-----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, KVfJ6bmK7mGsTCYV0cN0UdKT8J58v3pkCE8Xb7/vWJZYofUIYz6faaQ8Uh5jnfoN n3XS/3FVUnHeWukd36jzoQ== 0000932214-02-000035.txt : 20020416 0000932214-02-000035.hdr.sgml : 20020416 ACCESSION NUMBER: 0000932214-02-000035 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIRECT INSITE CORP CENTRAL INDEX KEY: 0000879703 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 112895590 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20660 FILM NUMBER: 02610899 BUSINESS ADDRESS: STREET 1: 80 ORVILLE DR CITY: BOHEMIA STATE: NY ZIP: 11716 BUSINESS PHONE: 5162441500 MAIL ADDRESS: STREET 1: 80 ORVILLE DRIVE CITY: BOHEMIA STATE: NY ZIP: 11716 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER CONCEPTS CORP /DE DATE OF NAME CHANGE: 19930328 10-K 1 di10k12-01live.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_______ to _______ Commission File No. 0-20660 DIRECT INSITE CORP. (Exact name of registrant as specified in its charter) Delaware 11-2895590 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 80 Orville Drive, Bohemia, N.Y. 11716 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (631) 244-1500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, par value $.0001 NASDAQ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of April 12, 2002, there were 3,259,932 shares of the registrant's Common Stock outstanding. The aggregate market value of the Common Stock held by non-affiliates was approximately $4,563,905 based on the closing sale price of the Common Stock as quoted on the NASDAQ on such date. Direct Insite Corp. and Subsidiaries Form 10-K for the Year Ended December 31, 2001 Table of Contents PART I PAGE ---- ITEM 1 Business 1 ITEM 2 Properties 11 ITEM 3 Legal Proceedings 11 ITEM 4 Submission of Matters to a Vote of Security Holders 11 PART II ITEM 5 Market for Registrant's Common Stock 12 ITEM 6 Selected Financial Data 13 ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 ITEM 7a Quantitative and Qualitative Disclosures About Market Risk 24 ITEM 8 Financial Statement 24 ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24 PART III ITEM 10 Directors and Executive Officers of Registrant 25 ITEM 11 Executive Compensation 27 ITEM 12 Security Ownership of Certain Beneficial Owners and Management 28 ITEM 13 Certain Relationships and Related Transactions 29 PART IV ITEM 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30 SIGNATURE 33 PART I Item 1. BUSINESS FORWARD-LOOKING STATEMENTS All statements other than statements of historical fact included in this Form 10-K including, without limitation, statements under, "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Form 10-K, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward - looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company's management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to, fluctuations in future operating results, technological changes or difficulties, management of future growth, expansion of international operations, the risk of errors or failures in the Company's software products, dependence on proprietary technology, competitive factors, risks associated with potential acquisitions, the ability to recruit personnel, and the dependence on key personnel. Such statements reflect the current views of management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the Company. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this paragraph. OVERVIEW The Company was organized under the name Unique Ventures, Inc. as a "blind pool" public company, under the laws of the State of Delaware on August 27, 1987, and changed its name to Computer Concepts Corp. in 1989. In March, 2000, in an effort to allow the Company the opportunity to seek new management perspectives and directions, the Chairman of the Board of Directors along with the President / Chief Executive Officer / Treasurer retired. Mr James A. Cannavino, was elected a board member and Chairman of the Board. Shortly thereafter the three remaining members of the Board of Directors resigned. Dr. Dennis Murray, president of Marist College and Mr. Charles Feld, Chief Information Officer of First Data Resources and the former Chief Information Officer of Delta Air Lines, were elected to the Company's board. In April, 2000, Ms. Carla J. Stovall, the attorney general of the state of Kansas was elected to serve as a member of the Board. In August, 2000, the shareholders voted to approve to change the name of the Company to Direct Insite Corp. which the Board of Directors believed was more in line with the new direction of the Company. Direct Insite Corp. and its subsidiaries (hereinafter referred to as "Direct Insite" or the "Company"), primarily operate as an application service provider ("ASP") which today, markets an integrated "fee for services" offering providing high volume processing of transactional data for billing purposes, electronic bill presentation and payment ("EBP&P") as well as visual data analysis and reporting tools delivered via the Internet for our customers. Direct Insite's core technology is d.b.Express?, the proprietary and patented management information tool, which provides targeted access through the mining of large volumes of transactional data via the Internet. In 2001 the Company acquired, Platinum Communications, Inc. ("Platinum"), a Dallas, Texas based company, which markets its integrated proprietary back office software solutions, Account Management Systems ("AMS") to the telecommunications industry either as a license or as an ASP. The Company and Platinum completed a merger under an Agreement and Plan of Merger ("Merger Agreement"). Under the Merger Agreement, a newly formed wholly owned subsidiary of the Company acquired all of the outstanding common stock of Platinum. Further, as an added source of revenue, the Company, during 2001 began providing custom engineering services for its customers. 1 This newly assembled suite of services enables Direct Insite to provide a comprehensive Internet delivered service from the raw transaction record through all of the internal workflow management processes including an electronically delivered invoice with customer analytics. This comprehensive service offering provides back office operations, cuts costs and provides for improved customer service by providing the end customer with easy access to all of the detailed information about their bill. The Company operates fully redundant data centers located at our main office in Bohemia, N.Y. and in Newark, NJ. Our facility in New Jersey is space leased at the IBM e-business Hosting Center. This co-location / redundancy feature enables the Company to offer virtually down time free service. Currently, IBM Global Services, the Company's largest customer, (representing approximately 82.2% of year 2001 revenue) utilizes our products and services to allow their large enterprise customers to mine their respective high volume telecommunications data to determine cost allocation by usage, provide for network planning, budgeting and the identification of significant trends in calling patterns. In addition, we added electronic invoice presentment, payment and analysis capabilities to our services offering all based on our d.b.Express? platform. Historically, the most significant portion of the Company's operations had been conducted through one of its subsidiaries, Softworks, Inc. ("Softworks"). Through Softworks, the Company developed, marketed and supported systems management software products for corporate mainframe data centers. The Company acquired Softworks in 1993. Softworks was wholly owned by the Company through June 29, 1998. Through a series of transactions, as described in Note 3 to the Consolidated Financial Statements, the Company's ownership of Softworks was reduced from 100% to 35% as of December 31, 1999. Pursuant to a tender offer made in December 1999, the Company sold its remaining interest in Softworks (a total of 6,145,767 shares) to EMC Corporation and its subsidiary ("EMC") for $10.00 per share. The transaction, which was completed in January 2000, provided aggregate cash proceeds of $61,458,000, and resulted in a pre-tax gain, net of expenses, of $47,813,000 recorded in the first quarter of 2000. In 2000, the Company began a marketing initiative known as Global Telecommunications Services ("GTS"). For a fee, this offering, which utilized d.b.Express would analyze long distance, data and wireless communication needs; assist in the negotiation of telecommunication contracts and monitor ongoing carrier contract compliance. During the fourth quarter of 2001, as a result of minimal revenue, the Company decided it would no longer market these services. In June 1998, the Company acquired certain software and related sales and marketing rights. The acquired software technology, marketed under the trade name Bo Dietl's One Tough ComputerCOP ("ComputerCOP"), is designed to inform non computer literate parents, guardians and alike, what materials, or possible threats to the safety and well being of their children or others has been accessed over the Internet, such as objectionable web sites, text, pictures, screens, electronic mail, etc. The Agreement also included the rights to the use of Richard "Bo" Dietl's name in conjunction with the promotion and endorsement of the software as well as appearances by Mr. Dietl in support of the software in regional and national marketing campaigns. Mr. Dietl has been recognized as one of the most decorated police officers of the city of New York. In February, 2000, the Company sold a newly created wholly owned subsidiary with assets consisting primarily of $20.5 million cash, the above referenced technology and remaining marketing rights, inventory and related receivables for 1,775,000 shares of NetWolves Corporation (Nasdaq: "WOLV"). The transaction was valued at approximately $35.5 million and resulted in a pre-tax gain of $8,534,000 recorded in the first quarter of 2000. During 1999, the Company began to develop a multi-media display station, which combined Internet strategy and e-commerce with multi-media forms of delivery, presentation and interaction with end-users. This Internet based communications/advertising network was being designed by the Company to create a means by which businesses could promote specific brand/product/service awareness. The Company intended to market this technology in association with owners and/or managers of high traffic venue areas (i.e., malls, airports, etc.) to local, regional and national businesses. From inception through March 31, 2000, the Company invested approximately $7,000,000 in its marketing and development efforts (charged to operations as incurred). As part of the Company's restructuring plan (Note 14 to the Consolidated Financial Statements), the Board of Directors determined that it was in the Company's best interest to immediately cease all funding of this project. As a result, in April 2000, the 2 Company entered into a contractual arrangement with an unrelated third party, whereby the Company transferred all of its in-process research and development technology related to the multi-media display station for the rights to 50% of the future profits (as defined), if any, from the third party's operation or sale of this technology. All future costs associated with any continued development and marketing of the display station would be absorbed by third party. To date, the Company has not received revenue from this transaction. In 1997, the Company created a business unit, "professional services", which primarily resold computer hardware and for a fee, assisted in the design, construction and installation of technology systems. In 1999, this business unit had one major contract, involving two customers, which was completed in 1999. Historically, net margins generated from this business unit were extremely low. As a result, in January, 2000, the Company elected to significantly curtail the operations of this business unit, and has further decided to completely refrain from any marketing of this business unit. PRODUCTS AND SERVICES The Company generates revenue from three primary offerings: ASP- managed services, which includes d.b.Express and EBP&P, custom engineering and its AMS suite of services. The Company offers, through its ASP - managed services, on fee for services model, its customer's analysis and reporting tools, which in turn enabled their customers to "mine" their own data. This service was primarily marketed to the telecommunications sector. During 2001 the Company enhanced this service by permitting its customers to ability to provide Internet customer care. It completed this suite of services by adding EBP&P. This combined set of services has allowed the Company to significantly expand its market, to include any large enterprise in any industry that wishes to provide their own customer with an electronic invoice as well as the ability to obtain reports and analysis Previously, all of the electronic reporting and analysis capability of d.b.Express was being delivered in support of the incumbent paper based billing system. For simple or low volume detail accounts, electronically delivered invoices are mostly a reproduction of the print stream or what is called a "document centric" approach. This system is not designed to handle high volume detail accounts. We believe that electronic invoices delivered by the telecommunications carrier to its large enterprise customers will require the ability to deliver all of the line item detail to support the summary billing information as well as the tools necessary to mine that data. Direct Insite's offering to this niche market includes the electronic presentation of invoices along with the tools to verify the detail behind the invoice. The Direct Insite offering is a "data centric" solution built on delivering summary billing information constructed from the underlying detail data contained in our d.b.Express database. Thus the supporting detail information, analysis and reporting tools are made available to the end user thus reducing costs for both provider and customer while improving customer service through customer self care. We believe that this is a critical component and a compelling reason to encourage companies to adopt electronic invoice presentment With respect to this ASP - managed services offering, Direct Insite generates revenue on a per- invoice basis, plus archiving and other added charges. The Company believes this should create a stable, recurring revenue stream in the future. As previously noted, the Company, during 2001 began providing custom engineering services for its customers. With respect to AMS, the company currently markets to the telecommunications industry as the initial and primary market for this suite of services. We believe we have identified an opportunity at the intersection of telecommunications back-office software and business intelligence software: the need to provide better information management tools for both carriers and their large enterprise customers. Direct Insite developed a front end product to integrate a presentment front end with d.b.Express, our high volume detail processing, reporting and analysis backend, to deliver a high volume "data centric" solution. With the acquisition of Platinum and the inclusion of the extensive line of software (AMS) that automate all back office functions including the important billing and rating function, Direct Insite now has a 3 complete systems management solution based on the control of a single database, all of the functionality required to manage the back office workflow and the high volume information delivery system for demanding enterprise accounts that includes EBP&P. The acquisition of Platinum and their AMS carrier management system in May 2001 provides the Company with the complementary software products and telecommunications industry management experience to offer the necessary software tools to process the high volume of raw switch data to the electronically presented invoice complete with data mining - all on an outsource business model. ASP - Managed Services Direct Insite offers a number of software applications, which are marketed as "managed services", formerly known as the server farm. The Company's competency is in the area of data mining in large, complex databases with hierarchical structures and the presentment of results in a highly visualized manner. The core technology to its suite of services is d.b.Express?. Our patented data base access technology is the host platform for the EBP&P, data mining and visualization, as well as call rating and billing applications. d.b.Express Background d.b.Express has been in development for more than ten years. The Windows Version 1.0 of d.b.Express? was introduced in December, 1993, and the DOS version was introduced in late 1992. Windows Version 2.0, with significantly enhanced functionality based on user feedback, was introduced in the second quarter of 1994 and a Windows 95(R) Version was introduced in the third quarter of 1995. Windows NT(R), Internet Server and JAVA Applet versions were introduced in 1996 and 1997. Version 6.0 was released during the fourth quarter of 1999; significant new features include increasing the ability to interactively access, via the Internet, millions of records in a matter of seconds. d.b.Express is a software tool which assists end users in the retrieval and visualization of all types of data. It allows customers to access and analyze high volumes of technical and account information. With the patented data mining technology found in d.b.Express, high volumes of detailed information is presented in our unique interface known as a "Filescape". With d.b.Express, you may create a Graph, Report, or simply List your information for easy viewing. d.b.Express simplifies the preparation of traditional reports by giving you the ability to view the billing data interactively using simple point-and-click mouse operation. With d.b.Express, you are given the ability to drill down into the call detail information allowing you to identify data trends and "cause and effect" relationships in an interactive, graphical format. For the Internet d.b.Express has overcome a major Internet problem, that of high data volume and limited bandwidth, currently responsible for the lengthy delays associated with data downloading. This web based reporting and analysis system was introduced to deliver all of the functionality of d.b.Express for the desktop with the advantages of managing the monthly call detail records on a centralized information server that is accessible via the World Wide Web. The Web based information delivery via the Internet is preferable to CD-ROM because, in most instances, large volumes of hard drive space are required. d.b.Express runs in common web browsers such as Internet Explorer 5.X (and newer versions) plus Netscape Navigator 4.X (and newer versions). This enables the ability to interact with and report on large monthly billing period data via remote Internet access. Direct Insite provides an online, Internet based service offering that provides the following features and functions for the end user: 4 - Summary View of Invoice. Enables the payer to view invoices from an aggregate level, thereby making it easier to see the total amount due and to download information. - Complex Presentment. (Data centric views). Data-centricity is the main selling point of this solution. Not only does the system offer summary views, it also provides users with in-depth itemizations, single data points, and consolidation of multiple products and services. - Data Mining and Visualization. Another benefit of data-centricity is the ability to apply d.b.Express data mining technology across the entire enterprise line item detail information not just a single operating unit or limited geographical area of the business. Additionally, the system provides a significant archiving capability such that 12 to 24 months of historical invoicing/charges can be data mined for trend and optimization opportunities. The results of the mining activity are presented in a highly visualized manner to the user. - Notification. Email notification is used for invoice alerts, disputes, workflow, administration, invoice status and payment timing. - Multi-tiered Accounts. Used for allocating portions of an invoice across complex, payer organizational structures. - Invoice Management. Enables the user to electronically route the invoice through the approval chain; passing the designated portions of an invoice to necessary parties for approval. This will also assist the user's ability to verify whether the approving se parties have received the invoice and if the portion has been reviewed, approved or disputed. We believe this to be a cost-saving feature. - Dispute Management. Includes automatic dispute resolution enabling the biller to establish a threshold below which a dispute is automatically cleared. - Payment and Remittance. Supports multiple payment options such as full payment, schedule payment and auto payment. The system also supports balance-forward accounting or open invoice accounting. Pre-scheduled payments are also supported by the system. - Billing Inquiry (or Trouble Ticket). Acts as a complaint service allowing customers to communicate problems to the biller. - Report Capabilities. Users can track orders, disputes, billing inquires, payments and system usage. This reporting function is driven by an online analytical processing (OLAP) tool that plugs into the user's database. This text reporting capability complements the graphical representation of results that is the output of the d.b.Express data-mining tool. - Invoice Format Support. Payers can choose how they would like to receive their invoices, via paper (PDF format) or electronically. From a usability and adoption rate perspective, the electronic form of the invoice is presented in a format that has a "look-n-feel" that is identical to that the customer may have been receiving in hard copy format. Options for electronic delivery include spreadsheet format such as Microsoft Excel. This functionality also applies to payments since the system allows for paper or electronic receipts. Advantages of d.b.Express All Data Indexed - Unlike traditional database products, our software indexes all data relationships, this eliminates the need to pre-determine what questions need to be answered. This facilitates analysis to discover the information normally hidden in summarized information and allows the user to "drill down" to the individual records to produce results. This is accomplished with our unique ability to visually present hundreds of millions of transaction records processed into our proprietary database. 5 Graphics Driven - The data is delivered via the Internet with simple browser technology thus allowing any Internet user to manipulate huge databases in seconds. High Power / Low Cost - d.b.Express? enables users to analyze millions of records over the Internet without the need to first download the data being analyzed. Better Access to Information - d.b.Express? improves the accessibility of databases created by database management systems (DBMS) by eliminating the need to write queries in computer code and facilitates data searches through the use of graphical query tools. The Company believes that this results in more timely and better quality business decision-making. Broader Access to Information. - d.b.Express? enables a broader population within an organization to visually and interactively mine their data without the need or support from internal or external management information system (MIS) professionals. d.b.Express? performs these tasks faster than any DBMS because the software does not reread the database for each task; it only reads the summaries it has created. Ease of Use - d.b.Express? utilizes simple point and click technology, which enables the user to view and analyze data to the lowest level of detail. d.b.Express? provides powerful desktop functionality, via the Internet, that allows the exploration of data patterns, trends, and exceptions. Data searches, queries and analyses can be converted to sophisticated, simple to use presentations providing integrated business graphics and report writing capabilities. Interfaces With Leading Databases and Other Tools - d.b.Express? provides direct access to leading databases created by DBMS vendors and can be exported to popular spreadsheets, report writers, graphics packages and word processors. Integrates Data From Multiple Vendors - When d.b.Express? reads a database, it creates its own summaries of information through its proprietary process. Information contained in databases is formatted into d.b.Express's proprietary format. This permits users to access and compare information contained in enterprise-wide databases created by different vendors simultaneously in the d.b.Express' user-friendly environment. Works in Common Operating Environments - d.b.Express? operates in virtually all file server and peer-to-peer networking environments providing secure visual data mining functionality through Internet browsers. High Processing Speed - Once a database source has been processed, d.b.Express? employs proprietary matrix storage technology rather than rereading each data element in that database. The elimination of the rereading step through d.b.Express' proprietary process increases the speed of data access enabling ad-hoc analysis at a rate we believe is far faster than possible with any other system. Security, Access and Storage - In order to meet the archival requirements of customers, the Company produces CDs of each month's billing details. In order to provide this service, the Company has put into place two fully redundant data centers. The service is available 24 hours a day, 7 days a week, 365 days a year. 6 Disadvantages in regard to d.b.Express(TM) include the following: Lack of Established User-base and Acceptance of the Product - d.b.Express? is not yet widely used, which may defer acceptance. The Company believes its focus on large-scale users and its low capital and deployment cost could help overcome the lack of acceptance in the market place. There is no assurance that the Company will be successful in reaching its sales plan to gain adoption of the technology. Limited Resources to Market and Promote d.b.Express? - The Company has limited resources with which to market and promote d.b.Express?. Regardless of the unique patented aspects of the product, if the Company is not able to effectively market and promote the usage of the product, the successful dispersion of the product as a widely used access tool may not be achieved. Alternative Methods Available to Access Data and Potential New Technologies - - d.b.Express' access method is patented and innovative. However, alternative methods for accessing data exist, primarily text based search engines. We believe that many of the alternative methods require knowledge of specific database query languages. The Company is not aware of any alternative technology which can effect data searches with the speed, and without sophisticated programming skills, which, d.b.Express? provides; however, it is possible that new technologies will be developed which may effectively compete with d.b.Express?. If such new technologies are developed, they could negatively impact the Company's ability to successfully market and promote d.b.Express? on the Internet. Electronic Bill Presentment and Payment - An Added Feature A significant feature within the managed services offering is EBP&P. In 2001 the Company entered into the Electronic Bill Presentment & Payment services business for the Business-to-Business ("B2B") market place with technology built upon our d.b.Express platform. This extension to our core product offering is well positioned to solve the two critical success factors/problems as defined by the Gartner Group that are inhibiting growth of this market - (1) complexity of deployment of such systems and (2) ability to integrate with a diversity of Accounts Payable systems. We believe that our system meets or exceeds all of the key market requirements to address the opportunity. Market research data published by the Gartner Group shows the worldwide market opportunity for EBP&P spending and the number of enterprise collectively associated with such spending. This is projected to be a high growth industry for the next several years and our product offering is targeted toward large enterprise "billers" that do business with large enterprise "payers" that require a system capable of delivering large numbers of invoices monthly along with the associated line item detail and not summary information. Account Management System - "AMS" Direct Insite also markets Account Management System ("AMS"), which is marketed to communications carriers as an end-to-end Integrated Management System ("IMS") supporting most aspects of a Carriers' relationship with its customers. The primary functionalities of AMS fall into two major aspects; Billing -(the accumulation of detail transactions and service items that bill on a recurring basis, the pricing of those items and the generation of an invoice, paper or electronic, for those items), and Provisioning (the generation of information utilized to enable or disable services to specific customers in coordination with a customer order, available communications assets and network devices or other carriers which are utilized to provide a communications service). Within AMS is a secondary offering, Telecommunications Asset Management System ("TAMS"). TAMS is marketed to enterprises which are large consumers of communications services. Utilizing substantially the same software assets in a modified presentation environment, TAMS allows the enterprise customer to maintain an inventory of its communications assets, manage and audit its relationship with the Carriers it purchases service from, allocate those 7 costs throughout its organization and deliver that cost allocation via Web based reporting tools.These products are the result of integrating and upgrading the software assets of Platinum with db Express data visualization products and the electronic invoicing products. Upgrades and enhancements are being developed, which we expect will permit all aspects of each product to be accessible via the World Wide Web as well as standardize the "look and feel" within the product line. These efforts are scheduled for completion during the second quarter of 2002 and with substantial components already completed and generating revenue in 2001. The AMS software is arranged in Modules, a listing of each module and its primary feature sets follows: Carrier Business Support Systems & Operations Support Systems BSS/OSS AMS is an internally developed and maintained system for the enterprise management of a Telecommunications Carrier. It is comprised of 10 major modules covering: 1) Customer Service (CSS), 2) Call Rating (CRS), 3) Activation Tracking (ATS), 4) Receivables Management (RMS), 5) Batch Processing (BPS), 6) Commission Tracking (CTS), 7) Database Management (DMS), 8) Cycle Billing (CBS), 9) Debit Card Management (DCS), and 10) Product Configuration (PCS). These systems each have an end-user interface and are supported by back-end processing programs, reports and utilities. All system data is maintained in a Relational Database Management System (RDBMS) such as Microsoft SQL Server, Oracle, or Sybase. The database independent AMS system utilizes a client/server approach operating on many different types of server operating systems and utilizing Windows based Personal Computers for the desktop. AMS is a truly scaleable system with the capability of the RDBMSs, which are available for Novell NetWare, WindowsNT Server, UNIX operating systems, and Mainframe operating systems. Telecommunications Asset Management System -- the Large Enterprise Solution TAMS provides Enterprises with the command and control over their own telecom services to place the Enterprise at an advantage over their service providers. TAMS not only provides control of the invoice collection, it also provides end-user customer information including provisioning of new products and services, presentment of invoices electronically for manager level approval and interrogation, automatic general ledger integration and payment of invoices. TAMS also provides the capability to allow Enterprises to gain the advantage over their suppliers by utilizing telecommunication usage information to obtain better pricing and terms of service from all suppliers. The TAMS suite of products is designed to assist our customers in managing their telecom usage and related information. TAMS provides control over the monthly validation and approval process related to telecommunications services. By capturing the standard charges as a baseline inventory of services directly from the service providers prior to billing, Enterprises can identify overcharging and miss charging, before the monthly invoice is approved for payment. The added level of financial control provides the Enterprise with the systematic methodology to aggressively manage financial health as it relates to telecommunications cost components. The TAMS application layer provides the systematic means to link invoiced services to budgeted expenditure levels. TAMS also allows: - - Access to all end-user information via a Web based interface - - Delivery of invoices electronically to approving managers via a Web based interface - - Approval or "Payment" of invoices electronically via a Web based interface 8 SALES AND MARKETING In addition to the Company's internal sales staff, it has three major channels to market: direct sales, partners and agents. A technical sales support group supports these channels. Direct Sales In January 2001, the Company began to increase its direct and channel sales resources. As a result it employed a seasoned executive formerly with IBM, who has more than 20 years of sales and management expertise in managing internal sales as well as developing new sales channels. The Company now employs three full-time sales people. In addition, Company executives are heavily involved in both new client development and expansion of existing accounts. Partners Direct Insite will pursue relationships with companies who either provides complementary products and services to the carriers, integrated services providers and enterprises targeted by Direct Insite or provide a means for the Company to enter new vertical markets. Agents Direct Insite has two agents on contract and anticipates expanding this network with experienced organizations in the telecommunications industry, who will assist the Company in its ongoing efforts to prospect and qualify opportunities with integrated services providers and carriers for the telecommunications solutions offering. RESEARCH AND DEVELOPMENT The computer software industry is characterized by rapid technological change, which requires ongoing development and maintenance of software products. It is customary for modifications to be made to a software product as experience with its use grows or changes in manufacturers' hardware and software so require. The Company believes that its research and development staff, many with extensive experience in the industry, represents a significant competitive advantage. As of December 31, 2001, the Company's research and development group consisted of 29 employees (45%). Further, when needed, the Company frequently retains the services of independent professional consultants. The Company seeks to recruit highly qualified employees, and its ability to attract and retain such employees will be a principal factor in its success in maintaining a leading technological position. For the three years ended December 31, 2001, 2000, and 1999, research and development expenses were approximately $2,734,000 $4,278,000, and $10,525,000, respectively. The Company's research and development expenditures relating to its core technology, d.b.Express and managed services were approximately $2,450,000, $2,600,000, and $5,650,000 for the three years ended December 31, 2001, 2000 and 1999, respectively. The Company believes that investments in research and development are required in order to remain competitive. COMPETITION Many of the Company's current and potential competitors have greater name recognition, larger installed customer bases, longer operating histories, and substantially greater financial, technical and marketing resources than the Company. The Company cannot assume that current and potential competitors will not develop products that may be or may be perceived to be more effective or responsive to technological change than are the Company's current or future 9 products or that the Company's technologies and products will not be rendered obsolete by such developments. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could have a material adverse effect on the Company's business, operating results and financial condition. The Company believes that its primary competitors are Amdocs, Lucent Technologies, Daleen Technologies, ADC, InfoDirections, Profitec, Data Beacon, Callvision and DigiMine. In the area of business intelligence software its primary competitors are Business Objects, Cognos and MicroStrategy. EMPLOYEES The Company had 65 employees, all in the United States, at December 31, 2001, including 18 in marketing, sales and support services, 34 in technical support, (including research and development) and 13 in corporate finance and administration. The future success of the Company will depend in part upon its continued ability to attract and retain highly skilled and qualified personnel. Competition for such personnel is intense, and the Company has experienced turnover in its management group. None of the Company's employees are represented by a labor union. The Company believes that its relations with its employees are good. PATENTS AND TRADEMARKS The Company has two federally registered trademarks, which it relies upon: "d.b.Express? and "dbACCEL?. In addition, the Company received a patent for the proprietary aspects of its d.b.Express technology in 1994, and a second, expanded patent on that technology in 1995, which broadened the claims regarding the product's graphical interface and indexing. No assurance can be given that the Company's patents and copyrights will effectively protect the Company from any copying or emulation of the Company's products in the future. Notwithstanding the efforts the Company takes to protect its proprietary rights, existing trade secret, copyright, and trademark laws afford only limited protection. Despite our efforts to protect our proprietary rights and other intellectual property, unauthorized parties may attempt to copy aspects of our products, obtain and use information that we regard as proprietary or misappropriate our copyrights, trademarks, trade dress and similar proprietary rights. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate. In addition, our competitors might independently develop similar technology or duplicate our products or circumvent any patents or our other intellectual property rights. Item 2. PROPERTIES The Company currently maintains leased facilities in the locations listed below:
Description Location Square Footage Lease term Annual Rental Cost - ----------- -------- -------------- ---------- ------------------ Corp Headquarters Bohemia, NY 10,000 7/1/94 - 6/30/02 $201,600 Texas office Dallas, TX 3,000 8/15/01 - 8/31/06 $74,000 Co-location facility Newark, NJ Note 1 2/1/01 - 1/31/04 $235,200 Note 1. The Company is obligated under the terms of an agreement with its major customer to maintain its redundant / co-location IBM site. The redundant facility provides the Company with, among other things, switches, routers, racks, connections to Internet network access points, at a variety of bandwidths, various levels on monitoring, and access to problem management support.
The Company has an option to extend its lease in Bohemia, New York for two years. 10 Item 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company is a party or of which any of its property is the subject. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of shareholders during the quarter ended December 31, 2001. PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK The Company's common stock has been traded on NASDAQ SmallCap market since September 23, 1992. The following table sets forth the high and low sales prices for the Company's common stock by the fiscal quarters indicated, as adjusted to reflect our one-for-fifteen reverse stock split on May 7, 2001.
High Low ---- --- 2000: First Quarter $40.310 $22.035 Second Quarter 22.500 10.320 Third Quarter 16.875 10.320 Fourth Quarter 15.938 4.699 2001: First Quarter 7.035 3.285 Second Quarter 5.140 1.633 Third Quarter 2.840 1.900 Fourth Quarter 1.990 0.990 2002 First Quarter 1.690 1.000
As of February 28, 2002, there were 3,083 shareholders of record. The Company estimates that there are approximately 10,700 shareholders whose shares are held in the name of their brokers or stock depositories. In February 2000, the Company declared a dividend of $1.50 per share (aggregating approximately $2 million) to its shareholders of record on March 15, 2000, and paid May 1, 2000. The Company does not presently anticipate declaring any dividends for the foreseeable future. The following securities of the Company were issued during the fiscal quarter ended December 31, 2001: Recent Sale of Unregistered Securities During the fourth quarter, the Company issued shares of its common stock as follows: - - Its Board of Directors agreed to accept in lieu of cash compensation for services on various committees, a total 17,380 shares of common stock, valued at $18,250; - - Fees to several consultants aggregating 193,334 shares valued at $203,000; - - The Company settled obligations to several of its vendors with 82,572 shares of common stock valued at $84,500. 12 Item 6. SELECTED FINANCIAL DATA The following selected consolidated financial data for the five fiscal years ended December 31, 2001,2000,1999, 1998 and 1997 are derived from the Company's audited financial statements. To better understand the following financial information, investors should also read the "Management's Discussion and Analysis of Operations." This data should also be read in conjunction with the consolidated financial statements of the Company, related notes, and other financial information included elsewhere in this Form 10-K. All numbers are in thousands, except per share amounts. In August, 1998, Softworks completed a public offering, after which the Company's ownership interest was reduced to approximately 72%. In April, 1999, the Company's ownership of Softworks was reduced below 50%, and accordingly, commencing April 1, 1999, Softworks' results are accounted for using the equity method of accounting and are no longer consolidated. See Note 3 to the Consolidated Financial Statements that provides pro forma consolidated financial information as if the sale of Softworks was consummated as of the beginning of the two years ended December 31, 2000, and 1999. Consolidated Statement of Operations Data:
Year Ended December 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Revenue $3,785 $2,120 $24,640 $61,988 $29,738 Cost of Revenue 806 322 13,044 21,018 3,663 ------ ------ ------- ------- ------- Gross Margin 2,979 1,798 11,596 40,970 26,075 ------ ------ ------- ------- ------- Research and Development 2,814 4,278 10,525 11,193 8,785 Sales and Marketing 2,532 4,644 17,417 28,496 17,033 General and Administrative 3,778 5,505 11,472 12,718 9,111 Amortization and Depreciation 985 871 4,738 4,207 2,386 Non-recurring Restructure Charge - 15,176 - - - Unusual Charges - - - - 686 -------------------------------------------------- Total Operating Expenses 10,109 30,474 44,152 56,614 38,001 -------------------------------------------------- Operating loss (7,130) (28,676) (32,556) (15,644) (11,926) Gain on Sale of Softworks - 47,813 17,107 28,785 - Equity in Earnings of Softworks - - 512 - - Gain on Sale of ComputerCOP in 2000 and Maplinx in 1997 - 8,534 - - 813 Other-Than-Temporary Decline in Investment in NetWolves (150) (29,737) - - - Corporation Interest Charge Pertaining to Discount on Convertible - (354) - - (1,288) Debenture Loss on sales of NetWolves common stock (3,666) - - - - Other (Expense) Income, net (288) 724 316 (485) 16 Minority Interest in Earnings of Softworks - - (46) (1,361) - -------------------------------------------------- (Loss) Income Before Provision for Income Taxes (11,234) (1,696) (14,667) 11,295 (12,385) Benefit From/(Provision For) Income Taxes 622 (10,040) 9,095 (1,748) - -------------------------------------------------- Net (Loss) Income $(10,612) $(11,736) $(5,572) $9,547 $(12,385) ================================================== Basic Net (Loss) Income per Share $(5.88) $(8.23) $(4.08) $8.70 $(16.65) ================================================== Diluted Net (Loss) Income per Share $(5.88) $(8.23) $(4.08) $8.40 $(16.65) ================================================== Cash Dividends Declared per Share $0 $1.50 $4.35 $0 $0 ================================================== Basic Weighted Average Common Shares Outstanding 1,804 1,426 1,364 1,102 744 ================================================== Diluted Weighted Average Common Shares Outstanding 1,804 1,426 1,364 1,135 744 ================================================== Year Ended December 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Consolidated Balance Sheet Data: Cash and Cash Equivalents $1,359 $10,851 $ 1,852 $ 8,176 $ 778 Working Capital 1,673 9,693 22,846 27,569 1,412 Total Assets 7,790 18,253 30,024 91,902 39,298 Long Term Debt, Less Current Portion 595 924 - 1,403 1,395 Minority Interest - - - 8,503 - Shareholders' Equity 4,106 10,538 24,486 34,016 9,667
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Direct Insite Corp. and its subsidiaries (hereinafter referred to as "Direct Insite" or the "Company"), primarily operate as an application service provider ("ASP") which today, markets an integrated "fee for services" offering providing high volume processing of transactional data for billing purposes, electronic bill presentation and payment ("EBP&P") as well as visual data analysis and reporting tools delivered via the Internet for our customers. Direct Insite now has integrated with its core technology, d.b.Express?, the proprietary and patented management information tool, which provides targeted access through the mining of large volumes of transactional data via the Internet, Platinum Communications, Inc. ("Platinum"), a Dallas, Texas based company which markets its integrated proprietary back office software solutions, Account Management Systems ("AMS") to the telecommunications industry either as a license or as an ASP. The Company and Platinum completed a merger under an Agreement and Plan of Merger ("Merger Agreement"). Under the Merger Agreement, a newly formed wholly owned subsidiary of the Company acquired all of the outstanding common stock of Platinum. Further, as an added source of revenue, the Company, during 2001, began providing custom engineering services for its customers. Currently, IBM Global Services, the Company's largest customer, (representing approximately 82.2% of year 2001's revenue) utilizes its core technology, d.b.Express? to allow their large enterprise customers to mine their respective high volume telecommunications data uncovering call abuse, deliver cost allocation by usage, provide for network planning, budgeting and the identification of significant trends in calling patterns. During the year 2001, due to negligible revenue and as part of its continuing effort to reduce costs and strive towards achieving operating profitability, the Company halted all marketing efforts of its Global Telecommunications Services ("GTS") offering. Seasonality/Quantity Fluctuations Revenue from managed services generally is not subject to fluctuations or seasonal flows. However, the Company believes that revenue derived from custom engineering, will have a significant tendency to fluctuate. Other factors including, but not limited to, new product introductions, domestic and international economic conditions, customer budgetary considerations, the timing of product upgrades, and fee recognition in connection with our telecommunications services may create fluctuations. As a result of the foregoing factors, the Company's operating results for any quarter are not necessarily indicative of results for any future period. Financial Condition and Liquidity During the year 2001, the Company incurred an operating loss of $7,130,000 and used $8,007,000 in operating activities. However, as a result major reductions in spending, due in large part through the implementation of the restructure plan put in affect in 2000, the Company was able to reduce its operating loss by $21,546,000 from year 2000's loss of $28,676,000 as well as reduce cash used in operating activities approximately $14,760,000 from a year ago. 14 Cash requirements of the Company have, in the past, been primarily funded through the sale of Softworks common stock, which included a series of separate transactions that included an initial public offering of Softworks in 1998, a private placement of Softworks common stock owned by the Company, a second public offering of Softworks in June 1999 and the sale of its remaining position in January 2000. Additional cash requirements for years 2001 and 2000 were derived from the sale of Netwolves common stock and the sales of Convertible Debentures in 2000. Further, during 2001 the Company raised $500,000 from the sale of its own common stock to its Chairman. As discussed above, the Company implemented a restructure plan during the first quarter of 2000. At December 31, 2001, the remaining cash requirement is $786,000, $294,000 is payable over the next twelve months, and $492,000 is payable thereafter through March 2005. See "Results of Operations" and Note 14 to the Consolidated Financial Statements for further details. On September 27, 2000, the Company entered into an agreement to sell an aggregate principal amount of $3,000,000 of Convertible Debentures (the "Debentures") bearing interest at a rate of 6% per annum. The Company sold a $2,000,000 Debenture on September 27, 2000, a $500,000 Debenture on October 27, 2000 and, an additional $500,000 Debenture on December 21, 2000. The Company received $3,000,000 less legal and other expenses aggregating $119,000. On January 30, 2001, the Company exercised its prepayment rights and paid the holders $3,700,000, plus accrued interest. As a result of the prepayment, the Company recorded a loss of $185,000 in the first quarter 2001. During 2001, the Company purchased $790,000 of additional equipment, predominantly for use in the Company's data centers. Additionally, the Company obtained the AMS technology through its acquisition of Platinum; the Company expended approximately $109,000 of net cash for this acquisition. In February 2001 the Company made an equity investment of $500,000 in Voyant Corp. The investment is reflected on the Company's balance sheet as a non-marketable security. Additionally, in November 2001, the Company acquired 15,680,167 shares of Voyant in exchange for 60,000 shares of NetWolves common stock fair valued at $156,000. Further, as part of an anti-dilution protection clause in the initial investment agreement, the Company is entitled to approximately 46,000,000 additional shares, which will increase the Company's ownership in Voyant to approximately 10.5%. Voyant is a privately held company, and accordingly, through December 31, 2001, the investment has been reflected on the Company's balance sheet as a non-marketable security, at cost. The Company recently began providing administrative services to Voyant and will begin charging Voyant $5,000 per month effective January 1, 2002; the value of these services is not readily determinable. The Company's Chairman is also the Chairman of Voyant. As a result of the foregoing, the Company believes that it has achieved a level of influence such that the Company expects to account for Voyant using the equity method commencing January 1, 2002. At December 31, 2001, the Company owned 298,500 shares of NetWolves common stock with a quoted market value $1,209,000 ($4.05 per share). During March and April 2002 the Company sold 120,000 shares receiving net proceeds of approximately $236,000. On April 5, 2002 the Company owned 178,500 shares, the quoted market value of the NetWolves common stock was $2.40 per share, aggregating $428,400. As discussed above and as detailed in the Consolidated Statement of Cash Flows, during the year ended December 31, 2001, the Company received net proceeds of $2,834,000 from the sale of NetWolves common stock and $500,000 from the sale of the Company's common stock, while utilizing $3,751,000 to repay the Debentures, $8,007,000 in operating activities (including $1,483,000 toward the restructuring), resulting in a cash balance of $1,359,000 as of December 31, 2001. Management's current short-term plan is primarily focused on achieving operating profit by successfully marketing innovative software products and services that capitalize on the Company's patented technologies. To achieve its goals, the Company has restructured its operations, which reduced its operating expenses, while continuing to market managed services, as well as continue to expand its custom engineering service. Additionally, the Company intends to increase revenue from the products and services acquired from Platinum. The Company is continually reviewing its long-term business strategy. 15 The Company is continually striving to achieve positive cash flows from operations. Significant components within the Company's plan include but are not limited to: - - The March 2000 restructure plan, which significantly reduced operating expenses; - - Expanding the Company's products and services; - - Materially improving its sales efforts through expanding its marketing staff; - - In 2002, the Company entered into a new ASP agreement with International Business Machines Corporation ("IBM"), which will enable IBM to provide an electronic invoice to their customers; - - The Company generated in excess of $800,000 in custom engineering fees in 2001 and believes that this revenue should continue into 2002; - - The Company also acquired Platinum Communications, Inc. (Note 3), which broadened the Company's product offerings. Management believes this acquisition significantly enhances the Company's current market strategy by allowing it to capitalize on the growing trend for outsource services within the communications sector; - - As an additional measure to reduce the Company's use of cash, a payroll rate reduction program was in effect October 1, 2001 through March 31, 2002. This plan reduced executive compensation 20% and the remainder of the work force incurred a 10% reduction; - - The Company was unable to generate revenue from its GTS product offering and ceased marketing this product offering and eliminated all associated costs; - - In October 2001, the Company also entered into an Accounts Receivable Purchase Agreement, which has provided an additional source of liquidity; - - In January, 2002, the Company's Chairman loaned $250,000 to the Company. This loan is due January, 2005 and bears interest at 5.0% annually. - - Subsequent to year-end the Company raised an additional $362,000 through the sale of its common stock to members of its Board of Directors, senior management and other non-related parties. Additionally, the Company has obtained a commitment from its Chairman, other members of the Board of Directors as well as its executive officers, in which they will provide up to $750,000 for working capital purposes, if needed. Management believes that its plan will ultimately enable the Company to generate positive cash flows from operations. Until such time, the Company believes that its present cash on hand, the sale of the remainder of its NetWolves common stock, as well as obtaining additional debt and/or equity financing should provide adequate funding through at least December 31, 2002. However, there can be no assurances that the Company will have sufficient funds to implement its current plan. In such an event, the Company would be forced to significantly reduce its operating expenses, which could have an adverse effect on future revenue generation. The Company's primary market is Telecommunications. It has been estimated that over $600 billion a year globally, and over $269 billion domestically was spent last year, with the largest percentage growth occurring in the wireless arena ($37 to $48 billion), which emphasizes that the telecommunications industry is lucrative and attractive. The Company believes it can provide both the provider as well as the end- user, with products and services that offer improved service as well as valuable information. Internet and wireless communications are introducing change to an industry that is already undergoing structural change (fiber optic cable vs. copper), deregulation, globalization, and technology. With the tremendous increase in call detail records (CDR) and data packets (DP) that will travel over wired and wireless networks, the Company believes that it is well positioned to benefit from these market conditions with its software and services offerings. Results of Operations Fiscal 2001 Compared to Fiscal 2000 For the year ended December 31, 2001, total revenue increased 78.5% or $1,665,000, to $3,785,000 when compared to the year ended December 31, 2000. During 2001, revenue from ASP fees for its managed services offering amounted to 16 $2,506,000 or nearly two-thirds (66.2%) of the Company's revenue, a $459,000 (22.4%) increase in same source revenue over the prior year. This increase is primarily the result of new / expanded services with International Business Machines Corporation ("IBM"). During the second half of 2001, the Company entered into a new agreement with IBM wherein for a per transaction fee, the Company enables IBM to present invoices to a portion of its customers via the Internet. This EBP&P offering has since been expanded to include additional functionality. In March 2002, the parties signed a new agreement, which allows IBM to expand this EBP&P offering to more of its customers, both domestic and international. The Company continues to provide data analysis and reporting services for IBM's telecommunications customers. During 2001, the Company began providing custom integration / engineering services. Revenue generated from this offering aggregated $814,000 for the year ended December 31, 2001. Management believes that revenue generated from custom engineering services should continue into 2002. The Company further believes that revenue generated from engineering services is the precursor to added recurring revenue sources. In an effort to better serve its customers, the Company built a fully redundant facility within an IBM co-location center, the purpose of which is to ensure virtual zero down time. IBM is currently the Company's largest customer, accounting for approximately 82.2% of total revenue or $3,110,000 and $1,707,000, or 80.5% of total revenue for 2001 and 2000, respectively. Further, the Company is presently investigating entry into new specific markets for these managed services. Included in total revenue for 2001, is $465,000 generated by Platinum. (See Note 3). In May 2001 the Company completed the acquisition of Platinum, which developed and markets an integrated proprietary suite of back office software solutions, known as AMS to the telecommunications industry as an ASP. Included in revenue for 2000, is $31,000 related to ComputerCOP, which was sold during the first quarter of 2000. (See Note 3) For the year ended December 31, 2001, cost of revenue attributable to managed services was $406,000 or 16.2% on respective revenue, approximately one percentage point higher than the previous year. Cost of revenue, associated with recently acquired AMS revenue was 16% or approximately $74,000. The most significant components of managed services cost of revenue and AMS cost of revenue include direct labor associated with processing call detail records, Internet connectivity costs and various overhead allocations, rent, utilities and telephones. Costs relating to custom engineering fees aggregated to $326,000 or 40.0% and consisted primarily of direct labor plus related employee benefits, travel and consulting fees. The Company believes that it will be able to maintain the cost to revenue ratio during the coming year. For the year ended December 31, 2000, the Company also incurred cost of revenue of $46,000 relating to ComputerCOP. There is no depreciation or amortization included in cost of revenue. Research and development expenses consist primarily of salaries and related costs (benefits, travel, training) for developers, sales application engineers, quality control / quality assurance and documentation personnel. It also includes consultants as well as applicable overhead allocations. Overall, when comparing the full year 2001 with full year 2000, the Company reduced its research and development expenses by $1,464,000. However, included in 2000 were costs associated with the development of a multi-media display station. Pursuant to the restructuring plan put in place during March 2000, the Company ceased development of the multi-media display station. As a result, there are no expenses attributable to this project in 2001, thereby creating a reduction of $1,793,000 when compared to 2000. Offsetting this decrease was $284,000 incurred as a result of the acquisition of Platinum. With respect to ASP- managed services, the Company continues to upgrade, improve and enhance its current products and services. As a result, development expenses directly attributable to managed services increased over prior year by $45,000. Management believes that it is critical to maintain a qualified personnel staff and, further to continue to enhance as well as develop new and innovative services and products. As such, it is likely that these costs could increase in future periods. 17 Sales and marketing expenses include salaries and related costs, commissions, travel, facilities, communications costs and promotional expenses for the Company's direct sales organization and marketing staff. Sales and marketing expenses decreased $2,112,000 to $2,532,000 for the year ended December 31, 2001, when compared to $4,644,000 for the year ended December 31, 2000. The major factor for this decrease was the restructure plan, which included, among other items, the elimination of $690,000 related to consultants' fees, $333,000 reduction in travel and entertainment expenses, and $397,000 in reduced staffing levels. Further, as part of the restructure plan, there was a reduction of expenses of $597,000 as a result of a contractual arrangement wherein the Company no longer is responsible for the marketing efforts relating to the multi-media display station. The Company has also reduced by nearly $124,000 its advertising and promotional costs and $55,000 and $40,000 related to auto expense and telephone expense, respectively. An additional component of the reduction is the sale of ComputerCOP in the first quarter 2000, which created a savings of $210,000. These reductions were offset by an increase of $136,000 of expenses attributable to the sales and marketing efforts of the Company's GTS offering as well as $410,000 to the Company's newly acquired subsidiary, Platinum. As a result of minimal revenue generated by GTS, we have decided to no longer market this product offering. As such, sales and marketing costs associated to the GTS product offering which totaled $366,000 during 2001 will not reoccur in future periods. General and administrative expenses include administrative and executive salaries and related benefits, legal, accounting and other professional fees as well as general corporate overhead. Expenses decreased $1,727,000 to $3,778,000 for year ended December 31, 2001, when compared to the year ended December 31, 2000. Major factors contributing to this decrease include, among other things, the cost savings generated by the implementation of the restructure plan in 2000, which resulted in net reductions in wages and related benefits of approximately $928,000. In additional the Company was able to reduce legal expenses $479,000, reduced its travel and entertainment by $147,000, and eliminated or reduced its dependency on financial consultants by $196,000. These reductions were offset by $113,000 attributable to the Company's newly acquired subsidiary, Platinum. It should be noted that general and administrative costs associated to the GTS product offering, which totaled $104,000 for the year ended December 31, 2001 will not reoccur in future periods as a result of management's decision to no longer market this product offering. Amortization and depreciation expenses increased $114,000 when comparing the years ended December 31, 2001 and 2000, respectively. The increase is primarily attributable to the purchase of property and equipment during the respective periods and amortization of intangibles associated with Platinum. Gain on sale of Softworks of $47,813,000 during 2000 represents the gain associated with a tender offering for the purchase of Softworks common stock made by EMC Corporation, which was completed on January 27, 2000. (See Note 3) Gain on sale of ComputerCOP assets held for sale of $8,534,000 during 2000 represents the gain associated with an agreement dated February 10, 2000 for the sale of the ComputerCOP subsidiary to NetWolves Corporation. (See Note 3). During the year ended December 31, 2001, the Company sold 466,500 shares of NetWolves common stock in the open market, 1,000,000 shares in a private transaction, and exchanged 110,000 shares for various services, resulting in a net loss on sales of approximately $3,666,000. During 2001 and 2000, the Company determined that there was an other-than-temporary decline in the carrying value of its investment in NetWolves. As such, the Company recorded an unrealized loss of $150,000 and $29,737,000, respectively, in the Consolidated Statements of Operations (See Note 8). As a result of the Company's sale of its remaining interest in Softworks in January 2000 and the sale of its ComputerCOP technology in February 2000, the Company recognized a taxable gain in the first quarter of 2000 and utilized approximately $36,000,000 of its net operating loss carryforwards ("NOLs"). The Company's tax provision for year ended December 31, 2000, of $10,040,000, consisted of deferred tax expense of $9,197,000 and current tax expense of $843,000, which was primarily based upon the alternative minimum tax. The 18 Company's tax benefit for the year ended December 31, 2001 was approximately $622,000. The tax benefit is generated from the Company's ability to carryback capital losses to obtain a refund of a portion of the alternative minimum taxes paid for 2000. The Company currently has $49 million of NOLs available to be utilized in 2002 that expire through 2021. While usage of these NOLs could be limited pursuant to Internal Revenue Code Section 382 as a result of future changes in control (if any), the Company currently expects that usage of its NOLs will result in nominal current income tax expense in the foreseeable future. The Company has not recorded a deferred income tax benefit from these NOLs, since it has provided a valuation allowance due to the uncertainty of their realization. Fiscal 2000 Compared to Fiscal 1999 Commencing April 1, 1999, Softworks' results were accounted for using the equity method of accounting and were no longer consolidated. Under the equity method of accounting, the Company's share of Softworks' earnings or losses was included in the Company's consolidated operating results in a single line item. Pro forma consolidated operating results as if Softworks were accounted for using the equity method for the entire year ended December 31, 1999, on a consistent basis with the actual results for 2000, is as follows: 20 Direct Insite Corp. and Subsidiaries Pro Forma Condensed Consolidated Statements of Operations For the year ended December 31, ( in thousands)
2000 1999 ---- ---- (Actual) (Pro-forma) Revenue Software licenses, net $ 31 $ 607 Maintenance 42 42 Managed services 2,047 1,436 Professional services - 12,297 ------- ------- 2,120 14,382 Cost of Revenue Software licenses 11 242 Maintenance - - Managed services 311 317 Professional services - 11,721 ------- ------- 322 12,280 ------- ------- Gross margin 1,798 2,102 ------- ------- Research and development costs 4,278 8,025 Sales and marketing costs 4,644 12,476 General and administrative costs 5,505 10,281 Non-recurring restructuring charge 15,176 - Amortization and depreciation 871 4,028 ------- ------- 30,474 34,810 ------- ------- Operating loss (28,676) (32,708) Gain on partial disposition of Softworks 47,813 17,107 Gain on sale of ComputerCOP 8,534 - Other-than-temporary decline in Investment in NetWolves (29,737) - Other 370 874 ------- ------- Loss before income taxes (1,696) (14,727) (Provision for) benefit from income taxes (10,040) 9,155 ------- ------- Net loss $(11,736) $(5,572) ======= =======
20 The following discussion dealing with the results of operations for the two years ended December 31, 2000 and December 31, 1999 are based on the operating results as presented in the above table. During 2000, the Company's primary source of revenue was generated from managed services. For the year ended December 31, 2000, total revenue decreased by $12,262,000, as compared to the year ended December 31, 1999. In January, 2000, the Company elected to significantly curtail operations of its business unit, marketed as professional services, which primarily resold computer hardware and assisted in the design, and installation of technology systems. For the year ended December 31, 1999, this business unit had one major contract involving two major customers, with combined revenue of $12,297,000. However, this business unit generated low margins, and operated in a highly competitive and volatile business arena. Accordingly, management elected to significantly curtail the operations of this unit, as it does not coincide with its short and long-range business plans. The Company did not have any other sales contracts. In February 2000 the Company sold the ComputerCOP Corp subsidiary accounting for a decrease in the software license revenue of $576,000. For the year ended December 31, 2000 managed services revenue was $2,047,000,an increase of $611,000 or 43% over the prior year. Managed services generates higher gross margin than the hardware reselling business. Managed services cost of revenue consists primarily of the direct labor associated with processing call detail records. The cost of revenue related to the resale of computer hardware consisted primarily of amounts paid to the Company's suppliers for goods and services. While managed services revenue for 2000 increased 43% when compared to 1999, cost of revenue as a percentage of managed services revenue, decreased to 15.2% in 2000 from 22.1% in 1999. The Company believes that the cost of revenue associated with managed services revenue is not directly proportional. As such, as revenue increases, costs, as a percentage of revenue, should decrease. The depreciation of managed services's hardware is included in "Amortization and depreciation." Research and development expenses include costs for the development of the multi-media display station (until the project was halted by the restructuring plan), salaries and related costs for software developers, quality assurance and documentation personnel involved in the Company's research, development and maintenance efforts. Costs attributable to the development of the multi-media display station was $3,826,000 for the year ended December 31, 1999, and decreased by $2,033,000 to $1,793,000 for the year ended December 31, 2000. Pursuant to the restructuring plan, the Company ceased development of this project in the first quarter of 2000, thereby eliminating these development costs. With respect to managed services, when comparing 2000 and 1999, the Company reduced its development costs by $1,714,000. However, the Company believed that costs attributable to further enhancing product and services offerings, porting the technology to a LINUX platform and development costs directly associated with the co-location facility could result in increases to overall research and development expenses during 2001. Sales and marketing expenses include salaries and related costs, commissions, travel, facilities, communications costs and promotional expenses for the Company's direct sales organization and marketing staff. For the year ended December 31, 2000, expenses decreased by $7,832,000 to $4,644,000 when compared to $12,476,000 for the same period last year. Included in this decrease were reductions pursuant to the restructuring plan including $3,151,000 related to consultants' fees; $626,000 to reduced staffing levels; reductions of approximately $3,696,000 due to the sale of ComputerCOP; $167,000 reduction in travel and entertainment expenses; and $194,000 pertaining to efforts to market the multi-media display station. Offsetting these decreases was $230,000 of expenses attributable to the Company's new consulting service. Management believed that, overall, this category would significantly decrease as a result of the restructure plan. General and administrative expenses include administrative and executive salaries and related benefits, legal, accounting and other professional fees as well as general corporate overhead. Expenses decreased $4,776,000 to $5,505,000 for the year ended December 31, 2000, when compared to the year ended December 31, 1999. Major factors contributing to the decrease include, among other things, various savings directly attributable to the restructure plan, such as staff reductions, reduced legal expenses and the reduction in the retention of financial consultants. The Company anticipated recognizing additional reductions during 2001. 21 As discussed above, the Company implemented a restructure plan during the first quarter of 2000. As a result, for the year ended December 31, 2000, the Company recorded a non-recurring restructuring charges of $15,176,000 related to the termination of 53 employees, retirement packages for certain Company officers and directors, and the termination of certain long-term consulting contracts and operating leases. The Company anticipated that the cost-saving initiatives would continue into 2001 and could result in additional charges. Amortization and depreciation expenses decreased $3,157,000 when comparing the years ended December 31, 2000 and 1999. The decrease is primarily attributable to the elimination of purchased software and goodwill acquired in the ComputerCOP transaction. Gain on sale of Softworks of $47,813,000 represents the gain associated with a successful tender offer for Softworks common stock made by EMC Corporation, which was completed in January, 2000. Gain on sale of ComputerCOP assets held for sale of $8,534,000 represents the gain associated with the sale in February 2000 of the ComputerCOP subsidiary to NetWolves Corporation. During the fourth quarter of 2000, the Company, in accordance with Staff Accounting Bulletin No. 59, determined that there was an other-than-temporary decline in the carrying value of its investment in NetWolves. As such, the Company recorded an unrealized loss of $29,737,000 in the Consolidated Statement of Operations. See Note 3 to the Consolidated Financial Statements. As a result of the Company's sale of its remaining interest in Softworks in January 2000 and the sale of its ComputerCOP technology in February 2000, the Company recognized a taxable gain in the first quarter of 2000 and utilized approximately $36,000,000 of its net operating loss carryforwards. The Company's tax provision for year ended December 31, 2000, of $10,040,000, consisted of deferred tax expense of $9,197,000 and current tax expense of $843,000, which was primarily based upon the alternative minimum tax. 22 Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item. Item 8. FINANCIAL STATEMENTS The financial statements and exhibits to Form 10 - K are included beginning on page F-1 and are indexed under Items 14(a), and 14 (b) respectively. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE Previously disclosed. 23 Part III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Directors and Executive Officers As of April 1, 2002, the names, ages and positions of the directors and executive officers of the Company are as follows:
Name Age Position Committee Member - ---- --- -------- ---------------- James A Cannavino 57 Chairman of the Board of Directors Audit, Compensation Charles Feld 60 Member of the Board of Directors Compensation Dennis Murray 56 Member of the Board of Directors Audit Carla Stovall 45 Member of the Board of Directors Audit Warren Wright 42 Chief Executive Officer Anthony Coppola 47 President George Aronson 53 Chief Financial Officer, Secretary
James A. Cannavino has been our Chairman of the Board since March 2000. Mr. Cannavino also has been the Chairman of Voyant Corporation since February 2000. From September of 1997 to April of 2000 he was elected non-executive Chairman of Softworks, Inc (a wholly owned subsidiary of Computer Concepts), which went public and was later sold to EMC. Mr. Cannavino was also the Chief Executive Officer and Chairman of the Board of Directors of CyberSafe, Inc., a corporation specializing in network security from April 1998 to July 2001. In August, 1995, he was hired as President and Chief Operating Officer of Perot Systems Corporation. In 1996 was elected to serve as Chief Executive Officer through July 1997 During his tenure at Perot, he was responsible for all the day-to-day global operations of the company, as well as for strategy and organization. Prior to that he served as a Senior Vice President at IBM, responsible for strategy and development. Mr. Cannavino's career worked over thirty years at IBM beginning in 1963. Mr. Cannavino led IBM's restructuring of its $7 billion PC business to form the IBM PC Company. He also served on the IBM Corporate Executive Committee and Worldwide Management Council, and on the board of IBM's integrated services and solutions company. . He also was a board member for three IBM joint-venture companies, including Prodigy Services, Inc.; Digital Domain, Inc.; and NewLeaf Entertainment. Mr. Cannavino presently serves on the Boards of the National Center for Missing and Exploited Children, the International Center for Missing and Exploited Children, Verio , and is Chairman of Artimas International. He recently was Chairman of the Board of Marist College in Poughkeepsie, New York and continues to serve on the board. Mr. Cannavino will serve on the Board until the next annual meeting of Shareholders. Charles Feld founded the Feld Group in 1992 to offer Fortune 500 and emerging companies the technology leadership they need to transform themselves into category leaders. As CEO and President of the Dallas-based firm, Mr. Feld currently serves as acting CIO at First Data Resources. His earlier Feld Group engagements include working transformational change as CIO and e-Leader at Delta Air Lines by building the framework to place the airline at the forefront of Global 1000 companies that understand and embrace the new economy. The Delta Technology team received the Smithsonian Award for Technology Excellence in 1998. As CIO of Burlington Northern, Charlie spearheaded the merger of the railroad's technologic systems and organization with those of the Santa Fe Railroad. Before launching The Feld Group in 1992, he was Vice President/CIO at Frito-Lay, Inc., where he played a pivotal role in streamlining the data network and developing the hand-held computer network for Frito-Lay's sales force. His team at Frito-Lay won the Smithsonian Award for Technology Excellence in 1998. Mr. Feld has been a member of the Board of Directors since March 2000, and will serve in such capacity until the next annual meeting of the shareholders. 24 Dr. Dennis J. Murray has been President of Marist College since 1979. Early in his tenure, he identified the importance of technology in higher education and made it one of the central themes of his administration. He developed an innovative joint study with the IBM Corporation, which resulted in Marist becoming one of the nations most technologically advanced liberal arts colleges. Marist was one of the first colleges or universities in the country to have a fully networked campus, and currently operates on an IBM G5 S/390 system. Dr. Murray has been a strong supporter of the Linux operating system and recently initiated a Linux Research and Development Center at Marist. Dr. Murray serves on the boards of the Franklin and Eleanor Roosevelt Institute, McCann Foundation, and the Greenway Conservancy for the Hudson River Valley, which oversees the National Heritage Area. He is also the author of two books on nonprofit management, editor of three books on government and public affairs, and co-author of a guide to corporate-sponsored university research in biotechnology. Mr. Murray has been a member of the Board of Directors since March 2000, and will serve in such capacity until the next annual meeting of the shareholders. Carla J. Stovall has been the Attorney General for the State of Kansas since 1994. Attorney General Stovall also currently serves as Vice President of the National Association of Attorneys General and will become the Association's president in 2001. She is also a member of the Board of Directors of the American Legacy Foundation, the national Center for Missing and Exploited Children, the National Crime Prevention Council and the Council of State Governments. In addition, she is a member of the Board of Governors of the University of Kansas School of Law and a member of the Kansas Children's Cabinet. Attorney General Stovall recently was honored with the Distinguished Service to Kansas' Children Award. Ms. Stovall has been a member of the Board of Directors since April 2000, and will serve in such capacity until the next annual meeting of the shareholders. Warren Wright was appointed CEO effective December 2000 after serving as a sales and marketing consultant to the Company since July, 1999. Prior to his joining the Company, Mr. Wright had been a marketing consultant based in New York for four years, providing consulting services to several e-commerce and technology companies including Voyant Corp., Direct Media Networks and Laguna Corporation. Prior to consulting, Mr. Wright was Sr. Vice president - Sales and Marketing for King Products, a Canadian based manufacturer of advanced multi-media telecommunication products and software. Mr. Wright was responsible for strategic alliances and the expansion of distribution internationally. Prior to his tenure at King products, Mr. Wright developed and sold a direct media advertising publication and also served as Marketing Manager for Westcan Electrical Manufacturing (a division of Siemens AG). Mr. Wright holds a degree in Economics from the University of Western Ontario and completed graduate work at Ohio University. Anthony Coppola was appointed President in March, 2000. From January, 1999 until his appointment as President, Mr. Coppola was Executive Vice President in charge of development, marketing and sales of our d.b.Express based telecommunications Electronic Bill Presentment Payment Analysis and Reporting software. Beginning in 1994, Mr. Coppola worked with us in various capacities related to sales and marketing management. His responsibilities included the management and direction of the design and programming for the telecommunications applications, as well as direct involvement with the sales and marketing of our applications and services to IBM and our other primary customers. Prior to joining us , Mr. Coppola was President of America Multimedia Corp., a firm active in consulting and the development and marketing of industry specific training software. George Aronson, CPA, has been the Chief Financial Officer of the Company since August, 1995. From March, 1989, to August, 1995, he was the Chief Financial Officer of Hayim & Co., an importer/distribution organization. Mr. Aronson graduated from Long Island University with a major in accounting in 1972 receiving a Bachelor of Science degree and is a Certified Public Accountant. 25 Item 11. EXECUTIVE COMPENSATION The following table sets forth the annual and long-term compensation with respect to the Chief Executive Officer and each of the other executive officers of the Company who received more than $100,000 for services rendered for the year ended December 31, 2001.
Summary Compensation Table Annual Compensation Long-Term Compensation ---------------------------------- ------------------------------- Restricted Securities Name and Fiscal Other Annual Stock Awards Underlying Principal Position Year Salary Bonus Compensation (2)(3)(5) Options/Warrants - ---------------------------------------------------------------------------------------------------------- Warren Wright (1)(5) 2001 $184,000 $ -- -- $ 25,000 25,000 Chief Executive 2000 90,000 -- -- -- -- Officer 1999 20,000 -- -- -- -- Anthony Coppola(2)(4)(5) 2001 $181,000 $ 37,000 -- $ 50,000 15,000 President 2000 154,000 95,000 -- -- 7,600 1999 136,000 200,000 -- 218,000 667 George Aronson(2)(3) 2001 $166,000 $ -- -- $ -- 15,000 Chief Financial Officer 2000 175,000 -- -- 500,000 6,667 1999 170,000 150,000 -- 382,000 -- Arnold Leap(2) 2001 $169,000 $ -- -- $ 17,000 15,000 Chief Technology Officer 2000 126,000 31,000 -- -- 9,667 1999 112,000 -- -- 62,000 2,333 Footnotes - --------- (1) Mr. Wright was appointed CEO November 30, 2000. (2) The Company granted cash bonuses in 1999, to Messrs. Aronson and Coppola in the amounts of $150,000 and $200,000, respectively. Mr. Coppola received $218,000 in the form of the Company's common stock. The remainder of Mr. Aronson's 1999 bonus consists of restricted shares of Softworks common stock. Mr. Leap received 3,000 shares of Softworks common stock in 1999. (3) In February 2000, Mr. Aronson received 25,000 shares of common stock of Netwolves Corporation that was valued at $20 per share at the time of grant. (4) Mr. Coppola was appointed President in March 2000. (5) The Company granted stock bonus' in 2001 to Messrs. Wright, Coppola and Leap in the amounts of $25,000, $50,000and $17,000, respectively. Mr. Coppola also received a $37,000 cash bonus in 2001.
Option/SAR Grants in Last Fiscal Year - ------------------------------------- During 2001 the following options grants were made to the named executive officers: The hypothetical value of the options as of their date of grant has been calculated using the Black- Scholes option-pricing model, as permitted by SEC rules, based upon various assumptions, which include: expected volatility of 74.1%, risk free interest rate of 5.79% and expected lives of 1.00 to 4.50 years. The approach used in developing the assumptions upon which the Black-Scholes valuations were calculated is consistent with the requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." It should be noted that this model is only one method of valuing options, and the Company's use of the model should not be interpreted as an endorsement of its accuracy. The actual value of the options may be significantly different, and the value actually realized, if any, will depend upon the excess of the market value of the common stock over the option exercise price at the time of exercise. 26
% of Total Options Number of Granted Hypothetical Options Employees Exercise Expiration Value at Name Granted in Fiscal Year Price Date Grant Date - ---- ---------- -------------- -------- ----------- ------------- Warren Wright 25,000 9.7% $ 1.63 04/30/06 $20,000 Anthony Coppola 15,000 5.8% 1.63 04/30/06 12,000 George Aronson 15,000 5.8% 1.63 04/30/06 12,000 Arnold Leap 15,000 5.8% 1.63 04/30/06 12,000
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values The following table set forth certain information with respect to stock option exercises by the named executive officers during the fiscal year ended December 31, 2001, and the value of unexercised options held by them at fiscal year-end.
Number of Unexercised Value of Unexercised Options at Fiscal In-the-Money Options Year End At Fiscal Year End (1) Shares Acquired Value Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable ---- ---------------- ------------ ----------- ------------- ----------- -------------- Warren Wright -- -- 12,500 12,500 $ -- $ -- Anthony Coppola -- -- 20,284 10,033 -- -- George Aronson -- -- 24,167 7,500 -- -- Arnold Leap -- -- 15,697 10,500 -- -- Footnotes - --------- (1) Market Value of the Company's Common stock on December 31, 2001, was $1.27. There were no in the money options at year-end.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the beneficial ownership of shares of voting stock of the Company, as of March 25, 2002, of (i) each person known by the Company to beneficially own 5% or more of the shares of outstanding common stock, based solely on filings with the Securities and Exchange Commission, (ii) each of the Company's executive officers and directors and (iii) all of the Company's executive officers and directors as a group. Except as otherwise indicated, all shares are beneficially owned, and investment and voting power is held by the persons named as owners. 27
Common Stock Rights to Acquire Total Beneficially Beneficially Beneficial Ownership Through Owned as % of Name of Beneficial Owner Owned exercise of Options Within 60 Days Outstanding Shares (2) - ------------------------ ------------ ---------------------------------- ---------------------- James Cannavino 414,023 86,833 15.0% Charles Feld 112,618 11,667 3.8 Dennis Murray 65,440 11,667 2.4 Carla Stovall 14,470 11,667 * Warren Wright 34,761 40,833 2.3 Anthony Coppola 38,018 53,650 2.8 George Aronson 10,200 45,000 1.7 All Officers and Directors as a Group (7 persons) 689,530 261,317 27.0% - ------- * = Less than 1% Footnotes (1) The address of the holder is 80 Orville Drive, Suite 200, Bohemia, New York 11716. (2) Based upon 3,259,932 outstanding as of March 25, 2002, plus outstanding options exercisable within 60 days owned by above named parties.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In February 2001, the Company acquired 2,000,000 shares of Voyant Corporation, a private company, through an equity investment of $500,000. Additionally, in November 2001, the Company acquired 15,680,167 shares in exchange for 60,000 shares of NetWolves common stock, with a value of $156,000. Further, as part of an anti-dilution protection clause in the initial investment agreement, the Company is entitled to approximately 46,000,000 additional shares, which will increase the Company's ownership in Voyant to approximately 10.5%. The Company recently began providing administrative services to Voyant and will begin charging Voyant $5,000 per month effective January 1, 2002; the value of these services is not readily determinable. On August 21, 2001, the Company privately sold 212,766 restricted shares of its common stock at $2.35, a premium to the market price, to its Chairman for an aggregate consideration of $500,000. In January 2002, the Company entered into a two-year services agreement with its Chairman. During the first year of this agreement, compensation will consist of 180,000 restricted shares of the Company's common stock. During the second year of this agreement compensation shall consist of a monthly fee of $15,000. Further, the Chairman shall receive 240,000 stock options, which vest ratably during months one through twenty-four of the term of this Agreement. The stock options shall have an exercise price equal to the closing price of the Company's common stock as indicated on NASDAQ on that date of this agreement. In January 2002, the Company sold 344,524 shares of the Company's common stock at market in a private placement for $1.05 per share or an aggregate of $361,750. The participation of the Company's executive officers and directors were as follows: Charles Feld Director 100,000 shares Dr. Dennis Murray Director 50,000 Warren Wright C.E.O. 9,524 Anthony Coppola President 1,905 George Aronson C.F.O. 3,333 In January 2002, the Company's Chairman loaned the Company $250,000. The term of the loan is three years and bears interest at 5.0% payable quarterly in arrears. 28 PART IV Item 14. (a) 1. FINANCIAL STATEMENTS Page ---- Report of Independent Certified Public Accountants F-1 Consolidated Balance Sheets December 31, 2001 and 2000 F-2 Consolidated Statements of Operations Years Ended December 31, 2001, 2000 and 1999 F-4 Consolidated Statement of Shareholders' Equity Years Ended December 31, 2001, 2000 and 1999 F-5 Consolidated Statements of Cash Flows Years Ended December 31, 2001, 2000 and 1999 F-8 Notes To Consolidated Financial Statements F-10 14. (a). 2. - SCHEDULES NONE 4. (a). 3. - EXHIBITS 3.1 (a) Certificate of Incorporation, as amended. (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1) (b) Certificate of Amendment (Change in Name) (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1) (c) Certificate of Amendment (Change in Name) (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1) (d) Certificate of Amendment (Authorizing Increase in Shares of Common Stock) (Incorporated by reference to Exhibit 3 (i) (d) to Form 10-K for the year ended 1995). (e) Certificate of Amendment (Authorizing one for ten reverse-stock split as of March 30, 1998). 3.2 By-Laws. (Incorporated by reference to Exhibit 3(d) to the Company's Form S-1 Registration Statement).(1) 4.1 Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4 to the Company's Form S-1 Registration Statement).(1) 29 4.2 Rights Agreement dated as of August 28, 2001 between the Company and Manhattan Transfer Registrar Company, as Rights Agent. (Incorporated by reference to Exhibit 4 to the Company's Form 8-K dated August 28, 2001. 10.1 Directors, Officers and Consultants 1993 Stock Option Plan (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed on June 28, 1995). 10.2 Employees 1993 Stock Option Plan (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 filed on June 28, 1995). 10.3 1995 Incentive Stock Plan (Incorporated by reference to Exhibit 5 to the Company's Proxy Statement filed on January 29, 1996). 10.4 2000 Stock Option Plan. 10.5 2001 Stock Option/Stock Issuance Plan. 10.6 2001-A Stock Option/Stock Issuance Plan. 10.7 2002 Stock Option/Stock Issuance Plan. 10.8 Lease Extension Agreement between Atrium Executive Center and the Company (Incorporated by reference to Exhibit 10 (g) (ii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.9 Offer to Purchase dated December 23, 1999, among Eagle Merger Corp., EMC Corporation and the Company (Incorporated by reference to Exhibit 1 to the Company's Form 8-K filed on February 9, 2000). 10.10 Indemnification Agreement dated December 21, 1999, among EMC Corporation, Eagle Merger Corp. and the Company (Incorporated by reference to Exhibit 2 to the Company's Form 8-K filed on February 9, 2000). 10.11 Indemnification Agreement dated December 21, 1999, between Softworks, Inc. and the Company (Incorporated by reference to Exhibit 3 to the Company's Form 8-K filed on February 9, 2000). 10.12 Escrow Agreement dated December 21, 1999, among EMC Corporation, Eagle Merger Corp., the Company and State Street Bank and Trust Company, Inc. as escrow agent (Incorporated by reference to Exhibit 4 to the Company's Form 8-K filed on February 9, 2000). 10.13 Exchange Agreement, dated February 10, 2000, among the Company, NetWolves Corporation and ComputerCOP Corp. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on March 2, 2000). 10.14 Agreement and Plan of Merger by and among Platinum Acquisition Corp., the Company, Platinum Communications, Inc., Kevin Ford and Ken Tanoury dated May 10, 2001 (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 2001). 10.15 Employment Agreement between the Company and Kevin Ford dated May 10, 2001 (Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q for the quarter ended June 30, 2001). . 10.16 Employment Agreement between the Company and Ken Tanoury dated May 10, 2001 (Incorporated by reference to Exhibit 10.3 to the Company's Report on Form 10-Q for the quarter ended June 30, 2001). . 10.17 Employment Agreement between the Company and Anthony Coppola dated December 1, 2001. 10.18 Services Agreement between the Company and James A. Cannavino dated January 18, 2002. 16.1 Dismissal of Independent Auditors. (Incorporated by reference to Form 8-K dated May 29, 1997). 16.2 Engagement of New Independent Auditors. (Incorporated by reference to Form 8-K dated June 3, 1997). 23(a) Consent of Markum & Kliegman, LLP. - ---------- (1) Filed with Form S-1, Registration Statement of the Company Reg. No 3-47322 and are incorporated herein by reference. 14. (b). - REPORTS ON FORM 8-K None 31 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 12th day of April 2002. DIRECT INSITE CORP. /s/ Warren Wright By: ______________________________________ Warren Wright, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on April 12, 2002 the following persons in the capacities indicated: /s/ James A. Cannavino ________________________ Chairman of the Board James A. Cannavino /s/ Warren Wright ________________________ Chief Executive Officer Warren Wright /s/ George Aronson ________________________ Chief Financial Officer George Aronson /s/ Charles Feld ________________________ Director Charles Feld /s/ Dennis J. Murray ________________________ Director Dennis J. Murray ________________________ Director Carla J. Stovall 32 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2001, 2000 and 1999 DIRECT INSITE CORP. AND SUBSIDIARIES CONTENTS Page INDEPENDENT AUDITORS' REPORT F-1 FINANCIAL STATEMENTS Consolidated Balance Sheets F-2 - F-3 Consolidated Statements of Operations F-4 Consolidated Statement of Shareholders' Equity F-5 - F-7 Consolidated Statements of Cash Flows F-8 - F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10 - F-43 INDEPENDENT AUDITORS' REPORT ---------------------------- Board of Directors and Shareholders Direct Insite Corp. Bohemia, New York We have audited the accompanying consolidated balance sheets of Direct Insite Corp. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Direct Insite Corp. and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ Marcum & Kliegman LLP February 28, 2002 Woodbury, New York F-1 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2001 and 2000
ASSETS 2001 2000 --------------------------- CURRENT ASSETS - -------------- Cash and cash equivalents $1,359 $10,851 Accounts receivable, net of allowance for doubtful accounts of $53 and $70 in 2001 and 2000, respectively 1,098 260 Investment in NetWolves Corporation 1,209 4,922 Prepaid expenses and other current assets 1,096 451 ------ ------- Total Current Assets 4,762 16,484 PROPERTY AND EQUIPMENT, net 1,278 1,140 - ---------------------- SOFTWARE COSTS, net 508 -- - -------------- INVESTMENT IN NON-MARKETABLE SECURITIES 656 -- - --------------------------------------- OTHER ASSETS 586 629 - ------------ ------ ------- TOTAL ASSETS $7,790 $18,253 ====== ======= The accompanying notes are an integral part of these consolidated financial statements.
F-2 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2001 and 2000
LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ 2001 2000 --------------------------- CURRENT LIABILITIES - ------------------- Accounts payable and accrued expenses $ 2,057 $ 1,715 Restructuring costs payable, current portion 294 1,526 Due to bank 448 -- Current portion of long-term debt 290 -- Convertible debentures, net of discount of $305 -- 2,695 Income taxes payable -- 855 ---------- --------- Total Current Liabilities 3,089 6,791 OTHER LIABILITIES - ----------------- Long-term debt, net of current portion 103 -- Restructuring costs payable, long-term 492 924 ---------- --------- TOTAL LIABILITIES 3,684 7,715 ---------- --------- COMMITMENTS AND CONTINGENCIES - ----------------------------- SHAREHOLDERS' EQUITY - -------------------- Common stock, $.0001 par value; 150,000,000 shares authorized; 2,472,866 and 1,449,871 shares issued in 2001 and 2000, respectively; and 2,401,828 and 1,425,500 shares outstanding in 2001 and 2000, respectively -- -- Additional paid-in capital 104,573 103,569 Unearned compensation -- (115) Accumulated deficit (100,114) (89,502) Accumulated other comprehensive loss (25) (3,086) ---------- --------- 4,434 10,866 Common stock in treasury, at cost; 24,371 shares in 2001 and 2000 (328) (328) ---------- --------- TOTAL SHAREHOLDERS' EQUITY 4,106 10,538 ---------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,790 $ 18,253 ========== ========= The accompanying notes are an integral part of these consolidated financial statements.
F-3 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 ---------------- ----------------- ---------------- REVENUE $ 3,785 $ 2,120 $ 24,640 COST OF REVENUE 806 322 13,044 --------- --------- -------- GROSS MARGIN 2,979 1,798 11,596 --------- --------- -------- OPERATING EXPENSES Research and development 2,814 4,278 10,525 Sales and marketing 2,532 4,644 17,417 General and administrative 3,778 5,505 11,472 Amortization and depreciation 985 871 4,738 Non-recurring restructuring charge -- 15,176 -- --------- --------- -------- TOTAL OPERATING EXPENSES 10,109 30,474 44,152 --------- --------- -------- Operating Loss (7,130) (28,676) (32,556) OTHER INCOME (EXPENSE) Gain on sale of Softworks -- 47,813 17,107 Equity in earnings of Softworks -- -- 512 Minority interest in earnings of Softworks -- -- (46) Gain on sale of ComputerCOP -- 8,534 -- Loss on sales of NetWolves common stock (3,666) -- -- Other-than-temporary decline in Investment in NetWolves (150) (29,737) -- Interest income (expense), net (363) 370 316 Other income (expense) 75 -- -- --------- --------- -------- Loss Before BENEFIT FROM (Provision FOR) income taxes (11,234) (1,696) (14,667) Benefit FROM (Provision for) Income Taxes 622 (10,040) 9,095 --------- --------- -------- NET LOSS $(10,612) $(11,736) $(5,572) ========= ========= ======= BASIC AND DILUTED NET LOSS PER SHARE $(5.88) $(8.23) $(4.08) ========= ========= ======= Basic and diluted weighted average COmmon shares oustanding 1,804 1,426 1,364 ========= ========= ======= The accompanying notes are an integral part of these consolidated financial statements.
F-4 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY For the Years Ended December 31, 2001, 2000 and 1999 (in thousands)
Accumulated Common Stock Additional Other Total Comprehensive Paid-in Unearned Accumulated Comprehensive Treasury Shareholders' Income Shares Amount Capital Compensation Deficit Loss Stock Equity (Loss) --------------------------------------------------------------------------------------------------------- BALANCE - January 1, 1999 1,289 $ -- $106,517 $ -- $ (72,194) $ (307) $ -- $ 34,016 Common stock and options issued for services 96 -- 2,353 -- -- -- -- 2,353 Dividend declared -- -- (6,000) -- -- -- -- (6,000) Acquisition of treasury stock (16) -- -- -- -- -- (393) (393) Currency translation adjustment -- -- -- -- -- 42 -- 42 $ 42 Marketable securities valuation adjustment -- -- -- -- -- 40 -- 40 40 Net loss -- -- -- -- (5,572) -- -- (5,572) $(5,572) ----- ----- -------- ----- --------- ------- ----- --------- ------- Total Comprehensive Loss $(5,490) ======= BALANCE - December 31, 1999 (Forward) 1,369 $ -- $102,870 $ -- $ (77,766) $ (225) $(393) $ 24,486 ----- ----- -------- ----- --------- ------- ----- --------- The accompanying notes are an integral part of these consolidated financial statements.
F-5 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, Continued For the Years Ended December 31, 2001, 2000 and 1999 (in thousands)
Accumulated Common Stock Additional Other Total Comprehensive Paid-in Unearned Accumulated Comprehensive Treasury Shareholders' Income Shares Amount Capital Compensation Deficit Loss Stock Equity (Loss) --------------------------------------------------------------------------------------------------------- BALANCE - December 31, 1999 (Forward) 1,369 $ -- $102,870 $ -- $ (77,766) $ (225) $ (393) $ 24,486 Common stock and options issued for services 108 -- 3,541 -- -- -- -- 3,541 Repayment of Officers' Loans (28) (923) -- -- -- -- (923) Dividend declared -- -- (2,184) -- -- -- -- (2,184) Retirement of treasury stock -- -- (393) -- -- -- 393 -- Acquisition of treasury stock (24) -- -- -- -- -- (328) (328) Discount on convertible debentures -- -- 658 -- -- -- -- 658 Unearned compensation on option grants -- -- -- (115) -- -- -- (115) Marketable securities valuation adjustment -- -- -- -- -- (2,861) -- (2,861) $(2,861) Net loss -- -- -- -- (11,736) -- -- (11,736) (11,736) ----- ----- -------- ------ --------- ------- ------ -------- -------- Total Comprehensive Loss $(14,597) ======== BALANCE - December 31, 2000 (forward) 1,425 $ -- $103,569 $ (115) $ (89,502) $(3,086) $ (328) $ 10,538 ----- ----- -------- ------ --------- ------- ------ -------- The accompanying notes are an integral part of these consolidated financial statements.
F-6 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, Continued For the Years Ended December 31, 2001, 2000 and 1999
Accumulated Common Stock Additional Other Total Comprehensive Paid-in Unearned Accumulated Comprehensive Treasury Shareholders' Income Shares Amount Capital Compensation Deficit Loss Stock Equity (Loss) --------------------------------------------------------------------------------------------------------- BALANCE - December 31, 2000 (Forward) 1,425 $ -- $103,569 $ (115) $(89,502) $(3,086) $ (328) $ 10,538 Common stock issued for services 571 -- 797 -- -- -- -- 797 Common stock issued for cash 212 -- 500 -- -- -- -- 500 Common stock issued for Platinum acquisition 66 -- 137 -- -- -- -- 137 Common stock issued for settlement of restructuring liabilities 110 -- 181 -- -- -- -- 181 Common stock issued for settlement of litigation 17 -- 47 -- -- -- -- 47 Unearned compensation on option grants -- -- -- 115 -- -- -- 115 Discount on convertible debentures settled with cash -- -- (658) -- -- -- -- (658) Marketable securities valuation adjustment -- -- -- -- -- 3,061 -- 3,061 $ 3,061 Net loss -- -- -- -- (10,612) -- -- (10,612) (10,612) ----- ----- -------- ----- --------- ------- ------ -------- ------- Total Comprehensive Loss $(7,551) ======= BALANCE - December 31, 2001 2,401 $ -- $104,573 $ -- $(100,114) $ (25) $ (328) $ 4,106 ===== ===== ======== ===== ========= ======= ====== ======== The accompanying notes are an integral part of these consolidated financial statements.
F-7 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 ----------------- ---------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(10,612) $(11,736) $ (5,572) Adjustments to reconcile net loss to net cash used in operating activities Amortization and depreciation: Property and equipment 929 807 1,020 Software costs 77 -- 1,940 Excess of cost over fair value of net assets acquired -- -- 1,951 Other 3 3 3 Non-cash interest charge pertaining to the discount on convertible debentures 346 353 -- Provision for doubtful accounts 74 62 -- Common stock and options exchanged for services 912 3,426 2,353 NetWolves common stock exchanged for services and for settlement of restructuring charges -- 2,000 -- Softworks common stock exchanged for services -- -- 4,814 Gain on disposition of Softworks -- (47,813) (17,107) Minority interest and equity in earnings of Softworks -- -- (466) Gain on sale of ComputerCop, net of $500,000 of NetWolves common stock exchanged for legal services -- (8,534) -- Loss on sale and other-than-temporary decline in investment in NetWolves Corporation 3,816 29,737 -- Deferred income tax expense (benefit) -- 9,197 (8,907) Accounts receivable (824) 121 17,341 Inventories -- -- 169 Prepaid expenses and other current assets (680) 465 1,786 Other assets 43 (337) 144 Accounts payable and accrued expenses 247 (3,731) (1,669) Restructuring costs payable (1,483) 2,450 -- Deferred revenue -- (42) (1,399) Income taxes payable (855) 805 (2,043) ---------- -------- --------- NET CASH USED IN OPERATING ACTIVITIES $ (8,007) $(22,767) $ (5,642) ---------- -------- --------- The accompanying notes are an integral part of these consolidated financial statements.
F-8 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued (in thousands) For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 ----------------- ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES - ------------------------------------ Expenditures for property and equipment $ (790) $ (602) $ (1,499) Software development and technology purchases -- -- (230) Net cash paid in the acquisition of Platinum (net of $15 cash acquired) (109) -- -- Proceeds from the license of technology -- -- 400 Reduction in cash resulting from excluding Softworks from the consolidated financial statements -- -- (6,759) Cash used in the ComputerCop/NetWolves transaction (including $2,072 of cash expenses) -- (22,572) -- Investment in NetWolves Corporation -- (4,500) -- Investment in non-marketable securities (500) Advances from (to) officers, net -- 899 (821) Proceeds from the sale of NetWolves common stock 2,834 -- -- Proceeds from the sale of Softworks common stock (net of $3,316 of expenses in 2000) -- 58,142 17,676 --------- --------- --------- NET CASH PROVIDED BY INVESTING ACTIVITIES 1,435 31,367 8,767 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES - ------------------------------------ Net proceeds from sales of common stock 500 -- -- Repayments of (net proceeds from) convertible debentures (3,751) 2,911 -- Advances from bank, net 448 -- -- Acquisition of treasury stock -- (328) (393) Payment of dividend -- (2,184) (6,000) Repayments of long-term debt, net (117) -- (3,056) --------- --------- --------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (2,920) 399 (9,449) --------- --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (9,492) 8,999 (6,324) CASH AND CASH EQUIVALENTS - Beginning 10,851 1,852 8,176 - ------------------------- --------- --------- --------- CASH AND CASH EQUIVALENTS - Ending $ 1,359 $ 10,851 $ 1,852 - ------------------------- ========= ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
F-9 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Nature of Business ------------------ Direct Insite Corp. and subsidiaries (the "Company"), primarily operate as an application service provider ("ASP"), which markets an integrated "fee for services" offering providing high volume processing of transactional data for billing purposes, electronic bill presentation as well as visual data analysis and reporting tools delivered via the Internet for its customers. The Company's core technology is d.b.Express?, the proprietary and patented management information tool, which provides targeted access through the mining of large volumes of transactional data via the Internet. In 2001, the Company acquired Platinum Communications, Inc. ("Platinum", see Note 3), a Dallas, Texas based company which markets integrated business and operational support systems to the telecommunications industry primarily as an ASP; marketed as Account Management Systems ("AMS"). Further, as an added source of revenue, the Company, during 2001, began providing custom engineering services to its customers. These newly assembled product offerings enable the Company to provide comprehensive services from the raw transaction record through all of the internal workflow management processes including an electronically delivered invoice with customer analytics. The Company operates fully redundant data centers located at its main office in Bohemia, N.Y. and in Newark, NJ. In 2000, the Company began offering a new consulting service, Global Telecommunications Services ("GTS"). For a fee, this offering, which utilized d.b.Express, would analyze long distance, data and wireless communication needs; assist in the negotiation of telecommunication contracts and monitor ongoing carrier contract compliance. During the fourth quarter of 2001, as a result of minimal revenue, the Company decided it would no longer market these services. The most significant portion of the Company's operations had historically (through 1999) been conducted through one of its subsidiaries, Softworks, Inc. ("Softworks"). Through Softworks, the Company developed, marketed and supported systems management software products for corporate mainframe data centers. Softworks was wholly owned by the Company through June 29, 1998, and majority owned through March 31, 1999. On January 27, 2000, the Company sold its remaining interest to EMC Corporation for approximately $61 million in cash, before expenses (see Note 3). In June 1998, the Company completed an acquisition of software (and related sales and marketing rights), which is designed to provide non computer literate owners (e.g. parents, guardians, schools, etc.) the ability to identify threats as well as objectionable material that may be viewed by users of the computer on the Internet (e.g. children). On February 14, 2000, the Company sold the ComputerCOP technology to NetWolves Corporation (see Note 3). F-10 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Nature of Business, continued ------------------ During 1997 through 1999, the Company resold and installed computer hardware. In 1999, this business unit had one major contract, involving two customers, which was completed in 1999. The Company does not currently have any other sales contracts and is no longer marketing this product. NOTE 2 - Significant Accounting Policies ------------------------------- Common Stock Split ------------------ On May 4, 2001, a one-for-fifteen reverse stock split was declared effective for shareholders of record as of the close of business on May 7, 2001. The effect of the stock split has been retroactively reflected in the financial statements and notes thereto. Par value and authorized shares remain unchanged at $.0001 and 150,000,000 shares, respectively. Principles of Consolidation and Equity Method --------------------------------------------- The consolidated financial statements include the accounts of Direct Insite Corp. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Effective April 1, 1999, when the Company's ownership interest in Softworks, Inc. ("Softworks") (see Note 3) was reduced below 50%, the Company began accounting for Softworks using the equity method of accounting. Under the equity method of accounting, the Company's proportionate share of Softworks' earnings or losses was included in the Company's consolidated operating results in a single line item, until Softworks was sold in January 2000. The separate public ownership of Softworks is reflected in the consolidated results of operations as minority interest through March 31, 1999. Revenue Recognition ------------------- The Company records revenue in accordance with Statement of Position 97-2 "Software Revenue Recognition", issued by the American Institute of Certified Public Accountants (as modified by Statement of Position 98-9) and SEC Staff Accounting Bulletin No. 101, regarding revenue recognition in the financial statements. In some circumstances, the Company enters into arrangements whereby it is obligated to deliver to its customer multiple products and/or services (multiple deliverables). In these transactions, the Company allocates the total revenue to be earned under the arrangement among the various elements based on fees for each element agreed to by the Company and their customer. The Company recognizes revenue related to the delivered products or services only if: -- Any undelivered products or services are not essential to the functionality of the delivered products or services; F-11 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Significant Accounting Policies, continued Revenue Recognition, continued ------------------------------ -- Payment for the delivered products or services is not contingent upon delivery of the remaining products or services; -- The Company has an enforceable claim to receive the amount due in the event it does not deliver the undelivered products or services and it is probable that such amount is collectible; -- There is evidence of the fair value for each of the undelivered products or services; -- Delivery of the delivered element represents the culmination of the earnings process. The following are the specific revenue recognition policies for each major category of revenue. ASP and AMS Services The Company provides transactional data processing services to its customers. Revenue from these services is recognized as performed. Custom Engineering Services The Company recognizes revenue for custom engineering services using the percentage of completion method. Progress is measured using the relative fair value of specifically identifiable output measures (milestones). Revenue is recognized when the customer accepts such milestones. Costs related to uncompleted milestones are deferred and included in other current assets (amounting to $128,000 at December 31, 2001). Cost of Revenue --------------- Cost of revenue in the consolidated statements of operations is presented exclusive of amortization and depreciation shown separately. Property and Equipment ---------------------- Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the terms of the respective leases or the service lives of the related assets, whichever is shorter. Capitalized lease assets are amortized over the shorter of the lease term or the service life of the related assets. F-12 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Significant Accounting Policies, continued Software Costs -------------- Costs associated with the development of software products are generally capitalized once technological feasibility is established. Purchased software technologies are recorded at cost and software technologies acquired in purchase business transactions are recorded at their estimated fair value. Software costs are amortized using the greater of the ratio of current revenue to total projected revenue for a product or the straight-line method over its estimated useful life. The useful life of the software acquired in the Platinum acquisition is 5 years. Amortization of software costs begins when products become available for general customer release. Costs incurred prior to establishment of technological feasibility are expensed as incurred and reflected as research and development costs in the accompanying consolidated statements of operations. Impairment of Long-Lived Assets ------------------------------- The Company reviews its long-lived assets, including goodwill resulting from business acquisitions, capitalized software costs and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine if impairment exists, the Company compares the estimated future undiscounted cash flows from the related long-lived assets to the net carrying amount of such assets. Once it has been determined that an impairment exists, the carrying value of the asset is adjusted to fair value. Factors considered in the determination of fair value include current operating results, trends and the present value of estimated expected future cash flows. Income Taxes ------------ The Company accounts for income taxes using the liability method. The liability method requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax bases of assets and liabilities, using enacted tax rates. Additionally, net deferred tax assets are adjusted by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Earnings per Share ------------------ The Company displays earnings per share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No. 128 requires dual presentation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share include the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Outstanding stock options, warrants and other potential stock issuances have not been considered in the computation of diluted earnings per share amounts since the effect of their inclusion would be antidilutive. F-13 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Significant Accounting Policies, continued ------------------------------- Cash and Cash Equivalents ------------------------- The Company considers all investments with original maturities of three months or less to be cash equivalents. Marketable Securities --------------------- Marketable securities, which are classified as "available for sale", are valued at fair market value. Unrealized gains or losses are recorded net of income taxes as accumulated other comprehensive income in shareholders' equity, whereas realized gains and losses are recognized in the Company's consolidated statements of operations using the first-in, first- out method. Other-than-temporary declines in the value of marketable securities are also recognized as a loss in the consolidated statements of operations. Advertising and Promotional Costs --------------------------------- Advertising and promotional costs are reported in "Sales and marketing" expense in the consolidated statements of operations and are expensed as incurred. Advertising expense for the years ended December 31, 2001, 2000 and 1999 was $37,000, $90,000 and $2,994,000, respectively. Advertising expense in 1999 included $2,746,000 of expense related to ComputerCop. Research and Development ------------------------ Research and development is expensed as incurred. Reclassifications ----------------- Certain reclassifications have been made to the consolidated financial statements shown for the prior years in order to have them conform to the current year's classifications. Concentrations and Fair Value of Financial Instruments ------------------------------------------------------ Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash investments and accounts receivable. At December 31, 2001, the Company has cash investments of approximately $1,359,000 at one bank. Concentrations of credit risk with respect to accounts receivable are disclosed in Note 20. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. Unless otherwise disclosed, the fair value of financial instruments approximates their recorded value. Use of Estimates ---------------- In preparing consolidated financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Disclosures that are particularly sensitive to estimation include management's plans, as disclosed in Note 17. Actual results could differ from those estimates. F-14 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Significant Accounting Policies, continued ------------------------------- New Accounting Pronouncements ----------------------------- During the period ended March 31, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. This Statement requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheets and measure those instruments at fair value. The accounting for changes in the fair value of a derivative instrument depends on its intended use and the resulting designation. Implementation of SFAS No. 133 did not have any material impact on the financial statements of the Company. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 provides guidance on the accounting for a business combination at the date a business combination is completed. The statement requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating use of the pooling-of-interests method. SFAS No. 142 provides guidance on how to account for goodwill and intangible assets after an acquisition is completed. The most substantive change is that goodwill will no longer be amortized, but instead will be tested for impairment periodically. This statement will apply to existing goodwill and intangible assets, beginning in 2002, and is not expected to have a material impact on the financial statements of the Company. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the accounting model for long- lived assets to be disposed of by sale and resulting implementation issues. This statement requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. It also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company will adopt SFAS No.144 in 2002 and is still evaluating the effect on the Company's financial position. F-15 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 Acquisitions and Dispositions ----------------------------- Platinum Communications, Inc. ----------------------------- On May 10, 2001, the Company and Platinum Communications, Inc. ("Platinum") completed a merger under an Agreement and Plan of Merger ("Merger Agreement"). Under the Merger Agreement, a newly formed wholly owned subsidiary of the Company acquired all of the outstanding common stock of Platinum. The purchase price of Platinum approximated $281,000, which consisted of $50,000, and 66,667 shares of common stock (valued at $138,000, based on the quoted market price at the time of the acquisition) and $93,000 of acquisition costs. The Company issued an additional 46,667 shares of its common stock and placed them in escrow (not reflected as outstanding common stock), that are to be released to the former shareholders of Platinum, subject to certain performance provisions (as defined), in various increments through April 2004; 15,556 shares were earned and will be issued effective January 1, 2002, valued at $20,000 which will be added to the cost of the acquisition. In addition, two key employees of Platinum have entered into three-year employment agreements with the Company, with an aggregate base compensation of $300,000 per annum and options to purchase an aggregate of 20,000 shares of the Company's common stock vesting over three years, with an exercise price of $2.06, the fair market value on the date of the grant. Further, as part of their employment agreements, the two key employees can, based upon achieving certain performance goals, earn an aggregate of $300,000 in employee incentive bonuses. The acquisition was accounted for as a purchase and, accordingly, assets and liabilities were fair valued at the date of acquisition and the results of operations are included in the consolidated financial statements of the Company, commencing May 1, 2001. An allocation of the fair value of the assets acquired and liabilities assumed is as follows: Purchase price: Direct Insite common stock issued $137,334 Cash consideration 50,000 Acquisition costs 73,266 -------- $260,600 ======== Allocation of purchase price Current assets $103,633 Software technology 584,376 Property and equipment 103,520 Current liabilities (405,409) Non-current liabilities (125,520) --------- $260,600 ========
F-16 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - Acquisitions and Dispositions, continued ----------------------------- Platinum Communications, Inc., continued ----------------------------- The following unaudited pro forma financial information has been prepared as if the acquisition of Platinum were consummated as of the beginning of each of the periods presented. The pro forma information is not necessarily indicative of the combined results that would have occurred had the acquisition taken place at the beginning of the period, nor is it necessarily indicative of the results that may occur in the future. (In thousands except per share data):
Year Ended December 31, 2001 2000 -------------------------- Revenue $ 4,012 $ 3,406 Expense 11,408 32,358 ---------- ---------- (7,396) (28,952) Other (expense) income, net (3,352) 16,940 ---------- ---------- Net loss $(10,748) $(12,012) ========== ========== Basic and diluted net loss per share $(5.89) $(8.05) ========== ========== Weighted average common shares outstanding 1,826 1,493 ========== ==========
Internet Tracking & Security Ventures, LLC and NetWolves Corporation -------------------------------------------------------------------- On June 30, 1998, pursuant to an Asset Purchase and Sale Agreement, the Company acquired certain software and related sales and marketing rights from Internet Tracking & Security Ventures, LLC ("ITSV") in exchange for 126,667 restricted shares of the Company's common stock and 1,000,000 restricted shares of common stock of the Company's then wholly owned subsidiary, Softworks. In March 1999, the Company sold certain rights to license ComputerCOP to a marketing company (Bo-Tel, Inc.) for $400,000. The license rights were limited to granting a specified original equipment manufacturer of personal computers the right to embed the software in its computers for sale to the general public. Bo-Tel, Inc. is an affiliate of ITSV, and accordingly, this sale was accounted for as a reduction of the cost of the assets acquired from ITSV. Pursuant to an agreement dated February 10, 2000, on February 14th, the Company sold its recently formed subsidiary, ComputerCOP Corp. to NetWolves Corporation ("NetWolves", traded on the NASDAQ SmallCap Market under the symbol "WOLV") in exchange for 1,775,000 shares of NetWolves common stock. The assets of ComputerCOP Corp. included the ComputerCOP technology (and certain related assets including inventory) and $20.5 million in cash. The transaction was treated as a sale of the ComputerCOP technology for F-17 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - Acquisitions and Dispositions, continued ----------------------------- Internet Tracking & Security Ventures, LLC and NetWolves Corporation, -------------------------------------------------------------------------- (continued) 750,000 shares valued at $15 million and the purchase of 1,025,000 shares from NetWolves for $20.5 million. Additionally, the Company purchased 225,000 shares from certain NetWolves shareholders for $4.5 million. The sale of the Company's ComputerCOP technology resulted in a pre-tax gain of $8,534,000, net of $2,572,000 of expenses, recorded in the first quarter of 2000. The $40,000,000 value of the 2,000,000 shares of NetWolves stock was determined based upon the quoted market price of the NetWolves stock at the time the transaction was agreed to and announced ($20 per share) and was also based on a fairness opinion obtained from the Company's investment banker. In May 2000, the Company's Chairman of the Board was appointed to the NetWolves Board of Directors (also see Note 8). Softworks, Inc. --------------- In October 1993, the Company completed the acquisition of all of the common stock of Softworks. Softworks provided systems management software products for mainframe data centers. The purchase price approximated $5,700,000. Prior to June 30, 1998, Softworks was a wholly owned subsidiary of the Company with 14,083,000 shares of common stock outstanding. On August 4, 1998, Softworks completed an initial public offering of 4,200,000 shares of its common stock at a price of $7.00 per share (less underwriting fees and commissions of $0.49 per share) as follows: 1,700,000 shares of common stock were sold by Softworks; 1,000,000 shares were sold by ITSV and 1,500,000 shares were sold by the Company. Additionally, in 1998, the Company exchanged 1,877,700 shares of Softworks common stock for services rendered and sold 1,000,000 restricted shares of Softworks common stock in a private placement in exchange for a $5,000,000 full recourse promissory note. The note was timely paid in full in the first quarter of 1999. The following additional transactions were recorded in 1999: -- The Company exchanged 529,000 restricted shares of Softworks common stock to three of the Company's executive officers for services rendered in 1999 resulting in a charge to operations of $2,117,000. -- In exchange for services rendered by several consultants in 1999, the Company granted options to acquire 80,000 restricted shares of Softworks common stock owned by the Company that were exercisable at $1.00 per share. These options were exercised in 1999. The $389,000 value of these options was charged to operations in 1999. F-18 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - Acquisitions and Dispositions, continued ----------------------------- Softworks, Inc., continued --------------- -- The Company exchanged 618,600 restricted shares of Softworks common stock to various employees and consultants (including 117,000 shares to a consultant with a financial interest in the ITSV) for services rendered in 1999 resulting in a charge to operations of $2,608,000. -- 125,000 shares of Softworks common stock, originally issued to a consultant in 1998, were returned to the Company in 1999, because the services were not satisfactorily performed. The original $300,000 value of these shares was credited to operating expenses in 1999. -- Softworks completed a second public offering of 3,900,000 shares of its common stock at a price of $10.50 per share (less underwriting fees and commissions of $.63 per share) as follows: 1,000,000 shares were sold by Softworks, 1,256,933 shares were sold by the Company, and 1,643,067 shares were sold by other existing shareholders. In conjunction with the offering, the Company issued 200,000 contract options to acquire restricted shares of Softworks common stock owned by the Company to a consultant, exercisable at $1.00 per share, which vested upon completion of the offering. The options were exercised when vested. The total value of the Softworks common stock exchanged by the Company for the above- described services (excluding the 200,000 contract options) in 1999 was $4,814,000. As a result of these transactions, the Company's ownership in Softworks was further reduced to 35% at December 31, 1999. Accordingly, the Company recognized a gain of $17,107,000 representing the difference between the fair value of the Softworks common stock exchanged or sold, and the related adjusted carrying value of the Company's investment in Softworks (pursuant to Staff Accounting Bulletins 51 and 84). In April 1999, the Company's ownership of Softworks was reduced below 50%, and accordingly, commencing April 1, 1999, Softworks' results were accounted for using the equity method of accounting and were no longer consolidated. Under the equity method of accounting, the Company's share of Softworks' earnings or losses was included in the Company's consolidated operating results in a single line item. Summarized financial information of Softworks for the entire year ended December 31, 1999 is as follows (in thousands): Revenue $54,570 Cost of revenue 3,325 ------- Gross margin 51,245 Operating expenses 48,805 ------- Operating Income $ 2,440 ======= Net income $1,456 ======
F-19 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - Acquisitions and Dispositions, continued ----------------------------- Softworks, Inc., continued --------------- Pursuant to a tender offer dated December 21, 1999, the Company sold its remaining 35% interest in Softworks (a total of 6,145,767 shares) to EMC Corporation and its subsidiary ("EMC") for $10.00 per share. The transaction, which was completed on January 27, 2000, provided aggregate cash proceeds of $61,458,000 and resulted in a pre-tax gain of $47,813,000, net of $3,316,000 of expenses, recorded in the first quarter of 2000. Pursuant to an Indemnification and Escrow Agreement, the Company deposited $10,000,000 of the sales proceeds into an interest bearing escrow account to secure any potential liabilities arising from certain indemnifications. The escrow funds were released to the Company in December 2000. Unaudited Pro forma condensed consolidated statements of operations as if the ComputerCop and Softworks transactions described above were consummated as of the beginning of the two year period ended December 31, 2000, are as follows (in thousands except per share data):
Year Ended December 31, 2000 1999 ----------------------- Revenue $ 2,089 $ 13,692 Cost of revenue 311 12,039 --------- -------- Gross margin 1,778 1,653 Total operating expenses 30,245 28,100 --------- -------- Operating loss (28,467) (26,447) Other income (expense) Loss on write down of investment in NetWolves (29,737) -- Other, net 370 274 -------- -------- Net loss $(57,960) $(26,173) ======== ======== Basic and diluted net loss per share (40.65) (19.19) ======== ========
F-20 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - Accounts Receivable and Due to Bank ----------------------------------- During October 2001, the Company entered into an Accounts Receivable Purchase Agreement with a Bank, whereby the Company from time to time may assign some of their accounts receivable to the Bank on a full recourse basis. Upon specific invoice approval, an advance of 80% of the underlying receivable is provided to the Company. The remaining balance (20%), less an administrative fee of approximately 0.5% plus interest at the rate of 1-1/2% per month, is paid to the Company once the customer has paid. The maximum amount of all assigned receivables outstanding at any time shall not exceed $1.5 million. This agreement expires in October 2002. At December 31, 2001, the Company had assigned approximately $560,000 of accounts receivable to the Bank and received advances of $448,000 from the Bank. NOTE 5 - Prepaid Expense and Other Current Assets ---------------------------------------- Prepaid expenses and other current assets consist of the following: NOTE 5 - Prepaid Expense and Other Current Assets ---------------------------------------- Prepaid expenses and other current assets consist of the following:
December 31, 2001 2000 ---------------------------------- (In thousands) Prepaid expenses $ 369 $332 Tax refund receivable 615 -- Notes and loans receivable 112 87 Marketable securities available for sale -- 32 ------ ---- $1,096 $451 ====== ====
NOTE 6 - Property and Equipment ---------------------- Property and equipment consist of the following:
December 31, Useful life 2001 2000 in Years ------------------------------------------- (in thousands) Computer equipment and purchased software $ 4,928 $ 3,811 3 - 7 Furniture and fixtures 421 392 5 - 7 ------- ------- 5,349 4,203 Less: accumulated deprecation and amortization (4,071) (3,063) ------- ------- Property and Equipment, Net $ 1,278 $ 1,140 ======= =======
F-21 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - Property and Equipment, continued ---------------------- Depreciation and amortization expense related to property and equipment for the years ended December 31, 2001, 2000 and 1999 was $908,000, $871,000 and $1,009,000, respectfully. NOTE 7 - Software Costs -------------- Software costs consist of the following:
December 31, 2001 2000 ------------------------ (in thousands) Capitalized software development costs $ 4,361 $ 3,775 Less: accumulated amortization (3,853) (3,775) ------- ------- Software Costs, Net $ 508 $ -- ======= =======
Amortization expense related to software development costs for the years ended December 31, 2001, 2000 and 1999 was $77,000, none, and $1,780,000, respectfully. NOTE 8 - Investment In Securities ------------------------ Non-Marketable -------------- In February 2001, the Company acquired 2,000,000 shares of Voyant Corporation ("Voyant") through an equity investment of $500,000. Additionally, in November 2001, the Company acquired 15,680,167 shares in exchange for 60,000 shares of NetWolves common stock, with a value of $156,000. Further, as part of an anti-dilution protection clause in the initial investment agreement, the Company is entitled to approximately 46,000,000 additional shares, which will increase the Company's ownership in Voyant to approximately 10.5%. Voyant is a privately held company, and accordingly, through December 31, 2001, the investment has been reflected on the Company's balance sheet as a non-marketable security, at cost. The Company recently began providing administrative services to Voyant and will begin charging Voyant $5,000 per month effective January 1, 2002; the value of these services is not readily determinable. The Company's Chairman is also the Chairman of Voyant. As a result of the foregoing, the Company believes that it has achieved a level of influence such that the Company will begin to account for its investment in Voyant utilizing the equity method of accounting commencing January 1, 2002. F-22 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - Investment In Securities ------------------------ Marketable Available for Sale ----------------------------- As discussed in Note 3, the Company obtained 2,000,000 shares of NetWolves common stock in February 2000. During the year ended December 31, 2000, 75,000 shares were exchanged as part of the restructuring plan (Note 14), 25,000 shares were used to pay legal fees to the Company's general counsel with respect to the NetWolves transaction, and 25,000 shares were issued as a bonus to an executive officer, resulting in a balance of 1,875,000 shares at December 31, 2000. All shares exchanged were valued at $20. In the fourth quarter of 2000, the Company determined that there was an other-than-temporary decline in the value of the NetWolves common stock to a value of $7,763,000 ($4.14 per share). At December 31, 2000, the quoted market value of the 1,875,000 shares of NetWolves common stock was $4,922,000 ($2.625 per share). The unrealized loss was $32,578,000, of which, $29,737,000 was recorded as a charge to operations and $2,841,000 was recorded as a charge to "accumulated other comprehensive loss." During the year ended December 31, 2001, the Company sold 466,500 shares in the open market at prices ranging from $2.29 to $5.30, aggregating proceeds of approximately $1,434,000. Additionally, the Company sold 1,000,000 shares in a private transaction resulting in proceeds of approximately $1,400,000 and exchanged 50,000 shares valued at $130,000 in settlement of related expenses. Further, the Company exchanged 60,000 shares for an additional investment in Voyant. At December 31, 2001, the Company owned 298,500 shares with a quoted market value $1,209,000 ($4.05 per share). NOTE 9 - Accounts Payable and Accrued Expenses ------------------------------------- Accounts payable and accrued expenses consist of the following:
December 31, 2001 2000 ----------------------- (in thousands) Trade accounts payable $ 672 $ 367 Sales taxes payable 633 632 Accrued payroll and benefits 255 373 Other accrued expenses 497 343 ------- ------- $ 2,057 $ 1,715 ======= =======
F-23 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - Convertible Debentures ---------------------- On September 27, 2000, the Company entered into an agreement to sell an aggregate principal amount of $3,000,000 of Convertible Debentures (the "Debentures") bearing interest at a rate of 6% per annum, due September 27, 2002. The Company sold a $2,000,000 Debenture on September 27, 2000, a $500,000 Debenture in October 2000 and a $500,000 debenture in December 2000, and incurred $119,000 of expenses. The Debentures were convertible into shares of the Company's common stock beginning February 25, 2001, subject to certain limitations. The conversion price was to be the lesser of $0.90 or 82% of the average per share market value at the time of the conversion. The Company had the right, exercisable at any time, to prepay all or any portion of the outstanding principal amount of the Debentures for which conversion notices had not previously been delivered. In January 2001, the Company exercised its prepayment rights and paid the Holders $3,700,000, plus accrued interest. As a result of the prepayment, the Company recorded a loss of $185,000 during 2001. The Debentures originally had a minimum assured discount of 18% from the fair value of the Company's common stock, as defined. In connection with that discount, the Company recorded debt discount of $658,000 upon receipt of $3,000,000 in funds and was amortizing the discount over the period the security was issued to the date it first became convertible. Accordingly, the Company recorded a non-cash interest charge of $353,000 in 2000. As a result of the prepayment, the discount, which was originally credited to additional paid-in- capital, was reversed in 2001. NOTE 11 - Long-term Debt -------------- Long-term debt consists of the following (in thousands):
December 31, 2001 2000 ----------------------- Lines of credit (a) $ 174 $ -- Capitalized lease obligations (b) 210 -- Other 9 -- ----- ----- 393 Less current portion (290) -- ----- ----- Long-term debt, net of current portion $ 103 $ -- ===== ===== (a) The Company has three lines of credit, which were assumed in connection with the Platinum acquisition (Note 3). These lines have various expiration dates. One line has no expiration date and bears an interest rate of prime plus 1%, is collateralized by substantially all the assets of Platinum and is personally guaranteed by one of the former officers of Platinum. The second line expires in May 2003 and bears an interest rate of 10%. The third line contains no expiration date and bears an interest rate of 16.75%. F-24 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 Long-term Debt, continued ---------------- (b) The Company has equipment under capital lease obligations expiring at various times through 2004. The assets and liabilities under capital leases are recorded at the lower of the present values of the minimum lease payments or the fair values of the assets. The assets are included in property and equipment and are depreciated over their estimated useful lives.
As of December 31, 2001 minimum future lease payments under these capital leases are:
Year Ending December 31, Amount ----------------------------------------------- ----------------- (in thousands) 2002 $119 2003 75 2004 34 ---- Total minimum lease payments 228 Less: amounts representing interest (18) ---- Net minimum lease payments $210 ====
NOTE 12 - Shareholders' Equity -------------------- Common Stock ------------ Year Ended December 31, 2001 ---------------------------- In September 2001, the Board of Directors approved a shareholder rights plan under which shareholders of record as of August 28, 2001 received a right, upon the occurrence of a Triggering Event, as defined, to purchase one share of the Company's common stock at an exercise price of $2.50, subject to adjustment. The rights attached to the shares expire on the earlier of (i) August 27, 2006 or (ii) redemption or exchange of the rights. The rights have certain anti-takeover effects and would cause substantial dilution to a person who attempts to acquire the Company without the consent of the Board of Directors. Year Ended December 31, 2000 ---------------------------- In February 2000, the Company declared a dividend of $1.50 per share (aggregating $2,184,000) to its shareholders of record on March 15, 2000 and paid on May 1, 2000. Pursuant to a Board Resolution adopted in January 1999, the Company was authorized to repurchase shares of its common stock at times and amounts that would be in the best interest of the Company. During the fourth quarter 2000, 24,371 shares of common stock were purchased at an average price of $12.74. F-25 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - Shareholders' Equity, continued --------------------- Year Ended December 31, 1999 ---------------------------- Pursuant to a Board Resolution adopted in January 1999, the Company was authorized to repurchase shares of its common stock at times and amounts that would be in the best interest of the Company. During 1999, 15,772 shares of common stock were purchased at an average price of $24.90. Pursuant to a Board Resolution adopted in August 1999, the Company paid on November 15, 1999, a cash dividend of $6,000,000 (approximately $4.35 per share) to shareholders of record as of September 30, 1999. Transactions with officers, employees and consultants ----------------------------------------------------- During the year ended December 31, 2001, the Company issued 976,328 shares of its common stock as detailed below: -- Issued 570,512 shares of its common stock for services valued at $797,000 as follows: o 63,785 shares to its Board of Directors as compensation for serving on various committees, valued at $108,000. o 442,727 shares to consultants as payment of certain liabilities valued at $584,000. o 64,000 shares for employee bonuses, valued at $105,000. -- Sold 212,766 shares of its common stock at $2.35, a premium to the quoted market price, to the Chairman of the Board of Directors of the Company for $500,000. -- Issued 66,667 shares of its common stock to the former shareholders of Platinum as part of the Merger Agreement, valued at $137,000 (see Note 3). -- Issued 109,715 shares of its common stock as payment of certain restructuring liabilities, valued at $181,000. -- Issued 16,668 shares of its common stock valued at $47,000 as settlement of a certain legal matter (see Note 16). During the year ended December 31, 2000, the Company issued 108,563 shares of its common stock valued at $30.00 per share based on the then quoted price of the Company's common stock as follows: -- Issued 32,667 shares of its common stock (net of 16,667 shares rescinded) as settlement of certain employee, director and consultant liabilities in conjunction with its restructuring plan (Note 14). The shares were valued at $980,000. F-26 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - Shareholders' Equity, continued Transactions with officers, employees and consultants ----------------------------------------------------- -- Issued 32,483 shares of its common stock (net of 3,083 shares rescinded) as settlement of employee bonuses. The shares were valued at $974,500, of which $468,000 was accrued in 1999. -- Issued 44,000 shares of its common stock (net of 2,500 shares rescinded) to various consultants for which it recorded a non-cash charge to earnings of $1,320,000. S.J. & Associates, Inc. was issued 25,000 of these shares upon achieving certain performance goals pursuant to its 1999 contract. -- Cancelled 587 shares as collateral payment of outstanding receivables. Additionally, the Company's Chairman and Chief Executive Officer tendered 27,345 shares of the Company's common stock, valued at $923,000 based on the quoted price at the time, towards the repayment of officers' loans. During the year ended December 31, 1999, the Company issued the following restricted common stock: -- As part of a bonus incentive compensation plan, the Company issued 44,367 shares to several non-executive employees for which it recorded a non cash charge to operations of $1,010,000. -- Issued 44,033 shares of its common stock to various consultants for whom it recorded a non cash charge to operations of $1,050,000. -- In lieu of cash, in January 1999, the Company issued 7,667 shares, valued at $100,000, for an acquisition of a technology license. This asset was fully amortized during the year ended December 31, 1999. Stock Option Plans ------------------ Effective June 1, 2000, the Company's Board of Directors authorized and adopted a plan for compensation, referred to as the 2000 Stock Option Plan, which provides for the grant of non-qualified stock options, to officers, employees and consultants to the Company, exercisable at the market price on the date of grant. All grants, which have varying expiration dates, shall be subject to various vesting conditions including specific performance goals. There are no shares available to be issued pursuant to this plan. During May 2001, the Board approved the 2001 Stock Option/Stock Issuance Plan whereby 330,000 shares of its authorized but unissued common stock were reserved. The Plan is divided into two separate equity programs: an option grant program and a stock issuance program. Under the stock issuance F-27 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - Shareholders' Equity, continued -------------------- Stock Option Plans, continued ------------------- program, the purchase price per share is fixed by the Board of Directors or committee but cannot be less than the fair market value of the common stock on the issuance date. There are no shares available to be issued pursuant to this plan. At the Company's annual meeting of stockholders held on September 17, 2001, the Company's shareholders ratified the 2001-A Stock Option/Stock Issuance Plan whereby 600,000 shares of its authorized but unissued or reacquired common stock were reserved. Similar to the 2001 Plan, the 2001-A Plan is divided into two separate equity programs: an option grant program and a stock issuance program. Under the stock issuance program, the purchase price per share is fixed by the Board of Directors or committee but cannot be less than the fair market value of the common stock on the issuance date. As of December 31, 2001, 565,555 shares remain available pursuant to this plan. Additional shares were issued in 2002 (Note 21). The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans and recognizes non cash compensation charges related to the intrinsic value of stock options granted to employees. If the Company had elected to recognize compensation expense based upon the fair value at the date of grant for awards under these plans, consistent with the methodology prescribed by SFAS 123, the effect on the Company's net loss and net loss per share would be as follows (in thousands, except per share data):
Year Ended December 31, 2001 2000 1999 ------------------- ------------------ ---------------- Net loss As reported $(10,612) $(11,736) $(5,572) ======== ======== ======= Pro forma $(10,920) $(12,046) $(6,118) ======== ======== ======= Basic and diluted net loss per share As reported $(5.88) $(8.23) $(4.08) ======== ======== ======= Pro forma $(6.05) $(8.40) $(4.50) ======== ======== =======
The fair value of Company common stock options granted to employees are estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility of 69.0% to 74.1% in 2001, 70.6 to 73.1% in 2000 and 62% to 66% in 1999, (2) risk-free interest rates of 5.79% in 2001, 5.80% in 2000 and 5.81% in 1999, and (3) expected lives of 1 to 4.5 years in 2001, 1.80 to 5.00 years in 2000 and 2.00 to 3.53 years in 1999. F-28 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - Shareholders' Equity, continued -------------------- Stock Option Plans, continued ------------------- The Company grants options under multiple stock-based compensation plans that do not differ substantially in the characteristics of the awards. The following is a summary of stock option activity for 2001, 2000 and 1999, relating to all of the Company's common stock plans (shares are in thousands):
Weighted Average Exercise Shares Price ------------------ ----------------- Outstanding at January 1, 1999 189 $ 53.70 Granted 125 18.75 Exercised -- -- Forfeited (20) 173.10 ----- Outstanding at December 31, 1999 294 30.60 Granted 153 14.70 Exercised -- -- Forfeited (193) 27.45 ----- Outstanding at December 31, 2000 (Forward) 254 23.85
-----
Weighted Average Exercise Shares Price ------------------ ----------------- Outstanding at December 31, 2000 (Forward) 254 $ 23.85 Granted 277 1.66 Exercised -- -- Forfeited (103) 36.73 ----- Outstanding at December 31, 2001 428 6.55 =====
At December 31, 2001, a total of 250,000 options are exercisable at various exercise prices: 129,000 options are exercisable at $1.63, 87,000 options are exercisable at prices ranging from $11.25 to $20.16 and 34,000 options at $26.25 to $30.00. The weighted-average remaining contractual life of options outstanding at December 31, 2001 is 2.43 years. A total of 429,000 shares of the Company's common stock are reserved for options, warrants and contingencies at December 31, 2001. F-29 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - Shareholders' Equity, continued --------------------- Stock Option Plans, continued ------------------- At December 31, 2000, a total of 254,000 options were exercisable at various exercise prices: 196,000 options were exercisable at prices ranging from $11.25 to $20.16 per share, 51,000 options at $26.25 to $31.35 and 7,000 options at $93.75 to $384.00. The weighted- average remaining contractual life of options outstanding at December 31, 2000 was 2.67 years. At December 31, 1999, a total of 285,000 options were exercisable at various exercise prices: 274,000 options were exercisable at prices ranging from $18.75 to $30.00 per share, 4,000 options at $37.50 to $52.50 and 7,000 options at $93.75 to $384.00. The weighted- average remaining contractual life of options outstanding at December 31, 1999 was 3.08 years. Total compensation costs recognized for stock option awards amounted to $115,000, $152,000 and $193,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Compensation cost represents the fair value of options granted to non- employees and the intrinsic value of options granted to employees. The total value of the 2000 options granted to non-employees was $267,000. These options have vesting periods ranging from immediate to two years. As of December 31, 2000, there was $115,000 of unearned compensation relating to the unvested portion of these options, which vested in 2001. Registration Statements/Restricted Securities --------------------------------------------- The Company has used restricted common stock for the purchase of certain companies (Note 3), as compensation to employees and consultants for services rendered, and has sold restricted common stock in private placements. At December 31, 2001, approximately 703,000 shares of restricted common stock were issued and outstanding. On March 24, 2000 the Company filed a registration statement on Form S-8 (No. 333- 33274) for 284,833 options and 25,653 shares of the Company's common stock that was effective upon filing. The primary purpose of this registration statement was to register options and shares issued to employees and certain consultants. On February 11, 1999 the Company filed a registration statement on Form S-8 (No. 333- 72203) for 150,816 options and 148,672 shares of the Company's common stock that was effective upon filing. The primary purpose of this registration statement was to register options, which were repriced in October 1998, and shares issued to employees and certain consultants. F-30 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - Income Taxes ------------ As a result of the Company's sale of its remaining interest in Softworks in January 2000 and the sale of its ComputerCOP technology in February 2000 (Note 3), the Company recognized a taxable gain in the first quarter of 2000. Accordingly, the Company reduced its valuation allowance by $9,197,000 (approximately $7,000,000 of which relates to deferred tax assets created in previous years) as of December 31, 1999. The following table summarizes components of the (provision) benefit for current and deferred income taxes for the years ended December 31, 2001, 2000 and 1999:
Year Ended December 31, 2001 2000 1999 ---------------- ----------------- --------------- (in thousands) Current Federal $ 565 $ (718) $ 196 State and other 57 (125) (8) -------- -------- -------- Total 622 (843) 188 -------- -------- -------- Deferred Federal -- (9,197) 8,950 State and other -- -- (43) -------- -------- -------- Total -- (9,197) 8,907 -------- -------- -------- $ 622 $(10,040) $ 9,095 -------- -------- --------
The following table summarizes the significant differences between the U.S. Federal statutory tax rate and the Company's effective tax rate for financial statement purposes for the years ended December 31, 2001, 2000 and 1999:
Year Ended December 31, 2001 2000 1999 ------------------------------------ U.S. Federal statutory tax rate 35.0% 35.0% 35.0% State and local taxes, net of U.S. Federal tax effect -- (7.4) -- Impact of Alternative Minimum Tax (5.0) (42.3) -- Gain on sale of Softworks and ComputerCOP -- (90.1) -- Loss and other-than-temporary decline in investment in NetWolves (11.9) (613.7) -- Restructuring costs timing difference 2.8 (33.4) -- Reduction of deferred tax asset valuation reserve -- -- 47.9 Utilization of net operating loss carryforward -- 199.3 -- Permanent differences - compensation -- (50.5) (12.2) Increase in valuation allowance (24.5) -- -- Amortization of intangible assets -- -- (6.0) Other (1.9) 11.1 (2.7) ------ ------ ------ 5.5% (592.0)% 62.0% ====== ====== ======
F-31 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - Income Taxes, continued ------------- The tax effects of temporary differences that give rise to deferred tax assets and liabilities are summarized as follows:
December 31, 2001 2000 ------------------------- (in thousands) Deferred tax assets Net operating loss carryforwards $ 25,851 $ 10,080 Tax credit carryforward -- 565 Fixed and intangible assets 237 135 Other-than-temporary decline in investment in NetWolves 50 12,490 Restructure accrual 302 -- Other 103 85 -------- -------- 26,543 23,355 Valuation allowance (26,543) (23,355) -------- -------- Deferred tax assets $ -- $ -- ======== ========
During 2000, $36 million of net operating loss carryforwards were utilized to substantially reduce the taxable income resulting from the gain on disposition of Softworks. At December 31, 2001, the Company has net operating loss carryforwards remaining of approximately $61 million to reduce future taxable income, if any. These losses, which expire through 2021, are subject to substantial limitations as a result of IRC Section 382 rules governing changes in control. Approximately $49 million these losses are available to be utilized in the year 2002. After the year 2002, approximately $1.2 million of losses become available each year (subject to, among other things, adjustment upon further changes in control) until the losses expire. NOTE 14 Restructuring ------------- In the first quarter 2000, the Company's newly appointed Board of Directors approved and the Company announced a restructuring plan to streamline the Company's operations and overhead structure, including: (i) elimination of employees, expenses and commitments that supported the ComputerCOP technology (sold to NetWolves, Note 3), (ii) elimination of employees, expenses and commitments that supported the Company's development project related to a multi-media display station, and (iii) general reduction of operating expenses. As a result, the Company recorded a non-recurring restructuring charge of $15,176,000 during the year ended December 31, 2000, related to the termination of 53 employees, retirement packages for certain Company officers and directors, and the termination of certain long-term consulting contracts and operating leases. Cash requirements of this plan were estimated at $12,696,000; $980,000 was settled with Company stock; and $1,500,000 was settled with NetWolves common stock. As of December 31, 2001, the remaining cash requirement is $786,000, $294,000 is payable over the next twelve months, and $492,000 is payable through March 2005. F-32 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - Restructuring, continued ------------- The restructuring charge includes costs directly related to the Company's plan. EITF No. 94-3 and SEC Staff Accounting Bulletin No. 100 provide specific requirements as to appropriate recognition of costs associated with employee termination benefits and other exit costs. Employee termination costs are recognized when details of the severance arrangements are communicated to affected employees (all 53 employees were actually terminated in March 2000). Other exit costs (such as contractual obligations) that are not associated with or that do not benefit activities that will be continued are recognized at the date of commitment to an exit plan subject to certain conditions. Other costs directly related to the restructuring that are not eligible for recognition at the commitment date are expensed as incurred. The activity in the restructuring accrual through December 31, 2001 is summarized below:
Officer/director Employee retirement Consulting Operating terminations packages contracts leases Other Total -------------------------------------------------------------------------------------------- Restructuring charges $2,088,000 $ 7,666,000 $3,681,000 $ 357,000 $1,384,000 $15,176,000 to operations, during 2000 Company stock Issuances -- (100,000) (630,000) -- (250,000) (980,000) NetWolves stock exchange -- (1,500,000) -- -- (1,500,000) Cash expenditures (2,056,000) (5,508,000) (1,938,000) (140,000) (604,000) (10,246,000) ----------- ----------- ----------- --------- --------- ----------- Restructuring accrual, December 31, 2000 32,000 558,000 1,113,000 217,000 530,000 2,450,000 Company stock Issuances -- -- (131,000) -- (50,000) (181,000) Cash expenditures (30,000) (548,000) (296,000) (129,000) (480,000) (1,483,000) ----------- ----------- ----------- -------- --------- ----------- Restructuring accrual, December 31, 2001 $ 2,000 $ 10,000 $ 686,000 $ 88,000 $ -- $ 786,000 =========== =========== =========== ======== ========== ===========
-- Employee termination costs represent severance and related benefits for the 53 employees that were terminated in March 2000: 18 employees in sales and administration, 14 employees involved in the development project related to a multi- media display station, 11 employees related to ComputerCOP and 10 employees in general research and development. Of these employees, 44 received severance benefits generally payable over 3 to 9 months, commencing April 2000. F-33 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - Restructuring, continued -------------- -- Officer/director retirement packages represent retirement packages for the Company's Chairman, its Chief Executive Officer and other board members aggregating $7,666,000. $1,500,000 was paid with 75,000 shares of NetWolves common stock (valued at $20 per share), $100,000 was paid with 50,000 shares of Company common stock, $5,508,000 was paid in 2000, $500,000 was paid in January 2001 and the $58,000 balance relates to employee benefits payable over various time periods. -- The Company settled 5 long-term consulting contracts that will no longer be required for an aggregate of $3,681,000. The Company agreed to pay off a 1999 consulting agreement with S.J. & Associates, Inc. for $1,276,000. Additionally, the Company settled three consulting agreements that were entered into during 2000 (originally totaling $1,785,000) for an aggregate of $1,277,000 (one of the agreements, settled for $524,000, is with a related party). Further, the Company paid $1,128,000 as part of a retirement arrangement with the Company's general counsel. These obligations are payable as follows: $630,000 was paid in the form of the Company's common stock; $1,938,000 was paid in 2000; and the $1,113,000 balance is payable through March 2005. -- Operating leases represent the settlement of the remaining lease payments with respect to certain automobile and equipment leases that are no longer required. Payments are expected to be paid over the remaining terms of the leases, which range from 3 to 17 months. -- Other costs include consulting fees related to the creation and execution of the restructuring plan (including $250,000 to S.J. & Associates, Inc. paid in the form of 125,000 shares of the Company's common stock), legal fees and other exit costs. NOTE 15 - Related Party and Other Transactions ------------------------------------ Three former executive officers of the Company had received advances from time to time, with such advances being payable upon demand and bearing interest at the rate of 7% per annum. In the first quarter 2000, the officers repaid $1,706,000 of these advances, consisting of $783,000 in cash and 27,345 shares of Company common stock valued at $923,000. In 2000 and 1999, the Company granted 1,667 and 1,667 shares of common stock (valued at $30.00 and $27.00 per share, respectively) to an outside Director (who resigned in March 2000) for legal and consulting services provided to the Company. In 2000, the Company also granted 1,333 options with an exercise price of $31.35 per share, which were valued at $17,000 and fully vested at December 31, 2000. Additionally, during the years ended December 31, 2000 and 1999, the Company paid to such director consulting fees of $52,000 and $170,000, respectively. F-34 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - Related Party and Other Transactions, continued ------------------------------------- In 2000, the Company granted 1,667 shares of common stock (valued at $30.00 per share) for consulting expenditures incurred in connection with the restructuring plan (Note 14) to another outside Director (who resigned in March 2000). The Company paid such Director consulting fees of $13,000, and $63,000 in each of the years ended December 31, 2000 and 1999, respectively. In 1999 the Company granted 1,667 shares of common stock (valued at $27.00 per share). Additionally, in 1999, 6,667 stock options were granted to such Director, valued at $45,000. In 2000, the Company granted to a third outside Director (who resigned in March 2000) 1,667 shares of common stock (valued at $30.00 per share) for consulting expenditures incurred in connection with the restructuring plan (Note 14). In addition, the Company granted 1,333 options with an exercise price of $31.35 for consulting services, which were valued at approximately $21,000, and were fully vested at December 31, 2000. In the first quarter 2000, the Company entered into a multi-year agreement with a consultant that is a family member of one of the former officers. Subsequently, the Company incurred a $524,000 restructuring charge for terminating this agreement. At December 31, 2001, approximately $9,000 of this settlement remains unpaid. In 2000, the Company's general counsel received 25,000 shares of NetWolves common stock, valued at $20.00 per share (Note 3), to pay legal fees with respect to the NetWolves transaction and 4,167 shares of the Company's common stock (valued at $30.00 per share) for consulting expenses incurred in connection with the restructuring plan (Note 14). In addition, the general counsel received $1,000,000 of cash compensation as part of a retirement arrangement. In 1999, the Company's general counsel received cash compensation of $689,000, and 75,000 shares of Softworks common stock and 10,000 Company stock options valued at $395,000, for business and financial consulting services rendered. In 1999, a consultant (who also has a financial interest in ITSV) received cash compensation of $215,000 and 117,000 shares of Softworks common stock valued at $423,000 for various consulting services. S.J. & Associates, Inc. ----------------------- The Company has entered into various agreements with S.J. & Associates, Inc. (including its affiliates are collectively referred to as "SJ") for various services that provide for the following compensation: -- In 2001, the Company incurred $292,000 of consulting expenses with SJ. The consulting expense was paid in the form of $152,000 in cash, 82,858 shares of Company common stock (valued at $87,000) and $53,000 in expense related to 2000 option grants vesting in 2001. F-35 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - Related Party and Other Transactions, continued ------------------------------------- S.J. & Associates, Inc., continued ------------------------ -- In 2001, the Company reduced its obligation to SJ relating to the restructure plan by $406,000. The amount was paid in the form of 109,715 shares (valued at approximately $181,000), and $225,000 in cash. -- In 2001, the Company settled prior year obligations to SJ (valued at approximately $36,000) with 22,285 shares of Company common stock. -- In 2000, the Company issued 8,333 shares (valued at $30.00 per share), for consulting fees related to the creation and execution of the restructuring plan. -- In 2000, the Company incurred $1,060,000 of consulting expenses with SJ. The consulting expense was paid in the form of $274,000 in cash, 25,000 shares of Company common stock (valued at $30.00 per share) and 10,000 stock options with an exercise price of $11.25 per share, resulting in a charge of approximately $36,000. -- SJ received minimum annual compensation pursuant to two agreements aggregating $227,000 per annum through November 1999. Commencing in December 1999, SJ was to receive minimum annual compensation pursuant to two agreements aggregating $316,000 per annum. The agreements expire in November 2004; however, one of the agreements was settled as part of the 2000 restructuring plan for $1,276,000 (as discussed in Note 14). SJ also consulted with Softworks in various capacities throughout 1999 and received compensation directly from Softworks. -- In 1999, the Company entered into an agreement with SJ to provide assistance to the Company in locating, negotiating and ultimately closing a transaction for the sale of the Company's entire remaining holdings of Softworks, the sale of the Company's ComputerCOP technology and related investment in NetWolves Corporation (Note 3). The Company agreed to pay SJ 4.0% of the value of the transactions. Accordingly, in the first quarter 2000, SJ earned $2,458,000 with respect to the Softworks transaction and $1,420,000 with respect to the transaction with NetWolves Corporation. -- In 1999, SJ was retained to assist the Company in its efforts to sell shares in Softworks second public offering (Note 3). The Company issued 200,000 contract options to acquire restricted shares of Softworks common stock owned by the Company, exercisable at $1.00 per share, which vested upon completion of Softworks second public offering. The options were exercised in June 1999. -- In November 1999, 100,000 shares of Softworks common stock and 5,333 shares of the Company's common stock were issued to SJ as payment for various consulting matters. Additionally, SJ was awarded 5,000 fully vested options of the Company's common stock exercisable at $18.75 per share (which expired November 30, 2001). The stock and options were valued at $621,000 and were charged to operations in 1999. F-36 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - Related Party and Other Transactions, continued ------------------------------------- S.J. & Associates, Inc., continued ------------------------ -- During 1999, the Company paid an affiliate of SJ $700,000 relating to certain multi- media Internet technology. NOTE 16 - Commitments and Contingencies ----------------------------- Operating Leases ---------------- Operating leases are primarily for office space, equipment and automobiles. At December 31, 2001, the future minimum lease payments under operating leases are summarized as follows (in thousands):
Year Ending December 31, Amount ------------------------------ ---------------- (in thousands) 2002 $ 573 2003 357 2004 93 2005 74 2006 49 -------- Total $1,146 ========
Rent expense approximated $499,000, $340,000 and $592,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Employment Agreement -------------------- In December 2001, the Company entered into an employment agreement with the President of the Company, which expires in January 2004. Compensation is $175,000 per annum plus a bonus at the discretion of the Board. Defined Contribution Plan ------------------------- The Company provides pension benefits to eligible employees through a 401(k) plan. Employer matching contributions to this 401(k) plan approximated $46,000, $41,000 and $41,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Settlement of Legal Matters --------------------------- In March 1995, an action was originally commenced against the Company and a number of defendants. In early 1997, after a change in counsel, the plaintiff amended the complaint for a second time, now naming as defendants only the Company and three of its officers. The second amended complaint alleged that certain third parties, unrelated to the Company, transferred unauthorized certificates representing 66,667 shares of the Company's F-37 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 - Commitments and Contingencies, continued ------------------------------ Settlement of Legal Matters, continued --------------------------- common stock to the plaintiff. The certificates had not been legally acquired from the Company and the Company had reported the certificates to the Securities and Exchange Commission as stolen certificates. Plaintiff requested validation of the transfer of the certificates and sought damages of an unspecified amount. The Company denied plaintiff's allegations and a motion for summary judgment was granted in favor of the Company and its officers. However, the plaintiff filed an appeal, which was contested by the Company. During the fourth quarter of 2000 the parties agreed, subject to District Court approval to settle this matter for 16,668 shares of the Company's common stock. As such, during the fourth quarter of 2000 the Company accrued $62,000 to cover the value of the shares plus estimated $18,000 in legal fees. In September 2001, the District Court approved the settlement and the shares were issued. In August of 1999, the Company and all of its former directors were served with a complaint filed in the Chancery Court of Delaware. This was a derivative action, which was an action brought by the plaintiff on behalf of the Company, in which the Company, for technical reasons, was named as a nominal defendant along with the directors. The plaintiffs alleged that the individual defendants breached their respective fiduciary duties to the Company by awarding excess compensation and was requesting a judgment in favor of the Company for such excess compensation. An answer to the complaint was interposed, denying the material allegations of the complaint. On June 29, 2001, this matter was resolved through the issuance of a Stipulation of Dismissal, without prejudice. NOTE 17 - Management's Plans ------------------ For the year ended December 31, 2001, the Company continued to incur net losses and use substantial amounts of cash in operating activities. The Company has been dependent upon the cash generated from the sale of Softworks in 2000 as well as the sale of NetWolves common stock to fund its operations. Additionally, during 2001, the Company raised $500,000 from the sale of its own common stock to its Chairman of the Board of Directors. The Company's management has and will continue to take numerous steps which it believes will create positive operating cash flow for the Company. Key measures are as follows: -- The March 2000 restructure plan, which significantly reduced operating expenses; -- Expanding the Company's products and services; -- Materially improving its sales efforts through expanding its marketing staff; -- In 2002, the Company entered into a new ASP agreement with International Business Machines Corporation ("IBM"), which will enable IBM to provide an electronic invoice to their customers; F-38 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 - Management's Plans, continued ------------------- -- The Company generated in excess of $800,000 in custom engineering fees in 2001 and believes that this revenue should continue into 2002; -- The Company also acquired Platinum Communications, Inc. (Note 3), which broadened the Company's product offerings. Management believes this acquisition significantly enhances the Company's current market strategy by allowing it to capitalize on the growing trend for outsource services within the communications sector; -- As an additional measure to reduce the Company's use of cash, a payroll rate reduction program was in effect October 1, 2001 through March 31, 2002. This plan reduced executive compensation 20% and the remainder of the work force incurred a 10% reduction; -- The Company was unable to generate revenue from its GTS product offering and ceased marketing this product offering and eliminated all associated costs; and -- In October 2001, the Company also entered into an Accounts Receivable Purchase Agreement, which has provided an additional source of liquidity. -- In January 2002, the Company raised an additional $612,000 through the issuance of long-term debt and the sale of its common stock to members of the Company's Board of Directors, senior executives and other non-related parties (Note 21). Additionally, the Company has obtained a commitment from its Chairman, other members of the Board of Directors as well as its executive officers, in which they will provide, under certain circumstances, up to an aggregate of $750,000 for working capital purposes if needed. Management believes that its plan will ultimately enable the Company to generate positive cash flows from operations. Until such time, the Company believes that its present cash on hand, the sale of the remainder of its NetWolves common stock, as well as obtaining additional debt and/or equity financing should provide adequate funding through at least December 31, 2002. However, there can be no assurances that the Company will have sufficient funds to implement its current plan. In such an event, the Company could be forced to significantly alter its plan and reduce its operating expenses, which could have an adverse effect on revenue generation and operations in the near term. NOTE 18 - Consolidated Statements of Cash Flows ------------------------------------- Supplemental disclosure of cash flow information for the years ended December 31, 2001, 2000 and 1999 is summarized as follows:
Year Ended December 31, 2001 2000 1999 ----------------------------------------------- (in thousands) Interest paid $467 $ 8 $139 ==== ==== ==== Net taxes paid $849 $ 38 $102 ==== ==== ====
F-39 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - Consolidated Statements of Cash Flows, continued -------------------------------------- Non-cash investing and financing activities for the years ended December 31, 2001, 2000 and 1999 are summarized as follows:
Year Ended December 31, 2001 2000 1999 ---------------------------------------- (in thousands) Net cash paid in Platinum acquisition (2001) and reduction in cash from Softworks de-consolidation (1999): Account and installment receivables $ (88) $ -- $ 33,942 Prepaid expenses and other current Assets -- -- 2,282 Property and equipment, net (104) -- 2,698 Intangible assets, net (585) -- 6,653 Other non current assets -- -- 2,061 Accounts payable and accrued Expenses 194 -- (4,468) Deferred revenue -- -- (26,787) Current and long-term debt 337 -- (4,460) Minority interest -- -- (9,353) Investment in Softworks -- -- (9,327) Common stock issued in acquisition 137 -- -- ----- ------ -------- Decrease in cash and cash equivalents $(109) $ -- $ (6,759) ===== ====== ======== Capitalized leases incurred $ 173 $ -- $ -- ===== ====== ========
Additional non-cash investing and financing activities for the year ended December 31, 2000 are summarized as follows: -- In conjunction with the sale of ComputerCop Corp. (Note 3), the Company received 1,775,000 shares of NetWolves common stock valued at $35,500,000 in exchange for $24,394,000 of ComputerCop assets, which included $20,500,000 cash. -- The Company's former chairman and Chief Executive Officer tendered 27,345 shares of the Company's common stock valued at $923,000 toward the repayment of officers' loans. F-40 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 - Products and Services --------------------- The Company and its subsidiaries currently operate in one business segment and have, during the years 2001, 2000 and 1999, provided five separate products: computer software, ASP Services, custom engineering fees, AMS Services, and equipment sales and installations. With the sale of Softworks and ComputerCOP (computer software) in the first quarter 2000 as well as the suspension of equipment sales unit, ("professional services" unit), the Company is now focused on managed services, custom engineering and its AMS product offerings. Refer to Note 1 for a detailed description of these products and services.
Year Ended December 31, 2001 2000 1999 ------------------------------------------- (in thousands) Computer Software (including $42 and $3,570 of maintenance revenue in 2000 and 1999, respectively) $ -- $ 73 $ 10,907 ASP fees 2,506 2,047 1,436 Custom Engineering fees 814 -- -- AMS fees 465 -- -- Equipment Sales and Installations -- -- 12,297 -------- -------- -------- Total Revenue $3,785 $2,120 $24,640 ======== ======== ========
NOTE 20 - Major Customers --------------- For the years ended December 31, 2001 and 2000, IBM accounted for 82.2% and 80.5% of the Company's revenue, respectively. Accounts receivable from IBM amounted to $850,000 and $204,000, at December 31, 2001 and 2000, respectively. For the year ended December 31, 1999, the Company had one major contract involving two customers, with combined revenue of $12,297,000 (49.9% of total revenue). This amount is included in the Professional Services and Domestic categories. NOTE 21 - Subsequent Events ----------------- In January 2002, the Company entered into a two-year services agreement with its Chairman. During the first year of the agreement, compensation will consist of 180,000 restricted shares of the Company's common stock, which will be expensed over the first twelve months of the agreement. During the second year of the agreement, compensation will consist of a monthly fee of $15,000. Further, the Chairman received 240,000 stock options, which vest ratably during the two-year term of the agreement. The stock options have an exercise price equal to the closing price of the Company's common stock on the date of the agreement. F-41 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21 - Subsequent Events, continued ----------------- In January 2002, the Company retained Broadband Capital Management, LLC ("Broadband") as a non-exclusive financial advisor to provide general financial advisory services. The Company expects Broadband to, among other areas, assist in maximizing shareholder value, advise the Company on matters relating to its capitalization and evaluate alternative financing structures and arrangements. The term of the agreement is for 12 months, with an aggregate fee of $120,000. The parties subsequently agreed that Broadband would be paid with 120,000 shares of the Company's common stock in lieu of cash. In January 2002, the Company issued an aggregate of 213,580 shares of common stock to substantially all of its employees as payment of $224,000 of bonuses accrued at December 31, 2001. In January 2002, the Company's Board of Directors authorized and adopted the 2002 Stock / Stock Option Plan whereby 625,000 shares of its common stock were reserved. Similar to both the 2001 and the 2001-A Plans (Note 12), the 2002 Plan is divided into two separate equity programs: an option grant program and a stock issuance program. Under the stock issuance program, the purchase price per share is fixed by the Board of Directors or committee but cannot be less than the fair market value of the common stock on the issuance date. Further, in January 2002, the Company granted 405,000 stock options to several of its employees. The options vest in one third increments on April 30, 2002, December 31, 2002 and June 30, 2003, with an exercise price of $1.05 per share. In January 2002, the Company's Chairman loaned the Company $250,000. The term of the loan is three years and bears interest at 5%, payable quarterly in arrears. Additionally, the Company raised approximately $362,000 through the sale of 344,524 shares of the Company's common stock to other members of the Company's Board of Directors, senior executives, Broadband and certain other non-related parties. NOTE 22 - Quarterly Financial Data (Unaudited) ------------------------------------
Year Ended December 31, 2001, First Second Third Fourth Quarter Quarter Quarter Quarter ----------------- ----------------- ---------------- ----------------- (in thousands, except per share amounts) Revenue $ 517 $ 677 $ 1,153 $ 1,438 Gross margin 428 521 847 1,103 Operating loss (1,701) (2,267) (1,783) (1,379) Loss on sales of NetWolves common stock -- (98) -- (3,718) Other (expense) income (317) 10 16 3 (Provision for) benefit from income taxes (33) (13) -- 668 -------- -------- -------- ------- Net Loss $(2,051) $(2,368) $(1,767) $(4,426) ======== ======== ======== ======= Basic and Diluted Net Loss Per Share $ (1.44) $ (1.44) $(0.90) $(2.10) ======== ======== ======== =======
F-42 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 22 - Quarterly Financial Data (Unaudited), continued ------------------------------------
Year Ended December 31, 2000, First Second Third Fourth Quarter Quarter Quarter Quarter ----------------- ----------------- ---------------- ----------------- (in thousands, except per share amounts) Revenue $ 526 $ 500 $ 557 $ 537 Gross margin 437 420 493 448 Operating loss (24,194) (1,424) (1,324) (1,734) Gain on sale of Softworks 47,813 -- -- -- Gain on sale of ComputerCOP 8,534 -- -- -- Other-than-temporary decline in Investment in NetWolves -- -- -- (29,737) Other income (expense) 332 212 131 (305) (Provision for) benefit from income taxes (12,812) 385 379 2,008 --------- -------- -------- ------- Net (Loss) Income $ 19,673 $ (827) $ (814) $(29,768) ======== ======== ======== =======
Year Ended December 31, 2000, First Second Third Fourth Quarter Quarter Quarter Quarter ----------------- ----------------- ---------------- ----------------- (in thousands, except per share amounts) Basic Net (Loss) Income Per Share $13.90 $ (0.65) $(0.65) $(20.85) ======== ========= ======== ======== Diluted Net (Loss) Income Per Share $13.90 $ (0.65) $(0.65) $(20.85) ======== ========= ======= ========
The unaudited interim financial information reflects all adjustments, which in the opinion of management, are necessary to a fair statement of the results of the interim periods presented, all adjustments are of normal recurring nature. F-43 EX-10 3 diexhibit10-4.txt COMPUTER CONCEPTS CORP. 2000 Stock Option Plan SECTION 1. GENERAL PROVISIONS 1.1. Name and General Purpose The name of this plan is the COMPUTER CONCEPTS CORP. 2000 Stock Option Plan (hereinafter called the "2000 Plan"). The 2000 Plan is intended to be a broadly-based incentive plan which enables COMPUTER CONCEPTS CORP. (the "Company") and its subsidiaries and affiliates to foster and promote the interests of the Company by attracting and retaining directors, officers and employees of, and consultants to, the Company who contribute to the Company's success by their ability, ingenuity and industry, to enable such directors, officers, employees and consultants to participate in the longterm success and growth of the Company by giving them a proprietary interest in the Company and to provide incentive compensation opportunities competitive with those of competing corporations. 1.2 Definitions a. "Affiliate" means any person or entity controlled by or under common control with the Company, by virtue of the ownership of voting securities, by contract or otherwise. b. "Board" means the Board of Directors of the Company. c. "Change in Control" means a change of control of the Company, or in any person directly or indirectly controlling the Company, which shall mean: (i) any person who is not currently such becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or (ii) three or more directors, whose election or nomination for election is not approved by a majority of the Incumbent Board (as hereinafter defined), are elected within any single 24month period to serve on the Board of Directors; or (iii) members of the Incumbent Board cease to constitute a majority of the Board of Directors without the approval of the remaining members of the Incumbent Board; or 1 (iv) any merger (other than a merger where the Company is the survivor and there is no accompanying Change in Control under subparagraphs (i), (ii) or (iii) of this paragraph (b)), consolidation, liquidation or dissolution of the Company, or the sale of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to subparagraph (i) of this definition solely because 25% or more of the combined voting power of the Company's outstanding securities is acquired by one or more employee benefit plans maintained by the Company or by any other employer, the majority interest in which is held, directly or indirectly, by the Company. For purposes of this definition, the terms "person" and "beneficial owner" shall have the meaning set forth in Sections 3(a) and 13(d) of the Exchange Act, and in the regulations promulgated thereunder, as in effect on June 1, 2000; and the term "Incumbent Board" shall mean (A) the members of the Board of Directors of the Company on June 1, 2000, to the extent that they continue to serve as members of the Board of Directors, and (B) any individual who becomes a member of the Board of Directors after June 1, 2000, if his election or nomination for election as a director was approved by a vote of at least threequarters of the then Incumbent Board. d. "Committee" means the Committee referred to in Section 1.3 of the 2000 Plan. e. "Common Stock" means shares of the Common Stock, par value $.0001 per share, of the Company. f. "Company" means COMPUTER CONCEPTS CORP., a corporation organized under the laws of the State of Delaware (or any successor corporation). g. "Fair Market Value" means the market price of the Common Stock on The Nasdaq Stock Market on the date of the grant or as reported on any other exchange on which the Common Stock is then traded on such date or on any other date on which the Common Stock is to be valued hereunder. If no sale shall have been reported on any such exchange, Fair Market Value shall be determined by the Committee. h. "Non-Employee Director" shall have the meaning set forth in Rule 16(b) promulgated by the Securities and Exchange Commission ("Commission"). i. "Option" means any option to purchase Common Stock under Section 2 of the 2000 Plan. j. "Option Agreement" means the option agreement described in Section 2.4 of the 2000 Plan. k. "Participant" means any director, officer, employee or consultant of the Company, a Subsidiary or an Affiliate who is selected by the Committee to participate in the 2000 Plan. 2 l. "Subsidiary" means any corporation in which the Company possesses directly or indirectly 50% or more of the combined voting power of all classes of stock of such corporation. m. "Total Disability" means accidental bodily injury or sickness which wholly and continuously disabled an optionee. The Committee, whose decisions shall be final, shall make a determination of Total Disability. 1.3 Administration of the Plan The 2000 Plan shall be administered by the Board or by the Committee appointed by the Board consisting of two or more members of the Board all of whom shall be Non-Employee Directors. The Committee shall serve at the pleasure of the Board and shall have such powers as the Board may, from time to time, confer upon it. Subject to this Section 1.3, the Committee shall have sole and complete authority to adopt, alter, amend or revoke such administrative rules, guidelines and practices governing the operation of the 2000 Plan as it shall, from time to time, deem advisable, and to interpret the terms and provisions of the 2000 Plan. The Committee shall keep minutes of its meetings and of action taken by it without a meeting. A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by all of the members of the Committee without a meeting, shall constitute the acts of the Committee. 1.4 Eligibility Stock Options may be granted only to directors, officers, employees or consultants of the Company or a Subsidiary or Affiliate. Any person who has been granted any Option may, if he is otherwise eligible, be granted an additional Option or Options. 1.5 Shares The aggregate number of shares reserved for issuance pursuant to the 2000 Plan shall be 2,500,000 shares of Common Stock, or the number and kind of shares of stock or other securities which shall be substituted for such shares or to which such shares shall be adjusted as provided in Section 1.6. Such number of shares may be set aside out of the authorized but unissued shares of Common Stock or out of issued shares of Common Stock acquired for and held in the Treasury of the Company, not reserved for any other purpose. Shares 3 subject to, but not sold or issued under, any Option terminating or expiring for any reason prior to its exercise in full will again be available for Options thereafter granted during the balance of the term of the 2000 Plan. 1.6 Adjustments Due to Stock Splits, Mergers, Consolidation, Etc. If, at any time, the Company shall take any action, whether by stock dividend, stock split, combination of shares or otherwise, which results in a proportionate increase or decrease in the number of shares of Common Stock theretofore issued and outstanding, the number of shares which are reserved for issuance under the 2000 Plan and the number of shares which, at such time, are subject to Options shall, to the extent deemed appropriate by the Committee, be increased or decreased in the same proportion, provided, however, that the Company shall not be obligated to issue fractional shares. Likewise, in the event of any change in the outstanding shares of Common Stock by reason of any recapitalization, merger, consolidation, reorganization, combination or exchange of shares or other corporate change, the Committee shall make such substitution or adjustments, if any, as it deems to be appropriate, as to the number or kind of shares of Common Stock or other securities which are reserved for issuance under the 2000 Plan and the number of shares or other securities which, at such time are subject to Options. In the event of a Change in Control, (a) all Options outstanding on the date of such Change in Control shall, for a period of sixty (60) days following such Change in Control, become immediately and fully exercisable, and (b) an optionee will be permitted to surrender for cancellation within sixty (60) days after such Change in Control any Option or portion of an Option which was granted more than six (6) months prior to the date of such surrender, to the extent not yet exercised, and to receive a cash payment in an amount equal to the excess, if any, of the Fair Market Value (on the date of surrender) of the shares of Common Stock subject to the Option or portion thereof surrendered, over the aggregate purchase price for such Shares under the Option. 1.7 Non-Alienation of Benefits Except as herein specifically provided, no right or unpaid benefit under the 2000 Plan shall be subject to alienation, assignment, pledge or charge and any attempt to alienate, assign, pledge or charge the same shall be void. If any Participant or other person entitled to benefits hereunder should attempt to alienate, assign, pledge or charge any benefit hereunder, then such benefit shall, in the discretion of the Committee, cease. 1.8 Withholding or Deduction for Taxes If, at any time, the Company or any Subsidiary or Affiliate is required, under applicable laws and regulations, to withhold, or to make any deduction for any taxes, or take any other action in connection with any Option exercise, the 4 Participant shall be required to pay to the Company or such Subsidiary or Affiliate, the amount of any taxes required to be withheld, or, in lieu thereof, at the option of the Company, the Company or such Subsidiary or Affiliate may accept a sufficient number of shares of Common Stock to cover the amount required to be withheld. 1.9 Administrative Expenses The entire expense of administering the 2000 Plan shall be borne by the Company. 1.10 General Conditions a. The Board or the Committee may, from time to time, amend, suspend or terminate any or all of the provisions of the 2000 Plan, provided that, without the Participant's approval, no change may be made which would alter or impair any right theretofore granted to any Participant. b. With the consent of the Participant affected thereby, the Committee may amend or modify any outstanding Option in any manner not inconsistent with the terms of the 2000 Plan, including, without limitation, and irrespective of the provisions of Section 2.3(c) below, to accelerate the date or dates as of which an installment of an Option becomes exercisable. c. Nothing contained in the 2000 Plan shall prohibit the Company or any Subsidiary or Affiliate from establishing other additional incentive compensation arrangements for employees of the Company or such Subsidiary or Affiliate. d. Nothing in the 2000 Plan shall be deemed to limit, in any way, the right of the Company or any Subsidiary or Affiliate to terminate a Participant's employment with the Company (or such Subsidiary or Affiliate) at any time. e. Any decision or action taken by the Board or the Committee arising out of or in connection with the construction, administration, interpretation and effect of the 2000 Plan shall be conclusive and binding upon all Participants and any person claiming under or through any Participant. f. No member of the Board or of the Committee shall be liable for any act or action, whether of commission or omission, (i) by such member except in circumstances involving actual bad faith, nor (ii) by any other member or by any officer, agent or employee. 1.11 Compliance with Applicable Law Notwithstanding any other provision of the 2000 Plan, the Company shall not be obligated to issue any shares of Common Stock, or grant any Option with respect thereto, unless it is advised by counsel of its selection that it may do 5 so without violation of the applicable Federal and State laws pertaining to the issuance of securities and the Company may require any stock certificate so issued to bear a legend, may give its transfer agent instructions limiting the transfer thereof, and may take such other steps, as in its judgment are reasonably required to prevent any such violation. 1.12 Effective Dates The 2000 Plan was adopted by the Board effective June 1, 2000. The 2000 Plan shall terminate on May 31, 2010. Section 2. OPTION GRANTS 2.1 Authority of Committee Subject to the provisions of the 2000 Plan, the Committee shall have the sole and complete authority to determine (i) the Participants to whom Options shall be granted; (ii) the number of shares to be covered by each Option; and (iii) the conditions and limitations, if any, in addition to those set forth in Sections 2 and 3 hereof, applicable to the exercise of an Option, including without limitation, the nature and duration of the restrictions, if any, to be imposed upon the sale or other disposition of shares acquired upon exercise of an Option. Stock Options granted under the 2000 Plan shall be nonqualified stock options. The Committee shall have the authority to grant Options. 2.2 Option Exercise Price The price of stock purchased upon the exercise of Options granted pursuant to the 2000 Plan shall be the Fair Market Value thereof at the time that the Option is granted. The purchase price is to be paid in full in cash, certified or bank cashier's check or, at the option of the Company, Common Stock valued at its Fair Market Value on the date of exercise, or a combination thereof, when the Option is exercised and stock certificates will be delivered only against such payment. 2.3 Option Grants Each Option will be subject to the following provisions: 6 a. Term of Option An Option will be for a term of not more than ten years from the date of grant. b. Exercise (i) By an Employee: Subject to the power of the Committee under Section 1.10(b) above and except in the manner described below upon the death of the optionee, an Option may be exercised only in installments as follows: up to onehalf of the subject shares on and after the first anniversary of the date of grant, up to all of the subject shares on and after the second such anniversary of the date of the grant of such Option but in no event later than the expiration of the term of the Option. An Option shall be exercisable during the optionee's lifetime only by the optionee and shall not be exercisable by the optionee unless, at all times since the date of grant and at the time of exercise, such optionee is an employee of or providing services to the Company, any parent corporation of the Company or any Subsidiary or Affiliate, except that, upon termination of all such employment or provision of services (other than by death, Total Disability, or by Total Disability followed by death in the circumstances provided below), the optionee may exercise an Option at any time within three months thereafter but only to the extent such Option is exercisable on the date of such termination. Upon termination of all such employment by Total Disability, the optionee may exercise such Options at any time within three years thereafter, but only to the extent such Option is exercisable on the date of such termination. In the event of the death of an optionee (i) while an employee of or providing services to the Company, any parent corporation of the Company or any Subsidiary or Affiliate, or (ii) within three months after termination of all such employment or provision of services (other than for Total Disability) or (iii) within three years after termination on account of Total Disability of all such employment or provision of services, such optionee's estate or any person who acquires the right to exercise such option by bequest or inheritance or by reason of the death of the optionee may exercise such optionee's Option at any time within the period of three years from the date of death. In the case of clauses (i) and (iii) above, such Option shall be exercisable in full for all the remaining shares covered thereby, but in the case of clause (ii) such Option shall be exercisable only to the extent it was exercisable on the date of such termination. 7 (ii) By Persons other than Employees: If the optionee is not an employee of the Company or the parent corporation of the Company or any Subsidiary or Affiliate, the vesting of such optionee=s right to exercise his Options shall be established and determined by the Committee in the Option Agreement covering the Options granted to such optionee. Notwithstanding the foregoing provisions regarding the exercise of an Option in the event of death, Total Disability, other termination of employment or provision of services or otherwise, in no event shall an Option be exercisable in whole or in part after the termination date provided in the Option Agreement. c. Transferability An Option granted under the 2000 Plan shall not be transferable otherwise than by will or by the laws of descent and distribution, or, as determined by the Board or the Committee, to (i) a member or members of the optionee=s family, (ii) a trust, (iii) a family limited partnership or (iv) a similar estate planning vehicle primarily for members of the optionee=s family. 2.4 Agreements In consideration of any Options granted to a Participant under the 2000 Plan, each such Participant shall enter into an Option Agreement with the Company providing, consistent with the 2000 Plan, such terms as the Committee may deem advisable. 8 EX-10 4 diexhibit10-5.txt DIRECT INSITE CORP., 2001 STOCK OPTION/STOCK ISSUANCE PLAN I. GENERAL PROVISIONS A. PURPOSE OF THE PLAN This 2001 Stock Option/Stock Issuance Plan ("Plan") is intended to promote the interests of Direct Insite Corp., a Delaware corporation ("Corporation"), by providing eligible persons in the employ or service of the Corporation or its affiliates with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to continue in such employ or service. Unless otherwise defined herein, all capitalized terms shall have the meaning assigned to them in the attached Appendix. B. STRUCTURE OF THE PLAN The Plan shall be divided into two (2) separate equity programs: (i) the Option Grant Program under which eligible persons ("Optionees") may, at the discretion of the Board, be granted options to purchase shares of Common Stock; and (ii) the Stock Issuance Program under which eligible persons ("Participants") may, at the discretion of the Board, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary). The provisions of Articles One and Four shall apply to both equity programs under the Plan and shall accordingly govern the interests of all persons under the Plan. C. ADMINISTRATION OF THE PLAN The Plan shall be administered by the Corporation's Board of Directors ("Board"), or in the discretion of the Board, a committee consisting of no less than two Non-Employee Directors or persons meeting such other requirements as may be imposed by Rule 16(b) under the 1934 Act ("Committee"). The Board or Committee shall have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Plan and to make such determinations under, and issue such interpretations of, the Plan and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Board shall be final and binding on all parties who have an interest in the Plan or any option or stock issuance thereunder. D. ELIGIBILITY The persons eligible to participate in the Plan are: - -- Employees; - -- non-employee members of the Board or the non-employee members of the board of directors of any Parent or Subsidiary; and - -- consultants and other independent advisors who provide services to the Corporation, or any parent or subsidiary of the Corporation. The Board or Committee shall have full authority to determine, (i) with respect to the grants made under the Option Grant Program, described in Article Two below, which eligible persons are to receive the option grants, the time or times when those grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding, and (ii) with respect to stock issuances made under the Stock Issuance Program, described in Article Three, which eligible persons are to receive such stock issuances, the time or times when those issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration to be paid by the Participant for such shares. The Board or Committee shall have the absolute discretion either to grant options in accordance with the Option Grant Program or to issue stock in accordance with the Stock Issuance Program. E. STOCK SUBJECT TO THE PLAN The stock issuable under the Plan shall be shares of the Corporation's authorized but unissued or reacquired Common Stock. The maximum number of shares of Common Stock which may be issued under the Plan is 330,000 shares. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (i) the options expire or terminate for any reason prior to exercise in full, or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan and subsequently repurchased by the Corporation, at the option exercise or direct issue price paid per share, pursuant to the Corporation's repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan. If there is any change to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, then appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, and (ii) the number and/or class of securities and the exercise price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. 2 II. OPTION GRANT PROGRAM A. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Board, and which shall be subject to the provisions of the Plan. 1. Exercise Price. a. The exercise price per share shall be fixed by the Board in accordance with the following provisions: (i) The exercise price per share shall not be less than the Fair Market Value per share of Common Stock on the option grant date. (ii) If the Optionee is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date for Incentive Options. b. The exercise price is payable in cash or check made payable to the Corporation upon exercise of the option, subject to the provisions of Section I of Article Four and the documents evidencing the option. If the Common Stock is registered under Section 12 of the Securities Exchange Act of 1934, as amended ("34 Act") at the time the option is exercised, then the exercise price may also be paid as follows: (i) in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (ii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions (x) to a Corporation- designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (y) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. 3 Except to the extent the foregoing sale and remittance procedure is used, payment of the exercise price for the purchased shares must be made on the Exercise Date. 2. Exercise and Term of Options. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Board or Committee and set forth in the documents evidencing the option grant. However, no option shall have a term in excess of ten (10) years measured from the option grant date. 3. Effect of Termination of Service. a. The following provisions shall govern the exercise of any vested option held by the Optionee at the time of cessation of Optionee's employment or rendering of services to the Corporation (collectively "Service") or death: (i) Should the Optionee cease to remain in Service for any reason other than death, Disability or Misconduct, then the Optionee shall have a period of three (3) months following the date of such cessation of Service during which to exercise each option held by such Optionee to the extent exercisable on the date of such termination. (ii) Should Optionee's Service terminate by reason of Disability, then the Optionee shall have a period of twelve (12) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee to the extent exercisable on the date of such termination. (iii)If the Optionee dies while holding an outstanding option, then the personal representative of his or her estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance shall have a twelve (12)-month period following the date of the Optionee's death to exercise such option to the extent exercisable on the date of such termination. (iv) Under no circumstances, however, shall any such option be exercisable after the specified expiration of the option term. (v) All vested options shall terminate upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term. b. The Board or Committee shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: (i) extend the period of time for which the option is to remain exercisable following Optionee's cessation of Service or death from the limited period otherwise in effect for that 4 option to such greater period of time as it shall deem appropriate, but in no event beyond the expiration of the option term, and/or (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested under the option had the Optionee continued in Service. Stockholder Rights. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person exercise the option, pays the exercise price and becomes the recordholder of the purchased shares. Limited Transferability of Options. During the lifetime of the Optionee, the option shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or, following the Optionee's death, by the laws of descent and distribution. B. CORPORATE TRANSACTION 1. All unvested options shall automatically vest in full if and when either of the following stockholder approved transactions to which the Corporation is a party are consummated: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. However, the shares subject to an outstanding option shall not vest on such an accelerated basis if and to the extent: (i) such option is assumed by the successor corporation (or parent thereof) in the Corporate Transaction or (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to those unvested option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Board or Committee at the time of the option grant. 2. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction, had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan following the consummation of such Corporate Transaction and (ii) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. 3. The Board or Committee shall have the discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to structure one or more options so that those options shall automatically accelerate and vest in full (and any repurchase rights of the 5 Corporation with respect to the unvested shares subject to those options shall immediately terminate) upon the occurrence of a Corporate Transaction, whether or not those options are to be assumed in the Corporate Transaction. 4. The Board or Committee shall also have full power and authority, exercisable either at the time the option is granted or at any time while the option remains outstanding, to structure such option so that the shares subject to that option will automatically vest on an accelerated basis should the Optionee's Service terminate by reason of the Optionee's involuntary dismissal or discharge by the Corporation for reasons other than misconduct ("Involuntary Termination") within a designated period (not to exceed one year) following the effective date of any Corporate Transaction in which the option is assumed and the repurchase rights applicable to those shares do not otherwise terminate. Any option so accelerated shall remain exercisable for the fully-vested option shares until the expiration or sooner termination of the option term. 5. The portion of any Incentive Option accelerated in connection with a Corporate Transaction shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000.00) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws. 6. The grant of options under the Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. III. STOCK ISSUANCE PROGRAM A. STOCK ISSUANCE TERMS Shares of Common Stock may, upon request by a Participant, be issued at the discretion of the Board or Committee under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall comply with the terms specified below. 1. Purchase Price. a. The purchase price per share shall be fixed by the Board or Committee but shall not be less than the Fair Market Value per share of Common Stock on the issue date. b. Subject to the provisions of Section A of Article IV, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Board may deem appropriate in each individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). 6 2. Vesting Provisions. a. Shares of Common Stock issued under the Stock Issuance Program shall be fully and immediately vested upon issuance. b. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. IV. MISCELLANEOUS A. FINANCING The Board or Committee may permit any Optionee or Participant to pay the option exercise price under the Option Grant Program or the purchase price for shares issued under the Stock Issuance Program by delivering a full-recourse, interest bearing promissory note payable in one or more installments and secured by the purchased shares. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Board in its sole discretion. In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares (less the par value of those shares) plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. B. EFFECTIVE DATE AND TERM OF PLAN 1. The Plan shall become effective on May 16, 2001, provided that no Incentive Options may be granted unless the Plan is first approved by the Corporation's stockholders. The Board may grant options and issue shares under the Plan at any time after the effective date of the Plan and before the date fixed herein for termination of the Plan. 2. The Plan shall terminate upon the earliest of (i) the expiration of the ten (10)-year period measured from the date the Plan is adopted by the Board, (ii) the date on which all shares available for issuance under the Plan shall have been issued as vested shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. All options and unvested stock issuances outstanding at the time of a clause (i) termination event shall continue to have full force and effect in accordance with the provisions of the documents evidencing those options or issuances. C. AMENDMENT OF THE PLAN The Board or Committee shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws and regulations. 7 D. WITHHOLDING The Corporation's obligation to deliver shares of Common Stock upon the exercise of any options or upon the issuance of shares issued under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. E. REGULATORY APPROVALS The implementation of the Plan, the granting of any options under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any option or (ii) under the Stock Issuance Program shall be subject to the Corporation's obtaining all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the shares of Common Stock issued pursuant to it. F. NO EMPLOYMENT OR SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. 8 APPENDIX The following definitions shall be in effect under the Plan: Board shall mean the Corporation's Board of Directors. Code shall mean the Internal Revenue Code of 1986, as amended. Common Stock shall mean the Corporation's common stock, $.0001 par value. Corporate Transaction shall mean either of the following stockholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. Corporation shall mean Direct Insite Corp., a Delaware corporation. Disability shall mean the inability of Optionee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances. Disability shall be deemed to constitute Permanent Disability in the event that such Disability is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more. Eligibility. Incentive Options may only be granted to Employees. Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. Exercise Date shall mean the date on which the option shall have been exercised. Exercise Price shall mean the exercise price payable per Option Share as specified in the Grant Notice. Expiration Date shall mean the date on which the option expires as specified in the Grant Notice. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the NASDAQ National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the 9 National Association of Securities Dealers on the NASDAQ National Market. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the NASDAQ National Market, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. Grant Date shall mean the date of grant of the option as specified in the Grant Notice. Grant Notice shall mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby. Incentive Option shall mean an option which satisfies the requirements of Code Section 422. Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). 1934 Act shall mean the Securities Exchange Act of 1934, as amended. Non-Employee Director shall have the meaning provided under Rule 16(b) or any successor rule under the 1934 Act. Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422. Option Agreement shall mean the option agreement issued pursuant to the Grant Notice. Option Shares shall mean the number of shares of Common Stock subject to the option. Optionee shall mean the person to whom the option is granted as specified in the Grant Notice. Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the 10 determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Permitted Transfer shall mean (i) a gratuitous transfer of the Purchased Shares, provided and only if Optionee obtains the Corporation's prior written consent to such transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to Optionee's will or the laws of intestate succession following Optionee's death or (iii) a transfer to the Corporation in pledge as security for any purchase-money indebtedness incurred by Optionee in connection with the acquisition of the Purchased Shares. Plan shall mean the Corporation's 200l Stock Option/Stock Issuance Plan. Plan Administrator shall mean either the Board or a committee of the Board acting in its capacity as administrator of the Plan. Purchase Agreement shall mean the stock purchase agreement pursuant to the Grant Notice. Service shall mean the Optionee's performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non-employee member of the board of directors or an independent consultant. Stock Exchange shall mean the American Stock Exchange or the New York Stock Exchange. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Vesting Commencement Date shall mean the date on which the Option Shares commences to vest as specified in the Grant Notice. Vesting Schedule shall mean the vesting schedule specified in the Grant Notice pursuant to which the Optionee is to vest in the Option Shares in a series of installments over his or her period of Service. 11 EX-10 5 diexhibit10-6.txt DIRECT INSITE CORP., 2001-A STOCK OPTION/STOCK ISSUANCE PLAN I. GENERAL PROVISIONS A. PURPOSE OF THE PLAN This 2001-A Stock Option/Stock Issuance Plan ("Plan") is intended to promote the interests of Direct Insite Corp., a Delaware corporation ("Corporation"), by providing eligible persons in the employ or service of the Corporation or its affiliates with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to continue in such employ or service. Unless otherwise defined herein, all capitalized terms shall have the meaning assigned to them in the attached Appendix. B. STRUCTURE OF THE PLAN The Plan shall be divided into two (2) separate equity programs: (i) the Option Grant Program under which eligible persons ("Optionees") may, at the discretion of the Board, be granted options to purchase shares of Common Stock; and (ii) the Stock Issuance Program under which eligible persons ("Participants") may, at the discretion of the Board, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary). The provisions of Articles One and Four shall apply to both equity programs under the Plan and shall accordingly govern the interests of all persons under the Plan. C. ADMINISTRATION OF THE PLAN The Plan shall be administered by the Corporation's Board of Directors ("Board"), or in the discretion of the Board, a committee consisting of no less than two Non-Employee Directors or persons meeting such other requirements as may be imposed by Rule 16(b) under the 1934 Act ("Committee"). The Board or Committee shall have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Plan and to make such determinations under, and issue such interpretations of, the Plan and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Board shall be final and binding on all parties who have an interest in the Plan or any option or stock issuance thereunder. 1 D. ELIGIBILITY The persons eligible to participate in the Plan are: - -- Employees; - -- non-employee members of the Board or the non-employee members of the board of directors of any Parent or Subsidiary; and - -- consultants and other independent advisors who provide services to the Corporation, or any parent or subsidiary of the Corporation. The Board or Committee shall have full authority to determine, (i) with respect to the grants made under the Option Grant Program, described in Article Two below, which eligible persons are to receive the option grants, the time or times when those grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding, and (ii) with respect to stock issuances made under the Stock Issuance Program, described in Article Three, which eligible persons are to receive such stock issuances, the time or times when those issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration to be paid by the Participant for such shares. The Board or Committee shall have the absolute discretion either to grant options in accordance with the Option Grant Program or to issue stock in accordance with the Stock Issuance Program. E. STOCK SUBJECT TO THE PLAN The stock issuable under the Plan shall be shares of the Corporation's authorized but unissued or reacquired Common Stock. The maximum number of shares of Common Stock which may be issued under the Plan is 600,000 shares. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (i) the options expire or terminate for any reason prior to exercise in full, or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan and subsequently repurchased by the Corporation, at the option exercise or direct issue price paid per share, pursuant to the Corporation's repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan. If there is any change to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, then appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, and (ii) the number and/or class of securities and the exercise price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. 2 II. OPTION GRANT PROGRAM A. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Board, and which shall be subject to the provisions of the Plan. 1. Exercise Price. a. The exercise price per share shall be fixed by the Board in accordance with the following provisions: (i) The exercise price per share shall not be less than the Fair Market Value per share of Common Stock on the option grant date. (ii) If the Optionee is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date for Incentive Options. b. The exercise price is payable in cash or check made payable to the Corporation upon exercise of the option, subject to the provisions of Section I of Article Four and the documents evidencing the option. If the Common Stock is registered under Section 12 of the Securities Exchange Act of 1934, as amended ("34 Act") at the time the option is exercised, then the exercise price may also be paid as follows: (i) in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (ii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions (x) to a Corporation- designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (y) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. 3 Except to the extent the foregoing sale and remittance procedure is used, payment of the exercise price for the purchased shares must be made on the Exercise Date. 2. Exercise and Term of Options. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Board or Committee and set forth in the documents evidencing the option grant. However, no option shall have a term in excess of five (5) years measured from the option grant date. 3. Effect of Termination of Service. a. The following provisions shall govern the exercise of any vested option held by the Optionee at the time of cessation of Optionee's employment or rendering of services to the Corporation (collectively "Service") or death: (i) Should the Optionee cease to remain in Service for any reason other than death, Disability or Misconduct, then the Optionee shall have a period of three (3) months following the date of such cessation of Service during which to exercise each option held by such Optionee to the extent exercisable on the date of such termination. (ii) Should Optionee's Service terminate by reason of Disability, then the Optionee shall have a period of twelve (12) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee to the extent exercisable on the date of such termination. (iii)If the Optionee dies while holding an outstanding option, then the personal representative of his or her estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance shall have a twelve (12)-month period following the date of the Optionee's death to exercise such option to the extent exercisable on the date of such termination. (iv) Under no circumstances, however, shall any such option be exercisable after the specified expiration of the option term. (v) All vested options shall terminate upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term. b. The Board or Committee shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: (i) extend the period of time for which the option is to remain exercisable following Optionee's cessation of Service or death from the limited period otherwise in effect for that option to such greater period of time as it shall deem appropriate, but in no event beyond the expiration of the option term, and/or 4 (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested under the option had the Optionee continued in Service. 4. Stockholder Rights. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person exercise the option, pays the exercise price and becomes the recordholder of the purchased shares. 5. Limited Transferability of Options. During the lifetime of the Optionee, the option shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or, following the Optionee's death, by the laws of descent and distribution. B. CORPORATE TRANSACTION 1. All unvested options shall automatically vest in full if and when either of the following stockholder approved transactions to which the Corporation is a party are consummated: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. However, the shares subject to an outstanding option shall not vest on such an accelerated basis if and to the extent: (i) such option is assumed by the successor corporation (or parent thereof) in the Corporate Transaction or (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to those unvested option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Board or Committee at the time of the option grant. 2. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction, had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan following the consummation of such Corporate Transaction and (ii) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. 3. The Board or Committee shall have the discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to structure one or more options so that those options shall automatically accelerate and vest in full (and any repurchase rights of the 5 Corporation with respect to the unvested shares subject to those options shall immediately terminate) upon the occurrence of a Corporate Transaction, whether or not those options are to be assumed in the Corporate Transaction. 4. The Board or Committee shall also have full power and authority, exercisable either at the time the option is granted or at any time while the option remains outstanding, to structure such option so that the shares subject to that option will automatically vest on an accelerated basis should the Optionee's Service terminate by reason of the Optionee's involuntary dismissal or discharge by the Corporation for reasons other than misconduct ("Involuntary Termination") within a designated period (not to exceed one year) following the effective date of any Corporate Transaction in which the option is assumed and the repurchase rights applicable to those shares do not otherwise terminate. Any option so accelerated shall remain exercisable for the fully-vested option shares until the expiration or sooner termination of the option term. 5. The portion of any Incentive Option accelerated in connection with a Corporate Transaction shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000.00) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws. 6. The grant of options under the Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. III. STOCK ISSUANCE PROGRAM A. STOCK ISSUANCE TERMS Shares of Common Stock may, upon request by a Participant, be issued at the discretion of the Board or Committee under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall comply with the terms specified below. 1. Purchase Price. a. The purchase price per share shall be fixed by the Board or Committee but shall not be less than the Fair Market Value per share of Common Stock on the issue date. b. Subject to the provisions of Section A of Article IV, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Board may deem appropriate in each individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). 6 2. Vesting Provisions. a. Shares of Common Stock issued under the Stock Issuance Program shall vest at the discretion of the Board of Directors or Committee. b. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. IV. MISCELLANEOUS A. FINANCING The Board or Committee may permit any Optionee or Participant to pay the option exercise price under the Option Grant Program or the purchase price for shares issued under the Stock Issuance Program by delivering a full-recourse, interest bearing promissory note payable in one or more installments and secured by the purchased shares. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Board in its sole discretion. In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares (less the par value of those shares) plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. B. ADJUSTMENTS DUE TO STOCK SPLITS, MERGERS, CONSOLIDATION, ETC. If, at any time, the Company shall take any action, whether by stock dividend, stock split, combination of shares or otherwise, which results in a proportionate increase or decrease in the number of shares of common stock theretofore issued and outstanding, the number of shares which are reserved for issuance under the Plan and the number of shares which, at such time, are subject to options shall, to the extent deemed appropriate by the committee, be increased or decreased in the same proportion, provided, however, that the Company shall not be obligated to issue fractional shares. Likewise, in the event of any change in the outstanding shares of common stock by reason of any recapitalization, merger, consolidation, reorganization, combination or exchange of shares or other corporate change, the committee shall make such substitution or adjustments, if any, as it deems to be appropriate, as to the number or kind of shares of common stock or other securities which are reserved for issuance under the Plan and the number of shares or other securities which, at such time are subject to Options. In the event of a change of control, at the option of the board of directors or committee, (a) all options outstanding on the date of such change of control shall, for a period of sixty days following such change of control, become immediately and fully exercisable, and (b) an optionee will be permitted to surrender for cancellation within sixty days after such change of control any option or portion of any option which was granted more than six months prior to the date of such surrender, to the extent not yet exercised, and to receive a cash payment in an amount equal to the excess, if any, of the Fair Market Value 7 (on the date of surrender) of the shares of common stock subject to the option or portion thereof surrendered, over the aggregate purchase price for such shares under the option. C. EFFECTIVE DATE AND TERM OF PLAN 1. The Plan shall become effective on September 17, 2001, provided that no Incentive Options may be granted unless the Plan is first approved by the Corporation's stockholders. The Board may grant options and issue shares under the Plan at any time after the effective date of the Plan and before the date fixed herein for termination of the Plan. 2. The Plan shall terminate upon the earliest of (i) the expiration of the ten (10)-year period measured from the date the Plan is adopted by the Board, (ii) the date on which all shares available for issuance under the Plan shall have been issued as vested shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. All options and unvested stock issuances outstanding at the time of a clause (i) termination event shall continue to have full force and effect in accordance with the provisions of the documents evidencing those options or issuances. D. AMENDMENT OF THE PLAN The Board or Committee shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws and regulations. E. WITHHOLDING The Corporation's obligation to deliver shares of Common Stock upon the exercise of any options or upon the issuance of shares issued under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. F. REGULATORY APPROVALS The implementation of the Plan, the granting of any options under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any option or (ii) under the Stock Issuance Program shall be subject to the Corporation's obtaining all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the shares of Common Stock issued pursuant to it. G. NO EMPLOYMENT OR SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. 8 APPENDIX The following definitions shall be in effect under the Plan: Board shall mean the Corporation's Board of Directors. Change of Control shall mean: (i) any person who is not currently such becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or (ii) three or more directors, whose election or nomination for election is not approved by a majority of the Incumbent Board (as defined in the plan), are elected within any single 12-month period to serve on the board of directors; or (iii) members of the Incumbent Board cease to constitute a majority of the Board of Directors without the approval of the remaining members of the Incumbent Board; or (iv) any merger (other than a merger where the Company is the survivor and there is no accompanying change in control under subparagraphs (i), (ii) or (iii) of this paragraph (b), consolidation, liquidation or dissolution of the Company, or the sale of all or substantially all of the assets of the Company. Code shall mean the Internal Revenue Code of 1986, as amended. Common Stock shall mean the Corporation's common stock, $.0001 par value. Corporate Transaction shall mean either of the following stockholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. Corporation shall mean Direct Insite Corp., a Delaware corporation. Disability shall mean the inability of Optionee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances. Disability shall be deemed to constitute Permanent Disability in the event that such Disability is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more. 9 Eligibility. Incentive Options may only be granted to Employees. Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. Exercise Date shall mean the date on which the option shall have been exercised. Exercise Price shall mean the exercise price payable per Option Share as specified in the Grant Notice. Expiration Date shall mean the date on which the option expires as specified in the Grant Notice. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the NASDAQ National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers on the NASDAQ National Market. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the NASDAQ National Market, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. Grant Date shall mean the date of grant of the option as specified in the Grant Notice. Grant Notice shall mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby. Incentive Option shall mean an option which satisfies the requirements of Code Section 422. Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any 10 Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). 1934 Act shall mean the Securities Exchange Act of 1934, as amended. Non-Employee Director shall have the meaning provided under Rule 16(b) or any successor rule under the 1934 Act. Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422. Option Agreement shall mean the option agreement issued pursuant to the Grant Notice. Option Shares shall mean the number of shares of Common Stock subject to the option. Optionee shall mean the person to whom the option is granted as specified in the Grant Notice. Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Permitted Transfer shall mean (i) a gratuitous transfer of the Purchased Shares, provided and only if Optionee obtains the Corporation's prior written consent to such transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to Optionee's will or the laws of intestate succession following Optionee's death or (iii) a transfer to the Corporation in pledge as security for any purchase-money indebtedness incurred by Optionee in connection with the acquisition of the Purchased Shares. Plan shall mean the Corporation's 200l-A Stock Option/Stock Issuance Plan. Plan Administrator shall mean either the Board or a committee of the Board acting in its capacity as administrator of the Plan. Purchase Agreement shall mean the stock purchase agreement pursuant to the Grant Notice. Service shall mean the Optionee's performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non-employee member of the board of directors or an independent consultant. Stock Exchange shall mean the American Stock Exchange or the New York Stock Exchange. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 11 Vesting Commencement Date shall mean the date on which the Option Shares commences to vest as specified in the Grant Notice. Vesting Schedule shall mean the vesting schedule specified in the Grant Notice pursuant to which the Optionee is to vest in the Option Shares in a series of installments over his or her period of Service. 12 EX-10 6 diexhibit10-7.txt DIRECT INSITE CORP., 2002 STOCK OPTION/STOCK ISSUANCE PLAN I. GENERAL PROVISIONS A. PURPOSE OF THE PLAN This 2002 Stock Option/Stock Issuance Plan ("Plan") is intended to promote the interests of Direct Insite Corp., a Delaware corporation ("Corporation"), by providing eligible persons in the employ or service of the Corporation or its affiliates with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to continue in such employ or service. Unless otherwise defined herein, all capitalized terms shall have the meaning assigned to them in the attached Appendix. B. STRUCTURE OF THE PLAN The Plan shall be divided into two (2) separate equity programs: (i) the Option Grant Program under which eligible persons ("Optionees") may, at the discretion of the Board, be granted options to purchase shares of Common Stock; and (ii) the Stock Issuance Program under which eligible persons ("Participants") may, at the discretion of the Board, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary). The provisions of Articles One and Four shall apply to both equity programs under the Plan and shall accordingly govern the interests of all persons under the Plan. C. ADMINISTRATION OF THE PLAN The Plan shall be administered by the Corporation's Board of Directors ("Board"), or in the discretion of the Board, a committee consisting of no less than two Non-Employee Directors or persons meeting such other requirements as may be imposed by Rule 16(b) under the 1934 Act ("Committee"). The Board or Committee shall have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Plan and to make such determinations under, and issue such interpretations of, the Plan and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Board shall be final and binding on all parties who have an interest in the Plan or any option or stock issuance thereunder. D. ELIGIBILITY The persons eligible to participate in the Plan are: 1. Employees; 2. non-employee members of the Board or the non-employee members of the board of directors of any Parent or Subsidiary; and 3. consultants and other independent advisors who provide services to the Corporation, or any parent or subsidiary of the Corporation. The Board or Committee shall have full authority to determine, (i) with respect to the grants made under the Option Grant Program, described in Article Two below, which eligible persons are to receive the option grants, the time or times when those grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding, and (ii) with respect to stock issuances made under the Stock Issuance Program, described in Article Three, which eligible persons are to receive such stock issuances, the time or times when those issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration to be paid by the Participant for such shares. The Board or Committee shall have the absolute discretion either to grant options in accordance with the Option Grant Program or to issue stock in accordance with the Stock Issuance Program. E. STOCK SUBJECT TO THE PLAN The stock issuable under the Plan shall be shares of the Corporation's authorized but unissued or reacquired Common Stock. The maximum number of shares of Common Stock which may be issued under the Plan is 625,000 shares. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (i) the options expire or terminate for any reason prior to exercise in full, or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan and subsequently repurchased by the Corporation, at the option exercise or direct issue price paid per share, pursuant to the Corporation's repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan. If there is any change to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, then appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, and (ii) the number and/or class of securities and the exercise price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. 2 II. OPTION GRANT PROGRAM A. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Board, and which shall be subject to the provisions of the Plan. 1. Exercise Price. a. The exercise price per share shall be fixed by the Board in accordance with the following provisions: (i) The exercise price per share shall not be less than the Fair Market Value per share of Common Stock on the option grant date. (ii) If the Optionee is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date for Incentive Options. b. The exercise price is payable in cash or check made payable to the Corporation upon exercise of the option, subject to the provisions of Section I of Article Four and the documents evidencing the option. If the Common Stock is registered under Section 12 of the Securities Exchange Act of 1934, as amended ("34 Act") at the time the option is exercised, then the exercise price may also be paid as follows: (i) in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (ii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions (x) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (y) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. 3 Except to the extent the foregoing sale and remittance procedure is used, payment of the exercise price for the purchased shares must be made on the Exercise Date. 2. Exercise and Term of Options. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Board or Committee and set forth in the documents evidencing the option grant. However, no option shall have a term in excess of five (5) years measured from the option grant date. 3. Effect of Termination of Service. a. The following provisions shall govern the exercise of any vested option held by the Optionee at the time of cessation of Optionee's employment or rendering of services to the Corporation (collectively "Service") or death: (i) Should the Optionee cease to remain in Service for any reason other than death, Disability or Misconduct, then the Optionee shall have a period of three (3) months following the date of such cessation of Service during which to exercise each option held by such Optionee to the extent exercisable on the date of such termination. (ii) Should Optionee's Service terminate by reason of Disability, then the Optionee shall have a period of twelve (12) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee to the extent exercisable on the date of such termination. (iii) If the Optionee dies while holding an outstanding option, then the personal representative of his or her estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance shall have a twelve (12)-month period following the date of the Optionee's death to exercise such option to the extent exercisable on the date of such termination. (iv) Under no circumstances, however, shall any such option be exercisable after the specified expiration of the option term. (v) All vested options shall terminate upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term. b. The Board or Committee shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: (i) extend the period of time for which the option is to remain exercisable following Optionee's cessation of Service or death from the limited period otherwise in effect for that option 4 to such greater period of time as it shall deem appropriate, but in no event beyond the expiration of the option term, and/or (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested under the option had the Optionee continued in Service. 4. Stockholder Rights. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person exercise the option, pays the exercise price and becomes the recordholder of the purchased shares. 5. Limited Transferability of Options. During the lifetime of the Optionee, the option shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or, following the Optionee's death, by the laws of descent and distribution. B. CORPORATE TRANSACTION 1. All unvested options shall automatically vest in full if and when either of the following stockholder approved transactions to which the Corporation is a party are consummated: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. However, the shares subject to an outstanding option shall not vest on such an accelerated basis if and to the extent: (i) such option is assumed by the successor corporation (or parent thereof) in the Corporate Transaction or (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to those unvested option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Board or Committee at the time of the option grant. 2. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction, had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan following the consummation of such Corporate Transaction and (ii) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. 3. The Board or Committee shall have the discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to structure one or more options so that those options shall automatically accelerate and vest in full (and any repurchase rights of the Corporation with respect to the unvested shares subject to those options shall immediately terminate) upon the occurrence of a Corporate Transaction, whether or not those options are to be assumed in the Corporate Transaction. 5 4. The Board or Committee shall also have full power and authority, exercisable either at the time the option is granted or at any time while the option remains outstanding, to structure such option so that the shares subject to that option will automatically vest on an accelerated basis should the Optionee's Service terminate by reason of the Optionee's involuntary dismissal or discharge by the Corporation for reasons other than misconduct ("Involuntary Termination") within a designated period (not to exceed one year) following the effective date of any Corporate Transaction in which the option is assumed and the repurchase rights applicable to those shares do not otherwise terminate. Any option so accelerated shall remain exercisable for the fully-vested option shares until the expiration or sooner termination of the option term. 5. The portion of any Incentive Option accelerated in connection with a Corporate Transaction shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000.00) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws. 6. The grant of options under the Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. III. STOCK ISSUANCE PROGRAM A. STOCK ISSUANCE TERMS Shares of Common Stock may, upon request by a Participant, be issued at the discretion of the Board or Committee under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall comply with the terms specified below. 1. Purchase Price. a. The purchase price per share shall be fixed by the Board or Committee but shall not be less than the Fair Market Value per share of Common Stock on the issue date. b. Subject to the provisions of Section A of Article IV, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Board may deem appropriate in each individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). 6 2. Vesting Provisions. a. Shares of Common Stock issued under the Stock Issuance Program shall vest at the discretion of the Board of Directors or Committee. b. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. IV. MISCELLANEOUS A. FINANCING The Board or Committee may permit any Optionee or Participant to pay the option exercise price under the Option Grant Program or the purchase price for shares issued under the Stock Issuance Program by delivering a full-recourse, interest bearing promissory note payable in one or more installments and secured by the purchased shares. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Board in its sole discretion. In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares (less the par value of those shares) plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. B. ADJUSTMENTS DUE TO STOCK SPLITS, MERGERS, CONSOLIDATION, ETC. If, at any time, the Company shall take any action, whether by stock dividend, stock split, combination of shares or otherwise, which results in a proportionate increase or decrease in the number of shares of common stock theretofore issued and outstanding, the number of shares which are reserved for issuance under the Plan and the number of shares which, at such time, are subject to options shall, to the extent deemed appropriate by the committee, be increased or decreased in the same proportion, provided, however, that the Company shall not be obligated to issue fractional shares. Likewise, in the event of any change in the outstanding shares of common stock by reason of any recapitalization, merger, consolidation, reorganization, combination or exchange of shares or other corporate change, the committee shall make such substitution or adjustments, if any, as it deems to be appropriate, as to the number or kind of shares of common stock or other securities which are reserved for issuance under the Plan and the number of shares or other securities which, at such time are subject to Options. In the event of a change of control, at the option of the board of directors or committee, (a) all options outstanding on the date of such change of control shall, for a period of sixty days following such change of control, become immediately and fully exercisable, and (b) an optionee will be permitted to surrender for cancellation within sixty days after such change of control any option or portion of any option which was granted more than six months prior to the date of such surrender, to the extent not yet exercised, and to receive a cash payment in an amount equal to the excess, if any, of the Fair Market Value (on the date of surrender) of the shares of common stock subject to the option or portion thereof surrendered, over the aggregate purchase price for such shares under the option. 7 C. EFFECTIVE DATE AND TERM OF PLAN 1. The Plan shall become effective on January 18, 2002, provided that no Incentive Options may be granted unless the Plan is first approved by the Corporation's stockholders. The Board may grant options and issue shares under the Plan at any time after the effective date of the Plan and before the date fixed herein for termination of the Plan. 2. The Plan shall terminate upon the earliest of (i) the expiration of the ten (10)-year period measured from the date the Plan is adopted by the Board, (ii) the date on which all shares available for issuance under the Plan shall have been issued as vested shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. All options and unvested stock issuances outstanding at the time of a clause (i) termination event shall continue to have full force and effect in accordance with the provisions of the documents evidencing those options or issuances. D. AMENDMENT OF THE PLAN The Board or Committee shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws and regulations. E. WITHHOLDING The Corporation's obligation to deliver shares of Common Stock upon the exercise of any options or upon the issuance of shares issued under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. F. REGULATORY APPROVALS The implementation of the Plan, the granting of any options under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any option or (ii) under the Stock Issuance Program shall be subject to the Corporation's obtaining all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the shares of Common Stock issued pursuant to it. G. NO EMPLOYMENT OR SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. 8 APPENDIX The following definitions shall be in effect under the Plan: Board shall mean the Corporation's Board of Directors. Change of Control shall mean: (i) any person who is not currently such becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or (ii) three or more directors, whose election or nomination for election is not approved by a majority of the Incumbent Board (as defined in the plan), are elected within any single 12_month period to serve on the board of directors; or (iii) members of the Incumbent Board cease to constitute a majority of the Board of Directors without the approval of the remaining members of the Incumbent Board; or (iv) any merger (other than a merger where the Company is the survivor and there is no accompanying change in control under subparagraphs (i), (ii) or (iii) of this paragraph (b),consolidation, liquidation or dissolution of the Company, or the sale of all or substantially all of the assets of the Company. Code shall mean the Internal Revenue Code of 1986, as amended. Common Stock shall mean the Corporation's common stock, $.0001 par value. Corporate Transaction shall mean either of the following stockholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. Corporation shall mean Direct Insite Corp., a Delaware corporation. Disability shall mean the inability of Optionee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances. Disability shall be deemed to constitute Permanent Disability in the event that such Disability is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more. Eligibility. Incentive Options may only be granted to Employees. Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. Exercise Date shall mean the date on which the option shall have been exercised. 9 Exercise Price shall mean the exercise price payable per Option Share as specified in the Grant Notice. Expiration Date shall mean the date on which the option expires as specified in the Grant Notice. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the NASDAQ National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers on the NASDAQ National Market. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the NASDAQ National Market, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. Grant Date shall mean the date of grant of the option as specified in the Grant Notice. Grant Notice shall mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby. Incentive Option shall mean an option which satisfies the requirements of Code Section 422. Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). 1934 Act shall mean the Securities Exchange Act of 1934, as amended. Non-Employee Director shall have the meaning provided under Rule 16(b) or any successor rule under the 1934 Act. Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422. Option Agreement shall mean the option agreement issued pursuant to the Grant Notice. 10 Option Shares shall mean the number of shares of Common Stock subject to the option. Optionee shall mean the person to whom the option is granted as specified in the Grant Notice. Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Permitted Transfer shall mean (i) a gratuitous transfer of the Purchased Shares, provided and only if Optionee obtains the Corporation's prior written consent to such transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to Optionee's will or the laws of intestate succession following Optionee's death or (iii) a transfer to the Corporation in pledge as security for any purchase-money indebtedness incurred by Optionee in connection with the acquisition of the Purchased Shares. Plan shall mean the Corporation's 200l-A Stock Option/Stock Issuance Plan. Plan Administrator shall mean either the Board or a committee of the Board acting in its capacity as administrator of the Plan. Purchase Agreement shall mean the stock purchase agreement pursuant to the Grant Notice. Service shall mean the Optionee's performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non-employee member of the board of directors or an independent consultant. Stock Exchange shall mean the American Stock Exchange or the New York Stock Exchange. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Vesting Commencement Date shall mean the date on which the Option Shares commences to vest as specified in the Grant Notice. Vesting Schedule shall mean the vesting schedule specified in the Grant Notice pursuant to which the Optionee is to vest in the Option Shares in a series of installments over his or her period of Service. 11 EX-10 7 diexhibit10-17.txt EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT dated as of the 1st day of December, 2001 by and between DIRECT INSITE CORP., a Delaware corporation (hereinafter the "Company") and ANTHONY COPPOLA, an individual residing at ___________________________________ (hereinafter called "Coppola"). W I T N E S S E T H: WHEREAS, the Company desires to enter into an Employment Agreement with Coppola (the "Agreement"); and WHEREAS, Coppola desires to enter into this Agreement with the Company; NOW, THEREFORE, it is agreed as follows: 1. Prior Agreements Superseded. This Agreement supersedes any employment, consulting or other agreements, oral or written, entered into between Coppola and the Company prior to the date of this Agreement except for stock options and stock grants previously granted to Coppola, which stock options and grants shall continue in full force and effect. 2. Employment. The Company hereby agrees to employ Coppola, and Coppola hereby agrees to serve, as President of the Company with commensurate responsibilities and to perform such services as directed by the Board of Directors. Coppola's employment hereunder shall be on a full-time basis and Coppola shall not engage in any other business, except with the prior approval of the Board of Directors of the Company. Coppola shall serve in similar capacities of such of the subsidiary corporations of the Company as may be selected by the Board of Directors without additional compensation. Notwithstanding the foregoing, it is understood that the duties of Coppola during the performance of employment shall not be inconsistent with his position and title as President of the Company. 3. Term. Subject to earlier termination on the terms and conditions hereinafter provided, the term of this Agreement shall end on January 1, 2004. 4. Compensation. For all services rendered by Coppola under this Agreement, compensation shall be paid to Coppola during the period of employment as follows: (a) Coppola shall be paid at the annual rate of One Hundred Seventy-Five Thousand ($175,000) Dollars. 1 (b) Coppola shall be eligible to participate in the Company's stock option and stock purchase plans to the extent determined in the discretion of the Board of Directors of the Company or committee thereof. (c) Coppola shall be entitled to receive an annual bonus at the discretion of the Board of Directors. (d) Coppola shall be furnished with office space and secretarial service and facilities commensurate with his position and adequate for the performance of his duties. (e) Coppola shall be entitled to fully participate in all benefit programs generally available to executive employees of the Company throughout the term of this Agreement, including but not limited to medical benefits. (f) Coppola shall be entitled to receive an automobile allowance not to exceed $1,000 per month, which shall cover the use of an automobile, insurance and related expenses. (g) Coppola shall be entitled to four (4) weeks of vacation and sick leaves consistent with current practice of the Company. 5. Expenses. Coppola shall be reimbursed for all out-of-pocket expenses reasonably incurred by him in the performance of his duties hereunder. Expense reports, with receipts and justifications, must be submitted to the Chairman of the Board of Chief Financial Officer for approval. 6. Severance Benefits. Coppola shall be entitled to the severance benefits provided for in subsection (c) hereof in the event of the termination of his employment by the Company without cause or in the event of a voluntary termination of employment by Coppola for good reason. Coppola and the Company acknowledge that the foregoing provisions of this paragraph 6 are reasonable and are based upon the facts and circumstances of the parties at the time of entering into this Agreement, and with this Agreement, and with due regard to future expectations. (a) The term "cause" shall mean: (i) Coppola's willful and continued failure to substantially perform his duties under this Agreement (other than any such failure resulting from his incapacity due to physical or mental illness) after demand for substantial performance is delivered to Coppola by the Chairman of the Board of the Company which specifically identifies the manner in which the Board believes Coppola has not substantially performed his duties. 2 (ii) Coppola's failure to refuse to follow directions from the Company's Board of Directors provided that Coppola's compliance with any such direction would not be illegal or unlawful. (iii) Any act or fraud, embezzlement or theft committed by Coppola whether or not in connection with his duties or in the course of his employment. (iv) Any willful disclosure by Coppola of confidential information or trade secrets of the Company or its affiliates. For purposes of this paragraph, no act or failure to act on Coppola's part shall be considered "willful" unless done, or omitted to be done, by Coppola not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, Coppola shall not be deemed to have been terminated for cause unless and until there shall have been delivered to him a copy of a notice of termination from the Chairman of the Board of the Company after reasonable notice to Coppola and an opportunity for Coppola with his counsel to be heard before the Board of Directors of the Company finding that in the good faith opinion of such Board of Directors Coppola was guilty of the conduct set forth in clauses (i), (ii) , (iii) or (iv) of this paragraph and specifying the particulars thereof in detail. (b) For these purposes, Coppola shall have "good reason" to terminate this Agreement if the Company removes Coppola from the position of President at any time during the term of this Agreement. (c) The severance benefits under this section in the event of termination without cause or by Coppola for "good reason", shall consist of the continued payment to Coppola for the remaining term of this Agreement of the annual salary provided in Section 4(a) hereof plus the immediate vesting of all outstanding options. 7. Death. In the event of Coppola's death during the term of this Agreement, Coppola's legal representative shall be entitled to receive his per annum base salary as provided in paragraph 4(a) of this Agreement to the last day of the calendar quarter following the calendar quarter in which Coppola's death shall have occurred. 8. Non-Competition. (a) Coppola agrees that, during the term of this Agreement, he will not, without the prior written approval of the Board of Directors of the Company, directly or indirectly, through any other individual or entity, (a) become an officer or employee of, or render any services [including consulting services] to, any competitor of the Company, (b) solicit, raid, entice or induce any customer of the Company to cease purchasing goods or services from the Company 3 or to become a customer of any competitor of the Company, and Coppola will not approach any customer for any such purpose or authorize the taking of any such actions by any other individual or entity, or (c) solicit, raid, entice or induce any employee of the Company, and Coppola will not approach any such employee for any such purpose or authorize the taking of any such action by any other individual or entity. (b) During the term hereof and at all times thereafter, Coppola shall not disclose to any person, firm or corporation other than the Company any trade secrets, trade information, techniques or other confidential information of the business of the Company, its methods of doing business or information concerning its customers learned or acquired by Coppola during Coppola's relationship with the Company and shall not engage in any unfair trade practices with respect to the Company. 9. Enforcement. (a) The necessity for protection of the Company and its subsidiaries against Coppola's competition, as well as the nature and scope of such protection, has been carefully considered by the parties hereto in light of the uniqueness of Coppola's talent and his importance to the Company. Accordingly, Coppola agrees that, in addition to any other relief to which the Company may be entitled, the Company shall be entitled to seek and obtain injunctive relief (without the requirement of any bond) for the purpose of restraining Coppola from any actual or threatened breach of the covenants contained in paragraph 8 of this Agreement. (b) If for any reason a court determines that the restrictions under paragraph 8 of this Agreement are not reasonable or that consideration therefor in adequate, the parties expressly agree and covenant that such restrictions shall be interpreted, modified or rewritten by such court to include as much of the duration and scope identified in paragraph 8 as will render the restrictions valid and enforceable. 10. Notices. Any notice to be given to the Company or Coppola hereunder shall be deemed given if delivered personally, telefaxed or mailed by certified or registered mail, postage prepaid, to the other party hereto at the following addresses: To the Company: Direct Insite Corp. 80 Orville Drive Bohemia, New York 11716 Copy to: David H. Lieberman, Esq. Blau, Kramer, Wactlar & Lieberman, P.C. 100 Jericho Quadrangle Suite 225 Jericho, NY 11753 To Coppola: Anthony Coppola 4 Either party may change the address to which notice may be given hereunder by giving notice to the other party as provided herein. 11. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns, and upon Coppola, his heirs, executors, administrators and legal representatives. 12. Entire Agreement. This Agreement constitutes the entire agreement between the parties except as specifically otherwise indicated herein. 13. Governing Law. This Agreement shall be construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. DIRECT INSITE CORP. /s/ Warren Wright By: __________________________________ /s/ James A. Cannavino ------------------------------------ ANTHONY COPPOLA Employee EX-10 8 diexhibit10-18.txt SERVICES AGREEMENT THIS SERVICES AGREEMENT dated as of the 18th day of January, 2002 by and between DIRECT INSITE CORP., a Delaware corporation (hereinafter the "Company") and James A. Cannavino, an individual residing at #1 Lovango Cay, USVI (mailing address 6501 Red Hook Plaza, Suite 201- PMB, Red Hook, VI, 00802, (hereinafter referred to as "Cannavino"). W I T N E S S E T H: WHEREAS, the Company desires to enter into an Services Agreement with Cannavino; and WHEREAS, Cannavino desires to enter into a Services Agreement with the Company; NOW, THEREFORE, it is agreed as follows: 1. Prior Agreements Superseded. This Agreement supersedes any services, consulting or other agreements, oral or written, entered into between Cannavino and the Company prior to the date of this Agreement except for stock options previously granted to Cannavino, which stock options shall continue in full force and effect. 2. Services. The Company hereby agrees to employ Cannavino and Cannavino hereby agrees to serve as Chairman of the Board of the Company with commensurate responsibilities and to perform such services as directed by the Board of Directors. Cannavino shall serve in similar capacities of such of the subsidiary corporations of the Company as may be selected by the Board of Directors without additional compensation. Notwithstanding the foregoing, it is understood that the duties of Cannavino during the performance of services shall not be inconsistent with his position and title as Chairman of the Board of the Company. 3. Term. Subject to earlier termination on the terms and conditions hereinafter provided, the term of this Services Agreement shall be for two years ending January 17, 2004. 4. Compensation. For all services rendered by Cannavino under this Agreement, compensation shall be paid to Cannavino as follows: (a) During the first year of this Agreement, Cannavino shall receive 180,000 shares of the Company's common stock plus 240,000 stock options. The shares of common stock shall vest ratably on a monthly (15,000 shares) basis during the first year of this Agreement with the first shares vesting on February 17, 2002. During the second year of this Agreement, Cannavino shall receive $15,000 per month as compensation. The 240,000 stock options shall vest ratably during months one through twenty- four of the term of this Agreement. The stock options shall have an exercise price equal to the closing price of the Company's common stock as indicated on NASDAQ on the date of this agreement. (b) During the period of this Agreement, Cannavino shall be eligible to participate in the Company's stock option and stock purchase plans to the extent determined in the discretion of the Board of Directors of the Company or committee thereof. (c) Cannavino shall be entitled to participate in any short-term or long-term incentive plan which the Company has in existence or which may be adopted. (d) During the period of this Agreement, Cannavino shall be furnished with office space and secretarial service and facilities commensurate with his position and adequate for the performance of his duties. (e) Cannavino shall be entitled to fully participate in all benefit programs available to executive employees of the Company throughout the term of this Agreement. 5. Expenses. Cannavino shall be reimbursed for all out-of-pocket expenses, including medical expenses, reasonably incurred by him in the performance of his duties hereunder, including New York City office and housing. 6. Severance Benefits. Cannavino shall be entitled to the severance benefits provided for in subsection (c) hereof in the event of the termination of this Agreement, by the Company without cause or in the event of a voluntary termination of this service Agreement by Cannavino for good reason. In such event, Cannavino shall have no duty to mitigate damages hereunder. Cannavino and the Company acknowledge that the foregoing provisions of this paragraph 6 are reasonable and are based upon the facts and circumstances of the parties at the time of entering into this Agreement, and with this Agreement, and with due regard to future expectations. (a) The term "cause" shall mean: (i) Cannavino's willful and continued failure to substantially perform his duties under this Agreement (other than any such failure resulting from his incapacity due to physical or mental illness) after demand for substantial performance is delivered to Cannavino by the Board of Directors of the Company which specifically identifies the manner in which the Board believes Cannavino has not substantially performed his duties. (ii) Cannavino's failure to refuse to follow directions from the Company's Board of Directors provided that (a) Cannavino is provided written notice of such directions and a reasonable period in which to comply and (b) Cannavino's compliance with any such direction would not be illegal or unlawful. (iii) Any act or fraud, embezzlement or theft committed by Cannavino whether or not in connection with his duties or in the course of his performance as defined in this Service Agreement, which substantially impairs his ability to perform his duties hereunder. (iv) Any willful disclosure by Cannavino of confidential information or trade secrets of the Company or its affiliates. For purposes of this paragraph, no act or failure to act on Cannavino's part shall be considered "willful" unless done, or omitted to be done, by Cannavino not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, Cannavino shall not be deemed to have been terminated for cause unless and until there shall have been delivered to him a copy of a notice of termination from the Board of Directors of the Company after reasonable notice to Cannavino and an opportunity for Cannavino with his counsel to be heard before the Board of Directors of the Company finding that in the good faith opinion of such Board of Directors Cannavino was guilty of the conduct set forth in clauses (i), (ii), (iii) or (iv) of this paragraph and specifying the particulars thereof in detail. (b) For these purposes, Cannavino shall have "good reason" to terminate this Agreement if the Company removes Cannavino from the position of Chairman of the Board at any time during the term of this Agreement. (c) The severance benefits under this section in the event of termination without cause or by Cannavino for "good reason", shall consist of the immediate vesting of all outstanding shares of common stock and options. 2 7. Death. In the event of Cannavino's death during the term of this Agreement, all shares and stock options issued hereunder shall immediately vest. 8. Non-Competition. (a) Cannavino agrees that, during the term of this Agreement, he will not, without the prior written approval of the Board of Directors of the Company, directly or indirectly, through any other individual or entity, (i) become an officer or employee of, or render any services [including consulting services] to, any competitor of the Company, (ii) solicit, raid, entice or induce any customer of the Company to cease purchasing goods or services from the Company or to become a customer of any competitor of the Company, and Cannavino will not approach any customer for any such purpose or authorize the taking of any such actions by any other individual or entity, or (iii) solicit, raid, entice or induce any employee of the Company, and Cannavino will not approach any such employee for any such purpose or authorize the taking of any such action by any other individual or entity. However, nothing contained in this paragraph 8 shall be construed as preventing Cannavino from investing his assets in such form or manner as will not require him to become an officer or employee of, or render any services (including consulting services) to, any competitor of the Company. (b) During the term hereof and at all times thereafter, Cannavino shall not disclose to any person, firm or corporation other than the Company any trade secrets, trade information, techniques or other confidential information of the business of the Company, its methods of doing business or information concerning its customers learned or acquired by Cannavino during Cannavino's relationship with the Company and shall not engage in any unfair trade practices with respect to the Company. 9. Enforcement. (a) The necessity for protection of the Company and its subsidiaries against Cannavino's competition, as well as the nature and scope of such protection, has been carefully considered by the parties hereto in light of the uniqueness of Cannavino's talent and his importance to the Company. Accordingly, Cannavino agrees that, in addition to any other relief to which the Company may be entitled, the Company shall be entitled to seek and obtain injunctive relief (without the requirement of any bond) for the purpose of restraining Cannavino from any actual or threatened breach of the covenants contained in paragraph 8 of this Agreement. (b) If for any reason a court determines that the restrictions under paragraph 8 of this Agreement are not reasonable or that consideration therefore in adequate, the parties expressly agree and covenant that such restrictions shall be interpreted, modified or rewritten by such court to include as much of the duration and scope identified in paragraph 8 as will render the restrictions valid and enforceable. 10. Notices. Any notice to be given to the Company or Cannavino hereunder shall be deemed given if delivered personally, telefaxed or mailed by certified or registered mail, postage prepaid, to the other party hereto at the following addresses: To the Company: Direct Insite Corp. 80 Orville Drive Bohemia, New York 11716 3 Copy to: David H. Lieberman, Esq. Blau, Kramer, Wactlar & Lieberman, P.C. 100 Jericho Quadrangle Suite 225 Jericho, NY 11753 To Cannavino: James A. Cannavino 6501 Red Hook Plaza, Suite 201-PMB New York, New York 10017 Either party may change the address to which notice may be given hereunder by giving notice to the other party as provided herein. 11. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns, and upon Cannavino, his heirs, executors, administrators and legal representatives. 12. Entire Agreement. This Agreement constitutes the entire agreement between the parties except as specifically otherwise indicated herein. 13. Governing Law. This Agreement shall be construed in accordance with the laws of the State of New York. 14. Change of Control. In the event (a) the Company has been consolidated or merged into or with any other corporation or all or substantially all of the assets of the Company have been sold to another corporation, with or without the consent of Employee, in his sole discretion; or (b) the Company undergoes a Change of Control, as hereinafter defined below, without prior Board approval; then Employee is entitled to the immediate vesting of all shares of common stock issued hereunder. A "Change of Control" of the Company, or in any person directly or indirectly controlling the Company, shall mean: (i) a change of control as such term is presently defined in Regulation 240.12b-2 under the Securities Exchange Act of 1934 (the "Exchange Act"); (ii) if during the Term of this services agreement any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) other than the Company or any person who on the date of this Services agreement Agreement is a director or officer of the Company, becomes the "beneficial owner" (as defined in Rule 13(d)03 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% of the voting power of the Company's then outstanding securities; or (iii) if during the Term of this services agreement the individuals who at the beginning of such period constitute the Board cease for any reason other than death, disability or retirement to constitute at least a majority thereof." 15. Consent under Rights Agreement. The parties acknowledge that this Agreement has been approved by the Company's Board of Directors and accordingly will not result in the issuance of any rights under the Rights Agreement dated as of August 28, 2001. IN WITNESS WHEREOF, the parties hereto have executed this Services Agreement as of the day and year first above written. DIRECT INSITE CORP. /s/ Warren Wright By: ____________________________ Warren Wright Chief Executive Officer /s/ James A. Cannavino _________________________________ James A. Cannavino EX-23 9 diexhibit23a.txt INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements of Direct Insite Corp. (f/k/a Computer Concepts Corp.) on Forms S-8 (File No. 33-88260, effective December 30, 1994; File No. 33-94058, effective June 28, 1995; File No. 333-4070, effective April 25, 1996; File No. 333-42795, effective December 19, 1997; File No. 333- 52875, effective May 15, 1998; File No. 333-72203, effective February 11, 1999; and File No. 333-33274, effective March 24, 2000) of our report dated February 28, 2002, appearing in the Annual Report on Form 10-K of Direct Insite Corp. for the year ended December 31, 2001. /s/ Marcum & Kliegman LLP April 12, 2002 Woodbury, New York -----END PRIVACY-ENHANCED MESSAGE-----