UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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.
(F/K/A Computer Concepts Corp.)
(Exact name of registrant as specified in its charter)
Delaware 11-2895590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 Orville Drive, Bohemia, N.Y. 11716
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 244-1500
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No ___
The number of shares of $.0001 par value stock outstanding as of October 31,
2000 was: 21,922,506.
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
PART I - FINANCIAL INFORMATION Page
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Operations and Comprehensive Income
For the Three and Nine Months Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
For the Nine Months ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6 - 15
Management's Discussion and Analysis of Financial Condition and
Results of Operations 16 - 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,182 $ 1,852
Accounts receivable, net of allowance for
sales returns and doubtful accounts of
$36 and $493 in 2000 and 1999, respectively 232 443
Investment in Softworks, held for sale - 10,329
Assets held for sale - ComputerCOP - 3,876
Deferred tax assets, current - 9,197
Advances to officers - 1,822
Prepaid expenses and other current assets 383 865
Investment in NetWolves Corporation 15,000 -
Cash held in escrow 10,214 -
--------- ---------
Total current assets 28,011 28,384
Property and equipment, net 1,263 1,345
Other assets 681 295
--------- ---------
$ 29,955 $ 30,024
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,664 $ 5,446
Restructuring costs payable, current portion 1,749 -
Deferred maintenance revenue 11 42
Income taxes payable 2,870 50
--------- ---------
Total current liabilities 6,294 5,538
Convertible debenture, net of discount of $430 1,570 -
Restructuring costs payable, long-term 1,035 -
--------- ---------
Total liabilities 8,899 5,538
--------- ---------
Commitments and contingencies
Shareholders' equity
Common stock, $.0001 par value;
150,000,000 shares authorized;
21,922,506 and 20,765,825 shares
issued in 2000 and 1999,
respectively; and 21,922,506 and
20,529,245 shares outstanding
in 2000 and 1999, respectively 2 2
Additional paid-in capital 103,696 102,868
Unearned compensation (164) -
Accumulated deficit (59,733) (77,766)
Accumulated other comprehensive loss (22,745) (225)
--------- ---------
21,056 24,879
Common stock in treasury, at cost -
236,580 shares - (393)
--------- ---------
Total shareholders' equity 21,056 24,486
--------- ---------
$ 29,955 $ 30,024
========= =========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Software licenses, net $ - $ 385 $ 35 $ 7,326
Maintenance 11 11 32 3,560
Professional services 546 410 1,516 13,533
------- ------- ------- -------
557 806 1,583 24,419
------- ------- ------- -------
Cost of revenue
Software licenses, net - 157 11 434
Maintenance - - - 548
Professional services 64 109 231 11,926
------- ------- ------- -------
64 266 242 12,908
------- ------- ------- -------
Gross margin 493 540 1,341 11,511
------- ------- ------- -------
Operating expenses
Research and development 380 2,081 3,840 7,825
Sales and marketing 344 2,607 4,133 14,007
General and administrative 794 1,309 4,571 5,966
Amortization and depreciation 218 1,019 652 3,698
Non-recurring restructuring charge 81 - 15,086 -
------- ------- ------- -------
1,817 7,016 28,282 31,496
------- ------- ------- -------
Operating loss (1,324) (6,476) (26,941) (19,985)
Other income (expenses)
Gain on sale of Softworks - 3 47,813 16,444
Gain on sale of ComputerCOP
assets held for sale - - 8,534 -
Interest income (expense), net 131 194 675 210
Equity in earnings of Softworks - 446 - 321
Minority interest in earnings of
Softworks - - - (46)
------- ------- ------- -------
Income (loss) before (provision for)
benefit from income taxes (1,193) (5,833) 30,081 (3,056)
(Provision for) benefit from income
taxes 379 (42) (12,048) (102)
------- ------- ------- -------
Net income (loss) $ (814) $(5,875) $18,033 $(3,158)
======= ======= ======= =======
Other comprehensive (loss) income
Unrealized loss on marketable
securities (3,870) - (22,520) -
Foreign currency translation
adjustments - 87 - 90
------- ------- ------- -------
Comprehensive loss $(4,684) $(5,788) $(4,487) $(3,068)
======= ======= ======= =======
Basic net income (loss) per share $ (0.04) $ (0.28) $ 0.84 $ (0.15)
======= ======= ======= =======
Diluted net income (loss) per share $ (0.04) $ (0.28) $ 0.82 $ (0.15)
======= ======= ======= =======
Basic weighted average common
shares outstanding 21,923 20,736 21,460 20,429
======= ======= ======= =======
Diluted weighted average common
shares outstanding 21,923 20,736 21,878 20,429
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------
2000 1999
-------- --------
(In thousands)
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities
Net income (loss) $ 18,033 $ (3,158)
Adjustments to reconcile net income (loss) to
net cash used in operating activities
Depreciation and amortization
Software costs - 1,532
Property and equipment 663 803
Excess of cost over fair value of net assets acquired - 1,523
Amortization of debt discount 9 -
Other 2 -
Equity in earnings of Softworks - (321)
Minority interest in net income of Softworks - 46
Provision for doubtful accounts 27 93
Deferred income taxes 9,197 -
Common stock and options issued for services 2,554 2,150
Common stock issued for settlement of restructuring charges 1,180 -
NetWolves common stock issued for services and for
settlement of restructuring charges 2,000
Softworks common stock exchanged for services - 2,522
Gain on sale of Softworks and ComputerCOP (56,347) (16,444)
Changes in operating assets and liabilities
Accounts receivable 184 16,731
Installment accounts receivable - 149
Inventories - 168
Prepaid expenses and other current assets 534 1,695
Assets held for sale - ComputerCOP (18) -
Cash held in escrow (214) -
Other assets (388) 283
Accounts payable and accrued expenses (4,193) (5,377)
Restructuring costs payable 2,784 -
Income taxes payable 2,820 (2,043)
Deferred income taxes - 290
Deferred revenue (31) (1,388)
-------- --------
Net cash used in operating activities (21,204) (746)
-------- --------
Cash flows from investing activities
Proceeds from the sale of Softworks stock
(net of $3,157 expenses - 2000) 48,301 17,406
Reduction in cash resulting from excluding
Softworks from consolidation - (6,759)
Proceeds from exercises of options to purchase
Softworks common stock - 240
Cash utilized in the ComputerCOP/NetWolves transaction
(including $1,819 of expenses) (22,319) -
Investment in NetWolves Corporation (4,500) -
Capital expenditures (581) (1,391)
Cash received from the license of technology - 400
Software development and technology purchases - (351)
Repayment of officers' loans, net 899 72
-------- --------
Net cash provided by investing activities 21,800 9,617
-------- --------
Cash flows from financing activities
Payment of dividend (2,194) -
Acquisition of treasury stock - (296)
Proceeds from long term debt (net of $72 of financing
costs in 2000) 1,928 2,021
Repayments of long term debt - (5,072)
-------- --------
Net cash used in financing activities (266) (3,347)
-------- --------
Effects of exchange rate changes on cash and cash equivalents - 2
-------- --------
Net increase in cash and cash equivalents 330 5,526
Cash and cash equivalents, beginning of period 1,852 8,176
-------- --------
Cash and cash equivalents, end of period $ 2,182 $ 13,702
======== ========
</TABLE>
See notes of condensed consolidated financial statements.
5
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
1 Interim financial information
The condensed consolidated balance sheet as of September 30, 2000, and the
condensed consolidated statements of operations and comprehensive income and
cash flows for the three and nine months ended September 30, 2000 and 1999, have
been prepared by the Company without audit. These interim financial statements
include all adjustments, consisting only of normal recurring accruals, which
management considers necessary for a fair presentation of the financial
statements for the above periods. The results of operations for the three and
nine months ended September 30, 2000, are not necessarily indicative of results
that may be expected for any other interim periods or for the full year.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 1999. The accounting policies used in preparing the condensed
consolidated financial statements are consistent with those described in the
December 31, 1999, consolidated financial statements.
2 The Company
At the annual shareholders' meeting held in August 2000, the shareholders
elected to change the corporate name to Direct Insite Corp. (formerly Computer
Concepts Corp.) to better reflect the initiation of new business strategies.
Direct Insite Corp. and subsidiaries (the "Company") primarily develop, market
and support information delivery software products and services. The Company
makes use of its proprietary data access technology, d.b.Express, in its
d.b.Express Internet Information Server, more commonly referred to as a "Server
Farm." This service presently is being marketed solely for telecommunications
analysis. The Server Farm permits end users the ability to visually access and
analyze information through the Internet. Data can be visually presented using
the Company's patented data visualization technology. Additionally, subsequent
to September 30, 2000, the Company entered into a license agreement, which will
enable it to add to its suite of products and services a complete Electronic
Bill Presentment and Payment ("EBPP), as well as an Internet Customer Care
("ICC") tool set.
In 2000, Company began offering a new consulting service. The primary function
of the consulting service is to create cost savings for its customers through
effectively negotiating their telecommunications and network service provider
contracts. The Company is combining this service with its Server Farm to create
a unique, powerful detailed customer profile. This new, enhanced profile will
allow customers to efficiently optimize all telecommunications contract
compliance, establish traffic metrics, monitor invoice accuracy and rate
compliance as well as support complex invoicing and reporting requirements,
exception reporting and electronic invoicing, all via the Internet.
The most significant portion of the Company's operations had historically been
conducted through one of its subsidiaries, Softworks, Inc. ("Softworks").
Through Softworks, the Company developed, marketed and supported systems
management software products for corporate mainframe data centers. Softworks was
wholly owned by the Company through June 29, 1998, and majority owned through
March 31, 1999. On January 27, 2000, the Company sold its remaining interest to
EMC Corporation for approximately $61 million in cash, before expenses (Note 8).
In June 1998, the Company completed an acquisition of software (and related
sales and marketing rights) which is designed to provide non computer literate
owners (e.g. parents, guardians, schools, etc.) the ability to identify threats
as well as objectionable material that may be viewed by users of the computer on
the Internet (e.g. children). On February 14, 2000, the Company sold the
ComputerCOP technology to NetWolves Corporation (Note 8).
In 1997, the Company created a business unit, "professional services", which
primarily resells computer hardware and for a fee, will assist in the design,
construction and installation of technology systems. In 1999, this business unit
had one major contract, involving two customers, which was completed in 1999.
The Company does not currently have any other sales contracts for this business
unit and is no longer actively pursuing new contracts.
6
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
3 Restructuring
In the first quarter of 2000, the Company's newly appointed Board of Directors
approved and the Company announced a restructuring plan that will streamline the
Company's operations and overhead structure, including: (i) elimination of
employees, expenses and commitments that supported the ComputerCOP technology
(sold to NetWolves, Note 8), (ii) elimination of employees, expenses and
commitments that supported the Company's development project related to a
multi-media display station (Note 11), and (iii) general reduction of operating
expenses. As a result, the Company recorded a non-recurring restructuring charge
of $15,086,000 during the nine months ended September 30, 2000, related to the
termination of 53 employees, retirement packages for certain Company officers
and directors, certain long-term consulting contracts and operating leases. Cash
requirements of this plan are estimated at $12,406,000; $1,180,000 was settled
with Company stock; and $1,500,000 was settled with NetWolves common stock. As
of September 30, 2000, the remaining cash requirement is $2,784,000, $1,749,000
is payable over the next twelve months, and $1,035,000 is payable through March
2005.
The restructuring charge includes costs directly related to the Company's plan.
EITF No. 94-3 and SEC Staff Accounting Bulletin No. 100 provide specific
requirements as to appropriate recognition of costs associated with employee
termination benefits and other exit costs. Employee termination costs are
recognized when details of the severance arrangements are communicated to
affected employees (all 53 employees were actually terminated in March 2000).
Other exit costs (such as contractual obligations) that are not associated with
or that do not benefit activities that will be continued are recognized at the
date of commitment to an exit plan subject to certain conditions. Other costs
directly related to the restructuring that are not eligible for recognition at
the commitment date are expensed as incurred.
The activity in the restructuring accrual through September 30, 2000 is
summarized below:
<TABLE>
<CAPTION>
Officer/director
Employee retirement Consulting Operating
terminations packages contracts Leases Other Total
------------ ----------------- ------------ ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Restructuring charge
to operations,
quarter ended March
31, 2000 $2,243,000 $7,535,000 $3,681,000 $369,000 $985,000 $14,813,000
Restructuring charges
to operations and
adjustments, after
March 31, 2000 (70,000) 140,000 - - 203,000 273,000
---------- ---------- ---------- ---------- ---------- ----------
Subtotal 2,173,000 7,675,000 3,681,000 369,000 1,188,000 15,086,000
Cash expenditures (1,567,000) (5,507,000) (1,865,000) (93,000) (590,000) (9,622,000)
Company stock
issuances (200,000) (100,000) (630,000) - (250,000) (1,180,000)
Netwolves stock
exchanged - (1,500,000) - - - (1,500,000)
---------- ---------- ---------- ---------- ---------- ----------
Restructuring accrual,
September 30, 2000 $ 406,000 $ 568,000 $1,186,000 $ 276,000 $ 348,000 $ 2,784,000
========== ========== ========== ========== ========== ===========
</TABLE>
7
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
-- Employee termination costs represent severance and related benefits for the
53 employees that were terminated in March 2000: 18 employees in sales and
administration, 14 employees involved in the development project related to
a multi-media display station, 11 employees related to ComputerCOP and 10
employees in general research and development. Of these employees, 44
received severance benefits generally payable over 3 to 9 months,
commencing April 2000; one of these employees also received 100,000 shares
of Company common stock (valued at $200,000) towards the settlement of his
severance obligation.
-- Officer/director retirement packages represent retirement packages for the
Company's Chairman, its Chief Executive Officer and other board members
aggregating $7,675,000. $1,500,000 was paid with 75,000 shares of NetWolves
common stock (valued at $20 per share), $100,000 was paid with 50,000
shares of Company common stock, $558,000 was paid in March 2000, $4,949,000
was paid in the second and third quarters, $500,000 is payable on or before
March 1, 2001 and the $68,000 balance relates to employee benefits payable
over various time periods.
-- The Company settled 5 long-term consulting contracts that will no longer be
required for an aggregate of $3,681,000. The Company agreed to pay off a
1999 consulting agreement with S.J. & Associates, Inc. for $1,276,000.
Additionally, the Company settled three consulting agreements that were
entered into during 2000 (originally totaling $1,785,000) for an aggregate
of $1,277,000 (one of the agreements, settled for $524,000, is with a
related party). Further, the Company paid $1,128,000 as part of a
retirement arrangement with the Company's general counsel. These
obligations are payable as follows: $630,000 was paid in the form of the
Company's common stock; $500,000 cash was paid in March 2000; $1,365,000
cash was paid in the second and third quarters; and the $1,186,000 balance
is payable through March 2005.
-- Operating leases represent the settlement of the remaining lease payments
with respect to certain automobile and equipment leases that are no longer
required. Payments are expected to be paid over the remaining terms of the
leases, which range from 1 to 32 months.
-- Other costs represent consulting fees related to the creation and execution
of the restructuring plan (including $250,000 to S.J. & Associates, Inc.
paid in the form of 125,000 shares of the Company's common stock), legal
fees and other exit costs.
4 Shareholders' equity
In February 2000, the Company declared a dividend of $0.10 per share
(aggregating $2,194,000) to its shareholders of record on March 15, 2000 and
paid on May 1, 2000.
During the quarter ended March 31, 2000, the Company issued 1,821,500 shares of
its common stock valued at $2.00 per share based on the quoted price of the
Company's common stock. The Company also recorded transactions with respect to
treasury stock and stock options in the first quarter of 2000 as detailed below:
-- Issued 590,000 shares of its common stock as settlement of certain
employee, director and consultant liabilities in conjunction with its
restructuring plan (Note 3). The shares were valued at $1,180,000.
-- Issued 534,000 shares of its common stock as settlement of employee
bonuses. The shares were valued at $1,068,000, of which $468,000 was
accrued in 1999.
-- Issued 697,500 shares of its common stock to various consultants for which
it recorded a non cash charge to earnings of $1,395,000. S.J. & Associates,
Inc. was issued 375,000 of these shares upon achieving certain performance
goals pursuant to its 1999 contract.
-- The Company's Chairman and Chief Executive Officer tendered 410,179 shares
of the Company's common stock, valued at $923,000 based on the quoted price
at the time, towards the repayment of officers' loans.
-- The Company retired 236,580 shares of treasury stock purchased by the
Company in 1999. The shares were returned to authorized but unissued
status.
-- In March 2000, the Company granted 285,000 options to employees and 70,000
options to consultants for services previously rendered. All options are
fully vested, are exercisable at $2.09 per share and expire December 31,
2001. The employee options have an intrinsic value of zero and the options
to consultants were valued at $59,000 using the Black-Scholes
option-pricing model.
8
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
During the quarter ended June 30, 2000, the Company granted 1,349,000 options to
employees and members of the Board of Directors and 562,000 options to
consultants for services. The options are exercisable as follows: 1,741,000 at
$0.75 per share and 170,000 at $1.03 per share. The employee options have an
intrinsic value of zero, expire May 31, 2005, and vest periodically from
immediate to thirty-one months. The options to consultants expire in a range
from December 31, 2002 to May 31, 2005, vest periodically from immediate to 24
months, and were valued at $216,000, of which $17,000 and $35,000 (the pro-rata
value of vested options) was recognized in the second and third quarters,
respectively.
During the nine month period ended September 30, 1999, the Company issued the
following restricted common stock as detailed below:
-- As part of a bonus incentive compensation plan, the Company issued 655,500
shares to several non-executive employees for which it recorded a non-cash
charge to earnings of $1,010,000.
-- Issued 660,500 shares of its common stock to various consultants for which
it recorded a non-cash charge to earnings of $1,050,000.
-- In lieu of cash, in January 1999, the Company issued 115,000 shares for an
acquisition of a technology license. The Company recorded amortization
expense of $58,000 during the nine months ended September 30, 1999.
Pursuant to a Board Resolution adopted in January, 1999, the Company was
authorized to repurchase shares of its common stock at times and amounts that
would be in the best interest of the Company. In the third quarter of 1999,
174,380 shares of common stock were purchased at an average price of $1.697. In
the fourth quarter of 1999, an additional 62,200 shares were repurchased at an
average price of $1.552.
Pursuant to a Board Resolution adopted in August 1999, the Company paid, on
November 15, 1999, a cash dividend of $6,000,000 (approximately $0.29 per share)
to shareholders of record as of September 30, 1999.
5 Legal matters
In March 1995, an action was commenced against the Company and a number of
defendants unrelated to the Company which action was later amended naming only
the Company and three of its officers as defendants. The complaint alleges that
certain third parties, unrelated to the Company, transferred certificates
representing 1,000,000 shares of the Company's common stock to the plaintiff.
The complaint further alleges that such shares were endorsed in blank by the
third parties and became bearer securities, which were negotiated to the
plaintiff by physical delivery. The certificates had not been legally acquired
from the Company and the certificates were reported to the Securities and
Exchange Commission by the Company as stolen certificates. Plaintiff has
requested validation of the transfer of the certificates and is seeking damages
of an unspecified amount, consisting of alleged diminution in market value of
the subject shares from 1994 through the date of any judgment in the plaintiff's
favor. The Company denied plaintiff's allegations and filed a motion for summary
judgment. In November 1999, the motion for summary judgment was granted in favor
of the Company and its officers on the grounds that the purported endorsement on
the certificates was ineffective to transfer ownership of the certificates.
However, the plaintiff filed an appeal, which is being contested by the Company.
The Company is unable to predict the ultimate outcome of this appeal and,
accordingly, no adjustments have been made in the consolidated financial
statements for any potential losses or potential issuance of common stock.
9
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
During 1999, the Company and certain officers received notification that they
had been named as defendants in a class action alleging violations of certain
securities laws with respect to the content of certain Company announcements.
The Company and its counsel are vigorously defending the matter. However, the
Company is unable to predict the ultimate outcome of this claim and,
accordingly, no adjustments have been made in the consolidated financial
statements for any potential losses or potential issuance of common stock.
In August 1999, The Company and its directors were served with a derivative
action complaint alleging awards of excess compensation and requesting a
judgment in favor of the Company for such excess compensation. The Company and
defendants have denied the allegations and are vigorously defending the matter,
however, the Company is unable to predict the outcome of this claim and,
accordingly, no adjustments have been made in the consolidated financial
statements in regard to this matter.
In November 1999, the Company (through one of its subsidiaries) was added as a
party in an amended complaint. The complaint alleged that a Company consultant
violated a personal non- compete agreement in performing services for the
Company. The plaintiffs contended that they were compelled to offer terms more
generous to their customers than they otherwise would have offered. Plaintiffs
did not disclose the amount of their alleged damages and requested injunctive
relief. The Company denied the allegation and vigorously defended the matter. In
September 2000, pursuant to stipulation of the Company and plaintiffs in a
Settlement Agreement, the case was effectively dismissed.
6 Reclassifications
Certain reclassifications have been made to the condensed consolidated financial
statements shown for the prior period in order to have it conform to the current
period's classifications.
7 Segment information
The Company and its subsidiaries previously operated in two separate business
segments, computer software and professional services. With the sale of
Softworks and ComputerCOP (Note 8) and the completion of its major professional
services contract, the Company is now operating in one business segment.
Major customer
For the three months ended September 30, 2000, the Company had one major
customer with revenue of $433,000 (77.7% of total revenue). For the nine months
ended September 30, 2000, the Company had one major customer with revenue of
$1,238,000 (78.2% of total revenue).
8 Dispositions
ComputerCOP Corp.
On June 30, 1998, pursuant to an Asset Purchase and Sale Agreement, the Company
acquired certain software and related sales and marketing rights from Internet
Tracking & Security Ventures, LLC ("ITSV") in exchange for 1,900,000 restricted
shares of the Company's common stock and 1,000,000 restricted shares of common
stock of the Company's then wholly owned subsidiary, Softworks. The acquisition
was valued at an aggregate of $12,210,000. The Agreement also included the
rights to the use of Richard "Bo" Dietl's name in conjunction with the promotion
and endorsement of the software as well as appearances by Mr. Dietl in support
of the software in regional and national marketing campaigns.
10
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
The $12,210,000 purchase price was allocated to the fair value of the assets
acquired at June 30, 1998, based upon a written valuation from an independent
investment-banking firm. Accordingly, $2,700,000 was allocated to "Software
costs", $4,150,000 was recorded as "Prepaid expenses and other current assets"
and $5,360,000 was recorded as "Excess of cost over fair value of net assets
acquired". The "assets held for sale - ComputerCOP" at December 31, 1999
included $250,000 of inventories, $1,064,000 of software costs and $2,562,000 of
goodwill.
In March 1999, the Company sold certain rights to license ComputerCOP to a
marketing company (Bo- Tel, Inc.) for $400,000. The license rights were limited
to granting a specified original equipment manufacturer of personal computers
the right to embed the software in its computers for sale to the general public.
Bo-Tel, Inc. is an affiliate of ITSV, and accordingly, this sale was accounted
for as a reduction of the cost of the assets acquired from ITSV.
Pursuant to an agreement dated February 10, 2000, on February 14th, the Company
sold its recently formed subsidiary, ComputerCop Corp. to NetWolves Corporation
("NetWolves", traded on the NASDAQ SmallCap Market under the symbol "WOLV") in
exchange for 1,775,000 shares of NetWolves common stock. The assets of
ComputerCop Corp. included the ComputerCOP technology (and certain related
assets including inventory) and $20.5 million in cash. The transaction was
treated as a sale of the ComputerCOP technology for 750,000 shares valued at $15
million and the purchase of 1,025,000 shares from NetWolves for $20.5 million.
Additionally, the Company purchased 225,000 shares from certain NetWolves
shareholders for $4.5 million. The sale of the Company's ComputerCOP technology
resulted in a pre-tax gain of $8,534,000, net of $2,572,000 of expenses,
recorded in the first quarter of 2000. The $40,000,000 value of the 2,000,000
shares of NetWolves stock was determined based upon the quoted market price of
the NetWolves stock at the time the transaction was agreed to and announced ($20
per share) and was also based on a fairness opinion obtained from the Company's
investment banker.
All of the shares of NetWolves stock owned by the Company ("Trust Shares") are
subject to a Voting Trust Agreement wherein the Trustee, NetWolves' Chief
Executive Officer, has been granted the right to vote all Trust Shares for a
minimum period of six months to a maximum period of two years. The Voting Trust
terminates with respect to any shares sold pursuant to a registration statement
effected by NetWolves. The Voting Trust terminates with respect to shares
privately sold (if any) if aggregate sales are 25% or less of the total Trust
Shares. The Voting Trust also terminates at the end of twelve months with
respect to shares privately sold (if any), if aggregate sales are 50% or less of
the total Trust Shares. The Company also received piggyback registration rights
and a one-time demand registration right effective after August 15, 2000, in
regard to the NetWolves stock.
As of September 30, 2000, the Company owns 1,875,000 shares of NetWolves common
stock: 75,000 shares were exchanged as part of the restructuring plan (Note 3),
25,000 shares were used to pay legal fees to the Company's general counsel with
respect to the NetWolves transaction, and 25,000 shares were issued as a bonus
to an executive officer. All shares exchanged were valued at $20. The Company
accounts for its investment in NetWolves as a marketable security available for
sale in accordance with Statement of Financial Standards No. 115 "Accounting For
Certain Investments in Debt and Equity Securities." At September 30, 2000, the
quoted market value of the 1,875,000 shares of NetWolves common stock was
$15,000,000 ($8.000 per share). The unrealized loss of $22,500,000 was recorded
as a charge to "accumulated other comprehensive loss." On October 31, 2000, the
quoted market value of the NetWolves common stock was $10,664,000 ($5.6875 per
share).
Softworks, Inc.
Softworks was wholly owned by the Company through June 29, 1998 and majority
owned through March 31, 1999. Through a series of transactions that included an
initial public offering of Softworks in August 1998, various exchanges of
Softworks common stock owned by the Company to consultants and employees for
services rendered, a private placement of Softworks common stock owned by the
Company in December 1998 and a second public offering in June 1999, the
Company's ownership of Softworks was reduced from 100% to 35% as of December 31,
1999. Accordingly, Softworks is accounted for as a consolidated subsidiary
through March 31, 1999, and commencing April 1, 1999, Softworks' results are
accounted for using the equity method of accounting.
11
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Pursuant to a tender offer dated December 21, 1999, the Company sold its
remaining 35% interest in Softworks (a total of 6,145,767 shares) to EMC
Corporation and its subsidiary ("EMC") for $10.00 per share. The transaction,
which was completed on January 27, 2000, provided aggregate cash proceeds of
$61,458,000 (less $10,000,000 placed in escrow) and resulted in a pre-tax gain
of $47,813,000, net of $3,316,000 of expenses, recorded in the first quarter of
2000.
In connection with the tender offer, the Company entered into an Indemnification
Agreement that provides, in part, that the Company shall indemnify EMC from all
losses sustained by EMC as a result of any breach of certain representations and
warranties appearing in the Agreement and Plan of Merger between Softworks and
EMC. The term of the Indemnification Agreement is two years from the date of
closing. Pursuant to an Escrow Agreement, the Company deposited $10,000,000 of
the sales proceeds into an interest bearing escrow account to secure any
potential liabilities arising from the Indemnification Agreement. Through
September 30, 2000, $159,000 has been disbursed from the escrow account in
settlement of a claim made by EMC. The escrow funds, net of any additional
claims against them (if any), are scheduled to be released to the Company one
year from the date of closing, January 27, 2001.
Pro forma condensed consolidated statements of operations (unaudited)
Pro forma condensed consolidated statements of operations as if the transactions
described above were consummated as of the beginning of each of the nine months
ended September 30, 2000 and 1999, are as follows (in thousands except per share
data):
<TABLE>
<CAPTION>
Nine months ended September 30, 2000
Pro Forma Adjustments
---------------------
NetWolves/
Softworks ComputerCOP
Actual Transaction Transaction Pro Forma
------ ----------- ------------ ---------
<S> <C> <C> <C> <C>
Revenue $ 1,583 $ - $ (35) $ 1,548
Cost of revenue 242 - (11) 231
-------- -------- -------- --------
Gross margin 1,341 - (24) 1,317
Total operating expenses * 28,282 - (229) 28,053
-------- -------- -------- --------
Operating loss (26,941) - 205 (26,736)
Other income (expense)
Gain on sale of Softworks 47,813 (47,813) - -
Gain on sale of ComputerCOP assets,
held for sale 8,534 - (8,534) -
Other, net 675 - - 675
-------- -------- -------- --------
Income (loss) before provision for
income taxes 30,081 (47,813) (8,329) (26,061)
Provision for income taxes (12,048) 10,234 1,783 (31)
-------- -------- -------- --------
Net income (loss) $ 18,033 $(37,579) $(6,546) $(26,092)
======== ======== ======== ========
Basic net income (loss) per share $ 0.84 $ (1.22)
======== ========
Diluted net income (loss) per share $ 0.82 $ (1.22)
======== ========
* Operating expenses include a non-recurring restructuring charge of
$15,086,000.
</TABLE>
12
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
Pro Forma Adjustments
---------------------
NetWolves/
Softworks ComputerCOP
Actual Transaction Transaction Pro Forma
------ ----------- ------------ ---------
<S> <C> <C> <C> <C>
Revenue $ 24,419 $(10,258) $ (596) $ 13,565
Cost of revenue 12,908 (764) (218) 11,926
--------- -------- -------- ---------
Gross margin 11,511 (9.494) (378) 1,639
Total operating expenses 31,496 (9,342) (3,343) 18,811
--------- -------- -------- --------
Operating loss (19,985) (152) 2,965 (17,172)
Other income (expense)
Gain on sale of Softworks 16,444 (16,444) - -
Other, net 485 (275) - 210
--------- -------- -------- --------
Loss before provision for income taxes (3,056) (16,871) 2,965 (16,962)
Provision for income taxes (102) 60 - (42)
--------- -------- -------- --------
Net income (loss) $ (3,158) $(16,811) $ 2,965 $(17,004)
========= ======== ======== ========
Basic and diluted loss per share $ ( 0.15) $ (0.83)
========= ========
</TABLE>
9 Income taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
the determination of deferred tax assets and liabilities based on the
differences between the financial statement and income tax bases of assets and
liabilities, using enacted tax rates. SFAS No.109 requires that the net deferred
tax asset be adjusted by a valuation allowance, if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
net deferred tax asset will not be realized.
As a result of the Company's sale of its remaining interest in Softworks in
January 2000 and the sale of its ComputerCOP technology in February 2000 (Note
8), the Company recognized a taxable gain in the first quarter of 2000 and
utilized all of its currently available net operating loss carryforwards. The
Company's tax provision for the nine months ended September 30, 2000, consists
of deferred tax expense of $9,197,000 and current tax expense of $2,851,000.
10 Earnings per share
Basic earnings per share are based on the weighted average number of common
shares outstanding during the period. For the nine months ended September 30,
2000, the Company's dilutive instruments are "in the money" stock options and
convertible debentures. The Company uses the treasury stock method to calculate
the effect that the conversion of stock options would have on diluted earnings
per share ("EPS") and assumes that convertible debentures were converted into
common stock at the later of the beginning of the period or the issuance date
and makes adjustments with respect to the related interest expense. The
following table sets forth the computation of basic and diluted EPS (in
thousands, except per share data):
13
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
<S> <C>
Numerator:
Net income $ 18,033
Plus interest on convertible debenture 10
----------
Net income plus assumed conversions $ 18,043
==========
Denominator:
Weighted average shares outstanding
(Denominator for basic EPS) 21,460
Effect of dilutive securities
Stock options 382
Convertible debentures 36
----------
Denominator for diluted EPS 21,878
==========
Basic net income per share $ 0.84
Diluted net income per share $ 0.82
</TABLE>
For the three and nine months ended September 30, 1999 and for the three months
ended September 30, 2000, outstanding stock options, warrants, convertible
debentures and other potential stock issuances have not been considered in the
computation of diluted earnings per share amounts, since the effect of their
inclusion would be antidilutive.
11 Multi-media display station
During 1999, the Company began to develop a unique multi-media display station,
which combines Internet strategy and e-commerce with multi-media forms of
delivery, presentation and interaction with end-users. This Internet based
communications/advertising network was being designed by the Company to create a
means by which businesses could promote specific brand/product/service
awareness. The Company intended to market this technology in association with
owners and/or managers of high traffic venue areas (i.e., malls, airports, etc.)
to local, regional and national businesses. From inception through March 31,
2000, the Company invested approximately $7,000,000 in its marketing and
development efforts (charged to operations as incurred). Additional funds will
be required in order to complete development and bring the product to market. As
part of the Company's restructuring plan (Note 3), the newly appointed Board of
Directors agreed that it was in the Company's best interest to immediately cease
all funding of this project, while maximizing its value. As a result, in April
2000, the Company entered into a contractual arrangement with an unrelated third
party, whereby the Company transferred all of its in-process research and
development technology related to the multi-media display station for the rights
to 50% of the future profits (as defined), if any, from the third party's
operation or sale of this technology. The third party agreed to utilize its
contacts in the industry and also agreed to fund all future costs associated
with the continued development and marketing of the display station. There can
be no assurances that the Company will recognize any proceeds from this
transaction. The related intangible assets continue to be recorded at their net
book value of zero.
12 Convertible Debentures
On September 27, 2000, the Company entered into an agreement to sell an
aggregate principal amount of $3,000,000 of Convertible Debentures (the
"Debentures") bearing interest at a rate of 6% per annum, due September 27,
2002. The Company sold a $2,000,000 Debenture on September 27, 2000, a $500,000
Debenture on October 27, 2000 and, subject to certain conditions, will sell an
additional $500,000 Debenture on November 27, 2000.
14
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
The Debentures cannot be converted into shares of the Company's common stock
until February 25, 2001 and then at no more than 16.67% of the Debentures issued
to the Holder on the original issue date every 15 days. The conversion price
shall be the lesser of $0.90 or 82% of the average per share market value for
five trading days during the twenty trading days immediately preceding the
applicable conversion date. The Company has the right, exercisable at any time,
to prepay all or any portion of the outstanding principal amount of the
Debentures for which conversion notices have not previously been delivered. The
prepayment amount is 130% of the principal balance converted, plus accrued
interest.
In connection with the sale of the Debentures, the Company is required to file a
Registration Statement prior to November 30, 2000 in which it must register
4,384,000 shares of common stock for resale by the Holders of the Debentures, if
converted. The agreement provides for various covenants and events of default,
including: (i) failure by the Company to have its Registration Statement
declared effective by the SEC on or before February 24, 2001 and (ii) delisting
or suspension of the Company's common stock from trading on the Nasdaq SmallCap
Market. Should an event of default (as defined) occur, the agreement imposes
various penalties including immediate conversion of the debentures into cash, as
well as cash penalties of 3% of the outstanding principal balance per month.
The convertible debentures have a minimum assured discount of 18% from the fair
value of the Company's common stock, as defined. In connection with that
discount, the Company recorded debt discount of $439,000 upon receipt of
$2,000,000 in funds and is amortizing the discount over the period the security
was issued to the date it first becomes convertible. Accordingly, the Company
recorded a non-cash interest charge of $9,000 in the third quarter of 2000.
15
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Forward looking statements
All statements other than statements of historical fact included in this Form
10-Q including, without limitation, statements under, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position, business strategy and the plans and objectives of
management for future operations, are forward-looking statements. When used in
this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect,"
"intend" and similar expressions, as they relate to the Company or its
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of management, as well as assumptions made by, and
information currently available to, the Company's' management. Actual results
could differ materially from those contemplated by the forward-looking
statements as a result of certain factors including but not limited to,
fluctuations in future operating results, technological changes or difficulties,
management of future growth, the risk of errors or failures in the Company's
software products, dependence on proprietary technology, competitive factors,
risks associated with potential acquisitions, the ability to recruit personnel
and the dependence on key personnel. Such statements reflect the current views
of management with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to the operations, results of
operations, growth strategy and liquidity of the Company. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by this
paragraph.
Overview
Direct Insite Corp. (f/k/a/ Computer Concepts Corp.) and subsidiaries (the
"Company") primarily develop, market and support information delivery software
products. The Company makes use of its proprietary data access technology,
d.b.Express, in its d.b.Express Internet Information Server, more commonly
referred to as a "Server Farm." The Server Farm permits end-users the ability to
visually access and analyze information through the Internet. Data can be
visually presented using the Company's patented data visualization technology.
This service presently is being marketed solely for telecommunications analysis.
Subsequent to September 30, 2000, the Company entered into a license agreement,
which will enable it to add to its suite of products and services a complete
Electronic Bill Presentment and Payment ("EBPP), as well as an Internet Customer
Care ("ICC") tool set.
During the second quarter of 2000, Company began offering a new consulting
service. The primary function of the consulting service is to create cost
savings for its customers through effectively negotiating their
telecommunications and network service provider contracts. The Company is
combining this service with its Server Farm to create a unique, powerful
detailed customer profile. This new, enhanced profile will allow customers to
efficiently optimize all telecommunications contract compliance, establish
traffic metrics, monitor invoice accuracy and rate compliance as well as support
complex invoicing and reporting requirements, exception reporting and electronic
invoicing, all via the Internet.
In the first quarter of 2000, the Company's newly appointed Board of Directors
approved and the Company announced a restructuring plan that it believes will
streamline the Company's operations and reduce overhead. As a result, the
Company recorded a non-recurring restructuring charge of $15,086,000 in the nine
months ended September 30, 2000.
In February 2000 the Company sold its recently formed subsidiary, ComputerCop
Corp. to NetWolves Corp. ("NetWolves") for 1,775,000 shares of NetWolves common
stock.
The most significant portion of the Company's operations had historically been
conducted through one of its subsidiaries, Softworks, Inc. ("Softworks").
Through Softworks, the Company developed, marketed and supported systems
management software products for corporate mainframe data centers. Softworks was
wholly owned by the Company through June 29, 1998, and majority owned through
March 31, 1999. On January 27, 2000, the Company sold its remaining interest to
EMC Corporation.
In 1997, the Company created a business unit, "professional services", which
primarily resells computer hardware and for a fee, will assist in the design,
construction and installation of technology systems. In 1999, this business unit
had one major contract, involving two customers, which was completed in 1999.
Historically, net margins generated from this business unit were extremely low.
The Company does not currently have any other sales contracts for this business
unit and is not actively pursuing new low margin contracts. The Company will
only accept new contracts if it believes the contract will generate
significantly higher margins.
16
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Results of operations
Commencing April 1, 1999, Softworks' results were accounted for using the equity
method of accounting and were no longer consolidated. Under the equity method of
accounting, the Company's share of Softworks' earnings or losses was included in
the Company's consolidated operating results in a single line item. Pro forma
condensed consolidated operating results as if Softworks were accounted for
using the equity method for the nine months ended September 30, 1999, on a
consistent basis with the actual results for the other periods presented, is as
follows:
Direct Insite Corp. and Subsidiaries
(F/K/A Computer Concepts Corp.)
Actual and Pro Forma Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the three months ended September 30, For the nine months ended September 30,
(in thousands) (in thousands)
2000 1999 2000 1999
(Actual) (Actual) (Actual) (Pro-forma)
-------- ------- -------- -----------
<S> <C> <C> <C> <C>
Revenue
Software licenses, net $ - $ 385 $ 35 $ 596
Maintenance 11 11 32 32
Professional services-server farm 546 410 1,516 948
Professional services - hardware - - - 12,585
-------- -------- -------- --------
557 806 1,583 14,161
Cost of Revenue
Software licenses - 157 11 218
Maintenance - - - -
Professional services - server farm 64 109 231 218
Professional services - hardware - - - 11,708
-------- -------- -------- --------
Gross margin 493 540 1,341 2,017
-------- -------- -------- --------
Research and development costs 380 2,081 3,840 5,324
Sales and marketing costs 344 2,607 4,133 9,066
General and administrative costs 794 1,309 4,571 4,776
Amortization and depreciation 218 1,019 652 2,988
Non-recurring restructuring charge 81 - 15,086 -
-------- -------- -------- --------
1,817 7,016 28,282 22,154
-------- -------- -------- --------
Operating loss (1,324) (6,476) (26,941) (20,137)
Gain on sale of Softworks - 3 47,813 16,444
Gain on sale of ComputerCOP
assets held for sale - - 8,534 -
Equity in earnings (loss) of Softworks - 446 - 367
Interest and other income
(expense), net 131 194 675 210
(Provision for) benefit from income
taxes 379 (42) (12,048) (42)
-------- -------- -------- --------
Net income (loss) $ (814) $ (5,875) $ 18,033 $ (3,158)
======== ======== ======== ========
</TABLE>
17
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
The following discussion is based on the operating results as presented in the
table above.
For the three months ended September 30, 2000 and 1999, Server Farm revenue was
$546,000 and $410,000, respectively, an increase of 33%. For the nine months
ended September 30, 2000 and 1999, revenue was $1,516,000 and $948,000,
respectively, an increase of 60%. At present, the Server Farm technology has
been developed to provide services solely for telecommunications analysis. The
Company is currently negotiating/finalizing several new contracts, which if
consummated, should continue to increase revenue. During the first nine months
of 2000, the Company's primary source of revenue was generated from the Server
Farm. While there can be no assurances, the Company believes that its new
consulting services will begin to generate revenue in the first quarter of 2001.
Substantially all of the revenue in the software license category relates to
ComputerCOP. During the first quarter of 2000, the Company sold the ComputerCOP
technology. See Note 8. For the three month period ended September 30, 2000,
total revenue decreased by $249,000, when compared to the three month period
ended September 30, 1999, primarily as a result of a $385,000 decrease in
ComputerCOP sales, offset by a $136,000 increase in Server Farm sales. For the
nine month period ended September 30, 2000, total revenue decreased by
$12,578,000, when compared to the nine month period ended September 30, 1999,
primarily as a result of a $12,585,000 decrease in its hardware reselling
business unit, and a $561,000 decrease in ComputerCOP sales, offset by a
significant $568,000 increase in Server Farm sales.
The Server Farm generates much higher gross margin than did the hardware
reselling business unit. The Server Farm cost of revenue consists primarily of
the direct labor associated with processing call detail records. The cost of
revenue related to the resale of computer hardware consisted primarily of
amounts paid to the Company's suppliers for goods and services. While revenue
related to the Server Farm for the three-month period ended September 30, 2000
increased $136,000 when compared to the three months ended September 30, 1999,
costs as a percentage of revenue decreased to 11.7% from 26.6%. Similarly, while
revenue related to the Server Farm for the nine-month period ended September 30,
2000 increased $568,000 when compared to the nine months ended September 30,
1999, costs as a percentage of revenue decreased to 15.2% from 23.0%. The
Company believes that the cost of revenue associated with the Server Farm
revenue is not directly proportional. As such, as revenue increases, costs, as a
percentage of revenue, should decrease. The depreciation of the Server Farm's
hardware is included in "Amortization and depreciation."
Management believes that the costs saving measures it has put in place during
the second quarter, in addition to the effects of the restructuring plan (which
includes the elimination of expenses attributable to the multi- media display
station), as well as the sale of ComputerCOP during the first quarter are
reflected in the third quarter operating expenses discussed below. While there
can be no assurances, the Company believes that, for other than expenses that
vary with sales volume, these costs savings should continue for the foreseeable
future.
Research and development expenses include costs for the development of the
multi-media display station, salaries and related costs for software developers,
quality assurance and documentation personnel involved in the Company's
research, development and maintenance efforts. Costs attributable to the
development of the multi-media display station was $1,296,000 for the nine
months ended September 30, 1999, and increased by $497,000 to $1,793,000 for the
nine months ended September 30, 2000 (none of which were attributable to the
quarter ended September 30, 2000). Pursuant to the restructuring plan, the
Company ceased development of this project in the first quarter of 2000, thereby
eliminating these development costs. With respect to the Server Farm, when
comparing the three and nine month periods ended September 30, 2000 and 1999,
the Company reduced its development costs by $1,140,000 and $1,981,000,
respectively.
Sales and marketing expenses include salaries and related costs, commissions,
travel, facilities, communications costs and promotional expenses for the
Company's direct sales organization and marketing staff. Expenses decreased
$2,263,000 to $344,000 for the three-month period ended September 30, 2000, when
compared to $2,607,000 for the three month period ended September 30, 1999. This
decrease was mainly comprised of reductions pursuant to the restructuring plan,
18
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
which included $619,000 related to consultants' fees, and $327,000 as a result
of reduced staffing levels. Additional reductions of approximately $1,011,000
were a result of the sale ComputerCOP in the first quarter 2000. Further, there
was a reduction of expenses of $187,000 as a result of a contractual arrangement
wherein the Company no longer is responsible for the marketing efforts relating
to the multi-media display station. These reductions were offset by $80,000 of
expenses attributable to the Company's new consulting service. For the
nine-month period ended September 30, 2000, expenses decreased by $4,933,000 to
$4,133,000 when compared to $9,066,000 for the same period last year. Included
in this decrease were reductions pursuant to the restructuring plan including
$1,613,000 related to consultants' fees; $392,000 to reduced staffing levels;
and reductions of approximately $3,104,000 due to the sale of ComputerCOP.
Offsetting these decreases was a year over year increase of $166,000 pertaining
to the multi-media display station due to the Company's effort during the first
quarter of 2000 to heavily market the multi-media display station, as well as
$167,000 of expenses attributable to the Company's new consulting service.
General and administrative expenses include administrative and executive
salaries and related benefits, legal, accounting and other professional fees as
well as general corporate overhead. Expenses decreased $515,000 to $794,000 for
the three-month period ended September 30, 2000, when compared to the three-
month period ended September 30, 1999 and decreased $205,000 to $4,571,000 for
the nine month period ended September 30, 2000 when compared to the same period
last year. Major factors contributing to the three-month and nine-month
decreases include, among other things, staff reductions, reduced legal expenses
and the reduction in the retention of financial consultants.
Amortization and depreciation expenses decreased $801,000 and $2,336,000 when
comparing the three and nine-month periods ended September 30, 2000 and
September 30, 1999, respectively. The decreases are primarily attributable to
the elimination of purchased software and goodwill acquired in the ComputerCOP
transaction. See Note 8.
Gain on sale of Softworks of $47,813,000 represents the gain associated with a
tender offering for the purchase of Softworks common stock made by EMC
Corporation, which was completed on January 27, 2000. See Note 8.
Gain on sale of ComputerCOP assets held for sale of $8,534,000 represents the
gain associated with an agreement dated February 10, 2000 for the sale of the
ComputerCOP subsidiary to NetWolves Corporation. See Note 8.
As a result of the Company's sale of its remaining interest in Softworks in
January 2000 and the sale of its ComputerCOP technology in February 2000, the
Company recognized a taxable gain in the first quarter of 2000 and utilized all
of its currently available net operating loss carryforwards. The Company's tax
provision for the nine months ended September 30, 2000, of $12,058,000, consists
of deferred tax expense of $9,197,000 and current tax expense of $2,851,000.
19
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Financial Condition and Liquidity
For the nine-month period ended September 30, 2000, the Company continued to
incur operating losses. The Company used substantial amounts of cash in
operating activities during the three months ended March 31, 2000. However, as a
result of the cost saving measures implemented as part of the restructure plan
put in affect in March, 2000, the Company has and believes it should continue to
see substantial reductions in its operating costs and use of funds when compared
to prior periods. The Company financed its operating activities primarily
through sale of Softworks common stock. In January 2000, the Company sold its
remaining interest in Softworks to EMC Corporation and its subsidiary ("EMC")
for $10.00 per share. The transaction provided cash proceeds of $48,301,000 (net
of expenses and fees of $3,157,000), and $10,000,000, which were placed in an
interest bearing escrow account. The escrow funds, net of any claims against
them (if any), are scheduled to be released to the Company one year from the
date of closing, January 27, 2001. Also during the first quarter of 2000, the
Company sold ComputerCOP Corp. for 1,775,000 shares of NetWolves Corp., valued
at $20 per share (aggregating $35,500,000). The assets of ComputerCOP Corp.
included the ComputerCOP technology (and certain related assets including
inventory) and $20,500,000 in cash. The Company purchased 225,000 additional
shares from certain NetWolves shareholders for $4,500,000. The Company paid
approximately $1,819,000 in related fees and expenses. See Note 8.
In the first quarter of 2000, the Company's newly appointed Board of Directors
approved and the Company announced a restructuring plan that it believes will
streamline the Company's operations and overhead structure (Note 3). Key
elements of the restructure plan include: (i) elimination of employees, expenses
and commitments that supported the ComputerCOP technology (sold to NetWolves,
see Note 8), (ii) elimination of employees, expenses and commitments that
supported the Company's development project related to a multi- media display
station (see Note 11), and (iii) general reduction of corporate operating
expenses. The restructuring activity for the nine month period ended September
30, 2000, is summarized in the table below:
<TABLE>
<CAPTION>
Officer/director
Employee retirement Consulting Operating
terminations packages contracts Leases Other Total
------------ ----------------- ------------ ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Restructuring charge
to operations,
quarter ended March
31, 2000 $ 2,243,000 $ 7,535,000 $ 3,681,000 $ 369,000 $ 985,000 $14,813,000
Restructuring charges
to operations and
adjustments, after
March 31, 2000 (70,000) 140,000 - - 203,000 273,000
----------- ----------- ----------- --------- --------- -----------
Subtotal 2,173,000 7,675,000 3,681,000 369,000 1,188,000 15,086,000
Cash expenditures (1,567,000) (5,507,000) (1,865,000) (93,000) (590,000) (9,622,000)
Company stock
issuances (200,000) (100,000) (630,000) - (250,000) (1,180,000)
Netwolves stock
exchanged - (1,500,000) - - - (1,500,000)
----------- ----------- ----------- ---------- --------- -----------
Restructuring accrual,
September 30, 2000 $ 406,000 $ 568,000 $1,186,000 $ 276,000 $ 348,000 $2,784,000
=========== =========== =========== =-======== ========= ===========
Of the total outstanding liability of $2,784,000, $1,035,000, is payable after
one year.
</TABLE>
20
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
As discussed above and as detailed in the Condensed Consolidated Statement of
Cash Flows, during the nine month period ended September 30, 2000, the Company
received $48,301,000 from the sale of Softworks, $2,000,000 (less $72,000 in
related expenses) from the sale of a convertible debenture, utilized $26,819,000
in the NetWolves/ComputerCOP transaction and $21,204,000 in operating
activities, which includes $9,622,000 toward the restructuring, and paid a
dividend to its stockholders totaling $2,194,000, resulting in a cash balance of
$2,182,000 as of September 30, 2000. The Company's cash balance as of October
31, 2000 is approximately $1,812,000.
Management's current short-term plan is primarily focused on achieving operating
profit by successfully marketing innovative software products and services that
capitalize on the Company's patented technologies. To achieve its goals, the
Company has restructured its operations, which reduced its operating expenses,
while continuing to market the Server Farm. Additionally, the Company intends to
successfully market its new consulting service. The Company is continually
reviewing its long-term business strategy.
Management believes that its plan will ultimately enable the Company to achieve
positive cash flows from operations. Until such time, the Company has several
sources to fund its short and long term plans. The Company believes that its
present cash on hand plus the possible sale of an additional $500,000
convertible debenture, and, if necessary a partial liquidation of its investment
in Netwolves should provide adequate funding until it receives the $10,214,000
currently being held in escrow which is scheduled to become available to the
Company (net of any claims) in January 2001. After which the Company believes it
will have sufficient funding to fulfill its plan.
NetWolves is an innovator of all-in-one Internet gateway software systems, which
is a trend in the networking industry due to the enhanced functionality, offered
to end-users. Their primary product is marketed under the trade name, FoxBox.
NetWolves incorporates a series of software modules managed by a single
administrative interface that protects end user investment and offers cost
savings. NetWolves also offers Internet based distance training and profit
enhancing programs for the petroleum industry. At September 30, 2000, the quoted
market value of the 1,875,000 shares of NetWolves common stock was $15,000,000
($8.000 per share). On October 31, 2000, the quoted market value of the
NetWolves common stock was $10,664,000 ($5.6875 per share).
As discussed in Note 11, in April 2000, the Company entered into a contractual
arrangement with an unrelated third party, whereby the Company transferred all
of its in-process research and development technology related to the multi-media
display station for the rights to 50% of the future profits (as defined), if
any, from the third party's operation or sale of this technology. The third
party agreed to utilize its contacts in the industry and also agreed to fund all
future costs associated with the continued development and marketing of the
display station. There can be no assurances that the Company will recognize any
proceeds from this transaction.
YEAR 2000 ISSUES
The Company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, the Company does not expect any significant
impact to its ongoing business as a result of the "Year 2000 issue". However it
is possible that the full impact of the date change, which was of concern to
computer programs that use two digits instead of four digits to define years,
has not been fully recognized. The Company believes that any such problems are
unlikely and that should they occur, they would be minor and correctable. In
addition, the Company could still be negatively affected if the Year 2000 or
similar issues adversely affect any of its suppliers. The Company is currently
not aware of any significant Year 2000 or similar problems that have arisen for
any of its vendors.
The Company estimates that it expended approximately $50,000 on Year 2000
readiness efforts through September 30, 2000. The Company does not anticipate
any further expenditure in connection with Year 2000 issues.
21
<PAGE>
DIRECT INSITE CORP. AND SUBSIDIARIES
(F/K/A Computer Concepts Corp.)
PART II - OTHER INFORMATION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual shareholders meeting, held August 23, 2000, the
shareholders of the Company elected the individuals identified below to the
Company's Board of Directors. Their terms expire at the next annual shareholders
meeting. James A. Cannavino, Charles Feld, Dr. Dennis Murray, Carla J. Stovall.
The tabulation of the results of the shareholders' vote was: 20,284,498 - For
and 173,840 - Against.
A proposal to amend the Company's Certificate of Incorporation to change the
name of the Company to "Direct Insite Corp." was approved by the vote of:
20,247,816 - For; 141,170 - Against; and 79,256 - Abstaining.
A proposal to ratify the appointment by the Board of Directors of Hays & Co. as
the Company's independent certified public accountants for fiscal/calendar year
2000 was approved by the vote of: 20,332,223 - For; 67,767 - Against; and 49,194
- Abstaining.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
4.1 Form of Convertible Debenture Purchase Agreement dated September 27,
2000 between Direct Insite Corp and Greenwood Court LLC., including
exhibits.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIRECT INSITE CORP.
(F/K/A Computer Concepts Corp.)
/s/ James Cannavino
--------------------------
James Cannavino Chairman and Director October 31, 2000
/s/ George Aronson
--------------------------
George Aronson Chief Financial Officer October 31, 2000
23
