-----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, PX+K+1FRLqHYBYjLc98YzMy41jV+esTP+DpH9jr9NefwkH2qkVgFA9QEKIV0iIvu mxmvYbV+B4wH8zt44IVE2A== 0001201800-03-000035.txt : 20030415 0001201800-03-000035.hdr.sgml : 20030415 20030415154711 ACCESSION NUMBER: 0001201800-03-000035 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030415 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: 03650592 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 di10kdecember2002final.txt 10-K 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, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File No. 0-20660 DIRECT INSITE CORP. (Exact name of registrant as specified in its charter) Delaware 11-2895590 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 80 Orville Drive, Bohemia, N.Y. 11716 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (631) 244-1500 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] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) NO [X] As of April 16, 2003, there were 3,945,821 shares of the registrant's Common Stock outstanding. The aggregate market value of the Common Stock held by non-affiliates was approximately $6,901,000 based on the closing sale price of the Common Stock as quoted on the NASDAQ on such date. DOCUMENTS INCORPORATED BY REFERENCE: Part III - Items 10, 11, 12 and 13). Registrant's definitive proxy statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934. Direct Insite Corp. and Subsidiaries Form 10-K for the Year Ended December 31, 2002 Table of Contents ----------------- PART I PAGE ---- ITEM 1 Business 1 ITEM 2 Properties 10 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 19 ITEM 8 Financial Statement 19 ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19 PART IV ITEM 14 Controls and Procedures 23 ITEM 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 23 SIGNATURE 26 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 our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Form 10-K, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to us or our management, identify forward-looking statements. Such forward - looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to, fluctuations in future operating results, technological changes or difficulties, management of future growth, expansion of international operations, the risk of errors or failures in our software products, dependence on proprietary technology, competitive factors, risks associated with potential acquisitions, the ability to recruit personnel, and the dependence on key personnel. Such statements reflect the current views of management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. OVERVIEW Direct Insite Corp. and its subsidiaries (hereinafter referred to at times as "Direct Insite" or the "Company"), was organized under the name Unique Ventures, Inc. as a "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 August, 2000, the shareholders voted to approve to change our name to Direct Insite Corp. which the Board of Directors believed was more in line with our new direction. In March, 2000, in an effort to allow us 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 our board. In April, 2000, Mrs. Carla J. Steckline, the then attorney general of the state of Kansas was elected to serve as a member of the Board. As part of the terms and conditions of our financing transaction with Metropolitan Venture Partners II, L.P. ("Metropolitan"), Mr Peter Yunich, their managing partner was elected to our Board in September, 2002. In September 2002, we sold 93,458 shares of our Series A Convertible Preferred Stock, ("Preferred Stock") in consideration for $2,000,000 less fees and expenses of $178,000 to Metropolitan, a private equity investment firm. In December 2002, we sold 23,365 shares of our Preferred Stock in consideration for $500,000 less fees and expenses of $61,000, to Metropolitan. The proceeds from this December transaction were received January 3, 2003, and the principal sum is reflected on the accompanying Balance Sheet as stock subscription receivable. The holders of Preferred Stock ("the holders") are entitled to dividends, on a cumulative basis at a rate of 9-1/2% per annum, compounded quarterly and payable on September 25, 2004 and September 25, 2005. Dividends are payable, at the option of the holders, in cash or in our common stock. The holders have certain demand and piggyback registration rights, have preference in the event of liquidation, and are entitled to ten votes for each share of Preferred Stock on all matters as to which holders of common stock are entitled to vote. As of December 31, 2002, $56,000 in dividends are payable to the holders. 1 Our Current Business We primarily operate as an application service provider ("ASP") and, market an integrated "fee for services" offering providing high volume processing of transactional data for billing purposes, electronic bill presentation and payment ("EBP&P") as well as visual data analysis and reporting tools delivered via the Internet for our customers. Our core technology is 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 we acquired, Platinum Communications, Inc. ("Platinum"), a Dallas, Texas based company, which markets its integrated proprietary back office software solutions, Account Management Systems ("AMS" or sometimes referred to as "TAMS") to the telecommunications industry either as a license or as an ASP. We completed a merger with Platinum under an Agreement and Plan of Merger ("Merger Agreement"). Under the Merger Agreement, our newly formed wholly owned subsidiary acquired all of the outstanding common stock of Platinum. Further, as an added source of revenue in 2001, we began to provide custom engineering services for our customers. This newly assembled suite of services enables us to provide a comprehensive Internet delivered service from the raw transaction record through all of the internal workflow management processes including an electronically delivered invoice with customer analytics. This comprehensive service offering provides back office operations, cuts costs and provides for improved customer service by providing the end customer with easy access to all of the detailed information about their bill. We operate fully redundant data centers located at our main office in Bohemia, N.Y. and in Newark, NJ. Our facility in New Jersey is space leased at an International Business Machines ("IBM"), IBM e-business Hosting Center. This co-location / redundancy feature enables us to offer virtually down time free service. Currently, IBM, our largest customer, representing more than 80% of our revenue in each of the three years in the period ended December 31, 2002, 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(TM) platform. Discontinued Products and Services Historically, the most significant portion of our operations had been conducted through one of our subsidiaries, Softworks, Inc. ("Softworks"). Through Softworks, we developed, marketed and supported systems management software products for corporate mainframe data centers. Through a series of transactions, our ownership of Softworks was reduced from 100% to 35% as of December 31, 1999. Pursuant to a tender offer made in December 1999, we sold our remaining interest in Softworks (a total of 6,145,767 shares) to EMC Corporation 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, we began a marketing initiative known as Global Telecommunications Services ("GTS"). For a fee, this offering utilizing 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, we decided we would no longer market these services. In June 1998, we 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. In February, 2000, we sold a newly created wholly 2 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, we 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 us to create a means by which businesses could promote specific brand/product/service awareness. We 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, we invested approximately $7,000,000 in its marketing and development efforts (charged to operations as incurred). As part of our restructuring plan (Note 14 to the Consolidated Financial Statements), the Board of Directors determined that it was in our best interest to immediately cease all funding of this project. As a result, in April 2000, we entered into a contractual arrangement with an unrelated third party, whereby wetransferred 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 the third party. To date, we have not received revenue from this transaction. In 1997, we 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, we 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 We currently operate in one business segment and have, during the years 2002, 2001 and 2000, provided three separate offerings: ASP Services, AMS Services and custom engineering fees. Currently, within the ASP offering we provide two key services: -- Invoices On Line ("IOL"), an EBP&P, offering, and; -- d.b.Express, a data visualization and mining service IOL --- LOL is an advanced web-based electronic invoice presentment, workflow management, reporting and data interrogation/analysis platform designed for large enterprise customers doing business internationally. Our web-based network is operational and is currently hosting millions of invoices and is actively serving invoices in the US, Canada, England, Ireland, Germany, Italy and France. We are planning on adding additional geographies and languages throughout the course of 2003. IOL provides the following features and functions for the end user: -- Summary View of Invoice. IOL 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 the consolidation of multiple products and/or services in one electronically delivered invoice. 3 -- Data Mining and Visualization. Another benefit of data-centricity is the ability to utilize the d.b.Express data mining technology across the entire enterprise to analyze line item detail information - not just a single operating unit or limited geographical area of the business. Additionally, 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 with multiple levels of management and associated viewing rights and/or privileges often found in large enterprise accounts. -- 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 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 line item level 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. 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 4 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. 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. 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(TM) 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(TM) 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. We believe that this results in more timely and better quality business decision-making. Broader Access to Information. - d.b.Express(TM) 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(TM) 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(TM) 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(TM) 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. 5 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, we produce CDs of each month's billing details. In order to provide this service, we have 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. 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. We believe our 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 we will be successful in reaching our sales plan to gain adoption of the technology. Limited Resources to Market and Promote d.b.Express(TM) - We have limited resources with which to market and promote d.b.Express(TM). Regardless of the unique patented aspects of the product, if we are 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. We are 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(TM). If such new technologies are developed, they could negatively impact our ability to successfully market and promote d.b.Express(TM) on the Internet. Both IOL and dbExpress applications are managed service offerings and are priced on a per transaction basis ranging from fees per invoice to fees per line item of detail processed and by information archived and made accessible via the Internet by either of our two data centers. In addition, we also generate revenue from custom engineering services. This form of engineering work also known as non recurring engineering ("NRE"), quite often leads to recurring sources of revenue. It can be in the form of custom application development or changes made at the request of a customer. Account Management System - "AMS" & "TAMS" We also market 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). 6 Within AMS, there is a secondary offering, TAMS, which 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 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 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. 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 Historically, our dominant product offering was dbExpress, a visual data analysis platform for use by Fortune 500 companies to consolidate communications traffic for the purpose of system analysis and contract compliance. We added to that telecommunication services capability with the acquisition of Platinum and their asset management system , suite of back office communications management software products. The resulting Telecommunication Asset Management Software was derived from the integration of AMS with dbExpress to create an end-to-end communications management system designed for large enterprise customers. The 7 TAMS service offering provides the following processes critical to managing complex high volume communications services within the large enterprise; work flow management, service provisioning, transaction rating, billing and analysis, A/R and cash application and electronic intra/inter company invoicing. During 2001, we enhanced the service offering by combining electronic invoice presentment and payment functionality with dbExpress to provide Internet services customers with an electronic invoice that is capable of delivering and data mining the high volume of internet transactions that large companies generate. This "data centric" approach was a significant departure from the industry standard "document centric" approach that delivered print stream images over the Internet and not the line item detail. This "data centric" approach formed the basis of our enhanced EBP&P offering IOL that was completed in 2002. This combined set of services has allowed us to significantly expand our market opportunities to include any large enterprise in any industry that seeks to provide their customers with an electronic invoice with the associated line item detail information with the associated reports and data mining capabilities. 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, a system that is not designed to handle high volume detail accounts. We believe that electronic invoices delivered to 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. Our offering to this 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 an underlying 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 our electronic invoice presentment and payment service. We now have a complete systems management solution called TAMS or telecommunications asset management system 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 provide us with the complementary software products and telecommunications industry management experience to offer the necessary software tools to process the high volume of telecommunication switch data to the electronically presented invoice complete with data mining - all on an outsourced business model. SALES AND MARKETING CHANNELS TO MARKET We have two primary channels to market - direct through our sales representatives and contract sales agents, and, indirect through channel and strategic partners. These channels are supported by a technical sales support group. 8 Direct ------ We have increased our direct sales resources to include three full time sales reps and two sales agents. In addition, our directors and executives are involved in new client development and the establishment of channel partners. Indirect -------- We are pursuing both reseller and strategic partner relationships to gain greater access to existing account relationships and to align our marketing with complementary products and services. This provides access to the additional engineering and professional resources required to implement our EBP&P service offering. Technical Sales Support and Post-Sales Account Management --------------------------------------------------------- We have a pre-sales support team and add post sales support to the existing account management group as we secure new business. This group is responsible for technical sales presentations, developing proposals and pricing, contract administration and then account management upon completion. RESEARCH AND DEVELOPMENT The computer software industry is characterized by rapid technological change, which requires ongoing development and maintenance of software products. It is customary for modifications to be made to a software product as experience with its use grows or changes in manufacturers' hardware and software so require. We believe that our research and development staff, many with extensive experience in the industry, represents a significant competitive advantage. As of December 31, 2002, our research and development group consisted of 40 employees (52%). Further, when needed, we retain the services of independent professional consultants. We seek to recruit highly qualified employees, and our ability to attract and retain such employees will be a principal factor in our success in maintaining a leading technological position. For the three years ended December 31, 2002, 2001, and 2000, research and development expenses were approximately $3,903,000, $2,814,000 and $4,278,000, respectively We believe that investments in research and development are required in order to remain competitive. COMPETITION We believe that our primary competitors are: Avolent is a privately held San Francisco based provider of enterprise software for Financial Relationship Management (FRM) that include electronic invoice presentment and payment (EIPP), online account management, process management, enterprise employee access, and decision support. Founded in 1995, Avolent has primarily focused on the financial services, healthcare, technology and utility markets. Bottomline Technologies (Nasdaq: EPAY) was established in 1989 and provides a B2B EBPP solution, primarily to financial institutions and the legal services markets. The company's products include software designed to automate the disbursement process for banks and their corporate customers anti-fraud and electronic commerce payment software. Bottomline focuses on cash management and financial-related remittance, reporting and audit data. The company has over 500 employees and is based in Portsmouth, NH. 9 BCE Emergis (TSE: IFM) is an ecommerce solutions and service provider, primarily focused on the healthcare and financial services industries. The company, based in Toronto, Canada, was acquired by Bell Canada's electronic commerce unit and subsequently changed its name to BCE Emergis. The company has focused primarily on the Canadian B2C EBPP marketplace but is expanding in the US through banking relationships. BillingZone was established as a joint venture between PNC Bank and Perot Systems was recently acquired by e-One Global. BillingZone is an information technology services firm that serves the B2B EBPP market with a consolidator model that is focused on the B2B EBPP industry and is primarily payer-centric. CheckFree Corporation (Nasdaq:CKFR) provides online billing and payment for companies on the Web. Primarily focused on the B2C market, consumers receive and pay bills online through CheckFree-managed services. CheckFree was founded in 1981 in Columbus, Ohio. The company is now headquartered in Atlanta, GA with offices across the U.S,, in Canada and in the UK. Docucorp International, Inc.,(Nasdaq: DOCC) is based in Dallas Tx, and provides enterprise software products and professional services related to its information software products. They also provides application service provider (ASP) hosting service to provide processing, print, mail, archival and Internet delivery of documents for insurance, utilities, bank and mutual fund statements, invoices, call center correspondence and EBP&P. DST Systems Inc., is a Kansas City based provider of integrated paper and electronic statements, bills, marketing and compliance pieces, and other documents, that primarily service the communications, financial, insurance and utility markets for B2C and B2B applications. Edocs, Inc. is a privately held company based in Natick NH with its primary business model focused on providing online account management and billing software to the global large enterprise market. The company has approximately 250 employees and is focused on providing their B2B and B2C products to the telecommunications, utility, healthcare, transportation, security, real estate, retail and leasing industries, as well as financial services firms with B2B electronic statement and presentment needs. Pitney Bowes docSense (docSense) is a wholly-owned subsidiary of Pitney Bowes (NYSE: PBI). docSense targets the B2C, B2B and internal messaging markets and provides solutions for the creation and distribution of documents in paper and digital forms. Pitney Bowes provides solutions for government, utility, and insurance markets. It focuses on bills and primarily the B2C market. Many of our current and potential competitors have greater name recognition, larger installed customer bases, longer operating histories, and substantially greater financial technical and marketing resources than us. We cannot assume that current and potential competitors will not develop products that may be or may be perceived to be more effective or responsive to technological change than are our current or future products or that our technologies and products will not be rendered obsolete by such developments. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could have a material adverse effect on our business, operating results and financial condition. EMPLOYEES We had 78 employees, all in the United States, at March 31, 2003, including 18 in marketing, sales and support services, 46 in technical support, (including research and development) and 14 in corporate finance and administration. Our future success will depend in part upon our continued ability to attract and retain highly skilled and qualified personnel. We believe that our relations with our employees are good, and we have no collective bargaining agreements with any labor unions. 10 INTELLECTUAL PROPERTY We have two federally registered trademarks, which we rely upon: "d.b.Express(TM) and "dbACCEL(TM). In addition, we 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 our patents and copyrights will effectively protect us from any copying or emulation of our products in the future. We also rely on proprietary knowledge and employ various methods, including confidentiality agreements, to protect our software codes, concepts, ideas and documentation of our proprietary technology. Despite these efforts, unauthorized parties may attempt to copy aspects of our products, obtain and use information that we regard as proprietary or misappropriate our copyrights, trademarks, trade dress and similar proprietary rights. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate. In addition, our competitors might independently develop similar technology or duplicate our products or circumvent any patents or our other intellectual property rights. OUR OFFICERS Name Age Positions and Offices James A Cannavino 58 Chairman of the Board of Directors Chief Executive Officer Robert Carberry 60 President George Aronson 54 Chief Financial Officer, Secretary Item 2. PROPERTIES - ------------------ We currently maintain leased facilities in the locations listed below:
Description Location Square Footage Lease term Annual Rental Cost - ----------- -------- -------------- ---------- ------------------ Corp Headquarters Bohemia, NY 10,000 7/1/02 - 6/30/03 $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. We are obligated under the terms of an agreement with our major customer to maintain a redundant/co-location IBM site. The redundant facility provides us with, among other things, switches, routers, racks, connections to Internet network access points, at a variety of bandwidths, various levels on monitoring, and access to problem management support. We have an option to extend our lease in Bohemia, New York for two years. Item 3. LEGAL PROCEEDINGS - ------------------------- We are not currently involved in any legal or regulatory proceeding, or arbitration, the outcome of which is expected to have a material adverse effect on our business. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ----------------------------------------------------------- No matters were submitted to a vote of shareholders during the fourth quarter ended December 31, 2002. 11 PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED - ---------------------------------------------------------- STOCKHOLDER MATTERS. ------------------- (a) Our 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 our common stock by the quarters indicated, as adjusted to reflect our one-for-fifteen reverse stock split on May 7, 2001.
High Low --------- ----------- 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 Second Quarter 3.160 1.200 Third Quarter 2.950 2.000 Fourth Quarter 2.500 1.600 2003 First Quarter 2.430 1.370
(b) As of March 31, 2003, there were 3,149 shareholders of record. We estimate that there are approximately 10,700 shareholders, including shareholders whose shares are held in the name of their brokers or stock depositories. (c) There were no cash dividends or other cash distributions made by us during the year ended December 31, 2002. Further dividend policy will be determined by our Board of Directors based on our earnings, financial condition, capital requirements and other then existing conditions. It is anticipated that cash dividends will not be paid to the holders of our common stock in the foreseeable future. (d) During the fourth quarter of 2002, we issued unregistered shares of our common stock as follows: -- 13,000 shares of common stock were issued in connection with the sale of preferred stock; -- 7,516 shares of common stock were issued to a consultant for services rendered. -- Pursuant to the Platinum agreement, 15,555 shares of common stock were issued to the former shareholders of Platinum. The foregoing shares were issued in reliance on the exemption provided by Section (4)(2) of the Securities Act as transactions not involving a public offering. All prior issuances of equity securities during the past three years have been previously reported. 12 Item 6. SELECTED FINANCIAL DATA - -------------------------------- The following selected consolidated financial data for the five fiscal years ended December 31, 2002, 2001, 2000, 1999, and 1998 are derived from our 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 our consolidated financial statements, 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 our ownership interest was reduced to approximately 72%. In April 1999, our 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. Consolidated Statement of Operations Data:
Year Ended December 31, ----------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Revenue $7,416 $3,785 $2,120 $24,640 $61,988 Cost And Expenses - ----------------- Operations, Research and Development 4,721 3,620 4,600 23,569 32,211 Sales and Marketing 2,467 2,532 4,644 17,417 28,496 General and Administrative 3,881 3,778 5,505 11,472 12,718 Amortization and Depreciation 957 985 871 4,738 4,207 Non-recurring Restructure Charge - - 15,176 - - --------------------------------------------------------- Total Operating Expenses 12,026 10,915 30,796 57,196 77,632 --------------------------------------------------------- Operating loss (4,610) (7,130) (28,676) (32,556) (15,644) Gain on Sale of Softworks - - 47,813 17,107 28,785 Equity in Earnings of Softworks - - - 512 - Equity in loss of Voyant and Valuation Adjustment (1,330) - - - - Gain on Sale of ComputerCOP in 2000 - - 8,534 - - Other-Than-Temporary Decline in Investment in NetWolves (457) (150) (29,737) - - Corporation Interest Charge Pertaining to Discount on Convertible - - (354) - - Debenture Loss on sales of NetWolves common stock (375) (3,666) - - - Other (Expense) Income, net (139) (288) 724 316 (485) Minority Interest in Earnings of Softworks - - - (46) (1,361) --------------------------------------------------------- (Loss) Income Before Provision for Income Taxes (6,911) (11,234) (1,696) (14,667) 11,295 Benefit From/(Provision For) Income Taxes - 622 (10,040) 9,095 (1,748) --------------------------------------------------------- Net (Loss) Income $ (6,911) $(10,612) $(11,736) $ (5,572) $9,547 ========================================================= Basic Net (Loss) Income per Share $(1.91) $(5.88) $(8.23) $(4.08) $8.70 ========================================================= Diluted Net (Loss) Income per Share $(1.91) $(5.88) $(8.23) $(4.08) $8.40 ========================================================= Cash Dividends Declared per Share $0 $0 $1.50 $4.35 $0 ========================================================= Basic Weighted Average Common Shares Outstanding 3,643 1,804 1,426 1,364 1,102 ========================================================= Diluted Weighted Average Common Shares Outstanding 3,643 1,804 1,426 1,364 1,135 ========================================================= December 31, Consolidated Balance Sheet Data 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Cash and Cash Equivalents $ 700 $1,359 $10,851 $ 1,852 $ 8,176 Working (Deficit)/Capital (218) 1,673 9,693 22,846 27,569 Total Assets 4,891 7,790 18,253 30,024 91,902 Long Term Debt, Less Current Portion 616 595 924 - 1,403 Minority Interest - - - - 8,503 Shareholders' Equity 1,212 4,106 10,538 24,486 34,016
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 at times as "Direct Insite" or 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 August, 2000, the shareholders voted to approve to change our name to Direct Insite Corp. which the Board of Directors believed was more in line with our new direction. In March, 2000, in an effort to allow us 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 our board. In April, 2000, Mrs. Carla J. Steckline, the then attorney general of the state of Kansas was elected to serve as a member of the Board. As part of the terms and conditions of our financing transaction with Metropolitan Venture Partners II, L.P. ("Metropolitan"), Mr Peter Yunich, their managing partner was elected to our Board in September, 2002. In September 2002, we sold 93,458 shares of our Series A Convertible Preferred Stock, ("Preferred Stock") in consideration for $2,000,000 less fees and expenses of $178,000 to Metropolitan, a private equity investment firm. In December 2002, we sold 23,365 shares of our Preferred Stock in consideration for $500,000 less fees and expenses of $61,000, to Metropolitan. The proceeds from this December transaction were received January 3, 2003, and the principal sum is reflected on the accompanying Balance Sheet as stock subscription receivable. The holders of Preferred Stock ("the holders") are entitled to dividends, on a cumulative basis at a rate of 9-1/2% per annum, compounded quarterly and payable on September 25, 2004 and September 25, 2005. Dividends are payable, at the option of the holders, in cash or in our common stock. The holders have certain demand and piggyback registration rights, have preference in the event of liquidation, and are entitled to ten votes for each share of Preferred Stock on all matters as to which holders of common stock are entitled to vote. As of December 31, 2002, $56,000 in dividends are payable to the holders. We primarily operate as an application service provider ("ASP") and, market an integrated "fee for services" offering providing high volume processing of transactional data for billing purposes, electronic bill presentation and payment ("EBP&P") as well as visual data analysis and reporting tools delivered via the Internet for our customers. Our core technology is d.b.Express(TM), 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 we acquired, Platinum Communications, Inc. ("Platinum"), a Dallas, Texas based company, which markets its integrated proprietary back office software solutions, Account Management Systems ("AMS" or sometimes referred to as "TAMS") to the telecommunications industry either as a license or as an ASP. We completed a merger with Platinum under an Agreement and Plan of Merger ("Merger Agreement"). Under the Merger Agreement, our newly formed wholly owned subsidiary acquired all of the outstanding common stock of Platinum. Further, as an added source of revenue, we began in 2001 to provide custom engineering services for our customers. This newly assembled suite of services enables us to provide a comprehensive Internet delivered service from the raw transaction record through all of the internal workflow management processes including an electronically delivered invoice with customer analytics. This comprehensive service offering provides back office operations, cuts costs and provides for improved customer service by providing the end customer with easy access to all of the detailed information about their bill. We operate fully redundant data centers located at our main office in Bohemia, N.Y. and in Newark, NJ. Our facility in New Jersey is leased at an International Business Machines ("IBM"), IBM e-business Hosting Center. This co-location / redundancy feature enables us to offer virtually down time free service. 14 Currently, IBM, our largest customer, (representing more than 80% of our revenue in each of the three years in the period ended December 31, 2002) 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(TM) platform. Discontinued Products and Services Historically, the most significant portion of our operations had been conducted through one of our subsidiaries, Softworks, Inc. ("Softworks"). Through Softworks, we developed, marketed and supported systems management software products for corporate mainframe data centers. Through a series of transactions, our ownership of Softworks was reduced from 100% to 35% as of December 31, 1999. Pursuant to a tender offer made in December 1999, we sold our remaining interest in Softworks (a total of 6,145,767 shares) to EMC Corporation 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, we 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, we decided to no longer market these services. In June 1998, we 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. In February, 2000, we 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, we 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 us to create a means by which businesses could promote specific brand/product/service awareness. We 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, we invested approximately $7,000,000 in its marketing and development efforts (charged to operations as incurred). As part of our restructuring plan (Note 14 to the Consolidated Financial Statements), our Board determined that it was in our best interest to immediately cease all funding of this project. As a result, in April 2000, we entered into a contractual arrangement with an unrelated third party, whereby we 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, we have has not received revenue from this transaction. 15 Seasonality/Quantity Fluctuations Revenue from managed services generally is not subject to fluctuations or seasonal flows. However, we believe 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, our operating results for any quarter are not necessarily indicative of results for any future period. Financial Condition and Liquidity During 2002, we incurred an operating loss of $4,610,000 and used $2,675,000 of cash in operating activities, an improvement from the prior year's operating loss of $7,130,000 and use of cash in operating activities of $8,007,000. In February 2001 we made an equity investment of $500,000 in Voyant Corp ("Voyant"). The investment was reflected on our balance sheet as a non-marketable security. Additionally, in November 2001, we acquired 15,680,167 shares of Voyant in exchange for 60,000 shares of NetWolves common stock fair valued at $156,000. During 2002 we invested an additional $674,000 for which we received 67,400,000 shares of Voyant common stock. We also began providing administrative services to Voyant, for which we received 12,300,000 shares of Voyant common stock. At December 31, 2002, we determined that the estimated fair value of our investment was nominal, and accordingly eliminated the entire carrying value. Our Chairman was also the Co-Chairman of Voyant until November 2002 at which time he resigned his position as their Co-chairman. Our Chairman beneficially owns approximately 19% of Voyant's outstanding common stock and holds $1,750,000 of approximately $2,800,000 of Voyant's notes which are convertible into Voyant's common stock at the rate of $.25 per share. In order to fund operating losses during 2002, we: -- received $2,500,000 (including $500,000 sold in December 2002 and received in January 2003), from the sale of Preferred Stock, less fees and expenses of $239,000, which were paid in a combination of cash and the Company's common stock; -- received $588,000 from the sale of our common stock; -- received a loan from our Chairman in the amount of $250,000; -- liquidated our holdings of NetWolves common stock by selling our remaining 298,500 shares for approximately $377,000; -- continue to make use of the financing arrangement with an asset based lending institution. We have utilized $2,675,000 in operating activities, which includes, among other items: -- a net loss of $6,911,000; o an increase in accounts receivable of $308,000; -- $420,000 paid in restructuring, as previously reported; -- reductions in payables and accrued expenses of $429,000. The items above were partially offset by: -- non-cash expenses totaling $4,193,000; -- an increase in deferred revenue of $252,000; -- decreases in prepaid expenses and other current assets of $857,000, primarily resulting from the collection of an income tax refund of $615,000. 16 During 2002, we expended approximately $456,000 for capital expenditures, which included $277,000 of additional data processing and Internet connectivity equipment for our co-location facility. Our current short-term plan is primarily focused on achieving operating profit by successfully marketing innovative software products and services that capitalize on our patented technologies. To achieve these goals, we continually review our overall operating costs, while continuing to market managed services, as well as continue to expand our custom engineering service. Additionally, we intend to increase revenue from the products and services acquired from Platinum. We are continually reviewing our long-term business strategy. We will continue to take steps that we believe will result in positive operating cash flow. These measures will include: -- Expanding our products and services: -- We continually expand our suite of products and services. During 2003 we are scheduled to release an enhanced version of IOL which will enable the user the ability to electronically attach all forms of supporting documentation to an electronic invoice. We believe this functionally is novel to the EBP&P industry. Further we expect to release a version later in 2003 with enhanced electronic payment functionality. -- The acquisition of Platinum in 2001 expanded our product offerings. We believe this acquisition significantly enhances our current market strategy by allowing us to capitalize on the growing trend for outsource services within the communications sector. -- Expanding custom engineering / development services: -- We generated custom engineering fees of $2,511,000 during 2002, more than three-fold 2001's total of $814,000. We believe engineering fees will continue to be a significant source of revenue throughout 2003. -- Our current plan will require, expense reductions, expanded sources of revenue, as well as obtaining additional debt and/or equity financing. As such, in January 2003 we received $500,000, from the December 2002 sale of 23,365 shares of preferred stock to Metropolitan, with terms similar to those included in the transaction with Metropolitan dated September 25, 2002. Also in January 2003, Tall Oaks Group, LLC loaned us $500,000. The loan matures March 31, 2005, bears interest at 9 1/2%, with the entire unpaid principal amount and all accrued interest payable on the maturity date. In April, 2003 we obtained a firm commitment from Metropolitan to purchase $250,000 of our preferred stock, with terms similar to their previous transactions ( Note 21). Further, we have firm commitments totaling $750,000 ($500,000 from Tall Oaks and $250,000 from our chairman) to guarantee a line of credit expected to be obtained from a major bank. Additionally, the senior executives have pledged an aggregate of $250,000 in the event we require capital in excess of the $1,000,000 described above. These commitments and pledges extend though at least December 31, 2003 We believe that our plan should provide adequate funding through at least December 31, 2003. However, there can be no assurances that we will be successful in achieving this plan. In such an event, we could be forced to significantly alter our long-term plan by further reducing operating expenses, which could have an adverse effect on future operations. 17 Cash Obligations As of December 31, 2002, our obligations and the periods in which they are scheduled to become due are set forth in the following table (in thousands):
December 31, ---------------------------------------------------------------------------- Total 2003 2004 2005 2006 2007 Thereafter ---------------------------------------------------------------------------- Lines of credit (a) $ 133 $ 133 $ - $ - $ - $ - $ - Capitalized lease obligations (b) 336 174 132 27 - - - Due to bank (c) 690 690 - - 3 - - Dividends payable (d) 644 - 503 141 50 - - Operating leases (e) 832 526 152 104 - - - Other (f) 561 132 132 297 - - - Employment&Consulting Agreements (g) 2,963 1,259 760 388 380 176 495 ------ ------ ------ ------ ------ ------ ------ Total cash obligations $6,159 $2,914 $1,679 $ 957 $ 433 $ 176 $ 495 ====== ====== ====== ====== ====== ====== ======
a. We have three lines of credit which were assumed in connection with the Platinum acquisition. These lines have various expiration dates. One line has no expiration date and bears an interest rate of prime (4.25% at December 31, 2002) plus 1%, is collateralized by substantially all the assets of Platinum, is personally guaranteed by one of the former officers of Platinum and has an unused balance of approximately $23,000 at December 31, 2002. The second line expires in May 2003, bears an interest rate of 10% and has no available balance as of December 31, 2002. The third line contains no expiration date, bears an interest rate of 16.25% and has no available balance as of December 31, 2002. The amounts in the table exclude interest payments, since the amount of interest cannot be determined. b. We have equipment under capital lease obligations expiring at various times through 2006. The assets and liabilities under capital leases are recorded at the lower of the present values of the minimum lease payments or the fair values of the assets. The assets are included in property and equipment. The amounts in the table include payments representing interest charges. c. We have an accounts receivable purchase agreement with a Bank, whereby from time to time we may assign some of our accounts receivable to the Bank on a full recourse basis. The maximum amount of all assigned receivables outstanding at any time shall not exceed $1.5 million. At December 31, 2002, we assigned approximately $851,000 of accounts receivable to the Bank and received advances of $690,000 from the Bank. The amounts in the table exclude interest payments, since the amount of interest cannot be determined d. During 2002, we sold 116,823 shares of our Series A Convertible Preferred Stock ("Preferred Stock"). The holders of the Preferred Stock are entitled to accrue dividends of 9-1/2% per annum, compounded quarterly and payable on September 25, 2004 and September 25, 2005. Dividends are payable, at the option of the holders, in cash or in common stock. e. Operating leases are primarily for office space, equipment and automobiles. f. In January 2002, our Chairman loaned the Company $250,000. The loan has a term of three years and bears interest at 5%, payable quarterly in arrears. Additionally, in December 2002, we executed a $250,000 note payable to Markus & Associates (an affiliate of S.J.& Associates, Inc.), pursuant to the terms of its termination agreement included in restructuring costs payable. The note has a term of twenty-eight months and bears interest at 9-1/2%, payable in monthly installments. The amounts in the table include expected interest payments. g. Employment and consulting agreements is comprised of the following: five employment agreements (including our CEO, president and vice-president of program management, and two former executives of Platinum) that include compensation and allowable expenses, and one consulting agreement that includes compensation and allowable expenses. Certain allowable expenses included in the table assume the maximum potential obligation. 18 New Accounting Pronouncements ----------------------------- SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets" became effective for the Company during 2002. The provisions of this statement that are applicable to us were implemented on a prospective basis as of January 1, 2002, which had no material effect on our financial statements. SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" is effective for transactions occurring after May 15, 2002. SFAS No. 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect and eliminates an inconsistency between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The adoption of this statement has had no material effect on our financial statements. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" provides guidance on the recognition and measurement of liabilities for cost associated with exit or disposal activities. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. We do not expect the adoption of SFAS No.146 to have a material effect on our financial statements. In November 2002, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 45, ("FIN 45") "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantee and elaborates on existing disclosure requirements related to guarantees and warranties. The initial recognition requirements of FIN 45 are effective for guarantees issued or modified after December 31, 2002 and adoption of the disclosure requirements are effective for us as of December 31, 2002. We do not expect that the adoption of the recognition requirements of FIN 45 will have a material effect on our consolidated financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. We do not expect the adoption of FIN 46 will have a material effect on our consolidated financial position or results of operations. 19 Stock Options and Similar Equity Instruments - -------------------------------------------- At December 31, 2002, we had five stock-based employee plans, which are described more fully in Note12. As permitted under SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure", which amended SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", we have elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB No. 25. No stock-based employee compensation cost is reflected in operations, as all options granted under those plans have an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and net loss per share if we applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share data):
Year Ended December 31, 2002 2001 2000 ---- ---- ---- Net loss attributable to common shareholders As reported $(6,967) $(10,612) $(11,736) Less: Stock-based employee compensation expense determined under fair value-based method for all awards (866) (308) (310) -------- ---------- --------- Pro forma $(7,833) $(10,920) $(12,046) ======== ========== ========= Basic and diluted net loss per share As reported $(1.91) $(5.88) $(8.23) ====== ====== ====== Pro forma $(2.15) $(6.05) $(8.40) ====== ====== ======
The fair value of our 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 67.7% to 74.5% in 2002, 69.0% to 74.1% in 2001 and 70.6 to 73.1% in 2000 (2) risk-free interest rates of 4.8% in 2002, 5.79% in 2001 and 5.80% in 2000 and (3) expected lives of 2.3 years to 5.0 years in 2002, 1 to 4.5 years in 2001 and 1.80 to 5.00 years in 2000. Net Operating Loss Carry Forwards As of December 31, 2002, we had a net operating loss carry forward of approximately $68 million, which expires beginning in the year 2008. The issuance of equity securities in the future, together with our earlier financing could result in an ownership change and, thus could limit our use of our prior net operating losses. If we achieve profitable operations, any significant limitation on the utilization of our net operating losses would have the effect of increasing our tax liability and reducing net income and available cash reserves. We are unable to determine the availability of these net operating losses since this availability is dependent upon profitable operations, which we have not achieved in prior periods; therefore, we have recorded a full valuation allowance for the benefit from the net operating losses. Results of Operations Fiscal 2002 Compared to Fiscal 2001 Total revenue increased $3,631,000 or 96% from $3,785,000 for fiscal year 2001 to $7,416,000 for fiscal year 2002. When compared to 2001, the current year reflected the following growth in its three product offerings: ASP increased 64% to $4,101,000 in 2002 from $2,506,000 in 2001; engineering fees increased by 20 more than three-fold; and AMS fees increased73% to $804,000 in 2002 from $465,000 in 2001. Significant factors contributing to the overall growth include expansion of our product offerings as well as increases in our customer base. We believe that revenue generated from engineering services is the precursor to added recurring revenue sources. IBM continues to be our largest customer accounting for 87.7%, or $6,505,000, of total revenue for 2002, up from 82.2%, or $3,110,000 of total revenue for 2001. We derive revenue from IBM from the sale of managed services (ASP) as well as custom engineering. During the second half of 2001, we entered into a new agreement with IBM wherein for a per transaction fee, we enable 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. We continue to provide data analysis and reporting services for IBM's telecommunications customers. During 2001, we began providing custom integration / engineering services. For 2002, revenue generated from this offering aggregated $2,511,000. We believe that revenue generated from custom engineering services should continue into 2003. We further believe that revenue generated from engineering services is the precursor to added recurring revenue sources. In an effort to better serve our customers, we built a fully redundant facility within an IBM co-location center, the purpose of which is to ensure virtual zero down time. AMS revenue increased $339,000 to $804,000 from the year 2001 results of $465,000. It should be noted that AMS revenue for 2001 is for the eight-month period May 1, 2001, the effective date of the acquisition, through December 31, 2001. During the third quarter of 2002, we entered into two separate multi year agreements with Fortune 1000 companies, for which it received and reported as deferred revenue $240,000. We are actively pursuing new sales opportunities to further reduce sales concentration. Operations, research and development expenses consist primarily of salaries and related costs (benefits, travel, training) for developers, programmers, custom engineers, network services, quality control / quality assurance and documentation personnel, applicable overhead allocations, as well as co-location facilities expenses and all costs directly associated with the production and or development of our services. When comparing 2002 and 2001, we increased our operations, research and development expenses by $1,101,000 or 30% of incremental revenue growth of $3,631,000 achieved during the same period. We continue to upgrade, improve and enhance our current products and services. As a result, the most significant items contributing to this increase was additional staffing costs and professional fees totaling $596,000 or 56% of the increase. We believe 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. Additionally, operations, research and development expenses incurred, increased $425,000 as a result of including Pl atinum for the full year. Other expenses showed a net increase of $80,000. Sales and marketing expenses include salaries and related costs, commissions, travel, facilities, communications costs and promotional expenses for our direct sales organization and marketing staff. Sales and marketing expenses decreased $65,000 to $2,467,000 for 2002 when compared to $2,532,000 for 2001. The acquisition of Platinum increased expenses by $10,000. Further, we paid $102,000 in commissions during 2002, including $50,000 earned by a sales consulting firm, which is wholly owned by our executive vice-president of program development. Additionally, wages and benefits increased $101,000, and rent expense, travel expense and telephone expense increased $86,000, $15,000 and $21,000, respectively. Offsetting these additions, among other things, was a reduction in consulting fees of $10,000, advertising expense of $39,000 and the elimination of the Global Technology Services product offering which totaled $366,000 for 2001. 21 General and administrative expenses include administrative and executive salaries and related benefits, legal, accounting and other professional fees as well as general corporate overhead. Expenses increased $103,000 to $3,881,000 for 2002 when compared to $3,778,000 for 2001. Major factors contributing to this increase include, among other things, increases in consulting fees of $264,000, rent expense of $66,000 and insurance expense of $55,000, as well as $67,000 of expenses attributable to Platinum, offset by decreases in wages, bad debts and legal expenses of $75,000, $44,000 and $192,000, respectively, and the elimination of the Global Technology Services product offering of $98,000. Amortization and depreciation expenses decreased by $28,000, primarily due to an increase of $65,000 related to the acquisition of Platinum, offset by general reductions in amortization and depreciation expense relating to fixed assets of $93,000. During 2002, we sold 208,500 shares of NetWolves common stock in the open market and 90,000 shares in a private transaction. As a result, we realized a loss of $375,000. At June 30, 2002, we wrote down our investment in NetWolves, resulting in a loss of $457,000 that was included in "Other-than-temporary decline in Investment in NetWolves." At December 31, 2002, we held no common shares of Netwolves (See Note 8). During the year ended December 31, 2002, we directly and indirectly advanced approximately $674,000 to Voyant Corporation; we did not increase the carrying value of our investment in Voyant and has therefore recognized an additional loss in Voyant during 2002 of $674,000. Additionally, at December 31, 2002, we eliminated the remaining carrying value of our investment of approximately $500,000. As a result, we have recorded an "Equity in Loss of Voyant and Valuation Adjustment" aggregating $1,330,000 for 2002 (See Note 8). 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 15(a), and 15 (b) respectively. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE - ------------------------------------------------------------------------------ Previously disclosed. 22 PART III The information required by Part III (Items 10, 11, 12 and 13) is incorporated by reference to our definitive proxy statement in connection with our annual meeting of stockholders scheduled to be held in May 2003, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year ended December 31, 2002. Information relating to our officers appears under Item 1 of this Report. PART IV Item 14. Controls and Procedures - --------------------------------- Our chief executive officer and chief financial officer have supervised and participated in an evaluation of the effectiveness of our disclosure controls and procedures as of a date within 90 days of the date of this report, and, based on their evaluations, they believe that our disclosure controls and procedures (as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. As a result of the evaluation, there were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Item 15. (a) 1. FINANCIAL STATEMENTS Page - -------------------------------------- ---- Report of Independent Certified Public Accountants F-1 Consolidated Balance Sheets December 31, 2002 and 2001 F-2 Consolidated Statements of Operations Years Ended December 31, 2002, 2001 and 2000 F-4 Consolidated Statement of Shareholders' Equity Years Ended December 31, 2002, 2001 and 2000 F-5 Consolidated Statements of Cash Flows Years Ended December 31, 2002, 2001 and 2000 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) 23 (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). (f) Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed October 3, 2002 (Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated September 25, 2002). (g) Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed December 20, 2002 (Incorporated by reference to Exhibit 3.2 of Company's Current Report on Form 8-K dated December 24, 2002). (h) Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed January 2, 2003 (Incorporated by reference to Exhibit 3.3 of Company's Current Report on Form 8-K dated January 2, 2003). 3.2 By-Laws. (Incorporated by reference to Exhibit 3(d) to the Company's Form S-1 Registration Statement).(1) 4.1 Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4 to the Company's Form S-1 Registration Statement).(1) 4.2 Rights Agreement dated as of August 28, 2001 between the Company and Manhattan Transfer Registrar Company, as Rights Agent. (Incorporated by reference to Exhibit 4 to the Company's Form 8-K dated August 28, 2001). 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 (Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.5 2001 Stock Option/Stock Issuance Plan (Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.6 2001-A Stock Option/Stock Issuance Plan. (Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.7 2002 Stock Option/Stock Issuance Plan (Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.8 2003 Stock Option /Stock Issuance Plan. 10.9 Lease Extension Agreement between Atrium Executive Center and the Company (Incorporated by reference to Exhibit 10 (g) (ii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.10 Offer to Purchase dated December 23, 1999, among Eagle Merger Corp., EMC Corporation and the Company (Incorporated by reference to Exhibit 1 to the Company's Form 8-K filed on February 9, 2000). 24 10.11 Indemnification Agreement dated December 21, 1999, among EMC Corporation, Eagle Merger Corp. and the Company (Incorporated by reference to Exhibit 2 to the Company's Form 8-K filed on February 9, 2000). 10.12Indemnification 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). 10.13Escrow 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). 10.14Exchange 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). 10.15Agreement 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). 10.16Employment 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). 10.17Employment 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). 10.18Employment Agreement between the Company and Anthony Coppola dated December 1, 2001 (Incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.19Services Agreement between the Company and James A. Cannavino dated January 25, 2003. 10.20Stock Purchase and Registration Rights Agreement between the Company and Metropolitan Venture Partners II, L.P. dated as of September 25, 2002 (Incorporated by reference to Exhibit 10.1 of Registrant's Current Report on Form 8-K dated September 25, 2002). 10.21Stock Purchase and Registration Rights Agreement between the Company and Metropolitan Venture Partners II, L.P. dated as of December 24, 2002 (Incorporated by reference to Exhibit 10.1 of Registrant's Current Report on Form 8-K dated December 24, 2002). 10.22Promissory Note between the Company and Tall Oaks Group LLC dated January 13, 2003. 10.23Amendment and Notice dated January 13, 2003 by and among the Company, Metropolitan Venture Partners II, L.P. and Tall Oaks Group L.L.C. 23 Consent of Markum & Kliegman, LLP. 99.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act. - ---------- (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 25 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 14th day of April 2003. DIRECT INSITE CORP. By: /s/ James A. Cannavino ------------------------------------------ James A. Cannavino, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on April 14, 2003 the following persons in the capacities indicated: /s/ James A. Cannavino Chairman of the Board - ---------------------- Chief Executive Officer James A. Cannavino /s/ George Aronson Chief Financial Officer - --------------------- George Aronson /s/ Charles Feld Director - --------------------- Charles Feld /s/ Dennis J. Murray Director - -------------------- Dennis J. Murray /s/ Carla J. Stovall Director - -------------------- Carla J. Stovall Director - -------------------- Peter Yunich 26 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, James A. Cannevino, certify that: 1. I have reviewed this Form 10-K of Direct Insite Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 12a- 14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 14, 2003 /s/ James A. Cannavino Name: James A. Cannevino Title: Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, George Aronson, certify that: 1. I have reviewed this Form 10-K of Direct Insite Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 12a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 14, 2003 /s/ George Aronson Name: George Aronson Title: Chief Financial Officer DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2002, 2001 and 2000 DIRECT INSITE CORP. AND SUBSIDIARIES CONTENTS - -------------------------------------------------------------------------------- Page ---- INDEPENDENT AUDITORS' REPORT F-1 FINANCIAL STATEMENTS - -------------------- Consolidated Balance Sheets F-2 - F3 Consolidated Statements of Operations F-4 Consolidated Statement of Shareholders' Equity F-5 - F7 Consolidated Statements of Cash Flows F-8 - F9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10 - F-41 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, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. April 9, 2003 Woodbury, New York F-1 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2002 and 2001 - --------------------------------------------------------------------------------
ASSETS ------ 2002 2001 ---------------- ----------------- CURRENT ASSETS - -------------- Cash and cash equivalents $ 700 $1,359 Stock subscription receivable 500 -- Accounts receivable, net of allowance for doubtful accounts of $42 and $53 in 2002 and 2001, respectively 1,350 1,098 Investment in NetWolves Corporation -- 1,209 Prepaid expenses and other current assets 239 1,096 ------- ------ Total Current Assets 2,789 4,762 PROPERTY AND EQUIPMENT, net 1,166 1,278 - ---------------------- SOFTWARE COSTS, net 444 508 - -------------- INVESTMENT IN NON-MARKETABLE SECURITIES -- 656 - --------------------------------------- OTHER ASSETS 492 586 - ------------ ------- ------ TOTAL ASSETS $4,891 $7,790 ======= ======
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, 2002 and 2001 - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------
2002 2001 ----------------- ------------------ CURRENT LIABILITIES - ------------------- Accounts payable and accrued expenses $ 1,663 $ 2,057 Restructuring costs payable, current portion 6 294 Due to Bank 690 448 Deferred revenue 252 -- Current portion of long-term debt 396 290 ---------- ---------- Total Current Liabilities 3,007 3,089 OTHER LIABILITIES - ----------------- Long-term debt, net of current portion 556 103 Dividends payable 56 -- Restructuring costs payable, long-term 60 492 ---------- ---------- TOTAL LIABILITIES 3,679 3,684 ---------- ---------- COMMITMENTS AND CONTINGENCIES - ----------------------------- SHAREHOLDERS' EQUITY - -------------------- Preferred stock, $.0001 par value; 2,000,000 shares authorized; 116,823 shares issued and outstanding in 2002, liquidation preference of $2,500,000 -- -- Common stock, $.0001 par value; 150,000,000 shares authorized; 3,966,055 and 2,472,866 shares issued in 2002 and 2001, respectively; and 3,926,128 and 2,401,828 shares outstanding in 2002 and 2001, respectively -- -- Additional paid-in capital 108,708 104,573 Accumulated deficit (107,081) (100,114) Stock subscription receivable (62) -- Accumulated other comprehensive loss (25) (25) ---------- ---------- 1,540 4,434 Common stock in treasury, at cost; 24,371 shares in 2002 and 2001 (328) (328) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 1,212 4,106 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY $ 4,891 $ 7,790 ========== ==========
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, 2002, 2001 and 2000 - --------------------------------------------------------------------------------
2002 2001 2000 ---------------- ----------------- ---------------- REVENUE $ 7,416 $ 3,785 $ 2,120 - ------- --------- --------- --------- COSTS AND EXPENSES - ------------------ Operations, research and development 4,721 3,620 4,600 Sales and marketing 2,467 2,532 4,644 General and administrative 3,881 3,778 5,505 Amortization and depreciation 957 985 871 Non-recurring restructuring charge -- -- 15,176 --------- --------- --------- TOTAL OPERATING EXPENSES 12,026 10,915 30,796 --------- --------- --------- Operating Loss (4,610) (7,130) (28,676) OTHER INCOME (EXPENSE) - --------------------- Gain on sale of Softworks -- -- 47,813 Gain on sale of ComputerCOP -- -- 8,534 Equity in loss of Voyant and Valuation Adjustment (1,330) -- -- Loss on sales of NetWolves common stock (375) (3,666) -- Other-than-temporary decline in Investment in NetWolves (457) (150) (29,737) Interest (expense) income, net (232) (363) 370 Other income 93 75 -- --------- --------- --------- LOSS BEFORE BENEFIT FROM (PROVISION - ----------------------------------- FOR) INCOME TAXES (6,911) (11,234) (1,696) ----------------- BENEFIT FROM (PROVISION FOR) INCOME - ----------------------------------- TAXES -- 622 (10,040) ----- --------- --------- --------- NET LOSS (6,911) (10,612) (11,736) - -------- PREFERRED STOCK DIVIDENDS 56 -- -- - ------------------------- --------- --------- -------- NET LOSS ATTRIBUTABLE TO COMMON - ------------------------------- SHAREHOLDERS $ (6,967) $(10,612) $(11,736) ------------ ========= ========= ======== BASIC AND DILUTED NET LOSS PER SHARE $(1.91) $(5.88) $(8.23) - ------------------------------------ ====== ====== ====== BASIC AND DILUTED WEIGHTED AVERAGE - ---------------------------------- COMMON SHARES OUSTANDING 3,643 1,804 1,426 ------------------------ ====== ===== =====
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, 2002, 2001 and 2000 (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, 1,369 $ -- $102,870 $ -- $(77,766) $ (225) $(393) $ 24,486 2000 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 reclassification adjustment -- -- -- -- -- (2,861) -- (2,861) $ (2,861) Net loss -- -- -- -- (11,736) -- -- (11,736) (11,736) ----- ----- -------- ------ -------- --------- ------ -------- --------- Total Comprehensive Loss BALANCE - December 31, 2000 (Forward) 1,425 $ -- $103,569 $ (115) $(89,502) $ (3,086) $ (328) $ 10,538 $ (14,597) ===== ===== ======== ====== ======== ========= ====== ======== ========= 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, 2002, 2001 and 2000 (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, 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 BALANCE - December 31, 2001 (forward) 2,401 $ -- $104,573 $ -- $(100,114) $ (25) $(328) $ 4,106 $ (7,551) ===== ===== ======== ====== ======== ========= ===== ======= =========
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, 2002, 2001 and 2000 (in thousands) - --------------------------------------------------------------------------------
Preferred Stock Common Stock Accumulated Compre- Additional Stock Other Total hensive Paid-in Subscription Accumulated Comprehensive Treasury Shareholders' Income Capital Receivable Deficit Loss Stock Equity (Loss) Shares Amount Shares Amount ------------------------------------------------------------------------------------------------------------- BALANCE - December 31, 2001 (Forward) -- $-- 2,401 $-- $104,573 $ -- $(100,114) $(25) $ (328) $ 4,106 Common stock and options issued for services, including $101 for fundraising commissions -- -- 878 -- 1,119 -- -- -- -- 1,119 Common stock subscribed -- -- 97 -- 116 (62) -- -- -- 54 Common stock issued for Platinum acquisition -- -- 31 -- 59 -- -- -- -- 59 Preferred stock issued for cash, net of fees of $239 117 -- -- -- 2,261 -- -- -- -- 2,261 Common stock issued for cash, net of fees of $4 -- -- 479 -- 530 -- -- -- -- 530 Common stock issued for settlement of restruct- uring liabilities -- -- 40 -- 50 -- -- -- -- 50 Dividends declared, preferred stock -- -- -- -- -- -- (56) -- -- (56) Net loss -- -- -- -- -- -- (6,911) -- -- (6,911) $(6,911) ----- --- ----- --- -------- ---- --------- ---- ----- ------ ------- Total Comprehensive Loss BALANCE - December 31, 2002 117 $-- 3,926 $-- $108,708 (62) $(107,081) $(25) $(328) $ 1,212 $(6,911) ===== === ===== === ======== ==== ========= ==== ===== ======== ========
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, 2002, 2001 and 2000 - --------------------------------------------------------------------------------
2002 2001 2000 ----------------- ---------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES - ------------------------------------ Net loss $(6,911) $(10,612) $(11,736) Adjustments to reconcile net loss to net cash used in operating activities Amortization and depreciation: Property and equipment 831 929 807 Software costs 123 77 -- Other 3 3 3 Non-cash interest charge pertaining to the discount on convertible debentures -- 346 353 Provision for doubtful accounts 56 74 62 Common stock and options issued for services 1,018 912 3,426 NetWolves common stock exchanged for services and for settlement of restructuring charges -- -- 2,000 Equity in Loss of Voyant and Valuation Adjustment 1,330 -- -- Gain on disposition of Softworks -- -- (47,813) 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 832 3,816 29,737 Deferred income tax expense -- -- 9,197 Changes in operating assets and liabilities: Accounts receivable (308) (824) 121 Prepaid expenses and other current assets 857 (680) 465 Other assets 91 43 (337) Accounts payable and accrued expenses (429) 247 (3,731) Restructuring costs payable (420) (1,483) 2,450 Deferred revenue 252 -- (42) Income taxes payable -- (855) 805 -------- -------- -------- NET CASH USED IN OPERATING ACTIVITIES $ (2,675) $ (8,007) $(22,767) -------- -------- --------
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, 2002, 2001 and 2000 - --------------------------------------------------------------------------------
2002 2001 2000 ----------------- ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES - ------------------------------------ Expenditures for property and equipment $ (456) $ (790) $ (602) Net cash paid in the acquisition of Platinum (net of $15 cash acquired) -- (109) -- Cash used in the ComputerCop/NetWolves transaction (including $2,072 of cash expenses) -- -- (22,572) Investment in NetWolves Corporation -- -- (4,500) Advances to and investment in Voyant (674) (500) Advances from officers, net -- -- 899 Proceeds from the sale of NetWolves common stock 377 2,834 -- Proceeds from the sale of Softworks common stock -- -- 58,142 ------------- ------------ ---------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (753) 1,435 31,367 ------------- ------------ ---------- CASH FLOWS FROM FINANCING ACTIVITIES - ------------------------------------ Proceeds from sales of common stock 588 500 -- Proceeds from sales of preferred stock 2,000 -- -- Consideration paid in connection with the sales of preferred and common stock (107) -- -- (Repayments of) net proceeds from convertible debentures -- (3,751) 2,911 Advances from Bank, net 242 448 -- Proceeds from long-term debt 250 -- -- Acquisition of treasury stock -- -- (328) Payment of dividend -- -- (2,184) Repayments of long-term debt (204) (117) -- ------------- ------------ ---------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,769 (2,920) 399 ------------- ------------ ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (659) (9,492) 8,999 CASH AND CASH EQUIVALENTS - Beginning 1,359 10,851 1,852 - ------------------------- ------------- ------------ ---------- CASH AND CASH EQUIVALENTS - Ending $ 700 $ 1,359 $ 10,851 - ------------------------- ============= ============ ==========
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 and payment 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. Management's liquidity plans are discussed in Note 17. Also, as described in Note 20, the Company has one major customer that accounted for more than 80% of the Company's revenue for each of the three years in the period ended December 31, 2002. Loss of this customer would have a material adverse effect on the Company. 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 --------------------------- 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. F-10 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - Significant Accounting Policies, continued ------------------------------- 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, in accordance with the Emerging Issues Task Force Issue No. 00-21, the Company allocates the total revenue to be earned among the various elements based on their relative fair values. The Company recognizes revenue related to the delivered products or services only if: -- Any undelivered products or services are not essential to the functionality of the delivered products or services; -- Payment for the delivered products or services is not contingent upon delivery of the remaining products or services; -- The Company has an enforceable claim to receive the amount due in the event it does not deliver the undelivered products or services and it is probable that such amount is collectible; -- There is evidence of the fair value for each of the undelivered products or services; -- 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, when applicable. F-11 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - Significant Accounting Policies, continued ------------------------------- Cost of Revenue --------------- Cost of revenue in the consolidated statements of operations is presented along with research and development costs and exclusive of amortization and depreciation shown separately. Property and Equipment ---------------------- Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the terms of the respective leases or the service lives of the related assets, whichever is shorter. Capitalized lease assets are amortized over the shorter of the lease term or the service life of the related assets. Software Costs -------------- Costs associated with the development of software products are generally capitalized once technological feasibility is established. Purchased software technologies are recorded at cost and software technologies acquired in purchase business transactions are recorded at their estimated fair value. Software costs are amortized using the greater of the ratio of current revenue to total projected revenue for a product or the straight-line method over its estimated useful life. 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 are included in "operations, research and development" in the accompanying consolidated statements of operations, and amount to $3,903,000, $2,814,000 and $4,278,000 for the years 2002, 2001 and 2000, respectively. Impairment of Long-Lived Assets ------------------------------- The Company reviews its long-lived assets, including capitalized software costs and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine if impairment exists, the Company compares the estimated future undiscounted cash flows from the related long-lived assets to the net carrying amount of such assets. Once it has been determined that 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. Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" became effective for the Company during 2002. The provisions of this statement that are applicable to the Company were implemented on a prospective basis as of January 1, 2002, which had no material effect on the Company's financial statements. F-12 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - Significant Accounting Policies, continued ------------------------------- Income Taxes ------------ The Company accounts for income taxes using the liability method. The liability method requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax bases of assets and liabilities, using enacted tax rates. Additionally, net deferred tax assets are adjusted by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Earnings per Share ------------------ The Company displays earnings per share in accordance with SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires dual presentation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share include the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Outstanding stock options, warrants and other potential stock issuances have not been considered in the computation of diluted earnings per share amounts since the effect of their inclusion would be antidilutive. Securities that could potentially dilute basic earnings per share ("EPS") in the future, that were not included in the computation of the diluted EPS because to do so would have been anti-dilutive for the periods presented, consist of the following (shares are in thousands): Options to purchase common stock 2,259 Redeemable Convertible Preferred Stock 1,168 ----- Total Potential Common Shares as of December 31, 2002 3,427 ===== Issuances after December 31, 2002 through March 31, 2003 20 --
Cash and Cash Equivalents ------------------------- The Company considers all investments with original maturities of three months or less to be cash equivalents. F-13 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - Significant Accounting Policies, continued ------------------------------- Accounts receivable ------------------- Accounts receivable is shown net of allowance for doubtful accounts of $42,000 and $53,000 at December 31, 2002 and 2001, respectively. The changes in the allowance for doubtful accounts are summarized as follows:
Year Ended December 31, 2002 2001 2000 ---------------- ------------------- ------------------ (in thousands) Beginning balance $ 53 $ 70 $ 8 Provision for doubtful accounts 56 74 62 Write-offs (67) (91) -- ---- ---- ----- Ending balance $ 42 $ 53 $ 70 ==== ==== =====
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, 2002, 2001 and 2000 was None, $37,000 and $90,000, respectively. 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 and accounts receivable. At December 31, 2002, the Company has cash investments of approximately $467,000 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. F-14 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - Significant Accounting Policies, continued ------------------------------- Use of Estimates ---------------- In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Disclosures that are particularly sensitive to estimation include management's plans, as disclosed in Note 17. Actual results could differ from those estimates. New Accounting Pronouncements ----------------------------- SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets" became effective for the Company during 2002. The provisions of this statement that are applicable to the Company were implemented on a prospective basis as of January 1, 2002, which had no material effect on the Company's consolidated financial statements. New Accounting Pronouncements, continued ----------------------------- SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" is effective for transactions occurring after May 15, 2002. SFAS No. 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect and eliminates an inconsistency between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The adoption of this statement has had no material effect on the Company's consolidated financial statements. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" provides guidance on the recognition and measurement of liabilities for cost associated with exit or disposal activities. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of SFAS No.146 to have a material effect on its consolidated financial statements. In November 2002, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 45, ("FIN 45") "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantee and elaborates on existing disclosure requirements related to guarantees and warranties. The initial recognition requirements of FIN 45 are effective for guarantees issued or modified after December 31, 2002 and adoption of the disclosure requirements are effective for the Company as of December 31, 2002. The Company does not expect that the adoption of the recognition requirements of FIN 45 will have a material effect on its consolidated financial statements. F-15 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - Significant Accounting Policies, continued ------------------------------- New Accounting Pronouncements, continued ----------------------------- In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company does not expect the adoption of FIN 46 will have a material effect on its consolidated financial statements. Stock Options and Similar Equity Instruments -------------------------------------------- At December 31, 2002, the Company had five stock-based employee plans, which are described more fully in Note12. As permitted under SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure", which amended SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", the Company has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB No. 25. No stock-based employee compensation cost is reflected in operations, as all options granted under those plans have an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share data):
Year Ended December 31, 2002 2001 2000 ----------------- ---------------- --------------- Net loss attributable to common shareholders As reported $(6,967) $(10,612) $(11,736) Less: Stock-based employee compensation expense determined under fair value-based method for all awards (866) (308) (310) ------- -------- -------- Pro forma $(7,833) $(10,920) $(12,046) ======= ======== ======== Basic and diluted net loss per share As reported $(1.91) $(5.88) $(8.23) ====== ====== ====== Pro forma $(2.15) $(6.05) $(8.40) ====== ====== ======
F-16 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - Significant Accounting Policies, continued ------------------------------- Stock Options and Similar Equity Instruments, continued -------------------------------------------- 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 67.7% to 74.5% in 2002, 69.0% to 74.1% in 2001 and 70.6 to 73.1% in 2000 (2) risk-free interest rates of 4.8% in 2002, 5.79% in 2001 and 5.80% in 2000 and (3) expected lives of 2.3 years to 5.0 years in 2002, 1 to 4.5 years in 2001 and 1.80 to 5.00 years in 2000. NOTE 3 - Acquisitions and Dispositions ----------------------------- Platinum Communications, Inc. ----------------------------- On May 10, 2001, 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. The purchase price of Platinum approximated $340,000, which consisted of $50,000, and 66,667 shares of common stock (valued at $138,000, based on the quoted market price at the time of the acquisition) and $93,000 of acquisition costs. The Company issued an additional 46,667 shares of its common stock and placed them in escrow (a portion of which is not reflected as outstanding common stock), that 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 were issued effective December 31, 2001, valued at $20,000, and 15,556 shares were earned and were issued effective December 31, 2002, valued at $39,000. Both issuances are additive to the cost of the acquisition. In addition, two key employees of Platinum 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. 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. F-17 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - Significant Accounting Policies, continued ------------------------------- Internet Tracking & Security Ventures, LLC and NetWolves Corporation -------------------------------------------------------------------- On June 30, 1998, the Company acquired certain software (known as "ComputerCop") and related sales and marketing rights from Internet Tracking & Security Ventures, LLC ("ITSV"). In February 2000, the Company sold its recently formed subsidiary, ComputerCOP Corp. to NetWolves Corporation ("NetWolves"), in exchange for 1,775,000 shares of NetWolves common stock. The assets of ComputerCOP Corp. included the ComputerCOP technology (and certain related assets including inventory) and $20.5 million in cash. The transaction was treated as a sale of the ComputerCOP technology for 750,000 shares valued at $15 million and the purchase of 1,025,000 shares from NetWolves for $20.5 million. Additionally, the Company purchased 225,000 shares from certain NetWolves shareholders for $4.5 million. The sale of the Company's ComputerCOP technology resulted in a pre-tax gain of $8,534,000, net of $2,572,000 of expenses, recorded in the first quarter of 2000. The $40,000,000 value of the 2,000,000 shares of NetWolves stock was determined based upon the quoted market price of the NetWolves stock at the time the transaction was agreed to and announced ($20 per share) and was also based on a fairness opinion obtained from the Company's investment banker. 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, Inc. ("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 and majority owned through March 31, 1999. Pursuant to a tender offer dated December 21, 1999, the Company sold its remaining 35% interest in Softworks to EMC Corporation and its subsidiary. 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. 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. F-18 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 % 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. The primary term of the agreement was for one year beginning October 2001, and continues until due notice of termination is given at any time by either party to the agreement. At December 31, 2002, the Company had assigned approximately $851,000 of accounts receivable to the Bank and received advances of $690,000 from the Bank. NOTE 5 - Prepaid Expense and Other Current Assets ---------------------------------------- Prepaid expenses and other current assets consist of the following:
December 31, 2002 2001 ---------------- ----------------- (In thousands) Prepaid expenses $ 197 $ 369 Tax refund receivable -- 615 Notes and loans receivable 42 112 ------- ------- $ 239 $ 1,096 ======= =======
NOTE 6 - Property and Equipment ---------------------- Property and equipment consist of the following:
December 31, Useful life 2002 2001 in Years -------------- --------------- ------------- (in thousands) Computer equipment and purchased software $ 5,594 $ 4,928 3 Furniture and fixtures 444 421 5 - 7 Automobile 30 -- 3 ------- ------- 6,068 5,349 Less: accumulated deprecation and amortization (4,902) (4,071) ------- ------- Property and Equipment, Net $ 1,166 $ 1,278 ======= =======
F-19 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, 2002, 2001 and 2000 was $831,000, $929,000 and $807,000, respectively. NOTE 7 - Software Costs -------------- Software costs consist of the following:
December 31, 2002 2001 ---------------- ----------------- (in thousands) Capitalized software development costs $4,420 $ 4,361 Less: accumulated amortization (3,976) (3,853) ------ ------- Software Costs, Net $ 444 $ 508 ====== =======
Amortization expense related to software development costs for the years ended December 31, 2002, 2001 and 2000 was $123,000, $77,000 and None, respectively. 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 48,000,000 additional shares, which brought the Company's ownership in Voyant to approximately 10.5%. Voyant is a privately held company, and accordingly, through December 31, 2001, the investment had been reflected on the Company's balance sheet as a non-marketable security, at cost. However, the Company had achieved a level of influence such that the Company began to account for its investment in Voyant utilizing the equity method of accounting commencing January 1, 2002. As a result, the Company recorded a $157,000 non-operating loss for its pro rata share of Voyant's operations for the year ended December 31, 2002. The Company's Chairman was also the Co-Chairman of Voyant until November 2002 at which time he resigned his position at Voyant. The Company's Chairman beneficially owns approximately 19% of Voyant's outstanding common stock and holds $1,750,000 of approximately $2,800,000 of Voyant's notes which are convertible into Voyant's common stock at the rate of $.25 per share. F-20 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 8 - Investment In Securities, continued ----------------------------------- Non-Marketable, continued -------------- The Company began providing various administrative services for Voyant during the second quarter of 2002, continuing through December 2002. The Company agreed to accept 12,300,000 shares of Voyant common stock as payment for these services. Additionally, throughout the year ended December 31, 2002, the Company directly and indirectly advanced approximately $674,000 to Voyant (including $208,000 in the fourth quarter) for which it is to receive an aggregate of 67,400,000 shares of Voyant common stock in settlement thereof, increasing to ownership in Voyant to approximately 40%. At December 31, 2002, the Company determined that the estimated fair value of its investment is nominal, and accordingly, eliminated the remaining carrying value of approximately $1,173,000. As a result, the Company recorded an "Equity in Loss of Voyant and Valuation Adjustment" aggregating $1,330,000 for the year ended December 31, 2002. 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. During the year ended December 31, 2002, the Company sold 208,500 shares in the open market at prices ranging from $0.75 to $2.06, aggregating proceeds of approximately $323,000. Additionally, the Company sold 90,000 shares in a private transaction resulting in proceeds of approximately $54,000. As a result of these transactions, the Company realized a loss of $375,000. Further, at June 30, 2002, the Company wrote down its investment in NetWolves to the then current market value of $1.49 per share, resulting in a loss of $457,000 that was included in "Other-than-temporary decline in Investment in NetWolves." At December 31, 2002, the Company held no common shares of Netwolves. F-21 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 9 - Accounts Payable and Accrued Expenses ------------------------------------- Accounts payable and accrued expenses consist of the following:
December 31, 2002 2001 ----------------- ---------------- (in thousands) Trade accounts payable $ 511 $ 672 Sales taxes payable 539 633 Accrued payroll and benefits 255 255 Other accrued expenses 358 497 ------- ------- $ 1,663 $ 2,057 ======= =======
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 in September 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. F-22 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 11 - Long-term Debt -------------- Long-term debt consists of the following (in thousands):
December 31, 2002 2001 ----------------- ---------------- Lines of credit (a) $ 133 $ 174 Capitalized lease obligations (b) 319 210 Other (c) 500 9 ----- ----- 952 393 Less current portion (396) (290) ----- ----- Long-term debt, net of current portion $ 556 $ 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 (4.25% at December 31, 2002) plus 1%, is collateralized by substantially all the assets of Platinum, is personally guaranteed by one of the former officers of Platinum and has an unused balance of approximately $23,000 at December 31, 2002. The second line expires in May 2003, bears an interest rate of 10% and has no available balance as of December 31, 2002. The third line contains no expiration date, bears an interest rate of 16.25% and has no available balance as of December 31, 2002. (b) The Company has equipment under capital lease obligations expiring at various times through 2006. The assets and liabilities under capital leases are recorded at the lower of the present values of the minimum lease payments or the fair values of the assets. The assets are included in property and equipment. As of December 31, 2002 minimum future lease payments under these capital leases are:
Year Ending December 31, Amount ----------------------------------------------- ----------------- (in thousands) 2003 $174 2004 132 2005 27 2006 3 ---- Total minimum lease payments 336 Less: amounts representing interest (17) ---- Net minimum lease payments $319 ====
F-23 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 11 - Long-term Debt, continued -------------- The interest rates pertaining to these capital leases range from 1.7% to 12.5%, and the net book value of the related assets is approximately $317,000 as of December 31, 2002. (c) In January 2002, the Company's Chairman loaned the Company $250,000. The loan has a term of three years and bears interest at 5%, payable quarterly in arrears. Additionally, in December 2002, the Company executed a $250,000 note payable to Markus & Associates (an affiliate of S.J. & Associates, Inc., see Note 15) pursuant to the terms of its termination agreement included in Restructuring costs payable (see Note 14). The note has a term of twenty-eight months and bears interest at 9 %, payable in monthly installments. Maturities of this loan and note are as follows:
Year Ending December 31, Amount ----------------------------------------------- ----------------- (in thousands) 2003 $ 107 2004 107 2005 286 --------- $ 500 =========
NOTE 12 - Shareholders' Equity -------------------- Preferred Stock --------------- Year Ended December 31, 2002 ---------------------------- At the Annual Meeting of Shareholders held in August 2002, a proposal to amend the Certificate of Incorporation to authorize 2,000,000 shares of preferred stock, par value $0.0001 was approved. In September 2002, the Company sold 93,458 shares of its Series A Convertible Preferred Stock, ("Preferred Stock") in consideration for $2,000,000 less fees and expenses of $178,000, to Metropolitan Venture Partners II, L.P. ("Metropolitan"), a private equity investment firm. In December 2002, the Company sold 23,365 shares of its Preferred Stock in consideration for $500,000 less fees and expenses of $61,000, to Metropolitan. The proceeds from this transaction were received January 3, 2003, and the principal sum is reflected on the accompanying Balance Sheet as Stock subscription receivable. The holders of Preferred Stock ("the holders") are entitled to dividends, on a cumulative basis, at the rate of 9-1/2% per annum, compounded quarterly and payable on September 25, 2004 and September 25, 2005. Dividends are payable, at the option of the holders, in cash or in the Company's common stock. The holders have certain demand and piggyback registration rights, have preference in the event of liquidation, and are entitled to ten votes for each share of Preferred Stock on all matters as to which holders of common stock are entitled to vote. As of December 31, 2002, $56,000 in dividends are payable to the holders. F-24 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12 - Shareholders' Equity, continued -------------------- Preferred Stock, continued --------------- Year Ended December 31, 2002, continued ---------------------------- The managing partner of Metropolitan was appointed as a member of the Company's Board of Directors in September 2002. Common Stock ------------ Year Ended December 31, 2002 ---------------------------- During the year ended December 31, 2002, the Company issued 1,524,300 shares and granted 50,000 options to purchase its common stock as detailed below: -- Issued 877,665 shares of its common stock and granted 50,000 options to purchase its common stock for services valued at $1,119,000 as follows: -- 180,000 shares to its Chairman of the Board of Directors as part of a two-year services agreement, valued at $180,000. -- 60,000 shares to its Board of Directors as compensation for serving on various committees, valued at $106,000. -- 431,032 shares to consultants as payment of certain liabilities valued at $585,000. -- 206,633 shares for employee bonuses, valued at $217,000. -- Granted options to purchase 50,000 shares of its common stock as payment of certain consultant liabilities, valued at $31,000 using the Black-Scholes option- pricing model. -- Sold 26,191 shares of its common stock on a subscription basis at the market price on the date of issuance of $1.05 to four key executives for $27,000. All subscribed shares were fully paid as of December 31, 2002. -- Sold an additional 71,000 shares of its common stock on a subscription basis at the market price on the date of issuance of $1.25 to four key executives for $89,000. All subscriptions are paid by July 1, 2003. -- Issued 31,111 shares of its common stock to the former shareholders of Platinum as part of the Merger Agreement, valued at $59,000 (see Note 3). -- Sold 318,333 shares of its common stock at the market price on the date of issuance of $1.05 to members of the Board of Directors of the Company, key executives and various accredited investors for $334,000. F-25 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12 - Shareholders' Equity, continued Common Stock, continued ------------ Year Ended December 31, 2002, continued --------------------------- -- Sold 160,000 shares of its common stock at the market price on the date of issuance of $1.25 to various accredited investors for $200,000. -- Issued 40,000 shares of its common stock as payment of certain restructuring liabilities, valued at $50,000 (see Note 14). 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. 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: -- 63,785 shares to its Board of Directors as compensation for serving on various committees, valued at $108,000. -- 442,727 shares to consultants as payment of certain liabilities valued at $584,000. -- 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. F-26 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12 - Shareholders' Equity, continued -------------------- Common Stock ------------ 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. 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. -- 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. 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 166,667 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 9,099 shares available to be issued pursuant to this plan. F-27 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12 - Shareholders' Equity, continued -------------------- Stock Option Plans, continued ------------------ 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 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 2,160 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, 2002, 25,642 shares remained available pursuant to this plan. In January 2002, the Company's Board of Directors authorized and adopted the 2002 Stock / Stock Option Plan whereby 625,000 shares of its common stock were reserved. The 2002 Plan is divided into two separate equity programs: an option grant program and a stock issuance program. Under the stock issuance program, the purchase price per share is fixed by the Board of Directors or committee but cannot be less than the fair market value of the common stock on the issuance date. During 2002, all 625,000 reserved shares were utilized under the option grant program. At the Company's annual meeting of stockholders held on August 5, 2002, a proposal to ratify and approve the Company's 2002-A Stock Option / Stock Issuance Plan granting the Board of Directors authority to grant up to 875,000 shares of stock or stock options was passed. The 2002-A Plan is also divided into two separate equity programs: an option grant program and a stock issuance program. As with the 2002 Plan, under the stock issuance program of the 2002-A Plan, the purchase price per share is fixed by the Board of Directors or committee but cannot be less than the fair market value of the common stock on the issuance date. During 2002, 815,000 options (of which 615,000 are Incentive Stock Options) and 60,000 shares were issued under this plan. As of December 31, 2002, there are no shares available to be issued pursuant to this plan. F-28 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12 - Shareholders' Equity, continued -------------------- Stock Option Plans, continued ------------------ In December 2002, the Company's Board of Directors authorized and adopted the 2003 Stock / Stock Option Plan whereby 725,000 shares of its common stock were reserved. The 2003 Plan is divided into two separate equity programs: an option grant program and a stock issuance program. Under the stock issuance program, the purchase price per share is fixed by the Board of Directors or committee but cannot be less than the fair market value of the common stock on the issuance date. During 2002, 240,000 reserved shares were utilized under the option grant program. 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 2002, 2001 and 2000, relating to all of the Company's common stock plans (shares are in thousands):
Weighted Average Exercise Shares Price ------------------- ------------------- Outstanding at January 1, 2000 294 $30.60 Granted 153 14.70 Exercised -- -- Forfeited (193) 27.45 ----- Outstanding at December 31, 2000 254 23.85 Granted 277 1.66 Exercised -- -- Forfeited (103) 36.73 ----- Outstanding at December 31, 2001 428 6.55 Granted 1,896 1.69 Exercised -- -- Forfeited (65) 17.07 ----- Outstanding at December 31, 2002 2,259 2.13 =====
F-28 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12 - Shareholders' Equity, continued -------------------- Stock Option Plans, continued ------------------ At December 31, 2002, a total of 1,064,000 options are exercisable at various exercise prices: 385,000 options are exercisable at $1.05, 573,000 options are exercisable at prices ranging from $1.25 to $2.19 and 106,000 options at $11.25. The weighted-average remaining contractual life of options outstanding at December 31, 2002 is 4.21 years. A total of 2,259,000 shares of the Company's common stock are reserved for options, warrants and contingencies at December 31, 2002. F-29 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12 - Shareholders' Equity, continued -------------------- Stock Option Plans, continued ------------------ At December 31, 2001, a total of 250,000 options were exercisable at various exercise prices: 129,000 options were exercisable at $1.63, 87,000 options were 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 was 2.43 years. 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. Total compensation costs recognized for stock option awards amounted to $31,000, $115,000 and $152,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Compensation cost represents the fair value of options granted to non- employees and the intrinsic value of options granted to employees. NOTE 13 - Income Taxes ------------ The following table summarizes components of the (provision) benefit for current and deferred income taxes for the years ended December 31, 2002, 2001 and 2000.
Year Ended December 31, 2002 2001 2000 ---------------- ----------------- ---------------- (in thousands) Current Federal $ -- $ 565 $ (718) State and other -- 57 (125) ----- --------- ---------- Total -- 622 (843) ----- --------- ---------- Deferred Federal -- -- (9,197) State and other -- -- -- ----- --------- ---------- Total -- -- (9,197) ----- --------- ---------- -- $ 622 $(10,040) ===== ========= ==========
F-30 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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, 2002, 2001 and 2000:
Year Ended December 31, 2002 2001 2000 ---------------- --------------- -------------- 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 (1.9) (11.9) (613.7) Restructuring costs timing difference 2.0 2.8 (33.4) Utilization of net operating loss carryforward -- -- 199.3 Permanent differences - compensation -- -- (50.5) Increase in valuation allowance (35.0) (24.5) -- Other (0.1) (1.9) 11.1 ---- ----- ----- 0.0% 5.5% (592.0)% ==== ===== =====
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are summarized as follows:
December 31, 2002 2001 ---------------- ----------------- (in thousands) Net operating loss carryforwards $ 31,205 $ 25,851 Tax credit carryforward 577 -- Fixed and intangible assets 47 237 Other-than-temporary decline in investment in NetWolves -- 50 Restructure accrual 133 302 Other 125 103 --------- --------- 32,087 26,543 Valuation allowance (32,087) (26,543) --------- --------- Deferred tax assets $ -- $ -- ======== =========
F-31 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 13 - Income Taxes, continued ------------ At December 31, 2002, the Company has net operating loss carryforwards remaining of approximately $68 million to reduce future taxable income, if any. These losses, which expire through 2022, are subject to substantial limitations as a result of IRC Section 382 rules governing changes in control. Approximately $58 million these losses are available to be utilized in the year 2003. After the year 2003, 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, 2002, the remaining cash requirement is $66,000, $6,000 payable over the next twelve months, and $60,000 is payable subsequent to the satisfaction of the note to Markus & Associates (see Note 11). 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. F-32 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 14 - Restructuring, continued ------------- The activity in the restructuring accrual through December 31, 2002 is summarized below:
Officer/director Employee retirement Consulting Operating terminations packages contracts leases Other Total ------------------------------------------------------------------------------------------- Restructuring charges to $ 2,088,000 $ 7,666,000 $ 3,681,000 $ 357,000 $1,384,000 $ 15,176,000 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 Company stock Issuances -- -- (50,000) -- -- (50,000) Converted to note payable -- -- (250,000) -- -- (250,000) Cash expenditures (2,000) (10,000) (326,000) (82,000) -- (420,000) ------------ ----------- ----------- ---------- ---------- ------------ Restructuring accrual, December 31, 2002 $ -- $ -- $ 60,000 $ 6,000 $ -- $ 66,000 ============ =========== =========== ========== ========== ============
-- 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. -- 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, and $5,508,000, $548,000 and $10,000 cash payments were paid in 2000, 2001 and 2002, respectively. F-33 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 14 - Restructuring, continued ------------- -- 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: $811,000 was paid in the form of the Company's common stock; $2,560,000 was paid through 2002; $250,000 was converted to a 9-1/2% twenty-eight month note; and the $60,000 balance is payable subsequent to the satisfaction of the note. -- 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 end by June 2003. -- Other costs included 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, the Company granted 1,667 shares of common stock (valued at $30.00 per share) 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 year ended December 31, 2000, the Company paid to such director consulting fees of $52,000. 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 for the year ended December 31, 2000. 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 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, 2002, approximately $6,000 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. 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"), an advisor to the Company and its' Board of Directors, for various services that provide for the following compensation: -- The Company entered into a consulting agreement with SJ initially terminating on May 31, 2007. Pursuant to the agreement, SJ is entitled to monthly compensation of $15,000. The Company will supply SJ an office/temporary living accommodations and reimbursement for auto leases at a cost not to exceed $9,900 per month. Pursuant to the agreement, SJ is entitled to a financing fee equal to 4% of the gross proceeds (or the gross transaction value) of any of the following events: (i) financing(s) (either debt or equity), (ii) sale of the Company's stock, (iii) an acquisition made by the Company, and (iv) the sale of the Company or merger of the Company with another entity. SJ is also entitled to an annual bonus at the discretion of the Companies Board of Directors. With no further approval, SJ is entitled to be reimbursed for other expenses not to exceed $2,000 per month, plus other reasonable expenses upon approval. Upon completion of the initial term of the agreement, SJ will continue to provide consulting services for an additional 7 1/2 year period. Minimum compensation during this additional period is approximately $5,500 per month. 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 2002, the Company incurred $153,000 of consulting expenses with SJ. The consulting expense was paid in cash. -- In 2002, the Company reduced its obligation to SJ relating to the restructure plan by $609,000. The amount was paid in the form of 40,000 shares (valued at $50,000), the issuance of a $250,000 note (see Note 11) and $309,000 in cash. -- 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. -- 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. -- As part of the 2000 restructure plan (Note 14) a long-term consulting contract was settled. F-36 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 16 - Commitments and Contingencies ----------------------------- Operating Leases ---------------- Operating leases are primarily for office space, equipment and automobiles. At December 31, 2002, the future minimum lease payments under operating leases are summarized as follows (in thousands):
Year Ending December 31, Amount ------------------------------ ---------------- (in thousands) 2003 $526 2004 152 2005 104 2006 50 ---- Total $832 ====
Rent expense approximated $474,000, $499,000 and $340,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Employment Agreements --------------------- In December 2002, the Company's Chairman became the Company's Chief Executive Officer. Subsequently, in January 2003, the Company entered into an employment agreement with its Chief Executive Officer, which expires in January 2005. Compensation is as follows: 60,000 shares of the Company's common stock which vest ratably over the first year of the agreement, 240,000 options to purchase common stock of the Company at $2.02, vesting 50% on execution of the agreement and 50% ratably over the life of the contract, and $180,000 per annum plus a bonus at the discretion of the Board. Additionally, the Chief Executive Officer is entitled to be reimbursed for (1) all out-of-pocket expenses reasonably incurred by him in the performance of his duties, and (2) housing and office expenses not to exceed $10,000 per month. In December 2001, the Company entered into an employment agreement with an executive of the Company, which expires 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 $65,000, $46,000 and $41,000 for the years ended December 31, 2002, 2001 and 2000, respectively. F-37 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 17 - Management's Liquidity Plans ---------------------------- For the year ended December 31, 2002, the Company continued to incur net losses and use substantial amounts of cash in operating activities. The Company has been dependent upon debt and equity financing as well as the liquidation of NetWolves common stock to fund its operations. 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: -- Expanding the Company's products and services; -- Materially improve its sales efforts through expanding its marketing staff; -- Continue to expand customer engineering fees. The Company generated in excess of $2,500,000 in custom engineering fees in 2002 and believes that this revenue should continue into 2003; -- Increase revenue as a result of the agreement entered into in 2002 between the Company and International Business Machines Corporation ("IBM"), which allows IBM the ability to electronically attach supporting documentation to an electronic invoice, all submitted via the Internet to their customers; -- Capitalize on the growing trend for outsource services within the communications sector. The acquisition of Platinum broadened the Company's product offerings in this market sector. The Company believes the increase in revenue during 2002 generated from Platinum should continue in 2003. -- A reduction of the Company's overhead costs, including staff reductions, as deemed necessary. -- In January 2003, the Company raised an additional $500,000 through the issuance of long-term debt to Tall Oaks Group, LLC (Note 21). -- We have obtained a firm commitment from Metropolitan to purchase $250,000 of our preferred stock, with terms similar to their previous transactions (Note 12). Further, we have firm commitments totaling $750,000 ($500,000 from Tall Oaks and $250,000 from our chairman) to guarantee a line of credit expected to be obtained from a major bank. Additionally, the senior executives have pledged an aggregate of $250,000 in the event we require capital in excess of the $1,000,000 described above. These commitments and pledges extend though at least December 31, 2003 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 as well as obtaining additional debt and/or equity financing should provide adequate funding through at least December 31, 2003. However, there can be no assurances that the Company will have sufficient funds to implement its current plan. In such an event, the Company could be forced to significantly alter its plan and reduce its operating expenses, which could have an adverse effect on revenue generation and operations in the near term. F-38 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 18 - Consolidated Statements of Cash Flows Supplemental disclosure of cash flow information for the years ended December 31, 2002, 2001 and 2000 is summarized as follows:
Year Ended December 31, 2002 2001 2000 ---------------- ------------------- ---------------- (in thousands) Interest paid $171 $467 $ 8 ==== ==== ==== Net taxes paid $ - $849 $38 ==== ==== ====
Non-cash investing and financing activities for the years ended December 31, 2002, 2001 and 2000 are summarized as follows:
Year Ended December 31, 2002 2001 2000 ------------ ------------ ---------- (in thousands) Net cash paid in Platinum acquisition in 2001 (in thousands): Account and installment receivables $ -- $ (88) $ -- Property and equipment, net -- (104) -- Intangible assets, net -- (585) -- Accounts payable and accrued Expenses -- 194 -- Current and long-term debt -- 337 -- Common stock issued in acquisition -- 137 -- ------- ------ ------- Decrease in cash and cash equivalents $ -- $ (109) $ -- ======= ====== ======= Capitalized leases incurred $ 263 $ 173 $ -- ======= ====== =======
Additional non-cash investing and financing activities for the years ended December 31, 2002 and 2000 are summarized as follows: 2002 ---- -- In connection with the sales of preferred stock (see Note 12), the Company recorded a stock subscription receivable of $500,000 and incurred dividend liabilities of $56,000. -- Accrued restructure cost of $250,000 were converted to a note payable pursuant to terms of a restructuring agreement (see Notes 11 and 15). F-39 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 18 - Consolidated Statements of Cash Flows, continued 2000 ---- -- 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. NOTE 19 - Products and Services --------------------- The Company and its subsidiaries currently operate in one business segment and have, during the years 2002, 2001 and 2000, provided three separate products: ASP Services, custom engineering fees and AMS Services. Refer to Note 1 for a detailed description of these products and services.
Year Ended December 31, 2002 2001 2000 ---------------- ---------------- ---------------- (in thousands) ASP fees $4,101 $2,506 $2,047 Custom Engineering fees 2,511 814 -- AMS fees 804 465 -- Other -- -- 73 ------ ------ ------ Total Revenue $7,416 $3,785 $2,120 ====== ====== ======
NOTE 20 - Major Customers --------------- For the years ended December 31, 2002, 2001 and 2000, IBM accounted for 87.7%, 82.2% and 80.5% of the Company's revenue, respectively. Accounts receivable from IBM amounted to $1,127,000 and $850,000, at December 31, 2002 and 2001, respectively. Loss of IBM as a customer would have a material adverse effect on the Company. NOTE 21 - Subsequent Events ----------------- In January 2003, Tall Oaks Group, LLC provided the Company with an unsecured $500,000 loan. The loan matures March 31, 2005, bears interest at 9 1/2%, with the entire unpaid principal amount and all accrued interest payable on the maturity date. F-40 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 22 - Quarterly Financial Data (Unaudited) ------------------------
Year Ended December 31, 2002, First Second Third Fourth Quarter Quarter Quarter Quarter -------------- ----------------- -------------- --------------- (in thousands, except per share amounts) Revenue $ 1,514 $ 1,982 $ 1,851 $ 2,069 Operating loss (1,278) (950) (1,180) (1,202) Loss on sales of NetWolves common stock (250) -- (14) (111) Other-than-temporary decline in Investment in Netwolves -- (457) -- -- Equity in Loss of Voyant and Valuation Adjustment -- (259) (281) (790) Other (expense) income (100) (51) (12) 24 (Provision for) benefit from income taxes -- -- -- -- ------- ------- ------- ------- Net Loss $(1,628) $(1,717) $(1,487) $(2,079) ======= ======= ======= ======= Basic and Diluted Net Loss Per Share $(0.53) $(0.46) $(0.39) $(0.53) ====== ====== ====== ====== 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 1,183 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-41 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 22 - Quarterly Financial Data (Unaudited) continued ------------------------ 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-42 EX-10.8 3 di10k2002exhibit10-8.txt STOCK OPTION/STOCK ISSUANCE PLAN Exhibit 10.8 DIRECT INSITE CORP., 2003 STOCK OPTION/STOCK ISSUANCE PLAN ---------------------------------------------------------- I. GENERAL PROVISIONS --------------------- A. PURPOSE OF THE PLAN ------------------- This 2003 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; 1 - -- 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 725,000 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. 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. 2 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. 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 3 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 (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 may at the discretion of the Board 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 4 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 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. 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. 5 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). 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. 6 B. EFFECTIVE DATE AND TERM OF PLAN ------------------------------- 1. The Plan shall become effective on December 8, 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. 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. 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. 7 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 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. 8 (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 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. 9 Plan shall mean the Corporation's 2003 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. 10 1 EX-10.19 4 di10k2002exhibit10-19.txt SERVICES AGREEMENT Exhibit 10.19 SERVICES AGREEMENT THIS SERVICES AGREEMENT dated as of the 25th day of January, 2003 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, St. Thomas, USVI 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 and restricted stock awards previously granted to Cannavino, which stock options and restricted stock awards shall continue in full force and effect. 2. Services. The Company hereby agrees to employ Cannavino and Cannavino hereby agrees to serve as Chief Executive Officer and 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 Chief Executive Officer and 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 24, 2005. 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 60,000 shares of the Company's common stock to offset Cannavino's requisite relocation expenses plus 240,000 stock options. The shares of common stock shall vest ratably on a monthly (5,000 shares) basis during the first year of this Agreement with the first shares vesting on February 25th, 2002. During the term of this Agreement, Cannavino shall receive $15,000 per month as compensation. The 240,000 stock options shall vest 50% on the execution of this agreement and the remaining in 50% 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. 1 (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, (Not to exceed $10,000.00 per month for office and housing). Additionally Cannavino shall be reimbursed for his reasonable expenses incurred performing his duties re: the following not for profit organizations, (Marist College, National & International Center for Missing and Exploited Children and "BENS" Business Executives for National Security). 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 2 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. 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. 3 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 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 Red Hook, St. Thomas, USVI 00802 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 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 4 (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. By: /s/ ----------------------------- George Aronson Chief Financial Officer /s/ - ------------------------------------- James A. Cannavino 5 EX-10.22 5 di10k2002exhibit10-22.txt PROMISSORY NOTE Exhibit 10.22 PROMISSORY NOTE U.S. $500,000.00 New York, New York January 13, 2003 FOR VALUE RECEIVED, the undersigned, DIRECT INSITE CORP., a Delaware corporation ("Maker"), hereby unconditionally promises to pay to the order of Tall Oaks Group L.L.C., a New Jersey limited liability company ("Payee"), the principal sum of Five Hundred Thousand Dollars ($500,000.00) (the "Principal Amount"), together with interest thereon as set forth below. This Note is subject to the following additional terms: 1. Interest. Interest shall be payable on the unpaid balance of the Principal Amount from and after the date hereof, commencing on the first day of each calendar quarter commencing April 1, 2003, at the rate of nine and one-half percent (9%) per annum. All computations of interest payable hereunder shall be on the basis of a 365-day year and the actual number of days elapsed in the period in which such interest is payable. 2. Maturity Date. The entire unpaid Principal Amount and all accrued and unpaid interest shall be due and payable to Payee by Maker on March 31, 2005 (the "Maturity Date"), or earlier as herein provided. 3. Prepayment. Maker shall have the right, upon prior written consent of Payee, to prepay the entire unpaid Principal Amount and any accrued by unpaid interest on this Note. 4. Place of Payment. All payments on account of this Note, including any Principal Amount and interest, shall be payable in lawful money of the United States of America, to Payee at 40 Beekman Terrace, Summit, New Jersey 07901, or such other place as Payee may designate in writing to Maker. 5. Rank. This Note shall rank junior in right of payment and performance upon liquidation or dissolution of Maker or otherwise to any and all obligations of Maker (whether contingent or otherwise), including, without limitation, credit facilities, secured and unsecured loans, equipment loans and financings, and inventory or receivable financings. Notwithstanding the foregoing, this Note shall rank senior to any preferred stock of the Company, whether now or hereafter authorized, issued and outstanding, including, without limitation, the Series A Convertible Preferred Stock of the Company, par value $0.0001 per share, in right of payment and performance upon liquidation or dissolution of Maker or otherwise. 1 6. Definitions. Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Stock Purchase and Registration Rights Agreement between Maker and Metropolitan Venture Partners II, L.P., dated as of December 24, 2002 (as the same has been or may be further amended, supplemented or modified, the "Stock Purchase Agreement"). 7. Representations and Warranties. Maker hereby represents and warrants to Payee (which representations and warranties shall be deemed to be repeated by Maker on each day on which any amounts remain outstanding hereunder) as follows: (a) Corporate Status. Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as now conducted and as proposed to be conducted. Maker is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the properties and assets owned, leased or operated by it makes such qualification or licensing necessary, except where the failure to be so qualified, licensed or in good standing would not have a Material Adverse Effect. (b) Authorization; Binding Agreement. Maker has the full corporate power and authority to execute and deliver this Note and to consummate the transactions contemplated hereby or thereby. The execution and delivery of this Note and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of Maker, and no other action on the part of Maker is necessary to authorize the execution and delivery of the Note or to consummate the transactions contemplated hereby. This Note has been duly and validly executed and delivered by Maker. This Note constitutes the legal, valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors' rights generally and to general principles of equity, regardless of whether enforcement is sought in a proceeding at law or in equity. (c) No Conflict. Neither the execution or delivery of this Note nor the consummation of the transactions contemplated hereby will conflict with, or result in any violation of, or cause a default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, amendment, cancellation or acceleration of any obligation contained in, or the loss of any material benefit under, or result in the creation of any Lien upon any of the properties or assets of Maker under any term, condition or provision of (a) the organizational documents of Maker, (b) any loan or credit agreement, note, bond, mortgage, indenture, license, lease, permit, agreement, instrument, obligation or contract to which Maker is a party, or (c) any applicable law, rule, regulation, judgment, injunction, order or decree binding upon Maker or to which any of its properties and assets is subject. (d) Approvals. No consent, approval or authorization of, or declaration or filing with, any Person on the part of Maker is required in connection with the execution or delivery by Maker of this Note which has not been previously obtained. 2 (e) Proceedings. There are no legal actions, suits, arbitration proceedings, official investigations or other proceedings pending or, to the knowledge of Maker, threatened against Maker that if adversely determined would materially affect the financial condition of Maker or the validity or enforceability of, or Maker's ability to perform its obligations under this Note. (f) Other Obligations. Maker is not in default under any agreement relating to, or instrument evidencing, indebtedness or any other material agreement to which Maker is a party or by which Maker or Maker's assets are bound. 8. Covenants. In addition to the other undertakings herein contained, Maker hereby covenants to Payee that, so long as any amount payable hereunder is outstanding, Maker shall perform the following obligations: (a) Maintenance and Continuity of Business. Maker shall, and shall cause its subsidiaries to, conduct its or their respective business in material compliance with all applicable laws and maintain adequate licenses and authorization to conduct its or their respective business. (b) Notice of Defaults and Other Matters. Maker shall, promptly upon acquiring knowledge of such matters, give written notice to Payee of each of the following events: (i) any material loss of or damage to the properties or assets of Maker or any of its subsidiaries; (ii) the commencement of any litigation or proceedings against Maker or any of its subsidiaries; which may have, individually, or in the aggregate, a Material Adverse Effect; (iii) any other circumstances that would reasonably be expected to have a Material Adverse Effect the performance by Maker of its obligations under this Note; and (iv) the occurrence of any Event of Default described in this Note or of any event or circumstance which, with the giving of notice or the lapse of time or both, would constitute an Event of Default. (c) Use of Proceeds. Maker shall use the proceeds of the loan evidenced by this Note for Maker's working capital needs in connection with its business. (d) Further Documents. Maker shall execute and deliver to Payee all such other documents and instruments and do all such other acts and things as Payee may reasonably require to carry out the transactions contemplated herein. 3 9. Events of Default. Each of the following events shall be deemed an Event of Default ( "Event of Default"): (a) principal, interest or any other amount due under the Note shall not be paid as and when due, whether at maturity, by declaration or otherwise, and such failure to pay is not cured with five (5) days after notice of such non-receipt from Payee; (b) any representation or warranty made or repeated or deemed to have been made or repeated by Maker in this Note shall prove to be false or misleading in any material respect as of the date made or repeated or deemed to have been made or repeated; (c) Maker shall default in any material respect in the due observance or performance of any term, obligation, agreement or covenant (other than as specified in clause (a), (b) or (d) of this Section 9) of this Note, which default is not cured within thirty (30) days after notice thereof is given by Payee to Maker; (d) the occurrence and continuation of an Event of Default after the expiration of all applicable grace or notice periods; (e) a material adverse order, judgment or decree shall be entered, without the application, approval or consent of Maker with respect to Maker or all or a substantial part of the assets of the Maker, or appointing a receiver or trustee for Maker, and such order, judgment or decree shall continue unstayed and in effect for a period of sixty (60) days; (f) Maker shall default in the due observance or performance of any term, obligation, agreement or covenant to be observed or performed by Maker pursuant to any evidence of indebtedness or liability for borrowed money in an amount that exceeds $100,000 (other than the Note) of Maker if such default permits the obligee thereof to accelerate the maturity of such evidence of indebtedness or liability for borrowed money (other than the Note) or any such evidence of indebtedness or liability shall not be paid as and when due after the expiration of all applicable grace or notice periods; or (g) Maker, pursuant to or within the meaning of any Bankruptcy Law (as defined below) (i) commences a voluntary case or proceeding, (ii) consents to the entry of an order for relief against it in an involuntary case or proceeding, (iii) consents to the appointment of a Custodian (as defined below) of it or for all or substantially all of its property, (iv) makes a general assignment for the benefit of its creditors, (v) admits in writing its inability to pay its debts as the same become due, or (vi) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (1) is for relief against Maker in an involuntary case, (2) appoints a Custodian (as defined below) of Maker or for all or substantially all of the property of Maker, or (3) orders the liquidation of Maker and, in each case, such order or decree remains unstayed and in effect for thirty (30) consecutive days. The term 4 "Bankruptcy Law" means title 11 of the U.S. Code or any similar United States federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. In each case, where an Event of Default occurs (other than the Event of Default specified in Section 9(g) hereof), Payee, by notice in writing Maker, may declare the aggregate outstanding Principal Amount, together with all unpaid accrued interest thereon and all other amounts then due hereunder, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable; provided that if an Event of Default specified in Section 9(g) occurs, the outstanding Principal Amount, together with all unpaid accrued interest thereon and all other amounts then due hereunder, shall become and be immediately due and payable without any declaration or other act on the part of Payee. Upon the occurrence of, and during the continuation of, any Event of Default the outstanding principal and, to the extent permitted by applicable law, all accrued and unpaid interest thereon and other amounts due hereunder shall bear interest at a rate of eleven percent (11.0%) per annum ("Default Interest"). 10. Application of Proceeds. The holder of this Note by its acceptance of this Note agrees that each payment or prepayment received by it hereunder shall be applied, first, to the payment of Default Interest, if any, on this Note to the date of such payment; second, to the payment of accrued interest on this Note to the date of such payment; and third, to the payment of the remaining unpaid principal amount of this Note. 11. Governing Law and Adjudication; Related Matters; Waiver of Jury Trial. (a) This Note shall be governed by and construed in accordance with the internal laws of the State of New York applicable to contracts made and to be wholly performed within such State, without reference to principles of conflicts of laws. Each party hereby irrevocably consents that any suit, action or proceeding against such party or any of its assets or properties arising out of or in any way connected with this Note may be instituted in any New York State or United States federal court located in the Borough of Manhattan in New York City, and by execution and delivery of this Note, each party hereby irrevocably submits to the jurisdiction of the aforesaid courts in any such suit, action or proceeding. Each party hereby irrevocably waives any objection which it may have at any time to the laying of venue of any such suit, action or proceeding brought in any such court, waives any claim that any such suit, action or proceeding has been brought in an inconvenient forum and further waives the right to object with respect to any such suit, action or proceeding that such court does not have any jurisdiction over it. Each party irrevocably consents to the service of process out of any of the above-mentioned courts in any such suit, action or proceeding by the delivery of copies thereof in any manner prescribed in Section 12(l) hereof, except by facsimile. Maker acknowledges that, in enforcing this Note, Payee in its sole discretion may use the procedures specified in Section 3213 of New York State's Civil Practice Law and Rules, if allowed by law, as the same may be amended or modified from time to time, in any suit, action or proceeding. 5 (b) THE PARTIES IRREVOCABLY AND UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY, INCLUDING, WITHOUT LIMITATION, ANY COUNTERACTION OR COUNTERCLAIM, WHETHER IN CONTRACT, STATUTE, TORT (INCLUDING, WITHOUT LIMITATION, NEGLIGENCE) OR OTHERWISE. 12. Miscellaneous. (a) Certain Waivers. Maker hereby waives diligence, presentment, demand, protest and notice (except as herein noted) of any kind in the enforcement of this Note. (b) Amendment and Modification. This Note may be amended, modified or supplemented only by a written agreement signed by each of the parties hereto. (c) Waivers; Consents. Any failure of Maker to comply with any obligation, covenant, agreement or condition herein may be waived by Payee, only by written instrument signed by Payee to Maker. The waiver by Payee of any breach hereof or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not be deemed to constitute a waiver of, or estoppel with respect to, any other breach or default or any subsequent breach or default. Whenever this Note requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver as set forth in this Section 12(c). (d) Construction of Note. This Note has been negotiated by the respective parties hereto and their legal counsel and the language hereof will not be construed for or against any party. The Article and Section headings used or contained in this Note are for convenience and reference only and shall not affect the construction of this Note. References herein to Articles, Sections, Schedules or Exhibits mean and refer to Articles and Sections of, and Schedules and Exhibits to, this Note, unless otherwise specified. Words in the singular include the plural, and words in the plural include the singular. Words used herein in the neuter gender include the masculine and feminine genders. (e) Other Remedies. Any and all remedies herein expressly conferred upon Payee will be deemed cumulative with and not exclusive of any other remedy conferred hereby or by law or contract or in equity or otherwise on Payee, and the exercise of one remedy will not preclude the exercise of another. (f) Counterparts. This Note may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 6 (g) Severability. If any provision of this Note or the application of any such provision to any party or circumstances shall be determined by a court of competent jurisdiction to be invalid or unenforceable to any extent, the remainder of this Note, or the application of such provision to such party or circumstances other than those to which it is so determined to be invalid or unenforceable, shall not be affected thereby, and each provision hereof shall be enforced to the fullest extent permitted by law. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the parties hereto agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration or area of the term or provision, to delete specific words or phrases and to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Note shall be enforceable as so modified. (h) No Third Party Beneficiaries. This Note is not intended to, and does not, provide or create any rights or benefits of any Person other than the parties hereto. (i) Entire Agreement. This Note constitutes the entire agreement and understanding of the parties hereto in respect of the subject matter hereof and thereof and supersedes all prior agreements and understandings, both written and oral, between the parties, with respect to the subject matter hereof and thereof. The express terms hereof control and supersede any course of performance or usage of the trade inconsistent with any of the terms hereof. (j) Certain Costs and Expenses. Maker agrees to pay on demand all of Payee's costs and expenses, including, without limitation, reasonable attorneys' fees, in connection with the collection of any sums due to Payee and the enforcement, protection or perfection of its rights or interests hereunder. Each party shall bear the costs and expenses incurred by such party in the preparation, execution and delivery of this Note; provided, however, that Maker shall be responsible for the payment of Payee's legal fees and expenses in respect of the negotiation, execution and delivery of this Note in an amount not to exceed $3,500.00, which payment shall be made out of the proceeds from this Note. (k) Assignments. Neither Maker nor Payee may assign or otherwise transfer any of its rights or delegate any of its obligations under this Note without the express prior written consent of the other party; provided, however, that Payee may assign or transfer any or all of its rights under this Agreement to one or more of its Affiliates upon written notice to Maker. (l) Notices. All notices and other communications given or made pursuant to this Note shall be in writing and shall be (i) sent by registered or certified mail, return receipt requested, postage prepaid, (ii) hand delivered, (iii) sent by prepaid overnight carrier, with a record of receipt or (iv) sent by facsimile (with confirmation of receipt), to the parties at the following addresses (or at such other addresses as shall be specified by the parties by like notice): 7 (i) if to Maker, at the address specified below Maker's signature hereon; and (ii)if to Payee: Tall Oaks Group L.L.C. 40 Beekman Terrace Summit, New Jersey 07901 Facsimile No. 908-273-7913 Each notice or communication shall be deemed to have been given on the date received. (m) Setoff. Payee may set off against any and all amounts payable by Payee to Maker, any and all amounts then due and payable under this Note to Payee by Maker. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 8 IN WITNESS WHEREOF, Maker has caused this Note to be duly executed as of the date hereof. DIRECT INSITE CORP. By: /s/ George Aronson -------------------------------- Name: George Aronson Title: CFO 80 Orville Drive Bohemia, New York 11716 Facsimile No. (631)563-8085 Accepted and agreed: TALL OAKS GROUP L.L.C. By: /s/ Lawrence D. Hite -------------------------- Name: Lawrence D. Hite Title: Manager EX-10.23 6 di10k2002exhibit10-23.txt AMENDMENT AND NOTICE Exhibit 10.23 AMENDMENT AND NOTICE AMENDMENT AND NOTICE, dated January 13, 2003 (this "Agreement"), is by and among Direct Insite Corp., a Delaware corporation having an address at 80 Orville Drive, Bohemia, New York 11716 (the "Company"), Metropolitan Venture Partners II, L.P., a Delaware limited partnership having an address at 257 Park Avenue South, 15th Floor, New York, New York 10010 ("MetVP") and Tall Oaks Group L.L.C., a New Jersey limited liability company having an address at 40 Beekman Terrace, Summit, New Jersey 07901 ("Tall Oaks"). WHEREAS, the Company and MetVP entered into that certain Stock Purchase and Registration Rights Agreement, dated as of December 24, 2002 (the "December 2002 Agreement"), and that certain Stock Purchase and Registration Rights Agreement, dated as of September 25, 2002 (the "September 2002 Agreement" and, together with the December 2002 Agreement, the "Stock Purchase Agreements"), pursuant to which MetVP purchased an aggregate of 116,823 shares of the Company's Series A Convertible Preferred Stock, par value $0.0001 per share (the "Preferred Stock"); and WHEREAS, pursuant to Section 5.2 of each respective Stock Purchase Agreement, under certain circumstances specified therein, MetVP was granted a right of first refusal to provide funds to the Company in the event the Company desired to incur indebtedness other than Senior Indebtedness (as defined therein); and WHEREAS, the Company and MetVP desire to amend Section 5.2 of each Stock Purchase Agreement to provide that in the event the right of first refusal provided therein shall be exercised by MetVP, MetVP shall have the right, but not the obligation, to assign the obligation to provide funds to the Company to any of MetVP's direct Affiliates (as defined in the Stock Purchase Agreements) (the "MetVP Affiliates"); and WHEREAS, the Company has provided MetVP with notice that it desires to incur indebtedness (other than Senior Indebtedness) in the amount of $500,000 (the "Indebtedness"); and WHEREAS, MetVP has elected to exercise the right of first refusal in respect of the Indebtedness and pursuant to the amendment being made in this Agreement to Section 5.2 of the Stock Purchase Agreements (as set forth below), MetVP has elected to assign its obligation to provide funds to the Company in respect of the Indebtedness to Tall Oaks, a MetVP Affiliate, which Indebtedness is to be evidenced by a promissory note substantially in the form of Exhibit A attached hereto (the "Note"). NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions contained herein, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. Amendment to Stock Purchase Agreements. Section 5.2 of the September 2002 Agreement and the December 2002 Agreement are each hereby amended and restated in their entirety by the language set forth on Exhibit B hereto. 1 2. Assignment of Funding Obligations to Tall Oaks. By executing this Agreement, MetVP hereby notifies the Company that pursuant to Section 5.2 of the Stock Purchase Agreements (as amended by Section 1 above), MetVP hereby elects to exercise the right of first refusal in respect of the Indebtedness pursuant to clause (b)(ii) of Section 5.2 of the Stock Purchase Agreements (as amended by Section 1 above) and assigns its obligation to provide funds in respect of the Indebtedness to Tall Oaks and Tall Oaks hereby accepts such assignment of the obligation to provide said funds to the Company. 3. Consent of the Company. The Company hereby expressly consents to the assignment being made by MetVP pursuant to Section 2 above and acknowledges and agrees that the obligation of MetVP to provide a Funding Notice pursuant to Section 5.2 of the Stock Purchase Agreements has been timely fulfilled by this Agreement, in all respects. 4. Representations and Warranties. (a) The Company hereby represents and warrants to MetVP and Tall Oaks as follows: (i) the Company is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware; (ii) the Company has full power and authority to execute, deliver and perform its obligations under this Agreement; (iii) the execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate action of the Company; (iv) this Agreement constitutes the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors; and (v) the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby by the Company do not and will not, with or without the giving of notice or the passage of time or both, when duly executed and delivered by MetVP, violate or conflict with or result in a breach or termination of any provision of, or constitute a default under any organizational instrument of the Company or any order, judgment, decree, statute, regulation, contract, agreement or any other restriction of any kind or description to which the Company is a party or by which the Company is or may be bound. (b) MetVP hereby represents and warrants to the Company as follows: (i) MetVP is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware; 2 (ii) MetVP has full power and authority to execute, deliver and perform its obligations under this Agreement; and (iii) the execution, delivery and performance by MetVP of this Agreement and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary partnership action on the part of MetVP. (c) Tall Oaks hereby represents and warrants to the Company as follows: (i) Tall Oaks is a limited liability company duly organized, validly existing and in good standing under the laws of the State of New Jersey; (ii) Tall Oaks has full power and authority to execute, deliver and perform its obligations under this Agreement; and (iii) the execution, delivery and performance by Tall Oaks of this Agreement and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary limited liability company action on the part of Tall Oaks. (iv) Tall Oaks represents and warrants that it is aware of the confidentiality restrictions set forth in Section 5.6 of the December 2002 Agreement, a copy of which is annexed hereto as Exhibit C, and agrees to comply with the provisions set forth therein, to the extent applicable. 5. Entire Agreement; Amendments. This Agreement and the Stock Purchase Agreements, as modified and amended by the terms of this Agreement, constitute the entire agreement of the parties with respect to the subject matter hereof, and supersede all other prior agreements and understandings with respect thereto, whether written or oral. This Agreement may not be modified or amended except as provided in the December 2002 Purchase Agreement. All terms of the Stock Purchase Agreements, except as modified hereby, remain in full force and effect and shall apply to the terms hereof. 6. Execution in Counterparts. This Agreement may be executed in two or more counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, taken together, shall constitute one and the same Agreement. 7. Successors and Assigns. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns whether so expressed or not. 8. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. 3 9. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. [SIGNATURE PAGE FOLLOWS] 4 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. DIRECT INSITE CORP. By: /s/ George Aronson ------------------------- Name: George Aronson Title: CFO METROPOLITAN VENTURE PARTNERS II, L.P. By: METROPOLITAN VENTURE PARTNERS (Advisors), L.P., as general partner By: METROPOLITAN VENTURE PARTNERS CORP., as general partner By: /s/ Michael Levin ------------------------- Michael Levin Vice President of Finance TALL OAKS GROUP L.L.C. By: /s/ Lawrence D. Hite ------------------------- Name: Lawrence D. Hite Title: Manager 5 EXHIBIT A PROMISSORY NOTE See attached. 6 EXHIBIT B SECTION 5.2 5.2 Incurrence of Indebtedness; Right of First Refusal. (a) If, at any time when the Purchaser owns the Threshold Percentage and at least 25% of the Preferred Stock outstanding immediately following the Closing, the Company desires to incur any indebtedness (other than Senior Indebtedness), the Company shall deliver a written notice to the Purchaser of the Company's good faith desire to incur such indebtedness, specifying the amount of indebtedness the Company desires to incur and a detailed explanation for the reason it desires to incur such indebtedness (the "Offer Notice"). The Offer Notice shall set forth the principal amount of the desired indebtedness, the term, the facilities for payment, schedule of payments, interest rate, and any other material terms and conditions of the desired indebtedness. (b) As promptly as practicable but in no event later than 15 calendar days after receipt of an Offer Notice (the "Offer Period"), the Purchaser shall have the right, but not the obligation, to elect to (i) provide the Company with all the financing so desired, (ii) assign its obligation to provide the Company with all the financing so desired to one or more of the Company's direct Affiliates or (iii) provide the Company with less than all of the financing so desired and assign its obligation to provide the Company with any remaining portion of the financing so desired and not provided by the Company to one or more of the Company's direct Affiliates, and whether in the case of clause (i), (ii) or (iii) above, in accordance with such Offer Notice. If the Purchaser makes an election pursuant to this clause (b), the Purchaser shall give written notice to the Company, prior to the expiration of the Offer Period, of the Purchaser's election and indicate whether the Purchaser has made such election in accordance with clause (i), (ii) or (iii) of this clause (b) (a "Funding Notice"). In the event such election is made in accordance with clause (ii) or (iii) of this clause (b), the Funding Notice shall state the name or names of the direct Affiliates to whom the Purchaser has assigned its obligation hereunder (the "Specified Affiliates"). (c) Any financing to be provided by the Purchaser and/or any of its direct Affiliate(s) pursuant to this Section 5.2 shall close within fifteen (15) calendar days after the date of the applicable Funding Notice. The Company and the Purchaser and/or the Specified Affiliate(s) shall enter into an agreement to effect such transaction on the terms and conditions set forth in the Offer Notice and with such representations, warranties, covenants, conditions and indemnities as are customary under the circumstances and otherwise commercially reasonable. (d) In the event the Purchaser declines (by written notice declining the offer pursuant to the Offer Notice) or shall fail to provide a Funding Notice prior to the expiration of the Offer Period (the "Date of Rejection"), then the Company shall have the right to engage in a transaction pursuant to the terms set forth in the Offer Notice at any time within 45 days after the Date of Rejection (the "Sale Period") upon terms and conditions no more favorable to such party than those specified in the Offer Notice. 7 (e) For the purposes of this Section 5.2, "terms and conditions no more favorable" shall mean that the price, facilities for payment, schedule of payments, interest rates, indemnification provisions and any other material terms and conditions of the agreement pursuant to which such financing is obtained by the Company shall not, in the aggregate, be economically more favorable to such Person than the terms and conditions offered to the Purchaser. (f) If such financing is not obtained by the Company within the Sale Period, any proposed incurrence of indebtedness (other than Senior Indebtedness) shall again be subject to the notice requirements and rights of first refusal set forth in this Section 5.2. (g) For purposes of this Section 5.2 only, the term "the Company" shall be deemed to include the Company and any of its subsidiaries. 8 EXHIBIT C SECTION 5.6 5.6 Confidentiality. The Purchaser covenants and agrees to keep confidential any and all material non-public information which it has heretofore obtained or shall hereafter obtain, directly or indirectly, from the Company pursuant to this Agreement or otherwise, and agrees not to use the same except for the purpose of this Agreement or to disclose the same to any party except as provided below, without the Company's prior written consent; provided that the terms of this Section 5.6 shall not extend to any such information that: (a) is already publicly known; (a) has become publicly known without any fault of the Purchaser or anyone to whom the Purchaser has made disclosure in compliance with the terms of this Section 5.6; or (b) is required to be disclosed to any governmental authorities or courts of law as a result of operation of law, regulation, or court order; provided, however, that the Purchaser shall have first given prompt written notice of such requirement to the Company (if permissible) and cooperates with the Company to restrict such disclosure and/or obtain confidential treatment thereof. The foregoing notwithstanding, the Purchaser may disclose such information to each of its directors, officers, employees, partners (including its limited partners), members, managers and representatives, which representatives have a need to know such information; provided that the Purchaser informs such persons of the restrictions set forth in this Section 5.6 with respect to such information and such persons agree to comply with the provisions of this Section 5.6. The Purchaser further agrees to give prompt notice to the Company of any disclosure made by the Purchaser or any of its directors, officers, employees, partners (including limited partners), members, managers or representatives in breach of this Section 5.6, to the extent the Purchaser has knowledge of such disclosure; provided that the Purchaser shall have no liability for losses incurred by the Company or any of its directors, officers, employees, stockholders or representatives solely as the result of the Company's failure, following its actual receipt of notice from the Purchaser of disclosure of information in breach of this Agreement, to make prompt public disclosure of the information so disclosed. For purposes of this Section 5.6, the knowledge of the Purchaser shall mean the actual knowledge of Peter B. Yunich or any successors to him as Managing Partner of the Purchaser. 9 EX-23 7 di10k2002exhibit23.txt ACCOUNTANT'S CONSENT Exhibit 23 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 ll, 1999; and File No. 333-33274, effective March 24, 2000) of our report dated April 9, 2003, appearing in the Annual Report on Form 10-K of Direct Insite Corp. for the year ended December 31, 2002. /s/ Marcum & Kliegman LLP April 14, 2003 Woodbury, New York EX-99.1 8 di10k2002exhibit99-1.txt CERTIFICATION Exhibit 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Direct Insite Corp. (the "Company"), does hereby certify, to such officer's knowledge, that: The Annual Report on Form 10-K for the year ended December 31, 2002 of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: April 14, 2003 /s/ James A. Cannavino ---------------------- Name: James A Cannevino Title: Chief Executive Officer /s/ George Aronson Dated: April 14, 2003 ----------------------- Name: George Aronson Title: Chief Financial Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-K or as a separate disclosure document. -----END PRIVACY-ENHANCED MESSAGE-----