10-Q 1 di10q3-01live.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 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 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 [ ] The number of shares of $.0001 par value stock outstanding as of May 14, 2001 was: 1,538,796 DIRECT INSITE CORP. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Page Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Operations and Comprehensive Income For the Three Months Ended March 31, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows For the Three Months ended March 31, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements 6 - 11 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2001 AND DECEMBER 31, 2000 (In thousands, except share data)
March 31, December 31, 2001 2000 --------- ------------ (Unaudited) (Audited) ASSETS Current assets Cash and cash equivalents $ 2,523 $ 10,851 Accounts receivable, net of allowance for sales returns and doubtful accounts of $31 and $70 in 2001 and 2000, respectively 672 260 Prepaid expenses and other current assets 371 451 Investment in NetWolves Corporation 5,625 4,922 -------- -------- Total current assets 9,191 16,484 Property and equipment, net 1,247 1,140 Other assets 1,102 629 -------- -------- $ 11,540 $ 18,253 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 1,667 $ 1,715 Restructuring costs payable, current portion 515 1,526 Convertible debentures, net of discount of $305 in 2000 - 2,695 Income taxes payable 39 855 -------- -------- Total current liabilities 2,221 6,791 Restructuring costs payable, long-term 754 924 -------- -------- Total liabilities 2,975 7,715 -------- -------- Commitments and contingencies Shareholders' equity Common stock, $.0001 par value; 150,000,000 shares authorized; 1,449,834 shares issued in 2001 and 2000; and 1,425,462 shares outstanding in 2001 and 2000 - - Additional paid-in capital 102,911 103,569 Unearned compensation (82) (115) Accumulated deficit (91,553) (89,502) Accumulated other comprehensive loss (2,383) (3,086) -------- -------- 8,893 10,866 Common stock in treasury, at cost - 24,372 shares (328) (328) -------- -------- Total shareholders' equity 8,565 10,538 -------- -------- $ 11,540 $ 18,253 ======== ======== See notes to condensed consolidated financial statements.
3 DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (In thousands, except per share data)
Three Months Ended ---------------------- March 31, --------- 2001 2000 --------- --------- Revenue $ 517 $ 526 Cost of revenue 89 105 -------- -------- Gross margin 428 421 -------- -------- Operating expenses Research and development 556 2,987 Sales and marketing 505 3,436 General and administrative 830 3,170 Amortization and depreciation 238 209 Non-recurring restructuring charge - 14,813 -------- -------- 2,129 24,615 -------- -------- Operating loss (1,701) (24,194) Other income (expenses) Gain on sale of Softworks - 47,813 Gain on sale of ComputerCOP assets held for sale - 8,534 Interest (expense) income, net (317) 332 -------- -------- (Loss) income before provision for income taxes (2,018) 32,485 Provision for income taxes (33) (12,812) -------- -------- Net (loss) income $ (2,051) $ 19,673 ======== ======== Other comprehensive income (loss) Unrealized gain (loss) on marketable Securities 704 (5,625) Comprehensive (loss) income $ (1,347) $ 14,048 ======== ======== Basic net (loss) income per share $ (1.44) $ 14.38 ======== ======== Diluted net (loss) income per share $ (1.44) $ 13.92 ======== ======== Basic weighted average common shares outstanding 1,425 1,368 ======== ======== Diluted weighted average common shares outstanding 1,425 1,413 ======== ======== See notes to condensed condolidated financial statements.
4 DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, ------------------------- 2001 2000 --------- --------- (In thousands) (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS Cash flows from operating activities Net (loss) income $ (2,051) $ 19,673 Adjustments to reconcile net (loss) income to net cash used in operating activities Depreciation and amortization Property and equipment 243 212 Other 1 1 Non-cash interest charge pertaining to the discount on convertible debentures and loss on prepayment 346 - Provision for doubtful accounts 8 - Deferred income taxes - 9,197 Common stock and options issued for services 33 2,522 Common stock issued for settlement of restructuring charges - 1,180 NetWolves common stock issued for services and for settlement of restructuring charges - 2,000 Gain on sale of Softworks and ComputerCOP - (56,347) Changes in operating assets and liabilities Accounts receivable (420) (17) Prepaid expenses and other current assets 79 144 Other assets 27 (26) Accounts payable and accrued expenses 4 (1,648) Restructuring costs payable (1,181) 11,015 Income taxes payable (816) 3,600 Deferred revenue - (10) -------- -------- Net cash used in operating activities (3,727) (8,504) -------- -------- Cash flows from investing activities Proceeds from the sale of Softworks stock (net of $3,157 expenses) - 48,301 Cash utilized in the ComputerCOP/NetWolves transaction (including $1,819 of expenses) - (22,319) Investment in NetWolves Corporation - (4,500) Investment in non-marketable securities (500) Capital expenditures (350) (405) Repayment of officers' loans, net - 899 -------- -------- Net cash (used in) provided by investing activities (850) 21,976 -------- -------- Cash flows from financing activities Repayments of convertible debentures (3,751) - -------- -------- Net (decrease) increase in cash and cash equivalents (8,328) 13,472 Cash and cash equivalents, beginning of period 10,851 1,852 -------- -------- Cash and cash equivalents, end of period $ 2,523 $ 15,324 ======== ======== See notes to condensed consolidated financial statements.
5 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 1 Interim financial information The condensed consolidated balance sheet as of March 31, 2001, and the condensed consolidated statements of operations and comprehensive income and cash flows for the three months ended March 31, 2001 and 2000, have been prepared by the Company without audit. These interim financial statements include all adjustments, consisting only of normal recurring accruals, which management considers necessary for a fair presentation of the financial statements for the above periods. The results of operations for the three months ended March 31, 2001, are not necessarily indicative of results that may be expected for any other interim periods or for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2000. The accounting policies used in preparing the condensed consolidated financial statements are consistent with those described in the December 31, 2000 consolidated financial statements. 2 The Company At the Company's special meeting of stockholders held on May 4th, 2001, the Company's shareholders granted the Board of Directors authority to effect a reverse stock split in a ratio of one-for-fifteen. On that date, the Board of Directors declared a one-for-fifteen reverse stock split effective for shareholders of record as of the close of business on May 7th, 2001. (See Note 4) At the annual shareholders' meeting held in August 2000, the shareholders elected to change the corporate name to Direct Insite Corp. (formerly Computer Concepts Corp.) to better reflect the initiation of new business strategies. Direct Insite Corp. and subsidiaries (the "Company") operate primarily as an Application Service Provider (generally referred to as an ASP, also referred to as the Server Farm) providing high volume data processing and analysis tools for their customers. The Company's core technology, d.b.Express, is a management information tool providing targeted access through the mining of large volumes of transactional data. This service presently is being marketed solely for telecommunications analysis. The Server Farm permits end users the ability to visually access and analyze information through the Internet. Data can be visually presented using the Company's patented data visualization technology. Additionally, in the fourth quarter 2000, the Company entered into a license agreement that will enable it to add to its suite of products and services, a complete Electronic Bill Presentment and Payment ("EBPP"), as well as an Internet Customer Care ("ICC") tool set. In 2000, Company began offering a new consulting service, "Telecommunications Solutions" (also marketed under the name Global Telecommunications Services or GTS). The primary function of the consulting service is to create cost savings for its customers through effectively negotiating their telecommunications and network service provider contracts as well as reviewing both past and future communication expenditures to assure compliance. The Company is combining this service with its Server Farm to create a unique, powerful detailed customer profile. This new, enhanced profile will allow customers to efficiently optimize all telecommunications contract compliance, establish traffic metrics, monitor invoice accuracy and rate compliance as well as support complex invoicing and reporting requirements, exception reporting and electronic invoicing, all via the Internet. To date, revenue from this service has been insignificant. The most significant portion of the Company's operations had historically been conducted through one of its subsidiaries, Softworks, Inc. ("Softworks"). Through Softworks, the Company developed, marketed and supported systems management software products for corporate mainframe data centers. Softworks was wholly owned by the Company through June 29, 1998, and majority owned through March 31, 1999. On January 27, 2000, the Company sold its remaining interest to EMC Corporation for approximately $61 million in cash, before expenses (Note 8). 6 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 In June 1998, the Company completed an acquisition of software (and related sales and marketing rights) which is designed to provide non computer literate individuals (e.g. parents, guardians, schools, etc.) the ability to identify threats as well as objectionable material that may be viewed by users (e.g. children) of a computer on the Internet The Company formed a wholly owned subsidiary and marketed the acquired technology under the trade name, ComputerCOP. On February 14, 2000, the Company sold ComputerCOP Corp. to NetWolves Corporation ("Netwolves"). (See Note 8). During the period ended March 31, 2001, the Company adopted SFAS No. 133. 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 condensed 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. 3 Restructuring 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 for the three months ended March 31, 2001 is summarized below:
Officer/director Employee retirement Consulting Operating terminations packages contracts leases Other Total ------------ ----------------- ----------- --------- ----- ----- Restructuring accrual, as of December 31, 2000 $ 32,000 $ 558,000 $1,113,000 $217,000 $530,000 $2,450,000 Cash expenditures, three months ended March 31, 2001 (15,000) (522,000) (136,000) (28,000) (480,000) (1,181,000) ---------- ---------- ---------- ---------- ---------- ---------- Restructuring accrual, March 31, 2001 $ 17,000 36,000 $ 977,000 $189,000 $ 50,000 $1,269,000 ========== ========== ========== ========== ========== ==========
Of the total outstanding liability of $1,269,000, $754,000, is payable after one year. 4 Shareholders' equity At the Company's special meeting of stockholders held on May 4th, 2001, the Company's shareholders granted the Board of Directors authority to effect a reverse stock split in a ratio of one-for-fifteen. On that date, the Board of Directors declared a one-for-fifteen reverse stock split effective for 7 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 shareholders of record as of the close of business on May 7th, 2001. Holders of the common stock have the right to payment in cash for partial shares. Common stock, treasury stock and additional paid-in capital as of March 31, 2001 and December 31, 2000 have been restated to reflect this split. Par value and authorized shares remain unchanged at $0.0001 and 150,000,000 shares, respectively. All references to the number of common shares and per share amounts elsewhere in the condensed consolidated financial statements and related footnotes have also been restated to reflect the effect of the split for the periods presented. 5 Legal matters In March, 1995, an action was originally commenced against the Company and a number of defendants (Barbara Merkens v. Aval Guarantee Ltd., Walter Mennel, J. Forror, A. Faehndreich-Braun, T&M Consulting AG, M. Schmidt, E.G. Baltruschat and Computer Concepts Corp.; United States District Court, Eastern District of New York). In early 1997, after a change in counsel, the plaintiff amended the complaint for a second time, now naming as defendants only the Company and three of its officers. The second amended complaint alleges that certain third parties, unrelated to the Company, transferred certificates representing 66,667 shares of the Company's common stock to the plaintiff. The complaint further alleges that such shares were endorsed in blank by the third parties and became bearer securities, which were negotiated to the plaintiff by physical delivery. The certificates had not been legally acquired from the Company and the Company had reported the certificates to the Securities and Exchange Commission as stolen certificates. Plaintiff has requested validation of the transfer of the certificates and is seeking damages of an unspecified amount, consisting of alleged diminution in market value of the subject shares from 1994 through the date of any judgment in the plaintiff's favor. The Company denied plaintiff's allegations and filed a motion for summary judgment. On or about November 8, 1999, the motion for summary judgment was granted in favor of the Company and its officers. However, the plaintiff filed an appeal, which was contested by the Company. Since that time the parties agreed to settle the matter. Under the terms of the tentative settlement agreement the Company would issue 16,667 shares of its common stock. The tentative settlement has been remanded to the district court, which is required to review the fairness of the settlement agreement pursuant to the Securities Act of 1933,as amended. The Company believes this settlement is likely to be accepted by the district court. Accordingly, during the fourth quarter of 2000 the Company accrued $80,000 to cover the value of the shares to be issued plus estimated legal fees. During 1999, the Company and certain officers received notification that they had been named as defendants in a class action (case # CV 99 1046, Kassouf, et al v. Computer Concepts Corp., Daniel DelGiorno, Sr. and Daniel DelGiorno Jr., U.S. District Court, Eastern District of New York) alleging violations of certain securities laws with respect to the content of certain Company announcements. On January 30, 2001, the Court entered a judgment dismissing the suit. The time to file an appeal has expired. In August of 1999, the Company and its directors were served with a complaint filed in the Chancery Court of Delaware, New Castle County Claude Nadef v. Daniel DelGiorno, et al and Computer Concepts Corp. as Nominal Defendant; C.A. No. 17376-NC). This is a derivative action, which is action brought by the plaintiff on behalf of the Company, in which the Company, for technical reasons, is named as a nominal defendant along with the real defendants in interest, Daniel DelGiorno, Sr., Daniel DelGiorno, Jr., Russell Pellicano, Augustin Medina, all former members of the Company's Board of Directors. The plaintiffs alleges that the individual defendants breached their respective fiduciary duties to the Company by awarding excess compensation and are requesting a judgment in favor of the Company for such excess compensation. An answer to the complaint was interposed, denying the material allegations of the Complaint. Document discovery has commenced, although no depositions are scheduled. The Company and defendants have denied the allegations and are vigorously defending the matter; however, the Company is unable to predict the outcome of this claim and, accordingly, no adjustments have been made in the consolidated financial statements in regard to this matter. 8 \ DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 6 Reclassifications Certain reclassifications have been made to the condensed consolidated financial statements shown for the prior period in order to have it conform to the current period's classifications. 7 Segment information The Company and its subsidiaries previously operated in two separate business segments, computer software and professional services. With the sale of Softworks and ComputerCOP (Note 8) and the completion of its major professional services contract, commencing in the quarter ended March 31, 2000, the Company began operating in one business segment. Major customer For the three months ended March 31, 2001 and 2000, the Company had one major customer with revenue of $467,000 and $412,000 (90.3% and 78.3% of total revenue, respectively). 8 Dispositions ComputerCOP Corp. ---------------- During February 2000, the Company sold ComputerCOP Corp., a wholly owned subsidiary with assets consisting primarily of $20.5 million dollars and the technology acquired pursuant to an Asset Purchase and Sale Agreement with Internet Tracking & Security Ventures, LLC ("ITSV") to NetWolves in exchange for 1,775,000 shares of NetWolves common stock. Additionally, the Company purchased 225,000 shares from certain NetWolves shareholders for $4.5 million dollars. The sale resulted in a pre-tax gain of $8,534,000, net of $2,572,000 of expenses, recorded in the first quarter of 2000 At March 31, 2001, the Company owns 1,875,000 shares of NetWolves common stock with a quoted market value $5,625,000 ($3.00 per share). The unrealized loss as of March 31, 2001 was $31,875,000, of which, $29,737,000 was recorded as a charge to operations in 2000 and $2,138,000 has been recorded as a charge to "accumulated other comprehensive loss." Softworks, Inc. -------------- Prior to June 30, 1998, Softworks was a wholly owned subsidiary of the Company with 14,083,000 shares of common stock outstanding. Pursuant to a series of transactions including an initial public offering of Softworks in August, 1998, and a second public offering in June, 1999, the Company's ownership in Softworks was reduced to 35%. Pursuant to a tender offer 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 , 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. 9 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 9 Income taxes The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 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. SFAS No.109 requires that the net deferred tax asset be 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 asset will not be realized. 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 8), the Company recognized a taxable gain in the first quarter of 2000 and utilized all of its then estimated available net operating loss carryforwards. The tax provision for the three months ended March 31, 2000 was $12,812,000, which consisted of deferred tax expense of $9,197,000 and current tax expense of $3,615,000. The Company's tax provision for the three months ended March 31, 2001, consists of current tax expense of $33,000. 10 Earnings per share For the three months ended March 31, 2001, outstanding stock options, warrants and other potential stock issuances have not been considered in the computation of diluted earnings per share amounts since the effect of their inclusion would be antidilutive. For the three months ended March 31, 2000, the Company's dilutive instruments are "in the money" stock options with various exercise dates and prices. The Company uses the treasury stock method to calculate the effect that the conversion of the stock options would have on earnings per share ("EPS"). The following table sets forth the computation of basic and diluted EPS:
Three months ended March 31, --------------------------- 2001 2000 ---- ---- (in thousands, except per share data) Numerator: Net income (loss) $ (2,051) $ 19,673 ========= ========= Denominator: Weighted average shares outstanding (Denominator for basic EPS) 1,425 1,368 Effect of dilutive securities Stock options N/A 45 --------- --------- Denominator for diluted EPS 1,425 1,413 ========= ========= Basic net income (loss) per share $ (1.44) $ 14.38 Diluted net income (loss) per share $ (1.44) $ 13.92
10 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 11 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 the full amount of $3,000,000 of Debentures in 2000. The Debentures were convertible into shares of the Company's common stock beginning February 25, 2001, subject to certain limitations. The Company had the right, exercisable at any time, to prepay all or any portion of the outstanding principal amount of the Debentures for which conversion notices had not previously been delivered. On January 30, 2001, the Company exercised its prepayment rights and paid the Holders $3,700,000, plus accrued interest. 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 Debentures were issued to the date they first became convertible. As a result of the prepayment, the discount, which was originally credited to additional paid-in-capital, was reversed in the first quarter 2001, resulting in a loss of $185,000. The Company recorded total interest charges of $751,000 ($353,000 in 2000 and $398,000 in 2001, including the $185,000 loss). 12 Investments In Non-Marketable Securities In February 2001, the Company made an equity investment of $500,000 in Voyant. Voyant is a privately held company, and accordingly, the investment is reflected on the Company's balance sheet as a non- marketable security, which is included in other assets - long term. The Company's Chairman is also the Chairman of Voyant. 13 Subsequent Event In May, 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. Platinum markets proprietary back office software solutions either as a license or as an Application Service Provider to the telecommunications sector. The former shareholders of Platinum received an aggregate of $50,000, and 113,334 shares, (valued at $233,000), of which 46,667 are subject to various performance provisions, which if not achieved would result in the return of a portion or all of the 46,667 shares. 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 revenue thresholds, earn up to an aggregate of a maximum of $1,000,000 in employee incentive bonuses. The acquisition will be accounted for as a purchase and, accordingly, assets and liabilities will be fair valued at the date of acquisition and the results of operations will be included in the consolidated financial statements of the Company, commencing that date. Management of the Company has determined that Platinum is not a significant subsidiary, as defined. As such, and no financial information is required to be presented. 11 DIRECT INSITE CORP. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 Forward looking statements All statements other than statements of historical fact included in this Form 10-Q 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-Q, 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, 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 Direct Insite Corp. and subsidiaries (the "Company") operate primarily as an Application Service Provider (generally referred to as an ASP, also referred to as the Server Farm) providing high volume data processing and analysis tools for their customers. The Company's core technology, d.b.Express, is a management information tool providing targeted access through the mining of large volumes of transactional data. This service presently is being marketed solely for telecommunications analysis. The Server Farm permits end users the ability to visually access and analyze information through the Internet. Data can be visually presented using the Company's patented data visualization technology. Additionally, in the fourth quarter 2000, the Company entered into a license agreement that will enable it to add to its suite of products and services, a complete Electronic Bill Presentment and Payment ("EBPP"), as well as an Internet Customer Care ("ICC") tool set. In 2000, Company began offering a new consulting service, "Telecommunications Solutions" (also marketed under the name Global Telecommunications Services or GTS). The primary function of the consulting service is to create cost savings for its customers through effectively negotiating their telecommunications and network service provider contracts as well as reviewing both past and future communication expenditures to assure compliance. The Company is combining this service with its Server Farm to create a unique, powerful detailed customer profile. This new, enhanced profile will allow customers to efficiently optimize all telecommunications contract compliance, establish traffic metrics, monitor invoice accuracy and rate compliance as well as support complex invoicing and reporting requirements, exception reporting and electronic invoicing, all via the Internet. This new service continues to meet resistance in the marketplace. To date, revenue from this service has been insignificant. In the first quarter of 2000, the Company's Board of Directors approved and the Company announced a restructuring plan that it believes will streamline the Company's operations and reduce overhead. As a result, the Company recorded a non-recurring restructuring charge of $15,176,000 in the year 2000. In February 2000 the Company sold its subsidiary, ComputerCOP Corp. to NetWolves for 1,775,000 shares of NetWolves common stock. The most significant portion of the Company's operations had historically been conducted through one of its subsidiaries, 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. 13 DIRECT INSITE CORP. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 Results of operations During the first three months of 2001 and 2000, the Company's primary source of revenue was generated from the Server Farm. At present, the Server Farm technology has been developed to provide services solely for telecommunications analysis. Presently the Company is providing data analysis and reporting services for International Business Machines Corporation's ("IBM") telecommunications customers. IBM is currently the Company's largest customer with revenue of $467,000 and $412,000 for the three months ended March 31, 2001 and 2000, respectively. As part of an expanded agreement, the Company is scheduled to provide outsourcing services to assist IBM with certain tasks related to EBPP. The Company will supply processing services, application development, consulting and integration / implementation services to support electronic invoice presentation on behalf of IBM. As part of this expanded agreement, the Company is currently in the process of establishing a redundant facility within an IBM co-location center. The purpose of which is to ensure virtual zero down time. Additionally, the Company is presently determining costs and other barriers to possibly enter and attract new specific markets / applications. Server Farm revenue increased $37,000, or 8%, to $517,000 from $480,000 when comparing the three months ended March 31, 2001 to March 31, 2000. Included in of revenue for the three month period ended March 31, 2000, is $46,000 related to ComputerCOP, which was sold during the first quarter of 2000. (See Note 8). For the three month period ended March 31, 2001, total revenue decreased $9,000 when compared to the same time period in 2000. For the three months ended March 31, 2001, the cost of revenue was solely attributable to the Server Farm. It consisted primarily of the direct labor associated with processing call detail records, Internet connectivity costs and various overhead allocations of rent, utilities and telephones. For the three months ended March 31, 2000, in addition to Server Farm costs, the Company also incurred cost of revenue of $11,000 relating to ComputerCOP. While revenue related to the Server Farm for the three-month period ended March 31, 2001 increased $37,000 when compared to the three months ended March 31, 2000, costs as a percentage of revenue decreased to 11.4 % from 16.3%. The Company believes that the cost of revenue associated with the Server Farm revenue is not directly proportional. As such, as revenue increases, costs, as a percentage of revenue, should decrease. The depreciation of the Server Farm's hardware is included in "Amortization and depreciation." Overall, when comparing the three-month periods ended March 31, 2001 and March 31, 2000, the Company reduced its research and development expenses by $2,431,000. 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. During the three months ended March 31, 2000 it also included costs associated with the development of the 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 the first quarter of 2001, thereby creating a reduction of $1,793,000 when compared the three months ended March 31, 2000. With respect to the Server Farm, the Company continues to upgrade improve and enhance the underlying technology associated with this offering. Further, it anticipates releasing a new version of the d.b.Express? technology in 2001. It should be noted that when comparing the three-month periods ended March 31, 2001 and 2000, the Company reduced its development costs associated to the Server Farm by $638,000. 14 DIRECT INSITE CORP. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 Sales and marketing expenses decreased $2,931,000 to $505,000 for the three-month period ended March 31, 2001, when compared to $3,436,000 for the three month period ended March 31, 2000. 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. Major factors for this decrease was again a result of the restructure plan, which included $1,126,000 related to consultants' fees, and $796,000 as a result of reduced staffing levels. An approximate $103,000 reduction was the result of decreased advertising and promotional costs. Additional reductions of approximately $210,000 were a result of the sale ComputerCOP in the first quarter 2000. Further, 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. These reductions were offset by $81,000 of expenses attributable to the Company's new consulting service. 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 $2,340,000 to $830,000 for the three-month period ended March 31, 2001, when compared to the three-month period ended March 31, 2000. Major factors contributing to this decrease include, among other things, staff reductions ($1,253,000), reduced legal expenses ($489,000) and the reduction in the retention of financial consultants ($306,000). Management believes the costs saving measures it had put in place during 2000, in addition to the effects of the 2000 restructuring plan, should, for other than expenses that vary with sales volume, continue for the foreseeable future. Amortization and depreciation expenses increased $29,000 when comparing the three-month period ended March 31, 2001 and March 31, 2000. The increase is primarily attributable to the purchase of property and equipment acquired during the first quarter of 2001. Gain on sale of Softworks of $47,813,000 during the quarter ended March 31, 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 8. Gain on sale of ComputerCOP assets held for sale of $8,534,000 during the quarter ended March 31, 2000 represents the gain associated with an agreement dated February 10, 2000 for the sale of the ComputerCOP subsidiary to NetWolves Corporation. See Note 8. The Company's tax provision for the three months ended March 31, 2001 was $33,000. 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 all of its then estimated available net operating loss carryforwards. The tax provision for the three months ended March 31, 2000 was $12,812,000, which consisted of deferred tax expense of $9,197,000 and current tax expense of $3,615,000. 15 DIRECT INSITE CORP. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 Financial Condition and Liquidity For the three-month period ended March 31, 2001, the Company continued to incur operating losses. The Company used substantial amounts of cash in operating activities during the three months ended March 31, 2001. However, as a result of the cost saving measures implemented as part of the restructure plan put in effect in March, 2000, the Company has seen substantial reductions in its operating costs and use of funds when compared to prior periods. The Company continues to finance its operations from cash generated from the sale of Softworks. In late December 2000, the Company received $10,000,000, which was being held in escrow by EMC Corp as a condition to the sale in January, 2000 of the Company's shares of Softworks. As discussed in Note 11, the Company, during the period September through December 2000, sold $3,000,000 of 6% Convertible Debentures, which was settled with a payment of $3,751,000 in January, 2001. As discussed previously, in the first quarter of 2000, the Company's Board of Directors approved and the Company implemented a restructuring plan that streamlined the Company's operations and overhead structure. (See Note 3) As detailed in the Condensed Consolidated Statement of Cash Flows, during the three month period ended March 31, 2001, the Company utilized $3,727,000 in operating activities, which includes, among other items, a net loss of $2,051,000, $1,181,000 paid toward the restructuring and income taxes paid of $816,000, During the three months ended March 31, 2001, the Company, as a condition to a recently expanded service agreement with its major customer, commenced the establishment of a co-location facility by purchasing $350,000 of additional data processing and Internet connectivity equipment. In February 2001, the Company made an equity investment of $500,000 in Voyant Corp. ("Voyant"). (See Note 12) The Company's cash balance as of May 4, 2001, is approximately $1,944,000. 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 restructured its operations in March, 2000, which reduced its operating expenses, while continuing to market the Server Farm. Additionally, the Company is continuing to market its new consulting service. The Company is continually reviewing its long-term business strategy. 16 As discussed in Note 13 to these Condensed Consolidated Financial Statements, the Company recently completed the acquisition of Platinum Communications, Inc., a provider of business-to-business infrastructure software for customer management, billing and operations for telecommunications, Internet and next generation communications service providers. Platinum's products provide an integrated solution based on a singular database strategy serving all order entry, workflow management, provisioning, rating and billing requirements for communications service providers. The acquisition should provide the Company with complementary technology for dbExpress-TM, the existing high volume data visualization, analysis and EBP&P toolset currently being marketed to the telecommunications industry. The Company believes this acquisition will allow it to capitalize on the growing trend for outsource services within the communications sector. Further, the acquisition broadens the product offering and completes the foundation of our current market strategy, that is to focus on the telecommunications market and expand our product / service offerings, specifically aimed at becoming a leading full service provider for all back office system functionality. Lastly, the Company intends to market its existing visual data analysis and EBP&P product offerings to Platinum's established clients, as well as through their distribution channels. Management believes that its plan will ultimately enable the Company to achieve positive cash flows from operations. Until such time, the Company believes that its present cash on hand and the liquidation of a portion of its investment in Netwolves should provide adequate funding through at least December 31,2001. The Company is deemed to be an Affiliate of NetWolves. As such, there are certain restrictions pursuant to regulations of the Securities and Exchange Commission that limit the amount of shares that the Company may sell in the open market in a 90-day period. Should the Company be required to liquidate shares in excess of the permitted quantities, the Company may need to sell a portion of its investment in private transactions. Private transactions would likely result in sales at a discount to the quoted market price. At March 31, 2001, the quoted market value of the 1,875,000 shares of NetWolves common stock was $5,625,000 ($3.000 per share). On May 14, 2001, the quoted market value of the NetWolves common stock was $5,418,750 ($2.89 per share). 17 DIRECT INSITE CORP. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 NetWolves is an innovator of firewall, security and all-in-one internet access device systems, which is a trend in the internet industry due to the enhanced functuality offered to end users. Their primary product is marketed under the trade name, FoxBox. In addition to the FoxBox appliances, NetWolves has patent pending "Mother System" technology that offers worldwide twenty-four hours a day, seven days a week, real-time monitoring and management of a complete network from one or many locations. In April 2000, the Company entered into a contractual arrangement with an unrelated third party, whereby the Company transferred all of its in-process research and development technology related to the multi-media display station for the rights to 50% of the future profits (as defined), if any, from the third party's operation or sale of this technology. The third party agreed to utilize its contacts in the industry and also agreed to fund all future costs associated with the continued development and marketing of the display station. There can be no assurances that the Company will recognize any proceeds from this transaction. 18 DIRECT INSITE CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 Item 1. Legal Proceedings See Note 5 to the Financial Statements. Item 2. Changes in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders A Special Shareholders Meeting was held on May 4, 2001 to approve a proposal to grant the Board of Directors authority to amend the Certificate of Incorporation to authorize a one-for-fifteen reverse stock split of the common stock. The results of the vote are: For - 18,349,923; Against - 2,165,245; Abstain - 89,636 Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K. Exhibits -------- 10.1 Agreement and Plan of Merger dated as of May 10, 2001 by and among Platinum Acquisition Corp., Direct Insite Corp, Platinum Communications, Inc., Kevin Ford and Ken Tanoury. 10.2 Employment Agreement dated as of May 10, 2001 between Platinum Acquisition Corp. and Kevin Ford. 10.3 Employment Agreement dated as of May 10, 2001 between Platinum Acquisition Corp. and Ken Tanoury. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIRECT INSITE CORP. /s/ James Cannavino -------------------------- James Cannavino Chairman and Director May 14, 2001 /s/ George Aronson -------------------------- George Aronson Chief Financial Officer May 14, 2001 20