<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
Commission file number 0-27459
Digital Insight Corporation
(Exact name of registrant as specified in its charter)
Delaware 77-0493142
(State of incorporation) (IRS Employer
Identification Number)
26025 Mureau Road, Calabasas, CA 91302
(Address of principal executive offices, including zip code)
(818) 871-0000
(Registrant's telephone number, including area code)
---------------------------
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock, $0.001 par value
28,894,410 shares outstanding as of August 4, 2000
<PAGE>
DIGITAL INSIGHT CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
----
<S> <C> <C>
ITEM 1 Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999........................... 1
Consolidated Statements of Operations for the three and six months ended June 30, 2000 and
1999.......................................................................................... 2
Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999........... 3
Notes to Consolidated Financial Statements...................................................... 4
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 7
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk......................................... 11
PART II - OTHER INFORMATION
ITEM 2 Changes in Securities and Use of Proceeds.......................................................... 12
ITEM 4 Submission of Matters to a Vote of Security Holders................................................ 13
ITEM 6 Exhibits and Reports on Form 8-K................................................................... 14
SIGNATURES...................................................................................................... 15
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial statements
DIGITAL INSIGHT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- --------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents....................................... $ 19,608 $ 51,274
Short-term investments.......................................... 24,243 27,757
Accounts receivable, net of allowance for doubtful accounts
of $212 and $86, respectively................................. 9,571 7,741
Accumulated implementation costs................................ 43 279
Other current assets............................................ 3,497 3,781
--------- ----------
Total current assets......................................... 56,962 90,832
Property and equipment, net of accumulated depreciation of
$4,698 and $2,545, respectively............................... 20,585 12,363
Goodwill and intangible assets, net of amortization of $300...... 37,977 -
Other assets..................................................... 3,988 293
--------- ----------
$ 119,512 $ 103,488
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................................ $ 1,138 $ 4,060
Accrued compensation and related benefits....................... 3,849 3,675
Current portion of capital lease obligations and note payable... 3,824 360
Customer deposits and deferred revenue.......................... 6,750 5,937
Other accruals.................................................. 7,206 2,879
--------- ----------
Total liabilities............................................ 22,767 16,911
Long-term portion of capital lease obligations and note payable.. 948 393
--------- ----------
23,715 17,304
--------- ----------
Stockholders' equity:
Common stock; $.001 par value, 100,000,000 shares
authorized: 24,650,552 and 23,018,715 shares issued and
outstanding, respectively..................................... 25 23
Additional paid-in capital...................................... 157,926 116,771
Notes receivable from stockholders.............................. (223) (216)
Deferred stock-based compensation............................... (9,027) (3,279)
Accumulated deficit............................................. (52,904) (27,115)
--------- ----------
Total stockholders' equity................................... 95,797 86,184
--------- ----------
$ 119,512 $ 103,488
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
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DIGITAL INSIGHT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- ----------------------------
2000 1999 2000 1999
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Implementation fees................................... $ 3,592 $ 2,417 $ 6,632 $ 3,613
Service fees.......................................... 8,810 3,641 16,190 6,620
-------- ------- -------- --------
Total revenues..................................... 12,402 6,058 22,822 10,233
-------- ------- -------- --------
Cost of revenues:
Implementation........................................ 2,040 1,299 4,422 2,191
Service............................................... 4,669 2,438 8,377 4,250
-------- ------- -------- --------
Total cost of revenues............................. 6,709 3,737 12,799 6,441
-------- ------- -------- --------
Gross profit............................................ 5,693 2,321 10,023 3,792
-------- ------- -------- --------
Operating expenses:
Sales, general and administrative..................... 7,314 4,414 16,329 6,988
Research and development.............................. 3,634 1,245 7,352 2,607
Amortization of stock-based compensation.............. 491 329 820 563
Amortization of goodwill and intangible assets........ 300 - 300 -
Merger related expenses............................... - - 12,658 -
-------- ------- -------- --------
Total operating expenses........................... 11,739 5,988 37,459 10,158
-------- ------- -------- --------
Loss from operations.................................... (6,046) (3,667) (27,436) (6,366)
Interest and other income, net.......................... 652 32 1,647 76
-------- ------- -------- --------
Net loss................................................ (5,394) (3,635) (25,789) (6,290)
Accretion of redeemable convertible preferred stock..... - (68) - (136)
-------- ------- -------- --------
Net loss attributable to common stockholders............ $ (5,394) $(3,703) $(25,789) $ (6,426)
======== ======= ======== ========
Basic and diluted net loss per share.................... $ (0.23) $ (0.35) $ (1.12) $ (0.61)
======== ======= ======== ========
Shares used in computing basic and diluted net loss per
share.................................................. 23,418 10,510 23,129 10,529
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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DIGITAL INSIGHT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................... $ (25,789) $ (6,290)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 2,087 623
Amortization of goodwill and intangible assets........ 300 -
Amortization of stock-based compensation.............. 820 563
Interest income on stockholders notes................. (7) (7)
Changes in operating assets and liabilities, net
of acquisition:
Accounts receivable................................ (1,403) (1,866)
Accumulated implementation costs................... 236 (29)
Other current assets............................... 441 (333)
Other assets....................................... (260) (982)
Accounts payable................................... (4,212) 1,955
Accrued compensation and related benefits.......... 169 386
Customer deposits and deferred revenue............. 499 1,239
Other accruals..................................... 809 2,129
------------- -------------
Net cash used in operating activities............ (26,310) (2,612)
------------- -------------
Cash flows from investing activities:
Maturity of short-term investments.................... 3,514 -
Cash used in acquisition of subsidiary................ (5,000) -
Acquisition of property and equipment................. (8,002) (2,257)
------------- -------------
Net cash used in investing activities............ (9,488) (2,257)
------------- -------------
Cash flows from financing activities:
Principal payments of capital lease obligations and
note payable........................................ (812) (157)
Proceeds from capital lease obligations and note
payable............................................. 3,000 817
Proceeds from exercise of stock options............... 1,439 164
Repurchase of redeemable convertible preferred stock.. - (200)
Proceeds from issuance of redeemable convertible
preferred stock..................................... - 8,440
Net proceeds from issuance of common stock............ 505 51
------------- -------------
Net cash provided by financing activities........ 4,132 9,115
------------- -------------
Net (decrease) increase in cash and cash equivalents.... (31,666) 4,246
Cash and cash equivalents at beginning of the period.... 51,274 6,636
------------- -------------
Cash and cash equivalents at end of the period.......... $ 19,608 $ 10,882
============= =============
Supplementary disclosures of cash flow information:
Cash paid during the year for interest................. 52 25
Supplemental non-cash investing and financing
activities:
Acquisition of property and equipment.................. (1,831) (1,043)
Capital lease obligation incurred...................... 1,831 896
Warrants issued........................................ 473 147
Effect of Acquisition:
Accounts receivable................................... (427) -
Property and equipment................................ (476) -
Goodwill and intangible assets........................ (38,277) -
Other assets.......................................... (3,119) -
Accounts payable and accrued compensation and benefits 1,295 -
Customer deposits and deferred revenue................ 314 -
Other accruals........................................ 3,518 -
Common stock issued in acquisition.................... 32,172 -
</TABLE>
The accompanying notes are an integral of thse consolidated financial
statements.
3
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DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Summary of its Significant Accounting Policies
The Company
Digital Insight Corporation (the "Company"), which incorporated in March
1997, provides Internet banking services to credit unions, small to mid-sized
banks and savings and loans. The Company's 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.
The Company completed its initial public stock offering (the "Offering") of
4,025,000 shares of common stock, par value $0.001 per share (the "Common
Stock"), in October 1999. In conjunction with the Offering, the Series A
mandatorily redeemable convertible preferred stock was automatically converted
into Common Stock.
On February 10, 2000, the Company merged with nFront, Inc. ("nFront"). The
merger was accounted for as a pooling of interests and was effected by the
exchange of 8,253,735 shares of Common Stock for all of the outstanding shares
of nFront common stock. In addition, the Company converted the nFront stock
options into options to purchase 627,926 shares of Common Stock. The financial
results for the Company and nFront have been combined for the historical periods
presented in accordance with the pooling of interests method.
The accompanying consolidated financial statements for the three and six
months ended June 30, 2000 and 1999 have been prepared in accordance with
generally accepted accounting principles ("GAAP") and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Independent public accountants have
not audited these financial statements. The financial statements, however,
include all adjustments (consisting of normal recurring adjustments), which are,
in the opinion of management, necessary for a fair statement of the financial
condition, results of operations and cash flows for such periods. However,
these results are not necessarily indicative of results for any other interim
period or for the full year. The accompanying consolidated balance sheet as of
December 31, 1999 has been derived from the audited financial statements, but
does not include all disclosures required by GAAP.
Certain information and footnote disclosures normally included in financial
statements in accordance with GAAP have been omitted pursuant to requirements of
the Securities and Exchange Commission (the "SEC"). Management believes that
the disclosures included in the accompanying interim financial statements and
footnotes are adequate to make the information not misleading, but should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1999, and the consolidated financial statements and notes thereto included
in the Company's Registration Statement on Form S-1 dated July 31, 2000.
Net loss per share
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," and SEC
Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No.
128 and SAB 98, basic and diluted net loss per share is computed by dividing the
net loss available to common stockholders for the period by the weighted average
number of shares of Common Stock outstanding during the period. 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 redeemable
convertible preferred stock.
4
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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 calculation as
if they were outstanding for all periods presented. No such shares have been
issued.
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 in Financial Statements," 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 provides guidance for disclosure related to revenue
recognition policies. The Company is required to adopt SAB 101 no later than the
quarter ended December 31, 2000. The SEC has recently indicated it intends to
issue further guidance with respect to specific issues addressed by SAB 101. At
this time, the Company is still assessing the impact of SAB 101 and its effect
on the Company's financial position, results of operation and cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving
Stock Compensation." FIN No. 44 provides guidance for issues arising in
applying APB Opinion No. 25, "Accounting for Stock Issued to Employees." FIN
No. 44 applies specifically to new awards, exchanges of awards in a business
combination, modification to outstanding awards and changes in grantee status
that occur on or after July 1, 2000, except for the provisions related to
repricings and the definition of an employee which apply to awards issued after
December 15, 1998. Application of FIN No. 44 did not have an effect on the
Company's financial reporting.
2. Acquisitions
On June 21, 2000, the Company completed its acquisition of 1View Network
Corporation ("1View"), a company based in San Francisco, California, that
provides electronic information aggregation solutions for the financial services
market. The purchase price consisted of $5 million in cash and 1,100,000 shares
of Common Stock and shares underlying options to purchase Common Stock in
exchange for all of the outstanding shares and options of 1View.The Company's
Common Stock issued in connection with the acquisition was valued at
approximately $46.2 million. The acquisition was accounted for using the
purchase method of accounting. The purchase price was allocated to the estimated
fair value of the assets acquired and liabilities assumed. The estimated fair
value of the assets acquired and liabilities assumed approximated the historical
cost basis, and the purchase price allocation indicates goodwill of
approximately $38.3 million, which will be amortized on a straight-line basis
over the estimated life of three years. In addition, deferred compensation was
recorded in the amount of $6.6 million for the unvested stock options assumed in
connection with the acquisition, and will be amortized over the estimated
service period of the employees. If 1View does not meet certain performance
objectives by September 30, 2000, the former majority stockholder of 1View has
agreed to return to the Company $3 million in cash and 178,112 shares of the
Company's Common Stock valued at $7.5 million which are being held in escrow
pending the resolution of the contingency. Accordingly, this portion of the
purchase price will be accounted for as contingent purchase consideration upon
resolution of the future performance requirements.
3. Pro forma net loss per share
Pro forma net loss per share for the three and six months ended June 30, 2000
and June 30, 1999 is computed using the weighted average number of common shares
outstanding, including the pro forma effects of the automatic conversion of the
Company's redeemable convertible preferred stock into shares of Common Stock
effective upon the closing of the Company's and nFront's initial public
offerings as if such conversions occurred on January 1, 1999 or at the date of
original issuance, if later. The resulting pro forma adjustment includes
increases in the
5
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weighted average shares used to compute basic and diluted net
loss per common share of 5,453,899 for the three months ended June 30, 1999 and
5,277,144 for the six months ended June 30, 1999. The pro forma net loss
calculation derived by excluding non-cash amortization of stock based
compensation, amortization of goodwill and intangible assets and non-recurring
merger related expenses is not a GAAP disclosure but is included for
informational purposes only, as follows;
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------- -------------------------
2000 1999 2000 1999
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Pro forma excluding stock based compensation,
---------------------------------------------
amortization of goodwill and intangible assets
----------------------------------------------
and merger related expenses:
----------------------------
Pro forma net loss............................. $(4,603) $(3,306) $(12,011) $(5,727)
Pro forma net loss per share................... $ (0.20) $ (0.21) $ (0.52) $ (0.36)
Shares used in computing pro forma net loss
per share..................................... 23,418 15,964 23,129 15,806
</TABLE>
4. Note payable
In May 2000, the Company obtained a $10 million secured revolving credit
commitment (the "Revolver") from a bank, which matures in May 2001. Interest on
the outstanding borrowings is payable monthly. The interest rate on the
Revolver is equal to the bank's prime rate, which was 9.5% as of June 30, 2000.
The Revolver is secured by all of the Company's assets. As of June 30, 2000,
the Company had outstanding advances of $3.0 million on the Revolver.
Under covenants of the Revolver, the Company is required to (i) maintain a
tangible net worth of not less than $13 million at all times, (ii) maintain a
ratio of total senior liabilities to tangible net worth of not more than 1.5 to
1, (iii) ensure quarterly losses do not exceed specified amounts, and (iv)
maintain liquid assets of not less than the greater of (a) twice the amount of
Revolver and other bank debt outstanding, or (b) the total cash expenditures for
capital assets during the prior two fiscal quarters.
5. Subsequent Events
On July 31, 2000, the Company completed the acquisition of AnyTime Access,
Inc., ("AnyTime Access") a company based in Sacramento, California that provides
services and solutions that allow credit unions, banks and other financial
institutions to outsource certain consumer communication and other
administrative functions associated with consumer loan originations. The
Company issued 2,121,862 shares of Common Stock and shares underlying options
and warrants to purchase Common Stock with an estimated value of $112.7 million
in exchange for all of the outstanding shares, options and warrants of AnyTime
Access. The acquisition will be accounted for using the purchase method of
accounting. The purchase price will be allocated to the estimated fair value of
assets acquired and liabilities assumed. The estimated fair value of the assets
acquired and liabilities assumed approximate the historical cost basis, and the
preliminary purchase price allocation indicates goodwill and identifiable
intangible assets of approximately $108.0 million, which the Company estimates
will be amortized over an aggregate life of five years. In addition, deferred
compensation in the amount of $2.2 million will be recorded for the unvested
stock options to be assumed in connection with the acquisition, and will be
amortized over the estimated service period of the employees.
On August 4, 2000, the Company completed its secondary public offering by
issuing 2,150,000 shares of Common Stock at a price of $31.00 per share. The
offering resulted in gross proceeds of approximately $66.7 million and net
proceeds of approximately $62.6 million. The Company expects to use the
proceeds for general corporate purposes, including working capital and capital
expenditures.
6
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
accompanying Consolidated Financial Statements and Notes thereto. The forward-
looking statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") relating to certain matters involve
risks and uncertainties, including anticipated financial performance, business
prospects, anticipated capital expenditures and other similar matters, which
reflect management's best judgment based on factors currently known. Actual
results and experience could differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements as a
result of a number of factors, including but not limited to those discussed in
the MD&A and under the caption "Risk Factors" in the Company's Registration
Statement on Form S-1 dated July 31, 2000, on file with the SEC.
Results of Operations
The discussion of the results of operations compares the three months ended
June 30, 2000 with the three months ended June 30, 1999 and the six months ended
June 30, 2000 with the six months ended June 30, 1999. In February 2000, the
Company merged with nFront, Inc. ("nFront") in a pooling of interests
transaction. Accordingly, the financial results for the Company and nFront have
been combined for the historical periods presented.
Comparison of Three Months Ended June 30, 2000 and June 30, 1999
Results of Operations: The net loss attributable to common stockholders
for the three months ended June 30, 2000 was $5.4 million, compared to $3.7
million for the corresponding period in 1999.
Revenues: Revenues for the three months ended June 30, 2000 were $12.4
million, an increase of 104.7% from the $6.1 million reported for the same
period of the prior year. This increase was primarily due to the growth in
service fees from $3.6 million for the three months ended June 30, 1999 to $8.8
million for the three months ended June 30, 2000. In addition, implementation
fees increased from $2.4 million to $3.6 million over the same period.
At June 30, 2000, the Company had contracts with a total of 970 financial
institutions 856 of which had contracted for Internet banking services and 340
of which had contracted for cash management services. The 856 financial
institutions that had contracted for Internet banking at June 30, 2000 had
21.4 million potential end users, versus the 409 financial institutions that had
contracted for Internet banking at June 30, 1999, which had 12.4 million
potential end users. As of June 30, 2000, there were 566 financial institutions
actively using the Company's Internet banking product. These active financial
institutions represented 17.1 million potential end users, of which 1,145,000
end users were using the product as of June 30, 2000. The Company has achieved
an overall penetration rate of 6.7%.
Cost of 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
the Company's data centers and fees paid to third parties, including bill
payment vendors, data processing vendors and communication services providers.
Cost of revenues increased from $3.7 million for the three months ended
June 30, 1999 to $6.7 million for the three months ended June 30, 2000,
representing an increase of 79.6%. The increase in cost of revenues was
primarily due to the costs of servicing additional financial institutions.
Sales, General and Administrative: Sales, general and administrative
expenses consist primarily of salaries and related expenses for executive,
sales, marketing, finance, human resources, administrative personnel and other
general corporate expenses. In addition, these expenses include marketing
expenses such as trade shows and promotional costs.
Sales, general and administrative expenses increased from $4.4 million for
the three months ended June 30, 1999 to $7.3 million for the three months ended
June 30, 2000. This increase was primarily due to an increase in sales
commissions associated with higher revenues and higher personnel expenses due to
increased staffing for sales and marketing, and to a lesser extent due to
promotional expenses and expenses for additional marketing support
7
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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 resulting from the merger with nFront. Even though sales,
general and administrative expenses increased by 65.7% over that of the period
year, as a percentage of revenues, sales general and administrative expenses
decreased from 72.9% for the three months ended June 30, 1999 to 59.0% for the
three months ended June 30, 2000.
Research and Development: Research and development expenses consist
primarily of salaries, related personnel expenses and consultant fees related to
the design, development, testing and enhancement of both the Company's products
and its data processing vendor interface software. The Company expenses all
research and development costs as incurred.
Research and development expenses increased from $1.2 million for the three
months ended June 30, 1999 to $3.6 million for the three months ended June 30,
2000. This increase was primarily due to higher personnel expenses related to
additional 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
increased from 20.6% for the three months ended June 30, 1999 to 29.3% for the
three months ended June 30, 2000, primarily as a result of an increase in
volume.
Amortization of Goodwill and Intangible Assets: The acquisition of 1View
generated goodwill and intangible assets of approximately $38.3 million, which
will be amortized on a straight-line basis over an estimated life of three
years.
Interest and Other Income, net: Interest and other income, net increased
from $32,000 for the three months ended June 30, 1999 to $652,000 for the three
months ended June 30, 2000. This increase was primarily due to higher average
cash balances in the three months ended June 30, 2000, as a result of the
initial public offerings of the Company and nFront, completed in October 1999
and July 1999, respectively.
Comparison of Six Months Ended June 30, 2000 and June 30, 1999
Results of Operations: The net loss attributable to common stockholders
for the six months ended June 30, 2000 was $25.8 million, compared to $6.4
million for the corresponding period in 1999.
Revenues: For the six months ended June 30, 2000, revenues were $22.8
million, an increase of 123.0% from $10.2 million in revenues for the
corresponding period in 1999. This increase was primarily due to the growth in
service fees from $6.6 million for the six months ended June 30,1999 to $16.2
million for the six months ended June 30, 2000. In addition, implementation
fees increased from $3.6 million to $6.6 million over the same period.
At June 30, 2000, the Company had contracts with a total of 970 financial
institutions, 856 of which had contracted for Internet banking services and 340
of which had contracted for cash management services. The 856 financial
institutions that had contracted for Internet banking at June 30, 2000 had
21.4 million potential end users, versus the 409 financial institutions that had
contracted for Internet banking at June 30, 1999, which had 12.4 million
potential end users. As of June 30, 2000, there were 566 financial institutions
actively using the Company's Internet banking product. These active financial
institutions represented 17.1 million potential end users, of which 1,145,000
end users were using the product as of June 30, 2000. The Company has achieved
an overall penetration rate of 6.7%.
Cost of 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
the Company's data center and fees paid to third parties, including bill payment
vendors, data processing vendors and communication services providers.
Cost of revenues increased from $6.4 million for the six months ended June
30, 1999 to $12.8 million for the six months ended June 30, 2000. The increase
in cost of revenues is primarily due to the costs of servicing additional
financial institutions.
Sales, General and Administrative: Sales, general and administrative
expenses consist primarily of salaries and related expenses for executive,
sales, marketing, finance, human resources and administrative personnel and
8
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other general corporate expenses. In addition, these expenses include marketing
expenses such as trade shows and promotional costs.
Sales, general and administrative expenses increased from $7.0 million for
the six months ended June 30, 1999 to $16.3 million for the six months ended
June 30, 2000. This increase was primarily due to an increase in sales
commissions associated with higher revenues and higher personnel expenses due to
increased staffing for sales and marketing, and to a lesser extent due to
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 resulting from the merger with nFront, Inc. Sales, general and
administrative expenses as a percentage of revenues increased from 68.3% for the
six months ended June 30, 1999 to 71.5% for the six months ended June 30, 2000.
Research and Development: Research and development expenses consist
primarily of salaries, related personnel expenses and consultant fees related to
the design, development, testing and enhancement of both the Company's products
and its data processing vendor interface software. The Company expenses all
research and development costs as incurred.
Research and development expenses increased from $2.6 million for the six
months ended June 30, 1999 to $7.4 million for the six months ended June 30,
2000. This increase was primarily due to higher personnel expenses related to
additional 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
increased from 25.5% for the six months ended June 30, 1999 to 32.3% for the six
months ended June 30, 2000, primarily as a result of an increase in volume.
Amortization of Goodwill and Intangible Assets: The acquisition of 1View
Network generated goodwill and intangible assets of approximately $38.3 million,
which will be amortized on a straight-line basis over an estimated life of three
years.
Merger-related expenses: One-time merger-related expenses represent merger
costs comprised of direct transaction costs and redundant costs related to the
nFront merger consummated on February 10, 2000.
Interest and Other Income, net: Interest and other income, net increased
from $76,000 for the six months ended June 30, 1999 to $1.6 million for the six
months ended June 30, 2000. This increase was primarily due to higher average
cash balances in the six months ended June 30, 2000, as a result of the initial
public offerings of the Company and nFront, completed in October 1999 and July
1999, respectively.
Provision for Income Taxes
The Company incurred operating losses through June 30, 2000, and therefore
has not recorded any significant provision for income taxes. The Company has
recorded a valuation allowance for the full amount of its net operating loss
carry-forwards, as the future realization of the tax benefit is not currently
likely.
Liquidity and Capital Resources
From the Company's inception until its Offering, the Company had financed
its operations primarily through the private placement of equity securities,
raising approximately $21.9 million. On October 6, 1999, the Company completed
its 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
July 1999, nFront completed its initial public offering by issuing 2,026,500
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 $31.6 million. In conjunction with the
Offering, the Company's mandatorily convertible preferred stock converted to
Common Stock and warrants to purchase preferred stock became warrants to
purchase Common Stock.
On August 4, 2000, the Company completed its secondary public offering by
issuing 2,150,000 shares of Common Stock, at a price of $31.00 per share. The
offering resulted in gross proceeds of approximately $66.7 million and net
proceeds of approximately $62.6 million. The Company expects to use the
proceeds for general corporate purposes, including working capital and capital
expenditures.
9
<PAGE>
At June 30, 2000, the Company had cash, cash equivalents and short-term
investments of $43.9 million. The Company has a $2.0 million equipment leasing
line of credit with a bank, under which approximately $892,000 had been drawn
and approximately $ 512,000 was outstanding at June 30, 2000.
In May 2000, the Company obtained a $10 million secured revolving credit
commitment from a bank, which matures in May 2001. Interest on the outstanding
borrowings is payable monthly. The interest rate on the Revolver is equal to the
bank's prime rate, which was 9.5% as of June 30, 2000. The Revolver is secured
by all of the Company's assets. As of June 30, 2000, the Company had outstanding
advances of $3.0 million on the Revolver.
Net cash used in operating activities was $26.3 million for the six months
ended June 30, 2000 and $2.6 million for the six months ended June 30, 1999. The
increase in cash used in operating activities was primarily due to non-recurring
costs related to the nFront merger.
Net cash used in investing activities was $9.5 million for the six months
ended June 30, 2000 and $2.3 million for the six months ended June 30, 1999. The
increase in cash used in investing activities was primarily due to
infrastructure expansion to meet end user growth, expenditures for computers and
other equipment for the Company's back up data centers and the acquisition of
1View Network.
The Company has no material commitments other than its Revolver and
obligations under its operating and capital leases. Future capital requirements
will depend upon many factors, including the timing of research and product
development efforts and the expansion of the Company's marketing efforts. The
Company expects to continue to expend significant amounts on expansion of
facility infrastructure, ongoing research and development, computer and related
data center equipment, and personnel.
The Company believes that its cash, cash equivalents and short-term
investment balances, funds available under its existing Revolver, together with
the proceeds from its secondary stock offering will be sufficient to satisfy its
cash requirements for at least the next 12 months. The Company intends to invest
its cash in excess of current operating requirements in short-term, interest-
bearing, investment grade securities.
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 in Financial Statements," 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 provides guidance for disclosure related to revenue
recognition policies. The Company is required to adopt SAB 101 no later than the
quarter ended December 31, 2000. The SEC has recently indicated it intends to
issue further guidance with respect to specific issues addressed by SAB 101. At
this time, the Company is still assessing the impact of SAB 101 and its effect
on the Company's financial position, results of operation and cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving
Stock Compensation." FIN No. 44 provides guidance for issues arising in
applying APB Opinion No. 25, "Accounting for Stock Issued to Employees." FIN
No. 44 applies specifically to new awards, exchanges of awards in a business
combination, modification to outstanding awards and changes in grantee status
that occur on or after July 1, 2000, except for the provisions related to
repricings and the definition of an employee which apply to awards issued after
December 15, 1998. Application of FIN No. 44 did not have an effect on the
Company's financial reporting.
10
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the impact of interest rate changes and changes
in the market values of its investments. The Company's 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 its cash
equivalents. The Company's exposure to market rate risk for changes in interest
rates relates primarily to its investment portfolio. The Company has not used
derivative financial instruments in its investment portfolio. The Company
invests its excess cash in debt instruments of the U.S. Government and its
agencies, and in high-quality corporate issuers and, by policy, limits the
amount of credit exposure to any one issuer. The Company protects and preserves
its 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, the Company's future investment income may fall
short of expectations due to changes in interest rates, or the Company may
suffer losses in principal if forced to sell securities, which have declined in
market value due to changes in interest rates.
The Company is also exposed to the impact of interest rate changes as they
affect the Revolver. Since the interest rate charged on the Revolver varies with
the bank's prime rate, the Company's interest expense will fluctuate with
changes in general level of U.S. interest rates. As of June 30, 2000, the
Company had outstanding advances of $3.0 million on the Revolver, with a current
interest rate of 9.5%.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities. During the three months
ended June 30, 2000, upon the exercise of a warrant to purchase shares of Common
Stock, the Company issued 20,819 shares of Common Stock for a purchase price
equivalent of approximately $56,211. The holder of the warrant elected to
exercise through a cashless exercise method by reducing the number of shares
eligible for purchase by the number of shares equal to the aggregate purchase
price. The Company relied upon sections 3(a)(9) and 4(2) of the Securities Act
of 1933 (the "Securities Act") in connection with the issuance.
On May 31, 2000, the Company issued a warrant to purchase 35,000 shares of
unregistered Common Stock at a price per share of $40.5625 to Aurum
Technologies, Inc., in connection with the execution of a Master DPV Agreement.
The Company relied upon Section 4(2) of the Securities Act in connection with
the issuance.
On June 21, 2000, the Company issued an aggregate of 1,100,000 shares of
unregistered Common Stock and Common Stock equivalents to the security holders
of 1View Network Corporation in connection with the acquisition of 1View Network
Corporation by the Company. The Company relied on Section 3(a)(10) of the
Securities Act in connection with the issuance.
On July 31, 2000, the Company issued an aggregate of 2,121,862 shares of
unregistered Common Stock and Common Stock equivalents to the security holders
of AnyTime Access, Inc., in connection with the acquisition of AnyTime Access,
Inc. by the Company. The Company relied on Section 3(a)(10) of the Securities
Act in connection with the issuance.
(d) Use of Proceeds From Sales of Registered Securities. The effective
date of the Company's first registration statement, filed on Form S-1 under the
Securities Act (No. 333-81547) relating to the Company's initial public offering
of Digital Insight Common Stock, was September 30, 1999. A total of 4,025,000
shares of Common Stock were sold at the closing at a price of $15.00 per share
to an underwriting syndicate led by Morgan Stanley Dean Witter Incorporated,
Deutsche Bank Securities Inc., Banc of America Securities LLC and Friedman,
Billings, Ramsey & Co., Inc. Public trading commenced on October 1, 1999 and the
offering closed on October 6, 1999. The initial public offering resulted in
gross proceeds of $60.4 million, $4.2 million of which was applied toward
underwriting discounts and commissions. Expenses related to the offering totaled
approximately $1.7 million. The Company received net proceeds in the amount of
$54.5 million.
On July 31, 2000, the Company's second registration statement filed on
Form S-1, under the Securities Act (No. 333-41196), relating to the Company's
secondary public offering of Digital Insight Common Stock was declared
effective. A total of 2,150,000 shares of Common Stock were sold at the closing
at a price of $31.00 per share to an underwriting syndicate led by Morgan
Stanley & Co., Incorporated, Banc of America Securities LLC, Chase Securities
Inc., Deutsche Bank Securities Inc., and Friedman, Billings, Ramsey & Co., Inc.
Public trading commenced on August 1, 2000 and the offer closed on August 4,
2000. The secondary public offering resulted in gross proceeds of approximately
$66.7 million, $3.3 million of which was applied toward underwriting discounts
and commissions. Expenses related to the offering are estimated at
approximately $700,000. The Company received net proceeds in the amount of
approximately $62.6 million.
The Company has used the net proceeds from its public offerings to invest
in interest bearing investment grade instruments and have used the Company's
previously existing cash balances to fund its general operations. The proceeds
from the initial public offering were also used in effectuating the acquisitions
of nFront, 1View and Anytime Access and in integrating the companies following
the acquisitions. The Company expects to use the proceeds from the secondary
offering for general corporate purposes, including working capital and capital
expenditures. In addition, a portion of the proceeds may also be used to
acquire or invest in complementary businesses or products, or to obtain rights
to use complementary technologies, although there are no current plans for any
of these transactions. Pending use of the net proceeds for the above purposes,
the Company intends to invest these funds in short-term, interest bearing, and
investment grade obligations. None of the Company's net proceeds of the public
offerings were paid directly or indirectly to any director, officer, general
partner of Digital Insight or their associates, persons owning 10% or more of
any class of equity securities of Digital Insight, or an affiliate of Digital
Insight.
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<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders held on May 11, 2000, the Company's
stockholders voted with respect to the following matters:
. To elect two Class I directors, who will serve until the 2003 annual
meeting of stockholders and until their successors are elected and have
qualified.
<TABLE>
<CAPTION>
Votes For Votes Against Abstained
---------- ------------- ---------
<S> <C> <C> <C>
Mr. Brady L. "Tripp" Rackley III 20,769,019 2,308 0
Mr. Kevin McDonnell 20,740,44 100,886 0
</TABLE>
In addition to the above directors, the following directors will continue
in office:
<TABLE>
<CAPTION>
Name Class Term Expires
---- ----- ------------
<S> <C> <C>
Mr. John Dorman III 2002
Mr. Paul Fiore II 2001
Mr. John Jarve II 2001
Mr. James McGuire III 2002
Mr. Robert North III 2002
</TABLE>
. To ratify the appointment of PricewaterhouseCoopers LLP as the Company's
independent public accountants for the year ending December 31, 2000.
Votes for: 20,838,358
Votes against: 1,484
Abstained 1,485
13
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger, dated as of March 30, 2000 by and among
the Registrant, ATA Acquisition Corp., and AnyTime Access, Inc. Filed
with the Registrant's Current Report on Form 8-K, dated April 14, 2000
and incorporated herein by reference.
2.2 First Amendment to Agreement and Plan of Merger, dated as of May 2,
2000 by and among the Registrant, ATA Acquisition Corp., and AnyTime
Access, Inc. Filed with Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000 and incorporated herein by
reference.
2.3 Second Amendment to Agreement and Plan of Merger, dated as of May 25,
2000 by and among the Registrant, ATA Acquisition Corp., and AnyTime
Access, Inc. Filed with Registrant's Registration Statement on Form
S-1 (File 333-41196), dated July 12, 2000 and incorporated herein by
reference.
2.4 Third Amendment to Agreement and Plan of Merger, dated as of June 13,
2000 by and among the Registrant, ATA Acquisition Corp., and AnyTime
Access, Inc. Filed with Registrant's Registration Statement on Form
S-1 (File 333-41196), dated July 12, 2000 and incorporated herein by
reference.
2.5 Agreement and Plan of Merger, dated as of April 8, 2000 by and among
the Registrant, Calabasas Acquisition Corp., and 1View Network
Corporation. Filed with the Registrant's Current Report on Form 8-K,
dated April 14, 2000 and incorporated herein by reference.
10.1 Standard Office Lease, dated as of March 6, 2000 by and between Arden
Realty Finance Partnership, L.P. and the Registrant. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 2000 and incorporated herein by reference.
10.2 Revolving Note and Commercial Security Agreement and Agreement for
Issuance of Letters of Credit, dated May 3, 2000 between City National
Bank and the Registrant. Filed with Registrant's Registration
Statement on Form S-1 (File 333-41196), dated July 12, 2000 and
incorporated herein by reference.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On April 14, 2000, the Company filed a Current Report on Form 8-K
announcing its Agreement and Plan of Merger dated as of March 30, 2000 by
and among the Registrant, ATA Acquisition Corp. and AnyTime Access, Inc.
and its Agreement and Plan to Merger dated as of April 8, 2000 by and among
the Registrant, Calabasas Acquisition Corp. and 1View Network Corporation,
On July 6, 2000, the Company filed a Current Report on Form 8-K
announcing the completion of its acquisition of 1View Network Corporation.
On August 14, 2000, the Company filed a Current Report on Form 8-K
announcing the completion of its acquisition of AnyTime Access, Inc.
On August 14, 2000, the Company filed an Amendment No. 1 to Current
Report on Form 8-K with financial statements for the Company's acquisition
of 1View Network Corporation.
14
<PAGE>
Signatures
Pursuant to the requirements 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.
DIGITAL INSIGHT CORPORATION
Date: August 14, 2000 By: /s/ Kevin McDonnell
--------------------
Kevin McDonnell
Senior Vice President
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
15
