-----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, DfPukyPds1ERyeS9KTpOsK/Eiv25gCVtiMR8Sc7DGpB3qq+yGF+fgOCWyCDA27MI gDaV9CR5f4Hlm59gDLDqaw== 0001201800-05-000056.txt : 20050331 0001201800-05-000056.hdr.sgml : 20050331 20050331160725 ACCESSION NUMBER: 0001201800-05-000056 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050329 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant ITEM INFORMATION: Unregistered Sales of Equity Securities ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20050331 DATE AS OF CHANGE: 20050331 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20660 FILM NUMBER: 05720390 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 8-K 1 diri8kmetvp-march2005.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: March 29, 2005 (Date of earliest event reported) DIRECT INSITE CORP. (Exact Name of Registrant as Specified in its Charter) Delaware 0-20660 11-2895590 (State or other Jurisdiction (Commission File Number) (IRS Employer of Incorporation) Identification Number) 80 Orville Drive, Bohemia, NY 11716 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (631) 244-1500 Not applicable (Former name or former address, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act [ ] Pre-commencement communications pursuant to Rule 13e-4c under the Exchange Act (17 CFR 240.13e-4c) ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT On March 29, 2005, we entered into a Securities Purchase Agreement (the "Agreement") with Sigma Opportunity Fund, LLC and Metropolitan Venture Partners II, L.P. for the issuance of $650,000 and $100,000, respectively, in Senior Subordinated Secured Notes (the "Notes") and warrants to purchase 650,000 and 100,000, respectively, shares of our common stock (the "Warrants"). Michael Levin, a member of our Board of Directors, is an affiliate of Metropolitan Venture Partners II, L.P. The Notes bear interest at 5% per annum, payable quarterly in cash or shares of our common stock at the election of the holder and mature on the earlier to occur of (i) September 29, 2006, (ii) the date on which demand for payment of our loan with JP Morgan Chase Bank dated as of June 27, 2003 is made, and (iii) commencing May 13, 2005, the due date of the loan with JP Morgan Chase Bank. Default interest at a rate of 12% per annum is due upon a default under the terms of the Note. In addition, we granted the investors a secured interest in all of our assets junior to certain existing bank lines and excluding certain receivables. The Warrants are exercisable for seven years from the date of issuance at a purchase price of $0.90 per share, subject to adjustment under certain events. The Agreement requires us to file with the SEC a registration statement which covers the resale of the common stock issuable (i) as interest on the Notes and (ii) upon exercise of the Warrants. ITEM 2.03 CREATION OF A DIRECT FINANCIAL OBLIGATION See Item 1.01 above. ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES See Item 1.01 above. ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS (c) Exhibits. 4.1 Securities Purchase Agreement dated as of March 29, 2005. 4.2 Form of Senior Subordinated Secured Note. 4.3 Form of Common Stock Purchase Warrant. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIRECT INSITE CORP. By: /s/ Michael J. Beecher ---------------------------- Michael J. Beecher Chief Financial Officer Dated: March 31, 2005 EX-4.1 2 diri8ksecpurex4-1.txt SECURITIES PURCHASE AGREEMENT Exhibit 4.1 SECURITIES PURCHASE AGREEMENT dated as of March 29, 2005 by and between DIRECT INSITE CORP., SIGMA OPPORTUNITY FUND, LLC AND METROPOLITAN VENTURE PARTNERS II, L.P. SENIOR SUBORDINATED SECURED NOTES AND COMMON STOCK PURCHASE WARRANTS DIRECT INSITE CORP. SECURITIES PURCHASE AGREEMENT SENIOR SUBORDINATED SECURED NOTES and COMMON STOCK PURCHASE WARRANTS TABLE OF CONTENTS
Page 1. DEFINITIONS.................................................................................................1 2. PURCHASE AND SALE; PURCHASE PRICE...........................................................................8 (a) Purchase...............................................................................................8 (b) Form of Payment........................................................................................8 (c) Closing................................................................................................8 3. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE BUYERS..................................................8 (a) Purchase for Investment................................................................................8 (b) Accredited Investor....................................................................................9 (c) Reoffers and Resales...................................................................................9 (d) Company Reliance.......................................................................................9 (e) Information Provided...................................................................................9 (f) Absence of Approvals..................................................................................10 (g) Securities Purchase Agreement.........................................................................10 (h) Buyer Status..........................................................................................10 (i) Short Sales...........................................................................................10 4. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE COMPANY................................................10 (a) Organization and Authority............................................................................10 (b) Qualifications........................................................................................10 (c) Capitalization........................................................................................11 (d) Concerning the Shares and the Common Stock............................................................11 (e) Corporate Authorization...............................................................................12 (f) Non-contravention.....................................................................................12 (g) Approvals, Filings, Etc...............................................................................13 (h) Information Provided..................................................................................13 (i) Conduct of Business...................................................................................13 (j) SEC Filings...........................................................................................14 (k) Absence of Certain Proceedings........................................................................14 (l) Financial Statements; Liabilities.....................................................................14 (m) Material Losses.......................................................................................15 (n) Absence of Certain Changes............................................................................15 (o) Intellectual Property.................................................................................15 (p) Internal Accounting Controls..........................................................................16 - i - (q) Compliance with Law...................................................................................16 (r) Properties............................................................................................16 (s) Labor Relations.......................................................................................17 (t) Insurance.............................................................................................17 (u) Tax Matters...........................................................................................17 (v) Investment Company....................................................................................17 (w) Absence of Brokers, Finders, Etc......................................................................17 (x) No Solicitation.......................................................................................17 (y) ERISA Compliance......................................................................................18 (z) Rights Agreement; Interested Stockholder..............................................................18 (aa) Sarbanes-Oxley Act....................................................................................18 (bb) Consulting Agreements.................................................................................18 5. CERTAIN COVENANTS..........................................................................................18 (a) Transfer Restrictions.................................................................................18 (b) Restrictive Legends...................................................................................19 (c) Reporting Status......................................................................................20 (d) Form D.................................................................................................. (e) State Securities Laws.................................................................................20 (f) Limitation on Certain Actions.........................................................................20 (g) Use of Proceeds.......................................................................................21 (h) Commercially Reasonable Efforts.......................................................................21 (i) Debt Obligation.......................................................................................21 (j) Follow-on Financing...................................................................................21 (k) Series A Certificate of Designation...................................................................21 (l) Certain Restrictions..................................................................................22 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.............................................................22 7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE...........................................................22 8. REGISTRATION RIGHTS........................................................................................24 (a) Mandatory Registration................................................................................24 (b) Obligations of the Company............................................................................25 (c) Obligations of the Buyers and Other Investors.........................................................28 (d) Rule 144..............................................................................................30 (e) Piggy-Back Registrations..............................................................................30 9. INDEMNIFICATION AND CONTRIBUTION...........................................................................31 (a) Indemnification.......................................................................................31 (b) Contribution..........................................................................................32 (c) Other Rights..........................................................................................33 10. MISCELLANEOUS...........................................................................................33 (a) Governing Law.........................................................................................33 (b) Headings..............................................................................................33 (c) Severability..........................................................................................33 (d) Notices...............................................................................................33 (e) Counterparts..........................................................................................33 (f) Entire Agreement; Benefit.............................................................................34 (g) Waiver................................................................................................34 - ii - (h) Amendment.............................................................................................34 (i) Further Assurances....................................................................................35 (j) Assignment of Certain Rights and Obligations..........................................................35 (k) Expenses..............................................................................................35 (l) Termination...........................................................................................36 (m) Survival..............................................................................................36 (n) Public Statements, Press Releases, Etc................................................................37 (o) Construction..........................................................................................37 ANNEXES - ------- ANNEX I Form of Senior Subordinated Secured Note ANNEX II Form of Common Stock Purchase Warrant ANNEX III Form of Opinion of Beckman, Lieberman & Barandes, LLP ANNEX IV Form of Consent of Metropolitan Venture Partners II, LP ANNEX V Form of Consent of Mountain Meadow Farm
- iii - SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT, dated as of March 29, 2005 (this "Agreement"), by and between DIRECT INSITE CORP., a Delaware corporation (the "Company"), with headquarters located at 80 Orville Drive, Bohemia, New York 11716, SIGMA OPPORTUNITY FUND, LLC and METROPOLITAN VENTURE PARTNERS II, L.P. (each a "Buyer" and together the "Buyers"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, each Buyer wishes to purchase from the Company and the Company wishes to sell to each Buyer, upon the terms and subject to the conditions of this Agreement, a promissory note of the Company having the principal amount set forth on Schedule 2(a) of this Agreement opposite each Buyer's name in the aggregate totaling $750,000 and in connection with which the Company shall issue to each Buyer warrants to purchase a total of 750,000 shares of Common Stock (such capitalized term and all other capitalized terms used in this Agreement having the meanings provided in Section 1); NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. DEFINITIONS (a) As used in this Agreement, the terms "Agreement", "Buyer", "Buyers" and "Company" shall have the respective meanings assigned to such terms in the introductory paragraph of this Agreement. (b) All the agreements or instruments herein defined shall mean such agreements or instruments as the same may from time to time be supplemented or amended or the terms thereof waived or modified to the extent permitted by, and in accordance with, the terms thereof and of this Agreement. (c) The following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Affiliate" means, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the subject Person. For purposes of this definition, "control" (including, with correlative meaning, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Blackout Period" means the period of up to 20 Trading Days (whether or not consecutive) during any period of 365 consecutive days after the date the Company notifies the Investors that they are required, pursuant to Section 8(c)(4), to suspend offers and sales of Registrable Securities as a result of an event or circumstance described in Section 8(b)(5)(A), during which period, by reason of Section 8(b)(5)(B), the Company is not required to amend the Registration Statement or supplement the related Prospectus. "Business Day" means any day other than a Saturday, Sunday or a day on which commercial banks in The City of New York are authorized or required by law or executive order to remain closed. "Claims" means any losses, claims, damages, liabilities or expenses, including, without limitation, reasonable fees and expenses of legal counsel (joint or several), incurred by a Person. "Closing Date" means 3:00 p.m., New York City time, on March 29, 2005 or such other mutually agreed to time. "Code" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder and published interpretations thereof. "Common Stock" means the Common Stock, par value $.0001 per share, of the Company. "Common Stock Equivalent" means any warrant, option, subscription or purchase right with respect to shares of Common Stock, any security convertible into, exchangeable for, or otherwise entitling the holder thereof to acquire, shares of Common Stock or any warrant, option, subscription or purchase right with respect to any such convertible, exchangeable or other security. "Current Fair Market Value" shall have the meaning provided or to be provided in the Warrants. "Encumbrances" means all mortgages, deeds of trust, claims, security interests, liens, pledges, leases, subleases, charges, escrows, options, proxies, rights of occupancy, rights of first refusal, preemptive rights, covenants, conditional limitations, hypothecations, prior assignments, easements, title retention agreements, indentures, security agreements or any other encumbrances of any kind. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder and published interpretations thereof. "Event of Default" shall have the meaning to be provided or provided in the Notes. "Follow-on Financing" shall mean a private placement consummated by the Company within 45 days after the Closing Date pursuant to which Sigma is the - 2 - lead investor and Sigma and its Affiliates and appointees invest between $2,500,000 and $3,500,000, including the conversion, if any, of the Notes into such financing. "Indebtedness" shall have the meaning to be provided or provided in the Notes. "Indemnified Party" means the Company, each of its directors, each of its officers who signs the Registration Statement, each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act, any underwriter and any other stockholder selling securities pursuant to the Registration Statement or any of its directors or officers or any Person who controls such stockholder or underwriter within the meaning of the 1933 Act or the 1934 Act. "Indemnified Person" means the Buyers and each other Investor who beneficially owns or holds Registrable Securities and each other Investor who sells such Registrable Securities in the manner permitted under this Agreement, the directors, if any, of such Investor, the officers or persons performing similar functions, if any, of the Buyers and any such Investor, each Person, if any, who controls a Buyer or any such Investor within the meaning of the 1933 Act or the 1934 Act, any underwriter (as defined in the 1933 Act) acting on behalf of an Investor who participates in the offering of Registrable Securities of such Investor in accordance with the plan of distribution contained in the Prospectus, the directors, if any, of such underwriter and the officers, if any, of such underwriter, and each Person, if any, who controls any such underwriter within the meaning of the 1933 Act or the 1934 Act. "Initial Warrant Exercise Price" means the "Purchase Price," as defined in the Warrants, on the Closing Date. "Inspector" means any attorney, accountant or other agent retained by an Investor for the purposes provided in Section 8(b)(9). "Interest Shares" means any shares of Common Stock issued in payment of interest on the Notes. "Intellectual Property" means all franchises, patents, trademarks, service marks, tradenames (whether registered or unregistered), copyrights, corporate names, licenses, trade secrets, proprietary software or hardware, proprietary technology, technical information, discoveries, designs and other proprietary rights, whether or not patentable, and confidential information related to Intellectual Property otherwise included in this definition (including, without limitation, know-how, processes and technology) used in the conduct of the business of the Company or any Subsidiary, or in which the Company or any Subsidiary has an interest. "Investor" and "Investors" means the Buyer or Buyers, as the case may be, and any transferee or assignee who agrees to become bound by the provisions of Sections 5(a), 5(b), 8, 9, and 10 of this Agreement. "Margin Stock" shall have the meaning provided in Regulation U of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221). - 3 - "Market Price" shall have the meaning to be provided or provided in the Note. "Maturity Date" shall have the meaning to be provided or provided in the Notes. "Nasdaq" means the Nasdaq National Market. "Nasdaq SmallCap" means the Nasdaq SmallCap Market. "NASD" means the National Association of Securities Dealers, Inc. "1934 Act" means the Securities Exchange Act of 1934, as amended. "1933 Act" means the Securities Act of 1933, as amended. "Next Financing" shall have the meaning provided or to be provided in the Notes. "Notes" means the Senior Subordinated Secured Notes of the Company issued to the Buyers in the form attached as Annex I. "Permitted Indebtedness" shall have the meaning to be provided or provided in the Notes. "Person" means any natural person, corporation, partnership, limited liability company, trust, incorporated organization, unincorporated association or similar entity or any government, governmental agency or political subdivision. "Prospectus" means the prospectus forming part of the Registration Statement at the time the Registration Statement is declared effective and any amendment or supplement thereto (including any information or documents incorporated therein by reference). "Purchase Price" means the purchase price for the Notes set forth on Schedule 2(a) of this Agreement. "QIB" shall have the meaning provided or to be provided in the Notes. "Record" means all pertinent financial and other records, pertinent corporate documents and properties of the Company subject to inspection for the purposes provided in Section 8(b)(9). "register," "registered," and "registration" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the 1933 Act and pursuant to Rule 415, and the declaration or ordering of effectiveness of such Registration Statement by the SEC. - 4 - "Registrable Securities" means (1) the Shares, (2) if the Common Stock is changed, converted or exchanged by the Company or its successor, as the case may be, into any other stock or other securities on or after the date hereof, such other stock or other securities which are issued or issuable in respect of or in lieu of the Shares and (3) if any other securities are issued to holders of the Common Stock (or such other shares or other securities into which or for which the Common Stock is so changed, converted or exchanged as described in the immediately preceding clause (2)) upon any reclassification, share combination, share subdivision, share dividend, merger, consolidation or similar transaction or event, such other securities which are issued or issuable in respect of or in lieu of the Common Stock. "Registration Default Period" means the period following August 30, 2005 during which any Registration Event occurs and is continuing. "Registration Event" means the occurrence of any of the following events if the Company is required to file a Registration Statement pursuant to Section 8(a)(1): (i) the Company fails to file with the SEC the Registration Statement on or before the date by which the Company is required to file the Registration Statement pursuant to Section 8(a)(1), (ii) the Registration Statement covering the Registerable Securities is not declared effective by the date agreed upon by the Company with the investors in the Next Financing, or in any case no later than December 31, 2005, (iii) after the SEC Effective Date, sales cannot be made pursuant to the Registration Statement for any reason (including without limitation by reason of a stop order of any untrue statement of a material fact or omission of a material fact in the Registration Statement, or the Company's failure to update the Registration Statement) but except as excused pursuant to Section 8(b)(5), (iv) the Common Stock generally or the Registrable Securities specifically are not listed or included for quotation on a Trading Market, or trading of the Common Stock is suspended or halted for a period exceeding 5 days on the Trading Market which at the time constitutes the principal market for the Common Stock, or (v) the Company fails, refuses or is otherwise unable timely to issue Interest Shares in accordance with the terms of the Notes or Warrant Shares upon exercise of the Warrant in accordance with the terms of the Warrant, or certificates therefor as required under the Transaction Documents or the Company fails, refuses or is otherwise unable timely to transfer any Shares as and when required by the Transaction Documents. "Registration Period" means the period from the SEC Effective Date to the earlier of (A) the date which is three years after the Closing Date (B), such date after which each Investor may sell all of its Registrable Securities without registration under the 1933 Act pursuant to Rule 144, free of any limitation on the volume of such securities which may be sold in any period) and (C) the date on which the Investors no longer own any Registrable Securities. - 5 - "Registration Statement" means a registration statement on Form S-1, Form SB-2, Form S-3 or such other form as may be available to the Company to be filed with the SEC under the 1933 Act relating to the Registrable Securities and which names the Investors as selling stockholders. "Regulation D" means Regulation D under the 1933 Act. "Repurchase Event" shall have the meaning to be provided or provided in the Note. "Required Information" means, with respect to each Investor, all information regarding such Investor, the Registrable Securities held by such Investor or which such Investor has the right to acquire and the intended method of disposition of the Registrable Securities held by such Investor or which such Investor has the right to acquire as shall be required by the 1933 Act to effect the registration of the resale by such Investor of such Registrable Securities. "Rule 144" means Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time provide a "safe harbor" exemption from registration under the 1933 Act so as to permit a holder to sell securities of the Company to the public without registration under the 1933 Act. "Rule 144A" means Rule 144A under the 1933 Act or any successor rule thereto. "SEC" means the Securities and Exchange Commission. "SEC Effective Date" means the date the Registration Statement is declared effective by the SEC. "SEC Filing Date" means the date the Registration Statement is first filed with the SEC pursuant to Section 8. "SEC Reports" means the Company's (1) Annual Report on Form 10-KSB for the year ended December 31, 2003, (2) Quarterly Reports on Form 10-QSB for the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, (3) Current Reports on Form 8-K filed with the SEC on April 16, 2004, May 14, 2004, May 26, 2004, August 24, 2004, November 24, 2004 and February 23, 2005, and (4) all other periodic and other reports filed by the Company with the SEC pursuant to the 1934 Act subsequent to February 23, 2005, and prior to the date hereof, in each case as filed with the SEC and including the information and documents (other than exhibits) incorporated therein by reference. "Securities" means, collectively, the Notes, the Shares and the Warrants. "Shares" means the Interest Shares and the Warrant Shares. "Sigma" shall mean Sigma Opportunity Fund, LLC. - 6 - "Subsidiary" means any corporation or other entity of which a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company. "Trading Day" means at any time a day on which any of a national securities exchange, Nasdaq, Nasdaq SmallCap or such other securities market as at such time constitutes the principal securities market for the Common Stock is open for general trading of securities. "Trading Market" means the Over-The-Counter Bulletin Board, the American Stock Exchange, Inc., the Nasdaq, the Nasdaq SmallCap or the New York Stock Exchange, Inc. "Transaction Documents" means, collectively, this Agreement, the Securities and the other agreements, instruments and documents contemplated hereby and thereby. "Transfer Agent" means Manhattan Transfer & Registrar Company, as transfer agent and registrar for the Common Stock, or its successor. "Violation" means: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any state securities law or any rule or regulation under the 1933 Act, the 1934 Act or any state securities law, or (iv) any breach or alleged breach by any Person other than the Buyers of any representation, warranty, covenant, agreement or other term of any of the Transaction Documents. "Warrants" means the Common Stock Purchase Warrants in the form attached hereto as Annex II. "Warrant Shares" means the shares of Common Stock issuable upon exercise of the Warrants. - 7 - 2. PURCHASE AND SALE; PURCHASE PRICE. (a) Purchase. Upon the terms and subject to the conditions of this Agreement, each Buyer hereby agrees to purchase from the Company, and the Company hereby agrees to sell to each Buyer, on the Closing Date, a Note in the principal amount set forth on Schedule 2(a) of this Agreement opposite each Buyer's name and having the terms and conditions as set forth in the form of the Note attached hereto as Annex I for the Purchase Price. In connection with the purchase of the Notes by the Buyers, the Company shall issue to each Buyer at the closing on the Closing Date Warrants in the form of Annex II entitling the holder to purchase a number of shares of Common Stock determined on the basis of one share of Common Stock for each $1.00 principal amount of the Note purchased by Buyer. (b) Form of Payment. Payment by the Buyers of the Purchase Price to the Company on the Closing Date shall be made by wire transfer of immediately available funds to: Citibank N.A. 4175 Veterans Memorial Highway Ronkonkoma, NY 11779 ABA# 021 001486 For Credit to: Direct Insite Corp. 80 Orville Drive Bohemia, NY 11716 Account number: 24046773 (c) Closing. The issuance and sale of the Notes and the issuance of the Warrants shall occur on the Closing Date at Moomjian & Waite, LLP, 100 Jericho Quadrangle, Jericho, New York 11753. At the closing, upon the terms and subject to the conditions of this Agreement, (1) the Company shall issue and deliver to the Buyers the Notes and the Warrants against payment by the Buyers to the Company of an amount equal to the Purchase Price, and (2) the Buyers shall pay to the Company and the Company shall have received in good funds an amount equal to the Purchase Price against delivery by the Company to the Buyers of the Notes and the Warrants. 3. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE BUYERS. Each Buyer, severally and not jointly, represents and warrants as to itself to, and covenants and agrees with, the Company as follows: (a) Purchase for Investment. The Buyer is purchasing the Note and acquiring the Warrants for its own account for investment and not with a view towards the public sale or distribution thereof within the meaning of the 1933 Act; and in the event that the Buyer shall acquire any Shares prior to the SEC Effective - 8 - Date of a Registration Statement covering the resale of such Shares, such acquisition by the Buyer shall be for its own account for investment and not with a view towards the public sale or distribution thereof within the meaning of the 1933 Act prior to the SEC Effective Date; and the Buyer has no intention of making any distribution, within the meaning of the 1933 Act, of the Shares except in compliance with the registration requirements of the 1933 Act or pursuant to an exemption therefrom; (b) Accredited Investor. The Buyer is an "accredited investor" as that term is defined in Rule 501 of Regulation D under the 1933 Act by reason of Rule 501(a)(3) thereof; (c) Reoffers and Resales. The Buyer will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Securities unless registered under the 1933 Act, pursuant to an exemption from registration under the 1933 Act or in a transaction not requiring registration under the 1933 Act; (d) Company Reliance. The Buyer understands that (1) the Note is being offered and sold and the Warrants are being issued to the Buyer, (2) the Interest Shares, if any, will be issued to the Buyer and (3) upon exercise of the Warrants, the Warrant Shares will be sold to the Buyer, in each such case in reliance on one or more exemptions from the registration requirements of the 1933 Act, including, without limitation, Regulation D, and exemptions from state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein, in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire or receive an offer to acquire the Securities; (e) Information Provided. The Buyer and its advisors, if any, have requested, received and considered all information relating to the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and information relating to the offer and sale of the Note and the offer of the Interest Shares and the Warrant Shares deemed relevant by them (assuming the accuracy and completeness of the SEC Reports and of the Company's responses to the Buyer's requests); the Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company concerning the terms of the offering of the Securities and the business, properties, operations, condition (financial or other), results of operations and prospects of the Company and its Subsidiaries and have received satisfactory answers to any such inquiries; without limiting the generality of the foregoing, the Buyer has had the opportunity to obtain and to review the SEC Reports; in connection with its decision to purchase the Note and to acquire the Warrants, the Buyer has relied solely upon the SEC Reports, the representations, warranties, covenants and agreements of the Company set forth in this Agreement and to be contained in the other Transaction Documents, as well as any investigation of the Company completed by the Buyer or its advisors; the Buyer understands that its investment in the Securities involves a high degree of risk; and the Buyer understands that the offering of the Note is being made to the Buyer as part of an offering in the aggregate amount of $750,000 (subject, however, to the right of the Company at any time prior to execution and delivery of this Agreement by the Company, in its sole discretion, to accept or reject an offer by the Buyer to purchase the Note and to acquire the Warrants); - 9 - (f) Absence of Approvals. The Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities; (g) Securities Purchase Agreement. The Buyer has all requisite power and authority, corporate or otherwise, to execute, deliver and perform its obligations under this Agreement and the other agreements executed by the Buyer in connection herewith and to consummate the transactions contemplated hereby and thereby; and this Agreement has been duly and validly authorized, duly executed and delivered by the Buyer and, assuming due execution and delivery by the Company, is a valid and binding agreement of the Buyer enforceable in accordance with its terms, except as the enforceability hereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and general principles of equity, regardless of whether enforcement is considered in a proceeding in equity or at law; and (h) Buyer Status. The Buyer is not a "broker" or "dealer" as those terms are defined in the 1934 Act which is required to be registered with the SEC pursuant to Section 15 of the 1934 Act. (i) Short Sales. Neither Buyer has an open short position in the Common Stock of the Company, and each Buyer agrees that it will not, and that it will cause its Affiliates not to, engage in any short sales of or hedging transactions with respect to the Common Stock. 4. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE COMPANY. The Company represents and warrants to, and covenants and agrees with, the Buyers as follows: (a) Organization and Authority. The Company and each of the Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and (i) each of the Company and the Subsidiaries has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as described in the SEC Reports and as currently conducted, and (ii) the Company has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and the other Transaction Documents to be executed and delivered by the Company in connection herewith, and to consummate the transactions contemplated hereby and thereby. Except as set forth on Schedule 4(a), the Company does not have any equity investment in any other Person other than the Subsidiaries listed in Schedule 4(a) hereto. The value on the books of the Company of the Subsidiaries and all other Persons in which the Company has an equity interest is listed on Schedule 4(a). (b) Qualifications. The Company and each of the Subsidiaries are duly qualified to do business as foreign corporations and are in good standing in all jurisdictions where such qualification is necessary and where failure so to - 10 - qualify could have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole. (c) Capitalization. (1) The authorized capital stock of the Company consists of (A) 50,000,000 shares of Common Stock, of which 4,507,086 shares are issued and outstanding and (B) 2,000,000 shares of Preferred Stock, $.0001 par value, of which (i) 134,680 have been designated as Series A Convertible Preferred Stock, 134,680 of which are issued and outstanding, (ii) 1,000 have been designated as Series B Redeemable Preferred Stock, 974 of which are issued and outstanding, (iii) 2,000 of which have been designated as Series C Redeemable Preferred Stock, 2,000 of which are issued and outstanding, and (iv) 1,500 of which have been designated as Series D Redeemable Preferred Stock, 100 of which are issued and outstanding. Schedule 4(c) hereto discloses all outstanding options or warrants for the purchase of, or rights to purchase or subscribe for, or securities convertible into, exchangeable for, or otherwise entitling the holder to acquire, Common Stock or other capital stock of the Company, or any contracts or commitments to issue or sell Common Stock or other capital stock of the Company or any such options, warrants, rights or other securities. (2) The Company has duly reserved from its authorized and unissued shares of Common Stock the full number of shares required for (A) all options, warrants, convertible securities, exchangeable securities, and other rights to acquire shares of Common Stock which are outstanding and (B) all shares of Common Stock and options and other rights to acquire shares of Common Stock which may be issued or granted under the stock option and similar plans which have been adopted by the Company or any Subsidiary; and, immediately following the Closing Date, after giving effect to any antidilution or similar adjustment arising by reason of issuance of the Notes and the Warrants, the total number of shares of Common Stock reserved and required to be reserved from the authorized and unissued shares of Common Stock for purposes of all such options, warrants, convertible securities, other rights, and stock option and similar plans (excluding the Notes and the Warrants) will be 9,462,806. Each outstanding class or series of securities of the Company for which any such antidilution adjustment will occur is identified on Schedule 4(c) attached hereto, together with the amount of such antidilution adjustment for each such class or series. The outstanding shares of Common Stock of the Company and outstanding options, warrants, rights, and other securities entitling the holders to purchase or otherwise acquire Common Stock have been duly and validly authorized and issued. None of the outstanding shares of Common Stock or options, warrants, rights, or other such securities has been issued in violation of the preemptive rights of any securityholder of the Company. To the knowledge of the Company, the offers and sales of the outstanding shares of Common Stock of the Company and options, warrants, rights, and other securities were at all relevant times either registered under the 1933 Act and applicable state securities laws or exempt from such requirements. Except for as set forth on Schedule 4(c) attached hereto, no holder of any of the Company's securities has any rights, "demand," "piggy-back" or otherwise, to have such securities registered by reason of the intention to file, filing or effectiveness of the Registration Statement. (d) Concerning the Shares and the Common Stock. The Shares have been duly authorized and the Interest Shares, when issued in payment of interest on the Notes, and the Warrant Shares, when issued upon exercise of the Warrants, will - 11 - be duly and validly issued, fully paid and non-assessable and will not subject the holder thereof to personal liability by reason of being such holder. Except as waived by Metropolitan Venture Partners II, LP as contemplated by Section 7(g) hereof, there are no preemptive or similar rights of any stockholder of the Company or any other Person to acquire any of the Shares or the Warrants. The Company has duly reserved 750,000 shares of Common Stock for issuance upon exercise of the Warrants, and such shares shall remain so reserved, and the Company shall from time to time reserve such additional shares of Common Stock as shall be required to be reserved pursuant to the Warrants, so long as the Warrants are outstanding. The Common Stock is traded on the Over-The-Counter Bulletin Board. The Company knows of no reason that the Shares will be ineligible for quotation on the Over-The-Counter Bulletin Board. (e) Corporate Authorization. This Agreement and the other Transaction Documents to which the Company is or will be a party have been duly and validly authorized by the Company; this Agreement has been duly executed and delivered by the Company and, assuming due execution and delivery by each Buyer, this Agreement is, and the Notes, and the Warrants will be, when executed and delivered by the Company, valid and binding obligations of the Company enforceable in accordance with their respective terms, except as the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and general principles of equity, regardless of whether enforcement is considered in a proceeding in equity or at law. (f) Non-contravention. The execution and delivery of the Transaction Documents by the Company and the consummation by the Company of the issuance of the Securities as contemplated by this Agreement and consummation by the Company of the other transactions contemplated by the Transaction Documents do not and will not, with or without the giving of notice or the lapse of time, or both, (i) result in any violation of any term or provision of the certificate of incorporation (including all certificates of designation) or bylaws of the Company or any Subsidiary, (ii) except for the right of first refusal of Metropolitan Venture Partners II, LP, which right has been waived, conflict with or result in a breach by the Company or any Subsidiary of any of the terms or provisions of, or constitute a default under, or result in the modification of, or result in the creation or imposition of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any Subsidiary pursuant to, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or any of their respective properties or assets are bound or affected, in any such case which would be reasonably likely to have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole, or the validity or enforceability of, or the ability of the Company to perform its obligations under, the Transaction Documents, (iii) violate or contravene any applicable law, rule or regulation or any applicable decree, judgment or order of any court, United States federal or state regulatory body, administrative agency or other governmental body having jurisdiction over the Company or any Subsidiary or any of their respective properties or assets, in any such case which would be - 12 - reasonably likely to have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole, or the validity or enforceability of, or the ability of the Company to perform its obligations under, the Transaction Documents, or (iv) have any material adverse effect on any permit, certification, registration, approval, consent, license or franchise necessary for the Company or any Subsidiary to own or lease and operate any of its properties and to conduct any of its business or the ability of the Company or any Subsidiary to make use thereof. (g) Approvals, Filings, Etc. No authorization, approval or consent of, or filing with, any United States or foreign court, governmental body, regulatory agency, self- regulatory organization, or stock exchange or market or the stockholders of the Company is required to be obtained or made by the Company or any Subsidiary for (x) the execution, delivery and performance by the Company of the Transaction Documents, (y) the issuance and sale of the Securities as contemplated by this Agreement and the terms of the Notes and the Warrants and (z) the performance by the Company of its obligations under the Transaction Documents, other than (1) registration of the resale of the Shares under the 1933 Act as contemplated by Section 8, (2) as may be required under applicable state securities or "blue sky" laws, (3) filing of one or more Forms D with respect to the Securities as required under Regulation D, and (4) the filing of a Current Report on Form 8-K to report the transactions contemplated by the Transaction Documents. (h) Information Provided. The SEC Reports, the Transaction Documents and the instruments delivered by the Company to the Buyers in connection with the closing on the Closing Date do not and will not on the date of execution and delivery of this Agreement, the date of delivery thereof to the Buyers and on the Closing Date contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading, it being understood that for purposes of this Section 4(h), any statement contained in such information shall be deemed to be modified or superseded for purposes of this Section 4(h) to the extent that a statement in any document included in such information which was prepared and furnished to the Buyers on a later date or filed with the SEC on a later date modifies or replaces such statement, whether or not such later prepared or filed statement so states. (i) Conduct of Business. Except as set forth on Schedule 4(i), since September 30, 2004, neither the Company nor any Subsidiary has (i) incurred any material obligation or liability (absolute or contingent) other than in the ordinary course of business; (ii) canceled, without payment in full, any material notes, loans or other obligations receivable or other debts or claims held by it other than in the ordinary course of business; (iii) sold, assigned, transferred, abandoned, mortgaged, pledged or subjected to lien any of its material properties, tangible or intangible, or rights under any material contract, permit, license, franchise or other agreement; (iv) conducted its business in a manner materially different from its business as conducted on such date; (v) declared, made or paid or set aside for payment any cash or non-cash distribution on any shares of its capital stock; or (vi) consummated, or entered into any agreement with respect to, any transaction or event which would constitute a Repurchase Event. The Company and each Subsidiary owns, possesses or has obtained all governmental, administrative and third party licenses, permits, certificates, registrations, approvals, consents and other authorizations necessary to own or lease (as the case may be) and operate its - 13 - properties, whether tangible or intangible, and to conduct its business or operations as currently conducted, except such licenses, permits, certificates, registrations, approvals, consents and authorizations the failure of which to obtain would not have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole. (j) SEC Filings. The Company has filed all reports required to be filed under the 1934 Act and any other material reports or documents required to be filed with the SEC since January 1, 2004. All of such reports and documents complied, when filed, in all material respects, with all applicable requirements of the 1933 Act and the 1934 Act. (k) Absence of Certain Proceedings. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body or governmental agency pending or, to the knowledge of the Company or any Subsidiary, threatened against or affecting the Company or any Subsidiary, in any such case wherein an unfavorable decision, ruling or finding would have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole, or the transactions contemplated by the Transaction Documents or which could adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, the Transaction Documents; the Company does not have pending before the SEC any request for confidential treatment of information and, to the best of the Company's knowledge, no such request will be made by the Company prior to the SEC Effective Date; and to the best of the Company's knowledge there is not pending or contemplated any, and since January 1, 2002, there has been no, investigation by the SEC involving the Company or any current or, to the knowledge of the Company, any former, director or officer of the Company. (l) Financial Statements; Liabilities. The financial statements included in the SEC Reports present fairly the financial position, results of operations and cash flows of the Company and the Subsidiaries, at the dates and for the periods covered thereby, have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods covered thereby, and include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company and the Subsidiaries at the dates and for the periods covered thereby. Except as and to the extent disclosed, reflected or reserved against in the financial statements of the Company and the notes thereto included in the SEC Reports or reflected in Schedule 4(l) hereto, neither the Company nor any Subsidiary has any liability, debt or obligation, whether accrued, absolute, contingent or otherwise, and whether due or to become due which, individually or in the aggregate, are material to the Company and the Subsidiaries, taken as a whole. Subsequent to September 30, 2004, neither the Company nor any Subsidiary has incurred any liability, debt or obligation of any nature whatsoever which, individually or in the aggregate are material to the Company and the Subsidiaries, taken as a whole, other than those incurred in the ordinary course of their respective businesses. A detailed description and the amount of the Indebtedness of the Company and Subsidiaries that will be outstanding on the Closing Date appear on Schedule 4(l) attached hereto. - 14 - (m) Material Losses. Since September 30, 2004, neither the Company nor any Subsidiary has sustained any loss or interference with its business or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, which loss or interference could be material to the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole. (n) Absence of Certain Changes. Except as set forth in Schedule 4(n), since September 30, 2004, there has been no material adverse change and no material adverse development in the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole. The Company's relationship with its customers is good and the Company has not received any notice that any customer intends, and to its knowledge no customer intends, to cease doing business with the Company or decrease in any material respect the amount of business that it does with the Company. Since September 30, 2004, the Company has not (i) declared or paid any dividends, (ii) sold any assets, individually or in the aggregate, outside of the ordinary course of business consistent with past practice, (iii) had capital expenditures outside of the ordinary course of business consistent with past practice, (iv) engaged in any transaction with any Affiliate except as set forth in the SEC Reports or (v) engaged in any other transaction outside of the ordinary course of business consistent with past practice. The Company has not taken any steps to seek protection pursuant to any bankruptcy law nor does the Company have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings. (o) Intellectual Property. Except as set forth on Schedule 4(o): (1) the Company holds all Intellectual Property, free and clear of all Encumbrances and restrictions on use or transfer, whether or not recorded, and has sole title to and ownership of or has the full, exclusive right to use, for the life of the proprietary right all Intellectual Property; (2) the use of the Intellectual Property by the Company or any Subsidiary does not, to the knowledge of the Company, violate or infringe on the rights of any other Person; (3) neither the Company nor any Subsidiary has received any notice of any conflict between the asserted rights of others and the Company or any Subsidiary with respect to any Intellectual Property; (4) all filings and other actions necessary to acquire, maintain, register, renew and perfect the rights of the Company and the Subsidiaries to all Intellectual Property used by the Company or any Subsidiary in its business or in which it has an interest have been duly made in all jurisdictions where such rights are used by it; (5) the Company and the Subsidiaries are in compliance with all terms and conditions of their agreements relating to the Intellectual Property; (6) neither the Company nor any Subsidiary is or has been a defendant in any action, suit, investigation or proceeding relating to infringement or misappropriation by the Company or any Subsidiary of any Intellectual Property; (7) neither the Company nor any Subsidiary has been notified of any alleged claim of infringement or misappropriation by the Company or any Subsidiary of any Intellectual Property; (8) the Company has no knowledge of any claim of infringement or misappropriation by the Company or any Subsidiary of any Intellectual Property; (9) to the knowledge of the Company, none of the products the Company and the Subsidiaries are researching, developing, propose to research and develop, make, have made, use, or sell, infringes or misappropriates any Intellectual Property right of any third party; (10) none of the trademarks and service marks used by the Company or any Subsidiary, to the knowledge of the Company, infringes the - 15 - trademark or service mark rights of any third party; (11) neither the Company nor any Subsidiary has entered into any agreement to indemnify any other person against any charge of infringement of any Intellectual Property; (12) none of the research and development results and other know-how relating to the Company's or the Subsidiaries' respective businesses, the value of which to the Company or the Subsidiaries is contingent upon maintenance of the confidentiality thereof, has been disclosed to any Person other than Persons bound by written confidentiality agreements; and (13) the Company owns directly, or possesses adequate rights to use, all Intellectual Property used in or relating to the business of the Company as currently conducted, and none of such Intellectual Property is owned, claimed or used by, or subject to any Encumbrance of or by, any Subsidiary. (p) Internal Accounting Controls. The Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset and liability accountability, (iii) access to assets or incurrence of liabilities is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets and liabilities is compared with the existing assets and liabilities at reasonable intervals and appropriate action is taken with respect to any difference. The Company maintains disclosure controls and procedures (as such term is defined in Rule 13a-15 under the 1934 Act) that are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC, including, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is accumulated and communicated to the Company's management, including its principal executive officer or officers and its principal financial officer or officers, as appropriate, to allow timely decisions regarding required disclosure. (q) Compliance with Law. Except as set forth on Schedule 4(q) attached hereto, neither the Company nor any Subsidiary is in violation of or has any liability under any statute, law, rule, regulation, ordinance, decision or order of any governmental agency or body or any court, domestic or foreign, except where such violation or liability would not individually or in the aggregate have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole; and neither the Company nor any Subsidiary is aware of any pending investigation which would reasonably be expected to lead to such a claim. (r) Properties. Each of the Company and the Subsidiaries has good title to all property, real and personal (tangible and intangible), and other assets owned by it, free and clear of all Encumbrances, except as set forth on Schedule 4(r). The leases, licenses or other contracts or instruments under which the Company and each Subsidiary leases, holds or is entitled to use any property, real or personal, which individually or in the aggregate are material to the Company and the Subsidiaries, taken as a whole, are valid, subsisting and enforceable, or proposed to be made, by the Company or such Subsidiary or have - 16 - expired or terminated in accordance with their terms or have been superseded by other classes, contracts or agreements. Neither the Company nor any Subsidiary has received notice of any material violation of any applicable law, ordinance, regulation, order or requirement relating to its owned or leased properties. Neither the Company nor any Subsidiary has any mortgage, lien, pledge, security interest or other charge or encumbrance on any of its assets or properties except as listed in Schedule 4(r) attached hereto. (s) Labor Relations. No material labor problem exists or, to the knowledge of the Company or any Subsidiary, is imminent with respect to any of the employees of the Company or any Subsidiary. Schedule 4(s) sets forth the names of each of the employees of the Company, his or her title or position, his or her current salary and any additional compensation arrangements with such person (e.g. as to raises, bonuses, etc.). (t) Insurance. The Company and the Subsidiaries maintain insurance against loss or damage by fire or other casualty and such other insurance, including but not limited to, product liability insurance, in such amounts and covering such risks as the Company believes are commercially reasonable. (u) Tax Matters. Except as set forth in Schedule 4(u), each of the Company and the Subsidiaries has filed all federal, state and local income and franchise tax returns required to be filed and has paid all material taxes shown by such returns to be due, and no tax deficiency has been determined adversely to the Company or any Subsidiary which has had (nor does the Company or any Subsidiary have any knowledge of any tax deficiency which, if determined adversely to the Company or any Subsidiary, might have) a material adverse effect on the business, properties, operations, condition (financial or other), results of operations, or prospects of the Company and the Subsidiaries, taken as a whole. (v) Investment Company. Neither the Company nor any Subsidiary is an "investment company" within the meaning of such term under the Investment Company Act of 1940, as amended, and the rules and regulations of the SEC thereunder. (w) Absence of Brokers, Finders, Etc. No broker, finder or similar Person is entitled to any commission, fee or other compensation by reason of action taken by or on behalf of the Company in connection with the transactions contemplated by this Agreement, and the Company shall pay, and indemnify and hold harmless each Buyer from, any claim made against any Buyer by any Person for any such commission, fee or other compensation. (x) No Solicitation. No form of general solicitation or general advertising was used by the Company or, to its knowledge, any other Person acting on behalf of the Company, in respect of the Securities or in connection with the offer and sale of the Securities. Neither the Company nor, to its knowledge, any Person acting on behalf of the Company has, either directly or indirectly, sold or offered for sale to any Person any of the Securities or, within the six months prior to the date hereof, any other similar security of the Company except as contemplated by this Agreement or as would not constitute a violation of the securities laws; and neither the Company nor any Person authorized to act on its - 17 - behalf will sell or offer for sale any promissory notes, warrants, shares of Common Stock or other securities to, or solicit any offers to buy any such security from, any Person so as thereby to cause the issuance or sale of any of the Securities to be in violation of any of the provisions of Section 5 of the 1933 Act. (y) ERISA Compliance. Each of the Company and the Subsidiaries is in compliance in all material respects with all presently applicable provisions of ERISA; no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company or any Subsidiary would have any liability; neither the Company nor any Subsidiary has incurred or expects to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Code; and each "pension plan" for which the Company or any Subsidiary would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (z) Rights Agreement; Interested Stockholder. Except set forth on Schedule 4(z), the Company has not adopted a shareholder rights plan or similar arrangement relating to accumulations of beneficial ownership of Common Stock or a change in control of the Company. All necessary and proper action has been taken by the Company and its Board of Directors such that the execution, delivery and performance of the Transaction Documents and the purchase, sale and issuance of the Securities will not give rise to the exercise of the rights issued under the Rights Agreement referred to on Schedule 4(z) or cause any Buyer to become an "interested stockholder" under Section 203 of the Delaware General Corporation Law. (aa) Sarbanes-Oxley Act. To the knowledge of Michael J. Beecher, the Chief Financial Officer of the Company, after due inquiry, the Company is in compliance with any and all applicable requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and any and all applicable rules and regulations promulgated by the SEC thereunder that are effective as of the date hereof, except such as would not have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole. (bb) Consulting Agreements. Except as set forth on Schedule 4(bb), the Company is not party to any material consulting agreements. 5. CERTAIN COVENANTS. (a) Transfer Restrictions. The Buyers acknowledge and agree that (1) the Notes and the Warrants have not been and are not being registered under the provisions of the 1933 Act or any state securities laws and, except as provided in Section 8, the Shares have not been and are not being registered under the 1933 Act or any state securities laws, and that the Notes and the Warrants may not be transferred unless the Buyer desiring to make such transfer shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company and its counsel, to the effect that the Note or the Warrants to be transferred may be transferred without such registration or unless transferred in accordance with Rule 144A to a QIB; (2) no sale, assignment or other transfer of a Note or the Warrants or any interest therein may be made except in accordance with the terms hereof and thereof; (3) the Shares may not be resold by any Buyer unless the resale has been registered - 18 - under the 1933 Act or is made pursuant to an applicable exemption from such registration and the Company shall have received the opinion of counsel provided for in the second to last sentence of this Section 5(a); (4) any sale of Shares under a Registration Statement shall be made only in compliance with the terms of this Section 5(a) and Section 8 (including, without limitation, Section 8(c)(5)); (5) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and further, if the exemption provided by Rule 144 is not available, any resale of the Securities under circumstances in which the seller, or the Person through whom the sale is made, may be deemed to be an underwriter, as that term is used in the 1933 Act, may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (6) the Company is under no obligation to register the Securities (other than registration of the resale of the Shares in accordance with Section 8) under the 1933 Act or, except as provided in Section 5(d) and Section 8, to comply with the terms and conditions of any exemption thereunder. Prior to the time particular Shares are eligible for resale under Rule 144(k), no Buyer may transfer the Shares in a transaction which does not constitute a transfer thereof pursuant to the applicable Registration Statement in accordance with the plan of distribution set forth therein or in any supplement to the related Prospectus unless the Buyer shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company and its counsel, that such Shares may be so transferred without registration under the 1933 Act. Nothing in any of the Transaction Documents shall limit the right of a holder of the Securities to make a bona fide pledge thereof to an institutional lender and the Company agrees to cooperate with any Investor who seeks to effect any such pledge by providing such information and making such confirmations as reasonably requested. The Company shall provide such assistance as reasonably necessary to allow a transfer of the Notes and Warrants. (b) Restrictive Legends. (1) The Buyers acknowledge and agree that the Notes shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the Notes): This Note has not been registered under the Securities Act of 1933, as amended (the "1933 Act"), or any state securities laws. This Note has been acquired for investment only and may not be sold, transferred or assigned unless (1) resale is registered under the Act, (2) the Company has received an opinion of counsel reasonably satisfactory in form, scope and substance to the Company and its counsel that such registration is not required or (3) sold, transferred or assigned to a QIB pursuant to Rule 144A. (2) The Buyers further acknowledge and agree that the Warrants shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the Warrants): This Warrant has not been registered under the Securities Act of 1933, as amended (the "Act"), and may not be sold, transferred or assigned unless (1) the resale hereof is registered under the Act, (2) the Company has received an opinion of counsel reasonably satisfactory in form, scope and - 19 - substance to the Company and its counsel that such registration is not required or (3) sold, transferred or assigned to a QIB pursuant to Rule 144A. (3) The Buyers further acknowledge and agree that until such time as the Shares have been registered for resale under the 1933 Act as contemplated by Section 8 or are eligible for resale under Rule 144(k) under the 1933 Act, the certificates for the Shares, may bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for the Shares): The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "1933 Act"). The securities have been acquired for investment and may not be resold, transferred or assigned in the absence of an effective registration statement for the securities under the 1933 Act or an opinion of counsel reasonably satisfactory in form, scope and substance to the Company and its counsel that registration is not required under the 1933 Act. (4) Once the Registration Statement required to be filed by the Company pursuant to Section 8 has been declared effective or particular Shares are eligible for resale pursuant to Rule 144(k) under the 1933 Act, thereafter (1) upon request of a Buyer the Company will substitute certificates without restrictive legend for certificates for any such Shares issued prior to the SEC Effective Date or prior to the time of such eligibility, as the case may be, which bear such restrictive legend and remove any stop-transfer restriction relating thereto promptly, but in no event later than three Business Days after surrender of such certificates by the Buyer, and (2) the Company shall not place any restrictive legend on certificates for Interest Shares issued in payment of interest on the Notes or on any Warrant Shares issued upon exercise of the Warrants or impose any stop-transfer restriction thereon. (c) Reporting Status. During the Registration Period, the Company shall use commercially reasonable efforts to timely file all reports required to be filed with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would permit such termination. (d) Form D. The Company agrees to file one or more Forms D with respect to the Securities as required under Regulation D to claim the exemption provided by Rule 506 of Regulation D and to provide a copy thereof to the Buyers promptly after such filing. (e) [Reserved] (f) Limitation on Certain Actions. From the date of execution and delivery of this Agreement by the parties hereto to the date of issuance of the Notes, the Company (1) shall comply with Article II of the Notes as if the Notes were outstanding, (2) shall not take any action which, if the Notes were outstanding, (A) would constitute an Event of Default or, with the giving of notice or the passage of time or both, would constitute an Event of Default or (B) would constitute a Repurchase Event or, with the giving of notice or the passage of time or both, would constitute a Repurchase Event. - 20 - (g) Use of Proceeds. The Company represents and agrees that: (1) it does not own or have any present intention of acquiring any Margin Stock; (2) the proceeds of sale of the Notes will be used as set forth on Schedule 5(g); (3) none of the proceeds from the sale of the Notes or Warrant Shares will be used, directly or indirectly (A) to pay any existing debt obligations (B) to make any loan to or investment in any other Person or (C) for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock or for the purpose of maintaining, reducing or retiring any indebtedness which was originally incurred to purchase or carry any stock that is currently a Margin Stock or for any other purpose which might constitute the transactions contemplated by this Agreement a "purpose credit" within the meaning of such Regulation U of the Board of Governors of the Federal Reserve System; and (4) neither the Company nor any agent acting on its behalf has taken or will take any action which might cause this Agreement or the transactions contemplated hereby to violate Regulation T, Regulation U or any other regulation of the Board of Governors of the Federal Reserve System or to violate the 1934 Act, in each case as in effect now or as the same may hereafter be in effect. (h) Commercially Reasonable Efforts. Each of the parties shall use its commercially reasonable efforts timely to satisfy each of the conditions to the other party's obligations to sell and purchase the Notes set forth in Section 6 or 7, as the case may be, of this Agreement on or before the Closing Date. (i) Debt Obligation. So long as any portion of the Notes are outstanding, the Company shall cause its books and records to reflect the Notes as a debt of the Company in its unpaid principal amount, shall cause its financial statements to reflect the Notes as a debt of the Company in such amount as required in accordance with generally accepted accounting principles and, whenever appropriate, as a valid senior debt obligation of the Company for money borrowed. (j) Follow-on Financing. For a period of 45 days after the Closing Date, Sigma shall have the exclusive rights to lead a Follow-on Financing on terms to be agreed upon between Sigma and the Company. Until the end of such period, or until the date Sigma notifies the Company in writing that it will not pursue the Follow-on Financing, if earlier, the Company shall not solicit or entertain offers for any other financing except as specifically approved by Sigma in writing. During such period, and as part of Sigma's due diligence process, the Company shall notify Sigma of any payment (or series of related payments to the same party or its affiliates) to be made by the Company in excess of $7,500 two Business Days prior to any such payment being made. In addition, no later than April 8, 2005, the Company shall institute procedures requiring two signatories on any check in excess of $5,000. Sigma shall also receive a copy of the weekly disbursements of the Company within two Business Days after the end of the applicable week commencing with the report delivered for the week ending April 1, 2005. Sigma shall notify the Company promptly if it decides not to pursue the Follow-on Financing. (k) Series A Certificate of Designation. The Company shall take such action as is necessary to promptly amend the Certificate of Designations of Series A Preferred Stock, but in no event later than five Business Days after the Closing - 21 - Date, to extend the automatic conversion of the Series A Preferred Stock upon the occurrence of an Automatic Conversion Event (as defined in the Certificate of Designations) from September 25, 2005 to September 25, 2008. (l) Certain Restrictions. From the Closing Date through the date upon which the Follow-on Financing is consummated or, if earlier, the date upon which Sigma notifies the Company in writing that it will not proceed with the Follow-on Financing, but in no event later than May 31, 2005, without the prior written consent of Sigma, the Company shall not except as set forth in Schedule 5(l): (i) issue any shares of Common Stock or Common Stock Equivalents other than in connection with the Next Financing or in connection with the exercise or conversion of currently outstanding Common Stock Equivalents; (ii) provide to its directors, officers, or employees any increase in any form of compensation received or to be by them and shall not reinstate the pay reductions currently in effect; or (iii) make any payments to Jim Cannavino, Joe Markus, Bob Carberry, or Metropolitan Venture Partners II, LP or any of their Affiliates in respect to accrued fees and other cash obligations owing to them through March 17, 2005. 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The Buyers understand that the Company's obligation to sell the Notes and issue the Warrants to the Buyers pursuant to this Agreement is conditioned upon satisfaction of the following conditions precedent on or before the Closing Date (any or all of which may be waived by the Company in its sole discretion): (a) On the Closing Date, no legal action, suit or proceeding shall be pending or threatened which seeks to restrain or prohibit the transactions contemplated by this Agreement; and (b) The representations and warranties of the Buyers contained in this Agreement shall have been true and correct on the date of this Agreement and on the Closing Date as if made on the Closing Date and on or before the Closing Date the Buyers shall have performed all covenants and agreements of the Buyers required to be performed by the Buyers on or before the Closing Date. 7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE. The Company understands that each Buyer's obligation to purchase a Note and acquire the Warrants is conditioned upon satisfaction of the following conditions precedent on or before the Closing Date (any or all of which may be waived by each Buyer in their sole discretion): - 22 - (a) On the Closing Date, no legal action, suit or proceeding shall be pending or threatened which seeks to restrain or prohibit the transactions contemplated by this Agreement; (b) The representations and warranties of the Company contained in this Agreement shall have been true and correct on the date of this Agreement and shall be true and correct on the Closing Date as if given on and as of the Closing Date (except for representations given as of a specific date, which representations shall be true and correct as of such date and, except for the approvals and filings referred to in clause (2) of Section 4(g), which shall have been obtained or made, on or before the Closing Date), and on or before the Closing Date the Company shall have performed all covenants and agreements of the Company contained herein or in any of the other Transaction Documents required to be performed by the Company on or before the Closing Date; (c) No event which, if the Note were outstanding, (1) would constitute an Event of Default or which, with the giving of notice or the passage of time, or both, would constitute an Event of Default shall have occurred and be continuing or (2) would constitute a Repurchase Event or which, with the giving of notice or the passage of time, or both, would constitute a Repurchase Event shall have occurred and be continuing; (d) The Company shall have delivered to the Buyers a certificate, dated the Closing Date, duly executed by its Chief Executive Officer or Chief Financial Officer, to the effect set forth in subparagraphs (a), (b), and (c) of this Section 7; (e) The Company shall have delivered to the Buyers a certificate, dated the Closing Date, of the Secretary of the Company certifying (1) the Certificate of Incorporation and By-Laws of the Company as in effect on the Closing Date, (2) all resolutions of the Board of Directors (and committees thereof) of the Company relating to this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby and (3) such other matters as reasonably requested by the Buyer; (f) On the Closing Date, the Buyers shall have received an opinion of Beckman, Lieberman & Barandes, LLP, counsel for the Company, dated the Closing Date, addressed to the Buyers, in form, scope and substance reasonably satisfactory to the Buyers, substantially in the form attached as Annex III; (g) The Company shall have delivered to the Buyers the waiver and consent of Metropolitan Venture Partners II, L.P., in form, scope and substance reasonably satisfactory to Buyers, substantially in the form attached as Annex IV; (h) The Company shall have delivered to the Buyers the waiver and consent of Mountain Meadow Farm, in form, scope and substance reasonably satisfactory to Buyers, substantially in the form attached as Annex V; and (i) On the Closing Date, (i) trading in securities on the New York Stock Exchange, Inc., the American Stock Exchange, Inc. or Nasdaq shall not have been suspended or materially limited and (ii) a general moratorium on commercial banking activities in the State of New York shall not have been declared by either federal or state authorities. - 23 - 8. REGISTRATION RIGHTS. (a) Mandatory Registration. (1) On or before the date upon which a registration statement is required to be filed in connection with the Next Financing, but in no event later than August 30, 2005, the Company shall prepare and file with the SEC a Registration Statement which covers the resale by the Buyers of (A) a number of shares of Common Stock equal to the maximum number of Interest Shares issuable in payment of interest on the Notes through the Maturity Date, determined based upon the Current Fair Market Value of the Common Stock on the SEC Filing Date, and (B) a number of shares of Common Stock equal to the number of Warrant Shares issuable upon exercise of the Warrant, in each such case as Registrable Securities, and which Registration Statement shall state that, in accordance with Rule 416 under the 1933 Act, the Registration Statement also covers such indeterminate number of additional shares of Common Stock as may become issuable upon exercise of the Warrants to prevent dilution resulting from stock splits, stock dividends or similar transactions. (2) If the Company is required to file a Registration Statement pursuant to subsection (a) above, prior to the SEC Effective Date, and during any time subsequent to the SEC Effective Date when the Registration Statement for any reason is not available for use by any Investor for the resale of any Registrable Securities, the Company shall not file any other registration statement or any amendment thereto with the SEC under the 1933 Act or request the acceleration of the effectiveness of any other registration statement previously filed with the SEC, other than (A) any registration statement on Form S-8 and (B) any registration statement or amendment which the Company is required to file, or as to which the Company is required to request acceleration, pursuant to any obligation in effect on the date of execution and delivery of this Agreement (including without limitation the obligations to holders of Series A Preferred Stock of the Company). (3) If a Registration Event occurs, then the Company will make payments to each Buyer as partial liquidated damages for the minimum amount of damages to each Buyer by reason thereof, and not as a penalty, at the rate of 1% per month of the Purchase Price paid by each Buyer pursuant to this Agreement (excluding the Purchase Price with respect to Shares already sold or which may be sold pursuant to Rule 144(k)), for each calendar month of the Registration Default Period (pro rated for any period less than 30 days) for the first two months after the occurrence of such Registration Event and 2% per month of the Purchase Price paid by each Buyer pursuant to this Agreement (excluding the Purchase Price with respect to Shares already sold or which may be sold pursuant to Rule 144(k)), for each calendar month of the Registration Default Period (pro rated for any period less than 30 days) thereafter. Each such payment shall be due and payable within five (5) days after the end of each calendar month of the Registration Default Period until the termination of the Registration Default Period and within five (5) days after such termination. Such payments shall be in partial compensation to the Buyers, and shall not constitute the Buyers' exclusive remedy for such events. The Registration Default Period shall terminate upon (u) the filing of the Registration Statement in the case of clause (i) of the definition of "Registration Event"; (v) the SEC Effective Date - 24 - in the case of clause (ii) of the definition of "Registration Event"; (w) the ability of each Buyer to effect sales pursuant to the Registration Statement in the case of clause (iii) of the definition of "Registration Event"; (x) the listing or inclusion and/or trading of the Common Stock on a Trading Market, as the case may be, in the case of clause (iv) of the definition of "Registration Event"; (y) the delivery of such shares or certificates in the case of clause (v) of the definition of "Registration Event"; and (z) in the case of the events described in clauses (ii) and (iii) of the definition of "Registration Event", the earlier termination of the Registration Period and in each such case any Registration Default Period that commenced by reason of the occurrence of such event shall terminate if at the time no other Registration Event is continuing. The amounts payable as partial liquidated damages pursuant to this paragraph shall be payable, at the option of the holder, in lawful money of the United States or in shares of Common Stock valued based upon the average of the Market Price of the Common Stock for all of the Trading Days during the period of 10 consecutive Trading Days ending on and including the Trading Day immediately preceding the day such liquidated damages are payable. Amounts payable as partial liquidated damages hereunder shall cease when the Buyer no longer holds the Notes, the Warrant or Registrable Securities. (b) Obligations of the Company. In connection with any registration of the Registrable Securities, the Company shall: (1) use its commercially reasonable efforts to cause the Registration Statement to become effective as promptly as possible and to keep the Registration Statement effective at all times during the Registration Period. The Company shall submit to the SEC, within three Business Days after the Company learns that no review of the Registration Statement will be made by the staff of the SEC or that the staff of the SEC has no further comments on the Registration Statement, as the case may be, a request for acceleration of effectiveness of the Registration Statement to a time and date not later than 48 hours after the submission of such request. The Company represents and warrants to the Investors that (a) the Registration Statement (including any amendments or supplements thereto and prospectuses contained therein), at the time it is first filed with the SEC, at the time it is ordered effective by the SEC and at all times during which it is required to be effective hereunder (and each such amendment and supplement at the time it is filed with the SEC and at all times during which it is available for use in connection with the offer and sale of the Registrable Securities) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (b) the Prospectus, at the time the Registration Statement is declared effective by the SEC and at all times that the Prospectus is required by this Agreement to be available for use by any Investor and, in accordance with Section 8(c)(4), any Investor is entitled to sell Registrable Securities pursuant to the Prospectus, shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; (2) subject to Section 8(b)(5), prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the Prospectus as may be necessary to keep the Registration Statement effective, and the Prospectus current, at all times during the Registration Period, and, during the Registration Period (other than - 25 - during any Blackout Period during which the provision of Section 8(b)(5)(B) as applicable), comply with the provisions of the 1933 Act applicable to the Company in order to permit the disposition by the Investors of all Registrable Securities covered by the Registration Statement; (3) furnish to Investors whose Registrable Securities are included in the Registration Statement and such Investors' respective legal counsel, promptly after the same is prepared and publicly distributed, filed with the SEC or received by the Company, (1) five copies of the Registration Statement and any amendment thereto and the Prospectus and each amendment or supplement thereto, (2) one copy of each letter written by or on behalf of the Company to the SEC or the staff of the SEC and each item of correspondence from the SEC or the staff of the SEC relating to the Registration Statement (other than any portion of any thereof which contains information for which the Company has sought confidential treatment), each of which the Company hereby determines to be confidential information and which each investor hereby agrees to keep confidential as a confidential Record in accordance with Section 8(b)(9) and (3) such number of copies of the Prospectus and all amendments and supplements thereto and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor; (4) subject to Section 8(b)(5), use its commercially reasonable efforts (i) to register and qualify the Registrable Securities covered by the Registration Statement under the securities or blue sky laws of such jurisdictions as any Investor who owns or holds any Registrable Securities reasonably requests, (ii) to prepare and to file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof at all times during the Registration Period and (iii) to take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale by the Investors in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto (I) to qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 8(b)(4), (II) to subject itself to general taxation in any such jurisdiction, (III) to file a general consent to service of process in any such jurisdiction, (IV) to provide any undertakings that cause more than nominal expense or burden to the Company or (V) to make any change in its charter or by-laws which the Board of Directors of the Company determines to be contrary to the best interests of the Company and its stockholders; (5) (A) as promptly as practicable after becoming aware of such event or circumstance, notify each Investor of the occurrence of any event or circumstance of which the Company has knowledge (x) as a result of which the Prospectus, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or (y) which requires the Company to amend or supplement the Registration Statement due to the receipt from an Investor or any other selling stockholder named in the Prospectus of new or additional information about such Investor or selling stockholder or its intended plan of distribution of its Registrable Securities or other securities covered by such Registration Statement, and use its commercially reasaonable efforts promptly to prepare a - 26 - supplement or amendment to the Registration Statement and Prospectus to correct such untrue statement or omission or to add any new or additional information, and deliver a number of copies of such supplement or amendment to each Investor as such Investor may reasonably request; (B) notwithstanding Section 8(b)(5)(A) above, if at any time the Company notifies the Investors as contemplated by Section 8(b)(5)(A) the Company also notifies the Investors that the event giving rise to such notice relates to a development involving the Company which occurred subsequent to the later of (x) the SEC Effective Date and (y) the latest date prior to such notice on which the Company has amended or supplemented the Registration Statement, then the Company shall not be required to use commercially reasonable efforts to make such amendment during a Blackout Period; provided, however, that in any period of 365 consecutive days the Company shall not be entitled to avail itself of its rights under this Section 8(b)(5)(B) with respect to more than two Blackout Periods; and provided further, however, that no Blackout Period may commence sooner than 90 days after the end of an earlier Blackout Period; (6) as promptly as practicable after becoming aware of such event, notify each Investor who holds Registrable Securities being offered or sold pursuant to the Registration Statement of the issuance by the SEC of any stop order or other suspension of effectiveness of the Registration Statement at the earliest possible time; (7) permit the Investors who hold Registrable Securities being included in the Registration Statement, (or their designee) and their counsel at such Investors' sole expense to review and have a reasonable opportunity to comment on the Registration Statement and all amendments and supplements thereto at least two Business Days (or such shorter period as may reasonably be specified by the Company) prior to their filing with the SEC. (8) [Reserved] (9) make available for inspection by any Investor and any Inspector retained by such Investor, at such Investor's sole expense, all Records as shall be reasonably necessary to enable such Investor to exercise its due diligence responsibility and cause the Company's and the Subsidiaries officers, directors and employees to supply all information which such Investor or Inspector may reasonably request for purposes of such due diligence; provided, however, that such Investor shall hold in confidence and shall not make any disclosure of any Record or other information which the Company determines in good faith to be confidential, and of which determination such Investor is so notified, unless (i) the disclosure of such Record is necessary to avoid or correct a misstatement or omission in the Registration Statement and a reasonable time prior to such disclosure the Investor shall have informed the Company of the need to so correct such misstatement or omission and the Company shall have failed to correct such misstatement or omission, (ii) the release of such Record is ordered pursuant to a subpoena or other order from a court or governmental body of competent jurisdiction or (iii) the information in such Record has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company shall not be required to disclose any confidential information in such Records to any Inspector until and unless such Inspector shall have entered into a confidentiality agreement with the Company with respect thereto, substantially in the form of this Section 8(b)(9), which agreement shall permit such Inspector to disclose Records to the Investor who - 27 - has retained such Inspector. Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. The Company shall hold in confidence and shall not make any disclosure of information concerning an Investor provided to the Company pursuant to this Agreement unless (i) the disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in the Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to such Investor and allow such Investor, at such Investor's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information; (10) use its commercially reasonable efforts to cause all the Registrable Securities covered by the Registration Statement as of the SEC Effective Date to be listed or quoted on the principal securities market on which securities of the same class or series issued by the Company are then listed or traded; (11) provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities at all times; (12) cooperate with the Investors who hold Registrable Securities being offered pursuant to the Registration Statement to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Registrable Securities to be offered pursuant to the Registration Statement and enable such certificates to be in such denominations or amounts as the Investors may reasonably request and registered in such names as the Investors may request; (13) during the Registration Period, the Company shall not bid for or purchase any Common Stock or any right to purchase Common Stock or attempt to induce any Person to purchase any such security or right if such bid, purchase or attempt would in any way limit the right of the Investors to sell Registrable Securities by reason of the limitations set forth in Regulation M under the 1934 Act; and (14) take all other reasonable actions necessary to expedite and facilitate disposition by the Investors of the Registrable Securities pursuant to the Registration Statement relating thereto. (c) Obligations of the Buyers and Other Investors. In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: - 28 - (1) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company the Required Information and shall execute such documents in connection with such registration as the Company may reasonably request. (2) Each Investor by such Investor's acceptance of the Registrable Securities agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Investor has notified the Company of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statement; (3) Each Investor agrees that it will not effect any disposition of the Registrable Securities except as contemplated in the Registration Statement or as otherwise is in compliance with applicable securities laws and that it will promptly notify the Company of any material changes in the information set forth in the Registration Statement regarding such Investor or its plan of distribution; each Investor agrees (a) to notify the Company in writing in the event that such Investor enters into any material agreement with a broker or a dealer for the sale of the Registrable Securities through a block trade, special offering, exchange distribution or a purchase by a broker or dealer and (b) in connection with such agreement, to provide to the Company in writing the information necessary to prepare any supplemental prospectus pursuant to Rule 424(c) under the 1933 Act which is required with respect to such transaction; (4) Each Investor acknowledges that there may occasionally be times as specified in Section 8(b)(5) or 8(b)(6) when the Company must suspend the use of the Prospectus until such time as an amendment to the Registration Statement has been filed by the Company and declared effective by the SEC, the Company has prepared a supplement to the Prospectus or the Company has filed an appropriate report with the SEC pursuant to the 1934 Act. Each Investor hereby covenants that it will not sell any Registrable Securities pursuant to the Prospectus during the period commencing at the time at which the Company gives such Investor notice of the suspension of the use of the Prospectus in accordance with Section 8(b)(5) or 8(b)(6) and ending at the time the Company gives such Investor notice that such Investor may thereafter effect sales pursuant to the Prospectus, or until the Company delivers to such Investor or files with the SEC an amended or supplemented Prospectus; and (5) In connection with any sale of Registrable Securities which is made by an Investor pursuant to the Registration Statement (A) if such sale is made through a broker, such Investor shall instruct such broker to deliver the Prospectus to the purchaser or purchasers (or the broker or brokers therefor) in connection with such sale, shall supply copies of the Prospectus to such broker or brokers and shall instruct such broker or brokers to deliver such Prospectus to the purchaser in such sale or such purchaser's broker; (B) if such sale is made in a transaction directly with a purchaser and not through the facilities of any securities exchange or market, such Investor shall deliver, or cause to be delivered, the Prospectus to such purchaser; and (C) if such sale is made by any means other than those described in the immediately preceding clauses (A) and (B), such Investor shall otherwise use its commercially reasonable efforts to comply with the prospectus delivery requirements of the 1933 Act applicable to such sale. - 29 - (d) Rule 144. With a view to making available to each Investor the benefits of Rule 144, the Company agrees: (1) so long as any Investor owns Registrable Securities, promptly upon request of such Investor, to furnish to such Investor such information as may be necessary to permit such Investor to sell Registrable Securities pursuant to Rule 144 without registration and otherwise reasonably to cooperate with such Investor and (2) if at any time the Company is not required to file reports with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, to use its commercially reasonable efforts, upon the request of an Investor, to make publicly available other information so long as is necessary to permit publication by brokers and dealers of quotations for the Common Stock and sales of the Registrable Securities in accordance with Rule 15c2-11 under the 1934 Act. (e) Piggy-Back Registrations. If at any time the Company shall determine to prepare and file with the SEC a Registration Statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, the Company shall send to each Investor who is entitled to registration rights under this Section 8(e) written notice of such determination and, if within ten (10) days after receipt of such notice, such Investor shall so request in writing, the Company shall include in such Registration Statement all or any part of the Registrable Securities such Investor requests to be registered, except that if, in connection with any underwritten public offering for the account of the Company the managing underwriter(s) thereof shall impose a limitation on the number of shares of Common Stock which may be included in the Registration Statement because, in such underwriter(s)' judgment, such limitation is necessary to effect an orderly public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registrable Securities with respect to which such Investor has requested inclusion hereunder. Any exclusion of Registrable Securities shall be made pro rata among the Investors seeking to include Registrable Securities, in proportion to the number of Registrable Securities sought to be included by such Investors; provided, however, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities the holders of which are not entitled by right to inclusion of securities in such Registration Statement; and provided further, however, that, after giving effect to the immediately preceding proviso, any exclusion of Registrable Securities shall be made pro rata with holders of other securities having the right to include such securities in the Registration Statement, based on the number of securities for which registration is requested except to the extent such pro rata exclusion of such other securities is prohibited under any written agreement entered into by the Company with the holder of such other securities prior to the date of this Agreement, in which case such other securities shall be excluded, if at all, in accordance with the terms of such agreement. No right - 30 - to registration of Registrable Securities under this Section 8(e) shall be construed to limit any registration required under Section 8(a) hereof. Notwithstanding any other provision of this Agreement, if any Registration Statement required to be filed pursuant to Section 8(a) of this Agreement shall have been ordered effective by the SEC and the Company shall have maintained the effectiveness of such Registration Statement as required by this Agreement and if the Company shall otherwise have complied in all material respects with its obligations under this Agreement, then the Company shall not be obligated to register any Registrable Securities on such Registration Statement referred to in this Section 8(e). 9. INDEMNIFICATION AND CONTRIBUTION. (a) Indemnification. (1) To the extent not prohibited by applicable law, the Company will indemnify and hold harmless each Indemnified Person against any Claims, except Claims for punitive damages, to which any of them may become subject under the 1933 Act, the 1934 Act or otherwise, insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any Violation or any of the transactions contemplated by this Agreement. Subject to the restrictions set forth in Section 9(a)(3) with respect to the number of legal counsel, the Company shall reimburse the Investors and each such controlling Person, promptly as such expenses are incurred and are due and payable, for any documented reasonable legal fees or other documented and reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 9(a)(1) shall not apply to: (I) a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information relating to an Indemnified Person furnished in writing to the Company by such Indemnified Person or an underwriter for such Indemnified Person expressly for use in connection with the preparation of any Registration Statement or any such amendment thereof or supplement thereto; (II) any Claim arising out of or based on any statement or omission in any Prospectus, which statement or omission was corrected in any subsequent Prospectus that was delivered to the Indemnified Person prior to the pertinent sale or sales of Registrable Securities by such Indemnified Person; and (III) amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors. (2) In connection with the Registration Statement, each Investor agrees to indemnify and hold harmless, to the same extent and in the same manner set forth in Section 9(a)(1), each Indemnified Party against any Claim, except Claims for punitive damages, to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim arises out of or is based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement or any amendment thereof or supplement thereto; and such Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 9(a)(2) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor; provided, further, however, that the Investor shall be liable under this Section 9(a)(2) for only - 31 - that amount of all Claims in the aggregate as does not exceed the amount by which the proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement exceeds the amount paid by such Investor for such Registrable Securities. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 9(a)(2) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in such preliminary prospectus was corrected on a timely basis in the related Prospectus, as then amended or supplemented. (3) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 9(a) of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 9(a), deliver to the indemnifying party a notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel reasonably satisfactory to the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential conflicting interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding, in which case the indemnifying party shall not be responsible for more than one such separate counsel, and one local counsel in each jurisdiction in which an Action is pending, for all Indemnified Persons or Indemnified Parties, as the case may be. The failure to deliver notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 9(a), except to the extent that the indemnifying party is prejudiced in its ability to defend such action. The indemnification required by this Section 9(a) shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. (b) Contribution. To the extent any indemnification by an indemnifying party as set forth in Section 9(a) above is applicable by its terms but is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 9(a) to the fullest extent permitted by law. In determining the amount of contribution to which the respective parties are entitled, there shall be considered the relative fault of each party, the parties' relative knowledge of and access to information concerning the matter with respect to which the claim was asserted, the opportunity to correct and prevent any statement or omission and any other equitable considerations appropriate under the circumstances; provided, however, that (a) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 9(a), (b) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any other Person who was not guilty - 32 - of such fraudulent misrepresentation and (c) the aggregate contribution by any seller of Registrable Securities shall be limited to the amount by which the proceeds received by such seller from the sale of such Registrable Securities exceeds the amount paid by such Investor for such Registrable Securities. (c) Other Rights. The indemnification and contribution provided in this Section shall be in addition to any other rights and remedies available at law or in equity. 10. MISCELLANEOUS. (a) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. (b) Headings. The headings, captions and footers of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. (c) Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. (d) Notices. Any notices required or permitted to be given under the terms of this Agreement shall be in writing and shall be sent by mail, personal delivery, telephone line facsimile transmission, the receipt of which is electronically confirmed, or courier and shall be effective five days after being placed in the mail, if mailed, or upon receipt, if delivered personally, by telephone line facsimile transmission or by courier, in each case addressed to a party at such party's address (or telephone line facsimile transmission number) shown in the introductory paragraph or on the signature page of this Agreement or such other address (or telephone line facsimile transmission number) as a party shall have provided by notice to the other party in accordance with this provision. In the case of any notice to the Company, such notice shall be addressed to the Company at its address shown in the introductory paragraph of this Agreement, Attention: Chief Financial Officer (telephone line facsimile number (631) 563- 8085), and a copy shall also be given to: Beckman, Lieberman & Barandes, LLP, 116 John Street, New York, New York 10038, Attention: Robert Barandes, Esq. (telephone line facsimile transmission number (212) 608-9687), and in the case of any notice to the Buyers, a copy shall be given to: Moomjian & Waite, LLP, 100 Jericho Quadrangle, Jericho, New York 11753 (telephone line facsimile transmission number (516) 937-5050). (e) Counterparts. This Agreement may be executed in counterparts and by the parties hereto on separate counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. A telephone line facsimile transmission of this Agreement bearing a signature on behalf of a party hereto shall be legal and binding on such party. Although this Agreement is dated as of the date first set forth above, the actual date of execution and delivery of this Agreement by each party is the date set forth below such party's signature on the signature page hereof. Any reference in this Agreement or in any of the documents executed and delivered by the parties - 33 - hereto in connection herewith to (1) the date of execution and delivery of this Agreement by a Buyer shall be deemed a reference to the date set forth below the Buyer's signature on the signature page hereof, (2) the date of execution and delivery of this Agreement by the Company shall be deemed a reference to the date set forth below the Company's signature on the signature page hereof and (3) the date of execution and delivery of this Agreement, or the date of execution and delivery of this Agreement by the Buyers and the Company, shall be deemed a reference to the later of the dates set forth below the signatures of the parties on the signature page hereof. (f) Entire Agreement; Benefit. This Agreement, including the Annexes and Schedules hereto, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties, or undertakings, other than those set forth or referred to herein with respect to the subject matter hereof. This Agreement, including the Annexes, supersedes all prior agreements and understandings, whether written or oral, between the parties hereto with respect to the subject matter hereof. This Agreement and the terms and provisions hereof are for the sole benefit of only the Company, the Buyers and their respective successors and permitted assigns. (g) Waiver. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, or any course of dealing between the parties, shall not operate as a waiver thereof or an amendment hereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or exercise of any other right or power. (h) Amendment. (1) No amendment, modification, waiver, discharge or termination of any provision of this Agreement on or prior to the Closing Date nor consent to any departure by the Buyer or the Company therefrom on or prior to the Closing Date shall in any event be effective unless the same shall be in writing and signed by all parties, and in any such case shall be effective only in the specific instance and for the purpose for which given. (2) No amendment, modification, waiver, discharge or termination of any provision of this Agreement after the Closing Date nor consent to any departure by the Company therefrom after the Closing Date shall in any event be effective unless the same shall be in writing and signed (x) by the Company if the Company is to be charged with enforcement or (y) by a majority in interest of the Buyers (which must include Metropolitan Venture Partners II, L.P., except in the case where the rights of Metropolitan Venture Partners II, L.P. would not be materially adversely affected by a waiver, in which case their prior written consent shall not be required) if the Buyers are to be charged with enforcement, based upon the aggregate principal amount of the Notes then outstanding, and in any such case shall be effective only in the specific instance and for the purpose for which given. Any such amendment, modification, waiver, discharge or termination shall affect the Investors proportionally. - 34 - (3) No course of dealing between the parties hereto shall operate as an amendment of this Agreement. (i) Further Assurances. Each party to this Agreement will perform any and all acts and execute any and all documents as may be necessary and proper under the circumstances in order to accomplish the intents and purposes of this Agreement and to carry out its provisions. (j) Assignment of Certain Rights and Obligations. The rights of an Investor under Sections 5(a), 5(b), 8, 9, and 10 of this Agreement shall be automatically assigned by such Investor to any transferee of all or any portion of such Investor's Registrable Securities (or all or any portion of the Notes or the Warrants) only if: (1) such Investor agrees in writing with such transferee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (2) the Company is, within a reasonable time after such transfer, furnished with notice of (A) the name and address of such transferee and (B) the securities with respect to which such rights and obligations are being transferred, (3) immediately following such transfer or assignment the further disposition of Registrable Securities by the transferee or assignee is restricted under the 1933 Act and applicable state securities laws, and (4) at or before the time the Company received the notice contemplated by clause (2) of this sentence the transferee agrees in writing with the Company to be bound by all of the provisions contained in Sections 5(a), 5(b), 8, 9, and 10 hereof. Upon any such transfer, the Company shall be obligated to such transferee to perform all of its covenants under Sections 5(a), 5(b), 8, 9, and 10 of this Agreement as if such transferee were the Buyer. In connection with any such transfer the Company shall, at its sole cost and expense, promptly after such transfer take such actions as shall be reasonably acceptable to the transferring Investor and such transferee to assure that the Registration Statement and related Prospectus for which the transferring Investor is a selling stockholder are available for use by such transferee for sales of the Registrable Securities in respect of which such rights and obligations have been so transferred. Transfer of the Note shall be limited as provided therein and transfer of the Warrants shall be limited as provided therein. (k) Expenses. The Company shall be responsible for its expenses (including, without limitation, the legal fees and expenses of its counsel), incurred by it in connection with the negotiation and execution of, and closing under, and performance of, this Agreement. Whether or not the closing occurs, the Company shall be obligated to pay the legal fees and expenses and out-of-pocket due diligence expenses of Sigma, not in excess of $40,000.00, and of Metropolitan Venture Partners II, LP, not in excess of $15,000, in connection with the negotiation and execution of, and closing under, this Agreement. At closing, Sigma shall withhold $40,000.00 and Metropolitan Venture Partners II, LP shall withhold $15,000 from the Purchase Price payable to the Company. Within 30 days after closing, Sigma and Metropolitan Venture Partners II, LP shall provide a detailed accounting of their fees and expenses for which the Company is responsible hereunder, and shall pay to the Company any difference between the amount withheld and the actual fees and expenses incurred. In addition, the Company shall reimburse up to $10,000 of fees and expenses incurred by Persons (not to exceed $5,000 per Person) to whom a portion of the Notes and Warrants purchased by Sigma may be assigned. All reasonable expenses incurred in connection with registrations, filings or qualifications pursuant to Sections 5(d), 5(e), 5(g) and 8 of this Agreement shall be paid by the Company, including, without limitation, all registration, listing and qualifications - 35 - fees, printers and accounting fees and the fees and disbursements of counsel for the Company and the Investors but excluding (a) fees and expenses of investment bankers retained by any Investor and (b) brokerage commissions incurred by any Investor. The Company shall pay on demand all expenses incurred by the Buyers after the Closing Date, including reasonable attorneys' fees and expenses, as a consequence of, or in connection with (1) the negotiation, preparation or execution of any amendment, modification or waiver of any of the Transaction Documents, (2) any default or breach of any of the Company's obligations set forth in any of the Transaction Documents, and (3) the enforcement or restructuring of any right of, including the collection of any payments due, the Buyers under any of the Transaction Documents, including any action or proceeding relating to such enforcement or any order, injunction or other process seeking to restrain the Company from paying any amount due the Buyers. Except as otherwise provided in this Section 10(k), each of the Company and the Buyers shall bear their own expenses in connection with this Agreement and the transactions contemplated hereby. (l) Termination. (1) Each Buyer shall have the right to terminate this Agreement by giving notice to the Company at any time at or prior to the Closing Date if: (A) the Company shall have failed, refused, or been unable at or prior to the date of such termination of this Agreement to perform any of its obligations hereunder required to be performed prior to the time of such termination; (B) any condition to such Buyer's obligations hereunder is not fulfilled at or prior to the time such condition is required to be satisfied; or (C) the closing shall not have occurred on a Closing Date on or before March 31, 2005, other than solely by reason of a breach of this Agreement by such Buyer. Any such termination shall be effective upon the giving of notice thereof by such Buyer. Upon such termination, such Buyer shall have no further obligation to the Company hereunder and the Company shall remain liable for any breach of this Agreement or the other documents contemplated hereby which occurred on or prior to the date of such termination. (2) The Company shall have the right to terminate this Agreement by giving notice to the Buyers at any times at or prior to the Closing Date if the closing shall not have occurred on a Closing Date on or before March 31, 2005, other than solely by reason of a breach of this Agreement by the Company, so long as the Company is not in breach of this Agreement at the time it gives such notice. Any such termination shall be effective upon the giving of notice thereof by the Company. Upon such termination, neither the Company nor the Buyers shall have any further obligation to one another hereunder, except for the Company's liability for the Buyers' expenses as provided in Section 10(k). (m) Survival. The respective representations, warranties, covenants and agreements of the Company and the Buyers contained in this Agreement and the documents delivered in connection with this Agreement shall survive the execution and delivery of this Agreement and the other Transaction Documents and the closing hereunder and delivery of and payment for the Notes and issuance of - 36 - the Warrants, and shall remain in full force and effect regardless of any investigation made by or on behalf of the Buyers or any Person controlling or acting on behalf of the Buyers or by the Company or any Person controlling or acting on behalf of the Company for a period ending on the earlier of (x) the date which is four years after the Closing Date and (y) the date which is two years after the Company shall have paid in full all amounts due from the Company under the Transaction Documents and performed in full all of its obligations under the Transaction Documents. (n) Public Statements, Press Releases, Etc. The Company and the Buyers shall have the right to approve before issuance any press releases or any other public statements with respect to the transactions contemplated hereby; provided, that the Buyers shall use good faith efforts to provide such approval; and provided, further, however, that the Company shall be entitled, without the prior approval of the Buyers, to make any press release or other public disclosure with respect to such transactions as is required by applicable law or applicable requirements of any stock market on which securities of the Company are listed for trading (although the Buyers shall be consulted by the Company in connection with any such press release or other public disclosure prior to its release and shall be provided with a copy thereof). (o) Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. [Remainder of This Page Intentionally Left Blank] - 37 - IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers or other representatives thereunto duly authorized on the respective dates set forth below their signatures hereto. SIGMA OPPORTUNITY FUND, LLC By: SIGMA CAPITAL ADVISORS, LLC By:/s/Thom Waye ------------------------------------------ Name: Thom Waye Title: Manager Date: March 29, 2005 Address: c/o Sigma Capital Advisors, LLC 800 Third Avenue Suite 1701 New York, New York 10022 Facsimile No.: (212) 937-3558 METROPOLITAN VENTURE PARTNERS II, L.P. By: METROPOLITAN VENTURE PARTNERS (Advisors), L.P., as general partner By: METROPOLITAN VENTURE PARTNERS CORP., as general partner By:/s/Michael Levin ------------------------------------------ Name: Michael Levin Title: Managing Director Date: March 29, 2005 Address: 257 Park Avenue South 15th Floor New York, NY 10010 Facsimile No.: (212) 844-3699 - 38 - DIRECT INSITE CORP. By:/s/Michael J. Beecher ------------------------------------------ Name: Michael J. Beecher Title: Chief Financial Officer Date: March 29, 2005 Address: 80 Orville Drive Bohemia, New York 11716 Facsimile No.: (631) 563-8085 - 39 - The disclosure of any matter in these schedules shall be deemed to be a disclosure for all purposes of the Agreement to which the relevance of such matter is reasonably apparent on its face. Schedule 2(a) -------------
Purchase Price/ Warrant Shares Initially Issuable Name and Address Principal Amount of Note Upon Exercise of Warrants ---------------- ------------------------ --------------------------------- Sigma Opportunity Fund, LLC $650,000 650,000 c/o Sigma Capital Advisors, LLC 800 Third Avenue Suite 1701 New York, New York 10022 Metropolitan Venture Partners II, LP $100,000 100,000 257 Park Avenue South 15th Floor New York, NY 10010
- 40 - EX-4.2 3 diri8knoteex4-2.txt NOTE Exhibit 4.2 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). PURSUANT TO THE SECURITIES PURCHASE AGREEMENT, THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT ONLY AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF REGISTRATION OF THE RESALE THEREOF UNDER THE 1933 ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY IN FORM, SCOPE AND SUBSTANCE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. DIRECT INSITE CORP. SENIOR SUBORDINATED SECURED NOTE No. ___ $__________ Bohemia, New York March 29, 2005 FOR VALUE RECEIVED, DIRECT INSITE CORP., a Delaware corporation (hereinafter called the "Company"), hereby promises to pay to - ------------------------------------------------------------------------------ or registered assigns (the "Holder"), or order, the sum of __________ ($__________), on the Maturity Date, and to pay interest on the unpaid principal balance hereof at the Applicable Rate commencing June 28, 2005, until the same becomes due and payable, whether at maturity or upon acceleration or by repurchase in accordance with the terms hereof or otherwise. Any amount, including, without limitation, principal of or interest on this Note or the Optional Redemption Price or the Repurchase Price, that is payable under this Note and that is not paid when due shall bear interest at the Default Rate from the due date thereof until the same is paid ("Default Interest"). No regular interest shall be due with respect to the period from March 29, 2005 to June 28, 2005. Regular interest shall be payable in arrears on each Interest Payment Date, commencing on October 1, 2005, on the principal amount outstanding on such date. Regular interest on this Note shall be computed on the basis of a 360-day year of twelve 30-day months and actual days elapsed. No regular interest shall be payable on an Interest Payment Date on any portion of the principal amount of this Note which shall have been redeemed prior to such Interest Payment Date so long as the Company shall have complied in full with its obligations with respect to such redemption. All payments of principal of and premium, if any, interest, and other amounts on this Note shall be made in lawful money of the United States of America, or, at the option of the Holder and subject to the provisions of this Note, interest payable on any Interest Payment Date may be paid in whole or in part in fully paid and nonassessable shares of Common Stock. All cash payments shall be made by wire transfer of immediately available funds to such account as the Holder may from time to time designate by written notice in accordance with the provisions of this Note. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a Business Day, the same shall instead be due on the next succeeding day which is a Business Day and, in the case of any Interest Payment Date which is not the date on which this Note is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of interest due on such date. Certain capitalized terms used in this Note are defined in Article VI. The obligations of the Company under this Note shall rank in right of payment junior to the existing bank lines with JP Morgan Chase Bank, Sterling National Bank, Silicon Valley Bank, and DIRI Rec Fund LLC and senior to all other obligations of the Company for indebtedness for borrowed money or the purchase price of property. This Note is issued pursuant to the Securities Purchase Agreement and the Holder of this Note and this Note are subject to the terms and entitled to the benefits of the Securities Purchase Agreement. The following terms shall apply to this Note: ARTICLE I PAYMENT OF CERTAIN INTEREST IN COMMON STOCK; OPTIONAL REDEMPTION 1.1 Issuance of Common Stock in Lieu of Cash Interest. (a) (1) The Holder may exercise its right to elect to receive payment of interest on this Note wholly or partly in Common Stock (herein sometimes called the "Share Interest Payment Option") with respect to any Interest Payment Date only by giving notice of such election to the Company not less than 5 or more than 10 Trading Days prior to such Interest Payment Date, which notice shall state the percentage of the interest payable on such Interest Payment Date which is to be paid in Interest Payment Shares, and which payment of interest in Common Stock shall be subject to the approval of the Company. If the Company does not approve the issuance of share of Common Stock in payment of interest with respect to any Interest Payment Date, the Company shall pay such interest in cash; provided, however, if the Company does not pay such cash by the Interest Payment Date, such interest shall be paid in shares of Common Stock. If the Holder elects the Share Interest Payment Option with respect to a particular Interest Payment Date and the Company approves such issuance or is required to issue shares of Common Stock, the Company shall issue to the Holder in respect of such Interest Payment Date the aggregate number of whole shares of Common Stock determined by dividing the per share Interest Share Price of the Common Stock on the applicable Interest Payment Date into an amount equal to the total amount of lawful money of the United States of America which the Holder would receive if the aggregate amount of interest on this Note which is being paid in Common Stock were being paid in such lawful money. Notwithstanding anything to the contrary herein, if the Interest Share Price on a particular Interest Payment Date is greater than 120% of the Market Price of the Common Stock on the date the Holder gives the Company notice that it has elected to exercise the Share Interest Payment Option with respect to such Interest Payment Date (the "Share Interest Notice Date"), the Holder may, at its option, require the Company to make such payment of interest on such Interest Payment Date in cash. (2) If the Holder elects the Share Interest Payment Option with respect to an Interest Payment Date and the Company approves such issuance or is required to issue shares of Common Stock, the Interest Payment Shares for such Interest 2 Payment Date shall become issuable on such Interest Payment Date and the Company shall deliver, or cause to be delivered, the appropriate number of shares of Common Stock to the Holder within five Trading Days after the applicable Interest Payment Date. If in any case the Company shall fail to deliver or cause to be delivered such number of shares of Common Stock to the Holder within such period of five Trading Days, then in addition to any other liabilities the Company may have hereunder and under applicable law (1) the Company shall pay or reimburse the Holder on demand for all out- of-pocket expenses, including, without limitation, reasonable fees and expenses of legal counsel, incurred by the Holder as a result of such failure, and (2) the Holder may by written notice (which may be given by mail, courier, personal service or telephone line facsimile transmission) or oral notice (promptly confirmed in writing), given at any time prior to delivery to the Holder of the shares of Common Stock issuable in connection with such exercise of the Share Interest Payment Option, require payment in cash of the interest in respect of which the Holder exercised the Share Interest Payment Option, in which case the amount of such interest shall be immediately due and payable, with Default Interest thereon from the applicable Interest Payment Date until paid in full and the Company shall not be obligated or entitled to issue such Interest Payment Shares in respect of such Interest Payment Date. The Holder shall notify the Company in writing (or by telephone conversation, confirmed in writing) as promptly as practicable following the third Trading Day after such Interest Payment Date if the Holder becomes aware that shares of Common Stock so issuable have not been received as provided herein but any failure to give such notice shall not affect the Holder's rights under this Note or otherwise. No fractional shares of Common Stock shall be issued in payment of interest on this Note. In lieu thereof, the Company may, at its option, issue a number of shares of Common Stock which reflects a rounding up to the next whole number or may pay lawful money of the United States of America in lieu of issuance of such fractional share. (b) If the Holder elects the Share Interest Payment Option with respect to a payment of interest on this Note with respect to a particular Interest Payment Date and the Company approves such issuance or is required to issue shares of Common Stock, the Company shall deliver to the Holder, on or prior to the date on which Interest Payment Shares for such payment of interest on this Note are to be received by the Holder, a Company Certificate setting forth (i) the total amount of the cash interest payment to which the Holder is entitled, (ii) the portion of such interest payment being made in Interest Payment Shares and the amount which is 100% thereof, (iii) the number of Interest Payment Shares allocable to such payment, as calculated pursuant to this Section 1.1, (iv) any rounding adjustment to such number or any payment necessary to be made pursuant to Section 1.1(a), (v) a brief statement of the facts requiring such adjustment, and (vi) a brief statement that all of the requirements of this Section 1.1 have been met. The Interest Payment Shares shall be duly issued in the name of the Holder or its nominee. Such Company Certificate shall be conclusive evidence of the correctness of the calculation of the number of Interest Payment Shares allocable to the payments to which such Company Certificate relates and of any adjustments to such number made pursuant to this Section 1.1 in the absence of manifest error. On or before the pertinent payment date, the Company shall issue, or cause the transfer agent for the Common Stock to prepare and issue, the Interest Payment Shares in the name of the Holder or its nominee before being so delivered by the Company on the payment date. 3 (c) The Interest Payment Shares, when issued pursuant to and in compliance with this Section 1.1, shall be, and for all purposes shall be deemed to be, validly issued, fully paid and nonassessable shares of Common Stock; the issuance and delivery thereof is in all respects hereby authorized; and the issuance thereof, together with lawful money of the United States of America, if any, paid in lieu of fractional shares of Common Stock, will be, and for all purposes shall be deemed to be, in full discharge and satisfaction of the Company's obligation to pay the interest on this Note to which such Interest Payment Shares relate. 1.2 Optional Redemption. The following right of redemption must be exercised on a proportionate basis, in accordance with outstanding amount due, among this Note and the Other Notes. (a) At any time during the Optional Redemption Period, the Company shall have the right to redeem at any one time all or from time to time any part of the outstanding principal amount of this Note at the Optional Redemption Price pursuant to this Section 1.2 on any Optional Redemption Date. In order to exercise its right of redemption under this Section 1.2, the Company shall give an Optional Redemption Notice to the Holder not less than 5 days or more than 10 days prior to the Optional Redemption Date stating that: (1) the Company is exercising its right to redeem a specified portion (which may be all, if so specified by the Company) of this Note in accordance with this Section 1.2, (2) the principal amount of this Note to be redeemed, (3) the Optional Redemption Price, and (4) the Optional Redemption Date. On the applicable Optional Redemption Date (or such later date as the Holder surrenders this Note to the Company) the Company shall pay to or upon the order of the Holder, by wire transfer of immediately available funds to such account as shall be specified for such purpose by the Holder at least one Business Day prior to the Optional Redemption Date, an amount equal to the Optional Redemption Price of the portion (which may be all) of this Note to be redeemed. In each such case the aggregate principal amount of this Note and the Other Notes to be so redeemed shall be at least $50,000.00 or such lesser aggregate principal amount of this Note and the Other Notes as shall remain outstanding at the time an Optional Redemption Notice is given. 1.3 No Prepayment. Except as specifically provided in Section 1.2, this Note may not be prepaid, redeemed or repurchased at the option of the Company prior to the Maturity Date. ARTICLE II CERTAIN COVENANTS So long as the Company shall have any obligation under this Note: 2.1 Limitations on Certain Indebtedness. The Company will not itself, and will not permit any Subsidiary to, create, assume, incur, suffer to exist or in any manner become liable in respect of, including, without limitation, by reason of any business combination transaction (all of which are referred to herein as "incurring"), any Indebtedness other than Permitted Indebtedness. 4 2.2 Payment of Obligations. The Company will pay and discharge, and will cause each Significant Subsidiary to pay and discharge, subject to the terms and conditions of the Securities Purchase Agreement, all their respective material obligations and liabilities, except where the same may be contested in good faith by appropriate proceedings and the Company shall have established adequate reserves therefor on its books. 2.3 Maintenance of Property; Insurance. (a) The Company will keep, and will cause each Significant Subsidiary to keep, all property which, in the reasonable business judgment of the Company, is useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Company will maintain, and will cause each Significant Subsidiary to maintain, with financially sound and responsible insurance companies, insurance, in at least such amounts and against such risks as is reasonably adequate for the conduct of their respective businesses and the value of their respective properties. 2.4 Conduct of Business and Maintenance of Existence. The Company will continue, and will cause each Significant Subsidiary to continue, to engage in business of the same general type as now conducted by the Company, and will preserve, renew and keep in full force and effect, and will cause each Significant Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business and such matter other than maintenance of the Company's corporate existence, except where the failure to do so would not have a material adverse effect on (i) the business, properties, operations, condition (financial or other), results of operation or prospects of the Company and the Subsidiaries, taken as a whole or, (ii) the ability of the Company to pay and perform its obligations under the Transaction Documents. 2.5 Compliance with Laws. The Company will comply, and will cause each Significant Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, decisions, orders and requirements of governmental authorities and courts (including, without limitation, environmental laws) except (i) where compliance therewith is contested in good faith by appropriate proceedings or (ii) where non-compliance therewith could not reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company and the Subsidiaries, taken as a whole. 2.6 Investment Company Act. The Company will not be or become an open-end investment trust, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended. 2.7 Limitations on Asset Sales, Liquidations, Etc.; Certain Matters. The Company shall not 5 (a) sell, convey or otherwise dispose of all or substantially all of the assets of the Company as an entirety or substantially as an entirety in a single transaction or in a series of related transactions; or (b) liquidate, dissolve or otherwise wind up the affairs of the Company. 2.8 Limitation on Certain Issuances. The Company shall not (A) offer, sell or issue, or enter into any agreement, arrangement or understanding to offer, sell or issue, any Common Stock Equivalent for which the price at which the holder of such Common Stock Equivalent is entitled to acquire shares of Common Stock varies based on the market or trading price of the Common Stock, or (B) offer, sell or issue, or enter into any agreement, arrangement or understanding to offer, sell or issue, any Common Stock or Common Stock Equivalent on terms which provide for adjustment or repricing of the purchase price or number of shares or other units of such Common Stock or Common Stock Equivalents other than pursuant to customary anti-dilution provisions; provided, however, that nothing in this Section 2.8 shall prohibit the Company from issuing shares of Common Stock for cash for the account of the Company (x) in an offering that is underwritten on a firm commitment basis and registered with the SEC under the 1933 Act, or (y) an offering of Common Stock that is a private investment in publicly-traded equity (commonly known as a PIPE). 2.9 Limitations on Liens. The Company will not itself, and will not permit any Subsidiary to, create, assume or suffer to exist any mortgage, lien, pledge, security interest or other charge or encumbrance (including, without limitation, the lien or retained security title of a conditional vendor), all of which are referred to below as "liens", upon all or any part of its property of any character, whether owned at the date hereof or thereafter acquired, except: (a) liens upon any property of any Subsidiary or Subsidiaries as security for indebtedness owing by such Subsidiary to the Company; (b) liens securing this Note and the Other Notes ratably; (c) liens for taxes or assessments or governmental charges or levies on its property if such taxes or assessments or charges or levies shall not at the time be due and payable or if the amount, applicability, or validity of any such tax, assessment, charge or levy shall currently be contested in good faith by appropriate proceedings or necessary preliminary steps are being taken to contest, compromise or settle the amount thereof or to determine the applicability or validity thereof and if the Company or such Subsidiary, as the case may be, shall have set aside on its books reserves (segregated to the extent required by sound accounting practice) deemed by it adequate with respect thereto; deposits or pledges to secure payment of worker's compensation, unemployment insurance, old age pensions or other social security; deposits or pledges to secure performance of bids, tenders, contracts (other than contracts for the payment of money borrowed or credit extended), leases, public or statutory obligations, surety or appeal bonds, or other deposits or pledges for purposes of like general nature in the ordinary course of business; mechanics', carriers', workers', repairmen's or other like liens arising in the ordinary 6 course of business securing obligations which are not overdue for a period of 60 days, or which are in good faith being contested or litigated, or deposits to obtain the release of such liens; liens created by or resulting from any litigation or legal proceedings or proceedings being contested in good faith by appropriate proceedings, provided any execution levied thereon shall be stayed; leases made, or existing on property acquired, in the ordinary course of business; landlords' liens under leases to which the Company or any Subsidiary is a party; and zoning restrictions, easements, licenses or restrictions on the use of real property or minor irregularities in title thereto; provided that all such liens described in this subsection (d) do not, in the aggregate, materially impair the use of such property in the operations of the business of the Company or any Subsidiary or the value of such property for the purpose of such business; (d) liens existing on the Issuance Date and listed in Schedule 4(r) to the Securities Purchase Agreement; and (e) liens upon raw materials, works in progress and finished goods inventory and accounts receivable granted to a bank, finance company or other institutional lender providing receivables and inventory financings. 2.10 Transactions with Affiliates. The Company will not pay, and will not permit any Subsidiary, directly or indirectly, to pay, any funds to or for the account of, make any investment (whether by acquisition of stock or Indebtedness, by loan, advance, transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, any Indebtedness, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect any transaction in connection with, any joint enterprise or other joint arrangement with, any Affiliate of the Company, except, on terms to the Company or such Subsidiary no less favorable than terms that could be obtained by the Company or such Subsidiary from a Person that is not an Affiliate of the Company, as determined in good faith by the Board of Directors. 2.11 Rule 144A Information Requirement. Within the period prior to the expiration of the holding period applicable to sales hereof under Rule 144(k) under the 1933 Act (or any successor provision), the Company shall, during any period in which it is not subject to Section 13 or 15(d) under the 1934 Act, make available to the Holder and any prospective purchaser of this Note from the Holder, the information required pursuant to Rule 144A(d)(4) under the 1933 Act upon the request of the Holder and it will take such further action as the Holder may reasonably request, all to the extent required from time to time to enable the Holder to sell this Note without registration under the 1933 Act within the limitations of the exemption provided by Rule 144A, as Rule 144A may be amended from time to time. Upon the request of the Holder, the Company will deliver to the Holder a written statement as to whether it has complied with such requirements. 2.12 Notice of Defaults. The Company shall notify the Holder promptly, but in any event not later than five days after the Company becomes aware of the fact, of any failure by the Company to comply with this Article II. 2.13 Security Agreement. No later than 30 days after the date hereof, the Company shall execute and deliver to the Holder and the holders of the Other Notes a Security Agreement, in form, scope and substance reasonably satisfactory to a majority in interest of the Holder and such other holders, taken together, 7 based upon the aggregate principal amount of Notes outstanding, granting a security interest in all of the assets of the Company excluding only Receivables as such term is defined in the Silicon Valley Bank Accounts Receivable Purchase Agreement dated October 10, 2001 (the "Collateral") to secure the obligations of the Company under this Note. Such security interest shall be junior only to the existing bank lines with JP Morgan Chase Bank, Sterling National Bank, Silicon Valley Bank and DIRI Rec Fund LLC. The Company shall use its commercially reasonable efforts to obtain any necessary consents to the granting of such security interest to the Holder and the holders of the Other Notes. ARTICLE III EVENTS OF DEFAULT 3.1 If any of the following events of default (each, an "Event of Default") shall occur: (a) Failure to Pay Principal, Interest, Etc. The Company fails (1) to pay the principal, the Optional Redemption Price or the Repurchase Price hereof when due, whether at maturity, upon acceleration or otherwise, as applicable, or (2) to pay any installment of interest hereon when due and, in the case of this clause (2) of this Section 3.1(a) only, such failure continues for a period of ten Business Days after notice from the Holder to the Company thereof; or (b) Breach of Certain Covenants. The Company fails to comply with Section 2.1, 2.7 or 2.8; or (c) Breach of Other Covenants. The Company fails to comply in any material respect with any other provision of Article II of this Note (other than Section 2.1, 2.7 or 2.8) or breaches any other material covenant or other material term or condition of this Note or any of the other Transaction Documents (other than as specifically provided in clauses (a) and (b) of this Section 3.1), and such breach continues for a period of 15 days after written notice thereof to the Company from the Holder; or (d) Breach of Representations and Warranties. Any representation or warranty of the Company made herein or in any agreement, statement or certificate given in writing pursuant hereto (or pursuant to any Transaction Documents) shall be false or misleading in any material respect when made; or (e) Certain Voluntary Proceedings. The Company or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or 8 shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due or shall admit in writing its inability generally to pay its debts as they become due; or (f) Certain Involuntary Proceedings. An involuntary case or other proceeding shall be commenced against the Company or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 consecutive days; or (g) Judgments and Governmental Actions. Any court of competent jurisdiction or any governmental authority shall enter one or more judgments against the Company or any Subsidiary or any of their respective properties or other assets, or find the Company or any Subsidiary liable for any damages or past due unpaid liabilities, including in respect of any unpaid taxes, including federal or state income, sales, use or other taxes, in an aggregate amount in excess of $50,000; or (h) Default Under Other Agreements. (a) The Company or any Subsidiary shall (i) default in any payment with respect to any Indebtedness for borrowed money (other than this Note) which Indebtedness has an outstanding principal amount in excess of $75,000 individually or in the aggregate for all such Indebtedness, beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created or (ii) default in any material respect in the observance or performance of any agreement, covenant or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, any such Indebtedness to become due prior to its stated maturity and such default or event shall continue beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created (after giving effect to any consent or waiver obtained and then in effect thereunder) and such default shall continue for five days (or to such earlier date as the holder of any other Indebtedness shall declare the same due and payable by reason of such default; or (b) any Indebtedness of the Company or any Subsidiary which has an outstanding principal amount in excess of the $75,000 individually or in the aggregate for all such Indebtedness shall, in accordance with its terms, be declared to be due and payable, or required to be prepaid other than by a regularly scheduled or required payment prior to the stated maturity thereof; or (i) Failure to Provide Security Interest. The Company does not provide the Holder and the holders of Other Notes with a perfected security interest in the Collateral to secure the obligations of the Company under the Notes by May 13, 2005, junior only to the existing bank lines with JP Morgan Chase Bank, Sterling National Bank, Silicon Valley Bank and DIRI Rec Fund LLC; then, 9 (1) upon the occurrence and during the continuation of any Event of Default specified in clause (a), (b), or (d) of this Section 3.1, at the option of the Holder, and upon the occurrence of any Event of Default specified in clause (e), (f) or (i) of this Section 3.1: (X) the Company shall pay to the Holder an amount equal to the outstanding principal amount of this Note plus accrued and unpaid interest on such principal amount to the date of payment plus accrued and unpaid Default Interest, if any, thereon at the rate provided in this Note to the date of payment, (Y) all other amounts payable hereunder or under any of the other Transaction Documents shall immediately become due and payable, all without demand, presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, reasonable legal fees and expenses of collection, and (Z) the Holder shall be entitled to exercise all other rights and remedies available at law or in equity; and (2) upon the occurrence and during the continuation of any Event of Default specified in clause (c), (g) or (h) of this Section 3.1: (A) if any Event of Default continues during the period of 30 consecutive days following the occurrence of such Event of Default, then thereafter so long as any Event of Default is continuing, at the option of the Holder (i) the Company shall pay to the Holder an amount equal to the outstanding principal amount of this Note plus accrued and unpaid interest on such principal amount to the date of payment plus accrued and unpaid Default Interest, if any, thereon at the rate provided in this Note to the date of payment, and (ii) all other amounts payable hereunder shall immediately become due and payable, all without demand, presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, reasonable legal fees and expenses, of collection, and (B) the Holder shall be entitled to exercise all rights and remedies available at law or in equity other than those set forth in the immediately preceding clause (A). ARTICLE IV REPURCHASE UPON A REPURCHASE EVENT 4.1 Repurchase Right Upon Repurchase Event. If a Repurchase Event occurs, in addition to any other right of the Holder, the Holder shall have the right, at the Holder's option, to require the Company to repurchase all of this Note, or any portion hereof on the repurchase date that is five Business Days after the date of the Holder Notice delivered with respect to such Repurchase Event; provided that any such repurchase shall be made proportionally among the Holder and the holders of Other Notes who have elected to have their Notes repurchased due to such Repurchase Event. The Holder shall have the right to require the Company to repurchase all or any such portion of this Note if a Repurchase Event occurs at any time while any portion of the principal amount of this Note is outstanding at a price equal to the Repurchase Price. 10 4.2 Notices; Method of Exercising Repurchase Rights, Etc. (a) On or before the fifth Business Day after the occurrence of a Repurchase Event, the Company shall give to the Holder a Company Notice of the occurrence of the Repurchase Event and of the repurchase right set forth herein arising as a result thereof. Such Company Notice shall set forth: (i) the date by which the repurchase right must be exercised, and (ii) a description of the procedure (set forth in this Section 4.2) which the Holder must follow to exercise the repurchase right. No failure of the Company to give a Company Notice or defect therein shall limit the Holder's right to exercise the repurchase right or affect the validity of the proceedings for the repurchase of this Note or portion hereof. (b) To exercise the repurchase right, the Holder shall deliver to the Company on or before the 30th day after a Company Notice (or if no such Company Notice has been given, within 40 days after the Holder first learns of the Repurchase Event) (i) a Holder Notice setting forth the name of the Holder and the principal amount of this Note to be repurchased, and (ii) this Note, duly endorsed for transfer to the Company of the portion of the outstanding principal amount of this Note to be repurchased. A Holder Notice may be revoked by the Holder at any time prior to the time the Company pays the applicable Repurchase Price to the Holder. (c) If the Holder shall have given a Holder Notice, then on the date which is five Business Days after the date such Holder Notice is given (or such later date as the Holder surrenders this Note) the Company shall make payment in immediately available funds of the applicable Repurchase Price to such account as specified by the Holder in writing to the Company at least one Business Day prior to the applicable repurchase date. 4.3 Other. A Holder Notice given by the Holder shall be deemed for all purposes to be in proper form unless the Company notifies the Holder within three Business Days after such Holder Notice has been given (which notice shall specify all defects in such Holder Notice), and any Holder Notice containing any such defect shall nonetheless be effective on the date given if the Holder promptly undertakes to correct all such defects. No such claim of defect shall limit or delay performance of the Company's obligation to repurchase any portion of this Note, the repurchase of which is not in dispute. ARTICLE V CONVERSION 5.1 Conversion Into Next Financing. (a) The Holder may convert all or any part of the principal and accrued interest on this Note into the securities issued in a Future Financing; provided that any partial conversion shall be in an amount at least equal to the minimum subscription allowable pursuant to the terms of the Future Financing. This Note may be converted into the number and type of securities as could be purchased in the Future Financing for a purchase price equal to the principal amount and accrued interest, including Default Interest, if any, on this Note being converted. 11 (b) In the event the Company contemplates a Future Financing, the Company shall provide written notice thereof to the Holder, which notice shall set forth in reasonable detail the terms of the Future Financing and include the final, definitive purchase agreement and related documentation. To exercise its conversion right, the Holder shall provide written notice to the Company within five Business Days after receipt of such notice from the Company of the principal and accrued interest it wishes to convert. In the event that the Company fails to deliver notice of the consummation of the Future Financing, the Holder shall have the right to convert this Note into the same securities on the same terms as those issued in the Future Financing by notice to the Company no later than thirty days after it learns of the consummation of the Future Financing. ARTICLE VI DEFINITIONS 6.1 Certain Defined Terms. (a) All the agreements or instruments herein defined shall mean such agreements or instruments as the same may from time to time be supplemented or amended or the terms thereof waived or modified to the extent permitted by, and in accordance with, the terms thereof and of this Note. (b) The following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Affiliate" means, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the subject Person. For purposes of this definition, "control" (including, with correlative meaning, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "AMEX" means the American Stock Exchange, Inc. "Applicable Rate" means 5 percent per annum or, if an Event of Default shall occur, then so long as any Event of Default shall continue, 12 percent per annum (or in either case such lesser rate as shall be the highest rate permitted by applicable law). "Board of Directors" means the Board of Directors of the Company. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board 12 of Directors, or duly authorized committee thereof (to the extent permitted by applicable law), and to be in full force and effect on the date of such certification, and delivered to the Holder. "Business Day" means any day other than a Saturday, Sunday or a day on which commercial banks in The City of New York are authorized or required by law or executive order to remain closed. "Common Stock" means the Common Stock, par value $.0001 per share, or any shares of capital stock of the Company into which such shares shall be changed or reclassified after the Issuance Date. "Common Stock Equivalent" means any warrant, option, subscription or purchase right with respect to shares of Common Stock, any security convertible into, exchangeable for, or otherwise entitling the holder thereof to acquire, shares of Common Stock or any warrant, option, subscription or purchase right with respect to any such convertible, exchangeable or other security. "Company" shall have the meaning provided in the first paragraph of this Note. "Company Certificate" means a certificate of the Company signed by an Officer. "Company Notice" means a Company Notice in the form attached hereto as Exhibit B. "Default Interest" shall have the meaning provided in the first paragraph of this Note. "Default Rate" means 12 percent per annum. "Eligible Bank" means a corporation organized or existing under the laws of the United States or any other state, having combined capital and surplus of at least $100 million and subject to supervision by federal or state authority and which has a branch located in New York, New York. "Event of Default" shall have the meaning provided in Section 3.1. "Fundamental Change" means (a) Any consolidation or merger of the Company or any Subsidiary with or into another entity (other than a merger or consolidation of a Subsidiary into the Company or a wholly-owned Subsidiary) where the stockholders of the Company immediately prior to such transaction do not collectively own at least 51% of the outstanding voting securities of the surviving corporation of such consolidation or merger immediately following such transaction; or the sale of all or substantially all of the assets of the Company and the Subsidiaries in a single transaction or a series of related transactions; or 13 (b) The occurrence of any transaction or event in connection with which all or substantially all the Common Stock shall be exchanged for, converted into, acquired for or constitute the right to receive consideration (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise) which is not all or substantially all common stock which is (or will, upon consummation of or immediately following such transaction or event, will be) listed on a national securities exchange or approved for quotation on Nasdaq or any similar United States system of automated dissemination of transaction reporting of securities prices; or (c) The acquisition by a Person or entity or group of Persons or entities acting in concert as a partnership, limited partnership, syndicate or group, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, of beneficial ownership of securities of the Company representing 25% or more of the(i) combined voting power of the outstanding voting securities of the Company ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors or (ii) fully diluted shares of Common Stock. "Future Financing" means a private placement financing, or series of related private placement financings, by the Company after the Closing Date pursuant to which gross proceeds of at least $1,500,000 are raised "Generally Accepted Accounting Principles" for any Person means the generally accepted accounting principles and practices applied by such Person from time to time in the preparation of its audited financial statements. "Holder" shall have the meaning provided in the first paragraph of this Note. "Holder Notice" means a Holder Notice in the form attached hereto as Exhibit C. "Indebtedness" as used in reference to any Person means all indebtedness of such Person for borrowed money, the deferred purchase price of property, goods and services and obligations under leases which are required to be capitalized in accordance with Generally Accepted Accounting Principles and shall include all such indebtedness guaranteed in any manner by such Person or in effect guaranteed by such Person through a contingent agreement to purchase and all indebtedness for the payment or purchase of which such Person has contingently agreed to advance or supply funds and all indebtedness secured by mortgage or other lien upon property owned by such Person, although such Person has not assumed or become liable for the payment of such indebtedness, and, for all purposes hereof, such indebtedness shall be treated as though it has been assumed by such Person. "Interest Payment Date" means each July 1, October 1, January 1 and April 1 and the Maturity Date. 14 "Interest Payment Shares" means the shares of Common Stock issuable in payment of interest on this Note in accordance with Section 1.1. "Interest Share Price" for any Interest Payment Date means the average of the Market Price of the Common Stock for all of the Trading Days during the period of 10 consecutive Trading Days ending on and including the Trading Day immediately preceding such Interest Payment Date. "Issuance Date" means March 29, 2005. "Market Price" with respect to any security on any day shall mean the closing price of such security on such day on the Nasdaq, the NYSE or the AMEX, as applicable, or, if such security is not listed or admitted to trading on the Nasdaq, the NYSE or the AMEX, on the principal national securities exchange or quotation system on which such security is quoted or listed or admitted to trading, in any such case as reported by Bloomberg, L.P. (or if such source ceases to be available, comparable source selected by the Holder and acceptable to the Company in its reasonable judgment) or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the closing price of such security on the over-the- counter market on the day in question, as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or if not so available, in such manner as furnished by any NYSE member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution. "Maturity Date" means the earlier to occur of (i) September 29, 2006, (ii) the date on which demand for payment of the loan payable to JPMorgan Chase Bank is made, and (iii) commencing May 13, 2005, the due date of the loan payable to JPMorgan Chase Bank pursuant to the Grid Demand Promissory Note, dated as of June 27, 2003, including if due on demand and whether or not demand for payment is actually made, as such due date may be extended. "Nasdaq" means the Nasdaq National Market. "Nasdaq SmallCap" means the Nasdaq SmallCap Market. "Next Financing" means the next private placement financing, or series of related private placement financings, by the Company after the Closing Date pursuant to which gross proceeds of at least $1,500,000 are raised. "1934 Act" means the Securities Exchange Act of 1934, as amended. "1933 Act" means the Securities Act of 1933, as amended. "Note" means this instrument as originally executed, or if later amended or supplemented in accordance with its terms, then as so amended or supplemented. "NYSE" means the New York Stock Exchange, Inc. 15 "Officer" means the Chairman of the Board, the Chief Executive Officer, the President or the Chief Financial Officer of the Company. "Optional Redemption Date" means each Business Day on which this Note is to be redeemed in whole or in part pursuant to Section 1.2. "Optional Redemption Notice" means an Optional Redemption Notice in the form attached hereto as Exhibit A. "Optional Redemption Period" means the period which commences on the date that is thirty days after closing of the Next Financing and ends on the Maturity Date. "Optional Redemption Price" means an amount in cash equal to the sum of (1) 100% of the outstanding principal amount of this Note specified in an Optional Redemption Notice as being redeemed by the Company plus (2) accrued and unpaid interest on such principal amount to the applicable Optional Redemption Date plus (3) accrued and unpaid Default Interest, if any, on the amount referred to in the immediately preceding clause (2) at the rate provided in this Note to the Optional Redemption Date. "Other Notes" means the Senior Subordinated Secured Notes issued by the Company pursuant to the Securities Purchase Agreement other than this Note. "Permitted Indebtedness" means (1) Indebtedness outstanding on the Issuance Date prior to issuance of this Note and listed on Schedule 4(l) to the Securities Purchase Agreement; and (2) Indebtedness evidenced by the Note and the Other Notes; (3) Indebtedness incurred after the Issuance Date which is unsecured, subordinated to the Notes as to payment on terms approved in advance of such incurrence by a majority in interest of the Holders of the Notes, based upon the outstanding principal amounts thereof, as evidenced by the written approval of such Holders given prior to the incurrence of such Indebtedness, and for which no payment of principal of such Indebtedness is scheduled to be due prior to the date that is six months after the latest scheduled Maturity Date; (4) endorsements for collection or deposit in the ordinary course of business; (5) in the case of any Subsidiary, Indebtedness owed by such Subsidiary to the Company; (6) Accrued expenses and trade payables incurred in the ordinary course of business of the Company; 16 (7) Indebtedness incurred after the Issuance Date in an aggregate amount not to exceed $250,000 at any one time outstanding so long as (x) such Indebtedness is incurred for the purpose of acquiring equipment owned or used or to be owned or used by the Company or any Subsidiaries (or for the purpose of acquiring the capital stock or similar equity interests of a Subsidiary that is formed for the limited purpose of owning same and does not own or hold any other material assets) and does not exceed the purchase price of the equipment, capital stock or other equity interest so acquired plus reasonable transaction expenses and (y) such Indebtedness, if secured, is secured solely by the interest of the Company or one of its Subsidiaries in the equipment so acquired and rights related thereto; and (8) Indebtedness incurred after the Issuance Date not to exceed $250,000 that is unsecured or subordinate to the Holder; so long as at the time of incurrence of such Indebtedness no Event of Default has occurred and is continuing or would result from such incurrence and no event which, with notice or passage of time, or both, would become an Event of Default has occurred and is continuing or would result from such incurrence and so long as in the case of such Indebtedness referred to in the preceding clauses (2), (3), (7) and (8), such Indebtedness shall have been approved by the Board of Directors prior to the incurrence thereof. "Person" means any natural person, corporation, partnership, limited liability company, trust, incorporated organization, unincorporated association or similar entity or any government, governmental agency or political subdivision. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Registration Statement" means the Registration Statement required to be filed by the Company with the SEC pursuant to Section 8(a)(1) of the Securities Purchase Agreement. "Repurchase Event" means the occurrence of any one or more of the following events: (a) Any Fundamental Change; (b) The consummation of the Next Financing; (c) The occurrence of any Event of Default specified in Article III of this Note; or (d) The failure of the Company to deliver to the Holder copies of fully- executed contracts with the customers listed on Exhibit D, substantially final drafts of which have been previously delivered to Holder or, with respect to GSX and Lenovo, contracts or proof of ongoing payments substantially equivalent thereto. "Repurchase Price" means with respect to any repurchase pursuant to Sections 4.1 and 4.2 an amount in cash equal to the sum of (1) 100% of the 17 outstanding principal amount of this Note plus (2) accrued and unpaid interest on such principal amount to the date of such repurchase plus (3) accrued and unpaid Default Interest, if any, thereon at the rate provided in this Note to the date of such repurchase. "Rule 144A" means Rule 144A as promulgated under the 1933 Act or any successor rule thereto. "SEC" means the Securities and Exchange Commission. "SEC Effective Date" means the date the Registration Statement is first declared effective by the SEC. "Securities Purchase Agreement" means the Securities Purchase Agreement, dated as of March 29, 2005, by and between the Company, Metropolitan Venture Partners II, L.P. and Sigma Opportunity Fund, LLC. "Share Interest Notice Date" shall have the meaning provided in Section 1.1(a). "Share Interest Payment Option" shall have the meaning provided in Section 1.1(a). "Significant Subsidiary" shall have the meaning provided in Regulation S-X of the SEC, except that a Subsidiary shall not be a Significant Subsidiary only if such Subsidiary, when consolidated for financial reporting purposes with all other Subsidiaries which are not Significant Subsidiaries, would not constitute a Significant Subsidiary. "Subsidiary" means any corporation or other entity of which a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions are at the time directly or indirectly owned by the Company. "Trading Day" means at any time a day on which any of a national securities exchange, Nasdaq, the OTC Bulletin Board or such other securities market as at such time constitutes the principal securities market for the Common Stock is open for general trading of securities. "Transaction Documents" means this Note, the Securities Purchase Agreement, and the Warrants and the other agreements, instruments and documents contemplated hereby and thereby. "Transfer Agent" means Manhattan Transfer & Registrar Company, or its successor as transfer agent and registrar for the Common Stock. "Warrants" means Common Stock Purchase Warrants of the Company issued to the original Holder of this Note pursuant to the Securities Purchase Agreement. 18 ARTICLE VII MISCELLANEOUS 7.1 Failure or Indulgency Not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privileges. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. 7.2 Notices. Except as otherwise specifically provided herein, any notice herein required or permitted to be given shall be in writing and may be personally served, sent by telephone line facsimile transmission, the receipt of which is electronically confirmed, or delivered by courier or sent by United States mail and shall be deemed to have been given upon receipt if personally served, sent by telephone line facsimile transmission or sent by courier or three days after being deposited in the facilities of the United States Postal Service, certified, with postage pre-paid and properly addressed, if sent by mail. For the purposes hereof, the address and facsimile line transmission number of the Holder shall be as furnished by the Holder for such purpose and shown on the records of the Company; and the address of the Company shall be 80 Orville Drive, Bohemia, New York 11716, Attention: Chief Financial Officer (telephone line facsimile transmission number (631) 563-8085). The Holder or the Company may change its address for notice by service of written notice to the other as herein provided. 7.3 Amendment, Waiver, Etc. Neither this Note nor any terms hereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the Company and a majority in interest of the Holders of Notes and Other Notes (which must include Metropolitan Venture Partners II, L.P., except in the case where the rights of Metropolitan Venture Partners II, L.P. would not be materially adversely affected by a waiver, in which case their prior written consent shall not be required), taken together, based upon the aggregate principal amount of the Notes and Other Notes then outstanding Any such amendment, modification, waiver, discharge or termination shall affect all Holders proportionally. 7.4 Assignability. This Note shall be binding upon the Company and its successors, and shall inure to the benefit of and be binding upon the Holder and its successors and permitted assigns. The Company may not assign its rights or obligations under this Note. 7.5 Certain Expenses. The Company shall pay on demand all expenses incurred by the Holder, including reasonable attorneys' fees and expenses, as a consequence of, or in connection with (x) any amendment or waiver of this Note or any other Transaction Document, (y) any default or breach of any of the Company's obligations set forth in the Transaction Documents and (z) the enforcement or restructuring of any right of, including the collection of any 19 payments due, the Holder under the Transaction Documents, including any action or proceeding relating to such enforcement or any order, injunction or other process seeking to restrain the Company from paying any amount due the Holder. 7.6 Governing Law. This Note shall be governed by the internal laws of the State of New York, without regard to the principles of conflict of laws. 7.7 Transfer of Note and Noteholder Payment Amount. This Note has not been and is not being registered under the provisions of the 1933 Act or any state securities laws and this Note may not be transferred unless the Holder shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that this Note may be sold or transferred without registration under the 1933 Act. Prior to any such transfer, such transferee shall have represented in writing to the Company that such transferee has requested and received from the Company all information relating to the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries deemed relevant by such transferee; that such transferee has been afforded the opportunity to ask questions of the Company concerning the foregoing and has had the opportunity to obtain and review the reports and other information concerning the Company which at the time of such transfer have been filed by the Company with the SEC pursuant to the 1934 Act. If such transfer is intended to assign the rights and obligations under 5(a), 5(b), 8, 9 and 10 of the Securities Purchase Agreement, such transfer shall otherwise be made in compliance with Article V of the Securities Purchase Agreement. The Holder may not transfer a portion of this Note to any Person if such transfer would result in an increase in the aggregate number of registered holders of this Note of more than four such holders without the prior written consent of the Company, which consent will not be unreasonably withheld. Any instrument issued upon any such transfer of a portion of this Note which results in such increase of one holder shall bear a legend that the holder thereof shall not be entitled to transfer such instrument in a manner which would further increase the aggregate number of registered holders of this Note without the prior written consent of the Company, which consent shall not be unreasonably withheld; provided, however, that any remaining right of the Holder to transfer all or a portion of this Note may be transferred to the transferee by agreement between the Holder and the transferee. The Company shall provide such assistance as reasonably necessary to allow a transfer of this Note. 7.8 Enforceable Obligation. The Company represents and warrants that at the time of the original issuance of this Note it received the full purchase price payable pursuant to the Securities Purchase Agreement in an amount at least equal to the original principal amount of this Note, and that this Note is an enforceable obligation of the Company which is not subject to any offset, reduction, counterclaim or disallowance of any sort. 7.9 Note Register; Replacement of Notes. The Company shall maintain a register showing the names, addresses and telephone line facsimile numbers of the Holder and the registered holders of the Other Notes. The Company shall also maintain a facility for the registration of transfers of this Note and the Other Notes and at which this Note and the Other Notes may be surrendered for split up into instruments of smaller denominations or for combination into instruments of larger denominations. Upon receipt by the Company of evidence reasonably 20 satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Note and (a) in the case of loss, theft or destruction, of indemnity from the Holder reasonably satisfactory in form to the Company (and without the requirement to post any bond or other security) or (b) in the case of mutilation, upon surrender and cancellation of this Note, the Company will execute and deliver to the Holder a new Note of like tenor without charge to the Holder. 7.10 Payment of Note on Redemption or Repurchase; Deposit of Redemption Price or Repurchase Price, Etc. (a) If this Note or any portion of this Note is to be redeemed as provided in Section 1.2 or repurchased as provided in Sections 4.1 and 4.2 and any notice required in connection therewith shall have been given as provided therein and the Company shall have otherwise complied with the requirements of this Note with respect thereto, then this Note or the portion of this Note to be so redeemed or repurchased and with respect to which any such notice has been given shall become due and payable on the date stated in such notice at the applicable Optional Redemption Price or Repurchase Price. On and after the Optional Redemption Date or repurchase date so stated in such notice, provided that the Company shall have deposited with an Eligible Bank on or prior to such Optional Redemption Date or repurchase date, an amount sufficient to pay the applicable Optional Redemption Price or Repurchase Price, interest on this Note or the portion of this Note to be so redeemed or repurchased shall cease to accrue, and this Note or such portion hereof shall be deemed not to be outstanding and shall not be entitled to any benefit with respect to principal of or interest on the portion to be so redeemed or repurchased except to receive payment of the applicable Optional Redemption Price or Repurchase Price. On presentation and surrender of this Note or such portion hereof, this Note or the specified portion hereof shall be paid and redeemed or repurchased at the applicable Optional Redemption Price or Repurchase Price. If a portion of this Note is to be redeemed or repurchased, upon surrender of this Note to the Company in accordance with the terms hereof, the Company shall execute and deliver to the Holder without service charge, a new Note or Notes, having the same date hereof and containing identical terms and conditions, in such denomination or denominations as requested by the Holder in aggregate principal amount equal to, and in exchange for, the unredeemed or unrepurchased portion of the principal amount of this Note so surrendered. (b) Upon the payment in full of all amounts payable by the Company under this Note or the deposit thereof as provided in Section 7.10(a), thereafter the obligations of the Company under this Note shall be as set forth in this Article VII, and, in the case of such deposit, to pay the Optional Redemption Price or Repurchase Price, as the case may be, from the funds so deposited. Upon such payment or deposit, any Event of Default which occurred prior to such payment or deposit by reason of one or more provisions of this Note with which the Company thereafter is no longer obligated to comply, then shall no longer exist. [Remainder of Page Intentionally Left Blank] 21 IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name by its duly authorized officer as of the day and in the year first above written. DIRECT INSITE CORP. By: Name: Title: ASSIGNMENT For value received _________________________ hereby sell(s), assign(s) and transfer(s) unto _________________________ (Please insert social security or other Taxpayer Identification Number of assignee: ______________________________) the within Note, and hereby irrevocably constitutes and appoints _________________________ attorney to transfer the said Note on the books of Direct Insite Corp., a Delaware corporation (the "Company"), with full power of substitution in the premises. In connection with any transfer of the Note within the period prior to the expiration of the holding period applicable to sales thereof under Rule 144(k) under the 1933 Act (or any successor provision) (other than any transfer pursuant to a registration statement that has been declared effective under the 1933 Act), the undersigned confirms that such Note is being transferred: [ ] To the Company or a subsidiary thereof; or [ ] To a QIB pursuant to and in compliance with Rule 144A; or [ ] To an "accredited investor" pursuant to and in compliance with the 1933 Act; or [ ] Pursuant to and in compliance with Rule 144 under the 1933 Act; and unless the box below is checked, the undersigned confirms that, to the knowledge of the undersigned, such Note is not being transferred to an "affiliate" of the Company as defined in Rule 144 under the 1933 Act (an "Affiliate"). [ ] The transferee is an Affiliate of the Company. Capitalized terms used in this Assignment and not defined in this Assignment shall have the respective meanings provided in the Note. Dated: NAME: Signature(s) Exhibit A DIRECT INSITE CORP. OPTIONAL REDEMPTION NOTICE (Section 1.2 of Senior Subordinated Secured Note) TO: (Name of Holder) (1) Pursuant to the terms of the Senior Subordinated Secured Note (the "Note"), Direct Insite Corp., a Delaware corporation (the "Company"), hereby notifies the above-named Holder that the Company is exercising its right to redeem the Note in accordance with Section 1.2 of the Note as set forth below: (i) The principal amount of the Note to be redeemed is $ . (ii) The Optional Redemption Price is $ . (iii) The Optional Redemption Date is . (2) Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note. Date _________________________ DIRECT INSITE CORP. By: Title: A-1 Exhibit B DIRECT INSITE CORP. COMPANY NOTICE (Section 4.2(a) of Senior Subordinated Secured Note) TO: (Name of Holder) (1) A Repurchase Event described in the Senior Subordinated Secured Note (the "Note") of Direct Insite Corp., a Delaware corporation (the "Company"), occurred on , 200 . As a result of such Repurchase Event, the Holder is entitled to exercise its repurchase rights pursuant to Section 4.2 of the Note. (2) The Holder's repurchase right must be exercised on or before , 200 . (3) At or before the date set forth in the preceding paragraph (2), the Holder must deliver to the Company: (a) a Holder Notice, in the form attached as Exhibit C to the Note; and (b) the Note, duly endorsed for transfer to the Company of the portion of the principal amount to be repurchased. (4) Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note. Date _________________________ DIRECT INSITE CORP. By: Title: B-1 Exhibit C DIRECT INSITE CORP. HOLDER NOTICE (Section 4.2(b) of Senior Subordinated Secured Note) TO: DIRECT INSITE CORP. (1) Pursuant to the terms of the Senior Subordinated Secured Note (the "Note"), the undersigned Holder hereby elects to exercise its right to require repurchase by the Company pursuant to Sections 4.2(a) and 4.2(b) of $ of the Note, equal to the sum of $ principal amount of the Note, $ of accrued and unpaid interest on such principal amount and $ of Default Interest on such interest at the Repurchase Price provided in the Note. (2) Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note. Date: NAME OF HOLDER: By:______________________________ Signature of Registered Holder (Must be signed exactly as name appears in the Note.) C-1 Exhibit D GXS Lenovo IBM EDS D-1 EX-4.3 4 diri8kwarrantex4-3.txt WARRANT Exhibit 4.3 NEITHER THIS WARRANT NOR ISSUANCE OF THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF TO THE HOLDER HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR QUALIFIED OR REGISTERED UNDER STATE SECURITIES OR BLUE SKY LAWS. NEITHER THIS WARRANT NOR SUCH SECURITIES MAY BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND THE APPLICABLE RULES AND REGULATIONS THEREUNDER. THIS WARRANT MAY NOT BE TRANSFERRED EXCEPT AS PROVIDED IN SECTION 24. No. SF- ___ Right to Purchase __________ Shares of Common Stock of Direct Insite Corp. DIRECT INSITE CORP. Common Stock Purchase Warrant DIRECT INSITE CORP., a Delaware corporation, hereby certifies that, for value received, _______________ or registered assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time on or after the Exercisability Date until 5:00 p.m., New York City time, on the Expiration Date (such capitalized term and all other capitalized terms used herein having the respective meanings provided herein), __________ fully paid and nonassessable shares of Common Stock at a purchase price per share equal to the Purchase Price. The number of such shares of Common Stock and the Purchase Price are subject to adjustment as provided in this Warrant. As used herein the following capitalized terms, unless the context otherwise requires, have the following respective meanings: "Aggregate Purchase Price" means at any time an amount equal to the product obtained by multiplying (x) the Purchase Price times (y) the number of shares of Common Stock for which this Warrant may be exercised at such time. "AMEX" means the American Stock Exchange, Inc. "Board of Directors" means the Board of Directors of the Company. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law or executive order to remain closed. "Closing Date" shall have the meaning provided in the Securities Purchase Agreement. "Common Stock" includes the Company's Common Stock, par value $.0001 per share (and any purchase rights issued with respect to the Common Stock in the future), as authorized on the date hereof, and any other securities into which or for which the Common Stock (and any such rights issued with respect to the Common Stock) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise and any stock (other than Common Stock) and other securities of the Company or any other Person which the Holder at any time shall be entitled to receive, or shall have received, on the exercise of this Warrant, in lieu of or in addition to Common Stock. "Common Stock Equivalents" means any warrant, option, subscription or purchase right with respect to shares of Common Stock, any security convertible into, exchangeable for, or otherwise entitling the holder thereof to acquire, shares of Common Stock or any warrant, option, subscription or purchase right with respect to any such convertible, exchangeable or other security. "Company" shall include Direct Insite Corp., a Delaware corporation, and any corporation that shall succeed to or assume the obligations of Direct Insite Corp. hereunder in accordance with the terms hereof. "Current Fair Market Value" means when used with respect to the Common Stock as of a specified date with respect to each share of Common Stock, the average of the closing prices of the Common Stock sold on all securities exchanges (including the Nasdaq, the Nasdaq SmallCap and the Over-the-Counter Bulletin Board) on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on such day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on such day the Common Stock is not so listed, the closing price on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of five Trading Days consisting of the day as of which the Current Fair Market Value of Common Stock is being determined (or if such day is not a Trading Day, the Trading Day next preceding such day) and the four consecutive Trading Days prior to such day. If on the date for which Current Fair Market Value is to be determined the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the Current Fair Market Value of Common Stock shall be the highest price per share which the Company could then obtain from a willing buyer (not an employee or director of the Company at the time of determination) in an arms'-length transaction for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board of Directors. 2 "Exercisability Date" shall mean the date on which the warrants issued in the Follow-on Financing become exercisable or as may otherwise be agreed between the Company and Holder in connection with the Follow-on Financing, or, if the Follow-on Financing does not occur by May 13, 2005, then the Exercisability Date shall be May 13, 2005 (unless a later date is agreed to in writing by the Company and Holder). "Expiration Date" means March 28, 2012. "Follow-on Financing" shall mean a private placement consummated by the Company within 45 days after the Closing Date, or such longer period as agreed in writing between the Company and Sigma, pursuant to which Sigma is the lead investor and Sigma and its Affiliates and appointees invest between $2,500,000 and $3,500,000. "Issuance Date" means the date of original issuance of this Warrant. "Nasdaq" means the Nasdaq National Market. "Nasdaq SmallCap" means the Nasdaq SmallCap Market. "1934 Act" means the Securities Exchange Act of 1934, as amended. "1933 Act" means the Securities Act of 1933, as amended. "Notes" means any of the Senior Subordinated Secured Notes issued by the Company pursuant to the Securities Purchase Agreement. "NYSE" means the New York Stock Exchange, Inc. "Other Securities" means any stock (other than Common Stock) and other securities of the Company or any other Person which the Holder at any time shall be entitled to receive, or shall have received, on the exercise of this Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4. "Other Warrants" means the Common Stock Purchase Warrants (other than this Warrant) issued or issuable by the Company pursuant to the Securities Purchase Agreement. "Person" means an individual, partnership, corporation, limited liability company, trust, unincorporated organization, business trust, association, joint stock company, joint venture, pool, syndicate, sole proprietorship, governmental agency or any other form of entity not specifically listed herein. "Purchase Price" means $.90, except that if the Follow-on Financing occurs, the Purchase Price shall be as agreed between the Company and Holder in 3 connection with the Follow-on Financing, subject to the same antidilution adjustments as provided in the warrants issued in connection with the Follow-on Financing, or, if the Follow-on Financing is not consummated within 45 days of the Closing Date or such later date as agreed to in writing by the Company and Holder, then the Purchase Price shall be $.01 effective 45 days after the Closing Date or such later date as agreed to in writing by the Company and Holder. In the event that the Purchase Price is adjusted to $.01, it shall not be subject to further adjustment except as required by Section 5 and 9 hereof. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Registration Period" shall have the meaning provided in the Securities Purchase Agreement. "Registration Statement" shall have the meaning provided in the Securities Purchase Agreement. "Restricted Securities" means securities that are not eligible for resale pursuant to Rule 144(k) under the 1933 Act (or any successor provision). "Reorganization Event" means the occurrence of any one or more of the following events: (i) any consolidation, merger or similar transaction of the Company or any Subsidiary with or into another entity (other than a merger or consolidation or similar transaction of a Subsidiary into the Company or a wholly-owned Subsidiary); or the sale or transfer of all or substantially all of the assets of the Company and the Subsidiaries in a single transaction or a series of related transactions; or (ii) the occurrence of any transaction or event in connection with which all or substantially all the Common Stock shall be exchanged for, converted into, acquired for or constitute the right to receive securities of any other Person (whether by means of a Tender Offer, liquidation, consolidation, merger, share exchange, combination, reclassification, recapitalization, or otherwise); or (iii) the acquisition by a Person or group of Persons acting in concert as a partnership, limited partnership, syndicate or group, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, of beneficial ownership of securities of the Company representing 50% or more of the combined voting power of the outstanding voting securities of the Company ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors; provided that there shall be excluded from the definition of Reorganization Event any event described in (i), (ii), or (iii) above that is consummated with a publicly traded company with a market capitalization in excess of $100 million and so long as the Holder has received at least ten Business Days prior notice of same (a "$100M event"). 4 "Rule 144A" means Rule 144A as promulgated under the 1933 Act. "Securities Purchase Agreement" means the Securities Purchase Agreement, dated as of March 29, 2005, by and between the Company and the investors named therein. "SEC" means the Securities and Exchange Commission. "SEC Effective Date" shall have the meaning provided in the Securities Purchase Agreement. "Sigma" means Sigma Opportunity Fund, LLC. "Subsidiary" means any corporation or other entity of which a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions are at the time directly or indirectly owned by the Company. "Tender Offer" means a tender offer, exchange offer or other offer by the Company to repurchase outstanding shares of its capital stock. "Trading Day" means at any time a day on which any of a national securities exchange, Nasdaq or such other securities market as at such time constitutes the principal securities market for the Common Stock is open for general trading of securities. "Warrant Shares" means the shares of Common Stock issuable upon exercise of this Warrant. 1. Exercise of Warrant. (a) Exercise. This Warrant may be exercised by the Holder in whole at any time or in part from time to time on or before the Expiration Date by (x) surrendering this Warrant to the Company, (y) giving a subscription form in the form of Exhibit 1 to this Warrant (duly executed by the Holder) to the Company, and (z) making payment, in cash or by certified or official bank check payable to the order of the Company, or by wire transfer of funds to the account of the Company, in any such case, in the amount obtained by multiplying (a) the number of shares of Common Stock designated by the Holder in the subscription form by (b) the Purchase Price then in effect. On any partial exercise the Company will forthwith issue and deliver to or upon the order of the Holder a new Warrant or Warrants of like tenor, in the name of the Holder or as the Holder (upon payment by the Holder of any applicable transfer taxes) may request, providing in the aggregate on the face or faces thereof for the purchase of the number of shares of Common Stock for which such Warrant or Warrants may still be exercised. The subscription form may be surrendered by telephone line facsimile transmission to such telephone number for the Company as shall have been specified in writing to the Holder by the Company; provided, however, that if the subscription form is given to the Company by telephone line facsimile transmission the Holder shall send an original of such subscription form to the Company within ten Business Days after such subscription form is so given to the Company; provided further, however, that any failure or delay on the part of the Holder in giving such original of any subscription form shall not affect the validity or the date on which such subscription form is so given by telephone line facsimile transmission. 5 (b) Net Exercise. The Holder may elect to exercise this Warrant, in whole at any time or in part from time to time, by receiving shares of Common Stock equal to the net issuance value (as determined below) of this Warrant, or any part hereof, upon surrender of the subscription form annexed hereto (duly executed by the Holder) to the Company (followed by surrender of this Warrant to the Company within three Trading Days after surrender of such subscription form), in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X = Y x (A - B) A where, X = the number of shares of Common Stock to be issued to the Holder Y = the number of shares of Common Stock as to which this Warrant is to be exercised A = the Current Fair Market Value of one share of Common Stock calculated as of the last Trading Day immediately preceding the exercise of this Warrant B = the Purchase Price 2. Delivery of Stock Certificates, etc., on Exercise. As soon as practicable after the exercise of this Warrant and in any event within five Trading Days thereafter, upon the terms and subject to the conditions of this Warrant, the Company at its expense (including the payment by it of any applicable issue or stamp taxes) will cause to be issued in the name of and delivered to the Holder, or as the Holder (upon payment by the Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock (or Other Securities) to which the Holder shall be entitled on such exercise, in such denominations as may be requested by the Holder, plus, in lieu of any fractional share to which the Holder would otherwise be entitled, cash equal to such fraction multiplied by the then Current Fair Market Value of one full share, together with any other stock or Other Securities or any property (including cash, where applicable) to which the Holder is entitled upon such exercise pursuant to Section 1 or otherwise. The Company shall pay any taxes and other governmental charges that may be imposed under the laws of the United States of America or any political subdivision or taxing authority thereof or therein in respect of the issue or delivery of shares of Common Stock (or Other Securities) or payment of cash upon exercise of this Warrant (other than income taxes imposed on the Holder). The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for shares of Common Stock (or Other Securities) 6 issuable upon exercise of this Warrant or payment of cash to any Person other than the Holder, and in case of such transfer or payment the Company shall not be required to deliver any certificate for shares of Common Stock (or Other Securities) upon such exercise or pay any cash until such tax or charge has been paid or it has been established to the Company's reasonable satisfaction that no such tax or charge is due. Upon exercise of this Warrant as provided herein, the Company's obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Company to the Holder, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with such exercise. If the Company fails to issue and deliver the certificates for the Common Stock to the Holder pursuant to the first sentence of this paragraph as and when required to do so, in addition to any other liabilities the Company may have hereunder and under applicable law, the Company shall pay or reimburse the Holder on demand for all out-of-pocket expenses, including, without limitation, fees and expenses of legal counsel, incurred by the Holder as a result of such failure. 3. Adjustment for Dividends in Other Stock, Property, etc.; Reclassification, etc. In case at any time or from time to time on or after the Issuance Date, all the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of stockholders eligible to receive) shall have become entitled to receive, without payment therefor, (a) other or additional stock, rights, warrants or other securities or property (other than cash) by way of dividend, or (b) any cash (excluding cash dividends payable solely out of earnings or earned surplus of the Company), or (c) other or additional stock, rights, warrants or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, otherthan (i) additional shares of Common Stock (or Other Securities) issued as a stock dividend or in a stock-split (adjustments in respect of which are provided for in Section 5) and (ii) rights or warrants to subscribe for Common Stock at less than the Current Fair Market Value (adjustments in respect of which are provided in Section 6), then and in each such case the Holder, on the exercise hereof as provided in Section 1, shall be entitled to receive the amount of stock, rights, warrants and Other Securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this Section 3) which the Holder would hold on the date of such exercise if on the date thereof the Holder had been the holder of record of the number of shares of Common Stock 7 called for on the face of this Warrant and had thereafter, during the period from the date thereof to and including the date of such exercise, retained such shares and all such other or additional stock, rights, warrants and Other Securities and property (including cash in the case referred to in subdivisions (b) and (c) of this Section 3) receivable by the Holder as aforesaid during such period, giving effect to all adjustments called for during such period by Section 4. 4. Exercise upon a Reorganization Event. In case of any Reorganization Event, and except to the extent that the Purchase Price has been adjusted to $.01 as provided herein and so long as the Holder has received at least ten Business Days notice prior to the consummation of the Reorganization Event, the Company shall, as a condition precedent to the consummation of the transactions constituting, or announced as, such Reorganization Event, cause effective provisions to be made so that the Holder shall have the right thereafter, by exercising this Warrant (in lieu of the shares of Common Stock of the Company and Other Securities or property purchasable and receivable upon exercise of the rights represented hereby immediately prior to such transaction) to purchase the kind and amount of shares of stock and Other Securities and property (including cash) receivable upon such Reorganization Event by a holder of the number of shares of Common Stock that might have been received upon exercise of this Warrant immediately prior to such Reorganization Event. Any such provision shall include provisions for adjustments in respect of such shares of stock and Other Securities and property that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. The provisions of this Section 4 shall apply to successive Reorganization Events. 5. Adjustment for Certain Extraordinary Events. In the event that on or after the Issuance Date the Company shall (i) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock, or (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the Purchase Price in effect immediately prior to such event by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 5. The Holder shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive that number of shares of Common Stock determined by multiplying the number of shares of Common Stock which would be issuable on such exercise immediately prior to such issuance by a fraction of which (i) the numerator is the Purchase Price in effect immediately prior to such issuance and (ii) the denominator is the Purchase Price in effect on the date of such exercise. 6. [Reserved] 7. [Reserved] 8. [Reserved] 9. Effect of Reclassification, Consolidation, Merger or Sale. (a) If any of the following events occur, namely (i) any reclassification or change of the outstanding shares of Common Stock (other than a change in par value, or from 8 par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any consolidation, merger or combination of the Company with another corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, or (iii) any sale or conveyance of the properties and assets of the Company as, or substantially as, an entirety to any other Person as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then the Company or the successor or purchasing Person, as the case may be, shall execute with the Holder a written agreement providing that (x) this Warrant shall thereafter entitle the Holder to purchase the kind and amount of shares of stock and Other Securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance by the holder of a number of shares of Common Stock issuable upon exercise of this Warrant (assuming, for such purposes, a sufficient number of authorized shares of Common Stock available to exercise this Warrant) immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance assuming such holder of Common Stock did not exercise such holder's rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance (provided that, if the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised ("non-electing share"), then for the purposes of this Section 9 the kind and amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares), (y) in the case of any such successor or purchasing Person, upon such consolidation, merger, combination, sale or conveyance such successor or purchasing Person shall be jointly and severally liable with the Company for the performance of all of the Company's obligations under this Warrant and the Securities Purchase Agreement and (z) if registration or qualification is required under the 1933 Act or applicable state law for the public resale by the Holder of such shares of stock and Other Securities so issuable upon exercise of this Warrant, such registration or qualification shall be completed prior to such reclassification, change, consolidation, merger, combination or sale. Such written agreement shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. If, in the case of any such reclassification, change, consolidation, merger, combination, sale or conveyance, the stock or other securities and assets receivable thereupon by a holder of shares of Common Stock includes shares of stock or other securities and assets of a corporation other than the successor or purchasing corporation, as the case may be, in such reclassification, change, consolidation, merger, combination, sale or conveyance, then such written agreement shall also be executed by such other corporation and shall contain such additional provisions to protect the interests of the Holder as the Board of Directors shall reasonably consider necessary by reason of the foregoing. (b) The above provisions of this Section 9 shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances. (c) If Section 4 applies to any event or occurrence, this Section 9 shall not apply to such event or occurrence. Further this Section 9 shall not apply to a $100M event. 9 10. Tax Adjustments. The Company may make such reductions in the Purchase Price, in addition to those required by Sections 3, 4, 5, 6, 7 and 8, as the Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. 11. Minimum Adjustment. (a) No adjustment in the Purchase Price (and no related adjustment in the number of shares of Common Stock which may thereafter be purchased upon exercise of this Warrant) shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that any adjustments which by reason of this Section 11 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All such calculations under this Warrant shall be made by the Company and shall be made to the nearest cent or to the nearest one hundredth of a share, as the case may be. (b) No adjustment need be made for a change in the par value of the Common Stock or from par value to no par value or from no par value to par value. 12. Notice of Adjustments. Whenever the Purchase Price is adjusted as herein provided, the Company shall promptly, but in no event later than five Trading Days thereafter, give a notice to the Holder setting forth the Purchase Price and number of shares of Common Stock which may be purchased upon exercise of this Warrant after such adjustment and setting forth a brief statement of the facts requiring such adjustment but which such statement shall not include any information which would be material non-public information for purposes of the 1934 Act. Failure to deliver such notice shall not affect the legality or validity of any such adjustment. 13. Further Assurances. The Company will take all action that may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock, free from all taxes, liens and charges with respect to the issue thereof, on the exercise of all or any portion of this Warrant from time to time outstanding. 14. Notice to Holder Prior to Certain Actions. In case on or after the Issuance Date: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock (other than in cash out of retained earnings); or (b) the Company shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any share of any class or any other rights or warrants; or (c) the Board of Directors shall authorize any reclassification of the Common Stock (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or any consolidation or merger or other business 10 combination transaction to which the Company is a party and for which approval of any stockholders of the Company is required, or the sale or transfer of all or substantially all of the assets of the Company; or (d) there shall be pending the voluntary or involuntary dissolution, liquidation or winding-up of the Company; the Company shall give the Holder, as promptly as possible but in any event at least ten Trading Days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined, or (y) the date on which such reclassification, consolidation, merger, other business combination transaction, sale, transfer, dissolution, liquidation or winding-up is expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record who shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, other business combination transaction, sale, transfer, dissolution, liquidation or winding-up shall be determined. Such notice shall not include any information which would be material non-public information for purposes of the 1934 Act. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. In the case of any such action of which the Company gives such notice to the Holder or is required to give such notice to the Holder, the Holder shall be entitled to give a subscription form to exercise this Warrant in whole or in part that is contingent on the completion of such action. 15. Reservation of Stock, etc., Issuable on Exercise of Warrants. The Company will at all times reserve and keep available out of its authorized but unissued shares of capital stock, solely for issuance and delivery on the exercise of this Warrant, a sufficient number of shares of Common Stock (or Other Securities) to effect the full exercise of this Warrant and the exercise, conversion or exchange of any other warrant or security of the Company exercisable for, convertible into, exchangeable for or otherwise entitling the holder to acquire shares of Common Stock (or Other Securities), and if at any time the number of authorized but unissued shares of Common Stock (or Other Securities) shall not be sufficient to effect such exercise, conversion or exchange, the Company shall take such action as may be necessary to increase its authorized but unissued shares of Common Stock (or Other Securities) to such number as shall be sufficient for such purposes. 16. Transfer of Warrant. This Warrant shall inure to the benefit of the successors to and assigns of the Holder. This Warrant and all rights hereunder, in whole or in part, are registrable at the office or agency of the Company referred to below by the Holder in Person or by his duly authorized attorney, upon surrender of this Warrant properly endorsed accompanied by an assignment form in the form attached to this Warrant, or other customary form, duly executed by the transferring Holder. 17. Register of Warrants. The Company shall maintain, at the principal office of the Company (or such other office as it may designate by notice to the Holder), a register in which the Company shall record the name and address of the Person in whose name this Warrant has been issued, as well as the name and address of each successor and prior owner of such Warrant. The Company shall be entitled to treat the Person in whose name this Warrant is so registered as the sole and absolute owner of this Warrant for all purposes. 11 18. Exchange of Warrant. This Warrant is exchangeable, upon the surrender hereof by the Holder at the office or agency of the Company referred to in Section 16, for one or more new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by the Holder at the time of such surrender. 19. Replacement of Warrant. On receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and (a) in the case of loss, theft or destruction, of indemnity from the Holder reasonably satisfactory in form to the Company (and without the requirement to post any bond or other security), or (b) in the case of mutilation, upon surrender and cancellation of this Warrant, the Company will execute and deliver to the Holder a new Warrant of like tenor without charge to the Holder. 20. Warrant Agent. The Company may, by written notice to the Holder, appoint the transfer agent and registrar for the Common Stock as the Company's agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, and the Company may, by written notice to the Holder, appoint an agent having an office in the United States of America for the purpose of exchanging this Warrant pursuant to Section 18, and replacing this Warrant pursuant to Section 19, or any of the foregoing, and thereafter any such exchange or replacement, as the case may be, shall be made at such office by such agent. 21. Remedies. The Company stipulates that the remedies at law of the Holder in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 22. No Rights or Liabilities as a Stockholder. This Warrant shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company. Nothing contained in this Warrant shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a stockholder of the Company on any matters or with respect to any rights whatsoever as a stockholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the Common Stock (or Other Securities) purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised in accordance with its terms. 23. Notices, etc. All notices and other communications from the Company to the Holder shall be mailed by first class certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by the Holder or at the address shown for the Holder on the register of Warrants referred to in Section 16. 12 24. Transfer Restrictions. This Warrant has not been and is not being registered under the provisions of the 1933 Act or any state securities laws and this Warrant may not be transferred unless (1) the transferee is an "accredited investor" (as defined in Regulation D under the 1933 Act) or a QIB in a transfer that meets the requirements of Rule 144A and (2) the Holder shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that this Warrant may be sold or transferred without registration under the 1933 Act. Prior to any such transfer, such transferee shall have represented in writing to the Company that such transferee has requested and received from the Company all information relating to the business, properties, operations, condition (financial or other), results of operations or prospects of the Company deemed relevant by such transferee; that such transferee has been afforded the opportunity to ask questions of the Company concerning the foregoing and has had the opportunity to obtain and review the Registration Statement (as defined in the Securities Purchase Agreement) and the prospectus included therein, each as amended or supplemented to the date of transfer to such transferee, and the reports and other information concerning the Company which at the time of such transfer have been filed by the Company with the SEC pursuant to the 1934 Act and which are incorporated by reference in such prospectus as of the date of such transfer. If such transfer is intended to assign the rights and obligations under Sections 5, 8, 9 and 10 of the Securities Purchase Agreement, such transfer shall otherwise be made in compliance with Section 10(j) of the Securities Purchase Agreement. The Company shall provide such assistance as reasonably necessary to allow a transfer of this Warrant. 25. Rule 144A Information Requirement. Within the period prior to the expiration of the holding period applicable to sales hereof under Rule 144(k) under the 1933 Act (or any successor provision), the Company covenants and agrees that it shall, during any period in which it is not subject to Section 13 or 15(d) under the 1934 Act, make available to the Holder and the holder of any shares of Common Stock issued upon exercise of this Warrant which continue to be Restricted Securities in connection with any sale thereof and any prospective purchaser of this Warrant from the Holder, the information required pursuant to Rule 144A(d)(4) under the 1933 Act upon the request of the Holder and it will take such further action as the Holder may reasonably request, all to the extent required from time to time to enable the Holder to sell this Warrant without registration under the 1933 Act within the limitation of the exemption provided by Rule 144A, as Rule 144A may be amended from time to time. Upon the request of the Holder, the Company will deliver to the Holder a written statement as to whether it has complied with such requirements. 26. Legend. Unless theretofore registered for resale under the 1933 Act, each certificate for shares issued upon exercise of this Warrant shall bear the following legend: The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "1933 Act"). The securities have been acquired for investment and may not be resold, transferred or assigned in the absence of an effective registration statement for the securities under the 1933 Act, or an opinion of counsel 13 reasonably satisfactory in form, scope and substance to the Company and its counsel that registration is not required under the 1933 Act. 27. Amendment; Waiver. This Warrant and any terms hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 28. Miscellaneous. This Warrant shall be construed and enforced in accordance with and governed by the internal law of the State of New York. The headings, captions and footers in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 29. Attorneys' Fees. In any litigation, arbitration or court proceeding between the Company and Holder relating hereto, the prevailing party shall be entitled to attorneys' fees and expenses and all costs of proceedings incurred in enforcing this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed on its behalf by one of its officers thereunto duly authorized. Dated: March 29, 2005 DIRECT INSITE CORP. By: Name: Title: 14 ASSIGNMENT For value __________________hereby sell(s), assign(s) and transfer(s) unto ________________________(Please insert social security or other Taxpayer Identification Number of assignee: _____________________) the attached original, executed Warrant to purchase share of Common Stock of Direct Insite Corp., a Delaware corporation (the "Company"), and hereby irrevocably constitutes and appoints ____________________________ attorney to transfer the Warrant on the books of the Company, with full power of substitution in the premises. In connection with any transfer of the Warrant within the period prior to the expiration of the holding period applicable to sales thereof under Rule 144(k) under the 1933 Act (or any successor provision) (other than any transfer pursuant to a registration statement that has been declared effective under the 1933 Act), the undersigned confirms that such Warrant is being transferred: [ ] To the Company or a subsidiary thereof; or [ ] To a QIB pursuant to and in compliance with Rule 144A; or [ ] To an "accredited investor" (as defined in Regulation D under the 1933 Act) pursuant to and in compliance with the 1933 Act; or [ ] Pursuant to and in compliance with Rule 144 under the 1933 Act; and unless the box below is checked, the undersigned confirms that, to the knowledge of the undersigned, such Warrant is not being transferred to an "affiliate" (as defined in Rule 144 under the 1933 Act) of the Company. [ ] The transferee is an affiliate of the Company. Capitalized terms used in this Assignment and not defined in this Assignment shall have the respective meanings provided in the Warrant. Dated: NAME: __________________________________ _________________________________________ Signature(s) Exhibit 1 FORM OF SUBSCRIPTION DIRECT INSITE CORP. (To be signed only on exercise of Warrant) TO: Direct Insite Corp. 80 Orville Drive Bohemia, New York 11716 Attention: Chief Executive Officer Facsimile No.: (631) _____________ 1. The undersigned Holder of the attached original, executed Warrant hereby elects to exercise its purchase right under such Warrant with respect to shares (the "Exercise Shares") of Common Stock, as defined in the Warrant, of Direct Insite Corp., a Delaware corporation (the "Company"). 2. The undersigned Holder (check one): [ ] [ ] (a) elects to pay the Aggregate Purchase Price for such shares of Common Stock (i) in lawful money of the United States or by the enclosed certified or official bank check payable in United States dollars to the order of the Company in the amount of $ , or (ii) by wire transfer of United States funds to the account of the Company in the amount of $ , which transfer has been made before or simultaneously with the delivery of this Form of Subscription pursuant to the instructions of the Company; or [ ] [ ] (b) elects to receive shares of Common Stock having a value equal to the value of the Warrant calculated in accordance with Section 1(b) of the Warrant. 3. Please issue a stock certificate or certificates representing the appropriate number of shares of Common Stock in the name of the undersigned or in such other name(s) as is specified below: Name:________________________________________ Address: ____________________________________ ____________________________________ Social Security or Tax Identification Number (if any): _____________________________________ Dated:________________ ______________________________________________ (Signature must conform to name of Holder as specified on the face of the Warrant) ______________________________________________ ______________________________________________ Address -----END PRIVACY-ENHANCED MESSAGE-----