-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T/ewN81i+seaHvqspWHREaSUZFRUhKyZ0PbGE6GGFm/2IhBRXBpVzGAhkN7DZzcO bAJ3hSq2m6/YhroW1o6rFA== 0000932214-02-000053.txt : 20020520 0000932214-02-000053.hdr.sgml : 20020520 20020520130604 ACCESSION NUMBER: 0000932214-02-000053 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020520 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIRECT INSITE CORP CENTRAL INDEX KEY: 0000879703 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 112895590 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20660 FILM NUMBER: 02657312 BUSINESS ADDRESS: STREET 1: 80 ORVILLE DR CITY: BOHEMIA STATE: NY ZIP: 11716 BUSINESS PHONE: 5162441500 MAIL ADDRESS: STREET 1: 80 ORVILLE DRIVE CITY: BOHEMIA STATE: NY ZIP: 11716 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER CONCEPTS CORP /DE DATE OF NAME CHANGE: 19930328 10-Q 1 di10qmarch2002-live.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, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File No. 0 20660 DIRECT INSITE CORP. (Exact name of registrant as specified in its charter) Delaware 11-2895590 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 80 Orville Drive, Bohemia, N.Y. 11716 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (631) 244-1500 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 17, 2002 was: 3,664,882. DIRECT INSITE CORP. AND SUBSIDIARIES INDEX PART I FINANCIAL INFORMATION Page Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 3 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) For the Three Months Ended March 31, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows For the Three Months ended March 31, 2002 and 2001 5 Notes to Condensed Consolidated Financial Statements 6 - 10 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 14 Quantitative and Qualitative Disclosure About Market Risk -------- Not Applicable PART II OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2002 AND DECEMBER 31, 2001 (In thousands, except share data)
March 31, December 31, 2002 2001 --------- ------------ (Unaudited) (Audited) ASSETS Current assets Cash and cash equivalents $ 264 $ 1,359 Accounts receivable, net of allowance for doubtful accounts of $80 and $53 in 2002 and 2001, respectively 1,668 1,098 Prepaid expenses and other current assets 1,015 1,096 Investment in NetWolves Corporation 419 1,209 ----------- ------------- Total current assets 3,366 4,762 Software costs, net 478 508 Property and equipment, net 1,185 1,278 Investment in non-marketable securities 593 656 Other assets 658 586 ----------- ------------- $ 6,280 $ 7,790 =========== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 1,759 $ 2,057 Restructuring costs payable, current portion 248 294 Due to bank 411 448 Current portion of long-term debt 282 290 ----------- ------------- Total current liabilities 2,700 3,089 Long term debt, net of current portion 328 103 Restructuring costs payable, long-term 337 492 ----------- ------------- Total liabilities 3,365 3,684 ----------- ------------- Commitments and contingencies Shareholders' equity Common stock, $.0001 par value; 150,000,000 shares authorized; - - 3,330,920 and 2,472,866 shares issued in 2002 and 2001, respectively; and 3,259,882 and 2,401,828 shares outstanding in 2002 and 2001, respectively Additional paid-in capital 105,477 104,573 Accumulated deficit (101,742) (100,114) Subscriptions receivable (28) - Unearned compensation (135) - Accumulated other comprehensive loss (329) (25) ----------- ------------- 3,243 4,434 Common stock in treasury, at cost - 24,371 shares (328) (328) ----------- ------------- Total shareholders' equity 2,915 4,106 ----------- ------------- $ 6,280 $ 7,790 =========== ============= See notes to condensed consolidated financial statements.
3 DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2002 and 2001 (in thousands, except per share data)
Three Months Ended March 31, --------- 2002 2001 ------- ------- Revenue $ 1,514 $ 517 ------- ------- Costs and expenses Operations, research and development 1,058 645 Sales and marketing 535 505 General and administrative 945 830 Amortization and depreciation 254 238 ------- ------- 2,792 2,218 ------- ------- Operating loss (1,278) (1,701) Other expenses Loss on sales of NetWolves common stock (250) - Equity in loss of Voyant (63) - Interest expense, net (37) (317) ------- ------- Loss before provision for income taxes (1,628) (2,018) Provision for income taxes - (33) ------- ------- Net loss (1,628) (2,051) Other comprehensive (loss) income Unrealized (loss) gain on marketable securities (303) 704 ------- ------- Comprehensive loss $(1,931) $(1,347) ======= ======= Basic and diluted net loss per share $ (0.53) $ (1.44) ======= ======= Basic and diluted weighted average common shares outstanding 3,069 1,425 ======= ======= See notes to condensed consolidated financial statements.
4 DIRECT INSITE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the three months ended March 31, -------------------------- 2002 2001 ---- ---- (In thousands) (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS Cash flows from operating activities Net loss $(1,628) $(2,051) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization Property and equipment 224 243 Software costs 30 - Other - 1 Non-cash interest charge pertaining to the discount on convertible debentures and loss on prepayment - 346 Provision for doubtful accounts 32 8 Loss on sales of NetWolves common stock 250 - Equity in loss of Voyant 63 - Common stock and options issued for services 186 33 Changes in operating assets and liabilities Accounts receivable (602) (420) Prepaid expenses and other current assets 81 79 Other assets (72) 27 Accounts payable and accrued expenses (77) 4 Restructuring costs payable (201) (1,181) Income taxes payable - (816) ------ ------ Net cash used in operating activities (1,714) (3,727) ------ ------ Cash flows from investing activities Proceeds from the sale of NetWolves common stock 236 - Investment in non-marketable securities - (500) Capital expenditures (131) (350) ------ ------ Net cash provided by (used in) investing activities 105 (850) ------ ------ Cash flows from financing activities Repayments of bank advances, net (37) - Proceeds from the sale of common stock 334 - Proceeds from long term debt, net of repayments 217 - Repayments of convertible debentures - (3,751) ------ ------ Net cash provided by (used in) financing activities 514 (3,751) ------ ------ Net decrease in cash and cash equivalents (1,095) (8,328) Cash and cash equivalents, beginning of period 1,359 10,851 ------ ------ Cash and cash equivalents, end of period $ 264 $2,523 ====== ====== 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, 2002 AND 2001 1 Interim financial information The condensed consolidated balance sheet as of March 31, 2002, and the condensed consolidated statements of operations and comprehensive income (loss) and cash flows for the periods ended March 31, 2002 and 2001, 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. The results of operations for the three months ended March 31, 2002, 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, 2001. The accounting policies used in preparing the condensed consolidated financial statements are consistent with those described in the December 31, 2001 consolidated financial statements. 2 The Company 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 May 2001, the Company acquired Platinum Communications, Inc. ("Platinum"), 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"). 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. New Accounting Pronouncements ----------------------------- SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets" became effective for the Company during the quarter ended March 31, 2002. The provisions of these interpretations that are applicable to the Company were implemented on a prospective basis as of January 1, 2002, which had no material effect on the Company's financial statements. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" became effective for the Company during the quarter ended March 31, 2002. The provisions of the interpretations that are applicable to the Company were implemented on a prospective basis as of January 1, 2002, which had no material effect on the Company's financial statements. 3 Restructuring The Company implemented a restructuring plan and recorded a non-recurring charge during the year ended December 31, 2000. The activity in the restructuring accrual for the three months ended March 31, 2002 is summarized below: 6 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Officer/director Employee retirement Consulting Operating terminations packages contracts leases Total ------------ ---------------- ---------- --------- ----- Restructuring accrual, as of December 31, 2001 $2,000 $10,000 $686,000 $88,000 $786,000 Cash expenditures, three months ended March 31, 2002 (2,000) (5,000) (155,000) (39,000) (201,000) ------ ------- -------- ------- -------- Restructuring accrual, March 31, 2002 $ - $ 5,000 $531,000 $49,000 $585,000 ====== ======= ======== ======= ========
4 Shareholders' equity In January 2002, the Company's Board of Directors authorized and adopted the 2002 Stock / Stock Option Plan whereby 625,000 shares of its common stock were reserved. The 2002 Plan is divided into two separate equity programs: an option grant program and a stock issuance program. Under the stock issuance program, the purchase price per share is fixed by the Board of Directors or committee but cannot be less than the fair market value of the common stock on the issuance date. During the quarter ended March 31, 2002, the Company issued 858,054 shares of its common stock and granted 645,000 options to purchase its common stock as detailed below: - -- The Company raised approximately $359,000 through the sale of 344,524 shares of the Company's common stock to members of the Company's Board of Directors, senior executives and other non-related parties. - -- In lieu of cash, the Company issued 213,580 shares of its common stock valued at $224,000 ($1.05) to its employees in settlement of bonus awards granted in 2001. - -- Issued 89,950 shares of its common stock as payment of certain consultant liabilities, valued at $111,000. - -- 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 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, valued at $180,000, 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. - -- In January 2002, the Company retained a financial advisor to provide general financial advisory services. The term of the agreement is for 12 months, with an aggregate fee of $120,000. The parties subsequently agreed that the fee would be paid with 120,000 shares of the Company's common stock in lieu of cash. Through March 31, 2002, 30,000 shares of common stock valued at $30,000 have been issued. 7 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 5 Long Term Debt 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. 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 Products and Services The Company and its subsidiaries currently operate in one business segment and have, during the years 2002 and 2001, provided three separate products, ASP Services, custom engineering fees and AMS Services.
Three Months Ended March 31, 2002 2001 ---------------------------- ASP fees $ 822 $ 480 Custom engineering fees 578 37 AMS fees 114 -- -------- -------- Total Revenue $ 1,514 $ 517 ======= ========
Major customer For the three months ended March 31, 2002 and 2001, the Company had one major customer that accounted for 90.9% and 90.3% of the Company's revenue, respectively. Accounts receivable from this customer amounted to $1,529,000 and $628,000, at March 31, 2002 and 2001, respectively. 8 Investments 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 had been reflected on the Company's balance sheet as a non-marketable security, at cost. The Company's Chairman is also the Chairman of Voyant. The Company has achieved a level of influence such that the Company began to account for its investment in Voyant utilizing the equity method of accounting commencing January 1, 2002. As a result, the Company recorded a $63,000 non-operating loss as its pro rata share of Voyant's operations for the quarter ended March 31, 2002. 8 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 The Company recently began providing administrative services to Voyant, the value of which are not readily determinable. Further, the Company has from time to time advanced and collected funds to and from Voyant. The net amount owed to the Company as of March 31, 2002 was $111,000. Marketable - Available for sale ------------------------------- The Company, as of December 31, 2001, held 298,500 shares of NetWolves Corporation common stock. During the three month period ended March 31, 2002, the Company sold 120,000 shares in the open market at prices ranging from $2.00 to $2.06 aggregating proceeds of approximately $236,000 and resulting in a realized loss of $250,000. At March 31, 2002, the Company owned 178,500 shares of NetWolves common stock with a quoted market value of $419,000 ($2.35 per share). The unrealized loss as of March 31, 2002 was $303,000, and has been included in "Accumulated other comprehensive loss." 9 Investment In Platinum Communications, Inc. On May 10, 2001, the Company and Platinum completed a merger. The following pro forma financial information has been prepared as if the acquisition of Platinum were consummated as of January 1, 2001. The pro forma information is not necessarily indicative of the combined results that would have occurred had the acquisition taken place at January 1, 2001, nor is it necessarily indicative of the results that may occur in the future. (In thousands except per share data):
Three months ended March 31, 2001 Pro Forma --------- Revenue $ 665 Expense 2,837 --------- Net loss $ (2,172) ========= Basic and diluted net loss per share $ (1.46) =========
10 Management's Plans For the three months ended March 31, 2002, the Company continued to incur net losses and use substantial amounts of cash in operating activities. In order to fund its operating losses, the Company continues to make use of the financing arrangement with an asset based lending institution, received cash from the sale of its common stock, issued long term debt as well as partially liquidated its holdings of NetWolves common stock. The Company's management has and will continue to take numerous steps that it believes will create positive operating cash flow for the Company. Key measures are as follows: -- Expanding the Company's products and services; -- The Company acquired Platinum Communications, Inc., 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; 9 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 -- 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 significant custom engineering fees in the first quarter of 2002 and believes that this revenue should continue in 2002; -- In October 2001, the Company entered into an Accounts Receivable Purchase Agreement, which has provided an additional source of liquidity. -- In January 2002, the Company raised an additional $609,000 through the issuance of long-term debt (Notes 5) and the sale of its common stock to members of the Company's Board of Directors, senior executives and other non-related parties (Note 4). -- 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 March 31, 2003. However, there can be no assurances that the Company will have sufficient funds to implement its current plan. In such an event, the Company could be forced to significantly alter its plan and reduce its operating expenses, which could have an adverse effect on revenue generation and operations in the near term. 11 Subsequent Events During April 2002 the Company sold, at market, an aggregate of 71,000 shares to four key employees. The Company accepted full recourse notes, aggregating $88,750, which carry an interest rate of 6% and will be repaid to the Company over twelve months through payroll deductions. Additionally, the shares further collateralize the obligation to the Company. Also in April, in settlement of various obligations, the Company issued 134,000 shares of its common stock valued at $160,000. On April 19, 2002 the Company also sold 160,000 shares of its common stock at an aggregate price of $200,000, or $1.25 per share, the market price on such date, to unrelated third parties in a private transaction. These proceeds will be used for working capital purposes. 10 DIRECT INSITE CORP. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 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"), 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 May 2001, the Company acquired Platinum Communications, Inc. ("Platinum"), 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"). 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, 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 offering. 11 DIRECT INSITE CORP. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 Results of operations For the three months ended March 31, 2002, total revenue increased 193% or $997,000, to $1,514,000 when compared to the three months ended March 31, 2001 amount of $517,000. During 2002, revenue from ASP fees amounted to $822,000 or 54.3% of the Company's revenue. This represents a 70% increase in revenue from this service. The major customer for this service is International Business Machines Corporation ("IBM"). In 2001, the Company entered into an 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 Electronic Bill Presentment & Payment ("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 $578,000 and $37,000 for the three months ended March 31, 2002 and 2001, respectively. The Company believes that revenue generated from engineering services is the precursor to added recurring revenue sources. In an effort to better serve its customers, in 2001, 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 90.9% of total revenue or $1,376,000 and $467,000, or 90.3% of total revenue for the three months ended March 31, 2002 and 2001, respectively. Further, the Company is presently investigating entry into new specific markets for these managed services. Included in total revenue for 2002, is $114,000 generated by Platinum. In May 2001 the Company completed the acquisition of Platinum, which develops and markets an integrated proprietary suite of back office software solutions, known as AMS to the telecommunications industry as an ASP. Operations, 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 three months ended March 31, 2002 and 2001, the Company increased its research and development expenses by $413,000. Included in this increase was $160,000 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 this offering increased $253,000 over prior year. 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. 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 increased slightly by $30,000 to $535,000 for the three months ended March 31, 2002, when compared to $505,000 for the three months ended March 31, 2001. The major factor for this increase was the acquisition of Platinum, which included approximately $108,000 of sales and marketing expenses. Offsetting this addition was the elimination of the Global Technology Services product offering which totaled $81,000 during 2001. General and administrative expenses include administrative and executive salaries and related benefits, legal, accounting and other professional fees as well as general corporate overhead. Expenses increased $115,000 to $945,000 for three months ended March 31, 2002, when compared to the three months ended March 31, 2001. Major factors contributing to this increase include, among other things, $113,000 attributable to the Company's newly acquired subsidiary, 12 Platinum, offset by the cost savings generated by the elimination of the Global Technology Services offering, which resulted in net reductions of approximately $32,000. Amortization and depreciation expenses increased $16,000 when comparing the three-month period ended March 31, 2002 and March 31, 2001, respectively. The increase is primarily attributable to the purchase of property and equipment during the respective periods and amortization of software costs associated with Platinum. As discussed in Note 8, for the three months ended March 31, 2002, the Company sold 120,000 shares of NetWolves common stock, resulting in a net loss of $250,000. The Company made no provision for taxes during the three months ended March 31, 2002. The tax provision for the three months ended March 31, 2001 was $33,000, which consisted entirely of current tax expense. 13 DIRECT INSITE CORP. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 Financial Condition and Liquidity For the three months ended March 31, 2002, the Company continued to incur net losses and use substantial amounts of cash in operating activities. In order to fund its operating losses, the Company continues to make use of the financing arrangement with an asset based lending institution, received cash from the sale of its common stock, issued long term debt as well as partially liquidated its holdings of NetWolves common stock. As detailed in the Condensed Consolidated Statement of Cash Flows, during the three month period ended March 31, 2002, the Company utilized $1,714,000 in operating activities, which includes, among other items, a net loss of $1,628,000 (offset by non-cash expenses totaling $785,000), an increase in accounts receivable of $602,000 and $201,000 paid toward the restructuring. During the three months ended March 31, 2002, pursuant to a service agreement with its major customer, the Company expended approximately $53,000 of additional data processing and Internet connectivity equipment for its co-location facility. 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 and will continue to take numerous steps that it believes will create positive operating cash flow. Key measures are as follows: -- Expanding the Company's products and services; -- The Company also acquired Platinum Communications, Inc., 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; -- Materially improving its sales efforts through expanding its marketing staff; -- In 2002, the Company entered into a new ASP agreement with IBM, which will enable IBM to provide an electronic invoice to their customers; The Company generated significant custom engineering fees in 2001 and believes that this revenue should continue into 2002; -- In October 2001, the Company entered into an Accounts Receivable Purchase Agreement, which has provided an additional source of liquidity. -- In January 2002, the Company raised an additional $609,000 through the issuance of long-term debt (Note 5) and the sale of its common stock to members of the Company's Board of Directors, senior executives and other non-related parties (Note 4). -- 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 March 31, 2003. However, there can be no assurances that the Company will have sufficient funds to implement its current plan. In such an event, the Company could be forced to significantly alter its plan and reduce its operating expenses, which could have an adverse effect on revenue generation and operations in the near term. 14 DIRECT INSITE CORP. AND SUBSIDIARIES PART II OTHER INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 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 Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K. Not applicable. 15 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 17, 2002 /s/ George Aronson - -------------------------- George Aronson Chief Financial Officer May 17, 2002 16 -----END PRIVACY-ENHANCED MESSAGE-----