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FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NUMBER 333-81547
PROSPECTUS
3,500,000 Shares
[LOGO OF DIGITAL INSIGHT]
COMMON STOCK
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Digital Insight is offering 3,500,000 shares of its common stock. This is our
initial public offering and no public market currently exists for our shares.
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The common stock has been approved for quotation on the Nasdaq National Market
under the symbol "DGIN."
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Investing in our common stock involves risks. See "Risk Factors" beginning on
page 6.
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PRICE $15 A SHARE
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Underwriting
Price to Discounts and Proceeds to
Public Commissions Digital Insight
----------- ------------- ---------------
<S> <C> <C> <C>
Per Share............................. $15.00 $1.05 $13.95
Total................................. $52,500,000 $3,675,000 $48,825,000
</TABLE>
Digital Insight has granted the underwriters the right to purchase up to an
additional 525,000 shares of common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on October 6, 1999.
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MORGAN STANLEY DEAN WITTER
DEUTSCHE BANC ALEX. BROWN
BANC OF AMERICA SECURITIES LLC
FRIEDMAN BILLINGS RAMSEY
September 30, 1999
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[Artwork incorporating multiple squares in shades of green and white and
enlarged lash-like figures as a background to the words "We make the
connection..." and a random series of numbers.]
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[Artwork incorporating Digital Insight's logo in center surrounded by words
"Internet Banking," "Checking Accounts," "Direct Deposit," "Bill Payment," "Web
Site Development," "Target Marketing," "Stock Quotes," "Loan Origination," "AXIS
Cash Management/TM/" and "Payroll" which are encircled by random series of
numbers. Directly beneath logo are the words "...between financial institutions
and their customers." Surrounding the logo and text is a depiction of two large
human eyes looking across the page toward each other. In a box along the bottom
margin of the page is the following text:
The Internet is dramatically changing the way more than 22,000 banks and
credit unions in the United States do business.
As a leading provider of Internet-banking services, we make the connection
between community financial institutions and their customers.
Technology has opened the door for financial institutions of all sizes to
compete for the millions of potential customers available in the
marketplace. Digital Insight provides small to mid-size community banks and
credit unions with services and strategies that can leverage the power of
the Internet to reach - and keep - customers.
We act as a partner for our clients by offering an integrated Internet
banking solution for both the financial institution's consumer and business
customers. Our solutions include private label Internet banking software, a
real time connection to the institution's data processing system, a secure
and reliable network, customized web site design and web site housing. Our
service bureau solution can be implemented in less than three months.
Beyond our Internet banking solution, Digital Insight is developing new and
better technologies to leverage the financial institution's Internet branch
capabilities. For example, we offer a target marketing solution to allow
the financial institution to sell related products and services to their
current Internet banking customers.
We at Digital Insight are committed to bringing our knowledge, imagination,
energy and enthusiasm to bear on one thing: empowering community financial
institutions to use the Internet to change and improve their businesses.
Beneath this text is Digital Insight's logo with the words "Digital Insight" in
a box next to it and the words "Beyond Internet Banking" beneath this box.]
<PAGE>
TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 4
Risk Factors............................................................. 6
Special Note Regarding Forward-Looking Statements........................ 14
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
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Page
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Business................................................................... 28
Management................................................................. 41
Certain Transactions....................................................... 50
Principal Stockholders..................................................... 52
Description of Capital Stock............................................... 54
Shares Eligible for Future Sale............................................ 56
Underwriters............................................................... 58
Legal Matters.............................................................. 60
Experts.................................................................... 60
Additional Information..................................................... 60
Index to Financial Statements.............................................. F-1
</TABLE>
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales
are permitted.
Until October 25, 1999 (25 days after the date of this prospectus), all
dealers effecting transactions in our common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
delivery requirement is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
3
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PROSPECTUS SUMMARY
You should read this summary together with the more detailed information
regarding Digital Insight and the common stock being sold in this offering and
the financial statements and related notes appearing elsewhere in this
prospectus. All names and trademarks of third parties appearing in this
prospectus are the property of their respective holders.
DIGITAL INSIGHT CORPORATION
Digital Insight is the leading provider of real time Internet banking
services to community financial institutions with assets of less than $10
billion, based on the number of home banking end users we serve as compared to
our direct competitors. Over 370 community financial institutions have
contracted with us for one or more of our products and services. Our customers
include credit unions, small to mid-sized banks and savings and loans. We offer
them a cost-effective, outsourced service which enables them to provide
Internet banking under their own brand to their individual and small business
customers. With our consumer product, individual customers of the financial
institution can use the Internet to manage their accounts, transfer funds, pay
bills, complete online loan applications and check stock quotes, among other
things. Our small business product provides similar features, as well as the
ability to initiate payroll and direct deposits, make wire transfers and
perform other services. Using our products, one can download his or her account
information into leading personal financial management and small business
accounting software. To enable financial institutions to sell additional
services to their customers, we offer target marketing programs. We also
provide customized web site design, implementation, maintenance and hosting
services.
Financial institutions, businesses and individuals are increasingly embracing
the Internet as a means to conduct financial transactions 24 hours a day.
However, while over half of the largest 100 banks in the United States offer
Internet banking, only 5% of community financial institutions do, according to
Online Banking Report and International Data Corporation, respectively. We
therefore see a large market opportunity to enable the approximately 22,000
community financial institutions in the United States to deliver Internet
banking to their customers.
We provide community financial institutions a customized, outsourced Internet
solution which can be rapidly and cost-effectively installed. Our solution is
highly secure and is designed to be readily expandable, or scalable, as the
number of users grows. Our solution can communicate in real time with the data
processing systems of these institution customers. This capability allows
transactions conducted on the web site to be posted immediately on the
financial institution's core system, and vice versa. We have developed real
time links, or interfaces, with 21 of the leading data processing vendors, so
that when we install our solution for a new customer supported by one of these
vendors, the product implementation is rapidly completed.
We generate implementation fee revenues for establishing our customers'
Internet banking services, and recurring service fees based on end user
adoption and web site maintenance. Both of these fees are paid to us by our
financial institution customers. An increasing percentage of our revenues,
approximately 77% in the six months ended June 30, 1999, comes from recurring
monthly service fees. As of June 30, 1999, we had home banking contracts with
financial institutions that have approximately 9.2 million potential end users
of our products and services. Of these, over 410,000 were actively using our
home banking application, with active enrollment increasing by more than 146%
over the past twelve months. As of June 30, 1999, we had an accumulated deficit
of $11.5 million.
We intend to leverage our leading market position to continue to increase the
number of financial institutions using our products and services, and to
increase the adoption of our solution by end users within those institutions.
We are also continuing to develop interfaces with data processing vendors in
order to serve as many financial institutions as possible. Finally, by
broadening our product and service offerings, we intend to attract additional
traffic onto our network of community financial institutions and business
partners and create the potential for new e-commerce revenues for Digital
Insight and our customers.
We were incorporated in Delaware on March 18, 1997, and are the successor to
Digital Insight LLC, a Minnesota limited liability company established in 1995.
Our principal executive offices are located at 26025 Mureau Road, Calabasas,
California 91302, and our telephone number is (818) 871-0000.
4
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THE OFFERING
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<S> <C>
Common stock offered............................ 3,500,000 shares
Common stock to be outstanding after this
offering....................................... 14,142,847 shares
Use of proceeds................................. For general corporate purposes,
including working capital and capital
expenditures. See "Use of Proceeds."
Nasdaq National Market symbol................... DGIN
</TABLE>
The foregoing information is based upon shares outstanding as of June 30,
1999 and excludes:
. 1,840,011 shares of common stock subject to outstanding options at June
30, 1999, at a weighted average exercise price of $1.86;
. 1,792,597 shares of common stock that have been set aside for future
stock options;
. 300,000 shares of common stock that have been set aside for our employee
stock purchase plan; and
. 51,041 shares of common stock issuable upon exercise of outstanding
warrants, at a weighted average exercise price of $3.13.
In addition, unless otherwise indicated, all information in this prospectus:
. gives effect to the conversion of 4,775,455 outstanding shares of
preferred stock into shares of common stock effective upon the closing
of the offering;
. assumes no exercise of the underwriters' over-allotment option; and
. assumes no exercise of outstanding warrants to purchase 51,041 shares of
our common stock.
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six
Period from Months
July 17, 1995 Year Ended December 31, Ended June 30,
(inception) through --------------------------- ----------------
December 31, 1995 1996 1997 1998 1998 1999
------------------- ------- -------- -------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 88 $ 1,561 $ 3,972 $ 8,230 $ 3,497 $ 7,092
Gross profit............ (54) 657 1,741 2,983 1,447 2,349
Loss from operations.... (315) (717) (2,538) (4,599) (1,753) (3,617)
Net loss................ (315) (712) (2,452) (4,356) (1,643) (3,555)
Basic and diluted net
loss per share......... $(.06) $ (.14) $ (.49) $ (.85) $ (.33) $ (.66)
Shares used to compute
basic and diluted net
loss per share......... 5,000 5,000 5,000 5,108 5,018 5,415
Pro forma basic and
diluted net loss per
share.................. $ (.50) $ (.37)
Shares used in computing
pro forma basic and
diluted net loss
per share.............. 8,712 9,534
</TABLE>
The pro forma basic and diluted share calculations above and the "pro forma"
column below reflect the conversion upon the closing of the offering of all
outstanding shares of preferred stock into 4,775,455 shares of common stock as
if the conversion occurred at the date of original issuance.
The "as adjusted" column below reflects our sale of shares of common stock in
this offering at an initial public offering price of $15.00 per share and the
application of the net proceeds, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, as described in "Use
of Proceeds."
<TABLE>
<CAPTION>
June 30, 1999
----------------------------
Pro
Actual Forma As Adjusted
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................ $10,753 $10,753 $58,478
Working capital.................................. 7,714 7,714 55,439
Total assets..................................... 16,398 16,398 64,123
Total liabilities................................ 5,169 5,169 5,169
Mandatorily redeemable convertible preferred
stock........................................... 20,847 -- --
Total stockholders' equity (deficit) ............ (9,618) 11,229 58,954
</TABLE>
5
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RISK FACTORS
This offering and an investment in our common stock involve a high degree of
risk. You should carefully consider the following risk factors and the other
information in this prospectus before investing in our common stock. Our
business and results of operations could be seriously harmed by any of the
following risks. The trading price of our common stock could decline due to
any of these risks, and you may lose part or all of your investment.
We Have a Limited Operating History and Are Subject to the Risks Encountered
by Early-Stage Companies
We began operations in July 1995. Accordingly, we have a limited operating
history, and our business and prospects must be considered in light of the
risks and uncertainties to which early-stage companies in rapidly evolving
markets such as Internet banking are particularly exposed. These risks
include:
.risks that fluctuations in our operating results will be significant
relative to our revenues;
. risks that community financial institutions may not widely adopt
Internet banking in general or our solution;
. risks that the Internet and the systems and networks of third parties
may not operate efficiently; and
. risks that competition and rapid technological change in our industry
could adversely affect market acceptance of all our products and
services.
We cannot assure you that our business strategy will be successful or that
we will successfully address these risks and the risks detailed below.
We Have a History of Losses, Expect Future Losses and Cannot Assure You that
We Will Achieve Profitability
Although our revenues have increased in every quarter since 1996, we have
not achieved profitability and cannot be certain that we will realize
sufficient revenue to achieve profitability. We have incurred net losses of
$712,000 in the year ended December 31, 1996, $2.5 million in the year ended
December 31, 1997 and $4.4 million in the year ended December 31, 1998. As of
June 30, 1999, we had an accumulated deficit of $11.5 million. We plan to
increase our operating expenses to expand our sales and marketing operations,
broaden our customer support capabilities and continue to build our
operational infrastructure. If growth in our revenues does not outpace the
increase in these expenses, we may not achieve or sustain profitability. We
expect that we will continue to lose money at least through 2001.
The Expected Fluctuations of Our Operating Results Could Cause Our Stock Price
to Fluctuate
We expect that our operating results may fluctuate significantly in the
future based upon a number of factors, many of which are not within our
control. We base our operating expenses on anticipated revenue growth and our
operating expenses are relatively fixed in the short term. The implementation
and utilization of our products involves a commitment of resources and
recurring expense by us and our customers. Among other things, we generally
provide a significant level of education to prospective customers regarding
the use and benefits of our products. We may expend substantial funds and
management resources during the sales cycle and fail to make
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the sale. Accordingly, our results of operations for a particular period may
be adversely affected if the sales forecasted for that period are delayed or
do not occur. As a result, if our revenues are lower than we expect in some
future period, our operating results may be below the expectations of public
market analysts or investors. If this occurs, the price of our common stock
would likely decrease.
Our operating results may fluctuate in the future due to a variety of
factors, including:
. the overall level of demand for Internet banking services by consumers
and businesses and the demand for our products, product enhancements and
services in particular;
. spending patterns and budgetary resources of community financial
institutions and their end user customers;
. technical difficulties, system downtime, system failures or reductions
in service levels;
. the timing of upgrades to our computer hardware infrastructure;
. increases in operating costs beyond anticipated levels;
. the timing of customer product implementations or our failure to timely
complete scheduled product implementations;
. delays in purchasing decisions or product implementations or decreases
in demand for Internet banking by financial institutions due to Year
2000 concerns; and
. governmental actions affecting Internet operations or content.
We Currently Rely on One Data Center to Provide All of Our Internet Banking
Products and Services; Any Failure in this Data Center Could Cause Us to Lose
Customers
In the event of a failure or interruption in our systems, our reputation
could be materially adversely harmed and we could lose many of our current and
potential customers. All of our communications and network equipment is
currently located at our corporate headquarters in Calabasas, California. We
do not currently have backup facilities to provide Internet services if this
facility is not functioning. A natural disaster, such as a fire, an earthquake
or a flood, at our facility could result in failures or interruptions in
providing our Internet banking products and services to our customers. In
addition, our systems are vulnerable to computer viruses, physical or
electronic break-ins, power loss, telecommunications failure and similar
events. For example, in April 1999, a failure of a critical router in our
Internet banking data center caused an outage of approximately six hours while
the problem was corrected. We have also contracted to provide a certain level
of service to our customers and a failure or interruption of our system has in
the past caused and in the future could cause us to refund fees to some of our
customers to compensate for decreased levels of service. We have contracted to
establish a second functional backup Internet banking data center in Herndon,
Virginia, but that data center is not scheduled to be fully operational until
the fourth quarter of 1999. We cannot assure that this data center will become
operational as scheduled or that, when operational, this data center will
perform as expected. Even with the second data center, we could experience a
failure or interruption in our systems which could lead to delays, loss of
data or the inability to provide our services to our customers.
We Are Dependent on the Widespread Adoption of Internet Banking by Community
Financial Institutions, Which Have Historically Been Slow to Adopt Internet
Banking
We expect that we will continue to depend on Internet banking products and
services for substantially all of our revenues in the foreseeable future.
However, the market for Internet banking has only recently begun to develop.
Internet banking has developed slowly to date within financial institutions,
and purchasing decisions for Internet banking products are often delayed due
to uncertainties relating to cost, return on investment and customer
acceptance. In particular, community financial institutions have been slower
to adopt Internet banking than larger banks. We cannot predict the size of the
market for Internet banking among community financial institutions, the rate
at which that market will grow, or whether there will be widespread end user
acceptance of Internet banking products and services such as ours.
7
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We also depend on our financial institution customers to market and promote
our products to their end user customers. Neither we nor our financial
institution customers may be successful in marketing our current or future
Internet banking products and services. Moreover, financial institutions
generally agree to use our products and services pursuant to contracts with
durations that range from one to five years. Upon expiration, these contracts
may be discontinued. Unless our Internet banking products and services are
successfully deployed and marketed by a large number of community financial
institutions and achieve widespread market acceptance by their end user
customers for a significant period of time, we will not be able to achieve our
business objectives and increase our revenues.
We Depend on the Efficient Operation of the Internet, Other Networks and
Systems of Third Parties; If They Do Not Operate Efficiently, We Will Not Be
Able to Effectively Provide Our Products and Services
We depend on the efficient operation of network connections from our
customer financial institutions and their data processing vendors to our
systems. Further, portions of our revenue are dependent on continued usage by
end users of Internet banking services and their connections to the Internet.
Each of these connections, in turn, depends on the efficient operation of web
browsers, Internet service providers and Internet backbone service providers,
all of which have had periodic operational problems or have experienced
outages. In addition, the majority of our services depend on real time
connections to the systems of financial institutions and data processing
vendors. Any operational problems or outages in these systems would cause us
to be unable to provide a real time connection to these systems and we would
be unable to process transactions for end users, resulting in decreased
revenues. In addition, any system delays, failures or loss of data, whatever
the cause, could reduce customer satisfaction with our products and services
and harm our sales.
We Depend on Cooperation from Data Processing Vendors for Financial
Institutions, Some of Whom Have Resisted Efforts in the Past to Allow the
Integration of Our Products and Services with Their Systems
Our products involve integration with products and systems developed by data
processing vendors that serve financial institutions. If any of our products
fail to be supported by our customers' data processing vendors, it would be
necessary to redesign our products to suit these customers. We cannot assure
that any redesign could be accomplished in a cost-effective or timely manner.
We rely on these vendors to jointly develop technology with us and to disclose
source code specifications to enable our products to integrate effectively
with their products and systems. In the past, some vendors have resisted
integrating our products or have caused delays or other disruptions in the
implementation process. Several of these data processing vendors offer or are
planning to offer Internet banking products and services that are directly
competitive with our products and services and have resisted efforts to allow
us to integrate our products and services with their systems in the past. In
addition, our customers' data processing vendors may develop new products and
systems that are incompatible with our products. Our failure to integrate our
products effectively with our customers' data processing vendors could result
in higher implementation costs or the loss of potential customers.
Competition From Third Parties Could Reduce or Eliminate Demand for Our
Products and Services
The market for Internet banking services is highly competitive, and we
expect that competition will intensify in the future. We may not be able to
compete successfully against our current or future competitors and,
accordingly, we cannot be certain that we will be able to expand the number of
our customers and end users, or retain our current customers or third-party
service providers. We face competition from four main areas: other companies
with Internet banking products aimed at community financial institutions,
vendors who primarily target the largest financial institutions, vendors of
data processing services to financial institutions, and smaller, local online
service outsourcing companies. Many of our current and potential competitors
have longer operating histories and may be in a better position to produce and
market their services due to their greater financial, technical, marketing and
other resources, as well as their significantly greater name recognition and
larger installed bases of customers. In addition, many of our competitors have
well-established relationships with our
8
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current and potential community financial institution customers and have
extensive knowledge of our industry. For a more detailed discussion of the
factors affecting our competitive position and the risks involved, see the
discussion in "Business--Competition."
Security Breaches Could Damage Our Reputation and Business
Our networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. We transmit confidential financial information in
providing our services. Users of Internet banking and other electronic
commerce services are concerned about the security of transmissions over
public networks. Therefore, it is critical that our facilities and
infrastructure remain secure and that our facilities and infrastructure are
perceived by the marketplace to be secure. A material security breach
affecting us could damage our reputation, deter financial institutions from
purchasing our products, deter their customers from using our products, or
result in liability to us. Further, any material security breach affecting our
competitors could affect the marketplace's perception of Internet banking in
general and have the same effects.
Concerns over security and the privacy of users may inhibit the growth of
the Internet and other online services generally, especially as a means of
conducting commercial transactions. Any well-publicized compromise of security
could deter people from using the Internet or using it to conduct transactions
that involve transmitting confidential information. We may need to expend
significant capital or other resources protecting against the threat of
security breaches or alleviating problems caused by breaches. Although we
intend to continue to implement state of the art security measures, persons
may be able to circumvent the measures that we implement in the future.
Eliminating computer viruses and alleviating other security problems may
result in interruptions, delays or cessation of service to users accessing web
sites that deliver our services, any of which could harm our business.
Our Failure to Respond to Rapid Change in the Market for Internet Banking
Could Cause Us to Lose Revenue and Harm Our Business
The market for Internet banking services is new and unproven and is subject
to rapid change. Our success will depend substantially upon our ability to
enhance our existing products and to develop and introduce, on a timely and
cost-effective basis, new products and features that meet changing financial
institution and end user requirements and incorporate technological
advancements. If we are unable to develop new products and enhanced
functionalities or technologies to adapt to these changes or if we cannot
offset a decline in revenues of existing products by sales of new products,
our business would suffer. In addition, our product development process
involves a number of risks. Developing technologically advanced products is a
complex and uncertain process requiring innovation as well as the accurate
anticipation of technology and market trends. We budget our research and
development expenditures based on planned product introductions and
enhancements. If we fail to timely and cost-effectively develop new products
that respond to new technologies and the needs of the Internet banking
services market, we will lose revenue and our business will suffer.
Newly Introduced Products May Contain Undetected or Unresolved Defects
Any new or enhanced products we introduce may contain undetected or
unresolved software or hardware defects when they are first introduced or as
new versions are released. In the past, we have discovered errors in our
products and it is possible that design defects will occur in new products.
These defects could result in a loss of sales and additional costs as well as
damage to our reputation and the loss of relationships with our customers.
9
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The Demand For Our Products and Services Could Be Negatively Affected by
Reduced Growth of Commerce over the Internet or Delays in the Development of
the Internet Infrastructure
Our future success depends heavily on the Internet being accepted and widely
used for commerce. If Internet commerce does not continue to grow or grows
more slowly than expected, our business would suffer. There are a number of
reasons that consumers and businesses may reject the Internet as a viable
commercial medium in general, or as a suitable vehicle for banking
transactions in particular. These reasons include potentially inadequate
network infrastructure, security concerns, slow development of enabling
technologies, reliability and quality problems, and issues relating to ease
and cost of access. In particular, the Internet infrastructure may not be able
to support the demands placed on it by increased Internet usage and data
transmission capacity requirements. In addition, delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet activity, or increased government regulation could cause the Internet
to lose its viability as a commercial medium. Even if the required
infrastructure, standards, protocols or complementary products, services or
facilities are developed, we may incur substantial expenses adapting our
solutions to changing or emerging technologies.
We Could Be Subject to Potential Liability Claims Related to Use of Our
Products and Services
Financial institutions use our products and services to provide Internet
banking services to their customers. Any errors, defects or other performance
problems in our products and services could result in financial or other
damages to these financial institutions for which we are liable. A product
liability claim brought against us, even if not successful, would likely be
time consuming, result in costly litigation and could seriously harm our
business. Although our contracts typically contain provisions designed to
limit our exposure to liability claims, existing or future laws or unfavorable
judicial decisions could negate these limitation of liability provisions.
Moreover, we may be liable for transactions executed using Internet services
based on our products and services even if the errors, defects or other
problems are unrelated to our products and services.
We Are Currently Experiencing a Period of Significant Growth that Is Placing a
Strain on Our Resources
We have recently experienced significant growth, including expansion in the
number of our employees, and anticipate that additional expansion may be
required in order to continue our growth. This growth places a significant
demand on our management and operational resources. Our management, personnel,
systems, procedures, controls and customer service may be inadequate to
support our existing and future operations. We continue to invest heavily in
our technological infrastructure and to build and scale our systems in order
to meet the demands of our growing customer base. For example, we restructured
our sales and implementation organizations in the second half of 1998 which
adversely impacted sales growth and implementation costs in that time period.
Further, since September 1998, we have added a number of key managerial,
technical and information technology personnel, including our president and
chief executive officer, chief financial officer, and chief information
officer, and we expect to add additional key personnel in the near future. As
a result, some members of our management team have only worked together for a
brief period of time.
Our Stock Price May Be Extremely Volatile
Our common stock has never been sold in a public market and an active
trading market for our common stock may not develop or be sustained upon the
completion of this offering. We negotiated and determined the initial offering
price of the common stock with the underwriters. However, the initial offering
price may not be indicative of the prices that will prevail in the public
market after the offering, and the market price of our common stock could fall
below the initial public offering price. You should read the "Underwriters"
section for a discussion of the factors considered in determining the initial
public offering price.
10
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In addition, the market price of our common stock could fluctuate widely in
response to the following particular factors:
.actual or anticipated variations in operating results;
. announcements by us or our competitors of new products, significant
contracts, acquisitions, or relationships;
. additions or departures of key personnel;
. future equity or debt offerings or our announcements of these offerings;
and
. economic well being of community financial institutions.
In addition, in recent years, the stock market in general, and the Nasdaq
National Market and the securities of technology companies in particular, have
experienced extreme price and volume fluctuations. These fluctuations have
often been unrelated or disproportionate to the operating performance of
individual companies. These broad market fluctuations may materially adversely
affect our stock price, regardless of our operating results.
Government Regulation of Our Business Could Cause Us to Incur Significant
Expenses, and Failure to Comply With Certain Regulations, if Adopted, Could
Make Our Business Less Efficient or Impossible
The financial services industry is subject to extensive and complex federal
and state regulation. Financial institutions such as commercial banks, savings
and loans and credit unions operate under high levels of governmental
supervision. Our customers must ensure that our services and related products
work within the
extensive and evolving regulatory requirements applicable to them. We do not
represent that our systems comply with such regulations.
We are not required to be licensed by the federal depository institution
regulators or other regulators of financial services. We are subject to
examination by the federal depository institution regulators under the Bank
Service Company Act and the Examination Parity and Year 2000 Readiness for
Financial Institutions Act. These regulators have broad supervisory authority
to remedy any shortcomings identified in any such examination.
Federal, state or foreign authorities could adopt laws, rules or regulations
relating to the financial services industry that affect our business, such as
by requiring us to comply with data, record keeping and processing and other
requirements. It is possible that laws and regulations may be enacted with
respect to the Internet, covering issues such as user privacy, pricing,
content, characteristics, taxation and quality of services and products.
Existing regulations may be modified. If enacted or deemed applicable to us,
these laws, rules or regulations could be imposed on our activities or our
business thereby rendering our business or operations more costly, burdensome,
less efficient or impossible, requiring us to modify our current or future
products or services.
Failure to Attract and Retain Experienced Personnel and Senior Management
Could Harm Our Ability to Grow
We believe that our future success will depend in large part upon our
continued ability to identify, hire, retain and motivate highly skilled
employees, who are in great demand. In particular, we believe that we must
expand our research and development, marketing, sales and customer support
capabilities in order to effectively serve the evolving needs of our present
and future customers. Competition for these employees is intense and we may
not be able to hire additional qualified personnel in a timely manner and on
reasonable terms. In addition, our success depends on the continuing
contributions of our senior management and technical personnel, all of whom
would be difficult to replace. The loss of any one of them could adversely
affect our ability to execute our business strategy. None of our employees is
bound by an employment agreement. We do not have "key person" life insurance
policies covering any of our employees.
11
<PAGE>
Our Limited Ability to Protect Our Proprietary Technology May Adversely Affect
Our Ability to Compete, and We May Be Found to Infringe Proprietary Rights of
Others, Which Could Harm Our Business.
Our future success and ability to compete depends in part upon our
proprietary technology. None of our technology is currently patented. Instead,
we rely on a combination of contractual rights and copyright, trademark and
trade secret laws to establish and protect our proprietary technology. We
generally enter into confidentiality agreements with our employees,
consultants, resellers, customers and potential customers, limit access to and
distribution of our source code, and further limit the disclosure and use of
other proprietary information. We cannot assure that the steps taken by us in
this regard will be adequate to prevent misappropriation of our technology or
that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technology. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain or use our products or technology. Monitoring unauthorized
use of our products is difficult, and while we are unable to determine the
extent to which piracy of our software products exists, software piracy can be
expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States.
We are also subject to the risk of claims and litigation alleging
infringement of the intellectual property rights of others. Third parties may
assert infringement claims in the future with respect to our current or future
products. Any assertion, regardless of its merit, could require us to pay
damages or settlement amounts and could require us to develop non-infringing
technology or pay for a license for the technology that is the subject of the
asserted infringement. Any litigation or potential litigation could result in
product delays, increased costs or both. In addition, the cost of litigation
and the resulting distraction of our management resources could adversely
affect our results of operations. We also cannot assure that any licenses for
technology necessary for our business will be available or that, if available,
these licenses can be obtained on commercially reasonable terms.
Consolidation of the Banking and Financial Services Industry Could Cause Our
Sales to Fall
Consolidation of the banking and financial services industry could result in
a smaller market for our products and services. A variety of factors could
result in our customers reassessing their purchase or potential purchase of
our products and could result in termination of services by existing
customers. After consolidation, banks and other financial institutions may
experience a realignment of management responsibilities and a reexamination of
strategic and purchasing decisions. We may lose relationships with key
constituencies within our customer's organization due to budget cuts, layoffs,
or other disruptions following a consolidation. In addition, consolidation may
result in a change in the technological infrastructure of the combined entity.
Our products and services may not integrate with this new technological
infrastructure. In addition, the acquiring institution may have its own in-
house system or outsource to competitors. For example, in May 1999, we lost
Home Savings of America as a customer following its acquisition by Washington
Mutual, which decided to integrate Home Savings' end users into its existing
home banking system.
Our Operations May Be Disrupted If We or Our Vendors Experience Systems
Failures or Data Corruption from the Year 2000 Issue
Many computers, software and other equipment include computer code in which
calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
These problems are widely expected to increase in frequency and severity as
the year 2000 approaches, and are commonly referred to as the "Year 2000"
problem. Beginning in 1998, we began assessing the ability of our software and
products to operate properly as a result of the Year 2000 problem. We believe
that our current products are Year 2000 compliant. However, any undetected
Year 2000 problem in our products, or any problem which cannot be solved in a
timely and cost-effective manner could substantially damage our customer
relationships, disrupt our business, subject us to threatened or actual
litigation and result in reduced revenues.
12
<PAGE>
The Year 2000 problem also affects the computers, software, other equipment
that we use, operate or maintain internally for our operations, and services
provided by third-party vendors. We employ widely available software
applications and other products from leading third-party vendors. To date, we
have obtained Year 2000 readiness verification from the majority of third-
party service and product providers associated with our critical development
and operations processes. However, any failure of third-party computer
products used by us to be Year 2000 compliant could interrupt and disrupt our
business. To fix any of these systems could require us to invest substantially
in our operating systems and to hire additional personnel. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Impact of Year 2000" for a further description of the issues we face with
regard to the Year 2000.
Our Charter and Bylaws and Delaware Law Contain Provisions Which Could
Discourage a Takeover
Provisions of our charter and bylaws may make it more difficult for a third
party to acquire, or may discourage a third party from attempting to acquire,
control of us, even if doing so would be beneficial to our stockholders. These
provisions could limit the price that investors might be willing to pay in the
future for shares of our common stock. These provisions include:
. division of the board of directors into three separate classes;
. elimination of cumulative voting in the election of directors;
. prohibitions on our stockholders from acting by written consent and
calling special meetings;
. procedures for advance notification of stockholder nominations and
proposals; and
. the ability of the board of directors to alter our bylaws without
stockholder approval.
In addition, our board of directors has the authority to issue up to
5,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The issuance of
preferred stock, while providing flexibility in connection with possible
financings or acquisitions or other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of our
outstanding voting stock.
We are also subject to Section 203 of the Delaware General Corporation Law
which, subject to exceptions, prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder for a period of
three years following the date that this stockholder became an interested
stockholder. The preceding provisions of our charter and bylaws, as well as
Section 203 of the Delaware General Corporation Law, could discourage
potential acquisition proposals, delay or prevent a change of control and
prevent changes in our management.
Members of Management and Our Board of Directors, and Their Affiliates, Will
Control 41.4% of Our Common Stock
Following this offering, members of our executive management team and our
board of directors and their affiliates will control approximately 41.4% of
our common stock. As a result, these management members and directors will be
able to significantly influence matters requiring stockholder approval.
Moreover, this concentration of ownership could have the effect of delaying or
preventing a change in control. For a more complete discussion of this
concentration of ownership, see "Principal Stockholders."
An Additional 10,642,847 Shares of Our Common Stock Will Become Available For
Sale Beginning on March 27, 2000 Which Could Cause Our Stock Price to Fall
Sales of a substantial number of shares of our common stock in the public
market, or the appearance that these shares are available for sale, could
materially adversely affect the trading price of our common stock. These sales
also might make it more difficult for us to sell equity securities or equity-
related securities in the future at a
13
<PAGE>
time and price that we deem appropriate. Upon completion of this offering, we
will have 14,142,847 shares outstanding. Of these shares, the 3,500,000 shares
sold in this offering are freely tradable in the public market. The remaining
10,642,847 shares of common stock as of June 30, 1999 are limited by
restrictions under the securities laws and 180-day lock-up agreements entered
into with Morgan Stanley & Co. Incorporated and will be eligible for sale in
the public market as follows:
<TABLE>
<CAPTION>
First Eligible Sale Date Number
------------------------ ------
<S> <C>
180 days after the date of this prospectus.................. 9,277,411 shares
May 25, 2000................................................ 521,400 shares
May 26, 2000................................................ 844,036 shares
</TABLE>
In addition, as of June 30, 1999 we had 1,840,011 shares subject to
outstanding options and 1,792,597 shares of our common stock available for
future grant pursuant to our stock option plans. All of these shares are
subject to a 180-day lock-up agreement. We intend to register, prior to the
expiration of the lock-up, the shares of common stock subject to outstanding
options and reserved for issuance under our stock option plans and shares of
common stock reserved for issuance under our employee stock purchase plan.
Accordingly, shares underlying vested options will be eligible for resale in
the public market beginning on expiration of the lock-up. We also have 51,041
shares underlying outstanding warrants, also subject to lock-ups, that will be
eligible for resale in the public market upon expiration of the warrant
holder's respective one-year holding periods under Rule 144, which will begin
upon the date of exercise or, in the case of a net exercise, on the date of
grant of the warrant.
Morgan Stanley & Co. Incorporated may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
its lock-up agreements.
We Do Not Intend to Pay Dividends on Our Common Stock
We currently intend to retain any future earnings for funding growth and,
therefore, do not anticipate paying any dividends in the foreseeable future.
See "Dividend Policy."
Investors in This Offering Will Suffer Immediate and Substantial Dilution
Investors in this offering will suffer an immediate and substantial dilution
of approximately $10.84 in net tangible book value per share, or approximately
72.3%, based upon the initial public offering price of $15.00 per share and
after deducting underwriting discounts and commissions and estimated offering
expenses payable by us. If the holders of options or warrants exercise these
securities, investors will suffer further dilution. See "Dilution."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect,"
"anticipate," "intend," "plan," "believe," "estimate," "potential," or
"continue," the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially from any forward-looking statement. In evaluating these statements,
you should specifically consider various factors, including the risks outlined
under "Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We undertake no obligation to update publicly any
forward-looking statements for any reason after the date of this prospectus to
conform these statements to actual results or to changes in our expectations.
Before you invest in our common stock, you should be aware that the occurrence
of the events described under "Risk Factors" and elsewhere in this prospectus
could have a material adverse effect on our business, operating results and
financial condition.
14
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 3,500,000 shares of
common stock we are offering will be approximately $47.7 million after
deducting underwriting discounts and commissions and estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, we
estimate that our net proceeds will be approximately $55.0 million. The
principal purposes of this offering are to increase our working capital, to
create a public market for our common stock, to facilitate our future access
to the public capital markets, and to increase our visibility with potential
customers. We expect to use the net proceeds from this offering for general
corporate purposes, including working capital and capital expenditures,
although we have no specific purposes for the proceeds of the offering. A
portion of the proceeds may also be used to acquire or invest in complementary
businesses or products, or to obtain the right to use complementary
technologies, although there are no current plans, negotiations or discussions
for any of these transactions. Pending use of the net proceeds for the above
purposes, we intend to invest these funds in short-term, interest-bearing,
investment grade obligations.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
other securities. We currently anticipate that we will retain all of our
future earnings for use in the expansion and operation of our business and do
not anticipate paying any cash dividends in the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
. on an actual basis;
. on a pro forma basis to reflect the conversion of all outstanding shares
of preferred stock into 4,775,455 shares of common stock effective upon
the closing of this offering; and
. on a pro forma as adjusted basis to reflect the receipt by Digital
Insight of the estimated net proceeds from the sale of common stock
offered by this prospectus, after deducting underwriting discounts and
commissions and estimated offering expenses.
The following table does not include:
. 1,840,011 shares of common stock subject to outstanding options as of
June 30, 1999;
. 1,792,597 shares of common stock that have been set aside for future
stock options as of June 30, 1999;
. 300,000 shares of common stock that have been set aside for our employee
stock purchase plan; or
. 51,041 shares of common stock issuable upon exercise of outstanding
warrants.
This information should be read in conjunction with our financial statements
and related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Long-term portion of lease obligation.......... $ 565 $ 565 $ 565
Mandatorily redeemable convertible preferred
stock, $.001 par value, 4,846,496 shares
authorized, 4,775,455 shares issued and
outstanding actual............................ 20,847 -- --
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized, no shares issued and
outstanding pro forma and pro forma as
adjusted...................................... -- -- --
Common stock, $.001 par value, 16,250,000
shares authorized; 5,867,392 shares issued and
outstanding actual, 10,642,847 shares issued
and outstanding pro forma; 100,000,000 shares
authorized, 14,142,847 shares issued and
outstanding pro forma as adjusted............. 6 11 14
Additional paid-in capital..................... 6,056 26,898 74,620
Notes receivable from stockholders............. (208) (208) (208)
Deferred stock-based compensation.............. (3,937) (3,937) (3,937)
Accumulated deficit............................ (11,535) (11,535) (11,535)
-------- -------- --------
Total stockholders' equity (deficit)......... (9,618) 11,229 58,954
-------- -------- --------
Total capitalization....................... $ 11,794 $ 11,794 $ 59,519
======== ======== ========
</TABLE>
16
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$11.1 million or $1.04 per share of common stock, assuming the conversion of
all outstanding shares of preferred stock into 4,775,455 shares of common
stock. Pro forma net tangible book value per share represents the amount of
our total tangible assets reduced by the amount of our total liabilities,
divided by the pro forma number of outstanding shares of common stock. After
giving effect to the sale of the 3,500,000 shares of common stock in this
offering, after deducting underwriting discounts and commissions and estimated
offering expenses, our pro forma net tangible book value at June 30, 1999
would have been $58.8 million or $4.16 per share. This represents an immediate
increase in pro forma net tangible book value of $3.12 per share to existing
stockholders and an immediate dilution of $10.84 per share to investors
purchasing shares in this offering. Dilution is determined by subtracting pro
forma net tangible book value per share after the offering from the initial
public offering price per share. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share $15.00
Pro forma net tangible book value per share as of June 30,
1999........................................................... $1.04
Increase in pro forma net tangible book value per share
attributable to new investors.................................. 3.12
-----
Pro forma net tangible book value per share after this offering... 4.16
------
Dilution per share to new investors............................... $10.84
======
</TABLE>
The following table sets forth, on the pro forma basis described above, as
of June 30, 1999, the difference between the number of shares of common stock
purchased from us, the total consideration paid, and the average price per
share paid by the existing stockholders and by investors purchasing shares in
this offering, before deduction of estimated underwriting discounts and
commissions and estimated offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 10,642,847 75.3% $20,995,000 28.6% $ 1.97
New investors.............. 3,500,000 24.7 52,500,000 71.4 15.00
---------- ----- ----------- -----
Total.................... 14,142,847 100.0% $73,495,000 100.0%
========== ===== =========== =====
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to 4,025,000, or 27.4% of the
total shares of common stock outstanding after this offering.
We have the following options and warrants outstanding, all of which will
remain outstanding following completion of this offering:
. 1,840,011 shares subject to outstanding options at June 30, 1999 at a
weighted average exercise price of $1.86 per share; and
. 51,041 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $3.13 per share.
To the extent that outstanding options or warrants are exercised, new
options or rights are issued under our stock plans, or we issue additional
shares of common stock in the future, new investors will experience further
dilution.
17
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
financial statements and related notes thereto, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included
elsewhere in this prospectus. The selected statement of operations data for
the years ended December 31, 1996, 1997 and 1998 and the selected balance
sheet data as of December 31, 1997 and 1998 have been derived from our audited
financial statements and the notes thereto included elsewhere in this
prospectus. The selected balance sheet data as of December 31, 1996 have been
derived from our audited financial statements not included herein. The
selected statement of operations data for the period from July 17, 1995
(inception) to December 31, 1995 and for the six month periods ended June 30,
1998 and 1999 have not been audited. In the opinion of management, such
unaudited financial statements have been prepared on the same basis as the
audited financial statements referred to above and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of results of operations for the indicated periods. Results of
operations for the six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the full fiscal year. The
pro forma balance sheet data as of June 30, 1999 are unaudited and reflect the
conversion of all outstanding shares of preferred stock into 4,775,455 shares
of common stock effective upon the closing of this offering.
<TABLE>
<CAPTION>
Period from
July 17,
1995 Six Months
(inception) Ended
through Year Ended December 31, June 30,
December 31, --------------------------- ----------------
1995 1996 1997 1998 1998 1999
------------ ------- -------- -------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Implementation fees.... $ 85 $ 1,053 $ 1,926 $ 2,420 $ 1,260 $ 1,666
Service fees........... 3 508 2,046 5,810 2,237 5,426
----- ------- -------- -------- ------- -------
Total revenues......... 88 1,561 3,972 8,230 3,497 7,092
Cost of revenues:
Implementation......... 141 643 1,217 1,631 695 1,241
Service................ 1 261 1,014 3,616 1,355 3,502
----- ------- -------- -------- ------- -------
Total cost of
revenues.............. 142 904 2,231 5,247 2,050 4,743
----- ------- -------- -------- ------- -------
Gross profit (loss)..... (54) 657 1,741 2,983 1,447 2,349
Operating expenses:
Sales, general and
administrative........ 167 809 2,516 4,183 1,774 3,609
Research and
development........... 94 565 1,612 2,555 1,178 1,794
Amortization of stock-
based compensation.... -- -- 151 844 248 563
----- ------- -------- -------- ------- -------
Total operating
expenses.............. 261 1,374 4,279 7,582 3,200 5,966
----- ------- -------- -------- ------- -------
Loss from operations.... (315) (717) (2,538) (4,599) (1,753) (3,617)
Interest income......... -- -- 89 262 122 102
Other income (expense),
net.................... -- 5 (3) (19) (12) (40)
----- ------- -------- -------- ------- -------
Net loss................ $(315) $ (712) $ (2,452) $ (4,356) $(1,643) $(3,555)
===== ======= ======== ======== ======= =======
Basic and diluted net
loss per share......... $(.06) $ (.14) $ (.49) $ (.85) $ (.33) $ (.66)
===== ======= ======== ======== ======= =======
Shares used to compute
basic and diluted net
loss per share......... 5,000 5,000 5,000 5,108 5,018 5,415
===== ======= ======== ======== ======= =======
Pro forma basic and
diluted net loss per
share.................. $ (.50) $ (.37)
======== =======
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 8,712 9,534
======== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
---------------------- -----------------------
1996 1997 1998 1999 1999 Pro Forma
----- ------ ------- ------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..... $ 28 $ 886 $ 4,758 $10,753 $10,753
Working capital (deficit)..... (243) (16) 3,067 7,714 7,714
Total assets.................. 433 3,071 8,077 16,398 16,398
Total liabilities............. 422 1,949 2,417 5,169 5,169
Mandatorily redeemable
convertible preferred stock.. -- 4,444 12,444 20,847 --
Total stockholders' equity
(deficit).................... -- (3,322) (6,784) (9,618) 11,229
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Digital Insight is the leading provider of Internet banking solutions for
community financial institutions, with over 370 financial institution
customers. We offer these community financial institutions an outsourced
service, branded in their name, which includes home banking for their
individual customers, business banking for their commercial customers, a
target marketing program to enable them to sell additional financial services,
and customized web site design and implementation services. Since inception,
substantially all of our revenues have been derived from our Internet home
banking services, associated features and website development. As of June 30,
1999, we had an accumulated deficit of approximately $11.5 million.
Our revenues consist primarily of recurring monthly service fees and, to a
lesser extent, one-time implementation fees. Revenues increased from $88,000
in 1995 to $8.2 million in 1998, and were $7.1 million in the first six months
of 1999. Our recurring revenues consist of service fees paid to us by our
financial institution customers based on the number of end users or end user
transactions, and fees for hosting and maintaining their web sites and other
monthly services. Recurring service fees as a percentage of revenues have
grown from approximately 33% in 1996 to 75% for the quarter ended June 30,
1999. To the extent that our installed base of customers continues to grow, we
expect recurring service fees to represent an increasing percentage of our
revenues in the future. Our customer contracts range from one to five years.
We require a 50% non-refundable cash deposit of product implementation fees,
payable at the time that a contract is signed. We record these deposits as
deferred revenues and, together with the balance of the implementation fees,
we recognize them upon completion of implementation and customer approval.
Recognition is usually two to four months from the contract date. Upon
completion of implementation and customer approval, we begin to receive and
recognize recurring service fees. For the six months ended June 30, 1999, no
single customer accounted for more than 5% of our revenues.
Cost of revenues consists of implementation and service costs.
Implementation costs are comprised primarily of salaries for implementation
personnel and fees paid to third parties, including bill payment and data
processing vendors. Service costs consist primarily of salaries and related
personnel expenses, network costs, expenses related to the operation of our
data center and fees paid to third parties, including bill payment vendors,
data processing vendors and communication services providers. Gross margin is
affected by the relative proportion of lower margin implementation fees and
higher margin service fees we generate, the mix of products we sell,
competitive pricing pressures and the size and complexity of our
implementations.
Sales, general and administrative expenses consist primarily of salaries and
related expenses for executive, sales, marketing, finance, human resources and
administrative personnel and other general corporate expenses. In addition,
these expenses include marketing expenses such as trade shows and promotional
costs.
Research and development expenses consist primarily of salaries, related
personnel expenses and consultant fees related to the design, development,
testing and enhancement of both our products and our data processing vendor
interface software. We expense all research and development costs as incurred.
We have recorded aggregate deferred stock-based compensation of $5.5 million
through June 30, 1999. The remaining unamortized balance of $3.9 million will
be fully amortized by the quarter ended March 31, 2003.
On May 15, 1998 we entered into a lease, which expires in May 2003, for our
facility in Calabasas, California. By the end of 1999, this facility will be
fully utilized and we will require additional office space. In January 1999,
we signed a three-year contract with Exodus Communications for a back-up data
center facility in Herndon, Virginia, which is expected to be fully
operational in the fourth quarter of 1999.
19
<PAGE>
Selected Quarterly Results of Operations
Because we have a limited operating history, we believe that year-to-year
comparisons prior to 1999 are less meaningful than an analysis of recent
quarterly operating results. Accordingly, we are providing a discussion and
analysis of our results of operations for the six quarters ended June 30,
1999.
The following tables present, in dollars and as a percentage of revenues,
unaudited statements of operations for the six quarters ended June 30, 1999.
This information reflects all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of such
information in accordance with generally accepted accounting principles. The
results of any quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Implementation fees... $ 612 $ 648 $ 543 $ 617 $ 680 $ 986
Service fees.......... 947 1,290 1,641 1,932 2,485 2,941
------ ------ ------- ------- ------- -------
Total revenues...... 1,559 1,938 2,184 2,549 3,165 3,927
Cost of revenues:
Implementation........ 265 430 420 516 499 742
Service............... 596 759 1,019 1,242 1,529 1,973
------ ------ ------- ------- ------- -------
Total cost of
revenues........... 861 1,189 1,439 1,758 2,028 2,715
------ ------ ------- ------- ------- -------
Gross profit...... 698 749 745 791 1,137 1,212
Operating expenses:
Sales, general and
administrative....... 795 979 1,114 1,295 1,468 2,141
Research and
development.......... 537 641 662 715 945 849
Amortization of stock-
based compensation... 113 135 147 449 234 329
------ ------ ------- ------- ------- -------
Total operating
expenses........... 1,445 1,755 1,923 2,459 2,647 3,319
------ ------ ------- ------- ------- -------
Loss from operations.... (747) (1,006) (1,178) (1,668) (1,510) (2,107)
Interest income......... 20 102 73 67 42 60
Other income (expense),
net.................... (34) 22 (5) (2) (6) (34)
------ ------ ------- ------- ------- -------
Net loss................ $ (761) $ (882) $(1,110) $(1,603) $(1,474) $(2,081)
====== ====== ======= ======= ======= =======
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
As a Percentage of
Revenues:
Revenues:
Implementation fees... 39.3 % 33.4 % 24.9 % 24.2 % 21.5 % 25.1 %
Service fees.......... 60.7 66.6 75.1 75.8 78.5 74.9
----- ----- ----- ----- ----- -----
Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Implementation........ 17.0 22.2 19.2 20.2 15.8 18.9
Service............... 38.2 39.2 46.7 48.7 48.3 50.2
----- ----- ----- ----- ----- -----
Total cost of
revenues........... 55.2 61.4 65.9 68.9 64.1 69.1
----- ----- ----- ----- ----- -----
Gross profit...... 44.8 38.6 34.1 31.1 35.9 30.9
Operating expenses:
Sales, general and
administrative....... 51.0 50.5 51.0 50.8 46.4 54.5
Research and
development.......... 34.5 33.1 30.3 28.1 29.9 21.6
Amortization of stock-
based compensation... 7.2 7.0 6.7 17.6 7.4 8.4
----- ----- ----- ----- ----- -----
Total operating
expenses........... 92.7 90.6 88.0 96.5 83.7 84.5
----- ----- ----- ----- ----- -----
Loss from operations.... (47.9) (51.9) (53.9) (65.4) (47.7) (53.7)
Interest income......... 1.3 5.3 3.3 2.6 1.3 1.5
Other income (expense),
net.................... (2.2) 1.1 (.2) (.1) (.2) (.9)
----- ----- ----- ----- ----- -----
Net loss................ (48.8)% (45.5)% (50.8)% (62.9)% (46.6)% (53.1)%
===== ===== ===== ===== ===== =====
</TABLE>
Revenues. Revenues increased in each of the six quarters ended June 30,
1999. Service fees grew as a result of an increase in the number of financial
institution customers and a greater number of end users. Implementation fees
increased in each quarter, except for the quarter ended September 30, 1998.
The decrease in implementation fees for the quarter ended September 30, 1998
resulted from a reorganization of our sales and implementation force designed
to provide scalability for future growth. This decrease in implementation fees
was more than offset by service fee increases.
Gross Profit. Gross profit increased in each quarter except for the quarter
ended September 30, 1998. Gross profit for the quarter September 30, 1998 was
adversely affected by the increase in implementation costs and the reduction
in implementation fees due to the reorganization of our sales force. In
addition, we renegotiated our pricing schedule with our bill payment provider
for the quarter ended September 30, 1998, which resulted in higher minimum
fees payable by us. The increases in gross profit for the quarters ended
December 31, 1998 and March 31, 1999 reflect increased revenues due to
increased usage of our Internet banking services by end users. Gross margin
declined from the March 31, 1998 quarter to the September 30, 1998 quarter due
to investments related to the expansion of our data center and network
services to accommodate end-user growth and provide increased system
reliability and faster response times. Implementation gross margin may vary
from period to period based upon fluctuations in our implementation revenues
and increases in our implementation infrastructure. However, such fluctuations
should not have a significant impact on overall gross margin.
Sales, General and Administrative. Sales, general and administrative
expenses increased in each of the six quarters ended June 30, 1999. These
increases were primarily due to an increase in the number of direct sales
personnel and the addition of a telesales and client relations group. In
addition, we increased our investment in advertising, end-user marketing
programs and trade shows. We expect sales, general and administrative expenses
to increase as we add personnel and incur additional costs to support the
growth of our operations, including expanding sales and marketing activities.
21
<PAGE>
Research and Development. Research and development expenses increased
significantly from the March 31, 1998 quarter to the June 30, 1998 quarter and
again from the September 30, 1998 quarter to the December 31, 1998 quarter.
Research and development expenses generally increase in large increments as we
periodically undertake significant new development projects, such as
additional investments in data processing interfaces and introductions of new
products. We believe that continued investment in research and development is
critical to attaining our strategic objectives. As a result, we intend to
increase expenditures in research and development programs in future periods
for the purpose of enhancing current products, accelerating the completion of
additional data processing vendor interfaces and developing new products and
programs to facilitate or enhance our customers' Internet capabilities.
Interest Income. Interest income consists of earnings on our cash and cash
equivalents. Interest income increased for the quarter ended June 30, 1998 as
a result of higher average cash balances resulting from our Series B preferred
stock financing, which was concluded in February 1998. For the three quarters
ended March 31, 1999, we generated interest income in declining amounts as we
spent the proceeds from our Series B preferred stock financing. Interest
income increased slightly in the quarter ended June 30, 1999 as a result of
higher average cash balances resulting from our Series C preferred stock
financing, which was concluded in May 1999.
Amortization of Stock-based Compensation. Amortization of stock-based
compensation was relatively unchanged in each of the six quarters ended June
30, 1999. Amortization of stock-based compensation increased in the quarter
ended December 31, 1998, primarily due to the grant of a stock option and
stock purchase right to our newly hired President and Chief Executive Officer
in October 1998. In the quarter ended June 30, 1999, amortization of stock-
based compensation increased moderately, primarily due to the hiring of new
employees, as well as an increase in the difference between the grant price
and the deemed fair value of our common stock.
Our quarterly and annual results of operations have fluctuated in the past
and are likely to fluctuate significantly in the future due to a variety of
factors, many of which are beyond our control. Because of these and other
factors, our quarterly revenues, expenses and results of operations could vary
significantly in the future, and period-to-period comparisons should not be
relied upon as indicators of future performance. We may not be able to
increase our revenues in future periods or sustain our existing level of
revenues or our rate of revenue growth on a quarterly or annual basis. In
addition, our annual or quarterly results of operations may not meet the
expectations of securities analysts or investors. If this happens, the price
of our stock would likely decrease. See "Risk Factors--We Have a Limited
Operating History and Are Subject to Risks Encountered by Early-Stage
Companies," "--We Have a History of Losses, Expect Future Losses and Cannot
Assure You that We Will Achieve Profitability" and "--The Expected
Fluctuations of Our Operating Results Could Cause Our Stock Price to
Fluctuate."
22
<PAGE>
Results of Operations
The following table presents, for the periods indicated, certain statement
of operations data as a percentage of revenues.
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
--------------------- -----------------
1996 1997 1998 1998 1999
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Implementation fees.............. 67.5% 48.5% 29.4% 36.0 % 23.5 %
Service fees..................... 32.5 51.5 70.6 64.0 76.5
----- ----- ----- ------- -------
Total revenues................. 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Implementation................... 41.2 30.6 19.8 19.9 17.5
Service.......................... 16.7 25.5 43.9 38.7 49.4
----- ----- ----- ------- -------
Total cost of revenues......... 57.9 56.1 63.7 58.6 66.9
----- ----- ----- ------- -------
Gross profit................. 42.1 43.9 36.3 41.4 33.1
Operating expenses:
Sales, general and
administrative.................. 51.8 63.3 50.8 50.7 50.9
Research and development......... 36.2 40.6 31.0 33.7 25.3
Amortization of stock-based
compensation.................... -- 3.8 10.3 7.1 7.9
----- ----- ----- ------- -------
Total operating expenses....... 88.0 107.7 92.1 91.5 84.1
----- ----- ----- ------- -------
Loss from operations............... (45.9) (63.8) (55.9) (50.1) (51.0)
Interest income.................... -- 2.2 3.2 3.5 1.4
Other income (expense), net........ .3 (.1) (.2) (.3) (.5)
----- ----- ----- ------- -------
Net loss........................... (45.6)% (61.7)% (52.9)% (46.9)% (50.1)%
===== ===== ===== ======= =======
</TABLE>
Comparison of Six Months Ended June 30, 1998 and June 30, 1999
Revenues. Revenues increased from $3.5 million for the six months ended June
30, 1998 to $7.1 million for the six months ended June 30, 1999. This increase
was primarily due to the growth in service fees from $2.2 to $5.4 million. The
number of active home banking end users increased over the same period from
167,000 to 411,000 and implementation fees increased from $1.3 million to $1.7
million.
Gross Profit. Gross profit increased from $1.5 million for the six months
ended June 30, 1998 to $2.3 million for the six months ended June 30, 1999.
Gross margin declined from 42% to 33% primarily due to the costs associated
with commencing installation of a redundant data center, and to a lesser
extent due to increased service and customer support levels, additional
quality assurance, consulting expenses and investment in networking services
infrastructure. Implementation gross margin declined from 45% to 26% and
service gross margin decreased from 39% to 35%. Implementation gross margin
may vary from period to period based upon fluctuations in our implementation
revenues and increases in our implementation infrastructure. However, such
fluctuations should not have a significant impact on overall gross margin.
Sales, General and Administrative. Sales, general and administrative
expenses increased from $1.8 million for the six months ended June 30, 1998 to
$3.6 million for the six months ended June 30, 1999. This increase was
primarily due to an increase in sales commissions associated with higher
revenues and higher personnel expenses for sales and marketing staff, and to a
lesser extent due to trade show and other promotional expenses, and expenses
for additional marketing support programs. This increase was also due to
increased staffing for finance and accounting, new senior management positions
and growth in recruiting and human resources expenses. Sales, general and
administrative expenses as a percentage of revenues remained constant at 51%
for each of the six months ended June 30, 1998 and 1999.
23
<PAGE>
Research and Development. Research and development expenses increased from
$1.2 million for the quarter ended June 30, 1998 to $1.8 million for the six
months ended June 30, 1999. This increase was primarily due to higher
personnel expenses related to more full-time software engineering staff
required for the functional enhancement of existing products and to a lesser
extent due to the development of new products. Research and development
expenses as a percentage of revenues decreased from 34% for the six months
ended June 30, 1998 to 2.5% for the six months ended June 30, 1999, primarily
as a result of an increase in revenues.
Interest Income. Interest income decreased from $122,000 for the six months
ended June 30, 1998 to $102,000 for the six months ended June 30, 1999. This
decrease was primarily due to higher average cash balances in the six months
ended June 30, 1998 as a result of our Series B preferred stock financing.
Amortization of Stock-based Compensation. Amortization of stock-based
compensation increased from $248,000 for the six months ended June 30, 1998 to
$563,000 for the six months ended June 30, 1999. This increase was primarily
due to the hiring of new employees and related stock option grants, as well as
an increase in the difference between the grant price and the deemed fair
value of our common stock.
Comparisons of Years Ended December 31, 1996, 1997 and 1998
Revenues. Revenues increased from $1.6 million in 1996 to $4.0 million in
1997, and to $8.2 million in 1998. These increases were driven primarily by
growth in service fees, which increased from $508,000 in 1996 to $2.0 million
in 1997 and to $5.8 million in 1998. To a lesser extent, the increase in
revenues during these periods was the result of growth in implementation fees
related to new contracts. The total number of active home banking end users
rose from 16,000 at December 31, 1996, to 83,000 at December 31, 1997, and to
273,000 at December 31, 1998.
Gross Profit. Gross profit increased from $657,000 in 1996 to $1.7 million
in 1997, and to $3.0 million in 1998. These increases were primarily the
result of the increases in revenues, particularly from service fees. Gross
margin remained relatively stable at 42.1% in 1996 and 43.9% in 1997, and
declined to 36.0% in 1998. This decline was primarily due to increased
investments in our data center and network operations in order to improve
system reliability and significantly enhance customer support, quality
assurance and security.
Sales, General and Administrative. Sales, general and administrative
expenses increased from $809,000 in 1996 to $2.5 million in 1997, and to $4.0
million in 1998. These increases were primarily the result of increases in
personnel and personnel-related costs to support our expanded operations.
Research and Development. Research and development expenses increased from
$565,000 in 1996 to $1.6 million in 1997, and to $2.7 million in 1998. These
increases were primarily due to increases in personnel and personnel-related
costs, product testing and enhancement, new interface development expenses and
expenses related to the completion and commercial release of new products.
Interest Income. Interest income increased from $0 in 1996 to $89,000 in
1997, and to $262,000 in 1998. This increase was primarily due to higher
average cash balances in 1997 as a result of our Series A preferred stock
financing, which concluded in March 1997, and higher average cash balances in
1998 as a result of our Series B preferred stock financing.
Amortization of Stock-based Compensation. Amortization of stock-based
compensation increased from $0 in 1996 to $151,000 in 1997, and to $844,000 in
1998. This increase was primarily due to the hiring of new employees and
related stock option grants, as well as an increase in the difference between
the grant price and the deemed fair value of our common stock.
24
<PAGE>
Provision for Income Taxes
We incurred operating losses from inception through June 30, 1999, and
therefore have not recorded any significant provision for income taxes. We
have recorded a valuation allowance for the full amount of our net operating
loss carry-forwards, as the future realization of the tax benefit is not
currently likely.
As of June 30, 1999, we had net operating loss carry-forwards for federal
and state tax purposes of approximately $10.4 million. The state tax loss
carry-forwards expire in 2005 and the federal tax loss carry-forwards expire
in 2012. Under the provisions of the Internal Revenue Code, certain
substantial changes in ownership may limit the amount of net operating loss
carry-forwards that could be utilized annually in the future to offset taxable
income.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the
private placement of equity securities, raising approximately $20.8 million,
including $8.4 million raised in May 1999.
At June 30, 1999, we had cash and cash equivalents of $10.8 million. We have
a $2.0 million equipment leasing line of credit with a bank, under which
$815,000 was outstanding at June 30, 1999. At June 30, 1999, we also had an
additional $103,000 in equipment financing outstanding with an equipment
leasing company.
Cash used in operating activities was $468,000 for the year ended December
31, 1996, $1.5 million for the year ended December 31, 1997, $2.1 million for
the year ended December 31, 1998 and $1.3 million for the six months ended
June 30, 1999. The increases in cash used in operating activities were
primarily due to increases in net loss.
Cash used in investing activities was $254,000 for the year ended December
31, 1996, $768,000 for the year ended December 31, 1997, $1.7 million for the
year ended December 31, 1998 and $1.0 million for the six months ended June
30, 1999. The increases in cash used in investing activities were primarily
due to infrastructure expansion to meet end user growth and a $2.0 million
expenditure for computers and other equipment for our second data center.
We have no material commitments other than obligations under our credit
facilities and operating and capital leases, including a sublease we entered
into in August 1999 to occupy additional space in our principal facility in
Calabasas, California beginning on December 1, 1999. See note 11 of notes to
financial statements included elsewhere in this prospectus. Commitments under
our new facility sublease are $528,000 for the next three years. Future
capital requirements will depend upon many factors, including the timing of
research and product development efforts and the expansion of our marketing
efforts. We expect to continue to expend significant amounts on expansion of
facility infrastructure, ongoing research and development, computer and
related data center equipment, and personnel.
We believe that our cash and cash equivalents balances and funds available
under our existing lines of credit, together with the proceeds of this
offering, will be sufficient to satisfy our cash requirements for at least the
next 18 months. We intend to invest our cash in excess of current operating
requirements in short-term, interest-bearing, investment grade securities.
Impact of Year 2000
Many computers, software and other equipment include computer code in which
calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
These problems are widely expected to increase in frequency and severity as
the year 2000 approaches, and are commonly referred to as the "Year 2000"
problem.
General Readiness Assessment. The Year 2000 problem affects the computers,
software, other equipment that we use, operate or maintain for our operations,
and services provided by third-party vendors. As a result, we have formalized
our Year 2000 compliance plan, which is being implemented by a team of
employees led by our internal information technology staff. This staff is
responsible for monitoring the assessment, including
25
<PAGE>
potential effects and costs, of our Year 2000 projects and remediation of any
Year 2000 problems. To date, we have obtained Year 2000 readiness verification
from the majority of third-party service and product providers associated with
our critical development and operations processes.
Assessment of Digital Insight's Software and Products. Beginning in 1998, we
began assessing the ability of our software and products to operate properly
as a result of the Year 2000 problem. We believe that our current products are
Year 2000 compliant. Additionally, as we design and develop new products, we
subject them to testing for Year 2000 compliance and the ability to
distinguish between various date formats. We will continue to test our
software and products for stand-alone Year 2000 compliance as well as
compliance when used with other standard operating systems or computer
platforms. At present, we have conducted Year 2000 interface testing with our
data processing vendor partners.
Assessment of Internal Infrastructure. We have identified the majority of
information technology systems, software and other equipment that are
necessary to our internal operations. Other equipment includes office and
facilities equipment, such as fax machines, telephone switches, security
systems and other common devices which may be affected by the Year 2000
problem. We have evaluated this equipment to determine which items must be
modified, upgraded, or replaced to minimize the possibility of material
disruption to our business. Remediation is substantially complete. We expect
the remaining remediation and deployment activities to be completed by
September 30, 1999.
Costs of Remedy Necessary. To date, our costs to address Year 2000
compliance have been approximately $95,000 and are included in operating
expenses. We anticipate the additional costs to address Year 2000 compliance
will be approximately $145,000, most of which we expect to incur in 1999.
Significant uncertainty exists concerning the potential costs and effects
associated with Year 2000 compliance. The actual remediation costs may be
substantially higher than our current estimate.
Based on the activities described above, we do not believe that the Year
2000 problem will have a material adverse effect on our business or operating
results. In addition, we have not deferred any material information technology
projects or equipment purchases as a result of our Year 2000 problem
activities.
Suppliers. As part of our Year 2000 compliance plan, we have contacted our
third-party vendors of products and services integrated into our products to
identify and, to the extent possible, resolve issues relating to the Year 2000
problem. However, we have limited or no control over the actions of these
third-party vendors. Thus, while we expect that we will be able to resolve any
significant Year 2000 problems with these third parties, there can be no
assurance that these vendors will resolve any or all Year 2000 problems before
the occurrence of a material disruption to the operation of our business. Any
failure of these third parties to timely resolve Year 2000 problems with their
systems could have a material adverse effect on our business, financial
condition and results of operations.
Most Likely Consequences of Year 2000 Problems. We expect to identify and
resolve all Year 2000 issues that could materially adversely affect our
business operations. However, we believe that it is not possible to determine
with complete certainty that all Year 2000 problems affecting us have been
identified or corrected. The number of devices and systems that could be
affected and the interactions among these devices and systems are too numerous
to address. In addition, no one can accurately predict which Year 2000-related
failures will occur or the severity, timing, duration, or financial
consequences of these potential failures. As a result, we believe that the
following consequences are possible:
. operational inconveniences and inefficiencies for us and our customers
that will divert management's time and attention and financial and human
resources from ordinary business activities; and
. business disputes alleging that we failed to comply with the terms of
contracts or industry standards of performance, some of which could
result in litigation or contract termination.
26
<PAGE>
Contingency Plans. We are currently developing contingency plans to be
implemented if our efforts to identify and correct Year 2000 problems
affecting our internal systems are not effective. We expect to complete our
contingency plans by September 30, 1999. Depending on the systems affected,
these plans could include:
. accelerated replacement of affected equipment or software;
. short to medium-term use of backup equipment and software or other
redundant systems;
. increased work hours for our personnel or the hiring of additional
information technology staff; and
. the use of contract personnel to correct, on an accelerated basis, any
Year 2000 problems that arise or to provide interim alternate solutions
for information system deficiencies.
Our failure to implement any of these contingency plans could have a
material adverse effect on our business, financial condition and results of
operations.
Worst Case Scenario. The worst case scenario for Year 2000 problems for us
would be to cease normal operations while we attempted to respond to Year 2000
problems in our internal systems. Although we do not believe that our business
would come to a standstill in the worst case scenario, we could experience
severe operational disruptions and inefficiencies resulting in delays in
delivering our products and services and a corresponding decrease in revenues.
Disclaimer. The discussion of our efforts and expectations relating to Year
2000 compliance are forward-looking statements. Our ability to achieve Year
2000 compliance, and the level of incremental costs associated therewith,
could be adversely affected by, among other things, the availability and cost
of contract personnel and external resources, third-party suppliers' ability
to modify proprietary software, and unanticipated problems not identified in
the ongoing compliance review.
Recently Issued Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." These statements, which
were adopted effective January 1, 1998, did not have a significant impact on
our financial statements.
27
<PAGE>
BUSINESS
Overview
Digital Insight is the leading provider of real time Internet banking
services to credit unions, small to mid-sized banks, and savings and loans
with assets of less than $10 billion, based on the number of home banking end
users we serve as compared to our direct competitors. We offer these community
financial institutions a cost-effective outsourced service, branded in their
name, which includes home banking for their individual customers, business
banking for their commercial customers, a targeted marketing program to enable
them to effectively sell additional financial services to end users, and
customized web site design and implementation services. As of June 30, 1999,
we had contracted with over 370 financial institution customers. The
contracted home banking customers had over 9.2 million potential end users. Of
these potential end users, over 410,000 were actively using our home banking
application.
We provide community financial institutions with a comprehensive and secure
Internet solution that can be installed rapidly with a high degree of
customization. Our solution is designed to be readily expandable, or scalable,
as the number of users grows. Our solution also offers high levels of service
and system redundancy. We work closely with leading data processing vendors so
that our financial institution customers can leverage the investment they have
made in existing data processing systems by fully integrating them with an
Internet solution.
We earn revenues from implementation fees that our customer financial
institutions pay us for establishing their Internet banking services, and
recurring service fees based on end user adoption and usage, as well as web
site hosting and maintenance and other monthly services. During the six months
ended June 30, 1999, approximately 77% of our revenues came from recurring
fees.
Industry Background
The Internet has emerged as the fastest growing communications medium in
history and is dramatically changing the way businesses and individuals
communicate and conduct commerce. International Data Corporation, a leading
provider of research for the information technology industry, estimates that
the number of Internet users worldwide will increase from approximately 97
million in 1998 to 320 million by 2002.
Businesses have embraced the Internet as an important means for
communicating and transacting business with customers. Although early business
web sites were primarily used for one-way presentation of basic product and
company information, technological advances now offer companies the
opportunity to make their web sites interactive and transaction-based,
enabling the development of a wide range of electronic commerce, or
e-commerce, applications. International Data Corporation estimates that
revenue from business to consumer e-commerce will increase from approximately
$15 billion in 1997 to more than $178 billion in 2003, a compound annual
growth rate of 51%. Forrester Research estimates that revenue from business to
business e-commerce will increase from approximately $43 billion in 1998 to
more than $1.3 trillion in 2003, a compound annual growth rate of 98%.
The Internet is increasingly being utilized as a medium for financial
transactions and services, including banking, brokerage and insurance.
Personal finance was the most heavily used content channel on America Online
in the first quarter of 1999, with an average of 10.7 million user hours per
month, as compared to 10.1 million user hours for games, 7.7 million user
hours for news and 4.7 million user hours for merchandise shopping. In
particular, consumers, businesses and financial institutions are recognizing
that the Internet is a powerful and efficient medium for the delivery of
banking services, including home banking, bill payment and other services for
individuals, and cash management, payroll and other services for the
commercial customers of financial institutions. Consumers and small businesses
use Internet banking because of its 24-hour-a-day, 7-day-a-week convenience
and the ability to perform a wide range of transactions from any personal
computer or Internet-enabled device.
28
<PAGE>
International Data Corporation estimates that there were approximately 3.4
million users banking over the Internet in the United States at the end of
1998 and projects that that number will increase to over 37 million by 2003.
In response to this demand, an increasing number of financial institutions are
offering Internet-based banking services. International Data Corporation
estimates the number of banks offering online banking services will increase
from 1,150 in 1998 to 15,845 by 2003, and that these services will be offered
primarily via the Internet. Internet banking enables financial institutions to
provide one-stop shopping to their customers by collecting and consolidating
financial data from a number of sources, including all of the customer's
accounts at that institution as well as information from other Internet
sources such as online brokerage and insurance firms. Internet banking also
allows a financial institution to collect and analyze customer data for use in
targeted marketing programs.
Customer service issues are motivating financial institutions to offer
Internet banking. According to a survey conducted by Mentis Corporation, a
recognized financial industry market research firm, financial institutions
offer Internet banking in order to:
. attract new customers, retain existing customers, increase customer
loyalty and improve customer access;
. offer additional value-added services and remain competitive;
. generate revenue;
. decrease service costs; and
. reduce branch traffic.
Early Internet banking initiatives were undertaken primarily by large
financial institutions. According to Online Banking Report, over 50% of the
100 largest banks in the United States offer Internet banking. By contrast,
only approximately 5% of community financial institutions currently offer
Internet banking. Nevertheless, there are approximately 22,000 credit unions,
banks, and savings and loans in the United States with assets of less than $10
billion each. These community financial institutions hold approximately $2.2
trillion in deposits, or 56% of total U.S. customer deposits. As a result of
the adoption of Internet banking services by their larger competitors,
community financial institutions are finding themselves under increasing
pressure to offer Internet home banking and business banking services.
Community financial institutions are realizing that if they do not provide
these services, or if their offerings are inadequate, they risk losing
customers to larger institutions, Internet-only banks, or locally competitive
community financial institutions who do offer these services.
Community financial institutions have been slow to adopt Internet banking
services as a result of several factors. A financial institution undertaking
its own Internet banking service must develop or acquire the relevant
expertise, dedicate appropriate information technology resources, and spend
significant time and capital on the project. In addition, a financial
institution must work closely with its data processing vendor or vendors to
develop workable interfaces between its core systems and its Internet
solution.
In order to remain competitive, community financial institutions require a
low-cost, outsourced Internet-based banking solution. The solution must be
rapidly and cost-effectively implemented, interface seamlessly and in real
time with the financial institution's data processing vendor or vendors,
preserve and extend the financial institution's own brand and provide suitable
features to end users. An Internet-based solution must also be secure,
reliable and scalable. Finally, the solution should provide a platform for
target marketing of financial services and potentially broader e-commerce
offerings. These offerings would provide community financial institutions with
additional revenue opportunities and appeal to end users who are increasingly
using the Internet to research, evaluate and purchase a broad array of
products and services.
29
<PAGE>
The Digital Insight Solution
Digital Insight is the leading provider of real time Internet banking
services to community financial institutions. The service includes a content-
rich home banking application for retail customers and a business banking
application for commercial customers. AXIS Home Banking, our consumer product,
includes account management, account transfers and interfaces to personal
financial management software, bill payment, stock quotes and other expanded
services. AXIS Cash Management, our small business product, includes similar
features as well as payroll/direct deposits and other services. To enable
financial institutions to sell additional financial services to their end
users based on individual profiles, we also offer target marketing programs to
our customers. We also provide customized web site design, implementation,
maintenance and hosting services to our customers.
Our solution offers the following benefits to community financial
institutions:
. Comprehensive and Customizable Solution. We provide full service bureau
support to customers who desire such an environment, including hosting
of web sites, web site maintenance, reporting tools and customized
online account presentations. Our home banking and business banking
applications can be configured to offer end users a variety of standard
and optional features. Our web site design and implementation services
also enable customers to establish Internet banking services with a look
and feel that preserves their unique brand identity.
. Real Time Online Architecture. Our architecture allows real time
communication with financial institutions' core data processing systems
in order to retrieve account information as needed. Unlike batch
processing, real time data processing allows for transactions conducted
on the web site to be immediately reflected on the host system, and
allows for transactions conducted at the financial institution to be
immediately reflected on the web site. As a result, the information we
present to consumers can be current with the financial institution's own
data, with as much transaction history as is then available from the
institution. For example, if an end user makes a withdrawal at a branch,
it will be reflected instantaneously online.
. Extensive Data Processing Vendor Relationships. Our solution provides
direct links, or interfaces, with multiple vendors of core banking
software and data processing services to financial institutions. We have
developed interfaces to the systems of 21 data processing vendors, who
serve more than 6,000 community financial institutions, and we have
interfaces for 10 additional vendors in development. By working directly
with these vendors, we enable our customers to offer real time
presentations of end user account data and we can quickly and cost-
effectively install our systems with customers of these vendors. Our
interfaces also allow for tight integration with other functions
supported by the data processing vendor, such as loan origination and
statement and check imaging.
. Scalable, Reliable and Secure Service. Our system can scale rapidly to
accommodate increased numbers of end users. A financial institution can
take advantage of our data center and the server infrastructure of its
data processing vendor to scale to meet demand, without building its own
separate server infrastructure. Our service is also highly reliable,
with an up-time availability record averaging 99.3% during the six-month
period ended May 31, 1999. Further, our systems incorporate
sophisticated data encryption techniques, a series of firewalls between
the Internet and our customers, and several layers of security
technology in order to minimize unauthorized access to our network.
. Rapid and Affordable Implementation. Our solution can be rapidly
implemented and represents an affordable alternative to internally
developed Internet banking services for community financial
institutions. Average implementation times for our home banking
application range from one to three months, depending on the complexity
of web site design requests and the availability of an existing
interface with a customer's data processing vendor. The typical
implementation cost for a home banking application is less than $50,000.
. Flexible Service Capabilities. Our applications are designed to be
deployed in a variety of environments, depending on a customer's needs.
A customer can use our data center in a service bureau arrangement,
house its own dedicated hardware in our data center or host our systems
in its own
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facility. Importantly, customers can migrate from one environment to
another as their needs evolve. In addition, we have the flexibility to
support data processing vendors whose systems are either batch or
realtime.
. Platform for Value-Added Services and Target Marketing. We enable
financial institutions to expand their Internet presence beyond their
core banking functions by providing additional value-added products and
services to their customers. These services include bill payment and
delivery of third- party services such as stock quotes. Our real time
solution is also capable of gathering relevant end-user account activity
information and usage profiles, enabling financial institutions to
target timely and appropriate services to their customers, thereby
creating additional revenue opportunities. We believe that these
additional product and service offerings will allow our customers to
derive additional revenue from existing and new end users.
The Digital Insight Strategy
Our objective is to increase our position as the leading provider of
Internet banking services to community financial institutions as well as to
provide these institutions with a competitive platform which will permit them
to exploit e-commerce opportunities.
. Increase the Number of Community Financial Institutions. We intend to
leverage our leading market position to further penetrate the
substantial market for an outsourced Internet banking solution among
community financial institutions. As of June 30, 1999, we had contracts
with over 370 community financial institutions in over 40 states. We
achieved early leadership among credit unions who, as a group, adopted
Internet banking more rapidly than community banks. Over the past two
years, we have begun to leverage our strong credit union customer base
to increase our sales efforts with banks. We also intend to increase the
number of customers by selectively expanding our international sales,
both directly and through strategic alliances with international
partners.
. Increase End User Penetration. As of June 30, 1999, our home banking
customers had more than 9.2 million potential end users. For the
financial institutions who had fully deployed our solution by June 30,
1998, the aggregate percentage of their customers utilizing home banking
rose from 3.9% at June 30, 1998 to 8.1% at June 30, 1999. We work with
our financial institution customers to expand the number of end users of
our home banking and business banking services through marketing
assistance programs and sharing best practices. We intend to continue to
train the staff of financial institutions in marketing and promoting
Internet banking services using the information and skills we have
gained through our experience in Internet banking implementations.
. Increase the Number of Interfaces to Core Data Processing Systems. We
intend to increase the number of our interfaces to core data processing
systems to allow our products to interface with more financial
institutions. Our strategy is to maintain neutrality among vendors, in
order to serve the broadest possible base of financial institutions. We
currently interface with vendors providing services to over 6,000
community financial institutions and our intermediate-term goal is to
increase this coverage to more than 12,000 community financial
institutions. A group of our engineers is dedicated to developing
interfaces to new data processing vendors.
. Broaden Product Offerings. We plan to offer new and enhanced products
and services to attract additional traffic onto our network of community
financial institutions and other business partners. We intend to enhance
the capabilities, or functionality, of our products to capitalize on the
trend of consumers to integrate financial services information and
transactions and to expand our target marketing capability. New
functionality and services are expected to include bill presentment, or
the delivery of interactive electronic bills over the Internet, online
loan origination, online check imaging and online statement delivery.
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Products and Services
Our primary products are home banking and business banking applications.
These applications allow a financial institution to create a customized
Internet banking service using an array of standard and optional features. We
complement our primary banking applications with additional tools, such as
target marketing, and with implementation and web site services.
Home Banking
Our AXIS Home Banking application is an Internet-based system through which
community financial institutions are able to provide home banking to their
retail customers. Standard features of this application include:
. Account information: End users can view balance information and
transaction history in real time for deposit accounts, such as checking
and savings, and loan accounts, such as consumer, credit cards,
automobile and mortgage.
. Funds transfer: End users can transfer funds among accounts, including
making loan payments.
. Interfaces with personal financial management software: End users can
download their account information into Quicken and Microsoft Money.
In addition to these standard features, financial institutions can also
choose to include the following home banking optional features:
. Bill payment: End users can pay bills electronically 24 hours a day,
seven days a week. End users can schedule one-time or recurring
payments, and can view payment history at their convenience.
. Online applications: End users can submit electronic loan, credit card
or other applications safely and securely to their financial
institution.
. Online services and additional features: End users can track stock
prices, calculate portfolio values, order U.S. Savings Bonds, make check
image requests and order checks.
Business Banking
Our AXIS Cash Management application provides a full range of Internet
business banking services for commercial customers of community financial
institutions. Standard features of this application include:
. Administration platform: Businesses can control access to business
banking and account features in order to provide financial and audit
controls for their staff.
. Account information: Businesses can view account balances and
transaction history, and reconcile accounts instantly.
. Funds transfer: Businesses can actively manage their accounts, setting
up future-dated transfers and automatic transfers of available balances
among accounts.
. Stop payment placement: Businesses can place stop payment orders on
checks.
. File export: Businesses can export their account information into a
computer file or into business financial management and accounting
software such as QuickBooks.
Optional features of AXIS Cash Management include:
. Bill payment: End users can pay bills electronically 24 hours a day,
seven days a week. End users can schedule one-time or recurring payments
and can view payment history at their convenience.
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. Automated Clearing House services: Businesses can initiate electronic
payments, including business to business, payroll direct deposit
disbursements and electronic state and federal tax payments.
. Wire transfers: Businesses can originate wire transfers of funds to
accounts with other financial institutions or trade partners.
. Online services and additional features: Businesses can complete
predefined loan and other applications, make photocopy requests, order
checks, and track portfolios.
Target Marketing
Our recently introduced Target Marketing module is designed to help make the
financial institution's web site a cost-effective sales tool. This module is
currently available for our home banking application and is expected to be
available for our business banking application later this year. Target
Marketing allows financial institutions to individually target their account
holders and present them with opportunities to buy products and services to
fit their needs. The Target Marketing module gives financial institutions the
ability to:
. analyze end users' demographic and financial profiles and online
activity, and apply a set of screening criteria to select appropriate
marketing promotions;
. present individually-targeted marketing promotions, such as
advertisements for loans, to end users when it is most appropriate;
. incorporate account sign-up forms and loan applications into specific
promotions;
. create time-limited promotions and seasonal messages; and
. change messages daily, hourly or randomly.
AXIS Management Console
Our Internet services management console provides our customers with a set
of tools to actively manage their Internet banking system. With this
management console, a financial institution can remotely manage its web site,
generate reports on daily activities and keep transaction logs and activity
records for all site events. A financial institution can also use this
management console to configure the Target Marketing module for specific
promotions.
Implementation Services and Web Site Development
For financial institutions without an existing web site, our team of experts
develop a fully interactive site. Working closely with the customer, the team
designs the site to incorporate the features and capabilities required by the
institution, including the integration of proprietary and value-added
financial services such as application forms, financial calculators and links
to other web sites. For customers with an existing web site, our
implementation services are focused on integrating the home banking and/or
business banking application into that site. In both instances, financial
institutions can elect to have Digital Insight host and maintain their web
site. We provide a team of web site experts who program the placement and
formatting of digitized text for a financial institution's Internet site,
including all connections to other web sites.
Systems Architecture
Overview
Our applications are designed to be deployed in a service bureau
environment, resource managed environment, or an in-house environment. In a
service bureau environment, the financial institution's web site and home
banking application share resources with other financial institutions in our
data center. These shared resources include hardware such as our servers, as
well as data transmission capacity, known as bandwidth. In a resource managed
environment, a financial institution has dedicated bandwidth and hardware but
the system is still located in our data center. In an in-house environment, a
financial institution runs the system out of its own data center. In all
environments, the financial institution or data processing vendor is connected
to Digital Insight through our private frame relay network.
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Our systems architecture is designed to provide real time data acquisition,
processing and presentation for Internet home banking and other applications.
Our application servers make use of information exchange brokers that retrieve
and initiate transactions using data located on financial institutions' host
systems, bill payment providers' servers, stock information databases or
relational databases. Our applications are driven by templates which define
how data is to be presented. This template driven approach allows
customization by our financial institution customers by supporting multiple
languages and multiple web site designs.
We believe that our real time architecture is more scalable than traditional
batch systems, which warehouse and store duplicate data. Instead of
duplicating each financial institution's host system by daily batch
transmittal of customer information, we communicate in real time through a
private frame relay network to retrieve account information as needed. Real
time data processing allows for transactions conducted on the web site to be
immediately reflected on the host system and vice versa. In contrast, in batch
systems, home banking transactions are not immediately sent to the financial
institution's host system for processing but are stored in a database at the
home banking data center. In addition, transactions processed at the financial
institution are only reflected in a batch system home banking application
after this data is uploaded to the data center. As a result, batch systems can
result in impairment of data integrity, as information on the host system may
be different from that of the Internet home banking application at any
particular time.
Future Impact of Second Data Center
We currently provide our services out of one data center located at our
headquarters in Calabasas, California. We expect to open a second data center
that we will manage at an Exodus Communications facility in Herndon, Virginia.
This second data center is expected to be fully operational as a working
backup data center in the fourth quarter of 1999. When operational, this data
center will allow for greater scalability and increased functionality by
providing backup functions to the Calabasas data center.
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<PAGE>
Transaction Flow
The following simplified diagram illustrates the transaction flow in a
typical service bureau or resource managed home banking or business banking
application, either through our current Calabasas data center or through our
second backup data center under construction in Herndon, VA:
[DIAGRAM OF CALABASAS DATA CENTER AND HERNDON DATA CENTER]
. Step 1: An end user initiates a banking transaction from his or her
browser by going to the financial institution's secure web site. Our
system will direct the transaction to the then currently operational
data center.
. Step 2: Our protocol translation and delivery technology translates
the request from web messaging protocol into our internal messaging
protocol, and then into a protocol understood by the target host
processor.
. Step 3: Requests are sent over a private frame relay network and
processed in real time by the target host processor, which sends the
response back to us to be processed and ultimately delivered back to
the end user's browser.
Excluding presentation to the end user, all of this processing generally
takes less than five seconds.
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Customers
Our target market is the approximately 22,000 community financial
institutions in the United States with assets of less than $10 billion each.
Within our target market, we focus on community financial institutions that
rely on one or more of the data processing vendors with whom we have developed
interfaces. At present, we have interfaces with data processing vendors
serving over 6,000 community financial institutions. We are seeking to expand
the number of vendors with whom we have interfaces.
As of June 30, 1999, we had contracts with over 370 financial institutions
to provide one or more of our products and services. Of these institutions,
over 245 have contracted with us for home banking, with more than 410,000
active end users. Based on publicly available regulatory submissions, as of
June 30, 1999, our home banking customers had more than 9.2 million potential
end users. For the year ended December 31, 1998 and the six months ended June
30, 1999, no individual customer accounted for 5% or more of our revenues.
The table below sets forth our ten largest home banking customers as of June
30, 1999 in the categories of banks/savings and loans and credit unions, based
on the number of potential end users.
<TABLE>
<CAPTION>
Banks/Savings and Loans Credit Unions
----------------------- -------------
<S> <C>
Trust Company of New Jersey The Golden 1 Credit Union
Reliance Federal Savings Government Employees Federal Credit Union
Commonwealth Bank, Pennsylvania AT&T Family Federal Credit Union
First Southern Bancorp Teachers Credit Union
Keystone Savings Bank Community Credit Union
Centier Bank Portland Teachers Credit Union
American Bank of Texas ESL Federal Credit Union
Commercial Bank of New York North Island Federal Credit Union
Brookline Savings Bank Mountain America Credit Union
Patriot Bank San Diego County Credit Union
</TABLE>
Third-Party Relationships
We have relationships with multiple vendors of core data processing software
and outsourced data processing services to financial institutions. Agreements
with these vendors allow us to interface to the financial institutions' host
systems to provide real time access to a financial institution's account data.
We have developed interfaces to the systems of 21 data processing vendors who
provide services to more than 6,000 community financial institutions. We
currently have interfaces for 10 additional vendors in development. Among the
data processing vendors with whom we interface are: BancTec, CSI, EDS Cube,
EDS Miser, Fiserv divisions such as Aftech, CBS, Galaxy and Summit, Jack
Henry, OSI, Symitar Systems, USERS Inc. and XP Systems. Among the interfaces
under development are ALLTEL and M&I Data Services.
To deliver bill payment services, we have relationships with major providers
such as M&I Data Services and CheckFree. Our agreement with M&I Data Services,
as successor to Moneyline Express, has a one-year renewable term and provides
for payment of fees based on the number of customers, end users and bill
payment transactions. We also have relationships with third parties, including
the U.S. Treasury, DecisionOne, 800 Support, Intuit and Microsoft, to provide
other related functions to our customers.
Sales and Marketing
We utilize a direct sales model. As of June 30, 1999, our sales and
marketing staff consisted of 27 professionals, who are regionally based to
facilitate the development of strong relationships with customers. The sales
staff is responsible for prospecting and acquiring new accounts as well as
managing current accounts and cross-selling additional products into those
accounts. We expect to significantly increase our sales and marketing
infrastructure over the next 12 months.
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Our typical sales cycle is approximately six months for new customers and
approximately two months for follow-on or upgrade sales to existing customers.
Our primary customer contact for new sales in smaller community financial
institutions is generally the chief executive officer, the chief financial
officer or the chief information officer, or a combination of these three, and
in larger community financial institutions, our primary contact is generally
the head of retail banking or business banking. Our primary customer contact
for follow-on sales is usually the functional manager for the community
financial institution or the direct manager of Internet banking for that
institution.
Our primary marketing efforts are focused on building brand awareness among
community financial institutions and identifying potential customers. Our
marketing efforts include:
. telemarketing, through which we make an average of 300 new financial
institution contacts a month;
. press relations, which are managed by an outside public relations firm
that specializes in banking and financial industries;
. direct mail, which uses product and service literature as well as
reprints of news articles;
. trade shows, with 26 appearances scheduled for 1999; and
. meetings with national and regional user groups of Internet banking
services and third-party data processing vendors, with 14 scheduled for
1999.
Product Development
As of June 30, 1999, our product development staff consisted of 32 software
developers and engineers. Their development efforts are focused on:
. Enhancements to Existing Products. We are developing new features and
functions for our home banking and business banking products in order to
provide a broader range of functions, including Internet loan
origination and bill presentment. For example, we are currently
developing a bill presentment graphical user interface for release in
1999.
. Interfaces with Data Processing Vendors. We are continuing to enhance
and expand our interfaces to financial institution core data processing
systems. A variety of different systems are utilized by both banks and
credit unions. We currently interface with vendors representing over
6,000 community financial institutions and our intermediate-term goal is
to increase this coverage to more than 12,000 community financial
institutions.
. Additional Web Site Customization. We intend to offer financial
institutions additional options and capabilities for customization of
their web sites by creating more templates and making these templates
more flexible.
. Enhancements to Target Marketing. We intend to add features to Target
Marketing to support a broader range of e-commerce activities.
. Other Products and Services. We are working to expand our offerings to
include related financial service capabilities such as online insurance,
brokerage, credit history management, tax preparation and filing and
merchant services.
Competition
The market for Internet banking services is highly competitive, and we
expect that competition will intensify in the future. In the area of home
banking, we primarily compete with other companies that provide outsourced
Internet banking services to community financial institutions, including
FundsXpress, nFront, Online Resources, Q-Up and Virtual Financial. Also,
vendors such as Corillian, Edify, Integrion and Security First Technologies,
who primarily target the largest financial institutions, occasionally compete
with us for community financial
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institution customers. In addition, several of the vendors offering data
processing services to financial institutions offer their own Internet banking
solutions, including EDS, Fiserv, Jack Henry and M&I Data Services. Local
competition for home banking services is provided by more than 100 smaller
online service outsourcing companies located throughout the United States.
Our primary competition for providing the business banking services that
financial institutions offer their commercial customers are vendors of cash
management systems for large corporations such as ADP, Magnet and Pulitzer &
Haney.
We also face potential indirect competition from Internet portals such as
E*TRADE and Yahoo! which might serve as an alternative to financial
institutions' web sites, particularly for bill presentment services. In
addition, we could experience competition from our customer financial
institutions and potential customers who develop their own online banking
solutions. Rather than purchasing Internet banking products and services from
third-party vendors, community financial institutions could develop, implement
and maintain their own services and applications. We can give no assurance
that these financial institutions will perceive sufficient value in our
products and services to justify investing in them.
We believe that our ability to compete successfully depends upon a number of
factors, including:
. our market presence with community financial institutions and related
scale advantages;
. the reliability, security, speed and capacity of our systems and
technical infrastructure;
. the comprehensiveness, scalability, ease of use and service level of our
products and services;
. our ability to interface with vendors of data processing software and
services;
. our pricing policies and the pricing policies of our competitors and
suppliers;
. the timing of introductions of new products and services by us and our
competitors; and
. our ability to support unique customer requirements.
We expect competition to increase significantly as new companies enter our
market and current competitors expand their product lines and services.
Government Regulation
The financial services industry is subject to extensive and complex federal
and state regulation. Our current and prospective customers, which consist of
financial institutions such as commercial banks, savings and loans, credit
unions, thrifts, securities brokers, finance companies, other loan
originators, insurers and other providers of financial services, operate in
markets that are also subject to rigorous regulatory oversight and
supervision. Our customers must ensure that our services and related products
work within the extensive and evolving regulatory requirements applicable to
them, including those under federal and state truth-in-lending and truth-in-
deposit rules, usury laws, the Equal Credit Opportunity Act, the Fair Housing
Act, the Electronic Fund Transfer Act, the Fair Credit Reporting Act, the Bank
Secrecy Act and the Community Reinvestment Act. The compliance of our products
and services with these requirements depends on a variety of factors including
the particular functionality, the interactive design and the classification of
the customer. Our financial services customers must assess and determine what
is required of them under these regulations and are responsible for ensuring
that our system and the design of their site conform to their regulatory
needs. We do not make representations to customers regarding applicable
regulatory requirements, and rely on each customer to identify its regulatory
issues and to adequately specify appropriate responses. It is not possible to
predict the impact that any of these regulations could have on our business.
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We are not licensed by the Office of the Comptroller of the Currency, the
Board of Governors of the Federal Reserve System, the Office of Thrift
Supervision, the National Credit Union Administration or other federal or
state agencies that regulate or supervise depository institutions or other
providers of financial services. We are subject to examination by the Federal
depository institution regulators under the Bank Service Company Act and the
Examination Parity and Year 2000 Readiness for Financial Institutions Act.
These regulators have broad supervisory authority to remedy any shortcomings
identified in any such examination. We are also subject to encryption and
security export laws and regulations which, depending on future developments,
could render our business or operations more costly, less efficient or
impossible.
Federal, state or foreign authorities could adopt laws, rules or regulations
affecting our business operations, such as by requiring us to comply with
data, record keeping and other processing requirements. We may become subject
to additional regulation as the market for our business evolves. It is
possible that laws and regulations may be enacted with respect to the
Internet, covering issues such as user privacy, pricing, content,
characteristics and quality of services and products. Existing regulations may
be modified. For example, we are not subject to the disclosure requirements of
Regulation E of the Federal Reserve Board under the Electronic Fund Transfer
Act, because we do not agree with consumers to provide them with electronic
funds transfer services or provide access devices (such as cards, codes or
other means of accessing accounts to initiate electronic funds transfers) to
them. Regulation E regulates certain electronic funds transfers made by
providers of access devices and electronic fund transfer services. Under
Regulation E, our customers are required, among other things, to provide
certain disclosure to retail customers using electronic transfer services, to
comply with certain notification periods regarding changes in the terms of
service provided and to follow certain procedures for dispute resolutions. The
Federal Reserve Board could adopt new rules and regulations for electronic
funds transfers that could lead to increased operating costs and could also
reduce the convenience and functionality of our services, possibly resulting
in reduced market acceptance. If enacted or deemed applicable to us, the laws,
rules or regulations applicable to financial services activities would render
our business or operations more costly, burdensome, less efficient or
impossible. We cannot assure that federal, state or foreign governmental
authorities will not adopt new regulations addressing electronic financial
services or operations generally that could require us to modify our current
or future products and services. The adoption of laws or regulations affecting
our business or our customer banks' business could have a material adverse
effect on our business, financial condition and results of operations.
A number of proposals at the federal, state and local level and by certain
foreign governments would, if enacted, expand the scope of regulation of
Internet-based financial services and could impose taxes on the sale of goods
and services and certain other Internet activities. Any development that
substantially impairs the growth of the Internet or its acceptance as a medium
for transaction processing could have a material adverse effect on our
business, financial condition and operating results.
Proprietary Rights
Although we believe that our success is more dependent upon our technical
expertise than our proprietary rights, our future success and ability to
compete is dependent in part upon our proprietary technology. We have filed an
application to register Digital Insight as our trademark. None of our
technology is currently patented. Instead, we rely on a combination of
contractual rights and copyright, trademark and trade secret laws to establish
and protect our proprietary technology. We generally enter into
confidentiality agreements with our employees, consultants, resellers,
customers and potential customers. We also limit access to and distribution of
our source code, and further limit the disclosure and use of other proprietary
information. We cannot assure that the steps taken by us in this regard will
be adequate to prevent misappropriation of our technology or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain or use our products or technology. In addition, the laws of some
foreign countries do not protect our proprietary rights to the same extent as
do the laws of the United States.
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Facilities
Our principal offices currently occupy approximately 30,385 square feet in
Calabasas, California, pursuant to a lease which expires in 2003. In August
1999, we entered into a sublease to occupy an additional 16,085 square feet in
our principal facility in Calabasas, California, beginning on December 1,
1999. Our principal data center is located in this facility. We have also
entered into a service agreement for a second data center serviced by Exodus
Communications in Herndon, Virginia. We believe that suitable additional or
alternative space will be available in the future on commercially reasonable
terms as needed.
Employees
As of June 30, 1999, we had a total of 132 full-time employees, including 57
in operations, 27 in sales and marketing, 32 in research and development and
16 in finance and administration. None of our work force is currently
unionized. We have not experienced any work stoppages and consider our
relations with our employees to be good.
Legal Proceedings
From time to time we may be involved in litigation arising in the normal
course of our business. We are not a party to any litigation, individually or
in the aggregate, that we believe would have a material adverse effect on our
financial condition or results of operations.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding the executive officers
and directors of Digital Insight as of September 30, 1999:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John Dorman............. 49 Chairman of the Board, Chief Executive Officer and President
Paul Fiore.............. 34 Executive Vice President, Co-Founder and Director
Mehariar Hasan.......... 40 Vice President, Product Management
Daniel Jacoby........... 33 Vice President, Chief Technology Officer and Co-Founder
Kevin McDonnell......... 38 Vice President, Finance, Chief Financial Officer and Secretary
Steven Reich............ 40 Vice President, Sales and Marketing
Stephen Zarate.......... 53 Vice President and Chief Information Officer
John Jarve(2)........... 43 Director
Nader Kazeminy.......... 34 Director
James McGuire(1)(2)..... 55 Director
Ofer Nemirovsky......... 41 Director
Robert North(1)(2)...... 64 Director
</TABLE>
- --------
(1) Member of the audit committee.
(2) Member of the compensation committee.
John Dorman. Mr. Dorman has been our President and Chief Executive Officer
and a director since October 1998. Mr. Dorman was appointed Chairman of the
Board in June 1999. Prior to his appointment as our President and Chief
Executive Officer, Mr. Dorman was Senior Vice President for Oracle Worldwide
Financial Services from August 1997 to October 1998. Prior to joining Oracle,
Mr. Dorman was founder, President, and Chief Executive Officer of Treasury
Services Corporation, known as TSC, a provider of management information
solutions to the financial services industry, from 1983 to 1997. TSC was sold
to Oracle in 1997. Prior to serving at TSC, Mr. Dorman spent 11 years in the
banking industry as a senior financial executive for Union Bank of California.
Mr. Dorman holds a BA degree in business administration and philosophy from
Occidental College and an MBA in finance from the University of Southern
California.
Paul Fiore. Mr. Fiore is a co-founder of Digital Insight and has served as
our Executive Vice President since October 1998 and as a director since March
1997. From March 1997 to October 1998, Mr. Fiore was President of Digital
Insight and from July 1995 to March 1997, Mr. Fiore served as President of
Digital Insight LLC, the predecessor of Digital Insight. Prior to co-founding
Digital Insight LLC in July 1995, Mr. Fiore was Vice President, Strategy &
Plans for XP Systems, a provider of turn-key data processing solutions for
credit unions, from March 1994 to July 1995. Before joining XP Systems, Mr.
Fiore was Vice President and Chief Financial Officer for AT&T Employees
Federal Credit Union from October 1989 to March 1994. Prior to joining AT&T,
Mr. Fiore was a financial analyst for Lehman Brothers. Mr. Fiore graduated
from New York University with a BS degree in management and finance.
Mehariar Hasan. Mr. Hasan joined Digital Insight as Vice President, Product
Management in July 1999. Prior to joining Digital Insight, Mr. Hasan was
Senior Vice President, Strategic Marketing for Transamerica Corporation from
June 1996 to July 1999. Prior to joining Transamerica, Mr. Hasan served as
Director of Consulting for TSC, a provider of management information solutions
to the financial services industry, from November 1994 to June 1996. Prior to
joining TSC, Mr. Hasan served in a variety of management roles for American
Savings Bank from November 1986 to November 1994. Mr. Hasan holds a BA in
Economics and an MS in Finance from the University of Arizona.
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<PAGE>
Daniel Jacoby. Mr. Jacoby is a co-founder of Digital Insight and has served
as Vice President and Chief Technology Officer since March 1997. From July
1995 to March 1997, Mr. Jacoby served as Chief Technology Officer of Digital
Insight LLC. Prior to co-founding Digital Insight in 1995, Mr. Jacoby served
in various technical and managerial positions for XP Systems from February
1989 to June 1995. Mr. Jacoby holds a BS degree in biomechanical engineering
from the University of California, San Diego.
Kevin McDonnell. Mr. McDonnell joined Digital Insight as Vice President,
Chief Financial Officer and Secretary in March of 1999. Prior to joining
Digital Insight, Mr. McDonnell was Executive Vice President and Chief
Financial Officer for Rockford Industries, a specialty finance company, from
July 1997 to February 1999. From October 1995 to July 1997, Mr. McDonnell
served as Vice President and Chief Financial Officer for Printrak
International, a provider of automated fingerprint identification systems.
From October 1992 to October 1995, Mr. McDonnell served as Vice President and
Chief Financial Officer of Mobile Technology, Inc., a medical services
company. Mr. McDonnell has a BA degree in business administration from Loyola
Marymount University and a JD degree from Loyola Law School.
Steven Reich. Mr. Reich joined Digital Insight as Vice President of Sales
and Marketing in May 1998. Prior to joining Digital Insight, Mr. Reich served
as a management consultant and spent ten years from 1987 to 1997 with TSC, a
provider of management information solutions to the financial services
industry, in a variety of management roles. Before joining TSC, Mr. Reich
worked at the consulting firm of Kaplan Smith and Associates as a Senior
Consulting Associate. He holds a BS degree in business administration from
Arizona State University and an MBA from Claremont Graduate School.
Stephen Zarate. Mr. Zarate has served as Vice President and Chief
Information Officer since March 1999. Prior to joining Digital Insight, Mr.
Zarate was Chief Information Officer for PeopleSoft from June 1993 to March
1999, where he was responsible for the company's worldwide internal
applications, communications, infrastructure and technology. Prior to joining
PeopleSoft, Mr. Zarate was the Managing Director of Golden Gate Bank from
October 1988 to April 1993. Mr. Zarate has a BA degree in political science
and history from San Francisco State University.
John Jarve. Mr. Jarve has been a director of Digital Insight since March
1997. He is a general partner and managing director of Menlo Ventures, a
venture capital firm, where he has been employed since 1985. Mr. Jarve
currently serves as a director of several privately held companies and also as
a trustee of the Massachussetts Institute of Technology. Mr. Jarve holds BS
and MS degrees in electrical engineering from the Massachusetts Institute of
Technology and an MBA from the Graduate School of Business at Stanford
University.
Nader Kazeminy. Mr. Kazeminy has been a director of Digital Insight since
February 1998. He has served as Vice President and Vice Chairman of NJK
Holding Corporation since April 1992. Mr. Kazeminy holds a BS in business and
organizational management from Gustavus Adolfus College.
James McGuire. Mr. McGuire has been a director of Digital Insight since
March 1997 and served as Chairman of the Board from our inception until June
1999. Mr. McGuire has served as President of NJK Holding Corporation since
1992. Mr. McGuire currently serves as a director for Sylvan Learning Systems,
a provider of educational services. Mr. McGuire holds a BBA in finance from
the University of Notre Dame.
Ofer Nemirovsky. Mr. Nemirovsky has served as a director of Digital Insight
since February 1998. Mr. Nemirovsky has been a Managing Director of
HarbourVest Partners, LLC since January 1997. HarbourVest Partners, LLC was
formed by the management team of Hancock Venture Partners, Inc., where
Mr. Nemirovsky had served in various capacities since 1986. Prior to joining
Hancock Venture Partners, Inc., Mr. Nemirovsky held various computer sales and
marketing positions at Hewlett-Packard Company. He is currently a director of
Primix Solutions, Inc., an electronic commerce consulting firm, Paradigm
Geophysical Limited, a provider of computer aided exploration software, and
The Ultimate Software Group, Inc., a provider of human resources management
and payroll software, as well as several privately-held companies. He holds a
BS in electrical engineering and a BS in finance from the University of
Pennsylvania and an MBA from Harvard Business School.
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<PAGE>
Robert North. Mr. North has been a director of Digital Insight since June
1997. Mr. North has served as Chief Executive Officer of HNC Software, a
provider of predictive software solutions, since 1987. Mr. North is also a
director of HNC Software, Peerless Systems, a provider of software-based
embedded imaging systems, and Abacus Direct, a provider of information
products and marketing research services. Mr. North holds BS and MS degrees in
electrical engineering from Stanford University.
Board Composition
We currently have seven directors. In accordance with the terms of our
certificate of incorporation, the terms of office of our board of directors
will be divided into three classes upon the closing of the offering: Class I,
whose term will expire at the annual meeting of stockholders to be held in
2000, Class II, whose term will expire at the annual meeting of stockholders
to be held in 2001 and Class III, whose term will expire at the annual meeting
of stockholders to be held in 2002. The Class I directors will be Messrs.
Nemirovsky and Kazeminy, the Class II directors will be Messrs. Fiore and
Jarve and the Class III directors will be Messrs. Dorman, McGuire and North.
At each annual meeting of stockholders after the initial classification, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. Any additional directorships will be distributed among the
three classes so that, as nearly as possible, each class will consist of one-
third of our directors. This classification of the board of directors may have
the effect of delaying or preventing changes in control or our company. Our
directors may be removed for cause by the affirmative vote of the holders of a
majority of our common stock.
Board Committees
Our board of directors has a compensation committee and an audit committee.
The compensation committee consists of Messrs. Jarve, McGuire and North. The
compensation committee makes recommendations regarding our stock option plans
and all matters concerning executive compensation. The audit committee
consists of Messrs. McGuire and North. The audit committee approves our
independent auditors, reviews the results and scope of annual audits and other
accounting related services, and evaluates our internal controls. Each of
these committees was established in June 1999.
Director Compensation
We do not pay any compensation to directors for serving in that capacity.
Directors are reimbursed for all reasonable expenses incurred by them in
attending board and committee meetings. The board of directors has the
discretion to grant options and rights to directors under our stock plans.
Employee directors are also eligible to participate in our employee stock
purchase plan. See "--Employee Benefit Plans."
Compensation Committee Interlocks and Insider Participation
The compensation committee consists of Messrs. Jarve, McGuire and North,
none of whom is an employee of Digital Insight. None of our executive officers
serves as a director or member of the compensation committee or other board
committee performing equivalent functions of another entity that has one or
more executive officers serving on the board of directors or compensation
committee of Digital Insight.
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<PAGE>
Executive Compensation
The following table sets forth information concerning the compensation
earned during the fiscal year ended December 31, 1998 by our Chief Executive
Officer and each of our other four most highly compensated executive officers
who earned more than $100,000 during the fiscal year ended December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
---------------- ------------
Securities
Underlying All Other
Name and Principal Position(1) Salary Bonus Options Compensation(2)
- ------------------------------ -------- ------- ------------ ---------------
<S> <C> <C> <C> <C>
John Dorman(3)................... $ 56,250 $28,125 690,000 $157
Chairman, Chief Executive
Officer and President
Paul Fiore(4).................... 140,000 20,000 -- 616
Executive Vice President and
Co-Founder
Ole Eichhorn(5).................. 160,000 50,000 -- 631
Former Vice President, Research
& Development
Daniel Jacoby.................... 100,000 12,500 -- 616
Vice President, Chief
Technology Officer and Co-
Founder
Ken Mattice(6)................... 115,000 26,667 -- 624
Controller
</TABLE>
- --------
(1) This table excludes information for Steven Reich, our Vice President,
Sales and Marketing who joined Digital Insight in May 1998. Mr. Reich's
combined salary and bonus during 1998 was $96,634 and his annualized
salary for 1998 was $150,000. Mr. Reich was also granted an option for
115,000 shares during 1998. This table also excludes information for Kevin
McDonnell, our Vice President, Finance, Chief Financial Officer and
Secretary, and Stephen Zarate, our Vice President and Chief Information
Officer, each of whom joined Digital Insight in March 1999. Mr.
McDonnell's annualized salary for 1999 is $165,000 and he has been granted
an option to purchase 115,000 shares. Mr. Zarate's annualized salary for
1999 is $175,000 and he has been granted an option to purchase 286,285
shares. This table also excludes information for Mehariar Hasan, our Vice
President, Product Management, who joined Digital Insight in July 1999.
Mr. Hasan's annualized salary for 1999 is $180,000 and he has been granted
an option to purchase 90,000 shares.
(2) Consists of premiums paid by Digital Insight for term life insurance.
(3) Mr. Dorman joined Digital Insight in October 1998. His annualized salary
for 1998 was $225,000.
(4) Mr. Fiore served as our President from inception until October 1998.
(5) Mr. Eichhorn resigned as an officer effective June 1999. Bonus includes
$20,000 earned in 1997 but paid in 1998.
(6) Mr. Mattice was an executive officer during 1998 when he served as our
Chief Financial Officer. Bonus includes $6,667 earned in 1997 but paid in
1998.
Option Grants in Last Fiscal Year
The following table sets forth stock options and stock purchase rights
granted to each of the named executive officers during the fiscal year ended
December 31, 1998. A total of 996,000 options and stock purchase rights were
granted in fiscal 1998, all under our 1997 Stock Plan. No stock appreciation
rights were granted during fiscal 1998.
Options and stock purchase rights were granted at an exercise price equal to
the fair market value of our common stock, as determined by the board of
directors, on the date of grant. In making this determination, the board
considered a number of factors, including:
. our historical and prospective future revenue and profitability;
. our cash balance and rate of cash consumption;
. the development and size of the market for our products;
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<PAGE>
. the status of our financing activities;
. the stability and tenure of our management team; and
. the breadth of our product offerings.
The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
reflect Digital Insight's projections or estimates of future stock price
growth.
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Number of % of Total Price
Securities Options/Rights Appreciation for
Underlying Granted to Exercise Option Term
Options/Rights Employees Price Per Expiration -----------------
Name Granted in Fiscal Year Share Date 5% 10%
- ---- -------------- -------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
John Dorman............. 115,000 11.5% $1.00 10/13/2008 $ 72,323 $183,280
575,000 57.7 1.00 10/13/2008 361,614 916,402
Paul Fiore.............. -- -- -- -- -- --
Ole Eichhorn............ -- -- -- -- -- --
Daniel Jacoby........... -- -- -- -- -- --
Ken Mattice............. -- -- -- -- -- --
</TABLE>
The 115,000 shares granted to Mr. Dorman were in the form of a stock
purchase right which was fully vested at the time of grant and has
subsequently been exercised. The 575,000 shares granted to Mr. Dorman were in
the form of a stock option which vests as to 25% percent of the shares on
October 13, 1999 and as to 1/48 of the shares each month thereafter.
Option Exercises and Holdings
The following table sets forth for each of the named executive officers
certain information concerning the number of shares subject to both
exercisable and unexercisable stock options at December 31, 1998. Also
reported are values for "in-the-money" options that represent the positive
spread between the respective exercise prices of outstanding stock options and
$1.00, or the fair market value of the common stock as of December 31, 1998,
as determined in good faith by the board of directors. No shares were acquired
by the named executive officers upon exercise of stock options or stock
purchase rights in the fiscal year ended December 31, 1998.
Aggregated Fiscal Year End Option/SPR Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options at
Year End Fiscal Year End
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John Dorman................. 115,000 575,000 $ -- $ --
Paul Fiore.................. -- -- -- --
Ole Eichhorn................ 27,167 54,333 19,016 38,033
Daniel Jacoby............... -- -- -- --
Ken Mattice................. 12,656 27,844 8,859 19,490
</TABLE>
Employment and Change of Control Agreements
As of December 31, 1998, John Dorman, our Chairman, Chief Executive Officer
and President, had an outstanding option to purchase 575,000 shares of common
stock. Under the terms of Mr. Dorman's option
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<PAGE>
agreement with Digital Insight, 25% of the shares subject to the option vest
on October 13, 1999 and 1/48 of the shares vest at the end of each calendar
month thereafter, provided that 50% of the then unvested portion of the option
shall accelerate and immediately vest if a change in control of Digital
Insight occurs. As of December 31, 1998, no shares were vested under this
option.
As of December 31, 1998, Ken Mattice, our Controller, had an outstanding
option to purchase 40,500 shares of common stock. Under the terms of Mr.
Mattice's option agreement with Digital Insight, all shares subject to the
option shall accelerate and vest in full if Mr. Mattice is involuntarily
terminated, with or without cause. As of December 31, 1998, 27,844 shares were
unvested under this option.
Three of our current officers, Kevin McDonnell, our Vice President, Finance,
Chief Financial Officer and Secretary, Mehariar Hasan, our Vice President,
Product Management, and Stephen Zarate, our Vice President and Chief
Information Officer, were hired in 1999 and have been granted options to
purchase shares of our common stock. Under the terms of each of their option
agreements with Digital Insight, 50% of the then unvested portion of the
options will accelerate and immediately vest if a change in control of Digital
Insight occurs. None of the shares subject to these options are currently
vested.
Employee Benefit Plans
1997 Stock Plan
A total of 3,000,000 shares of common stock have been reserved for issuance
under our 1997 Stock Plan, as amended. Under the 1997 Stock Plan, as of June
30, 1999, options to purchase 1,840,011 shares were outstanding, 867,392
shares of common stock had been purchased following exercises of stock options
and stock purchase rights, or SPRs, and 292,597 shares were available for
future grant. We do not plan to grant any additional options or SPRs under
this plan following this offering.
The 1997 Stock Plan provides for the grant of incentive stock options within
the meaning of Section 422 of the Internal Revenue Code, nonstatutory stock
options and SPRs to our employees, directors and consultants. Nonstatutory
stock options and SPRs may be granted to our employees, directors and
consultants. Incentive stock options may be granted only to employees. The
1997 Stock Plan is administered by the board of directors, or a committee
appointed by the board of directors, which determines the terms of options
granted, including the exercise price and the number of shares subject to each
option. The board of directors also determines the schedule upon which options
become exercisable. Generally, initial options granted to an employee under
the 1997 Stock Plan vest 25% after the first year of employment and monthly
thereafter for 48 months and subsequent grants to an employee vest monthly
over 48 months from the date of grant. The maximum term of options granted
under the 1997 Stock Plan is ten years.
Options and SPRs granted under the 1997 Stock Plan are not transferable by
the optionee except by will or by the laws of descent or distribution, and
each option and SPR is exercisable during the lifetime of the optionee only by
that optionee. Options granted under the 1997 Stock Plan must generally be
exercised within three months after the end of optionee's status as our
employee, director or consultant, or within 12 months after the optionee's
termination by disability or death, to the extent the optionee is vested on
the date of termination. However, an option may not be exercised later than
the expiration of the option's term.
The 1997 Stock Plan provides that if we merge with or into another
corporation, or sell all or substantially all of our assets, each outstanding
option and SPR must be assumed or an equivalent option substituted for by the
successor corporation or a parent or subsidiary of the successor corporation.
If the outstanding options and SPRs are not assumed or substituted for, the
optionee will fully vest in and have the right to exercise the option or SPR
as to all of the optioned stock, including shares as to which it would not
otherwise be exercisable. The administrator shall notify the optionee that the
option or SPR shall be fully exercisable for a period of 15 days from the date
of this notice, and the option or SPR will terminate upon the expiration of
this period. If a dissolution or liquidation is proposed, the board of
directors, or any of its committees, in its discretion may accelerate the
vesting of any outstanding option or SPR before the effective date of the
proposed transaction.
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<PAGE>
1999 Stock Plan
Our 1999 Stock Plan was adopted by the board of directors in June 1999 and
was approved by the stockholders in July 1999. A total of 1,500,000 shares of
common stock, plus annual increases beginning on March 1, 2001, equal to the
lesser of 750,000 shares, 5% of our shares on that date or a lesser amount
determined by the board of directors are currently reserved for issuance under
our 1999 Stock Plan. Unless terminated sooner, the 1999 Stock Plan will
terminate automatically in June 2009.
The 1999 Stock Plan provides for the discretionary grant of incentive stock
options to employees, the grant of nonstatutory stock options and SPRs to
employees, directors and consultants.
The 1999 Stock Plan may be administered by the board of directors or a
committee of the board. The administrator has the power to determine the terms
of the options or SPRs granted, including:
. the exercise price of the option or SPR;
. the number of shares subject to each option or SPR;
. the exercisability thereof; and
. the form of consideration payable upon exercise.
In addition, the administrator has the authority to amend, suspend or
terminate the 1999 Stock Plan, provided that this action shall not impair the
rights of any optionee, unless mutually agreed upon in writing.
The exercise price of all incentive stock options granted under the 1999
Stock Plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of nonstatutory stock options and
SPRs granted under the 1999 Stock Plan is determined by the administrator, but
with respect to nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Internal Revenue Code, the exercise price must be at least equal to the fair
market value of the common stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of our outstanding capital stock, the exercise price of any incentive
stock option granted must be at least equal 110% of the fair market value on
the grant date and the term of this incentive stock option must not exceed
five years. The term of all other incentive stock options granted under the
1999 Stock Plan may not exceed ten years.
In the case of SPRs, unless the administrator determines otherwise, the
restricted stock purchase agreement will grant us a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
service with us for any reason, including death or disability. The purchase
price for shares repurchased under the restricted stock purchase agreement
will be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to us. The repurchase option
will lapse at a rate determined by the administrator.
Options and SPRs granted under the 1999 Stock Plan are generally not
transferable by the optionee, except by will or the laws of descent or
distribution, and are exercisable during the lifetime of the optionee only by
that optionee. Options granted under the 1999 Stock Plan must generally be
exercised within three months after the end of optionee's status as an
employee, director or consultant of our company, or within 12 months after the
optionee's termination by disability or death, but in no event later than the
expiration of the option's term.
The 1999 Stock Plan provides that in the event of a merger of our company
with or into another corporation, or a sale of substantially all of our
assets, each outstanding option and SPR must be assumed or an equivalent
option substituted for by the successor corporation or a parent or subsidiary
of the successor corporation. If the outstanding options and SPRs are not
assumed or substituted for, the optionee will fully vest in and have the right
to exercise the option or SPR as to all of the optioned stock, including
shares as to which it would not otherwise be exercisable. The administrator
shall notify the optionee that the option or SPR shall be fully exercisable
for a period of 15 days from the date of this notice, and the option or SPR
will terminate upon the
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<PAGE>
expiration of this period. In the event of our proposed dissolution or
liquidation, the board of directors, or any of its committees, in its
discretion may accelerate the vesting of any outstanding option or SPR prior
to the effective date of the proposed transaction.
1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan, or the 1999 Purchase Plan, was
adopted by the board of directors in June 1999 and was approved by the
stockholders in July 1999. A total of 300,000 shares of common stock has been
reserved for issuance under the 1999 Purchase Plan, plus annual increases
beginning on March 1, 2001, equal to the lesser of 300,000 shares, 2% of the
outstanding shares or a lesser amount determined by the board of directors.
The 1999 Purchase Plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, contains successive, overlapping twenty-four month
offering periods. The offering periods generally start on the first trading
day on or after May 1 and November 1 of each year and end on the last trading
day of that twenty-four month period. Each offering period contains four six-
month purchase periods. The first offering period commences on the effective
date of this offering and ends on the last trading day on or before October
31, 2001.
Employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, the 1999 Purchase Plan excludes
from participation any employee who:
. immediately after the grant, owns stock and/or options to purchase stock
representing 5% or more of the total combined voting power or value of
all classes of our capital stock; or
. has rights to purchase stock under all of our employee stock purchase
plans that accrue at a rate which exceed $25,000 worth of stock for each
calendar year.
The 1999 Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 15% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions, but exclusive of payments for overtime shift premium,
incentive compensation, incentive payments, bonus and any other compensation.
The maximum number of shares a participant may purchase during a single
purchase period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the 1999 Purchase Plan is 85% of the lower of the fair market
value of the common stock at the beginning or end of the offering period. In
the event the fair market value at the end of a purchase period is less than
the fair market value at the beginning of the offering period, the
participants will be withdrawn from the current offering period following
exercise and automatically re-enrolled in a new offering period. The new
offering period will use the lower fair market value as of the first date of
the new offering period to determine the purchase price for future purchase
periods. Participants may end their participation at any time during an
offering period, and they will be paid their payroll deductions credited to
their account without interest. Upon termination of employment a participant
will be deemed to have elected to withdraw from the 1999 Purchase Plan.
Payroll deductions credited to a participant's account and any rights
granted under the 1999 Purchase Plan are not transferable by a participant
other than by will, the laws of descent and distribution, or as otherwise
provided under the 1999 Purchase Plan. The 1999 Purchase Plan provides that,
in the event of our merger with or into another corporation or a sale of
substantially all of our assets, each outstanding option may be assumed or
substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering
period then in progress will be shortened and a new exercise date will be set.
In addition, in the event of a proposed dissolution or liquidation of us the
offering period then in progress will be shortened and a new exercise date
will be set.
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<PAGE>
The board of directors has the authority to amend or terminate the 1999
Purchase Plan, except that this action may not make a change in any option
previously granted which may adversely affect the rights of any participant,
provided that the board of directors may terminate an offering period on any
exercise date if the Board determines that the termination of the 1999
Purchase Plan is in our best interests and our stockholders' best interests.
The 1999 Purchase Plan will become effective on the consummation of this
offering and will terminate in ten years, unless sooner terminated by the
board of directors.
401(k) Plan
We maintain a tax-qualified retirement and deferred savings plan for our
employees, commonly known as a 401(k) plan. The 401(k) plan provides that each
participant may contribute up to 20% of his or her pre-tax gross compensation
up to a statutory limit, which was $10,000 in calendar year 1998. Under the
401(k) plan, we may make discretionary matching contributions. We made no
contributions to the 401(k) plan in 1998.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. breach of their duty of loyalty to the corporation or its stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal or state securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
Our bylaws provide that we shall indemnify our directors and officers, to
the maximum extent permitted by Delaware law. We believe that indemnification
under our bylaws covers at least negligence and gross negligence on the part
of indemnified parties. Our bylaws also permit us to secure insurance on
behalf of any current or former officer, director, employee or other agent of
Digital Insight, or of another enterprise if serving at our request, for any
liability arising out of his or her actions in that capacity, regardless of
whether we would have the power to indemnify him or her against liability
under the provisions of Delaware law.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for any and all expenses such as federal, state, local or foreign taxes
imposed on them as a result of the actual or deemed receipt of any payments
under the indemnification agreement, judgments, fines, penalties and amounts
paid in settlement, as long as the settlement is approved in advance by us,
which approval shall not be unreasonably withheld, actually and reasonably
incurred by the officer or director in any action or proceeding, including any
action by or in the right of Digital Insight arising out of a person's
services as a director, officer, employee, agent or fiduciary of Digital
Insight, any subsidiary of Digital Insight or any other company or enterprise
to which the person provides services at our request. We believe that these
provisions and agreements are necessary to attract and retain qualified
persons as directors and executive officers.
At present, there is no pending litigation or proceeding involving a
director or officer in which indemnification is required or permitted, and we
are not aware of any threatened litigation or proceeding that may result in a
claim for indemnification.
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CERTAIN TRANSACTIONS
The following is a description of transactions since January 1, 1996 to
which we have been a party, in which the amount involved in the transaction
exceeds $60,000 and in which any director, executive officer or holder of more
than 5% of our capital stock had or will have a direct or indirect material
interest other than compensation arrangements which are otherwise described
under "Management."
Reorganization
We were incorporated in March 1997 as the successor to Digital Insight LLC.
As part of the reorganization of our company from a limited liability company
to a corporation, we issued an aggregate of 5,000,000 shares of common stock
and 481,500 shares of Series A preferred stock to the former members of
Digital Insight LLC in consideration for the transfer of all of the tangible
and intangible assets of Digital Insight LLC. During the time that they were
members of the limited liability company, certain of our executive officers
and directors and certain stockholders who own beneficially 5% or more of our
securities loaned funds to Digital Insight LLC. A portion of these loans were
subsequently contributed to the capital of Digital Insight LLC in
consideration for an increase in the lenders' respective membership interests
in the limited liability company. The remaining loans were repaid in March
1997. Listed below are those directors, executive officers and stockholders
who beneficially own 5% or more of our securities who were former members of
Digital Insight LLC and who received shares of our common stock and Series A
preferred stock and/or loaned money to Digital Insight LLC.
<TABLE>
<CAPTION>
Amount
Contributed to
Number of Shares Amount Loaned to Capital of Amount Repaid by
Number of Shares of Series A Digital Insight Digital Digital Insight
Stockholder of Common Stock Preferred Stock LLC Insight LLC LLC
- ----------- ---------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Nasser J. Kazeminy and
affiliated
entities(1)............ 2,226,750 214,435 $118,221 $118,221 $ --
Paul Fiore.............. 456,050 43,917 -- -- --
Edward Harris........... 791,750 76,245 109,589 67,555 42,034
Daniel Jacoby........... 456,050 43,917 -- -- --
</TABLE>
- --------
(1) Consists of shares purchased by and loans made by Nasser J. Kazeminy, The
Nasser J. Kazeminy Irrevocable Trust and Yvonne P. Kazeminy-Mofrad
Irrevocable Trust. Mr. Kazeminy is co-trustee of the Nasser J. Kazeminy
Irrevocable Trust and Yvonne P. Kazeminy-Mofrad, the wife of Nasser J.
Kazeminy, is the co-trustee of the Yvonne P. Kazeminy-Mofrad Irrevocable
Trust. Mr. Kazeminy disclaims beneficial ownership of the shares held by
these trusts.
Equity Transactions
In March 1997, we sold an aggregate of 1,111,100 shares of our Series A
preferred stock at a price per share of $2.70 and issued warrants to purchase
up to 763,450 shares of Series B preferred stock. These warrants were
exercisable for an exercise price per share of $3.93 and have since expired
unexercised. In February 1998, we sold an aggregate of 2,305,475 shares of our
Series B preferred stock at a price per share of $3.47. In May 1999, we sold
an aggregate of 844,036 shares of our Series C preferred stock at a price per
share of $10.00. Simultaneously with the consummation of this offering, all
shares of these series of preferred stock will be converted into shares of
common stock. Listed below are those directors, executive officers and
stockholders who beneficially own 5% or more of our securities who
participated in these financings. We believe that the shares issued in these
transactions were sold at the then fair market value and that the terms of
these transactions were no less favorable than we could have obtained from
unaffiliated third parties.
50
<PAGE>
<TABLE>
<CAPTION>
Series A Series B Series C Aggregate
Preferred Preferred Preferred Cash
Stockholder Stock Stock Stock Consideration
- ----------- --------- --------- --------- -------------
<S> <C> <C> <C> <C>
Entities affiliated with Menlo
Ventures(1)...................... 1,111,100 864,553 400,000 $9,999,969
HarbourVest Partners V-Direct
Fund, L.P........................ -- 1,440,922 101,328 6,013,280
Nasser J. Kazeminy and affiliated
entities(2)...................... -- -- 171,669 1,716,690
Edward Harris..................... -- -- 61,039 610,390
John Dorman....................... -- -- 40,000 400,000
Stephen Zarate.................... -- -- 30,000 300,000
Paul Fiore........................ -- -- 10,000 100,000
Daniel Jacoby..................... -- -- 10,000 100,000
Kevin McDonnell................... -- -- 10,000 100,000
Steven Reich...................... -- -- 10,000 100,000
</TABLE>
- --------
(1) Consists of shares purchased by Menlo Ventures VII, L.P. and Menlo
Entrepreneurs Fund VII, L.P. John Jarve, a director of Digital Insight, is
a managing member of MV Management VII, LLC, the general partner of Menlo
Ventures VII, L.P. and Menlo Entrepreneurs Fund VII, L.P. Mr. Jarve
disclaims beneficial ownership of the shares held by these funds, except
to the extent of his proportionate pecuniary interest therein.
(2) Consists of shares purchased by Nasser J. Kazeminy, The Nasser J. Kazeminy
Irrevocable Trust and Yvonne P. Kazeminy-Mofrad Irrevocable Trust. Mr.
Kazeminy is co-trustee of the Nasser J. Kazeminy Irrevocable Trust and
Yvonne P. Kazeminy-Mofrad, the wife of Nasser J. Kazeminy, is the co-
trustee of the Yvonne P. Kazeminy Irrevocable Trust. Mr. Kazeminy has
shared voting authority with a co-trustee for the trust in his name. Mr.
Kazeminy does not hold voting or dispositive authority over the shares
held by the Yvonne P. Kazeminy Irrevocable Trust. Mr. Kazeminy disclaims
beneficial ownership of the shares held by these trusts.
Stock Purchase Rights
In October 1997, Paul Fiore, our Executive Vice President, a director and
co-founder of Digital Insight, exercised a stock purchase right to purchase an
aggregate of 309,250 shares of common stock and entered into a restricted
stock purchase agreement with respect to this exercise. Mr. Fiore paid the
$.30 exercise price per share for these shares by delivery of a full-recourse
promissory note bearing interest at the rate of 7.0% per annum. The note is
secured by the shares of common stock purchased by Mr. Fiore. As of June 30,
1999, $103,900 in unpaid principal and interest was outstanding in the
aggregate under the note.
In October 1997, Daniel Jacoby, our Vice President, Chief Technology Officer
and a co-founder of Digital Insight, exercised a stock purchase right to
purchase an aggregate of 309,250 shares of common stock and entered into a
restricted stock purchase agreement with respect to this exercise. Mr. Jacoby
paid the $.30 exercise price per share for these shares by delivery of a full-
recourse promissory note bearing interest at the rate of 7.0% per annum. The
note is secured by the shares of common stock purchased by Mr. Jacoby. As of
June 30, 1999, $103,900 in unpaid principal and interest was outstanding in
the aggregate under the note.
In February 1999, John Dorman, our Chairman, Chief Executive Officer and
President, exercised a stock purchase right to purchase an aggregate of
115,000 shares of common stock. These shares are fully vested. Mr. Dorman paid
the $1.00 exercise price per share in cash.
Other Transactions
Digital Insight plans to enter into an indemnification agreement with each
of its executive officers and directors.
Holders of preferred stock are entitled to registration rights with respect
to the common stock issued or issuable upon conversion of preferred stock. See
"Description of Capital Stock--Registration Rights."
We believe that all related-party transactions described above were on terms
no less favorable than could have been otherwise obtained from unrelated third
parties. All future transactions between us and our principal officers,
directors and affiliates will be approved by a majority of the independent and
disinterested members of the board and will be on terms deemed to be no less
favorable than could be obtained from unrelated third parties.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of June 30, 1999, and as adjusted to
reflect the sale of the shares of common stock offered hereby, certain
information with respect to the beneficial ownership of the common stock as
to:
. each person known by us to own beneficially more than 5% of the
outstanding shares of our common stock,
. each of the executive officers named in the Summary Compensation Table
above,
. each of our directors, and
. all of our directors and executive officers as a group.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named below have sole voting and investment power with
respect to all shares of common stock held by them.
Applicable percentage ownership in the table is based on 10,642,847 shares
of common stock outstanding as of June 30, 1999 and 14,142,847 shares
outstanding immediately following the completion of this offering. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Shares of common stock subject to options that are
presently exercisable or exercisable within 60 days of June 30, 1999 are
deemed outstanding for the purpose of computing the percentage ownership of
the person or entity holding the options, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other person or
entity.
Unless otherwise indicated below, each person or entity named below has an
address in care of Digital Insight's principal executive offices.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Number of Shares ------------------------------
Name of Beneficial Owner Beneficially Owned Before Offering After Offering
- ------------------------ ------------------ --------------- --------------
<S> <C> <C> <C>
5% Stockholders:
Nasser J. Kazeminy and
affiliated entities(1).... 3,046,105 28.6% 21.5%
Entities affiliated with
Menlo Ventures(2)......... 2,375,653 22.3 16.8
HarbourVest Partners V-
Direct Fund, L.P.(3)...... 1,542,250 14.5 10.9
Edward Harris.............. 929,034 8.7 6.6
Paul Fiore(4).............. 759,217 7.1 5.4
Daniel Jacoby(5)........... 759,217 7.1 5.4
Directors and Named Executive
Officers:
John Dorman................ 155,000 1.5 1.1
Ole Eichhorn(6)............ 74,100 * *
Ken Mattice(7)............. 19,406 * *
John Jarve(2).............. 2,375,653 22.3 16.8
Nader Kazeminy(8).......... -- -- --
James McGuire.............. 88,149 * *
Ofer Nemirovsky(3)......... 1,542,250 14.5 10.9
Robert North(9)............ 21,937 * *
All directors and officers
as a group
(14 persons)(10).......... 5,880,866 54.9% 41.4%
</TABLE>
- --------
* Less than 1%
52
<PAGE>
(1) The address of record for Nasser J. Kazeminy and affiliated entities is
c/o NJK Holdings Corp., 7803 Glenroy Rd., Suite 300, Bloomington, MN
55439. Number of shares consists of (i) 1,553,162 shares held by Nasser
J. Kazeminy, (ii) 529,846 shares held by The Nasser J. Kazeminy
Irrevocable Trust and (iii) 529,846 shares held by the Yvonne P.
Kazeminy-Mofrad Irrevocable Trust. Mr. Kazeminy and Kamran Talebi are co-
trustees of the Nasser J. Kazeminy Irrevocable Trust and share voting
authority over these shares. Yvonne P. Kazeminy-Mofrad, the wife of
Nasser Kazeminy, and Kamran Talebi are co-trustees of the Yvonne P.
Kazeminy Irrevocable Trust and share voting authority over these shares.
Kamran Talebi has sole dispositive authority over the shares held by the
trusts. Mr. Kazeminy does not hold authority over the Yvonne P. Kazeminy
Irrevocable Trust. Mr. Kazeminy disclaims beneficial ownership of the
shares held by these trusts.
(2) The address of record for each entity affiliated with Menlo Ventures is
3000 Sand Hill Road, Building 4, Suite 100, Menlo Park, CA 94025. Number
of shares consists of 2,276,836 shares held by Menlo Ventures VII, L.P.,
and 98,817 shares held by Menlo Entrepreneurs Fund VII, L.P. John Jarve,
a director of Digital Insight, is a managing member of MV Management VII,
LLC, the general partner of Menlo Ventures VII, L.P. and Menlo
Entrepreneurs Fund VII, L.P. Along with Thomas Bredt, Sonja Hoel, Douglas
Carlisle, Mark Siegel, Michael Laufer and Dubose Montgomery, the other
six managing members of MV Management VII, LLC, Mr. Jarve has shared
voting and dispositive authority over the shares held by Menlo Ventures
and its affiliates. Mr. Jarve and the other managing members disclaim
beneficial ownership of the shares held by these entities except to the
extent of their proportionate pecuniary interests therein.
(3) The address of record for HarbourVest Partners V-Direct Fund, L.P. is One
Financial Center, 44th Floor, Boston, MA 02111. Ofer Nemirovsky, a
director of Digital Insight, is a member of HVP V-Direct Associates
L.L.C., a general partner of HarbourVest Partners V-Direct Fund L.P. and
a managing director of HarbourVest Partners, LLC the manager of
HarbourVest Partners V-Direct Fund L.P. Mr. Nemirovsky does not hold
voting or dispositive authority over the shares held by HarbourVest and
its affiliates. Voting and dispositive authority is held by an investment
committee consisting of two managing directors of HarbourVest Partners,
LLC, Ed Kane and Brooks Zug. Mr. Nemirovsky disclaims beneficial
ownership of these shares except to the extent of his proportionate
pecuniary interest therein.
(4) Number of shares includes 309,250 shares of common stock issued upon
exercise of a stock purchase right, 154,625 shares of which are subject
to a repurchase option held by Digital Insight as of June 30, 1999.
(5) Number of shares includes 309,250 shares of common stock issued upon
exercise of a stock purchase right, 154,625 shares of which are subject
to a repurchase option held by Digital Insight as of June 30, 1999.
(6) Number of shares includes 40,750 shares of common stock issuable upon
exercise of options exercisable within 60 days of June 30, 1999. Mr.
Eichhorn resigned as an officer effective June 1999.
(7) Number of shares includes 3,375 shares of common stock issuable upon
exercise of options exercisable within 60 days of June 30, 1999.
(8) Excludes 3,046,105 shares held by Nasser J. Kazeminy and affiliated
entities. Nader Kazeminy is the adult son of Nasser Kazeminy. Nader
Kazeminy is the co-beneficiary of The Nasser J. Kazeminy Irrevocable
Trust and the Yvonne P. Kazeminy-Mofrad Irrevocable Trust but does not
have voting or dispositive authority over these trusts. See footnote (1)
above.
(9) Number of shares consists of 21,937 shares of common stock issuable upon
exercise of options exercisable within 60 days of June 30, 1999.
(10) Number of shares consists of shares beneficially owned by our current
officers and directors as well as 19,406 shares beneficially owned by Ken
Mattice, our Controller and former Chief Financial Officer, and 74,100
shares beneficially owned by Ole Eichhorn, our former Vice President of
Research and Development. In addition, of the 5,880,866 shares listed,
73,249 shares are issuable upon exercise of options held by our officers
and directors exercisable within 60 days of June 30, 1999, 1,542,250
shares are held by HarbourVest Partners V-Direct Fund, L.P. (see footnote
3 above) and 2,375,653 shares are held by entities affiliated with Menlo
Ventures (see footnote 2 above).
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, $.001 par value per share, and
5,000,000 shares of preferred stock, $.001 par value per share.
The following summary does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of our restated certificate of
incorporation, which is included as an exhibit to the registration statement
of which this prospectus is a part, and by the provisions of applicable law.
Common Stock
As of June 30, 1999, there were 10,642,847 shares of common stock
outstanding held of record by 52 stockholders, assuming the conversion of all
outstanding shares of preferred stock into common stock. After giving effect
to the sale of common stock offered hereby, there will be 14,142,847 shares of
common stock outstanding.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of common
stock have no preemptive rights or rights to convert their common stock into
any other securities. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and non-assessable, and the shares of common stock to be issued
upon completion of this offering will be fully paid and non-assessable.
Preferred Stock
Under our restated certificate of incorporation, the board of directors has
the authority, without further action by the stockholders, to issue up to
5,000,000 shares of preferred stock in one or more series and to fix the
designations, powers, preferences, privileges and relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater
than the rights of the common stock. The board, without stockholder approval,
can issue preferred stock with voting, conversion or other rights that could
adversely affect the voting power and other rights of the holders of common
stock. Preferred stock could thus be issued quickly with terms calculated to
delay or prevent a change in control of Digital Insight or make removal of
management more difficult. Additionally, the issuance of preferred stock may
have the effect of decreasing the market price of the common stock, and may
adversely affect the voting and other rights of the holders of common stock.
Upon the closing of this offering, there will be no shares of preferred stock
outstanding and we have no plans to issue any of the preferred stock.
Warrants
Upon completion of the offering, we will have (i) a warrant outstanding to
purchase 28,819 shares of common stock at an exercise price of $3.47 per share
which expires in February 2006, and (ii) a warrant outstanding to purchase
22,222 shares of common stock at an exercise price of $2.70 per share which
expires on the earlier of January 2002 or two years from the closing of this
offering. In lieu of exercising the warrants for cash, the holders of the
warrants can elect a cashless exercise. The holders of the warrants are
entitled to registration rights with respect to the shares issued under the
warrants.
Registration Rights
Upon completion of this offering, the holders of an aggregate of 10,397,705
shares of common stock will be entitled to rights with respect to the
registration of shares under the Securities Act. In addition, the holders of
51,041 shares subject to outstanding warrants are entitled to registration
rights. Under the terms of an investor rights agreement, if we propose to
register any of our securities under the Securities Act, either for our own
account or for the account of other security holders exercising registration
rights, these holders are entitled to notice of this registration and are
entitled to include their shares of common stock in the registration. The
rights are subject to conditions and limitations, among them the right of the
underwriters to limit the number of shares
54
<PAGE>
included in the registration. Holders of common stock benefiting from these
rights may also require us to file a registration statement under the
Securities Act at our expense with respect to their shares of common stock,
and we are required to use our best efforts to effect this registration,
subject to conditions and limitations. Furthermore, the holders of
registration rights may require us to file additional registration statements
on Form S-3, subject to certain conditions and limitations.
Delaware Anti-Takeover Law and Certain Charter and Bylaws Provisions
Provisions of our charter and bylaws may make it more difficult for a third
party to acquire, or may discourage a third party from attempting to acquire,
control of us. These provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock. These provisions
include:
. division of the board of directors into three separate classes;
. elimination of cumulative voting in the election of directors;
. prohibitions on our stockholders from acting by written consent and
calling special meetings;
. procedures for advance notification of stockholder nominations and
proposals; and
. the ability of the board of directors to alter our bylaws without
stockholder approval.
In addition, subject to limitations prescribed by law, our board of
directors has the authority to issue up to 5,000,000 shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The issuance of preferred stock, while providing flexibility
in connection with possible financings or acquisitions or other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of our outstanding voting stock.
These and other provisions contained in our charter and bylaws could have
the effect of delaying or preventing a change in control.
We are also subject to Section 203 of the Delaware General Corporation Law
which, subject to exceptions, prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder for a period of
three years following the date that a stockholder became an interested
stockholder, unless:
. prior to that date, the board of directors approved either the business
combination or the transaction which resulted in the stockholder
becoming an interested stockholder; or
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock outstanding at the time the transaction
commenced; or
. on or following that date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is BankBoston, N.A.
BankBoston, N.A.'s address is 150 Royall Street, Canton, Massachusetts 02021,
and its telephone number is (781) 575-2000.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock
and any sale of substantial amounts of common stock in the open market may
adversely affect the market price of our common stock. Furthermore, since only
a limited number of shares will be available for sale shortly after this
offering because of contractual and legal restrictions on resale (as described
below), sales of substantial amounts of our common stock in the public market
after the restrictions lapse could adversely affect the prevailing market
price and our ability to raise equity capital in the future.
Upon completion of the offering, we will have outstanding 14,142,847 shares
of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of options after June 30, 1999. Of these shares, the
3,500,000 shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act; provided
however, that if shares are purchased by "affiliates" as that term is defined
in Rule 144 of the Securities Act, their sales of shares would be subject to
certain limitations and restrictions that are described below.
The remaining 10,642,847 shares of common stock held by existing
stockholders as of June 30, 1999 were issued and sold by us in reliance on
exemptions from the registration requirements of the Securities Act. These
shares of common stock are limited by restrictions under securities laws and
lock-up agreements applicable to these shares and will be eligible for sale in
the public market as follows:
<TABLE>
<CAPTION>
First Eligible Date Number
------------------- ---------
<S> <C>
180 days after the date of this prospectus......................... 9,277,411
May 25, 2000....................................................... 521,400
May 26, 2000....................................................... 844,036
</TABLE>
In addition, as of June 30, 1999 we had 1,840,011 shares subject to
outstanding options and 1,792,597 shares of our common stock available for
future grant pursuant to our stock plans. All of these outstanding options are
also subject to the 180-day lock-up. We intend to register, prior to the
expiration of the lock-up, all of the shares of common stock subject to
outstanding options and reserved for issuance under our stock option plans and
an additional 300,000 shares of common stock reserved for issuance under our
employee stock purchase plan. This registration will permit the resale of
vested shares by non-affiliates in the public market without restriction
beginning on expiration of the lock-up. We also have 51,041 shares underlying
outstanding warrants, also subject to lock-ups, that will be eligible for
resale in the public market upon expiration of the warrant holder's respective
one-year holding periods under Rule 144, which will begin upon the date of
exercise or, in the case of a net exercise, on the date of grant of the
warrant.
Each of our officers, directors and substantially all other stockholders
have agreed with Morgan Stanley & Co. Incorporated not to sell or otherwise
dispose of any their shares for a period of 180 days after the date of this
prospectus without the prior written consent of Morgan Stanley & Co.
Incorporated. Morgan Stanley & Co. Incorporated, however, may in its sole
discretion, at any time and without notice, release all or any portion of the
shares subject to its lock-up agreements.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 141,428 shares immediately after this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market System during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to other requirements regarding the
manner of sale, notice filing and the availability of current public
information about us.
56
<PAGE>
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, would be entitled to
sell these shares under Rule 144(k) without regard to the requirements
described above. Therefore, unless otherwise restricted, "144(k) shares" may
be sold immediately upon the completion of this offering.
Rule 701
In general, any employee, director, officer, consultant or advisor who
purchases shares from us in connection with a compensatory stock or option
plan or other written agreement before the effective date of the offering is
entitled to resell these shares 90 days after the effective date of the
offering in reliance on Rule 144, without having to comply with certain
restrictions, including the holding period, contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements
of the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of these options, including exercises after the date of this
prospectus. Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this prospectus, may be sold by persons
other than "affiliates" subject only to the manner of sale restrictions of
Rule 144 and by "affiliates" under Rule 144 without compliance with its one-
year minimum holding requirement.
57
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Deutsche Bank Securities Inc., Banc of
America Securities LLC and Friedman, Billings, Ramsey & Co., Inc. are acting
as representatives, have severally agreed to purchase, and we have agreed to
sell to them the respective number of shares of common stock set forth
opposite the names of the underwriters below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated.................................. 1,400,000
Deutsche Bank Securities Inc....................................... 700,000
Banc of America Securities LLC..................................... 490,000
Friedman, Billings, Ramsey & Co., Inc. ............................ 210,000
First Union Capital Markets Corp. ................................. 100,000
Hambrecht & Quist LLC.............................................. 100,000
Edward D. Jones & Co., L.P. ....................................... 100,000
Raymond James & Associates, Inc. .................................. 100,000
The Seidler Companies Incorporated................................. 100,000
Soundview Technology Group, Inc. .................................. 100,000
U.S. Bancorp Piper Jaffray Inc. ................................... 100,000
---------
Total............................................................ 3,500,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept
delivery of the shares of common stock offered hereby are subject to the
approval of certain legal matters by their counsel and to other conditions.
The underwriters are obligated to take and pay for all of the shares of common
stock offered by this prospectus, other than those covered by the over-
allotment option described below, if any of these shares are taken. Discover
Brokerage Direct, Inc., an affiliate of Morgan Stanley & Co. Incorporated, is
acting as a selected dealer in connection with the offering and will be a
distributor of shares of common stock over the Internet to its eligible
account holders.
The underwriting agreement provides that the underwriters will severally
agree to purchase shares of common stock from Digital Insight at $13.95 per
share and propose to make a public offering of those shares at the initial
public offering price set forth on the cover of this prospectus. If the shares
are sold at the initial public offering price, the underwriters will receive a
fee, referred to as the underwriting fee, of $1.05 per share. The underwriting
fee is 7% of the initial public offering price.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $.63 per share under the public
offering price. Any underwriters may allow, and any of these dealers may
reallow, a concession not in excess of $.10 per share to other underwriters or
to certain other dealers. After the initial offering of the shares of common
stock, the offering price and other selling terms may from time to time be
varied by the representatives of the underwriters.
Pursuant to the underwriting agreement, we have granted to the underwriters
an option, exercisable for 30 days from the date of this prospectus, to
purchase up to an aggregate of 525,000 additional shares of common stock at
the public offering price set forth on the cover page hereof, less
underwriting discounts and commissions. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if any, made in
connection with this offering of common stock. To the extent this over-
allotment option is exercised, each underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of
additional shares of common stock as the number set forth next to that
underwriter's name in the preceding table bears to the total number of shares
of common stock set forth next to the names of all underwriters in the
preceding table.
58
<PAGE>
At our request, the underwriters have reserved up to 350,000 shares of
common stock to be issued by us and offered hereby for sale, at the initial
public offering price, to directors, officers, employees, business associates
and related persons of us. The number of shares of common stock available for
sale to the general public will be reduced to the extent these individuals
purchase such reserved shares. Any reserved shares which are not so purchased
will be offered by the underwriters to the general public on the same basis as
the other shares offered by this prospectus.
Each of the directors and officers, and certain other stockholders and
optionholders of Digital Insight have each agreed that, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, during the period ending 180 days after the date of this
prospectus, they will not, directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of
common stock,
whether any transaction described above is to be settled by delivery of common
stock or these other securities, in cash or otherwise.
The restrictions described above do not apply to:
. the sale to the underwriters of the shares of common stock under the
underwriting agreement,
. the issuance by Digital Insight of shares of common stock upon exercise
of an option or a warrant or the conversion of a security outstanding on
the date of this prospectus which is described in this prospectus,
. transactions by any person other than Digital Insight relating to shares
of common stock or other securities acquired in open market transactions
after the completion of the offering of the shares, or
. issuances of shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans as in existence on
the date of this prospectus.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "DGIN."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
59
<PAGE>
Pricing of the Offering
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the shares of
common stock was determined by negotiations between us and the representatives
of the underwriters. Among the factors considered in determining the initial
public offering price were our record of operations, our current financial
position and future prospects, the future prospects of Digital Insight's
industry in general, the experience of our management, sales, earnings and
certain of our other financial and operating information in recent periods,
the price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to ours.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Digital Insight by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California. Certain legal matters in connection with this offering
will be passed upon for the underwriters by Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, Menlo Park, California.
EXPERTS
The financial statements as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus and the financial statement schedules included in the Registration
Statement have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
exhibits, schedules and amendments filed with this registration statement,
under the Securities Act with respect to the common stock to be sold under
this prospectus. Prior to the offering we were not required to file reports
with the SEC. This prospectus does not contain all the information set forth
in the registration statement. For further information about our company and
the shares of common stock to be sold in the offering, please refer to the
registration statement. Statements made in this prospectus concerning the
contents of any contract, agreement or other document filed as an exhibit to
the registration statement are summaries of the terms of contract, agreements
or documents and are not necessarily complete. Complete exhibits have been
filed with the registration statement.
The registration statement and exhibits may be inspected, without charge,
and copies may be obtained at prescribed rates, at the SEC's Public Reference
facility maintained by the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The registration
statement and other information filed with the SEC is available at the web
site maintained by the SEC on the worldwide web at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent accountants and quarterly
reports for the first three quarters of each fiscal year containing unaudited
financial statements.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations .................................................. F-4
Statement of Stockholders' Deficit ........................................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Digital Insight Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' deficit and cash flows present fairly, in all
material respects, the financial position of Digital Insight Corporation at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for the years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Costa Mesa, California
February 12, 1999, except as to note 12,
which is as of May 28, 1999
F-2
<PAGE>
DIGITAL INSIGHT CORPORATION
BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
Pro Forma
December 31, Stockholders'
-------------- June 30, Equity at
1997 1998 1999 June 30, 1999
------ ------ -------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............. $ 886 $4,758 $10,753
Accounts receivable, net............... 766 356 969
Tax refund receivable.................. 73 73 73
Accumulated implementation costs....... 71 135 164
Other current assets................... 45 80 360
------ ------ -------
Total current assets.................. 1,841 5,402 12,319
Property and equipment, net............. 789 2,353 3,776
Deposits................................ 240 240 169
Intangible assets, net.................. 201 53 8
Other assets............................ -- 29 126
------ ------ -------
$3,071 $8,077 $16,398
====== ====== =======
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Accounts payable....................... $ 587 $ 214 $ 845
Accrued compensation and related
benefits.............................. 91 542 984
Current portion of lease obligation.... 41 71 369
Deferred revenue....................... 785 1,036 1,549
Other accruals......................... 353 472 858
------ ------ -------
Total current liabilities............. 1,857 2,335 4,605
Long-term portion of lease obligation... 92 82 564
------ ------ -------
1,949 2,417 5,169
Commitments and contingencies (Note 11)
Mandatorily redeemable convertible
preferred stock:
$.001 par value; 2,431,616, 3,973,641,
and 4,846,496 shares authorized;
1,645,944, 3,951,419, and 4,775,455
(unaudited) shares issued and
outstanding; no shares pro forma
(unaudited)........................... 4,444 12,444 20,847 --
Stockholders' equity (deficit):
Common stock; $.001 par value,
16,250,000 shares authorized;
5,618,500, 5,621,156, and 5,867,392
(unaudited) shares issued and
outstanding; 10,642,847 shares issued
and outstanding pro forma
(unaudited)........................... 6 6 6 11
Additional paid-in-capital............. 1,994 3,977 6,056 26,898
Notes receivable from stockholders..... (186) (201) (208) (208)
Deferred stock-based compensation...... (1,658) (2,732) (3,937) (3,937)
Accumulated deficit.................... (3,478) (7,834) (11,535) (11,535)
------ ------ ------- -------
Total stockholders' equity (deficit).. (3,322) (6,784) (9,618) $11,229
------ ------ ------- =======
$3,071 $8,077 $16,398
====== ====== =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
DIGITAL INSIGHT CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Implementation fees... $ 1,053 $ 1,926 $ 2,420 $ 1,260 $ 1,666
Service fees.......... 508 2,046 5,810 2,237 5,426
--------- --------- --------- --------- ---------
Total revenues...... 1,561 3,972 8,230 3,497 7,092
--------- --------- --------- --------- ---------
Cost of revenues:
Implementation........ 643 1,217 1,631 695 1,241
Service............... 261 1,014 3,616 1,355 3,502
--------- --------- --------- --------- ---------
Total cost of
revenues........... 904 2,231 5,247 2,050 4,743
--------- --------- --------- --------- ---------
Gross profit............ 657 1,741 2,983 1,447 2,349
--------- --------- --------- --------- ---------
Operating expenses:
Sales, general and
administrative....... 809 2,516 4,183 1,774 3,609
Research and
development.......... 565 1,612 2,555 1,178 1,794
Amortization of stock-
based compensation... -- 151 844 248 563
--------- --------- --------- --------- ---------
Total operating
expenses........... 1,374 4,279 7,582 3,200 5,966
--------- --------- --------- --------- ---------
Loss from operations.... (717) (2,538) (4,599) (1,753) (3,617)
Interest income......... -- 89 262 122 102
Other income (expense),
net.................... 5 (3) (19) (12) (40)
--------- --------- --------- --------- ---------
Net loss................ $ (712) $ (2,452) $ (4,356) $ (1,643) $ (3,555)
========= ========= ========= ========= =========
Basic and diluted net
loss per share......... $ (.14) $ (.49) $ (.85) $ (.33) $ (.66)
========= ========= ========= ========= =========
Shares used to compute
basic and diluted net
loss per share......... 5,000,000 5,000,000 5,108,444 5,017,940 5,414,865
========= ========= ========= ========= =========
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (.50) $ (.37)
========= =========
Shares used to compute
pro forma basic and
diluted net loss per
share (unaudited)...... 8,712,463 9,534,048
========= =========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
DIGITAL INSIGHT CORPORATION
STATEMENT OF STOCKHOLDERS' DEFICIT
(in thousands except share data)
<TABLE>
<CAPTION>
Common Stock
----------------
Additional Stockholders' Deferred Total
Members' Paid-In Notes Stock-Based Accumulated Stockholders'
Capital Shares Amount Capital Receivable Compensation Deficit Deficit
-------- --------- ------ ---------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... $ (11) -- $-- $ -- $ -- $ -- $ -- $ --
Contribution of
capital................ 750 -- -- -- -- -- -- --
Net loss................ (712) -- -- -- -- -- -- --
-----
Balance at December 31,
1996................... 27 -- -- -- -- -- -- --
Contribution of
capital................ 192 -- -- -- -- -- -- --
Distribution............ (50) -- -- -- -- -- -- --
LLC loss from January 1,
1997 through March 17,
1997................... (23) -- -- -- -- -- -- --
Conversion of members'
capital to Series A
preferred and common
stock.................. (146) 5,000,000 5 -- -- -- (1,049) (1,044)
Stock options exercised
with note receivable... -- 618,500 1 185 (186) -- -- --
Deferred stock-based
compensation........... -- -- -- 1,809 -- (1,809) -- --
Amortization of deferred
stock-based
compensation........... -- -- -- -- -- 151 -- 151
Net loss................ -- -- -- -- -- -- (2,429) (2,429)
----- --------- ---- ------ ----- ------- -------- -------
Balance at December 31,
1997................... -- 5,618,500 6 1,994 (186) (1,658) (3,478) (3,322)
Interest on stockholder
notes.................. -- -- -- -- (15) -- -- (15)
Stock options
exercised.............. -- 2,656 -- 1 -- -- -- 1
Warrants to purchase
Series A preferred
stock.................. -- -- -- 64 -- -- -- 64
Deferred stock-based
compensation........... -- -- -- 1,918 -- (1,918) -- --
Amortization of deferred
stock-based
compensation........... -- -- -- -- -- 844 -- 844
Net loss................ -- -- -- -- -- -- (4,356) (4,356)
----- --------- ---- ------ ----- ------- -------- -------
Balance at December 31,
1998................... -- 5,621,156 6 3,977 (201) (2,732) (7,834) (6,784)
Interest on stockholder
notes (unaudited)...... -- -- -- (7) -- -- (7)
Stock options exercised
(unaudited)............ -- 246,236 -- 164 -- -- -- 164
Warrants to purchase
Series B preferred
stock (unaudited)...... -- -- -- 147 -- -- -- 147
Repurchase of Series A
preferred stock
(unaudited)............ -- -- -- -- -- -- (146) (146)
Deferred stock-based
compensation
(unaudited)............ -- -- -- 1,768 -- (1,768) -- --
Amortization of deferred
stock-based
compensation
(unaudited)............ -- -- -- -- -- 563 -- 563
Net loss (unaudited).... -- -- -- -- -- -- (3,555) (3,555)
----- --------- ---- ------ ----- ------- -------- -------
Balance at June 30, 1999
(unaudited)............ $ -- 5,867,392 $ 6 $6,056 $(208) $(3,937) $(11,535) $(9,618)
===== ========= ==== ====== ===== ======= ======== =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
DIGITAL INSIGHT CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
----------------------- ----------------
1996 1997 1998 1998 1999
----- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.......................... $(712) $(2,452) $(4,356) $(1,643) $(3,555)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization..... 59 166 587 307 488
Amortization of debt issuance
cost............................. -- -- 20 8 26
Amortization of deferred stock-
based compensation............... -- 151 844 249 563
Interest income on stockholder
notes............................ -- -- (15) (7) (7)
Net loss from sale of property and
equipment........................ -- -- 33 -- --
Changes in operating assets and
liabilities:
Accounts receivable.............. (50) (654) 410 360 (613)
Tax refund receivable............ -- (73) -- -- --
Accumulated implementation
costs........................... (28) (43) (64) (27) (29)
Other assets..................... (6) (36) (18) (27) (256)
Deposits......................... -- (240) -- (36) 71
Accounts payable................. (38) 582 (373) 46 631
Accrued compensation and related
benefits........................ 72 12 451 28 386
Deferred revenue................. 232 779 251 (74) 442
Other accruals................... 3 341 119 8 513
----- ------- ------- ------- -------
Net cash used in operating
activities....................... (468) (1,467) (2,111) (808) (1,340)
----- ------- ------- ------- -------
Cash flows used in investing
activities:
Proceeds from sale of assets...... -- -- 29 -- --
Acquisition of property and
equipment........................ (254) (488) (1,774) (1,254) (970)
Acquisition of customer base...... -- (280) -- -- --
----- ------- ------- ------- -------
Net cash used in investing
activities....................... (254) (768) (1,745) (1,254) (970)
----- ------- ------- ------- -------
Cash flows provided by financing
activities:
Principal payments on lease
obligations...................... -- -- (273) (157) (116)
Distribution...................... -- (50) -- -- --
Contribution of capital........... 750 -- -- -- --
Issuance of common stock.......... -- -- 1 -- --
Proceeds from exercise of stock
options.......................... -- -- -- -- 164
Proceeds from issuance of Series A
preferred stock.................. -- 3,143 -- -- --
Proceeds from issuance of Series B
preferred stock.................. -- -- 8,000 8,000 --
Proceeds from issuance of Series C
preferred stock.................. -- -- -- -- 8,403
Repurchase of Series A preferred
stock............................ -- -- -- -- (146)
----- ------- ------- ------- -------
Net cash provided by financing
activities....................... 750 3,093 7,728 7,843 8,305
----- ------- ------- ------- -------
Net increase in cash................ 28 858 3,872 5,781 5,995
----- ------- ------- ------- -------
Cash and cash equivalents, beginning
of period.......................... -- 28 886 886 4,758
----- ------- ------- ------- -------
Cash and cash equivalents, end of
period............................. $ 28 $ 886 $ 4,758 $ 6,667 $10,753
===== ======= ======= ======= =======
Supplementary disclosures of cash
flow information:
Cash paid during the year for
interest......................... $ -- $ -- $ 12 $ 3 $ 20
Non-cash financing activities:
Capital lease obligations
incurred......................... -- 133 293 -- 896
Series A warrants issued in
conjunction with capital lease... -- -- 64 64 --
Series B warrants issued in
conjunction with capital lease... -- -- -- -- 147
Conversion of members' capital to
Series A
preferred and common stock....... -- 1,305 -- -- --
Notes receivable from
stockholders..................... -- 186 -- -- --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. The Company and Summary Significant Accounting Policies
The Company
Digital Insight Corporation (the "Company"), incorporated in March 1997,
provides real time Internet banking services to credit unions, small to mid-
sized banks and savings and loans. Its Internet banking services include home
banking for individual customers, business banking for commercial customers, a
target marketing program to increase financial services to end users, and
customized web site design and implementation services. Substantially all of
the Company's revenues are derived from these services.
The Company originally operated as Digital Insight LLC, a Minnesota limited
liability company, which was formed in July 1995. On March 18, 1997, all
members of Digital Insight LLC, converted their members' capital balances to
shares of Series A mandatorily redeemable convertible preferred and common
stock of Digital Insight Corporation, a Delaware corporation, in accordance
with the Member Control Agreement (Note 6).
Cash and cash equivalents
Cash and cash equivalents consist of cash, money market funds, and other
highly liquid investments with maturities of three months or less at the date
of original purchase. The carrying value of these instruments approximates
fair value.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation.
Assets held under capital leases are recorded at the present value of the
minimum lease payments at lease inception. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of the
assets, generally three to five years.
Use of estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Revenue recognition
Recurring fees are recognized as services are provided, and relate to the
number of end-users or end-user transactions and for hosting and maintaining
web sites. One-time implementation fees consist of salaries for implementation
personnel and fees for third parties, including bill payment and data
processing vendors. These fees are recognized upon completion of
implementation and customer approval. Implementation generally occurs over a
two to four month period. Costs and related revenues are deferred on the
balance sheet until that time. Accumulated implementation costs consist
primarily of salaries for implementation personnel in advance of related
billings. Losses on implementation, if any, are recognized in the period when
such losses are identified.
Income taxes
The Company accounts for income taxes under the liability method. Deferred
income tax assets are provided for as temporary differences between financial
and income tax reporting. The Company has not recorded any deferred tax assets
or liabilities prior to the recapitalization, since Digital Insight LLC was a
limited liability company treated as a partnership for federal and Minnesota
income tax purposes. As a result, prior to March 18, 1997, federal and
Minnesota income tax attributes passed to the Digital Insight LLC members.
Stock-based compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans based on
the fair market value of options granted. The Company has chosen to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles
F-7
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation for stock options is measured as
the excess, if any, of the fair market value of the Company's stock price at
the date of grant as determined by the Board of Directors over the amount an
employee must pay to acquire the stock.
Net loss per share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share," and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss
per share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of shares of common
stock outstanding during the period. Shares of common stock issued in
connection with the conversion of members' capital (Note 6) have been
considered outstanding for all periods presented. The calculation of diluted
net loss per share excludes potential common shares if the effect is
antidilutive. Potential common shares are composed of common stock subject to
repurchase rights and incremental shares of common stock issuable upon the
exercise of stock options and warrants and upon conversion of Series A and B
mandatorily redeemable convertible preferred stock.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
98, common shares issued in each of the periods presented for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No such shares have been
issued.
The following table sets forth the computation of basic and dilutive net
loss per share for the years indicated (in thousands, except share and per
share data):
<TABLE>
<CAPTION>
Year Ended
December 31,
1997 1998
---------- ----------
<S> <C> <C>
Net loss........................................... $ (2,452) $ (4,356)
========== ==========
Weighted average shares.......................... 5,000,000 5,348,183
Weighted average unvested common shares subject
to repurchase................................... -- (239,739)
---------- ----------
Denominator for basic and diluted calculation...... 5,000,000 5,108,444
========== ==========
Net loss per share:
Basic and diluted................................ $ (.49) $ (.85)
========== ==========
</TABLE>
The following table sets forth common stock equivalents that are not
included in the diluted net loss per share calculation above because to do so
would be antidilutive for the periods indicated:
<TABLE>
<CAPTION>
Year Ended
December 31,
1997 1998
--------- ---------
<S> <C> <C>
Weighted average effect of common stock equivalents:
Series A mandatorily redeemable convertible preferred
stock............................................... 1,307,736 1,645,944
Series B mandatorily redeemable convertible preferred
stock............................................... -- 1,958,075
Warrants............................................. -- 21,065
Unvested common shares subject to repurchase......... -- 239,739
Employee stock options............................... 439,923 1,086,292
--------- ---------
1,747,658 4,951,115
========= =========
</TABLE>
F-8
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended December 31, 1998 and the
six months ended June 30, 1999 is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's mandatorily redeemable convertible Series A,
Series B, and Series C mandatorily convertible preferred stock into shares of
the Company's common stock effective upon the closing of the Company's initial
public offering as if such conversion occurred on January 1, 1998, or at date
of original issuance, if later. The resulting pro forma adjustment includes an
increase in the weighted average shares used to compute basic net loss per
share of 3,604,019 and 4,119,183 for the year ended December 31, 1998 and the
six months ended June 30, 1999, respectively. Pro forma diluted net loss per
share is computed using the pro forma weighted average number of common and
common equivalent shares outstanding. Pro forma common equivalent shares,
composed of common stock subject to repurchase and incremental common shares
issuable upon the exercise of stock options and warrants, are excluded from
diluted net loss per share as they are antidilutive.
Pro forma stockholder's equity (unaudited)
Effective upon the closing of this Offering, the outstanding shares of
mandatorily redeemable convertible preferred stock will automatically convert
into 4,775,455 shares of common stock. The pro forma effects of these
transactions are unaudited and have been reflected in the accompanying pro
forma balance sheet at June 30, 1999.
Interim financial information (unaudited)
The accompanying interim financial statements as of June 30, 1999 and for
the six months ended June 30, 1998 and 1999 are unaudited. In the opinion of
management, the unaudited interim financial statements have been prepared on
the same basis as the annual audited financial statements and reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position as of June 30, 1999 and its
results of operations and its cash flows for the six months ended June 30,
1998 and 1999. The results for the six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
Intangible assets
Intangible assets include a non-compete agreement and an acquired customer
base. The non-compete agreement is being amortized over the term of the
agreement, which is two years. The acquired customer base is being amortized
over one year. All intangibles are amortized using the straight-line method.
Long-lived assets
In 1997, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed Of." The statement
requires the recognition of an impairment loss on a long-lived asset including
the customer base held for use when events and circumstances indicate that the
estimate of undiscounted future cash flows expected to be generated by the
asset are less than its carrying amount.
Fair value of financial instruments
The Company's financial instruments include cash, accounts receivable,
accumulated implementation costs, deposits and other assets, accounts payable,
accrued and other current liabilities. The carrying value of these
F-9
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
financial instruments approximates fair value due to their short-term nature.
The mandatorily redeemable convertible preferred stock is carried at its
respective redemption price as such stock is not traded in the open market and
a market price is not readily available.
Concentration of credit risk
The market for Internet banking in the United States, in which the Company
operates, is characterized by rapid technological developments, frequent new
product introductions and changes in end user requirements. The Company's
future success will depend on its ability to develop, introduce and market
enhancements to its existing products and services, to introduce new products
and services in a timely manner which meet customer requirements and to
respond to competitive pressures and technological advances. Further, the
emergence of new industry standards, whether through adoption by official
standards committees or widespread use by financial institutions or other
financial institution data processing vendors, could require the Company to
redesign its products and services.
During the years ended December 31, 1996, 1997 and 1998, and the six months
ended June 30, 1999 (unaudited), no customer accounted for more than 10% of
net revenues or net accounts receivable.
The Company performs ongoing credit evaluations of its customers' financial
condition and limits the amount of credit extended when deemed necessary, but
generally does not require collateral. Management believes that any risk of
loss is significantly reduced due to the number of its customers and
geographic sales areas. The Company maintains a provision for potential credit
losses, and write-offs of accounts receivable were insignificant during the
years ended December 31, 1996, 1997 and 1998, and for the six months ended
June 30, 1999.
The Company from time to time maintains a substantial portion of its cash
and cash equivalents in money market accounts with one financial institution.
The Company has not experienced any significant losses on its cash
equivalents.
New accounting standards
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." This statement, which was adopted effective
January 1, 1998, did not have a significant impact on the financial
statements.
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
The Company operates in one business segment: developing, marketing,
implementing and supporting Internet banking solutions for community financial
institutions throughout the United States. The Company identifies its
operating segments based on business activities, management responsibility and
geographical location. During the years ended December 31, 1996, 1997 and
1998, the Company operated in a single business segment providing Internet
banking services to credit unions, small to mid-sized banks and savings and
loans, primarily in the United States.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective
for financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The Company will adopt the provisions of SOP 98-1
in its fiscal year ending December 31, 1999, and does not expect such adoption
to have a material effect on the Company's financial statements.
F-10
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Related Party Transactions
The Company paid royalties totaling $0, $37,000 and $162,000 during 1996,
1997 and 1998, respectively, to a business partner who is also a stockholder.
The Company paid $60,000, $169,000 and $0 in 1996, 1997 and 1998,
respectively, to a business partner, who is also a stockholder, for employee
medical benefits coverage under the affiliates plan, accounting services,
payroll and related expenses, and rent.
3. Property and Equipment
Property and equipment includes the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
-------------- -----------
1997 1998 1999
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Leasehold improvements............................. $ -- $ 282 $ 299
Data processing equipment.......................... 849 2,128 3,903
Furniture and fixtures............................. 186 597 673
------ ------ -------
1,035 3,007 4,875
Less accumulated depreciation and amortization..... (246) (654) (1,099)
------ ------ -------
$ 789 $2,353 $ 3,776
====== ====== =======
</TABLE>
Assets acquired under capitalized lease obligations are included in property
and equipment and totaled $133,000, $213,000, and $705,000 (unaudited) with
related accumulated amortization of $16,000, $85,000, and $896,000 (unaudited)
at December 31, 1997, December 31, 1998, and June 30, 1999, respectively.
4. Acquisition
On August 18, 1997, the Company acquired the customer base of RJE Internet
Services, Inc. ("RJE"). RJE develops, hosts and maintains web sites. The
acquisition of this customer base was accounted for as a purchase. The results
of operations and cash flows of the acquisition have been included from the
date of the acquisition of the customer base. The purchase price of the
customer base totaled $100,000 plus $180,000 for a covenant not to compete.
The accumulated amortization of the customer base was $42,000 at December 31,
1997. The customer base was fully amortized at December 31, 1998. Accumulated
amortization of the covenant not to compete totaled $38,000 and $128,000 at
December 31, 1997 and 1998, respectively.
5. Income Taxes
Prior to March 18, 1997, Digital Insight was a limited liability company
that was treated as a partnership for federal and Minnesota income tax
purposes. As a result, all federal and Minnesota tax matters for Digital
Insight LLC, prior to March 18, 1997, are the responsibility of the members.
As of December 31, 1997 and 1998, the Company had net operating loss carry-
forwards for federal and state purposes of $2,429,000 and $6,785,000,
respectively. Federal and state net operating loss carry-forwards expire in
the years 2012 and 2005, respectively.
Given its history of operating losses, the Company has recorded a full
valuation allowance against its deferred tax assets generated from operating
losses because it is more likely than not that the deferred tax benefits will
not be utilized. Accordingly, the accompanying statements of operations
include no benefit for income taxes.
F-11
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of the Company's deferred taxes are (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Net operating loss carryforwards........................... $ 829 $ 2,093
Research credit carryforwards.............................. 155 392
Stock compensation......................................... 60 398
Other...................................................... 63 171
------- -------
Gross deferred tax assets.................................. 1,107 3,054
------- -------
Gross deferred tax liabilities............................. -- --
------- -------
Net deferred tax assets.................................... 1,107 3,054
------- -------
Deferred tax asset valuation allowance..................... (1,107) (3,054)
------- -------
Deferred tax assets........................................ $ -- $ --
======= =======
</TABLE>
6. Mandatorily Redeemable Convertible Preferred Stock
Mandatorily redeemable convertible preferred stock consists of the
following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------- June 30, 1999
1997 1998 (Unaudited)
---------------------- ---------------------- ----------------------
Issued and Issued and Issued and
Authorized Outstanding Authorized Outstanding Authorized Outstanding
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series A.. 1,668,166 1,645,944 1,668,166 1,645,944 1,668,166 1,625,944
Series B.. 763,450 -- 2,305,475 2,305,475 2,334,294 2,305,475
Series C.. -- -- -- -- 844,036 844,036
--------- --------- --------- --------- --------- ---------
2,431,616 1,645,944 3,973,641 3,951,419 4,846,496 4,775,455
========= ========= ========= ========= ========= =========
</TABLE>
The Company's mandatorily redeemable convertible preferred stockholders have
the option to require the Company to repurchase all of the preferred shares
upon written request (election) of at least 60% of the outstanding shares of
preferred holders. The shares shall be redeemed on the earlier of February 28,
2002 or 180 days following the date of the election. Shares are to be redeemed
from any source of funds legally available at the redemption price of $2.70
per share of Series A preferred stock, $3.47 per share of Series B preferred
stock or $10.00 per share of Series C preferred stock, as originally issued,
plus all declared but unpaid dividends, if any, through the redemption date.
Effective on the incorporation and Member Control Agreement date, March 18,
1997, Digital Insight LLC converted its members' capital balances to shares of
Series A preferred stock and common stock in accordance with the Member
Control Agreement. As a result, 481,500 and 5,000,000 shares of Series A
preferred stock and common stock, respectively, were issued.
F-12
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
In March 1997, the Company issued 1,164,444 shares of Series A preferred
stock for $2.70 per share. In February 1998, the Company issued 2,305,475
shares of Series B preferred stock for $3.47 per share. In May 1999, the
Company issued 844,036 shares of Series C preferred stock for $10.00 per
share.
Dividend rights
Dividends shall be paid, when and if declared by the Board of Directors, at
the rate of $0.24, $0.31, and $0.90 per share of the outstanding Series A,
Series B and Series C preferred stock, respectively, and shall be payable out
of funds legally available. No dividends have been declared to date.
Liquidation
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the Company, the holders of the Series A, Series B, and Series C preferred
stock will be entitled to be paid, before any payment shall be made to the
common shareholders, an amount in cash or property equal to the sum of $2.70
per share of Series A preferred stock, $3.47 per share of Series B preferred
stock and $10.00 per share of Series C preferred stock, plus all accrued but
unpaid dividends.
Conversion right
Each share of preferred stock shall be convertible, at the option of the
holder, at any time after the date of issuance, into one share of common
stock, subject to adjustment. The preferred shares will automatically convert
into shares of common stock, at the then-applicable conversion price, upon the
closing of an underwritten public offering of the Company's common shares at a
price of not less than $8.68 per share and from which the gross proceeds to
the Company are not less than $20.0 million.
Voting rights
The holders of the preferred shares are entitled to the number of votes to
which they would be entitled if the preferred shares were converted into
common shares.
7. Notes Receivable from Stockholders
Effective October 23, 1997, under the Company's 1997 Stock Plan (the "Option
Plan"), two officers of the Company exercised their options to purchase
309,250 shares each, of the Company's common stock. In consideration, each
officer executed a note payable to the Company for $93,000. The note is
payable at the earlier of ten years from the date of execution or 30 days
after termination. Interest is being charged at the rate of 7% per annum.
Interest income realized in 1998 and for the six months ended June 30, 1999 on
the loans was $15,000 and $7,000, (unaudited) respectively. The officers have
the option to prepay all or any portion of the principal or interest without
penalty.
8. Preferred Stock Warrants
In March 1997, the Company issued warrants to purchase 763,450 shares of
Series B preferred stock at an exercise price of $3.93 per share in
conjunction with the issuance of 1,111,100 shares of Series A preferred stock.
The warrants expired without being exercised on January 31, 1998.
On January 31, 1998, the Company issued a warrant to purchase 22,222 shares
of Series A preferred stock, at $2.70 per share, to a leasing company in
connection with the Company obtaining certain leases which were accounted for
as capitalized leases. The warrant issued is exercisable for a period of
(i) four years or (ii) two
F-13
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
years from the effective date of the Company's initial public offering,
whichever is shorter. The value of the warrant using the Black-Scholes option
pricing model totaled $64,000. This value was recorded as capital lease issue
costs and is being amortized as additional interest costs over the three year
life of the capitalized leases. Accordingly, the Company has recorded
additional interest expense of $20,000 and $10,000 (unaudited) at December 31,
1998 and June 30, 1999, respectively. The Company has reserved 22,222 shares
of Series A preferred stock for the exercise of this warrant. The warrant was
outstanding at December 31, 1998.
9. 1997 Stock Plan
The Company's 1997 Stock Plan (the "Plan") was approved by the Board of
Directors on August 11, 1997. Under the Plan, the maximum aggregate number of
shares which may be optioned and sold is 1,500,000 shares of common stock,
subject to adjustments upon changes in capitalization or merger. In February
1998, the Company adopted, and the Board of Directors and stockholders
approved, a resolution to increase the aggregate number of shares reserved for
options to 2,500,000 shares. Incentive and non-statutory stock options may be
granted to employees, and non-statutory stock options may be granted to
directors and consultants. Generally options granted under the Plan are fully
exercisable on and after the date of grant. Shares generally vest in monthly
installments over four years following the date of grant (as determined by the
Board of Directors), subject to the optionee's continuous service. However,
for first time grants, the initial vesting shall occur twelve months from the
vesting start date, at which time 25% of the shares will be vested. The
remaining shares are vested monthly over the remaining three years. Options
expire ten years from the date of grant with the exception of an incentive
stock option granted to an optionee who owns stock representing more than 10%
of the voting power of all classes of stock of the Company or any parent or
subsidiary, in which case the term of the option shall be five years. An
option shall generally terminate three months after termination of employment.
Options are generally granted at a fair market value determined by the Board
of Directors subject to the following:
(a) With respect to options granted to an employee or service provider who,
at the time of this grant owns stock representing more than 10% of the
voting power of all classes of stock of the Company or any parent or
subsidiary, the per share exercise price shall be no less than 110% of
the fair market value on the date of the grant.
(b) With respect to options granted to any employee or service provider
other than described in the preceding paragraph, the exercise price
shall be no less than 100% for incentive stock options and 85% for non-
statutory stock options of the fair market value on the date of the
grant.
Stock option activity under the Plan was as follows:
<TABLE>
<CAPTION>
Exercise
Options Price Per
Outstanding Share
----------- -------------
<S> <C> <C>
Granted.......................................... 1,210,500 $ 0.30
Canceled......................................... (44,500) $ 0.30
Exercised........................................ (618,500) $ 0.30
--------- -------------
Balance December 31, 1997........................ 547,500 $ 0.30
Granted.......................................... 996,000 $0.30 - $1.00
Canceled......................................... (104,640) $0.30 - $0.50
Exercised........................................ (2,656) $ 0.30
--------- -------------
Balance December 31, 1998........................ 1,436,204 $0.30 - $1.00
Granted (unaudited).............................. 705,535 $1.75 - $9.00
Canceled (unaudited)............................. (55,492) $0.30 - $9.00
Exercised (unaudited)............................ (246,236) $0.30 - $1.75
--------- -------------
Balance June 30, 1999 (unaudited)................ 1,840,011 $0.30 - $9.00
========= =============
</TABLE>
F-14
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------
Weighted-Average
Remaining Contractual Weighted Average Weighted-Average
Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price
--------------- --------- --------------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$0.30 388,721 8.2 $0.30 129,077 $0.30
$0.50 190,795 9.0 $0.50 23,410 $0.50
$1.00 575,000 9.3 $1.00 --
$1.75 113,960 9.6 $1.75 5,414 $1.75
$2.25 401,285 9.7 $2.25 --
$9.00 170,250 9.8 $9.00 1,674 $9.00
--------- --- ----- ------- -----
$0.30-$9.00 1,840,011 9.2 $1.86 159,575 $0.47
========= === ===== ======= =====
</TABLE>
On March 17, 1997, the Board of Directors approved and the Company entered
into a stock option agreement (the "Agreement") with an officer of the
Company. The Company reserved 106,700 shares of Series A preferred stock for
issuance upon the exercise of options at an exercise price of $2.70. These
options expired on March 28, 1997. Prior to the expiration of these options,
53,350 shares were exercised for an aggregate purchase price of $145,000. Had
compensation cost for these options granted been determined using the Black-
Scholes option pricing model under SFAS No. 123, the difference between the
Company's net loss as reported and as adjusted for the compensation cost for
the year ended December 31, 1997 would have been insignificant.
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" to account for its employee stock option plans. Under APB
No. 25, when the exercise price of the Company's employee stock options equals
or exceeds the fair value price of the underlying stock on the date of grant,
no compensation expense is recognized in the Company's financial statements.
The Company granted options at exercise prices based upon the fair value of
the underlying stock as determined by its Board of Directors. Subsequently, it
was determined that the Company had granted options in 1997, 1998 and the six
months ended June 30, 1999 at exercise prices that were below the fair value
price of the underlying stock. Accordingly, the Company has recorded deferred
stock-based compensation of $1,809,000, $1,918,000 and $1,768,000 (unaudited)
in the years ended December 31, 1997 and 1998 and the six months ended June
30, 1999, respectively, based upon the intrinsic value of the options at the
grant date. The deferred stock-based compensation is being amortized to
expense over the vesting periods of the underlying options which is generally
four years.
The fair value of each option grant is estimated on the date of grant using
the minimum value method as prescribed in SFAS 123. Assumptions used for
options granted during the year ended December 31, 1997 and 1998 were a risk-
free interest rate of 5.9% to 6.2%, and 4.6% to 5.8%, respectively, and a
weighted-average expected option term of four years.
The stock-based compensation cost associated with the Company's stock-based
compensation plan, determined using the minimum value method prescribed by
SFAS No. 123, did not result in a material difference from the reported net
loss for the years ended December 31, 1997 and 1998 and for the six months
ended June 30, 1998 and 1999 (unaudited).
The minimum value method requires input of highly subjective assumptions,
changes in which could materially affect the fair value estimate. In addition,
the minimum value method is only allowed for non-public entities as public
entities are required to include an expected volatility factor in addition to
the factors described above. As a result, the effects on pro forma disclosures
of applying SFAS 123 are not likely to be representative of the effects on pro
forma disclosures of future years.
F-15
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. Employee Benefits
Effective September 1, 1998, the Company adopted a Defined Contribution
Profit Sharing Plan. This plan includes a 401(k) salary deferral plan. All
employees are eligible to participate in the plan after six months of
continued service. Contributions to the 401(k) are in the form of employee-
salary deferrals which are not subject to employer-matching contributions.
11. Commitments and Contingencies
The Company leases its facilities and certain equipment under noncancelable
operating leases. Rent expense under the operating leases was $46,000, $71,000
and $174,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
Future minimum lease payments under all noncancelable capitalized and
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, Capital Operating
----------------------- ------- ---------
<S> <C> <C>
1999....................................................... $ 80 $ 321
2000....................................................... 80 401
2001....................................................... 11 419
2002....................................................... -- 438
2003....................................................... -- 219
---- ------
Total minimum lease payments............................... 171 $1,798
======
Amounts representing interest.............................. 18
----
Present value of capitalized lease obligations............. 153
Less: current portion...................................... 71
----
Noncurrent portion of capitalized lease obligations........ $ 82
====
</TABLE>
In December 1997, the Company entered into a Business Continuity Services
Master Agreement, which provides backup capability. The agreement is for a
term of five years with monthly payments of $6,000. Future minimum payments
under the agreement are $71,000 for each of the five years beginning 1998
through 2002.
12. Subsequent Events
In January 1999, the Company entered into an Internet Data Center Services
Agreement to obtain redundant data center capabilities. The initial term of
the agreement is for one year and will automatically renew for additional one
year terms. Minimum payments under the agreement are $31,000 per month through
the initial term ending February 2000.
On March 1, 1999, the Company entered into a Master Lease Agreement (the
"Agreement") with a leasing company. The Agreement provides a line of credit
of $2,000,000 for capital equipment purchases with an additional $500,000
based upon attaining revenue targets. As a condition to the lessor for
entering into the Agreement, the Company issued a warrant to purchase 28,819
shares of Series B preferred stock at $3.47 per share. The warrant issued is
exercisable for a period of seven years. The value of the warrant using the
Black-Scholes option pricing model totaled $147,000. This value is being
recorded as capital lease issue costs and is being amortized as additional
interest costs over the three year life of the capitalized leases. As of
May 13, 1999, the Company purchased approximately $493,000 of capital
equipment under the lease.
On March 30, 1999, the Board of Directors and stockholders approved a
resolution to increase the aggregate number of shares of common stock reserved
for options under the Company's 1997 Stock Plan to 3,000,000 shares.
F-16
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
In May 1999, the Company completed the private placement of 844,036 shares
of its Series C mandatorily redeemable convertible preferred stock at a price
per share of $10.00. Dividends shall be paid, when and if declared by the
Board of Directors, at the rate of $0.89 per share. Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of Series C preferred stock will be entitled to be paid, before any payments
shall be made to common stockholders, an amount in cash or property equal to
the sum of $10.00 per share. The Series C preferred stock shall be
convertible, at the option of the holder, at any time after the date of
issuance, into one share of common stock, subject to adjustment. The Series C
preferred stock is mandatorily redeemable and will automatically convert into
shares of common stock on the same terms as the Series A and B mandatorily
redeemable convertible preferred stock.
13. Subsequent Events (unaudited)
On June 21, 1999, the Board of Directors approved a resolution to increase
the number of shares of authorized common stock to 100,000,000 shares.
Additionally, the Board of Directors approved the creation of an undesignated
class of authorized preferred stock consisting of 5,000,000 shares.
On June 21, 1999, the Board of Directors approved a resolution to adopt the
1999 Stock Plan and reserved 1,500,000 shares of the Company's common stock
for issuance under this plan.
On June 21, 1999, the Board of Directors approved a resolution to adopt the
1999 Employee Stock Purchase Plan and reserved 300,000 shares of the Company's
common stock to be reserved for issuance under this plan.
On June 29, 1999, the Company repurchased 20,000 shares of Series A
mandatorily redeemable convertible preferred stock at $10.00 per share from a
former executive officer.
F-17
<PAGE>
[Artwork incorporating multiple squares in shades of blue, green and black as
a background to a rectangular box in the lower right corner of the page which
contains, on the left, Digital Insights's logo and, on the right, the words
"Digital Insight." Beneath this box appear the words "Beyond Internet
Banking." Near the top of the page appears text containing Digital Insight's
address, telephone and fax numbers, and its website.]
<PAGE>
[LOGO OF DIGITAL INSIGHT]
