Included in this decrease
were reductions pursuant to the restructuring plan including $3,151,000 related
to consultants' fees; $626,000 to reduced staffing levels; reductions of
approximately $3,696,000 due to the sale of ComputerCOP; $167,000 reduction in
travel and entertainment expenses; and $194,000 pertaining to efforts to market
the multi-media display station. Offsetting these decreases was $230,000 of
expenses attributable to the Company's new consulting service. Management
believed that, overall, this category would significantly decrease as a result
of the restructure plan.
General and administrative expenses include administrative and executive
salaries and related benefits, legal, accounting and other professional fees as
well as general corporate overhead. Expenses decreased $4,776,000 to $5,505,000
for the year ended December 31, 2000, when compared to the year ended December
31, 1999. Major factors contributing to the decrease include, among other
things, various savings directly attributable to the restructure plan, such as
staff reductions, reduced legal expenses and the reduction in the retention of
financial consultants. The Company anticipated recognizing additional reductions
during 2001.
21
As discussed above, the Company implemented a restructure plan during
the first quarter of 2000. As a result, for the year ended December 31, 2000,
the Company recorded a non-recurring restructuring charges of $15,176,000
related to the termination of 53 employees, retirement packages for certain
Company officers and directors, and the termination of certain long-term
consulting contracts and operating leases. The Company anticipated that the
cost-saving initiatives would continue into 2001 and could result in additional
charges.
Amortization and depreciation expenses decreased $3,157,000 when comparing
the years ended December 31, 2000 and 1999. The decrease is primarily
attributable to the elimination of purchased software and goodwill acquired in
the ComputerCOP transaction.
Gain on sale of Softworks of $47,813,000 represents the gain associated
with a successful tender offer for Softworks common stock made by EMC
Corporation, which was completed in January, 2000.
Gain on sale of ComputerCOP assets held for sale of $8,534,000 represents
the gain associated with the sale in February 2000 of the ComputerCOP subsidiary
to NetWolves Corporation.
During the fourth quarter of 2000, the Company, in accordance with Staff
Accounting Bulletin No. 59, determined that there was an other-than-temporary
decline in the carrying value of its investment in NetWolves. As such, the
Company recorded an unrealized loss of $29,737,000 in the Consolidated Statement
of Operations. See Note 3 to the Consolidated Financial Statements.
As a result of the Company's sale of its remaining interest in Softworks in
January 2000 and the sale of its ComputerCOP technology in February 2000, the
Company recognized a taxable gain in the first quarter of 2000 and utilized
approximately $36,000,000 of its net operating loss carryforwards. The Company's
tax provision for year ended December 31, 2000, of $10,040,000, consisted of
deferred tax expense of $9,197,000 and current tax expense of $843,000, which
was primarily based upon the alternative minimum tax.
22
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments that would
require disclosure under this item.
Item 8. FINANCIAL STATEMENTS
The financial statements and exhibits to Form 10 - K are included beginning
on page F-1 and are indexed under Items 14(a), and 14 (b) respectively.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
AND FINANCIAL DISCLOSURE
Previously disclosed.
23
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Directors and Executive Officers
As of April 1, 2002, 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 57 Chairman of the Board of Directors Audit, Compensation
Charles Feld 60 Member of the Board of Directors Compensation
Dennis Murray 56 Member of the Board of Directors Audit
Carla Stovall 45 Member of the Board of Directors Audit
Warren Wright 42 Chief Executive Officer
Anthony Coppola 47 President
George Aronson 53 Chief Financial Officer, Secretary
James A. Cannavino has been our Chairman of the Board since March 2000. Mr.
Cannavino also has been the Chairman of Voyant Corporation since February 2000.
From September of 1997 to April of 2000 he was elected non-executive Chairman of
Softworks, Inc (a wholly owned subsidiary of Computer Concepts), 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 hired as President and Chief Operating Officer of Perot Systems
Corporation. 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 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's career worked over thirty years at IBM
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. . He also was a board member for
three IBM joint-venture companies, including Prodigy Services, Inc.; Digital
Domain, Inc.; and NewLeaf Entertainment. Mr. Cannavino presently serves on the
Boards of the National Center for Missing and Exploited Children, the
International Center for Missing and Exploited Children, Verio , and is Chairman
of Artimas International. He recently was Chairman of the Board of Marist
College in Poughkeepsie, New York and continues to serve on the board. Mr.
Cannavino will serve on the Board until the next annual meeting of Shareholders.
Charles Feld founded the Feld Group in 1992 to offer Fortune 500 and
emerging companies the technology leadership they need to transform themselves
into category leaders. As CEO and President of the Dallas-based firm, Mr. Feld
currently serves as acting CIO at First Data Resources. His earlier Feld Group
engagements include working transformational change as CIO and e-Leader at Delta
Air Lines by building the framework to place the airline at the forefront of
Global 1000 companies that understand and embrace the new economy. The Delta
Technology team received the Smithsonian Award for Technology Excellence in
1998. As CIO of Burlington Northern, Charlie spearheaded the merger of the
railroad's technologic systems and organization with those of the Santa Fe
Railroad. Before launching The Feld Group in 1992, he was Vice President/CIO at
Frito-Lay, Inc., where he played a pivotal role in streamlining the data network
and developing the hand-held computer network for Frito-Lay's sales force. His
team at Frito-Lay won the Smithsonian Award for Technology Excellence in 1998.
Mr. Feld has been a member of the Board of Directors since March 2000, and will
serve in such capacity until the next annual meeting of the shareholders.
24
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 G5 S/390 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 Greenway Conservancy for the Hudson River Valley, which
oversees the 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. Mr. Murray has been a member of the Board of Directors since
March 2000, and will serve in such capacity until the next annual meeting of the
shareholders.
Carla J. Stovall has been the Attorney General for the State of Kansas
since 1994. Attorney General Stovall also currently serves as Vice President of
the National Association of Attorneys General and will become the Association's
president in 2001. 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 Stovall recently was honored with the Distinguished
Service to Kansas' Children Award. Ms. Stovall has been a member of the Board of
Directors since April 2000, and will serve in such capacity until the next
annual meeting of the shareholders.
Warren Wright was appointed CEO effective December 2000 after serving as a
sales and marketing consultant to the Company since July, 1999. Prior to his
joining the Company, Mr. Wright had been a marketing consultant based in New
York for four years, providing consulting services to several e-commerce and
technology companies including Voyant Corp., Direct Media Networks and Laguna
Corporation. Prior to consulting, Mr. Wright was Sr. Vice president - Sales and
Marketing for King Products, a Canadian based manufacturer of advanced
multi-media telecommunication products and software. Mr. Wright was responsible
for strategic alliances and the expansion of distribution internationally. Prior
to his tenure at King products, Mr. Wright developed and sold a direct media
advertising publication and also served as Marketing Manager for Westcan
Electrical Manufacturing (a division of Siemens AG). Mr. Wright holds a degree
in Economics from the University of Western Ontario and completed graduate work
at Ohio University.
Anthony Coppola was appointed President in March, 2000. From January, 1999
until his appointment as President, Mr. Coppola was Executive Vice President in
charge of development, marketing and sales of our d.b.Express based
telecommunications Electronic Bill Presentment Payment Analysis and Reporting
software. Beginning in 1994, Mr. Coppola worked with us in various capacities
related to sales and marketing management. His responsibilities included the
management and direction of the design and programming for the
telecommunications applications, as well as direct involvement with the sales
and marketing of our applications and services to IBM and our other primary
customers. Prior to joining us , Mr. Coppola was President of America Multimedia
Corp., a firm active in consulting and the development and marketing of industry
specific training software.
George Aronson, CPA, has been the Chief Financial Officer of the Company
since August, 1995. From March, 1989, to August, 1995, he was the Chief
Financial Officer of Hayim & Co., an importer/distribution organization. Mr.
Aronson graduated from Long Island University with a major in accounting in 1972
receiving a Bachelor of Science degree and is a Certified Public Accountant.
25
Item 11. 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, 2001.
Summary Compensation Table
Annual Compensation Long-Term Compensation
---------------------------------- -------------------------------
Restricted Securities
Name and Fiscal Other Annual Stock Awards Underlying
Principal Position Year Salary Bonus Compensation (2)(3)(5) Options/Warrants
- ----------------------------------------------------------------------------------------------------------
Warren Wright (1)(5) 2001 $184,000 $ -- -- $ 25,000 25,000
Chief Executive 2000 90,000 -- -- -- --
Officer 1999 20,000 -- -- -- --
Anthony Coppola(2)(4)(5) 2001 $181,000 $ 37,000 -- $ 50,000 15,000
President 2000 154,000 95,000 -- -- 7,600
1999 136,000 200,000 -- 218,000 667
George Aronson(2)(3) 2001 $166,000 $ -- -- $ -- 15,000
Chief Financial Officer 2000 175,000 -- -- 500,000 6,667
1999 170,000 150,000 -- 382,000 --
Arnold Leap(2) 2001 $169,000 $ -- -- $ 17,000 15,000
Chief Technology Officer 2000 126,000 31,000 -- -- 9,667
1999 112,000 -- -- 62,000 2,333
Footnotes
- ---------
(1) Mr. Wright was appointed CEO November 30, 2000.
(2) The Company granted cash bonuses in 1999, to Messrs. Aronson and Coppola in
the amounts of $150,000 and $200,000, respectively. Mr. Coppola received
$218,000 in the form of the Company's common stock. The remainder of Mr.
Aronson's 1999 bonus consists of restricted shares of Softworks common
stock. Mr. Leap received 3,000 shares of Softworks common stock in 1999.
(3) In February 2000, Mr. Aronson received 25,000 shares of common stock of
Netwolves Corporation that was valued at $20 per share at the time of
grant.
(4) Mr. Coppola was appointed President in March 2000.
(5) The Company granted stock bonus' in 2001 to Messrs. Wright, Coppola and
Leap in the amounts of $25,000, $50,000and $17,000, respectively. Mr.
Coppola also received a $37,000 cash bonus in 2001.
Option/SAR Grants in Last Fiscal Year
- -------------------------------------
During 2001 the following options grants were made to the named executive
officers:
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
74.1%, risk free interest rate of 5.79% and expected lives of 1.00 to 4.50
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.
26
% of Total
Options
Number of Granted Hypothetical
Options Employees Exercise Expiration Value at
Name Granted in Fiscal Year Price Date Grant Date
- ---- ---------- -------------- -------- ----------- -------------
Warren Wright 25,000 9.7% $ 1.63 04/30/06 $20,000
Anthony Coppola 15,000 5.8% 1.63 04/30/06 12,000
George Aronson 15,000 5.8% 1.63 04/30/06 12,000
Arnold Leap 15,000 5.8% 1.63 04/30/06 12,000
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End
Option Values
The following table set forth certain information with respect to stock
option exercises by the named executive officers during the fiscal year ended
December 31, 2001, and the value of unexercised options held by them at fiscal
year-end.
Number of Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Year End At Fiscal Year End (1)
Shares Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ---------------- ------------ ----------- ------------- ----------- --------------
Warren Wright -- -- 12,500 12,500 $ -- $ --
Anthony Coppola -- -- 20,284 10,033 -- --
George Aronson -- -- 24,167 7,500 -- --
Arnold Leap -- -- 15,697 10,500 -- --
Footnotes
- ---------
(1) Market Value of the Company's Common stock on December 31, 2001, was $1.27.
There were no in the money options at year-end.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of shares of voting
stock of the Company, as of March 25, 2002, of (i) each person known by the
Company to beneficially own 5% or more of the shares of outstanding common
stock, based solely on filings with the Securities and Exchange Commission, (ii)
each of the Company's executive officers and directors and (iii) all of the
Company's executive officers and directors as a group. Except as otherwise
indicated, all shares are beneficially owned, and investment and voting power is
held by the persons named as owners.
27
Common Stock Rights to Acquire Total Beneficially
Beneficially Beneficial Ownership Through Owned as % of
Name of Beneficial Owner Owned exercise of Options Within 60 Days Outstanding Shares (2)
- ------------------------ ------------ ---------------------------------- ----------------------
James Cannavino 414,023 86,833 15.0%
Charles Feld 112,618 11,667 3.8
Dennis Murray 65,440 11,667 2.4
Carla Stovall 14,470 11,667 *
Warren Wright 34,761 40,833 2.3
Anthony Coppola 38,018 53,650 2.8
George Aronson 10,200 45,000 1.7
All Officers and Directors
as a Group (7 persons) 689,530 261,317 27.0%
- -------
* = Less than 1% Footnotes
(1) The address of the holder is 80 Orville Drive, Suite 200, Bohemia, New York
11716.
(2) Based upon 3,259,932 outstanding as of March 25, 2002, plus outstanding
options exercisable within 60 days owned by above named parties.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 2001, the Company acquired 2,000,000 shares of Voyant
Corporation, a private company, through an equity investment of $500,000.
Additionally, in November 2001, the Company acquired 15,680,167 shares in
exchange for 60,000 shares of NetWolves common stock, with a value of $156,000.
Further, as part of an anti-dilution protection clause in the initial investment
agreement, the Company is entitled to approximately 46,000,000 additional
shares, which will increase the Company's ownership in Voyant to approximately
10.5%. The Company recently began providing administrative services to Voyant
and will begin charging Voyant $5,000 per month effective January 1, 2002; the
value of these services is not readily determinable.
On August 21, 2001, the Company privately sold 212,766 restricted shares of
its common stock at $2.35, a premium to the market price, to its Chairman for an
aggregate consideration of $500,000.
In January 2002, the Company entered into a two-year services agreement
with its Chairman. During the first year of this agreement, compensation will
consist of 180,000 restricted shares of the Company's common stock. During the
second year of this agreement compensation shall consist of a monthly fee of
$15,000. Further, the Chairman shall receive 240,000 stock options, which vest
ratably during months one through twenty-four of the term of this Agreement. The
stock options shall have an exercise price equal to the closing price of the
Company's common stock as indicated on NASDAQ on that date of this agreement.
In January 2002, the Company sold 344,524 shares of the Company's common
stock at market in a private placement for $1.05 per share or an aggregate of
$361,750. The participation of the Company's executive officers and directors
were as follows:
Charles Feld Director 100,000 shares
Dr. Dennis Murray Director 50,000
Warren Wright C.E.O. 9,524
Anthony Coppola President 1,905
George Aronson C.F.O. 3,333
In January 2002, the Company's Chairman loaned the Company $250,000. The
term of the loan is three years and bears interest at 5.0% payable quarterly in
arrears.
28
PART IV
Item 14. (a) 1. FINANCIAL STATEMENTS Page
----
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets
December 31, 2001 and 2000 F-2
Consolidated Statements of Operations
Years Ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statement of Shareholders' Equity
Years Ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999 F-8
Notes To Consolidated Financial Statements F-10
14. (a). 2. - SCHEDULES
NONE
4. (a). 3. - EXHIBITS
3.1 (a) Certificate of Incorporation, as amended. (Incorporated by reference
to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(b) Certificate of Amendment (Change in Name) (Incorporated by reference
to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(c) Certificate of Amendment (Change in Name) (Incorporated by reference
to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(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).
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)
29
4.2 Rights Agreement dated as of August 28, 2001 between the Company
and Manhattan Transfer Registrar Company, as Rights Agent.
(Incorporated by reference to Exhibit 4 to the Company's Form 8-K dated
August 28, 2001.
10.1 Directors, Officers and Consultants 1993 Stock Option Plan (Incorporated
by reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-8 filed on June 28, 1995).
10.2 Employees 1993 Stock Option Plan (Incorporated by reference to Exhibit
4.2 to the Company's Registration Statement on Form S-8 filed on
June 28, 1995).
10.3 1995 Incentive Stock Plan (Incorporated by reference to Exhibit 5 to
the Company's Proxy Statement filed on January 29, 1996).
10.4 2000 Stock Option Plan.
10.5 2001 Stock Option/Stock Issuance Plan.
10.6 2001-A Stock Option/Stock Issuance Plan.
10.7 2002 Stock Option/Stock Issuance Plan.
10.8 Lease Extension Agreement between Atrium Executive Center and the
Company (Incorporated by reference to Exhibit 10 (g) (ii) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993).
10.9 Offer to Purchase dated December 23, 1999, among Eagle Merger Corp., EMC
Corporation and the Company (Incorporated by reference to Exhibit 1 to
the Company's Form 8-K filed on February 9, 2000).
10.10 Indemnification Agreement dated December 21, 1999, among EMC
Corporation, Eagle Merger Corp. and the Company (Incorporated by
reference to Exhibit 2 to the Company's Form 8-K filed on February 9,
2000).
10.11 Indemnification 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).
10.12 Escrow 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).
10.13 Exchange 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).
10.14 Agreement 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).
10.15 Employment 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).
.
10.16 Employment 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).
.
10.17 Employment Agreement between the Company and Anthony Coppola dated
December 1, 2001.
10.18 Services Agreement between the Company and James A. Cannavino dated
January 18, 2002.
16.1 Dismissal of Independent Auditors. (Incorporated by reference to Form 8-K
dated May 29, 1997).
16.2 Engagement of New Independent Auditors. (Incorporated by reference to
Form 8-K dated June 3, 1997).
23(a) Consent of Markum & Kliegman, LLP.
- ----------
(1) Filed with Form S-1, Registration Statement of the Company Reg.
No 3-47322 and are incorporated herein by reference.
14. (b). - REPORTS ON FORM 8-K
None
31
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 12th day of
April 2002.
DIRECT INSITE CORP.
/s/ Warren Wright
By: ______________________________________
Warren Wright, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on April 12, 2002 the following persons in the
capacities indicated:
/s/ James A. Cannavino
________________________ Chairman of the Board
James A. Cannavino
/s/ Warren Wright
________________________ Chief Executive Officer
Warren Wright
/s/ George Aronson
________________________ Chief Financial Officer
George Aronson
/s/ Charles Feld
________________________ Director
Charles Feld
/s/ Dennis J. Murray
________________________ Director
Dennis J. Murray
________________________ Director
Carla J. Stovall
32
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001, 2000 and 1999
DIRECT INSITE CORP. AND SUBSIDIARIES
CONTENTS
Page
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Shareholders' Equity F-5 - F-7
Consolidated Statements of Cash Flows F-8 - F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10 - F-43
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors and Shareholders
Direct Insite Corp.
Bohemia, New York
We have audited the accompanying consolidated balance sheets of Direct Insite
Corp. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Direct Insite
Corp. and subsidiaries as of December 31, 2001 and 2000, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Marcum & Kliegman LLP
February 28, 2002
Woodbury, New York
F-1
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2001 and 2000
ASSETS
2001 2000
---------------------------
CURRENT ASSETS
- --------------
Cash and cash equivalents $1,359 $10,851
Accounts receivable, net of allowance for
doubtful accounts of $53 and $70 in 2001 and
2000, respectively 1,098 260
Investment in NetWolves Corporation 1,209 4,922
Prepaid expenses and other current assets 1,096 451
------ -------
Total Current Assets 4,762 16,484
PROPERTY AND EQUIPMENT, net 1,278 1,140
- ----------------------
SOFTWARE COSTS, net 508 --
- --------------
INVESTMENT IN NON-MARKETABLE SECURITIES 656 --
- ---------------------------------------
OTHER ASSETS 586 629
- ------------ ------ -------
TOTAL ASSETS $7,790 $18,253
====== =======
The accompanying notes are an integral part of these consolidated financial statements.
F-2
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2001 and 2000
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
2001 2000
---------------------------
CURRENT LIABILITIES
- -------------------
Accounts payable and accrued expenses $ 2,057 $ 1,715
Restructuring costs payable, current portion 294 1,526
Due to bank 448 --
Current portion of long-term debt 290 --
Convertible debentures, net of discount of $305 -- 2,695
Income taxes payable -- 855
---------- ---------
Total Current Liabilities 3,089 6,791
OTHER LIABILITIES
- -----------------
Long-term debt, net of current portion 103 --
Restructuring costs payable, long-term 492 924
---------- ---------
TOTAL LIABILITIES 3,684 7,715
---------- ---------
COMMITMENTS AND CONTINGENCIES
- -----------------------------
SHAREHOLDERS' EQUITY
- --------------------
Common stock, $.0001 par value; 150,000,000 shares
authorized; 2,472,866 and 1,449,871 shares
issued in 2001 and 2000, respectively; and
2,401,828 and 1,425,500 shares outstanding
in 2001 and 2000, respectively -- --
Additional paid-in capital 104,573 103,569
Unearned compensation -- (115)
Accumulated deficit (100,114) (89,502)
Accumulated other comprehensive loss (25) (3,086)
---------- ---------
4,434 10,866
Common stock in treasury, at cost; 24,371 shares
in 2001 and 2000 (328) (328)
---------- ---------
TOTAL SHAREHOLDERS' EQUITY 4,106 10,538
---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,790 $ 18,253
========== =========
The accompanying notes are an integral part of these consolidated financial statements.
F-3
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
---------------- ----------------- ----------------
REVENUE $ 3,785 $ 2,120 $ 24,640
COST OF REVENUE 806 322 13,044
--------- --------- --------
GROSS MARGIN 2,979 1,798 11,596
--------- --------- --------
OPERATING EXPENSES
Research and development 2,814 4,278 10,525
Sales and marketing 2,532 4,644 17,417
General and administrative 3,778 5,505 11,472
Amortization and depreciation 985 871 4,738
Non-recurring restructuring charge -- 15,176 --
--------- --------- --------
TOTAL OPERATING EXPENSES 10,109 30,474 44,152
--------- --------- --------
Operating Loss (7,130) (28,676) (32,556)
OTHER INCOME (EXPENSE)
Gain on sale of Softworks -- 47,813 17,107
Equity in earnings of Softworks -- -- 512
Minority interest in earnings of Softworks -- -- (46)
Gain on sale of ComputerCOP -- 8,534 --
Loss on sales of NetWolves common stock (3,666) -- --
Other-than-temporary decline in Investment in
NetWolves (150) (29,737) --
Interest income (expense), net (363) 370 316
Other income (expense) 75 -- --
--------- --------- --------
Loss Before BENEFIT FROM (Provision FOR)
income taxes (11,234) (1,696) (14,667)
Benefit FROM (Provision for) Income Taxes 622 (10,040) 9,095
--------- --------- --------
NET LOSS $(10,612) $(11,736) $(5,572)
========= ========= =======
BASIC AND DILUTED NET LOSS PER SHARE $(5.88) $(8.23) $(4.08)
========= ========= =======
Basic and diluted weighted average
COmmon shares oustanding 1,804 1,426 1,364
========= ========= =======
The accompanying notes are an integral part of these consolidated financial statements.
F-4
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands)
Accumulated
Common Stock Additional Other Total Comprehensive
Paid-in Unearned Accumulated Comprehensive Treasury Shareholders' Income
Shares Amount Capital Compensation Deficit Loss Stock Equity (Loss)
---------------------------------------------------------------------------------------------------------
BALANCE - January 1,
1999 1,289 $ -- $106,517 $ -- $ (72,194) $ (307) $ -- $ 34,016
Common stock and options
issued for services 96 -- 2,353 -- -- -- -- 2,353
Dividend declared -- -- (6,000) -- -- -- -- (6,000)
Acquisition of treasury
stock (16) -- -- -- -- -- (393) (393)
Currency translation
adjustment -- -- -- -- -- 42 -- 42 $ 42
Marketable securities
valuation adjustment -- -- -- -- -- 40 -- 40 40
Net loss -- -- -- -- (5,572) -- -- (5,572) $(5,572)
----- ----- -------- ----- --------- ------- ----- --------- -------
Total Comprehensive
Loss $(5,490)
=======
BALANCE - December 31,
1999 (Forward) 1,369 $ -- $102,870 $ -- $ (77,766) $ (225) $(393) $ 24,486
----- ----- -------- ----- --------- ------- ----- ---------
The accompanying notes are an integral part of these consolidated financial statements.
F-5
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, Continued
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands)
Accumulated
Common Stock Additional Other Total Comprehensive
Paid-in Unearned Accumulated Comprehensive Treasury Shareholders' Income
Shares Amount Capital Compensation Deficit Loss Stock Equity (Loss)
---------------------------------------------------------------------------------------------------------
BALANCE - December 31,
1999 (Forward) 1,369 $ -- $102,870 $ -- $ (77,766) $ (225) $ (393) $ 24,486
Common stock and options
issued for services 108 -- 3,541 -- -- -- -- 3,541
Repayment of Officers'
Loans (28) (923) -- -- -- -- (923)
Dividend declared -- -- (2,184) -- -- -- -- (2,184)
Retirement of treasury
stock -- -- (393) -- -- -- 393 --
Acquisition of treasury
stock (24) -- -- -- -- -- (328) (328)
Discount on convertible
debentures -- -- 658 -- -- -- -- 658
Unearned compensation on
option grants -- -- -- (115) -- -- -- (115)
Marketable securities
valuation
adjustment -- -- -- -- -- (2,861) -- (2,861) $(2,861)
Net loss -- -- -- -- (11,736) -- -- (11,736) (11,736)
----- ----- -------- ------ --------- ------- ------ -------- --------
Total Comprehensive Loss $(14,597)
========
BALANCE - December 31,
2000 (forward) 1,425 $ -- $103,569 $ (115) $ (89,502) $(3,086) $ (328) $ 10,538
----- ----- -------- ------ --------- ------- ------ --------
The accompanying notes are an integral part of these consolidated financial statements.
F-6
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, Continued
For the Years Ended December 31, 2001, 2000 and 1999
Accumulated
Common Stock Additional Other Total Comprehensive
Paid-in Unearned Accumulated Comprehensive Treasury Shareholders' Income
Shares Amount Capital Compensation Deficit Loss Stock Equity (Loss)
---------------------------------------------------------------------------------------------------------
BALANCE - December 31,
2000 (Forward) 1,425 $ -- $103,569 $ (115) $(89,502) $(3,086) $ (328) $ 10,538
Common stock issued for
services 571 -- 797 -- -- -- -- 797
Common stock issued for
cash 212 -- 500 -- -- -- -- 500
Common stock issued for
Platinum acquisition 66 -- 137 -- -- -- -- 137
Common stock issued for
settlement of
restructuring
liabilities 110 -- 181 -- -- -- -- 181
Common stock issued for
settlement of
litigation 17 -- 47 -- -- -- -- 47
Unearned compensation on
option grants -- -- -- 115 -- -- -- 115
Discount on convertible
debentures settled with
cash -- -- (658) -- -- -- -- (658)
Marketable securities
valuation
adjustment -- -- -- -- -- 3,061 -- 3,061 $ 3,061
Net loss -- -- -- -- (10,612) -- -- (10,612) (10,612)
----- ----- -------- ----- --------- ------- ------ -------- -------
Total Comprehensive Loss $(7,551)
=======
BALANCE - December 31,
2001 2,401 $ -- $104,573 $ -- $(100,114) $ (25) $ (328) $ 4,106
===== ===== ======== ===== ========= ======= ====== ========
The accompanying notes are an integral part of these consolidated financial statements.
F-7
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------------- ---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(10,612) $(11,736) $ (5,572)
Adjustments to reconcile net loss to net
cash used in operating activities
Amortization and depreciation:
Property and equipment 929 807 1,020
Software costs 77 -- 1,940
Excess of cost over fair value of net
assets acquired -- -- 1,951
Other 3 3 3
Non-cash interest charge pertaining to the
discount on convertible debentures 346 353 --
Provision for doubtful accounts 74 62 --
Common stock and options exchanged for
services 912 3,426 2,353
NetWolves common stock exchanged for services
and for settlement of restructuring charges -- 2,000 --
Softworks common stock exchanged for services -- -- 4,814
Gain on disposition of Softworks -- (47,813) (17,107)
Minority interest and equity in earnings of
Softworks -- -- (466)
Gain on sale of ComputerCop, net of $500,000
of NetWolves common stock exchanged for
legal services -- (8,534) --
Loss on sale and other-than-temporary decline in
investment in NetWolves Corporation 3,816 29,737 --
Deferred income tax expense (benefit) -- 9,197 (8,907)
Accounts receivable (824) 121 17,341
Inventories -- -- 169
Prepaid expenses and other current assets (680) 465 1,786
Other assets 43 (337) 144
Accounts payable and accrued expenses 247 (3,731) (1,669)
Restructuring costs payable (1,483) 2,450 --
Deferred revenue -- (42) (1,399)
Income taxes payable (855) 805 (2,043)
---------- -------- ---------
NET CASH USED IN OPERATING
ACTIVITIES $ (8,007) $(22,767) $ (5,642)
---------- -------- ---------
The accompanying notes are an integral part of these consolidated financial statements.
F-8
DIRECT INSITE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(in thousands)
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Expenditures for property and equipment $ (790) $ (602) $ (1,499)
Software development and technology purchases -- -- (230)
Net cash paid in the acquisition of Platinum
(net of $15 cash acquired) (109) -- --
Proceeds from the license of technology -- -- 400
Reduction in cash resulting from excluding
Softworks from the consolidated financial
statements -- -- (6,759)
Cash used in the ComputerCop/NetWolves
transaction (including $2,072 of cash expenses) -- (22,572) --
Investment in NetWolves Corporation -- (4,500) --
Investment in non-marketable securities (500)
Advances from (to) officers, net -- 899 (821)
Proceeds from the sale of NetWolves common
stock 2,834 -- --
Proceeds from the sale of Softworks common
stock (net of $3,316 of expenses in 2000) -- 58,142 17,676
--------- --------- ---------
NET CASH PROVIDED BY INVESTING
ACTIVITIES 1,435 31,367 8,767
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Net proceeds from sales of common stock 500 -- --
Repayments of (net proceeds from) convertible
debentures (3,751) 2,911 --
Advances from bank, net 448 -- --
Acquisition of treasury stock -- (328) (393)
Payment of dividend -- (2,184) (6,000)
Repayments of long-term debt, net (117) -- (3,056)
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (2,920) 399 (9,449)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (9,492) 8,999 (6,324)
CASH AND CASH EQUIVALENTS - Beginning 10,851 1,852 8,176
- ------------------------- --------- --------- ---------
CASH AND CASH EQUIVALENTS - Ending $ 1,359 $ 10,851 $ 1,852
- ------------------------- ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-9
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business
------------------
Direct Insite Corp. and subsidiaries (the "Company"), primarily operate as
an application service provider ("ASP"), which markets an integrated "fee
for services" offering providing high volume processing of transactional
data for billing purposes, electronic bill presentation as well as visual
data analysis and reporting tools delivered via the Internet for its
customers. The Company's core technology is d.b.Express?, the proprietary
and patented management information tool, which provides targeted access
through the mining of large volumes of transactional data via the Internet.
In 2001, the Company acquired Platinum Communications, Inc. ("Platinum",
see Note 3), a Dallas, Texas based company which markets integrated
business and operational support systems to the telecommunications industry
primarily as an ASP; marketed as Account Management Systems ("AMS").
Further, as an added source of revenue, the Company, during 2001, began
providing custom engineering services to its customers. These newly
assembled product offerings enable the Company to provide comprehensive
services from the raw transaction record through all of the internal
workflow management processes including an electronically delivered invoice
with customer analytics. The Company operates fully redundant data centers
located at its main office in Bohemia, N.Y. and in Newark, NJ.
In 2000, the Company began offering a new consulting service, Global
Telecommunications Services ("GTS"). For a fee, this offering, which
utilized d.b.Express, would analyze long distance, data and wireless
communication needs; assist in the negotiation of telecommunication
contracts and monitor ongoing carrier contract compliance. During the
fourth quarter of 2001, as a result of minimal revenue, the Company decided
it would no longer market these services.
The most significant portion of the Company's operations had historically
(through 1999) been conducted through one of its subsidiaries, Softworks,
Inc. ("Softworks"). Through Softworks, the Company developed, marketed and
supported systems management software products for corporate mainframe data
centers. Softworks was wholly owned by the Company through June 29, 1998,
and majority owned through March 31, 1999. On January 27, 2000, the Company
sold its remaining interest to EMC Corporation for approximately $61
million in cash, before expenses (see Note 3).
In June 1998, the Company completed an acquisition of software (and related
sales and marketing rights), which is designed to provide non computer
literate owners (e.g. parents, guardians, schools, etc.) the ability to
identify threats as well as objectionable material that may be viewed by
users of the computer on the Internet (e.g. children). On February 14,
2000, the Company sold the ComputerCOP technology to NetWolves Corporation
(see Note 3).
F-10
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business, continued
------------------
During 1997 through 1999, the Company resold and installed computer
hardware. In 1999, this business unit had one major contract, involving two
customers, which was completed in 1999. The Company does not currently have
any other sales contracts and is no longer marketing this product.
NOTE 2 - Significant Accounting Policies
-------------------------------
Common Stock Split
------------------
On May 4, 2001, a one-for-fifteen reverse stock split was declared
effective for shareholders of record as of the close of business on May 7,
2001. The effect of the stock split has been retroactively reflected in the
financial statements and notes thereto. Par value and authorized shares
remain unchanged at $.0001 and 150,000,000 shares, respectively.
Principles of Consolidation and Equity Method
---------------------------------------------
The consolidated financial statements include the accounts of Direct Insite
Corp. and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Effective April 1, 1999, when the Company's ownership interest in
Softworks, Inc. ("Softworks") (see Note 3) was reduced below 50%, the
Company began accounting for Softworks using the equity method of
accounting. Under the equity method of accounting, the Company's
proportionate share of Softworks' earnings or losses was included in the
Company's consolidated operating results in a single line item, until
Softworks was sold in January 2000. The separate public ownership of
Softworks is reflected in the consolidated results of operations as
minority interest through March 31, 1999.
Revenue Recognition
-------------------
The Company records revenue in accordance with Statement of Position 97-2
"Software Revenue Recognition", issued by the American Institute of
Certified Public Accountants (as modified by Statement of Position 98-9)
and SEC Staff Accounting Bulletin No. 101, regarding revenue recognition in
the financial statements. In some circumstances, the Company enters into
arrangements whereby it is obligated to deliver to its customer multiple
products and/or services (multiple deliverables). In these transactions,
the Company allocates the total revenue to be earned under the arrangement
among the various elements based on fees for each element agreed to by the
Company and their customer. 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;
F-11
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
Revenue Recognition, continued
------------------------------
-- Payment for the delivered products or services is not contingent
upon delivery of the remaining products or services;
-- The Company has an enforceable claim to receive the amount due in
the event it does not deliver the undelivered products or
services and it is probable that such amount is collectible;
-- There is evidence of the fair value for each of the undelivered
products or services;
-- Delivery of the delivered element represents the culmination
of the earnings process.
The following are the specific revenue recognition policies for each
major category of revenue.
ASP and AMS Services
The Company provides transactional data processing services to
its customers. Revenue from these services is recognized as
performed.
Custom Engineering Services
The Company recognizes revenue for custom engineering services
using the percentage of completion method. Progress is measured
using the relative fair value of specifically identifiable output
measures (milestones). Revenue is recognized when the customer
accepts such milestones. Costs related to uncompleted milestones
are deferred and included in other current assets (amounting to
$128,000 at December 31, 2001).
Cost of Revenue
---------------
Cost of revenue in the consolidated statements of operations is
presented exclusive of amortization and depreciation shown separately.
Property and Equipment
----------------------
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the related
assets. Leasehold improvements are amortized over the 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.
F-12
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
Software Costs
--------------
Costs associated with the development of software products are generally
capitalized once technological feasibility is established. Purchased
software technologies are recorded at cost and software technologies
acquired in purchase business transactions are recorded at their estimated
fair value. Software costs are amortized using the greater of the ratio of
current revenue to total projected revenue for a product or the
straight-line method over its estimated useful life. The useful life of the
software acquired in the Platinum acquisition is 5 years. Amortization of
software costs begins when products become available for general customer
release. Costs incurred prior to establishment of technological feasibility
are expensed as incurred and reflected as research and development costs in
the accompanying consolidated statements of operations.
Impairment of Long-Lived Assets
-------------------------------
The Company reviews its long-lived assets, including goodwill resulting
from business acquisitions, capitalized software costs and property and
equipment, for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully
recoverable. To determine if impairment exists, the Company compares the
estimated future undiscounted cash flows from the related long-lived assets
to the net carrying amount of such assets. Once it has been determined that
an impairment exists, the carrying value of the asset is adjusted to fair
value. Factors considered in the determination of fair value include
current operating results, trends and the present value of estimated
expected future cash flows.
Income Taxes
------------
The Company accounts for income taxes using the liability method. The
liability method requires the determination of deferred tax assets and
liabilities based on the differences between the financial statement and
income tax bases of assets and liabilities, using enacted tax rates.
Additionally, net deferred tax assets are adjusted by a valuation allowance
if, based on the weight of available evidence, it is more likely than not
that some portion or all of the net deferred tax assets will not be
realized.
Earnings per Share
------------------
The Company displays earnings per share in accordance with Statement of
Financial Accounting Standards ("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) available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per
share include the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into
common stock. Outstanding stock options, warrants and other potential stock
issuances have not been considered in the computation of diluted earnings
per share amounts since the effect of their inclusion would be
antidilutive.
F-13
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Cash and Cash Equivalents
-------------------------
The Company considers all investments with original maturities of three
months or less to be cash equivalents.
Marketable Securities
---------------------
Marketable securities, which are classified as "available for sale", are
valued at fair market value. Unrealized gains or losses are recorded net of
income taxes as accumulated other comprehensive income in shareholders'
equity, whereas realized gains and losses are recognized in the Company's
consolidated statements of operations using the first-in, first- out
method. Other-than-temporary declines in the value of marketable securities
are also recognized as a loss in the consolidated statements of operations.
Advertising and Promotional Costs
---------------------------------
Advertising and promotional costs are reported in "Sales and marketing"
expense in the consolidated statements of operations and are expensed as
incurred. Advertising expense for the years ended December 31, 2001, 2000
and 1999 was $37,000, $90,000 and $2,994,000, respectively. Advertising
expense in 1999 included $2,746,000 of expense related to ComputerCop.
Research and Development
------------------------
Research and development is expensed as incurred.
Reclassifications
-----------------
Certain reclassifications have been made to the consolidated financial
statements shown for the prior years in order to have them conform to the
current year's classifications.
Concentrations and Fair Value of Financial Instruments
------------------------------------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and
accounts receivable. At December 31, 2001, the Company has cash investments
of approximately $1,359,000 at one bank. Concentrations of credit risk with
respect to accounts receivable are disclosed in Note 20. The Company
performs ongoing credit evaluations of its customers' financial condition
and, generally, requires no collateral from its customers. Unless otherwise
disclosed, the fair value of financial instruments approximates their
recorded value.
Use of Estimates
----------------
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the consolidated
financial statements, as well as the reported amounts of revenue and
expenses during the reporting period. Disclosures that are particularly
sensitive to estimation include management's plans, as disclosed in Note
17. Actual results could differ from those estimates.
F-14
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
New Accounting Pronouncements
-----------------------------
During the period ended March 31, 2001, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. This Statement requires that an entity recognize all
derivatives as either assets or liabilities in the consolidated balance
sheets and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative instrument depends on its
intended use and the resulting designation. Implementation of SFAS No. 133
did not have any material impact on the financial statements of the
Company.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 provides guidance on the accounting for a
business combination at the date a business combination is completed. The
statement requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001, thereby eliminating
use of the pooling-of-interests method. SFAS No. 142 provides guidance on
how to account for goodwill and intangible assets after an acquisition is
completed. The most substantive change is that goodwill will no longer be
amortized, but instead will be tested for impairment periodically. This
statement will apply to existing goodwill and intangible assets, beginning
in 2002, and is not expected to have a material impact on the financial
statements of the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the
accounting model for long- lived assets to be disposed of by sale and
resulting implementation issues. This statement requires that those
long-lived assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer
be measured at net realizable value or include amounts for operating losses
that have not yet occurred. It also broadens the reporting of discontinued
operations to include all components of an entity with operations that can
be distinguished from the rest of the entity and that will be eliminated
from the ongoing operations of the entity in a disposal transaction. The
Company will adopt SFAS No.144 in 2002 and is still evaluating the effect
on the Company's financial position.
F-15
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 Acquisitions and Dispositions
-----------------------------
Platinum Communications, Inc.
-----------------------------
On May 10, 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 $281,000, 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 (not reflected as outstanding common
stock), that are to be released to the former shareholders of Platinum,
subject to certain performance provisions (as defined), in various
increments through April 2004; 15,556 shares were earned and will be issued
effective January 1, 2002, valued at $20,000 which will be added to the
cost of the acquisition. In addition, two key employees of Platinum have
entered into three-year employment agreements with the Company, with an
aggregate base compensation of $300,000 per annum and options to purchase
an aggregate of 20,000 shares of the Company's common stock vesting over
three years, with an exercise price of $2.06, the fair market value on the
date of the grant. Further, as part of their employment agreements, the two
key employees can, based upon achieving certain performance goals, earn an
aggregate of $300,000 in employee incentive bonuses.
The acquisition was accounted for as a purchase and, accordingly, assets
and liabilities were fair valued at the date of acquisition and the results
of operations are included in the consolidated financial statements of the
Company, commencing May 1, 2001. An allocation of the fair value of the
assets acquired and liabilities assumed is as follows:
Purchase price:
Direct Insite common stock issued $137,334
Cash consideration 50,000
Acquisition costs 73,266
--------
$260,600
========
Allocation of purchase price
Current assets $103,633
Software technology 584,376
Property and equipment 103,520
Current liabilities (405,409)
Non-current liabilities (125,520)
---------
$260,600
========
F-16
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Acquisitions and Dispositions, continued
-----------------------------
Platinum Communications, Inc., continued
-----------------------------
The following unaudited pro forma financial information has been prepared
as if the acquisition of Platinum were consummated as of the beginning of
each of the periods presented. The pro forma information is not necessarily
indicative of the combined results that would have occurred had the
acquisition taken place at the beginning of the period, nor is it
necessarily indicative of the results that may occur in the future. (In
thousands except per share data):
Year Ended December 31,
2001 2000
--------------------------
Revenue $ 4,012 $ 3,406
Expense 11,408 32,358
---------- ----------
(7,396) (28,952)
Other (expense) income, net (3,352) 16,940
---------- ----------
Net loss $(10,748) $(12,012)
========== ==========
Basic and diluted net loss per share $(5.89) $(8.05)
========== ==========
Weighted average common shares outstanding 1,826 1,493
========== ==========
Internet Tracking & Security Ventures, LLC and NetWolves Corporation
--------------------------------------------------------------------
On June 30, 1998, pursuant to an Asset Purchase and Sale Agreement, the
Company acquired certain software and related sales and marketing rights
from Internet Tracking & Security Ventures, LLC ("ITSV") in exchange for
126,667 restricted shares of the Company's common stock and 1,000,000
restricted shares of common stock of the Company's then wholly owned
subsidiary, Softworks.
In March 1999, the Company sold certain rights to license ComputerCOP to a
marketing company (Bo-Tel, Inc.) for $400,000. The license rights were
limited to granting a specified original equipment manufacturer of personal
computers the right to embed the software in its computers for sale to the
general public. Bo-Tel, Inc. is an affiliate of ITSV, and accordingly, this
sale was accounted for as a reduction of the cost of the assets acquired
from ITSV.
Pursuant to an agreement dated February 10, 2000, on February 14th, the
Company sold its recently formed subsidiary, ComputerCOP Corp. to NetWolves
Corporation ("NetWolves", traded on the NASDAQ SmallCap Market under the
symbol "WOLV") in exchange for 1,775,000 shares of NetWolves common stock.
The assets of ComputerCOP Corp. included the ComputerCOP technology (and
certain related assets including inventory) and $20.5 million in cash. The
transaction was treated as a sale of the ComputerCOP technology for
F-17
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Acquisitions and Dispositions, continued
-----------------------------
Internet Tracking & Security Ventures, LLC and NetWolves Corporation,
--------------------------------------------------------------------------
(continued)
750,000 shares valued at $15 million and the purchase of 1,025,000 shares
from NetWolves for $20.5 million. Additionally, the Company purchased
225,000 shares from certain NetWolves shareholders for $4.5 million. The
sale of the Company's ComputerCOP technology resulted in a pre-tax gain of
$8,534,000, net of $2,572,000 of expenses, recorded in the first quarter of
2000. The $40,000,000 value of the 2,000,000 shares of NetWolves stock was
determined based upon the quoted market price of the NetWolves stock at the
time the transaction was agreed to and announced ($20 per share) and was
also based on a fairness opinion obtained from the Company's investment
banker. In May 2000, the Company's Chairman of the Board was appointed to
the NetWolves Board of Directors (also see Note 8).
Softworks, Inc.
---------------
In October 1993, the Company completed the acquisition of all of the common
stock of Softworks. Softworks provided systems management software products
for mainframe data centers. The purchase price approximated $5,700,000.
Prior to June 30, 1998, Softworks was a wholly owned subsidiary of the
Company with 14,083,000 shares of common stock outstanding. On August 4,
1998, Softworks completed an initial public offering of 4,200,000 shares of
its common stock at a price of $7.00 per share (less underwriting fees and
commissions of $0.49 per share) as follows: 1,700,000 shares of common
stock were sold by Softworks; 1,000,000 shares were sold by ITSV and
1,500,000 shares were sold by the Company.
Additionally, in 1998, the Company exchanged 1,877,700 shares of Softworks
common stock for services rendered and sold 1,000,000 restricted shares of
Softworks common stock in a private placement in exchange for a $5,000,000
full recourse promissory note. The note was timely paid in full in the
first quarter of 1999.
The following additional transactions were recorded in 1999:
-- The Company exchanged 529,000 restricted shares of Softworks common
stock to three of the Company's executive officers for services
rendered in 1999 resulting in a charge to operations of $2,117,000.
-- In exchange for services rendered by several consultants in 1999, the
Company granted options to acquire 80,000 restricted shares of
Softworks common stock owned by the Company that were exercisable at
$1.00 per share. These options were exercised in 1999. The $389,000
value of these options was charged to operations in 1999.
F-18
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Acquisitions and Dispositions, continued
-----------------------------
Softworks, Inc., continued
---------------
-- The Company exchanged 618,600 restricted shares of Softworks common
stock to various employees and consultants (including 117,000 shares
to a consultant with a financial interest in the ITSV) for services
rendered in 1999 resulting in a charge to operations of $2,608,000.
-- 125,000 shares of Softworks common stock, originally issued to a
consultant in 1998, were returned to the Company in 1999, because the
services were not satisfactorily performed. The original $300,000
value of these shares was credited to operating expenses in 1999.
-- Softworks completed a second public offering of 3,900,000 shares of
its common stock at a price of $10.50 per share (less underwriting
fees and commissions of $.63 per share) as follows: 1,000,000 shares
were sold by Softworks, 1,256,933 shares were sold by the Company, and
1,643,067 shares were sold by other existing shareholders. In
conjunction with the offering, the Company issued 200,000 contract
options to acquire restricted shares of Softworks common stock owned
by the Company to a consultant, exercisable at $1.00 per share, which
vested upon completion of the offering. The options were exercised
when vested.
The total value of the Softworks common stock exchanged by the Company for
the above- described services (excluding the 200,000 contract options) in
1999 was $4,814,000. As a result of these transactions, the Company's
ownership in Softworks was further reduced to 35% at December 31, 1999.
Accordingly, the Company recognized a gain of $17,107,000 representing the
difference between the fair value of the Softworks common stock exchanged
or sold, and the related adjusted carrying value of the Company's
investment in Softworks (pursuant to Staff Accounting Bulletins 51 and 84).
In April 1999, the Company's ownership of Softworks was reduced below 50%,
and accordingly, commencing April 1, 1999, Softworks' results were
accounted for using the equity method of accounting and were no longer
consolidated. Under the equity method of accounting, the Company's share of
Softworks' earnings or losses was included in the Company's consolidated
operating results in a single line item. Summarized financial information
of Softworks for the entire year ended December 31, 1999 is as follows (in
thousands):
Revenue $54,570
Cost of revenue 3,325
-------
Gross margin 51,245
Operating expenses 48,805
-------
Operating Income $ 2,440
=======
Net income $1,456
======
F-19
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Acquisitions and Dispositions, continued
-----------------------------
Softworks, Inc., continued
---------------
Pursuant to a tender offer dated December 21, 1999, the Company sold its
remaining 35% interest in Softworks (a total of 6,145,767 shares) to EMC
Corporation and its subsidiary ("EMC") for $10.00 per share. The
transaction, which was completed on January 27, 2000, provided aggregate
cash proceeds of $61,458,000 and resulted in a pre-tax gain of $47,813,000,
net of $3,316,000 of expenses, recorded in the first quarter of 2000.
Pursuant to an Indemnification and Escrow Agreement, the Company deposited
$10,000,000 of the sales proceeds into an interest bearing escrow account
to secure any potential liabilities arising from certain indemnifications.
The escrow funds were released to the Company in December 2000.
Unaudited Pro forma condensed consolidated statements of operations as if
the ComputerCop and Softworks transactions described above were consummated
as of the beginning of the two year period ended December 31, 2000, are as
follows (in thousands except per share data):
Year Ended December 31,
2000 1999
-----------------------
Revenue $ 2,089 $ 13,692
Cost of revenue 311 12,039
--------- --------
Gross margin 1,778 1,653
Total operating expenses 30,245 28,100
--------- --------
Operating loss (28,467) (26,447)
Other income (expense)
Loss on write down of
investment in NetWolves (29,737) --
Other, net 370 274
-------- --------
Net loss $(57,960) $(26,173)
======== ========
Basic and diluted net loss per share (40.65) (19.19)
======== ========
F-20
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Accounts Receivable and Due to Bank
-----------------------------------
During October 2001, the Company entered into an Accounts Receivable
Purchase Agreement with a Bank, whereby the Company from time to time may
assign some of their accounts receivable to the Bank on a full recourse
basis. Upon specific invoice approval, an advance of 80% of the underlying
receivable is provided to the Company. The remaining balance (20%), less an
administrative fee of approximately 0.5% plus interest at the rate of
1-1/2% 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. This agreement expires in October 2002.
At December 31, 2001, the Company had assigned approximately $560,000 of
accounts receivable to the Bank and received advances of $448,000 from the
Bank.
NOTE 5 - Prepaid Expense and Other Current Assets
----------------------------------------
Prepaid expenses and other current assets consist of the following:
NOTE 5 - Prepaid Expense and Other Current Assets
----------------------------------------
Prepaid expenses and other current assets consist of the following:
December 31,
2001 2000
----------------------------------
(In thousands)
Prepaid expenses $ 369 $332
Tax refund receivable 615 --
Notes and loans receivable 112 87
Marketable securities available for sale -- 32
------ ----
$1,096 $451
====== ====
NOTE 6 - Property and Equipment
----------------------
Property and equipment consist of the following:
December 31, Useful life
2001 2000 in Years
-------------------------------------------
(in thousands)
Computer equipment and purchased software $ 4,928 $ 3,811 3 - 7
Furniture and fixtures 421 392 5 - 7
------- -------
5,349 4,203
Less: accumulated deprecation and amortization (4,071) (3,063)
------- -------
Property and Equipment, Net $ 1,278 $ 1,140
======= =======
F-21
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Property and Equipment, continued
----------------------
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 2001, 2000 and 1999 was $908,000, $871,000 and
$1,009,000, respectfully.
NOTE 7 - Software Costs
--------------
Software costs consist of the following:
December 31,
2001 2000
------------------------
(in thousands)
Capitalized software development costs $ 4,361 $ 3,775
Less: accumulated amortization (3,853) (3,775)
------- -------
Software Costs, Net $ 508 $ --
======= =======
Amortization expense related to software development costs for the years
ended December 31, 2001, 2000 and 1999 was $77,000, none, and $1,780,000,
respectfully.
NOTE 8 - Investment In Securities
------------------------
Non-Marketable
--------------
In February 2001, the Company acquired 2,000,000 shares of Voyant
Corporation ("Voyant") through an equity investment of $500,000.
Additionally, in November 2001, the Company acquired 15,680,167 shares in
exchange for 60,000 shares of NetWolves common stock, with a value of
$156,000. Further, as part of an anti-dilution protection clause in the
initial investment agreement, the Company is entitled to approximately
46,000,000 additional shares, which will increase the Company's ownership
in Voyant to approximately 10.5%.
Voyant is a privately held company, and accordingly, through December 31,
2001, the investment has been reflected on the Company's balance sheet as a
non-marketable security, at cost. The Company recently began providing
administrative services to Voyant and will begin charging Voyant $5,000 per
month effective January 1, 2002; the value of these services is not readily
determinable. The Company's Chairman is also the Chairman of Voyant. As a
result of the foregoing, the Company believes that it has achieved a level
of influence such that the Company will begin to account for its investment
in Voyant utilizing the equity method of accounting commencing January 1,
2002.
F-22
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Investment In Securities
------------------------
Marketable Available for Sale
-----------------------------
As discussed in Note 3, the Company obtained 2,000,000 shares of NetWolves
common stock in February 2000. During the year ended December 31, 2000,
75,000 shares were exchanged as part of the restructuring plan (Note 14),
25,000 shares were used to pay legal fees to the Company's general counsel
with respect to the NetWolves transaction, and 25,000 shares were issued as
a bonus to an executive officer, resulting in a balance of 1,875,000 shares
at December 31, 2000. All shares exchanged were valued at $20. In the
fourth quarter of 2000, the Company determined that there was an
other-than-temporary decline in the value of the NetWolves common stock to
a value of $7,763,000 ($4.14 per share). At December 31, 2000, the quoted
market value of the 1,875,000 shares of NetWolves common stock was
$4,922,000 ($2.625 per share). The unrealized loss was $32,578,000, of
which, $29,737,000 was recorded as a charge to operations and $2,841,000
was recorded as a charge to "accumulated other comprehensive loss."
During the year ended December 31, 2001, the Company sold 466,500 shares in
the open market at prices ranging from $2.29 to $5.30, aggregating proceeds
of approximately $1,434,000. Additionally, the Company sold 1,000,000
shares in a private transaction resulting in proceeds of approximately
$1,400,000 and exchanged 50,000 shares valued at $130,000 in settlement of
related expenses. Further, the Company exchanged 60,000 shares for an
additional investment in Voyant. At December 31, 2001, the Company owned
298,500 shares with a quoted market value $1,209,000 ($4.05 per share).
NOTE 9 - Accounts Payable and Accrued Expenses
-------------------------------------
Accounts payable and accrued expenses consist of the following:
December 31,
2001 2000
-----------------------
(in thousands)
Trade accounts payable $ 672 $ 367
Sales taxes payable 633 632
Accrued payroll and benefits 255 373
Other accrued expenses 497 343
------- -------
$ 2,057 $ 1,715
======= =======
F-23
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - Convertible Debentures
----------------------
On September 27, 2000, the Company entered into an agreement to sell an
aggregate principal amount of $3,000,000 of Convertible Debentures (the
"Debentures") bearing interest at a rate of 6% per annum, due September 27,
2002. The Company sold a $2,000,000 Debenture on September 27, 2000, a
$500,000 Debenture in October 2000 and a $500,000 debenture in December
2000, and incurred $119,000 of expenses.
The Debentures were convertible into shares of the Company's common stock
beginning February 25, 2001, subject to certain limitations. The conversion
price was to be the lesser of $0.90 or 82% of the average per share market
value at the time of the conversion. The Company had the right, exercisable
at any time, to prepay all or any portion of the outstanding principal
amount of the Debentures for which conversion notices had not previously
been delivered. In January 2001, the Company exercised its prepayment
rights and paid the Holders $3,700,000, plus accrued interest. As a result
of the prepayment, the Company recorded a loss of $185,000 during 2001.
The Debentures originally had a minimum assured discount of 18% from the
fair value of the Company's common stock, as defined. In connection with
that discount, the Company recorded debt discount of $658,000 upon receipt
of $3,000,000 in funds and was amortizing the discount over the period the
security was issued to the date it first became convertible. Accordingly,
the Company recorded a non-cash interest charge of $353,000 in 2000. As a
result of the prepayment, the discount, which was originally credited to
additional paid-in- capital, was reversed in 2001.
NOTE 11 - Long-term Debt
--------------
Long-term debt consists of the following (in thousands):
December 31,
2001 2000
-----------------------
Lines of credit (a) $ 174 $ --
Capitalized lease obligations (b) 210 --
Other 9 --
----- -----
393
Less current portion (290) --
----- -----
Long-term debt, net of current portion $ 103 $ --
===== =====
(a) The Company has three lines of credit, which were assumed in
connection with the Platinum acquisition (Note 3). These lines have
various expiration dates. One line has no expiration date and bears an
interest rate of prime 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 expires in May 2003 and
bears an interest rate of 10%. The third line contains no expiration
date and bears an interest rate of 16.75%.
F-24
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 Long-term Debt, continued
----------------
(b) The Company has equipment under capital lease obligations expiring at
various times through 2004. The assets and liabilities under capital
leases are recorded at the lower of the present values of the minimum
lease payments or the fair values of the assets. The assets are
included in property and equipment and are depreciated over their
estimated useful lives.
As of December 31, 2001 minimum future lease payments under these
capital leases are:
Year Ending December 31, Amount
----------------------------------------------- -----------------
(in thousands)
2002 $119
2003 75
2004 34
----
Total minimum lease payments 228
Less: amounts representing interest (18)
----
Net minimum lease payments $210
====
NOTE 12 - Shareholders' Equity
--------------------
Common Stock
------------
Year Ended December 31, 2001
----------------------------
In September 2001, the Board of Directors approved a shareholder rights
plan under which shareholders of record as of August 28, 2001 received a
right, upon the occurrence of a Triggering Event, as defined, to purchase
one share of the Company's common stock at an exercise price of $2.50,
subject to adjustment. The rights attached to the shares expire on the
earlier of (i) August 27, 2006 or (ii) redemption or exchange of the
rights. The rights have certain anti-takeover effects and would cause
substantial dilution to a person who attempts to acquire the Company
without the consent of the Board of Directors.
Year Ended December 31, 2000
----------------------------
In February 2000, the Company declared a dividend of $1.50 per share
(aggregating $2,184,000) to its shareholders of record on March 15, 2000
and paid on May 1, 2000.
Pursuant to a Board Resolution adopted in January 1999, the Company was
authorized to repurchase shares of its common stock at times and amounts
that would be in the best interest of the Company. During the fourth
quarter 2000, 24,371 shares of common stock were purchased at an average
price of $12.74.
F-25
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - Shareholders' Equity, continued
---------------------
Year Ended December 31, 1999
----------------------------
Pursuant to a Board Resolution adopted in January 1999, the Company was
authorized to repurchase shares of its common stock at times and amounts
that would be in the best interest of the Company. During 1999, 15,772
shares of common stock were purchased at an average price of $24.90.
Pursuant to a Board Resolution adopted in August 1999, the Company paid on
November 15, 1999, a cash dividend of $6,000,000 (approximately $4.35 per
share) to shareholders of record as of September 30, 1999.
Transactions with officers, employees and consultants
-----------------------------------------------------
During the year ended December 31, 2001, the Company issued 976,328 shares
of its common stock as detailed below:
-- Issued 570,512 shares of its common stock for services valued at
$797,000 as follows:
o 63,785 shares to its Board of Directors as compensation for
serving on various committees, valued at $108,000.
o 442,727 shares to consultants as payment of certain liabilities
valued at $584,000.
o 64,000 shares for employee bonuses, valued at $105,000.
-- Sold 212,766 shares of its common stock at $2.35, a premium to the
quoted market price, to the Chairman of the Board of Directors of the
Company for $500,000.
-- Issued 66,667 shares of its common stock to the former shareholders of
Platinum as part of the Merger Agreement, valued at $137,000 (see Note
3).
-- Issued 109,715 shares of its common stock as payment of certain
restructuring liabilities, valued at $181,000.
-- Issued 16,668 shares of its common stock valued at $47,000 as
settlement of a certain legal matter (see Note 16).
During the year ended December 31, 2000, the Company issued 108,563 shares
of its common stock valued at $30.00 per share based on the then quoted
price of the Company's common stock as follows:
-- Issued 32,667 shares of its common stock (net of 16,667 shares
rescinded) as settlement of certain employee, director and consultant
liabilities in conjunction with its restructuring plan (Note 14). The
shares were valued at $980,000.
F-26
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - Shareholders' Equity,
continued
Transactions with officers, employees and consultants
-----------------------------------------------------
-- Issued 32,483 shares of its common stock (net of 3,083 shares
rescinded) as settlement of employee bonuses. The shares were valued
at $974,500, of which $468,000 was accrued in 1999.
-- Issued 44,000 shares of its common stock (net of 2,500 shares
rescinded) to various consultants for which it recorded a non-cash
charge to earnings of $1,320,000. S.J. & Associates, Inc. was issued
25,000 of these shares upon achieving certain performance goals
pursuant to its 1999 contract.
-- Cancelled 587 shares as collateral payment of outstanding receivables.
Additionally, the Company's Chairman and Chief Executive Officer tendered
27,345 shares of the Company's common stock, valued at $923,000 based on
the quoted price at the time, towards the repayment of officers' loans.
During the year ended December 31, 1999, the Company issued the following
restricted common stock:
-- As part of a bonus incentive compensation plan, the Company issued
44,367 shares to several non-executive employees for which it recorded
a non cash charge to operations of $1,010,000.
-- Issued 44,033 shares of its common stock to various consultants for
whom it recorded a non cash charge to operations of $1,050,000.
-- In lieu of cash, in January 1999, the Company issued 7,667 shares,
valued at $100,000, for an acquisition of a technology license. This
asset was fully amortized during the year ended December 31, 1999.
Stock Option Plans
------------------
Effective June 1, 2000, the Company's Board of Directors authorized and
adopted a plan for compensation, referred to as the 2000 Stock Option Plan,
which provides for the grant of non-qualified stock options, to officers,
employees and consultants to the Company, exercisable at the market price
on the date of grant. All grants, which have varying expiration dates,
shall be subject to various vesting conditions including specific
performance goals. There are no shares available to be issued pursuant to
this plan.
During May 2001, the Board approved the 2001 Stock Option/Stock Issuance
Plan whereby 330,000 shares of its authorized but unissued common stock
were reserved. The Plan is divided into two separate equity programs: an
option grant program and a stock issuance program. Under the stock issuance
F-27
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - Shareholders' Equity, continued
--------------------
Stock Option Plans, continued
-------------------
program, the purchase price per share is fixed by the Board of Directors or
committee but cannot be less than the fair market value of the common stock
on the issuance date. There are no shares available to be issued pursuant
to this plan.
At the Company's annual meeting of stockholders held on September 17, 2001,
the Company's shareholders ratified the 2001-A Stock Option/Stock Issuance
Plan whereby 600,000 shares of its authorized but unissued or reacquired
common stock were reserved. Similar to the 2001 Plan, the 2001-A Plan is
divided into two separate equity programs: an option grant program and a
stock issuance program. Under the stock issuance program, the purchase
price per share is fixed by the Board of Directors or committee but cannot
be less than the fair market value of the common stock on the issuance
date. As of December 31, 2001, 565,555 shares remain available pursuant to
this plan. Additional shares were issued in 2002 (Note 21).
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). The Company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its
plans and recognizes non cash compensation charges related to the intrinsic
value of stock options granted to employees. If the Company had elected to
recognize compensation expense based upon the fair value at the date of
grant for awards under these plans, consistent with the methodology
prescribed by SFAS 123, the effect on the Company's net loss and net loss
per share would be as follows (in thousands, except per share data):
Year Ended December 31,
2001 2000 1999
------------------- ------------------ ----------------
Net loss
As reported $(10,612) $(11,736) $(5,572)
======== ======== =======
Pro forma $(10,920) $(12,046) $(6,118)
======== ======== =======
Basic and diluted net loss per share
As reported $(5.88) $(8.23) $(4.08)
======== ======== =======
Pro forma $(6.05) $(8.40) $(4.50)
======== ======== =======
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 69.0% to 74.1%
in 2001, 70.6 to 73.1% in 2000 and 62% to 66% in 1999, (2) risk-free
interest rates of 5.79% in 2001, 5.80% in 2000 and 5.81% in 1999, and (3)
expected lives of 1 to 4.5 years in 2001, 1.80 to 5.00 years in 2000 and
2.00 to 3.53 years in 1999.
F-28
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - Shareholders' Equity, continued
--------------------
Stock Option Plans, continued
-------------------
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 2001, 2000 and 1999,
relating to all of the Company's common stock plans (shares are in
thousands):
Weighted
Average
Exercise
Shares Price
------------------ -----------------
Outstanding at January 1, 1999 189 $ 53.70
Granted 125 18.75
Exercised -- --
Forfeited (20) 173.10
-----
Outstanding at December 31, 1999 294 30.60
Granted 153 14.70
Exercised -- --
Forfeited (193) 27.45
-----
Outstanding at December 31, 2000 (Forward) 254 23.85
-----
Weighted
Average
Exercise
Shares Price
------------------ -----------------
Outstanding at December 31, 2000 (Forward) 254 $ 23.85
Granted 277 1.66
Exercised -- --
Forfeited (103) 36.73
-----
Outstanding at December 31, 2001 428 6.55
=====
At December 31, 2001, a total of 250,000 options are exercisable at various
exercise prices: 129,000 options are exercisable at $1.63, 87,000 options
are exercisable at prices ranging from $11.25 to $20.16 and 34,000 options
at $26.25 to $30.00. The weighted-average remaining contractual life of
options outstanding at December 31, 2001 is 2.43 years. A total of 429,000
shares of the Company's common stock are reserved for options, warrants and
contingencies at December 31, 2001.
F-29
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - Shareholders' Equity, continued
---------------------
Stock Option Plans, continued
-------------------
At December 31, 2000, a total of 254,000 options were exercisable at
various exercise prices: 196,000 options were exercisable at prices ranging
from $11.25 to $20.16 per share, 51,000 options at $26.25 to $31.35 and
7,000 options at $93.75 to $384.00. The weighted- average remaining
contractual life of options outstanding at December 31, 2000 was 2.67
years.
At December 31, 1999, a total of 285,000 options were exercisable at
various exercise prices: 274,000 options were exercisable at prices ranging
from $18.75 to $30.00 per share, 4,000 options at $37.50 to $52.50 and
7,000 options at $93.75 to $384.00. The weighted- average remaining
contractual life of options outstanding at December 31, 1999 was 3.08
years.
Total compensation costs recognized for stock option awards amounted to
$115,000, $152,000 and $193,000 for the years ended December 31, 2001, 2000
and 1999, respectively. Compensation cost represents the fair value of
options granted to non- employees and the intrinsic value of options
granted to employees. The total value of the 2000 options granted to
non-employees was $267,000. These options have vesting periods ranging from
immediate to two years. As of December 31, 2000, there was $115,000 of
unearned compensation relating to the unvested portion of these options,
which vested in 2001.
Registration Statements/Restricted Securities
---------------------------------------------
The Company has used restricted common stock for the purchase of certain
companies (Note 3), as compensation to employees and consultants for
services rendered, and has sold restricted common stock in private
placements. At December 31, 2001, approximately 703,000 shares of
restricted common stock were issued and outstanding.
On March 24, 2000 the Company filed a registration statement on Form S-8
(No. 333- 33274) for 284,833 options and 25,653 shares of the Company's
common stock that was effective upon filing. The primary purpose of this
registration statement was to register options and shares issued to
employees and certain consultants.
On February 11, 1999 the Company filed a registration statement on Form S-8
(No. 333- 72203) for 150,816 options and 148,672 shares of the Company's
common stock that was effective upon filing. The primary purpose of this
registration statement was to register options, which were repriced in
October 1998, and shares issued to employees and certain consultants.
F-30
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - Income Taxes
------------
As a result of the Company's sale of its remaining interest in Softworks in
January 2000 and the sale of its ComputerCOP technology in February 2000
(Note 3), the Company recognized a taxable gain in the first quarter of
2000. Accordingly, the Company reduced its valuation allowance by
$9,197,000 (approximately $7,000,000 of which relates to deferred tax
assets created in previous years) as of December 31, 1999.
The following table summarizes components of the (provision) benefit for
current and deferred income taxes for the years ended December 31, 2001,
2000 and 1999:
Year Ended December 31,
2001 2000 1999
---------------- ----------------- ---------------
(in thousands)
Current
Federal $ 565 $ (718) $ 196
State and other 57 (125) (8)
-------- -------- --------
Total 622 (843) 188
-------- -------- --------
Deferred
Federal -- (9,197) 8,950
State and other -- -- (43)
-------- -------- --------
Total -- (9,197) 8,907
-------- -------- --------
$ 622 $(10,040) $ 9,095
-------- -------- --------
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, 2001, 2000
and 1999:
Year Ended December 31,
2001 2000 1999
------------------------------------
U.S. Federal statutory tax rate 35.0% 35.0% 35.0%
State and local taxes, net of U.S. Federal
tax effect -- (7.4) --
Impact of Alternative Minimum Tax (5.0) (42.3) --
Gain on sale of Softworks and
ComputerCOP -- (90.1) --
Loss and other-than-temporary decline in
investment in NetWolves (11.9) (613.7) --
Restructuring costs timing difference 2.8 (33.4) --
Reduction of deferred tax asset valuation
reserve -- -- 47.9
Utilization of net operating loss
carryforward -- 199.3 --
Permanent differences - compensation -- (50.5) (12.2)
Increase in valuation allowance (24.5) -- --
Amortization of intangible assets -- -- (6.0)
Other (1.9) 11.1 (2.7)
------ ------ ------
5.5% (592.0)% 62.0%
====== ====== ======
F-31
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - Income Taxes, continued
-------------
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are summarized as follows:
December 31,
2001 2000
-------------------------
(in thousands)
Deferred tax assets
Net operating loss carryforwards $ 25,851 $ 10,080
Tax credit carryforward -- 565
Fixed and intangible assets 237 135
Other-than-temporary decline in
investment in NetWolves 50 12,490
Restructure accrual 302 --
Other 103 85
-------- --------
26,543 23,355
Valuation allowance (26,543) (23,355)
-------- --------
Deferred tax assets $ -- $ --
======== ========
During 2000, $36 million of net operating loss carryforwards were utilized
to substantially reduce the taxable income resulting from the gain on
disposition of Softworks. At December 31, 2001, the Company has net
operating loss carryforwards remaining of approximately $61 million to
reduce future taxable income, if any. These losses, which expire through
2021, are subject to substantial limitations as a result of IRC Section 382
rules governing changes in control. Approximately $49 million these losses
are available to be utilized in the year 2002. After the year 2002,
approximately $1.2 million of losses become available each year (subject
to, among other things, adjustment upon further changes in control) until
the losses expire.
NOTE 14 Restructuring
-------------
In the first quarter 2000, the Company's newly appointed Board of Directors
approved and the Company announced a restructuring plan to streamline the
Company's operations and overhead structure, including: (i) elimination of
employees, expenses and commitments that supported the ComputerCOP
technology (sold to NetWolves, Note 3), (ii) elimination of employees,
expenses and commitments that supported the Company's development project
related to a multi-media display station, and (iii) general reduction of
operating expenses. As a result, the Company recorded a non-recurring
restructuring charge of $15,176,000 during the year ended December 31,
2000, related to the termination of 53 employees, retirement packages for
certain Company officers and directors, and the termination of certain
long-term consulting contracts and operating leases. Cash requirements of
this plan were estimated at $12,696,000; $980,000 was settled with Company
stock; and $1,500,000 was settled with NetWolves common stock. As of
December 31, 2001, the remaining cash requirement is $786,000, $294,000 is
payable over the next twelve months, and $492,000 is payable through March
2005.
F-32
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - Restructuring, continued
-------------
The restructuring charge includes costs directly related to the Company's
plan. EITF No. 94-3 and SEC Staff Accounting Bulletin No. 100 provide
specific requirements as to appropriate recognition of costs associated
with employee termination benefits and other exit costs. Employee
termination costs are recognized when details of the severance arrangements
are communicated to affected employees (all 53 employees were actually
terminated in March 2000). Other exit costs (such as contractual
obligations) that are not associated with or that do not benefit activities
that will be continued are recognized at the date of commitment to an exit
plan subject to certain conditions. Other costs directly related to the
restructuring that are not eligible for recognition at the commitment date
are expensed as incurred.
The activity in the restructuring accrual through December 31, 2001 is
summarized below:
Officer/director
Employee retirement Consulting Operating
terminations packages contracts leases Other Total
--------------------------------------------------------------------------------------------
Restructuring charges $2,088,000 $ 7,666,000 $3,681,000 $ 357,000 $1,384,000 $15,176,000
to operations,
during 2000
Company stock
Issuances -- (100,000) (630,000) -- (250,000) (980,000)
NetWolves stock
exchange -- (1,500,000) -- -- (1,500,000)
Cash expenditures (2,056,000) (5,508,000) (1,938,000) (140,000) (604,000) (10,246,000)
----------- ----------- ----------- --------- --------- -----------
Restructuring accrual,
December 31, 2000 32,000 558,000 1,113,000 217,000 530,000 2,450,000
Company stock
Issuances -- -- (131,000) -- (50,000) (181,000)
Cash expenditures (30,000) (548,000) (296,000) (129,000) (480,000) (1,483,000)
----------- ----------- ----------- -------- --------- -----------
Restructuring accrual,
December 31, 2001 $ 2,000 $ 10,000 $ 686,000 $ 88,000 $ -- $ 786,000
=========== =========== =========== ======== ========== ===========
-- Employee termination costs represent severance and related benefits
for the 53 employees that were terminated in March 2000: 18 employees
in sales and administration, 14 employees involved in the development
project related to a multi- media display station, 11 employees
related to ComputerCOP and 10 employees in general research and
development. Of these employees, 44 received severance benefits
generally payable over 3 to 9 months, commencing April 2000.
F-33
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - Restructuring, continued
--------------
-- Officer/director retirement packages represent retirement packages for
the Company's Chairman, its Chief Executive Officer and other board
members aggregating $7,666,000. $1,500,000 was paid with 75,000 shares
of NetWolves common stock (valued at $20 per share), $100,000 was paid
with 50,000 shares of Company common stock, $5,508,000 was paid in
2000, $500,000 was paid in January 2001 and the $58,000 balance
relates to employee benefits payable over various time periods.
-- The Company settled 5 long-term consulting contracts that will no
longer be required for an aggregate of $3,681,000. The Company agreed
to pay off a 1999 consulting agreement with S.J. & Associates, Inc.
for $1,276,000. Additionally, the Company settled three consulting
agreements that were entered into during 2000 (originally totaling
$1,785,000) for an aggregate of $1,277,000 (one of the agreements,
settled for $524,000, is with a related party). Further, the Company
paid $1,128,000 as part of a retirement arrangement with the Company's
general counsel. These obligations are payable as follows: $630,000
was paid in the form of the Company's common stock; $1,938,000 was
paid in 2000; and the $1,113,000 balance is payable through March
2005.
-- Operating leases represent the settlement of the remaining lease
payments with respect to certain automobile and equipment leases that
are no longer required. Payments are expected to be paid over the
remaining terms of the leases, which range from 3 to 17 months.
-- Other costs include consulting fees related to the creation and
execution of the restructuring plan (including $250,000 to S.J. &
Associates, Inc. paid in the form of 125,000 shares of the Company's
common stock), legal fees and other exit costs.
NOTE 15 - Related Party and Other Transactions
------------------------------------
Three former executive officers of the Company had received advances from
time to time, with such advances being payable upon demand and bearing
interest at the rate of 7% per annum. In the first quarter 2000, the
officers repaid $1,706,000 of these advances, consisting of $783,000 in
cash and 27,345 shares of Company common stock valued at $923,000.
In 2000 and 1999, the Company granted 1,667 and 1,667 shares of common
stock (valued at $30.00 and $27.00 per share, respectively) to an outside
Director (who resigned in March 2000) for legal and consulting services
provided to the Company. In 2000, the Company also granted 1,333 options
with an exercise price of $31.35 per share, which were valued at $17,000
and fully vested at December 31, 2000. Additionally, during the years ended
December 31, 2000 and 1999, the Company paid to such director consulting
fees of $52,000 and $170,000, respectively.
F-34
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - Related Party and Other Transactions, continued
-------------------------------------
In 2000, the Company granted 1,667 shares of common stock (valued at $30.00
per share) for consulting expenditures incurred in connection with the
restructuring plan (Note 14) to another outside Director (who resigned in
March 2000). The Company paid such Director consulting fees of $13,000, and
$63,000 in each of the years ended December 31, 2000 and 1999,
respectively. In 1999 the Company granted 1,667 shares of common stock
(valued at $27.00 per share). Additionally, in 1999, 6,667 stock options
were granted to such Director, valued at $45,000.
In 2000, the Company granted to a third outside Director (who resigned in
March 2000) 1,667 shares of common stock (valued at $30.00 per share) for
consulting expenditures incurred in connection with the restructuring plan
(Note 14). In addition, the Company granted 1,333 options with an exercise
price of $31.35 for consulting services, which were valued at approximately
$21,000, and were fully vested at December 31, 2000.
In the first quarter 2000, the Company entered into a multi-year agreement
with a consultant that is a family member of one of the former officers.
Subsequently, the Company incurred a $524,000 restructuring charge for
terminating this agreement. At December 31, 2001, approximately $9,000 of
this settlement remains unpaid.
In 2000, the Company's general counsel received 25,000 shares of NetWolves
common stock, valued at $20.00 per share (Note 3), to pay legal fees with
respect to the NetWolves transaction and 4,167 shares of the Company's
common stock (valued at $30.00 per share) for consulting expenses incurred
in connection with the restructuring plan (Note 14). In addition, the
general counsel received $1,000,000 of cash compensation as part of a
retirement arrangement. In 1999, the Company's general counsel received
cash compensation of $689,000, and 75,000 shares of Softworks common stock
and 10,000 Company stock options valued at $395,000, for business and
financial consulting services rendered.
In 1999, a consultant (who also has a financial interest in ITSV) received
cash compensation of $215,000 and 117,000 shares of Softworks common stock
valued at $423,000 for various consulting services.
S.J. & Associates, Inc.
-----------------------
The Company has entered into various agreements with S.J. & Associates,
Inc. (including its affiliates are collectively referred to as "SJ") for
various services that provide for the following compensation:
-- In 2001, the Company incurred $292,000 of consulting expenses with SJ.
The consulting expense was paid in the form of $152,000 in cash,
82,858 shares of Company common stock (valued at $87,000) and $53,000
in expense related to 2000 option grants vesting in 2001.
F-35
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - Related Party and Other Transactions, continued
-------------------------------------
S.J. & Associates, Inc., continued
------------------------
-- In 2001, the Company reduced its obligation to SJ relating to the
restructure plan by $406,000. The amount was paid in the form of
109,715 shares (valued at approximately $181,000), and $225,000 in
cash.
-- In 2001, the Company settled prior year obligations to SJ (valued at
approximately $36,000) with 22,285 shares of Company common stock.
-- In 2000, the Company issued 8,333 shares (valued at $30.00 per share),
for consulting fees related to the creation and execution of the
restructuring plan.
-- In 2000, the Company incurred $1,060,000 of consulting expenses with
SJ. The consulting expense was paid in the form of $274,000 in cash,
25,000 shares of Company common stock (valued at $30.00 per share) and
10,000 stock options with an exercise price of $11.25 per share,
resulting in a charge of approximately $36,000.
-- SJ received minimum annual compensation pursuant to two agreements
aggregating $227,000 per annum through November 1999. Commencing in
December 1999, SJ was to receive minimum annual compensation pursuant
to two agreements aggregating $316,000 per annum. The agreements
expire in November 2004; however, one of the agreements was settled as
part of the 2000 restructuring plan for $1,276,000 (as discussed in
Note 14). SJ also consulted with Softworks in various capacities
throughout 1999 and received compensation directly from Softworks.
-- In 1999, the Company entered into an agreement with SJ to provide
assistance to the Company in locating, negotiating and ultimately
closing a transaction for the sale of the Company's entire remaining
holdings of Softworks, the sale of the Company's ComputerCOP
technology and related investment in NetWolves Corporation (Note 3).
The Company agreed to pay SJ 4.0% of the value of the transactions.
Accordingly, in the first quarter 2000, SJ earned $2,458,000 with
respect to the Softworks transaction and $1,420,000 with respect to
the transaction with NetWolves Corporation.
-- In 1999, SJ was retained to assist the Company in its efforts to sell
shares in Softworks second public offering (Note 3). The Company
issued 200,000 contract options to acquire restricted shares of
Softworks common stock owned by the Company, exercisable at $1.00 per
share, which vested upon completion of Softworks second public
offering. The options were exercised in June 1999.
-- In November 1999, 100,000 shares of Softworks common stock and 5,333
shares of the Company's common stock were issued to SJ as payment for
various consulting matters. Additionally, SJ was awarded 5,000 fully
vested options of the Company's common stock exercisable at $18.75 per
share (which expired November 30, 2001). The stock and options were
valued at $621,000 and were charged to operations in 1999.
F-36
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - Related Party and Other Transactions, continued
-------------------------------------
S.J. & Associates, Inc., continued
------------------------
-- During 1999, the Company paid an affiliate of SJ $700,000 relating to
certain multi- media Internet technology.
NOTE 16 - Commitments and Contingencies
-----------------------------
Operating Leases
----------------
Operating leases are primarily for office space, equipment and automobiles.
At December 31, 2001, the future minimum lease payments under operating
leases are summarized as follows (in thousands):
Year Ending December 31,
Amount
------------------------------ ----------------
(in thousands)
2002 $ 573
2003 357
2004 93
2005 74
2006 49
--------
Total $1,146
========
Rent expense approximated $499,000, $340,000 and $592,000 for the years
ended December 31, 2001, 2000 and 1999, respectively.
Employment Agreement
--------------------
In December 2001, the Company entered into an employment agreement with the
President of the Company, which expires in January 2004. Compensation is
$175,000 per annum plus a bonus at the discretion of the Board.
Defined Contribution Plan
-------------------------
The Company provides pension benefits to eligible employees through a
401(k) plan. Employer matching contributions to this 401(k) plan
approximated $46,000, $41,000 and $41,000 for the years ended December 31,
2001, 2000 and 1999, respectively.
Settlement of Legal Matters
---------------------------
In March 1995, an action was originally commenced against the Company and a
number of defendants. In early 1997, after a change in counsel, the
plaintiff amended the complaint for a second time, now naming as defendants
only the Company and three of its officers. The second amended complaint
alleged that certain third parties, unrelated to the Company, transferred
unauthorized certificates representing 66,667 shares of the Company's
F-37
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - Commitments and Contingencies, continued
------------------------------
Settlement of Legal Matters, continued
---------------------------
common stock to the plaintiff. The certificates had not been legally
acquired from the Company and the Company had reported the certificates to
the Securities and Exchange Commission as stolen certificates. Plaintiff
requested validation of the transfer of the certificates and sought damages
of an unspecified amount. The Company denied plaintiff's allegations and a
motion for summary judgment was granted in favor of the Company and its
officers. However, the plaintiff filed an appeal, which was contested by
the Company. During the fourth quarter of 2000 the parties agreed, subject
to District Court approval to settle this matter for 16,668 shares of the
Company's common stock. As such, during the fourth quarter of 2000 the
Company accrued $62,000 to cover the value of the shares plus estimated
$18,000 in legal fees. In September 2001, the District Court approved the
settlement and the shares were issued.
In August of 1999, the Company and all of its former directors were served
with a complaint filed in the Chancery Court of Delaware. This was a
derivative action, which was an action brought by the plaintiff on behalf
of the Company, in which the Company, for technical reasons, was named as a
nominal defendant along with the directors. The plaintiffs alleged that the
individual defendants breached their respective fiduciary duties to the
Company by awarding excess compensation and was requesting a judgment in
favor of the Company for such excess compensation. An answer to the
complaint was interposed, denying the material allegations of the
complaint. On June 29, 2001, this matter was resolved through the issuance
of a Stipulation of Dismissal, without prejudice.
NOTE 17 - Management's Plans
------------------
For the year ended December 31, 2001, the Company continued to incur net
losses and use substantial amounts of cash in operating activities. The
Company has been dependent upon the cash generated from the sale of
Softworks in 2000 as well as the sale of NetWolves common stock to fund its
operations. Additionally, during 2001, the Company raised $500,000 from the
sale of its own common stock to its Chairman of the Board of Directors.
The Company's management has and will continue to take numerous steps which
it believes will create positive operating cash flow for the Company. Key
measures are as follows:
-- The March 2000 restructure plan, which significantly reduced
operating expenses;
-- Expanding the Company's products and services;
-- Materially improving its sales efforts through expanding its
marketing staff;
-- In 2002, the Company entered into a new ASP agreement with
International Business Machines Corporation ("IBM"), which will
enable IBM to provide an electronic invoice to their customers;
F-38
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - Management's Plans, continued
-------------------
-- The Company generated in excess of $800,000 in custom engineering
fees in 2001 and believes that this revenue should continue into
2002;
-- The Company also acquired Platinum Communications, Inc. (Note 3),
which broadened the Company's product offerings. Management
believes this acquisition significantly enhances the Company's
current market strategy by allowing it to capitalize on the
growing trend for outsource services within the communications
sector;
-- As an additional measure to reduce the Company's use of cash, a
payroll rate reduction program was in effect October 1, 2001
through March 31, 2002. This plan reduced executive compensation
20% and the remainder of the work force incurred a 10% reduction;
-- The Company was unable to generate revenue from its GTS product
offering and ceased marketing this product offering and
eliminated all associated costs; and
-- In October 2001, the Company also entered into an Accounts
Receivable Purchase Agreement, which has provided an additional
source of liquidity.
-- In January 2002, the Company raised an additional $612,000
through the issuance of long-term debt and the sale of its common
stock to members of the Company's Board of Directors, senior
executives and other non-related parties (Note 21). Additionally,
the Company has obtained a commitment from its Chairman, other
members of the Board of Directors as well as its executive
officers, in which they will provide, under certain
circumstances, up to an aggregate of $750,000 for working capital
purposes if needed.
Management believes that its plan will ultimately enable the Company
to generate positive cash flows from operations. Until such time, the
Company believes that its present cash on hand, the sale of the
remainder of its NetWolves common stock, as well as obtaining
additional debt and/or equity financing should provide adequate
funding through at least December 31, 2002. However, there can be no
assurances that the Company will have sufficient funds to implement
its current plan. In such an event, the Company could be forced to
significantly alter its plan and reduce its operating expenses, which
could have an adverse effect on revenue generation and operations in
the near term.
NOTE 18 - Consolidated Statements of Cash Flows
-------------------------------------
Supplemental disclosure of cash flow information for the years ended
December 31, 2001, 2000 and 1999 is summarized as follows:
Year Ended December 31,
2001 2000 1999
-----------------------------------------------
(in thousands)
Interest paid $467 $ 8 $139
==== ==== ====
Net taxes paid $849 $ 38 $102
==== ==== ====
F-39
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - Consolidated Statements of Cash Flows, continued
--------------------------------------
Non-cash investing and financing activities for the years ended December
31, 2001, 2000 and 1999 are summarized as follows:
Year Ended December 31,
2001 2000 1999
----------------------------------------
(in thousands)
Net cash paid in Platinum acquisition (2001) and
reduction in cash from Softworks de-consolidation
(1999):
Account and installment receivables $ (88) $ -- $ 33,942
Prepaid expenses and other current
Assets -- -- 2,282
Property and equipment, net (104) -- 2,698
Intangible assets, net (585) -- 6,653
Other non current assets -- -- 2,061
Accounts payable and accrued
Expenses 194 -- (4,468)
Deferred revenue -- -- (26,787)
Current and long-term debt 337 -- (4,460)
Minority interest -- -- (9,353)
Investment in Softworks -- -- (9,327)
Common stock issued in acquisition 137 -- --
----- ------ --------
Decrease in cash and cash
equivalents $(109) $ -- $ (6,759)
===== ====== ========
Capitalized leases incurred $ 173 $ -- $ --
===== ====== ========
Additional non-cash investing and financing activities for the year ended
December 31, 2000 are summarized as follows:
-- In conjunction with the sale of ComputerCop Corp. (Note 3), the
Company received 1,775,000 shares of NetWolves common stock valued at
$35,500,000 in exchange for $24,394,000 of ComputerCop assets, which
included $20,500,000 cash.
-- The Company's former chairman and Chief Executive Officer tendered
27,345 shares of the Company's common stock valued at $923,000 toward
the repayment of officers' loans.
F-40
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - Products and Services
---------------------
The Company and its subsidiaries currently operate in one business segment
and have, during the years 2001, 2000 and 1999, provided five separate
products: computer software, ASP Services, custom engineering fees, AMS
Services, and equipment sales and installations. With the sale of Softworks
and ComputerCOP (computer software) in the first quarter 2000 as well as
the suspension of equipment sales unit, ("professional services" unit), the
Company is now focused on managed services, custom engineering and its AMS
product offerings. Refer to Note 1 for a detailed description of these
products and services.
Year Ended December 31,
2001 2000 1999
-------------------------------------------
(in thousands)
Computer Software (including $42
and $3,570 of maintenance revenue
in 2000 and 1999, respectively) $ -- $ 73 $ 10,907
ASP fees 2,506 2,047 1,436
Custom Engineering fees 814 -- --
AMS fees 465 -- --
Equipment Sales and Installations -- -- 12,297
-------- -------- --------
Total Revenue $3,785 $2,120 $24,640
======== ======== ========
NOTE 20 - Major Customers
---------------
For the years ended December 31, 2001 and 2000, IBM accounted for 82.2% and
80.5% of the Company's revenue, respectively. Accounts receivable from IBM
amounted to $850,000 and $204,000, at December 31, 2001 and 2000,
respectively.
For the year ended December 31, 1999, the Company had one major contract
involving two customers, with combined revenue of $12,297,000 (49.9% of
total revenue). This amount is included in the Professional Services and
Domestic categories.
NOTE 21 - Subsequent Events
-----------------
In January 2002, the Company entered into a two-year services agreement
with its Chairman. During the first year of the agreement, compensation
will consist of 180,000 restricted shares of the Company's common stock,
which will be expensed over the first twelve months of the agreement.
During the second year of the agreement, compensation will consist of a
monthly fee of $15,000. Further, the Chairman received 240,000 stock
options, which vest ratably during the two-year term of the agreement. The
stock options have an exercise price equal to the closing price of the
Company's common stock on the date of the agreement.
F-41
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - Subsequent Events, continued
-----------------
In January 2002, the Company retained Broadband Capital Management, LLC
("Broadband") as a non-exclusive financial advisor to provide general
financial advisory services. The Company expects Broadband to, among other
areas, assist in maximizing shareholder value, advise the Company on
matters relating to its capitalization and evaluate alternative financing
structures and arrangements. The term of the agreement is for 12 months,
with an aggregate fee of $120,000. The parties subsequently agreed that
Broadband would be paid with 120,000 shares of the Company's common stock
in lieu of cash.
In January 2002, the Company issued an aggregate of 213,580 shares of
common stock to substantially all of its employees as payment of $224,000
of bonuses accrued at December 31, 2001.
In January 2002, the Company's Board of Directors authorized and adopted
the 2002 Stock / Stock Option Plan whereby 625,000 shares of its common
stock were reserved. Similar to both the 2001 and the 2001-A Plans (Note
12), the 2002 Plan is divided into two separate equity programs: an option
grant program and a stock issuance program. Under the stock issuance
program, the purchase price per share is fixed by the Board of Directors or
committee but cannot be less than the fair market value of the common stock
on the issuance date. Further, in January 2002, the Company granted 405,000
stock options to several of its employees. The options vest in one third
increments on April 30, 2002, December 31, 2002 and June 30, 2003, with an
exercise price of $1.05 per share.
In January 2002, the Company's Chairman loaned the Company $250,000. The
term of the loan is three years and bears interest at 5%, payable quarterly
in arrears. Additionally, the Company raised approximately $362,000 through
the sale of 344,524 shares of the Company's common stock to other members
of the Company's Board of Directors, senior executives, Broadband and
certain other non-related parties.
NOTE 22 - Quarterly Financial Data (Unaudited)
------------------------------------
Year Ended December 31, 2001,
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------- ----------------- ---------------- -----------------
(in thousands, except per share amounts)
Revenue $ 517 $ 677 $ 1,153 $ 1,438
Gross margin 428 521 847 1,103
Operating loss (1,701) (2,267) (1,783) (1,379)
Loss on sales of NetWolves
common stock -- (98) -- (3,718)
Other (expense) income (317) 10 16 3
(Provision for) benefit from
income taxes (33) (13) -- 668
-------- -------- -------- -------
Net Loss $(2,051) $(2,368) $(1,767) $(4,426)
======== ======== ======== =======
Basic and Diluted Net
Loss Per Share $ (1.44) $ (1.44) $(0.90) $(2.10)
======== ======== ======== =======
F-42
DIRECT INSITE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 - Quarterly Financial Data (Unaudited), continued
------------------------------------
Year Ended December 31, 2000,
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------- ----------------- ---------------- -----------------
(in thousands, except per share amounts)
Revenue $ 526 $ 500 $ 557 $ 537
Gross margin 437 420 493 448
Operating loss (24,194) (1,424) (1,324) (1,734)
Gain on sale of Softworks 47,813 -- -- --
Gain on sale of ComputerCOP 8,534 -- -- --
Other-than-temporary decline
in Investment in NetWolves -- -- -- (29,737)
Other income (expense) 332 212 131 (305)
(Provision for) benefit from
income taxes (12,812) 385 379 2,008
--------- -------- -------- -------
Net (Loss) Income $ 19,673 $ (827) $ (814) $(29,768)
======== ======== ======== =======
Year Ended December 31, 2000,
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------- ----------------- ---------------- -----------------
(in thousands, except per share amounts)
Basic Net (Loss) Income
Per Share $13.90 $ (0.65) $(0.65) $(20.85)
======== ========= ======== ========
Diluted Net (Loss)
Income Per Share $13.90 $ (0.65) $(0.65) $(20.85)
======== ========= ======= ========
The unaudited interim financial information reflects all adjustments, which
in the opinion of management, are necessary to a fair statement of the
results of the interim periods presented, all adjustments are of normal
recurring nature.
F-43