-----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, Ew5PcKa7F4hz3zybqJTgZ8BwcrQu+SZrEKiqNKYEM+1sZiD5Pm6Y00cG9kP2jdbT FyI9YnTUgEvlJ3qtGNLbKw== 0001201800-05-000086.txt : 20050429 0001201800-05-000086.hdr.sgml : 20050429 20050429084401 ACCESSION NUMBER: 0001201800-05-000086 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050429 DATE AS OF CHANGE: 20050429 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: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-20660 FILM NUMBER: 05782704 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 10KSB 1 diri10ksbdec04.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB [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, 2004 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 Identification No.) incorporation or organization) 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-B 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-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year: $7,558,000 As of March 31,2005, there were 4,516,985 shares of the registrant's Common Stock outstanding. The aggregate market value of the Common Stock held by non-affiliates was approximately $2,784,487 based on the closing sales price of the Common Stock as quoted on the OTC-BB on such date. DOCUMENTS INCORPORATED BY REFERENCE: None Direct Insite Corp. and Subsidiaries Form 10-KSB for the Year Ended December 31, 2004 Table of Contents -----------------
PART I PAGE ---- ITEM 1 Description of Business 1 ITEM 2 Description of Properties 9 ITEM 3 Legal Proceedings 10 ITEM 4 Submission of Matters to a Vote of Security Holders 10 PART II ITEM 5 Market for Common Equity and Related Stockholder Matters 11 ITEM 6 Management's Discussion and Analysis or Plan of Operation 12 ITEM 7 Financial Statements 18 ITEM 8. Changes in and Disagreements with Accountants on Accounting 18 and Financial Disclosure ITEM 8A. Controls and Procedures 18 PART III ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(A) of the Exchange Act 20 ITEM 10. Executive Compensation 22 ITEM 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 23 ITEM 12. Certain Relationships and Related Transactions 24 ITEM 13. Exhibits and Reports on Form-8K 25 ITEM 14. Principal Accountant Fees and Services 28 SIGNATURES 29 CERTIFICATIONS 30
PART I Item 1. DESCRIPTION OF BUSINESS - -------------------------------- FORWARD-LOOKING STATEMENTS All statements other than statements of historical fact included in this Form 10-KSB including, without limitation, statements under, "Management's Discussion and Analysis or Plan of Operation" regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Form 10-KSB, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as such words or expressions relate to us or our management, identify forward-looking statements. Such forward - looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to, fluctuations in future operating results, technological changes or difficulties, management of future growth, expansion of international operations, the risk of errors or failures in our software products, dependence on proprietary technology, competitive factors, risks associated with potential acquisitions, the ability to recruit personnel, and the dependence on key personnel. Such statements reflect the current views of management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. OVERVIEW Direct Insite Corp. and its subsidiaries (hereinafter referred to at times as "Direct Insite" or the "Company"), was organized under the name Unique Ventures, Inc. as a public company, under the laws of the State of Delaware on August 27, 1987. In August, 2000, we changed our name to Direct Insite Corp. which the Board of Directors believed was more in line with our new direction. In March, 2000, Mr. James A. Cannavino was elected a board member and Chairman of the Board. Shortly thereafter, Dr. Dennis Murray, president of Marist College and Mr. Charles Feld, Founder and Chief Executive Officer of the Feld Group, and Chief Information Officer of First Data Resources and the former Chief Information Officer of Delta Air Lines, were elected to our Board of Directors. In April, 2000, Mrs. Carla J. Steckline, the then attorney general of the state of Kansas, was elected to serve as a member of the Board. As part of the terms and conditions of our financing transaction with Metropolitan Venture Partners II, L.P., a private equity investment firm, ("Metropolitan"), Mr. Peter Yunich, their managing partner, was elected to our Board in September, 2002. In February 2004, Mr. Bernard Puckett, Chairman of the Board of Openwave Systems, Inc. and former Senior Vice President of Strategy and Business Development at IBM, was appointed to our Board, replacing Mr. Feld, who had previously resigned to assume new responsibilities at Electronic Data Systems ("EDS"). In February 2005, Mr. Michael Levin, Managing Director of Metropolitan, was appointed to the board to succeed Mr. Yunich who resigned from the board for personal reasons. Our Current Business Direct Insite primarily operates as an application service provider ("ASP"), providing an integrated transaction based "fee for service" offering called Invoices On-Line (IOL), an electronic invoice presentment and payment (EIP&P) service that processes high volumes of transactional data for invoice presentment purposes delivered via the Internet on a global basis on behalf of our customers. IOL is the Company's primary offering and it is a globally delivered service that provides electronic invoice presentation in the Americas, Europe and Asia, including 28 different countries around the globe and in more than 13 languages and currencies. Direct Insite currently hosts several million 1 invoices that are accessible "on-line" via the Internet 24 hours per day, seven days per week, 365 days per year. IOL is a uniquely positioned service offering in the industry, the service is designed to handle the complex invoicing found in today's global business environment. The solution allows Global 1000 companies to receive, route, approve and pay invoices on-line in the local language and currency. By automating the traditional paper-based invoicing process, customers now have easy and quick access to line-item billing information, reporting and analytics. With the enhanced level of accuracy provided by IOL, invoice disputes are greatly reduced and overall customer satisfaction is substantially increased. We also provide additional service offerings in the form of our patented dbExpressTM technology, a management information tool that allows users to visually data mine large volumes of transactional data via the Internet. A complete Internet Customer Care tool set integrated with the EIP&P product set is also available. We operate fully redundant data centers located at our main office in Bohemia, N.Y. and in Newark, NJ. Our facility in New Jersey is space leased at an International Business Machines ("IBM"), e-business Hosting Center. This co-location/redundancy feature enables us to offer virtually down time free service. This suite of services enables us to provide a comprehensive Internet delivered service including the processing and consolidation of invoice related transaction records and supporting information through all of the internal workflow management processes including an electronically delivered invoice with customer analytics including the ability to dispute any line item of any invoice and pay the invoice through multiple electronic payment options. This comprehensive service offering provides back office operations, reduces our customers' costs and provides for improved customer service by providing our customer's customer with easy access to all of the detailed information about their invoice. Currently, IBM, our largest customer, representing approximately 92% and 97% of our revenue for the years ended December 31, 2004 and 2003, respectively, utilizes our suite of IOL products and services to allow their customers from around the globe to receive, analyze, dispute and cost allocate all of their invoice related information in their local language and currency via the Internet 24 hours a day, 7 days a week, 365 days a year. Also in 2004 we added our second Fortune 500 company to our customer base. Recent Financing In March 2005 the Company entered into a Securities Purchase Agreement with Sigma Opportunity Fund LLC ("Sigma") and Metropolitan Venture Partners II LP ("MetVP"), collectively the "Buyers", whereby the Buyers purchased Senior Subordinated Secured notes (the "Note Purchase") in the aggregate amount of $750,000. The notes bear interest at the rate of five percent (5%) per year beginning June 28, 2005 and mature on the earlier to occur of (i) September 29, 2006, (ii) the date on which demand for payment of the loan payable to JPMorgan Chase Bank is made, and (iii) commencing May 13, 2005, the due date of the loan payable to JPMorgan Chase Bank pursuant to the Grid Demand Promissory Note, dated as of June 27, 2003, including if due on demand and whether or not demand for payment is actually made, as such due date may be extended. In connection with the note purchase the Buyers were issued warrants to purchase 750,000 common shares of the Company. The exercise price of the warrants is $0.90 per share of common stock subject to adjustment on the occurrence of certain events. Sigma has the right to lead a "Follow-on Financing" which is expected to be consummated within 45 days of the closing of the Note purchase. In the event that the Follow-on- Financing does occur the exercise price of the warrants issued in conjunction with the Note Purchase will be adjusted as agreed between the Company and the buyers. In the event the Follow-on-Financing is not consummated the exercise price of the warrants shall be $0.01 per common share. In November 2004 the Board of Directors authorized us to sell up to 1,500 shares of Series D Redeemable Preferred Stock ("Series D Preferred") at $1,000 per share. The holders of Series D Preferred are entitled to dividends, on a cumulative basis, at the rate of 9-1/2% per year, compounded and payable quarterly beginning on April 1, 2006. The holders of Series D Preferred have preference in the payment of dividends and, in the event of liquidation, to all classes of capital stock of the Company except for the Series A, B and C 2 Preferred Stock. As of December 31, 2004 we had sold 100 shares of Series D Preferred and received proceeds of $100,000. The buyer was issued warrants to purchase 90,909 common shares at an exercise price of $2.03 per share in conjunction with the sale. In December 2003 the Board of Directors authorized us to sell up to 1,500 shares of Series C Redeemable Preferred Stock ("Series C Preferred") at $1,000 per share and in April 2004 the Board authorized the sale of an additional 500 shares. The holders of Series C Preferred are entitled to dividends, on a cumulative basis, at the rate of 9-1/2% per year, compounded and payable quarterly beginning on October 1, 2005. The holders of Series C Preferred have preference in the payment of dividends and, in the event of liquidation, to all classes of capital stock of the Company except for the Series B Preferred Stock. As of December 31, 2004 we had sold 2000 shares of Series C Preferred and received proceeds of $2,000,000 less expenses of $140,000. Of the total shares sold Metropolitan has purchased 540 shares, our Chairman and Chief Executive Officer of the Company purchased 200 shares and certain Directors purchased 105 shares. The proceeds were used for working capital purposes. In June 2003, the Company's Board of Directors approved the exchange of the then outstanding obligations to our Chairman and Chief Executive Officer, Markus & Associates and Tall Oaks Group, LLC for 974 shares of Series B Preferred Stock at an exchange ratio of $1,000 of debt per share ("Price Per Share"). The Series B Preferred was issued as follows: -- 266 shares were exchanged for $266,000 of debt obligation to our Chairman and Chief Executive Officer; -- 208 shares were exchanged for $208,000 of debt obligation to Markus & Associates; and -- 500 shares were exchanged for $500,000 of debt obligation to Tall Oaks Group, LLC. Each of the Series B Preferred shares is entitled to mandatory dividends, payable quarterly, commencing on the first day of the calendar quarter after the date of issuance, at the rate of 12% per annum. Additionally, the Series B Preferred shares are redeemable, at the sole option of the Company, on or after March 31, 2005. Upon redemption, the holders of the Series B Preferred shall be entitled to receive, for each share of Series B Preferred outstanding, an amount equal to the Price Per Share plus accrued and unpaid dividends. Between September 2002 and June 2003, the Company sold a total of 134,680 shares of Series A Convertible Preferred Stock, ("Series A Preferred") in consideration for the gross amount of $2,750,000 to Metropolitan Venture Partners II, L.P. Each share of Series A Preferred is convertible into 10 shares of common stock of the Company. The holders of the Series A Preferred ("the Holders") are entitled to dividends, on a cumulative basis, at the rate of 9-1/2% per annum, compounded quarterly and payable on February 1, 2005 and September 25, 2005. The payment of the first dividend was originally scheduled for September 25, 2004, however, the Company and the Holders agreed to defer this payment until February 1, 2005. As consideration for the deferral of the dividend payment, the Company agreed to pay the Holders a premium of 7.5% of the dividend. In May 2004 the Company and the Holders further agreed to grant the Company the right, in its sole discretion, to defer the payment of the dividend scheduled to be paid on February 1, 2005 until February 1, 2006. In the event the Company elects to pay the dividend on February 1, 2006 the Holders would receive a premium of $129,000. In December 2004 the Company exercised its right to defer payment of this dividend until February 1, 2006. Also, the Company and the Holders further agreed to grant the Company the right, in its sole discretion, to defer the payment of the dividend scheduled to be paid on September 25, 2005 until February 1, 2006. In the event the Company elects to pay this dividend on February 1, 2006 the Holders would receive a premium of $41,000. In the event the Company does not elect to defer the payment of the dividend the Company agreed to pay the Holders a premium of $13,000. Discontinued Products and Services In 2001 we acquired Platinum Communications, Inc. ("Platinum"), a Dallas, Texas based company, which marketed its integrated proprietary back office software solutions, Account Management Systems ("AMS" or sometimes referred to as "TAMS") to the telecommunications industry either as a license or as an ASP. 3 As a result of the lack of development of the Platinum business and to focus our resources on our core business, in December 2003, we decided to close the operations of Platinum. For the year ended December 31, 2003 Platinum incurred a loss of $1,912,000, including a provision for closing costs of $220,000 and impairments of long-lived assets of $352,000. For the year ended December 31, 2004 the Company recognized income from the discontinued operations of $288,000 as a result of settling certain liabilities of the Platinum operation for less than the original obligation. The income (loss) is reflected as Income (Loss) from Discontinued Operations in the accompanying Consolidated Statements of Operations. PRODUCTS AND SERVICES We currently operate in one business segment, the Electronic Billing Presentment and Payment ("EBP&P") sIector, and, during the years 2004 and 2003, have provided three primary forms of service offerings: EBP&P Application Service Provider ("ASP") Services, AMS or TAMS Services (which have been reclassified to discontinued operations) and professional engineering services. Within the ASP offering we provide two primary services: - -- Invoices On Line, an EBP&P offering, and; - -- dbExpress, a data visualization and mining service Invoices On Line ---------------- IOL is an advanced web-based electronic invoice presentment, workflow management; reporting and data interrogation/analysis platform designed for large enterprise customers conducting business internationally. Direct Insite's web-based service offering has been operational since 2002 and is currently delivering invoices to users in the Americas, Europe, the Middle East and Africa (EMEA) and the Asia Pacific geographic regions. We are planning on supporting additional geographies and languages throughout the course of 2005. From a system user perspective, IOL is operated on behalf of an enterprise that delivers goods and services to a customer. Subsequent to delivery, IOL would be the vehicle for the service provider or "Biller" to present an invoice to the customer, who would become the "Payer" of an invoice. IOL provides the following functions on behalf of the Biller to the customer or Payer: -- Summary View of Invoice. IOL enables the Payer to view a collection of all invoices being presented to the Payer and further allows the payer to view a summary of the amount due for goods and services. This allows the Payer to view the total amount due as well as a summary of the collection of goods and services delivered. -- Complex Presentment. (Data centric views). Historically, paper invoices have been used by Billers as the primary vehicle to communicate the types of goods and services delivered to customers. Because of the fundamental limitations of the amount of detail that could be present in a "single sheet" paper invoice, there was a general lack of detail provided to the customers. The result of the absence of detail resulted in calls to the biller in order to obtain more information. IOL is based on a hierarchical data structure that allows the user the convenience of seeing a high level summary of all invoices or to "drill down" on any given invoice or any line item of an invoice. This "Data- centric" model conveniently supports high level summary or low level explanatory information to satisfy the customers needs to understand, verify and pay the invoice.. -- Data Mining and Visualization. Another benefit of data-centricity is the ability to utilize the dbExpress data mining technology across the entire enterprise to analyze line item detail information -- not just a single operating unit or limited geographical area of the business. Additionally, IOL provides a significant archiving capability such that 12 to 24 months of historical invoicing/charges can be data mined for trend and optimization opportunities. The results of the mining activity are presented in a highly visualized manner to the user. -- Notification. Email notification is used to provide invoice alerts, disputes, workflow, administration, invoice status and payment timing. 4 -- Multi-tiered Accounts. This capability is used for allocating portions of an invoice across complex, payer organizational structures with multiple levels of management and associated viewing rights and/or privileges often found in large enterprise accounts. -- Workflow Management. Enables the user to electronically route the invoice through the approval chain; passing the designated portions of an invoice to necessary parties for approval. This will also assist the user's ability to verify whether the approving parties have received the invoice and if the portion has been reviewed, approved or disputed.. -- Dispute Management. This capability supports the ability of the customer/payer to dispute a charge at the invoice level of at the level of any line time within the invoice. Once invoked, the billing dispute function provides for automatic "forms fill" of the information related to the dispute and automatically routes the dispute to the appropriate customer support organization. -- Payment and Remittance. This facility supports multiple payment options such as full payment, schedule payment and auto payment. The system also supports balance-forward accounting or open invoice accounting. Pre- scheduled payments are also supported by the system. -- Billing Inquiry (or Trouble Ticket). The process of customer or payer registering a disagreement with a given line item of the invoice or simply needing to require a clarification of additional supporting data is supported through the Billing Inquiry function". -- Report Capabilities. Users can track orders, disputes, billing inquires, payments and system usage. This reporting function is driven by an online analytical processing (OLAP) tool that plugs into the user's database. This text reporting capability complements the graphical representation of results that is the output of the dbExpress data- mining tool. dbExpress Background dbExpress has been in use in various forms for more than ten years. dbExpress is a software tool which assists end users in the retrieval and visualization of all types of data. It allows customers to access and analyze high volumes of information quickly and easily. With the patented data mining technology found in dbExpress, high volumes of detailed information is presented in our unique interface known as a "Filescape". With dbExpress, the customer may create graphs, reports, or simply list the customer information for easy viewing. dbExpress simplifies the preparation of traditional reports by giving the customer the ability to view billing data interactively using simple point-and-click mouse operation. With dbExpress, the customer is given the ability to drill down into detail information allowing the customer to identify data trends and "cause and effect" relationships in an interactive, graphical format. Addresses Internet Bandwidth Limitations dbExpress is a data analysis tool that addresses a major Internet problem, that of high data volume and limited bandwidth. This limitation is currently responsible for the lengthy delays associated with data downloading. dbExpress is a web based reporting and analysis system that was introduced to deliver all of the functionality of traditional data mining systems with the added advantage of managing large volumes of detailed transactions on a centralized information server that is accessible via the Internet. dbExpress runs in common web browsers such as Internet Explorer 5.X (and newer versions) plus Netscape Navigator 4.X (and newer versions). Customers may interact with and report on large monthly billing period data via remote Internet access. Advantages of dbExpress All Data Indexed - Unlike traditional database products, dbExpress pre-computes data access indexes associated with all data relationships of interest. This eliminates the need to compute such access mechanisms on a case by case basis. The users of dbExpress are free to "question" the database across 5 a wide range of relationships and massive amounts of data with far less time delay as compared to the standard database query systems. Furthermore, the presentment of the "search results" is in the form of graphical "filescapes" that can be "visually drilled down" to further understand the information relationships. Graphics Driven - The data is delivered via the Internet with simple browser technology thereby allowing an authorized Internet user to manipulate huge databases in seconds. High Power / Low Cost - dbExpressTM enables users to analyze millions of records over the Internet without the need to first download the data being analyzed. Better Access to Information - dbExpressTM improves the accessibility to databases created by database management systems (DBMS) by eliminating the need to write queries in computer code and facilitates data searches through the use of graphical query tools. We believe that this results in more timely and better quality business decision-making. Broader Access to Information. - dbExpressTM enables a broader population within an organization to visually and interactively mine data without the need or support from internal or external management information system (MIS) professionals. dbExpressTM performs these tasks faster than conventional database systems. Ease of Use - dbExpressTM utilizes a simple "point-and-click" navigation approach, which enables the user to view and analyze data down to the lowest level of detail. dbExpressTM provides powerful functionality via the Internet that allows the exploration of data patterns, trends, and exceptions. Data searches, queries and analyses can be converted to sophisticated, simple to use presentations providing integrated business graphics and report writing capabilities. Interfaces With Leading Databases and Other Tools - dbExpressTM provides direct access to leading databases and can be exported to popular spreadsheets, report writers, graphics packages and word processors. Integrates Data From Multiple Vendors - When dbExpressTM reads a database, it creates its own summaries of information through a proprietary process. Information This permits users to access and compare information contained in enterprise-wide databases created by different vendors simultaneously in the d.b.Express' user-friendly environment. Works in Common Operating Environments - dbExpressTM operates in virtually all file server and peer-to-peer networking environments providing secure visual data mining functionality through Internet browsers. High Processing Speed - Once a database source has been processed, dbExpressTM employs proprietary matrix storage technology rather than rereading each data element in that database. The elimination of this rereading step increases the speed of data access, enabling ad-hoc analysis at a rate that has been demonstrated to be far faster than possible with any other system. Security, Access and Storage - In order to meet the archival requirements of customers, the Company produces CDs of each month's billing details. In order to provide this service, the Company has put into place a fully redundant data center. The archive service is available 24 hours a day, 7 days a week, 365 days a year. Historically, our primary product offering was dbExpress, the visual data analysis platform described for use by Fortune 500 companies to consolidate communications traffic for the purpose of system analysis and contract compliance. The telecommunication offerings were expanded with the acquisition of a telecommunications asset management system suite of back office communications management software products. This suite of offerings provided the capability to manage complex high volume communications services within the large enterprise; work flow management, service provisioning, transaction rating, billing and analysis, A/R and cash application and electronic intra/inter company invoicing. 6 During 2001, we enhanced our service offerings by combining electronic invoice presentment and payment functionality with dbExpress. This combination provides Internet-based services to customers in the form of an electronic invoice capable of delivering both summary and detailed billing information with the ability to data mine high volume of internet transactions that large companies generate. This "data centric" approach is a significant departure from the industry standard "document centric" approach that delivered print stream images over the Internet and not the line item detail. This approach, and the addition of payment capabilities, formed the basis for our enhanced Electronic Bill Presentment and Payment offering referred to as Invoices on Line which was brought to market in 2002. This combined set of services has allowed Direct Insite to significantly expand its market opportunities to include any large enterprise in a given industry sector that seeks to provide their customers with an electronic invoice with the associated line item detail information and with the associated reports and data mining capabilities. Previously, all of the electronic reporting and analysis capabilities of dbExpress were being delivered in support of the traditional paper-based billing system. For simple or low volume detail accounts, electronically delivered invoices are primarily a reproduction of the print stream. We believe that electronic invoices delivered to large enterprise customers require the ability to deliver all of the line item detail to support the summary billing information as well as the tools necessary to mine that data. IOL offers to this market electronic presentation of invoices along with the tools to verify the detail behind the invoice. The Direct Insite offering is a "data centric" solution built on delivering summary billing information constructed from the underlying detail data contained in an underlying database. Because the supporting detail information, analysis and reporting tools are made available to the end user, costs are reduced for both the provider and customer while improving customer service through customer self care. We believe that this is a critical component and a compelling reason to encourage potential customers to adopt our electronic invoice presentment and payment service. SALES AND MARKETING CHANNELS TO MARKET We have two primary channels to market -- direct through our sales representatives and indirect through channel and strategic partners. These channels are supported by a technical sales support group. Direct ------ We have recently employed a new sales executive and independent agents. In addition, our directors and executives are involved in new client development and the establishment of channel partnerships. Indirect -------- We are pursuing both reseller and strategic partner relationships to further develop existing account relationships and to increase market coverage. These relationships can also expand our offerings, therefore we are seeking to establish partnerships with other companies that offer complementary products and services such as supply chain management and payment services. The use of the indirect channel provides access to additional engineering and professional resources to implement our EBP&P service offering. IBM RESELLER AGREEMENT The Company signed a reseller agreement with IBM on August 4, 2003. This agreement provides IBM with the ability to sell the Invoice on Line service offering to its customers. The Company supports this sales activity by providing Subject Matter Experts (SME's) to assist the IBM sales organization. Technical Sales Support and Post-Sales Account Management 7 We have a pre-sales support staff and add post sales support to the existing account management group as we secure new business. This group is responsible for technical sales presentations, developing proposals and pricing, contract administration and then account management upon completion. RESEARCH AND DEVELOPMENT The computer software industry is characterized by rapid technological change, which requires ongoing development and maintenance of software products. It is customary for modifications to be made to a software product as experience with its use grows or changes in manufacturers' hardware and software so require. We believe that our research and development staff, many with extensive experience in the industry, represents a significant competitive advantage. As of March 31, 2005, our research and development group consists of 21 employees. Further, when needed, we retain the services of independent professional consultants. We seek to recruit highly qualified employees, and our ability to attract and retain such employees is expected to be a principal factor in our success in maintaining a leading technological position. For the two years ended December 31, 2004 and 2003, research and development expenses were approximately $2,227,000, and $3,201,000, respectively, including $561,000 for 2003 that is included in Loss from Discontinued Operations in the accompanying Consolidated Statements of Operations. We believe that investments in research and development are required in order to remain competitive. COMPETITION We believe our primary competitors are: Avolent is a privately held San Francisco based provider of enterprise software for Financial Relationship Management (FRM) that include electronic invoice presentment and payment (EIPP), online account management, process management, enterprise employee access, and decision support. Founded in 1995, Avolent has primarily focused on the financial services, healthcare, technology and utility markets. Bottomline Technologies (NASDAQ: EPAY) was established in 1989 and provides a Business to Business ("B2B") EBPP solution, primarily to financial institutions and the legal services markets. The company's products include software designed to automate the disbursement process for banks and their corporate customers' anti-fraud and electronic commerce payment software. Bottomline focuses on cash management and financial-related remittance, reporting and audit data. The company has over 500 employees and is based in Portsmouth, NH. Emergis (TSE: IFM) is an ecommerce solutions and service provider, primarily focused on the healthcare and financial services industries. The company, based in Toronto, Canada, was acquired by Bell Canada's electronic commerce unit and subsequently changed its name to BCE Emergis. The company has focused primarily on the Canadian B2C EBPP marketplace but is expanding in the US through banking relationships. Velosant (formerly BillingZone), established as a joint venture between PNC Bank and Perot Systems, was acquired by e-One Global. BillingZone is an information technology services firm that serves the B2B EBPP market with a consolidator model that is focused on the B2B EBPP industry and is primarily payer-centric. CheckFree Corporation (Nasdaq:CKFR) provides online billing and payment for companies on the Web. Primarily focused on the B2C market, consumers receive and pay bills online through CheckFree-managed services. CheckFree was founded in 1981 in Columbus, Ohio. The company is now headquartered in Atlanta, GA with offices across the U.S,, in Canada and in the UK. Docucorp International, Inc.,(Nasdaq: DOCC) is based in Dallas Tx, and provides enterprise software products and professional services related to its information software products. They also provides application service provider (ASP) hosting service to provide processing, print, mail, archival and Internet delivery of documents for insurance, utilities, bank and mutual fund statements, invoices, call center correspondence and EBP&P. 8 DST Systems Inc., is a Kansas City based provider of integrated paper and electronic statements, bills, marketing and compliance pieces, and other documents, that primarily service the communications, financial, insurance and utility markets for B2C and B2B applications. Edocs, Inc., a subsidiary of Siebel Systems, Inc., based in Natick NH with its primary business model focused on providing online account management and billing software to the global large enterprise market. The company has approximately 250 employees and is focused on providing their B2B and B2C products to the telecommunications, utility, healthcare, transportation, security, real estate, retail and leasing industries, as well as financial services firms with B2B electronic statement and presentment needs. Pitney Bowes docSense (docSense) is a wholly-owned subsidiary of Pitney Bowes (NYSE: PBI). docSense targets the B2C, B2B and internal messaging markets and provides solutions for the creation and distribution of documents in paper and digital forms. Pitney Bowes provides solutions for government, utility, and insurance markets. It focuses on bills and primarily the B2C market. Many of our current and potential competitors have greater name recognition, larger installed customer bases, longer operating histories, and substantially greater financial, technical and marketing resources than Direct Insite. We cannot assume that current and potential competitors will not develop products that may be or may be perceived to be more effective or responsive to technological change than are our current or future products or that our technologies and products will not be rendered obsolete by such developments. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could have a material adverse effect on our business, operating results and financial condition. EMPLOYEES We had 56 employees, all in the United States, at March 31, 2005, including 38 in technical support, (including research and development), 9 in marketing, sales and support services, and 9 in corporate finance and administration. Our future success will depend in part upon our continued ability to attract and retain highly skilled and qualified personnel. We believe that our relations with our employees are good, and we have no collective bargaining agreements with any labor unions. INTELLECTUAL PROPERTY We have two federally registered trademarks, which we rely upon: "dbExpressTM" and "dbACCELTM". In addition, we received a patent for the proprietary aspects of our dbExpress technology in 1994, and a second, expanded patent on that technology in 1995, which broadened the claims regarding the product's graphical interface and indexing. No assurance can be given that our patents and copyrights will effectively protect us from any copying or emulation of our products in the future. We also rely on proprietary knowledge and employ various methods, including confidentiality agreements, to protect our software codes, concepts, ideas and documentation of our proprietary technology. Despite these efforts, unauthorized parties may attempt to copy aspects of our products, obtain and use information that we regard as proprietary or misappropriate our copyrights, trademarks, trade dress and similar proprietary rights. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate. In addition, our competitors might independently develop similar technology or duplicate our products or circumvent any patents or our other intellectual property rights. Item 2. DESCRIPTION OF PROPERTIES - ---------------------------------- We currently maintain leased facilities in the locations listed below: 9
Description Location Square Footage Lease term Annual Rental Cost ----------- -------- -------------- ---------- ------------------ Corporate offices Bohemia, NY 10,000 7/1/04 - 6/30/05 $206,136 Co-location facility Newark, NJ Note 1 10/1/03 - 9/30/08 $257,280
Note 1. We are obligated under the terms of an agreement with our major customer to maintain a co-location site at an IBM eHosting facility in Newark, New Jersey or an agreed on alternative location. The redundant facility provides us with, among other things, switches, routers, racks, connections to Internet network access points, at a variety of bandwidths, various levels on monitoring, and access to problem management support. The lease expires on September 30, 2008. Item 3. LEGAL PROCEEDINGS - -------------------------- We are not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material adverse effect on our business. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No matters were submitted to a vote of shareholders during the quarter ended December 31, 2004. 10 PART II Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ----------------------------------------------------------------- (a) Market Information Our common stock is traded on the Over-The-Counter Bulletin Board since October 24, 2003. Previously our stock was traded on NASDAQ SmallCap market since September 23, 1992. The following table sets forth the high and low sales prices for our common stock by the quarters indicated:
High Low ---- --- 2003 First Quarter 2.430 1.370 Second Quarter 1.850 1.040 Third Quarter 1.480 0.590 Fourth Quarter 1.050 0.520 2004 First Quarter 1.200 0.560 Second Quarter 2.450 0.780 Third Quarter 2.500 1.500 Fourth Quarter 2.400 1.600 2005 First Quarter 1.750 0.760
(b) As of March 31, 2005, there were 2,570 shareholders of record. We estimate that there are approximately 10,700 shareholders, including shareholders whose shares are held in the name of their brokers or stock depositories. (c) There were no cash dividends or other cash distributions made by us during the year ended December 31, 2004 to common shareholders. In 2003, we paid dividends of $30,000 to Preferred Series B shareholders. Further dividend policy will be determined by our Board of Directors based on our earnings, financial condition, capital requirements and other then existing conditions. It is anticipated that cash dividends will not be paid to the holders of our common stock in the foreseeable future. (d) During the fourth quarter of 2004, we issued unregistered shares of our common stock as follows: -- We issued 111,752 shares valued at $139,000 to directors for service on the Board of Directors and Committees of the Board; -- We issued 6,666 shares of common stock valued at $13,000 to consultants for services. -- We issued 5,957 shares to employees for services -- We issued 27,027 non-vested shares to an employee pursuant to an employment agreement (e) Subsequent to December 31, 2004, we issued unregistered shares of our common stock as follows: -- We issued 10,000 shares to an employee and a consultant for services The foregoing shares were issued in reliance on the exemption provided by Section (4)(2) of the Securities Act as transactions not involving a public offering. All shares to officers and directors were issued under stock plans that have been approved by shareholders. All prior issuances of equity 11 securities during the past three years have been previously reported. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION --------------------------------------------------------- Overview Direct Insite Corp. and its subsidiaries (hereinafter referred to at times as "Direct Insite" or the "Company"), was organized under the name Unique Ventures, Inc. as a public company, under the laws of the State of Delaware on August 27, 1987. In August, 2000, we changed our name to Direct Insite Corp. which the Board of Directors believed was more in line with our new direction. In March, 2000, Mr. James A. Cannavino was elected a board member and Chairman of the Board. Shortly thereafter Dr. Dennis Murray, president of Marist College and Mr. Charles Feld, Chief Information Officer of First Data Resources and the former Chief Information Officer of Delta Air Lines, were elected to our board. In April, 2000, Mrs. Carla J. Steckline, the then attorney general of the state of Kansas, was elected to serve as a member of the Board. As part of the terms and conditions of our financing transaction with Metropolitan Venture Partners II, L.P., a private equity investment firm, ("Metropolitan"), Mr. Peter Yunich, their managing partner, was elected to our Board in September, 2002. In February 2005, Mr. Michael Levin, Managing Director of Metropolitan was appointed to the Board to succeed Mr. Yunich who resigned for personal reasons. In February 2004, Mr. Bernard Puckett, Chairman of the Board of Openwave Systems, Inc. and former Senior Vice President of Strategy and Business Development at IBM was appointed to our Board, replacing Mr. Feld who assumed new responsibilities at Electronic Data Systems ("EDS"). We primarily operate as an application service provider ("ASP") and, market an integrated "fee for services" offering providing high volume processing of transactional data for billing purposes, electronic bill presentation and payment ("EBP&P") as well as visual data analysis and reporting tools delivered via the Internet for our customers. Our core technology is dbExpressTM, the proprietary and patented management information tool, which provides targeted access through the mining of large volumes of transactional data via the Internet. Further, in 2001, we began to provide custom engineering services for our customers. These services have increasingly become a significant source of revenue for us and we believe will continue to increase. Additionally, we believe that this type of service leads to recurring revenue streams similar to our ASP products. This newly assembled suite of services enables us to provide a comprehensive Internet delivered service from the raw transaction record through all of the internal workflow management processes including an electronically delivered invoice with customer analytics. This comprehensive service offering provides back office operations, cuts costs and provides for improved customer service by providing the end customer with easy access to all of the detailed information about their bill. We operate fully redundant data centers located at our main office in Bohemia, N.Y. and in Newark, NJ. Our facility in New Jersey is space leased at an International Business Machines ("IBM"), e-business Hosting Center. This co-location / redundancy feature enables us to offer virtually down time free service. Currently, IBM, our largest customer, representing approximately 92% and 97% of our revenue for the years ended December 31, 2004 and 2003, respectively, utilizes our suite of IOL products and services to allow their customers from around the globe to receive, analyze, dispute and cost allocate all of their invoice related information in their local language and currency via the Internet 24 hours a day, 7 days a week, 365 days a year. Also in 2004 we added our second Fortune 500 company to our customer base. 12 Discontinued Operations In 2001 we acquired Platinum Communications, Inc. ("Platinum"), a Dallas, Texas based company, which marketed its integrated proprietary back office software solutions, Account Management Systems ("AMS" or sometimes referred to as "TAMS") to the telecommunications industry either as a license or as an ASP. As a result of the lack of development of the Platinum business and to focus our resources on our core business, in December 2003 we decided to close the operations of Platinum. For the year ended December 31, 2003 Platinum incurred a loss of $1,912,000, including a provision for closing costs of $220,000 and impairments of long-lived assets of $352,000. For the year ended December 31, 2004 the Company recognized income from the discontinued operations of $288,000 as a result of settling certain liabilities of the Platinum operation for less than the original obligation. The income (loss) is reflected as Income (Loss) from Discontinued Operations in the accompanying Consolidated Statements of Operations. Recent Financing In March 2005 the Company entered into a Securities Purchase Agreement with Sigma Opportunity Fund LLC ("Sigma") and Metropolitan Venture Partners II LP ("MetVP"), collectively the "Buyers", whereby the Buyers purchased Senior Subordinated Secured notes (the "Note Purchase") in the aggregate amount of $750,000. The notes bear interest at the rate of five percent (5%) per year beginning June 28, 2005 and mature on the earlier to occur of (i) September 29, 2006, (ii) the date on which demand for payment of the loan payable to JPMorgan Chase Bank is made, and (iii) commencing May 13, 2005, the due date of the loan payable to JPMorgan Chase Bank pursuant to the Grid Demand Promissory Note, dated as of June 27, 2003, including if due on demand and whether or not demand for payment is actually made, as such due date may be extended. In connection with the note purchase the Buyers were issued warrants to purchase 750,000 common shares of the Company. The exercise price of the warrants is $0.90 per share of common stock subject to adjustment on the occurrence of certain events. Sigma has the right to lead a "Follow-on Financing" which is expected to be consummated within 45 days of the closing of the Note purchase. In the event that the Follow-on-Financing does occur the exercise price of the warrants issued in conjunction with the Note Purchase will be adjusted as agreed between the Company and the buyers. In the event the Follow-on-Financing is not consummated the exercise price of the warrants shall be $0.01 per common share. In November 2004 the Board of Directors authorized us to sell up to 1,500 shares of Series D Redeemable Preferred Stock ("Series D Preferred") at $1,000 per share. The holders of Series D Preferred are entitled to dividends, on a cumulative basis, at the rate of 9-1/2% per year, compounded and payable quarterly beginning on April 1, 2006. The holders of Series D Preferred have preference in the payment of dividends and, in the event of liquidation, to all classes of capital stock of the Company except for the Series A, B and C Preferred Stock. As of December 31, 2004 we had sold 100 shares of Series D Preferred and received proceeds of $100,000. The buyer was issued warrants to purchase 90,909 common shares at an exercise price of $2.03 per share in conjunction with the sale. In December 2003 the Board of Directors authorized us to sell up to 1,500 shares of Series C Redeemable Preferred Stock ("Series C Preferred") at $1,000 per share and in April 2004 the Board authorized the sale of an additional 500 shares. The holders of Series C Preferred are entitled to dividends, on a cumulative basis, at the rate of 9-1/2% per year, compounded and payable quarterly beginning on October 1, 2005. The holders of Series C Preferred have preference in the payment of dividends and, in the event of liquidation, to all classes of capital stock of the Company except for the Series B Preferred Stock. As of December 31, 2004 we had sold 2000 shares of Series C Preferred and received proceeds of $2,000,000 less expenses of $140,000. Of the total shares sold Metropolitan has purchased 540 shares, our Chairman and Chief Executive Officer of the Company purchased 200 shares and certain Directors purchased 105 shares. The proceeds were used for working capital purposes. In June 2003, the Company's Board of Directors approved the exchange of the then outstanding obligations to our Chairman and Chief Executive Officer, Markus & Associates and Tall Oaks Group, LLC for 974 shares of Series B Preferred Stock at an exchange ratio of $1,000 of debt per share ("Price Per Share"). The Series B Preferred was issued as follows: -- 266 shares were exchanged for $266,000 of debt obligation to our Chairman and Chief Executive Officer; 13 -- 208 shares were exchanged for $208,000 of debt obligation to Markus & Associates; and -- 500 shares were exchanged for $500,000 of debt obligation to Tall Oaks Group, LLC ("Tall Oaks"). Each of the Series B Preferred shares is entitled to mandatory dividends, payable quarterly, commencing on the first day of the calendar quarter after the date of issuance, at the rate of 12% per annum. Additionally, the Series B Preferred shares are redeemable, at the sole option of the Company, on or after March 31, 2005 (or prior to March 31, 2005 with the consent of majority-in-interest holders of Series B Preferred shares). Upon redemption, the holders of the Series B Preferred shall be entitled to receive, for each share of Series B Preferred outstanding, an amount equal to the Price Per Share plus accrued and unpaid dividends. Between September 2002 and June 2003, the Company sold a total of 134,680 shares of Series A Convertible Preferred Stock, ("Series A Preferred") in consideration for the gross amount of $2,750,000 to Metropolitan Venture Partners II, L.P. Each share of Series A Preferred is convertible into 10 shares of common stock of the Company. The holders of the Series A Preferred ("the Holders") are entitled to dividends, on a cumulative basis, at the rate of 9-1/2% per annum, compounded quarterly and payable on February 1, 2005 and September 25, 2005. The payment of the first dividend was originally scheduled for September 25, 2004, however, the Company and the Holders agreed to defer this payment until February 1, 2005. As consideration for the deferral of the dividend payment, the Company agreed to pay the Holders a premium of 7.5% of the dividend. In May 2004 the Company and the Holders further agreed to grant the Company the right, in its sole discretion, to defer the payment of the dividend scheduled to be paid on February 1, 2005 until February 1, 2006. In the event the Company elects to pay the dividend on February 1, 2006 the Holders would receive a premium of $129,000. In December 2004 the Company exercised its right to defer payment of this dividend until February 1, 2006. Also, the Company and the Holders further agreed to grant the Company the right, in its sole discretion, to defer the payment of the dividend scheduled to be paid on September 25, 2005 until February 1, 2006. In the event the Company elects to pay this dividend on February 1, 2006 the Holders would receive a premium of $41,000. In the event the Company does not elect to defer the payment of the dividend the Company agreed to pay the Holders a premium of $13,000. Seasonality/Quantity Fluctuations Revenue from ASP ongoing services generally is not subject to fluctuations or seasonal flows. However, we believe that revenue derived from custom engineering services will have a significant tendency to fluctuate based on customer demand. Other factors including, but not limited to, new product introductions, domestic and international economic conditions, customer budgetary considerations, and the timing of product upgrades may create fluctuations. As a result of the foregoing factors, our operating results for any quarter are not necessarily indicative of results for any future period. Financial Condition and Liquidity For the year ended December 31, 2004, we incurred a loss from continuing operations of $1,571,000 compared to a loss from continuing operations of $3,270,000 for the year ended December 31, 2003, an improvement of $1,699,000 or 52%. We used $1,050,000 in cash for continuing operations in 2004 compared to $1,432,000 in 2003, an improvement of $382,000 or 27%. Cash used for discontinued operations was $221,000 for the year ended December 31, 2004 compared to $1,012,000 in 2003. We funded the shortfall in cash from operations through the sale of preferred stock totaling $1,510,000 less fees and expenses of $80,000. Cash used in operations (including cash used for discontinued operations) for the year ended December 31, 2004 was $1,271,000, consisting of the net loss from continuing operations of $1,571,000, offset by non-cash expenses of $712,000, including depreciation and amortization of $534,000 and common stock and options issued for services valued at $165,000. Cash from operations was 14 reduced by an increase in accounts receivable of $803,000 and increases in other assets, net of $10,000, offset by an increase in accounts payable and accrued expenses of $95,000 and an increase in deferred revenue of $527,000. Additionally, net cash used in discontinued operations was $221,000. Cash used in investing activities was $114,000 for the year ended December 31, 2004, compared to $349,000 for the previous year. This was principally expenditures for equipment in 2004 and 2003. Cash from financing activities totaled $1,616,000 for the year ended December 31, 2004, compared to $2,248,000 in the prior year. We received net proceeds from the sale of Series C and Series D Preferred stock of $1,430,000 during the year ended December 31, 2004. Advances from credit lines for receivable financing increased $427,000 for the year ended December 31, 2004. This included $250,000 in advances from DIRI Rec Fund LLC, under a new receivables financing agreement established in 2004. In addition, we repaid $241,000 in principal on loans and equipment financing leases. As a result of these operating, investing and financing activities cash increased by $231,000 to $306,000 at December 31, 2004. Management's Liquidity and Financing Plans In order to meet our cash needs and to achieve positive operating cash flows we have and will continue to take various actions and steps that we believe will enable us to attain these goals. These actions include: In the second half of 2003 we embarked on a major cost reduction program, including among other things, staff reductions, pay rate reductions, and elimination of non-essential expenses. Principally as a result of this cost reduction program we reduced our operating costs for continuing operations by $1,599,000 in 2004 compared to 2003, excluding costs for depreciation and amortization,. We believe these cost reductions will continue to have a positive impact on our operating results. We note that during 2004 we partially restored the pay rate reductions and we further restored pay rate reductions in January 2005. -- As discussed above in December 2003 we closed the operations of our Platinum subsidiary. Platinum had experienced losses and had significant cash needs. This action has reduced our operating costs by approximately $1,700,000 from 2003 to 2004. -- We intend to raise additional capital through private equity offerings and borrowing. In 2004 we received net proceeds from the sale of Preferred Stock of $1,430,000. Also in 2004 we entered into an agreement with DIRI Rec Fund LLC, a corporation formed and funded to loan funds to the Company against accounts receivable, and received advances totaling $250,000 from Diri Rec Fund. In March 2005 the Company closed a Bridge Loan financing with Sigma Capital Partners LLC and Metropolitan Venture Partners II LLC and received proceeds of $750,000 less legal fees of $55,000. Further, the Company intends to renew for a minimum of one year the $500,000 loan scheduled to mature on June 30, 2005 and the guarantors of this loan have consented to this extension (see Note 8 to the Consolidated Financial Statements). -- We continue to strive to increase our revenue through offering custom engineering services, expanding and enhancing our existing product offerings such as IOL, and introducing new product offerings. In 2004 our revenues from continuing operations increased $119,000 or 1.6% over revenues in 2003. In 2004 we entered into a new agreement to provide IOL services to a Fortune 500 company. We anticipate that revenue from this new customer will continue to increase in 2005 and beyond and we expect to further broaden our customer base in 2005. -- We continue to expand our marketing efforts in order to increase our customer base. In this regard, in 2003, we became a business partner with IBM and through this relationship will work with IBM to achieve sales to new customers. We will continue to pursue similar channel partner opportunities. Also in the fourth quarter 2004 we employed a new sales and marketing executive and engaged an independent sales agent to further expand our sales efforts. 15 We believe that our plans and new initiatives as discussed above will lead to positive cash flows and profitability. While we pursue these goals we also believe that our ability to raise additional capital through equity and debt placements will provide sufficient cash to meet our requirements at least through December 31, 2005. There can be no assurance, however, that we will achieve our cash flow and profitability goals, or that we will be able to raise additional capital sufficient to meet our operating expenses or implement our plan. In such event, we may have to revise our plans and significantly reduce our operating expenses, which could have an adverse effect on revenue and operations in the short term. Results of Operations IBM continues to be our largest customer accounting for 92% and 97% of total revenue for the years ended December 31, 2004 and 2003, respectively. We derive revenue from IBM from the sale of our Invoices On Line ("IOL") managed services (ASP) as well as custom engineering services. During the second half of 2001, we entered into an agreement with IBM wherein for a per transaction fee, we enable IBM to present invoices to their customers via the Internet. Our IOL service is an electronic invoice presentment and payment system ("EIP&P") offering and has been expanded to include additional functionality. In March 2002, the parties signed a new agreement, which allows IBM to expand this EIP&P offering to more of its customers, both domestic and international. We are actively pursuing new sales opportunities to reduce sales concentration and in this regard in 2004 we added a second Fortune 500 company to our customer base. For the year ended December 31, 2004 revenue from continuing operations increased by $119,000 or 1.6% to $7,558,000 compared to revenue from continuing operations of $7,439,000 in 2003. The increase is primarily due to an increase in engineering services of $710,000, an increase in IOL and Customer Presentable Invoice ("CPI") services, our ASP service offerings, of $201,000, offset by a decrease of $792,000 in telecommunications management services ("TAMS"). The increase in revenue from ASP services was the result of further deploying our ASP services in Europe and the Asia Pacific regions and IOL services to a new customer. The increase in engineering fees resulted from completing certain engineering projects that resulted in the increase in ASP services and engineering fees from implementing our service at a new customer. The decrease in the TAMS services resulted from a decrease in demand and our focus on our EIP&P ASP services. We expect that new projects begun in late 2004 and the addition of new customers and new projects in 2005 will lead to an increase in custom engineering revenue in 2005 and additional increases in ASP services. Costs of operations, research and development decreased by $708,000 (16.4%) to $3,620,000 for the year ended December 31, 2004 compared to the costs in 2003. These costs consist principally of salaries and related expenses for software developers, programmers, custom engineers, network services, and quality control and assurance. Also included are network costs, costs of the production co-location facility and other expenses directly related to our custom engineering and ASP production services. The decrease in costs is principally due to decreases in staffing costs of $529,000, professional fees of $155,000, offset by an increase in rent for our co-location production facility of $81,000. All other operating expenses combined decreased approximately $105,000 net. These decreases are the result of the planned cost reductions discussed above. Sales and marketing costs were $1,676,000 for the year ended December 31, 2004, a decrease of $546,000 or 24.6% compared to the same costs in 2003. Salaries and related costs decreased by $275,000 primarily due to staff and salary reductions. Consulting costs decreased by $321,000 principally from elimination of certain consulting services and reassignment of other consulting fees to other departments. These decreases were offset by an increase in professional fees of $33,000 and travel costs of $40,000 as a result of our increasing our sales and marketing efforts. Other sales and marketing costs combined decreased approximately $23,000. General and administrative costs decreased $345,000 or 10.5% to $2,940,000 for the year ended December 31, 2004 compared to costs of $3,285,000 in 2003. Salaries and related costs decreased $307,000 principally due to a reduction in staff and payroll reductions. This was partially offset by an increase in professional fees of $83,000 as the company outsourced certain accounting functions. Legal costs decreased $106,000. This decrease was the result of higher costs incurred in 2003 related to financial reporting and employee related matters. Accounting fees were reduced by $28,000 and Director's fees and 16 expenses decreased by $51,000. All other general and administrative costs had a net increase of $64,000. Depreciation and amortization expense decreased by $151,000 (22%) primarily due to fully amortizing certain software costs and other computer equipment. Interest expense increased by $31,000 due to the increase in borrowings in June of 2003 under two new lines of credit and an increase in borrowings through the assignment of accounts receivable under the agreement with a bank. Net Operating Loss Carry Forwards - --------------------------------- At December 31, 2004, the Company has net operating loss carryforwards ("NOLs") remaining of approximately $78 million, which may be available to reduce taxable income, if any. These NOLs expire through 2024. However, Internal Revenue Code Section 382 rules limit the utilization of NOLs upon a change in control of a company. The Company has not completed a recent evaluation of whether a change in control has taken place. If it is determined that a change in control has taken place, utilization of its NOLs will be subject to severe limitations in future periods, which would have the effect of eliminating substantially all of the future income tax benefits of the NOLs. New Accounting Pronouncements - ----------------------------- In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123R, "Share-Based Payment." SFAS No. 123R eliminates the alternative to use APB No. 25's intrinsic value method of accounting that was provided in SFAS No 123 as originally issued. SFAS No. 123R requires entities to recognize the cost of employee services in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). That cost will be recognized over the period during which the employee is required to provide the service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. SFAS No. 123R requires entities to initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of the award will be remeasured at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. The grant date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123R is effective as of the beginning of the Company's fiscal year following December 15, 2005 (January 1, 2006). The adoption of SFAS No. 123R will have no effect on the Company's consolidated cash flows or financial position but will have an adverse effect on the Company's consolidated results of operations. In December 2004, the FASB issued FAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29." This Statement eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29 and replaces it with an exception for exchanges that do not have commercial substance. This Statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the Company's consolidated financial position, liquidity, or results of operations. In April 2004, the EITF issued Statement No. 03-06 "Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, 17 including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. The adoption of this statement did not have any effect on the Company's calculation of EPS. In September 2004, the EITF issued statement EITF Issue No. 04-08, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share" ("EITF 04-08"). Contingently convertible debt instruments are generally convertible into common shares of an issuer after the common stock price has exceeded a predetermined threshold for a specified period of time (the "market price contingency"). EITF 04-08 requires that shares issuable upon conversion of contingently convertible debt be included in diluted earnings per share computations regardless of whether the market price contingency contained in the debt instrument has been met. EITF 04-08 is effective for reporting periods ending after December 15, 2004 and requires restatement of prior periods to the extent applicable. The adoption of this statement is not expected to have an effect on the Company's calculation of EPS. Item 7. FINANCIAL STATEMENTS -------------------- The financial statements are included beginning on page F-1 Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS --------------------------------------------- ON ACCOUNTNG AND FINANCIAL DISCLOSURE ------------------------------------- None. Item 8A. CONTROLS AND PROCEDURES ----------------------- Disclosures Controls and Procedures - ----------------------------------- The Company maintains controls and procedures designed to ensure that it is able to collect the information that is required to be disclosed in the reports it files with the SEC, and to process, summarize and disclose this information within the time period specified in the rules of the SEC. The Company's Chief Executive and Chief Financial Officers are responsible for establishing, maintaining and enhancing these procedures. They are also responsible, as required by the rules established by the SEC, for the evaluation of the effectiveness of these procedures. Based on their evaluation of the Company's disclosure controls and procedures which took place as of the date of filing of this report, the Chief Executive Officer and the Chief Financial Officer believe that as is typical of small companies, these procedures were not effective with respect to timeliness as a result of limited resources and a limited segregation of duties in accounting and financial reporting. Internal Financial Controls - --------------------------- The Company maintains a system of internal controls designed to provide reasonable assurance that transactions are executed in accordance with management's general or specific authorization; transactions are recorded as necessary to (1) permit preparation of financial statements in conformity with accepted accounting principles generally accepted in the United States of America, and (2) maintain accountability for assets. Access to assets is permitted only in accordance with management's general or specific authorization. Since the date of the most recent evaluation of the Company's internal controls by the Chief Executive and Chief Financial Officers, there have been no significant changes in such controls or in other factors that could have significantly affected those controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 18 Internal Controls over Financial Reporting - ------------------------------------------ It is the responsibility of the Company's management to establish and maintain adequate internal control over financial reporting. However, due to its limited financial resources typical of companies its size, there is only limited segregation of duties within the accounting function, leaving most significant aspects of financial reporting in the hands of the CFO. Based on the integrity and trustworthiness of the Company's chief financial officer, the Board of Directors has had confidence that there have been no irregularities in the Company's financial reporting or in the protection of its assets. Our independent auditors have reported to our Board of Directors certain matters involving internal controls that our independent auditors considered to be a reportable condition and a material weakness, under standards established by the American Institute of Certified Public Accountants. The reportable conditions and material weakness relates to the December 31, 2004 financial close process, limited segregation of duties and the absence of appropriate reviews and approvals of transactions and accounting entries. Given these reportable conditions and material weaknesses, management devoted additional resources to resolving questions that arose during our year-end audit. As a result, we are confident that our financial statements for the year ended December 31, 2004 fairly present, in all material respects, our financial condition and results of operations. 19 PART III Item 9. DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS; ------------------------------------------------------------ COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ------------------------------------------------- As of March 31, 2005, the names, ages and positions of the directors and executive officers of the Company are as follows:
Name Age Position Committee Member - ----------------- --- ---------------------------------- ------------------- James A Cannavino 60 Chairman of the Board of Directors and Chief Executive Officer Bernard Puckett (1) 60 Member of the Board of Directors Audit, Compensation Dennis Murray 59 Member of the Board of Directors Audit, Compensation Carla Steckline 48 Member of the Board of Directors Audit, Compensation Michael Levin (2) 32 Member of the Board of Directors Robert Carberry 62 President Michael J. Beecher 60 Chief Financial Officer and Secretary _________ (1) Mr. Puckett was appointed to the Board of Directors in February 2004, succeeding Mr. Charles Feld who had previously resigned to assume new responsibilities at EDS. (2) Mr. Levin was appointed to the Board of Directors in February 2005 to succeed Mr. Peter Yunich who resigned for personal reasons. Mr. Levin is Managing Director of Metropolitan Venture Partners.
James A. Cannavino has been our Chairman of the Board and a director since March 2000, and Chief Executive Officer since December 2002. From September of 1997 to April of 2000 he was the non-executive Chairman of Softworks, Inc (a then wholly owned subsidiary of the Company), which went public and was later sold to EMC. Mr. Cannavino was also the Chief Executive Officer and Chairman of the Board of Directors of CyberSafe, Inc., a corporation specializing in network security from April 1998 to July 2001. In August, 1995, he was appointed as President and Chief Operating Officer of Perot Systems Corporation and in 1996 was elected to serve as Chief Executive Officer through July 1997. During his tenure at Perot he was responsible for all the day-to-day global operations of the company, as well as for strategy and organization. Prior to that he served as a Senior Vice President at IBM, responsible for strategy and development. Mr. Cannavino held various positions at IBM for over thirty years beginning in 1963. Mr. Cannavino led IBM's restructuring of its $7 billion PC business to form the IBM PC Company. He also served on the IBM Corporate Executive Committee and Worldwide Management Council, and on the board of IBM's integrated services and solutions company. Mr. Cannavino presently serves on the Boards of the National Center for Missing and Exploited Children, the International Center for Missing and Exploited Children, and Verio. He recently was Chairman of the Board of Marist College in Poughkeepsie, New York and continues to serve on the board. Mr. Cannavino will serve on the Board until his successor is elected. Bernard Puckett is Chairman of the Board of Openwave Systems, Inc., a leading provider of open IP-based communication infrastructure software and applications. Mr. Puckett was formerly the President and Chief Executive Officer of Mobile Telecommunications Technology Corp. ("Mtel"). Prior to joining Mtel, Mr. Puckett spent 26 years with IBM where he was Senior Vice-president -- Corporate Strategy and Development. He also held positions in marketing, finance, product development, manufacturing and new business development during his tenure at IBM. He also serves on the board of directors of IMS Health (NYSE:RX). Mr. Puckett was appointed to our Board of Directors in February 2004 and will serve in such capacity until his successor is elected. 20 Dr. Dennis J. Murray has been President of Marist College since 1979. Early in his tenure, he identified the importance of technology in higher education and made it one of the central themes of his administration. He developed an innovative joint study with the IBM Corporation, which resulted in Marist becoming one of the nations most technologically advanced liberal arts colleges. Marist was one of the first colleges or universities in the country to have a fully networked campus, and currently operates on an IBM e-server zSeries 900 processor with a z/OS operating system. Dr. Murray has been a strong supporter of the Linux operating system and recently initiated a Linux Research and Development Center at Marist. Dr. Murray serves on the boards of the Franklin and Eleanor Roosevelt Institute, McCann Foundation, and the New York State Greenway Conservancy, which oversees the Hudson River Valley National Heritage Area. He is also the author of two books on nonprofit management, editor of three books on government and public affairs, and co-author of a guide to corporate-sponsored university research in biotechnology. Dr. Murray has been a member of the Board of Directors since March 2000, and will serve in such capacity until his successor is elected. Carla J. Steckline was the Attorney General for the State of Kansas frpom 1994 through January 2003.. Attorney General Stovall also served as Vice President of the National Association of Attorneys General. She is also a member of the Board of Directors of the American Legacy Foundation, the national Center for Missing and Exploited Children, the National Crime Prevention Council and the Council of State Governments. In addition, she is a member of the Board of Governors of the University of Kansas School of Law and a member of the Kansas Children's Cabinet. Attorney General 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 her successor is elected. Michael Levin is a Managing Director of Metropolitan Venture Partners, a venture capital firm he co- founded in 1999. Working actively with his partners, Michael has helped to build Metropolitan into an operationally focused and exit oriented firm with investments in the US and UK. Metropolitan has the institutional backing of the Man Group plc, a FTSE 100 global financial services firm and the largest hedge fund manager in the world. In his role, Mr. Levin negotiates and manages investments, as well as oversees the financial and operational management of the firm. He also serves as an active Board member and works closely with portfolio companies on strategic growth and ensuring proper fiscal discipline. Prior to Metropolitan, Mr. Levin developed and managed hedge funds for the Man Group plc and Larry Hite. He previously worked as a research analyst at Mint Investment Management Company and was recruited by Mr. Hite, the former Managing Director of Mint, as part of a two-person team to form a hedge fund under his guidance. His role encompassed the critical aspects of both building a business and managing a diverse investment portfolio. Mr. Levin graduated Magna Cum Laude from The Wharton School at the University of Pennsylvania with a concentration in Finance. He is also an alumnus of Phillips Exeter Academy. Robert Carberry was appointed President of the Company in December 2002. Mr. Carberry was a consultant to the Company since March 2000 focusing on business development, wordwide deployment and functional enhancement of our product lines. Prior to Direct Insite, Mr. Carberry was an Executive Vice-President of Research &Development and Business Development, CyberSafe Corporation where he was responsible for defining corporate strategy, and for business development/corporate development and R&D functions. Prior to Cybersafe, Mr. Carberry was Vice-President -- Technology for Viacom/Blockbuster; and the responsible executive for Blockbuster/Viacom Holdings -- a Blockbuster Venture Capital group where he managed of all Blockbuster's advanced technology/business development activities including: NewLeaf -- a Blockbuster/IBM joint venture for development and deployment of interactive media distribution, Fairway, an IBM Blockbuster joint venture for marketing interactive on demand media to commercial and residential customers. He was also the executive responsible for a portfolio of Blockbuster corporate technology investments in various new media companies. Prior to Viacom, Mr. Carberry served in several capacities over a twenty year career at IBM where most recently he served as President, IBM Technology Venture Fund -- where he was responsible for IBM starting or acquiring 24 companies in the new media application and broadband distribution fields. Prior to that, he held several senior executive positions including Vice-President - Business Operations for the IBM Personal Computer Group where he was responsible for all business strategy, development, and distribution operations/agreements, Vice-President Development for IBM Personal Computer Group -- where he was responsible for product line development 21 including the IBM PC, AT, and PS-2 product groups. Mr. Carberry was Director of Engineering and Scientific Computing -- IBM Large Systems, a division where he was responsible for the IBM Kingston Laboratory and the definition and implementation of the entry of IBM into the super computer product area. As Director of Large Systems for IBM Data Systems Division, he led the development of all IBM large systems products: 3033, 3090 and successor product lines that contributed more than $25B in IBM revenues. Michael J. Beecher, CPA, joined the Company as Chief Financial Officer in December 2003 to succeed Mr. Aronson. Prior to joining Direct Insite Mr. Beecher was Chief Financial Officer and Treasurer of FiberCore, Inc., a publicly held company in the fiber-optics industry. From 1989 to 1995 he was Vice-President Administration and Finance at the University of Bridgeport. Mr. Beecher began his career in public accounting with Haskins & Sells, an international public accounting firm. He is a graduate of the University of Connecticut, a Certified Public Accountant and a member of the American Institute of Certified Public Accountants. Item 10. EXECUTIVE COMPENSATION ---------------------- The following table sets forth the annual and long-term compensation with respect to the Chief Executive Officer and each of the other executive officers of the Company who received more than $100,000 for services rendered for the year ended December 31, 2004.
Summary Compensation Table Annual Compensation Long-Term Compensation ------------------------ ------------------------------ Restricted Securities Name and Fiscal Other Annual Stock Awards Underlying Principal Position Year Salary Bonus Compensation Options/Warrants - ------------------------------------------------------------------------------------------------------------------ James A. Cannavino (1) 2004 $96,000 $ -- $ -- $ 4,000 -- Chief Executive Officer 2003 $156,000 -- -- 54,000 708,000 2002 -- -- -- 210,000 314,000 Robert Carberry (2) 2004 $192,000 $ -- $ -- $ -- -- President 2003 $177,000 -- -- -- 203,000 2002 78,000 -- 72,000 139,000 57,500 Anthony Coppola (3) 2004 $145,000 $ -- $ -- -- -- President/V.P. Program 2003 $157,000 4,000 26,000 -- 3,000 Management 2002 166,000 50,000 -- -- 137,500 Arnold Leap (4) 2004 $145,000 $ -- $ -- $ -- -- Chief Technology Officer 2003 $158,000 $ 26,000 $ -- $ -- 103,000 2002 161,000 20,000 -- -- 113,500 Michael Beecher (5) 2004 $106,000 $ -- $ -- $ -- 30,000 Chief Financial Officer 2003 $3,000 $ -- $ -- $ -- 30,000 and Secretary Footnotes - --------- (1) Mr. Cannavino was appointed CEO December 7, 2002. Pursuant to his January 2002 two-year services agreement, Mr. Cannavino received 180,000 shares of common stock valued at $180,000. In addition, Mr. Cannavino received 17,650 shares of common stock valued at $30,000 in connection with his duties as Chairman of the Board of Directors. Pursuant to his January 2003 employment agreement, Mr. Cannavino received 45,000 shares of common stock valued at $54,000. (2) Mr. Carberry was appointed President in December 2002. During 2002, Mr. Carberry received 111,665 shares valued at $139,000 in lieu of cash for services rendered. (3) Mr. Coppola served as President from March 2000 to December 2002. During 2002, the Company paid a $50,000 sales commission earned by a sales consulting firm that is wholly owned by Mr. Coppola. In 2003 the Company paid $26,000 for services rendered by this same consulting firm. Mr. Coppola also earned a $4,000 cash performance bonus in 2003. 22 (4) Mr. Leap earned cash performance bonuses totaling $26,000 and $20,000 for years 2003 and 2002, respectively. (5) Mr. Beecher was appointed Chief Financial Officer and Secretary effective December 16, 2003.
Option/SAR Grants in Last Fiscal Year - ------------------------------------- During 2004 the following options grants were made to the named executive officers:
% of Total Options Number of Granted Hypothetical Options Employees Exercise Expiration Value at Name Granted in Fiscal Year Price Date Grant Date - ---- --------- -------------- -------- ---------- ------------ Michael Beecher 30,000 8.6% $ 1.60 07/31/09 $30,000
The hypothetical value of the options as of their date of grant has been calculated using the Black- Scholes option-pricing model, as permitted by SEC rules, based upon various assumptions, which include: expected volatility of 69.5%, risk free interest rate of 4.8% and expected lives of 5.00 years. The approach used in developing the assumptions upon which the Black-Scholes valuations were calculated is consistent with the requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation." It should be noted that this model is only one method of valuing options, and the Company's use of the model should not be interpreted as an endorsement of its accuracy. The actual value of the options may be significantly different, and the value actually realized, if any, will depend upon the excess of the market value of the common stock over the option exercise price at the time of exercise. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option - -------------------------------------------------------------------------------- Values - ------ The following table set forth certain information with respect to stock option exercises by the named executive officers during the fiscal year ended December 31, 2004, and the value of unexercised options held by them at fiscal year-end.
Number of Unexercised Options at Value of Unexercised In-the Fiscal Year End -Money Options at Fiscal Year End (1) Shares Acquired Name On Exercise (#) Value Realized Exercisable Unexercisable Exercisable Unexercisable ($) James Cannavino -- -- 897,333 195,000 $ 270,000 $ 105,000 Robert Carberry -- -- 260,500 -- 109,000 -- Anthony Coppola -- -- 163,100 -- 62,000 -- Michael Beecher -- -- 40,000 20,000 30,000 2,000 Arnold Leap -- -- 207,166 33,334 76,000 17,000 Footnotes (1) Market Value of the Company's common stock on December 31, 2004, was $1.70. There were 1,134,666 in-the-money options at year end, valued at $671,000.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND ------------------------------------------------------------------ RELATED STOCKHOLDER MATTERS --------------------------- The following table sets forth the beneficial ownership of shares of voting stock of the Company, as of March 31, 2005 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 the persons named as owners hold investment and voting power. 23
Common Stock Rights to Acquire Total Beneficially Beneficially Beneficial Ownership Through Owned as % of Name of Beneficial Owner (1) Owned Exercise of Options Within 60 Days Outstanding Shares (2) - ------------------------------------------------------------------------------------------------------------------- Metropolitan Venture Partners II, L.P. 29,067 1,346,800 23.5% James Cannavino 517,402 897,333 26.1 Bernard Puckett 27,423 23,596 1.1 Dennis Murray 140,722 61,667 4.4 Carla Steckline 80,039 56,667 3.0 Anthony Coppola 81,113 163,100 5.2 Robert Carberry 197,665 260,500 9.6 Michael Levin -- -- 0.0 Michael Beecher -- 40,000 * All Officers and Directors as a Group (8 persons) 1,044,364 1,502,863 42.8% _______ * = Less than 1% Footnotes (1) The address of the holder is 80 Orville Drive, Suite 200, Bohemia, New York 11716, except for Metropolitan Venture Partners II, L.P. which is 257 Park Avenue South, 15th Floor, New York, NY 10010. (2) Based upon 4,516,985 common shares outstanding as of March 31, 2005, plus outstanding options exercisable within 60 days and Series A Stock convertible into common shares owned by above named parties.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- In December 1999, the Company has entered into various agreements with S.J. & Associates, Inc. (including its affiliates are collectively referred to as "SJ"), an advisor to the Company and its' Board of Directors, for various services that provide for the following compensation: -- The Company entered into a consulting agreement with SJ initially terminating on May 31, 2007. Pursuant to the agreement, SJ is entitled to monthly compensation of $15,000. The Company will supply SJ an office/temporary living accommodations and reimbursement for auto leases at a cost not to exceed $9,900 per month. Pursuant to the agreement, SJ is entitled to a financing fee equal to 4% of the gross proceeds (or the gross transaction value) of any of the following events: (i) financing(s) (either debt or equity), (ii) sale of the Company's stock, (iii) an acquisition made by the Company, and (iv) the sale of the Company or merger of the Company with another entity. SJ is also entitled to an annual bonus at the discretion of the Companies Board of Directors. With no further approval, SJ is entitled to be reimbursed for other expenses not to exceed $2,000 per month, plus other reasonable expenses upon approval. Upon completion of the initial term of the agreement, SJ will continue to provide consulting services for an additional 7 1/2 year period. Minimum compensation during this additional period is approximately $5,500 per month. Under this agreement, the Company incurred consulting expenses of $108,000 and $144,000 in 2004 and 2003, respectively. In addition, SJ earned $80,000 of fees related to the sales and issuance of Series C Preferred stock and was reimbursed for other expenses in accordance with the consulting agreement. In 2003, the Company reduced its obligation to SJ relating to the restructure plan, completed in 2003, by $60,000. 24 Item 13. EXHIBITS AND REPORTS ON FORM - 8K --------------------------------- 13. (a) - EXHIBITS ---------- 3.1 (a) Certificate of Incorporation, as amended. (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1) (b) Certificate of Amendment (Change in Name) (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1) (c) Certificate of Amendment (Change in Name) (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1) (d) Certificate of Amendment (Authorizing Increase in Shares of Common Stock) (Incorporated by reference to Exhibit 3 (i) (d) to Form 10-K for the year ended 1995). (e) Certificate of Amendment (Authorizing one for ten reverse-stock split as of March 30, 1998). (1) (f) Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed October 3, 2002 (Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated September 25, 2002). (g) Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed December 20, 2002 (Incorporated by reference to Exhibit 3.2 of Company's Current Report on Form 8-K dated December 24, 2002). (h) Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed January 2, 2003 (Incorporated by reference to Exhibit 3.3 of Company's Current Report on Form 8-K dated January 2, 2003). (i) Certificate of Designation, Preferences and Rights of Series B Redeemable Preferred Stock filed December 10, 2003 (Incorporated by reference to Exhibit 3(i) of the Company's Annual Report on Form 10-KSB filed April 14, 2004). (j) Certificate of Designation, Preferences and Rights of Series C redeemable Preferred Stock filed December 16, 2003 (Incorporated by reference to Exhibit 3(j) of the Company's Annual Report on Form 10-KSB filed April 14, 2004). (k) Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series C Preferred Stock filed March 29, 2005. 3.2 By-Laws. (Incorporated by reference to Exhibit 3(d) to the Company's Form S-1 Registration Statement).(1) 4.1 Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4 to the Company's Form S-1 Registration Statement).(1) 4.2 Rights Agreement dated as of August 28, 2001 between the Company and Manhattan Transfer Registrar Company, as Rights Agent. (Incorporated by reference to Exhibit 4 to the Company's Form 8-K dated August 28, 2001. 4.3 Securities Purchase Agreement between the Company, Sigma Opportunity Fund, LLC and Metropolitan Venture Partners II, LP (Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed March 31, 2005). 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). 25 10.2 Employees 1993 Stock Option Plan (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 filed on June 28, 1995). 10.3 1995 Incentive Stock Plan (Incorporated by reference to Exhibit 5 to the Company's Proxy Statement filed on January 29, 1996). 10.4 2000 Stock Option Plan (Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.5 2001 Stock Option/Stock Issuance Plan (Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.6 2001-A Stock Option/Stock Issuance Plan. (Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.7 2002 Stock Option/Stock Issuance Plan (Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.8 2003 Stock Option /Stock Issuance Plan. (2) 10.9 Lease Extension Agreement between Atrium Executive Center and the Company (Incorporated by reference to Exhibit 10 (g) (ii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.10 Offer to Purchase dated December 23, 1999, among Eagle Merger Corp., EMC Corporation and the Company (Incorporated by reference to Exhibit 1 to the Company's Form 8-K filed on February 9, 2000). 10.11 Indemnification Agreement dated December 21, 1999, among EMC Corporation, Eagle Merger Corp. and the Company (Incorporated by reference to Exhibit 2 to the Company's Form 8-K filed on February 9, 2000). 10.12 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). 10.13 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). 10.14 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). 10.15 Agreement and Plan of Merger by and among Platinum Acquisition Corp., the 26 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). 10.16 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). 10.17 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). 10.18 Employment Agreement between the Company and Anthony Coppola dated December 1, 2001 (Incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.19 Services Agreement between the Company and James A. Cannavino dated January 25, 2003.(2) 10.20 Stock Purchase and Registration Rights Agreement between the Company and Metropolitan Venture Partners II, L.P. dated as of September 25, 2002 (Incorporated by reference to Exhibit 10.1 of Registrant's Current Report on Form 8-K dated September 25, 2002). 10.21 Stock Purchase and Registration Rights Agreement between the Company and Metropolitan Venture Partners II, L.P. dated as of December 24, 2002 (Incorporated by reference to Exhibit 10.1 of Registrant's Current Report on Form 8-K dated December 24, 2002). 10.22 Promissory Note between the Company and Tall Oaks Group LLC dated January 13, 2003.(2) 10.23 Amendment and Notice dated January 13, 2003 by and among the Company, Metropolitan Venture Partners II, L.P. and Tall Oaks Group L.L.C.(2) 10.24 Form of Subscription Agreement for Series C Redeemable Preferred Stock.(3) 10.25 Employment and Consulting Agreement between the Company and Robert L. Carberry (Incorporated by reference to Exhibit 10.2 of registrant's Current Report on Form 8-K dated December 5, 2003). 23(a) Consent of Marcum & Kliegman, LLP. 31.0 Certification of Officers. 32.0 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. __________ (1)Filed with Form S-1, Registration Statement of the Company Reg. No 3-47322 and are incorporated herein by reference. (2)Incorporated by reference to the Company's Annual Report on Form-10K filed April 15, 2003. (3)Incorporated by reference to the Company's Annual Report on Form-10KSB filed April 14, 2004. 27 13. (b). - REPORTS ON FORM 8-K - ------------------------------ None Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES -------------------------------------- The following is a summary of the fees billed to us by Marcum & Kliegman, LLP, our independent auditors, for professional services rendered for the fiscal years ended December 31, 2004 and 2003:
Description 2004 2003 ----------- ---- ---- Audit Fees(1) $ 175,000 $ 126,850 Audit-Related Fees (2) -- 3,500 Tax Fees (3) 30,000 41,305 --------- --------- Total Fees $ 205,000 $ 171,655 Our Audit Committee has determined that the provision of services by Marcum & Kliegman LLP other than for audit related services is compatible with maintaining the independence of Marcum & Kliegman as our independent accountants. ________________________ (1) Audit Fees consist of aggregate fees billed for professional services rendered for the audit of our annual financial statements and review of the interim financial statements included in quarterly reports or services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2004 and 2003. (2) Audit related fees consist of fees billed for professional services in conjunction with the review of issuance of preferred shares. (3) Tax Fees consist of the aggregate fees billed for professional services rendered for tax compliance, tax advice, and tax planning, including fees related to the preparation of federal and state income tax returns.
28 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 28th day of April 2005. DIRECT INSITE CORP. By: /s/ James A. Cannavino ------------------------------------------- James A. Cannavino, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on April 28, 2005 by the following persons in the capacities indicated: /s/James A. Cannavino Chairman of the Board James A. Cannavino Chief Executive Officer /s/Michael J. Beecher Chief Financial Officer Michael J. Beecher - --------------------- Director Bernard Puckett /s/Dennis J. Murray Director Dennis J. Murray /s/Carla J. Steckline Director Carla J. Steckline - --------------------- Director Michael Levin 29 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2004 and 2003 DIRECT INSITE CORP. AND SUBSIDIARIES CONTENTS - -------------------------------------------------------------------------------- Page ---- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1 FINANCIAL STATEMENTS Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-4 Consolidated Statement of Shareholders' Equity (Deficiency) F-5 Consolidated Statements of Cash Flows F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-31 EPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------ To the Audit Committee of the Board of Directors and Shareholders of Direct Insite Corp. and Subsidiaries Bohemia, New York We have audited the consolidated accompanying balance sheets of Direct Insite Corp. and Subsidiaries (the "Company") as of December 31, 2004 and 2003 and the related consolidated statements of operations, shareholders' equity (deficiency) , and cash flows for each of the two years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2004 and 2003 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. Marcum & Kliegman LLP New York, NY April 7, 2005 F-1 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2004 and 2003 - -------------------------------------------------------------------------------- ASSETS
2004 2003 ---------------- ----------------- CURRENT ASSETS - -------------- Cash and cash equivalents $ 306 $ 75 Accounts receivable, net of allowance for doubtful accounts of $2 in 2004 and 2003 1,871 1,068 Prepaid expenses and other current assets 262 215 Assets from discontinued operations -- 47 ----------- ---------- Total Current Assets 2,439 1,405 PROPERTY AND EQUIPMENT, Net 577 771 - --------------------- OTHER ASSETS 285 335 - ------------ ----------- ---------- TOTAL ASSETS $ 3,301 $ 2,511 ========== ==========
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, 2004 and 2003 - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' DEFICIENCY ----------------------------------------
2004 2003 --------------- --------------- CURRENT LIABILITIES - ------------------- Current portion of long-term debt $ 782 $ 880 Short-term revolving loans 1,012 585 Accounts payable and accrued expenses 2,086 2,248 Deferred revenue 623 96 Dividends payable, current 376 0 Liabilities from discontinued operations, current portion 112 581 --------------- --------------- Total Current Liabilities 4,991 4,390 OTHER LIABILITIES - ----------------- Long-term debt, net of current portion 125 42 Dividends payable, net of current portion 722 382 Liabilities from discontinued operations, long-term -- 87 --------------- --------------- TOTAL LIABILITIES 5,838 4,901 --------------- --------------- COMMITMENTS AND CONTINGENCIES - ----------------------------- SHAREHOLDERS' DEFICIENCY - ------------------------ Preferred stock, $0.0001 par value; 2,000,000 shares authorized; Series A Convertible Preferred, 134,680 issued and outstanding in 2004 and 2003; liquidation preference of $2,750,000 in 2004 and 2003; -- -- Series B Redeemable Preferred, 974 issued and outstanding in 2004 and 2003; liquidation preference of $974,075; -- -- Series C Redeemable Preferred, 2,000 and 590 issued and outstanding in 2004 and 2003, respectively; liquidation preference of $2,000,000 and $590,000 in 2004 and 2003, respectively; Series D Redeemable Preferred, 100 shares issued and outstanding, liquidation preference of $100,000 in 2004; Common stock, $.0001 par value; 50,000,000 shares authorized; 4,547,013 and 4,080,402 shares issued in 2004 and 2003, respectively; and 4,507,086 and 4,040,475 shares outstanding in 2004 and 2003, respectively -- -- Additional paid-in capital 112,484 110,582 Unearned compensation (50) -- Accumulated deficit (114,643) (112,644) --------------- --------------- (2,209) (2,062) Common stock in treasury, at cost; 24,371 shares in 2004 and 2003 (328 (328 --------------- --------------- TOTAL SHAREHOLDERS' DEFICIENCY (2,537) (2,390) --------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 3,301 $ 2,511 =============== ===============
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, 2004 and 2003 - --------------------------------------------------------------------------------
2004 2003 -------------- ---------------- REVENUES $ 7,558 $ 7,439 - -------- -------------- ---------------- COSTS AND EXPENSES - ------------------ Operations, research and development 3,620 4,328 Sales and marketing 1,676 2,222 General and administrative 2,940 3,285 Amortization and depreciation 537 688 -------------- ---------------- TOTAL OPERATING EXPENSES 8,773 10,523 -------------- ---------------- OPERATING LOSS (1,215) (3,084) -------------- ---------------- OTHER EXPENSE - ------------- Interest expense, net 318 287 Other expense 33 7 -------------- ---------------- TOTAL OTHER EXPENSE 351 294 -------------- ---------------- LOSS BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES (1,566) (3,378) - ----------------------------------------------------- PROVISION FOR (BENEFIT FROM) INCOME TAXES 5 (108) - ------------------------------------------ -------------- ---------------- LOSS FROM CONTINUING OPERATIONS (1,571) (3,270) - ------------------------------- (1,912) INCOME (LOSS) FROM DISCONTINUED OPERATIONS 288 - ------------------------------------------ -------------- ---------------- NET LOSS (1,283) (5,182) - -------- PREFERRED STOCK DIVIDENDS (716) (356) - ------------------------- -------------- ---------------- NET LOSS ATTRIBUTABLE TO COMMON - ------------------------------- SHAREHOLDERS $ (1,999) $ (5,538) ------------ ============== ================ BASIC AND DILUTED LOSS PER SHARE: - -------------------------------- Loss from continuing operations attributable to common shareholders $(0.53) $(0.91) Income (Loss) from discontinued operations 0.07 (0.48) -------------- ---------------- Net loss attributable to common shareholders $(0.46) $(1.39) ============== ================ BASIC AND DILUTED WEIGHTED AVERAGE - ---------------------------------- COMMON SHARES OUSTANDING 4,285 3,974 ------------------------ ============== ================
The accompanying notes are an integral part of these consolidated financial statements. F-4 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY) For the Years Ended December 31, 2004 and 2003 (in thousands) - --------------------------------------------------------------------------------
Preferred Stock ----------------------------------------------- Accumulated Other Series A Series B Series C Cmmon Stock Additional Stock Accum- Compren- Comprehensive Paid-in Subscription ulated sive Treasury Income Shares Amount Shares Amount Shares Amount Shares Amount Capital Receivable Deficit Loss Stock Total (Loss) -------------------------------------------------------------------------------------------------------------------------- BALANCE - 117 $ -- -- $ -- -- $ -- 3,926 $ -- $108,708 $ (62) $(107,081) $ (25) $(328) $1,212 $ -- January 1, 2003 Common stock and options issued for services -- -- -- -- -- -- 114 -- 135 -- -- -- -- 135 -- Payment of stock subscrip- tion receivable -- -- -- -- -- -- -- -- -- 62 -- -- -- 62 -- Preferred stock issued for cash, net of fees of $15 18 -- -- -- -- -- -- -- 235 -- -- -- -- 235 -- Conversion of long- term debt to pre- ferred stock -- -- 1 -- -- -- -- -- 974 -- -- -- -- 974 -- Preferred stock issued for cash, net of fees of $60 -- -- -- -- 1 -- -- -- 530 -- -- -- -- 530 -- Dividends declared, preferred stock -- -- -- -- -- -- -- -- -- -- (356) -- -- (356) -- Other compre- hensive loss -- -- -- -- -- -- -- -- -- -- (25) 25 -- -- 25 Net loss -- -- -- -- -- -- -- -- -- -- (5,182) -- -- (5,182) (5,182) ---- ----- ----- ------ ------ ------- ------- ----- --------- ---------- ---------- ------- ------ -------- ------- Total Compre- hensive Loss $(5,157) ======= BALANCE - December 31, 2003 135 $ -- 1 $ -- 1 $ -- 4,040 $ -- $ 110,582 $ -- $(112,644) $ -- $(328) $(2,390) ==== ===== ===== ====== ===== ======== ====== ====== ========== ========== ========== ======= ====== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY), Continued For the Years Ended December 31, 2004 and 2003 (in thousands) - --------------------------------------------------------------------------------
Preferred Stock ----------------------------------------------- Additional Accum- Paid-in Deferred ulated Treasury Series A Series B Series C Series D Common stock Capital Compen- Deficit Stock Total sation Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Amount -------------------------------------------------------------------------------------------------------------------------- BALANCE - December 31, 2003 135 $ -- 1 $ -- 1 $ -- -- $ -- 4,040 $ -- $110,582 $ -- $(112,644) $(328) $(2,390) Common stock and options issued for services -- -- -- -- -- -- -- -- 157 -- 215 (50) -- -- 165 Common stock and options issued in settle- ment of liabil- ities -- -- -- -- -- -- -- -- 310 -- 257 -- -- -- 257 Series C Preferred stock issued for Cash, net of fees of $80 -- -- -- -- 1 -- -- -- -- -- 1,330 -- -- -- 1,330 Series D Preferred stock issued for Cash -- -- -- -- -- -- -- -- -- -- 100 -- -- -- 100 Dividends declared, preferred stock -- -- -- -- -- -- -- -- -- -- -- -- (716) -- (716) Net loss -- -- -- -- -- -- -- -- -- -- -- -- (1,283) -- (1,283) ---- --- ----- ------ ---- ------- ------ ----- ------ ---------- ---------- ---- ------ ----- ------- BALANCE - December 31, 2004 135 $ -- 1 $ -- 2 $ -- -- $ -- 4,507 $ -- $ 112,484 $(50) $(114,643) $(328) $(2,537) ==== === ===== =====- ==== ======= ====== ===== ====== ========== ========== ==== ====== ===== =======
The accompanying notes are an integral part of these consolidated financial statements. F-6 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2004 and 2003 - --------------------------------------------------------------------------------
2004 2003 ------------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES - ------------------------------------ Loss from continuing operations $ (1,571) $ (3,270) Adjustments to reconcile loss from continuing operations to net cash used in continuing operations: Amortization and depreciation: Property and equipment 534 686 Other 3 2 Common stock and options issued for services 165 135 Other 10 50 Changes in operating assets and liabilities: Accounts receivable (803) 63 Prepaid expenses and other current assets (47) 24 Other assets 37 93 Accounts payable and accrued expenses 95 755 Restructuring costs payable -- (66) Deferred revenue 527 96 ------------------------ ------------------ Net cash used in continuing operations (1,050) (1,432) ------------------------ ------------------ Income (loss) from discontinued operations 288 (1,912) Change in: Assets and liabilities from discontinued operations (509) 900 ------------------------ ------------------ Net cash used in discontinued operations (221) (1,012) ------------------------ ------------------ NET CASH USED IN OPERATING ACTIVITIES $ (1,271) $ (2,444) ------------------------ ------------------
The accompanying notes are an integral part of these consolidated financial statements. F-7 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued (in thousands) For the Years Ended December 31, 2004 and 2003 - --------------------------------------------------------------------------------
2004 2003 ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES - ------------------------------------ Expenditures for property and equipment $ (114) $ (349) ----------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES - ------------------------------------ Proceeds from common stock and subscription receivable -- 22 Proceeds from sales of preferred stock, net 1,430 1,257 Advances from (repayment on) Short-term revolving loans, net 427 (105) Proceeds from long-term debt, net of fees -- 496 Proceeds from line of credit -- 750 Payment of dividend -- (30) Repayments of long-term debt (241) (142) ----------------- ----------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,616 2,248 ----------------- ----------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 231 (545) CASH AND CASH EQUIVALENTS - Beginning 75 620 ----------------- ----------------- CASH AND CASH EQUIVALENTS - Ending $ 306 $ 75 ================= =================
The accompanying notes are an integral part of these consolidated financial statements. F-8 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Nature of Business ------------------ Direct Insite Corp. and subsidiaries (the "Company"), primarily operate as an application service provider ("ASP"), that markets an integrated transaction based "fee for service" offering called Invoices On-Line (IOL), an electronic invoice presentment and payment (EIP&P) service that processes high volumes of transactional data for invoice presentment purposes delivered via the Internet on a global basis. The Company also provides additional service offerings in the form of its patented dbExpress TM technology, a management information tool that allows users to visually data mine large volumes of transactional data via the Internet. A complete Internet Customer Care tool set integrated with the EIP&P product set is also available. The Company operates fully redundant data centers located at its main office in Bohemia, N.Y. and in an IBM co-location facility in Newark, NJ. Management's liquidity plans are discussed in Note 13. Also, as described in Note 16, the Company has one major customer that accounted for approximately 92% and 97% of the Company's revenue for the years ended December 31 2004 and 2003, respectively. Loss of this customer would have a material adverse effect on the Company. NOTE 2 - Significant Accounting Policies ------------------------------- Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of Direct Insite Corp. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Revenue Recognition ------------------- The Company records revenue in accordance with Statement of Position 97-2 "Software Revenue Recognition", issued by the American Institute of Certified Public Accountants (as modified by Statement of Position 98-9) and SEC Staff Accounting Bulletin Topic 13 "Revenue Recognition in Financial Statements." In some circumstances, the Company enters into arrangements whereby it is obligated to deliver to its customer multiple products and/or services (multiple deliverables). In these transactions, in accordance with the Emerging Issues Task Force Issue No. 00-21, the Company allocates the total revenue to be earned among the various elements based on their relative fair values. The Company recognizes revenue related to the delivered products or services only if: -- Any undelivered products or services are not essential to the functionality of the delivered products or services; -- Payment for the delivered products or services is not contingent upon delivery of the remaining products or services; -- The Company has an enforceable claim to receive the amount due in the event it does not deliver the undelivered products or services and it is probable that such amount is collectible; -- There is evidence of the fair value for each of the undelivered products or services; F-9 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Significant Accounting Policies, continued ------------------------------- -- Delivery of the delivered element represents the culmination of the earnings process. The following are the specific revenue recognition policies for each major category of revenue. ASP Services ------------ The Company provides transactional data processing services to its customers. Revenue is recognized as the services are performed. Custom Engineering Services --------------------------- The Company recognizes revenue for custom engineering services using the percentage of completion method. Progress is measured using the relative fair value of specifically identifiable output measures (milestones). Revenue is recognized when the customer accepts such milestones. Costs related to uncompleted milestones are deferred and included in other current assets, when applicable. Cost of Revenue --------------- Cost of revenue in the consolidated statements of operations is presented along with research and development costs and exclusive of amortization and depreciation shown separately. Property and Equipment ---------------------- Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the terms of the respective leases or the service lives of the related assets, whichever is shorter. Capitalized lease assets are amortized over the shorter of the lease term or the service life of the related assets. Software Costs -------------- Costs associated with the development of software products are generally capitalized once technological feasibility is established. Purchased software technologies are recorded at cost and software technologies acquired in purchase business transactions are recorded at their estimated fair value. Software costs are amortized using the greater of the ratio of current revenue to total projected revenue for a product or the straight-line method over its estimated useful life. Amortization of software costs begins when products become available for general customer release. Costs incurred prior to establishment of technological feasibility are expensed as incurred and are included in "operations, research and development" in the accompanying consolidated statements of operations, and amount to $2,227,000 and $2,640,000 for the years 2004 and 2003, respectively. Impairment of Long-Lived Assets ------------------------------- The Company reviews its long-lived assets, including capitalized software costs and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine if impairment exists, the Company compares the estimated future undiscounted cash flows from the related long-lived assets to the net carrying amount of such assets. Once it has been determined that impairment exists, the carrying value of the asset is adjusted to fair value. Factors considered in the determination of fair value include current operating results, trends and the present value of estimated expected future cash flows. Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" became effective for the Company during 2002. F-10 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Significant Accounting Policies, continued ------------------------------------------ Income Taxes ------------ The Company accounts for income taxes using the liability method. The liability method requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax bases of assets and liabilities, using enacted tax rates. Additionally, net deferred tax assets are adjusted by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Earnings per Share ------------------ The Company displays earnings per share in accordance with SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires dual presentation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share include the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Outstanding stock options, warrants and other potential stock issuances have not been considered in the computation of diluted earnings per share amounts since the effect of their inclusion would be anti-dilutive. Securities that could potentially dilute basic earnings per share ("EPS") in the future, that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the periods presented, consist of the following (shares are in thousands):
December 31, -------------------------------- 2004 2003 ---------------- --------------- Options to purchase common stock 4,645 4,442 Warrants to purchase common stock 2,082 631 Series A Convertible Preferred Stock 1,347 1,347 ---------------- --------------- Total Potential Common Shares as of December 31, 8,074 6,420 ---------------- --------------- Issuances after December 31, 2004 through March 31, 2005 Common stock 10 Options to purchase common stock 60 Warrants to purchase common stock 750 ---------------- 8,894 ================
Cash and Cash Equivalents ------------------------- The Company considers all investments with original maturities of three months or less to be cash equivalents. Allowance For Doubtful Accounts ------------------------------- The allowance for doubtful accounts reflects management's best estimate of probable losses inherent in the account receivable balance. Management determines the allowance based on known troubled accounts, historical experience, and other currently available evidence. F-11 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Significant Accounting Policies, continued ------------------------------- Advertising and Promotional Costs --------------------------------- Advertising and promotional costs are reported in "Sales and marketing" expense in the consolidated statements of operations and are expensed as incurred. Advertising and promotional costs for the years ended December 31, 2004 and 2003 was $31,000 and $4,000, respectively. Reclassifications ----------------- Certain reclassifications have been made to the consolidated financial statements shown for the prior year in order to have them conform to the current year's classifications. Concentrations and Fair Value of Financial Instruments ------------------------------------------------------ Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. At December 31, 2004, the Company has cash investments of approximately $208,000 at one bank. Concentrations of credit risk with respect to accounts receivable are disclosed in Note 16. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. Unless otherwise disclosed, the fair value of financial instruments approximates their recorded value. Use of Estimates In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Disclosures that are particularly sensitive to estimation include management's plans, as disclosed in Note 13. Actual results could differ from those estimates. New Accounting Pronouncements ----------------------------- In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123R, "Share-Based Payment." SFAS No. 123R eliminates the alternative to use APB No. 25's intrinsic value method of accounting that was provided in SFAS No 123 as originally issued. SFAS No. 123R requires entities to recognize the cost of employee services in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). That cost will be recognized over the period during which the employee is required to provide the service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. SFAS No. 123R requires entities to initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of the award will be remeasured at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. The grant date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123R is effective as of the beginning of the Company's fiscal year following December 15, 2005 (January 1, 2006). The adoption of SFAS No. 123R will have no effect on the Company's consolidated cash flows or financial position but will have an adverse effect on the Company's consolidated results of operations. In December 2004, the FASB issued FAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29." This Statement eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29 and replaces it with an exception for exchanges that do not have commercial substance. This Statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as F-12 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Significant Accounting Policies, continued New Accounting Pronouncements, continued ----------------------------- a result of the exchange. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the Company's consolidated financial position, liquidity, or results of operations. In April 2004, the EITF issued Statement No. 03-06 "Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. The adoption of this statement did not have any effect on the Company's calculation of EPS. In September 2004, the EITF issued statement EITF Issue No. 04-08, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share" ("EITF 04-08"). Contingently convertible debt instruments are generally convertible into common shares of an issuer after the common stock price has exceeded a predetermined threshold for a specified period of time (the "market price contingency"). EITF 04-08 requires that shares issuable upon conversion of contingently convertible debt be included in diluted earnings per share computations regardless of whether the market price contingency contained in the debt instrument has been met. EITF 04-08 is effective for reporting periods ending after December 15, 2004 and requires restatement of prior periods to the extent applicable. The adoption of this statement is not expected to have an effect on the Company's calculation of EPS. Stock Options and Similar Equity Instruments -------------------------------------------- At December 31, 2004, the Company had five stock-based employee plans, which are described more fully in Note 10. As permitted under SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure", which amended SFAS No. 123, "Accounting for Stock-Based Compensation", the Company has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB No. 25. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share data): As discussed in Note 2, FAS No. 123R will require the Company to expense stock options based on grant date fair value in its financial statements. The effect of expensing stock options on the Company's results of operations using a Black-Scholes option-pricing model is presented in the following pro forma table: F-13 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Significant Accounting Policies, continued ------------------------------- Stock Options and Similar Equity Instruments, continued ---------------------------------------------
2004 2003 ---------------- ----------------- Net loss attributable to common shareholders As reported $(1,999) $(5,538) Add: Stock-based employee compensation expense included in reported net loss -- 4 Less: Stock-based employee compensation expense determined under fair value-based method for all awards (929) (1,513) ---------------- ----------------- Pro forma $(2,928) $(7,047) ================ ================= Basic and diluted net loss per share As reported $(0.46) $(1.39) ================ ================= Pro forma $(0.68) $(1.77) ================ =================
The fair value of Company common stock options granted to employees are estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility of 68.1% to 75.5% in 2004 and 62.7% to 72.3% in 2003 (2) risk-free interest rates of 4.8% in 2004 and 2003 and (3) expected lives of 5.0 years in 2004 and 2003. NOTE 3 - Discontinued Operations ----------------------- Platinum Communications, Inc. ----------------------------- In 2001, the Company and Platinum Communications, Inc. ("Platinum") completed a merger under an Agreement and Plan of Merger ("Merger Agreement"). Under the Merger Agreement, a newly formed wholly owned subsidiary of the Company acquired all of the outstanding common stock of Platinum. The purchase price of Platinum approximated $340,000, which consisted of $50,000, and 66,667 shares of common stock (valued at $138,000, based on the quoted market price at the time of the acquisition) and $93,000 of acquisition costs. The Company issued an additional 46,667 shares of its common stock and placed them in escrow (a portion of which is not reflected as outstanding common stock), that were scheduled to be released to the former shareholders of Platinum, subject to certain performance provisions (as defined), in various increments through April 2004; 15,556 shares were earned and were issued effective December 31, 2001, valued at $20,000, and 15,556 shares were earned and were issued effective December 31, 2002, valued at $39,000. Both issuances are additive to the cost of the acquisition. In addition, two key employees of Platinum entered into three-year employment agreements with the Company, with an aggregate base compensation of $300,000 per annum and options to purchase an aggregate of 20,000 shares of the Company's common stock vesting over three years, with an exercise price of $2.06, the fair market value on the date of the grant. In conjunction with the closing of the Platinum operations these employment agreements were terminated. The acquisition was accounted for as a purchase and, accordingly, assets and liabilities were fair valued at the date of acquisition and the results of operations were included in the consolidated financial statements of the Company, commencing May 1, 2001. As a result of the lack of development of the Platinum business and to focus the Company's resources on its core business, in December 2003, the Company decided to close the operations of Platinum. F-14 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - Discontinued Operations, continued ------------------------ Platinum Communications, Inc., continued ----------------------------- Accordingly, the results of operations and the assets and liabilities of Platinum are presented as discontinued operations for both the current and prior period. The losses are reflected as loss from discontinued operations in the accompanying consolidated statements of operations. The following table reflects the results of the discontinued operations of Platinum for the years ended December 31, 2004 and 2003, respectively:
2004 2003 ---------------- ----------------- (In thousands) Revenue $ -- $ 441 ---------------- ----------------- Income and (Costs and Expenses) ------------------------------- Operations, research and development -- (656) Sales and marketing -- (717) General and administrative -- (201) Amortization and depreciation -- (187) Other income - net 297 -- Costs associated with shut-down of operations: Impairment of fixed assets, net -- (41) Impairment of software costs, net -- (311) Continuing lease obligations, net -- (220) Interest expense, net (9) (20) ---------------- ----------------- Total income and (costs and expenses) 288 (2,353) ---------------- ----------------- Income (loss) from discontinued operations $ 288 $ (1,912) ================ =================
For the year ended December 31, 2004 the Company recognized income from the discontinued opeartions of $288,000 as a result of settling certain liabilities of the Platinum operation for less than the original obligation. Platinum has three lines of credit, which were assumed in connection with the Platinum acquisition. These lines have various expiration dates. One line has no expiration date and bears an interest rate of prime (4.75% at December 31, 2004) plus 1%, is collateralized by substantially all the assets of Platinum, and is personally guaranteed by one of the former officers of Platinum. The second line expired in May 2003 and bears an interest rate of 10%. The third line contains no expiration date and bears an interest rate of 16.74%. The total obligation under these three lines of credit as of December 31, 2004 is $71,000. The following table reflects the assets and liabilities from the discontinued operations of Platinum as of December 31, 2004 and 2003: F-15 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 Discontinued Operations, continued ----------------------- Platinum Communications, Inc., continued -----------------------------
December 31, 2004 2003 ---------------- ----------------- (In thousands) ASSETS ------ Accounts receivable, net of allowance of $-- and $46 in 2004 and 2003, respectively $ -- $ 5 Other assets -- 42 ---------------- ----------------- Total Current Assets From Discontinued Operations -- 47 ---------------- ----------------- Total Assets From Discontinued Operations $ -- $47 ---------------- ----------------- LIABILITIES ----------- Accounts payable and accrued expenses $ 41 $390 Deferred revenue -- 180 Current portion of long-term debt 71 11 ---------------- ----------------- Total Current Liabilities from Discontinued Operations 112 581 Long-Term Debt, Net of Current Portion -- 87 ---------------- ----------------- Total Liabilities From Discontinued Operations $ 112 $668 ================ =================
F-16 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - Accounts Receivable and Short-term Revolving Loans -------------------------------------------------- The Company has an Accounts Receivable Purchase Agreement with a Bank, whereby the Company from time to time may assign some of their accounts receivable to the Bank on a full recourse basis. Upon specific invoice approval, an advance of 80% of the underlying receivable is provided to the Company. The remaining balance (20%), less an administrative fee of approximately 0.5% plus interest at the rate of 1 % per month, is paid to the Company once the customer has paid. Under the Agreement, the maximum amount of all assigned receivables outstanding at any time shall not exceed $1.5 million. The primary term of the agreement was for one year beginning October 2001, and continues until due notice of termination is given at any time by either party to the agreement. At December 31, 2004, the Company had assigned approximately $952,000 of accounts receivable to the Bank and received advances of $762,000 from the Bank. In May 2004, the Company entered into an Agreement with DIRI Rec Fund LLC (the "Rec Fund") whereby the Company may assign certain accounts receivable on a full recourse basis to the Rec Fund as security for advances (loans). The Rec Fund was established solely to advance funds to the Company upon the assignment of receivables. The Rec Fund is administered by a third party trustee. Certain shareholders of the Company and a Director of the Company, are the principal investors in the Rec Fund. Under the Agreement, the Company pays interest at the rate of one (1) percent per month on the maximum purchase amount (as defined in the agreement) of the Rec Fund and pays the administrative costs of the Rec Fund which approximate $12,000 per year. At December 31, 2004 the Company had outstanding advances of $250,000. NOTE 5 - Prepaid Expenses and Other Current Assets ----------------------------------------- Prepaid expenses and other current assets consist of the following:
December 31, 2004 2003 ---------------- ----------------- (In thousands) Prepaid expenses $ 239 $ 181 Employee notes and loans receivable 23 34 ---------------- ----------------- $ 262 $ 215 ================ =================
F-17 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - Property and Equipment ---------------------- Property and equipment consist of the following:
December 31, Useful life in Years 2004 2003 -------------- --------------- -------------- (in thousands) Computer equipment and purchased software $ 6,078 $ 5,738 3 Furniture and fixtures 446 446 5 - 7 Automobile 30 30 3 -------------- --------------- -------------- 6,554 6,214 Less: accumulated deprecation and amortization (5,977) (5,443) -------------- -------------- Property and Equipment, Net $ 577 $ 771 ============== ==============
Depreciation and amortization expense related to property and equipment for the years ended December 31, 2004 and 2003 was $534,000 and $686,000, respectively. NOTE 7 - Accounts Payable and Accrued Expenses ------------------------------------- Accounts payable and accrued expenses consist of the following:
December 31, 2004 2003 ----------------- ---------------- (in thousands) Trade accounts payable $ 809 $ 862 Sales taxes payable 539 539 Accrued payroll and benefits 253 242 Other accrued expenses 485 605 ----------------- ---------------- $2,086 $2,248 ================= ================
NOTE 8 - Long-term Debt -------------- Long-term debt consists of the following:
December 31, 2004 2003 ----------------- ---------------- (in thousands) Lines of credit (a) $ 668 $ 736 Capitalized lease obligations (b) 239 186 ----------------- ---------------- 907 922 Less: current portion (782) (880) ----------------- ---------------- Long-term debt, net of current portion $ 125 $ 42 ================= ================ (a) In June 2003, the Company obtained a discretionary Line of Credit ("LoC") in the amount of $500,000 from JP Morgan Private Bank ("JPMC"). The LoC is guaranteed by Tall Oaks Group, LLC (an affiliate F-18 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - Long-term Debt, continued of Metropolitan, Note 9) and is repayable the earlier of demand or June 30, 2005. The LoC permitted two forms of draw down; one based upon prime rate, the second based upon LIBOR. In July 2003, the Company elected to draw down $500,000 applying the terms and conditions set forth for LIBOR. The interest rate is the JPMC reserve adjusted LIBOR plus 2.30%. As of December 31, 2004, the balance outstanding was $500,000 and the applied interest rate was 4.15%. Also in 2003, the Company obtained, and fully drew upon, a second line of credit from Sterling National Bank ("Sterling") in the amount of $250,000. The line is guaranteed by the Company's chairman, secured by the assets of the Company and carries an interest rate of 7%. Repayments are calculated monthly at 2.778% of the outstanding balance, plus finance charges, and continue until the line is fully paid. At December 31, 2004, the Company had an outstanding balance of approximately $168,000 under the line of credit. (b) The Company has equipment under capital lease obligations expiring at various times through 2006. The assets and liabilities under capital leases are recorded at the lower of the present values of the minimum lease payments or the fair values of the assets.
As of December 31, 2004 minimum future lease payments under these capital leases are:
Year Ending December 31, Amount ----------------------------------------------- --------------------- (in thousands) 2005 $ 137 2006 92 2007 36 2008 11 ------- Total minimum lease payments 276 Less: amounts representing interest (37) ------- Net minimum lease payments $ 239 =======
The interest rates pertaining to these capital leases range from 5.0% to 17.2%, and the net book value of the related assets is approximately $207,000 as of December 31, 2004. NOTE 9 - Shareholders' Equity (Deficiency) --------------------------------- Preferred Stock - --------------- Year Ended December 31, 2004 - ---------------------------- In 2004 the Board of Directors authorized the sale of up to 1,500 shares of Series D Redeemable Preferred Stock ("Series D Preferred") at $1,000 per share. The holders of Series D Preferred are entitled to dividends, on a cumulative basis, at the rate of 9-1/2% per year, compounded and payable quarterly beginning on April 1, 2006. The holders of Series D Preferred have preference in the payment of dividends and, in the event of liquidation, to all classes of capital stock of the Company except for the Series A, B and C Preferred Stock. As of December 31, 2004, 100 shares of Series D Preferred had been F-19 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - Shareholders' Deficiency, continued ------------------------ Preferred Stock, continued - --------------- Year Ended December 31, 2004, continued - ---------------------------- sold and the Company received proceeds of $100,000. The buyer was issued warrants to purchase 90,909 common shares at an exercise price of $2.03 per share in conjunction with the sale. At December 31, 2004 there were $2,000 of dividends accrued and unpaid for Series D Preferred Holders. In 2004, the Board authorized the sale of an additional 500 shares of its non-voting Series C Redeemable Preferred Stock ("Preferred Stock - C"). The holders of Preferred Stock - C are entitled to dividends at the rate of 9-% per annum, payable quarterly in arrears beginning October 1, 2005. The Company has the option to redeem issued shares of Preferred Stock - C, in whole or in part, at any time, with the redemption price equal to the purchase price plus accrued and unpaid dividends. For each share of Preferred Stock - C purchased, each investor received a Warrant to purchase the number of shares of the Company's common stock equal to the exchange ratio of $1,000 of price per share ("Price Per Share") divided by 123% of the closing price per share of the Company's common stock on the trading day immediately prior to the date of issuance of the Warrant. During 2004 the Company sold 1,410 shares of Preferred Stock C for proceeds of $1,410,000, and issued 1,159,629 warrants in connection with the issuance. Metropolitan was issued 200,000 warrants with an exercise price of $2.125 to purchase common stock of the Company for services in connection with the transaction. As of December 31, 2004, 1,990,779 warrants are outstanding in connection with the issuances of Preferred Stock C. The warrants expire in 2008 and 2009 and have exercise prices ranging from $0.86 to $2.13 per common share. The proceeds were used for working capital purposes. As of December 31, 2004, approximately $158,000 in dividends is accrued for the Preferred Stock - C holders. During 2002 and 2003, the Company sold Series A Convertible Preferred Stock ("Series A Preferred") to Metropolitan Venture Partners II, L.P. ("Metropolitan"), a private equity investment firm. Each share of Series A Preferred is convertible into 10 shares of common stock of the Company. The holders of the Series A Preferred ("the Holders") are entitled to dividends, on a cumulative basis, at the rate of 9-% per annum, compounded quarterly and payable on February 1, 2005 and September 25, 2005. Holders have certain demand and piggyback registration rights for the Common Stock issuable upon conversion of the Series A Preferred. The payment of the first dividend was originally scheduled for September 25, 2004, however, the Company and the Holders agreed to defer this payment until February 1, 2005. As consideration for the deferral of the dividend payment, the Company agreed to pay the Holders a premium of 7.5% of the dividend. In May 2004, the Company and the Holders further agreed to grant the Company the right, in its sole discretion, to defer the payment of the dividend scheduled to be paid on February 1, 2005 until February 1, 2006. In the event the Company elects to pay the dividend on February 1, 2006 the Holders would receive a premium of $129,000. Also, the Company and the Holders further agreed to grant the Company the right, in its sole discretion, to defer the payment of the dividend scheduled to be paid on September 25, 2005 until February 1, 2006. In the event the Company elects to pay this dividend on February 1, 2006 the Holders would receive a premium of $41,000. In the event the Company does not elect to defer the payment of the dividend the Company agreed to pay the Holders a premium of $13,000. At December 31, 2004 there were $781,000 of dividends accrued and unpaid for Series A Preferred Holders. In 2003, the Company's Board of Directors approved the exchange of certain outstanding debt for Non- Voting Series B Redeemable Preferred Stock ("Preferred Stock - B") at the Price Per Share (see discussion below). As of December 31, 2004, approximately $157,000 in dividends are payable to the Preferred Stock - B holders. Year Ended December 31, 2003 ---------------------------- In December 2003, the Company's Board of Directors authorized the sale of up to 1,500 shares of its Preferred Stock - C. During December 2003, the Company sold 590 shares of the Preferred Stock - C in consideration for $590,000 less fees and expenses of $60,000 to Metropolitan and certain F-20 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - Shareholders' Equity (Deficiency), continued ---------------------------------- Preferred Stock, continued ---------------- Year Ended December 31, 2003, continued ---------------------------- board members and an executive officer of the Company. As of December 31, 2003, approximately $3,000 in dividends was accrued for the Preferred Stock - C holders. As of December 31, 2003, 631,151 warrants were outstanding in connection with the issuances of Preferred Stock C. The warrants expire in 2008 and 2009 and have exercise prices ranging from $0.93 to $1.11 per common share. The proceeds were used for working capital purposes. In June 2003, the Company's Board of Directors approved the exchange of $974,000 of outstanding debt owed to its Chairman and current Chief Executive Officer, Markus & Associates (an affiliate of SJ, Note 12) and Tall Oaks Group, LLC (an affiliate of Metropolitan) for 974 shares of Preferred Stock - B at the Price Per Share. The Preferred Stock - B was issued as follows: -- 266 shares were exchanged for $266,000 of debt obligation to the Company's Chairman and current Chief Executive Officer; -- 208 shares were exchanged for $208,000 of debt obligation to Markus & Associates; and -- 500 shares were exchanged for $500,000 of debt obligation to Tall Oaks Group, LLC. Each of the Preferred Stock - B shares is entitled to mandatory dividends, payable quarterly, commencing on the first day of the calendar quarter after the date of issuance, at the rate of 12% per annum. Additionally, the Preferred Stock - B shares are redeemable, at the sole option of the Company, on or after March 31, 2005 (or prior to March 31, 2005 with the consent of majority-in-interest holders of Preferred Stock - B shares). Upon redemption, the holders of the Preferred Stock - B shall be entitled to receive, for each share of Preferred Stock - B outstanding, an amount equal to the price per share plus accrued and unpaid dividends. As of December 31, 2003, approximately $29,000 in dividends were payable to the Preferred Stock - B holders. In June 2003, the Company sold 17,857 shares of its Preferred Stock - A in consideration for $250,000 less fees and expenses of $5,000 to Metropolitan. As of December 31, 2003, $350,000 in dividends were payable to the Holders. Common Stock ------------ Year Ended December 31, 2004 ---------------------------- During 2004, the Company issued 466,611 unregistered shares of common stock as follows: -- 15,000 shares of common stock valued at $12,000 pursuant to an employment agreement with the Company's Chief Executive Officer as follows: 5,000 shares valued at $4,000 for services for the quarter ended March 31, 2004, and 10,000 shares valued at $8,000 for services rendered and costs recorded in the year 2003. -- 82,509 shares valued at $75,000 to directors for service on the Board of Directors and Committees of the Board for services rendered and accrued during 2003. F-21 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - Shareholders' Equity (Deficiency), continued --------------------------------- Common Stock, continued ------------- Year Ended December 31, 2004, continued ---------------------------- -- 111,752 shares valued at $139,000 to directors for service on the Board of Directors and Committees of the Board for the year 2004; -- 35,000 shares valued at $26,000 to an employee for services rendered and accrued during 2003; -- 27,027 shares of non-vested common stock valued at $50,000 to an employee of the Company pursuant to an employment agreement. The shares vest ratably through November 29, 2005; -- 182,700 shares valued at $148,000 to consultants for services rendered and accrued in 2003. -- 6,666 shares valued at $13,000 to consultants for services rendered in 2004; -- 5,957 shares valued at $10,000 to employees for services rendered in 2004; Year Ended December 31, 2003 ---------------------------- During the year ended December 31, 2003, the Company issued 114,347 shares of its common stock and compensatory options to purchase 9,000 shares of its common stock as detailed below: -- Issued 69,347 net shares of its common stock as payment of certain consulting expenses, valued at $77,000. -- The Company granted 9,000 options to purchase shares of its common stock to three employees of the Company. The options vest in one-third increments on the date of issuance, December 31, 2003 and June 30, 2004. The options have an exercise price of $1.30 per share and have an intrinsic value of $4,000. -- In January 2003, the Company entered into an employment agreement with its Chief Executive Officer, which expires in January 2005. As part of the compensation, the Chief Executive Officer will receive 60,000 shares of the Company's common stock that vest ratably over the first twelve months of the agreement. During 2003, the Company issued 45,000 shares of its common stock valued at $54,000 under this agreement. F-22 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - Shareholders' Equity (Deficiency), continued --------------------- Stock Option Plans ------------------ In April 2003, the Company's Board of Directors authorized and adopted the 2003-A Stock / Stock Option Plan whereby 975,000 shares of its common stock were reserved for issuance under the Plan. The plan was adopted by the stockholders at our annual meeting in May 2003. The 2003-A Plan is also divided into two separate equity programs: an option grant program and a stock issuance program. As with the 2003 Plan, under the stock issuance program of the 2003-A Plan, the purchase price per share is fixed by the Board of Directors or compensation committee but cannot be less than the fair market value of the common stock on the issuance date. As of December 31, 2004, there are 16,000 shares available to be issued pursuant to this plan. In 2004, the Company's Board of Directors authorized and adopted the 2004 Stock / Stock Option Plan whereby 1,200,000 shares of its common stock were reserved for issuance under the Plan. The 2004 Plan is divided into two separate equity programs: an option grant program and a stock issuance program. Under the stock issuance program, the purchase price per share is fixed by the Board of Directors or compensation committee but cannot be less than the fair market value of the common stock on the issuance date. As of December 31, 2004, there are 1,030,000 shares available to be issued pursuant to this plan. The Company grants options under multiple stock-based compensation plans that do not differ substantially in the characteristics of the awards. The following is a summary of stock option activity for 2004 and 2003, relating to all of the Company's common stock plans (shares are in thousands):
Weighted Average Exercise Shares Price ------------------ ------------------- Outstanding at January 1, 2003 2,259 $ 2.13 Granted 2,327 1.15 Exercised -- -- Forfeited (144) 1.93 Outstanding at December 31, 2003 4,442 1.63 Granted 350 1.63 Exercised -- -- Forfeited (147) 1.60 ----------- Outstanding at December 31, 2004 4,645 1.63 =========== Exercisable at December 31, 2004 3,692 1.65 ===========
F-23 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - Shareholders' Equity (Deficiency), continued -------------------- Stock Option Plans, continued ------------------- The following table summarizes stock option information as of December 31, 2004.
Options Outstanding ------------------------- ------------------------------ ----------------------- --------------------------- Exercise Prices Number Outstanding Contractual Life Options Exercisable ------------------------- ------------------------------ ----------------------- --------------------------- $0.75 665,000 3.97 years 665,000 ------------------------- ------------------------------ ----------------------- --------------------------- $0.76 to $1.10 598,000 2.93 years 508,000 ------------------------- ------------------------------ ----------------------- --------------------------- $1.16 800,000 3.16 years 560,000 ------------------------- ------------------------------ ----------------------- --------------------------- $1.20 to $1.63 901,000 1.77 years 762,000 ------------------------- ------------------------------ ----------------------- --------------------------- $1.75 to $2.19 1,575,000 2.67 years 1,091,000 ------------------------- ------------------------------ ----------------------- --------------------------- $11.25 106,000 0.41 years 106,000 --------- ---------- ---------- ------------------------- ------------------------------ ----------------------- --------------------------- Total 4,645,000 2.75 years 3,692,000 ========= ========== ========= ------------------------- ------------------------------ ----------------------- ---------------------------
A total of 1,130,000 and 23,000 shares of the Company's common stock are reserved for options, warrants and contingencies at December 31, 2004 and 2003, respectively. Total compensation costs recognized for stock option awards amounted to $ 0 and $4,000 for the years ended December 31, 2004 and 2003, respectively. Compensation cost represents the fair value of options granted to non-employees and the intrinsic value of options granted to employees. NOTE 10 - Income Taxes ------------ The following table summarizes components of the provision for (benefit from) current and deferred income taxes for the years ended December 31, 2004 and 2003:
December 31, 2004 2003 ---------------- ----------------- (in thousands) Current Federal $ -- $( 108) State and other 5 -- ---------------- ----------------- Total 5 ( 108) ---------------- ----------------- Federal -- -- State and other -- -- ---------------- ----------------- Total 5 -- ---------------- ----------------- Provision for (benefit from) from Income Taxes $ 5 $( 108) ================ =================
F-24 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - Income Taxes, continued ------------ The following table summarizes the significant differences between the U.S. Federal statutory tax rate and the Company's effective tax rate for financial statement purposes for the years ended December 31, 2004 and 2003:
December 31, 2004 2003 ----------------- -------------- U.S. Federal statutory tax rate 35.0% 35.0% Permanent items (2.7) (0.8) Other 0.7 6.1 Increase in valuation allowance (33.4) (38.3) ----------------- -------------- (0.4)% 2.0% ================= ==============
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are summarized as follows:
December 31, 2004 2003 ----------------- ---------------- (in thousands) Deferred tax assets Net operating loss carryforwards $ 28,465 $ 27,966 Tax credit carryforward 733 733 Fixed and intangible assets 130 200 Deferred revenue 262 116 Unrealized loss on securities 577 577 Discontinued operations accruals -- 156 Other 104 96 ----------------- ---------------- 30,271 29,844 Valuation allowance (30,271) (29,844) ----------------- ---------------- Deferred tax assets $ 0 $ 0 ================= ================
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are summarized as follows: At December 31, 2004, the Company has federal and state net operating loss carryforwards ("NOLs") remaining of approximately $78 million and $33 million, respectively, which may be available to reduce taxable income, if any. These NOLs expire through 2024. However, Internal Revenue Code Section 382 rules limit the utilization of NOLs upon a change in control of a company. During 2004, the Company performed a preliminary evaluation as to whether a change in control had taken place. Management believes that there has been no change in control as such applies to Section 382. However, if it is determined that a change in control has taken place, either historically or in the future, utilization of its NOLs could be subject to severe limitations which could have the effect of eliminating substantially all of the future income tax benefits of the NOLs. NOTE 11 - Related Party and Other Transactions ------------------------------------ S.J. & Associates, Inc. ----------------------- In December 1999, the Company entered into an agreement with S.J. & Associates, Inc. (including its affiliates are collectively referred to as "SJ"), an advisor to the Company and its Board of Directors, for various services that provide for the following compensation: -- The Company entered into a consulting agreement with SJ initially terminating on May 31, 2007. F-25 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 Related Party and Other Transactions, continued ------------------------------------ S.J. & Associates, Inc., continued ----------------------- -- Pursuant to the agreement, SJ is entitled to monthly compensation of $15,000. The Company will supply SJ an office/temporary living accommodations and reimbursement for auto leases at a cost not to exceed $9,900 per month. Pursuant to the agreement, SJ is entitled to a financing fee equal to 4% of the gross proceeds (or the gross transaction value) of any of the following events (i) financing(s) (either debt or equity), (ii) sale of the Company's stock, (iii) an acquisition made by the Company, and (iv) the sale of the Company or merger of the Company with another entity. SJ is also entitled to an annual bonus at the discretion of the Company's Board of Directors. With no further approval, SJ is entitled to be reimbursed for other expenses not to exceed $2,000 per month, plus other reasonable expenses upon approval. Upon completion of the initial term of the agreement, SJ will continue to provide consulting services for an additional 7 year period. Minimum compensation during this additional period is approximately $5,500 per month. During 2004 and 2003, the Company incurred $108,000 and $144,000, respectively, of consulting expenses with SJ. The consulting expense was paid in cash. In addition, SJ earned $80,000 of fees related to the sales and issuance of Series C Preferred stock and was reimbursed for other expenses in accordance with the consulting agreement. -- In 2003, the Company reduced its obligation to SJ relating to a restructuring plan from March of 2000 by $60,000. The amount was paid in cash. NOTE 12 - Commitments and Contingencies ----------------------------- Operating Leases ---------------- Operating leases are primarily for office space, co-location, equipment and automobiles. At December 31, 2004, the future minimum lease payments under operating leases are summarized as follows:
Year Ending December 31, Amount ------------------------------ ---------------- (in thousands) 2005 $ 499 2006 335 2007 308 2008 219 ------- Total $1,361 =======
Rent expense approximated $872,000 and $756,000 for the years ended December 31, 2004 and 2003, respectively. Employment Agreements --------------------- In December 2002, the Company's Chairman became the Company's Chief Executive Officer. In January 2003, the Company entered into an employment agreement with its Chief Executive Officer, which expires in January 2005. Compensation is as follows: 60,000 shares of the Company's common stock which vest ratably over the first year of the agreement, 240,000 options to purchase common stock of the Company at $2.02, vesting 50% on execution of the agreement and 50% ratably over the life of the contract, and $180,000 per annum plus a bonus at the discretion of the Board. Additionally, the Chief Executive Officer is entitled to be reimbursed for (1) all out-of-pocket expenses reasonably incurred by him in the performance of his F-26 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - Commitments and Contingencies, continued ------------------------------ Employment Agreements, continued --------------------- duties, and (2) housing and office expenses not to exceed $10,000 per month. The Company extended its services agreement with its Chief Executive Officer on December 5, 2003. The agreement now expires August 24, 2007. The extended agreement calls for compensation of $15,000 per month and 360,000 options, vesting 7,500 per month for the term of the agreement (48 months), to purchase the Company's common stock at an exercise price of $1.16, the closing price of the Company's common stock on the date the agreement was effective. The agreement provides for reimbursement of reasonable out of pocket business expenses and further provides for living and travel expenses not to exceed $11,000 per month. The Company entered into an employment and consulting agreement with its President effective January 1, 2003. The agreement was amended on January 1, 2005. The employment term of the agreement expires June 30, 2005 and is followed by a consulting period which ends December 31, 2007. During the employment term compensation is based on an annual salary of $240,000. In addition the President received options to purchase 100,000 shares of the Company's common stock at $0.50 per share which vest ratably over a period of 26 months and an additional option to purchase 100,000 shares of the Company's common stock at market price on the date of grant which vest on an equal monthly basis over a period of 36 months. During the employment term and for 90 days thereafter the President may be reimbursed for reasonable out-of-pocket expenses and temporary living accommodations not to exceed $2,500 per month. During the employment term he also receives a transportation allowance of $600 per month and the cost for transportation to his home. During the consulting term of the agreement compensation will be $12,000 per month and duties during the consulting term include consultation with senior executives concerning the Company's respective businesses and operations. Defined Contribution Plan ------------------------- The Company provides pension benefits to eligible employees through a 401(k) plan. Employer matching contributions to this 401(k) plan approximated $0 and $38,000 for the years ended December 31, 2004 and 2003, respectively. NOTE 13 - Management's Liquidity Plans ---------------------------- In order to meet cash needs and to achieve positive operating cash flows the Company has and will continue to take various actions and steps that we believe will enable us to attain these goals. These actions include: In the second half of 2003 the Company embarked on a major cost reduction program, including among other things, staff reductions, pay rate reductions, and elimination of non-essential expenses. Principally as a result of this cost reduction program the Company reduced its operating costs for continuing operations, excluding costs for depreciation and amortization, in 2004 compared to 2003 by $1,594,000. The Company believes these cost reductions will continue to have a positive impact on its operating results. The Company notes that during 2004 it partially restored the pay rate reductions and further restored pay rate reductions in January 2005. -- As discussed above in December 2003 the Company closed the operations of its Platinum subsidiary. Platinum had experienced losses and had significant cash needs. This action has reduced operating costs approximately $1,700,000 from 2003 to 2004. F-27 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - Management's Liquidity Plans, continued ----------------------------- -- The Company intends to raise additional capital through private equity offerings and borrowing. In 2004 the Company received net proceeds from the sale of Preferred Stock of $1,430,000. Also in 2004 the Company entered into an agreement with DIRI Rec Fund LLC, a corporation formed and funded to loan funds to the Company against accounts receivable, and received advances totaling $250,000 from Diri Rec Fund. Further, the Company intends to renew for a minimum of one year the $500,000 loan scheduled to mature on June 30, 2005 and the guarantors of this loan have consented to this extension (see Note 8). -- In March 2005 the Company closed a Bridge Loan financing with Sigma Capital Partners LLC and Metropolitan Venture Partners II, L.P. and received proceeds of $750,000 less legal fees of $55,000. (See Note 18). -- The Company continues to strive to increase its revenue through offering custom engineering services, expanding and enhancing its existing product offerings such as IOL, and introducing new product offerings. In 2004 revenues from continuing operations increased $119,000 or 1.6% over revenues in 2003. In 2004 the Company entered into a new agreement to provide IOL services to a Fortune 500 company. Management anticipates that revenue from this new customer will continue to increase in 2005 and beyond-and expects to further broaden our customer base in 2005. -- The Company continues to expand its marketing efforts in order to increase its customer base. In this regard, in 2003, the Company became a business partner with IBM and through this relationship will work with IBM to achieve sales to new customers. The Company will continue to pursue similar channel partner opportunities. Also in the fourth quarter 2004 the Company employed a new sales and marketing executive and engaged an independent sales agent to further expand our sales efforts. Management believes that our plans and new initiatives as discussed above will lead to positive cash flows and profitability. While the Company pursues these goals we also believe that our ability to raise additional capital through equity and debt placements will provide sufficient cash to meet cash requirements at least through December 31, 2005. There can be no assurance, however, that the Company will achieve its cash flow and profitability goals, or that it will be able to raise additional capital sufficient to meet its operating expenses or implement its plan. In such event, the Company may have to revise its plans and significantly reduce its operating expenses, which could have an adverse effect on revenue and operations in the short term. F-28 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - Consolidated Statements of Cash Flows ------------------------------------- Supplemental disclosure of cash flow information for the years ended December 31, 2004 and 2003 is summarized as follows:
Year ended December 31, 2004 2003 ----------------- ------------------ (in thousands) Interest paid $308 $267 ===== ===== Income taxes paid $ 5 $ 1 ===== ===== Non-cash investing and financing activities for the years ended December 31, 2004 and 2003 are summarized as follows: Year Ended December 31, 2004 2003 --------------- ------------------ (in thousands) Dividends accrued and unpaid $ 716 $ 326 ====== ====== Capitalized leases incurred $ 226 $ 38 ====== ====== Conversion of long-term debt into 974 shares of Series B Redeemable Preferred Stock $ -- $974 ====== ====== Issuance of 310,209 common shares in 2004 for services and fees incurred in 2003 $ 257 $ -- ====== ======
NOTE 15 - Products and Services --------------------- The Company and its subsidiaries currently operate in one business segment and have, during the years 2004 and 2003, provided two separate products: ASP Services and custom engineering services. Refer to Note 1 for a detailed description of these products and services.
Year Ended December 31, 2004 2003 -------------- ---------------- (in thousands) ASP fees $4,580 $5,171 Custom Engineering fees 2,978 2,268 ------ ------ Total Revenue $7,558 $7,439 ====== ======
NOTE 16 - Major Customers --------------- For the years ended December 31, 2004 and 2003, IBM accounted for 92.1% and 97.1% of theCompany's revenue, respectively. Accounts receivable from IBM amounted to $1,516,000 and $1,065,000, at December 31, 2004 and 2003, respectively. Loss of IBM as a customer would have a material adverse effect on the Company. F-29 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 Net Loss Per Share ------------------ The following chart provides a reconciliation of information used in calculating the per share amounts: (in thousands, except per share data)
Year Ended December 31, 2004 2003 ----------------- ---------------- Numerator for loss per share: Loss from continuing operations before discontinued operations $ (1,571) $ (3,270) Preferred stock dividends (716) (356) ----------------- ---------------- Loss from continuing operations attributable to common Shareholders before discontinued operations $ (2,287) $ (3,626) ================= ================ Denominator for loss per share*: 4,285 3,974 ================= ================ Basic and diluted income (loss) per share: Loss from continuing operations attributable to common shareholders before discontinued operations $(0.53) $(0.91) Income (loss) from discontinued operations 0.07 (0.48) ----------------- ---------------- Net loss attributable to common shareholders $(0.46) $(1.39) ================= ================ * The effect of dilutive securities (stock options, Series A convertible preferred stock and warrants) have not been included herein as their inclusion would be anti- dilutive.
NOTE 18 - Subsequent Events ----------------- In March 2005, the Company entered into a Securities Purchase Agreement (the "Agreement") with Sigma Opportunity Fund LLC ("Sigma") and Metropolitan Venture Partners II LP ("MetVP"), collectively the "Buyers", whereby the Buyers purchased Senior Subordinated Secured Notes (the "Note Purchase") in the aggregate amount of $750,000. The notes bear interest at the rate of five percent (5%) per year beginning June 28, 2005, and payable quarterly in cash or common stock at the option of the Buyers. The Notes mature on the earlier to occur of (i) September 29, 2006, (ii) the date on which demand for payment of the loan payable to JPMorgan Chase Bank is made, and (iii) commencing May 13, 2005, the due date of the loan payable to JPMorgan Chase Bank pursuant to the Grid Demand Promissory Note, dated as of June 27, 2003, including if due on demand and whether or not demand for payment is actually made, as such due date may be extended. In connection with the note purchase the Buyers were issued warrants to purchase 750,000 common shares of the Company. The exercise price of the warrants is $0.90 per share of common stock subject to adjustment on the occurrence of certain events as defined. Under the terms of the agreement, not later than August 30, 2005, the Company is required to file with the Securities and Exchange Commission a Registration Statement to register a number of common shares equal to the number of shares that would be issuable to the Buyers in payment of interest on the notes through the maturity date plus a number of F-30 common shares issuable upon exercise of the warrants. Sigma has the right to lead a "Follow-on Financing" which is expected to be consummated within 45 days of the closing of the Note purchase. In the event that the Follow-on- Financing does occur the exercise price of the warrants issued in conjunction with the Note Purchase will be adjusted as agreed between the Company and the buyers. In the event the Follow-on- Financing is not consummated the exercise price of the warrants shall be $0.01 per common share. F-31 EX-3.1(K) 2 diri10kdec04ex3-1k.txt CERTIFICATE OF AMENDMENT OF CERT. OF DESIGNATION Exhibit 3.1(k) Delaware Page 1 -------- The First State I, HARRIET SMITH WINDSOR, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "DIRECT INSITE CORP.", FILED IN THIS OFFICE ON THE TWENTY-NINTH DAY OF MARCH, A.D. 2005, AT 8:52 O'CLOCK P.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. 2136195 8100 SECRETARY'S OFFICE /s/ Harriet Smith Windsor OF DELAWARE ------------------------- 050256473 SEAL Harriet Smith Windsor, Secretary of State AUTHENTICATION: 3776762 DATE: 03-30-05 State of Delaware Secretary of State Division of Coporations Delivered 10:48 PM 03/29/2005 FILED 8:52 PM 03/29/2005 SRV 050256473 - 2136195 FILE CERTIFICATE OF AMENDMENT OF CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES C REDEEMABLE PREFERRED STOCK OF DIRECT INSITE CORP. ------------------- DIRECT INSITE CORP., a corporation organized and existing under the laws of the State of Delaware (the "Company"), DOES HEREBY CERTIFY THAT: Pursuant to authority conferred upon the Board of Directors of the Company (the "Board of Directors") by the Certificate of Incorporation of the Company, at a meeting duly held on April 14, 2004, the Board of Directors adopted resolutions (i) increasing the number of Series C Redeemable Preferred Stock from 1,500 to 2,000, an increase of 500 shares; and (ii) filing of a certificate of amendment to the Certificate of Designation restating the designation, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions of the Series C Redeemable Preferred Stock, as follows: RESOLVED, that the Company be, and hereby is, authorized, empowered and directed to designate, as of April 14, 2004, an additional 500 shares of the Company's preferred stock, par value $0.0001 per share ("Preferred Stock"), as Series C Redeemable Preferred Stock ("Series C Preferred Stock"), so that the aggregate number of shares of Preferred Stock designated as Series C Preferred Stock equals 2,000, all of which shall have the powers, designations, preferences and other special rights as set forth in the Certificate of Designation, Preferences and Rights of Series C Redeemable Preferred Stock of the Company as filed with the Secretary of State of Delaware on December 16, 2003, as the same may be further amended . 1. The name of the corporation is Direct Insite Corp. The Certificate of Designation, Preferences and Rights of Series C Redeemable Preferred Stock was filed on December 16, 2003 ("Certificate of Designation"). 2. The Certificate of Designation as hereby restated, shall read in its entirety, as follows: "RESOLVED, that the Company be, and hereby is, authorized, empowered and directed to designate 2,000 shares of the Company's 2,000,000 shares of authorized preferred stock, par value $0.0001 per share ("Preferred Stock"), as Series C Redeemable Preferred Stock, par value $0.0001 per share ("Series C Preferred Stock"), which shall have the powers, designations, preferences and other special rights, as follows: 1. Certain Definitions. Except as otherwise expressly provided herein, the following terms, as used herein, have the following meanings: "Board of Directors" means the Board of Directors of the Company. "Business Day" means any day, other than a Saturday or Sunday or a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to close. "Certificate of Incorporation" means the Certificate of Incorporation of the Company as amended to date and as the same may be further amended from time to time hereafter. "Common Stock" means the common stock, par value $0.0001 per share, of the Company, including any capital stock of any class of the Company thereafter authorized that shall not be limited to a fixed sum in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company. "Dividend Payment Dates" means January 1, April 1, July 1 and October 1 of each year while any shares of Series C Preferred Stock are outstanding, commencing October 1, 2005; provided, however, if any such date occurs on a day that is not a Business Day, the applicable Dividend Payment Date shall be the next following Business Day. "Holder" means each Person in whose name any shares of Series C Preferred Stock are issued and outstanding, at the time a determination is made, including Persons to whom such shares are transferred pursuant to the terms hereof. "Issuance Date" means, with respect to any shares of Series C Preferred Stock, the date of issuance of such shares. "Liquidation Event" means any liquidation, dissolution, or winding up of the Company whereby all equity securities of the Company then outstanding are redeemed. "Liquidation Preference" means $1,000.00 plus all accrued and unpaid dividends per share of Series C Preferred Stock outstanding. "Person" means any individual, company, corporation, partnership, limited liability company, trust, division, governmental, quasi-governmental or regulatory entity or authority or other entity. "Redemption Price" means $1,000.00 per share of Series C Preferred Stock plus all accrued and unpaid dividends and distributions thereon. - 2 - "Securities Act" shall mean the U. S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Series A Preferred Stock" means the Series A Convertible Preferred Stock of the Company, par value $0.0001 per share. "Series B Preferred Stock" means the Series B Redeemable Preferred Stock of the Company, par value $0.0001 per share. 2. Dividends. (a) The Holders of outstanding shares of Series C Preferred Stock shall be entitled to receive dividends out of funds legally available for the payment of dividends, which shall begin to accrue on and be cumulative from and after the respective Issuance Dates for such shares, whether or not such dividends have been declared and whether or not there shall be net profits or net assets of the Company legally available for the payment of such dividends. Dividends shall not be payable, however, until October 1, 2005. The amount of such dividends per share of Series C Preferred Stock (the "Dividend Amount") shall be equal to the amount derived by multiplying (i) the Liquidation Preference per share of such Series C Preferred Stock (as prorated for fractional shares) plus the amount of all previously accrued but unpaid dividends per such share by (ii) nine and one-half percent (9 1/2%) per annum. The Dividend Amount then accrued shall be payable in cash on each Dividend Payment Date. So long as any shares of Series C Preferred Stock are outstanding, no dividends shall be declared, set apart or paid on, nor shall the Company purchase, redeem or otherwise acquire, or sell to any subsidiary of the Company any Common Stock of the Company or any capital stock of the Company that ranks junior to the Series C Preferred Stock in respect of dividends, unless all Dividend Amounts unpaid and accrued shall have first been paid or made available for payment to the Holders of then outstanding shares of Series C Preferred Stock as provided in this Section 2(a). Notwithstanding anything herein to the contrary, nothing in this Certificate of Designation or the rights granted to the holders of Series C Preferred Stock shall affect the right and obligation of the Company to make payments as same become due on the Series A Preferred Stock and Series B Preferred Stock of whatever nature or description. (b) The amount of dividends payable for any period shorter than a year shall be determined on the basis of twelve 30-day months and a 360-day year. (c) Without limiting any of the foregoing, in the event that (i) all dividends then accrued and payable hereunder shall not have been paid in full or made available for payment to the Holders then entitled to receive such dividends hereunder, and (ii) funds legally available for the payment of dividends are insufficient to permit payment in full to all such Holders of the full Dividend Amount to which such Holders are then entitled, then the entire amount available for payment of dividends by the Company shall be distributed ratably among all such Holders in proportion to the full Dividend Amount to which they would otherwise be respectively entitled. - 3 - 3. Liquidation. (a) Upon the occurrence of any Liquidation Event, each Holder of shares of Series C Preferred Stock then outstanding shall be paid the Liquidation Preference per share immediately before the making of any distributions of any kind in respect of any shares of Common Stock or any other class of capital stock of the Company ranking junior to the Series C Preferred Stock, in respect of Liquidation Preferences whether now existing or hereafter created. (b) If, upon the occurrence of any Liquidation Event, the assets of the Company available for distribution to the Holders are insufficient to permit the payment in full of the Liquidation Preference per share then outstanding, then the assets of the Company shall be ratably distributed among the Holders, to the extent applicable. Written notice of a Liquidation Event, stating the date established by the Board of Directors for determining Holders of record and the date of the Liquidation Event, the Liquidation Preference, the amount thereof payable per share and the place where said sums shall be payable shall be given by mail, postage prepaid, not less than thirty (30) or more than sixty (60) days prior to the payment date stated therein, to each Holder of then outstanding shares of Series C Preferred Stock at such Holder's mailing address as shown in the books and records of the Company. 4. Redemption. (a) Right of Company to Redeem. The Company may elect to redeem shares of Series C Preferred Stock, in whole or in part, at any time and from time to time out of funds legally available therefor. Upon redemption of any shares of Series C Preferred Stock, the participating Holders thereof shall receive an amount equal to the Redemption Price for each share of outstanding Series C Preferred Stock so redeemed. (b) Redemption Procedures. Upon election by the Company to redeem the Series C Preferred Stock in compliance with applicable law: The Company shall give to each Holder, no later than 20 days prior to the Redemption Date defined below, written notice of such redemption setting forth the following information (each such notice, a "Redemption Notice"): (i) the date established by the Board of Directors for determining Holders of record entitled to payment of the Redemption Price (the "Record Date"); (ii) the total number of shares of Series C Preferred Stock to be redeemed by the Company, and, in the event of any partial redemption, the pro rata number of shares of Series C Preferred Stock to be redeemed; (iii) the effective date of redemption, which date shall not be less than twenty (20) nor more than sixty (60) calendar days following the Record Date (the "Redemption Date"); and (iv) the place for surrender by the Holders of certificates evidencing shares of Series C Preferred Stock being redeemed. - 4 - (c) Special Procedures for Partial Redemptions. If the Company elects to redeem only a portion of the then outstanding shares of Series C Preferred Stock, then such redemption shall be effected pro rata among all those who are Holders of such outstanding shares on the applicable record date, and the Redemption Notice shall state, in addition to any other information required to be stated therein by this Section 4, that (i) only a portion of the total outstanding shares of Series C Preferred Stock are being redeemed, (ii) the total number of such shares to be redeemed, and (iii) the pro rata number of shares to be redeemed from each Holder. If, in connection with a partial redemption, any Holder surrenders for redemption one or more share certificates representing more than the number of shares of Series C Preferred Stock to be redeemed from such Holder, the Company shall, promptly after the applicable Redemption Date, remit to each such Holder a certificate representing the number of shares of Series C Preferred Stock equal to the difference between the total number of shares thereof represented by the stock certificate(s) surrendered and the number of such shares redeemed (such certificates, "Excess Share Certificates"). (d) Remitting Redemption Price. No later than two (2) Business Days after the applicable Redemption Date, the Company shall remit to the Holders of shares of Series C Preferred Stock on the applicable Record Date the Redemption Price of such shares being redeemed. Notwithstanding the foregoing, the Company is not required to remit the Redemption Price to any Holder until (i) after receipt by the Company of such Holder's certificate for shares of Series C Preferred Stock to be surrendered for cancellation in connection with a redemption pursuant to this Section 4, (ii) delivery of an affidavit of Lost Certificate with indemnity (supported by a bond, if demanded by the Company), or (iii) upon satisfaction of other arrangements entered into by the Company with a Holder for the surrender of such shares. (e) Notices; Address for Payment, Etc. All notices to be given and payments to be made by the Company under this Section 4 shall be in writing and shall be deemed sent or given when given in person or when sent by certified mail, postage prepaid, return receipt requested, to each Holder on the applicable record date at such Holder's address as shown on the Company's books and records. All Excess Share Certificates to be sent to any Holder pursuant to this Section 4 shall be sent to such holder by mail, postage prepaid, to such Holder's address as shown on the Company's books and records. The Redemption Price payable to a Holder pursuant to this Section 4 shall be sent to such Holder (i) at its address as shown on the Company's books and records or (ii) sent by wire transfer to an account of such Holder designated by such Holder (with all necessary wiring information) by written notice given to the Company no later than two (2) calendar days prior to the applicable Redemption Date. 5. Voting Rights. Except as otherwise required by applicable law or this Certificate of Designation, the Holders shall have no voting rights in respect of their shares of Series C Preferred Stock. 6. Principal Office; Notices. The address of the principal offices of the Company is located at 80 Orville Drive, Bohemia, New York 11716. Any notice or certificate required by the Certificate of Incorporation, or this Certificate of - 5 - Designation to be delivered to any Holder shall be deemed given when personally delivered to such Holder or upon deposit in the United States Mail, certified mail, return receipt requested and addressed to such Holder at his or its address appearing on the books and records of the Company. 7. Cancellation of Series C Preferred Stock. In the event of redemption of any shares of Series C Preferred Stock, the shares so redeemed shall be canceled, shall return to the status of authorized, but unissued shares of preferred stock of no designated series, and shall be issuable by the Company as any series of Preferred Stock. 8. Amendments and Other Actions. (a) For as long as any shares of Series C Preferred Stock are outstanding, the Company shall not, without first obtaining the approval (by vote or written consent) of the holders of 66 2/3% of the then outstanding shares of Series C Preferred Stock, voting as a separate class: In any manner (i) alter or change the rights, preferences or privileges of the Series C Preferred Stock so as to affect adversely the Series C Preferred Stock; or (ii) create any new class or series of capital stock senior to or pari passu with the Series C Preferred Stock with respect to the right to payment and receipt of (A) dividends or (B) distributions upon a Liquidation Event. (b) Notwithstanding the foregoing, when authorized by resolution of the Board of Directors, the Company may amend or supplement this Certificate without the consent of any holder of Series C Preferred Stock to cure any ambiguity, defect or inconsistency herein or make any other changes herein, provided that each such amendment or supplement shall not adversely affect the interests of the Holders thereof and that prior to the filing of any document reflecting any such changes, the Company provides the Holders written notice of any such proposed changes. 9. Registration and Transfer (a) The Company shall maintain at its principal offices (or at the offices of its transfer agent or such other office or agency as it may designate by notice to the holders of the Series C Preferred Stock) a stock register for the Series C Preferred Stock in which the Company shall record the names and addresses of the Holders. (b) Prior to due presentment for registration of any Permitted Transferee (as defined below) of any Series C Preferred Stock, the Company may deem and treat the person in whose name any Series C Preferred Stock is registered as the absolute owner of such Series C Preferred Stock and the Company shall not be affected by notice to the contrary. (c) Anything contained herein to the contrary notwithstanding, the Company shall not register as a holder of any shares of Series C Preferred Stock any proposed transferee thereof, and such proposed transferee shall not be deemed a Holder for any purposes hereunder, unless: (i) such proposed transferee (A) represents to the Company in writing that such proposed transferee is an accredited investor, as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act and (B) provides written certification to - 6 - the Company of the basis of such transferee's status as an accredited investor, which certification shall be satisfactory to the Company in its sole discretion, exercised in good faith; (C) agrees, in writing, to abide by the terms of, and to assume the obligations of the initial Holder under any written agreement between the Company and such initial Holder; and (D) is provided a copy of this Certificate of Designation (as the same may be amended from time to time); and (ii) the proposed transfer is made pursuant to an effective registration statement under the Securities Act and applicable state securities laws, or an exemption from such registration is available. (d) Each certificate representing any shares of Series C Preferred Stock shall contain the following legends placed prominently on the front or back of the certificate: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SAID ACT. DIRECT INSITE CORP. WILL FURNISH, WITHOUT CHARGE, TO EACH HOLDER OF ITS SERIES C PREFERRED STOCK WHO SO REQUESTS A COPY OF THE CERTIFICATE Of DESIGNATION SETTING FORTH THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF SUCH STOCK AND ANY OTHER CLASS OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. (e) No service charge shall be made to any Holder for any registration, transfer or exchange. 10. Ranking. Except as otherwise provided herein or agreed to by the Holders: with respect to the right to payment and receipt of dividends and the right to receive distributions of assets upon a Liquidation Event, the Series C Preferred Stock shall rank (i) junior to the Series B Preferred Stock; and (ii) senior to any and all other classes of capital stock of the Company, whether now existing or hereafter created, including, without limitation, the Series A Preferred Stock. 11. Action by Written Consent. Whenever, under this Certificate of Designation or otherwise, the Holders of the Series C Preferred Stock are required to take any action, such Holders may take action without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the Holders of more than 66 2/3% of the then outstanding shares of Series C Preferred Stock." - 7 - 3. This amendment and restatement of the Certificate of Designation herein certified has been duly adopted at a meeting of the Board of Directors and a written consent of the Holder of the outstanding Series C Redeemable Preferred Stock in lieu of a meeting has been given in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Direct Insite Corp. has caused this Certificate of Amendment of the Certificate of Designation to be signed by its Chief Financial Officer on this 23rd day of March, 2005. DIRECT INSITE CORP. By: /s/ Michael Beecher --------------------------------- Name: Michael Beecher Title: Chief Financial Officer - 8 - EX-31.1 3 diri10kdec04ex31-1.txt CERTIFICATIONS Exhibit 31.1 I, James Cannavino certify that: 1. I have reviewed this annual report on Form 10-KSB of Direct Insite Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. April 28, 2005 /s/James A. Cannavino --------------------- James A. Cannavino Chief Executive Officer EX-31.2 4 diri10kdec04ex31-2.txt CERTIFICATIONS Exhibit 31.2 I, Michael J. Beecher, certify that: 1. I have reviewed this annual report on Form 10-KSB of Direct Insite Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. April 28, 2005 /s/Michael J. Beecher --------------------- Michael J. Beecher Chief Financial Officer EX-32 5 diri10kdec04ex32.txt CERTIFICATIONS Exhibit 32.0 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of Direct Insite Corp., (the "Company") on Form 10-KSB for the year ending December 31,2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James Cannavino, Chief Executive Officer, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: April 28, 2005 /s/James A. Cannavino --------------------- James A. Cannavino Chief Executive Officer Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of Direct Insite Corp., (the "Company") on Form 10-KSB for the year ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael J. Beecher, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: April 28, 2005 /s/Michael J. Beecher --------------------- Michael J. Beecher Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----