-----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, Wfz95PuEK4YSczW3FsvGNdKwNDqDMQOLRKMoucIbWcl/DJQZ3Z0vIp5I7Ih1Q6R/ gmSAhIt/zMaIHys9faE3Zw== 0001201800-04-000061.txt : 20040414 0001201800-04-000061.hdr.sgml : 20040414 20040414161236 ACCESSION NUMBER: 0001201800-04-000061 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIRECT INSITE CORP CENTRAL INDEX KEY: 0000879703 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 112895590 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-20660 FILM NUMBER: 04733258 BUSINESS ADDRESS: STREET 1: 80 ORVILLE DR CITY: BOHEMIA STATE: NY ZIP: 11716 BUSINESS PHONE: 5162441500 MAIL ADDRESS: STREET 1: 80 ORVILLE DRIVE CITY: BOHEMIA STATE: NY ZIP: 11716 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER CONCEPTS CORP /DE DATE OF NAME CHANGE: 19930328 10KSB 1 di-10kdecember2003.txt FORM 10-KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-20660 DIRECT INSITE CORP. (Exact name of registrant as specified in its charter) Delaware 11-2895590 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 80 Orville Drive, Bohemia, N.Y. 11716 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (631) 244-1500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Title of each class Name of each exchange on which registered -------------------- ------------------------------------------ Common Stock, par value $.0001 NASDAQ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuers revenue for its most recent fiscal year: $7,439,000. As of March 31,2004, there were 4,227,984 shares of the registrant's Common Stock outstanding. The aggregate market value of the Common Stock held by non-affiliates was approximately $2,550,891 based on the closing sales price of the Common Stock as quoted on the OTC-BB on such date. DOCUMENTS INCORPORATED BY REFERENCE: None Direct Insite Corp. and Subsidiaries Form 10-KSB for the Year Ended December 31, 2003 Table of Contents ----------------- PART I PAGE ---- ITEM 1 Description of Business 1 ITEM 2 Description of Properties 9 ITEM 3 Legal Proceedings 9 ITEM 4 Submission of Matters to a Vote of Security Holders 9 PART II ITEM 5 Market for Common Equity and Related Stockholder Matters 10 ITEM 6 Management's Discussion and Analysis or Plan of Operation 11 ITEM 7 Financial Statements 16 ITEM 8. Changes in and Disagreements with Accountants on Accounting 16 and Financial Disclosure ITEM 8A. Controls and Procedures 16 PART III ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(A) of the Exchange Act 17 ITEM 10. Executive Compensation 19 ITEM 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 21 ITEM 12. Certain Relationships and Related Transactions 22 ITEM 13. Exhibits and Reports on Form-8K 22 ITEM 14. Principal Accountant Fees and Services 25 SIGNATURES 26 CERTIFICATIONS PART I Item 1. DESCRIPTION OF BUSINESS - -------------------------------- FORWARD-LOOKING STATEMENTS All statements other than statements of historical fact included in this Form 10-KSB including, without limitation, statements under, "Management's Discussion and Analysis 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-KSB, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as such words or expressions relate to us or our management, identify forward-looking statements. Such forward - looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to, fluctuations in future operating results, technological changes or difficulties, management of future growth, expansion of international operations, the risk of errors or failures in our software products, dependence on proprietary technology, competitive factors, risks associated with potential acquisitions, the ability to recruit personnel, and the dependence on key personnel. Such statements reflect the current views of management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. OVERVIEW Direct Insite Corp. and its subsidiaries (hereinafter referred to at times as "Direct Insite" or the "Company"), was organized under the name Unique Ventures, Inc. as a public company, under the laws of the State of Delaware on August 27, 1987. In August, 2000, we changed our name to Direct Insite Corp. which the Board of Directors believed was more in line with our new direction. In March, 2000, Mr. James A. Cannavino was elected a board member and Chairman of the Board. Shortly thereafter, Dr. Dennis Murray, president of Marist College and Mr. Charles Feld, Founder and Chief Executive Officer of the Feld Group, and Chief Information Officer of First Data Resources and the former Chief Information Officer of Delta Air Lines, were elected to our Board of Directors. In April, 2000, Mrs. Carla J. Steckline, the then attorney general of the state of Kansas, was elected to serve as a member of the Board. As part of the terms and conditions of our financing transaction with Metropolitan Venture Partners II, L.P., a private equity investment firm, ("Metropolitan"), Mr. Peter Yunich, their managing partner, was elected to our Board in September, 2002. In February 2004, Mr. Bernard Puckett, Chairman of the Board of Openwave Systems, Inc. and former Senior Vice President of Strategy and Business Development at IBM, was appointed to our Board, replacing Mr. Feld, who had previously resigned to assume new responsibilities at Electronic Data Systems ("EDS"). Our Current Business We operate primarily as an application service provider ("ASP") and, market an integrated service offering that provides for high volume processing of transactional billing data, electronic bill presentment and payment ("EBP&P").The offering also supports a visual data analysis and reporting tool that is delivered via the Internet. Our core technology is dbExpressTM, a proprietary and patented management information tool, which provides targeted access through the mining of large volumes of transactional data via the Internet. Further, in 2001, we began to provide custom engineering services for our customers. These services have increasingly become a significant source of revenue for us and we believe will continue to increase. Additionally, we believe that this type of service leads to recurring revenue streams similar to our ASP products. 1 This suite of offerings enables us to provide customers with a comprehensive set of services ranging from graphical rendering of transaction records to complex workflow management processes, preliminary bill review, to final invoice presentment with supporting "attached" data items. This comprehensive service offering provides support for Accounts Receivable (AR) and Accounts Payable (AP) back office operations, reduces operating costs and provides for improved customer satisfaction. The Company operates data centers located at the main office in Bohemia, N.Y. and in Newark, NJ. The Direct Insite facility in New Jersey is space leased at an International Business Machines ("IBM"), e-business Hosting Center. This co-location facility and its associated high redundancy feature supports mission critical service level agreements with virtually no down time. IBM, our largest customer, representing more than 97% of our revenue in each of the two years in the period ended December 31, 2003, 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 dbExpressTM platform. Since the initial deployment of our principal service, Invoices on Line ("IOL") in the United States geographic area, we have expanded the geographic areas of service coverage to include Canada, South America, and the major European countries. We believe that providing such global coverage uniquely address the global invoice distribution needs of Fortune 500 counties. Recent Financing In December 2003 the Board of Directors authorized us to sell up to 1,500 shares of Series C Redeemable Preferred Stock ("Series C Preferred") at $1,000 per share. The holders of Series C Preferred are entitled to dividends, on a cumulative basis, at the rate of 9-1/2% per year, compounded and payable quarterly beginning on October 1, 2005. The holders of Series C Preferred have preference in the payment of dividends and, in the event of liquidation, to all classes of capital stock of the Company except for the Series B Preferred Stock. As of December 31, 2003 we had sold 590 shares of Series C Preferred and received proceeds of $590,000 less expenses of $60,000. Subsequent to December 31, 2003, we sold an additional 760 shares for $760,000. Of the total shares sold through March 31, 2004, Metropolitan has purchased 540 shares, our Chairman and Chief Executive Officer of the Company purchased 200 shares and certain Directors purchased 105 shares. The proceeds were used for working capital purposes. In June 2003, the Company's Board of Directors approved the exchange of the then outstanding obligations to our Chairman and Chief Executive Officer, Markus & Associates and Tall Oaks Group, LLC for 974 shares of Series B Preferred Stock at an exchange ratio of $1,000 of debt per share ("Price Per Share"). The Series B Preferred was issued as follows: -- 266 shares were exchanged for $266,000 of debt obligation to our Chairman and Chief Executive Officer; -- 208 shares were exchanged for $208,000 of debt obligation to Markus & Associates; and -- 500 shares were exchanged for $500,000 of debt obligation to Tall Oaks Group, LLC. Each of the Series B Preferred shares is entitled to mandatory dividends, payable quarterly, commencing on the first day of the calendar quarter after the date of issuance, at the rate of 12% per annum. Additionally, the Series B Preferred shares are redeemable, at the sole option of the Company, on or after March 31, 2005 (or prior to March 31, 2005 with the consent of majority-in-interest holders of Series B Preferred shares). Upon redemption, the holders of the Series B Preferred shall be entitled to receive, for each share of Series B Preferred outstanding, an amount equal to the Price Per Share plus accrued and unpaid dividends. In September 2002, we sold 93,458 shares of its Series A Convertible Preferred Stock, ("Series A Preferred ") in consideration for $2,000,000 less fees and expenses of $178,000 to Metropolitan. In December 2002, we 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, as of December 31, 2002, the principal sum was 2 reflected as stock subscription receivable. In June 2003, we sold 17,857 shares of its Series A Convertible Preferred Stock in consideration for $250,000 less fees and expenses of $5,000 to Metropolitan. 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 February 1, 2005 and September 25, 2005. The payment of first dividend was originally scheduled for September 25, 2004, however, the Company and the Holders agreed to defer this payment until February 1, 2005. As consideration for the deferral of the dividend payment, the Company agreed to pay the Holders a premium of 7.5% of the dividend. Dividends are payable, at the option of the holders, in cash or in the Company's common stock. Each share of Preferred Stock is convertible into 10 shares of common stock, at the option of the holder. 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. Discontinued Products and Services In 2001 we acquired Platinum Communications, Inc. ("Platinum"), a Dallas, Texas based company, which marketed its integrated proprietary back office software solutions, Account Management Systems ("AMS" or sometimes referred to as "TAMS") to the telecommunications industry either as a license or as an ASP. As a result of the lack of development of the Platinum business and to focus our resources on our core business, in December 2003, we decided to close the operations of Platinum. For the years ended December 31, 2003 and 2002 Platinum incurred losses of $1,912,000 and $797,000, respectively, including a provision for closing costs of $220,000 and impairments of long-lived assets of $352,000 in 2003. The losses are reflected as Loss from Discontinued Operations in the accompanying Consolidated Statements of Operations. PRODUCTS AND SERVICES We currently operate in one business segment, the Electronic Billing Presentment and Payment ("EBP&P") sector, and, during the years 2003 and 2002, have provided three primary forms of service offerings: EBP&P Application Service Provider ("ASP") Services, AMS or TAMS Services (which have been reclassified to discontinued operations) and professional engineering services. Within the ASP offering we provide two primary services: -- Invoices On Line, an EBP&P offering, and; -- dbExpress, a data visualization and mining service Invoices on Line ---------------- IOL is an advanced web-based electronic invoice presentment, workflow management; reporting and data interrogation/analysis platform designed for large enterprise customers conducting business internationally. Direct Insite's web-based service offering has been operational since 2002 and is currently delivering invoices to users in the Americas - the US, Canada, and South American, - in Europe, the Middle East and Africa (EMEA) geographic regions including England, Ireland, Germany, Italy and France. Service is also provided to the Nordic, Scandinavian, and Iberian countries. We are planning on supporting additional geographies and languages throughout the course of 2004. From a system user perspective, IOL is operated on behalf of an enterprise that delivers goods and services to a customer. Subsequent to delivery, IOL would be the vehicle for the service provider or "Biller" to present an invoice to the customer, who would become the "Payer" of an invoice. IOL provides the following functions on behalf of the Biller to the customer or Payer: -- Summary View of Invoice. IOL enables the Payer to view a collection of all invoices being presented to the Payer and further allows the payer to view a summary of the amount due for goods and services. This allows the Payer to view the total amount due as well as a summary of the collection of goods and services delivered. 3 -- Complex Presentment. (Data centric views). Historically, paper invoices have been used by Billers as the primary vehicle to communicate the types of goods and services delivered to customers. Because of the fundamental limitations of the amount of detail that could be present in a "single sheet" paper invoice, there was a general lack of detail provided to the customers. The result of the absence of detail resulted in calls to the biller in order to obtain more information. IOL is based on a hierarchical data structure that allows the user the convenience of seeing a high level summary of all invoices or to "drill down" on any given invoice or any line item of an invoice. This "Data- centric" model conveniently supports high level summary or low level explanatory information to satisfy the customers needs to understand and pay the invoice. -- Data Mining and Visualization. Another benefit of data-centricity is the ability to utilize the dbExpress data mining technology across the entire enterprise to analyze line item detail information - not just a single operating unit or limited geographical area of the business. Additionally, IOL provides a significant archiving capability such that 12 to 24 months of historical invoicing/charges can be data mined for trend and optimization opportunities. The results of the mining activity are presented in a highly visualized manner to the user. -- Notification. Email notification is used to provide invoice alerts, disputes, workflow, administration, invoice status and payment timing. -- Multi-tiered Accounts. This capability is used for allocating portions of an invoice across complex, payer organizational structures with multiple levels of management and associated viewing rights and/or privileges often found in large enterprise accounts. -- Workflow Management. Enables the user to electronically route the invoice through the approval chain; passing the designated portions of an invoice to necessary parties for approval. This will also assist the user's ability to verify whether the approving parties have received the invoice and if the portion has been reviewed, approved or disputed.. -- Dispute Management. This capability supports the ability of the customer/payer to dispute a charge at the invoice level of at the level of any line time within the invoice. Once invoked, the billing dispute function provides for automatic "forms fill" of the information related to the dispute and automatically routes the dispute to the appropriate customer support organization. -- Payment and Remittance. This facility supports multiple payment options such as full payment, schedule payment and auto payment. The system also supports balance-forward accounting or open invoice accounting. Pre- scheduled payments are also supported by the system. -- Billing Inquiry (or Trouble Ticket). The process of customer or payer registering a disagreement with a given line item of the invoice or simply needing to require a clarification of additional supporting data is supported through the Billing Inquiry function". -- Report Capabilities. Users can track orders, disputes, billing inquires, payments and system usage. This reporting function is driven by an online analytical processing (OLAP) tool that plugs into the user's database. This text reporting capability complements the graphical representation of results that is the output of the dbExpress data- mining tool. dbExpress Background dbExpress has been in use in various forms for more than ten years. The Windows Version 1.0 of dbExpressTM 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. 4 dbExpress is a software tool which assists end users in the retrieval and visualization of all types of data. It allows customers to access and analyze high volumes of technical and account information. With the patented data mining technology found in dbExpress, high volumes of detailed information is presented in our unique interface known as a "Filescape". With dbExpress, the customer may create a graph, report, or simply list the customer information for easy viewing. dbExpress simplifies the preparation of traditional reports by giving the customer the ability to view the billing data interactively using simple point-and-click mouse operation. With dbExpress, the customer is given the ability to drill down into the call detail information allowing the customer to identify data trends and "cause and effect" relationships in an interactive, graphical format. Addresses Internet Bandwidth Limitations dbExpress is a data analysis tool that addresses a major Internet problem, that of high data volume and limited bandwidth. This limitation is currently responsible for the lengthy delays associated with data downloading. dbExpress is a web based reporting and analysis system that was introduced to deliver all of the functionality of dbExpress 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. dbExpress 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 dbExpress All Data Indexed - Unlike traditional database products, dbExpress precomputes data access indexes associated with all data relationships of interest. This eliminates the need to compute such access mechanisms on a case by case basis. The users of dbExpress are free to "question" the data base across a wide range of relationships and massive amounts of data with far less time delay as compared to the standard data base query systems. Furthermore, the presentment of the "search results" is in the form of graphical "filescapes" that can be "visually drilled down" to further understand the information relationships. Graphics Driven - The data is delivered via the Internet with simple browser technology thereby allowing an authorized Internet user to manipulate huge databases in seconds. High Power / Low Cost - dbExpressTM enables users to analyze millions of records over the Internet without the need to first download the data being analyzed. Better Access to Information - dbExpressTM improves the accessibility to databases created by database management systems (DBMS) by eliminating the need to write queries in computer code and facilitates data searches through the use of graphical query tools. We believe that this results in more timely and better quality business decision-making. Broader Access to Information. - dbExpressTM enables a broader population within an organization to visually and interactively mine data without the need or support from internal or external management information system (MIS) professionals. dbExpressTM performs these tasks faster than conventional data base systems because the various paths to access the data are calculated one time when the data in loaded into dbExpress as compared to traditional approach of waiting until the user asks for a given type of data and the access path is computed when requested and not in advance. Ease of Use - dbExpressTM utilizes simple "point-and-click" navigation approach, which enables the user to view and analyze data to the lowest level of detail. dbExpressTM 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. 5 Interfaces With Leading Databases and Other Tools - dbExpressTM provides direct access to leading databases created by Data Base Management Systems (DBMS) vendors and can be exported to popular spreadsheets, report writers, graphics packages and word processors. Integrates Data From Multiple Vendors - When dbExpressTM reads a database, it creates its own summaries of information through a proprietary process. Information contained in databases is formatted into d.b.Express's proprietary format. This permits users to access and compare information contained in enterprise-wide databases created by different vendors simultaneously in the d.b.Express' user-friendly environment. Works in Common Operating Environments - dbExpressTM operates in virtually all file server and peer-to-peer networking environments providing secure visual data mining functionality through Internet browsers. High Processing Speed - Once a database source has been processed, dbExpressTM employs proprietary matrix storage technology rather than rereading each data element in that database. The elimination of this rereading step increases the speed of data access enabling ad-hoc analysis at a rate that has been demonstrated to be far faster than possible with any other system. Security, Access and Storage - In order to meet the archival requirements of customers, the Company produces CDs of each month's billing details. In order to provide this service, the Company has put into place a fully redundant data center. The archive service is available 24 hours a day, 7 days a week, 365 days a year. Historically, our primary product offering was dbExpress, the visual data analysis platform described for use by Fortune 500 companies to consolidate communications traffic for the purpose of system analysis and contract compliance. The telecommunication offerings were expanded with the acquisition of a telecommunications asset management system suite of back office communications management software products. This suite of offerings provided the capability to manage complex high volume communications services within the large enterprise; work flow management, service provisioning, transaction rating, billing and analysis, A/R and cash application and electronic intra/inter company invoicing. During 2001, we enhanced our service offerings by combining electronic invoice presentment and payment functionality with dbExpress. This combination provides Internet-based services to customers in the form of an electronic invoice capable of delivering both summary and detailed billing information with the ability to data mine high volume of internet transactions that large companies generate. This "data centric" approach is a significant departure from the industry standard "document centric" approach that delivered print stream images over the Internet and not the line item detail. This approach, and the addition of payment capabilities, formed the basis for our enhanced Electronic Bill Presentment and Payment offering referred to as Invoices on Line which was brought to market in 2002. This combined set of services has allowed Direct Insite to significantly expand its market opportunities to include any large enterprise in a given industry sector that seeks to provide their customers with an electronic invoice with the associated line item detail information with the associated reports and data mining capabilities. Previously, all of the electronic reporting and analysis capabilities of dbExpress were being delivered in support of the traditional paper-based billing system. For simple or low volume detail accounts, electronically delivered invoices are primarily a reproduction of the print stream. We believe that electronic invoices delivered to large enterprise customers require the ability to deliver all of the line item detail to support the summary billing information as well as the tools necessary to mine that data. IOL offers to this market electronic presentation of invoices along with the tools to verify the detail behind the invoice. The Direct Insite offering is a "data centric" solution built on delivering summary billing information constructed from the underlying detail data contained in an underlying database. Because the supporting detail information, analysis and reporting tools are made available to the end user, costs are reduced for both the provider and customer while improving customer service through customer self care. We believe that this is a critical component and a compelling reason to encourage potential customers to adopt our electronic invoice presentment and payment service. 6 The Company now has 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 provided 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 indirect through channel and strategic partners. These channels are supported by a technical sales support group. Direct ------ We have increased our direct sales resources to include three full time sales representatives. In addition, our directors and executives are involved in new client development and the establishment of channel partnerships. Indirect -------- We are pursuing both reseller and strategic partner relationships to further develop existing account relationships and to increase market coverage. These relationships can also expand our offerings, therefore we are seeking to establish partnerships with other companies that offer complementary products and services such as supply chain management and payment services. The use of the indirect channel provides access to the additional engineering and professional resources required to implement our EBP&P service offering. IBM RESELLER AGREEMENT The Company signed a reseller agreement with IBM on August 4, 2003. This agreement provides IBM with the ability to sell the Invoice on Line service offering to its customers. The Company supports this sales activity by providing Subject Matter Experts (SME's) to assist the IBM sales organization. Technical Sales Support and Post-Sales Account Management We have a pre-sales support staff and add post sales support to the existing account management group as we secure new business. This group is responsible for technical sales presentations, developing proposals and pricing, contract administration and then account management upon completion. RESEARCH AND DEVELOPMENT The computer software industry is characterized by rapid technological change, which requires ongoing development and maintenance of software products. It is customary for modifications to be made to a software product as experience with its use grows or changes in manufacturers' hardware and software so require. We believe that our research and development staff, many with extensive experience in the industry, represents a significant competitive advantage. As of March 31, 2004, our research and development group consists of 21 employees. Further, when needed, we retain the services of independent professional consultants. We seek to recruit highly qualified employees, and our ability to attract and retain such employees is expected to be a principal factor in our success in maintaining a leading technological position. For the two years ended December 31, 2003 and 2002, research and development expenses were approximately $3,201,000, and $3,903,000, respectively, including $561,000 and $673,000 for 2003 and 2002, respectively, that are included in Loss from Discontinued Operations in the accompanying Consolidated Statements of Operations. We believe that investments in research and development are required in order to remain competitive. 7 COMPETITION We believe our primary competitors are: Avolent is a privately held San Francisco based provider of enterprise software for Financial Relationship Management (FRM) that include electronic invoice presentment and payment (EIPP), online account management, process management, enterprise employee access, and decision support. Founded in 1995, Avolent has primarily focused on the financial services, healthcare, technology and utility markets. Bottomline Technologies (NASDAQ: EPAY) was established in 1989 and provides a Business to Business ("B2B") EBPP solution, primarily to financial institutions and the legal services markets. The company's products include software designed to automate the disbursement process for banks and their corporate customers' anti-fraud and electronic commerce payment software. Bottomline focuses on cash management and financial-related remittance, reporting and audit data. The company has over 500 employees and is based in Portsmouth, NH. 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. Vwlosant (formerly BillingZone), established as a joint venture between PNC Bank and Perot Systems, was acquired by e-One Global. BillingZone is an information technology services firm that serves the B2B EBPP market with a consolidator model that is focused on the B2B EBPP industry and is primarily payer-centric. CheckFree Corporation (Nasdaq:CKFR) provides online billing and payment for companies on the Web. Primarily focused on the B2C market, consumers receive and pay bills online through CheckFree-managed services. CheckFree was founded in 1981 in Columbus, Ohio. The company is now headquartered in Atlanta, GA with offices across the U.S,, in Canada and in the UK. Docucorp International, Inc.,(Nasdaq: DOCC) is based in Dallas Tx, and provides enterprise software products and professional services related to its information software products. They also provides application service provider (ASP) hosting service to provide processing, print, mail, archival and Internet delivery of documents for insurance, utilities, bank and mutual fund statements, invoices, call center correspondence and EBP&P. 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 Direct Insite. We cannot assume that current and potential competitors will not develop products that may be or may be perceived to be more effective or responsive to technological change than are our current or future products or that our technologies and products will not be rendered obsolete by such developments. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could have a material adverse effect on our business, operating results and financial condition. 8 EMPLOYEES We had 56 employees, all in the United States, at March 31, 2004, including 34 in technical support, (including research and development), 9 in marketing, sales and support services, and 13 in corporate finance and administration. Our future success will depend in part upon our continued ability to attract and retain highly skilled and qualified personnel. We believe that our relations with our employees are good, and we have no collective bargaining agreements with any labor unions. INTELLECTUAL PROPERTY We have two federally registered trademarks, which we rely upon: "dbExpress TM" and "dbACCEL TM". In addition, we received a patent for the proprietary aspects of our dbExpress technology in 1994, and a second, expanded patent on that technology in 1995, which broadened the claims regarding the product's graphical interface and indexing. No assurance can be given that our patents and copyrights will effectively protect us from any copying or emulation of our products in the future. We also rely on proprietary knowledge and employ various methods, including confidentiality agreements, to protect our software codes, concepts, ideas and documentation of our proprietary technology. Despite these efforts, unauthorized parties may attempt to copy aspects of our products, obtain and use information that we regard as proprietary or misappropriate our copyrights, trademarks, trade dress and similar proprietary rights. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate. In addition, our competitors might independently develop similar technology or duplicate our products or circumvent any patents or our other intellectual property rights. Item 2. DESCRIPTION OF PROPERTIES - ---------------------------------- We currently maintain leased facilities in the locations listed below:
Description Location Square Footage Lease term Annual Rental Cost ----------- -------- -------------- ---------- ------------------ Corporate offices Bohemia, NY 10,000 7/1/02 - 6/30/04 $201,600 Co-location facility Newark, NJ Note 1 10/1/03 - 9/30/08 $257,280
Note 1. We are obligated under the terms of an agreement with our major customer to maintain a co-location site at an IBM eHosting facility in Newark, New Jersey or an agreed on alternative location. The redundant facility provides us with, among other things, switches, routers, racks, connections to Internet network access points, at a variety of bandwidths, various levels on monitoring, and access to problem management support. The lease expires on September 30, 2008. In addition, we are obligated under an office lease for our closed operations in Dallas, Texas. The remaining lease payments through the lease termination date of November 30, 2006 approximates $238,000. We are actively pursuing subletting this facility. The amount of the remaining lease payments less anticipated sublet rental income is included in the Loss from Discontinued Operations in 2003 in the accompanying Consolidated Statements of Operations. 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, 2003. 9 PART II Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ----------------------------------------------------------------- (a) Market Information Our common stock is traded on the Over-The-Counter Bulletin Board since October 24, 2003. Previously our stock was traded on NASDAQ SmallCap market since September 23, 1992. The following table sets forth the high and low sales prices for our common stock by the quarters indicated:
High Low ---- --- 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 Second Quarter 1.850 1.040 Third Quarter 1.480 0.590 Fourth Quarter 1.050 0.520 2004 First Quarter 1.080 0.560
(b) As of March 31, 2004, there were 3,160 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, 2003 to common shareholders. In 2003, we paid dividends of $30,000 to Preferred Series B Shareholders Further dividend policy will be determined by our Board of Directors based on our earnings, financial condition, capital requirements and other then existing conditions. It is anticipated that cash dividends will not be paid to the holders of our common stock in the foreseeable future. (d) During the fourth quarter of 2003, we issued unregistered shares of our common stock as follows: -- Pursuant to an employment agreement with our Chief Executive Officer, we issued 5,000 shares of common stock valued at $3,000; -- We issued 42,000 shares of common stock valued at $41,000 to consultants for services. (e) Subsequent to December 31, 2003, we issued unregistered shares of our common stock as follows: -- Pursuant to an employment agreement with our Chief Executive Officer, we issued 15,000 shares of common stock valued at $12,000; -- We issued 82,509 shares valued at $101,000 to directors for service on the Board of Directors and Committees of the Board; -- We issued 35,000 valued at $26,000 shares to an employee; . 10 -- We issued 55,000 shares valued at $41,000 to consultants for services The foregoing shares were issued in reliance on the exemption provided by Section (4)(2) of the Securities Act as transactions not involving a public offering. All shares to officers and directors were issued under stock plans that have been approved by shareholders. All prior issuances of equity securities during the past three years have been previously reported. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - ------------------------------------------------------------------ Overview Direct Insite Corp. and its subsidiaries (hereinafter referred to at times as "Direct Insite" or the "Company"), was organized under the name Unique Ventures, Inc. as a public company, under the laws of the State of Delaware on August 27, 1987. In August, 2000, we changed our name to Direct Insite Corp. which the Board of Directors believed was more in line with our new direction. In March, 2000, Mr. James A. Cannavino was elected a board member and Chairman of the Board. Shortly thereafter Dr. Dennis Murray, president of Marist College and Mr. Charles Feld, Chief Information Officer of First Data Resources and the former Chief Information Officer of Delta Air Lines, were elected to our board. In April, 2000, Mrs. Carla J. Steckline, the then attorney general of the state of Kansas, was elected to serve as a member of the Board. As part of the terms and conditions of our financing transaction with Metropolitan Venture Partners II, L.P., a private equity investment firm, ("Metropolitan"), Mr. Peter Yunich, their managing partner, was elected to our Board in September, 2002. In February 2004, Mr. Bernard Puckett, Chairman of the Board of Openwave Systems, Inc. and former Senior Vice President of Strategy and Business Development at IBM was appointed to our Board, replacing Mr. Feld who assumed new responsibilities at Electronic Data Systems ("EDS"). We primarily operate as an application service provider ("ASP") and, market an integrated "fee for services" offering providing high volume processing of transactional data for billing purposes, electronic bill presentation and payment ("EBP&P") as well as visual data analysis and reporting tools delivered via the Internet for our customers. Our core technology is dbExpressTM, the proprietary and patented management information tool, which provides targeted access through the mining of large volumes of transactional data via the Internet. Further, in 2001, we began to provide custom engineering services for our customers. These services have increasingly become a significant source of revenue for us and we believe will continue to increase. Additionally, we believe that this type of service leads to recurring revenue streams similar to our ASP products. This newly assembled suite of services enables us to provide a comprehensive Internet delivered service from the raw transaction record through all of the internal workflow management processes including an electronically delivered invoice with customer analytics. This comprehensive service offering provides back office operations, cuts costs and provides for improved customer service by providing the end customer with easy access to all of the detailed information about their bill. We operate fully redundant data centers located at our main office in Bohemia, N.Y. and in Newark, NJ. Our facility in New Jersey is space leased at an International Business Machines ("IBM"), e-business Hosting Center. This co-location / redundancy feature enables us to offer virtually down time free service. Currently, IBM, our largest customer, representing approximately 97% of our revenue in each of the two years in the period ended December 31, 2003, 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 dbExpressTM platform. 11 Discontinued Operations In 2001 we acquired Platinum Communications, Inc. ("Platinum"), a Dallas, Texas based company, which marketed its integrated proprietary back office software solutions, Account Management Systems ("AMS" or sometimes referred to as "TAMS") to the telecommunications industry either as a license or as an ASP. As a result of the lack of development of the Platinum business and to focus our resources on our core business, in December 2003 we decided to close the operations of Platinum. For the years ended December 31, 2003 and 2002 Platinum incurred net losses of $1,912,000 and $797,000, respectively, including a provision for closing costs of $220,000 and impairments of long-lived assets of $352,000 in 2003. The losses are reflected as Loss from Discontinued Operations in the accompanying Consolidated Statements of Operations. Recent Financing In December 2003 the Board of Directors authorized us to sell up to 1,500 shares of Series C Redeemable Preferred Stock ("Series C Preferred") at $1,000 per share. The holders of Series C Preferred are entitled to dividends, on a cumulative basis, at the rate of 9.5% per year, compounded and payable quarterly beginning on October 1, 2005. The holders of Series C Preferred have preference in the payment of dividends and, in the event of liquidation, to all classes of capital stock of the Company except for the Series B Preferred Stock. As of December 31, 2003 we had sold 590 shares of Series C Preferred and received proceeds of $590,000 less expenses of $60,000. Subsequent to December 31, 2003 we have sold an additional 760 shares for $760,000. Of the total shares sold to March 31, 2004, Metropolitan has purchased 540 shares and the Chairman and Chief Executive Officer of the Company has purchased 200 shares. The proceeds were used for working capital purposes. In June 2003, the Company's Board of Directors approved the exchange of the then outstanding obligations to our Chairman and Chief Executive Officer, Markus & Associates and Tall Oaks Group, LLC for 974 shares of Series B Preferred Stock at an exchange ratio of $1,000 of debt per share ("Price Per Share"). The Series B Preferred was issued as follows: -- 266 shares were exchanged for $266,000 of debt obligation to our Chairman and Chief Executive Officer; -- 208 shares were exchanged for $208,000 of debt obligation to Markus & Associates; and -- 500 shares were exchanged for $500,000 of debt obligation to Tall Oaks Group, LLC ("Tall Oaks"). Each of the Series B Preferred shares is entitled to mandatory dividends, payable quarterly, commencing on the first day of the calendar quarter after the date of issuance, at the rate of 12% per annum. Additionally, the Series B Preferred shares are redeemable, at the sole option of the Company, on or after March 31, 2005 (or prior to March 31, 2005 with the consent of majority-in-interest holders of Series B Preferred shares). Upon redemption, the holders of the Series B Preferred shall be entitled to receive, for each share of Series B Preferred outstanding, an amount equal to the Price Per Share plus accrued and unpaid dividends. In September 2002, the Company sold 93,458 shares of its Series A Convertible Preferred Stock, ("Series A Preferred ") in consideration for $2,000,000 less fees and expenses of $178,000 to 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, as of December 31, 2002, the principal sum was reflected as stock subscription receivable. In June 2003, the Company sold 17,857 shares of its Series A Convertible Preferred Stock in consideration for $250,000 less fees and expenses of $5,000 to Metropolitan. The holders of Preferred Stock ("the Holders") are entitled to dividends, on a cumulative basis, at the rate of 9.5% per annum, compounded quarterly and payable on February 1, 2005 and September 25, 2005.The payment of first dividend was originally scheduled for September 25, 2003, however, the Company and the Holders agreed to defer this payment until February 1, 2005. As consideration for the deferral of the dividend payment, the Company agreed to pay the Holders a premium of 7.5% of the dividend. Dividends are payable, at the option of the holders, in cash or in the Company's common stock. Each share of Preferred Stock is convertible into 10 shares of common stock, at the option of the holder. 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. 12 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 For the year ended December 31, 2003, we incurred a loss from continuing operations of $3,270,000 compared to a loss from continuing operations of $6,114,000 for the year ended December 31, 2002, an improvement of $2,844,000 or 47%. We used $2,444,000 in cash for operations in 2003 (including cash used for discontinued operations of $1,012,000) compared to $2,736,000 in 2002, an improvement of $292,000 or 11%. We funded the shortfall in cash from operations through a combination of sales of common and preferred stock totaling $1,362,000 less fees and expenses of $83,000, borrowings under two lines of credit totaling $750,000 and a loan from Tall Oaks of $500,000 less fees of $4,000. As discussed above, the loan from Tall Oaks was exchanged for 500 shares of Series B Preferred stock. In addition, we used cash on hand at the beginning of the year of $620,000. As noted above, cash used in operations for the year ended December 31, 2003 was $2,444,000, consisting of the net loss $5,182,000, including the loss from discontinued operations, offset by non-cash expenses of $873,000, including depreciation and amortization of $686,000 and common stock and options issued for services valued at $135,000. The net loss is further offset by a decrease in operating assets of $180,000, an increase in accounts payable and accrued expenses of $755,000 and an increase in other liabilities of $30,000. Additionally, cash used in operations was reduced by the decrease in net assets attributable to discontinued operations of $900,000. Cash used in investing activities was $349,000 for the year ended December 31, 2003, compared to $753,000 for the previous year. This was principally expenditures for property and equipment in 2003, compared to $418,000 expended for property and equipment in 2002. Additionally, in 2002, we made advances to and investments in Voyant Corporation of $674,000 and realized proceeds from the sale of NetWolves Corporation common stock of $377,000. Cash from financing activities totaled $2,248,000 for the year ended December 31, 2003, compared to $2,769,000 in the prior year. We received net proceeds from the sale of Series C Preferred stock of $530,000, net proceeds from the sales of Series A Preferred of $235,000 and the collection of the Series A Preferred stock subscription of $492,000. In addition, we borrowed $750,000 under two lines of credit from two banks as detailed in Note 9 to the Consolidated Financial Statements. We also received a loan from Tall Oaks of $500,000 less expenses of $4,000. This loan was exchanged for Series B Preferred stock as discussed above. We also repaid $142,000 of long-term debt and capital lease obligations in 2003. Advances from a bank for receivables financing decrease by $105,000 in 2003 primarily the result of obtaining working capital from other sources as discussed here. In addition, we paid $30,000 for dividends on the Preferred Series B shares. The proceeds of these new financings were used for working capital. Management's Liquidity and Financing Plans In order to meet our cash needs and to achieve positive operating cash flows we have and will continue to take various actions and steps that we believe will enable us to attain these goals. These actions include: 13 -- In the second half of 2003 we embarked on a major cost reduction program, including among other things, staff reductions, pay rate reductions, and elimination of non-essential expenses. We believe that this will reduce our operating costs in excess of $1.6 million on an annual basis. We believe these cost reductions have already begun to have a positive impact on our operating performance. We note that it is our intent to reinstate the pay rate reductions as soon as practical and our operating results and cash flows permit -- As discussed above in December 2003 we closed the operations of our Platinum subsidiary. Platinum had experienced losses and had significant cash needs. We estimate that this action will reduce our operating costs in excess of $1,200,000 annually. -- We intend to raise additional capital through private equity offerings and borrowing. In this regard in December 2003, as discussed above, we initiated the sale of Series C Preferred stock and as of December 31, 2003 had net proceeds from these sales of $530,000. Subsequent to December 31, 2003 and through March 15, 2004 we received an additional $760,000 from sales of this issue. There can be no assurance, however, that we will be able to raise additional capital through equity sales and/or borrowing. -- We continue to strive to increase our revenue through offering custom engineering services, expanding and enhancing our existing product offerings such as IOL, and introducing new product offerings. In 2003 our revenues from continuing operations increased $827,000 or 12.5% over revenues in 2002. For the first quarter 2004 we anticipate that our revenue from continuing operations will exceed revenue for the same period in 2003 by more than 10%. -- We continue to expand our marketing efforts in order to increase our customer base. In this regard, in 2003, we became a business partner with IBM and through this relationship will work with IBM to achieve sales to new customers. We will continue to pursue similar channel partner opportunities. We believe that our plans and new initiatives as discussed above will lead to positive cash flows and profitability. While we pursue these goals we also believe that our ability to raise additional capital through equity and debt placements will provide sufficient cash to meet our requirements at least through December 31, 2004. There can be no assurance, however, that we will achieve our cash flow and profitability goals, or that we will be able to raise additional capital sufficient to meet our operating expenses or implement our plan. In such event, we may have to revise our plans and significantly reduce our operating expenses, which could have an adverse effect on revenue and operations in the short term. Results of Operations IBM continues to be our largest customer accounting for 97% of total revenue for the year ended December 31, 2003, as compared to 98% for the year ended December 31, 2002. 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 an agreement with IBM wherein for a per transaction fee, we enable IBM to present invoices to a portion of its customers via the Internet. Our Invoicing On Line is an electronic invoice presentment and payment system ("EIP&P") offering and has been expanded to include additional functionality. In March 2002, the parties signed a new agreement, which allows IBM to expand this EIP&P offering to more of its customers, both domestic and international. In addition, the Company continues to provide data analysis and reporting services for IBM's telecommunications customers. We are actively pursuing new sales opportunities to reduce sales concentration. For the year ended December 31, 2003 revenue from continuing operations increased by $827,000 or 12.5% to $7,439,000 compared to revenue from continuing operations of $6,612,000 in 2002. The increase is primarily due to an increase in ongoing ASP services, particularly of $1,043,000 off set by a slight decrease in custom engineering fees of $216,000. The increase in revenue from ASP 14 services was the result of implementing new ASP services and an increase in continuing IOL services. In 2003 we expanded the IOL service into eight countries in Europe and Brazil. We believe that this service will be deployed in additional countries in Europe, the Middle East and the Pacific Rim in 2004. We also implemented the ASP service, Customer Presentable Invoice ("CPI"), in the United States in 2003. We expect this product to be deployed into additional countries in 2004. The decrease in engineering fees resulted from completing certain engineering projects that resulted in the increase in ASP services. We expect that new projects begun in late 2003 and new projects in 2004 will lead to an increase in custom engineering revenue in 2004 and additional increases in ASP services. Costs of operations, research and development increased by $409,000 (10.4%) to $4,328,000 for the year ended December 31, 2003 compared to the costs in 2002. These costs consist principally of salaries and related expenses for software developers, programmers, custom engineers, network services, and quality control and assurance. Also included are network costs, costs of the production co-location facility and other expenses directly related to our custom engineering and ASP production services. The increase in costs is principally due to increases in staffing costs of $440,000 offset by reductions in costs for software and supplies of $40,000. All other operating expenses increased approximately $9,000 net. Sales and marketing costs were $2,222,000 for the year ended December 31, 2003, an increase of $174,000 or 8.5% over the same costs in 2002. Salaries increased by $561,000 primarily due to the reassignment of personnel from the administrative area and the employment of personnel that were previously engaged as consultants. This increase is offset by a decrease in consulting fees of $318,000, travel expenses of $65,000 and other sales expenses of $4,000 net. General and administrative costs decreased $416,000 or 11.2% to $3,285,000 for the year ended December 31, 2003 compared to costs of $3,701,000 in 2002. Salaries and related costs decreased $93,000 principally due to a decrease of $322,000 as a result of the reassignment of personnel to sales and marketing, offset by an increase of $275,000 due to the full-time engagement of the Chief Executive Officer and other staff additions. Group benefits and other personnel related costs decreased in the net amount of $46,000. Other reductions in administrative costs included $395,000 resulting from the reduction in consulting and professional fees, $146,000 in costs related to the Board of Directors, and reductions in travel expenses of $208,000. This was offset by increases in rent of $141,000, and relocation expenses of $63,000 all principally related to the hiring of new employees. Legal fees increased $165,000 primarily due to services related to financial reporting and employee related matters. All other general and administrative costs had a net increase of $57,000. Depreciation and amortization expense decreased by $103,000 (13%) primarily due to fully amortizing certain software costs and other computer equipment. Interest expense increased by $89,000 due to the increase in borrowings under two new lines of credit and an increase in borrowings through the assignment of accounts receivable under the agreement with a bank. We also received a refund of federal taxes of $108,000 in 2003. Net Operating Loss Carry Forwards - --------------------------------- At December 31, 2003, the Company has net operating loss carryforwards ("NOLs") remaining of approximately $77 million, which may be available to reduce taxable income, if any. These NOLs expire through 2023. However, Internal Revenue Code Section 382 rules limit the utilization of NOLs upon a change in control of a company. The Company has not completed a recent evaluation of whether a change in control has taken place. If it is determined that a change in control has taken place, utilization of its NOLs will be subject to severe limitations in future periods, which would have the effect of eliminating substantially all of the future income tax benefits of the NOLs. 15 New Accounting Pronouncements - ----------------------------- In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities", an Interpretation of ARB No. 51. FIN 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is any legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. However, in December 2003, FASB deferred the latest date by which all public entities, which meet the definition of small business issuer under SEC Regulation S-B, must apply FIN 46 to the first interim or annual reporting period ended after December 15, 2004. The effect of the adoption of this new accounting pronouncement is not expected to have a significant impact on our consolidated financial statements. . In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which establishes standards for how an entity that issues financial instruments (or may be required under the terms of a financial instrument to issue its equity shares) classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. The adoption of SFAS No. 150 did not have a material effect on our consolidated financial statements. Item 7. FINANCIAL STATEMENTS - ---------------------------- The financial statements are included beginning on page F-1 Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS - ----------------------------------------------------- ON ACCOUNTNG AND FINANCIAL DISCLOSURE ------------------------------------- None. Item 8A. CONTROLS AND PROCEDURES 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. 16 PART III Item 9. DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS; - -------------------------------------------------------------------- COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ------------------------------------------------- As of March 31, 2004, the names, ages and positions of the directors and executive officers of the Company are as follows:
Name Age Position Committee Member - -------------------- --- -------- ---------------- James A Cannavino 59 Chairman of the Board of Directors and Chief Executive Officer Bernard Puckett (1) 59 Member of the Board of Directors Audit, Compensation Dennis Murray 58 Member of the Board of Directors Audit, Compensation Carla Steckline 47 Member of the Board of Directors Audit, Compensation Peter Yunich 57 Member of the Board of Directors Robert Carberry 61 President George Aronson (2) 55 Secretary Michael J. Beecher (2) 59 Chief Financial Officer ________ (1) Mr. Puckett was appointed to the Board of Directors in February 2003, succeeding Mr. Charles Feld who had previously resigned to assume new responsibilities at EDS (2) Mr. Aronson served as Chief Financial Officer until December 2003, at which time Mr. Beecher was appointed Chief Financial Officer
James A. Cannavino has been our Chairman of the Board and a director since March 2000, and Chief Executive Officer since December 2002. From September of 1997 to April of 2000 he was the non-executive Chairman of Softworks, Inc (a then wholly owned subsidiary of the Company), which went public and was later sold to EMC. Mr. Cannavino was also the Chief Executive Officer and Chairman of the Board of Directors of CyberSafe, Inc., a corporation specializing in network security from April 1998 to July 2001. In August, 1995, he was appointed as President and Chief Operating Officer of Perot Systems Corporation and in 1996 was elected to serve as Chief Executive Officer through July 1997. During his tenure at Perot he was responsible for all the day-to-day global operations of the company, as well as for strategy and organization. Prior to that he served as a Senior Vice President at IBM, responsible for strategy and development. Mr. Cannavino held various positions at IBM for over thirty years beginning in 1963. Mr. Cannavino led IBM's restructuring of its $7 billion PC business to form the IBM PC Company. He also served on the IBM Corporate Executive Committee and Worldwide Management Council, and on the board of IBM's integrated services and solutions company. Mr. Cannavino presently serves on the Boards of the National Center for Missing and Exploited Children, the International Center for Missing and Exploited Children, and Verio. He recently was Chairman of the Board of Marist College in Poughkeepsie, New York and continues to serve on the board. Mr. Cannavino will serve on the Board until his successor is elected. Bernard Puckett is Chairman of the Board of Openwave Systems, Inc., a leading provider of open IP-based communication infrastructure software and applications. Mr. Puckett was formerly the President and Chief Executive Officer of Mobile Telecommunications Technology Corp. ("Mtel"). Prior to joining Mtel, Mr. Puckett spent 26 years with IBM where he was Senior Vice-president - Corporate Strategy and Development. He also held positions in marketing, finance, product development, manufacturing and new business development during his tenure at IBM. He also serves on the board of directors of IMS Health (NYSE:RX). Mr. Puckett was appointed to our Board of Directors in February 2004 and will serve in such capacity until his successor is elected. 17 Dr. Dennis J. Murray has been President of Marist College since 1979. Early in his tenure, he identified the importance of technology in higher education and made it one of the central themes of his administration. He developed an innovative joint study with the IBM Corporation, which resulted in Marist becoming one of the nations most technologically advanced liberal arts colleges. Marist was one of the first colleges or universities in the country to have a fully networked campus, and currently operates on an IBM e-server zSeries 900 processor with a z/OS operating system. Dr. Murray has been a strong supporter of the Linux operating system and recently initiated a Linux Research and Development Center at Marist. Dr. Murray serves on the boards of the Franklin and Eleanor Roosevelt Institute, McCann Foundation, and the New York State Greenway Conservancy, which oversees the Hudson River Valley National Heritage Area. He is also the author of two books on nonprofit management, editor of three books on government and public affairs, and co-author of a guide to corporate-sponsored university research in biotechnology. Dr. Murray has been a member of the Board of Directors since March 2000, and will serve in such capacity until his successor is elected. Carla J. Steckline was the Attorney General for the State of Kansas frpom 1994 through January 2003.. Attorney General Stovall also served as Vice President of the National Association of Attorneys General. She is also a member of the Board of Directors of the American Legacy Foundation, the national Center for Missing and Exploited Children, the National Crime Prevention Council and the Council of State Governments. In addition, she is a member of the Board of Governors of the University of Kansas School of Law and a member of the Kansas Children's Cabinet. Attorney General Stovall recently was honored with the Distinguished Service to Kansas' Children Award. Ms. Stovall has been a member of the Board of Directors since April 2000, and will serve in such capacity until her successor is elected. Peter Yunich currently serves as Managing Partner of Metropolitan Venture Partners, a private equity investor affiliated with the Man Group, the world's largest hedge fund and a FTSE 100 component. Immediately prior to joining Metropolitan, Peter founded and served as the CEO of Globalgate.com, Inc., a technology company that developed and delivered innovative e-commerce solutions. Beginning in 1999, Globalgate acquired majority interest in four companies as well as funded two others including Yellowpages.com, the premiere on-line business directory, ThinkAgent Technologies and Annuncio, Inc. Before Globalgate, Peter served in senior management positions in diverse information technology, media and marketing companies. Peter was Senior Vice President and Chief Information Officer of Simon & Schuster, Inc. prior to assuming the position of President of Simon & Schuster Interactive, the electronic publishing arm of the than $4.3 billion publishing division of Viacom International. During his career, Mr. Yunich has also served as President and CEO of Global Transaction Services Company, a joint venture between AT&T and the Telerate division of Dow Jones & Company, prior to which he was an Executive Director of AT&T Corporation. On behalf of AT&T, Peter led the team responsible for identifying and negotiating strategic business relationships, acquisitions and mergers.Prior to AT&T, Peter served in senior executive positions specializing in marketing and new business development with such noted companies as Bristol-Meyers/Squibb, Doubleday & Co. and the Charter Company. Mr. Yunich earned an MBA Degree from the Harvard University Graduate School of Business in 1970, and a Bachelor of Arts in Classical Languages from Brown University. Mr. Yunich serves on the board of System Detection, Inc. Mr. Yunich was appointed to the Board of Directors in September 2000 and will serve until his successor is elected. Robert Carberry was appointed President of the Company in December 2002. Mr. Carberry was a consultant to the Company since March 2000 focusing on business development, wordwide deployment and functional enhancement of our product lines. Prior to Direct Insite, Mr. Carberry was an Executive Vice-President of Research &Development and Business Development, CyberSafe Corporation where he was responsible for defining corporate strategy, and for business development/corporate development and R&D functions. Prior to Cybersafe, Mr. Carberry was Vice-President - Technology for Viacom/Blockbuster; and the responsible executive for Blockbuster/Viacom Holdings - a Blockbuster Venture Capital group where he managed of all Blockbuster's advanced technology/business development activities including: NewLeaf - a Blockbuster/IBM joint venture for development and deployment of interactive media distribution, Fairway, an IBM Blockbuster joint venture for marketing interactive on demand media to commercial and residential customers. He was also 18 the executive responsible for a portfolio of Blockbuster corporate technology investments in various new media companies. Prior to Viacom, Mr. Carberry served in several capacities over a twenty year career at IBM where most recently he served as President, IBM Technology Venture Fund - where he was responsible for IBM starting or acquiring 24 companies in the new media application and broadband distribution fields. Prior to that, he held several senior executive positions including Vice-President - Business Operations for the IBM Personal Computer Group where he was responsible for all business strategy, development, and distribution operations/agreements, Vice-President Development for IBM Personal Computer Group - where he was responsible for product line development including the IBM PC, AT, and PS-2 product groups. Mr. Carberry was Director of Engineering and Scientific Computing - IBM Large Systems, a division where he was responsible for the IBM Kingston Laboratory and the definition and implementation of the entry of IBM into the super computer product area. As Director of Large Systems for IBM Data Systems Division, he led the development of all IBM large systems products: 3033, 3090 and successor product lines that contributed more than $25B in IBM revenues. George Aronson, CPA, was the Chief Financial Officer of the Company from August, 1995 until December 2003. Mr. Aronson continues as the Company's corporate Secretary. Prior to joining the Company he was the Chief Financial Officer of Hayim & Co., an importer/distribution organization from March 1989 to August 1995. Mr. Aronson graduated from Long Island University with a major in accounting in 1972 receiving a Bachelor of Science degree and is a Certified Public Accountant in the state of New York. He is also a member of the AICPA. Michael J. Beecher, CPA, joined the Company as Chief Financial Officer in December 2003 to succeed Mr. Aronson. Prior to joining Direct Insite Mr. Beecher was Chief Financial Officer and Treasurer of FiberCore, Inc., a publicly held company in the fiber-optics industry. From 1989 to 1995 he was Vice-President Administration and Finance at the University of Bridgeport. Mr. Beecher began his career in public accounting with Haskins & Sells, an international public accounting firm. He is a graduate of the University of Connecticut, a Certified Public Accountant and a member of the American Institute of Certified Public Accountants. Item 10. EXECUTIVE COMPENSATION - -------------------------------- The following table sets forth the annual and long-term compensation with respect to the Chief Executive Officer and each of the other executive officers of the Company who received more than $100,000 for services rendered for the year ended December 31, 2003.
Summary Compensation Table Annual Compensation Long-Term Compensation -------------------------------- ---------------------------------- Securities Name and Fiscal Other Annual Restricted Underlying Principal Position Year Salary Bonus Compensation Stock Awards Options/Warrants - ------------------------------------------------------------------------------------------------------------ James A. Cannavino (1) 2003 $156,000 $ -- $ -- $ 54,000 708,000 Chief Executive Officer 2002 -- -- -- 210,000 314,000 2001 -- -- -- -- -- Robert Carberry (2) 2003 $177,000 $ -- $ -- $ -- 203,000 President 2002 78,000 -- 72,000 139,000 57,500 2001 -- -- 114,000 Warren Wright (3), (7) 2003 $151,000 $ 9,000 $ 33,000 $ -- 28,000 Chief Executive Officer 2002 154,000 -- 33,000 -- 170,000 /V.P. of Marketing 2001 184,000 -- 3,000 25,000 25,000 Anthony Coppola (4), (7) 2003 $157,000 $ 4,000 $26,000 -- 3,000 President/V.P. Program 2002 166,000 50,000 -- -- 137,500 Management 2001 181,000 37,000 -- 50,000 15,000 Arnold Leap (5), (7) 2003 $158,000 $ 26,000$ -- $ -- 103,000 Chief Technology Officer 2002 161,000 20,000 -- -- 113,500 George Aronson (6) 2003 $157,000 $ 3,000 $ -- $ -- 13,000 Chief Financial Officer 2002 165,000 -- -- -- 110,000 and Secretary 2001 166,000 -- -- -- 15,000 19 Footnotes - --------- (1) Mr. Cannavino was appointed CEO December 7, 2002. Pursuant to his January 2002 two-year services agreement, Mr. Cannavino received 180,000 shares of common stock valued at $180,000. In addition, Mr. Cannavino received 17,650 shares of common stock valued at $30,000 in connection with his duties as Chairman of the Board of Directors. Pursuant to his January 2003 employment agreement, Mr. Cannavino received 45,000 shares of common stock valued at $54,000. (2) Mr. Carberry was appointed President in December 2002. During 2002, Mr. Carberry received 111,665 shares valued at $139,000 in lieu of cash for services rendered. (3) Mr. Wright served as CEO from November 30, 2000 to December 7, 2002. (4) Mr. Coppola served as President from March 2000 to December 2002. During 2002, the Company paid a $50,000 sales commission earned by a sales consulting firm that is wholly owned by Mr. Coppola. In 2003 the Company paid $26,000 for services rendered by this same consulting firm. Mr. Coppola also earned a $4,000 cash performance bonus in 2003. (5) Mr. Leap earned cash performance bonuses totaling $26,000 and $20,000 for years 2003 and 2002, respectively. (6) Mr. Aronson earned a cash performance bonus of $3,000 in 2003. Mr. Aronson served as Chief Financial Officer until December 2003. (7) We granted stock bonus' in 2001 to Messrs. Wright, Coppola, and Leap in the amounts of $25,000, $50,000, and $17,000, respectively. Mr. Coppola also received a cash bonus of $37,000 in 2001.
Option/SAR Grants in Last Fiscal Year - ------------------------------------- During 2003 the following options grants were made to the named executive officers:
% of Total Options Number of Granted Hypothetical Options Employees Exercise Expiration Value at Name Granted in Fiscal Year Price Date Grant Date - ---- -------- -------------- -------- ---------- ----------- James Cannavino 240,000 10.3% $ 2.00 07/31/07 $288,000 108,000 4.6% 1.26 04/01/06 62,000 360,000 15.5% 1.16 08/31/08 184,000 Warren Wright 25,000 1.1% 0.75 12/31/08 11,000 3,000 0.1% 1.26 04/01/06 2,000 Robert Carberry 200,000 8.6% 1.16 07/31/08 125,000 3,000 0.1% 1.26 04/01/06 2,000 Anthony Coppola 3,000 0.1% 1.26 04/01/06 2,000 George Aronson 10,000 0.4% 0.75 12/31/08 5,000 3,000 0.1% 1.26 04/01/06 2,000 Arnold Leap 100,000 4.3% 1.20 04/30/08 75,000 3,000 0.1% 1.26 04/01/06 2,000
20 The hypothetical value of the options as of their date of grant has been calculated using the Black- Scholes option-pricing model, as permitted by SEC rules, based upon various assumptions, which include: expected volatility of 67.7%, risk free interest rate of 4.8% and expected lives of 5.00 years. The approach used in developing the assumptions upon which the Black-Scholes valuations were calculated is consistent with the requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation." It should be noted that this model is only one method of valuing options, and the Company's use of the model should not be interpreted as an endorsement of its accuracy. The actual value of the options may be significantly different, and the value actually realized, if any, will depend upon the excess of the market value of the common stock over the option exercise price at the time of exercise. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option - -------------------------------------------------------------------------------- Values - ------ The following table set forth certain information with respect to stock option exercises by the named executive officers during the fiscal year ended December 31, 2003, and the value of unexercised options held by them at fiscal year-end.
Number of Unexercised Options at Value of Unexercised In-the-Money Fiscal Year End Options at Fiscal Year End (1) Shares Acquired Name On Exercise (#) Value Realized ($) Exercisable Unexercisable Exercisable Unexercisable ---- --------------- ------------------ ----------- ------------- ----------- ------------- James Cannavino -- -- 648,000 444,333 $ -- -- Warren Wright -- -- 166,333 56,667 6,000 -- Robert Carberry -- -- 222,167 38,333 -- -- Anthony Coppola -- -- 133,100 30,000 -- -- George Aronson -- -- 113,000 31,667 3,000 -- Arnold Leap -- -- 106,500 134,000 -- -- Footnotes - --------- (1) Market Value of the Company's common stock on December 31, 2003, was $1.00. There were 9,000 in-the-money options at year end, valued at $4,000.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND - -------------------------------------------------------------------------------- RELATED STOCKHOLDER MATTERS --------------------------- The following table sets forth the beneficial ownership of shares of voting stock of the Company, as of March 31, 2004 of (i) each person known by the Company to beneficially own 5% or more of the shares of outstanding common stock, based solely on filings with the Securities and Exchange Commission, (ii) each of the Company's executive officers and directors and (iii) all of the Company's executive officers and directors as a group. Except as otherwise indicated, all shares are beneficially owned, and the persons named as owners hold investment and voting power.
Common Stock Rights to Acquire Total Beneficially Beneficially Beneficial Ownership Through Owned as % of Name of Beneficial Owner (1) Owned Exercise of Options Within 60 Days Outstanding Shares (2) - ------------------------------------------------------------------------------------------------------- Metropolitan Venture Partners II, L.P. (3) -- 1,346,800 24.2% James Cannavino 503,632 677,666 24.1 Bernard Puckett -- 6,940 * Dennis Murray 108,367 38,344 3.4 Carla Steckline 55,605 36,667 2.2 Peter Yunich (3) 16,297 103,000 2.8 Warren Wright 61,191 194,667 5.8 Anthony Coppola 81,113 131,100 4.9 George Aronson 16,200 128,834 3.3 Robert Carberry 197,665 241,333 9.8 Michael Beecher -- 12,500 * All Officers and Directors as a Group (10 persons) 1,040,070 1,571,051 45.0% _______ * = Less than 1% 21 Footnotes - --------- (1) The address of the holder is 80 Orville Drive, Suite 200, Bohemia, New York 11716, except for Metropolitan Venture Partners II, L.P. which is 257 Park Avenue South, 15th Floor, New York, NY 10010. (2) Based upon 4,227,984 common shares outstanding as of March 31, 2004, plus outstanding options exercisable within 60 days and Series A Stock convertible into common shares owned by above named parties. (3) Mr. Peter Yunich, one of our directors and the managing Partner of Metropolitan, disclaims beneficial ownership of the shares owned by Metropolitan.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- 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. -- In 2003, the Company incurred $102,000 of consulting expenses with SJ. The consulting expense was paid in cash. -- In 2003, the Company reduced its obligation to SJ relating to the restructure plan by $60,000. The amount was paid in cash. -- 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 09) and $309,000 in cash. Item 13. EXHIBITS AND REPORTS ON FORM 8-K - ------------------------------------------ 13. (a) - EXHIBITS - ------------------- 3.1 (a) Certificate of Incorporation, as amended. (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1) (b) Certificate of Amendment (Change in Name) (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1) (c) Certificate of Amendment (Change in Name) (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1) (d) Certificate of Amendment (Authorizing Increase in Shares of Common Stock) (Incorporated by reference to Exhibit 3 (i) (d) to Form 10-K for the year ended 1995). (e) Certificate of Amendment (Authorizing one for ten reverse-stock split as of March 30, 1998). (1) 22 (f) Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed October 3, 2002 (Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated September 25, 2002). (g) Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed December 20, 2002 (Incorporated by reference to Exhibit 3.2 of Company's Current Report on Form 8-K dated December 24, 2002). (h) Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock filed January 2, 2003 (Incorporated by reference to Exhibit 3.3 of Company's Current Report on Form 8-K dated January 2, 2003). (i) Certificate of Designation, Preferences and Rights of Series B Redeemable Preferred Stock filed December 10, 2003 (j) Certificate of Designation, Preferences and Rights of Series C redeemable Preferred Stock filed December 16, 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. (2) 10.9 Lease Extension Agreement between Atrium Executive Center and the Company (Incorporated by reference to Exhibit 10 (g) (ii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.10Offer 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). 23 10.11Indemnification 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. (2) 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.(2) 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. (2) 10.24 Form of Subscription Agreement for Series C Redeemable Preferred Stock. 10.25Employment and Consulting Agreement between the Company and Robert L. Carberry (Incorporated by reference to Exhibit 10.2 of registrant's Current Report on Form 8-K dated December 5, 2003). 23(a) Consent of Marcum & Kliegman, LLP. 24 31.0 Certification of Officers 32.0 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 __________ (1)Filed with Form S-1, Registration Statement of the Company Reg. No 3-47322 and are incorporated herein by reference. (2)Incorporated by reference to the Company's Annual Report on Form-10K filed April 15, 2003. 13. (b). - REPORTS ON FORM 8-K - ------------------------------- Form 8-K filed December 10, 2003 disclosing the extension of the Services Agreement with James A. Cannavino, Chief Executive Officer and disclosure of the terms of the Employment Agreement with Robert L. Carberry, President. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES - ------------------------------------------------ The following is a summary of the fees billed to us by Marcum & Kliegman, LLP, our independent auditors, for professional services rendered for the fiscal years ended December 31, 2003 and 2002:
Description 2003 2002 ----------- ---- ---- Audit Fees(1) $ 126,850 $ 166,345 Audit-Related Fees (2) 3,500 - Tax Fees (3) 41,305 32,420 --------- --------- Total Fees $ 171,655 $ 198,765 ========= ========= Our Audit Committee has determined that the provision of services by Marcum & Kliegman LLP other than for audit related services is compatible with maintaining the independence of Marcum & Kliegman as our independent accountants. ______________ (1) Audit Fees consist of aggregate fees billed for professional services rendered for the audit of our annual financial statements and review of the interim financial statements included in quarterly reports or services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2003 and 2002. (2) Audit related fees consist of fees billed for professional services in conjunction with the review of issuance of preferred shares. (3) Tax Fees consist of the aggregate fees billed for professional services rendered for tax compliance, tax advice, and tax planning, including fees related to the preparation of federal and state income tax returns.
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 2004. 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, 2004 the following persons in the capacities indicated: /s/ James A. Cannavino Chairman of the Board James A. Cannavino Chief Executive Officer /s/ Michael J. Beecher Chief Financial Officer Michael J. Beecher _______________________ Director Bernard Puckett /s/ Dennis J. Murray Director Dennis J. Murray /s/ Carla J. Steckline Director Carla J. Steckline /s/ Peter Yunich Director Peter Yunich 26 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2003 and 2002 DIRECT INSITE CORP. AND SUBSIDIARIES CONTENTS Page ---- INDEPENDENT AUDITORS' REPORT F-1 FINANCIAL STATEMENTS Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-4 Consolidated Statement of Shareholders' (Deficiency) Equity F-5 Consolidated Statements of Cash Flows F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-30 INDEPENDENT AUDITORS' REPORT To the Audit Committee of the 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, 2003 and 2002, and the related consolidated statements of operations, shareholders' (deficiency) equity and cash flows for the years then ended. 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, 2003 and 2002, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Marcum & Kliegman LLP April 8, 2004 New York, New York DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2003 and 2002 ASSETS
2003 2002 ---------------- ----------------- CURRENT ASSETS Cash and cash equivalents $ 75 $ 620 Stock subscription receivable -- 500 Accounts receivable, net of allowance for doubtful accounts of $2 in 2003 and 2002 1,068 1,131 Prepaid expenses and other current assets 215 239 Assets from discontinued operations 47 300 ---------- ---------- Total Current Assets 1,405 2,790 PROPERTY AND EQUIPMENT, NET 771 1,070 OTHER ASSETS 335 430 ASSETS FROM DISCONTINUED OPERATIONS -- 601 ---------- ---------- TOTAL ASSETS $2,511 $4,891 ========== ========== 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)
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY 2003 2002 ---------------- ------------------ CURRENT LIABILITIES Current portion of long-term debt $ 880 $ 249 Due to Bank 585 690 Accounts payable and accrued expenses 2,248 1,440 Restructuring costs payable, current portion -- 6 Deferred revenue 96 - Liabilities from discontinued operations, current portion 581 622 ------------ ------------ Total Current Liabilities 4,390 3,007 OTHER LIABILITIES Long-term debt, net of current portion 42 556 Dividends payable 382 56 Restructuring costs payable, long-term -- 60 Liabilities from discontinued operations, long-term 87 -- ------------ ------------ TOTAL LIABILITIES 4,901 3,679 ------------ ------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS'(DEFICIENCY) EQUITY Preferred stock, $0.0001 par value; 2,000,000 shares authorized; Series A Convertible Preferred, 134,680 and 116,823 issued and outstanding in 2003 and 2002, respectively; liquidation preference of $2,750,000 and $2,500,000 in 2003 and 2002, -- -- respectively; Series B Redeemable Preferred, 974 issued and outstanding in -- -- 2003; liquidation preference of $974,075 in 2003 Series C Redeemable Preferred, 590 issued and outstanding in -- -- 2003; liquidation preference of $590,000 in 2003 Common stock, $.0001 par value; 150,000,000 shares authorized; 4,080,402 and 3,966,055 shares issued in 2003 and 2002, respectively; and 4,040,475 and 3,926,128 shares outstanding in 2003 and 2002, respectively -- -- Additional paid-in capital 110,582 108,708 Accumulated deficit (112,644) (107,081) Stock subscription receivable -- (62) Accumulated other comprehensive loss -- (25) ------------ ------------ (2,062) 1,540 Common stock in treasury, at cost; 24,371 shares in 2003 and 2002 (328) (328) ------------ ------------ TOTAL SHAREHOLDERS' (DEFICIENCY) EQUITY (2,390) 1,212 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY $ 2,511 $ 4,891 ============ ============ 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, 2003 and 2002
2003 2002 -------------- -------------- REVENUES $ 7,439 $ 6,612 ------------ ----------- COSTS AND EXPENSES Operations, research and development 4,328 3,919 Sales and marketing 2,222 2,048 General and administrative 3,285 3,701 Amortization and depreciation 688 791 ------------ ----------- TOTAL OPERATING EXPENSES 10,523 10,459 ------------ ----------- OPERATING LOSS (3,084) (3,847) OTHER INCOME (EXPENSE) Equity in loss of Voyant and Valuation Adjustment -- (1,330) Loss on sales of NetWolves common stock -- (375) Other-than-temporary decline in Investment in NetWolves -- (457) Interest expense, net (287) (198) (7) 93 ------------ ----------- OTHER (EXPENSE) INCOME LOSS BEFORE BENEFIT FROM INCOME TAXES (3,378) (6,114) BENEFIT FROM INCOME TAXES 108 -- ------------ ----------- LOSS FROM CONTINUING OPERATIONS (3,270) (6,114) LOSS FROM DISCONTINUED OPERATIONS (1,912) (797) ------------ ----------- NET LOSS (5,182) (6,911) PREFERRED STOCK DIVIDENDS (356) (56) ------------ ----------- NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (5,538) $ (6,967) ============ =========== BASIC AND DILUTED LOSS PER SHARE: Loss from continuing operations attributable to common shareholders $(0.91) $(1.69) Loss from discontinued operations (0.48) (0.22) ------------ ----------- Net loss attributable to common shareholders $(1.39) $(1.91) ============ =========== BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,974 3,643 ============ =========== The accompanying notes are an integral part of these consolidated financial statements.
F-4 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS'(DEFICIENCY) EQUITY For the Years Ended December 31, 2003 and 2002 (in thousands)
Accumu- Stock lated Subscrip- Other Compre- Additional tion Accumu- Compre- hensive Preferred Stock Common Stock Paid-in Receiv- lated hensive Treasury Income Shares Amount Shares Amount Capital able Deficit Loss Stock Total (Loss) ------ ------ ------ ------ ---------- --------- ------- ---------- ------- ----- ------- BALANCE - January 1, 2002 2002 -- $ -- 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 restructuring liabilities -- -- 40 -- 50 -- -- -- -- 50 Dividends declared, preferred Stock -- -- -- -- -- -- (56) -- -- (56) Net loss -- -- -- -- -- -- (6,911) -- -- $(6,911)(6,911) ----- ----- ----- ----- -------- ------ --------- ------ ----- ------- ------ Total Comprehensive Loss $(6,911) ======= BALANCE - December 31, 2002 117 $ -- 3,926 -- $108,708 (62) $(107,081) $ (25) (328) $1,212 ===== ===== ===== ===== ======== ====== ========= ====== ===== ======= The accompanying notes are an integral part of these consolidated financial statements.
F-5 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIENCY) EQUITY, Continued For the Years Ended December 31, 2003 and 2002 (in thousands)
Accumu- Stock lated Preferred Stock Subscrip- Other Compre- Common Addt'l tion Accumu- Compre- hensive Series A Series B Series C Stock Paid-in Receiv- lated hensive Treasury Income Shs. Amt. Shs. Amt. Shs. Amt. Shs. Amt. Capital able Deficit Loss Stock Total (Loss) --------------------------------------------------------------------------------------------------------- BALANCE - December 31, 117 $-- -- $ -- -- $-- 3,926 $ -- $108,708 $(62) $(107,081) $(25) $(328) $1,212 $ -- 2002 Common stock and options issued for services -- -- -- -- -- -- 114 -- 135 -- -- -- -- 135 -- Payment of stock subscription receivable -- -- -- -- -- -- -- -- -- 62 -- -- -- 62 -- Preferred stock issued for cash, net fees of $15 18 -- -- -- -- -- -- -- 235 -- -- -- -- 235 -- Conversion of long-term debt to preferred stock -- -- 1 -- -- -- -- -- 974 -- -- -- -- 974 -- Preferred stock issued for cash, net of fees of $60 -- -- -- -- 1 -- -- -- 530 -- -- -- -- 530 -- Dividends declared, preferred stock -- -- -- -- -- -- -- -- -- -- (356) -- -- (356) -- Other comprehensive loss -- -- -- -- -- -- -- -- -- -- (25) 25 -- -- 25 Net loss -- -- -- -- -- -- -- -- -- -- (5,182) -- -- (5,182) (5,182) --- ---- --- --- --- --- ------ --- -------- ---- -------- ---- ------ -------- ------ Total Comprehensive Loss $(5,157) BALANCE - December 31, ======= 2003 135 $ -- $1 $-- $1 $-- $4,040 $-- $110,582 $ -- $(112,644)$ -- $(328) $(2,390) === ==== === === === === ====== === ======== ==== ========= ==== ====== ======== The accompanying notes are an integral part of these consolidated financial statements.
F-6 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2003 and 2002
2003 2002 ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES Loss from continuing operations $ (3,270) $ (6,114) Adjustments to reconcile loss from continuing operations to net cash used in continuing operations: Amortization and depreciation: Property and equipment 686 788 Other 2 3 Provision for doubtful accounts -- 2 Common stock and options issued for services 135 1,018 Equity in Loss of Voyant and Valuation Adjustment -- 1,330 Loss on sale and other-than-temporary decline in investment in NetWolves Corporation -- 832 Other 50 -- Changes in operating assets and liabilities: Accounts receivable 63 (203) Prepaid expenses and other current assets 24 854 Other assets 93 93 Accounts payable and accrued expenses 755 (428) Restructuring costs payable (66) (420) Deferred revenue 96 -- -------- -------- Net cash used in continuing operations (1,432) (2,245) -------- -------- Loss from discontinued operations (1,912) (797) Change in: Assets and liabilities from discontinued operations 900 306 -------- -------- Net cash used in discontinued operations (1,012) (491) -------- -------- NET CASH USED IN OPERATING ACTIVITIES (2,444) $ (2,736) -------- -------- The accompanying notes are an integral part of these consolidated financial statements.
F-7 DIRECT INSITE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued (in thousands) For the Years Ended December 31, 2003 and 2002
2003 2002 ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property and equipment $ (349) $ (418) Expenditures for property and equipment - discontinued operations -- (38) Advances to and investment in Voyant -- (674) Proceeds from the sale of NetWolves common stock -- 377 ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (349) (753) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from common stock and subscription receivable 22 588 Proceeds from sales of preferred stock 1,340 2,000 Consideration paid in connection with the sales of preferred and common stock (83) (107) Advances from Bank, net (105) 242 Proceeds from long-term debt, net of fees 496 250 Repayments of long-term debt - discontinued operations -- (97) Proceeds from line of credit 750 -- Payment of dividend (30) -- Repayments of long-term debt (142) (107) ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,248 2,769 ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (545) (720) CASH AND CASH EQUIVALENTS - Beginning 620 1,340 ----------- ----------- CASH AND CASH EQUIVALENTS - Ending $ 75 $ 620 =========== =========== The accompanying notes are an integral part of these consolidated financial statements.
F-8 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Nature of Business Direct Insite Corp. and subsidiaries (the "Company"), primarily operate as an application service provider ("ASP"), 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.bExpressTM, the proprietary and patented management information tool, which provides targeted access through the mining of large volumes of transactional data via the Internet. During 2001, the Company began providing custom engineering services to its customers. These 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 14. Also, as described in Note 17, the Company has one major customer that accounted for approximately 97% of the Company's revenue for each of the two years in the period ended December 31, 2003. Loss of this customer would have a material adverse effect on the Company. NOTE 2 - Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Direct Insite Corp. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Revenue Recognition The Company records revenue in accordance with Statement of Position 97-2 "Software Revenue Recognition", issued by the American Institute of Certified Public Accountants (as modified by Statement of Position 98-9) and SEC Staff Accounting Bulletin Topic 13 "Revenue Recognition in Financial Statements." In some circumstances, the Company enters into arrangements whereby it is obligated to deliver to its customer multiple products and/or services (multiple deliverables). In these transactions, in accordance with the Emerging Issues Task Force Issue No. 00-21, the Company allocates the total revenue to be earned among the various elements based on their relative fair values. The Company recognizes revenue related to the delivered products or services only if: -- Any undelivered products or services are not essential to the functionality of the delivered products or services; -- Payment for the delivered products or services is not contingent upon delivery of the remaining products or services; -- The Company has an enforceable claim to receive the amount due in the event it does not deliver the undelivered products or services and it is probable that such amount is collectible; -- There is evidence of the fair value for each of the undelivered products or services; F-9 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Significant Accounting Policies, continued -- Delivery of the delivered element represents the culmination of the earnings process. The following are the specific revenue recognition policies for each major category of revenue. ASP Services The Company provides transactional data processing services to its customers. Revenue is recognized as the services are performed. Custom Engineering Services The Company recognizes revenue for custom engineering services using the percentage of completion method. Progress is measured using the relative fair value of specifically identifiable output measures (milestones). Revenue is recognized when the customer accepts such milestones. Costs related to uncompleted milestones are deferred and included in other current assets, when applicable. Cost of Revenue Cost of revenue in the consolidated statements of operations is presented along with research and development costs and exclusive of amortization and depreciation shown separately. Property and Equipment Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the terms of the respective leases or the service lives of the related assets, whichever is shorter. Capitalized lease assets are amortized over the shorter of the lease term or the service life of the related assets. Software Costs Costs associated with the development of software products are generally capitalized once technological feasibility is established. Purchased software technologies are recorded at cost and software technologies acquired in purchase business transactions are recorded at their estimated fair value. Software costs are amortized using the greater of the ratio of current revenue to total projected revenue for a product or the straight-line method over its estimated useful life. Amortization of software costs begins when products become available for general customer release. Costs incurred prior to establishment of technological feasibility are expensed as incurred and are included in "operations, research and development" in the accompanying consolidated statements of operations, and amount to $2,640,000 and $3,230,000 for the years 2003 and 2002, respectively. Impairment of Long-Lived Assets The Company reviews its long-lived assets, including capitalized software costs and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine if impairment exists, the Company compares the estimated future undiscounted cash flows from the related long-lived assets to the net carrying amount of such assets. Once it has been determined that impairment exists, the carrying value of the asset is adjusted to fair value. Factors considered in the determination of fair value include current operating results, trends and the present value of estimated expected future cash flows. Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" became effective for the Company during 2002. The provisions of this statement that are applicable to the Company were implemented on a prospective basis as of January 1, 2002, and had no material effect on the Company's financial statements. F-10 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Significant Accounting Policies, continued Income Taxes The Company accounts for income taxes using the liability method. The liability method requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax bases of assets and liabilities, using enacted tax rates. Additionally, net deferred tax assets are adjusted by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Earnings per Share The Company displays earnings per share in accordance with SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires dual presentation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share include the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Outstanding stock options, warrants and other potential stock issuances have not been considered in the computation of diluted earnings per share amounts since the effect of their inclusion would be anti-dilutive. Securities that could potentially dilute basic earnings per share ("EPS") in the future, that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the periods presented, consist of the following (shares are in thousands):
2003 2002 ---- ---- Options to purchase common stock 4,442 2,259 Warrants to purchase common stock 631 -- Series A Convertible Preferred Stock 1,347 1,168 ----- ----- Total Potential Common Shares as of December 31, 2003 6,420 3,427 ===== ===== Issuances after December 31, 2003 through March 31, 2004 Common stock 188 Options to purchase common stock -- Warrants to purchase common stock 807 ----- 995 =====
Cash and Cash Equivalents The Company considers all investments with original maturities of three months or less to be cash equivalents. Allowance For Doubtful Accounts The allowance for doubtful accounts reflects management's best estimate of probable losses inherent in the account receivable balance. Management determines the allowance based on known troubled accounts, historical experience, and other currently available evidence. F-11 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Significant Accounting Policies, continued 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 loss in shareholders' (deficiency) 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, 2003 and 2002 was $4,000 and NONE, respectively. Reclassifications Certain reclassifications have been made to the consolidated financial statements shown for the prior year in order to have them conform to the current year's classifications. Concentrations and Fair Value of Financial Instruments Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. At December 31, 2003, the Company has cash investments of approximately $63,000 at one bank. Concentrations of credit risk with respect to accounts receivable are disclosed in Note 17. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. Unless otherwise disclosed, the fair value of financial instruments approximates their recorded value. Use of Estimates In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Disclosures that are particularly sensitive to estimation include management's plans, as disclosed in Note 14. Actual results could differ from those estimates. New Accounting Pronouncements In January 2003 and amended in December 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), an interpretation of Accounting Research Bulletin No. 51. FIN 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is any legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. However, in December 2003, FASB deferred the latest date by which all public entities, which meet the definition of small business issuer under SEC Regulation S-B, must apply FIN 46 to the first interim or annual reporting period ended after December 15, 2004. The effect of the adoption of this new accounting pronouncement is not expected to have a significant impact on the Company's consolidated financial statements. F-12 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Significant Accounting Policies, continued New Accounting Pronouncements, continued In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which establishes standards for how an entity that issues financial instruments (or may be required under the terms of a financial instrument to issue its equity shares) classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. The adoption of SFAS No. 150 did not have a material effect on the Company's consolidated financial statements. Stock Options and Similar Equity Instruments At December 31, 2003, the Company had five stock-based employee plans, which are described more fully in Note 10. As permitted under SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which amended SFAS No. 123, "Accounting for Stock-Based Compensation", the Company has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB No. 25. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share data):
2003 2002 ---- ---- Net loss attributable to common shareholders As reported $(5,538) $(6,967) Add: Stock-based employee compensation expense included in reported net loss 4 -- Less: Stock-based employee compensation expense determined under fair value-based method for all awards (1,513) (866) ------- ------- Pro forma $(7,047) $(7,833) ======= ======= Basic and diluted net loss per share As reported $(1.39) $(1.91) ======= ======= Pro forma $(1.77) $(2.15) ======= =======
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 62.7% to 72.3% in 2003 and 67.7% to 74.5% in 2002 (2) risk-free interest rates of 4.8% in 2003 and 2002 and (3) expected lives of 1.2 years to 5 years in 2003 and 2.3 years to 5.0 years in 2002. NOTE 3 - Discontinued Operations Platinum Communications, Inc. In 2001, the Company and Platinum Communications, Inc. ("Platinum") completed a merger under an Agreement and Plan of Merger ("Merger Agreement"). Under the Merger Agreement, a newly formed wholly owned subsidiary of the Company acquired all of the outstanding common stock of Platinum. F-13 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - Discontinued Operations, continued Platinum Communications, Inc., continued The purchase price of Platinum approximated $340,000, which consisted of $50,000, and 66,667 shares of common stock (valued at $138,000, based on the quoted market price at the time of the acquisition) and $93,000 of acquisition costs. The Company issued an additional 46,667 shares of its common stock and placed them in escrow (a portion of which is not reflected as outstanding common stock), that were scheduled to be released to the former shareholders of Platinum, subject to certain performance provisions (as defined), in various increments through April 2004; 15,556 shares were earned and were issued effective December 31, 2001, valued at $20,000, and 15,556 shares were earned and were issued effective December 31, 2002, valued at $39,000. Both issuances are additive to the cost of the acquisition. In addition, two key employees of Platinum entered into three-year employment agreements with the Company, with an aggregate base compensation of $300,000 per annum and options to purchase an aggregate of 20,000 shares of the Company's common stock vesting over three years, with an exercise price of $2.06, the fair market value on the date of the grant. In conjunction with the closing of the Platinum operations these employment agreements were terminated. The acquisition was accounted for as a purchase and, accordingly, assets and liabilities were fair valued at the date of acquisition and the results of operations were included in the consolidated financial statements of the Company, commencing May 1, 2001. As a result of the lack of development of the Platinum business and to focus the Company's resources on its core business, in December 2003, the Company decided to close the operations of Platinum. Accordingly, the results of operations and the assets and liabilities of Platinum are presented as discontinued operations for both the current and prior period. The losses are reflected as loss from discontinued operations in the accompanying consolidated statements of operations. The following table reflects the results of the discontinued operations of Platinum for the years ended December 31, 2003 and 2002, respectively:
2003 2002 ---- ---- (In thousands) Revenue $ 441 $ 804 -------- -------- Costs and Expenses Operations, research and development 656 802 Sales and marketing 717 419 General and administrative 201 180 Amortization and depreciation 187 166 Costs associated with shut-down of operations: Impairment of fixed assets, net 41 -- Impairment of software costs, net 311 -- Continuing lease obligations, net 220 -- Interest expense, net 20 34 -------- -------- Total costs and expenses 2,353 1,601 -------- -------- Loss from discontinued operations $(1,912) $ (797) ======== ========
F-14 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - Discontinued Operations, continued Platinum Communications, Inc., continued Platinum has three lines of credit, which were assumed in connection with the Platinum acquisition. These lines have various expiration dates. One line has no expiration date and bears an interest rate of prime (4.00% at December 31, 2003) plus 1%, is collateralized by substantially all the assets of Platinum, and is personally guaranteed by one of the former officers of Platinum. The second line expired in May 2003 and bears an interest rate of 10%. The third line contains no expiration date and bears an interest rate of 16.25%. The total obligation under these three lines of credit as of December 31, 2003 is $96,000. Continuing lease obligations is disclosed net of anticipated sublease rental income of approximately $2,500 per month beginning October 2004. The following table reflects the assets and liabilities from the discontinued operations of Platinum as of December 31, 2003 and 2002:
December 31, 2003 2002 -------------------------- (In thousands) ASSETS ------ Cash $ -- $ 80 Accounts receivable, net of allowance of $46 and $40 in 2003 and 2002, respectively 5 220 Other assets 42 -- ------ ------ Total Current Assets From Discontinued Operations 47 300 Property and Equipment -- 539 Other Assets -- 62 ------ ------ Total Assets From Discontinued Operations $ 47 $ 901 ====== ====== LIABILITIES ----------- Accounts payable and accrued expenses $ 390 $ 224 Deferred revenue 180 252 Current portion of long-term debt 11 146 ------ ------ Total Current Liabilities from Discontinued Operations 581 622 Long-Term Debt, Net of Current Portion 87 -- ------ ------ Total Liabilities From Discontinued Operations $668 $622 ====== ======
F-15 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - Accounts Receivable and Due to Bank The Company has an Accounts Receivable Purchase Agreement with a Bank, whereby the Company from time to time may assign some of their accounts receivable to the Bank on a full recourse basis. Upon specific invoice approval, an advance of 80% of the underlying receivable is provided to the Company. The remaining balance (20%), less an administrative fee of approximately 0.5% plus interest at the rate of 1-1/2% per month, is paid to the Company once the customer has paid. Under the Agreement, the maximum amount of all assigned receivables outstanding at any time shall not exceed $1.5 million. The primary term of the agreement was for one year beginning October 2001, and continues until due notice of termination is given at any time by either party to the agreement. At December 31, 2003, the Company had assigned approximately $731,000 of accounts receivable to the Bank and received advances of $585,000 from the Bank. NOTE 5 - Prepaid Expense and Other Current Assets Prepaid expenses and other current assets consist of the following:
December 31, 2003 2002 ------------------------- (In thousands) Prepaid expenses $ 181 $ 197 Employee notes and loans receivable 34 42 ------ ------ $ 215 $ 239 ====== ======
NOTE 6 - Property and Equipment Property and equipment consist of the following:
December 31, Useful life 2003 2002 in Years --------------------------------------------- (in thousands) Computer equipment and purchased software $ 5,738 $ 5,430 3 Furniture and fixtures 446 445 5 - 7 Automobile 30 30 3 ------- ------- 6,214 5,905 Less: accumulated deprecation and amortization (5,443) (4,835) ------- ------- Property and Equipment, Net $ 771 $ 1,070 ======= =======
Depreciation and amortization expense related to property and equipment for the years ended December 31, 2003 and 2002 was $686,000 and $788,000, respectively. F-16 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - Investment In Securities Non-Marketable In 2001, the Company acquired 2,000,000 shares of Voyant Corporation ("Voyant") through an equity investment of $500,000. Additionally, in 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 was 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 as their Co-Chairman. The Company's chairman beneficially owns approximately 19% of Voyant's outstanding common stock and holds $1,750,000 of Voyant's notes which are convertible into Voyant's common stock at the rate of $.25 per share. 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, for which it is to receive an aggregate of 67,400,000 shares of Voyant common stock in settlement thereof, increasing its ownership in Voyant to approximately 40%. At December 31, 2002, the Company determined that the estimated fair value of its investment was 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. Subsequent to December 31, 2002, Voyant had no significant operations, assets or liabilities. Marketable - Available for Sale During the year ended December 31, 2002, the Company sold 208,500 shares of NetWolves common stock 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, in 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, 2003 and 2002, the Company held no common shares of NetWolves. F-17 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following:
December 31, 2003 2002 ---- ---- (in thousands) Trade accounts payable $ 862 $ 454 Sales taxes payable 539 539 Accrued payroll and benefits 242 204 Other accrued expenses 605 243 ------ ------ $2,248 $1,440 ====== ======
NOTE 9 - Long-term Debt Long-term debt consists of the following:
December 31, 2003 2002 ---- ---- (in thousands) Lines of credit (a) $ 736 $ -- Capitalized lease obligations (b) 186 305 Other (c) -- 500 ------ ------ 922 805 Less current portion (880) (249) ------ ------ Long-term debt, net of current portion $ 42 $ 556 ====== ======
(a) In June 2003, the Company obtained a discretionary Line of Credit ("LoC") in the amount of $500,000 from JP Morgan Private Bank ("JPMC"). The LoC is guaranteed by Tall Oaks Group, LLC (an affiliate of Metropolitan, Note 10) and is repayable the earlier of demand or June 30, 2005. The LoC permitted two forms of draw down; one based upon prime rate, the second based upon LIBOR. In July 2003, the Company elected to draw down $500,000 applying the terms and conditions set forth for LIBOR. The interest rate is the JPMC reserve adjusted LIBOR plus 2.30%. As of December 31, 2003, the applied interest rate was 3.75%. In October 2003, the Company obtained, and fully drew upon, a second line of credit from Sterling National Bank ("Sterling") in the amount of $250,000. The line is guaranteed by the Company's chairman, secured by the assets of the Company and carries an interest rate of 7%. Repayments are calculated monthly at 2.778% of the outstanding balance, plus finance charges, and continue until the line is fully paid. At December 31, 2003, the Company had an outstanding balance of approximately $236,000 under the line of credit. (b) The Company has equipment under capital lease obligations expiring at various times through 2006. The assets and liabilities under capital leases are recorded at the lower of the present values of the minimum lease payments or the fair values of the assets. F-18 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - Long-term Debt, continued As of December 31, 2003 minimum future lease payments under these capital leases are:
Year Ending December 31, Amount ---------------------------------- (in thousands) 2004 $ 151 2005 42 2006 4 ------- Total minimum lease payments 197 Less: amounts representing interest (11) ------- Net minimum lease payments $ 186 =======
The interest rates pertaining to these capital leases range from 2.3% to 13.3%, and the net book value of the related assets is approximately $199,000 as of December 31, 2003. (c) In 2002, the Company's Chairman and Chief Executive Officer loaned the Company $250,000. The loan had a term of three years with interest at 5%, payable quarterly in arrears. In June 2003, the loan plus accrued interest, aggregating $266,000, was converted into 266 shares of the Company's Series B Redeemable Preferred Stock. See Note 10. In 2002, the Company executed a $250,000 note payable to Markus & Associates (an affiliate of S.J. & Associates, Inc., see Note 12). This note was payable in 28 equal monthly installments of principal plus interest at 9-1/2%. In June 2003, the loan balance of $208,000 was converted into 208 shares of the Company's Series B Redeemable Preferred stock. See Note 10. NOTE 10 - Shareholders' Equity Preferred Stock Year Ended December 31, 2003 In December 2003, the Company's Board of Directors authorized the sale of up to 1,500 shares of its non-voting Series C Redeemable Preferred Stock ("Preferred Stock - C"). During December 2003, the Company sold 590 shares of the Preferred Stock - C in consideration for $590,000 less fees and expenses of $60,000 to Metropolitan (defined below) and certain board members and an executive officer of the Company. The holders of Preferred Stock - C are entitled to dividends at the rate of 9-1/2% per annum, payable quarterly in arrears beginning October 1, 2005. The Company has the option to redeem issued shares of Preferred Stock - C, in whole or in part, at any time, with the redemption price equal to the purchase price plus accrued and unpaid dividends. For each share of Preferred Stock - C purchased, each investor received a Warrant to purchase the number of shares of the Company's common stock equal to the Price Per Share divided by 123% of the closing price per share of the Company's common stock on the trading day immediately prior to the date of issuance of the Warrant. As of December 31, 2003, approximately $3,000 in dividends are accrued for the Preferred Stock - C holders. As of December 31, 2003, 631,151 warrants are outstanding in connection with the issuances of Preferred Stock - C. Subsequent to December 31, 2003 the Company sold an additional 760 shares for proceeds of $760,000, and issued 807,325 warrants in connection with the issuance. The warrants expire in 2008 and 2009 and have exercise prices ranging from $0.93 to $1.11 per common share. The proceeds were used for working capital purposes. F-19 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - Shareholders' Equity, continued Preferred Stock, continued Year Ended December 31, 2003, continued In June 2003, the Company's Board of Directors approved the exchange of $974,000 of outstanding debt owed to its Chairman and current Chief Executive Officer, Markus & Associates (an affiliate of SJ, Note 12) and Tall Oaks Group, LLC (an affiliate of Metropolitan) for 974 shares of Non-Voting Series B Redeemable Preferred Stock ("Preferred Stock - B") at an exchange ratio of $1,000 of debt per share ("Price Per Share"). The Preferred Stock - B was issued as follows: - -- 266 shares were exchanged for $266,000 of debt obligation to the Company's Chairman and current Chief Executive Officer; - -- 208 shares were exchanged for $208,000 of debt obligation to Markus & Associates; and - -- 500 shares were exchanged for $500,000 of debt obligation to Tall Oaks Group, LLC. Each of the Preferred Stock - B shares is entitled to mandatory dividends, payable quarterly, commencing on the first day of the calendar quarter after the date of issuance, at the rate of 12% per annum. Additionally, the Preferred Stock - B shares are redeemable, at the sole option of the Company, on or after March 31, 2005 (or prior to March 31, 2005 with the consent of majority-in-interest holders of Preferred Stock - B shares). Upon redemption, the holders of the Preferred Stock - B shall be entitled to receive, for each share of Preferred Stock - B outstanding, an amount equal to the price per share plus accrued and unpaid dividends. As of December 31, 2003, approximately $29,000 in dividends are payable to the Preferred Stock - B holders. In June 2003, the Company sold 17,857 shares of its Series A Convertible Preferred Stock ("Preferred Stock - A") in consideration for $250,000 less fees and expenses of $5,000 to Metropolitan Venture Partners II, L.P. ("Metropolitan"), a private equity investment firm. The holders of Preferred Stock-A ("the Holders") are entitled to dividends, on a cumulative basis, at the rate of 9-1/2% per annum, compounded quarterly and payable on February 1, 2005 and September 25, 2005. The payment of the first dividend was originally scheduled for September 25, 2003, however, the Company and the Holders agreed to defer this payment until February 1, 2005. As consideration for the deferral of the dividend payment, the Company agreed to pay the Holders a premium of 7.5% of the dividend. Dividends are payable, at the option of the Holders, in cash or in the Company's common stock. Each share of Preferred Stock - A is convertible into 10 shares of common stock, at the option of the holder. 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 - - A on all matters as to which holders of common stock are entitled to vote. As of December 31, 2003, $350,000 in dividends are payable to the Holders. 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 Preferred Stock - A, in consideration for $2,000,000 less fees and expenses of $178,000, to Metropolitan. In December 2002, the Company sold 23,365 shares of its Preferred Stock - A 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 was reflected on the accompanying Balance Sheet as Stock subscription receivable at December 31, 2002. The managing partner of Metropolitan was appointed as a member of the Company's Board of Directors in September 2002. F-20 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - Shareholders' Equity, continued Common Stock Year Ended December 31, 2003 During the year ended December 31, 2003, the Company issued 114,347 shares of its common stock and compensatory options to purchase 9,000 shares of its common stock as detailed below: - -- Issued 69,347 net shares of its common stock as payment of certain consulting expenses, valued at $77,000. - -- The Company granted 9,000 options to purchase shares of its common stock to three employees of the Company. The options vest in one-third increments on the date of issuance, December 31, 2003 and June 30, 2004. The options have an exercise price of $1.30 per share and have an intrinsic value of $4,000. - -- In January 2003, the Company entered into an employment agreement with its Chief Executive Officer, which expires in January 2005. As part of the compensation, the Chief Executive Officer will receive 60,000 shares of the Company's common stock that vest ratably over the first twelve months of the agreement. During 2003, the Company issued 45,000 shares of its common stock valued at $54,000 under this agreement. 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 were satisfied in either cash or compensation in 2003. F-21 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - Shareholders' Equity, continued Common Stock, continued Year Ended December 31, 2002, continued - -- 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. - -- 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. Stock Option Plans In 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 for issuances under the Plan. 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 the compensation committee but cannot be less than the fair market value of the common stock on the issuance date. As of December 31, 2003, there are 8,401 shares available to be issued pursuant to this plan. At the Company's annual meeting of shareholders held in August 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 compensation committee but cannot be less than the fair market value of the common stock on the issuance date. During 2003, 47,000 options were issued under this plan. As of December 31, 2003, there are 4,000 shares available to be issued pursuant to this plan. In 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 for issuance under the Plan. 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 compensation committee but cannot be less than the fair market value of the common stock on the issuance date. During 2003, 632,000 reserved shares were utilized under the option grant program. As of December 31, 2003, there are 9,235 shares available to be issued pursuant to this plan. F-22 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - Shareholders' Equity, continued Stock Option Plans, continued In April 2003, the Company's Board of Directors authorized and adopted the 2003-A Stock / Stock Option Plan whereby 975,000 shares of its common stock were reserved for issuance under the Plan. The plan was adopted by the stockholders at our annual meeting in May 2003. The 2003-A Plan is also divided into two separate equity programs: an option grant program and a stock issuance program. As with the 2003 Plan, under the stock issuance program of the 2003-A Plan, the purchase price per share is fixed by the Board of Directors or compensation committee but cannot be less than the fair market value of the common stock on the issuance date. During 2003, 914,000 options were granted and 60,000 shares were issued under the option grant program. As of December 31, 2003, there are 1,000 shares available to be issued pursuant to this plan. The Company grants options under multiple stock-based compensation plans that do not differ substantially in the characteristics of the awards. The following is a summary of stock option activity for 2003 and 2002, relating to all of the Company's common stock plans (shares are in thousands):
Weighted Average Exercise Shares Price --------------------------------- Outstanding at January 1, 2002 428 $ 6.55 Granted 1,896 1.69 Exercised -- -- Forfeited (65) 17.07 -------- Outstanding at December 31, 2002 2,259 2.13 Granted 2,327 1.15 Exercised -- -- Forfeited (144) 1.93 -------- Outstanding at December 31, 2003 4,442 1.63 ========
At December 31, 2003, a total of 3,089,000 options are exercisable at various exercise prices: 619,000 options are exercisable at $0.75, 418,000 options are exercisable at prices ranging from $0.95 to $1.10, 470,000 are exercisable at $1.16, 709,000 are exercisable at prices ranging from $1.25 to $1.63, 767,000 are exercisable at prices ranging from $1.80 to $2.19, and 106,000 options at $11.25. The weighted- average remaining contractual life of options outstanding at December 31, 2003 is 3.59 years. A total of 23,000 shares of the Company's common stock are reserved for options, warrants and contingencies at December 31, 2003. At December 31, 2002, a total of 1,064,000 options were exercisable at various exercise prices: 385,000 options were exercisable at $1.05, 573,000 options were 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 was 4.21 years. The weighted-average fair value of options granted during 2003 was $1.15. A total of 2,259,000 shares of the Company's common stock were reserved for options, warrants and contingencies at December 31, 2002. F-23 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - Shareholders' Equity, continued Stock Option Plans, continued Total compensation costs recognized for stock option awards amounted to $4,000 and $31,000 for the years ended December 31, 2003 and 2002, respectively. Compensation cost represents the fair value of options granted to non-employees and the intrinsic value of options granted to employees. NOTE 11 - Income Taxes The following table summarizes components of the (provision) benefit for current and deferred income taxes for the years ended December 31, 2003 and 2002.
Year Ended December 31, 2003 2002 ------------------------------------- (in thousands) Current Federal $ 108 $ -- State and other -- -- ------- ------- Total 108 -- ------- ------- Deferred Federal -- -- State and other -- -- ------- ------- Total -- -- ------- ------- Benefit from Income Taxes $ 108 $ -- ======= =======
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, 2003 and 2002:
Year Ended December 31, 2003 2002 ------------------------------------- (in thousands) U.S. Federal statutory tax rate 35.0% 35.0% Loss and other-than-temporary decline in investment in NetWolves -- (1.9) Restructuring costs timing difference 0.4 2.0 Increase in valuation allowance (37.4) (35.0) Other -- (0.1) ------ ------ 2.0% 0.0% ====== ======
F-24 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - Income Taxes, continued The tax effects of temporary differences that give rise to deferred tax assets and liabilities are summarized as follows:
December 31, 2003 2002 --------------------------------------- (in thousands) Deferred tax assets Net operating loss carryforwards $ 32,204 $ 31,205 Tax credit carryforward 577 577 Fixed and intangible assets 200 47 Deferred revenue 40 -- Restructure accrual -- 133 Discontinued operations accruals 156 -- Other 96 125 -------- -------- 33,273 32,087 Valuation allowance (33,273) (32,087) -------- -------- Deferred tax assets $ -- $ -- ======== ========
At December 31, 2003, the Company has net operating loss carryforwards ("NOLs") remaining of approximately $77 million, which may be available to reduce taxable income, if any. These NOLs expire through 2023. However, Internal Revenue Code Section 382 rules limit the utilization of NOLs upon a change in control of a company. The Company has not completed a recent evaluation of whether a change in control has taken place. If it is determined that a change in control has taken place, utilization of its NOLs will be subject to severe limitations in future periods, which would have the effect of eliminating substantially all of the future income tax benefits of the NOLs. NOTE 12 - Related Party and Other Transactions 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 Company's Board of Directors. With no further approval, SJ is entitled to be reimbursed for other expenses not to exceed $2,000 per month, plus other reasonable expenses upon approval. Upon completion of the initial term of the agreement, SJ will continue to provide consulting services for an additional 7-1/2 year period. Minimum compensation during this additional period is approximately $5,500 per month. F-25 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - Related Party and Other Transactions, continued S.J. & Associates, Inc., continued - -- In 2003, the Company incurred $144,000 of consulting expenses with SJ. The consulting expense was paid in cash. - -- In 2003, the Company reduced its obligation to SJ relating to a restructure plan from March of 2000 by $60,000. The amount was paid in cash. - -- 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 a restructure plan from March of 2000 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 9) and $309,000 in cash. NOTE 13 - Commitments and Contingencies Operating Leases Operating leases are primarily for office space, co-location, equipment and automobiles. At December 31, 2003, the future minimum lease payments under operating leases are summarized as follows (in thousands):
Year Ending December 31, Amount ---------------------------------------------- (in thousands) 2004 $ 481 2005 318 2006 279 2007 258 2008 193 -------- Total $1,529 ========
Rent expense approximated $756,000 and $633,000 for the years ended December 31, 2003 and 2002, respectively. Employment Agreements In December 2002, the Company's Chairman became the Company's Chief Executive Officer. In January 2003, the Company entered into an employment agreement with its Chief Executive Officer, which expires in January 2005. Compensation is as follows: 60,000 shares of the Company's common stock which vest ratably over the first year of the agreement, 240,000 options to purchase common stock of the Company at $2.02, vesting 50% on execution of the agreement and 50% ratably over the life of the contract, and $180,000 per annum plus a bonus at the discretion of the Board. Additionally, the Chief Executive Officer is entitled to be reimbursed for (1) all out-of-pocket expenses reasonably incurred by him in the performance of his duties, and (2) housing and office expenses not to exceed $10,000 per month. The Company extended its services agreement with its Chief Executive Officer on December 5, 2003. The agreement now expires August 24, 2007. The extended agreement calls for compensation of $15,000 per month and 360,000 options, vesting 7,500 per month for the term of the agreement (48 months), to purchase the Company's common stock at an exercise price of $1.16, the closing price of the Company's common stock on the date the agreement was effective. The agreement provides for reimbursement of reasonable out of pocket business expenses and further provides for living and travel expenses not to exceed $11,000 per month. F-26 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - Commitments and Contingencies Employment Agreements, continued The Company entered into an employment and consulting agreement with its President effective January 1, 2003. The employment term of the agreement expires August 15, 2004 and then sequentially a consulting period runs until February 15, 2007. Employment compensation is stated at an annual salary of $240,000, options to purchase 200,000 shares of the Company's common stock at $1.16 per share, the closing price of the Company's common stock on the date the agreement became effective. The employment term of the agreement contains a monthly allowance not to exceed $3,100 covering auto and housing expenses. The consulting term of the agreement calls for monthly compensation of $12,000 and requires consultation with senior executives concerning the Company's respective businesses and operations. 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 $38,000 and $41,000 for the years ended December 31, 2003 and 2002, respectively. NOTE 14 - Management's Liquidity Plans In order to meet the Company's cash needs and to achieve positive operating cash flows the Company has and will continue to take various actions and steps that it believes will enable the Company to attain these goals. These actions include: - -- In the second half of 2003 the Company embarked on a cost reduction program, including among other things, staff reductions, pay rate reductions, and elimination of non-essential expenses. The Company believes these cost reductions have already begun to have a positive impact on its operating performance. The Company notes that its intention is to reinstate the pay rate reductions as soon as practical and as soon as its operating results and cash flows permit. - -- As discussed in Note 3, in December 2003 the Company closed the Dallas, Texas based operations of Platinum. Platinum had experienced losses and had significant cash needs. In 2003, Platinum utilized $1,012,000 of cash. - -- The Company intends to raise additional capital through private equity offerings and borrowing. In this regard in December 2003, as discussed in Note 10, the Company initiated the sale of Series C Preferred stock and as of December 31, 2003 had net proceeds from these sales of $530,000. - -- Subsequent to December 31, 2003 and through March 31, 2004 the Company received an additional $760,000 from sales of this issue. There can be no assurance, however, that the Company will be able to raise additional capital through equity sales and/or borrowing. F-27 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - Management's Liquidity Plans, continued - -- The Company continues to strive to increase revenue through offering custom engineering services, expanding and enhancing its existing product offerings, and introducing new product offerings. In 2003 the Company's revenue from continuing operations increased $827,000 or 12.5% over revenue in 2002. - -- The Company continues to expand its marketing efforts in order to increase its customer base. In this regard, in 2003, the Company became a business partner with IBM and through this relationship will work with IBM in an effort to achieve sales to new customers. The Company will continue to pursue similar channel partner opportunities. The Company believes that the plan and new initiatives as discussed above will ultimately lead to positive cash flows and profitability. While the Company pursues these goals the Company also believes that the ability to raise additional capital through equity and debt placements will provide sufficient cash to meet our requirements at least through December 31, 2004. There can be no assurance, however, that the Company will achieve its cash flow and profitability goals, or that the Company will be able to raise additional capital sufficient to meet operating expenses or implement the plan. In such event, the Company may have to revise the plans and significantly reduce operating expenses, which could have an adverse effect on revenue and operations in the short term. NOTE 15 - Consolidated Statements of Cash Flows Supplemental disclosure of cash flow information for the years ended December 31, 2003 and 2002 is summarized as follows:
Year Ended December 31, 2003 2002 --------------------------------------- (in thousands) Interest paid $267 $171 ==== ==== Income taxes paid $ 1 $ - ==== ====
Non-cash investing and financing activities for the years ended December 31, 2003 and 2002 are summarized as follows:
Year Ended December 31, 2003 2002 --------------------------------------- (in thousands) Capitalized leases incurred $ 38 $263 ==== ==== Conversion of long-term debt into 974 shares of Series B Redeemable Preferred Stock $974 $ -- ==== ==== Preferred stock subscription receivable $ -- $500 ==== ==== Conversion of accrued restructure costs to note payable $ -- $250 ==== ====
F-28 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 - Products and Services The Company and its subsidiaries currently operate in one business segment and have, during the years 2003 and 2002, provided two separate products: ASP Services and custom engineering services. Refer to Note 1 for a detailed description of these products and services.
Year Ended December 31, 2003 2002 --------------------------------------- (in thousands) ASP fees $5,144 $4,101 Custom Engineering fees 2,295 2,511 ------ ------ Total Revenue $7,439 $6,612 ====== ======
NOTE 17 - Major Customers For the years ended December 31, 2003 and 2002, IBM accounted for 97.1% and 98.4% of the Company's revenue, respectively. Accounts receivable from IBM amounted to $1,065,000 and $1,127,000, at December 31, 2003 and 2002, respectively. Loss of IBM as a customer would have a material adverse effect on the Company. NOTE 18 - Net Loss Per Share The following chart provides a reconciliation of information used in calculating the per share amounts: (in thousands, except per share data)
Year Ended December 31, 2003 2002 --------------------------------------- (in thousands) Numerator for loss per share: Loss from continuing operations before discontinued operations $ (3,270) $ (6,114) Preferred stock dividends (356) (56) -------- -------- Loss from continuing operations attributable to common Shareholders before discontinued operations $ (3,626) $ (6,170) ======== ======== Denominator for loss per share*: 3,974 3,643 ======== ======== Basic and diluted loss per share: Loss from continuing operations attributable to common shareholders before discontinued operations $ (0.91) $ (1.69) Loss from discontinued operations (0.48) (0.22) -------- -------- Net loss attributable to common shareholders $ (1.39) $ (1.91) ======== ========
F-29 DIRECT INSITE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - Net Loss Per Share, continued * The effect of dilutive securities (stock options, Series A convertible preferred stock and warrants) have not been included herein as their inclusion would be anti- dilutive. NOTE 19 - Subsequent Events Subsequent to December 31, 2003, the Company sold an additional 760 Preferred Stock-C shares for $760,000. Of the total shares sold through March 31, 2004, Metropolitan has purchased 540 shares, the Chairman and Chief Executive Officer of the Company purchased 200 shares and certain Directors purchased 105 shares. The proceeds were used for working capital purposes. Subsequent to December 31, 2003, the Company issued unregistered shares of common stock as follows: - -- 15,000 shares of common stock valued at $12,000 pursuant to an employment agreement with the Company's Chief Executive Officer - -- 82,509 shares valued at $101,000 to directors for service on the Board of Directors and Committees of the Board; - -- 35,000 shares valued at $26,000 to an employee; - -- 55,000 shares valued at $41,000 to consultants for services. F-30 EX-3 3 di10kdec2003ex3-i.txt CERTIFICATE OF DESIGNATIONS - SERIES B EXHIBIT 3(i) CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES B REDEEMABLE PREFERRED STOCK OF DIRECT INSITE CORP. DIRECT INSITE CORP., a corporation organized and existing under the laws of the State of Delaware (the "Company"), DOES HEREBY CERTIFY THAT: Pursuant to authority conferred upon the Board of Directors of the Company (the "Board of Directors") by the Certificate of Incorporation of the Company, at a meeting duly held, the Board of Directors adopted resolutions (i) authorizing a series of the Company's authorized preferred stock, par value $0.0001 per share (the "Preferred Stock"), to be known as the Series B Redeemable Preferred Stock (the "Series B Preferred Stock"), and (ii) providing for the designation, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions of the Series B Preferred Stock, as follows: RESOLVED, that the Company be, and hereby is, authorized, empowered and directed to designate 1,000 shares of the Company's 2,000,000 shares of authorized preferred stock, par value $0.0001 per share ("Preferred Stock"), as Series B Redeemable Preferred Stock, par value $0.0001 per share ("Series B Preferred Stock"), which shall have the powers, designations, preferences and other special rights, as follows: 1. Certain Definitions. Except as otherwise expressly provided herein, the following terms, as used herein, have the following meanings: "Board of Directors" means the Board of Directors of the Company. "Business Day" means any day, other than a Saturday or Sunday or a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to close. "Certificate of Incorporation" means the Certificate of Incorporation of the Company as amended to date and as the same may be further amended from time to time hereafter. "Common Stock" means the common stock, $.0001 par value, of the Company, including any capital stock of any class of the Company thereafter authorized that shall not be limited to a fixed sum in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company. 1 "Dividend Payment Dates" means April 1, July 1, October 1 and January 1 of each year while any shares of Series B Preferred Stock are outstanding, commencing October 1, 2003; provided, however, if any such date occurs on a day that is not a Business Day, the applicable Dividend Payment Date shall be the next following Business Day. "Holder" means each Person in whose name any shares of Series B Preferred Stock are issued and outstanding, at the time a determination is made, including Persons to whom such shares are transferred pursuant to the terms hereof. "Issuance Date" means the date of issuance of the Series B Preferred Stock. "Liquidation Event" means any liquidation, dissolution, or winding up of the Company whereby all equity securities of the Company then outstanding are redeemed. "Liquidation Preference" means $1,000.00 plus all accrued and unpaid dividends per share of Series B Preferred Stock outstanding. "Person" means any individual, company, corporation, partnership, limited liability company, trust, division, governmental, quasi-governmental or regulatory entity or authority or other entity. "Redemption Price" means $1,000.00 per share of Series B Preferred Stock plus all accrued and unpaid dividends and distributions thereon. "Securities Act" shall mean the U. S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. 2. Dividends. (a) The Holders of outstanding shares of Series B Preferred Stock shall be entitled to receive dividends out of funds legally available for the payment of dividends, which shall begin to accrue on and be cumulative from and after the Issuance Date whether or not such dividends have been declared and whether or not there shall be net profits or net assets of the Company legally available for the payment of such dividends. The amount of such dividends per share of Series B Preferred Stock (the "Dividend Amount") shall be equal to the amount derived by multiplying (i) the Liquidation Preference per share of such Series B Preferred Stock (as prorated for fractional shares) plus the amount of all previously accrued but unpaid dividends per such share by (ii) twelve percent (12%) per annum, compounded quarterly. The Dividend Amount then accrued shall be payable in cash on each Dividend Payment Date. So long as any shares of Series B Preferred Stock are outstanding, no dividends shall be declared, set apart or paid on, nor shall the Company purchase, redeem or otherwise acquire, or sell to any subsidiary of the Company any Common Stock of the Company or any capital stock of the Company that ranks junior to the Series B Preferred Stock in respect of dividends, unless all Dividend Amounts unpaid and accrued shall have first been paid or made available for payment to the Holders of then outstanding shares of Series B Preferred Stock as provided in this Section 2(a). 2 (b) The amount of dividends payable for any period shorter than a year shall be determined on the basis of twelve 30-day months and a 360-day year. (c) Without limiting any of the foregoing, in the event that (i) all dividends then accrued and payable hereunder shall not have been paid in full or made available for payment to the Holders then entitled to receive such dividends hereunder, and (ii) funds legally available for the payment of dividends are insufficient to permit payment in full to all such Holders of the full Dividend Amount to which such Holders are then entitled, then the entire amount available for payment of dividends by the Company shall be distributed ratably among all such Holders in proportion to the full Dividend Amount to which they would otherwise be respectively entitled. 3. Liquidation. (a) Upon the occurrence of any Liquidation Event, each Holder of shares of Series B Preferred Stock then outstanding shall be paid the Liquidation Preference per share immediately before the making of any distributions of any kind in respect of any shares of Common Stock or any other class of capital stock of the Company ranking junior to the Series B Preferred Stock whether now existing or hereafter created. (b) If, upon the occurrence of any Liquidation Event, the assets of the Company available for distribution to the Holders are insufficient to permit the payment in full of the Liquidation Preference per share then outstanding, then the assets of the Company shall be ratably distributed among the Holders, to the extent applicable. Written notice of a Liquidation Event, stating the date established by the Board of Directors for determining Holders of record and the date of the Liquidation Event, the Liquidation Preference, the amount thereof payable per share and the place where said sums shall be payable shall be given by mail, postage prepaid, not less than thirty (30) or more than sixty (60) days prior to the payment date stated therein, to each Holder of then outstanding shares of Series B Preferred Stock at such Holder's mailing address as shown in the books and records of the Company. 4. Redemption. (a) Right of Company to Redeem. The Company may elect to redeem shares of Series B Preferred Stock, in whole or in part, (i) at any time on or after March 31, 2005 at the option of the Company; and (ii) prior to March 31, 2005 with the consent of any Holder (for such Holder's shares only). Upon redemption of any shares of Series B Preferred Stock, the participating Holders thereof shall receive an amount equal to the Redemption Price for each share of outstanding Series B Preferred Stock so redeemed. (b) Redemption Procedures On or After March 31, 2005. Upon election by the Company to redeem the Series B Preferred Stock, in whole or in part, on or after March 31, 2005 in compliance with applicable law: 3 (i) the Company shall give to each Holder, no later than 20 days prior to the Redemption Date defined below, written notice of such redemption setting forth the following information (each such notice, a "Redemption Notice"): (A) the date established by the Board of Directors for determining Holders of record entitled to payment of the Redemption Price (the "Record Date"); (B) the total number of shares of Series B Preferred Stock to be redeemed by the Company, and, in the event of any partial redemption, the pro rata number of shares of Series B Preferred Stock to be redeemed; (C) the effective date of redemption, which date shall not be less than twenty (20) nor more than sixty (60) calendar days following the Record Date (the "Redemption Date"); and (E) the place for surrender by the Holders of certificates evidencing shares of Series B Preferred Stock being redeemed. (c) Redemption Procedures Prior to March 31, 2005. Upon election by the Company to redeem all or a portion of the Series B Preferred Stock prior to March 31, 2005, in compliance with applicable law: (i) the Company shall give each Holder a Redemption Notice containing the information required by Section 4(b) hereof, provided, however, that the Redemption Date for a redemption pursuant to this Section 4(c) shall not be less than thirty (30) nor more than sixty (60) calendar days following the Record Date; and provided further, that the Redemption Notice shall indicate that the address designated therein for surrender of share certificates evidencing shares of Series B Preferred Stock is also the address to which each Holder shall send its Redemption Consent (as defined below). (ii) The Redemption Notice sent to each Holder by the Company shall be accompanied by a form of written consent of the Holders, containing appropriate language that enables each Holder to indicate whether or not such Holder consents to the proposed redemption described in the accompanying Redemption Notice (the "Redemption Consent") and the procedures to exercise such right. (iii) Each Holder shall have twenty (20) days from the date on which the Company sends the Redemption Notice and Redemption Consent to such Holder pursuant to this Section 4(c) (the "Redemption Consent Period"), to return an executed and completed Redemption Consent to the Company, at the Company's address designated for such purpose in the Redemption Notice (or, if no address is so designated, the address of the Company's principal offices as set forth in Section 6 hereof). Failure by a Holder to provide an executed and completed Redemption Consent to the Company by 5 p.m. Eastern Time on the last day of the Redemption Consent Period shall be deemed by the Company and the Holders to constitute a vote "against," and a refusal to consent to, the redemption proposed in the applicable Redemption Notice. 4 (iv) If, by 5 p.m. Eastern Time on the last day of the Redemption Consent Period, the Company shall have received Redemption Consents in favor of or consenting to the proposed redemption from any or all Holder(s), such redemption shall take place in accordance with the terms set forth in the Redemption Notice and this Certificate of Designation. (d) Special Procedures for Partial Redemptions. If the Company elects to redeem only a portion of the then outstanding shares of Series B Preferred Stock, then such redemption shall be effected pro rata among all those who are Holders of such outstanding shares on the applicable record date, and the Redemption Notice shall state, in addition to any other information required to be stated therein by this Section 4 that (i) only a portion of the total outstanding shares of Series B Preferred Stock are being redeemed, (ii) the total number of such shares to be redeemed, and (iii) the pro rata number of shares to be redeemed from each Holder. Where the partial Redemption is prior to March 31, 2005, the Redemption Notice shall only state the percent of the total shares to be redeemed and the redemption shall be effected pro rata among all those who are consenting Holders on the applicable record date. To the extent there are not sufficient shares among consenting Holders to complete the redemption requested by the Company, the shares shall remain unredeemed and continue to be subject to the redemption provisions set forth herein. If, in connection with a partial redemption, any Holder surrenders for redemption one or more share certificates representing more than the number of shares of Series B Preferred Stock to be redeemed from such Holder, the Company shall, promptly after the applicable Redemption Date, remit to each such Holder a certificate representing the number of shares of Series B Preferred Stock equal to the difference between the total number of shares thereof represented by the stock certificate(s) surrendered and the number of such shares redeemed (such certificates, "Excess Share Certificates"). (e) Remitting Redemption Price. No later than two (2) Business Days after the applicable Redemption Date, the Company shall remit to the Holder thereof the Redemption Price therefor. Notwithstanding the foregoing, the Company is not required to remit the Redemption Price to any Holder until after receipt by the Company of such Holder's certificate for shares of Series B Preferred Stock to be surrendered for cancellation in connection with a redemption pursuant to this Section 4, or upon Company making other arrangements with a Holder for the surrender of such shares. (f) Notices; Address for Payment, Etc. All notices to be given and payments to be made by the Company under this Section 4 shall be in writing and shall be deemed sent or given when given in person or when sent by certified mail, postage prepaid, return receipt requested, to each Holder on the applicable record date at such Holder's address as shown on the Company's books and records. All Excess Share Certificates to be sent to any Holder pursuant to this 5 Section 4 shall be sent to such holder by mail, postage prepaid, to such Holder's address as shown on the Company's books and records. The Redemption Price payable to a Holder pursuant to this Section 4 shall be sent to such Holder (i) at its address as shown on the Company's books and records or (ii) sent by wire transfer to an account of such Holder designated by such Holder (with all necessary wiring information) by written notice given to the Company no later than two (2) calendar days prior to the applicable Redemption Date. 5. Voting Rights. Except as otherwise required by applicable law or this Certificate of Designation, the Holders shall have no voting rights in respect of their shares of Series B Preferred Stock. 6. Principal Office; Notices. The address of the principal offices of the Company is located at 80 Orville Drive, Bohemia, New York 11716. Any notice or certificate required by the Certificate of Incorporation of the Company, as amended, or this Certificate of Designation to be delivered to any Holder shall be deemed given when personally delivered to such Holder or upon deposit in the United States Mail, certified mail, return receipt requested and addressed to such Holder at his or its address appearing on the books and records of the Company. 7. Cancellation of Series B Preferred Stock. In the event of redemption of any shares of Series B Preferred Stock, the shares so redeemed shall be canceled, shall return to the status of authorized, but unissued shares of preferred stock of no designated series, and shall be issuable by the Company as any series of Preferred Stock. 8. Amendments and Other Actions. When authorized by resolutions of the Board of Directors, the Company may amend or supplement this Certificate without the consent of any holder of Series B Preferred Stock to cure any ambiguity, defect or inconsistency herein or make any other changes herein, provided that each such amendment or supplement shall not adversely affect the interests of the Holders thereof and that prior to the filing of any document reflecting any such changes, the Company provides the Holders with written notice of any such proposed changes. 9. Registration and Transfer (a) The Company shall maintain at its principal offices (or at the offices of its transfer agent or such other office or agency as it may designate by notice to the holders of the Series B Preferred Stock) a stock register for the Series B Preferred Stock in which the Company shall record the names and addresses of the Holders. (b) Prior to due presentment for registration of any Permitted Transferee (as defined below) of any Series B Preferred Stock, the Company may deem and treat the person in whose name any Series B Preferred Stock is registered as the absolute owner of such Series B Preferred Stock and the Company shall not be affected by notice to the contrary. (c) Anything contained herein to the contrary notwithstanding, the Company shall not register as a holder of any shares of Series B Preferred Stock any proposed transferee thereof, and such proposed transferee shall not be deemed a Holder for any purposes hereunder, unless: (i) such 6 proposed transferee (A) represents to the Company in writing that such proposed transferee is an accredited investor, as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act and (B) provides written certification to the Company of the basis of such transferee's status as an accredited investor, which certification shall be satisfactory to the Company in its sole discretion, exercised in good faith; (C) agrees, in writing, to abide by the terms of, and to assume the obligations of the initial Holder under any written agreement between the Company and such initial Holder; and (D) is provided a copy of this Certificate of Designation (as the same may be amended from time to time), and (ii) the proposed transfer is made pursuant to an effective registration statement under the Securities Act and applicable state securities laws, or an exemption from such registration is available. (d) Each certificate representing any shares of Series B Preferred Stock shall contain the following legends placed prominently on the front or back of the certificate: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SAID ACT. DIRECT INSITE CORP. WILL FURNISH, WITHOUT CHARGE, TO EACH HOLDER OF ITS SERIES B PREFERRED STOCK WHO SO REQUESTS A COPY OF THE CERTIFICATE Of DESIGNATION SETTING FORTH THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF SUCH STOCK AND ANY OTHER CLASS OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. (e) No service charge shall be made to any Holder for any registration, transfer or exchange. 10. Ranking. Except as otherwise provided herein or agreed to by the Holders, any and all classes of capital stock of the Company, whether now existing or hereafter created, shall be deemed to rank junior to the Series B Preferred Stock as to right to payment and receipt of dividends and as to the right to receive distributions of assets upon a Liquidation Event. 11. Action by Written Consent. Whenever, under this Certificate of Designation or otherwise, the Holders of the Series B Preferred Stock are required to take any action, such Holders may take action without a meeting, 7 without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the Holders of more than 50% of the then outstanding shares of Series B Preferred Stock. IN WITNESS WHEREOF, Direct Insite Corp. has caused this Certificate of Designation to be signed by its Chief Financial Officer on this 27th day of June, 2003. DIRECT INSITE CORP. By: /s/George Aronson Name: George Aronson Title: Chief Financial Officer EX-3 4 di10kdec2003ex3-j.txt CERTIFICATE OF DESIGNATIONS - SERIES C EXHIBIT 3(j) CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES C REDEEMABLE PREFERRED STOCK OF DIRECT INSITE CORP. DIRECT INSITE CORP., a corporation organized and existing under the laws of the State of Delaware (the "Company"), DOES HEREBY CERTIFY THAT: Pursuant to authority conferred upon the Board of Directors of the Company (the "Board of Directors") by the Certificate of Incorporation of the Company, at a meeting duly held, the Board of Directors adopted resolutions (i) authorizing a series of the Company's authorized preferred stock, par value $0.0001 per share (the "Preferred Stock"), to be known as the Series C Redeemable Preferred Stock (the "Series C Preferred Stock"), and (ii) providing for the designation, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions of the Series C Preferred Stock, as follows: RESOLVED, that the Company be, and hereby is, authorized, empowered and directed to designate 1,500 shares of the Company's 2,000,000 shares of authorized preferred stock, par value $0.0001 per share ("Preferred Stock"), as Series C Redeemable Preferred Stock, par value $0.0001 per share ("Series C Preferred Stock"), which shall have the powers, designations, preferences and other special rights, as follows: 1. Certain Definitions. Except as otherwise expressly provided herein, the following terms, as used herein, have the following meanings: "Board of Directors" means the Board of Directors of the Company. "Business Day" means any day, other than a Saturday or Sunday or a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to close. "Certificate of Incorporation" means the Certificate of Incorporation of the Company as amended to date and as the same may be further amended from time to time hereafter. "Common Stock" means the common stock, par value $0.0001 per share, of the Company, including any capital stock of any class of the Company thereafter authorized that shall not be limited to a fixed sum in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company. "Dividend Payment Dates" means January 1, April 1, July 1 and October 1 of each year while any shares of Series C Preferred Stock are outstanding, commencing October 1, 2005; provided, however, if any such date occurs on a day that is not a Business Day, the applicable Dividend Payment Date shall be the next following Business Day. "Holder" means each Person in whose name any shares of Series C Preferred Stock are issued and outstanding, at the time a determination is made, including Persons to whom such shares are transferred pursuant to the terms hereof. "Issuance Date" means, with respect to any shares of Series C Preferred iStock, the date of issuance of such shares. "Liquidation Event" means any liquidation, dissolution, or winding up of the Company whereby all equity securities of the Company then outstanding are redeemed. "Liquidation Preference" means $1,000.00 plus all accrued and unpaid dividends per share of Series C Preferred Stock outstanding. "Person" means any individual, company, corporation, partnership, limited liability company, trust, division, governmental, quasi-governmental or regulatory entity or authority or other entity. "Redemption Price" means $1,000.00 per share of Series C Preferred Stock plus all accrued and unpaid dividends and distributions thereon. "Securities Act" shall mean the U. S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Series A Preferred Stock" means the Series A Convertible Preferred Stock of the Company, par value $0.0001 per share. "Series B Preferred Stock" means the Series B Redeemable Preferred Stock of the Company, par value $0.0001 per share. 2. Dividends. (a) The Holders of outstanding shares of Series C Preferred Stock shall be entitled to receive dividends out of funds legally available for the payment of dividends, which shall begin to accrue on and be cumulative from and after the respective Issuance Dates for such shares, whether or not such dividends have been declared and whether or not there shall be net profits or net assets of the Company legally available for the payment of such dividends. Dividends shall not be payable, however, until October 1, 2005. The amount of such dividends per share of Series C Preferred Stock (the "Dividend Amount") shall be equal to the amount derived by multiplying (i) the Liquidation Preference per share of such Series C Preferred Stock (as prorated for fractional shares) plus the amount of all previously 2 accrued but unpaid dividends per such share by (ii) nine and one-half percent (9 %) per annum. The Dividend Amount then accrued shall be payable in cash on each Dividend Payment Date. So long as any shares of Series C Preferred Stock are outstanding, no dividends shall be declared, set apart or paid on, nor shall the Company purchase, redeem or otherwise acquire, or sell to any subsidiary of the Company any Common Stock of the Company or any capital stock of the Company that ranks junior to the Series C Preferred Stock in respect of dividends, unless all Dividend Amounts unpaid and accrued shall have first been paid or made available for payment to the Holders of then outstanding shares of Series C Preferred Stock as provided in this Section 2(a). Notwithstanding anything herein to the contrary, nothing in this Certificate of Designation or the rights granted to the holders of Series C Preferred Stock shall affect the right and obligation of the Company to make payments as same become due on the Series A Preferred Stock and Series B Preferred Stock of whatever nature or description. (b) The amount of dividends payable for any period shorter than a year shall be determined on the basis of twelve 30-day months and a 360-day year. (c) Without limiting any of the foregoing, in the event that (i) all dividends then accrued and payable hereunder shall not have been paid in full or made available for payment to the Holders then entitled to receive such dividends hereunder, and (ii) funds legally available for the payment of dividends are insufficient to permit payment in full to all such Holders of the full Dividend Amount to which such Holders are then entitled, then the entire amount available for payment of dividends by the Company shall be distributed ratably among all such Holders in proportion to the full Dividend Amount to which they would otherwise be respectively entitled. 3. Liquidation. (a) Upon the occurrence of any Liquidation Event, each Holder of shares of Series C Preferred Stock then outstanding shall be paid the Liquidation Preference per share immediately before the making of any distributions of any kind in respect of any shares of Common Stock or any other class of capital stock of the Company ranking junior to the Series C Preferred Stock, in respect of Liquidation Preferences whether now existing or hereafter created. (b) If, upon the occurrence of any Liquidation Event, the assets of the Company available for distribution to the Holders are insufficient to permit the payment in full of the Liquidation Preference per share then outstanding, then the assets of the Company shall be ratably distributed among the Holders, to the extent applicable. Written notice of a Liquidation Event, stating the date established by the Board of Directors for determining Holders of record and the date of the Liquidation Event, the Liquidation Preference, the amount thereof payable per share and the place where said sums shall be payable shall be given by mail, postage prepaid, not less than thirty (30) or more than sixty (60) days prior to 3 the payment date stated therein, to each Holder of then outstanding shares of Series C Preferred Stock at such Holder's mailing address as shown in the books and records of the Company. 4. Redemption. (a) Right of Company to Redeem. The Company may elect to redeem shares of Series C Preferred Stock, in whole or in part, at any time and from time to time out of funds legally available therefor. Upon redemption of any shares of Series C Preferred Stock, the participating Holders thereof shall receive an amount equal to the Redemption Price for each share of outstanding Series C Preferred Stock so redeemed. (b) Redemption Procedures. Upon election by the Company to redeem the Series C Preferred Stock in compliance with applicable law: The Company shall give to each Holder, no later than 20 days prior to the Redemption Date defined below, written notice of such redemption setting forth the following information (each such notice, a "Redemption Notice"): (i) the date established by the Board of Directors for determining Holders of record entitled to payment of the Redemption Price (the "Record Date"); (ii) the total number of shares of Series C Preferred Stock to be redeemed by the Company, and, in the event of any partial redemption, the pro rata number of shares of Series C Preferred Stock to be redeemed; (iii) the effective date of redemption, which date shall not be less than twenty (20) nor more than sixty (60) calendar days following the Record Date (the "Redemption Date"); and (iv) the place for surrender by the Holders of certificates evidencing shares of Series C Preferred Stock being redeemed. (c) Special Procedures for Partial Redemptions. If the Company elects to redeem only a portion of the then outstanding shares of Series C Preferred Stock, then such redemption shall be effected pro rata among all those who are Holders of such outstanding shares on the applicable record date, and the Redemption Notice shall state, in addition to any other information required to be stated therein by this Section 4, that (i) only a portion of the total outstanding shares of Series C Preferred Stock are being redeemed, (ii) the total number of such shares to be redeemed, and (iii) the pro rata number of shares to be redeemed from each Holder. If, in connection with a partial redemption, any Holder surrenders for redemption one or more share certificates representing more than the number of shares of Series C Preferred Stock to be redeemed from such Holder, the Company shall, promptly after the applicable Redemption Date, remit to each such Holder a certificate representing the number of shares of Series C Preferred Stock equal to the difference between the total number of shares thereof represented by the stock certificate(s) surrendered and the number of such shares redeemed (such certificates, "Excess Share Certificates"). 4 (d) Remitting Redemption Price. No later than two (2) Business Days after the applicable Redemption Date, the Company shall remit to the Holders of shares of Series C Preferred Stock on the applicable Record Date the Redemption Price of such shares being redeemed. Notwithstanding the foregoing, the Company is not required to remit the Redemption Price to any Holder until (i) after receipt by the Company of such Holder's certificate for shares of Series C Preferred Stock to be surrendered for cancellation in connection with a redemption pursuant to this Section 4, (ii) delivery of an affidavit of Lost Certificate with indemnity (supported by a bond, if demanded by the Company), or (iii) upon satisfaction of other arrangements entered into by the Company with a Holder for the surrender of such shares. (e) Notices; Address for Payment, Etc. All notices to be given and payments to be made by the Company under this Section 4 shall be in writing and shall be deemed sent or given when given in person or when sent by certified mail, postage prepaid, return receipt requested, to each Holder on the applicable record date at such Holder's address as shown on the Company's books and records. All Excess Share Certificates to be sent to any Holder pursuant to this Section 4 shall be sent to such holder by mail, postage prepaid, to such Holder's address as shown on the Company's books and records. The Redemption Price payable to a Holder pursuant to this Section 4 shall be sent to such Holder (i) at its address as shown on the Company's books and records or (ii) sent by wire transfer to an account of such Holder designated by such Holder (with all necessary wiring information) by written notice given to the Company no later than two (2) calendar days prior to the applicable Redemption Date. 5. Voting Rights. Except as otherwise required by applicable law or this Certificate of Designation, the Holders shall have no voting rights in respect of their shares of Series C Preferred Stock. 6. Principal Office; Notices. The address of the principal offices of the Company is located at 80 Orville Drive, Bohemia, New York 11716. Any notice or certificate required by the Certificate of Incorporation, or this Certificate of Designation to be delivered to any Holder shall be deemed given when personally delivered to such Holder or upon deposit in the United States Mail, certified mail, return receipt requested and addressed to such Holder at his or its address appearing on the books and records of the Company. 7. Cancellation of Series C Preferred Stock. In the event of redemption of any shares of Series C Preferred Stock, the shares so redeemed shall be canceled, shall return to the status of authorized, but unissued shares of preferred stock of no designated series, and shall be issuable by the Company as any series of Preferred Stock. 8. Amendments and Other Actions. (a) For as long as any shares of Series C Preferred Stock are outstanding, the Company shall not, without first obtaining the approval (by vote or written consent) of the holders of 66 2/3% of the then outstanding shares of Series C Preferred Stock, voting as a separate class: In any manner (i) alter or change the rights, preferences or privileges of 5 the Series C Preferred Stock so as to affect adversely the Series C Preferred Stock; or (ii) create any new class or series of capital stock senior to or pari passu with the Series C Preferred Stock with respect to the right to payment and receipt of (A) dividends or (B) distributions upon a Liquidation Event. (b) Notwithstanding the foregoing, when authorized by resolution of the Board of Directors, the Company may amend or supplement this Certificate without the consent of any holder of Series C Preferred Stock to cure any ambiguity, defect or inconsistency herein or make any other changes herein, provided that each such amendment or supplement shall not adversely affect the interests of the Holders thereof and that prior to the filing of any document reflecting any such changes, the Company provides the Holders written notice of any such proposed changes. 9. Registration and Transfer (a) The Company shall maintain at its principal offices (or at the offices of its transfer agent or such other office or agency as it may designate by notice to the holders of the Series C Preferred Stock) a stock register for the Series C Preferred Stock in which the Company shall record the names and addresses of the Holders. (b) Prior to due presentment for registration of any Permitted Transferee (as defined below) of any Series C Preferred Stock, the Company may deem and treat the person in whose name any Series C Preferred Stock is registered as the absolute owner of such Series C Preferred Stock and the Company shall not be affected by notice to the contrary. (c) Anything contained herein to the contrary notwithstanding, the Company shall not register as a holder of any shares of Series C Preferred Stock any proposed transferee thereof, and such proposed transferee shall not be deemed a Holder for any purposes hereunder, unless: (i) such proposed transferee (A) represents to the Company in writing that such proposed transferee is an accredited investor, as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act and (B) provides written certification to the Company of the basis of such transferee's status as an accredited investor, which certification shall be satisfactory to the Company in its sole discretion, exercised in good faith; (C) agrees, in writing, to abide by the terms of, and to assume the obligations of the initial Holder under any written agreement between the Company and such initial Holder; and (D) is provided a copy of this Certificate of Designation (as the same may be amended from time to time); and (ii) the proposed transfer is made pursuant to an effective registration statement under the Securities Act and applicable state securities laws, or an exemption from such registration is available. (d) Each certificate representing any shares of Series C Preferred Stock shall contain the following legends placed prominently on the front or back of the certificate: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD OR OFFERED FOR 6 SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SAID ACT. DIRECT INSITE CORP. WILL FURNISH, WITHOUT CHARGE, TO EACH HOLDER OF ITS SERIES C PREFERRED STOCK WHO SO REQUESTS A COPY OF THE CERTIFICATE Of DESIGNATION SETTING FORTH THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF SUCH STOCK AND ANY OTHER CLASS OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. (e) No service charge shall be made to any Holder for any registration, transfer or exchange. 10. Ranking. Except as otherwise provided herein or agreed to by the Holders: with respect to the right to payment and receipt of dividends and the right to receive distributions of assets upon a Liquidation Event, the Series C Preferred Stock shall rank (i) junior to the Series B Preferred Stock; and (ii) senior to any and all other classes of capital stock of the Company, whether now existing or hereafter created, including, without limitation, the Series A Preferred Stock. 11. Action by Written Consent. Whenever, under this Certificate of Designation or otherwise, the Holders of the Series C Preferred Stock are required to take any action, such Holders may take action without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the Holders of more than 66 2/3% of the then outstanding shares of Series C Preferred Stock. IN WITNESS WHEREOF, Direct Insite Corp. has caused this Certificate of Designation to be signed by its Chief Financial Officer on this 11th day of December, 2003. DIRECT INSITE CORP. By: /s/ George Aronson Name: George Aronson Title: Chief Financial Officer 7 EX-10 5 di10kdec2003ex10-24.txt SUBSCRIPTION AGREEMENT Exhibit 10.24 Print Subscriber Name: ____________________________________ SUBSCRIPTION DOCUMENTS Private Offering of Series C Redeemable Preferred Stock ("Preferred Stock") and Common Stock Purchase Warrants: of DIRECT INSITE CORP. (a Delaware corporation) Offering: $1,500,000 of Preferred Stock 1,500 Shares Minimum Subscription: $10,000 - 10 Shares Of Preferred Stock Warrant for shares of Common Stock for each share of Preferred Stock Purchased. Number of Warrant Shares based on Closing Price of Common Stock on the trading date prior to issuance of Warrant PLEASE READ CAREFULLY BEFORE SIGNING APPLICABLE SIGNATURE PAGE ALL SUBSCRIPTIONS ARE SUBJECT TO ACCEPTANCE BY DIRECT INSITE CORP. (THE "COMPANY"). ALL INFORMATION REQUIRED TO BE PROVIDED HEREIN BY SUBSCRIBERS FOR DETERMINING INVESTOR QUALIFICATION WILL BE KEPT STRICTLY CONFIDENTIAL. HOWEVER, THE COMPANY MAY PRESENT THE INFORMATION TO SUCH PARTIES AS IT DEEMS APPROPRIATE IN ORDER TO ASSURE ITSELF THAT THE OFFER AND SALE OF THE SHARES WILL NOT RESULT IN A VIOLATION OF THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OR A VIOLATION OF THE SECURITIES LAWS OF ANY STATE. THE SHARES OF SERIES C PREFERRED STOCK ("SHARES") AND THE WARRANTS ATTACHED THERETO ARE BEING OFFERED PURSUANT TO A PRIVATE PLACEMENT IN RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE REGULATIONS THEREUNDER AFFORDED BY SECTION 4 (2) OF THE SECURITIES ACT AND RULE 506 OF REGULATION D THEREUNDER, TO A LIMITED NUMBER OF ACCREDITED INVESTORS WITHIN THE MEANING OF REGULATION D. THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR ANY STATE SECURITIES LAWS. THE SHARES MAY NOT BE SOLD OR OFFERED FOR SALE, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE SECURITIES ACT, AND APPLICABLE STATE SECURITIES LAWS AND DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. Dated: December 11, 2003 INSTRUCTIONS TO SUBSCRIBERS: The attached Subscription Agreement relates to an offer to subscribe for a minimum of 10 Shares at $1,000.00 per share. For each Share purchased, the subscriber shall receive a Warrant to purchase shares of common stock of the Company ("Common Stock") at an Exercise Price equal to 123% of the closing price of the Common Stock on the trading day immediately prior to issuance of the Warrant. The number of Warrant Shares will be equal to $1,000 (the Purchase Price per share of Preferred Stock) divided by the Exercise Price. (By way of example only, if the closing price is $0.65, then the exercise price per Warrant Share would be $0.80 [123% of $0.65] and the number of Warrant Shares represented by the Warrant would be 1,250 [$1,000 divided by $0.80]). In order to subscribe for any Shares, please complete the Subscription Documents and return them along with your payment in accordance with the following instructions: I. SUBSCRIPTION AGREEMENT. Complete the Subscription Agreement including checking the appropriate sections, as required. Affix your signature with all applicable information, including, without limitation, your address, fax number (if any), and social security number or taxpayer identification number on the appropriate signature page. II. PAYMENT Return the Subscription Agreement and related documents with a certified check or bank draft in an amount equal to the number of shares you wish to subscribe for at $1,000.00 per Share. Checks should be made payable to "Direct Insite Corp." III. SUBMISSION OF DOCUMENTS Please return: (a) the original executed Subscription Agreement, (b) a completed Internal Revenue Service Form W-9, (c) your certified check or bank draft in the appropriate amount, payable to Direct Insite Corp. (unless the Company has approved a wire transfer), to: Direct Insite Corp. attn: George Aronson 80 Orville Drive Bohemia, New York 11716 Telephone: (631) 244-1500 Facsimile: (631) 563-8085 SUBSCRIPTION AGREEMENT Private Offering of Series C Redeemable Preferred Stock and Common Stock Purchase Warrants of DIRECT INSITE CORP. Subscriber: _____________________ Amount of Subscription $ _____________ (the "Purchase Price") _________________ Number of Shares Direct Insite Corp. attn: George Aronson 80 Orville Drive Bohemia, New York 11716 Gentlemen: 1. SUBSCRIPTION a. The shares ("Shares") of Series C Redeemable Preferred Stock of Direct Insite Corp., a Delaware corporation (the "Company"), par value $0.0001 per share ("Preferred Stock"), are being subscribed for by the undersigned in connection with an offering by the Company of up to $1,500,000 in Preferred Stock (or more as the Company may determine in its sole discretion without notice to subscribers), and warrants ("Warrants") to purchase shares of common stock of the Company (the "Warrant Shares") delivered with each share of Preferred Stock purchased. The minimum investment is $10,000 (10 Shares) unless otherwise determined in the sole discretion of the Company. The undersigned understands that the Exercise Price for the Warrant Shares will equal to 123% of the closing price of the Common Stock of the Company ("Common Stock") on the trading day immediately prior to issuance of the Warrant (the "Closing Price") and the number of Warrant Shares for which the Warrant will be exercisable (the "Warrant Share Amount") will be equal to $1,000 (the Purchase Price per share of Preferred Stock) divided by the Exercise Price. b. The undersigned (sometimes referred to herein as "Subscriber"), intending to be legally bound, irrevocably subscribes for and agrees to purchase the Shares indicated above and an attached Warrant to purchase the Warrant Share Amount for each share of Preferred Stock purchased at $1,000.00, in the aggregate amount indicated above (the "Purchase Price"), on the terms and conditions described herein. The 1 undersigned herewith delivers to the Company the Purchase Price required to purchase the Shares subscribed for hereunder by delivery to the Company of a check or certified funds payable to the Company in the amount of the Purchase Price. 2. ACCREDITED INVESTOR REPRESENTATIONS a. In order to insure that the Shares are sold pursuant to appropriate exemption from registration under the Securities Act of 1933, as amended (the "Securities Act"), and in accordance with Rule 506 of Regulation D promulgated thereunder, the undersigned represents and warrants that the undersigned is an accredited investor described within one of the following categories: PLEASE CHECK THE BOX NEXT TO DEFINITION THAT APPLIES _____________________________________________________________________________ [ ] i. A bank as defined in section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(13) of the Securities Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; [ ] ii. A private business development company as defined in section 202 (a)22 of the Investment Advisers Act of 1940; [ ] iii.An organization described in section 501(c)3 of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000; 2 [ ] iv. A director, executive officer, or general partner of the Company; [ ] v. A natural person whose individual net worth, or joint net worth with that person's spouse, which, at the time of the purchase exceeds $1,000,000; [ ] vi. A natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; [ ]vii. A trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 505(b)(2)(ii) of Regulation D; or [ ]viii.An entity in which all of the equity owners are accredited investors. ______________________________________________________________________________ b. The undersigned certifies that this representation is true and correct and hereby agrees to notify the Company of any change which occurs in such information prior to the Company's acceptance of this subscription. 3. GENERAL REPRESENTATIONS AND WARRANTIES The undersigned hereby acknowledges, represents and warrants to and agrees with the Company, with full knowledge that the Company intends to rely hereon as follows: a. The undersigned is acquiring the Shares and the Warrants for the undersigned's own account as principal, for investment purposes only, and not with a view to, or for, resale or distribution of all or any part of the Shares, or the Warrants, or the Warrant Shares and no other person has a direct or indirect beneficial interest in such Warrants, Shares or Warrant Shares; b. The undersigned acknowledges its understanding that: i. The Shares, Warrants and Warrant Shares are being offered and sold without registration under the Securities Act of 1933, as amended (the "Securities Act"), or the securities laws of any state, in reliance upon the exemptions from the registration provisions of the Securities Act and the regulations thereunder afforded by Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder ("Regulation D"), but that the Company does not waive other exemptions under the Securities Act or under the laws of any State which may be available to it, 3 and, in furtherance thereof, the undersigned represents and warrants to and agrees with the Company that the undersigned has the financial ability to bear the economic risk of the investment by the undersigned in the Shares and Warrants, has adequate means for providing for the undersigned's current needs and contingencies and has no need for liquidity with respect to the undersigned's investment in the Shares and Warrants. ii. Neither the Shares, the Warrants nor the Warrant Shares have been registered under the Securities Act on the basis that the issuance thereof is exempt under on or more the following exemptions: Sections 4(2) or 3(b) of the Securities Act; under the Rules and Regulations promulgated under the Securities Act; as a transaction by an issuer not involving any public offering; or under Regulation D promulgated under the Securities Act, and the Company's reliance on one or more of such exemptions is predicated in part on the undersigned's representations and warranties set forth in this Subscription Agreement. Neither the Shares, the Warrants nor the Warrant Shares have been registered under the laws of any State ("State Laws") in reliance on specific exemptions from registration thereunder, and no securities administrator of any State or the Federal Government has made any finding or determination relating to the fairness of the Offering and no securities administrator of any State or the Federal Government has recommended or endorsed the Offering. c. If an individual, the undersigned is at least 21 years of age, and a bona fide resident of the state set forth on the signature page hereof, the address set forth is my true and correct residence address; and I am legally empowered to enter into binding contracts pursuant to the laws of such state. d. If a corporation, limited liability company, partnership, trust, qualified plan or other entity, the undersigned is authorized and qualified to become a holder of Shares and Warrants, and the person signing this Subscription Agreement on behalf of such entity has been duly authorized to do so and has not been formed for the sole purpose of acquiring the Shares and the Warrants. e. Any information which the undersigned has heretofore furnished and herewith furnishes to the Company with respect to the undersigned's financial position and business experience is correct and complete as of the date of this Agreement and if there should be any material change in such information prior to issuance to the undersigned of Shares and Warrants, the undersigned will immediately furnish such revised or corrected information to the Company. f. The foregoing acknowledgments, representations, warranties and agreements shall survive the closing at which the Shares and Warrants are issued. 4 g. The undersigned acknowledges that the undersigned has not purchased the Shares and Warrants as a result of any general solicitation or general advertising; h. The undersigned's overall commitment to investments which are not readily marketable is not disproportionate to the undersigned's net worth, and the undersigned's prospective investment in the Company will not cause such overall commitment to become excessive, and i. Nothing contained herein should be construed as tax advice to me; and I represent and warrant that I have secured independent tax advice related to my purchase of Shares and Warrants and the Warrant Shares; that I have consulted my own attorney, business adviser and tax adviser as to the legal, business, tax and related matters pertaining to the investment; that the Shares and Warrants are speculative investments which involve a high degree of risk, including, without limitation, the risk of loss of my/our entire investment; and that no governmental agency has made any finding or determination as to the fairness of the investment, nor any recommendation or endorsement of the Shares, Warrants or Warrant Shares. j. The undersigned further represents and warrants that the undersigned: i. has been furnished with, has carefully read and understands this Subscription Agreement, the Certificate of Designation, Preferences and Rights of Series C Redeemable Preferred Stock of the Company (the "Certificate of Designation") and the form of Warrant (the "Warrant"), and has relied solely on the information included therein; ii. has been given the opportunity to ask questions of and receive answers from the Company concerning the terms and conditions of the Offering, and has been given the opportunity to obtain such additional information necessary for the undersigned to evaluate the merits and risks of investment in the Shares and the Warrants to the extent that the Company possesses such information or can acquire it without unreasonable effort or expense and such information has not been furnished with any other offering literature except as referred to herein; iii. has not relied on any oral representation, warranty or information in connection with the Offering of the Company, or any officer, employee, agent, representative or affiliate of the Company; iv. has determined the Shares and the Warrants are a suitable investment for the undersigned and that at this time the undersigned can bear a complete loss of the undersigned's entire investment therein; and 5 v. has such knowledge and experience in financial and business matters that the undersigned is capable of evaluating the merits and risks of the undersigned's investment in the Shares and the Warrants. 4. SUBSCRIPTION IRREVOCABLE BY SUBSCRIBER BUT SUBJECT TO ACCEPTANCE OR REJECTION BY THE COMPANY a. This Agreement is not, and shall not be, revocable by me. I intend to be legally bound by this Agreement. b. The Company, in its sole discretion, has the right to accept or reject this subscription, in whole or in part, for any reason whatsoever. 5. CLOSING. Closings of the sale of Shares and Warrants in the Offering shall take place from time to time as and when the Company accepts subscriptions therefor (each, a "Closing"). At each Closing, the Company shall issue certificates representing the Shares and Warrants to each investor whose subscription therefor has been accepted by the Company prior to the date of such Closing, but has not yet received Shares and Warrants, in consideration of delivery by such subscribers of the Purchase Price. 6. AGREEMENT TO INDEMNIFY AND HOLD HARMLESS. The undersigned agrees to indemnify and hold harmless the Company, its affiliates and their respective directors, officers, employees, agents, members, controlling persons and representatives (the Company and each such person, an "Indemnified Party," and collectively, the "Indemnified Parties"), from and against any and all losses, claims, damages, liabilities and expenses whatsoever (including, but not limited to, any and all expenses whatsoever reasonably incurred investigating, preparing or defending against any litigation commenced or threatened or any claim whatsoever), joint or several, as incurred, to which any such Indemnified Parties may become subject under any applicable United States federal or state law or the laws of any other domestic or foreign jurisdiction, or otherwise, and related to or arising out of or based upon any false representation, warranty or acknowledgment, or breach or failure by the undersigned to comply with any covenant or agreement made by the undersigned herein or in any other document furnished by the undersigned to any of the foregoing in connection with the Offering and the transactions contemplated thereby. 7. GOVERNING LAW, ETC. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York applicable to agreements made and to be performed wholly within such State, without giving effect to conflicts of law principles. All captions and section headings are for convenience only. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or persons or entity or entities may require. This Agreement is not transferable or assignable by the Subscriber. If the 6 Subscriber is more than one person, the obligations of the Subscriber shall be joint and several and the representations, warranties and agreements herein contained shall be deemed to be made by and be binding upon each such person and each such person's heirs, executors, administrators and successors and assigns. BALANCE OF PAGE INTENTIONNALLY LEFT BLANK 7 INDIVIDUAL SUBSCRIPTION SIGNATURE PAGE Private Offering of Series C Redeemable Preferred Stock and Common Stock Purchase Warrants of DIRECT INSITE CORP. (a Delaware Corporation) The undersigned, desiring to purchase Series C Redeemable Preferred Stock ("Preferred Stock") and Common Stock Purchase Warrants of Direct Insite Corp., a Delaware corporation (the "Company"), hereby agrees to all the terms of the Subscription Agreement to which this Signature Page was attached and, upon acceptance of the Subscription Agreement by the Company, agrees to be bound by the terms and provisions thereof. By executing this Subscription Signature Page, the undersigned hereby A. executes, adopts and agrees to all terms, conditions and representations of this Subscription Agreement, and B. subscribes for ____________ Shares of Preferred Stock, and Warrants to purchase the number of shares of Common Stock for each share of Preferred Stock purchased determined by the Company in accordance with the terms of the Subscription Agreement, at $1,000.00 per Share of Preferred Stock (minimum purchase, $10,000 Shares). Printed Name & Residence Address (Note: Business Address will NOT be accepted.) Name_________________________________ Phone ( )_________________ Street_________________________________ Fax ( )________________ City_____________ State____ Zip _________ E-Mail_________________________ ________________________________________________________________________________ Signature ___________________________ Date: Social Security Number____________________ ________________________________________________________________________________ Subscription accepted as of _________________________________, 200_ Direct Insite Corp. By:______________________ Authorized Signatory 8 ENTITY SUBSCRIPTION PAGE Private Offering of Series C Redeemable Preferred Stock and Common Stock Purchase Warrants of DIRECT INSITE CORP. (a Delaware corporation) The undersigned, desiring to purchase Series C Redeemable Preferred Stock and Common Stock Purchase Warrants of Direct Insite Corp., a Delaware corporation (the "Company"), hereby agrees to all the terms of the Subscription Agreement to which this Signature Page was attached and, upon acceptance of the Subscription Agreement by the Company, agrees to be bound by the terms and provisions thereof. By executing this Subscription Agreement Page, the undersigned hereby: a. executes, adopts and agrees to all terms, conditions and representations of this Subscription Agreement, and b. subscribes for ____________ Shares of Preferred Stock, and Warrants to purchase the number of shares of Common Stock determined by the Company in accordance with the terms of the Subscription Agreement for each share of Preferred Stock purchased, at $1,000.00 per Share of Preferred Stock (minimum purchase, $10,000 Shares). ________________________________________________________________________________ Printed Name & Address of Principal State of Organization (if different from of Place of Business Principal Place of Business: Name ________________________ Street _________________________ Phone ( ____ ) City _______________State_____Zip E-mail ____________ FORM OF OWNERSHIP -- Check type of Subscriber. _________ TRUST (Please include name of trust, name of trustee, date trust was formed and copy of the trust agreement). _________ PARTNERSHIP (Please include copy of the Partnership agreement authorizing signature). __________ CORPORATION (Please include certified corporate resolution(s) authorizing signature and purchase of Shares). 9 __________ OTHER (Please specify and include copy of document authorizing signature). The undersigned trustee, partner or officer warrants that he has full power and authority from all beneficiaries, partners or shareholders of the entity named above to execute this Subscription Agreement Signature Page on behalf of such entity and that investment is not prohibited by the governing documents of such entity. ________________________________________________________________________________ Dated: ___________________ _________________________________ (Name of Entity) By: _______________________________ (Trustee, partner or authorized corporate officer) ___________________________________ Taxpayer Identification Number Subscription accepted as of Direct Insite Corp. ___________________ , 200_ By: __________________________ Authorized Signatory 10 EX-23 6 di10kdec2003ex23.txt AUDITORS' CONSENT Exhibit 23(a) INDEPENDENT AUDITORS' CONSENT ----------------------------- We consent to the incorporation by reference in the Registration Statements of Direct Insite Corp. on Forms S-8 (File No. 33-88260, effective December 30, 1994; File No. 33- 94058, effective June 28, 1995; File No. 333-4070, effective April 25, 1996; File No. 333-42795, effective December 19, 1997; File No. 333-52875, effective May 15, 1998; File No. 333-72203, effective February 11, 1999; and File No. 333-33274, effective March 24, 2000) of our report dated April 8, 2004, appearing in the Annual Report on Form 10-KSB of Direct Insite Corp. for the year ended December 31, 2003. /s/ Marcum & Kliegman LLP Marcum & Kliegman LLP April 13, 2004 New York, New York EX-31 7 di10kdec2003ex31.txt CERTIFICATIONS Exhibit 31 I, James Cannavino certify that: 1. I have reviewed this annual report on Form 10-KSB of Direct Insite Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. April 14, 2004 /s/James Cannavino ------------------ James Cannavino Chief Executive Officer I, Michael J. Beecher, certify that: 1. I have reviewed this annual report on Form 10-KSB of Direct Insite Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. April 14, 2004 /s/Michael J. Beecher --------------------- Michael J. Beecher Chief Financial Officer EX-32 8 di10kdec2003-ex32.txt CERTIFICATIONS Exhibit 32 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of Direct Insite Corp., (the "Company") on Form 10-KSB for the year ending December 31,2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James Cannavino, Chief Executive Officer, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: April 14, 2004 /s/James Cannavino ----------------------- James Cannavino Chief Executive Officer Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of Direct Insite Corp., (the "Company") on Form 10-KSB for the year ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael J. Beecher, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: April 14, 2004 /s/Michael J. Beecher ----------------------- Michael J. Beecher Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----