<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-27459
Digital Insight Corporation
(Exact name of Registrant as specified in its charter)
Delaware 77-0493142
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
26025 Mureau Road
Calabasas, CA 91302
(Address of principal executive offices) (Zip Code)
(818) 871-0000
(Registrant's telephone number, including area code)
__________________________________________________
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes No X
--- ---
As of November 1, 1999, there were 14,763,042 shares of the Registrant's Common
Stock outstanding.
<PAGE>
FORM 10-Q
DIGITAL INSIGHT CORPORATION
INDEX
PART I FINANCIAL INFORMATION
Number
<TABLE>
<CAPTION>
ITEM 1: Financial Statements:
<C> <S> <C>
Balance Sheet as of December 31, 1998 and September
30, 1999......................................................................... 2
Statement of Income for the three and nine months
ended September 30, 1998 and 1999................................................ 3
Statement of Cash Flows for the nine months ended
September 30, 1998 and 1999...................................................... 4
Notes to Financial Statements....................................................... 5
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 8
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk.......................... 18
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings................................................................... 18
ITEM 2: Changes in Securities and Use of Proceeds........................................... 18
ITEM 3: Defaults Upon Senior Securities..................................................... 18
ITEM 4: Submission of Matters to a Vote of Security Holders................................. 18
ITEM 5: Other Information................................................................... 18
ITEM 6: Exhibits and Reports on Form 8-K.................................................... 18
Signatures...................................................................................... 19
</TABLE>
1
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGITAL INSIGHT CORPORATION
BALANCE SHEETS
Unaudited
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,758 $ 6,177
Accounts receivable, net 356 1,985
Tax refund receivable 73 -
Accumulated implementation costs 135 211
Other current assets 80 1,044
------- --------
Total current assets 5,402 9,417
Property and equipment, net 2,353 5,274
Deposits 240 212
Intangible assets, net 53 -
Other assets 29 -
------- --------
$ 8,077 $ 14,903
======= ========
Liabilities and Stockholders' (Deficit)
Current liabilities:
Accounts payable $ 214 $ 383
Accrued compensation and related benefits 542 1,457
Current portion of lease obligations 71 367
Deferred revenue 1,036 2,024
Other accruals 472 1,080
------- --------
Total current liabilities 2,335 5,311
Long-term portion of lease obligations 82 478
------- --------
2,417 5,789
Commitments and contingencies
Mandatorily redeemable convertible preferred stock:
$.001 par value; 3,973,641 and 4,846,496 shares authorized;
3,951,419 and 4,775,455 shares issued and outstanding 12,444 20,847
Stockholder's (deficit):
Common stock; $.001 par value, 16,250,000 shares authorized;
5,621,156 and 5,960,732 shares issued and outstanding 6 6
Additional paid-in-capital 3,977 6,094
Notes receivable from stockholders (201) (212)
Deferred stock-based compensation (2,732) (3,608)
Accumulated deficit (7,834) (14,013)
------- --------
Total stockholders' (deficit) (6,784) (11,733)
------- --------
$ 8,077 $ 14,903
======= ========
</TABLE>
See accompanying notes to financial statements
2
<PAGE>
DIGITAL INSIGHT CORPORATION
STATEMENT OF OPERATIONS
Unaudited
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
Revenues: 1998 1999 1998 1999
<S> <C> <C> <C> <C>
Implementation fees $ 543 $ 1,286 $ 1,803 $ 2,952
Service fees 1,641 3,417 3,878 8,844
---------------------- ----------------------
Total revenues 2,184 4,703 5,681 11,796
---------------------- ----------------------
Cost of revenues:
Implementation 420 840 1,115 2,081
Service 1,019 1,906 2,374 5,408
---------------------- ----------------------
Total cost of revenues 1,439 2,746 3,489 7,489
---------------------- ----------------------
Gross Profit 745 1,957 2,192 4,307
---------------------- ----------------------
Operating expenses:
Sales, general and administrative 1,114 2,889 2,888 6,498
Research and development 662 1,268 1,840 3,061
Amortization of stock-based compensation 147 329 395 892
---------------------- ----------------------
Total operating expenses 1,923 4,486 5,123 10,451
---------------------- ----------------------
Loss from operations (1,178) (2,529) (2,931) (6,144)
Interest income 73 83 195 183
Other income (expense), net (5) (33) (17) (72)
---------------------- ----------------------
Net loss $(1,110) $(2,479) $(2,753) $(6,033)
====================== ======================
Basic and diluted net loss per share $ (0.21) $ (0.44) $ (0.54) $ (1.10)
====================== ======================
Shares used to compute basic and diluted net loss
per share 5,177 5,638 5,072 5,490
====================== ======================
Proforma basic and diluted net loss per share
(unaudited) $ (0.11) $ (0.21) $ (0.29) $ (0.52)
====================== ======================
Shares used to compute pro forma basic and
diluted net loss per share (unaudited) 9,109 10,414 8,251 9,817
====================== ======================
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
DIGITAL INSIGHT CORPORATION
STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,753) $(6,033)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 398 831
Amortization of debt issuance cost 14 46
Amortization of deferred stock-based compensation 395 892
Interest income on stockholder notes (11) (11)
Changes in operating assets and liabilities:
Accounts receivable 166 (1,629)
Tax refund receivable (6) 73
Accumulated implementation costs (20) (76)
Other assets (54) (781)
Deposits (9) 28
Accounts payable (96) 169
Accrued compensation and related benefits 65 915
Deferred revenue 227 988
Other accruals 38 608
-----------------------------
Net cash used in operating activities (1,646) (3,980)
Cash flows used in investing activities:
Acquisition of property and equipment (1,682) (2,860)
-----------------------------
Net cash used in investing activities (1,682) (2,860)
Cash flows provided by financing activities:
Principal payments on lease obligations (95) (200)
Proceeds from exercise of stock options 1 202
Proceeds from issuance of Series A preferred stock 64
Proceeds from issuance of Series B preferred stock 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 7,970 8,259
-----------------------------
Net increase in cash 4,642 1,419
-----------------------------
Cash and Cash Equivalents, beginning of period 886 4,758
-----------------------------
Cash and Cash Equivalents, end of period $ 5,528 $ 6,177
=============================
Supplementary disclosures of cash flow information:
Cash paid during the period for interest $ 5 $ 52
Non-cash financing activities:
Capital lease obligations incurred 133 892
Series A warrants issued in conjunction with capital lease 64 -
Series B warrants issued in conjunction with capital lease - 147
</TABLE>
See accompanying notes to financial statements
4
<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.
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.
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 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 periods indicated (in thousands, except share and per share
data):
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, 1998 September 30, 1999
----------------- ------------------
<S> <C> <C>
Net Loss $ (4,356) $ (6,033)
================= ==================
Weighted Average Shares 5,348,183 5,815,846
Weighted Average Unvested Common Shares Subject to Repurchase (239,739) (325,723)
----------------- ------------------
Denominator for Basic and Diluted Calculation 5,108,444 5,490,123
================= ==================
Net Loss Per Share:
Basic and Diluted $ (0.85) $ (1.10)
================= ==================
</TABLE>
5
<PAGE>
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 Nine Months
December 31, 1998 September 30, 1999
----------------- ------------------
<S> <C> <C>
Weighted average effect of common stock equivalents:
Series A mandatorily redeemable convertible preferred stock 1,645,944 1,625,944
Series B mandatorily redeemable convertible preferred stock 1,958,075 2,305,475
Series C mandatorily redeemable convertible preferred stock - 395,738
Warrants 21,065 44,813
Unvested common shares subject to repurchase 239,739 325,723
Employee stock options 1,086,292 1,233,380
----------------- ------------------
4,951,115 5,931,073
================= ===================
</TABLE>
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the nine months ended December 31, 1998 and the
nine months ended September 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 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 3,179,818 and
4,327,158 for the nine months ended December 31, 1998 and the nine months ended
September 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 the Company's initial public offering in October
1999, the outstanding shares of mandatorily redeemable convertible preferred
stock automatically converted into 4,775,455 shares of common stock. See Note 5
Subsequent Events (unaudited).
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.
2. Related Party Transactions
On September 30, 1999, we entered into a software license and customization
agreement with HNC Software Inc. A member of our board of directors is the CEO
and a director of HNC Software, Inc. The agreement was ratified by the
independent and disinterested members of the board. The Company believes that
the terms of the agreement were no less favorable than could have been obtained
from unrelated parties.
6
<PAGE>
3. Common 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 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 $15,000 and $15,000 (unaudited) for the nine
months ended December 31, 1998 and September 30, 1999, respectively. The
Company has reserved 22,222 shares of Series A preferred stock for the exercise
of this warrant. In conjunction with the Company's initial public offering, the
warrants became rights to purchase 22,222 shares of common stock.
On February 1, 1999, the Company issued a warrant to purchase 28,819 shares of
Series B preferred stock, at $3.47 per share, to a financial institution in
connection with the Company obtaining certain leases which were accounted for as
capitalized leases. A portion of these warrants, 5,764, is dependent upon the
Company utilizing over $2.0 million of the facility. The warrant issued is
exercisable over a period of seven years. The value of the warrant using the
Black-Scholes option pricing model totaled $147,000. 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 $28,000 for the nine months ended
September 30, 1999. The Company has reserved 28,819 shares of Series B
preferred stock for the exercise of this warrant. In conjunction with the
Company's initial public offering, the warrants became rights to purchase 28,819
shares of common stock.
4. Segment Information:
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.
5. Subsequent Events (unaudited)
On October 6, 1999 the Company completed its initial public offering by issuing
4,025,000 shares of common stock (including the exercise of the underwriter's
over-allotment option) and realized proceeds, net of underwriter's discounts,
commissions and issuance costs, of $54.7 million. In conjunction with the
initial public offering, the Company's mandatorily redeemable convertible
preferred stock converted to common stock and all warrants to purchase preferred
stock became warrants to purchase common stock. Simultaneous with the closing
of the offering, the Company amended its corporate bylaws and certificate of
incorporation.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This document contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. When used in this document, the words "expects,"
"anticipates," "intends," "plans" and similar expressions are intended to
identify certain of these forward-looking statements. The cautionary statements
made in this document should be read as being applicable to all related forward-
looking statements wherever they appear in this document. The Company's actual
results could differ materially from those discussed in this document. Factors
that could cause or contribute to such differences include those discussed
below, as well as those discussed in the Company's Prospectus dated September
30, 1999.
Overview
Digital Insight is the leading provider of Internet banking solutions for
community financial institutions, with approxiamately 400 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 September 30, 1999, we had
an accumulated deficit of approximately $14.0 million.
Comparisons of Quarter Ended September 30, 1998 and 1999
Revenues. Our revenues consist primarily of recurring monthly service fees and,
to a lesser extent, one-time implementation fees. 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. Revenues increased
from $2.2 million for the quarter ended September 30, 1998 to $4.7 million for
the quarter ended September 30, 1999. This increase was primarily due to the
growth in service fees from $1.6 to $3.4 million. The number of active home
banking end users increased over the same period from over 210,000 to
approximately 537,000 and implementation fees increased from $.6 million to $1.3
million.
Gross Profit. 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 profit increased
from $.7 million for the quarter ended September 30, 1998 to $2.0 million for
the quarter ended September 30, 1999. Gross margin improved from 34% to 42%
primarily due to leverage of our implementation costs as a result of higher
implementation fees generated during the quarter and service fees margin
improved due to continued end user growth without a corresponding increase in
costs. Implementation gross margin improved from 23% to 35% and service gross
margin improved from 38% to 44%. 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
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. Sales, general and
administrative expenses increased from $1.1 million for the quarter ended
September 30, 1998 to $2.9 million for the quarter ended September 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 our national user conference, corporate
branding effort, 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. As a result of the above, sales, general and
administrative expenses as a percentage of revenues increased from 51% to 61%
for each of the quarters ended September 30, 1998 and 1999.
Research and Development. 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
8
<PAGE>
interface software. We expense all research and development costs as incurred.
Research and development expenses increased from $.7 million for the quarter
ended September 30, 1998 to $1.3 million for the quarter ended September 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 30% for the quarter ended September 30, 1998 to 27% for the
quarter ended September 30, 1999, primarily as a result of an increase in
revenues.
Interest Income. Interest income increased from $73,000 for the quarter ended
September 30, 1998 to $83,000 for the quarter ended September 30, 1999. This
increase was primarily due to slightly higher average cash balances in the
quarter ended September 30, 1999.
Amortization of Stock-based Compensation. Amortization of stock-based
compensation increased from $147,000 for the quarter ended September 30, 1998 to
$329,000 for the quarter ended September 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.
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."
Comparison of Nine Months Ended September 30, 1998 and September 30, 1999
Revenues. Our revenues consist primarily of recurring monthly service fees and,
to a lesser extent, one-time implementation fees. 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. Revenues increased from
$5.7 million for the nine months ended September 30, 1998 to $11.8 million for
the nine months ended September 30, 1999. This increase was primarily due to the
growth in service fees from $3.9 to $8.8 million. The number of active home
banking end users increased over the same period from 210,000 to approximately
537,000 and implementation fees increased from $1.8 million to $3.0 million.
Gross Profit. 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 profit increased
from $2.2 million for the nine months ended September 30, 1998 to $4.3 million
for the nine months ended September 30, 1999. Gross margin declined from 39% to
37% 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, consulting expenses and investment in networking
services infrastructure. Implementation gross margin declined from 38% to 30%
and service gross margin remained flat at 39%. 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
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. Sales, general and
administrative expenses increased from $2.9 million for the nine months ended
September 30, 1998 to $6.5 million for the nine months ended September 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 increased from 51% to
55% for each of the nine months ended September 30, 1998 and 1999.
9
<PAGE>
Research and Development. 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. Research and development expenses increased from $1.8 million
for the quarter ended September 30, 1998 to $3.1 million for the nine months
ended September 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 32% for the nine months ended September 30, 1998 to
26% for the nine months ended September 30, 1999, primarily as a result of an
increase in revenues.
Interest Income. Interest income decreased from $195,000 for the nine months
ended September 30, 1998 to $183,000 for the nine months ended September 30,
1999. This decrease was primarily due to higher average cash balances in the
nine months ended September 30, 1998 as a result of our Series B preferred stock
financing.
Amortization of Stock-based Compensation. Amortization of stock-based
compensation increased from $395,000 for the nine months ended September 30,
1998 to $892,000 for the nine months ended September 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.
Provision for Income Taxes
We incurred operating losses from inception through September 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.
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. On October 6, 1999 the Company completed its
initial public offering by issuing 4,025,000 shares of common stock (including
the exercise of the underwriter's over-allotment option) and realized proceeds,
net of underwriter's discounts, commissions and issuance costs, of $54.7
million. In conjunction with the initial public offering, the Company's
mandatorily redeemable convertible preferred stock converted to common stock and
all warrants to purchase preferred stock became warrants to purchase common
stock.
At September 30, 1999, we had cash and cash equivalents of $6.2 million. We have
a $2.0 million equipment leasing line of credit with a bank, under which $.7
million was outstanding at September 30, 1999. At September 30, 1999, we also
had an additional $.1 million in equipment financing outstanding with an
equipment leasing company.
Cash used in operating activities increased from $1.6 million for the nine
months ended September 30, 1998 to $4.0 million for the nine months ended
September 30, 1999. The increases in cash used in operating activities were
primarily due to increases in net loss.
Cash used in investing activities increased from $1.6 million for the nine
months ended September 30, 1998 to $2.9 million for the nine months ended
September 30, 1999. The increases in cash used in investing activities were
primarily due to infrastructure expansion to meet end user growth and
expenditures 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. 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 the initial public
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.
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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 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.
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Contingency Plans. We have developed a contingency plan to be implemented if our
efforts to identify and correct Year 2000 problems affecting our internal
systems are not effective. The plan identifies a hierarchy of critical
functions, recovery strategies to return functions to operational status and
defines the core team for managing this recovery process. Specific action items
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.
We plan to continue to modify our plan to address new systems and new products
as they are introduced to, or implemented by, the Company.
Our failure to implement any of these action items could have a material adverse
effect on our business, financial condition and results of operations.
Moreover, although we have a contingency plan to address Year 2000 problems
affecting our internal systems, we are unable to make any contingency plans if a
significant number of the computers constituting the Internet fail to process
dates properly for the year 2000 and there is a system-wide slowdown or
breakdown. Our business is dependent on the continued successful operation of
the Internet. Any interruption or significant degradation of Internet
operations due to Year 2000 problems could harm the Company's business.
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.
Risk Factors That May Effect Our Financial Condition and Results of Operations
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
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September 30, 1999, we had an accumulated deficit of $14.0 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 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
have contracted to establish a second functional backup Internet banking data
center in Herndon, Virginia, which is scheduled to be put into operation during
the fourth quarter of 1999 with functionality added throughout the next year. We
cannot assure that this data center will become operational as scheduled or
that, when operational, this data center will perform as expected. 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. 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.
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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.
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 current and potential community financial institution
customers and have extensive knowledge of our industry.
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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.
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
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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.
Our Stock Price May Be Extremely Volatile
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
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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.
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.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the Company's first registration statement, filed on Form
S-1 under the Securities Act of 1933 (No. 333-81547) relating to the Company's
initial public offering of its Common Stock, was September 30, 1999. A total of
4,025,000 shares of Company's Common Stock were sold at the closing at a price
of $15.00 per share to an underwriting syndicate led by Morgan Stanley Dean
Witter. Incorporated, Deutsche Bank Securities Inc., Banc of America Securities
LLC and Friedman, Billings, Ramsey & Co., Inc. Public trading commenced on
October 1, 1999 and the offering closed on October 6, 1999. The initial public
offering resulted in gross proceeds of $60.4 million, $4.2 million of which was
applied toward underwriting discount and commissions. Expenses related to the
offering totaled approximately $1.5 million. Net proceeds to the Company were
$54.7 million.
The Company's Registration Statement relating to its initial public offering was
declared effective on September 30, 1999 and trading commenced on October 1,
1999. The closing of the offering, and the receipt of the proceeds after
deduction of underwriters' commission, did not occur until October 6, 1999, and,
as a result, information relating to offering expenses and proceeds are not
disclosed in this quarterly report which relates to the quarter ended September
30, 1999. This information will be disclosed in the Company's Annual Report on
Form 10-K to be filed within 90 days of the end of the Company's fiscal year.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
10.1 License Agreement with HNC Software Inc. (+)
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed.
- ------------
+ Confidential treatment has been requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
18
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DIGITAL INSIGHT CORPORATION
Date: November 10, 1999 By: /s/ Kevin McDonnell
--------------------
Kevin McDonnell
Vice President, Finance,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
19
<PAGE>
EXHIBIT 10.1
LICENSE AGREEMENT
This License Agreement is made and entered into effective as of September 30,
1999 (the "Effective Date") by and between HNC SOFTWARE INC., a Delaware
corporation having its principal offices at 5935 Cornerstone Court West, San
Diego, California 92121-3728 ("HNC"), and DIGITAL INSIGHT CORPORATION, a
Delaware corporation having its principal offices at 26025 Mureau Road,
Calabasas, California 91302 ("Licensee").
RECITALS
A. HNC is the developer of a certain proprietary software system known
commercially as the Capstone(TM) Decision Manager for consumer lending, mortgage
lending, and payment card which tracks consumer loan, real estate loan, and
credit card applications from initiation through decisioning (the "Capstone
Decision Manager").
B. Licensee provides to community financial institutions and credit
unions certain products and services related to Internet banking, cash
management and web site development. Licensee desires to obtain a license for
the use of a software similar to the Capstone Decision Manager that is capable
of supporting multiple financial institutions on a single platform.
C. Licensee desires to license the Capstone Decision Manager.
NOW, THEREFORE, in consideration of the mutual agreements and obligations
contained herein, the parties agree as follows:
ARTICLE 1
Certain Definitions
-------------------
For purposes of this Agreement, the following terms shall have the meanings set
forth herein:
1.1 This "Agreement" means this License Agreement between Licensee and
HNC, as it may be amended from time to time by a writing signed by authorized
officers of both HNC and Licensee.
1.2 "Confidential Information" has the meaning set forth in Article 6.
1.3 "Designated System" means Licensee's computer systems as described
in Exhibit 3 of this Agreement.
1.4 "Designated Use" shall have the meaning as described in Exhibit 3
of this Agreement.
1.5 "Documentation" means the human readable user manuals, and related
written materials provided by HNC that describe the use, functionality, output
and/or other characteristics of the Software or guidance regarding proper Use of
the Software, in either electronic or printed form.
1.6 "End User" means current and potential customers or members of
Licensee Clients who will use Software for business and personal use that is
customary to the lending industry and not for redistribution.
1.8 "Error" means a defect in the Software that prevents it from
functioning in substantial conformity with its Documentation.
1.9 "Software" means all the software owned by HNC that is described as
the "Software" in Exhibit 2 to this Agreement, whether in source or object code
form. The software programs that are included in the Software are used
together collectively to form a single system.
1.10 "Intellectual Property" means, collectively, patents, copyrights,
trademarks, trade names, trade secrets, and other proprietary and intellectual
property rights.
1.11 "License" means the license rights granted by HNC to Licensee in
Article 2 of this Agreement with respect to the Software.
- ---------
1.12 "Licensee Client" means current or future clients of Licensee
comprised of federal credit unions or community banks with assets of $10 billion
or less who have contracted or will contract with Licensee for internet-based
software products and services.
1.13 "Receipt" means the date on which delivery of the Software occurs,
as evidenced by Client's notice of receipt by way of a separate letter to HNC or
signed delivery documents.
1.14 "Release" means commercially released modifications to the Software
which correct any Errors or defects in the version of the Software (including
Documentation) delivered to Licensee pursuant to this Agreement (e.g., by way of
example only, "version 5.2", where the new Release is signified by the digit to
the right of the decimal).
1.16 "Territory" means the United States of America and its
commonwealth, protectorate or territory.
1.17 "Use" means to load, execute, employ, utilize, store, display,
distribute or copy any machine readable portion of the Software in accordance
with the terms and conditions of this Agreement or to make use of any
Documentation or related materials in connection with the execution of any
machine readable portion of the Software in accordance with the terms and
conditions of this Agreement.
1.18 "Version" means any commercially released modifications or
enhancements to the Software product which improve the efficiency or
effectiveness of the functions of or add new functionality to the Software or
Documentation (such as a release of a new full version of the Software, e.g., by
way of example only, "Version 5.0", where the new Version is signified by the
digit to the left of the decimal).
ARTICLE 2
---------
Software License; Transfers;
Intellectual Property Rights
2.1 Grant of License of the Software. Subject to the terms and
--------------------------------
conditions of this Agreement, HNC hereby grants to Licensee, a nonexclusive,
nontransferable license to Use the Software only in object code form, only in
the Territory, only at the Licensee Site and on the Designated System for the
Designated Use identified in this Agreement, solely for the benefit of Licensee
or to sublicense under the terms and conditions set forth in Exhibit 4 to
Licensee Clients for use with End-Users. Except for agents or contractors of
Licensee who Use the Software in accordance with this Agreement solely for the
purpose of assisting Licensee in exercising its License under this Agreement in
the performance of their duties for Licensee, Licensee will not permit any other
person or entity to Use the Software other than as permitted herein. HNC shall
deliver to Licensee one (1) object code copy of the Software, and, Licensee may
make and Use any number of object code copies of the Software to the extent
reasonably needed to use the Software in connection with Licensee's business for
the benefit of multiple Licensee Clients as
1
<PAGE>
permitted in this Agreement and to enable Licensee to follow normal backup and
disaster recovery procedures.
2.2 Grant of License of Documentation. Subject to the terms and
---------------------------------
conditions of this Agreement, particularly Article 4, HNC hereby grants to
Licensee, a nonexclusive, nontransferable license to Use, copy and reproduce in
any form the Documentation, to prepare Licensee documentation as a derivative
work thereof, and to copy and distribute Licensee documentation, which may
include HNC's Documentation, to Licensee Clients.
2.3 Grant of License of Trademark. Subject to the terms and conditions
-----------------------------
of this Agreement, HNC hereby grants to Licensee, a nonexclusive,
nontransferable license to use and reproduce certain of HNC's logos, trademarks
and servicemarks in connection with the Use and promotion of the Software in a
manner approved by HNC. HNC agrees that the Software and the Documentation may
contain the name, logo and/or trademark of Licensee and/or Licensee Clients,
subject to reasonable restrictions as may be imposed by HNC.
2.4 Mergers and Acquisitions Involving Licensee. The parties recognize
-------------------------------------------
that the fees charged to Licensee under this Agreement may be determined by
taking into account a number of factors, depending on the product licensed,
including, but not limited to, the number of Licensee installations anticipated
to use the Software and, as applicable, the quantity of data processed. For
that reason, the parties agree that in the event Licensee is merged with,
acquired by or acquires another entity, or otherwise acquires the rights to
process the accounts of another entity, that HNC and Licensee will, in good
faith, negotiate and agree to the amount of any additional or increased fees
which may be payable to HNC; provided however, that in no event shall the amount
of the One-Time License Fee be adjusted after the payment of such Fee. Licensee
agrees it will not process any data from such other entity (either combined with
Licensee, or as a separate portfolio) through the Software until HNC and
Licensee have negotiated the amount of such additional or increased fees.
2.5 Protection of HNC Intellectual Property. The Software and
---------------------------------------
Documentation are protected by U.S. and international copyright and patent laws.
Client will reproduce on each copy of the Software and the Documentation the HNC
copyright notice and any other proprietary legends that were in the original
copy supplied by HNC. Licensee shall not remove or destroy any copyright
notice or other proprietary legends or markings placed upon or contained in the
Software. Licensee shall not adopt or use any trade name, trademark, or
service mark that is, in HNC's reasonable good faith opinion, confusingly
similar to the mark or trade name that HNC uses to identify the Software or the
services that Licensee performs with the Software in accordance with the
provisions of this Section 2.3. Licensee agrees that neither Licensee, nor its
-------
employees, representatives, and/or agents will decompile, reverse engineer,
disassemble, or otherwise reduce the Software to a human perceivable form or
permit any other party to do so. Except as may be otherwise provided in this
Agreement, Licensee may not copy, modify, adapt, translate, rent, lease, loan,
resell for profit, or create derivative works based upon, the Software. No
right, title, or interest in or to the Software or any Intellectual Property in
or related thereto is conveyed or assigned by HNC by virtue of this Agreement,
except as may be expressly licensed under the terms and conditions set forth
herein. HNC retains and reserves the sole and exclusive worldwide right, title,
and interest in and to all of the Software, Documentation, any custom code
developed by HNC for Licensee (if applicable), and all worldwide intellectual
property rights therein and all copies thereof, in whole or in part, subject
only to the limited non-exclusive license rights granted to Licensee pursuant to
this Agreement.
ARTICLE 3
---------
Delivery of the Software; Escrow
3.1 Delivery. HNC shall deliver the Software to Licensee on or before
--------
September 30, 1999 in a form or medium that permits installation on Licensee's
System with reasonable ease. Upon delivery of the Software, Licensee agrees to
confirm Receipt to HNC by facsimile or overnight delivery to the address for
notice provided in Section 11.8 of this Agreement.
3.2 Software Escrow. Within thirty (30) days after the execution of this
---------------
Agreement, HNC will provide a copy of the Software into escrow with DSI
Technology Escrow Services on terms reasonably acceptable to Licensee at the
cost of Licensee. Within thirty (30) days after the delivery of any
enhancements, upgrades, versions or Custom Programming, HNC will provide a copy
into escrow with a third party acceptable to Licensee and on terms acceptable to
Licensee. In the event that the Software Escrow Account is utilized, HNC shall
provide Licensee with sufficient documentation to enable Licensee to utilize the
Software.
ARTICLE 4
---------
Documentation and Maintenance Services
4.1 Documentation. Two (2) numbered sets of Documentation will be
-------------
provided to Licensee for the Software. HNC will also deliver one (1) set of
such Documentation in electronic format upon Licensee's written request at no
additional charge to Licensee. If Licensee wishes to utilize such electronic
Documentation, Licensee may provide such Documentation to Licensee Clients or
use such Documentation for internal purposes only in connection with its
training and related materials, subject to Licensee acknowledgement that HNC
owns all worldwide right, title, and interest in and to the Documentation,
including, but not limited to, ownership of the worldwide copyrights to the
Documentation. In addition, any document created by Licensee and/or any
Licensee Client that contains any material from such Documentation must also
contain the following statement on the same page where Licensee and/or Licensee
Client includes its copyright notice and other attributions: "Portions of this
document are copyrighted by HNC Software Inc. and are used by permission of HNC
Software Inc."
4.2 Maintenance of the Software. There are no maintenance and/or
---------------------------
support services provided by HNC under this Agreement
4.3 New Versions and Products. The parties acknowledge their
-------------------------
understanding and agree that this Agreement does not include: (i) Versions; or
(ii) any current or future HNC products which are not included in the Software
as delivered to Licensee pursuant to this Agreement. The parties further
acknowledge and agree that if Licensee should wish to license a future Version
of the Software licensed hereunder (a "Future Version") (when and if such Future
Version is available), Licensee may do so under separately negotiated terms
regarding installation, support and other such matters. Licensee's licensee fee
for such Future Version will be equal to the difference between the list price
in effect for the currently licensed Version of the Software as of the Effective
Date ("Licensed Version Effective Date") and the list price for such Future
Version in effect at the time Licensee licenses such Future Version;, provided
that upon Licensee's license of any Future Version, it shall replace Licensee's
current licensed version of the Software hereunder. HNC acknowledges and agrees
that the agreement for the license of the Future Version (including its price)
with Licensee shall be negotiated in good faith and shall be on terms no less
favorable to Licensee than terms provided to any of HNC's other licensee, of
similar stature, of HNC for such Future Version.
2
<PAGE>
ARTICLE 5
---------
Fees; Payment Terms
5.1 Invoices and Payment. All amounts stated in this Agreement are in
--------------------
U.S. Dollars and shall be paid to HNC in U.S. Dollars. Unless otherwise noted
in this Agreement, all invoices from HNC to Licensee pursuant to this Agreement
will be due and payable by Licensee to HNC within thirty (30) days of Licensee's
receipt of such invoice.
5.2 Late Charges. Any payment due to HNC hereunder (including but not
------------
limited to payments of license fees or reimbursements of expenses) that remain
unpaid for more than thirty (30) days after the date such payment is due to HNC
hereunder are subject to a one percent (1.0%) per month late fee.
5.3 One-time License Fee. In addition to any other fees payable to HNC
--------------------
under this Agreement and in consideration of HNC's grant to Licensee of license
rights described in this Agreement, Licensee agrees to pay HNC the One-Time
License Fee set forth in Exhibit 1, subject to the volume limitations set forth
in the exhibit.
5.4 Travel-Related Expenses. All travel expenses reasonably incurred
-----------------------
by HNC personnel in connection with the performance of this Agreement will occur
only after Licensee's approval, which will not be unreasonably withheld and such
expenses are in addition to the payment of any other fees payable to HNC under
this Agreement.
5.5 Fees Are Exclusive of Taxes. All payments by Licensee to HNC under
---------------------------
this Agreement for any fees and reimbursement of any expenses will be exclusive
of any sales, use, service, or value added taxes, or any other levy, tariff,
duty or tax of any kind whatsoever imposed by any governmental authority with
respect to the services rendered or expenses incurred by HNC hereunder (other
than a tax imposed upon HNC's income). With the exception of the taxes
described in the foregoing parenthetical, Licensee agrees to pay, within sixty
(60) days of receipt of the applicable HNC invoices, any such tax whenever such
tax is imposed by a governmental authority.
5.6 Price Adjustments. The parties shall review, in good faith, all
-----------------
fees, prices, and expense reimbursement rates set forth in this Agreement upon
each anniversary of the Agreement Effective Date (the "Adjustment Date"),
including each year during any renewal of this Agreement. Adjustments may be
made to all such fees, prices, labor rates and expense reimbursement rates
within three (3) months of the Adjustment Date if both parties agree to the
proposed adjustment.
ARTICLE 6
---------
6.1 Confidential Information.
------------------------
6.1.1 Licensee and HNC each agree that neither will, at any time
during or after the term of this Agreement, disclose or disseminate to any other
person or entity, or use except as permitted by this Agreement, any information
regarding the business, data, processes, technology, software or products of the
other party obtained during the course of performance under this Agreement (the
"Confidential Information"). The Confidential Information of HNC will include,
but not be limited to, the Software, its Documentation and any related
materials. Each party will use its best efforts to ensure that any Confidential
Information obtained from the other party will be disclosed only to the
receiving party's employees and agents and only on a "need-to-know" basis, and
that such employees and agents will be bound by an obligation to maintain the
confidentiality of the Confidential Information substantially similar to the
obligations of HNC and Licensee under this Section. Nothing contained herein
will be construed to restrict or impair in any way the right of the parties to
disclose or communicate any information which (i) is at the time of its
disclosure hereunder generally available to the public; (ii) becomes generally
available to the public through no fault of the receiving party; (iii) is, prior
to its initial disclosure hereunder, in the possession of the receiving party as
evidenced in a documentary form; or (iv) is acquired by the receiving party from
any third party having a right to disclose it to the receiving party or not
known to the receiving party to be in breach of the obligation of
confidentiality.
6.1.2 Should disclosure of any information or material covered
by this Agreement be sought by way of legal mandate, subpoena, court order,
administrative decree, or by any lawful means while the same is in the
possession of the party in receipt of such information (the "Recipient") by or
anyone acting for, or at the direction of the Recipient, the Recipient shall
advise the party which disclosed such information (the "Discloser") of this
promptly and subsequently confirm its advice in writing. In addition it shall
provide the Discloser by the most expeditious means available with copies of any
papers seeking the disclosure of such information together with copies of all
material sought if the same exist and are under the Recipient's control. The
Recipient shall not disclose any information voluntarily in such circumstances
and shall, if requested by the Discloser, take appropriate action to safeguard
the confidentiality of such information including, but not limited to, at the
Discloser's expense, seeking a protective order of a court of competent
jurisdiction.
6.1.3 Both parties acknowledge that the Confidential Information
received from the Discloser under this Agreement contains valuable trade
secrets of said party, the disclosure of which would cause irreparable harm to
Discloser that could not be remedied by the payment of damages alone.
Accordingly, for any breach by Recipient of this Section, the Discloser will be
entitled to seek from any court of competent jurisdiction (i) a temporary
restraining order; (ii) preliminary and permanent injunctive relief; and (iii)
an equitable accounting for all profits or benefits arising out of such breach.
6.2 Remedies; Survival. HNC and Licensee agree that in the event that
------------------
either party breaches any of the provisions contained in this Article, then,
notwithstanding the provisions of Section 11.10, the nonbreaching party shall be
authorized and entitled to seek from any court of competent jurisdiction (i) a
temporary restraining order, (ii) preliminary and permanent injunctive relief;
and (iii) an equitable accounting for all profits or benefits arising out of
such breach. Such rights or remedies shall be cumulative and in addition to any
other rights or remedies to which the non-breaching party may be entitled. The
provisions of this Article 9 shall continue in effect following termination of
this Agreement and expiration or termination of the Term.
ARTICLE 7
---------
Representations of the Parties
7.1 HNC. HNC represents and warrants to Licensee that: (i) it is a
---
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware; (ii) it has the corporate power and authority to enter
into this Agreement and perform all of its obligations hereunder, (iii) it has
the right to grant all licenses granted by HNC to Licensee herein; (iv) HNC is
the owner of and/or has all necessary rights in all the Software necessary to
grant Licensee the License to use the Software granted by HNC to Licensee under
this Agreement; (v) there are no claims, liens or
3
<PAGE>
clouds on the title or right with respect to HNC's ownership of the Software;
and (vi) to the best of HNC's knowledge, the Software does not infringe upon any
proprietary right or intellectual property rights of any third party.
7.2 Licensee. Licensee represents and warrants to HNC that: (i) it is a
--------
corporation duly organized, validly existing and in good standing under the laws
of its state of incorporation, (ii) it has the corporate power and authority to
enter into this Agreement and perform all of its obligations hereunder
7.3 Intellectual Property Indemnification.
-------------------------------------
7.3.1 Indemnification. HNC will indemnify Licensee against, and
---------------
hold Licensee harmless from, any liability, cost, loss, or expense arising out
of any claim, demand, or action alleging that the Software or any portion
thereof as furnished under this Agreement and used within the scope of the
licenses granted to Licensee hereunder infringes any third-party rights in a
trade secret, a U.S. copyright or a U.S. patent that issued prior to the
Effective Date; provided that: (i) Licensee promptly gives written notice
-------- ----
of the claim, demand, or action to HNC; (ii) Licensee gives prompt assistance to
HNC in connection with the defense and/or settlement of such claim, demand or
action; and (iii) HNC directs, controls, and fully participates in the defense
of or any settlement of such claims, demand or action, to the extent it does not
unfairly prejudice Licensee.
7.3.2 Exceptions. Notwithstanding the foregoing, HNC's indemnity
----------
obligations under Section 7.3.1 will not apply to any claim, demand or action
arising from: (i) modifications made to the Software that were not authorized by
HNC; (ii) the combination of the Software product with any products not provided
by HNC; or (iii) Licensee's specifications or requested modifications.
7.3.3 Injunctions. In the event that Licensee's use of the
-----------
Software or portion thereof in accordance with this Agreement is enjoined in an
action as described in Section 7.3.1, or HNC reasonably believes that it will be
so enjoined, then HNC will, at its sole option and expense: (i) procure for
Licensee the right to continue using the Software or portion thereof; (ii)
replace the same with non-infringing software of equivalent functions and
efficiency; or, if neither (i) nor (ii) may be accomplished despite HNC's
reasonable efforts, (iii) terminate this Agreement with regard to the given
Software or portions thereof that are alleged to infringe a third party's rights
and receive a refund of the unearned License Fees equal to a pro-rata amount of
the License Fees actually paid amortized over a five year period (as measured
from the Effective Date).
7.3.4 Sole and Exclusive Remedy. THE REMEDIES SPECIFIED IN THIS
-------------------------
SECTION 7.3 WILL BE CLIENT'S SOLE AND EXCLUSIVE REMEDIES IN CONNECTION WITH ANY
ALLEGED OR ACTUAL INFRINGEMENT OR MISAPPROPRIATION OF ANY INTELLECTUAL PROPERTY
RIGHTS BY THE SOFTWARE OR ITS DOCUMENTATION.
ARTICLE 8
---------
Limited Warranty;
Conformity to Specifications;
Limited Liability; Warranty Disclaimer
8.1 Conformity to Documentation. HNC hereby warrants that the Software
---------------------------
will substantially conform to its Documentation and will function substantially
in conformity with the Documentation from the earlier of either (1) twelve
months from date of Receipt of the HNC Software or (2) the date the Software is
first placed into "Production Use" (defined as processing an End-User
application for a fee) by Licensee (the "Warranty Period").. If Licensee
discovers an Error in the Software during the Warranty Period, then HNC agrees
to use its reasonable commercial efforts to correct, cure, replace or otherwise
remedy, at HNC's option, such material malfunction without additional charge to
Licensee, upon HNC's receipt of written notification from Licensee, provided
that such notice is furnished to HNC during the Warranty Period, within three
(3) days of such notice, or if the malfunction cannot be remedied within such
time, to begin such corrective action within three (3) days, provided that, in
any event, the malfunction is remedied no later than thirty (30) days of such
notice. Licensee agrees to cooperate and work closely with HNC in a prompt and
reasonable manner in connection with HNC's correction efforts.
8.2 Year 2000 Compliance. HNC represents and warrants that the
--------------------
Software is year 2000 Compliant (as defined below). The provisions of this
Section shall not apply to any error or deficiency caused by operation of
software other than the Software (for example, operating system or external
database providers, or database software), any failure of such software to
properly and accurately exchange data with the Software in a form and format
compatible with the Software or any hardware or other equipment operated by
Licensee. HNC shall use reasonable efforts to promptly correct any reproducible
failure of the Software to be Year 2000 Compliant. HNC agrees to provide
Licensee with any information Licensee may reasonably request with respect to
HNC's Year 2000 preparedness. For purposes of this Agreement, "Year 2000
---------
Compliant" means that a software program, when used in accordance with its
- ---------
program, when used in accordance with its documentation and when processing data
containing dates in the year 2000 and in any preceding and following years, will
correctly store, represent, calculate, compare, manipulate, sequence and
otherwise correctly manage in all respects data involving dates, including
single-century formulas, multi-century formulas and leap year calculations, and
will not cause an abnormal termination of or within such software program or
result in incorrect or invalid values or calculations generated involving such
dates.
8.3 Configuration and Support. HNC represents and warrants that the
-------------------------
Software is configurable and commercially reasonable to maintain (exclusive of
the maintenance services provided by HNC as part of its maintenance and support
services generally made available to its customers under a separate maintenance
agreement) within the Licensee's Designated System and consistent with
Licensee's Designated Use.
8.4 REMEDIES AND DISCLAIMER. LICENSEE'S SOLE REMEDY FOR ANY BREACH OF
WARRANTY UNDER THIS AGREEMENT WILL BE TO HAVE HNC USE ITS REASONABLE COMMERCIAL
EFFORTS TO CURE SUCH BREACH AS PROVIDED HEREIN BY REPAIRING OR REPLACING THE
SOFTWARE OR, IF NEITHER OPTION IS PRACTICABLE, HNC WILL REFUND THE LICENSE FEES
PAID PLUS INTEREST AT A RATE OF 6% PER ANNUM FROM THE DATE OF PAYMENT. EXCEPT
FOR THE EXPRESS WARRANTIES SET FORTH IN SECTIONS 8.1, 8.2 AND 8.3 ABOVE, HNC
MAKES NO OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, UNDER THIS AGREEMENT AND
HEREBY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING ANY WARRANTIES REGARDING
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CORRESPONDENCE WITH
DESCRIPTION.
8.5 Limited Liability. REGARDLESS WHETHER ANY REMEDY SET FORTH HEREIN
-----------------
OR IN ANY OF HNC'S LIMITED WARRANTIES IN SECTIONS 8.1, 8.2 AND 8.3 HEREOF FAILS
OF ITS ESSENTIAL PURPOSE OR OTHERWISE, HNC WILL NOT BE LIABLE FOR ANY LOST
PROFITS, LOSS OF BUSINESS OR FOR INDIRECT, INCIDENTAL, EXEMPLARY, CONSEQUENTIAL,
PUNITIVE OR SPECIAL DAMAGES SUFFERED BY LICENSEE, ITS RESPECTIVE CUSTOMERS OR
OTHERS ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE SOFTWARE, THE
DOCUMENTATION OR ANY OTHER HNC PRODUCTS OR SERVICES, FOR ALL CAUSES OF ACTION OF
ANY
4
<PAGE>
KIND (INCLUDING BUT NOT LIMITED TO TORT, CONTRACT, NEGLIGENCE, STRICT PRODUCT
LIABILITY AND BREACH OF WARRANTY) EVEN IF HNC HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
8.6 Limit on Maximum Liability. EXCEPT FOR THE INDEMNIFICATION UNDER
--------------------------
SECTION 7.3, HNC'S TOTAL LIABILITY UNDER THIS AGREEMENT WILL IN NO EVENT EXCEED
THE TOTAL DOLLARS PAID BY LICENSEE TO HNC UNDER THIS AGREEMENT (EXCLUSIVE OF
REIMBURSED EXPENSES) PLUS INTEREST AT THE RATE OF 6% PER ANNUM FROM THE DATE OF
PAYMENT.
ARTICLE 9
---------
Term; Material Breach; Termination
9.1 Term. This Agreement, after it has been signed by an authorized
----
representative of each of the parties, will be binding upon the parties as of
the Effective Date and will continue in full force and effect unless otherwise
terminated in accordance with Section 9.2 below.
9.2 Events of Termination. Either HNC or Licensee will have the right,
---------------------
at its option, to terminate this Agreement if:
9.2.1 the other party materially breaches this Agreement, and fails
to cure such material breach within thirty (30) days after written notice or
such shorter time as provided for in Section 8.1 in the case of HNC;
9.2.2 the other party becomes the subject of a voluntary petition
in bankruptcy or any voluntary proceeding relating to insolvency, receivership,
liquidation, or composition for the benefit of creditors; or
9.2.3 the other party becomes the subject of an involuntary
petition in bankruptcy or involuntary proceeding relating to insolvency,
receivership, liquidation, or composition for the benefit of creditors, and such
involuntary petition or proceeding is not dismissed within sixty (60) days of
the earlier of its filing or commencement.
9.3 HNC's Remedies. Upon termination by reason of Licensee's uncured
--------------
breach or bankruptcy as provided above: (i) all rights of Licensee (and Licensee
Clients and End-Users) to use the Software hereunder will cease; and (ii) HNC's
obligation (if any) to provide any services under this Agreement will
immediately cease. In addition, HNC will immediately return to Licensee all
copies of Licensee's Confidential Information, and related materials.
9.4 Licensee's Remedies. Upon termination by reason of HNC's uncured
-------------------
breach or bankruptcy as provided above: (i) Licensee shall be entitled to all of
the remedies provided herein; and (ii) all rights of Licensee (and Licensee
Clients and End-Users) to use the Software under the license granted shall not
be effected and shall continue in full force and effect following the
termination.
9.5 Survival. The following rights and obligations will survive any
--------
termination or expiration of this Agreement: (a) Licensee's obligations to make
any payments due to HNC hereunder that accrued prior to termination; and (b) the
rights and obligations of the parties under Sections 2.5 (Protection of HNC's
Intellectual Property), 6 (Confidentiality), 8.4 (Warranty Disclaimer), 8.5
(Limited Liability), 8.6 (Limit on Maximum Liability), 9.3 (HNC's Remedies), 9.4
(Licensee's Remedies) 9.5 (Survival) and 10.3 (Exclusivity).
ARTICLE 10
-----------
Additional Agreements of the Parties
10.1 Reference Site Services. Each party agrees to become a production
-----------------------
site reference for the Software for the other party. In connection thereto, the
parties will permit up to a reasonable number of on-site visits per year by
prospective clients and telephone reference calls, subject to availability,
which permission will not be unreasonably withheld. Each party agrees to
reasonably contact the other party's representative in advance of any contact by
any prospective customer.
10.2 Press; Publicity. Upon execution of this Agreement and from time
----------------
to time thereafter, the parties may agree to issue joint press releases with
respect to the relationship between HNC and Licensee. Neither party will make
or issue any external press statement regarding the terms of this Agreement or
the relationship between the parties unless it has received the written consent
of the other party signed by an authorized officer of such party, which will not
be unreasonably withheld.
10.3 Exclusivity. The parties will collaborate on the development of the
-----------
Custom Programming Services. It is intended that Licensee will provide
considerable technical and other assistance and input based on competitive and
proprietary information in its possession. For a period of **** from the first
Production Use of the Custom Programming Services HNC agrees that it shall not,
without the prior written consent by an authorized officer of Licensee,
distribute, sell, or offer to sell, or provide to ****, the Custom Programming
Services software.
[****] Certain information in this exhibit has been omitted and filed separately
with the commission. Confidential treatment has been requested with respect to
the omitted portions.
10.4 Custom Programming Services. HNC shall perform the custom
---------------------------
programming services, for the fees and times, set forth in Exhibit 5 ("Custom
Programming Services").
ARTICLE 11
General
-------
11.1 Disclaimer of Partnership and Agency. HNC and Licensee are
------------------------------------
independent contractors and will have no power, nor will either of the parties
represent that is has any power, to bind the other party or to assume or to
create any obligation or responsibility, express or implied, on behalf of the
other party or in the other party's name. This Agreement will not be construed
as constituting HNC and Licensee partners, joint venturers or agents or to
create any other form of legal association that would impose liability upon one
party for the act or failure to act of the other party.
11.2 Counterparts. This Agreement may be executed in counterparts, which
------------
taken together shall constitute one single Agreement between the parties.
11.3 Section Headings; Exhibits. The section and subsection headings
--------------------------
used herein are for reference and convenience only, and will not enter into the
interpretation hereof. The Exhibits referred to herein and attached, and to be
attached hereto, are incorporated in this Agreement to the same extent as if set
forth in full herein.
11.4 No Waiver. No delay or omission by either party hereto to exercise
---------
any right or power occurring upon any non-compliance or default by the other
party with respect to any of the terms of this Agreement will impair any such
right or power or be construed to be a waiver thereof. A waiver by either of
the parties hereto of any of the covenants, conditions, or agreements to be
performed by the other will not be construed to be a waiver of any succeeding
breach thereof or of any covenant, condition, or agreement herein contained. No
waiver of any rights of a party under this Agreement will be effective unless
such waiver is set forth in a writing signed by such party.
5
<PAGE>
11.5 Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be unlawful,
prohibited by or invalid under applicable law, then such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or any of the remaining provisions
of this Agreement.
11.6 Governing Law. This Agreement will be governed by and construed in
-------------
accordance with the internal laws of the State of California, U.S.A. applicable
to agreements made in California by California residents.
11.7 Entire Agreement. This Agreement, and the Exhibits hereto
----------------
constitute the entire agreement and understanding between the parties regarding
the subject matter hereof, and supersede all prior agreements, understandings,
documents and statements regarding such subject matter, and there are no
understandings or agreements relative hereto other than those which are
expressed herein. No amendment or modification of this Agreement will be
effective unless it is in writing and is executed by both HNC and Licensee.
11.8 Notices. Under this Agreement, if one party is required to give
-------
notice to the other, such notices shall be deemed given when personally
delivered or three (3) business days after being mailed by an express mail
service (e.g., FedEx, UPS, DHL, etc.) and addressed as follows (or to such other
address for notice as a party may subsequently notify the other in accordance
with the provisions of this Section):
If to HNC: HNC Software Inc.
5930 Cornerstone Court West
San Diego, CA 92121-3728
Attention: V.P. Finance
If to Licensee: Digital Insight Corporation
26025 Mureau Road
Calabasas, CA 91302
Attention: Meheriar Hasan
With a copy to: Digital Insight Corporation
26025 Mureau Road
Calabasas, CA 91302
Attention: Legal Counsel
11.9 No Assignment. Neither party shall, without the prior written
-------------
consent of the other party, assign or transfer this Agreement, and any attempt
to do so without first obtaining such written consent will be void and of no
force and effect. Notwithstanding the foregoing, this Agreement may be assigned
by operation of law through a merger, reorganization, consolidation, or sale of
all or substantially all its assets.
11.10 Excused Performance. Notwithstanding anything to the contrary
-------------------
herein, neither party shall be deemed to be in default of any provision of this
Agreement or be liable to the other party or to any third party for any delay,
error, failure in performance or interruption of performance due to any act of
God, war, insurrection, riot, boycott, strikes, interruption of power service,
interruption of communications service, labor or civil disturbance, acts of any
other person not under the control of either party or other similar causes, the
occurrence of which are (i) not reasonably foreseeable by a party other than by
virtue of the fact that similar things have happened in the past from time to
time, and (ii) beyond the reasonable control of that party. Licensee and HNC
shall each use its best efforts to remedy its delay, error, failure to perform,
or incomplete performance in a manner which is fair and equitable to both
parties. The delayed party shall give the other party reasonable written
notification of any material or indefinite delay due to such causes. This
Agreement shall be deemed to have been amended to extend the term of this
Agreement by the period of time attributable to the excusable delay.
11.11 Further Assurances. Each party shall take such action (including
------------------
but not limited to, the execution, acknowledgment and delivery of documents) as
may reasonably be requested by the other party for the implementation or
continuing performance of this Agreement.
11.12 Dispute Resolution. Other than as specifically stated otherwise
herein, any controversy or claim between Licensee and HNC arising from or in
connection with this Agreement or the relationship of the parties under this
Agreement, whether based on contract, tort, common law, equity, statute,
regulation, order or otherwise, other than a dispute regarding ownership of the
Software, Documentation or Intellectual Property rights (a "Dispute"), shall be
resolved by the parties through negotiations conducted in good faith. If the
parties are unable to resolve the Dispute by good faith negotiation, the Dispute
shall be submitted to final, binding arbitration by one (1) arbitrator with
expertise relevant to the dispute, which arbitrator shall be reasonably
acceptable to both parties. Any such arbitration shall be held in the State of
California and conducted under the then current Commercial Arbitration Rules of
the American Arbitration Association. If the parties cannot agree upon an
arbitrator, an arbitrator shall be selected in accordance with such rules. Each
party shall share equally in the cost of arbitration and shall bear its own
expenses including professional fees.
IN WITNESS WHEREOF, HNC and Licensee have caused this Agreement to be signed in
duplicate and delivered by their duly authorized representatives as of the
Effective Date.
HNC SOFTWARE INC.
BY Diane S. Morgan
---------------
TITLE V.P. Sales + Mkt.
----------------
SIGNATURE /s/ Diane S. Morgan
-------------------
LICENSEE
BY MEHERIAR HASAN
--------------
TITLE V.P. PRODUCT MANAGEMENT
-----------------------
SIGNATURE /s/ Mehariar Hasan
------------------
6
<PAGE>
LIST OF EXHIBITS
to
LICENSE AGREEMENT
Exhibit 1 Fees and Payment Terms and Conditions
Exhibit 2 Description of the Software
Exhibit 3 Designated System, Licensee Site and Designated Use
Exhibit 4 Form of Processor Client Agreement Terms
Exhibit 5 Custom Programming Services
1
<PAGE>
EXHIBIT 1
---------
FEE AND PAYMENT TERMS AND CONDITIONS
I. License Fees
- -----------------
A. Fees. In consideration of HNC's grant to Licensee of the non-exclusive right
to use the HNC Software as described in Article 2 of this Agreement, Licensee
agrees to pay HNC the following one-time License Fees, subject to the volume
limitations below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Component One-Time License Fee
- ---------------------------------------------------------------------------------------------
<S> <C>
Capstone Decision Server - 3.x* (object code) $****
- ---------------------------------------------------------------------------------------------
Credit Card Decisioning Module - 3.x* (object code) $****
- ---------------------------------------------------------------------------------------------
Consumer Loan Decisioning Module - 3.x* (object code) $****
- ---------------------------------------------------------------------------------------------
Mortgage Loan Decisioning Module - 3.x* (object code) $****
- ---------------------------------------------------------------------------------------------
US Credit Subsystem Module- 3.x* (object code) $****
- ---------------------------------------------------------------------------------------------
Total One Time License Fees: $****
- ---------------------------------------------------------------------------------------------
</TABLE>
* "x" - as defined in Exhibit 2 of this Agreement.
B. Maximum Volume Limitation:
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------
Maximum Annual Volume (**) **** applications
- ------------------------------------------------------------------------------------------
</TABLE>
** Measured from the preceding 12 month period as of each annual anniversary of
the Effective Date of the Agreement, adjusted for the succeeding twelve (12)
month period according to the Volume Upgrades in II below.
C. Payable. Such one-time License Fee will be payable to HNC as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Item When Due and Payable Amount Due
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
One-time License Fees - First Installment Upon execution of this Agreement $****
- -------------------------------------------------------------------------------------------------------------------------
One-time License Fees - Second Installment One Hundred and Eighty (180) days from the $****
Effective Date of this Agreement
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
II. Volume Upgrade Fees
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
From To Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- -0- Applications(***) per year **** Applications per year $**** per Application
- ----------------------------------------------------------------------------------------------------------------------------------
**** Applications per year **** Applications per year $**** per Application above ****
applications per year
- ----------------------------------------------------------------------------------------------------------------------------------
**** Applications per year And above $**** per Application above ****
application per year
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(***) "Applications" means decisioned-applications where the application
results in an approval, denial or review by the financial institution.
Application does not include withdrawn, cancelled or unprocessed
applications.
THE EXHIBIT AND ITS PRICING IS ONLY EFFECTIVE IF THIS AGREEMENT IS
EXECUTED BY BOTH PARTIES ON OR BEFORE 11:59 P.M., SEPTEMBER 30, 1999
[****] Certain information in this exhibit has been omitted and filed separately
with the commission. Confidential treatment has been requested with respect to
the omitted portions.
2
<PAGE>
EXHIBIT 2
---------
DESCRIPTION OF THE HNC SOFTWARE
The HNC Software consists of the following
Capstone Decision Manager
. Capstone Decision Server 500 (object code) - Version 3.x
Includes:
. Capstone Configuration Workstation (object code) - Version 3.x
. Capstone Server Monitor (object code) - Version 3.x
. Capstone Decision Starter Set (object code) - Version 3.x,
including:
Sample Report Templates (Capstone Configuration Code)
. Aquarius Decision Process Libraries (Configuration Export Files)
(object code)- Version 1.11Capstone Mortgage Only US Credit
Subsystem Module (object code ) - Version 3.x
. Capstone Configuration Modules for Credit Card and Consumer Loan
Decisioning (object code) - Version 3.x
"x" in the version numbers noted above means any Releases to Version 3 of
--------
the HNC Software - Capstone.
CAPSTONE IS A TRADEMARK OF HNC SOFTWARE INC. AND LICENSEE AGREES TO
RECOGNIZE SAID MARK AS SUCH.
Product Description
-------------------
The following Documentation constitutes the functional specifications for
the HNC Software. Such Documentation will be provided to Licensee
concurrently with the delivery of the HNC Software:
1. System Reference Capstone Version 3.x (Cap0004)
2. User's Guide Capstone Configuration Workstation Version 3.x (Cap0001)
3. User's Guide Capstone Server Monitor Version 3.x (Cap0003)
4. Aquarius Suite Decision Process Libraries Version 1.11 (Aqu0003)
Licensee agrees to promptly acknowledge its receipt of such Documentation
(including any revised Documentation which may be produced by HNC from time
to time in connection with any release updates to the HNC Software) using
the acknowledgement form to be furnished to Licensee by HNC.
3
<PAGE>
EXHIBIT 3
---------
Description of Designated System
--------------------------------
Principal Server Complex - Sun Microsystems Enterprise 6500 (6 x 336MHz
CPU, 4GB RAM) plus associated application server processors
Backup Server Complex - Sun Microsystems Enterprise 6500 (6 x 336MHz
CPU, 4GB RAM) plus associated application server processors
Licensee's Site
---------------
Principal Data Center located at 26025 Mureau Road, Calabasas, CA 91302
("Principal Data Center")
Backup Data Center located at Herndon, VA ("Backup Data Center")
Description of Designated Use
-----------------------------
Designated Use means the process of capturing and storing credit
application data from End Users residing in the Territory who would like to
apply for a Licensee Client loan product customarily offered by financial
institutions and then applying Licensee Client credit policies and
guidelines to establish the creditworthiness of the End User, including the
use of automated decision engine technology to process such application and
render a credit decision.
To support this Designated Use, Licensee will Use the Software at its
Principal Data Center for the purpose of processing credit applications on
behalf of Licensee Clients. Credit application data will be submitted
either by End Users or employees of Licensee Clients. A backup copy of the
Software will be simultaneously Used in Licensee's Backup Data Center to
enable continuous provision of service from Licensee to Licensee Clients
and End Users in the event of a systems failure at Licensee's Principal
Data Center.
Licensee will Use a separate copy of the HNC Software at its Principal Data
Center and its Backup Data Center for each Licensee Client to whom credit
application processing services are being provided by Licensee.
4
<PAGE>
EXHIBIT 4
---------
FORM OF PROCESSOR CLIENT AGREEMENT TERMS
1. Licensee grants to Licensee Client ("Licensee Client"), defined as a
customer of Licensee that will use the Software for the Designated Purpose)
a nonexclusive, nontransferable sublicense to use the HNC Software only in
object code form as provided herein and to use the Documentation for the
HNC Software. Licensee Client's rights may not be sublicensed, assigned,
or transferred in any respect, whether by operation of law or otherwise,
except as specifically set forth in this Agreement. Licensee Client's
rights and license with respect to the HNC Software are subject to
termination if Licensee's rights under the License Agreement between HNC
and Licensee are terminated by reason of an uncured breach or bankruptcy by
Licensee.
Client agrees to take such reasonable steps as necessary to insure the
following (including, if reasonably necessary, the insertion of following
terms and conditions in Licensee's agreements with its Licensee Client):
(a) Title to and ownership of the Software shall remain
exclusively with HNC and its licensors (if any). Licensee Client
shall not alter or erase any proprietary notices appearing on the
Software.
(b) The Software and Documentation contains trade secrets of
HNC, and to protect them, Licensee Client agrees not to decompile,
reverse engineer, disassemble, or otherwise reduce the Software to
human perceivable form. Except as otherwise provided in this
Agreement, Licensee Client may not use, copy, modify, adapt,
translate, rent, lease, loan, resell for profit, distribute, network
or create derivative works based upon the Software or any part
thereof.
(c) HNC and its licensors (if any) shall not be liable to
Licensee Client or any third party for any damages, including direct,
indirect, incidental, consequential or punitive damages, that may
arise from use of the Software, whether or not HNC or anyone else has
been advised of the possibility of such damages.
5
<PAGE>
EXHIBIT 5
Custom Software
Description of Custom Programming Services:
The Custom Programming Services shall introduce additional architecture to
support a complete segregation of all aspects of a Licensee Client's
business process. This shall include, but will not be limited to:
. segregation of application data, configurations, workflows, users,
queues, reports and data access
. ability to include within a given Licensee Client configuration,
elements
For clarification, these specific features shall be supported:
SINGLE DATABASE USAGE
. ****
USER ADMINISTRATION
****. The architecture of Capstone and the Configuration Workstation
tool shall enforce/./ the following constraints:
----------
. ****
. ****
. ****
. ****
. ****
WORKFLOW CONFIGURATION
****. The architecture of Capstone and the Configuration Workstation
tool shall enforce the following constraints:
-------
. ****
. ****
. ****
USER AND WORKFLOW SYNCHRONIZATION
. **** The architecture of Capstone and the Configuration
Workstation tool shall enforce the following constraints:
-------
. ****
. ****
DATA ACCESS
. **** The architecture of Capstone and the Configuration
Workstation shall enforce the following constraints:
-------
. ****
. ****
. ****
[****] Certain information in this exhibit has been omitted and filed separately
with the commission. Confidential treatment has been requested with respect to
the omitted portions.
- ----------------------
/./ "Enforce" shall mean that specific functionality within the product exists
to prevent violations of the required behavior.
6
<PAGE>
REPORTING AND ANALYSIS
. **** The architecture of Capstone and the Configuration
Workstation tool shall enforce the following constraints:
-------
. ****
. ****
License Fees:
The License Fee for the Custom Programming Services shall be a one-time fee
of $**** due upon delivery.
Milestones
HNC shall use its commercially reasonable efforts towards completion of the
Custom Programming Services within a reasonable time after the project has
begun not to exceed 120 days, with an option by either party to extend the
completion date by an additional 30 days. Once delivered, the Custom
Programming Services shall be thereafter included in the definition of
Software as defined in Section 2 of this Agreement.
[****] Certain information in this exhibit has been omitted and filed separately
with the commission. Confidential treatment has been requested with respect to
the omitted portions.
7
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,177
<SECURITIES> 0
<RECEIVABLES> 2,033
<ALLOWANCES> (48)
<INVENTORY> 0
<CURRENT-ASSETS> 9,417
<PP&E> 6,759
<DEPRECIATION> (1,485)
<TOTAL-ASSETS> 14,903
<CURRENT-LIABILITIES> 5,311
<BONDS> 0
20,847
0
<COMMON> 6
<OTHER-SE> (11,739)
<TOTAL-LIABILITY-AND-EQUITY> 14,903
<SALES> 11,796
<TOTAL-REVENUES> 11,796
<CGS> 7,489
<TOTAL-COSTS> 10,451
<OTHER-EXPENSES> (111)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,033)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,033)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,033)
<EPS-BASIC> $(1.10)
<EPS-DILUTED> $(1.10)
</TABLE>
