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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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[X]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 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
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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 No.)
26025 Mureau Road, Calabasas, California 91302
(Address of principal executive offices, including zip code)
(818) 871-0000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 15, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant, based upon the closing sales price of the
registrant's common stock as reported by the Nasdaq National Market System, was
$541,701,300. The shares of common stock held by each officer and director and
by each person known to the registrant who owns 5% or more of the outstanding
common stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of March 15, 2000, the
registrant had 23,029,251 shares of its common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the 2000 annual meeting of
stockholders are incorporated by reference in Part III of this Annual Report on
Form 10-K to the extent stated herein. The proxy statement will be filed within
120 days of the end of the fiscal year covered by this Annual Report on Form
10-K.
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TABLE OF CONTENTS
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PART I
Item 1. Business............................................................................... 4
Item 2. Properties............................................................................. 22
Item 3. Legal Proceedings...................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders.................................... 22
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters................... 23
Item 6. Selected Financial Data................................................................ 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 28
Item 8. Financial Statements and Supplementary Data............................................ 29
Item 9. Changes In and Disagreements with Accountants On Accounting and Financial Disclosure... 29
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... 30
Item 11. Executive Compensation................................................................. 31
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 31
Item 13. Certain Relationships and Related Transactions......................................... 31
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K........................ 32
Signatures...................................................................................... 34
Financial Statements............................................................................ F-1
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements that involve risks and uncertainties. These
forward-looking statements include, among other things, statements regarding
our anticipated costs and expenses, our capital needs and financing plans,
product and service development, our growth strategies, market demand for our
products and services, relationships with our strategic marketing alliances,
competition, and the reliability and security of our data center. These
forward-looking statements include, among other things, those statements
including the words "expects," "anticipates," "intends," "believes" and similar
language. Our actual results may differ significantly from those projected in
the forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed under the heading
"Risk Factors" in Item 1 of Part I. You should also review the risk factors
described in other documents we file from time to time with the Securities and
Exchange Commission, including our quarterly reports on Form 10-Q. You are
cautioned not to place undue reliance on the forward-looking statements, which
speak only as of the date of this Annual Report on Form 10-K. We undertake no
obligation to publicly release any revisions to the forward-looking statements
to reflect events or circumstances after the date of this Annual Report on Form
10-K.
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PART I
ITEM 1. BUSINESS
Digital Insight is the leading provider of Internet banking services to
credit unions, small to mid-sized banks, and savings and loans with assets of
less than $10 billion, based on the number of home banking end users we serve
as compared to our direct competitors. We offer these community financial
institutions a cost-effective outsourced service, branded in their name, which
includes home banking for their individual customers, business banking for
their commercial customers, a targeted marketing program to enable them to
effectively sell additional financial services to end users, and customized web
site design and implementation services. As of December 31, 1999, we had
contracted with over 467 financial institution customers. The contracted home
banking customers had over 11.7 million potential end users. Of these potential
end users, over 663,000 were actively using our home banking application.
We provide community financial institutions with a comprehensive and secure
Internet solution that can be installed rapidly with a high degree of
customization. Our solution is designed to be readily expandable, or scalable,
as the number of users grows. Our solution also offers high levels of service
and system redundancy. We work closely with leading data processing vendors so
that our financial institution customers can leverage the investment they have
made in existing data processing systems by fully integrating them with an
Internet solution.
We earn revenues from implementation fees that our financial institution
customers pay us for establishing their Internet banking services, and
recurring service fees based on end user adoption and usage, as well as web
site hosting and maintenance and other monthly services. During the year ended
December 31, 1999, approximately 76.3% of our revenues came from recurring
fees.
The Digital Insight Solution
We provide Internet banking services to community financial institutions.
Our service includes a content-rich home banking application for retail
customers and a business banking application for commercial customers. AXIS
Home Banking, our consumer product, includes account management, account
transfers and interfaces to personal financial management software, bill
payment, stock quotes and other expanded services. AXIS Cash Management, our
small business product, includes similar features as well as payroll/direct
deposits and other services. To enable financial institutions to sell
additional financial services to their end users based on individual profiles,
we also offer target marketing programs to our customers. We also provide
customized web site design, implementation, maintenance and hosting services.
Our solution offers the following benefits to community financial
institutions:
. Comprehensive and Customizable Solution. We provide full service bureau
support to customers who desire such an environment, including hosting of
web sites, web site maintenance, reporting tools and customized online
account presentations. Our home banking and business banking applications
can be configured to offer end users a variety of standard and optional
features. Our web site design and implementation services also enable
customers to establish Internet banking services with a look and feel
that preserves their unique brand identity.
. Real Time and Batch Online Architecture. Our architecture allows either
real time or batch communication with financial institutions' core data
processing systems. Real time data processing allows for transactions
conducted on the web site to be immediately reflected on the host system,
and allows for transactions conducted at the financial institution to be
immediately reflected on the web site. As a result, the information we
present to consumers can be current with the financial institution's own
data, with as much transaction history as is then available from the
institution. For example, if an end user makes a withdrawal at a branch,
it will be reflected instantaneously online. Meanwhile, batch processing
systems transfer transaction data between the home banking data center
and the financial
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institution's host system on a daily basis, rather than sending
transactions immediately to the host system for processing. Our ability to
offer both real time and batch processing capabilities to financial
institutions increases our potential customer base.
. Extensive Data Processing Vendor Relationships. Our solution provides
direct links, or interfaces, with multiple vendors of core banking
software and data processing services to financial institutions. As of
March 1, 2000, we have developed interfaces to data processing vendors
representing 51 separate systems, serving more than 12,000 community
financial institutions. We are currently developing interfaces to 16
additional systems provided by 12 separate data processing vendors that
support more than 3,000 financial institutions. By working directly with
these vendors, we enable our customers to offer either real time or batch
presentations of end user account data and we can quickly and cost-
effectively install our systems with customers of these vendors. Our
interfaces also allow for tight integration with other functions
supported by the data processing vendor, such as loan origination and
statement and check imaging.
. Scalable, Reliable and Secure Service. Our system can scale rapidly to
accommodate increased numbers of end users. A financial institution can
take advantage of our data center and the server infrastructure of its
data processing vendor to scale to meet demand, without building its own
separate server infrastructure. Our service is also highly reliable, with
an up-time availability record averaging 99.41% during the twelve-month
period ended December 31, 1999. Further, our systems incorporate
sophisticated data encryption techniques, a series of firewalls between
the Internet and our customers, and several layers of security technology
in order to minimize unauthorized access to our network.
. Rapid and Affordable Implementation. Our solution can be rapidly
implemented and represents an affordable alternative to internally
developed Internet banking services for community financial institutions.
Average implementation times for our home banking application range from
one to three months, depending on the complexity of web site design
requests and the availability of an existing interface with a customer's
data processing vendor.
. Flexible Service Capabilities. Our applications are designed to be
deployed in a variety of environments, depending on a customer's needs. A
customer can use our data center in a service bureau arrangement, house
its own dedicated hardware in our data center or host our systems in its
own facility. Importantly, customers can migrate from one environment to
another as their needs evolve. In addition, we have the flexibility to
support data processing vendors whose systems are either batch or real
time.
. Platform for Value-Added Services and Target Marketing. We enable
financial institutions to expand their Internet presence beyond their
core banking functions by providing additional value-added products and
services to their customers. These services include bill payment and
delivery of third-party services such as stock quotes. Our real time and
batch solutions are also capable of gathering relevant end-user account
activity information and usage profiles, enabling financial institutions
to target timely and appropriate services to their customers, thereby
creating additional revenue opportunities. We believe that these
additional product and service offerings will allow our customers to
derive additional revenue from existing and new end users.
Products and Services
Our primary products are home banking and business banking applications.
These applications allow a financial institution to create a customized
Internet banking service using an array of standard and optional features. We
complement our primary banking applications with additional tools, such as
target marketing, and with implementation and web site services.
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Home Banking
Our AXIS Home Banking application is an Internet-based system through which
community financial institutions are able to provide home banking to their
retail customers. Standard features of this application include:
. Account information: End users can view balance information and
transaction history for deposit accounts, such as checking and savings,
and loan accounts, such as consumer, credit cards, automobile and
mortgage.
. Funds transfer: End users can transfer funds among accounts, including
making loan payments.
. Interfaces with personal financial management software: End users can
download their account information into Quicken and Microsoft Money.
In addition to these standard features, financial institutions can also
choose to include the following home banking optional features:
. Bill payment: End users can pay bills electronically 24 hours a day,
seven days a week. End users can schedule one-time or recurring payments,
and can view payment history at their convenience.
. Online applications: End users can submit electronic loan, credit card or
other applications safely and securely to their financial institution.
. Online services and additional features: End users can track stock
prices, calculate portfolio values, order U.S. Savings Bonds, make check
image requests and order checks.
Business Banking
Our AXIS Cash Management application provides a full range of Internet
business banking services for commercial customers of community financial
institutions. Standard features of this application include:
. Administration platform: Businesses can control access to business
banking and account features in order to provide financial and audit
controls for their staff.
. Account information: Businesses can view account balances and transaction
history, and reconcile accounts instantly.
. Funds transfer: Businesses can actively manage their accounts, setting up
future-dated transfers and automatic transfers of available balances
among accounts.
. Stop payment placement: Businesses can place stop payment orders on
checks.
. File export: Businesses can export their account information into a
computer file or into business financial management and accounting
software such as QuickBooks.
Optional features of AXIS Cash Management include:
. Bill payment: End users can pay bills electronically 24 hours a day,
seven days a week. End users can schedule one-time or recurring payments
and can view payment history at their convenience.
. Automated Clearing House services: Businesses can initiate electronic
payments, including business-to-business, payroll direct deposit
disbursements and electronic state and federal tax payments.
. Wire transfers: Businesses can originate wire transfers of funds to
accounts with other financial institutions or trade partners.
. Online services and additional features: Businesses can complete
predefined loan and other applications, make photocopy requests, order
checks, and track portfolios.
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Target Marketing
Our Target Marketing module is designed to help make the financial
institution's web site a cost-effective sales tool. This module is currently
available for both our home banking application and our business banking
application. Target Marketing allows financial institutions to individually
target account holders and present the account holders with opportunities to
buy products and services to fit their needs. The Target Marketing module gives
financial institutions the ability to:
. analyze end users' demographic and financial profiles and online
activity, and apply a set of screening criteria to select appropriate
marketing promotions;
. present individually-targeted marketing promotions, such as
advertisements for loans, to end users when it is most appropriate;
. incorporate account sign-up forms and loan applications into specific
promotions;
. create time-limited promotions and seasonal messages; and
. change messages daily, hourly or randomly.
AXIS Management Console
Our Internet services management console provides our customers with a set
of tools to actively manage their Internet banking system. With this management
console, a financial institution can remotely manage its web site, generate
reports on daily activities and keep transaction logs and activity records for
all site events. A financial institution can also use this management console
to configure the Target Marketing module for specific promotions.
Implementation Services and Web Site Development
For financial institutions without an existing web site, our team of experts
develops a fully interactive site. Working closely with the customer, the team
designs the site to incorporate the features and capabilities required by the
institution, including the integration of proprietary and value-added financial
services such as application forms, financial calculators and links to other
web sites. For customers with an existing web site, our implementation services
are focused on integrating the home banking and/or business banking application
into that site. In both instances, financial institutions can elect to have
Digital Insight host and maintain their web site. We provide a team of web site
experts who program the placement and formatting of digitized text for a
financial institution's Internet site, including all connections to other web
sites.
Systems Architecture
Our applications are designed to be deployed in a service bureau
environment, resource managed environment, or an in-house environment. In a
service bureau environment, the financial institution's web site and home
banking application share resources with other financial institutions in our
data center. These shared resources include hardware such as our servers, as
well as data transmission capacity, known as bandwidth. In a resource-managed
environment, a financial institution has dedicated bandwidth and hardware but
the system is still located in our data center. In an in-house environment, a
financial institution runs the system out of its own data center. In all
environments, the financial institution or data processing vendor is connected
to Digital Insight through our private frame relay network.
Our systems architecture is designed to provide both real time and batch
data acquisition, processing and presentation for Internet home banking and
other applications. Our application servers make use of information exchange
brokers that retrieve and initiate transactions using data located on financial
institutions' host systems, bill payment providers' servers, stock information
databases or relational databases. Our applications are driven by templates
which define how data is to be presented. This template driven approach allows
customization by our financial institution customers by supporting multiple
languages and multiple web site designs.
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Our real time architecture is highly scalable, and allows end users to
communicate in real time through a private frame relay network to retrieve
account information as needed. Real time data processing allows for
transactions conducted on the web site to be immediately reflected on the host
system and vice versa. In contrast, in batch systems, home banking transactions
are not immediately sent to the financial institution's host system for
processing but are instead transferred between the home banking data center and
the host system on a daily basis. Our recent acquisition of nFront, Inc.
enables us to offer both real time and batch processing capabilities to
financial institutions, thus expanding our potential customer base.
We currently provide most of our services out of one data center located at
our headquarters in Calabasas, California. We launched a second data center
that we will manage at an Exodus Communications facility in Herndon, Virginia.
This second data center was put into operation in the fourth quarter of 1999
with functionality to be added throughout 2000. When fully operational, this
data center will allow for greater scalability and increased functionality by
providing backup functions to the Calabasas data center.
Customers
Our target market is the approximately 22,000 community financial
institutions in the United States with assets of less than $10 billion each.
Within our target market, we focus on community financial institutions that
rely on one or more of the data processing vendors with whom we have developed
interfaces. As of March 1, 2000, we have interfaces with data processing
vendors serving over 12,000 community financial institutions. We are seeking to
expand the number of vendors with whom we have interfaces.
As of December 31, 1999, we had contracts with over 467 financial
institutions to provide one or more of our products and services. Of these
institutions, over 350 have contracted with us for home banking, with more than
663,000 active end users. Based on publicly available regulatory submissions,
as of December 31 1999, our home banking customers had more than 11.7 million
potential end users. For the years ended December 31, 1998 and December 31,
1999, no individual customer accounted for 10% or more of our revenues.
The table below sets forth our ten largest home banking customers as of
March 1, 2000 in the categories of banks/savings and loans (based on asset
size) and credit unions (based on the number of potential end users).
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Banks/Savings and Loans Credit Unions
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City National Bank of California The Golden 1 Credit Union
Trust Company Bank Government Employees Federal Credit Union
Sun National Bank Truliant Federal Credit Union
East West Bank Teachers Credit Union
California Commerce Bank ESL Federal Credit Union
City National Bank of Florida Community Credit Union
West Coast Bank Portland Teachers Federal Credit Union
Commercial Bank of New York Mountain America Credit Union
Pacific Century Bank North Island Federal Credit Union
San Diego National Bank San Diego County Credit Union
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Third-Party Relationships
We have relationships with multiple vendors of core data processing software
and outsourced data processing services to financial institutions. Agreements
with these vendors allow us to interface to the financial institutions' host
systems to provide access to a financial institution's account data. As of
March 1, 2000, we have developed interfaces to the systems of 31 data
processing vendors who provide services to more than 12,000 community financial
institutions. We are currently developing interfaces for 16 additional systems
provided by 12 different vendors. Among the data processing vendors with whom
we interface are: BancTec, CSI, CUC Inc., EDS Cube, EDS Miser, Fiserv divisions
such as Aftech, CBS, Galaxy and Summit, Helvetia de Caribe, Jack Henry, OSI,
Symitar Systems, USERS Inc. and XP Systems. Among the interfaces under
development are ALLTEL and M&I Data Services.
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To deliver bill payment services, we have relationships with major providers
such as M&I Data Services and CheckFree. Our agreement with M&I Data Services,
as successor to Moneyline Express, has a one-year renewable term and provides
for payment of fees based on the number of customers, end users and bill
payment transactions. We also have relationships with third parties, including
the U.S. Treasury, DecisionOne, 800 Support, Intuit and Microsoft, to provide
other related functions to our customers.
Sales and Marketing
We utilize a direct sales model. As of December 31, 1999, our sales and
marketing staff consisted of 31 professionals, who are regionally based to
facilitate the development of strong relationships with customers. The sales
staff is responsible for prospecting and acquiring new accounts as well as
managing current accounts and cross-selling additional products into those
accounts. We expect to significantly increase our sales and marketing
infrastructure over the next 12 months.
Our typical sales cycle is approximately six months for new customers and
approximately two months for follow-on or upgrade sales to existing customers.
Our primary customer contact for new sales in smaller community financial
institutions is generally the chief executive officer, the chief financial
officer or the chief information officer, or a combination of these three, and
our primary contact in larger community financial institutions is generally the
head of retail banking or business banking. Our primary customer contact for
follow-on sales is usually the functional manager for the community financial
institution or the direct manager of Internet banking for that institution.
Our primary marketing efforts are focused on building brand awareness among
community financial institutions and identifying potential customers. Our
marketing efforts include:
. telemarketing;
. press relations, which are managed by an outside public relations firm
that specializes in banking and financial industries;
. direct mail, which uses product and service literature as well as
reprints of news articles;
. trade shows; and
. meetings with national and regional user groups of Internet banking
services and third-party data processing vendors.
Product Development
As of December 31, 1999, our product development staff consisted of 51
software developers and engineers. Their development efforts are focused on:
. Enhancements to Existing Products. We are developing new features and
functions for our home banking and business banking products in order to
provide a broader range of functions, including Internet loan origination
and bill presentment.
. Interfaces with Data Processing Vendors. We are continuing to enhance and
expand our interfaces to financial institutions' core data processing
systems. A variety of different systems are utilized by both banks and
credit unions.
. Additional Web Site Customization. We intend to offer financial
institutions additional options and capabilities for customization of
their web sites by creating more templates and making these templates
more flexible.
. Enhancements to Target Marketing. We intend to add features to Target
Marketing to support a broader range of electronic commerce activities.
. Other Products and Services. We are working to expand our offerings to
include related financial service capabilities such as online insurance,
brokerage, credit history management, tax preparation and filing and
merchant services.
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Competition
The market for Internet banking services is highly competitive, and we
expect that competition will intensify in the future. In the area of home
banking, we primarily compete with other companies that provide outsourced
Internet banking services to community financial institutions, including
FundsXpress, HomeCom, Home Financial Network, NetZee, Online Resources, Q-Up
and Virtual Financial. Also, vendors such as Corillian, Integrion and Security
First Technologies, who primarily target the largest financial institutions,
occasionally compete with us for community financial institution customers. In
addition, several of the vendors offering data processing services to financial
institutions offer their own Internet banking solutions, including EDS, Fiserv,
Jack Henry and M&I Data Services. Local competition for home banking services
is provided by more than 100 smaller online service outsourcing companies
located throughout the United States.
Our primary competition for providing the business banking services that
financial institutions offer their commercial customers are vendors of cash
management systems for large corporations such as ADP, Magnet and Pulitzer &
Haney.
We also face potential indirect competition from Internet portals such as
E*TRADE and Yahoo! which might serve as an alternative to financial
institutions' web sites, particularly for bill presentment services. In
addition, we could experience competition from our customer financial
institutions and potential customers who develop their own online banking
solutions. Rather than purchasing Internet banking products and services from
third-party vendors, community financial institutions could develop, implement
and maintain their own services and applications. We can give no assurance that
these financial institutions will perceive sufficient value in our products and
services to justify investing in them.
We believe that our ability to compete successfully depends upon a number of
factors, including:
. our market presence with community financial institutions and related
scale advantages;
. the reliability, security, speed and capacity of our systems and
technical infrastructure;
. the comprehensiveness, scalability, ease of use and service level of our
products and services;
. our ability to interface with vendors of data processing software and
services;
. our pricing policies and the pricing policies of our competitors and
suppliers;
. the timing of introductions of new products and services by us and our
competitors; and
. our ability to support unique customer requirements.
We expect competition to increase significantly as new companies enter our
market and current competitors expand their product lines and services.
Government Regulation
The financial services industry is subject to extensive and complex federal
and state regulation. Our current and prospective customers, which consist of
financial institutions such as commercial banks, savings and loans, credit
unions, thrifts, securities brokers, finance companies, other loan originators,
insurers and other providers of financial services, operate in markets that are
also subject to rigorous regulatory oversight and supervision. Our customers
must ensure that our services and related products work within the extensive
and evolving regulatory requirements applicable to them, including those under
federal and state truth-in-lending and truth-in-deposit rules, usury laws, the
Equal Credit Opportunity Act, the Fair Housing Act, the Electronic Fund
Transfer Act, the Fair Credit Reporting Act, the Bank Secrecy Act and the
Community Reinvestment Act. The compliance of our products and services with
these requirements depends on a variety of factors including the particular
functionality, the interactive design and the classification of the customer.
Our financial services customers must assess and determine what is required of
them under these regulations and are responsible for ensuring that our system
and the design of their site conform to their regulatory needs. We do not make
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representations to customers regarding applicable regulatory requirements, and
rely on each customer to identify its regulatory issues and to adequately
specify appropriate responses. It is not possible to predict the impact that
any of these regulations could have on our business.
We are not licensed by the Office of the Comptroller of the Currency, the
Board of Governors of the Federal Reserve System, the Office of Thrift
Supervision, the National Credit Union Administration or other federal or state
agencies that regulate or supervise depository institutions or other providers
of financial services. We are subject to examination by federal depository
institution regulators under the Bank Service Company Act and the Examination
Parity and Year 2000 Readiness for Financial Institutions Act. These regulators
have broad supervisory authority to remedy any shortcomings identified in any
such examination. We are also subject to encryption and security export laws
and regulations which, depending on future developments, could render our
business or operations more costly, less efficient or impossible.
Federal, state or foreign authorities could adopt laws, rules or regulations
affecting our business operations, such as requiring us to comply with data,
record keeping and other processing requirements. We may become subject to
additional regulation as the market for our business evolves. It is possible
that laws and regulations may be enacted with respect to the Internet, covering
issues such as user privacy, pricing, content, characteristics and quality of
services and products. Existing regulations may be modified. For example, we
are not subject to the disclosure requirements of Regulation E of the Federal
Reserve Board under the Electronic Fund Transfer Act, because we do not agree
with consumers to provide them with electronic funds transfer services or
provide access devices such as cards, codes or other means of accessing
accounts to initiate electronic funds transfers. Regulation E regulates certain
electronic funds transfers made by providers of access devices and electronic
fund transfer services. Under Regulation E, our customers are required, among
other things, to provide certain disclosures to retail customers using
electronic transfer services, to comply with certain notification periods
regarding changes in the terms of service provided and to follow certain
procedures for dispute resolutions. The Federal Reserve Board could adopt new
rules and regulations for electronic funds transfers that could lead to
increased operating costs and could also reduce the convenience and
functionality of our services, possibly resulting in reduced market acceptance.
If enacted or deemed applicable to us, the laws, rules or regulations
applicable to financial services activities would render our business or
operations more costly, burdensome, less efficient or impossible. We cannot
assure that federal, state or foreign governmental authorities will not adopt
new regulations addressing electronic financial services or operations
generally that could require us to modify our current or future products and
services. The adoption of laws or regulations affecting our business or our
customer financial institutions' business could have a material adverse effect
on our business, financial condition and operating results.
A number of proposals at the federal, state and local level and by certain
foreign governments would, if enacted, expand the scope of regulation of
Internet-based financial services and could impose taxes on the sale of goods
and services and certain other Internet activities. Any development that
substantially impairs the growth of the Internet or its acceptance as a medium
for transaction processing could have a material adverse effect on our
business, financial condition and operating results.
Proprietary Rights
Although we believe that our success is more dependent upon our technical
expertise than our proprietary rights, our future success and ability to
compete is dependent in part upon our proprietary technology. We have filed an
application to register Digital Insight as our trademark. None of our
technology is currently patented. Instead, we rely on a combination of
contractual rights and copyright, trademark and trade secret laws to establish
and protect our proprietary technology. We generally enter into confidentiality
agreements with our employees, consultants, resellers, customers and potential
customers. We also limit access to and distribution of our source code, and
further limit the disclosure and use of other proprietary information. We
cannot assure that the steps taken by us in this regard will be adequate to
prevent misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or
superior to our technology. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or
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otherwise obtain or use our products or technology. In addition, the laws of
some foreign countries do not protect our proprietary rights to the same extent
as do the laws of the United States.
Employees
As of December 31, 1999, we had a total of 161 full-time employees,
including 60 in operations, 31 in sales and marketing, 51 in research and
development and 19 in finance and administration. None of our work force is
currently unionized. We have not experienced any work stoppages and consider
our relations with our employees to be good.
Recent Developments
On February 10, 2000, we completed the acquisition of nFront, Inc., a
provider of Internet banking and other financial services to small to mid-sized
banks and credit unions. Through the transaction, we expanded our client base,
increased the number of interfaces that we support and acquired complementary
technology. On a pro forma combined basis, upon completion of the acquisition
we had more than 730 financial institution clients, with a total customer base
of 17 million potential end users. These clients include 650 Internet banking
contracts with 13.6 million potential end users.
As a result of the acquisition, we now have interfaces with data processing
vendors providing coverage of more than 80 percent of community financial
institutions. With the addition of nFront's "fat server" architecture to our
technology capabilities, we are now able to offer unparalleled expertise in
both real time and batch processing.
Fat Server Architecture. The technology acquired from nFront is based on a
system architecture that is commonly referred to as a "fat server" design. A
"server" is the computer or collection of computers that store information and
handle many of the more complex data processing functions. A "fat server"
refers to a server that has been configured to handle significant volumes of
data storage and retrieval, as well as complex data processing functions. With
"fat server" architecture, the system utilizes a relational database located on
our system server to receive and store customer data from a financial
institution's core computer system. This data storage architecture allows our
system to store and organize the financial institution customer's account data
locally, without a continuous, direct connection between the customer and the
financial institution's core system.
The fat server architecture allows us to provide an alternative to our real
time architecture. The fat server technology provides the following benefits:
. Access to historical financial information. Information stored on the fat
server allows a customer to generate consolidated reports on financial
transactions spanning an extended period of time. Our fat server system
currently stores up to two years of customer data, whereas "thin server"
systems typically provide access to 60 to 90 days of financial data.
. Analysis of customer information. A fat server solution enhances the
financial institution's ability to extract and analyze relevant customer
account information and more efficiently cross-sell products.
. Effective consolidation of financial services. The fat server enables
consolidation of the customer's financial data from disparate host
systems in one place. These host systems include banking, brokerage and
insurance financial data.
We assumed nFront's leases in the acquisition. As a result, we now have an
additional data center and sales, marketing and development facilities in
Norcross, Georgia.
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Risk Factors
You should carefully consider the following risks in your evaluation of
Digital Insight. The risks and uncertainties described below are not the only
ones we face. Additional risks and uncertainties may also adversely impact and
impair our business. If any of the following risks actually occur, our
business, results of operations or financial condition would likely suffer. In
such case, the trading price of our common stock could decline.
We have a limited operating history in an early-stage market and, as a
result, our business strategy may not prove to be successful.
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
early-stage, rapidly evolving and uncertain Internet banking market in which we
operate. As a result:
. fluctuations in our operating results may be significant relative to our
revenues;
. community financial institutions may not widely adopt Internet banking in
general or our solution in particular;
. the Internet and the systems and networks of third parties may not
operate efficiently; and
. competition and rapid technological change in the industry could
adversely affect market acceptance of all of our products and services.
As a result, our business strategy may not prove to be successful.
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 incurred net losses of $712,000
in the year ended December 31, 1996, $2.5 million in the year ended December
31, 1997, $4.4 million in the year ended December 31, 1998 and $7.5 million in
the year ended December 31, 1999. As of December 31, 1999, we had an
accumulated deficit of $15.5 million. We plan to increase our operating
expenses to expand our sales and marketing operations, broaden our customer
support capabilities and continue to build our operational infrastructure. If
growth in our revenues does not outpace the increase in these expenses, we may
not achieve or sustain profitability.
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 our customers and us. 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 market analysts or
investors. If this occurs, the price of our common stock would likely decrease.
Our operating results may also fluctuate in the future due to a variety of
other 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;
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. 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 may not achieve the benefits we expected from the acquisition of nFront,
which may have a material adverse effect on our business, financial condition
and operating results and/or could result in loss of key personnel.
We completed our acquisition of nFront, Inc. on February 10, 2000. We are
continuing to overcome significant challenges in order to realize the benefits
and synergies from the acquisition, including the timely, efficient and
successful execution of a number of post-merger events. Key events include:
. integrating the operations of the two companies;
. retaining and assimilating the key personnel of each company;
. offering the existing services of each company to the other company's
customers;
. retaining the existing customers and strategic partners of each company;
. developing new services that utilize the assets of both companies; and
. maintaining uniform standards, controls, procedures and policies.
The successful execution of these post-merger events involves considerable
risk and we may not be successful in executing them. These risks include:
. the potential disruption of our ongoing business and distraction of its
management;
. the difficulty of incorporating acquired technology and rights into the
combined company's products and services;
. unanticipated expenses related to technology integration;
. the impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
. potential unknown liabilities associated with the acquired business.
We may not succeed in addressing these risks or any other problems
encountered during the integration process.
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 was put into initial operation during the
fourth quarter of 1999 with functionality to be added throughout 2000.
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We cannot assure that this data center will become fully operational as
scheduled or that, when fully operational, this data center will perform as
expected. We do not currently have sufficient backup facilities to provide
Internet services if the Calabasas 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.
We are dependent on the widespread adoption of Internet banking by community
financial institutions, which have historically been slow to do so.
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. To
date, Internet banking has developed slowly 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 those of Digital Insight.
We also depend on our financial institution customers to market and promote
our products to their end user customers. Neither Digital Insight nor its
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
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vendors, we would have 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.
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 Digital Insight
could damage our reputation, deter financial institutions from purchasing our
products, deter their customers from using our products, or result in liability
to Digital Insight. 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 to protect against the threat of
security breaches or to alleviate 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
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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 Digital Insight, even if not successful, would
likely be time consuming, result in costly litigation and could seriously harm
our business. Although our contracts typically contain provisions designed to
limit our exposure to liability claims, existing or future laws or unfavorable
judicial decisions could negate these limitation of liability provisions.
Moreover, we may be liable for transactions executed using Internet services
based on our products and services even if the errors, defects or other
problems are unrelated to our products and services.
We are currently experiencing a period of significant growth that is
placing a strain on our resources.
We have recently experienced significant growth, including expansion in the
number of our employees, and we 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.
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Our stock price is 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 it 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.
Neither federal depository institution regulators nor other regulators of
financial services require us to obtain any licenses. We are subject to
examination by 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 and requiring us to modify our current or future
products or services.
Failure to attract and retain experienced personnel and senior management
could harm our ability to grow.
We believe that our future success will depend in large part upon our
continued ability to identify, hire, retain and motivate highly skilled
employees, who are in great demand. In particular, we believe that we must
expand our research and development, marketing, sales and customer support
capabilities in order to effectively serve the evolving needs of our present
and future customers. Competition for these employees is intense and we may not
be able to hire additional qualified personnel in a timely manner and on
reasonable terms. In addition, our success depends on the continuing
contributions of our senior management and technical personnel, all of whom
would be difficult to replace. The loss of any one of them could adversely
affect our ability to execute our business strategy.
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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. We also limit access
to and distribution of our source code, and further limit the disclosure and
use of other proprietary information. We cannot assure that the steps taken by
us in this regard will be adequate to prevent misappropriation of our
technology or that our competitors will not independently develop technologies
that are substantially equivalent or superior to our technology. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain or use our products or technology. 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 operating results. 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
cause our customers to reassess 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. The
acquiring institution may also have its own in-house system or outsource to
competitors. For example, in May 1999, we lost Home Savings of America as a
customer after it was acquired by Washington Mutual, which decided to integrate
Home Savings' end users into its existing home banking system.
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Future sales of our shares could affect the stock price.
The market price of our common stock could fall dramatically if stockholders
sell large amounts of stock in the public market. These sales, or the
possibility that these sales may occur, could affect the market price of our
common stock and could make it more difficult for us to sell equity or equity-
related securities in the future. As of March 15, 2000, there were 23,029,251
shares of our common stock outstanding. Of these, 7,590,592 shares are freely
tradable. The remaining 15,438,659 shares are limited by restrictions under the
securities laws and "lock-up" agreements with underwriters and/or Digital
Insight. These shares will be eligible for sale in the public market as
follows:
<TABLE>
<CAPTION>
First Eligible Sale Date Number of Shares
------------------------ ----------------
<S> <C>
March 29, 2000............................................ 1,872,787
Two trading days after Digital Insight publicly announces
financial results covering at least 30 days of combined
operations of Digital Insight and nFront................. 12,200,436
May 25, 2000.............................................. 521,400
May 26, 2000.............................................. 844,036
</TABLE>
Approximately 13,504,833 shares held by our affiliates are subject to
certain conditions and restrictions under federal securities laws, including
satisfying applicable holding periods and complying with limitations on the
volume of sales.
As of March 15, 2000, options to purchase 3,167,793 shares of common stock
were outstanding and 1,206,992 shares of common stock were available for future
grant pursuant to our stock plans. Our 1999 Stock Plan is subject to annual
increases beginning on March 1, 2001, equal to the lesser of 750,000 shares, 5%
of our shares on that date, or a lesser amount determined by the board of
directors. We have registered the shares of common stock underlying outstanding
options and those reserved for issuance under our stock option plans and under
our employee stock purchase plans. Accordingly, shares underlying vested
options and stock purchase rights will be eligible for resale upon their
exercise.
In addition, there are 51,041 shares underlying outstanding warrants, also
subject to lock-ups, that will be eligible for resale in the public market upon
expiration of the warrant holders' respective one-year holding periods under
Rule 144, which will begin upon the date of exercise, or, in the case of a net
exercise, on the date of grant of the warrant.
Morgan Stanley & Co., Inc., our underwriter, may, in its sole discretion and
at any time without prior notice, release all or any portion of the common
stock subject to lock-up agreements.
Potential acquisitions involve risks.
We intend to continuously evaluate our position within our industry, and we
may acquire complementary technologies or businesses in the future. Due to
consolidation trends within the Internet banking services industry, failure to
adopt and successfully implement a long-term acquisition strategy could damage
our competitive position. Future acquisitions may involve large one-time write-
offs and amortization expenses related to goodwill and other intangible assets.
Any of these factors could adversely affect our operating results or stock
price. Acquisitions involve numerous risks, including:
. difficulties in assimilating the operations, products, technology,
information systems and personnel of the acquired company with our
operations;
. diverting our management's attention from other business concerns;
. impairing relationships with our employees, affiliates, strategic
marketing alliances and content providers;
. inability to maintain uniform standards, controls, procedures and
policies;
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. entering markets in which we have no direct prior experience; and
. losing key employees of the acquired company.
Some or all of these risks could result in a material adverse effect on our
business, financial condition and operating results. In addition, we cannot
assure you that we will be able to identify suitable acquisition candidates
that are available for sale at reasonable prices. We may elect to finance
future acquisitions using some or all of the proceeds from our initial public
offering. We may also elect to finance future acquisitions with debt financing,
which would increase our debt service requirements, or through the issuance of
additional common or preferred stock, which could result in dilution to our
stockholders. There can be no assurance that we will be able to arrange
adequate financing for any acquisitions on acceptable terms.
Our charter and bylaws and Delaware law contain provisions which could
discourage a takeover.
Provisions of our charter and bylaws may make it more difficult for a third
party to acquire, or may discourage a third party from attempting to acquire,
control of us, even if doing so would be beneficial to our stockholders. These
provisions could limit the price that investors might be willing to pay in the
future for shares of our common stock. These provisions include:
. division of the board of directors into three separate classes;
. elimination of cumulative voting in the election of directors;
. prohibitions on our stockholders from acting by written consent and
calling special meetings;
. procedures for advance notification of stockholder nominations and
proposals; and
. the ability of the board of directors to alter our bylaws without
stockholder approval.
In addition, our board of directors has the authority to issue up to
5,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The issuance of
preferred stock, while providing flexibility in connection with possible
financings or acquisitions or other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of our
outstanding voting stock.
We are also subject to Section 203 of the Delaware General Corporation Law
which, subject to exceptions, prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years following the date that this stockholder became an interested
stockholder. The preceding provisions of our charter and bylaws, as well as
Section 203 of the Delaware General Corporation Law, could discourage potential
acquisition proposals, delay or prevent a change of control and prevent changes
in our management.
Members of management and our board of directors, and their affiliates,
control 39.1% of our common stock.
As of March 15, 2000, members of our executive management team and our board
of directors and their affiliates control approximately 39.1% of our common
stock. As a result, these management members and directors will be able to
significantly influence matters requiring stockholder approval. Moreover, this
concentration of ownership could have the effect of delaying or preventing a
change in control.
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ITEM 2. PROPERTIES
Our principal offices currently occupy approximately 30,385 square feet in
Calabasas, California, pursuant to a lease that expires in 2003. In August
1999, we entered into a sublease to occupy an additional 16,085 square feet in
our principal facility in Calabasas, California, beginning on December 1, 1999.
Our principal data center is located in this facility. We have also entered
into a service agreement for a second data center serviced by Exodus
Communications in Herndon, Virginia. We believe that suitable additional or
alternative space will be available in the future on commercially reasonable
terms as needed.
We also occupy two properties in Georgia under leases that we took over in
connection with our recent acquisition of nFront, Inc. The first property
consists of approximately 13,800 square feet of office space in Norcross,
Georgia, where we now have an additional data center and sales, marketing and
development facilities. Our lease on this property expires August 1, 2003. The
second property consists of approximately 1,000 square feet in a facility in
Bogart, Georgia, and serves as a location for some of our graphic designers.
ITEM 3. LEGAL PROCEEDINGS
From time to time we may be involved in litigation arising in the normal
course of our business. We are not a party to any litigation, individually or
in the aggregate, that we believe would have a material adverse effect on our
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for vote by our stockholders during the fourth
quarter of the year ended December 31, 1999.
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"DGIN." Our common stock began trading on Nasdaq on October 1, 1999, the date
of our initial public offering. The following table sets forth the range of
high and low closing sale prices reported on the Nasdaq National Market for our
common stock for the period indicated.
<TABLE>
<CAPTION>
Fiscal Period High Price Low Price
------------- ---------- ---------
<S> <C> <C>
October 1, 1999-December 31, 1999...................... $52.38 $19.00
</TABLE>
As of March 15, 2000, there were 133 holders of record of our common stock.
We have never paid any cash dividends on our stock, and we anticipate that,
for the foreseeable future, we will continue to retain any earnings for use in
the operation of our business.
Changes in Securities and Use of Proceeds
The effective date of our first registration statement, filed on Form S-1
under the Securities Act of 1933 (File No. 333-81547), relating to our initial
public offering of our common stock, was September 30, 1999. A total of
4,025,000 shares of our 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
offering resulted in gross proceeds of $60.4 million, $4.2 million of which was
applied toward underwriting discounts and commissions. Expenses related to the
offering totaled approximately $1.7 million. Net proceeds to Digital Insight
were $54.5 million.
We incurred the following expenses with respect to the offering through
December 31, 1999:
<TABLE>
<CAPTION>
Underwriting
Discounts and Underwriters'
Commissions Finders' Fees Expenses Other Expenses Total Expenses
------------- ------------- -------- -------------- --------------
<S> <C> <C> <C> <C>
$4,200,000 $ 0 $ 0 $1,700,000 $5,900,000
</TABLE>
The net proceeds from this offering were used for general corporate
purposes, including working capital, capital expenditures, and to fund
operating losses, although we have no specific purposes for the proceeds of the
offering. A portion of the proceeds was used to acquire or invest in
complementary businesses or products, or to obtain the right to use
complementary technologies. On November 21, 1999, we announced a merger
agreement with nFront, Inc., of Norcross, Georgia, a leading Internet banking
services company in a tax-free, stock for stock transaction. We incurred
expenses of approximately $87,000 as of December 31, 1999 in connection with
the acquisition of nFront. Pending use of the net proceeds for the above
purposes, we have invested these funds in short-term, interest-bearing,
investment grade obligations. None of the foregoing expenses constituted direct
or indirect payments to our directors, officers, general partners or their
associates or to persons owning 10% or more of any class of our equity
securities or to our affiliates.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
financial statements and related notes thereto, and "Management Discussion and
Analysis of Financial Condition and Results of Operations," included elsewhere
in this Annual Report on Form 10-K.
The selected statement of operations data for the four years ended December
31, 1999 and the selected balance sheet data as of December 31, 1996, 1997,
1998, and 1999 have been derived from our audited financial statements. The
selected statement of operations data for the period from July 17, 1995
(inception) to
23
<PAGE>
December 31, 1995 has not been audited. In the opinion of management, such
unaudited financial statements have been prepared on the same basis as the
audited financial statements referred to above and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of results of operations for the indicated periods.
<TABLE>
<CAPTION>
Period from
July 17,
1995
(inception)
through Year ended December 31,
December 31, ---------------------------------
1995 1996 1997 1998 1999
------------ ------ ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Implementation fees......... $ 85 $1,053 $ 1,926 $ 2,420 $ 4,142
Service fees................ 3 508 2,046 5,810 13,364
------ ------ ------- ------- -------
Total revenues............ 88 1,561 3,972 8,230 17,506
------ ------ ------- ------- -------
Cost of revenues:
Implementation.............. 141 643 1,217 1,631 3,058
Service..................... 1 261 1,014 3,616 7,545
------ ------ ------- ------- -------
Total cost of revenues.... 142 904 2,231 5,247 10,603
------ ------ ------- ------- -------
Gross profit.................. (54) 657 1,741 2,983 6,903
------ ------ ------- ------- -------
Operating expenses:
Sales, general and
administrative............. 167 809 2,516 4,183 9,420
Research and development.... 94 565 1,612 2,555 4,546
Amortization of stock-based
compensation............... 151 844 1,221
------ ------ ------- ------- -------
Total operating expenses.. 261 1,374 4,279 7,582 15,187
------ ------ ------- ------- -------
Loss from operations.......... (315) (717) (2,538) (4,599) (8,284)
Interest income............... 89 262 778
Other income (expense), net... 5 (3) (19)
------ ------ ------- ------- -------
Net loss...................... $ (315) $ (712) $(2,452) $(4,356) $(7,506)
====== ====== ======= ======= =======
Basic and diluted net loss per
share........................ $(0.06) $(0.14) $ (0.49) $ (0.85) $ (0.97)
====== ====== ======= ======= =======
Shares used to compute basic
and diluted net loss per
share........................ 5,000 5,000 5,000 5,108 7,765
====== ====== ======= ======= =======
Pro forma basic and diluted
loss per share............... $ (0.50) $ (0.68)
======= =======
Shares used in computing pro
forma basic and diluted net
loss per share............... 8,712 11,001
======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1997 1998 1999
----- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................... $ 28 $ 886 $ 4,758 $42,249
Working capital (deficit).................... (243) (16) 3,067 55,236
Total assets................................. 433 3,071 8,077 71,438
Total liabilities............................ 422 1,949 2,417 9,033
Mandatory redeemable convertible preferred
stock....................................... 4,444 12,444
Total stockholders equity (deficit).......... (3,322) (6,784) 62,405
</TABLE>
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are the leading provider of Internet banking solutions for community
financial institutions, with over 467 financial institution customers as of
December 31, 1999. 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 web site development. As of December
31, 1999, we had an accumulated deficit of approximately $15.5 million.
Our revenues consist primarily of recurring monthly service fees and, to a
lesser extent, one-time implementation fees. Revenues increased from $88,000 in
1995 to $8.2 million in 1998, and were $17.5 million in 1999. Our recurring
revenues consist of service fees paid to us by our financial institution
customers based on the number of end users or end user transactions, and fees
for hosting and maintaining their web sites and other monthly services.
Recurring service fees as a percentage of revenues have grown from
approximately 32.5% in 1996 to 76.3% for the year ended December 31, 1999. To
the extent that our installed base of customers continues to grow, we expect
recurring service fees to represent an increasing percentage of our revenues in
the future. Our customer contracts range from one to five years.
We require a 50% non-refundable cash deposit of product implementation fees,
payable at the time that a contract is signed. We record these deposits as
deferred revenues and, together with the balance of the implementation fees, we
recognize them upon completion of implementation and customer approval.
Recognition is usually two to four months from the contract date. Upon
completion of implementation and customer approval, we begin to receive and
recognize recurring service fees. For the year ended December 31, 1999, no
single customer accounted for more than 10% of our revenues.
Cost of revenues consists of implementation and service costs.
Implementation costs are comprised primarily of salaries for implementation
personnel and fees paid to third parties, including bill payment and data
processing vendors. Service costs consist primarily of salaries and related
personnel expenses, network costs, expenses related to the operation of our
data center and fees paid to third parties, including bill payment vendors,
data processing vendors and communication services providers. Gross margin is
affected by the relative proportion of lower margin implementation fees and
higher margin service fees we generate, the mix of products we sell,
competitive pricing pressures and the size and complexity of our
implementations.
Sales, general and administrative expenses consist primarily of salaries and
related expenses for executive, sales, marketing, finance, human resources and
administrative personnel and other general corporate expenses. In addition,
these expenses include marketing expenses such as trade shows and promotional
costs.
Research and development expenses consist primarily of salaries, related
personnel expenses and consultant fees related to the design, development,
testing and enhancement of both our products and our data processing vendor
interface software. We expense all research and development costs as incurred.
We have recorded aggregate deferred stock-based compensation of $5.5 million
through December 31, 1999. The remaining unamortized balance of $3.3 million
will be fully amortized by the quarter ended March 31, 2003.
Comparisons of Years Ended December 31, 1998 and December 31, 1999
Revenues. Revenues increased from $8.2 million for the year ended December
31, 1998 to $17.5 million for the year ended December 31, 1999. This increase
was primarily due to the growth in service fees from $5.8 million to $13.4
million. The number of active home banking end users increased over the same
period from over 273,000 to approximately 663,000, and implementation fees
increased from $2.4 million to $4.1 million.
25
<PAGE>
Gross Profit. Gross profit increased from $3.0 million for the year ended
December 31, 1998 to $6.9 million for the year ended December 31, 1999. Gross
margin improved from 36.2% to 39.4% primarily due to leverage of our
implementation costs as a result of higher implementation fees generated during
the year, and service fees margin improved due to continued end user growth
without a corresponding increase in costs. Implementation gross margin
decreased from 32.6% to 26.2% and service gross margin improved from 37.8% to
43.5%. Implementation gross margin may vary from one period to another based
upon fluctuations in our implementation revenues and increases in our
implementation infrastructure.
Sales, General and Administrative. Sales, general and administrative
expenses increased from $4.2 million for the year ended December 31, 1998 to
$9.4 million for the year ended December 31, 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. Sales, general and administrative expenses as a percentage of
revenues increased from 50.8% for the year ended December 31, 1998 to 53.8% for
the year ended December 31, 1999.
Research and Development. Research and development expenses increased from
$2.6 million for the year ended December 31, 1998 to $4.5 million for the year
ended December 31, 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 31.0% for the year ended December 31, 1998 to 26.0%
for the year ended December 31, 1999, primarily as a result of an increase in
revenues.
Interest Income. Interest income increased from $262,000 for the year ended
December 31, 1998 to $778,000 for the year ended December 31, 1999. This
increase was primarily due to higher average cash balances in the year ended
December 31, 1999.
Amortization of Stock-Based Compensation. Amortization of stock-based
compensation increased from $844,000 for the year ended December 31, 1998 to
$1.2 million for the year ended December 31, 1999. This increase was primarily
due to the hiring of new employees and related stock option grants, as well as
an increase in the difference between the grant price and the deemed fair value
of our common stock.
Comparisons of Years Ended December 31, 1997 and December 31, 1998
Revenues. Revenues increased from $4.0 million for the year ended December
31, 1997 to $8.2 million for the year ended December 31, 1998. This increase
was driven primarily by growth in service fees, which increased from $2.0
million in 1997 to $5.8 million in 1998. To a lesser extent, the increase in
revenues during these periods was the result of growth in implementation fees
related to new contracts. The total number of active home banking end users
rose from 83,000 at December 31, 1997 to 273,000 at December 31, 1998.
Gross Profit. Gross profit increased from $1.7 million for the year ended
December 31, 1997 to $3.0 million for the year ended December 31, 1998. This
increase was primarily the result of the increase in revenues, particularly
from service fees. Gross margin declined from 43.8% in 1997 to 36.2% in 1998.
This decline was primarily due to increased investments in our data center and
network operations in order to improve system reliability and significantly
enhance customer support, quality assurance and security.
Sales, General and Administrative. Sales, general and administrative
expenses increased from $2.5 million for the year ended December 31, 1997 to
$4.2 million for the year ended December 31, 1998. This increase was primarily
the result of increases in personnel and personnel-related costs to support our
expanded operations.
26
<PAGE>
Research and Development. Research and development expenses increased from
$1.6 million for the year ended December 31, 1997 to $2.6 million for the year
ended December 31, 1998. This increase was primarily due to increases in
personnel and personnel-related costs, product testing and enhancement, new
interface development expenses and expenses related to the completion and
commercial release of new products.
Interest Income. Interest income increased from $89,000 for the year ended
December 31, 1997 to $262,000 for the year ended December 31, 1998. This
increase was primarily due to higher average cash balances as a result of our
Series A preferred stock financing, which concluded in March 1997, and our
Series B preferred stock financing, which concluded in February 1998.
Amortization of Stock-Based Compensation. Amortization of stock-based
compensation increased from $151,000 for the year ended December 31, 1997 to
$844,000 for the year ended December 31, 1998. This increase was primarily due
to the hiring of new employees and related stock option grants, as well as an
increase in the difference between the grant price and the deemed fair value of
our common stock.
Provision for Income Taxes
We incurred operating losses from inception through December 31, 1999, and
therefore have not recorded any significant provision for income taxes. We have
recorded a valuation allowance for the full amount of our net operating loss
carry-forwards, as the future realization of the tax benefit is not currently
likely.
As of December 31, 1999, we had net operating loss carry-forwards for
federal and state tax purposes of approximately $10.8 million. The state tax
loss carry-forwards expire in 2004 and the federal tax loss carry-forwards
expire in 2011. Under the provisions of the Internal Revenue Code, certain
substantial changes in ownership may limit the amount of net operating loss
carry-forwards that could be utilized annually in the future to offset taxable
income.
Liquidity and Capital Resources
Since inception, we had financed our operations primarily through the
private placement of equity securities, raising approximately $20.8 million. On
October 6, 1999, we completed our initial public offering by issuing 4,025,000
shares of common stock (including the exercise of the underwriters' over-
allotment option) and realized proceeds, net of underwriting discounts,
commissions and issuance costs, of $54.5 million. In conjunction with the
initial public offering, our mandatory convertible preferred stock converted to
common stock and all warrants to purchase preferred stock became warrants to
purchase common stock.
At December 31, 1999, we had cash and cash equivalents of $42.2 million. We
have a $2.0 million equipment leasing line of credit with a bank, under which
$892,000 was outstanding at December 31, 1999. At December 31, 1999, we also
had an additional $103,000 in equipment financing outstanding with an equipment
leasing company.
Cash used in operating activities was $1.5 million for the year ended
December 31, 1997, $2.1 million for the year ended December 31, 1998 and $3.9
million for the year ended December 31, 1999. The increases in cash used in
operating activities were primarily due to increases in the net loss.
Cash used in investing activities was $768,000 for the year ended December
31, 1997, $1.7 million for the year ended December 31, 1998 and $21.3 million
for the year ended December 31 1999. The increases in cash used in investing
activities were primarily due to infrastructure expansion to meet end user
growth and a $6.8 million expenditure for computers and other equipment for our
second data center.
We have no material commitments other than obligations under our credit
facilities and operating and capital leases, including a sublease we entered
into in August 1999 to occupy additional space in our principal facility in
Calabasas, California beginning on December 1, 1999. See note 12 of notes to
financial statements included elsewhere in this report. 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
27
<PAGE>
development efforts and the expansion of our marketing efforts. We expect to
continue to expend significant amounts on expansion of facility infrastructure,
ongoing research and development, computer and related data center equipment,
and personnel.
We believe that our cash and cash equivalents balances and funds available
under our existing lines of credit, together with the proceeds of this
offering, will be sufficient to satisfy our cash requirements for at least the
next 18 months. We intend to invest our cash in excess of current operating
requirements in short-term, interest-bearing, investment grade securities.
On November 21, 1999, we announced the signing of a definitive agreement to
acquire nFront, Inc., a publicly traded company. The acquisition received
regulatory and stockholder approval on February 10, 2000. Under the terms of
the acquisition, which has been accounted for as a pooling of interests, we
exchanged 8,253,735 shares of our common stock for 14,255,194 shares of nFront
common stock. Additionally, we converted 1,084,741 nFront stock options into
627,926 of our stock options. We expect to record a one-time charge in the
first quarter of 2000 relating to non-recurring merger costs of $12.1 million,
consisting of $11.1 million of direct transaction costs, comprised primarily of
investment banking, legal, printing, registration, and accounting fees, and
$1.0 million of other merger-related expenses, comprised primarily of severance
and closing costs of redundant functions and operations.
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 may have failed to operate or produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems were commonly referred to as the "Year 2000" problem.
The Year 2000 problem affects the computers, software and other equipment
that we use, operate or maintain for our operations, and services provided by
third-party vendors. As a result, we formalized our Year 2000 compliance plan,
which was implemented by a team of employees led by our internal information
technology staff. This staff was responsible for monitoring the assessment,
including potential effects and costs, of our Year 2000 projects and
remediation of any Year 2000 problems. As part of our Year 2000 compliance
plan, we 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. To date, we have not experienced any
significant Year 2000 problems in our operations or services provided by third-
party vendors. However, we cannot assure you that problems will not develop in
the future.
Our costs to address Year 2000 compliance have been approximately $250,000
and are included in operating expenses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to the impact of interest rate changes and changes in the
market values of our investments. Our interest income is sensitive to changes
in general level of U.S. interest rates. In this regard, changes in U.S.
interest rates affect the interest earned on our cash equivalents. Our exposure
to market rate risk for changes in interest rates relates primarily to our
investment portfolio. We have not used derivative financial instruments in our
investment portfolio. We invest our excess cash in debt instruments of the U.S.
Government and its agencies, and in high-quality corporate issuers and, by
policy, limit the amount of credit exposure to any one issuer. We protect and
preserve our invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates, or we may suffer losses in
principal if forced to sell securities which have declined in market value due
to changes in interest rates.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements are submitted as a separate section of this Annual
Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information required by this item is incorporated by reference from
the information contained in our Proxy Statement for the 2000 Annual Meeting of
Stockholders expected to be filed with the Securities and Exchange Commission
not later than April 31, 2000 (the "2000 Proxy Statement") under the captions
"Election of Directors," "Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance."
Executive Officers and Directors
The following table sets forth information regarding our executive officers
and directors as of December 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
John Dorman................. 49 Chairman of the Board, Chief Executive
Officer and President
Paul Fiore.................. 35 Executive Vice President, Co-Founder and
Director
Mehariar Hasan.............. 41 Vice President, Product Management
Daniel Jacoby............... 34 Vice President, Chief Technology Officer
and Co-Founder
Kevin McDonnell............. 38 Vice President, Finance, Chief Financial
Officer and Secretary
Steven Reich................ 40 Vice President, Sales and Marketing
Stephen Zarate.............. 53 Vice President and Chief Information
Officer
</TABLE>
John Dorman. Mr. Dorman has been our President and Chief Executive Officer
and a director since October 1998. Mr. Dorman was appointed Chairman of the
Board in June 1999. Prior to his appointment as our President and Chief
Executive Officer, Mr. Dorman was Senior Vice President for Oracle Worldwide
Financial Services from August 1997 to October 1998. Prior to joining Oracle,
Mr. Dorman was founder, President, and Chief Executive Officer of Treasury
Services Corporation, known as TSC, a provider of management information
solutions to the financial services industry, from 1983 to 1997. TSC was sold
to Oracle in 1997. Prior to serving at TSC, Mr. Dorman spent 11 years in the
banking industry as a senior financial executive for Union Bank of California.
Mr. Dorman holds a BA degree in business administration and philosophy from
Occidental College and an MBA in finance from the University of Southern
California.
Paul Fiore. Mr. Fiore is a co-founder of Digital Insight and has served as
our Executive Vice President since October 1998 and as a director since March
1997. From March 1997 to October 1998, Mr. Fiore was President of Digital
Insight and from July 1995 to March 1997, Mr. Fiore served as President of
Digital Insight LLC, the predecessor of Digital Insight. Prior to co-founding
Digital Insight LLC in July 1995, Mr. Fiore was Vice President, Strategy &
Plans for XP Systems, and a provider of turnkey data processing solutions for
credit unions, from March 1994 to July 1995. Before joining XP Systems, Mr.
Fiore was Vice President and Chief Financial Officer for AT&T Employees Federal
Credit Union from October 1989 to March 1994. Prior to joining AT&T, Mr. Fiore
was a financial analyst for Lehman Brothers. Mr. Fiore graduated from New York
University with a BS degree in management and finance.
Mehariar Hasan. Mr. Hasan joined Digital Insight as Vice President, Product
Management in July 1999. Prior to joining Digital Insight, Mr. Hasan was Senior
Vice President, Strategic Marketing for Transamerica Corporation from June 1996
to July 1999. Prior to joining Transamerica, Mr. Hasan served as Director of
Consulting for TSC, a provider of management information solutions to the
financial services industry, from November 1994 to June 1996. Prior to joining
TSC, Mr. Hasan served in a variety of management roles for American Savings
Bank from November 1986 to November 1994. Mr. Hasan holds a BA in Economics and
an MS in Finance from the University of Arizona.
30
<PAGE>
Daniel Jacoby. Mr. Jacoby is a co-founder of Digital Insight and has served
as Vice President and Chief Technology Officer since March 1997. From July 1995
to March 1997, Mr. Jacoby served as Chief Technology Officer of Digital Insight
LLC. Prior to co-founding Digital Insight in 1995, Mr. Jacoby served in various
technical and managerial positions for XP Systems from February 1989 to June
1995. Mr. Jacoby holds a BS degree in biomechanical engineering from the
University of California, San Diego.
Kevin McDonnell. Mr. McDonnell joined Digital Insight as Vice President,
Chief Financial Officer and Secretary in March of 1999. Prior to joining
Digital Insight, Mr. McDonnell was Executive Vice President and Chief Financial
Officer for Rockford Industries, a specialty finance company, from July 1997 to
February 1999. From October 1995 to July 1997, Mr. McDonnell served as Vice
President and Chief Financial Officer for Printrak International, a provider of
automated fingerprint identification systems. From October 1992 to October
1995, Mr. McDonnell served as Vice President and Chief Financial Officer of
Mobile Technology, Inc., a medical services company. Mr. McDonnell has a BA
degree in business administration from Loyola Marymount University and a JD
degree from Loyola Law School.
Steven Reich. Mr. Reich joined Digital Insight as Vice President of Sales
and Marketing in May 1998. Prior to joining Digital Insight, Mr. Reich served
as a management consultant and spent ten years from 1987 to 1997 with TSC, a
provider of management information solutions to the financial services
industry, in a variety of management roles. Before joining TSC, Mr. Reich
worked at the consulting firm of Kaplan Smith and Associates as a Senior
Consulting Associate. He holds a BS degree in business administration from
Arizona State University and an MBA from Claremont Graduate School.
Stephen Zarate. Mr. Zarate has served as Vice President and Chief
Information Officer since March 1999. Prior to joining Digital Insight, Mr.
Zarate was Chief Information Officer for PeopleSoft from June 1993 to March
1999, where he was responsible for the company's worldwide internal
applications, communications, infrastructure and technology. Prior to joining
PeopleSoft, Mr. Zarate was the Managing Director of Golden Gate Bank from
October 1988 to April 1993. Mr. Zarate has a BA degree in political science and
history from San Francisco State University.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information contained in the 2000 Proxy Statement under the caption "Executive
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information contained in the 2000 Proxy Statement under the caption "Security
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information contained in the 2000 Proxy Statement under the caption "Certain
Transactions."
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedule
The financial statements are submitted as a separate section of this Annual
Report beginning on page F-1.
The financial statement schedules have been omitted because they are not
applicable, not required, or the information is included elsewhere in the
financial statements or notes thereto.
(b) Reports on Form 8-K
On November 22, 1999, we filed a Form 8-K regarding the merger between
Digital Insight Corporation and nFront, Inc. of Norcross, Georgia.
(c) Exhibits
The following exhibits are filed as part of, or are incorporated by
reference into, this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1*** Agreement and Plan of Merger and Reorganization by and among Digital
Insight Corporation, Black Transitory Corporation and nFront, Inc.,
as amended.
3.1* Third Amended and Restated Certificate of Incorporation of the
Registrant, as currently in effect.
3.2* Restated Bylaws of the Registrant, as currently in effect.
4.1* Specimen Common Stock certificate.
4.2 Third Amended and Restated Rights Agreement, dated as of February 10,
2000, between the Registrant and the parties named therein.
4.3* Warrant to Purchase Stock, dated February 18, 1999, issued to Silicon
Valley Bank.
4.4* Warrant Agreement, dated January 31, 1998, issued to Comdisco, Inc.
4.5 Shareholder Agreement, dated as of May 13, 1998, as amended.
10.1* Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.
10.2* Stock Option Agreement, dated October 13, 1998, between John Dorman
and the Registrant.
10.3* Stock Option Agreement, dated March 30, 1999, between Kevin McDonnell
and the Registrant.
10.4* Stock Option Agreement, dated March 30, 1999, between Stephen Zarate
and the Registrant.
10.5* 1997 Stock Plan.
10.6* 1999 Stock Plan and related agreements, as amended.
10.7* 1999 Employee Stock Purchase Plan and related agreements.
10.8* Commercial Office Lease by and between Arden Realty Limited
Partnership, a Maryland Limited Partnership and the Registrant, dated
August 4, 1997.
10.9* Master Lease Agreement, dated March 1, 1999, between the Registrant
and Silicon Valley Bank.
10.10* Internet Data Center Services Agreement, dated March 1, 1999, between
the Registrant and Exodus Communications, Inc.
10.11+/* Moneyline Express (M&I) Agreement, dated February 27, 1997.
</TABLE>
32
<PAGE>
<TABLE>
<C> <S>
10.12+/** License Agreement with HNC Software Inc.
11.1 Statement of computation of net loss per share and pro forma net
loss per share (see note 1 of notes to financial statements).
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
27.1 Financial Data Schedule.
</TABLE>
- --------
+ Confidential treatment has been granted for portions of these agreements.
Omitted portions have been filed separately with the Commission.
* Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-81547), which was declared
effective on September 30, 1999.
** Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ending September 30, 1999.
*** Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-4 (File No. 333-94341), filed on January
10, 2000.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 2000 Digital Insight Corporation
/s/ John Dorman
By: _________________________________
John Dorman
Chairman of the Board of
Directors, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ John Dorman Chairman of the Board, Chief March 27, 2000
___________________________________ Executive Officer and President
John Dorman (Principal Executive Officer)
/s/ Kevin McDonnell Senior Vice President, Finance & March 27, 2000
___________________________________ Administration, Chief Financial
Kevin McDonnell Officer and Secretary (Principal
Financial and Accounting
Officer)
/s/ Paul Fiore March 27, 2000
___________________________________ Executive Vice President,
Paul Fiore New Ventures and Director
/s/ John Jarve
___________________________________
John Jarve Director March 27, 2000
/s/ James McGuire
___________________________________
James McGuire Director March 27, 2000
/s/ Robert North
___________________________________
Robert North Director March 27, 2000
/s/ Brady L. "Tripp" Rackley III
___________________________________
Brady L. "Tripp" Rackley III Vice Chairman March 27, 2000
</TABLE>
34
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent Accountants.............. F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statement of Stockholders' Deficit......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Digital Insight Corporation
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity (deficit) and cash flows present fairly, in
all material respects, the financial position of Digital Insight Corporation at
December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Woodland Hills, California
January 28, 2000, except as to note 13,
as to which the date is March 6, 2000
F-2
<PAGE>
DIGITAL INSIGHT CORPORATION
BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- -------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 42,249 $ 4,758
Short-term investments.................................... 15,841 --
Accounts receivable, net.................................. 4,276 356
Tax refund receivable..................................... -- 73
Inventory................................................. 162 --
Accumulated implementation costs.......................... 21 135
Other current assets...................................... 1,327 80
-------- -------
Total current assets.................................... 63,876 5,402
Property and equipment, net................................. 7,381 2,353
Deposits.................................................... 119 240
Intangible assets, net...................................... -- 53
Other assets................................................ 62 29
-------- -------
$ 71,438 $ 8,077
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities
Accounts payable.......................................... $ 1,876 $ 214
Accrued compensation and related benefits................. 2,099 542
Current portion of lease obligation....................... 360 71
Customer deposits......................................... 3,293 1,036
Other accruals............................................ 1,012 472
-------- -------
Total current liabilities............................... 8,640 2,335
Long-term portion of lease obligation....................... 393 82
-------- -------
9,033 2,417
-------- -------
Commitments and contingencies (Note 11).....................
Mandatorily redeemable convertible preferred stock: $.001
par value, 4,846,496 and 3,973,641 shares authorized; zero
and 3,951,419 shares issued and outstanding, respectively.. -- 12,444
Stockholders' equity (deficit):
Preferred stock; $.001 par value, 5,000,000 shares
authorized, no shares issued and outstanding.............
Common stock; $.001 par value, 100,000,000 and 16,250,000
shares authorized; 14,766,184 and 5,621,156 shares issued
and outstanding, respectively............................ 15 6
Additional paid-in-capital................................ 81,371 3,977
Notes receivable from stockholders........................ (216) (201)
Deferred stock-based compensation......................... (3,279) (2,732)
Accumulated deficit....................................... (15,486) (7,834)
-------- -------
Total stockholders' equity (deficit).................... 62,405 (6,784)
-------- -------
$ 71,438 $ 8,077
======== =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
DIGITAL INSIGHT CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Revenues:
Implementation fees....................... $ 4,142 $ 2,420 $ 1,926
Service fees.............................. 13,364 5,810 2,046
---------- --------- ---------
Total revenues.......................... 17,506 8,230 3,972
---------- --------- ---------
Cost of revenues:
Implementation............................ 3,058 1,631 1,217
Service................................... 7,545 3,616 1,014
---------- --------- ---------
Total cost of revenues.................. 10,603 5,247 2,231
---------- --------- ---------
Gross profit................................ 6,903 2,983 1,741
---------- --------- ---------
Operating expenses:
Sales, general and administrative......... 9,420 4,183 2,516
Research and development.................. 4,546 2,555 1,612
Amortization of stock-based compensation.. 1,221 844 151
---------- --------- ---------
Total operating expenses................ 15,187 7,582 4,279
---------- --------- ---------
Loss from operations........................ (8,284) (4,599) (2,538)
Interest and other income, net.............. 778 243 86
---------- --------- ---------
Net loss.................................... $ (7,506) $ (4,356) $ (2,452)
========== ========= =========
Basic and diluted net loss per share........ $ (.97) $ (.85) $ (.49)
========== ========= =========
Shares used to compute basic and diluted net
loss per share............................. 7,764,762 5,108,444 5,000,000
========== ========= =========
Pro forma basic and diluted net loss per
share...................................... $ (.68) $ (.50)
========== =========
Shares used to compute pro forma basic and
diluted net loss per share................. 11,001,239 8,712,463
========== =========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
DIGITAL INSIGHT CORPORATION
STATEMENT OF STOCKHOLDERS' DEFICIT
(in thousands except share data)
<TABLE>
<CAPTION>
Common Stock Additional Stockholders' Deferred Total
Members' ----------------- Paid-In Notes Stock-Based Accumulated Stockholders'
Capital Shares Amount Capital Receivable Compensation Deficit Deficit
-------- ---------- ------ ---------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $ 27 -- $-- $ -- $ -- $ -- $ -- $ --
Contribution of
capital................ 192 -- -- -- -- -- -- --
Distribution............ (50) -- -- -- -- -- -- --
LLC loss from January 1,
1997 through March 17,
1997................... (23) -- -- -- -- -- -- --
Conversion of members'
capital to Series A
preferred and common
stock.................. (146) 5,000,000 5 -- -- -- (1,049) (1,044)
Stock options exercised
with note receivable .. -- 618,500 1 185 (186) -- -- --
Deferred stock-based
compensation........... -- -- -- 1,809 -- (1,809) -- --
Amortization of deferred
stock-based
compensation........... -- -- -- -- -- 151 -- 151
Net loss................ -- -- -- -- -- -- (2,429) (2,429)
----- ---------- ---- ------- ----- ------- -------- -------
Balance at December 31,
1997................... -- 5,618,500 6 1,994 (186) (1,658) (3,478) (3,322)
Interest on stockholder
notes.................. -- -- -- -- (15) -- -- (15)
Stock options
exercised.............. -- 2,656 -- 1 -- -- -- 1
Warrants to purchase
Series A preferred
stock.................. -- -- -- 64 -- -- -- 64
Deferred stock-based
compensation........... -- -- -- 1,918 -- (1,918) -- --
Amortization of deferred
stock-based
compensation........... -- -- -- -- -- 844 -- 844
Net loss................ -- -- -- -- -- -- (4,356) (4,356)
----- ---------- ---- ------- ----- ------- -------- -------
Balance at December 31,
1998................... -- 5,621,156 6 3,977 (201) (2,732) (7,834) (6,784)
Interest on stockholder
notes.................. -- -- -- -- (15) -- -- (15)
Stock options
exercised.............. -- 344,573 -- 204 -- -- -- 204
Warrants to purchase
Series B preferred
stock.................. -- -- -- 147 -- -- -- 147
Repurchase of Series A
preferred stock........ -- -- -- -- -- -- (146) (146)
Deferred stock-based
compensation........... -- -- -- 1,768 -- (1,768) -- --
Amortization of deferred
stock-based
compensation........... -- -- -- -- -- 1,221 -- 1,221
Conversion of
mandatorily redeemable
convertible preferred
stock to common stock.. -- 4,775,455 5 20,825 -- -- -- 20,830
Issuance of common stock
in initial public
offering............... -- 4,025,000 4 54,450 -- -- -- 54,454
Net loss................ -- -- -- -- -- -- (7,506) (7,506)
----- ---------- ---- ------- ----- ------- -------- -------
Balance at December 31,
1999................... $ -- 14,766,184 $ 15 $81,371 $(216) $(3,279) $(15,486) $62,405
===== ========== ==== ======= ===== ======= ======== =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
DIGITAL INSIGHT CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (7,506) $(4,356) $(2,452)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 1,326 587 166
Amortization of debt issuance cost................ 60 20 --
Amortization of deferred stock-based
compensation..................................... 1,221 844 151
Interest income on stockholder notes.............. (15) (15) --
Net loss from sale of property and equipment...... -- 33 --
Changes in operating assets and liabilities:
Accounts receivable............................... (3,920) 410 (654)
Tax refund receivable............................. 73 -- (73)
Inventory......................................... (162) -- --
Accumulated implementation costs.................. 114 (64) (43)
Other assets...................................... (1,193) (18) (36)
Deposits.......................................... 121 -- (240)
Accounts payable.................................. 1,662 (373) 582
Accrued compensation and related benefits......... 1,557 451 12
Customer deposits................................. 2,257 251 779
Other accruals.................................... 540 119 341
-------- ------- -------
Net cash used in operating activities............ (3,865) (2,111) (1,467)
-------- ------- -------
Cash flows used in investing activities:
Proceeds from sale of assets...................... -- 29 --
Acquisition of property and equipment............. (5,478) (1,774) (488)
Disposal of equipment............................. 69 -- --
Purchase of short-term investments................ (15,841) -- --
Acquisition of customer base...................... -- -- (280)
-------- ------- -------
Net cash used in investing activities............ (21,250) (1,745) (768)
-------- ------- -------
Cash flows provided by financing activities:
Principal payments on lease obligations........... (292) (273) --
Distribution...................................... -- -- (50)
Proceeds form issuance of common stock............ 54,454 1 --
Proceeds from exercise of stock options........... 204 -- --
Proceeds from issuance of Series A preferred
stock............................................ -- -- 3,143
Proceeds from issuance of Series B preferred
stock............................................ -- 8,000 --
Proceeds from issuance of Series C preferred
stock............................................ 8,440 -- --
Repurchase of Series A preferred stock............ (200) -- --
-------- ------- -------
Net cash provided by financing activities........ 62,606 7,728 3,093
-------- ------- -------
Net increase in cash and cash equivalents.......... 37,491 3,872 858
Cash and cash equivalents, beginning of period..... 4,758 886 28
-------- ------- -------
Cash and cash equivalents, end of period........... $ 42,249 $ 4,758 $ 886
======== ======= =======
Supplementary disclosures of cash flow information:
Cash paid during the year for interest............ $ -- $ 12 $ --
Non-cash financing activities:....................
Capital lease obligations incurred................ 892 293 133
Series A warrants issued in conjunction with
capital lease.................................... -- 64 --
Series B warrants issued in conjunction with
capital lease.................................... 147 -- --
Conversion of members' capital to Series A
preferred and common stock....................... -- -- 1,305
Notes receivable from stockholders................ -- -- 186
Conversion of mandatorily redeemable convertible
preferred stock to common stock.................. 20,830 -- --
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
Digital Insight Corporation (the "Company"), incorporated in March 1997,
provides 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 capital balances to shares of
Series A mandatorily redeemable convertible preferred and common stock of
Digital Insight Corporation, a Delaware corporation, in accordance with a
Member Control Agreement.
Cash equivalents and short-term investments
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents, and
investments maturing in 12 months or less to be short-term investments. Cash
equivalents at December 31, 1999 consist of money-market funds and commercial
paper totaling $40,842,000. At December 31, 1999, the Company had short-term
investments of $15,841,000. The Company classifies, at the date of acquisition,
its short-term investments into categories in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Currently, the Company
classifies its short-term investments as held to maturity. These securities are
stated at amortized cost plus accrued interest. Net unrealized gains (losses)
on held-to-maturity investments have not been recognized in the accompanying
financial statements. Net realized gains on short-term investments for the year
ended December 31, 1999 were $758,000.
Inventories
Inventories, which consist principally of finished goods, are stated at the
lower of cost or market, cost being determined under the first-in, first-out
method.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Assets held under capital leases are recorded at the present
value of the minimum lease payments at lease inception. Depreciation and
amortization is computed using the straight-line method over the estimated
useful lives of the assets, generally three to five years.
Use of estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Revenue recognition
Recurring fees are recognized as services are provided, and relate to the
number of end users or end user transactions and for hosting and maintaining
web sites. One-time implementation fees consist of salaries for implementation
personnel and fees for third parties, including bill payment and data
processing vendors. These
F-7
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
fees are recognized upon completion of implementation and customer approval.
Implementation generally occurs over a two to four month period. Costs and
related revenues are deferred on the balance sheet until that time. Accumulated
implementation costs consist primarily of salaries for implementation personnel
in advance of related billings. Losses on implementation, if any, are
recognized in the period when such losses are identified.
Income taxes
The Company accounts for income taxes under the liability method. Deferred
income tax assets are provided for as temporary differences between financial
and income tax reporting. The Company has not recorded any deferred tax assets
or liabilities prior to the conversion of members' capital pursuant to the
Member Control Agreement, since Digital Insight LLC was a limited liability
company treated as a partnership for federal and Minnesota income tax purposes.
As a result, prior to March 18, 1997, federal and Minnesota income tax
attributes passed to the Digital Insight LLC members.
Stock-based compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, companies to record compensation cost for stock-based
employee compensation plans based on the fair market value of options granted.
The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation for stock options is measured as the excess, if any,
of the fair market value of the Company's stock price at the date of grant as
determined by the Board of Directors over the amount an employee must pay to
acquire the stock.
Research and development
Research and development costs are charged to operations as incurred.
Comprehensive income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in the financial statements.
Comprehensive income, as defined, includes the Company's net losses and all
other changes in equity during a period from non-owner sources. To date, the
Company has not had any material transactions that are required to be reported
as other comprehensive income.
Net loss per share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share," and Securities and Exchange Commission 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 pursuant to the
Member Control Agreement 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, Series B, and Series C mandatorily redeemable
convertible preferred stock.
F-8
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pursuant to SAB 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 diluted net loss
per share for the years indicated (in thousands, except share and per share
data):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Net loss............................. $ (7,506) $ (43,256) $ (2,452)
---------- ---------- ----------
Weighted average shares............ 8,085,705 5,348,183 5,000,000
Weighted average unvested common
shares subject to repurchase...... (320,943) (239,739)
---------- ---------- ----------
Denominator for basic and diluted
calculation......................... 7,764,762 5,108,444 5,000,000
---------- ---------- ----------
Net loss per share:
Basic and diluted.................. $ (.97) $ (.85) $ (.49)
========== ========== ==========
</TABLE>
The following table sets forth common stock equivalents that are not
included in the diluted net loss per share calculation above because to do so
would be antidilutive for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average effect of common stock
equivalents:
Series A mandatorily redeemable convertible
preferred stock........................... -- 1,645,944 1,307,736
Series B mandatorily redeemable convertible
preferred stock........................... -- 1,958,075 --
Warrants................................... 46,372 21,065 --
Unvested common shares subject to
repurchase................................ 320,943 239,739 --
Employee stock options..................... 1,866,452 1,086,292 439,923
--------- --------- ---------
2,233,767 4,951,115 1,747,659
========= ========= =========
</TABLE>
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the years ended December 31, 1999 and 1998
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, 1999 and January 1, 1998, or at date of original issuance, if later. The
resulting pro forma adjustment includes increases in the weighted average
shares used to compute basic and diluted net loss per share of 3,236,477 and
3,604,019, respectively, for the years ended December 31, 1999 and 1998.
Intangible assets
Intangible assets include a non-compete agreement and an acquired customer
base. The non-compete agreement is being amortized over the term of the
agreement, which is two years. The acquired customer base is being amortized
over one year. All intangibles are amortized using the straight-line method.
F-9
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Long-lived assets
In 1997, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed Of." The statement
requires the recognition of an impairment loss on a long-lived asset held for
use when events and circumstances indicate that the estimate of undiscounted
future cash flows expected to be generated by the asset are less than its
carrying amount.
Fair value of financial instruments
The Company's financial instruments include cash and cash equivalents,
short-term investments, accounts receivable, accumulated implementation costs,
deposits and other assets, accounts payable, accrued and other current
liabilities. The carrying value of these financial instruments approximates
fair value due to their short-term nature. The carrying value of the Company's
capital lease obligations approximates their fair values given their market
rates of interest and maturity schedules.
Concentration of credit risk
The market for Internet banking in the United States, in which the Company
operates, is characterized by rapid technological developments, frequent new
product introductions and changes in end user requirements. The Company's
future success will depend on its ability to develop, introduce and market
enhancements to its existing products and services, to introduce new products
and services in a timely manner which meet customer requirements and to respond
to competitive pressures and technological advances. Further, the emergence of
new industry standards, whether through adoption by official standards
committees or widespread use by financial institutions or other financial
institution data processing vendors, could require the Company to redesign its
products and services.
During the years ended December 31, 1999, 1998 and 1997, no customer
accounted for more than 10% of net revenues or net accounts receivable.
The Company performs ongoing credit evaluations of its customers' financial
condition and limits the amount of credit extended when deemed necessary, but
generally does not require collateral. Management believes that any risk of
loss is significantly reduced due to the number of its customers and geographic
sales areas. The Company maintains a provision for potential credit losses, and
write-offs of accounts receivable were insignificant during the years ended
December 31, 1999, 1998 and 1997.
The Company from time to time maintains a substantial portion of its cash
and cash equivalents in money market accounts with one financial institution.
The Company has not experienced any significant losses on its cash equivalents.
New accounting standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The new
standard requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Under SFAS No. 133, gains or
losses resulting from changes in the values of derivatives are to be reported
in the statement of operations or as a deferred item, depending on the use of
the derivatives and whether they qualify for hedge accounting. The Company is
required to adopt SFAS No. 133 in the first quarter of 2001. To date, the
Company has not engaged in any hedging activity and does not expect adoption of
this new standard to have a significant impact on the Company.
In December 1999, the SEC issued Staff Accounting Bulletin 101 ("SAB 101"),
"Revenue Recognition," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and
F-10
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
provides guidance for disclosure related to revenue recognition policies. At
this time, the Company is still assessing the impact of SAB 101 and its effect
(if any) on the Company's financial position, results of operations and cash
flows.
Capitalized Software Costs
The Company capitalizes the costs of computer software developed or obtained
for internal use in accordance with Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use."
Capitalized computer software costs consist of a purchased software license and
implementation costs. Costs capitalized at December 31, 1999 of $1,032,000 are
included in construction in progress. The capitalized software costs will be
amortized on a straight-line method over a period of three years. No
amortization has been charged for the years ended December 31, 1999, 1998, and
1997.
2. RELATED PARTY TRANSACTIONS
The Company paid royalties totaling $167,000, $162,000 and $37,000 for the
years ended December 31, 1999, 1998 and 1997, respectively, to a business
partner who is also a stockholder.
The Company paid $169,000 and $60,000 for the years ended December 31, 1998
and 1997, respectively, to a business partner who is also a stockholder,
primarily for employee medical benefits coverage under the affiliates plan and
other reimbursable costs. No such payments were made in 1999.
The Company entered into a Software License Agreement (the "Agreement") with
a software company whose CEO and Director is also a director of the Company.
The Agreement is for the license of customized software for approximately $1.4
million, plus additional implementation, and usage fees based on user volume.
3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
------- ----
<S> <C> <C>
Short-term investments (in thousands):
U.S. government obligations.................................. $11,939 $ --
Commercial paper............................................. 3,902 --
------- ----
$15,841 $ --
======= ====
</TABLE>
Property and equipment includes the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- ------
<S> <C> <C>
Construction in progress.................................... $ 1,125 $ --
Leasehold improvements...................................... 420 282
Data processing equipment................................... 6,800 2,128
Furniture and fixtures...................................... 964 597
------- ------
9,309 3,007
Less accumulated depreciation and amortization.............. (1,928) (654)
------- ------
$ 7,381 $2,353
======= ======
</TABLE>
Assets acquired under capitalized lease obligations are included in property
and equipment and totaled $1,105,000 and $213,000 with related accumulated
amortization of $272,000 and $85,000 at December 31, 1999 and 1998,
respectively.
F-11
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. ACQUISITION
On August 18, 1997, the Company acquired the customer base of RJE Internet
Services, Inc. ("RJE"). RJE develops, hosts and maintains web sites. The
acquisition of this customer base was accounted for as a purchase. The results
of operations and cash flows of the acquisition have been included from the
date of the acquisition of the customer base. The purchase price of the
customer base totaled $100,000 plus $180,000 for a covenant not to compete. The
customer base was fully amortized at December 31, 1998. Accumulated
amortization of the covenant not to compete totaled $180,000 and $128,000 at
December 31, 1999 and 1998, respectively.
5. INCOME TAXES
Prior to March 18, 1997, Digital Insight was a limited liability company
that was treated as a partnership for federal and Minnesota income tax
purposes. As a result, all federal and Minnesota tax matters for Digital
Insight LLC, prior to March 18, 1997, are the responsibility of the members.
As of December 31, 1999 and 1998, the Company had net operating loss carry-
forwards for federal and state purposes of $10,752,112 and $5,395,411,
respectively. Federal and state net operating loss carry-forwards begin to
expire in the years 2011 and 2004, respectively.
Given its history of operating losses, the Company has recorded a full
valuation allowance against its deferred tax assets generated from operating
losses because it is more likely than not that the deferred tax benefits will
not be utilized. Accordingly, the accompanying statements of operations include
no benefit for income taxes.
The components of the Company's deferred taxes are (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------ ------
<S> <C> <C>
Net operating loss carryforwards............................. $4,222 $2,093
Research credit carryforwards................................ 702 392
Stock compensation........................................... 879 398
Accruals and reserves........................................ 555 171
------ ------
Gross deferred tax assets.................................... 6,358 3,054
------ ------
Gross deferred tax liabilities............................... -- --
------ ------
Net deferred tax assets...................................... 6,358 3,054
------ ------
Deferred tax asset valuation allowance....................... (6,358) (3,054)
------ ------
Deferred tax assets.......................................... $ -- $ --
====== ======
</TABLE>
6. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Mandatorily redeemable convertible preferred stock at December 31, 1998
consists of the following:
<TABLE>
<CAPTION>
Issued and
Authorized Outstanding
---------- -----------
<S> <C> <C>
Series A.............................................. 1,668,166 1,645,944
Series B.............................................. 2,305,475 2,305,475
--------- ---------
3,973,641 3,951,419
========= =========
</TABLE>
F-12
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
In May 1999, the Company completed the private placement of 844,036 shares
of its Series C mandatorily redeemable convertible preferred stock at a price
per share of $10.00. The holders of mandatorily redeemable convertible
preferred stock were entitled to voting rights equivalent to the number of
shares of common stock into which it was convertible. In addition, holders of
Series A, Series B, and Series C mandatorily redeemable convertible preferred
stock were entitled to receive noncumulative dividends at the per annum rate of
$0.24, $0.31 and $0.90 per share, respectively, when and if declared by the
Board of Directors, as well as a liquidation preference of $2.70, $3.47 and
$10.00 per share, respectively, in the event of the dissolution of the Company.
In June 1999, the Company repurchased 20,000 shares of Series A mandatorily
redeemable convertible preferred stock at $10.00 per share from a former
executive officer.
All shares of Series A, Series B and Series C mandatorily redeemable
convertible preferred stock were converted into common stock upon the closing
of the Company's initial public offering in October 1999.
7. NOTES RECEIVABLE FROM STOCKHOLDERS
Effective October 23, 1997, under the Company's 1997 Stock Plan, two
officers of the Company exercised their options to purchase 309,250 shares
each, of the Company's common stock. In consideration, each officer executed a
note payable to the Company for $93,000. The note is payable at the earlier of
ten years from the date of execution or 30 days after termination. Interest is
being charged at the rate of 7% per annum. Interest income realized for the
years ended December 31, 1999, 1998 and 1997 on the loans was $15,000, $15,000
and $0, respectively. The officers have the option to prepay all or any portion
of the principal or interest without penalty.
8. PREFERRED STOCK WARRANTS
In connection with certain borrowings in 1999 and 1998, the Company issued
warrants to purchase Series A and Series C mandatorily redeemable convertible
preferred stock which, after conversion, resulted in warrants to purchase
22,222 and 28,819 shares of common stock for $2.70 and $3.47 per share,
respectively. Such warrants expire through 2006. Using the Black-Scholes
pricing model, the Company estimated that the aggregate fair value of the
warrants was $211,000. The Company recognized $60,000 and $20,000 of interest
expense associated with these warrants for the years ended December 31, 1999
and 1998, respectively.
In connection with the Company's initial public offering, the warrants were
converted to warrants to purchase common stock. Warrants to purchase 51,041
shares of common stock remain outstanding at December 31, 1999.
9. COMMON STOCK
In June 1999, the Board of Directors approved a resolution to increase the
number of shares of authorized common stock to 100,000,000 shares.
In October 1999, the Company completed its initial public offering of
4,025,000 shares of common stock for net proceeds of approximately $54.5
million.
F-13
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. STOCK-BASED COMPENSATION PLANS
In August 1997, the Company adopted the 1997 Stock Plan (the "1997 Plan").
The 1997 Plan provides for the granting of stock options and common stock to
employees and consultants of the Company. Options granted under the 1997 Plan
may be either incentive stock options or nonqualified stock options. Incentive
stock options ("ISOs") may be granted only to Company employees (including
officers and directors who are also employees). Nonqualified stock options
("NSOs") may be granted to Company employees and consultants. As of December
31, 1999, the Company has reserved 3,000,000 shares of common stock for
issuance under the 1997 Plan.
In June 1999, the Company adopted the 1999 Stock Incentive Plan (the "1999
Plan") and has reserved 1,500,000 shares of common stock for issuance under the
1999 Plan. Shares not yet issued under the 1997 Plan are also available under
the 1999 Plan. The 1999 Plan allows grants of ISOs, NSOs and restricted stock
to employees, non-employee board members and consultants.
Options under the Plans may be granted for periods of up to ten years, with
the exception of an ISO granted to an optionee who owns stock representing more
than 10% of the voting power of all classes of stock of the parent or
subsidiary, in which case the term of the option shall be five years, and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant, provided, however, that (i) the exercise price of an ISO and NSO
shall not be less than 100% and 85% of the estimated fair value of the shares
on the date of grant, respectively, and (ii) the exercise price of an ISO and
NSO granted to a 10% shareholder shall not be less than 110% of the estimated
fair value of the shares on the date of grant. Options generally vest in
monthly installments over four years following the date of grant, subject to
the optionee's continuous service. However, for first time grants, the initial
vesting shall occur twelve months from the vesting start date, at which time
25% of the shares will be vested. The remaining shares are vested over the
remaining three years.
Effective June 21, 1999, the Company adopted the 1999 Employee Stock
Purchase Plan (the "Purchase Plan"), which provides for the issuance of a
maximum of 300,000 shares of Common Stock. Eligible employees can have up to
15% of their earnings withheld, up to certain maximums, to be used to purchase
shares of the Company's common stock on every May 1 and November 1. The price
of the common stock purchased under the Purchase Plan is equal to 85% of the
lower of the fair market value of the common stock on the offering date of each
two year offering period or the specified purchase date. No shares have been
purchased under the Purchase Plan for the year ended December 31, 1999.
F-14
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Fair value disclosures
The Company applies the provisions of APB 25 and related interpretations in
accounting for employee stock-based compensation arrangements. Had compensation
cost for the Company's stock-based compensation plan been determined based on
the fair value at the grant dates for the awards under the method prescribed by
SFAS No. 123, for the years ended December 31, 1998 and 1997, the Company's net
loss would not have been materially different. For the year ended December 31,
1999, had compensation cost been determined pursuant to SFAS No. 123, the
Company's net loss would have been as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
---------------------
(In thousands, except
per share data)
<S> <C>
Net loss:
As reported.......................................... $(7,506)
-------
Pro forma............................................ $(9,913)
-------
Net loss per share--basic and diluted:
As reported.......................................... $ (.97)
-------
Pro forma............................................ $ (1.28)
-------
</TABLE>
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes pricing model with the following
assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected life (years)...................................... 4 4 4
Risk free interest rate.................................... 5.5% 6.2% 5.8%
Expected volatility........................................ 80% -- --
Dividend yield............................................. -- -- --
</TABLE>
F-15
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred stock-based compensation
In the years ended December 31, 1999, 1998 and 1997, the Company recorded
deferred stock-based compensation expense of $1,768,000, $1,918,000 and
$1,809,000, respectively, related to the issuance of stock options at prices
subsequently determined to be below fair market value. These charges are being
amortized over a period of four years from the date of grant. Amortization of
$1,221,000, $844,000 and $151,000 has been recognized as stock-based
compensation expense in the years ended December 31, 1999, 1998 and 1997,
respectively.
Stock option activity under the Plans is as follows:
<TABLE>
<CAPTION>
Exercise
Options Price Per
Outstanding Share
----------- ------------
<S> <C> <C>
Granted.......................................... 1,210,500 $0.30
Canceled......................................... (44,500) $0.30
Exercised........................................ (618,500) $0.30
--------- ------------
Balance December 31, 1997........................ 547,500 $0.30
Granted.......................................... 996,000 $0.30-$ 1.00
Canceled......................................... (104,640) $0.30-$ 0.50
Exercised........................................ (2,656) $0.30
--------- ------------
Balance December 31, 1998........................ 1,436,204 $0.30-$ 1.00
Granted.......................................... 1,061,785 $1.75-$44.50
Canceled......................................... (110,765) $0.30-$13.00
Exercised........................................ (344,948) $0.30-$39.94
--------- ------------
Balance December 31, 1999........................ 2,042,276 $0.30-$44.50
--------- ------------
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------
Weighted-Average Weighted- Weighted-
Remaining Contractual Average Average
Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price
--------------- --------- --------------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$0.30 260,479 7.7 $0.30 96,713 $0.30
$0.50 181,579 8.5 $0.50 46,946 $0.50
$1.00 575,000 8.8 $1.00 167,708 $1.00
$1.75 107,400 9.1 $1.75 15,643 $1.75
$2.25 401,285 9.2 $2.25 -- --
$9.00 165,533 9.3 $9.00 13,630 $9.00
$13.00 272,000 9.6 $13.00 1,333 $13.00
$31.00-$44.50 79,000 9.9 $31.00-$44.50 93 $31.00-$44.50
------------- --------- --- ------------- ------- -------------
$0.30-$44.50 2,042,276 8.9 $4.89 342,066 $2.68
========= === ============= ======= =============
</TABLE>
11. EMPLOYEE BENEFITS
Effective September 1, 1998, the Company adopted a Defined Contribution
Profit Sharing Plan. This plan includes a 401(k) salary deferral plan. All
employees are eligible to participate in the plan after six months of continued
service. Contributions to the 401(k) are in the form of employee-salary
deferrals which are not subject to employer-matching contributions.
F-16
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under noncancelable
operating and capital leases with various expiration dates through 2004 and
2002, respectively. Certain of the facilities leases have renewal options.
Additionally, the terms of the facilities leases provide generally for rental
payments on a graduated scale. The Company recognizes rent expense on a
straight-line basis over the lease period. Rent expense under the leases was
$365,000, $174,000 and $71,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
At December 31, 1999, the Company had $1,108,000 available under a capital
lease line for the acquisition of equipment.
Future minimum lease payments under all noncancelable capitalized and
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
------- ---------
<S> <C> <C>
2000.................................................... $401 $ 670
2001.................................................... 338 708
2002.................................................... 74 609
2003.................................................... -- 201
2004.................................................... -- 55
---- ------
Total minimum lease payments............................ 813 $2,243
======
Amounts representing interest........................... 60
----
Present value of capitalized lease obligations.......... 753
Less: current portion................................... 360
----
Noncurrent portion of capitalized lease obligations..... $393
====
</TABLE>
In December 1997, the Company entered into a Business Continuity Services
Master Agreement, which provides backup capability. The agreement is for a term
of five years with monthly payments of $6,000. Future minimum payments under
the agreement are $72,000 for each of the years through 2002.
13. SUBSEQUENT EVENTS
On November 21, 1999, the Company announced the signing of a definitive
agreement to acquire nFront, Inc., a publicly traded company. The acquisition
received regulatory and stockholder approval on February 10, 2000. Under the
terms of the acquisition, which has been accounted for as a pooling of
interests, the Company exchanged 8,253,735 shares of Digital Insight
Corporation common stock for 14,255,194 shares of nFront common stock.
Additionally, the Company converted 1,084,741 nFront stock options into 627,926
Digital Insight Corporation stock options. The Company expects to record a one-
time charge in the first quarter of 2000 relating to non-recurring merger costs
of $12.1 million, consisting of $11.1 million of direct transaction costs,
comprised primarily of investment banking, legal, printing, registration, and
accounting fees, and $1.0 million of other merger-related expenses, comprised
primarily of severance and closing costs of redundant functions and operations.
On March 6, 2000, the Company entered into a five-year facility lease
agreement. Minimum annual payments under the lease agreement are $845,000. The
lease agreement requires the Company to establish a $760,000 line of credit in
the form of a security deposit.
F-17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ------------
<C> <S> <C>
4.2 Third Amended and Restated Rights Agreement, dated as of
February 10, 2000, between the Registrant and the
parties named therein...................................
4.5 Shareholder Agreement, dated as of May 13, 1998, as
amended.................................................
21.1 List of Subsidiaries of the Registrant..................
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.............................................
27.1 Financial Data Schedule.................................
</TABLE>
<PAGE>
EXHIBIT 4.2
----------------------------------
DIGITAL INSIGHT CORPORATION
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
February 10, 2000
----------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1 Certain Definitions........................................... 1
Section 2 Piggyback Rights.............................................. 2
2.1 Notice of Registration........................................ 2
2.2 Underwriting.................................................. 3
2.3 Right to Terminate Registration............................... 4
2.4 Termination of Piggy-back Rights.............................. 4
Section 3 Demand Registration............................................ 4
3.1 Demand Registration........................................... 4
3.2 Underwritten Public Offering.................................. 5
3.3 Inclusion of Additional Shares................................ 5
3.4 Limitations................................................... 6
3.5 Termination of Demand Rights.................................. 6
Section 4 Form S-3 Registration.......................................... 6
4.1 Registrations on Form S-3..................................... 6
4.2 Termination of S-3 Rights..................................... 7
Section 5 Obligations of Company......................................... 7
Section 6 Expenses of Registration....................................... 8
Section 7 Indemnification................................................ 8
7.1 The Company................................................... 8
7.2 Holders....................................................... 9
7.3 Defense of Claims............................................. 9
Section 8 Rule 144 Reporting............................................. 10
Section 9 Limitations on Subsequent Registration Rights.................. 10
Section 10 Covenants..................................................... 10
10.1 Directors and Officers Insurance.............................. 10
10.2 Key Man Life Insurance........................................ 11
10.3 Proprietary Information Agreements............................ 11
Section 11 Merger........................................................ 11
11.1 Merger Holders................................................ 11
Section 12 Miscellaneous................................................. 11
12.1 Assignment.................................................... 12
12.2 Governing Law................................................. 12
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
(continued)
Page
----
<S> <C>
12.3 Counterparts.................................................. 12
12.4 Titles and Subtitles.......................................... 12
12.5 Notices....................................................... 12
12.6 Attorney's Fees............................................... 13
12.7 Amendments and Waivers........................................ 13
12.8 Severability.................................................. 13
12.9 Delays or Omissions........................................... 13
12.10 Entire Agreement.............................................. 13
</TABLE>
-ii-
<PAGE>
DIGITAL INSIGHT CORPORATION
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
THIS THIRD AMENDED AND RESTATED RIGHTS AGREEMENT (the "Agreement") is
effective as of February 10, 2000 among DIGITAL INSIGHT CORPORATION, a Delaware
corporation (the "Company"), Paul Fiore and Daniel Jacoby (the "Management
Holders"), Ole Eichhorn, Nasser J. Kazeminy, Edward Harris, Robert Newkirk, Gary
Mason, the Nasser J. Kazeminy Irrevocable Trust, the Yvonne P. Kazeminy-Mofrad
Irrevocable Trust, Kevin Savage, Robert Lucas, XP Systems Corporation, Menlo
Ventures VII, L.P., Menlo Entrepreneurs Fund VII, L.P., HarbourVest Partners V-
Direct Fund, L.P., John Dorman, Steve Zarate, Steve Reich, Kevin McDonnell,
Silicon Valley Bank and Comdisco, Inc. (the "Investor Holders"), Noro-Moseley
Partners IV, L.P. (the "Merger Investor Holders"), Brady L. Rackley III and
Brady L. Rackley (the "Merger Management Holders"). The Management Holders and
the Investor Holders are sometimes referred to herein as (the "Holders") and the
Merger Management Holder and the Merger Investor Holders are sometimes referred
to herein as (the "Merger Holders"). This Agreement amends and restates in its
entirety that certain Second Amended and Restated Rights Agreement dated May 26,
1999, as amended to date, (the "Second Rights Agreement") which amended and
restated in its entirety that certain Rights Agreement dated February 27, 1998.
Pursuant to Section 12.7 of the First Rights Agreement and Section 13.7 of the
Second Rights Agreement, this Agreement shall benefit and bind all Holders who
signed the First Rights Agreement or Second Rights Agreement, regardless of
whether or not they sign this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties agree that the Second Rights Agreement shall
be amended and restated to read in its entirety as follows:
Section 1
Certain Definitions
-------------------
Certain Definitions. As used in this Agreement, the following terms shall
-------------------
have the following respective meanings:
1.1 "SEC" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
1.2 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC promulgated thereunder, all as
the same shall be in effect at that time.
<PAGE>
1.3 "Initial Public Offering" or "IPO" means the Company's sale of its
Common Stock in a bona fide, firm commitment underwriting pursuant to a
registration statement under the Securities Act.
1.4 "Merger Agreement" shall mean that certain Plan of Merger and
Reorganization by and among the Company, Black Transitory Corporation and nFront
Inc. of even date herewith.
1.5 The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act (as defined below), and the declaration or
ordering of the effectiveness of such registration statement.
1.6 "Registrable Securities" means: (a) with respect to the Holders, (i)
the shares of Common Stock of the Company outstanding on May 26, 1999 and the
shares of Common Stock of the Company issuable or issued upon conversion of the
Series A Preferred Stock (the "Series A Preferred"), the Series B Preferred (the
"Series B Preferred") or the Series C Preferred (the Series A Preferred, the
Series B Preferred and the Series C Preferred being collectively referred to
hereinafter as the "Stock") outstanding as of May 26, 1999, and (ii) any other
shares of the Company's Common Stock issued as (or issuable upon conversion or
exercise of any warrant, right or other security which is issued as) a dividend
or other distribution with respect to or in exchange for or replacement of the
Stock; (b) with respect to the Merger Holders, the shares of Common Stock of the
Company issued (or issuable upon exercise of a warrant) to the Merger Holders
pursuant to the Merger Agreement; provided, however, (c) in all cases, any
-------- -------
shares that would otherwise be Registrable Securities sold by a person in a
transaction in which that person's rights under this Agreement are not assigned
or to or through (other than to the Merger Holders) a broker, dealer or
underwriter in a public distribution or a public securities transaction shall
not be Registrable Securities.
1.7 "Securities Act" shall mean the Securities Act of 1933, as amended,
and the rules and regulations of the SEC promulgated thereunder, all as the same
shall be in effect at the time.
1.8 An "Affiliate" of an entity referenced herein shall mean (i) any
entity who controls, is controlled by, or is under common control with such
entity, or (ii) any constituent partner or stockholder of such entity.
Section 2
Piggyback Rights
----------------
2.1 Notice of Registration. If at any time or from time to time, but with
----------------------
no obligation to do so, the Company proposes to register (including for this
purpose a registration effected by the Company for stockholders other than the
Holders) any of its equity securities under the Securities Act in connection
with the firm commitment underwritten public offering of such securities solely
for cash (other than a registration relating solely to the sale of securities of
participants in a Company stock plan, or a registration on any form which does
not include substantially the same information as would be required to be
included in a registration statement covering the sale of the Registrable
Securities), the Company will:
<PAGE>
(i) promptly give to the Holders written notice thereof; and
(ii) use its reasonable best efforts to include in such
registration (and any related qualification under blue sky laws or other
compliance), and underwriting, all the Registrable Securities (subject to
cutback as set forth in Section 2.2) specified in a written request or requests
made within thirty (30) days after receipt of such written notice from the
Company by any Holder.
In connection with any registration pursuant to this Section 2, the Holders
participating in such registration shall provide all information to the Company
as may be required in order to permit the Company to comply with all applicable
requirements of the SEC in connection with such registration.
2.2 Underwriting. The right of any Holder to registration pursuant to
------------
this Section 2 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of Registrable Securities in the underwriting to
the extent provided herein. If any Holder proposes to distribute its securities
through such underwriting, such Holder shall (together with the Company and any
other stockholders distributing their securities through such underwriting)
enter into an underwriting agreement in customary form with the managing
underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this Section 2, if the managing
underwriter advises the Holders registering shares of Common Stock in writing
that marketing factors require a limitation on the number of shares to be
underwritten, then the Registrable Securities of the Holders, the securities of
the Company and the securities held by any other stockholders distributing their
securities through such underwriting shall be excluded from the underwriting by
reason of the underwriter's marketing limitation to the extent so required by
such limitation as follows: (a) first, the securities held by such other
stockholders distributing their securities through such underwriting shall be
excluded in a manner such that the number of any shares that may be included by
such holders are allocated in proportion, as nearly as practicable to the
amounts of such securities proposed to be offered by such persons in such
registration, (b) if after all securities held by such other stockholders have
been excluded and additional shares shall be excluded, Registrable Securities of
the Holders shall be excluded in a manner such that the number of any
Registrable Securities that may be included by such Holders are allocated in
proportion, as nearly as practicable to the amounts of Registrable Securities
held by such Holders, and (c) if after all securities held by the Holders and
such other stockholders have been excluded and additional shares shall be
excluded, securities of the Company shall be excluded. If any Holder or other
stockholders disapprove of the terms of any such underwriting, he or she may
elect to withdraw therefrom by written notice to the Company and the managing
underwriter. Any securities excluded or withdrawn from such underwriting shall
be withdrawn from such registration, and shall not be transferred in a public
distribution prior to ninety (90) days after the effective date of the
registration statement relating thereto.
2.3 Right to Terminate Registration. The Company shall have the right to
-------------------------------
terminate or withdraw any registration initiated by it under this Section 2
prior to the effectiveness of such registration, whether or not any Holder has
elected to include securities in such registration.
-3-
<PAGE>
2.4 Termination of Piggy-back Rights. The rights of any Holder to receive
--------------------------------
notice and to participate in a registration pursuant to the terms of this
Section 2 shall terminate at such time as such Holder could sell all of the
Registrable Securities held by such Holder in any one three month period under
the terms of Rule 144 under the Securities Act; provided, that such Investor
Holder holds fewer than 1% of the Company's outstanding capital stock; and
provided further, that the Company is subject to the reporting requirements of
the Securities Exchange Act of 1934.
Section 3
Demand Registration
-------------------
3.1 Demand Registration. At any time after the earlier of (a) January 1,
-------------------
2000, or (b) six months after the closing of the Company's IPO, the Investor
Holders shall be entitled to have the Company effect two (2) demand
registrations of Registrable Securities then owned by such Investor Holders
requesting such registration. A request for such registration (a "Registration
Request") must be made in writing and such Registrable Securities must have an
offering value of at least $10,000,000. The Company shall give notice of such
requested registration to all Investor Holders and shall use its reasonable best
efforts to cause the Registrable Securities specified in such Registration
Request to be registered as soon as reasonably practicable so as to permit the
sale thereof, and in connection therewith, shall prepare and file a registration
statement (on any appropriate form selected by the Company) with the SEC under
the Securities Act to effect such registration. Such registration statement
shall contain such required information pursuant to the rules and regulations
promulgated under the Securities Act and such additional information as deemed
necessary by the managing underwriter or if there is no managing underwriter, as
deemed necessary by mutual agreement between the Investor Holders requesting
registration and the Company. Such Registration Request shall (i) specify the
number of shares intended to be offered and sold; (ii) express the present
intention of the requesting Investor Holders to offer or cause the offering of
such shares for distribution; (iii) describe the nature or method of the
proposed offer and sale thereof; and (iv) contain the undertaking of the
requesting Investor Holders to provide all such information and materials and
take all such action as may be required in order to permit the Company to comply
with all applicable requirements of the SEC and to obtain any desired
acceleration of the effective date of such registration statement.
3.2 Underwritten Public Offering. If requested in the Registration
----------------------------
Request, and provided that the underwriter or underwriters are reasonably
satisfactory to the Company, the Company (together with all officers, directors
and other third parties proposing to distribute their securities through such
underwriting pursuant to Section 3.3 hereof) shall enter into an underwriting
agreement with an investment banking firm or firms containing representations,
warranties, indemnities and agreements then customarily included by an issuer in
underwriting agreements with respect to secondary distributions. The Company
shall not cause the registration under the Securities Act of any other shares of
its Common Stock to become effective (other than registration of an employee
stock plan, or registration in connection with any Rule 145 or similar
transaction) during the effectiveness of a registration requested hereunder for
an underwritten public offering if, in the judgment of the underwriter or
underwriters, marketing factors would adversely affect the price of the
Registrable Securities subject to such underwritten registration.
-4-
<PAGE>
3.3 Inclusion of Additional Shares. The Company may include in a
------------------------------
registration pursuant to this Section 3 securities for its own account and by
other third parties (including officers and employees of the Company), in
amounts as determined by the Company's Board of Directors (the "Additional
Securities"). In the event that such Additional Securities are included in a
registration pursuant to this Section 3, and if the underwriter of such
registration advises the stockholders or the Company registering shares of
Common Stock in writing that marketing factors require a limitation on the
number of shares to be underwritten, then the Registrable Securities of the
Investor Holders, the securities of the Company and the securities held by
stockholders other than the Investor Holders shall be excluded from the
underwriting by reason of the underwriter's marketing limitation to the extent
so required by such limitation as follows: (a) first, the securities held by
stockholders other than the Investor Holders shall be excluded in a manner such
that the number of any shares that may be included by such holders are allocated
in proportion, as nearly as practicable to the amounts of such securities
proposed to be offered by such persons in such registration, (b) if after all
securities held by stockholders other than the Investor Holders have been
excluded and additional shares shall be excluded, securities of the Company
shall be excluded, and (c) last, if after all securities of the Company and
securities held by stockholders other than the Investor Holders have been
excluded and additional shares shall be excluded, Registrable Securities of the
Investor Holders shall be excluded in a manner such that the number of any
Registrable Securities that may be included by such Investor Holders are
allocated in proportion, as nearly as practicable to the amounts of Registrable
Securities held by such Investor Holders. No securities excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
included in such registration. If any officer, director or other stockholder
(including Investor Holders) who has requested inclusion in such registration as
provided above disapproves of the terms of the underwriting, such person may
elect to withdraw therefrom by written notice to the Company, the underwriter
and the Investor Holders requesting registration. In the event that the Company
has substantially prepared and has filed, or is in a position to file, a
registration statement pursuant to this Section 3, and such registration does
not become effective by reason of the refusal of the Investor Holders to proceed
(other than refusal to proceed based upon the existence in the registration
statement, or the prospectus contained therein, of an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading), then a demand
registration shall be deemed to have been effected by the Company at the request
of the Investor Holders. In the event that 50% or more of the Registrable
Securities proposed to be offered by any Investor Holder in a registration
pursuant to this Section 3 are excluded from such proposed registration as a
result of the underwriter's marketing limitation, then the Investor Holders
shall be entitled to an additional demand registration pursuant to the terms of
this Section 3.
3.4 Limitations. Notwithstanding the foregoing, if at the time of any
-----------
request to register Registrable Securities pursuant to this Section 3, the
Company is engaged, or has formal plans to engage within ninety (90) days of the
time of the request, in a registered public offering or any other activity that,
in the good faith determination of the Board of Directors of the Company, would
be adversely affected by the requested registration to the material detriment of
the Company, then the Company may, at its option, direct that such request be
delayed for a period not in excess of ninety (90) days from the effective date
of such offering, or the date of commencement of such other material activity,
as the case may be. Such rights to delay a request may not be exercised more
than once in any twelve month period.
-5-
<PAGE>
3.5 Termination of Demand Rights. The rights of any Investor Holder to
----------------------------
request a registration pursuant to the terms of this Section 3 shall terminate
upon the earlier of (i) such time as such Holder could sell all of the
Registrable Securities held by such Holder in any one three month period under
the terms of Rule 144 under the Securities Act; provided, that such Investor
Holder holds fewer than 1% of the Company's outstanding capital stock; and
provided further, that the Company is subject to the reporting requirements of
the Securities Exchange Act of 1934l; and (ii) three years following the closing
of the Company's IPO.
Section 4
Form S-3 Registration
---------------------
4.1 Registrations on Form S-3. Any Investor Holders shall be entitled to
-------------------------
request (an "S-3 Registration Request") an unlimited number of registrations of
Registrable Securities then owned by such requesting Investor Holders on a Form
S-3 registration statement under the Securities Act (an "S-3 Registration"). The
S-3 Registration Request must be made in writing and the S-3 Registration
Request shall (i) specify the number of shares intended to be offered and sold;
(ii) express the present intention of the requesting Investor Holders to offer
or cause the offering of such shares for distribution; (iii) describe the nature
or method of the proposed offer and sale thereof and (iv) contain the
undertaking of the requesting Investor Holders to provide all such information
and materials and take all such action as may be required in order to permit the
Company to comply with all applicable requirements of the SEC and to obtain any
desired acceleration of the effective date of such registration statement. The
Company shall, as soon as practicable, file an S-3 Registration and proceed to
obtain all such qualifications and compliance as may be so requested and as
would permit or facilitate the sale and distribution of all or such portion of
the requesting Investor Holders' Registrable Securities as are specified in the
S-3 Registration Request, within 30 days after receipt of such written notice by
the Company; provided, however, that the Company shall not be obligated to
-------- -------
effect any such registration, qualification or compliance, pursuant to this
Section 4 if (i) Form S-3 is not available for such offering by the requesting
Investor Holders; or (ii) the Company has, within the twelve (12) month period
preceding the date of such request, already effected two registrations on Form
S-3 for any Investor Holders pursuant to this Section 4.
4.2 Termination of S-3 Rights. The rights of any Investor Holder to
-------------------------
request a registration pursuant to the terms of this Section 4 shall terminate
upon the earlier of (such time as such Holder could sell all of the Registrable
Securities held by such Holder in any one three month period under the terms of
Rule 144 under the Securities Act; provided, that such Investor Holder holds
fewer than 1% of the Company's outstanding capital stock; and provided further,
that the Company is subject to the reporting requirements of the Securities
Exchange Act of 1934; and (ii) three years following the closing of the
Company's IPO.
Section 5
Obligations of Company
----------------------
-6-
<PAGE>
Whenever the Company is required by the provisions of this Agreement to use
its reasonable best efforts to effect the registration of the Registrable
Securities, the Company shall (i) prepare and, as soon as possible, file with
the SEC a registration statement with respect to the Registrable Securities, and
use its reasonable best efforts to cause such registration statement to become
effective and to remain effective until the earlier of the sale of the
Registrable Securities so registered or ninety (90) days subsequent to the
effective date of such registration; (ii) prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to make and to keep such
registration statement effective and to comply with the provisions of the
Securities Act with respect to the sale or other disposition of all securities
proposed to be registered in such registration statement until the earlier of
the sale of the Registrable Securities so registered or ninety (90) days
subsequent to the effective date of such registration statement, (iii) furnish
to any Holder such number of copies of any prospectus (including any preliminary
prospectus and any amended or supplemented prospectus), in conformity with the
requirements of the Securities Act, as such Holder may reasonably request in
order to effect the offering and sale of the Registrable Securities to be
offered and sold, but only while the Company shall be required under the
provisions hereof to cause the registration statement to remain current; (iv)
use its commercially reasonable efforts to register or qualify the Registrable
Securities covered by such registration statement under the securities or blue
sky laws of such states as any Holder shall reasonably request, maintain any
such registration or qualification current until the earlier of the sale of the
Registrable Securities so registered or ninety (90) days subsequent to the
effective date of the registration statement, and take any and all other actions
either necessary or reasonably advisable to enable the Holders to consummate the
public sale or other disposition of the Registrable Securities in jurisdictions
where such Holders desire to effect such sales or other disposition; and (v)
take all such other actions either necessary or reasonably desirable to permit
the Registrable Securities held by a Holder to be registered and disposed of in
accordance with the method of disposition described herein. Notwithstanding the
foregoing, the Company shall not be required to register or to qualify an
offering of the Registrable Securities under the laws of a state if as a
condition to so doing the Company is required to qualify to do business or to
file a general consent to service of process in any such state or jurisdiction,
unless the Company is already subject to service in such jurisdiction.
Section 6
Expenses of Registration
------------------------
The Company shall pay all of the reasonable out-of-pocket expenses incurred
in connection with any registration statements that are initiated pursuant to
this Agreement, including, without limitation, all SEC and blue sky registration
and filing fees, printing expenses, transfer agent and registrar fees, the fees
and disbursements of the Company's legal counsel and independent accountants.
Any underwriting discounts, fees and disbursements of counsel to the Holders,
selling commissions and stock transfer taxes applicable to the Registrable
Securities registered on behalf of any Holders shall be borne by the Holders of
the Registrable Securities included in such registration.
Section 7
Indemnification
---------------
-7-
<PAGE>
7.1 The Company. The Company will indemnify the Holders and each person
-----------
controlling any Holders within the meaning of Section 15 of the Securities Act,
and each underwriter if any, of the Company's securities, with respect to any
registration, qualification or compliance which has been effected pursuant to
this Agreement, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, or any violation by the Company of any rule or
regulation promulgated under the Securities Act applicable to the Company in
connection with any such registration, qualification or compliance, and the
Company will reimburse the Holders and each person controlling any Holders, and
each underwriter, if any, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Company by such Holder or
controlling person or underwriter seeking indemnification.
7.2 Holders. Each Holder will, if Registrable Securities held by such
-------
Holder are included in the securities as to which such registration,
qualification or compliance is being effected (the "Indemnifying Holder"),
indemnify the Company, each of its directors and officers and each underwriter,
if any, of the Company's securities covered by such registration statement and
each person who controls the Company within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof), arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any amendment or
supplement thereto, incident to any such registration, qualification or
compliance or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by such Holder of any rule or
regulation promulgated under the Securities Act applicable to such Holder in
connection with any such registration, qualification or compliance, and will
reimburse the Company, such directors, officers or control persons or
underwriters for any legal or any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by such Indemnifying Holder, provided that in no event
shall any indemnity under this Section 7.2 exceed the gross proceeds of the
offering received by such Indemnifying Holder.
7.3 Defense of Claims. Each party entitled to indemnification under this
-----------------
Section 7 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of
-8-
<PAGE>
any such claim or any litigation resulting therefrom, provided that counsel for
the Indemnifying Party, who shall conduct the defense of such claim or
litigation, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying Party
-------- -------
shall pay such expense if representation of the Indemnified Party by counsel
retained by the Indemnifying Party would be inappropriate due to actual or
potential differing interests between the Indemnified Party and any other party
represented by such counsel in such proceeding, and provided further that the
-------- -------
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Section 7 unless
the failure to give such notice is materially prejudicial to an Indemnifying
Party's ability to defend such action. No Indemnifying Party, in the defense of
any such claim or litigation shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. No Indemnifying Party shall be required to
indemnify any Indemnified Party with respect to any settlement entered into
without such Indemnifying Party's prior consent.
Section 8
Rule 144 Reporting
------------------
With a view to making available the benefits of certain rules and
regulations of the SEC which may at any time permit the sale of the Registrable
Securities to the public without registration, the Company agrees to use its
best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times from
and after ninety (90) days following the effective date of the IPO;
(b) File with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
at any time after it has become subject to such reporting requirements; and
(c) So long as an Investor Holder owns any Registrable Securities,
furnish to such Investor Holder forthwith upon request a written statement by
the Company as to its compliance with the reporting requirements of said Rule
144 (at any time from and after ninety (90) days following the effective date of
the first registration statement filed by the Company for an offering of its
securities to the general public), and of the Securities Act and the Exchange
Act (at any time after it has become subject to such reporting requirements), a
copy of the most recent annual or quarterly report of the Company, and such
other reports and documents of the Company, and such other reports and documents
so filed as an Investor Holder may reasonably request in availing itself of any
rule or regulation of the SEC allowing such Investor Holder to sell any such
securities without registration.
-9-
<PAGE>
Section 9
Limitations on Subsequent Registration Rights
---------------------------------------------
From and after the date of this Agreement, the Company shall not, without
the prior written consent of the Investor Holder(s) of at least a majority of
the outstanding Registrable Securities, enter into any agreement with any holder
or prospective holder of any securities of the Company giving such holder or
prospective holder any registration rights the terms of which are more favorable
than the registration rights granted to any Holders hereunder or to require the
Company to effect a registration earlier than the date on which the Holders can
first require a registration under Section 3.1.
Section 10
Covenants
---------
10.1 Directors and Officers Insurance. The Company shall use its
--------------------------------
commercially reasonable efforts to promptly obtain and maintain for so long as
any Venture Holder or any representative thereof shall serve on the Board of
Directors of the Company, directors' and officers' liability insurance policies
in favor of the Board of Directors of the Company in an amount not less than
$1,000,000.
10.2 Key Man Life Insurance. The Company shall use its commercially
----------------------
reasonable efforts to promptly obtain and maintain for so long as Paul D. Fiore
shall remain an employee of the Company, a key man life insurance policy in
favor of the Company in an amount not less than $1,000,000.
10.3 Proprietary Information Agreements. The Company will use its
----------------------------------
commercially reasonable efforts to have each current and former employee and
officer of the Company execute an agreement with the Company regarding
confidentiality and proprietary information substantially in the form attached
to the Purchase Agreement as Exhibit H and will thereafter use its commercially
---------
reasonable efforts to prevent any violations thereof.
Section 11
Merger
------
11.1 Merger Holders. In the event that the Merger as defined in the Merger
--------------
Agreement is consummated, the Merger Holders shall be treated as Investor
Holders for purposes of Sections 3 of this Agreement (except that the definition
of Registrable Securities applicable to Merger Holders shall apply) and as
Holders for purposes of Sections 2 through 10 and 12 of this Agreement (except
that the definition of Registrable Securities applicable to Merger Holders shall
apply); Provided, however, that (a) the Company will not be obligated to provide
-------- -------
the Merger Management Holders with demand registration rights pursuant to
Section 3 or S-3 registration rights pursuant to Section 4
-10-
<PAGE>
until the earlier of (i) the one-year anniversary of the Closing Date as defined
in the Merger Agreement and (ii) the date on which Brady L. Rackley III ceases
to be employed by the Company as a result of being terminated without "Cause" by
the Company, or the Surviving Corporation as defined in the Merger Agreement, or
his termination for "Good Reason" (as such terms are defined in Mr. Rackley
III's Employment Agreement), (b) any exercise of demand registration rights by
either of the Merger Management Holders must be pursuant to a firm commitment
underwritten offering led by an underwriter of the Company's choice (which
choice shall be reasonably satisfactory to the Merger Management Holders), and
(c) Merger Investor Holder hereby waives its rights under that certain
Shareholder Agreement dated May 13, 1998, as amended, to which it and nFront
Inc. are among the parties.
Section 12
Miscellaneous
-------------
12.1 Assignment. The rights to cause the Company to register Registrable
----------
Securities granted to the Investor Holders by the Company under this Agreement
may be transferred or assigned (but only with all related obligations) by the
Investor Holders to an Affiliate of any Investor Holder or a transferee which
acquires at least 10% of the Registrable Securities held by such Investor Holder
at any time; provided (i) that the Company is given written notice at the time
--------
of or within a reasonable time after said transfer or assignment, stating the
name and address of the transferee or assignee and identifying the securities
with respect to which such registration rights are being transferred or
assigned, and, (ii) provided further, that the transferee or assignee of such
-------- -------
rights assumes in writing the obligations of such Holder under this Agreement.
Subject to the preceding sentence, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns. Any transferee or assignee shall thereafter be treated as an
Investor Holder, subject to the limitations herein. Until the Company receives
actual notice of any transfer or assignment, it shall be entitled to rely on the
then existing list of Holders and the failure to notify the Company of any
transfer or assignment shall not affect the validity of a notice properly given
by the Company to the Holders pursuant to lists maintained by the Company.
12.2 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of Delaware as applied to agreements entered into
solely between residents of, and to be performed entirely within, such state.
12.3 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.4 Titles and Subtitles. The titles and subtitles used in this Agreement
--------------------
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
12.5 Notices.
-------
(a) All notices, requests, demands and other communications under this
Agreement or in connection herewith shall be given to or made upon the Holder at
the addresses set
-11-
<PAGE>
forth in the Company's records with a copy to Debevoise & Plimpton, 875 Third
Avenue, New York, New York 10022, attention: David Schwartz, and, if to the
Company, to: Digital Insight Corporation, 28025 Mureau Road, Calabasas,
California 91302, attention: Chief Financial Officer with a copy to Wilson
Sonsini Goodrich & Rosati, P.C. at 650 Page Mill Road, Palo Alto, California
94304, attention: Steven E. Bochner.
(b) All notices, requests, demands and other communications given or
made in accordance with the provisions of this Agreement shall be in writing,
and shall be sent by airmail, return receipt requested, or by facsimile with
confirmation of receipt, and shall be deemed to be given or made when receipt is
so confirmed.
(c) Any party may, by written notice to the other, alter its address
or respondent, and such notice shall be considered to have been given three (3)
days after the airmailing or faxing thereof.
12.6 Attorney's Fees. If any action at law or in equity (including
---------------
arbitration) is necessary to enforce or interpret the terms of this Agreement,
the prevailing party shall be entitled to reasonable attorney's fees costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
12.7 Amendments and Waivers. Any term of this Agreement may be amended
----------------------
with the written consent of the Company and the holders of at least two-thirds
in interest of the Holders. Any amendment or waiver effected in accordance with
this Section 12.7 shall be binding upon the Holders and each transferee of the
Registrable Securities, each future holder of all such Registrable Securities,
and the Company.
12.8 Severability. If one or more provisions of this Agreement are held
------------
to be unenforceable under applicable law, portions of such provisions, or such
provisions in their entirety, to the extent necessary, shall be severed from
this Agreement, and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
12.9 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party to this Agreement, upon any breach or
default of the other party, shall impair any such right, power or remedy of such
non-breaching party nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any party of any breach or default under this Agreement, or any
waiver on the part of any party of any provisions or conditions of this
Agreement, must be made in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, or by law or otherwise afforded to any Holder, shall be cumulative
and not alternative.
12.10 Entire Agreement. This Agreement and the documents referred to
----------------
herein constitute the entire agreement between the parties hereto pertaining to
the subject matter hereof and any other written or oral agreements between the
parties hereto are expressly canceled.
-12-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement of the
day and year first above written.
COMPANY: HOLDERS:
Digital Insight Corporation Menlo Ventures VII, L.P.
By: /s/ John Dorman By: MV Management VII, L.L.C.
-----------------------
John Dorman Its General Partner
Chief Executive Officer
By: /s/ John Jarve
-----------------------------------
John Jarve
Its Managing Member
Menlo Entrepreneurs Fund VII, L.P.
By: MV Management VII, L.L.C.
Its General Partner
By: /s/ John Jarve
-----------------------------------
John Jarve
Its Managing Member
HarbourVest Partners V-Direct Fund, L.P.
By: HVP V-Direct Associates, L.L.C.
Its Managing Member
By: /s/ Ofer Nemirovsky
-----------------------------------
Name: Ofer Nemirovsky
----------------------------------
Title: Member
---------------------------------
[Signature Page to Third Amended and Restated Rights Agreement]
<PAGE>
__________________________________ XP Systems Corporation
Ole Eichhorn
By:______________________________________
Name: ___________________________________
Title: __________________________________
/s/ Paul D. Fiore /s/ Daniel Jacoby
__________________________________ _________________________________________
Paul Fiore Dan Jacoby
/s/ Nasser Kazeminy
__________________________________ _________________________________________
Nasser J. Kazeminy Edward Harris
__________________________________ _________________________________________
Robert Newkirk Gary Mason
The Nasser J. Kazeminy Irrevocable The Yvonne P. Kazeminy-Mofrad Irrevocable
Trust Trust
By: /s/ Nasser Kazeminy By: /s/ Yvonne Kazeminy-Mofrad
__________________________________ ____________________________________
Name: Nasser J. Kazeminy Name: Yvonne P. Kazeminy-Mofrad
_____________________________ ___________________________________
Title: Co-Trustee Title: Co-Trustee
____________________________ __________________________________
__________________________________ _________________________________________
Kevin Savage Robert Lucas
/s/ John Dorman /s/ Stephen Zarate
__________________________________ _________________________________________
John Dorman Steve Zarate
/s/ Kevin McDonnell
__________________________________ _________________________________________
Steve Reich Kevin McDonnell
[Signature Page to Third Amended and Restated Rights Agreement]
<PAGE>
SILICON VALLEY BANK
- -------------------
By: _______________________________________
Name:______________________________________
Title:_____________________________________
COMDISCO, Inc.
- --------------
By:________________________________________
Name:______________________________________
Title:_____________________________________
[Signature Page to Third Amended and Restated Rights Agreement]
<PAGE>
MEMBER INVESTOR HOLDERS MERGER MANAGEMENT HOLDERS
Noro-Moseley Partners IV, L.P.
By MKFJ-IV. L.L.C., General Partner
Its General Partner
By /s/ Brady L. Rackley III
------------------------------- --------------------------------
Charles D. Moseley, Jr., Member Brady L. Rackley III
/s/ Brady L. Rackley
--------------------------------
Brady L. Rackley
The Brady Rackley Grantor Retained
Annuity Trust
By: /s/ Katharine S. Rackley
--------------------------
Name: Katharine S. Rackley
--------------------------
Title: Trustee
--------------------------
The Katharine and Brady Rackley
Charitable Remainder Unitrust
By: /s/ Brady L. Rackley
--------------------------
Name: Brady L. Rackley
--------------------------
Title: Trustee
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/s/ Katharine S. Rackley
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Katharine S. Rackley
The Katharine Rackley Grantor Retained
Annuity Trust
By: /s/ Brady L. Rackley
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Name: Brady L. Rackley
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Title: Trustee
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[Signature page to Third Amended and Restated Rights Agreement]
<PAGE>
EXHIBIT 4.5
SHAREHOLDER AGREEMENT
THIS SHAREHOLDER AGREEMENT is made and entered into this 13th day of
May 1998, by and among NFRONT, INC. a Georgia corporation (the "Company"), BRADY
L. RACKLEY, III, a resident of the State of Georgia ("Rackley"), Brady L.
Rackley, a resident of the State of Georgia ("B. Rackley"), Tom E. Greene
("greene"), James A. Verbrugge ("Verbrugge"), Warren Derek Porter ("Porter"),
Steve Scott Neel ("Neel"), CNL Financial Corporation ("CNL"), and NORO-MOSELEY
PARTNERS IV, L.P., a Georgia limited partnership ("Investor" and, together with
Rackley, B. Rackley, Greene, Verbrugge, Porter, Neel, and CNL the
"Shareholders").
BACKGROUND
A. Pursuant to a Series A Convertible Preferred Stock Purchase
Agreement of even date herewith (the "Stock Purchase Agreement"), Investor has
purchased Two Hundred Fifty Five Thousand Eight Hundred Eighty Five (255,885)
shares of the Company's Preferred Stock (as hereinafter defined).
B. Pursuant to a Common Stock Purchase Agreement of even date herewith
(the "Common Stock Agreement"), Investor has purchased Thirty Five Thousand
Eight Hundred Twenty Four (35,824) shares of the Company's Common Stock from B.
Rackley.
C. The execution ad delivery of this Agreement by the Company and each
of the Shareholders, each of whom owns the number of shares of Common Stock set
forth adjacent to such person's name on the signature page hereto and who,
collectively, own all of the shares of Common Stock (as hereinafter defined)
outstanding on the date hereof, is a condition precedent to the obligation of
Investor to purchase the Preferred Stock pursuant to the Stock Purchase
Agreement.
D. The parties hereto wish to state herein their mutual agreements and
obligations and to impose certain restrictions on the rights and benefits with
respect to the voting and disposition of the Shares (as hereinafter defined) now
or hereafter owned by the Shareholders, and to set forth certain agreements with
respect to the management of the Company.
AGREEMENT
For and in consideration of the foregoing, the agreements set forth
below, and other good and valuable consideration, the receipt and sufficiency of
which is acknowledged, the parties agree as follows:
SECTION 1. DEFINITIONS
The following capitalized terms are used in this Agreement with
meanings thereafter ascribed:
"AFFILIATE" means any person, firm, corporation, partnership,
association, or other entity that, directly or indirectly or through one or more
intermediaries, controls, is controlled by, or is under common control with a
specified person, firm, corporation, partnership, association, or entity.
"AGREEMENT" means this Agreement, together with any addenda and
amendments made in the manner described in this Agreement.
"BUSINESS" means the business of selling Internet banking services to
community banks.
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"BUSINESS DAY" means any Monday, Tuesday, Wednesday, Thursday, or
Friday on which banks are open in Atlanta, Georgia.
"COMMISSION" means the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"COMMON STOCK" means the common stock, no par value, of the Company of
which Five Million (5,000,000) shares are authorized and One Million Twenty
Three Thousand Eighteen (1,023,018) shares are issued and outstanding as of the
date hereof.
"COMMON STOCK EQUIVALENTS" means the sum of (x) the number of shares
of Common Stock outstanding, PLUS (y) the number of shares of Common Stock
issuable upon (i) conversion or exchange of all outstanding securities
convertible into or exchangeable for Common Stock, (ii) the exercise of all
vested and outstanding warrants, options, and rights to purchase Common Stock or
securities convertible into or exchangeable for Common Stock, and (iii) the
conversion or exchange of all convertible or exchangeable securities purchased
upon such exercise, all as of the date upon which the number of Common Stock
Equivalents is being determined.
"COMPANY BENEFIT PLAN" means any stock purchase or stock option plan
which the Company maintains for the benefit of its employees.
"COMPETITOR" means a person or entity that is substantially engaged in
the Business. For purposes hereof, "substantially engaged" shall mean that the
average annual revenues of such person or entity derived from the conduct of the
Business during the three most recent completed fiscal years of such person or
entity (or if such person or entity has conducted such business for less than
three completed fiscal years, then for such lesser period) is in excess of $30
million and is equal to or greater than thirty percent (30%) of the average
annual gross revenues of such person or entity over such fiscal years (or such
lesser period).
"CONFIDENTIAL INFORMATION" means information, other than Trade
Secrets, that is of value to its owner and is treated as confidential,
including, but not limited to, information concerning the customers, suppliers,
products, pricing strategies of the Company, personnel assignments and policies
of the Company, matters concerning the financial affairs and management of the
Company or any parent, subsidiary, or affiliate of the Company, future business
plans, licensing strategies, advertising campaigns, and information regarding
executives or employees of the Company.
"DISPOSITION" means any transfer of all or any part of the rights and
incidents of ownership of the Shares, including the right to vote, and the right
to possession of Shares as collateral for indebtedness, whether such transfer is
outright or conditional, inter vivos or testamentary, voluntary or involuntary,
or for or without consideration, but in any event shall exclude any transfer
pursuant to the Prior Agreements, as amended hereby.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
or any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"EXISTING SHAREHOLDERS' AGREEMENTS" means those certain Shareholders'
Agreements between the Company and each of Greene, Verbrugge, Porter, and Neel,
respectively, each dated March 31, 1997.
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"FAIR VALUE" means the value of one share of Common Stock determined
as set forth below, as of the business day which immediately precedes the date
for which Fair Value is determined.
(a) If the Common Stock IS NOT Publicly Traded, the Fair
Value of one share of Common Stock shall be equal to: (i) the value of
the Company, DIVIDED BY (II) the number of Common Stock Equivalents
(assuming in such case the conversion or exercise of only such
convertible securities or options or warrants that are, as of the date
of such calculation, then convertible or exercisable). The value of the
Company will initially be determined in good faith by the Board of
Directors of the Company, with the approval of the Series A Director
(his or her approval not to be unreasonably withheld). If Board of
Directors and the Series A Director shall be unable to agree as to the
value of the Company, within ten (10) business days from the first
meeting to determine the value of the Company, then the value of the
Company will be determined by appraisal as follows: the Company and the
Series A Director shall each select an appraiser experienced in the
business of evaluating or appraising the market value of stock of
privately held companies, and the two appraisers so selected shall,
within thirty (30) days of selection, appraise the fair market value of
the Company. Each of the Company and the Series A Director shall pay
the fees and expenses of their respective appraisers so chosen. If the
difference between the two appraisals is not greater than ten percent
(10%) of the higher appraisal, the average of the two appraisals shall
be deemed the value of the Company; otherwise, the two appraisers shall
select a third appraiser, who shall be experienced in a manner similar
to the initial appraisers. If the initial appraisers fail to select
such third appraiser as provided above, either the Series A Director,
or the Company, may apply, after written notice to the other, to any
judge of any court of general jurisdiction for the appointment of such
third appraiser. The third appraiser so selected shall appraise the
fair market value of the Company as of the date Fair Value is to be
determined, and shall forthwith give written notice of his
determination to the Company and the Series A Director. The value of
the Company shall then be established by averaging the three
determinations of value, and then, disregarding the value determination
which deviates most from such average, and averaging the remaining two
value determinations. The Company and the Series A Director shall each
pay one-half (1/2) the expenses and fees of the third appraiser. In
making the determination of the Fair Value pursuant to this subsection,
the Board of Directors and/or the appraisers, as the case may be, shall
assume that fair market value of the Company is equal to the amount
which would be paid in cash for the Company, as a going concern, by an
unaffiliated third party buyer, without any discount for factors such
as the absence of a trading market, the minority status of the shares,
or any other factors would might otherwise be applicable. In the event
of a Liquidation which is occasioned by a transaction such as a sale of
assets, a sale of securities by the holders thereof, or a merger or
share exchange, Fair Value shall be determined by reference to the
transaction which gives rise to the Liquidation.
(b) If the Common Stock IS Publicly Traded, "Fair Value"
means the average Daily Price (as such term is defined below) over a
twenty (20) trading day period consisting of the day as of which Fair
Value is being determined and the nineteen (19) consecutive trading
days prior to such date. For the purposes of computing Fair Value, the
"Daily Price" for each of the twenty (20) consecutive trading days
shall be determined as follows:
(i) If the Common Stock is listed on a securities
exchange, the "Daily Price" is the closing price of the Common
Stock on the securities exchange having the greatest trading
volume over the preceding thirty (30) calendar day period, OR,
if there have been
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no sales on a particular trading day, the average of the last
reported bid and asked quotations on such exchange at the close
of business for such trading day.
(ii) If the Common Stock is quoted on the NASDAQ
National Market System, the "Daily Price" is the average of the
representative bid and asked prices of the Common Stock quoted
in the NASDAQ National Market System as of 4:00 p.m., Eastern
Time.
(iii) If the Common Stock is quoted on the
over-the-counter market as reported by the National Quotation
Bureau, the "Daily Price" is the average of the highest bid and
asked prices of the Common Stock on the over-the-counter market
as reported by the National Quotation Bureau.
"MANAGEMENT SHAREHOLDERS" means Rackley and B. Rackley.
"PERMITTED DISPOSITION" means a Disposition effected:
(a) by a Shareholder to which Investor and other
Shareholders holding at least a majority of the Shares held by such
other Shareholders consent in writing;
(b) pursuant to Section 2.2 hereof, or Section 2.4 hereof;
(c) by a Shareholder to a member of such person's immediate
family, as defined in the regulations promulgated under Section 16 of
the Exchange Act, or to any trust for his or their benefit;
(d) by a Shareholder effective at the closing of a
Transaction or a Qualifying Public Offering; and
(e) by Investor to an Affiliate of Investor.
The foregoing notwithstanding, no Disposition described in (a), (b),
(c) or (e) above shall be a Permitted Disposition unless the transferor shall
have obtained the written agreement of the proposed transferee, that such
transferee will be bound by, and the Shares proposed to be transferred will be
subject to, this Agreement. Such written agreement shall be attached as an
addendum to this Agreement and thereby incorporated as a part of this Agreement,
whereupon the proposed transferee shall have adopted this Agreement, and
thereafter shall be a party hereto, and the term "Shareholders" as used herein
shall thereafter mean and include such transferee.
"PREFERRED STOCK" means 255,885 shares of Series A Convertible
Preferred Stock issued and outstanding upon closing.
"PRIME RATE" means the "prime rate" as published in The Wall Street
Journal (Eastern Edition) under its "Money Rates" column or, if no longer
published as such, the rate of interest announced from time to time by
NationsBank, N.A., as its prime rate, base rate, or reference rate. If the Wall
Street Journal publishes more than one "prime rate" under its "Money Rates"
column or a range of rates, then the Prime Rate shall be the average of such
rates.
"PRIOR AGREEMENTS" means collectively the Existing Shareholders
Agreements and the Voting Trust Agreements.
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"PROPRIETARY INFORMATION" means Trade Secrets and Confidential
Information.
"PUBLIC OFFERING" means any offering by the Company of its securities
to the public pursuant to a registration statement filed with the Commission
under the Securities Act.
"PUBLICLY TRADED" means that the Common Stock of the Company is: (i)
listed on any securities exchange, (ii) quoted in the NASDAQ National Market
System or Bulletin Board, or (iii) quoted on the over-the-counter marker as
reported by the National Quotation Bureau.
"QUALIFYING PUBLIC OFFERING" means one or a series of firm-commitment
underwritten Public Offerings by the Company whereby the Company and/or one or
more of its Shareholders completes a sale of Common Stock such that the gross
proceeds resulting from such sale exceed Fifteen Million Dollars ($15,000,000)
before deduction of expenses and commissions, and the price per share (before
deduction of expenses and commissions) is not less than three (3) times the then
effective Series A Conversion Price (as defined in the Articles of Amendment
designating the Series A Convertible Preferred Stock).
"REGISTRATION EXPENSES" has the meaning ascribed in Section 4.5
hereof.
"REGISTRABLE SECURITIES" means all shares of Common Stock held by
Investor and issued upon conversion of the Preferred Stock purchased under the
Stock Purchase Agreement, excluding in each case securities which have been (a)
registered under the Securities Act pursuant to an effective registration
statement filed thereunder and disposed of in accordance with the registration
statement covering them or (b) publicly sold pursuant to Rule 144 under the
Securities Act.
"RESTRICTIONS TERMINATION DATE" means the first to occur of (a) the
date on which Investor shall first hold less than (i) twenty-five percent (25%)
of the shares of Series A Convertible Preferred Stock issued on the date hereof
or (ii) twenty-five percent (25%) of the shares of Common Stock issued upon
conversion of the Series A Convertible Preferred Stock or (b) the date of
closing of the first Qualified Public Offering.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"SELLING EXPENSES" has the meaning ascribed in Section 4.5 hereof.
"SERIES A DIRECTOR" means the member of the Board of Directors elected
by the holders of Preferred Stock pursuant to Section 3 hereof.
"SHARES" means and includes as to each Shareholder, all shares of the
capital stock of the Company, including without limitation the Common Stock and
the Preferred Stock, now or in the future owned of record or beneficially by
such Shareholder (including without limitation, all Common Stock, Preferred
Stock, or other securities of the Company hereafter acquired pursuant to the
exercise of any option, warrant, or other right granted by the Company to such
Shareholder), and all securities of the Company that may be issued in exchange
for or in respect of such capital stock or securities (including, without
limitation, all securities issued or resulting from any stock dividend, stock
split, recapitalization, or merger effected by the Company).
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"TRADE SECRET(S)" means information if any form which derives economic
value, actual or potential, from not being generally known and not being readily
ascertainable to other persons who can obtain economic value from its disclosure
or use and which is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy or confidentiality. Trade Secrets may
include either technical or non-technical data, including without limitation:
(a) any useful process, machine, chemical formula, composition of matter, or
other device which: (i) is new or which the Shareholder has a reasonable basis
to believe may be new, (ii) is being used or studied by the Company and is not
described in a patent or in any literature already published and distributed
externally by the Company, and (iii) is not readily ascertainable from
inspection of a product of the Company; (b) any engineering, technical, or
product specifications including those of features used in any current product
of the Company, or to be used, or the use of which is contemplated, in a future
product of the Company; (c) any application, operating system, communication
system, or other computer software (whether in source or object code) and all
flow charts, algorithms, coding sheets, routines, subroutines, compilers,
assemblers, design concepts, test data, documentation, or manuals related
thereto, whether or not copyrighted, patented or patentable, related to or used
in the business of the company; and (d) information concerning the customers,
suppliers, products, pricing strategies of the Company, personnel assignments,
and policies of the Company, or matters concerning the financial affairs and
management of the Company or any parent, subsidiary, or affiliate of the
Company; PROVIDED HOWEVER, that Trade Secrets shall not include any information
that: (A) has been voluntarily disclosed to the public by the Company or has
become generally known to the public (except where such public disclosure has
been made by or through such Shareholder or by a third person or entity with the
knowledge of such Shareholder without authorization by the Company); (B) has
been independently developed and disclosed by parties other than such
Shareholder or the Company, without a breach of any obligation of
confidentiality by any such person running directly or indirectly to the
Company; or (C) otherwise enters the public domain through lawful means.
"VOTING TRUST AGREEMENTS" means those certain Voting Trust Agreements
between Rackley and each of Greene, Verbrugge, Porter, and Neel, respectively,
each dated March 31, 1997.
SECTION 2. SHARE CONTROL
SECTION 2.1. RESTRICTIONS UPON TRANSFER OF SHARES. At all times prior
to the Restrictions Termination Date, no Shareholder shall make any Disposition
of Shares, except a Permitted Disposition as provided in this Agreement.
SECTION 2.2. RIGHT OF FIRST REFUSAL.
(a) If any Shareholder (other than Investor as to any
transfer after May 13, 1999) (the "Offering Shareholder"), desires to
make a transfer of Shares prior to the Restrictions Termination Date,
which is not a Permitted Disposition until the provisions of this
Section 2.2 have been observed, shall receive a bona fide written offer
from a third party that is not a Competitor (the "Proposed Transferee")
to purchase all or part of the Shares then owned by the Offering
Shareholder that the Offering Shareholder desires to accept (an
"Offer"), the Offering Shareholder shall, as a condition precedent to
accepting the Offer, offer to the Company, and each of the other
Shareholders (such other Shareholders are hereinafter collectively
referred to as the "Other Shareholders" and individually as an "Other
Shareholder"), in the manner set forth below, the right to purchase,
individually or in the aggregate, all of the Shares that are the
subject of the Offer for the same price and the same terms as contained
in the Offer.
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(b) Within ten (10) Business Days after receipt of the Offer,
the Offering Shareholder shall notify the Company and each of the Other
Shareholders in writing of the Offer, stating in such notice (the
"Transfer Notice") the details of the Offer, including (i) the name and
address of the Proposed Transferee, (ii) the number of Shares to which
the Offer pertains (the "Offered Shares"), (iii) the price per share
offered by the Proposed Transferee for the Offered Shares (the
"Price"), and (iv) the terms and method of payment. A copy of the Offer
shall be attached to the Transfer Notice. The Transfer Notice shall
constitute an offer (the "Right of First Refusal") by the Offering
Shareholder to sell the Offered Shares to the Company and, if and to
the extent that the Company shall not accept the Right of First
Refusal, to the Other Shareholders at the Price and upon the terms and
conditions set forth in the Transfer Notice, which offer shall be
irrevocable for thirty (30) Business Days (the "Offer Period") from the
date the Transfer Notice is delivered to the Company (the "Commencement
Date"), subject to satisfaction of the conditions specified in Section
2(g) hereof.
(c) The Company shall have the first option to purchase all or
any portion of the Offered Shares. If the Company desires to purchase
all or any part of the Offered Shares, the Company shall communicate,
in writing, its election to purchase to the Offering Shareholder, which
communication shall state the number of Offered Shares the Company
desires to purchase and the Price and terms of payment (which shall be
identical to the terms described in the Transfer Notice), and shall be
delivered to the Offering Shareholder at the address set forth in the
Transfer Notice or if no address is set forth in the Transfer Notice,
at the address reflected in the Company's stock transfer records (with
a copy being contemporaneously delivered to each of the Other
Shareholders) within ten (10) Business Days of the Commencement Date
(such ten (10) Business Day period is hereinafter referred to as the
"Company Acceptance Period"). Such communication shall, when taken in
conjunction with the Transfer Notice, be deemed to constitute a valid,
legally binding, and enforceable agreement for the sale and purchase of
all or that portion of the Offered Shares which the Company has so
elected to purchase, subject to satisfaction to the conditions
specified in Section 2.2(g) hereof.
(d) If the Company does not exercise its option to purchase
all of the Offered Shares from the Offering Shareholder within the
Company Acceptance Period, each Other Shareholder shall have an option
to purchase all or any portion of the Offered Shares not purchased by
the Company (the "Remaining Shares"), exercisable by giving written
notice of exercise to the Offering Shareholder, each Other Shareholder,
and the Company. Such written notice shall state the number of
Remaining Shares such Other Shareholder elects to purchase, and shall
be delivered to the Offering Shareholder with a copy delivered
substantially contemporaneously to the Company and to each Other
Shareholder at the addresses reflected in the Company's stock transfer
records within the ten (10) Business Day period which commences on the
first day after the expiration of the Company Acceptance Period (such
ten (10) Business Day period is hereinafter referred to as the
"Shareholder Acceptance Period"). Such communication shall, when taken
in conjunction with the Transfer Notice, be deemed to constitute a
valid, legally binding, and enforceable agreement for the sale and
purchase of all or that portion of the Offered Shares which each such
Other Shareholder has so elected to purchase, subject to the
satisfaction of the conditions specified in Section 2.2(f) of this
Agreement, and to the terms set forth in the remainder of this
paragraph. In the event that more than one Other Shareholder exercises
the right to purchase the Remaining Shares, each Other Shareholder may
only purchase up to such Other Shareholder's pro rata share of the
Remaining Shares (based upon the ratio of the number of Common Stock
Equivalents owned by such exercising Other Shareholder to the number of
Common Stock Equivalents owned by all Other Shareholders).
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(e) If one or more Other Shareholders fails to timely
exercise such Other Shareholder's option to purchase the full pro rata
share of Offered Shares to which such Other Shareholder is entitled
within the Shareholder Acceptance Period, the Other Shareholders which
did exercise their respective options to purchase the full pro rata
share of Remaining Shares (an "Eligible Other Shareholder") shall have
an option to purchase that portion of the Remaining Shares which remain
available for purchase (the "Available Shares"), exercisable by giving
written notice of exercise to the Offering Shareholder, each Eligible
Other Shareholder, and the Company. Such written notice shall state the
number of Available Shares such Eligible Other Shareholder elects to
purchase, and shall be delivered to the Offering Shareholder with a
copy delivered substantially contemporaneously to the Company and to
each Eligible Other Shareholder at the addresses reflected in the
Company's stock transfer records within the five (5) Business Day
period which commences on the first day after the expiration of the
Shareholder Acceptance Period (such five (5) Business Day period is
hereinafter referred to as the "Overallotment Acceptance Period") Each
Eligible Other Shareholder may purchase a pro rata share of the
Available Shares (based upon the ratio of the number of Common Stock
Equivalents owned by each Eligible Other Shareholder to the number of
Common Stock Equivalents owned by all Eligible Other Shareholders).
This method of allocation shall continue to apply to options to
purchase all of the Available Shares until the first to occur of the
following: (i) all options have been exercised by one or more Eligible
Other Shareholders (which exercises shall constitute the valid, legally
binding, and enforceable agreement as provided above), (ii) the
Eligible Other Shareholders elect not to exercise their rights to
purchase any additional Available Shares, or (iii) the Overallotment
Acceptance Period expires.
(f) The closing of the purchase of any Offered Shares by the
Company, any Remaining Shares by the Other Shareholders, and any
Available Shares by the Eligible Other Shareholders (as the case may
be) shall be held at the principal office of the Company. The Company
shall designate a closing date and time, which date shall be later than
thirty (30) Business Days after the date of the Transfer Notice or such
other date as may be agreed upon by the Company (after consultation
with any Other Shareholder who has exercised such Other Shareholder's
option to purchase Remaining Shares or Available Shares) and the
Offering Shareholder (such date is hereinafter the "Share Transfer
Date"). At the closing, the Offering Shareholder shall deliver
certificates duly endorsed or accompanied by duly executed stock powers
for the Offered Shares being purchased pursuant to this Section 2.2 and
shall transfer the Offered Shares being purchased pursuant to this
Section 2.2 to the purchasers thereof, free and clear of all liens,
claims, charges, or encumbrances, against payment for the Offered
Shares in accordance with the terms of the Transfer Notice. If the
Company shall be the purchaser of any of the Offered Shares, the
Company shall have the right to set off against any payment made to the
Offering Shareholder by the Company in respect of such Offered Shares
the amount by which the Offering Shareholder is then indebted to the
Company.
(g) Notwithstanding the foregoing, if the Right of First
Refusal is not exercised with respect to all of the Offered Shares (i)
on or before the expiration of the Overallotment Acceptance Period, or
(ii) if the Company and the Other Shareholders do not purchase all of
the Offered Shares on the Share Transfer Date, then the Offering
Shareholder shall be under no obligation to sell any Offered Shares to
the Company or the Other Shareholders, and the Offered Shares may be
sold by the Offering Shareholder to the Proposed Transferee at any time
during a thirty (30) Business Day period which commences the day after
(x) the expiration of the Offer Period (if the condition in clause (i)
of this subparagraph (g) is not satisfied) or (y) the Share Transfer
Date (if the condition in clause (i) of this subparagraph (g) is
satisfied but the condition
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in clause (ii) of this subparagraph (g) is not satisfied (such thirty
(30) Business Day Period is hereinafter referred to as the "Free
Transfer Period"). Any such sale shall be only to the Proposed
Transferee at not less than the Price and upon other terms and
conditions not more favorable to the Proposed Transferee than those
specified in the Transfer Notice. No transfer of the Offered Shares or
any portion thereof shall be made to any Competitor.
(h) As a condition precedent to the sale and transfer of any
Offered Shares by the Offering Shareholder, the Offering Shareholder
shall obtain (i) the written agreement of the Proposed Transferee that
the Proposed Transferee will be bound by, and that the Offered Shares
transferred to the Proposed Transferee will be subject to, this
Agreement as provided in Section 2.1 above, except that,
notwithstanding any other provision of this Agreement, the Proposed
Transferee shall not be subject to Section 2.4 of this Agreement and
(ii) (unless waived by the Company) an opinion of counsel, satisfactory
to the Company, that such transfer of interest does not require
registration under the Securities Act, and any applicable state
securities laws. The Company shall not give effect on its books to any
transfer or purported transfer of Offered Shares held or owned by any
Offering Shareholder to the Proposed Transferee unless each and all of
the conditions hereof effecting such transfer shall have been
satisfied. If the transfer by the Offering Shareholder to the Proposed
Transferee of that portion of the Offered Shares as to which the Right
of First Refusal has not been exercised and consummated, is not made
within the Free Transfer Period, the right to transfer in accordance
with this Section 2.2 shall expire. In such event, the restrictions of
this Section 2.2 shall be reinstated as to all Shares which have not
been so transferred, and any subsequent transfer of such Shares,
whether or not to the same Proposed Transferee, must be made strictly
in compliance with the provisions of this Section 2.2.
SECTION 2.3. FAILURE TO DELIVER SHARES TO THE COMPANY. If a
Shareholder becomes obligated to sell any Shares to the Company or to the Other
Shareholders under this Agreement (the "Obligated Shareholder") and fails to
deliver such Shares in accordance with the terms of this Agreement, the Company
or such Other Shareholder may, in addition to all other remedies it may have,
tender to the Obligated Shareholder, at the address set forth in the stock
transfer records of the Company, the purchase price for such Offered Shares as
is herein specified, and (i) in the case of shares to be sold to the Company
pursuant to this Agreement, cancel such shares on its books and records
whereupon all of the Obligated Shareholder's right, title, and interest in and
to such Shares shall terminate, (ii) in the case of Shares to be sold to an
Other Shareholder under this Agreement, issue certificates representing such
shares to the Other Shareholder and register the Other Shareholder on its
Company's books and records as the record owner of the shares whereupon all of
the Obligated Shareholder's right, title, and interest in and to such shares
shall terminate.
SECTION 2.4. CO-SALE RIGHTS.
(a) If at any time prior to the Restrictions Termination Date
a Shareholder proposes to effect a Disposition of any or all of the
Shares owned by such Shareholder to a third party (such transferee for
purposes of this Section 2.4 is referred to as the "Transferee") other
than a transaction described in paragraphs(a), (c) and (d) of the
definition "Permitted Disposition," and such Shareholder shall have
complied with the provisions of Section 2.2 hereof (for the purposes of
this Section 2.4, such Shares to be sold are hereinafter referred to as
the "Transfer Shares"), such Shareholder shall require the Transferee,
as a condition precedent to the consummation of the sale or disposition
of the Transfer Shares of such Shareholder to the Transferee, to offer
to acquire from Investor on the same terms as the proposed sale or
disposition from Shareholder a number of Common Stock Equivalents equal
to the product of (i) the number of Common Stock
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Equivalents owned of record by Investor MULTIPLIED BY (ii) a fraction,
the numerator of which is the number of Transfer Shares such
Shareholder proposes to sell or otherwise dispose of to the
Transferee, and the denominator of which is the total number of Common
Stock Equivalents owned beneficially and of record by such Shareholder
and Investor (for the purposes of this Section 2.4, such number of
Common Stock Equivalents is hereinafter referred to as the "Allocation
Shares").
(b) Such Shareholder shall give written notice (for the
purposes of this Section 2.4, the "Co-Sale Notice") to Investor which
shall describe fully the terms of the proposed sale or disposition,
the number of Transfer Shares to be sold or otherwise disposed of, and
the number of Allocation Shares of Investor eligible for co-sale, the
name and address of the Transferee or the Company, as applicable, and
the proposed closing date of the purchase and sale. The Co-Sale Notice
shall be signed by such Shareholder and by the Transferee or the
Company, as applicable, and shall be an irrevocable offer, open for
fifteen (15) days after receipt, to Investor to acquire, as provided
above, all Allocation Shares. Investor shall have fifteen (15) days
after receipt of the Co-Sale Notice to accept such offer as to all or
a portion of the Allocation Shares and notify the Transferee and such
Shareholder in writing of the number of Allocation Shares, if any,
Investor wishes to sell to the Transferee. Such Shareholder may not
consummate the proposed sale or disposition to the Transferee unless
(x) the sale of Allocation Shares pursuant to the co-sale right of
Investor (but only if an Investor timely accepts the offer of such
Shareholder and the Transferee) is consummated; (y) an Investor waives
the right of co-sale as to all or part of the Allocation Shares; or
(z) the irrevocable offer expires without acceptance by an Investor
after the fifteen (15) day period.
SECTION 3. GOVERNANCE PROVISIONS
SECTION 3.1. ELECTION OF DIRECTORS. At all times prior to the
Restrictions Termination Date, each Shareholder agrees to:
(a) Vote all Shares the voting of which is under the
control of such Shareholder to:
(i) maintain a Board of Directors consisting of
five (5) members;
(ii) cause one (1) person designated as the
Series A Director and nominated by the Investor to be elected
as directors of the Company;
(iii) cause two (2) persons designated in writing by the
Management Shareholders (the "Management Shareholder
Nominees") to be elected as directors of the Company; and
(iv) cause two (2) persons, each of whom either meet the
definition of "non-employee director" as defined in Rule 16b-3
of the Securities Exchange Act of 1934 and is not an
"interested person" of the Investor as defined in Section
2(a)(19) of the Investment Company Act of 1940 OR would
otherwise be qualified to serve on the Audit Committee of the
Company if the Company were listed on the New York Stock
Exchange (the "Outside Nominees"), designated in writing by
the Management Shareholder Nominees and approved by the Series
A Director, such approval not to be unreasonably withheld or
delayed.
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(b) As of the date hereof, the Investor Nominee is Charles D.
Moseley; the Management Shareholder Nominees are Rackley and B. Rackley
and the Outside Nominees are Greene and Verbrugge. These designations
shall remain in effect until a new designation is delivered in writing
to the Company and each party to this Agreement. A new designation
shall be effective when delivered. The Company will use reasonable
efforts to notify all Shareholders at least three (3) days prior to any
meeting (or written action in lieu of a meeting) of the Shareholders at
or by which directors are to be elected, if the director nominees will
change from the nominees designated in this Section 3.1(b).
(c) In the event that any of the Series A Director, and the
Management Shareholder Nominees, shall cease to serve as a director of
the Company for any reason, Investor, or the Management Shareholders,
as applicable, shall have the right to appoint a successor nominee. If
any Outside Nominee shall cease to serve as a director of the Company
for any reason, the Management Shareholder Nominees, with the approval
of the Series A Director, such approval not to be unreasonably withheld
or delayed, shall appoint a successor nominee who meets the eligibility
criteria set forth in Section 3.1(a)(iv) hereof. The Shareholders shall
use their best efforts to ensure that such successor nominee is duly
appointed and elected to fill such vacancy in the manner provided in
the Bylaws of the Company.
(d) Each director shall be entitled to one (1) vote on each
matter on which the Board of Directors takes action.
SECTION 3.2. RIGHT TO PURCHASE NEW SECURITIES. The Company hereby
grants to Investor the right to purchase a pro rata share of any New Securities,
as hereinafter defined, which the Company may, at any time prior to the
Restrictions Termination Date, propose to sell and issue (the "Purchase Right").
A pro rata share, for purposes of this Purchase Right, is a fraction, the
numerator of which is the number of Common Stock Equivalents then held by
Investor, and the denominator of which is the total number of Common Stock
Equivalents then outstanding.
(a) Except as set forth below, "New Securities" means any
shares of capital stock of the Company including Common Stock, whether
now or hereafter authorized, and any rights, options, or warrants to
purchase said shares of capital stock, and any securities of any type
that are, or may become, convertible into said shares of capital stock.
Notwithstanding the foregoing, "New Securities" does not include: (i)
securities offered to the public generally pursuant to a registration
statement filed pursuant to the Securities Act, or pursuant to
Regulation A under the Securities Act; (ii) securities issued pursuant
to any merger or share exchange in which the Company is the survivor or
parent, or pursuant to the purchase of substantially all of the assets
of another person; (iii) shares of Common Stock or related options
convertible into such Common Stock issued to employees, officers, and
directors of the Company pursuant to any plan or arrangement approved
by the Board of Directors, (including options outstanding on the date
hereof) as adjusted for stock splits, stock dividends, and similar
transactions; (iv) securities issued pursuant to any rights or
agreements including without limitation convertible securities,
options, and warrants, provided that the Purchase Right under this
Section 3.2 applies with respect to the initial sale of New Securities
or the grant by the Company of such rights or agreements; (v)
securities issued in connection with any stock split, stock dividend,
or recapitalization by the Company; and (vi) securities issuable to CNL
pursuant to that certain Stock Purchase and Stock Option Agreement
dated January 15, 1998 between the Company and CNL (the "CNL
Agreement").
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(b) In the event the Company proposes to undertake an
issuance of New Securities, it shall give Investor written notice of
its intention, describing the type of New Securities and the price and
terms upon which the Company proposes to issue the New Securities.
Investor shall have fifteen (15) days from the date of receipt of any
such notice to agree to purchase up to its respective pro rata portion
of shares of such New Securities for the price and upon the terms
specified in the notice by giving written notice to the Company of
Investor's intentions, and stating therein the quantity of New
Securities to be purchased by Investor. Investor shall have fifteen
(15) days to complete the purchase. If Investor fails to close such
purchase within the fifteen (15) day period, Investor shall have
forfeited Investor's right to buy a pro-rata share of that particular
issuance of New Securities.
(c) In the event Investor fails to exercise the Purchase
Right as provided herein within said fifteen (15) day period, the
Company shall have ninety (90) days thereafter to sell or enter into a
written agreement (pursuant to which the sale of New Securities covered
thereby shall be completed, if at all, within sixty (60) days from the
date of said agreement) to sell the New Securities not elected to be
purchased by Investor at a price and upon such terms which are no more
favorable to the purchaser of such New Securities than specified in the
Company's notice to Investor. In the event the Company has not sold the
New Securities or entered into a written agreement to sell the New
Securities within said ninety (90) day period (or completed the sale of
the New Securities within sixty (60) days from the date of said
agreement, as provided above), the Company shall not thereafter issue
or sell any New Securities without first offering such securities in
the manner provided in this Section 3.2.
SECTION 3.3. VOTING AGREEMENT. The holders of the then outstanding
shares of Series A Convertible Preferred Stock will not withhold their approval
of any merger ("Business Combination") and shall vote as a class in favor of
such Business Combination, if (A) such Business Combination receives the
approval of the holders of a majority of the outstanding shares of Common Stock,
the holders of Series A Convertible voting with the holders of Common Stock (as
if that all Series A Convertible Preferred Stock were fully converted) and (B)
all Merger Consideration (as such term is defined below) is distributed pro-rata
(other than as may be necessary under Section 2D of the Amended and Restated
Articles of Incorporation of the Company, as amended, to pay to holders of
Series A Convertible Preferred Stock the full amount of the "Senior Liquidation
Payments" to which such holders are entitled) to all Shareholders. As used
herein "Merger Consideration" means all consideration (i) distributed to
Shareholders and (ii) paid to Shareholders of the Corporation in respect of a
Business Combination (including, without limitation, amounts paid in respect of
noncompetition covenants), required by the terms of the Business Combination to
be held in escrow, or is otherwise not immediately available for distribution to
Shareholders (including, without limitation, (x) amounts payable in conjunction
with any "earn-out" or other type of contingent consideration based in whole or
in part upon future performance, and (y) amounts payable pursuant to promissory
notes or other forms of seller financing) and all amounts paid to Shareholders
for consulting services, transition bonuses, stay-on bonuses, excluding,
however, amounts paid to Shareholders that are not in excess of reasonable
compensation for services actually performed for the surviving entity in the
Business Combination by such Shareholder.
SECTION 4. REGISTRATION RIGHTS.
SECTION 4.1. DEMAND REGISTRATION. At any time following a Public
Offering, Investor may request the Company to register under the Securities Act
not less than forty percent (40%) of all shares of Registrable Securities then
held by Investor for sale in the manner specified in such notice.
Notwithstanding anything to the contrary contained herein, no request may be
made under this
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Section 4.1 within six months after the effective date of a registration
statement filed by the Company covering a firm commitment underwritten public
offering in which Investor shall have been entitled to join pursuant to Section
4.2 hereof, and in which there shall have been effectively registered all shares
of Registrable Securities as to which registration shall have been requested by
Investor and permitted by the managing underwriter. If the Company receives a
notice from Investor that imposes on the Company the registration obligations of
this Section 4.1, and if, in the reasonable opinion of the Board of Directors of
the Company the general market conditions are not appropriate at the time for an
offering, the Company may, at its option, delay the commencement of the
performance of the Company's obligation pursuant to this Section 4.1 for up to
one hundred twenty (120) days. If Investor specifies in the notice, that the
method of disposition of the Registrable Securities shall be an underwritten
public offering, Investor may designate the managing underwriter of such
offering, subject to the approval of the Company, which approval shall not be
unreasonably withheld or delayed. The Company shall be obligated to prepare and
file a registration statement with respect to Registrable Securities pursuant to
this Section 4.1 on one occasion only PROVIDED HOWEVER, that such obligation
shall be deemed satisfied only when a registration statement covering shares of
Registrable Securities, for sale in accordance with the method of disposition
specified by the requesting Investor, shall have become effective (or is in a
position to be declared effective but for Investor's election not to proceed
with the contemplated offering). The Company shall be entitled to include in any
registration statement referred to in this Section 4.1 for sale in accordance
with the method of disposition specified by Investor, shares of Common Stock to
be sold by the Company for its own account and for the accounts of other holders
of Common Stock, except as and to the extent that in the opinion of the managing
underwriter (if such method of disposition shall be an underwritten public
offering), such inclusion would adversely affect the marketing of the
Registrable Securities to be sold. Except for registration statements on Forms
S-4 or S-8, or any successor thereto, the Company will not file with the
Commission any other registration statement with respect to its Common Stock,
whether for its own account or that of other shareholders, from the date of
receipt of a notice from Investor pursuant to this Section 4.1 until the
completion of the period of distribution of the registration contemplated
thereby (determined as provided in Section 4.3 hereof, but in no event to exceed
ninety (90) days following the effective date of the applicable registration
statement).
SECTION 4.2. PIGGYBACK REGISTRATION. At any time following a Public
Offering, if the Company at any time proposes to register any Common Stock under
the Securities Act for sale to the public, whether for its own account or for
the account of other security holders or both (except with respect to
registration statements on Forms S-4 or S-8 or another form not available for
registering the Registrable Securities for sale to the public), each such time
it will give written notice to Investor of its intention so to do. Upon the
written request of an Investor received by the Company within 10 days after the
giving of any such notice by the Company, to register such number of shares of
Registrable Securities held by Investor (or by persons taking from Investor
pursuant to a Permitted Disposition) specified in such written request, the
Company will cause the Registrable Securities as to which registration shall
have been so requested to be included in the securities to be covered by the
registration statement proposed to be filed by the Company, all to the extent
requisite to permit the sale or other disposition by Investor (in accordance
with its written request) of such Registrable Securities so registered. In the
event that any registration pursuant to this Section 4.2 shall be, in whole or
in part, an underwritten public offering of Common Stock, the number of shares
of Registrable Securities to be included in such an underwriting may be reduced
if and to the extent that the managing underwriter shall be of the opinion that
such inclusion would adversely affect the marketing of the securities to be sold
by the Company therein. In the event such a reduction is necessary, the
reduction shall be borne first by holders of Registrable Securities who are not
Investor, and if a further reduction is necessary in the judgment of the
managing underwriter, then, Investor proposing to sell Registrable Securities in
the offering shall bear the reduction on a pro-rata basis, based on the number
of shares of Registrable Securities that Investor
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proposed to offer for sale in the Offering, or if Investor holds a majority of
the shares of Registrable Securities that Investor may elect to withdraw from
such registration all shares of Registrable Securities held by Investor as to
which registration was requested. Notwithstanding the foregoing provisions, the
Company may for any reason and without the consent of Investor withdraw any
registration statement referred to in this Section 4.2 without thereby incurring
any liability to Investor.
SECTION 4.3. REGISTRATION PROCEDURES. If and whenever the Company is
required by the provisions of Section 4.1 or 4.2 hereof to use its best efforts
to effect the registration of any shares of Registrable Securities under the
Securities Act, the Company will, as expeditiously as possible:
(a) prepare and file with the Commission a registration
statement (which, in the case of an underwritten public offering
pursuant to Section 4.1 or 4.2 hereof, shall be on Form S-1, Form S-2,
Form S-3, any successor forms thereto, or other form of general
applicability satisfactory to the managing underwriter selected as
herein provided) with respect to such securities and use its best
efforts to cause such registration statement to become and remain
effective for the period of the distribution contemplated thereby
(determined as hereinafter provided);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for the period of distribution and comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities covered by such registration statement in
accordance with the intended method of disposition set forth in such
registration statement for such period;
(c) furnish to each Shareholder and to each underwriter such
number of copies of the registration statement and the prospectus
included therein (including each preliminary prospectus) as such
persons reasonably may request in order to facilitate the public sale
or other disposition of the Registrable Securities covered by such
registration statement;
(d) use its best efforts to register or qualify the
Registrable Securities covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as the
Shareholders, or, in the case of an underwritten public offering, the
managing underwriter reasonably shall request, PROVIDED HOWEVER, that
the Company shall not for any such purpose be required to qualify
generally to transact business as a foreign corporation in any
jurisdiction where it is not so qualified or to consent to general
service of process in any such jurisdiction;
(e) use its best efforts to list the Registrable Securities
covered by such registration statement with any securities exchange or
NASDAQ on which the Common Stock of the Company is then listed or
quoted;
(f) notify each selling Shareholder at any time when a
prospectus relating to Registrable Securities is required to be
delivered under the Securities Act of the happening of any event as a
result of which the prospectus included in such registration statement
contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading, and, at the
request of any such Shareholder, the Company will prepare a supplement
or amendment to such prospectus so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus will not
contain an untrue statement of a material fact or omit to state any
fact necessary to make the statements therein not misleading;
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(g) notify the selling Shareholders immediately, and confirm
the notice in writing, (1) when the registration statement becomes
effective, (2) of the issuance by the Commission of any stop order or
of the initiation, or the threatening, of any proceedings for that
purpose, (3) of the receipt by the Company of any notification with
respect to the suspension of qualification of the Restricted Stock for
sale in any jurisdiction or of the initiation, or the threatening, of
any proceedings for that purpose, and (4) of the receipt of any
comments, or requests for additional information, from the Commission
or any state regulatory authority. If the Commission or any state
regulatory authority shall enter such a stop order or order suspending
qualification at any time, the Company will promptly use its best
reasonable efforts to obtain the lifting of such order; and
(h) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its security holders as soon as reasonably practicable, but not
later than eighteen (18) months after the effective date of the
registration statement, an earnings statement covering a period of at
least twelve (12) months beginning after the effective date of the
registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act.
For purposes hereof, the period of distribution of Registrable
Securities in a firm commitment underwritten public offering shall be deemed to
extend until each underwriter has completed the distribution of all securities
purchased by it, and the period of distribution of Registrable Securities in any
other registration shall be deemed to extend until the earlier of the sale of
all Registrable Securities covered thereby or 180 days after the effective date
thereof.
In connection with each registration hereunder, each Shareholder will
furnish to the Company in writing such information with respect to it as a
shareholder as reasonably shall be necessary in order to assure compliance with
federal and applicable state securities laws.
In connection with each registration pursuant to Section 4.1 or 4.2
hereof covering an underwritten public offering, the Company and each
Shareholder agree to enter into a written agreement with the managing
underwriter selected in the manner herein provided in such form and containing
such provisions as are customary in the securities business for such an
arrangement between such underwriter and companies of the Company's size and
investment stature.
SECTION 4.4. EXPENSES. All reasonable expenses incurred by the Company
in complying with Section 4.1 or 4.2 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel and independent public accountants for the Company, fees and expenses
(including counsel fees) incurred in connection with complying with state
securities or "blue sky" laws, fees of the National Association of Securities
Dealers, Inc., transfer taxes, fees of transfer agents and registrars, and in
the case of Section 4.1 the reasonable fees and disbursements of one counsel for
the sellers of Restricted Stock , but excluding any Selling Expenses, are called
"Registration Expenses." All underwriting discounts and selling commissions
applicable to the sale of Restricted Stock are called "Selling Expenses."
(a) The Company shall pay all Registration Expenses
attributable to the shares of Restricted Stock of Shareholders included
in the Registration in connection with each registration statement
under Section 4.1 or 4.2 hereof.
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(b) All Selling Expenses in connection with each registration
statement under Section 4.1 or 4.2 hereof shall be borne by Investor
and any other selling shareholder in proportion to the number of shares
sold by Investor or by such other selling shareholders.
SECTION 4.5. INDEMNIFICATION AND CONTRIBUTION.
(a) In the event of a registration of any of the Registrable
Securities under the Securities Act pursuant to Section 4.1 or 4.2
hereof, the Company will indemnify and hold harmless Investor, its
directors and its officers (provided Investor is a seller of
Registrable Securities thereunder), each underwriter of such
Registrable Securities thereunder, and each other person, if any, who
controls Investor, its directors and its officers or underwriter within
the meaning of the Securities Act, against any losses, claims, damages,
or liabilities, joint or several, to which Investor, its directors and
officers, such underwriter or such person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages,
or liabilities (or actions in respect thereof) arise out of or are
based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which any
shares of Registrable Securities were registered under the Securities
Act pursuant to Section 4.1, 4.2, or 4.3 hereof, any preliminary
prospectus or final prospectus contained therein, or any amendment or
supplement thereof, or (ii) the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse
Investor, its directors and officers, each such underwriter and each
such controlling person for any legal or other expenses reasonably
incurred by any of them in connection with investigating or defending
any such loss, claim, damage, liability, or action; PROVIDED, HOWEVER,
that the Company will not be liable in any such case if and to the
extent that any such loss, claim, damage, or liability arises out of or
is based upon an untrue statement or alleged untrue statement or
omission or alleged omission so made in conformity with information
furnished by an Investor, its directors and its officers, such
underwriter and such controlling person in writing specifically for use
in such registration statement or prospectus.
(b) In the event of a registration of any of the shares of
Registrable Securities under the Securities Act pursuant to Section 4.1
or 4.2 hereof, Investor including Shares of Registrable Securities in
such registration, severally but not jointly, will indemnify and hold
harmless the Company, each person, if any, who controls the Company
within the meaning of the Securities Act, each officer of the Company
who signs the registration statement, each director of the Company,
each underwriter, and each person who controls any underwriter within
the meaning of the Securities Act, against all losses, claims, damages,
or liabilities, joint or several, to which the person may become
subject under the Securities Act or otherwise, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement
under which any shares of Registrable Securities were registered under
the Securities Act pursuant to Section 4.1 or 4.2 hereof, any
preliminary prospectus, or final prospectus contained therein, or any
amendment thereof or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company and each such
officer, director, underwriter, and controlling person for any legal or
other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability, or
action, PROVIDED, HOWEVER, that Investor will be liable hereunder in
any such case if and
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only to the extent that any such loss, claim, damage, or liability
arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in
conformity with information pertaining to Investor, as such,
respectively, furnished in writing to the Company by Investor
specifically for use in such registration statement or prospectus, and
PROVIDED, FURTHER, HOWEVER, that the respective liability of an
Investor hereunder shall be limited to the proportion of any such loss,
claim, damage, liability, or expense which is equal to the proportion
that the public offering price of the shares sold by Investor, under
such registration statement bears to the total public offering price of
all securities sold thereunder, but not in any event to exceed the
proceeds received by an Investor from the sale of shares of Registrable
Securities or covered by such registration statement. In no event will
any Shareholder be required to enter into any agreement or undertaking
in connection with any registration under this Agreement providing for
any indemnification or contribution obligation on the part of Investor
greater than Investor's obligation under this Section 4.
(c) Promptly after receipt by an indemnified party hereunder
of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the
indemnifying party hereunder, notify the indemnifying party in writing
thereof, but the omission so to notify the indemnifying party shall not
relieve it from any liability which it may have to such indemnified
party other than under this Section 5 and shall only relieve it from
any liability which it may have to such indemnified party under this
Section 5 if and to the extent the indemnifying party is prejudiced by
such omission. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate in and, to the extent it shall wish, to assume and
undertake the defense thereof with counsel satisfactory to such
indemnified party, and, after notice from the indemnifying party to
such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such
indemnified party under this Section 4.6 for any legal expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation and of
liaison with counsel so selected, PROVIDED, HOWEVER, that, if the
defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party shall have reasonably
concluded that there may be reasonable defenses available to it which
are different from or additional to those available to the indemnifying
party or if the interests of the indemnified party reasonably may be
deemed to conflict with the interests of the indemnifying party, the
indemnified party shall have the right to select a separate counsel and
to assume such legal defenses and otherwise to participate in the
defense of such action, with the expenses and fees of such separate
counsel and other expenses related to such participation to be
reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which
indemnification is unavailable to any indemnified party then, and in
each such case, the intended indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities, in such proportion as is
appropriate to reflect the relative fault of the intended indemnifying
party on the one hand and of the indemnified parties on the other in
connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative fault of the intended
indemnifying party and of the indemnified parties shall be determined
by reference to, among other things, whether the untrue
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or alleged untrue statement of a material fact or the omission to state
a material fact relates to information supplied by the intended
indemnifying party, or by the indemnified party, and the parties'
relative intent, knowledge, access to information and opportunity to
correct or present such statement or omission. The Company and Investor
agree that it would not be just and equitable if contribution pursuant
to this Section 4.6(d) were determined by pro rata allocation or by any
other method of allocation which does not take into account the
equitable considerations referred to in the immediately preceding
paragraph, PROVIDED HOWEVER, that (i) Investor shall not be required to
contribute any amounts in excess of the limitations in Section 4.6(b)
and (ii) no person guilty of fraudulent misrepresentations (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
SECTION 4.6. CHANGES IN COMMON STOCK. If, and as often as, there is any
change in the Common Stock by way of a stock split, stock dividend, combination
or reclassification, or through a merger, consolidation, reorganization or
recapitalization, or by any other means, appropriate adjustment shall be made in
the provisions hereof so that the registration rights granted in this Section 4
shall continue with respect to the Common Stock as so changed.
SECTION 4.7. RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Registrable Securities to the public without
registration, at all times after ninety (90) days after any registration
statement covering a Public Offering shall have become effective (provided that
the public offering, contemplated thereby is in fact consummated), the Company
agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act;
(b) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company
under the Securities Act and the Exchange Act; and
(c) furnish to Investor holding Registrable Securities
forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of such Rule 144 and of the
Securities Act and the Exchange Act, a copy of the most recent annual
or quarterly report of the Company, and such other reports as an
Investor may reasonably request in availing itself of any rule or
regulation of the Commission allowing Investor to sell any Registrable
Securities without registration.
SECTION 4.8. TRANSFER OF REGISTRATION RIGHTS. The rights to cause the
Corporation to register securities granted the Investor under Section 4 hereof
may be assigned to a transferee or assignee in connection with any transfer or
assignment of Registrable Securities or Preferred Stock provided that: (i) such
transfer may otherwise be effected in accordance with applicable securities
laws, and (ii) such assignee or transferee acquires at least one-half of the
shares of Registrable Securities or Preferred Stock (appropriately adjusted for
stock split or recapitalization) then held by such Investor. Notwithstanding the
foregoing, the rights to cause the Company to register securities may be
assigned to any shareholder, partner, or affiliate of an Investor without
compliance with item (ii) above, provided written notice thereof is promptly
given to the Company.
-18-
<PAGE>
SECTION 4.9. STANDOFF AGREEMENT.
(a) Management Shareholders agree, so long as Management
Shareholders in the aggregate, hold at least five percent (5%) of the
outstanding Common Stock, in connection with the Company's initial
Public Offering, upon request of the Company or the underwriters
managing any underwritten offering of the Company's securities, not to
sell, make any short sale of, loan, grant any option for the purchase
of, or otherwise dispose of any Common Stock (other than those included
in the registration) without the prior written consent of the Company
or such underwriters, as the case may be, for such period of time (not
to exceed ninety (90) days from the effective date of such
registration) as may be requested by the underwriters.
(b) Investor agrees, so long as Investor holds at least five
percent (5%) of the outstanding Common Stock, in connection with the
Company's initial public offering, upon request of the Company or the
underwriters managing any underwritten offering of the Company's
securities, not to sell, make any short sale of, loan, grant any option
for the purchase of, or otherwise dispose of any Registrable Securities
(other than those included in the registration) without the prior
written consent of the Company or such underwriters, as the case may
be, for such period of time (not to exceed ninety (90) days from the
effective date of such registration) as may be requested by the
underwriters.
SECTION 5. GENERAL PROVISIONS
SECTION 5.1. TERM. This Agreement shall terminate and be of no force
and effect, unless extended as provided herein, upon the first to occur of (a)
the passage of ten (10) years from the date of this Agreement or (b) the
effective date of a written agreement signed by all of the parties hereto
providing for the termination of this Agreement.
SECTION 5.2. PARTIAL TERMINATION UPON QUALIFIED PUBLIC OFFERING. The
restrictions in Sections 2.1, 2.2, and 2.4, and Section 3 shall terminate upon
the Restriction Termination Date.
SECTION 5.3. LEGEND. During the term of this Agreement, each
certificate representing the Shares shall bear the following legend, or a
similar legend deemed by the Company to constitute an appropriate notice of the
provisions hereof and the applicable security laws (any such certificate not
having such legend shall be surrendered upon demand by the Company and so
endorsed):
On the face of the certificate:
"TRANSFER OF THIS STOCK IS RESTRICTED IN ACCORDANCE WITH CONDITIONS
PRINTED ON THE REVERSE OF THIS CERTIFICATE."
On the reverse:
"THE SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO AND
TRANSFERABLE ONLY IN ACCORDANCE WITH THAT CERTAIN SHAREHOLDER AGREEMENT
BY AND AMONG NFRONT, INC. (ISSUER) (THE "COMPANY") AND CERTAIN
SHAREHOLDERS THEREOF, DATED MAY 13, 1998 A COPY OF WHICH IS ON FILE AT
THE PRINCIPAL OFFICE OF THE COMPANY AND MAY BE INSPECTED DURING NORMAL
BUSINESS HOURS. NO TRANSFER OR PLEDGE OF THE SHARES EVIDENCED HEREBY
MAY BE MADE EXCEPT IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF
SAID AGREEMENT. BY ACCEPTANCE OF THIS CERTIFICATE, ANY HOLDER,
TRANSFEREE OR PLEDGEE HEREOF AGREES TO BE BOUND BY ALL OF THE
PROVISIONS OF SAID AGREEMENT."
"SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED BY
THE HOLDER FOR INVESTMENT PURPOSES ONLY AND NOT FOR RESALE, TRANSFER OR
DISTRIBUTION, HAVE BEEN
-19-
<PAGE>
ISSUED PURSUANT TO EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF
APPLICABLE STATE AND FEDERAL SECURITIES LAWS, AND MAY NOT BE OFFERED
FOR SALE, SOLD OR TRANSFERRED OTHER THAN PURSUANT TO EFFECTIVE
REGISTRATION UNDER SUCH LAWS, OR IN TRANSACTIONS OTHERWISE IN
COMPLIANCE WITH OR EXEMPT FROM SUCH LAWS, AND UPON EVIDENCE
SATISFACTORY TO THE COMPANY OF COMPLIANCE WITH OR EXEMPTION FROM SUCH
LAWS, AS TO WHICH THE COMPANY MAY RELY UPON AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY."
Each Shareholder shall promptly surrender the certificates representing
his/her Shares to the Company so that the Company may affix the foregoing
legends thereto. A copy of this Agreement shall be kept on file in the principal
office of the Company. Upon termination of all applicable restrictions set forth
herein and upon tender to the Company of the appropriate stock certificates, the
Company shall reissue to the holder of such stock certificates new stock
certificates which shall contain only the second paragraph of the restrictive
legend set forth above. The parties to this Agreement intend that the legend
conform to the applicable provisions of the Georgia Business Corporation Code.
This legend may be modified from time to time by the Board of Directors of the
Company to conform to such statutes or to this Agreement.
SECTION 5.4. WAIVER OF PRE-EMPTIVE RIGHTS; PRIOR AGREEMENTS.
(a) All Shareholders other than the Investor hereby
irrevocably waive any pre-emptive or other rights, including, without
limitation, any rights of first refusal or similar rights any of them
have or may have with respect to the issuance of the Preferred Stock
(b) Each of the Shareholders who are parties to the Prior
Agreements hereby acknowledge that the Prior Agreements remain
unaffected by the execution and delivery of the Stock Purchase
Agreement and this Agreement, except that, with respect to the Existing
Shareholders' Agreements, the provisions of Section 2 of each such
Existing Shareholders' Agreements shall be superseded only to the
extent that such transfer is a "Permitted Transfer" (as defined in the
Existing Shareholders' Agreements) by the provisions of Section 2 of
this Agreement until the earlier of the Restrictions Termination Date
or the termination of this Agreement, at which time all of the
provisions of Section 2 of each of the Existing Shareholders'
Agreements shall again be effective. In the event of any conflict
between the Prior Agreements and the terms and conditions of this
Agreement, the terms and conditions of this Agreement shall control.
SECTION 5.5. PROPRIETARY INFORMATION.
(a) Each Shareholder acknowledges and agrees that all
Proprietary Information, and all physical embodiments thereof, are
confidential to and shall be and remain the sole and exclusive property
of the Company and that any Proprietary Information produced by the
Shareholder during the period of the Shareholder's employment by the
Company shall be considered "work for hire" as such term is defined in
17 U.S.C. Section 101, et. seq., the ownership and, if applicable, the
copyright of which shall be vested solely in the Company. Each
Shareholder agrees (i) immediately to disclose to the Company all
Proprietary Information developed in whole or part by such Shareholder
during the term of such Shareholder's employment by the Company, and
(ii) at the request and expense of the Company, to do all things and
sign all documents or instruments reasonably necessary in the opinion
of the Company to eliminate any ambiguity as to the exclusive rights of
the Company in such Proprietary Information including, without
limitation, providing to the Company such Shareholder's full
cooperation in any litigation or other proceeding to establish,
protect, or obtain such exclusive rights. Upon request by the Company,
and in any event upon termination of employment, or
-20-
<PAGE>
cessation of ownership of Shares, as the case may be, such Shareholder
shall promptly deliver to the Company, and shall not retain or transmit
to any other party or parties, all property belonging to the Company
including, without limitation, all Proprietary Information (and all
embodiments thereof) then in such Shareholder's custody, control, or
possession.
(b) Each Shareholder agrees that all Proprietary Information
received or developed by such Shareholder as a result of such
Shareholder's employment or association with the Company will be held
in trust and kept in the strictest confidence, that such Shareholder
will protect such Proprietary Information from disclosure, and that
such Shareholder will not use, reproduce, distribute, disclose, or
otherwise disseminate, by electronic or other means, the Proprietary
Information or any physical embodiments thereof, except in connection
with such Shareholder's employment hereunder, without the Company's
prior written consent. The obligations of confidentiality contained in
this Agreement with respect to all Proprietary Information will apply
during such Shareholder's employment by the Company, or cessation of
ownership of Shares, as the case may be, and at any and all times after
expiration or termination (for whatever reason) of such or ownership.
(c) In the event of final adjudication of a breach or
contemplated breach of the covenants and agreements set forth in
subsections (a) and (b) above, the Company shall have the right, in
addition to all other rights or remedies available to it at law or in
equity, to set off against and deduct from any monies then payable or
thereafter to become payable to the breaching Shareholder pursuant to
Section 2 hereof, the amount of any damages suffered or incurred by the
Company as a result of such breach. In addition, the Company shall be
entitled to preliminary and permanent injunctive relief against the
breaching Shareholder to prevent or enjoin an actual or threatened
breach of such covenants and agreements or the continuation thereof by
such Shareholder.
SECTION 5.6. EXTENSION OF TERM. This Agreement may be extended for
additional ten (10) year periods if all Shareholders bound by this Agreement at
the time of the extension so agree in writing.
SECTION 5.7. CONTINUATION OF EMPLOYMENT. Nothing in this Agreement
shall create an obligation on the Company to continue the employment of a
Shareholder with the Company or any Affiliate of the Company.
SECTION 5.8. SPECIFIC ENFORCEMENT. The Shareholders expressly agree
that they will be irreparably damaged if this Agreement is not specifically
enforced. Upon a breach or threatened breach of the terms, covenants and/or
conditions of this Agreement by any Shareholder, any other Shareholder shall, in
addition to all other remedies available with respect to such breach, be
entitled to a temporary or permanent injunction, without showing any actual
damage, and/or a decree for specific performance, in accordance with the
provisions hereof.
SECTION 5.9. NOTICES. All notices, requests, consents, and other
communications required or permitted hereunder shall be in writing and shall be
effective when delivered in person or by "confirmed" facsimile transmission or
one day after deposit with a nationally recognized overnight delivery carrier
properly addressed and deposited prior to the applicable deadline for receipt of
overnight packages, or five days after deposit in the U.S. Mail, certified or
registered mail, return receipt requested, postage prepaid, in each case
addressed as follows (or at such other address for the parties as shall be
specified by like notice):
-21-
<PAGE>
(a) if to the Company:
nFront, Inc.
1551 Jennings Mill Road, Suite 800A
Bogart, Georgia 30622
Attention: Tripp Rackley
Facsimile: (706) 369-8611
with a copy (which shall not constitute notice) to:
Rogers & Hardin, LLP
229 Peachtree Street
2700 International Tower, Peachtree Center
Atlanta, Georgia 30303
Attention: Alan C. Leet, Esq.
Facsimile: (404) 525-2224
(b) if to a Shareholder other than NMP, such Shareholder's
address as reflected in the stock records of the Company or as such
Shareholder shall designate to the Company in writing.
(c) if to NMP:
Noro-Moseley Partners, IV, L.P.
9 North Parkway Square
4200 Northside Pkwy
Atlanta, GA 30327
Attention: Charles D. Moseley, Jr.
Facsimile: (404) 239-9280
with a copy (which shall not constitute notice) to:
Balboni Law Group LLC
990 One Live Oak Center
3475 Lenox Road, N.E.
Atlanta, Georgia 30326
Attention: Gerardo M. Balboni II, Esq.
Facsimile: (404) 812-3101
SECTION 5.10. ASSIGNMENT. This Agreement shall not be assignable by any
of the parties hereto without the written consent of the other parties.
SECTION 5.11. GOVERNING LAW. This Agreement shall be construed and
enforced in accordance with the internal laws of the State of Georgia,
irrespective of the choice of law provisions thereof. The parties agree that any
appropriate state court located in Fulton County, Georgia, or any Federal Court
located in the Northern District of Georgia-Atlanta Division, shall have
exclusive jurisdiction of any case or controversy arising under or in connection
with this Agreement and shall be a proper forum in which to adjudicate such case
or controversy. The parties consent to the jurisdiction of such courts.
SECTION 5.12. AMENDMENT. Except as otherwise provided herein, this
Agreement may be amended, supplemented, or interpreted at any time, but only by
a written instrument executed by the
-22-
<PAGE>
Company, the Investor, and Shareholders holding at least sixty-seven percent
(67%) of the Shares held by such Shareholders in the aggregate.
SECTION 5.13. FACSIMILE SIGNATURE; COUNTERPARTS. This Agreement may be
executed by facsimile signature and in two or more counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument.
SECTION 5.14. ENTIRE AGREEMENT. Subject to Section 5.4 hereof with
regard to the Prior Agreements, this Agreement, together with other documents
delivered pursuant hereto or incorporated by reference herein, contain the
entire agreement between the parties hereto concerning the transactions
contemplated herein and supersede all prior agreements or understandings between
the parties hereto relating to the subject matter hereof. No oral
representation, agreement, or understanding made by any party hereto shall be
valid or binding upon such party or any other party hereto.
SECTION 5.15. EFFECT OF OTHER LAWS AND AGREEMENTS. The rights and
obligations of the parties under this Agreement shall be subject to any
restrictions on the purchase of stock which may be imposed by the Georgia
Business Corporation Code or any agreement now or hereafter entered into between
the Company and any financial institution with respect to loans or other
financial accommodations made to the Company. Nothing contained herein shall be
deemed to limit the obligations and duties imposed upon officers and directors
in accordance with state and federal laws.
SECTION 5.16. FURTHER ASSURANCE. Each party hereto shall do and
perform, or cause to be done and performed, all such further acts and things and
shall execute and deliver all such other agreements, certificates, instruments
and documents as any other party hereto may reasonably request in order to carry
out the intent and accomplish the purposes of this Agreement and the
consummation of the transactions contemplated hereby.
SECTION 5.17. CAPTIONS AND SECTION HEADINGS. Except as used in Section
1, captions and section headings used herein are for convenience only and are
not a part of this Agreement and shall not be used in construing it.
SECTION 5.18. WAIVER. Any waiver by any party hereto of any of his or
its rights hereunder shall be without prejudice of his or its future assertion
of any such rights, and any delay in exercising any rights shall not operate as
a waiver thereof.
SECTION 5.19. SEVERABILITY OF PROVISIONS. If any one or more of the
provisions of this Agreement shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provision of this Agreement shall not be impaired in any way.
SECTION 5.20. SPECIFIC PERFORMANCE. In any action or proceeding to
specifically enforce the provisions of this Agreement, any person (including the
Company) against whom such action or proceeding is brought hereby waives the
claim or defense therein that the plaintiff or claimant has an adequate remedy
at law, and such person shall not urge in any such action or proceeding the
claim or defense that such remedy at law exists. The provisions of this
paragraph shall not prevent any party from seeking a remedy at law in connection
with any breach of this Agreement.
SECTION 5.21. SHAREHOLDER OBLIGATIONS. The obligations of the
Shareholders hereunder are several and not joint.
-23-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the date and
year first above written.
nFront, Inc.
By: /s/ Brady L. Rackley III
-----------------------------------------------------
Brady L. Rackley, III, President
Noro-Moseley Partners IV, L.P.
By: MKFJ IV., L.L.C., General Partner
By: /s/ Charles D. Moseley, Jr.
-----------------------------------------------------
Charles D. Moseley, Jr., Member 35,824 Shares (Common)
255,885 Shares (Preferred)
/s/ Brady L. Rackley III
---------------------------------------------------------
Brady L. Rackley, III 435,000 Shares
/s/ Brady L. Rackley
---------------------------------------------------------
Brady L. Rackley 435,000 Shares
/s/ Steve J. Smith, COO/CFO
---------------------------------------------------------
CNL Financial Corporation 23,018 Shares
/s/ Tom E. Greene
---------------------------------------------------------
Tom E. Greene 15,000 Shares
/s/ James A. Verbrugge
---------------------------------------------------------
James A. Verbrugge 15,000 Shares
<PAGE>
/s/ Warren Derek Porter
---------------------------------------------------------
Warren Derek Porter 75,000 Shares
/s/ Steven Scott Neel
---------------------------------------------------------
Steven Scott Neel 25,000 Shares
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Names under
which
Name of Subsidiary does
Subsidiary State of incorporation business
---------- ---------------------- ---------------
<S> <C> <C>
nFront, Inc. Georgia Digital Insight
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 333-90053 and 333-30876) of Digital Insight
Corporation of our report dated January 28, 2000, except as to note 13, as to
which the date is March 6, 2000, relating to the financial statements that
appear in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
- -----------------------------------
PricewaterhouseCoopers LLP
Woodlands Hills, California
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 42,249 4,758
<SECURITIES> 15,841 0
<RECEIVABLES> 4,276 429
<ALLOWANCES> 0 0
<INVENTORY> 183 135
<CURRENT-ASSETS> 63,876 5,402
<PP&E> 7,381 2,353
<DEPRECIATION> 1,326 587
<TOTAL-ASSETS> 71,438 8,077
<CURRENT-LIABILITIES> 8,640 2,335
<BONDS> 0 0
0 12,444
0 0
<COMMON> 15 6
<OTHER-SE> 62,390 (6,790)
<TOTAL-LIABILITY-AND-EQUITY> 71,438 8,077
<SALES> 17,506 8,230
<TOTAL-REVENUES> 17,506 8,230
<CGS> 10,603 5,247
<TOTAL-COSTS> 10,603 5,247
<OTHER-EXPENSES> 15,187 7,582
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (7,506) (4,356)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,506) (4,356)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,506) (4,356)
<EPS-BASIC> (.97) (.85)
<EPS-DILUTED> (.97) (.85)
</TABLE>
