<PAGE>
As filed with the Securities and Exchange Commission on July 27, 2000
Registration No. 333-41196
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 2
to
Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
DIGITAL INSIGHT CORPORATION
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
Delaware 7375 77-0493142
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or
organization) Classification Code Number) Identification Number)
</TABLE>
26025 Mureau Road
Calabasas, CA 91302
(818) 871-0000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
John Dorman
Chairman of the Board, Chief Executive Officer and President
Digital Insight Corporation
26025 Mureau Road
Calabasas, CA 91302
(818) 871-0000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
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<S> <C>
Richard Boehmer Brooks Stough
Dean Sussman John F. Dietz
O'Melveny & Myers LLP Gunderson Dettmer Stough
400 S. Hope Street Villeneuve Franklin & Hachigian, LLP
Los Angeles, CA 90071 155 Constitution Drive
Telephone: (213) 430-6000 Menlo Park, CA 94025
Fax: (213) 430-6407 Telephone: (650) 321-2400
Fax: (650) 321-2800
</TABLE>
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued July 27, 2000
4,000,000 Shares
[LOGO OF DIGITAL INSIGHT]
COMMON STOCK
-----------
Digital Insight is offering 2,150,000 shares and the selling stockholders are
offering 1,850,000 shares.
-----------
Our common stock is quoted on the Nasdaq National Market under the symbol
"DGIN." On July 18, 2000, the reported last sale price of our common stock on
the Nasdaq National Market was $39 5/8 per share.
-----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
-----------
PRICE $ A SHARE
-----------
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<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Digital Insight Stockholders
---------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
Total..................... $ $ $ $
</TABLE>
Digital Insight and the selling stockholders have granted the underwriters the
right to purchase up to an additional 600,000 shares of common stock to cover
over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2000.
-----------
MORGAN STANLEY DEAN WITTER
BANC OF AMERICA SECURITIES LLC
CHASE H&Q
DEUTSCHE BANC ALEX. BROWN
FRIEDMAN BILLINGS RAMSEY
, 2000
<PAGE>
TABLE OF CONTENTS
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Page
----
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Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Special Note Regarding Forward-Looking Statements........................ 15
Use of Proceeds.......................................................... 16
Price Range of Common Stock.............................................. 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
</TABLE>
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Page
----
<S> <C>
Business................................................................... 30
Management................................................................. 43
Certain Transactions....................................................... 54
Principal and Selling Stockholders......................................... 56
Description of Capital Stock............................................... 60
Underwriters............................................................... 62
Legal Matters.............................................................. 64
Experts.................................................................... 64
Additional Information..................................................... 65
Index to Financial Statements.............................................. F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We and the selling stockholders are offering to
sell, and seeking offers to buy, shares of our common stock only in
jurisdictions where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
common stock.
2
<PAGE>
PROSPECTUS SUMMARY
You should read this summary together with the more detailed information
regarding Digital Insight and the common stock being sold in this offering and
the financial statements and related notes appearing elsewhere in this
prospectus. All names and trademarks of third parties appearing in this
prospectus are the property of their respective holders.
We are the leading provider of Internet banking services to banks, credit
unions, and savings and loans, based on the number of financial institutions
and Internet banking end users we serve. We offer these financial institutions
cost-effective outsourced solutions, branded in their name, which include
Internet banking for their retail and commercial customers, a target marketing
program and data mining service to enable them to effectively sell additional
financial services to end users, and customized e-commerce portal web site
design and implementation services. We provide our solutions to our customers
over the Internet, from facilities hosted by us, which requires minimal
software installation at the customer site. This means of providing services is
commonly referred to as the application service provider, or ASP, model. As of
March 31, 2000, we had contracted with over 880 financial institution
customers. These customers had over 18.5 million potential end users. As of
June 30, 2000, over 1.1 million end users were actively using our Internet
banking application.
We provide financial institutions with comprehensive Internet solutions that
can be installed rapidly with a high degree of customization. Our solutions are
designed to be readily expandable, or scalable, as the number of users grows.
Our solutions also offer high levels of up-time availability and system
redundancy. We work closely with leading data processing vendors so that our
financial institution customers can leverage their investments 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, and the three months ended March 31, 2000, approximately
64.4% and 70.5% of our revenues came from recurring fees.
We intend to leverage our leading market position to continue to increase the
number of financial institutions using our products and services, and to
increase the adoption of our solution by end users within those institutions.
We are also continuing to develop interfaces with data processing vendors in
order to serve as many financial institutions as possible. Finally, by
broadening our product and service offerings, we intend to create the potential
for new e-commerce revenues for Digital Insight and our customers.
We were incorporated in Delaware on March 18, 1997, and are the successor to
Digital Insight LLC, a Minnesota limited liability company established in 1995.
In February 2000, we completed our merger with nFront, Inc., which was
accounted for as a pooling of interests. Accordingly, our financial statements
for all prior periods have been restated to give effect to this merger. Our
principal executive offices are located at 26025 Mureau Road, Calabasas,
California 91302, and our telephone number is (818) 871-0000.
Recent Developments
Acquisitions
On March 30, 2000, we entered into a definitive agreement to acquire all of
the outstanding stock of AnyTime Access, Inc., a company based in Sacramento,
California that provides solutions that allow credit unions, banks and other
financial institutions to outsource certain customer communication and other
administrative functions associated with consumer loan originations. Upon the
closing of the transaction, we will issue approximately 2.1 million shares of
our common stock and shares underlying options and warrants to purchase common
stock in exchange for all of the outstanding shares, options and warrants of
AnyTime Access. The acquisition is to be accounted for using the purchase
method of accounting and will be consummated upon receipt of necessary
regulatory and shareholder approvals, which are anticipated to be obtained in
the third quarter of 2000.
3
<PAGE>
On June 21, 2000, we completed our acquisition of 1View Network Corporation,
a company based in San Francisco, California that provides electronic
information aggregation and electronic bill presentment and payment solutions
for the financial services market. In the acquisition, we paid $5 million in
cash and issued 1.1 million shares of our common stock and shares underlying
options to purchase common stock in exchange for all of the outstanding shares
and options of 1View Network. The acquisition is to be accounted for using the
purchase method of accounting. If 1View Network does not meet certain
performance objectives by September 30, 2000, the former majority shareholder
of 1View Network has agreed to return to us $3 million in cash and 178,112
shares of our common stock.
Second Quarter Results
For the quarter ended June 30, 2000, our revenues were $12.4 million, a 105%
increase over revenues of $6.1 million in the quarter ended June 30, 1999, and
an increase of 19% over the quarter ended March 31, 2000. Gross profit for the
quarter ended June 30, 2000 was $5.7 million, or 46% of revenues, compared to
gross profit of $2.3 million, or 38% of revenues, for the quarter ended June
30, 1999. Our net loss for the quarter ended June 30, 2000 was $5.4 million, or
$0.23 per share, compared to a net loss attributable to common stockholders for
the same period in the prior year of $3.7 million, or $0.35 per share.
Excluding deferred compensation charges, and amortization of goodwill and
intangibles, our pro forma net loss for the quarter ended June 30, 2000 was
$4.6 million, or $0.20 per share, compared to a pro forma net loss for the same
period in the prior year of $3.3 million, or $0.21 per share. The 1999 pro
forma per-share information assumes the conversion of all outstanding preferred
stock upon our and nFront's initial public offerings as if the conversions had
occurred on the date of issuance of the preferred stock.
We added 90 new financial institution customers during the quarter ended June
30, 2000, bringing the total number of financial institutions using one or more
of our products to 970. As of June 30, 2000, we had approximately
1,145,000 active Internet banking end users, a 158% increase over the 444,000
active end users we had as of June 30, 1999.
THE OFFERING
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<S> <C>
Common stock offered by Digital Insight......... 2,150,000 shares
Common stock offered by the selling
stockholders................................... 1,850,000 shares
Common stock to be outstanding after this
offering....................................... 26,800,552 shares
Use of proceeds................................. For general corporate purposes,
including working capital, capital
expenditures and possible acquisitions.
See "Use of Proceeds."
Nasdaq National Market symbol................... DGIN
</TABLE>
The foregoing information is based upon shares outstanding as of June 30,
2000 and excludes:
. 3,597,542 shares of common stock subject to outstanding options, at a
weighted average exercise price of $24.61 per share;
. 35,000 shares of common stock subject to an outstanding warrant, at an
exercise price of $40.5625 per share;
. 649,154 shares of common stock that have been set aside for future stock
options;
. 260,375 shares of common stock that have been set aside for our employee
stock purchase plan; and
. 2,126,759 shares of common stock that have been set aside for the
AnyTime Access acquisition.
In addition, unless otherwise indicated, all information in this prospectus
assumes no exercise of the underwriters' over-allotment option.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from Pro Forma
July 17, 1995 -------------------------
(Inception) Three Months Three Months
through Year Ended December 31, Ended March 31, Year Ended Ended
December 31, ---------------------------------- ----------------- December 31, March 31,
1995 1996 1997 1998 1999 1999 2000 1999 2000
------------- ------ ------- ------- -------- ------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues................ $ 88 $2,412 $ 5,054 $13,195 $ 26,245 $ 4,175 $ 10,419 $ 37,605 $ 14,053
Gross profit............ (54) 1,179 2,313 5,389 10,641 1,471 4,330 13,446 5,579
Loss from operations.... (315) (672) (3,086) (8,030) (19,459) (2,699) (21,391) (71,486) (34,391)
Net loss................ (315) (663) (2,975) (7,748) (18,018) (2,655) (20,396) (70,193) (33,390)
Net loss attributable
to common
stockholders........... $(315) $ (663) $(3,011) $(8,021) $(18,154) $(2,723) $(20,396) $(70,329) $(33,390)
Basic and diluted net
loss per share......... $(.06) $ (.08) $ (.31) $ (.80) $ (1.26) $ (.26) $ (.89)
Shares used to compute
basic and diluted net
loss per share......... 5,000 7,941 9,651 10,055 14,389 10,347 22,803
Pro forma basic and
diluted net loss per
share.................. $ (3.38) $ (1.31)
Shares used in computing
pro forma basic and
diluted net loss
per share.............. 20,833 25,420
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 2000
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments ................................... $57,467 $ 56,063 $136,307
Working capital................................. 51,228 45,193 125,437
Total assets.................................... 84,708 237,488 317,732
Total liabilities............................... 18,557 28,660 28,660
Total stockholders' equity ..................... 66,151 208,828 289,072
</TABLE>
5
<PAGE>
For the three months ended March 31, 2000, our actual and pro forma net loss
included $12.7 million of expenses related to our merger with nFront.
The pro forma selected financial data above reflect our acquisition of 1View
Network in June 2000 and our pending acquisition of AnyTime Access. The pro
forma basic and diluted share calculations above reflect the conversion of the
outstanding shares of preferred stock of Digital Insight and nFront into
approximately 3.8 million shares of common stock in connection with their
respective initial public offerings as if the conversions occurred at the date
of original issuance of the preferred stock.
The pro forma as adjusted selected financial data above reflect our sale of
2,150,000 shares of common stock in this offering at an assumed public offering
price of $39.63 per share and the application of the net proceeds, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us, as described in "Use of Proceeds."
6
<PAGE>
RISK FACTORS
This offering and an investment in our common stock involve a high degree of
risk. You should carefully consider the following risk factors and the other
information in this prospectus before investing in our common stock. Our
business and results of operations could be seriously harmed by any of the
following risks. The trading price of our common stock could decline due to
any of these risks, and you may lose part or all of your investment.
We have a limited operating history 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;
. 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 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 revenues to achieve profitability. We incurred net losses of
$663,000 in the year ended December 31, 1996, $3.0 million in the year ended
December 31, 1997, $7.7 million in the year ended December 31, 1998, $18.0
million in the year ended December 31, 1999 and $20.4 million for the three
months ended March 31, 2000, including $12.7 million of merger-related
expenses. As of March 31, 2000, we had an accumulated deficit of $47.5
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;
7
<PAGE>
. spending patterns and budgetary resources of 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; and
. governmental actions affecting Internet operations or content.
We may not achieve the benefits we expected from our recent acquisitions,
which may have a material adverse effect on our business, financial condition
and operating results.
We completed our acquisition of nFront, Inc. on February 10, 2000 and our
acquisition of 1View Network on June 21, 2000. We must overcome significant
challenges in order to realize the benefits and synergies from the
acquisitions, including the timely, efficient and successful execution of a
number of post-merger events. Key events include:
. integrating the operations of the acquired companies into Digital
Insight;
. retaining and assimilating the key personnel of each company;
. offering the existing services of each company to the combined company's
customers;
. retaining the existing customers and strategic partners of each company;
. developing new services that utilize the assets of the acquired
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 our
management;
. the difficulty of incorporating acquired technology and rights into our
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 businesses.
We may not succeed in addressing these risks or any other problems
encountered during the integration process.
We currently rely on two independent data centers to provide our Internet
banking products and services; any failure in either 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 and
at our regional data center in Norcross, Georgia. We plan to integrate these
two data centers to provide system redundancy and emergency backup capability.
We are also building a third data center in Westlake Village, California, to
which we plan to relocate our Calabasas data center, and a fourth data center
in Norcross, Georgia, to which we plan to relocate our existing Norcross data
center. Pending the full buildout of our redundant data centers in Westlake
Village and Norcross, which is expected to occur in the fourth quarter of
2000, we have contracted to establish functional backup and failover
capabilities for our Internet banking applications with an outside data center
provider in Herndon, Virginia for the Calabasas facility and another data
center in Sterling, Virginia for the
8
<PAGE>
Norcross facility. Once integrated, our Calabasas and Norcross facilities will
host all of our communications and network equipment. We cannot assure that
the Calabasas and Norcross data centers will become fully integrated as
scheduled or that, when fully integrated, these data centers will provide
system redundancy and failover backup as expected. In addition, we may
experience problems during this integration that could cause system failures
and decreased levels of service.
We do not currently have sufficient backup facilities to provide full
Internet services if either the Calabasas facility or the Norcross facility is
not functioning. A natural disaster, such as a fire, an earthquake or a flood,
at either of our facilities could result in failures or interruptions in
providing our Internet banking products and services to our customers. In
addition, our systems are vulnerable to operational failures, power loss,
telecommunications failure and similar events. For example, in April 1999, a
failure of a router in one of our data centers 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 integration of our two facilities
and the installation of the third-party data centers, 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
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, some smaller financial institutions have been
slower to adopt Internet banking than larger banks. We cannot predict the size
of the market for Internet banking among financial institutions, the rate at
which that market will grow, or whether there will be widespread end user
acceptance of Internet banking products and services such as ours.
We also depend on our financial institution customers to market and promote
our products to their end user customers. Neither we nor our financial
institution customers may be successful in marketing our current or future
Internet banking products and services. Moreover, financial institutions
generally agree to use our products and services pursuant to contracts with
durations that range from one to five years. Upon expiration, these contracts
may be discontinued. Unless our Internet banking products and services are
successfully deployed and marketed by a large number of 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.
9
<PAGE>
We depend on cooperation from data processing vendors for financial
institutions, some of whom have resisted efforts in the past to allow the
integration of our products and services with their systems.
Our products involve integration with products and systems developed by data
processing vendors that serve financial institutions. If any of our products
fail to be supported by our customers' data processing vendors, 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 or result
in lower prices 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, retain our current customers or third-party
service providers or maintain our current pricing levels for our products and
services. We face competition from three main areas: other companies with
Internet banking offerings, 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 financial institution customers
and data processing vendors 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 be perceived by the marketplace as secure. A
material security breach affecting us could damage our reputation, deter
financial institutions from purchasing our products, deter their customers
from using our products, or result in liability to us. Further, any material
security breach affecting our competitors could affect the marketplace's
perception of Internet banking in general and have the same effects.
Concerns over security and the privacy of end 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.
10
<PAGE>
Our failure to respond to rapid change in the market for Internet banking
could cause us to lose revenue and harm our business.
The market for Internet banking services is new and unproven and is subject
to rapid change. Our success will depend substantially upon our ability to
enhance our existing products and to develop and introduce, on a timely and
cost-effective basis, new products and features that meet changing financial
institution and end user requirements and incorporate technological
advancements. If we are unable to develop new products and enhanced
functionalities or technologies to adapt to these changes or if we cannot
offset a decline in revenues of existing products by sales of new products,
our business would suffer. In addition, our product development process
involves a number of risks. Developing technologically advanced products is a
complex and uncertain process requiring innovation as well as the accurate
anticipation of technology and market trends. We budget our research and
development expenditures based on planned product introductions and
enhancements. If we fail to timely and cost-effectively develop new products
that respond to new technologies and the needs of the Internet banking
services market, we will lose revenue and our business will suffer.
Newly introduced products may contain undetected or unresolved defects.
Any new or enhanced products we introduce may contain undetected or
unresolved software or hardware defects when they are first introduced or as
new versions are released. In the past, we have discovered errors in our
products and it is possible that design defects will occur in new products.
These defects could result in a loss of sales and additional costs as well as
damage to our reputation and the loss of relationships with our customers.
The demand for our products and services could be negatively affected by
reduced growth of commerce over the Internet or delays in the development of
the Internet infrastructure.
Our future success depends heavily on the Internet being accepted and widely
used for commerce. If Internet commerce does not continue to grow or grows
more slowly than expected, our business would suffer. There are a number of
reasons that consumers and businesses may reject the Internet as a viable
commercial medium in general, or as a suitable vehicle for banking
transactions in particular. These reasons include potentially inadequate
network infrastructure, security concerns, slow development of enabling
technologies, reliability and quality problems, and issues relating to ease
and cost of access. In particular, the Internet infrastructure may not be able
to support the demands placed on it by increased Internet usage and data
transmission capacity requirements. In addition, delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet activity, or increased government regulation could cause the Internet
to lose its viability as a commercial medium. Even if the required
infrastructure, standards, protocols or complementary products, services or
facilities are developed, we may incur substantial expenses adapting our
solutions to changing or emerging technologies.
We could be subject to potential liability claims related to use of our
products and services.
Financial institutions use our products and services to provide Internet
banking services to their customers. Any errors, defects or other performance
problems in our products and services could result in financial or other
damages to these financial institutions for which we are liable. A product
liability claim brought against us, even if not successful, would likely be
time consuming, result in costly litigation and could seriously harm our
business. Although our contracts typically contain provisions designed to
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 from 132 as of June 30, 1999 to 369 as of June 30,
2000, 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
11
<PAGE>
to support our existing and future operations. We continue to invest heavily
in our technological infrastructure and to build and scale our systems in
order to meet the demands of our growing customer base.
Our stock price is volatile.
The market price of our common stock has fluctuated significantly in the
past and in the future could fluctuate 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;
. changes in estimates or ratings of securities analysts;
. future equity or debt offerings or our announcements of these offerings;
and
. economic well-being of 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, the Examination Parity and Year 2000 Readiness for
Financial Institutions Act and the Gramm Leach Bliley Act of 1999. These
regulators have broad supervisory authority to remedy any shortcomings
identified in any such examination.
Except as noted above, our business is not subject to federal and state
regulations applicable particularly to financial institutions. However,
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 or our customers 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 end 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, particularly research
and development personnel, 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
12
<PAGE>
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.
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 depend 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.
Future sales of our shares could affect the stock price.
The market price of our common stock could fall significantly 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 June 30, 2000, there were
24,650,552 shares of our common stock outstanding. Of these, 10,217,423 shares
are freely tradable. The remaining 14,433,129 shares are limited by
restrictions under the securities laws, "lock-up" agreements with certain
former stockholders of 1View Network and 90-day "lock-up" agreements with the
underwriters. Of these remaining shares, 14,250,017 will become eligible for
sale in the public market as follows:
13
<PAGE>
<TABLE>
<CAPTION>
First Eligible Sale Date Number
------------------------ ------
<S> <C>
90 days after the date of this prospectus....................... 13,737,117
December 18, 2000............................................... 108,047
March 21, 2001.................................................. 324,142
June 21, 2001................................................... 80,711
</TABLE>
An additional 178,112 shares are being held in escrow and will be returned
to us if 1View Network does not meet certain performance objectives by
September 30, 2000. As of June 30, 2000, the holders of an aggregate of
14,661,266 shares of common stock were entitled to rights with respect to the
registration of shares under the Securities Act. Approximately 11,511,638
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 June 30, 2000, options to purchase 3,597,542 shares of common stock
were outstanding, 649,154 shares of common stock were available for future
grant pursuant to our stock plans, a warrant to purchase 35,000 shares of
common stock was outstanding, and 260,375 shares of common stock were
available for purchase under our employee stock purchase plan. Our 1999 Stock
Plan is subject to annual increases on March 1 of each year, equal to the
lesser of 750,000 shares, 5% of our shares outstanding 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.
Morgan Stanley & Co. Incorporated 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 with the underwriters.
Potential acquisitions involve risks.
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. We closed the previously announced
acquisition of 1View Network on June 21, 2000 and expect to close the
previously announced acquisition of AnyTime Access in the third quarter of
2000. 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;
. the inability to maintain uniform standards, controls, procedures and
policies;
. 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 close the AnyTime Access acquisition as
planned or at all, or identify other 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 this 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. We cannot
assure you that we will be able to arrange adequate financing, if required,
for any acquisitions on acceptable terms.
14
<PAGE>
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 33.8% of our common stock.
As of June 30, 2000, members of our executive management team and our board
of directors and their affiliates controlled approximately 33.8% 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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect,"
"anticipate," "intend," "plan," "believe," "estimate," "potential," or
"continue," the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially from any forward-looking statement. In evaluating these statements,
you should specifically consider various factors, including the risks outlined
under "Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We undertake no obligation to update publicly any
forward-looking statements for any reason after the date of this prospectus to
conform these statements to actual results or to changes in our expectations.
Before you invest in our common stock, you should be aware that the occurrence
of the events described under "Risk Factors" and elsewhere in this prospectus
could have a material adverse effect on our business, operating results and
financial condition.
15
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 2,150,000 shares of
common stock we are offering will be approximately $80.2 million, at an
assumed public offering price of $39.63 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $97.8 million. We expect to use the net
proceeds from this offering for general corporate purposes, including working
capital and capital expenditures, although we have no specific plans for the
proceeds of the offering. A portion of the proceeds may also be used to
acquire or invest in complementary businesses or products, or to obtain the
right to use complementary technologies, although there are no current plans,
negotiations or discussions for any of these transactions. Pending use of the
net proceeds for the above purposes, we intend to invest these funds in short-
term, interest-bearing, investment grade obligations.
We will not receive any of the proceeds from the sale of shares by the
selling stockholders.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"DGIN." Our common stock began trading on the Nasdaq National Market on
October 1, 1999. 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>
Common Stock Price
--------------------
Fiscal Period High Low
------------- ---------- ---------
<S> <C> <C>
Year Ended December 31, 1999
Fourth Quarter........................................... $50 7/8 $27 7/8
Year Ended December 31, 2000
First Quarter............................................ 83 7/8 33 7/16
Second Quarter........................................... 46 15/16 29 7/8
Third Quarter (through July 18, 2000).................... 39 5/8 29 1/2
</TABLE>
As of June 30, 2000, there were 127 holders of record of our common stock.
On July 18, 2000, the reported last sale price of our common stock on the
Nasdaq National Market was $39 5/8 per share.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
other securities. We currently anticipate that we will retain all of our
future earnings for use in the expansion and operation of our business and do
not anticipate paying any cash dividends in the foreseeable future.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
. on an actual basis;
. on a pro forma basis to give effect to our acquisition of 1View Network
in June 2000 for $5 million in cash and 807,425 shares of our common
stock, including 178,112 shares of our common stock held in escrow, and
our pending acquisition of AnyTime Access for 1,987,557 shares of our
common stock; and
. on a pro forma, as adjusted basis to reflect our receipt of the
estimated net proceeds from our sale of 2,150,000 shares of common stock
in this offering, at an assumed public offering price of $39.63 per
share, after deducting estimated underwriting discounts and commissions
and estimated offering expenses.
The following table does not include:
. 3,252,143 shares of common stock subject to outstanding options as of
March 31, 2000;
. 1,248,727 shares of common stock that had been set aside for future
stock option grants as of March 31, 2000;
. 22,222 shares of common stock subject to an outstanding warrant as of
March 31, 2000;
. 300,000 shares of common stock that had been set aside for our employee
stock purchase plan; or
. 431,761 shares of common stock that have been set aside for options and
warrants in connection with our acquisitions of AnyTime Access and 1View
Network.
This information should be read in conjunction with our financial statements
and related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 31, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Cash, cash equivalents and short-term
investments................................... $ 57,467 $ 56,063 $136,307
======== ======== ========
Long-term portion of capital lease obligation
and long-term debt............................ 998 1,039 1,039
-------- -------- --------
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized, no shares issued and
outstanding and as adjusted................. -- -- --
Common stock, $.001 par value, 100,000,000
shares authorized; 23,074,968 shares issued
and outstanding-actual; 25,869,950 shares
issued and outstanding-pro forma; and
28,019,950 shares outstanding-pro forma as
adjusted.................................... 23 26 28
Additional paid-in capital................... 116,808 268,223 348,465
Notes receivable from stockholders........... (219) (219) (219)
Deferred stock-based compensation............ (2,950) (11,691) (11,691)
Accumulated deficit.......................... (47,511) (47,511) (47,511)
-------- -------- --------
Total stockholders' equity................. 66,151 208,828 289,072
-------- -------- --------
Total capitalization..................... $ 67,149 $209,867 $290,111
======== ======== ========
</TABLE>
17
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was approximately
$63.9 million or $2.47 per share of common stock. Pro forma net tangible book
value per share represents the amount of our total pro forma tangible assets
reduced by the amount of our pro forma total liabilities, divided by the pro
forma number of outstanding shares of common stock, in each case giving effect
to our acquisition of 1View Network in June 2000 for $5 million in cash and
807,425 shares of our common stock, including 178,112 shares held in escrow,
and our pending acquisition of AnyTime Access for 1,987,557 shares of our
common stock. After giving effect to our sale of 2,150,000 shares of common
stock in this offering, at an assumed public offering price of $39.63 per
share, after deducting estimated underwriting discounts and commissions and
estimated offering expenses, our pro forma net tangible book value as of
March 31, 2000 would have been $144.1 million or $5.15 per share. This
represents an immediate increase in pro forma net tangible book value of $2.68
per share to existing stockholders and an immediate dilution of $34.48 per
share to investors purchasing shares in this offering. Dilution is determined
by subtracting pro forma net tangible book value per share after the offering
from the offering price per share. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share........................... $39.63
Pro forma net tangible book value per share as of March 31,
2000........................................................... $2.47
Increase in pro forma net tangible book value per share
attributable to new investors.................................. 2.68
-----
Pro forma net tangible book value per share after this offering... 5.15
------
Dilution per share to new investors............................... $34.48
======
</TABLE>
We had the following options and warrant outstanding as of March 31, 2000:
. 3,252,143 shares subject to outstanding options at a weighted average
exercise price of $19.05 per share; and
. 22,222 shares of common stock issuable upon exercise of an outstanding
warrant at an exercise price of $2.70 per share.
To the extent that outstanding options or the warrant are exercised, new
warrants are issued, new options or rights are issued under our stock plans,
or we issue additional shares of common stock in the future, new investors
will experience further dilution.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included elsewhere in this prospectus. The selected
consolidated statement of operations data for the years ended December 31,
1997, 1998 and 1999 and the selected consolidated balance sheet data as of
December 31, 1998 and 1999 have been derived from our audited consolidated
financial statements and the notes thereto included elsewhere in this
prospectus. The selected consolidated statement of operations data for the
year ended December 31, 1996 and the selected consolidated balance sheet data
as of December 31, 1996 have been derived from our audited consolidated
financial statements not included herein. The selected consolidated statement
of operations data for the period from July 17, 1995 (inception) to
December 31, 1995 and for the three-month periods ended March 31, 1999 and
2000 have not been audited. In the opinion of management, such unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements referred to above and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of consolidated results of operations for the indicated
periods. Consolidated results of operations for the three months ended March
31, 2000 are not necessarily indicative of the results that may be expected
for the full fiscal year.
The actual selected consolidated financial data are derived from
consolidated financial statements that give effect to our merger with nFront
in February 2000. The merger was accounted for as a pooling of interests, and
accordingly all prior periods have been restated to combine the results of
Digital Insight and nFront. nFront's historical year end was June 30, and as
such the restated consolidated financial statements as of December 31, 1998
and for the years ended December 31, 1997 and 1998 combine the Digital Insight
historical financial statements for each of these periods with the historical
financial statements of nFront as of June 30, 1999 and for the years ended
June 30, 1998 and 1999. The consolidated financial statements as of December
31, 1999 and for the year then ended and for the three months ended March 31,
1999 are presented on a conformed period basis. No adjustments have been
necessary to conform accounting policies of the entities. There were no
intercompany transactions requiring elimination in any period presented.
The pro forma selected consolidated financial data are derived from pro
forma condensed consolidated financial information that reflects our
acquisition of 1View Network in June 2000 and our pending acquisition of
AnyTime Access, as if the transactions occurred as of January 1, 1999 and
2000, respectively, and as of March 31, 2000. These acquisitions are to be
accounted for using the purchase method. The pro forma condensed consolidated
financial information is presented for illustrative purposes only and is not
necessarily indicative of the financial position or results of operations that
would have occurred if the transactions had been consummated at the dates
indicated, nor is it necessarily indicative of the future financial position
or results of operations of the combined companies.
19
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
Period from ----------------------
July 17, 1995 Three Months Three
(Inception) Ended Months
through Year Ended December 31, March 31, Year Ended Ended
December 31, ---------------------------------- ----------------- December 31, March 31,
1995 1996 1997 1998 1999 1999 2000 1999 2000
------------- ------ ------- ------- -------- ------- -------- ------------ ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
Implementation fees.... $ 85 $1,870 $ 2,649 $ 5,578 $ 9,351 $ 1,196 $ 3,078 $ 9,351 $ 3,078
Service fees........... 3 542 2,405 7,617 16,894 2,979 7,341 16,894 7,341
Transaction fees and
other................. -- -- -- -- -- -- -- 11,360 3,634
----- ------ ------- ------- -------- ------- -------- -------- --------
Total revenues......... 88 2,412 5,054 13,195 26,245 4,175 10,419 37,605 14,053
Cost of revenues:
Implementation......... 141 897 1,607 3,090 5,548 892 2,380 5,548 2,380
Service................ 1 336 1,134 4,716 10,056 1,812 3,709 10,056 3,709
Transaction fees and
other................. -- -- -- -- -- -- -- 8,555 2,385
----- ------ ------- ------- -------- ------- -------- -------- --------
Total cost of
revenues.............. 142 1,233 2,741 7,806 15,604 2,704 6,089 24,159 8,474
----- ------ ------- ------- -------- ------- -------- -------- --------
Gross profit (loss)..... (54) 1,179 2,313 5,389 10,641 1,471 4,330 13,446 5,579
Operating expenses:
Sales, general and
administrative........ 167 1,178 3,462 8,828 21,211 2,574 9,016 29,296 11,225
Research and
development........... 94 673 1,786 3,747 7,668 1,362 3,718 12,525 4,934
Amortization of stock-
based compensation.... -- -- 151 844 1,221 234 329 9,203 2,676
Amortization of
goodwill and
intangibles........... -- -- -- -- -- -- -- 33,908 8,477
Merger-related
expenses.............. -- -- -- -- -- -- 12,658 -- 12,658
----- ------ ------- ------- -------- ------- -------- -------- --------
Total operating
expenses.............. 261 1,851 5,399 13,419 30,100 4,170 25,721 84,932 39,970
----- ------ ------- ------- -------- ------- -------- -------- --------
Loss from operations.... (315) (672) (3,086) (8,030) (19,459) (2,699) (21,391) (71,486) (34,391)
Interest income and
other income, net...... -- 9 111 282 1,441 44 995 1,293 1,001
----- ------ ------- ------- -------- ------- -------- -------- --------
Net loss................ (315) (663) (2,975) (7,748) (18,018) (2,655) (20,396) (70,193) (33,390)
Accretion on redeemable
convertible preferred
stock.................. -- -- (36) (273) (136) (68) -- (136) --
----- ------ ------- ------- -------- ------- -------- -------- --------
Net loss attributable to
common stockholders.... $(315) $ (663) $(3,011) $(8,021) $(18,154) $(2,723) $(20,396) $(70,329) $(33,390)
===== ====== ======= ======= ======== ======= ======== ======== ========
Basic and diluted net
loss per share......... $(.06) $ (.08) $ (.31) $ (.80) $ (1.26) $ (.26) $ (.89)
===== ====== ======= ======= ======== ======= ========
Shares used to compute
basic and diluted net
loss per share......... 5,000 7,941 9,651 10,055 14,389 10,347 22,803
===== ====== ======= ======= ======== ======= ========
Pro forma basic and
diluted net loss per
share.................. $ (3.38) $ (1.31)
======== ========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 20,833 25,420
======== ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of March 31, 2000
---------------------------------- --------------------
1996 1997 1998 1999 Actual Pro Forma
----- ------- -------- -------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash, cash equivalents,
and short-term
investments............ $ 271 $ 3,407 $ 4,886 $ 79,031 $ 57,467 $ 56,063
Working capital
(deficit).............. (275) 1,941 (31) 73,921 51,228 45,193
Total assets............ 834 6,069 13,172 103,488 84,708 237,488
Total liabilities....... 785 2,781 8,088 17,304 18,557 28,660
Redeemable convertible
preferred stock........ -- 6,819 15,092 -- -- --
Total stockholders'
equity (deficit)....... 49 (3,531) (10,008) 86,184 66,151 208,828
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are the leading provider of Internet banking services to banks, credit
unions, and savings and loans, based on the number of financial institutions
and Internet banking end users we serve. We offer these financial institutions
cost-effective outsourced solutions, branded in their name, which include
Internet banking for their retail and commercial customers, a target marketing
program and data mining service to enable them to effectively sell additional
financial services to end users, and customized e-commerce portal web site
design and implementation services. We provide our solutions to our customers
over the Internet, from facilities hosted by us, which requires minimal
software installation at the customer site. This means of providing services
is commonly referred to as the application service provider, or ASP, model. As
of March 31, 2000, we had contracted with over 880 financial institution
customers. These customers had over 18.5 million potential end users. As of
June 30, 2000, over 1.1 million end users were actively using our Internet
banking application.
In February 2000, we completed our merger with nFront, Inc. in which we
issued 8,253,735 shares of our common stock and assumed options to purchase
627,926 shares of our common stock. Since the merger was accounted for as a
pooling of interests, our financial statements for all prior periods have been
restated to combine the results of Digital Insight and nFront. nFront's
historical year end was June 30, and as such the restated consolidated
financial statements as of December 31, 1998 and for the years ended December
31, 1997 and 1998 combine the Digital Insight historical financial statements
for each of these periods with the historical financial statements of nFront
as of June 30, 1999 and for the years ended June 30, 1998 and 1999. The
consolidated financial statements as of December 31, 1999 and for the year
then ended include the results of Digital Insight and nFront on a conformed
period basis. No adjustments have been necessary to conform accounting
policies of the entities. There were no intercompany transactions requiring
elimination in any period presented.
Our revenues consist primarily of recurring monthly service fees and, to a
lesser extent, one-time implementation fees. Revenues increased from $13.2
million in 1998 to $26.2 million in 1999, and were $10.4 million for the three
months ended March 31, 2000. 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 22.5% in 1996 to 70.5% for the three
months ended March 31, 2000. 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. After giving effect to our acquisition of 1View
Network and our pending acquisition of AnyTime Access, we expect to realize a
significant portion of our revenues from transaction fees.
We generally 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 revenue 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 years ended December 31,
1997, 1998 and 1999 and for the three months ended March 31, 2000, no single
customer accounted for 10% or more 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.
21
<PAGE>
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, promotional
costs and end user marketing campaigns.
Research and development expenses consist primarily of salaries, related
personnel expenses and consultant fees related to the design, development,
testing and enhancement of 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 March 31, 2000. The remaining unamortized balance of $3.0 million will
be fully amortized by the quarter ended March 31, 2003.
We recorded $12.7 million of expenses in the three months ended March 31,
2000 related to our merger with nFront, and we expect to incur significant
charges for the amortization of goodwill and intangibles and deferred
compensation from our acquisition of 1View Network and our pending acquisition
of AnyTime Access. See "Recent Acquisitions" below.
As of June 30, 2000, we had contracted with over 970 financial institutions.
We added more new financial institutions in the fourth quarter of 1999 and the
first quarter of 2000 than we did in the second quarter of 2000. We believe
that the increases in the fourth quarter of 1999 and the first quarter of 2000
were partly attributable to year-end capital expenditures and reduced concerns
over Year 2000 problems.
Recent Acquisitions
On March 30, 2000 we entered into a definitive agreement to acquire all of
the outstanding stock of 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 customer
communication and other administrative functions associated with consumer loan
originations. Upon the closing of the transaction, we will issue approximately
2.1 million shares of our common stock and shares underlying options and
warrants to purchase common stock in exchange for all of the outstanding
shares, options and warrants of AnyTime Access. The acquisition is to be
accounted for using the purchase method of accounting and will be consummated
upon the receipt of necessary regulatory and shareholder approvals, which are
anticipated to be obtained in the third quarter of 2000. 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 approximated the historical cost basis, and the
preliminary purchase price allocation indicates goodwill and identifiable
intangible assets of approximately $108.0 million, which we estimate 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. For further
information, see the unaudited pro forma condensed consolidated financial
information included elsewhere in this prospectus.
On June 21, 2000 we completed our acquisition of 1View Network, a company
based in San Francisco, California that provides electronic information
aggregation solutions for the financial services market. In the acquisition we
paid $5 million in cash and issued 1.1 million shares of our common stock and
shares underlying options to purchase common stock in exchange for all of the
outstanding shares and options of 1View Network. The acquisition is to 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 approximated the historical cost basis, and the preliminary purchase
price allocation indicates goodwill of approximately $36.9 million, which will
be amortized on a straight-line basis over an estimated life of three years.
In addition, deferred compensation will be recorded in the amount of
$6.6 million 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. If 1View Network does not meet certain performance objectives
by September 30, 2000, the former majority shareholder of 1View Network has
agreed to return to us $3 million in cash and 178,112 shares of our common
stock. For further information, see the unaudited pro forma condensed
consolidated financial information included elsewhere in this prospectus.
22
<PAGE>
Results of Operations
The following table presents, for the periods indicated, certain statement
of operations data as a percentage of revenues.
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended March 31,
--------------------- ------------------
1997 1998 1999 1999 2000
----- ----- ----- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Implementation fees............. 52.4 % 42.3 % 35.6 % 28.6 % 29.5 %
Service fees.................... 47.6 57.7 64.4 71.4 70.5
----- ----- ----- ------- --------
Total revenues................ 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Implementation.................. 31.8 23.4 21.1 21.4 22.8
Service......................... 22.4 35.8 38.4 43.4 35.6
----- ----- ----- ------- --------
Total cost of revenues........ 54.2 59.2 59.5 64.8 58.4
----- ----- ----- ------- --------
Gross profit................ 45.8 40.8 40.5 35.2 41.6
Operating expenses:
Sales, general and
administrative................. 68.5 66.9 80.8 61.7 86.5
Research and development........ 35.3 28.4 29.2 32.6 35.7
Amortization of stock-based
compensation................... 3.0 6.4 4.7 5.5 3.2
Merger-related expenses......... -- -- -- -- 121.5
----- ----- ----- ------- --------
Total operating expenses...... 106.8 101.7 114.7 99.8 246.9
----- ----- ----- ------- --------
Loss from operations.............. (61.0) (60.9) (74.2) (64.6) (205.3)
Interest income and other income,
net.............................. 2.2 2.2 5.5 1.0 9.5
----- ----- ----- ------- --------
Net loss.......................... (58.8)% (58.7)% (68.7)% (63.6)% (195.8)%
===== ===== ===== ======= ========
</TABLE>
Comparison of Three Months Ended March 31, 1999 and March 31, 2000
Revenues. Revenues increased from $4.2 million for the three months ended
March 31, 1999 to $10.4 million for the three months ended March 31, 2000.
This increase included a growth in service fees from $3.0 million to $7.3
million and a growth in implementation fees from $1.2 million to $3.1 million.
The number of active Internet banking end users increased over the same period
from 372,000 to 950,000.
Gross Profit. Gross profit increased from $1.5 million for the three months
ended March 31, 1999 to $4.3 million for the three months ended March 31,
2000. Gross margin increased from 35.2% to 41.6%, primarily due to improved
service fee margin resulting mainly from continued end user growth without a
corresponding increase in costs. Implementation gross margin declined from
25.4% to 22.7% and service gross margin improved from 39.2% to 49.5%. The
decrease in implementation gross margin resulted, in part, from conforming the
contractual practices of nFront to our contractual practices requiring
customer approval prior to recognizing implementation fees. Gross margins may
vary from period to period based upon fluctuations in our implementation
revenues and increases in our service and implementation infrastructure.
Sales, General and Administrative. Sales, general and administrative
expenses increased from $2.6 million for the three months ended March 31, 1999
to $9.0 million for the three months ended March 31, 2000. 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 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.
Sales, general and administrative expenses as a percentage of revenues
increased from 61.7% for the three months ended March 31, 1999 to 86.5% for
the three months ended March 31, 2000. We expect sales, general and
administrative expenses to increase in absolute dollars but to decrease as a
percentage of revenues.
23
<PAGE>
Research and Development. Research and development expenses increased from
$1.4 million for the three months ended March 31, 1999 to $3.7 million for the
three months ended March 31, 2000. This increase was primarily due to higher
personnel and consulting expenses required for the functional enhancement of
existing products and due to the development of new products. Research and
development expenses as a percentage of revenues increased from 32.6% for the
three months ended March 31, 1999 to 35.7% for the three months ended March
31, 2000, primarily as a result of increased staffing and product development
efforts.
Amortization of Stock-Based Compensation. Amortization of stock-based
compensation increased from $234,000 for the three months ended March 31, 1999
to $329,000 for the three months ended March 31, 2000. This increase was
primarily due to the hiring of new employees and related stock option grants
during the first nine months of 1999, prior to our initial public offering,
when the grant price and the deemed fair value of our common stock differed.
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 Income. Interest income increased from $44,000 for the three months
ended March 31, 1999 to $995,000 for the three months ended March 31, 2000.
This increase was primarily due to higher average cash balances in the three
months ended March 31, 2000 as a result of our initial public offering in
October 1999 and our merger with nFront in February 2000.
Comparison of Years Ended December 31, 1998 and December 31, 1999
Revenues. Revenues increased from $13.2 million for the year ended December
31, 1998 to $26.2 million for the year ended December 31, 1999. This increase
included a growth in service fees from $7.6 million to $16.9 million and a
growth in implementation fees from $5.6 million to $9.4 million. The number of
active Internet banking end users increased over the same period from over
287,000 to over 750,000.
Gross Profit. Gross profit increased from $5.4 million for the year ended
December 31, 1998 to $10.6 million for the year ended December 31, 1999. Gross
margin remained basically unchanged at 40.8% in 1998 and 40.5% in 1999.
Implementation gross margin decreased from 44.6% to 40.7%, primarily as a
result of necessary infrastructure investments in 1999 to support growth.
Service gross margin improved from 38.1% to 40.5% due to continued end user
growth without a corresponding increase in costs.
Sales, General and Administrative. Sales, general and administrative
expenses increased from $8.8 million for the year ended December 31, 1998 to
$21.2 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,
increased staffing for finance and accounting, new senior management positions
and growth in recruiting and human resources expenses. This increase was also
due, to a lesser extent, to our national user conference, corporate branding
effort, other promotional expenses and expenses for additional marketing
support programs. Sales, general and administrative expenses as a percentage
of revenues increased from 66.9% for the year ended December 31, 1998 to 80.8%
for the year ended December 31, 1999.
Research and Development. Research and development expenses increased from
$3.7 million for the year ended December 31, 1998 to $7.7 million for the year
ended December 31, 1999. This increase was primarily due to higher personnel
and consulting expenses required for the functional enhancement of existing
products and due to the development of new products. Research and development
expenses as a percentage of revenues increased from 28.4% for the year ended
December 31, 1998 to 29.2% for the year ended December 31, 1999, primarily as
a result of an increase in staffing and product development efforts.
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
24
<PAGE>
increase was primarily due to the hiring of new employees and related stock
option grants during the first nine months of 1999, prior to our initial
public offering, when the grant price and the deemed fair value of our common
stock differed.
Interest Income. Interest income increased from $282,000 for the year ended
December 31, 1998 to $1.4 million for the year ended December 31, 1999. This
increase was primarily due to higher average cash balances in the year ended
December 31, 1999 as a result of the initial public offerings of Digital
Insight in October 1999 and of nFront in July 1999.
Comparison of Years Ended December 31, 1997 and December 31, 1998
Revenues. Revenues increased from $5.1 million for the year ended December
31, 1997 to $13.2 million for the year ended December 31, 1998. This increase
included a growth in service fees from $2.4 million in 1997 to $7.6 million in
1998 and a growth in implementation fees from $2.6 million in 1997 to
$5.6 million in 1998. The number of active Internet banking end users
increased over the same period from 83,000 to 287,000.
Gross Profit. Gross profit increased from $2.3 million for the year ended
December 31, 1997 to $5.4 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 45.8% in 1997 to 40.8% 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 $3.5 million for the year ended December 31, 1997 to
$8.8 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.
Research and Development. Research and development expenses increased from
$1.8 million for the year ended December 31, 1997 to $3.7 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.
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 at a grant
price less than the deemed fair value of our common stock.
Interest Income. Interest income increased from $111,000 for the year ended
December 31, 1997 to $282,000 for the year ended December 31, 1998. This
increase was primarily due to higher average cash balances as a result of
preferred stock financings during the periods.
25
<PAGE>
Selected Quarterly Results of Operations
The following tables present, in dollars and as a percentage of revenues,
unaudited consolidated statements of operations for the five quarters ended
March 31, 2000. This information reflects all adjustments, consisting only of
normal recurring adjustments, that we consider necessary for a fair
presentation of such information in accordance with generally accepted
accounting principles. The results of any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1999 1999 1999 1999 2000
-------- -------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
Implementation fees......... $ 1,196 $ 2,417 $ 2,794 $ 2,944 $ 3,078
Service fees................ 2,979 3,641 4,428 5,846 7,341
-------- -------- -------- ------- --------
Total revenues............ 4,175 6,058 7,222 8,790 10,419
Cost of revenues:
Implementation.............. 892 1,299 1,567 1,790 2,380
Service..................... 1,812 2,438 2,518 3,288 3,709
-------- -------- -------- ------- --------
Total cost of revenues.... 2,704 3,737 4,085 5,078 6,089
-------- -------- -------- ------- --------
Gross profit............ 1,471 2,321 3,137 3,712 4,330
Operating expenses:
Sales, general and
administrative............. 2,574 4,414 6,276 7,947 9,016
Research and development.... 1,362 1,245 1,975 3,086 3,718
Amortization of stock-based
compensation............... 234 329 329 329 329
Merger-related expenses .... -- -- -- -- 12,658
-------- -------- -------- ------- --------
Total operating expenses.. 4,170 5,988 8,580 11,362 25,721
-------- -------- -------- ------- --------
Loss from operations.......... (2,699) (3,667) (5,443) (7,650) (21,391)
Interest income and other
income, net.................. 44 32 400 965 995
-------- -------- -------- ------- --------
Net loss...................... $(2,655) $(3,635) $(5,043) $(6,685) $(20,396)
======== ======== ======== ======= ========
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1999 1999 1999 1999 2000
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
As a Percentage of Revenues:
Revenues:
Implementation fees........... 28.6% 39.9% 38.7% 33.5% 29.5%
Service fees.................. 71.4 60.1 61.3 66.5 70.5
----- ----- ----- ----- ------
Total revenues.............. 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Implementation................ 21.4 21.4 21.7 20.4 22.8
Service....................... 43.4 40.3 34.9 37.4 35.6
----- ----- ----- ----- ------
Total cost of revenues...... 64.8 61.7 56.6 57.8 58.4
----- ----- ----- ----- ------
Gross profit.............. 35.2 38.3 43.4 42.2 41.6
Operating expenses:
Sales, general and
administrative............... 61.7 72.9 86.9 90.4 86.5
Research and development...... 32.6 20.5 27.3 35.1 35.7
Amortization of stock-based
compensation................. 5.5 5.4 4.6 3.7 3.2
Merger-related expenses....... -- -- -- -- 121.5
----- ----- ----- ----- ------
Total operating expenses.... 99.8 98.8 118.8 129.2 246.9
----- ----- ----- ----- ------
Loss from operations............ (64.6) (60.5) (75.4) (87.0) (205.3)
Interest income and other
income, net.................... 1.0 .5 5.6 10.9 9.5
----- ----- ----- ----- ------
Net loss........................ (63.6)% (60.0)% (69.8)% (76.1)% (195.8)%
===== ===== ===== ===== ======
</TABLE>
Our quarterly results of operations have fluctuated in the past and are
likely to fluctuate significantly in the future due to a variety of factors,
many of which are beyond our control. Because of these and other factors, our
quarterly revenues, expenses and results of operations could vary
significantly in the future, and period-to-period comparisons should not be
relied upon as indicators of future performance. We may not be able to
increase our revenues in future periods or sustain our existing level of
revenues or our rate of revenue growth on a quarterly or annual basis. In
addition, our annual or quarterly results of operations may not meet the
expectations of securities analysts or investors. If this happens, the price
of our stock would likely decrease. See "Risk Factors."
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 carryforwards and other deferred tax assets, as the future realization of
the tax benefit is not currently likely.
As of December 31, 1999, we had net operating loss carryforwards for federal
and state tax purposes of approximately $22.2 million and $5.4 million,
respectively. The state tax loss carryforwards begin to expire in 2004 and the
federal tax loss carryforwards begin to expire in 2011. Under the provisions
of the Internal Revenue Code, certain substantial changes in ownership may
limit the amount of net operating loss carryforwards that could be utilized
annually in the future to offset taxable income.
Liquidity and Capital Resources
From our inception until our initial public offering, we had financed our
operations primarily through the private placement of equity securities,
raising approximately $21.9 million. On October 6, 1999, Digital Insight
completed its initial public offering by issuing 4,025,000 shares of common
stock, including the exercise of the
27
<PAGE>
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 our
initial public offering, our mandatorily convertible preferred stock converted
to common stock and all warrants to purchase preferred stock became warrants
to purchase common stock.
At March 31, 2000, we had cash, cash equivalents and short-term investments
of $57.5 million. We have a $2.0 million equipment leasing line of credit with
a bank, under which $892,000 was outstanding at March 31, 2000. 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 $1.7 million for the year ended
December 31, 1997, $3.5 million for the year ended December 31, 1998, $10.0
million for the year ended December 31, 1999, and $18.2 million for the three
months ended March 31, 2000. The increases in cash used in operating
activities were primarily due to increases in the net loss. The net loss for
the three months ended March 31, 2000 included $12.7 million of costs related
to the merger with nFront.
Cash used in investing activities was $888,000 for the year ended December
31, 1997, $3.5 million for the year ended December 31, 1998, $37.3 million for
the year ended December 31, 1999, and $7.7 million for the three months ended
March 31, 2000. The increases in cash used in investing activities were
primarily due to infrastructure expansion to meet end user growth,
expenditures for computers and other equipment for our backup data center and
investment of our excess cash into short-term investments.
In May 2000, we obtained a $10 million secured line of credit with a bank.
As of June 30, 2000, we have not drawn any amount under this line of credit
and the full amount remains available to us. The interest rate on the line of
credit is equal to the prime rate. The line of credit is secured by all of our
assets.
We have no material commitments other than obligations under our credit
facilities and operating and capital leases, as well as facility leases in
California and Georgia. See note 13 of notes to our consolidated financial
statements included elsewhere in this prospectus. Future capital requirements
will depend upon many factors, including the timing of research and product
development efforts and the expansion of our marketing efforts. We expect to
continue to expend significant amounts on expansion of facility
infrastructure, ongoing research and development, computer and related data
center equipment, and personnel.
We believe that our cash, cash equivalents and short-term investment
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 12 months. We intend to invest our cash in
excess of current operating requirements in short-term, interest-bearing,
investment grade obligations.
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 the hedge accounting. We are
required to adopt SFAS No. 133 in the first quarter of 2001. To date, we have
not engaged in any hedging activity and do not expect adoption of this new
standard to have a significant impact on us.
In December 1999, the SEC issued Staff Accounting Bulletin 101, or 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 provides guidance
28
<PAGE>
for disclosure related to revenue recognition policies. In June 2000, the SEC
issued SAB 101B, which requires implementation of SAB 101 no later than
December 31, 2000. At this time, we are still assessing the impact of SAB 101
and its effect, if any, on our financial position and results of 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" had been interpreted to mean 1900, rather than 2000.
These problems were commonly referred to as the "Year 2000" problem.
The Year 2000 problem could affect 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.
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.
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BUSINESS
Overview
We are the leading provider of Internet banking services to banks, credit
unions and savings and loans, based on the number of financial institutions
and Internet banking end users we serve. We offer these financial institutions
cost-effective outsourced solutions, branded in their name, which include
Internet banking for their retail and commercial customers, a target marketing
program and data mining service to enable them to effectively sell additional
financial services to end users, and customized e-commerce portal web site
design and implementation services. We provide our solutions to our customers
over the Internet, from facilities hosted by us, which requires minimal
software installation at the customer site. This means of providing services
is commonly referred to as the application service provider, or ASP, model. As
of March 31, 2000, we had contracted with over 880 financial institution
customers. These customers had over 18.5 million potential end users. As of
June 30, 2000, over 1.1 million end users were actively using our Internet
banking application.
We provide financial institutions with comprehensive Internet solutions that
can be installed rapidly with a high degree of customization. Our solutions
are designed to be readily expandable, or scalable, as the number of users
grows. Our solutions also offer high levels of up-time availability and system
redundancy. We work closely with leading data processing vendors so that our
financial institution customers can leverage their investments 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 and the three months ended March 31, 2000, approximately
64.4% and 70.5%, respectively, of our revenues came from recurring fees.
Industry Background
The Internet has emerged as the fastest growing communications medium in
history and is dramatically changing the way businesses and individuals
communicate and conduct commerce. International Data Corporation, a leading
provider of research for the information technology industry, estimates that
the number of Internet users worldwide will increase from approximately 196
million in 1999 to 502 million by 2003.
The Internet is increasingly being utilized as a medium for financial
transactions and services, including banking, brokerage and insurance.
Personal finance was the most heavily used content channel on America Online
in the first quarter of 1999, with an average of 10.7 million user hours per
month, as compared to 10.1 million user hours for games, 7.7 million user
hours for news and 4.7 million user hours for merchandise shopping. In
particular, consumers, businesses and financial institutions are recognizing
that the Internet is a powerful and efficient medium for the delivery of
banking services, including home banking, bill payment and other services for
individuals, and cash management, payroll and other services for the
commercial customers of financial institutions. Consumers and small businesses
use Internet banking because of its 24-hour-a-day, 7-day-a-week convenience
and the ability to perform a wide range of transactions from any personal
computer or Internet-enabled device.
International Data Corporation estimates that there were approximately 3.4
million users banking over the Internet in the United States at the end of
1998 and projects that that number will increase to over 37 million by 2003.
In response to this demand, an increasing number of financial institutions are
offering Internet-based banking services. International Data Corporation
estimates the number of banks offering online banking services will increase
from 3,000 in 1999 to 15,845 by 2003, and that these services will be offered
primarily via the Internet. IDC estimates that 86% of all United States banks
and credit unions will offer online banking services by 2003, compared to 6%
at the end of 1998. Internet banking enables financial institutions to provide
one-stop shopping to their customers by collecting and consolidating financial
data from a number of sources, including
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all of the customer's accounts at that institution as well as information from
other Internet sources such as online brokerage and insurance firms. Internet
banking also allows a financial institution to collect and analyze customer
data for use in targeted marketing programs.
Early Internet banking initiatives were undertaken primarily by large
financial institutions. However, there are approximately 22,000 credit unions,
banks, and savings and loans in the United States with assets of less than $10
billion each. These community financial institutions hold approximately $2.2
trillion in deposits, or 56% of total U.S. customer deposits. As a result of
the adoption of Internet banking services by their larger competitors,
community financial institutions are finding themselves under increasing
pressure to offer Internet home banking and business banking services.
Financial institutions of all sizes are realizing that if they do not provide
these services, or if their offerings are inadequate, they risk losing
customers to other institutions, Internet-only banks, or locally competitive
financial institutions who do offer these services.
Some financial institutions have been slow to adopt Internet banking
services as a result of several factors. A financial institution undertaking
its own Internet banking service must develop or acquire the relevant
expertise, dedicate appropriate information technology resources, and spend
significant time and capital on the project. In addition, a financial
institution must work closely with its data processing vendor or vendors to
develop workable interfaces between its core systems and its Internet
solution.
In order to remain competitive, financial institutions require a low-cost,
outsourced Internet-based banking solution. The solution must be rapidly and
cost-effectively implemented, interface seamlessly with the financial
institution's data processing vendor or vendors, preserve and extend the
financial institution's own brand and provide suitable features to end users.
An Internet-based solution must also be secure, reliable and scalable.
Finally, the solution should provide a platform for target marketing of
financial services and broader e-commerce offerings. These offerings would
provide additional revenue opportunities and appeal to end users who are
increasingly using the Internet to research, evaluate and purchase a broad
array of products and services.
The Digital Insight Solution
We provide Internet banking solutions to financial institutions under an ASP
model. Our solution includes separate content-rich Internet banking
applications for financial institutions' retail and commercial banking
customers. AXIS Internet 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 business banking 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 offer target marketing programs to our customers. We also provide
customized web site design, implementation, maintenance and hosting services.
In addition, AXIS eCommerce, our customized Internet portal product, is
currently available, and AXIS Online Lending, our online lending product, is
in the final stages of development and we expect will be commercially
available by the third quarter of 2000.
Our solution offers the following benefits to financial institutions:
. Comprehensive and Customizable Solution. We provide full ASP support to
customers who desire such an environment, including application and web
site hosting, reporting tools and customized online account
presentations. Our Internet 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
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transactions conducted at the financial institution to be immediately
reflected on the web site. Batch processing systems transfer transaction
data between the Internet banking data center and the financial
institution's host system on a daily basis. Our ability to offer both
real time and batch processing capabilities allows us to interface with
whatever system the financial institution employs.
. 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
June 30, 2000, we have developed interfaces to data processing vendors
representing 43 separate systems, serving more than 14,000 financial
institutions. We are currently developing interfaces to 12 additional
systems provided by 10 separate data processing vendors that support more
than 2,500 financial institutions. By working directly with these
vendors, we can quickly and cost-effectively install our systems with
customers of these vendors that purchase our solutions. 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 99.68% during the twelve-month
period ended March 31, 2000. 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 ASP solution can be rapidly
implemented and represents an affordable alternative to internally
developed Internet banking services for financial institutions. Average
implementation times for our home banking application range from two to
four 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.
Most of our customers use our data center in an ASP arrangement. A
customer can also elect to 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 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.
. Multilingual Web Site Capabilities. With our template-based architecture,
financial institutions can choose to purchase bilingual versions of their
web sites. We currently offer a Spanish/English version and are
developing a Chinese/English version. The bilingual web site allows end
users to choose in what language they wish to view their transactions
over the Internet. A toggle function allows multiple users within a
single household to switch from one language to the other, based on
personal preference.
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The Digital Insight Strategy
Our objective is to increase our position as the leading provider of
Internet banking services to financial institutions as well as to provide
these institutions with a competitive platform which will permit them to
exploit e-commerce opportunities. To achieve this objective, we intend to:
. Increase the Number of Our Financial Institution Customers. Currently,
there are approximately 22,000 credit unions, banks and savings and
loans in the United States. As of December 31, 1999, less than 15% had
Internet banking. We intend to leverage our leading market position to
further penetrate the substantial market for an ASP Internet banking
solution. As of March 31, 2000 we had contracts with over 880 financial
institutions throughout the United States. We intend to attract
customers through one or more of our three core product offerings,
namely home banking, business banking and, when introduced, online
lending.
. Pursue Cross-Selling Opportunities. We currently enable our financial
institution customers to offer Internet banking solutions to their
retail and business banking end users, and we expect to offer online
lending capabilities in late 2000. For those of our customers that use
one or two of these capabilities, we believe that we have a significant
opportunity to sell them additional offerings as their needs evolve and
their customer base grows. We intend to cross-sell additional products
and services to our current customers.
. Increase End User Penetration. As of March 31, 2000, our Internet
banking customers had more than 18.5 million potential end users. For
the financial institutions who had fully deployed our solution by March
31, 1999, the aggregate percentage of their customers utilizing Internet
banking rose from 4.3% at March 31, 1999 to 8.3% at March 31, 2000. We
work with our financial institution customers to expand the number of
end users of our Internet banking and business banking services through
marketing assistance programs and sharing best practices. We intend to
continue to train the staff of financial institutions in marketing and
promoting Internet banking services using the information and skills we
have gained through our experience in Internet banking implementations.
. Increase the Number of Interfaces to Core Data Processing Systems. We
intend to increase the number of our interfaces to core data processing
systems to allow our products to interface with more financial
institutions. We currently interface with vendors providing services to
over 14,000 financial institutions and our goal is to continually
increase this coverage. A group of our engineers is dedicated to
developing interfaces to new data processing vendors.
. Broaden Product and Service Offerings. We plan to offer new and enhanced
products and services to attract additional traffic onto our network of
financial institutions and other business partners. We intend to enhance
the capabilities, or functionality, of our products to capitalize on the
trend of consumers to integrate financial services information and
transactions and to expand our target marketing capability. New
functionality and services are expected to include electronic bill
presentment, or the delivery of interactive electronic bills over the
Internet, online loan origination, online financial exchange, or OFX,
server capability and account aggregation.
. Pursue Strategic Merger and Acquisition Opportunities. We intend to
continue to pursue opportunities to merge with or acquire businesses
that can provide us with additional financial institution customers,
complementary technologies or services, or other benefits.
Products and Services
Our primary products are Internet retail 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. In addition,
AXIS eCommerce is currently available and AXIS Online Lending is in the final
stages of development and we expect it will be commercially available in the
third quarter of 2000.
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AXIS Internet Banking
Our AXIS Internet Banking application is an Internet-based system through
which 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 Internet 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.
. Online statements: End users can receive online account statements
through AXIS Internet Banking. Online statement capabilities help
financial institutions reduce operating expenses associated with paper
statements while enhancing their customers' experience with online
banking. Financial institution customers are generally able to access
their statements more quickly than with paper statements delivered
through traditional methods.
. Wireless banking: We recently introduced our wireless banking feature.
End users can access their account information through a variety of
wireless devices, including cellular phones, Wireless Access Protocol
devices and personal digital assistant devices. This service offers two-
way messaging, instant notifications and technology that allows viewer
customization. This service is expected to be available throughout the
United States.
AXIS Cash Management
Our AXIS Cash Management application provides a full range of Internet
business banking services which can be offered by our financial institution
customers to their commercial customers. 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: Businesses can pay bills electronically 24 hours a day,
seven days a week. Businesses 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.
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. 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.
AXIS Target Marketing
Our AXIS 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. AXIS 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 AXIS 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.
Our recently announced AXIS Advanced Target Marketing module will enhance
and expand the capabilities of our existing Target Marketing module, including
adding online survey capability and expanded targeting parameters. In
addition, our AXIS Advanced Target Marketing services will enable our
customers to gather additional data regarding end users in order to better
focus their marketing efforts. We expect AXIS Advanced Target Marketing to be
commercially available in the third quarter of 2000.
AXIS eCommerce
AXIS eCommerce allows our financial institution customers to provide a
financial portal through which they can provide a wide array of financial and
other revenue-generating products in a convenient, secure Internet
environment, fully integrated with the financial institution's own products
and content. Among the integrated financial services offered through AXIS
eCommerce are discount brokerage services, online mortgage services, direct
investing, auto shopping, credit card services, office supply procurement,
travel services and IRA servicing. AXIS eCommerce is designed to enable
financial institutions to establish their web site as the primary financial
destination for their customers. In some cases, financial institutions will
receive a share of the revenue generated through the transactions on its e-
commerce website.
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
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forms, financial calculators and links to other web sites. For customers with
an existing web site, our implementation services are focused on integrating
the Internet banking and/or business banking application into that site. In
both instances, financial institutions can elect to have us 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.
AXIS Online Lending
AXIS Online Lending is expected to enable financial institutions to provide
real-time decisioning over the Internet for consumer and real estate loans.
Utilizing HNC Software's Capstone Decision Manager, AXIS Online Lending is
expected to feature interfaces to major loan origination systems, online
credit bureau verification, comprehensive scoring with custom guidelines, pre-
qualification for real estate and consumer loans, and complete online
underwriting for consumer loans. In addition, AXIS Online Lending is expected
to simplify complex processes such as tracking applications and delivering
conditional approval or referral decisions. We expect AXIS Online Lending to
be commercially available in the third quarter of 2000.
Systems Architecture
Our applications are designed to be deployed in an ASP environment or a
resource-managed environment. In an ASP 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 both 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.
Data Centers
We currently provide most of our services out of two data centers located in
our headquarters in Calabasas, California and at our regional center in
Norcross, Georgia. All customers on our real time architecture are served
through the Calabasas data center; all batch customers are served through the
Norcross data center. We plan to integrate these two data centers to provide
system redundancy and emergency backup capability. We are also building a
third data center in Westlake Village, California, to which we plan to
relocate our Calabasas data center, and a fourth data center in Norcross,
Georgia, to which we plan to relocate our existing Norcross data center. When
fully integrated, these data centers will allow for greater scalability and
increased functionality by providing backup and failover functions in the
event of system interruption or shutdown involving one of the data centers.
Pending the full buildout of our redundant data centers in Westlake Village
and Norcross, which is expected to occur in the fourth quarter of 2000, we
have contracted to establish functional backup and failover capabilities for
our Internet banking applications with an outside data center provider in
Herndon, Virginia for the Calabasas facility and in Sterling, Virginia for the
Norcross facility.
Each of our data centers provides a controlled access environment that
includes a high capacity battery backup system, providing continuous power to
all production systems. In addition, a diesel power generator provides backup
power to each of our facilities in Calabasas and Norcross in the event of an
extended power outage.
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Customers
Our target market is the approximately 22,000 financial institutions in the
United States with assets of less than $10 billion each. Within our target
market, we focus on financial institutions that rely on one or more of the
data processing vendors with whom we have developed interfaces. As of June 30,
2000, we have interfaces with data processing vendors serving over 14,000
financial institutions. We are seeking to expand the number of data processing
vendors with whom we have interfaces.
As of March 31, 2000, we had contracts with over 880 financial institutions
to provide one or more of our products and services. Of these institutions,
767 have contracted with us for retail banking, with more than 950,000 active
users, and 282 have contracted with us for business banking, including
institutions that have also contracted with us for retail banking. Based on
publicly available regulatory submissions, as of March 31, 2000, our Internet
banking customers had more than 18.5 million potential end users.
The table below sets forth our largest Internet banking customers as of June
30, 2000 in the categories of banks/savings and loans, based on asset size,
and credit unions, based on the number of potential end users.
<TABLE>
<CAPTION>
Banks/Savings and Loans Credit Unions
----------------------- -------------
<S> <C>
Bank United The Golden 1 Credit Union
Roslyn Savings Bank Government Employees Credit Union
City National Bank of California Truliant Federal Credit Union
Bancorpsouth Teachers Credit Union
Flagstar Bank ESL Federal Credit Union
First Republic Bank Community Credit Union
Trust Company Bank Portland Teachers Federal Credit Union
Coastal Banc SSB South Carolina Federal Credit Union
Richmond County Savings Bank Mountain America Credit Union
First Source Bank North Island Federal Credit Union
</TABLE>
Third-Party Relationships
We have relationships with multiple vendors of core data processing software
and outsourced data processing services to financial institutions. Agreements
with these vendors allow us to interface to the financial institutions' host
systems to provide access to a financial institution's account data. As of
June 30, 2000, we have developed interfaces to the systems of major data
processing vendors that provide services to more than 14,000 financial
institutions. We are currently developing interfaces for 12 additional systems
provided by 10 different vendors. Among the data processing vendors with whom
we interface are: Aurum Technologies, Computer Services Inc., Credit Union
Consultants, Inc., EDS Cube, Fiserv divisions such as Aftech, CBS and USERS,
Helvetia de Caribe, Open Solutions Inc., Sparak Financial Systems, Inc. and
Symitar Systems, Inc. Among the interfaces under development are Data
Dimensions, Inc. and Modern Banking Systems. We also have an exclusive
marketing agreement with BISYS to resell our products to their customer base.
To deliver bill payment services, we have relationships with major providers
such as M&I Data Services and CheckFree. Our agreement with M&I Data Services,
as successor to Moneyline Express, has a one-year renewable term and provides
for payment of fees based on the number of customers, end users and bill
payment transactions. We also have relationships with third parties, including
the U.S. Treasury, DecisionOne, 800 Support, Intuit and Microsoft, to provide
other related functions to our customers.
Sales and Marketing
We utilize a direct sales model. As of June 30, 2000, our sales and
marketing staff consisted of 77 people, 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 to those accounts.
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Our typical sales cycle is approximately six months for new customers and
approximately two months for follow-on or upgrade sales to existing customers.
Our primary customer contact for new sales in smaller 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 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 or the direct manager of Internet banking
for that financial institution.
Our primary marketing efforts are focused on building brand awareness among
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 technology, 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.
In addition, we receive marketing benefits from endorsements and strategic
alliances. Following our acquisition of nFront, the American Bankers
Association, or ABA, agreed to extend its exclusive endorsement for Internet
banking to Digital Insight. The ABA endorsement, issued by the Corporation for
American Banking, or CAB, an ABA subsidiary, was extended to Digital Insight
after an extensive due diligence process which included an analysis of our
management, financial soundness, solution functionality, marketing
capabilities and customer service standards, as well as a review of other
national providers of Internet banking solutions. Our endorsement agreement
requires CAB to promote our Internet banking services to all ABA members in
the United States and permits us to display the "American Bankers Association-
Sponsored" logo in all of our marketing materials related to Internet banking
services. We provide CAB with a small percentage share of the revenues
received from ABA members who have become our customers since the effective
date of the endorsement agreement, with a guaranteed minimum payment of
$800,000 by the end of the third year. The endorsement agreement expires on
May 14, 2002 and is renewable for consecutive three year terms.
Product Development
As of June 30, 2000, our product development staff consisted of 112 software
developers and engineers. Their development efforts are focused on:
. Introduction of New Product Lines. AXIS eCommerce was recently made
available to our customers. We are in the final stages of completing our
AXIS Online Lending products. These products are in final testing on
certain of our clients' beta sites, where we are monitoring them for
quality assurance. We expect these products to be commercially available
in the third quarter of 2000.
. 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.
. Interfaces with Data Processing Vendors and Other Third Parties. We are
continuing to enhance and expand our interfaces to financial
institutions' core data processing systems and other third party systems,
such as online check imaging. 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.
38
<PAGE>
. Other Products and Services. We are working to expand our offerings to
include related financial service capabilities such as online insurance,
brokerage, credit history management, tax preparation and filing and
merchant services.
Competition
The market for Internet banking services is highly competitive, and we
expect that competition will intensify in the future. In the area of Internet
banking, we primarily compete with other companies that provide outsourced
Internet banking services to financial institutions, including FundsXpress,
HomeCom, Financial Fusion (a subsidiary of Sybase), NetZee, Online Resources,
Q-Up (a subsidiary of S1 Corporation) and Virtual Financial. Also, vendors
such as Corillian, Integrion and S1 Corporation, who primarily target the
largest financial institutions, occasionally compete with us for 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 Internet 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 Politzer &
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, 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 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
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<PAGE>
Act, the Fair Credit Reporting Act, the Bank Secrecy Act, the Real Estate
Settlement Procedure Act, the Bank Service Corporation Act, the Community
Reinvestment Act and other state and local laws and regulations. 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 web sites conform to their regulatory needs. We do not make
representations to customers regarding applicable regulatory requirements, and
rely on each customer to identify its regulatory issues and to adequately
specify appropriate responses. It is not possible to predict the impact that
any of these regulations could have on our business.
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, the
Examination Parity and Year 2000 Readiness for Financial Institutions Act and
the Gramm Leach Bliley Act of 1999. 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 or our customers 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 end user privacy, pricing, content,
characteristics, taxation 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 could 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 are 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
40
<PAGE>
and protect our proprietary technology. We generally enter into
confidentiality agreements with our employees, consultants, resellers,
customers and potential customers. We also limit access to and distribution of
our source code, and further limit the disclosure and use of other proprietary
information. We cannot assure that the steps taken by us in this regard will
be adequate to prevent misappropriation of our technology or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain or use our products or technology. In addition, the laws of some
foreign countries do not protect our proprietary rights to the same extent as
do the laws of the United States.
Employees
As of June 30, 2000, we had a total of 369 full-time employees, including
126 in operations, 77 in sales and marketing, 112 in research and development
and 54 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
Acquisition of nFront, Inc.
On February 10, 2000, we completed our acquisition of nFront, Inc., a
provider of Internet banking and related financial services to small to mid-
sized banks. Through the transaction, we expanded our client base, increased
the number of data processing vendor interfaces that we support and acquired
complementary technology. As a result of the acquisition, we now have
interfaces with data processing vendors providing coverage of more than 80% of
community financial institutions.
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 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.
Acquisition of 1View Network Corporation
On June 21, 2000, we completed our acquisition of 1View Network, an Internet
content aggregation company specializing in the development of systems and
services for web portals and financial institutions. 1View Network's products
center around two emerging industries: electronic bill presentment and payment
and
41
<PAGE>
electronic account information aggregation from disparate sources. With the
acquisition of 1View Network's product lines, we are now able to provide our
financial institutions with the technology to offer web-based personal
financial management products to their customers. These products allow
customers to consolidate and manage multiple accounts and financial
relationships in one convenient website and allow financial institutions to
provide consolidated bill presentment and payment to those customers.
Facilities
Our principal offices currently occupy approximately 46,000 square feet in
Calabasas, California, pursuant to a lease and sublease that expire in 2003.
One of our principal data centers is located in this facility. We have entered
into an agreement to lease approximately 52,130 square feet of office space in
Westlake Village, California. This facility is under construction and is
expected to be completed in August 2000. Under the lease agreement, which
expires March 31, 2005, we paid the first month's rent and are currently
paying only operating expenses. The base rent is abated through the end of
August 2000.
We also occupy properties in San Francisco, California, and Athens and
Norcross, Georgia under leases we assumed in connection with our recent
acquisitions. In addition, we currently lease approximately 58,672 square feet
of office space in Norcross, Georgia where we plan to relocate the Norcross
data center upon the completion of construction, which is estimated to take
place September 2, 2000. The lease expires on July 5, 2005.
We believe that suitable additional or alternative space will be available
in the future on commercially reasonable terms as needed.
Legal Proceedings
From time to time we may be involved in litigation arising in the normal
course of our business. We are not a party to any litigation, individually or
in the aggregate, that we believe would have a material adverse effect on our
financial condition or results of operations.
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<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The following table sets forth information regarding the executive officers,
directors and key employees of Digital Insight as of June 30, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
John Dorman................... 49 Chairman of the Board, Chief Executive
Officer and President
Brady L. "Tripp" Rackley III.. 29 Vice Chairman of the Board
Paul Fiore.................... 35 Executive Vice President, Co-Founder and
Director
Meheriar Hasan................ 41 Senior Vice President, Product Management
& Engineering
Kevin McDonnell............... 38 Senior Vice President, Finance &
Administration, Chief Financial Officer,
Secretary and Director
Steven Reich.................. 40 Senior Vice President, Sales & Marketing
Stephen Zarate................ 53 Senior Vice President, Operations and
Chief Information Officer
Vincent R. Brennan............ 37 Vice President, Sales
Daniel Jacoby................. 34 Vice President and Co-Founder
Steven S. Neel................ 30 Vice President, Operations Administration
Lois E. Peck.................. 47 Vice President, Customer Service
Paul D. Witman................ 39 Vice President, Engineering
John Jarve(1)(2).............. 44 Director
James McGuire(1)(2)........... 56 Director
Robert North(1)(2)............ 64 Director
</TABLE>
--------
(1) Member of the audit committee.
(2) Member of the compensation committee.
John Dorman. Mr. Dorman has been our President and Chief Executive Officer
and a director since October 1998. Mr. Dorman was appointed Chairman of the
Board in June 1999. Prior to his appointment as our President and Chief
Executive Officer, Mr. Dorman was Senior Vice President for Oracle Worldwide
Financial Services from August 1997 to October 1998. Prior to joining Oracle,
Mr. Dorman was founder, President, and Chief Executive Officer of Treasury
Services Corporation, known as TSC, a provider of management information
solutions to the financial services industry, from 1983 to 1997. TSC was sold
to Oracle in 1997. Prior to serving at TSC, Mr. Dorman spent 11 years in the
banking industry as a senior financial executive for Union Bank of California.
Mr. Dorman holds a BA degree in business administration and philosophy from
Occidental College and an MBA in finance from the University of Southern
California.
Brady L. "Tripp" Rackley III. Mr. Rackley has served as Vice Chairman of our
Board of Directors since February 2000, following the acquisition of nFront,
Inc. Mr. Rackley was the founder of nFront and served as its Chairman of the
Board and Chief Executive Officer since its inception in 1996. Prior to
forming nFront, Mr. Rackley served as Chief Operating Officer of LeapFrog
Technologies, Inc., a software development company, from October 1995 until
February 1996, and as Vice President, Development of Systeme Corp., a software
development company, from December 1992 until September 1995. Mr. Rackley
graduated from Georgia Institute of Technology with an industrial engineering
degree and has post-graduate studies in business and human computer interface
at the University of Central Florida.
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Paul Fiore. Mr. Fiore has served as our Executive Vice President since
October 1998. He is a co-founder of Digital Insight and has served as a
director since March 1997. From March 1997 to October 1998, Mr. Fiore was
President of Digital Insight and from July 1995 to March 1997, Mr. Fiore
served as President of Digital Insight LLC, the predecessor of Digital
Insight. Prior to co-founding Digital Insight LLC in July 1995, Mr. Fiore was
Vice President, Strategy & Plans for XP Systems, a provider of turn-key data
processing solutions for credit unions, from March 1994 to July 1995. Before
joining XP Systems, Mr. Fiore was Vice President and Chief Financial Officer
for AT&T Employees Federal Credit Union from October 1989 to March 1994. Prior
to joining AT&T, Mr. Fiore was a financial analyst for Lehman Brothers. Mr.
Fiore graduated from New York University with a BS degree in management and
finance.
Meheriar Hasan. Mr. Hasan has served as our Senior Vice President, Product
Management & Engineering since February 2000 and as our Vice President,
Product Management from July 1999 to February 2000. 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.
Kevin McDonnell. Mr. McDonnell has served as our Senior Vice President,
Finance & Administration since February 2000, as Chief Financial Officer and
Secretary since joining Digital Insight in March of 1999 and as a director
since May 2000. 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 has served as our Senior Vice President, Sales &
Marketing since February 2000, and as our Vice President of Sales and
Marketing from May 1998 to February 2000. Prior to joining Digital Insight,
Mr. Reich served as a management consultant for, 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 our Senior Vice President,
Operations since February 2000 and as our Chief Information Officer since
joining Digital Insight in 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.
Vincent R. Brennan. Mr. Brennan has served as our Vice President, Sales
since February 2000, following the merger with nFront. Mr. Brennan served as
Senior Vice President--Sales of nFront from March 1999 to February 2000. From
September 1998 until March 1999, he served as Senior Vice President--Sales and
Marketing of nFront. Prior to joining nFront, Mr. Brennan was employed by John
H. Harland Co. from June 1986 until September 1998, serving as Senior Vice
President--Sales, managing the financial markets division from December 1995
until September 1998 and as Vice President from April 1993 until December
1995. Mr. Brennan received a BA degree in business administration from the
University of Connecticut.
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<PAGE>
Daniel Jacoby. Mr. Jacoby is a co-founder of Digital Insight and has served
as Vice President since June 2000. He served as Vice President, New Ventures
Technology from February 2000 to June 2000. He served as our Vice President
and Chief Technology Officer from March 1997 to February 2000. 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.
Steven S. Neel. Mr. Neel has served as our Vice President, Operations
Administration since February 2000, following the merger with nFront. Mr. Neel
served as Senior Vice President--Operations of nFront from July 1996 to
February 2000. Prior to joining nFront, he served as Vice President--
Implementations of LeapFrog Technologies, Inc., a software development
company, from October 1995 until July 1996. Prior to joining LeapFrog
Technologies, Inc., Mr. Neel was a partner from April 1993 until October 1995
in an Atlanta-based consulting firm where he obtained experience in the
financial services industry. Mr. Neel received a BA degree in management from
the Georgia Institute of Technology.
Lois E. Peck. Ms. Peck has served as our Vice President, Customer Service
since July 2000 and as Director, Customer Service from February 2000 to July
2000. From February 1994 to February 2000, Ms. Peck served as Senior Vice
President, Retail Operations for Fidelity Federal Bank in Glendale,
California. Prior to joining Fidelity Federal Bank, Ms. Peck worked at Great
Western Bank from August 1980 to February 1994 in various positions, including
as Vice President, Checking and Savings Services from October 1989 to February
1994 and as Vice President, Retirement Plans Department from May 1984 to
October 1989. Ms. Peck received a BS degree in Psychology from Virginia
Commonwealth University and an MBA from California State University,
Northridge.
Paul D. Witman. Mr. Witman has served as our Vice President, Engineering
since June 2000. Prior to joining Digital Insight, Mr. Witman was with
Citicorp for 17 years, serving in various engineering and managerial
positions, most recently as Director, Global Delivery Systems. Mr. Witman
received a BS degree in Math and Computer Science from UCLA and an MS in
Computer Information Systems from Claremont Graduate School.
John Jarve. Mr. Jarve has been a director of Digital Insight since March
1997. He is a general partner and managing director of Menlo Ventures, a
venture capital firm, where he has been employed since 1985. Mr. Jarve
currently serves as a director of iBasis, Inc. and several privately held
companies, and also as a trustee of the Massachussetts Institute of
Technology. Mr. Jarve holds BS and MS degrees in electrical engineering from
the Massachusetts Institute of Technology and an MBA from the Graduate School
of Business at Stanford University.
James McGuire. Mr. McGuire has been a director of Digital Insight since
March 1997 and served as Chairman of the Board from our inception until June
1999. Mr. McGuire has served as President of NJK Holding Corporation, an
investment company, since 1992. Mr. McGuire currently serves as a director for
Sylvan Learning Systems, a provider of educational services. Mr. McGuire holds
a BBA in finance from the University of Notre Dame.
Robert North. Mr. North has been a director of Digital Insight since June
1997. Mr. North is currently Chairman of the Board of HNC Software, a provider
of predictive software solutions, and served as the Chief Executive Officer of
HNC Software from 1987 to January 2000. Mr. North is also a director of
Peerless Systems, a provider of software-based embedded imaging systems, and
Abacus Direct, a provider of information products and marketing research
services. Mr. North holds BS and MS degrees in electrical engineering from
Stanford University.
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<PAGE>
Board Composition
We currently have seven directors. Our board of directors is divided into
three classes, and each member serves for a staggered three-year term. The
Board is currently comprised of two Class I directors (Kevin McDonnell and
Brady L. "Tripp" Rackley III), two Class II directors (Paul Fiore and John
Jarve) and three Class III directors (John Dorman, James McGuire and Robert
North). At each annual meeting of stockholders, the successors to directors
whose terms will then expire will be elected to serve from the time of
election and qualification until the third annual meeting following election.
The terms of the Class I directors, Class II directors and Class III directors
will expire upon the election and qualification of successor directors at the
2003, 2001 and 2002 annual meeting of stockholders, respectively. Any
additional directorships will be distributed among the three classes so that,
as nearly as possible, each class will consist of one-third of our directors.
This classification of the board of directors may have the effect of delaying
or preventing changes in control or our company. Our directors may be removed
for cause by the affirmative vote of the holders of a majority of our common
stock.
Board Committees
There are two standing committees of our board of directors: the
compensation committee and the audit committee. Both committees consist of
Messrs. Jarve, McGuire and North. The compensation committee makes
recommendations regarding our stock option plans and all matters concerning
executive compensation. The audit committee approves our independent auditors,
reviews the results and scope of annual audits and any other accounting-
related services, and evaluates our internal controls.
Director Compensation
We do not pay any compensation to directors for serving in that capacity.
Directors are reimbursed for all reasonable expenses incurred by them in
attending board and committee meetings. The board of directors has the
discretion to grant options and rights to directors under our 1997 Stock Plan
and our 1999 Stock Plan. Employee directors are also eligible to participate
in our 1999 Employee Stock Purchase Plan. See "--Employee Benefit Plans."
Compensation Committee Interlocks and Insider Participation
The compensation committee consists of Messrs. Jarve, McGuire and North,
none of whom is an employee of Digital Insight. None of our executive officers
serves as a director or member of the compensation committee or other board
committee performing equivalent functions of another entity that has one or
more executive officers serving on the board of directors or compensation
committee of Digital Insight.
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<PAGE>
Executive Compensation
The following table sets forth information concerning the compensation
earned during the fiscal year ended December 31, 1999 by our Chief Executive
Officer and each of our other four most highly compensated executive officers
who earned more than $100,000 during the fiscal year ended December 31, 1999.
Summary Compensation Table
for Fiscal Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Annual ------------
Fiscal Year Compensation Securities All Other
Name and Principal Ended ----------------- Underlying Compensation
Position(1) December 31, Salary Bonus Options (2)
------------------ ------------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
John Dorman(3)...................... 1999 $225,000 $123,751 -- $627
Chairman, Chief Executive 1998 56,250 28,125 690,000 157
Officer and President
Stephen Zarate(4)................... 1999 145,833 96,251 286,285 627
Senior Vice President, Operations 1998 -- -- -- --
and Chief Information Officer
Kevin McDonnell(5).................. 1999 130,625 90,751 115,000 627
Senior Vice President, Finance & 1998 -- -- -- --
Administration, Chief Financial
Officer and Secretary
Steven Reich(6)..................... 1999 150,000 82,500 -- 627
Senior Vice President, 1998 96,635 25,000 115,000 366
Sales & Marketing
Paul Fiore(7)....................... 1999 145,000 79,751 -- 616
Executive Vice President 1998 140,000 20,000 -- 616
and Co-Founder
</TABLE>
--------
(1) This table excludes information for Brady L. "Tripp" Rackley III, Vice
Chairman, who joined Digital Insight in February 2000, and for Meheriar
Hasan, Senior Vice President, Product Management & Engineering, who joined
Digital Insight in July 1999. Mr. Rackley's annualized salary for 2000 is
$215,000. Mr. Hasan's annualized salary for 1999 was $180,000. Mr. Hasan
was also granted an option to purchase 90,000 shares of our common stock
in 1999.
(2) Consists of premiums paid by us for term life insurance.
(3) Mr. Dorman joined Digital Insight in October 1998. His annualized salary
for 1998 was $225,000.
(4) Mr. Zarate joined Digital Insight in March 1999. His annualized salary for
1999 was $175,000.
(5) Mr. McDonnell joined Digital Insight in March 1999. His annualized salary
for 1999 was $165,000.
(6) Mr. Reich joined Digital Insight in May 1998. His annualized salary for
1998 was $150,000.
(7) Mr. Fiore served as Digital Insight's President from inception until
October 1998.
Option Grants in Last Fiscal Year
The following table sets forth stock options and stock purchase rights
granted to each of the executive officers named in the Summary Compensation
Table during the fiscal year ended December 31, 1999. A total of 491,285
options and stock purchase rights were granted in 1999 under our 1997 Stock
Plan and 1999 Stock Plan. No stock appreciation rights were granted in 1999.
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Options and stock purchase rights were granted at an exercise price equal to
the fair market value of our common stock, as determined by the board of
directors, on the date of grant. In making this determination, the board
considered a number of factors, including:
. our historical and prospective future revenue and profitability;
. our cash balance and rate of cash consumption;
. the development and size of the market for our products;
. the status of our financing activities;
. the stability and tenure of our management team; and
. the breadth of our product offerings.
The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
reflect Digital Insight's projections or estimates of future stock price
growth.
<TABLE>
<CAPTION>
Potential Realizable
Individual Grants Value at Assumed
--------------------------------------------- Annual
Number of Percent of Rates of Stock Price
Securities Total Options Exercise Appreciation for
Underlying Granted to or Base Option Term
Options Employees in Price Per Expiration ---------------------
Name Granted Fiscal Year Share Date 5% 10%
---- ---------- ------------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
John Dorman............. -- -- % $ -- -- $ -- $ --
Stephen Zarate.......... 286,285 25.54 2.25 3/30/09 405,097 1,026,595
Kevin McDonnell......... 115,000 10.26 2.25 3/30/09 162,726 412,381
Steven Reich............ -- -- -- -- -- --
Paul Fiore.............. -- -- -- -- -- --
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values
The following table sets forth, for each of the executive officers named in
the Summary Compensation Table, certain information concerning the number and
value of shares acquired upon exercise of stock options and stock purchase
rights in 1999, as well as the number of shares subject to both exercisable
and unexercisable stock options at December 31, 1999. Also reported are values
for "in-the-money" options that represent the positive spread between the
respective exercise prices of outstanding stock options and the closing price
of our common stock on December 31, 1999.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised In-
Unexercised Options at the-Money Options at
Shares Fiscal Year-End Fiscal Year-End
Acquired on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John Dorman (1)......... 115,000 $ -- 167,708 407,292 $6,310,014 $15,324,362
Stephen Zarate.......... -- -- -- 286,285 -- 10,413,617
Kevin McDonnell......... -- -- -- 115,000 -- 4,183,125
Steven Reich (2)........ 28,750 244,375 16,770 69,480 639,356 2,648,925
Paul Fiore.............. -- -- -- -- -- --
</TABLE>
--------
(1) In February 1999, John Dorman, our Chairman, Chief Executive Officer and
President, exercised a stock purchase right to purchase an aggregate of
115,000 shares of common stock at a price of $1.00 per share. The fair
market value of such shares at the time of exercise was $1.00 per share.
(2) In June 1999, Steven Reich, our Senior Vice President, Sales & Marketing,
exercised options to purchase 28,750 shares of common stock at a price of
$0.50 per share. The fair market value of such shares at the time of
exercise was $9.00 per share.
48
<PAGE>
Employment and Change of Control Agreements
As of December 31, 1999, John Dorman, our Chairman, Chief Executive Officer
and President, had an outstanding option to purchase 575,000 shares of common
stock. Under the terms of Mr. Dorman's option agreement with Digital Insight,
25% of the shares subject to the option vested on October 13, 1999 and 1/48 of
the shares vest at the end of each calendar month thereafter, provided that
50% of the then unvested portion of the option will accelerate and immediately
vest if a change in control of Digital Insight occurs. As of December 31,
1999, 167,708 shares were vested under this option.
Three of our current officers, Kevin McDonnell, our Senior Vice President,
Finance & Administration, Chief Financial Officer and Secretary, Meheriar
Hasan, our Senior Vice President, Product Management & Engineering, and
Stephen Zarate, our Senior Vice President, Operations and Chief Information
Officer, were hired in 1999 and have been granted options to purchase shares
of our common stock. Under the terms of each of their option agreements with
Digital Insight, 50% of the then unvested portion of the options will
accelerate and immediately vest if a change in control of Digital Insight
occurs. As of December 31, 1999, none of the shares subject to these options
were vested.
Brady L. "Tripp" Rackley III and Digital Insight are parties to an
employment agreement dated February 10, 2000, which has the following terms:
. The agreement will terminate on February 10, 2001, but will be
automatically extended for an additional one year term, unless both
parties agree not to extend the agreement.
. Mr. Rackley will receive an annual base salary of $215,000. Mr. Rackley
will also be entitled to receive an annual bonus of up to 50% of his
base salary based on performance milestones to be mutually agreed upon
by Mr. Rackley and the board of directors.
. Mr. Rackley will be eligible to receive management stock option grants
consistent with options granted to other top executives in the company.
. If we terminate Mr. Rackley's employment for reasons other than cause or
if Mr. Rackley terminates his employment for good reason, he will be
entitled to receive 12 months of his base salary, plus bonus pro rated
through the date of termination, and continued health coverage and
benefits for 12 months.
. In order to receive severance payments and benefits, Mr. Rackley is
prohibited from competing with, or soliciting employees from, Digital
Insight for a period equal to the later of 12 months from the
termination date or two years from the date of the agreement.
Employee Benefit Plans
1997 Stock Plan
A total of 3,000,000 shares of common stock have been reserved for issuance
under our 1997 Stock Plan, as amended. Under the 1997 Stock Plan, as of
December 31, 1999, options to purchase 1,963,276 shares were outstanding,
966,104 shares of common stock had been purchased following exercises of stock
options and stock purchase rights, or SPRs, and 70,620 shares were available
for future grant. We do not plan to grant any additional options or SPRs under
this plan following this offering.
The 1997 Stock Plan provides for the grant of incentive stock options within
the meaning of Section 422 of the Internal Revenue Code, nonstatutory stock
options and SPRs to our employees, directors and consultants. Nonstatutory
stock options and SPRs may be granted to our employees, directors and
consultants. Incentive stock options may be granted only to employees. The
1997 Stock Plan is administered by the board of directors, or a committee
appointed by the board of directors, which determines the terms of options
granted, including the exercise price and the number of shares subject to each
option. The administrator also determines the schedule upon which options
become exercisable. Generally, initial options granted to an employee under
the 1997 Stock Plan vest 25% after the first year of employment and monthly
thereafter for 36 months, and subsequent grants to an employee vest monthly
over 48 months from the date of grant. The maximum term of options granted
under the 1997 Stock Plan is ten years.
49
<PAGE>
Options and SPRs granted under the 1997 Stock Plan are not transferable by
the optionee except by will or by the laws of descent or distribution, and
each option and SPR is exercisable during the lifetime of the optionee only by
that optionee. Options granted under the 1997 Stock Plan must generally be
exercised within three months after the end of optionee's status as our
employee, director or consultant, or within 12 months after the optionee's
termination by disability or death, to the extent the optionee is vested on
the date of termination. However, an option may not be exercised later than
the expiration of the option's term.
The 1997 Stock Plan provides that if we merge with or into another
corporation, or sell all or substantially all of our assets, each outstanding
option and SPR must be assumed or an equivalent option substituted for by the
successor corporation or a parent or subsidiary of the successor corporation.
If the outstanding options and SPRs are not assumed or substituted for, the
optionee will fully vest in and have the right to exercise the option or SPR
as to all of the optioned stock, including shares as to which it would not
otherwise be exercisable. The administrator shall notify the optionee that the
option or SPR shall be fully exercisable for a period of 15 days from the date
of the notice, and the option or SPR will terminate upon the expiration of
this period. If a dissolution or liquidation is proposed, the board of
directors, or any of its committees, in its discretion may accelerate the
vesting of any outstanding option or SPR before the effective date of the
proposed transaction.
1999 Stock Plan
Our 1999 Stock Plan was adopted by the board of directors in June 1999 and
was approved by the stockholders in July 1999. In February 2000, our
stockholders voted to increase the shares available for issuance under the
1999 Stock Plan. As a result, a total of 2,500,000 shares of common stock,
plus annual increases beginning on March 1, 2001, equal to the lesser of
750,000 shares, 5% of our shares on that date or a lesser amount determined by
the board of directors, are currently reserved for issuance under our 1999
Stock Plan. As of December 31, 1999, under the 1999 Stock Plan, options to
purchase 668,225 shares (including 589,225 shares in the nFront option plan as
of December 31, 1999) were outstanding and 828,132 shares were available for
future grants. Unless terminated sooner, the 1999 Stock Plan will terminate
automatically in June 2009.
The 1999 Stock Plan provides for the discretionary grant of incentive stock
options to employees and the grant of nonstatutory stock options and SPRs to
employees, directors and consultants.
The 1999 Stock Plan may be administered by the board of directors or a
committee of the board. The administrator has the power to determine the terms
of the options or SPRs granted, including:
. the exercise price of the option or SPR;
. the number of shares subject to each option or SPR;
. the exercisability thereof; and
. the form of consideration payable upon exercise.
In addition, the administrator has the authority to amend, suspend or
terminate the 1999 Stock Plan, provided that this action shall not impair the
rights of any optionee, unless mutually agreed upon in writing.
The exercise price of all incentive stock options granted under the 1999
Stock Plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of nonstatutory stock options and
SPRs granted under the 1999 Stock Plan is determined by the administrator, but
with respect to nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Internal Revenue Code, the exercise price must be at least equal to the fair
market value of the common stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of our outstanding capital stock, the exercise price of any incentive
stock option granted must be at least equal 110% of the fair market value on
the grant date and the term of this incentive stock option must not exceed
five years. The term of all other incentive stock options granted under the
1999 Stock Plan may not exceed ten years.
50
<PAGE>
In the case of SPRs, unless the administrator determines otherwise, the
restricted stock purchase agreement will grant us a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
service with us for any reason, including death or disability. The purchase
price for shares repurchased under the restricted stock purchase agreement
will be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to us. The repurchase option
will lapse at a rate determined by the administrator.
Options and SPRs granted under the 1999 Stock Plan are generally not
transferable by the optionee, except by will or the laws of descent or
distribution, and are exercisable during the lifetime of the optionee only by
that optionee. Options granted under the 1999 Stock Plan must generally be
exercised within three months after the end of optionee's status as an
employee, director or consultant of our company, or within 12 months after the
optionee's termination by disability or death, but in no event later than the
expiration of the option's term.
The 1999 Stock Plan provides that in the event of a merger of our company
with or into another corporation, or a sale of substantially all of our
assets, each outstanding option and SPR must be assumed or an equivalent
option substituted for by the successor corporation or a parent or subsidiary
of the successor corporation. If the outstanding options and SPRs are not
assumed or substituted for, the optionee will fully vest in and have the right
to exercise the option or SPR as to all of the optioned stock, including
shares as to which it would not otherwise be exercisable. The administrator
shall notify the optionee that the option or SPR shall be fully exercisable
for a period of 15 days from the date of the notice, and the option or SPR
will terminate upon the expiration of this period. In the event of our
proposed dissolution or liquidation, the board of directors, or any of its
committees, in its discretion may accelerate the vesting of any outstanding
option or SPR prior to the effective date of the proposed transaction.
1999 Stock Option Plan
In connection with the acquisition of 1View Network, our board of directors
approved the assumption of 1View Network's 1999 Stock Option Plan. A total of
452,075 shares of our common stock, stated on a converted basis, have been
reserved for issuance under the 1999 Stock Plan, of which 57,624 shares are
currently available for future grants. Upon the closing of the 1View Network
acquisition, the board amended the terms of the 1999 Stock Option Plan to
provide substantially the same terms as our 1999 Stock Plan.
1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan, or the 1999 Purchase Plan, was
adopted by the board of directors in June 1999 and was approved by the
stockholders in July 1999. A total of 300,000 shares of common stock has been
reserved for issuance under the 1999 Purchase Plan, plus annual increases
beginning on March 1, 2001, equal to the lesser of 300,000 shares, 2% of the
outstanding shares or a lesser amount determined by the board of directors. As
of June 30, 2000, 260,375 shares remain available under the 1999 Purchase
Plan.
The 1999 Purchase Plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, contains successive, overlapping twenty-four month
offering periods. The offering periods generally start on the first trading
day on or after May 1 and November 1 of each year and end on the last trading
day of that twenty-four month period. Each offering period contains four six-
month purchase periods. The first offering period commenced on the effective
date of our initial public offering and ends on the last trading day on or
before October 31, 2001.
Employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, the 1999 Purchase Plan excludes
from participation any employee who:
. immediately after the grant, owns stock and/or options to purchase stock
representing 5% or more of the total combined voting power or value of
all classes of our capital stock; or
. has rights to purchase stock under all of our employee stock purchase
plans that accrue at a rate that exceeds $25,000 worth of stock for each
calendar year.
51
<PAGE>
The 1999 Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 15% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions, excluding payments for overtime shift premium, incentive
compensation, incentive payments, bonus and any other compensation. The
maximum number of shares a participant may purchase during a single purchase
period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the 1999 Purchase Plan is 85% of the lower of the fair market
value of the common stock at the beginning or end of the offering period. In
the event the fair market value at the end of a purchase period is less than
the fair market value at the beginning of the offering period, the
participants will be withdrawn from the current offering period following
exercise and automatically re-enrolled in a new offering period. The new
offering period will use the lower fair market value as of the first date of
the new offering period to determine the purchase price for future purchase
periods. Participants may end their participation at any time during an
offering period, and they will be paid their payroll deductions credited to
their account without interest. Upon termination of employment a participant
will be deemed to have elected to withdraw from the 1999 Purchase Plan.
Payroll deductions credited to a participant's account and any rights
granted under the 1999 Purchase Plan are not transferable by a participant
other than by will, the laws of descent and distribution, or as otherwise
provided under the 1999 Purchase Plan. The 1999 Purchase Plan provides that,
in the event of our merger with or into another corporation or a sale of
substantially all of our assets, each outstanding option may be assumed or
substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering
period then in progress will be shortened and a new exercise date will be set.
In addition, in the event of a proposed dissolution or liquidation of us, the
offering period then in progress will be shortened and a new exercise date
will be set.
The board of directors has the authority to amend or terminate the 1999
Purchase Plan, except that this action may not make a change in any option
previously granted which may adversely affect the rights of any participant,
provided that the board of directors may terminate an offering period on any
exercise date if the Board determines that the termination of the 1999
Purchase Plan is in our best interests and our stockholders' best interests.
The 1999 Purchase Plan became effective on the consummation of our initial
public offering and will terminate ten years after the effective date, unless
sooner terminated by the board of directors.
401(k) Plan
We maintain a tax-qualified retirement and deferred savings plan for our
employees, commonly known as a 401(k) plan. The 401(k) plan provides that each
participant may contribute up to 20% of his or her pre-tax gross compensation
up to a statutory limit, which was $10,000 in calendar year 1999. Under the
401(k) plan, we may make discretionary matching contributions. We made no
contributions to the 401(k) plan in 1999.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. breach of their duty of loyalty to the corporation or its stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
52
<PAGE>
This limitation of liability does not apply to liabilities arising under the
federal or state securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
Our bylaws provide that we shall indemnify our directors and officers, to
the maximum extent permitted by Delaware law. We believe that indemnification
under our bylaws covers at least negligence and gross negligence on the part
of indemnified parties. Our bylaws also permit us to secure insurance on
behalf of any current or former officer, director, employee or other agent of
Digital Insight, or of another enterprise if serving at our request, for any
liability arising out of his or her actions in that capacity, regardless of
whether we would have the power to indemnify him or her against liability
under the provisions of Delaware law.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for any and all expenses such as federal, state, local or foreign taxes
imposed on them as a result of the actual or deemed receipt of any payments
under the indemnification agreement, judgments, fines, penalties and amounts
paid in settlement, as long as the settlement is approved in advance by us,
which approval shall not be unreasonably withheld, actually and reasonably
incurred by the officer or director in any action or proceeding, including any
action by or in the right of Digital Insight arising out of a person's
services as a director, officer, employee, agent or fiduciary of Digital
Insight, any subsidiary of Digital Insight or any other company or enterprise
to which the person provides services at our request. We believe that these
provisions and agreements are necessary to attract and retain qualified
persons as directors and executive officers.
At present, there is no pending litigation or proceeding involving a
director or officer in which indemnification is required or permitted, and we
are not aware of any threatened litigation or proceeding that may result in a
claim for indemnification.
53
<PAGE>
CERTAIN TRANSACTIONS
Equity Transactions
In March 1997, we sold an aggregate of 1,111,100 shares of our Series A
preferred stock at a price per share of $2.70 and issued warrants to purchase
up to 763,450 shares of Series B preferred stock. These warrants were
exercisable for an exercise price per share of $3.93 and have since expired
unexercised. In February 1998, we sold an aggregate of 2,305,475 shares of our
Series B preferred stock at a price per share of $3.47. In May 1999, we sold
an aggregate of 844,036 shares of our Series C preferred stock at a price per
share of $10.00. All shares of these series of preferred stock were converted
into shares of common stock upon consummation of our initial public offering
in October 1999. Listed below are those directors, executive officers and
stockholders who beneficially own 5% or more of our securities who
participated in these financings. We believe that the shares issued in these
transactions were sold at the then fair market value and that the terms of
these transactions were no less favorable than we could have obtained from
unaffiliated third parties.
<TABLE>
<CAPTION>
Series A Series B Series C Aggregate
Preferred Preferred Preferred Cash
Stockholder Stock Stock Stock Consideration
----------- --------- --------- --------- -------------
<S> <C> <C> <C> <C>
Entities affiliated with Menlo
Ventures(1)...................... 1,111,100 864,553 400,000 $9,999,969
HarbourVest Partners V-Direct
Fund, L.P........................ -- 1,440,922 101,328 6,013,280
Nasser J. Kazeminy and affiliated
entities(2)...................... -- -- 171,669 1,716,690
Edward Harris..................... -- -- 61,039 610,390
John Dorman....................... -- -- 40,000 400,000
Stephen Zarate.................... -- -- 30,000 300,000
Paul Fiore........................ -- -- 10,000 100,000
Daniel Jacoby..................... -- -- 10,000 100,000
Kevin McDonnell................... -- -- 10,000 100,000
Steven Reich...................... -- -- 10,000 100,000
</TABLE>
--------
(1) Consists of shares purchased by Menlo Ventures VII, L.P. and Menlo
Entrepreneurs Fund VII, L.P. John Jarve, a director of Digital Insight, is
a managing member of MV Management VII, LLC, the general partner of Menlo
Ventures VII, L.P. and Menlo Entrepreneurs Fund VII, L.P. Mr. Jarve
disclaims beneficial ownership of the shares held by these funds, except
to the extent of his proportionate pecuniary interest therein.
(2) Consists of shares purchased by Nasser J. Kazeminy, The Nasser J. Kazeminy
Irrevocable Trust and Yvonne P. Kazeminy-Mofrad Irrevocable Trust. Mr.
Kazeminy is co-trustee of the Nasser J. Kazeminy Irrevocable Trust and
Yvonne P. Kazeminy-Mofrad, the wife of Nasser J. Kazeminy, is the co-
trustee of the Yvonne P. Kazeminy Irrevocable Trust. Mr. Kazeminy has
shared voting authority with a co-trustee for the trust in his name. Mr.
Kazeminy does not hold voting or dispositive authority over the shares
held by the Yvonne P. Kazeminy Irrevocable Trust. Mr. Kazeminy disclaims
beneficial ownership of the shares held by these trusts.
Stock Purchase Rights
In October 1997, Paul Fiore, Executive Vice President, director and co-
founder of Digital Insight, exercised a stock purchase right to purchase an
aggregate of 309,250 shares of common stock and entered into a restricted
stock purchase agreement with respect to this exercise. Mr. Fiore paid the
$.30 exercise price per share for these shares by delivery of a full-recourse
promissory note bearing interest at the rate of 7.0% per annum. The note is
secured by the shares of common stock purchased by Mr. Fiore. As of December
31, 1999, $107,575 in unpaid principal and interest was outstanding in the
aggregate under the note.
In October 1997, Daniel Jacoby, Vice President and a co-founder of Digital
Insight, exercised a stock purchase right to purchase an aggregate of 309,250
shares of common stock and entered into a restricted stock purchase agreement
with respect to this exercise. Mr. Jacoby paid the $.30 exercise price per
share for these
54
<PAGE>
shares by delivery of a full-recourse promissory note bearing interest at the
rate of 7.0% per annum. The note is secured by the shares of common stock
purchased by Mr. Jacoby. As of December 31, 1999, $107,575 in unpaid principal
and interest was outstanding in the aggregate under the note.
In February 1999, John Dorman, our Chairman, Chief Executive Officer and
President, exercised a stock purchase right to purchase an aggregate of
115,000 shares of common stock. Mr. Dorman paid the $1.00 exercise price per
share in cash.
nFront Transactions
In January 1997, nFront entered into an agreement with a company owned by
certain principal stockholders of nFront, including nFront's chief executive
officer Brady L. "Tripp" Rackley III, whereby nFront would obtain certain
furniture and equipment in exchange for programming services. The parties
valued these assets at $83,986 and the obligation was satisfied upon the
provision of $9,901 and $74,085 of programming services in 1996 and 1997,
respectively.
In October 1997, nFront loaned a stockholder $20,000, which was repaid in
February 1998. The loan was unsecured and bore interest at 10.5% per annum.
During the period from October 1997 through January 1998, nFront borrowed
$90,000 from its chief executive officer, Brady L. "Tripp" Rackley III. The
loans were unsecured and bore interest at 10.5% per annum, and were repaid in
February 1998.
One of nFront's stockholders was a reseller of nFront's services. During the
year ended December 31, 1997, this reseller accounted for $136,872 of nFront's
revenues. There were no revenues from this reseller during the years ended
December 31, 1998 and 1999.
Other Transactions
In September 1999, we entered into a software license and customization
agreement with HNC Software Inc. A member of our board of directors is also
the Chairman of the Board and former Chief Executive Officer of HNC Software
Inc. We are obligated under the agreement to pay HNC Software Inc. a total of
$1.5 million in licensing and software customization fees.
We have entered into an indemnification agreement with each of our executive
officers and directors.
55
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of March 31, 2000, and as adjusted to
reflect the sale of the shares of common stock offered by this prospectus,
certain information with respect to the beneficial ownership of the common
stock as to:
. each person known by us to own beneficially more than 5% of the
outstanding shares of our common stock;
. each selling stockholder;
. each of the executive officers named in the Summary Compensation Table
above;
. each of our directors; and
. all of our directors and executive officers as a group.
The following table does not include:
. 3,252,143 shares of common stock subject to outstanding options as of
March 31, 2000;
. 1,248,727 shares of common stock that had been set aside for future
stock options as of March 31, 2000;
. 22,222 shares of common stock subject to an outstanding warrant as of
March 31, 2000;
. 300,000 shares of common stock that had been set aside for our employee
stock purchase plan; or
. 3,226,759 shares of common stock that had been set aside for announced
acquisitions.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named below have sole voting and investment power with
respect to all shares of common stock held by them.
Applicable percentage ownership in the table is based on 23,074,968 shares
of common stock outstanding as of March 31, 2000. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission. Shares of common stock subject to options that are presently
exercisable or exercisable within 60 days of March 31, 2000 are deemed
outstanding for the purpose of computing the percentage ownership of the
person or entity holding the options, but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person or
entity. This table assumes no exercise of the underwriters' over-allotment
option.
56
<PAGE>
Unless otherwise indicated below, each person or entity named below has an
address in care of Digital Insight's principal executive offices.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Number of Shares Shares Being ------------------------------
Name of Beneficial Owner Beneficially Owned Offered Before Offering After Offering
------------------------ ------------------ ------------ --------------- --------------
<S> <C> <C> <C> <C>
Nasser J. Kazeminy...... 1,059,692 115,000
AND
Exponential Partners II
Limited Partnership.... 1,986,413 215,000
--------- -------
Total for Nasser J.
Kazeminy and
Exponential Partners II
Limited
Partnership(1)......... 3,046,105 330,000 13.2% 10.8%
Entities affiliated with
Menlo Ventures(2)...... 2,375,653 356,348 10.3 8.0
John Jarve(2)........... 2,375,653 356,348 10.3 8.0
Brady L. "Tripp" Rackley
III(3)................. 1,737,000 238,051 7.5 5.9
Brady L. Rackley(4)..... 1,634,545 245,182 7.1 5.5
HarbourVest Partners V-
Direct Fund, L.P.(5)... 1,542,250 154,225 6.7 5.5
Essex Investment
Management Co.,
LLC(6)................. 1,451,254 -- 6.3 5.8
Noro-Moseley Partners
IV, L.P.(7)............ 1,322,446 176,392 5.7 4.5
Paul Fiore(8)........... 759,217 105,751 3.3 2.6
Daniel Jacoby(9)........ 759,217 105,751 3.3 2.6
John Dorman(10)......... 388,071 40,000 1.7 1.4
Derek Porter(11)........ 310,758 33,000 1.3 1.1
Steve Zarate(12)........ 116,414 7,500 * *
Steven Neel(13)......... 103,585 13,000 * *
James McGuire........... 89,649 8,800 * *
Steve Reich(14)......... 70,414 18,000 * *
Kevin McDonnell(15)..... 46,456 18,000 * *
Robert North(16)........ 34,531 -- * *
All directors and
executive officers as a
group
(10 persons)........... 5,620,320 792,450 23.9 18.8
</TABLE>
--------
* Less than 1%
(1) The address of record for Nasser J. Kazeminy is 760 Island Drive, Palm
Beach, Florida 33480. The address of record for Exponential Partners II
Limited Partnership is 400 South Fourth Street, Suite 1700, Las Vegas,
Nevada 89101. This information was obtained from a Schedule 13G filed
with the SEC on January 10, 2000, combined with additional information
from the transfer agent for our common stock. Nasser J. Kazeminy is the
sole limited partner of Exponential Partners II Limited Partnership and
the sole member of NJK Investments, LLC, which is the sole general
partner of Exponential Partners II Limited Partnership.
(2) The address of record for Menlo Ventures is 3000 Sand Hill Road, Building
4, Suite 100, Menlo Park, California 94025. The address of record for
John Jarve is Digital Insight Corporation, 26025 Mureau Road, Calabasas,
California 91302. This information was obtained from a Schedule 13G filed
with the SEC on February 1, 2000. Number of shares consists of 2,276,836
shares held by Menlo Ventures VII, L.P., and 98,817 shares held by Menlo
Entrepreneurs Fund VII, L.P. John Jarve, a director of Digital Insight,
is a managing member of MV Management VII, LLC, which is the general
partner of Menlo Ventures VII, L.P. and Menlo Entrepreneurs Fund VII,
L.P. Along with Thomas H. Bredt, Sonja L. Hoel, Douglas C. Carlisle, Mark
A. Siegel, Michael D. Laufer and H. Dubose Montgomery, the other six
managing members of MV Management VII, LLC, Mr. Jarve has shared voting
and dispositive authority over the shares held by Menlo Ventures and its
affiliates. Mr. Jarve and the other six managing members disclaim
beneficial ownership of the shares held by these entities except to the
extent of their proportionate pecuniary interests therein.
(3) The address of record for Brady L. "Tripp" Rackley III is Digital Insight
Corporation, 26025 Mureau Road, Calabasas, California 91302. Mr. Rackley
has served as Vice Chairman and director of Digital Insight since the
closing of our acquisition of nFront.
57
<PAGE>
(4) The address of record for Brady L. Rackley is 7075 Greatwood Trail,
Alpharetta, Georgia 30005. The amounts shown in the table include 38,358
shares beneficially owned by Mr. Rackley's wife, Katharine S. Rackley,
421,946 shares beneficially owned by The Katharine Rackley Grantor
Retained Annuity Trust and 421,946 shares beneficially owned by The Brady
Rackley Grantor Retained Annuity Trust. Mr. Rackley disclaims beneficial
ownership of shares held by Ms. Rackley.
(5) The address of record for HarbourVest Partners V-Direct Fund, L.P. is One
Financial Center, 44th Floor, Boston, Massachusetts 02111. As disclosed
on a Schedule 13G--Amendment No. 1 filed with the SEC on February 11,
2000, HarbourVest Partners, LLC is the managing member of HarbourVest
Partners V-Direct Associates L.L.C., which is the general partner of
HarbourVest Partners V-Direct Fund L.P. HarbourVest Partners V-Direct
Fund L.P. is the record and ultimate owner of 1,542,250 shares of our
common stock. HarbourVest Partners, LLC, in its capacity as managing
member of the general partner of HarbourVest Partners V-Direct Fund L.P.,
has the sole power to vote and dispose of the securities held by
HarbourVest Partners V-Direct Fund L.P. Messrs. Edward W. Kane and D.
Brooks Zug are Managing Members of HarbourVest Partners, LLC. As such,
they share the voting control of HarbourVest Partners, LLC. While neither
of them owns of record any shares of our company, as the result of their
positions, Messrs. Kane and Zug may be deemed to be beneficial owners of
and to have the power to exercise or to direct the exercise of voting
and/or dispositive power with respect to these shares. Messrs. Kane and
Zug disclaim beneficial ownership over any of these shares except to the
extent of their proportionate pecuniary interests therein.
(6) The address of record for Essex Investment Management Co., LLC is 125
High Street, 29th floor, Boston, Massachusetts 02110. As disclosed on a
Form 13F filed with the SEC on June 2, 2000, for the period ended March
31, 2000, Essex Investment Management Co., LLC had sole voting and
dispositive power with respect to 1,451,254 shares.
(7) The address of record for Noro-Moseley Partners IV, L.P. is 9 North
Parkway Square, 4200 Northside Parkway, Atlanta, Georgia 30327.
(8) Number of shares includes 309,250 shares of common stock issued upon
exercise of a stock purchase right, 212,609 shares of which are subject
to a repurchase option held by Digital Insight as of March 31, 2000.
(9) Number of shares includes 309,250 shares of common stock issued upon
exercise of a stock purchase right, 212,609 shares of which are subject
to a repurchase option held by Digital Insight as of March 31, 2000.
(10) Number of shares includes 233,071 shares of common stock issuable upon
exercise of options exercisable within 60 days of March 31, 2000. As of
June 30, 2000, Mr. Dorman held vested and unvested options to purchase
554,167 shares of common stock.
(11) As of June 30, 2000, Mr. Porter held unvested options to purchase 22,500
shares of common stock.
(12) Number of shares includes 86,414 shares of common stock issuable upon
exercise of options exercisable within 60 days of March 31, 2000. As of
June 30, 2000, Mr. Zarate held vested and unvested options to purchase
256,822 shares of common stock.
(13) As of June 30, 2000, Mr. Neel held unvested options to purchase 30,000
shares of common stock.
(14) Number of shares includes 31,664 shares of common stock issuable upon
exercise of options exercisable within 60 days of March 31, 2000. As of
June 30, 2000, Mr. Reich held vested and unvested options to purchase
146,250 shares of common stock.
58
<PAGE>
(15) Number of shares includes 36,456 shares of common stock issuable upon
exercise of options exercisable within 60 days of March 31, 2000. As of
June 30, 2000, Mr. McDonnell held vested and unvested options to purchase
141,459 shares of common stock.
(16) Number of shares consists of 29,531 shares of common stock issuable upon
exercise of options exercisable within 60 days of March 31, 2000. As of
June 30, 2000, Mr. North held vested and unvested options to purchase
45,500 shares of common stock.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common stock,
$.001 par value per share, and 5,000,000 shares of preferred stock, $.001 par
value per share.
The following summary does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of our restated certificate of
incorporation, which is included as an exhibit to the registration statement
of which this prospectus is a part, and by the provisions of applicable law.
Common Stock
As of June 30, 2000, we had outstanding 24,650,552 shares of common stock
and a warrant to purchase 35,000 shares of our common stock at an exercise
price of $40.5625 per share. After giving effect to the sale of common stock
offered hereby by us, there will be 26,800,552 shares of common stock
outstanding.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of common
stock have no preemptive rights or rights to convert their common stock into
any other securities. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and non-assessable, and the shares of common stock to be issued
upon completion of this offering will be fully paid and non-assessable.
Preferred Stock
Under our restated certificate of incorporation, the board of directors has
the authority, without further action by the stockholders, to issue up to
5,000,000 shares of preferred stock in one or more series and to fix the
designations, powers, preferences, privileges and relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater
than the rights of the common stock. The board, without stockholder approval,
can issue preferred stock with voting, conversion or other rights that could
adversely affect the voting power and other rights of the holders of common
stock. Preferred stock could thus be issued quickly with terms calculated to
delay or prevent a change in control of Digital Insight or make removal of
management more difficult. Additionally, the issuance of preferred stock may
have the effect of decreasing the market price of the common stock, and may
adversely affect the voting and other rights of the holders of common stock.
There are no shares of preferred stock outstanding and we have no plans to
issue any of the preferred stock.
Registration Rights
As of June 30, 2000, the holders of an aggregate of 14,661,266 shares of
common stock were entitled to rights with respect to the registration of
shares under the Securities Act. Under the terms of an investor rights
agreement, if we propose to register any of our securities under the
Securities Act, either for our own account or for the account of other
security holders exercising registration rights, these holders are entitled to
notice of this registration and are entitled to include their shares of common
stock in the registration. The rights are subject to conditions and
limitations, among them the right of the underwriters to limit the number of
shares included in the registration. Holders of common stock benefiting from
these rights may also require us to file a registration statement under the
Securities Act at our expense with respect to their shares of common stock,
and we are required to use our best efforts to effect this registration,
subject to conditions and limitations. Furthermore, the holders of
registration rights may require us to file additional registration statements
on Form S-3, subject to certain conditions and limitations.
60
<PAGE>
Delaware Anti-Takeover Law and Certain Charter and Bylaws Provisions
Provisions of our charter and bylaws may make it more difficult for a third
party to acquire, or may discourage a third party from attempting to acquire,
control of us. These provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock. These provisions
include:
. division of the board of directors into three separate classes;
. elimination of cumulative voting in the election of directors;
. prohibitions on our stockholders from acting by written consent and
calling special meetings;
. procedures for advance notification of stockholder nominations and
proposals; and
. the ability of the board of directors to alter our bylaws without
stockholder approval.
In addition, subject to limitations prescribed by law, our board of
directors has the authority to issue up to 5,000,000 shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The issuance of preferred stock, while providing flexibility
in connection with possible financings or acquisitions or other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of our outstanding voting stock.
These and other provisions contained in our charter and bylaws could have
the effect of delaying or preventing a change in control.
We are also subject to Section 203 of the Delaware General Corporation Law
which, subject to exceptions, prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder for a period of
three years following the date that a stockholder became an interested
stockholder, unless:
. prior to that date, the board of directors approved either the business
combination or the transaction which resulted in the stockholder
becoming an interested stockholder; or
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock outstanding at the time the transaction
commenced; or
. on or following that date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Fleet National
Bank. Fleet National Bank's address is 150 Royall Street, Canton,
Massachusetts 02021, and its telephone number is (781) 575-2000.
61
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Chase
Securities Inc., Deutsche Bank Securities Inc. and Friedman, Billings, Ramsey
& Co., Inc. are acting as representatives, have severally agreed to purchase,
and we and the selling stockholders have agreed to sell to them, the
respective number of shares of common stock set forth opposite the names of
the underwriters below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
Banc of America Securities LLC.....................................
Chase Securities Inc...............................................
Deutsche Bank Securities Inc.......................................
Friedman, Billings, Ramsey & Co., Inc. ............................
---------
Total............................................................ 4,000,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept
delivery of the shares of common stock offered by this prospectus are subject
to the approval of certain legal matters by their counsel and to other
conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered by this prospectus, other than those covered by
the over-allotment option described below, if any of these shares are taken.
Morgan Stanley Dean Witter Online, an affiliate of Morgan Stanley & Co.
Incorporated, is acting as a selected dealer in connection with the offering
and will be a distributor of shares of common stock over the Internet to its
eligible account holders.
The underwriting agreement provides that the underwriters will severally
agree to purchase shares of common stock from us at $ per share and propose
to make a public offering of those shares at the public offering price set
forth on the cover of this prospectus. If the shares are sold at the public
offering price, the underwriters will receive a fee, referred to as the
underwriting fee, of $ per share. The underwriting fee is % of the public
offering price.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ per share under the public
offering price. No underwriter will allow, and no dealer will reallow, any
concession to other underwriters or to other dealers. After the public
offering of the shares of common stock, the offering price and other selling
terms may from time to time be varied by the representatives of the
underwriters.
Pursuant to the underwriting agreement, we and the selling stockholders have
granted to the underwriters an option, exercisable for 30 days from the date
of this prospectus, to purchase up to an aggregate of 600,000 additional
shares of common stock at the public offering price set forth on the cover
page of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise this option solely for the purpose of covering over-
allotments, if any, made in connection with this offering of common stock. To
the extent this over-allotment option is exercised, each underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of additional shares of common stock as the number set forth
next to that underwriter's name in the preceding table bears to the total
number of shares of common stock set forth next to the names of all
underwriters in the preceding table.
62
<PAGE>
We, each of the directors and officers, and certain other stockholders and
optionholders of Digital Insight have each agreed that, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, during the period ending 90 days after the date of this
prospectus, we and they will not, directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of
common stock,
whether any transaction described above is to be settled by delivery of common
stock or these other securities, in cash or otherwise.
The restrictions described above do not apply to:
. the sale to the underwriters of the shares of common stock under the
underwriting agreement,
. the issuance by us of shares of common stock upon exercise of an option
or a warrant or the conversion of a security outstanding on the date of
this prospectus which is described in this prospectus,
. transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares,
. issuances of shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans as in existence on
the date of this prospectus, or
. the issuance by us of shares of common stock in connection with our
acquisition of AnyTime Access or upon exercise of options or warrants
that we assume in connection with that acquisition.
Our common stock is quoted on the Nasdaq National Market under the symbol
"DGIN."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
We, the selling stockholders and the underwriters have agreed to indemnify
each other against certain liabilities, including liabilities under the
Securities Act.
63
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Digital Insight by O'Melveny & Myers LLP, Los Angeles, California. Certain
legal matters in connection with this offering will be passed upon for the
underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California.
EXPERTS
The consolidated financial statements of Digital Insight Corporation as of
December 31, 1998 and 1999 and for each of the three years in the period ended
December 31, 1999 included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
Their report on the Digital Insight Corporation consolidated financial
statements as of December 31, 1998 and for the years ended December 31, 1997
and 1998 is based in part on the report of Ernst & Young LLP, independent
auditors for nFront, Inc. for the financial statements of nFront, Inc., as of
June 30, 1999 and for the years ended June 30, 1998 and 1999 (not presented
separately herein). The consolidated financial statements included in this
prospectus have been so included in reliance on the report of Ernst & Young
LLP on the financial statements of nFront, Inc., given on the authority of
such firm as experts in accounting and auditing.
The financial statements of 1View Network Corporation, as of December 31,
1999 and for the period from May 21, 1999 (Inception) through December 31,
1999, included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of AnyTime Access, Inc., as of December 31, 1999
and for the year then ended included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, and
have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The financial statements of AnyTime Access, Inc. at December 31, 1998 and
for the years ended December 31, 1998 and 1997, appearing in this prospectus
and registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
is included in reliance upon such report given on the authority of such firm
as experts in accounting and auditing.
64
<PAGE>
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
exhibits, schedules and amendments filed with this registration statement,
under the Securities Act with respect to the common stock to be sold under
this prospectus. This prospectus does not contain all the information set
forth in the registration statement. For further information about our company
and the shares of common stock to be sold in the offering, please refer to the
registration statement. Statements made in this prospectus concerning the
contents of any contract, agreement or other document filed as an exhibit to
the registration statement are summaries of the terms of contract, agreements
or documents and are not necessarily complete. Complete exhibits have been
filed with the registration statement.
The registration statement and exhibits may be inspected, without charge,
and copies may be obtained at prescribed rates, at the SEC's Public Reference
facility maintained by the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The registration
statement and other information filed with the SEC is available at the web
site maintained by the SEC on the worldwide web at http://www.sec.gov.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and therefore we file reports, proxy statements and
other information with the SEC. You can inspect and copy the reports, proxy
statements and other information that we file at the public reference
facilities maintained by the SEC at the Public Reference Room, and at the
SEC's regional offices located at 7 World Trade Center, Suite 1300, New York,
New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. You can also obtain copies of such material from the SEC's Public
Reference Room at prescribed rates. The SEC also makes electronic filings
publicly available on its web site. Our common stock is quoted on the Nasdaq
National Market under the trading symbol "DGIN." Reports, proxy and
information statements and other information about us may be inspected at the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Digital Insight Corporation
Report of Independent Accountants, PricewaterhouseCoopers LLP........... F-2
Report of Ernst & Young LLP, Independent Auditors....................... F-3
Consolidated Balance Sheets............................................. F-4
Consolidated Statements of Operations................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)............... F-6
Consolidated Statements of Cash Flows................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
Unaudited Pro Forma Condensed Consolidated Financial Information
Introduction to Unaudited Pro Forma Condensed Consolidated Financial
Information............................................................ F-22
Unaudited Pro Forma Condensed Consolidated Balance Sheet................ F-23
Unaudited Pro Forma Condensed Consolidated Statement of Operations...... F-24
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information............................................................ F-26
1View Network Corporation
Report of Independent Accountants, PricewaterhouseCoopers LLP........... F-28
Balance Sheets.......................................................... F-29
Statements of Operations................................................ F-30
Statements of Stockholders' Deficit..................................... F-31
Statements of Cash Flows................................................ F-32
Notes to Financial Statements........................................... F-33
AnyTime Access, Inc.
Independent Auditors' Report, Deloitte & Touche LLP..................... F-40
Report of Ernst & Young LLP, Independent Auditors....................... F-41
Consolidated Balance Sheets............................................. F-42
Consolidated Statements of Operations................................... F-43
Consolidated Statements of Shareholders' Deficit........................ F-44
Consolidated Statements of Cash Flows................................... F-45
Notes to Consolidated Financial Statements.............................. F-46
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Digital Insight Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Digital Insight Corporation and subsidiary at December 31, 1998 and 1999, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These consolidated
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 did not audit the financial statements of nFront, Inc. a
wholly-owned subsidiary, which statements reflect total assets as of December
31, 1998 of 38.7% and net loss constituting 17.6% and 43.8%, respectively, for
the years ended 1997 and 1998 of the related consolidated financial totals.
Those statements were audited by other auditors whose report has been
furnished to us, and our opinion insofar as it relates to data included for
nFront, Inc. is based solely on the report of the other auditors. 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.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
April 20, 2000
F-2
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
nFront, Inc.
We have audited the balance sheet of nFront, Inc. (the "Company") as of June
30, 1999 and the related statements of operations, redeemable convertible
preferred stock and stockholders' equity (deficit) and cash flows for the two
years in the period ended June 30, 1999 (not presented separately herein).
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 in accordance with auditing standards generally
accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of nFront, Inc. at June 30,
1999 and the results of its operations and its cash flows for the two years in
the period ended June 30, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Atlanta, Georgia
July 28, 1999
F-3
<PAGE>
DIGITAL INSIGHT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999 March 31, 2000
-------- -------- --------------
(unaudited)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ 4,886 $ 51,274 $ 25,282
Short-term investments................... -- 27,757 32,185
Accounts receivable, net of allowance for
doubtful accounts of $19, $86 and $184,
respectively............................ 2,404 7,741 8,975
Accumulated implementation costs......... 135 279 33
Other current assets..................... 242 3,781 2,312
-------- -------- --------
Total current assets................... 7,667 90,832 68,787
Property and equipment, net................ 4,198 12,363 15,400
Intangible assets, net..................... 53 -- --
Other assets............................... 1,254 293 521
-------- -------- --------
$ 13,172 $103,488 $ 84,708
======== ======== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
----------------------------------------------
Current liabilities:
Accounts payable......................... $ 1,627 $ 4,060 $ 4,021
Accrued compensation and related
benefits................................ 542 3,675 2,128
Current portion of capital lease
obligation and
long-term debt.......................... 849 360 355
Customer deposits and deferred revenue... 2,368 5,937 7,316
Other accruals........................... 2,312 2,879 3,739
-------- -------- --------
Total current liabilities.............. 7,698 16,911 17,559
Long-term portion of capital lease
obligation and
long-term debt............................ 390 393 998
-------- -------- --------
8,088 17,304 18,557
-------- -------- --------
Commitments and contingencies (Note 13)....
Redeemable convertible preferred stock:
$.001 par value, 9,763,641 and shares
authorized; 5,129,270 and zero shares
issued and outstanding, respectively;
liquidation preference of $15,227......... 15,092 -- --
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 shares authorized;
10,636,377, 23,018,715, and 23,074,968
shares issued and outstanding,
respectively............................ 11 23 23
Additional paid-in-capital............... 4,618 116,771 116,808
Notes receivable from stockholders....... (201) (216) (219)
Deferred stock-based compensation........ (2,732) (3,279) (2,950)
Accumulated deficit...................... (11,704) (27,115) (47,511)
-------- -------- --------
Total stockholders' (deficit) equity... (10,008) 86,184 66,151
-------- -------- --------
$ 13,172 $103,488 $ 84,708
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
DIGITAL INSIGHT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Implementation fees.......... $ 2,649 $ 5,578 $ 9,351 $1,196 $3,078
Service fees................. 2,405 7,617 16,894 2,979 7,341
------- ------- -------- ------- --------
Total revenues............. 5,054 13,195 26,245 4,175 10,419
------- ------- -------- ------- --------
Cost of revenues:
Implementation............... 1,607 3,090 5,548 892 2,380
Service...................... 1,134 4,716 10,056 1,812 3,709
------- ------- -------- ------- --------
Total cost of revenues..... 2,741 7,806 15,604 2,704 6,089
------- ------- -------- ------- --------
Gross profit................... 2,313 5,389 10,641 1,471 4,330
------- ------- -------- ------- --------
Operating expenses:
Sales, general and
administrative.............. 3,462 8,828 21,211 2,574 9,016
Research and development..... 1,786 3,747 7,668 1,362 3,718
Amortization of stock-based
compensation................ 151 844 1,221 234 329
Merger related expenses...... -- -- -- -- 12,658
------- ------- -------- ------- --------
Total operating expenses... 5,399 13,419 30,100 4,170 25,721
------- ------- -------- ------- --------
Loss from operations........... (3,086) (8,030) (19,459) (2,699) (21,391)
Interest and other income,
net........................... 111 282 1,441 44 995
------- ------- -------- ------- --------
Net loss....................... (2,975) (7,748) (18,018) (2,655) (20,396)
Accretion of redeemable
convertible preferred stock... (36) (273) (136) (68) --
------- ------- -------- ------- --------
Net loss attributable to common
stockholders.................. $(3,011) $(8,021) $(18,154) $(2,723) $(20,396)
======= ======= ======== ======= ========
Basic and diluted net loss per
share......................... $ (0.31) $ (0.80) $ (1.26) $ (0.26) $ (0.89)
======= ======= ======== ======= ========
Shares used to compute basic
and diluted net loss per
share......................... 9,651 10,055 14,389 10,347 22,803
======= ======= ======== ======= ========
Pro forma basic and diluted net
loss per share................ $ (1.00)
========
Shares used to compute pro
forma basic and diluted net
loss per share................ 18,216
========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
DIGITAL INSIGHT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands except share data)
<TABLE>
<CAPTION>
Total
Common Stock Additional Stockholders' Deferred Stockholders'
Members' ----------------- Paid-In Notes Stock-Based Accumulated Equity
Capital Shares Amount Capital Receivable Compensation Deficit (Deficit)
-------- ---------- ------ ---------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $ 27 4,603,050 $ 5 $ -- $ (1) $ -- $ 49 $ 80
Contribution of
capital............... 192 -- -- -- -- -- -- 192
Distribution........... (50) -- -- -- -- -- -- (50)
LLC loss from January
1, 1997 through March
17, 1997.............. (23) -- -- -- -- -- -- (23)
Conversion of members'
capital to Series A
preferred and common
stock................. (146) 5,000,000 5 -- 1 -- (1,030) (1,170)
Proceeds from the
issuance of common
stock................. -- 105,953 -- 300 -- -- -- 300
Stock options exercised
with note
receivable............ -- 618,500 1 185 (186) -- -- --
Accretion of redeemable
convertible preferred
stock................. -- -- -- (36) -- -- -- (36)
Deferred stock-based
compensation.......... -- -- -- 1,809 -- (1,809) -- --
Amortization of
deferred stock-based
compensation.......... -- -- -- -- -- 151 -- 151
Net loss............... -- -- -- -- -- -- (2,975) (2,975)
----- ---------- ---- -------- ----- ------- -------- -------
Balance at December 31,
1997................... -- 10,327,503 11 2,258 (186) (1,658) (3,956) (3,531)
Interest on
stockholder's notes... -- -- -- -- (15) -- -- (15)
Stock options
exercised............. -- 2,656 -- 1 -- -- -- 1
Warrants to purchase
Series A preferred
stock................. -- -- -- 64 -- -- -- 64
Proceeds from the
issuance of common
stock................. -- 306,218 -- 650 -- -- -- 650
Accretion of redeemable
convertible preferred
stock................. -- -- -- (273) -- -- -- (273)
Deferred stock-based
compensation.......... -- -- -- 1,918 -- (1,918) -- --
Amortization of
deferred stock-based
compensation.......... -- -- -- -- -- 844 -- 844
Net loss............... -- -- -- -- -- -- (7,748) (7,748)
----- ---------- ---- -------- ----- ------- -------- -------
Balance at December 31,
1998................... -- 10,636,377 11 4,618 (201) (2,732) (11,704) (10,008)
Interest on
stockholder's notes... -- -- -- -- (15) -- -- (15)
Stock options
exercised............. -- 344,573 -- 204 -- -- -- 204
Warrants to purchase
Series B preferred
stock................. -- -- -- 147 -- -- -- 147
Accretion of redeemable
convertible preferred
stock................. -- -- -- (136) -- -- -- (136)
Proceeds from the
issuance of common
stock................. -- 32,959 -- 504 -- -- -- 504
Deferred stock-based
compensation.......... -- -- -- 1,768 -- (1,768) -- --
Amortization of
deferred stock-based
compensation.......... -- -- -- -- -- 1,221 -- 1,221
Conversion of
redeemable convertible
preferred stock....... -- 5,953,306 6 23,473 -- -- -- 23,479
Issuance of common
stock in initial
public offerings...... -- 6,051,500 6 86,057 -- -- -- 86,063
Adjustment to conform
year-ends............. -- -- -- 136 -- -- 2,607 2,743
Net loss............... -- -- -- -- -- -- (18,018) (18,018)
----- ---------- ---- -------- ----- ------- -------- -------
Balance at December 31,
1999................... -- 23,018,715 23 116,771 (216) (3,279) (27,115) 86,184
Interest on
stockholders' notes
(unaudited)........... -- -- -- -- (3) -- -- (3)
Stock options exercised
and proceeds from the
issuance of common
stock (unaudited)..... -- 56,253 -- 37 -- -- -- 37
Amortization of
deferred stock-based
compensation
(unaudited) .......... -- -- -- -- -- 329 -- 329
Net loss (unaudited)... -- -- -- -- -- -- (20,396) (20,396)
----- ---------- ---- -------- ----- ------- -------- -------
Balance at March 31,
2000 (unaudited)....... $ -- 23,074,968 $ 23 $116,808 $(219) $(2,950) $(47,511) $66,151
===== ========== ==== ======== ===== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
DIGITAL INSIGHT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------- ------------------
1997 1998 1999 1999 2000
------- ------- -------- ------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss...................... $(2,975) $(7,748) $(18,018) $(2,655) $ (20,396)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................. 200 757 1,914 248 927
Amortization of deferred
stock-based compensation..... 151 844 1,221 234 329
Interest income on
stockholders' notes.......... -- (15) (15) (3) (3)
Loss from sale of property
and equipment................ -- 33 -- -- --
Adjustment to conform fiscal
year ends for pooled
acquisition.................. -- -- 3,275 1,793 --
Changes in operating assets
and liabilities:
Accounts receivable.......... (829) (1,425) (5,337) (519) (1,234)
Accumulated implementation
costs....................... (43) (64) (144) 28 246
Other current assets......... (125) 5 (3,539) (288) 1,469
Other assets................. (280) (58) 961 (188) (228)
Accounts payable............. 562 953 2,433 314 (39)
Accrued compensation and
related benefits............ 12 451 3,133 50 (1,547)
Customer deposits and
deferred revenue ........... 1,301 1,028 3,569 663 1,379
Other accruals............... 318 1,768 566 477 860
------- ------- -------- ------- ---------
Net cash used in operating
activities................. (1,708) (3,471) (9,981) 154 (18,237)
------- ------- -------- ------- ---------
Cash flows used in investing
activities:
Proceeds from sale of assets.. -- 29 -- -- --
Acquisition of property and
equipment.................... (608) (3,565) (9,576) (528) (3,274)
Disposal of equipment......... -- -- 69 -- --
Purchase of short-term
investments.................. -- -- (27,757) -- (4,428)
Acquisition of customer base.. (280) -- -- -- --
------- ------- -------- ------- ---------
Net cash used in investing
activities.................. (888) (3,536) (37,264) (528) (7,702)
------- ------- -------- ------- ---------
Cash flows provided by
financing activities:
Principal payments on lease
obligations.................. -- (273) (292) (49) (90)
Distribution.................. (50) -- -- -- --
Proceeds from issuance of
common stock................. 300 652 86,567 50 15
Proceeds from exercise of
stock options................ -- -- 204 124 22
Proceeds from issuance of
redeemable convertible
preferred stock.............. 5,483 8,000 8,440 -- --
Repurchase of redeemable
convertible preferred stock.. -- -- (200) -- --
Increase in stock offering
costs........................ -- (980) -- -- --
Proceeds from bank credit
facility..................... -- 1,836 -- -- --
Repayment of credit facility.. -- (750) (1,086) -- --
------- ------- -------- ------- ---------
Net cash provided by (used
in) financing activities.... 5,733 8,485 93,633 125 (53)
------- ------- -------- ------- ---------
Net increase (decrease) in cash
and cash equivalents.......... 3,137 1,478 46,388 (249) (25,992)
Cash and cash equivalents,
beginning of period........... 271 3,408 4,886 4,886 51,274
------- ------- -------- ------- ---------
Cash and cash equivalents, end
of period..................... $ 3,408 $ 4,886 $ 51,274 $ 4,637 $ 25,282
======= ======= ======== ======= =========
Supplementary disclosures of
cash flow information:
Cash paid during the year for
interest..................... $ 30 $ 42 $ 32 $ 9 $ 13
Non-cash financing activities:
Capital lease obligations
incurred..................... -- 293 892 493 682
Warrants issued in
conjunction with capital
lease........................ -- 64 147 147 --
Conversion of members'
capital to Series A
preferred and common stock... 1,170 -- -- -- --
Conversion of mandatorily
redeemable convertible
preferred stock to
common stock................. -- -- 23,479 -- --
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All information for the three months ended March 31, 1999 and 2000 is
unaudited)
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.
As more fully discussed in Note 3, the Company consummated its merger with
nFront, Inc. ("nFront") in February 2000. As the merger was accounted for as a
pooling of interests, all prior period financial statements have been restated
to include the results of nFront.
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.
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 after three months but within 12 months or less to be
short-term investments. Cash equivalents at December 31, 1999 consist of
money-market funds and commercial paper. 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 in government
obligations 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. All other short-term investments are classified as
available for sale.
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.
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
F-8
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 1999 and 2000 is
unaudited)
upon being placed in service. No amortization has been charged for the years
ended December 31, 1997, 1998, and 1999.
Revenue recognition
Recurring fees are recognized as services are provided, and relate to the
number of end users or end user transactions and for hosting and maintaining
web sites. One-time implementation fees consist of salaries for implementation
personnel and fees for third parties, including bill payment and data
processing vendors. These fees are recognized upon completion of
implementation and customer approval for the historical Digital Insight
customers and were recognized over the implementation period for historical
nFront customers as a result of differing contractual practices. These
contractual practices were conformed subsequent to the consummation of the
merger to require customer approval prior to recognition of revenue.
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 taxes are provided for 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.
Advertising expense
The Company expenses advertising costs as incurred. Advertising expense for
the years ended December 31, 1997, 1998 and 1999 and the three months ended
March 31, 1999 and 2000 amounted to $193,200, $514,950, $246,700, $8,400, and
$467,000, respectively.
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 other transactions resulting in changes from non-owner
sources that are required to be reported as other comprehensive income and the
Company's comprehensive losses equal its net losses.
F-9
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 1999 and 2000 is
unaudited)
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 redeemable convertible preferred stock.
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,
---------------------------
1997 1998 1999
-------- ------- --------
<S> <C> <C> <C>
Numerator:
Net loss attributable to common
stockholders............................... $(3,011) $(8,021) $(18,154)
-------- ------- --------
Weighted average shares................... 9,651 10,295 14,710
Weighted average unvested common shares
subject to repurchase.................... -- (240) (321)
-------- ------- --------
Denominator for basic and diluted
calculation................................ 9,651 10,055 14,389
-------- ------- --------
Net loss per share:
Basic and diluted......................... $ (0.31) $ (0.80) $ (1.26)
======== ======= ========
</TABLE>
The following table sets forth common stock equivalents that are not
included in the diluted net loss per share calculation above because to do so
would be antidilutive for the periods indicated:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Weighted average effect of common stock equivalents:
Redeemable convertible preferred stock.................. 1,463 4,782 3,827
Warrants................................................ -- 27 65
Unvested common shares subject to repurchase............ -- 240 321
Employee stock options.................................. 440 1,517 2,448
----- ----- -----
1,903 6,566 6,661
===== ===== =====
</TABLE>
F-10
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 1999 and 2000 is
unaudited)
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended December 31, 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 the Company's common
stock effective upon the closing of nFront's and Digital Insight's initial
public offerings in July and October of 1999, respectively, as if such
conversion occurred on January 1, 1999, 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 common share of
3,827,016 for the year ended December 31, 1999.
Intangible assets
Intangible assets include a non-compete agreement and an acquired customer
base. The non-compete agreement is being amortized over the term of the
agreement, which is two years. The acquired customer base is being amortized
over one year. All intangibles are amortized using the straight-line method.
Long-lived assets
In 1997, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed Of." The statement
requires the recognition of an impairment loss on a long-lived asset 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, 1997, 1998 and 1999 and for the three
months ended March 31, 2000, no customer accounted for 10% or more 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
F-11
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 1999 and 2000 is
unaudited)
areas. The Company maintains a provision for potential credit losses, and
write-offs of accounts receivable were insignificant during the years ended
December 31, 1997, 1998 and 1999.
The Company from time to time maintains a substantial portion of its cash
and cash equivalents in money market accounts with one financial institution.
The Company has not experienced any significant losses on its cash
equivalents.
Unaudited interim financial information
The interim consolidated financial statements of the Company for the three
months ended March 31, 1999 and 2000 included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations relating to interim financial
statements. In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position of the Company at March 31, 2000 and the results of its operations
and its cash flows for the three months ended March 31, 1999 and 2000.
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 provides guidance for disclosure related to revenue recognition policies.
In June 2000, the SEC issued SAB 101B, which requires implementation of SAB
101 no later than December 31, 2000. At this time, the Company is still
assessing the impact of SAB 101 and its effect, if any, on the Company's
financial position and results of operations.
2. RELATED PARTY TRANSACTIONS
The Company paid royalties totaling $37,000, $162,000, and $167,000 for the
years ended December 31, 1997, 1998 and 1999, respectively, to a business
partner who is also a stockholder.
The Company paid $60,000 and $169,000 for the years ended December 31, 1997
and 1998, 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 or subsequent
periods.
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.
F-12
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 1999 and 2000 is
unaudited)
In January 1997, nFront entered into an agreement with a company owned by
certain principal stockholders of nFront whereby nFront would obtain certain
furniture and equipment in exchange for programming services. The parties
valued these assets at $83,986 and the obligation was satisfied upon the
provision of $9,901 and $74,085 of programming services in 1996 and 1997,
respectively.
In October 1997, nFront loaned a stockholder $20,000, which was repaid in
February 1998. The loan was unsecured and bore interest at 10.5% per annum.
During the period from October 1997 through January 1998, nFront borrowed
$90,000 from its Chief Executive Officer. The loans were unsecured and bore
interest at 10.5% per annum, and were repaid in February 1998.
One of nFront's stockholders is a reseller of nFront's services. During the
year ended December 31, 1997, this reseller accounted for $136,872 of nFront's
revenues. There were no revenues from this reseller during the year ended
December 31, 1998 and 1999.
3. nFRONT BUSINESS COMBINATION
The Company consummated its Agreement and Plan of Merger (the "Agreement")
with nFront on February 10, 2000 in a stock-for-stock transaction which was
accounted for as a pooling of interests. Pursuant to the Agreement, all
outstanding shares of nFront stock were converted into 8,253,735 shares of the
Company's common stock and options to purchase 627,926 shares of the Company's
common stock. In connection with the merger, the Company recorded a one-time
charge in the quarter ended March 31, 2000 relating to non-recurring merger
costs of $12.7 million comprised of direct transaction costs and nonrecurring
redundant costs.
As the merger was accounted for as a pooling of interests, all prior periods
have been restated. nFront's historical year end was June 30, and as such the
restated consolidated financial statements as of December 31, 1998 and for the
years ended December 31, 1997 and 1998 combine the Digital Insight historical
financial statements for each period with the historical financial statement
of nFront as of June 30, 1999 and for the years ended June 30, 1998 and 1999.
The consolidated financial statements as of December 31, 1999 and for the year
then ended include the results of Digital Insight and nFront on a conformed
period basis. Accordingly, an adjustment for nFront's operating results for
the period of overlap from January 1, 1999 through June 30, 1999 has been
reflected as an adjustment to retained earnings in the 1999 consolidated
financial statements to conform the year ends. No adjustments have been
necessary to conform accounting policies of the entities. There were no
intercompany transactions requiring elimination in any period presented.
F-13
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 1999 and 2000
and as of March 31, 2000 is unaudited)
The following table shows the historical results of the Company and nFront
for the periods prior to the consummation of the merger of the two entities:
<TABLE>
<CAPTION>
Year Ended (1)
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Revenues:
Digital Insight................................ $ 3,972 $ 8,230 $ 17,506
nFront......................................... 1,082 4,965 8,739
------- ------- --------
$ 5,054 $13,195 $ 26,245
======= ======= ========
Net loss:
Digital Insight................................ $(2,452) $(4,355) $ (7,506)
nFront......................................... (523) (3,393) (10,512)
------- ------- --------
$(2,975) $(7,748) $(18,018)
======= ======= ========
</TABLE>
--------
(1) Year ended periods for Digital Insight are December 31, 1997, 1998, and
1999 and for nFront are June 30, 1998, and 1999 and December 31, 1999.
4. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
December 31,
------------ March 31,
1998 1999 2000
---- ------- ---------
<S> <C> <C> <C>
Short-term investments (in thousands):
U.S. government obligations......................... $ -- $ 7,498 $ 9,478
Commercial paper.................................... -- 18,262 12,838
Other............................................... -- 1,997 9,869
---- ------- -------
$ -- $27,757 $32,185
==== ======= =======
</TABLE>
Property and equipment includes the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------- March 31,
1998 1999 2000
------ ------- ---------
<S> <C> <C> <C>
Leasehold improvements........................... $ 314 $ 479 $ 650
Equipment and software........................... 3,428 11,916 14,002
Furniture and fixtures........................... 950 1,388 1,698
Construction in process.......................... 358 1,125 2,529
------ ------- -------
5,050 14,908 18,879
Less accumulated depreciation and amortization... (852) (2,545) (3,479)
------ ------- -------
$4,198 $12,363 $15,400
====== ======= =======
</TABLE>
Assets acquired under capitalized lease obligations are included in property
and equipment and totaled $213,000 and $1,105,000 with related accumulated
amortization of $85,000 and $272,000 at December 31, 1998 and 1999,
respectively.
F-14
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 1999 and 2000 is
unaudited)
5. 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 $128,000 and $180,000 at
December 31, 1998 and 1999, respectively.
6. 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, the Company had estimated net operating loss
carryforwards for federal and state purposes of approximately $22.2 million
and $5.4 million, respectively. Federal and state net operating loss
carryforwards begin to expire in the years 2011 and 2004, respectively.
Given its history of operating losses and potential limitations on the
utilization of net 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,
-----------------
1998 1999
------- --------
<S> <C> <C>
Net operating loss carryforwards.......................... $ 3,626 $ 8,104
Research credit carryforwards............................. 392 702
Stock compensation........................................ 398 879
Accruals, reserves and other.............................. 185 468
------- --------
Gross deferred tax assets................................. 4,601 10,153
------- --------
Deferred tax asset valuation allowance.................... (4,601) (10,153)
------- --------
Deferred tax assets....................................... $ -- $ --
======= ========
</TABLE>
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock at December 31, 1998 related to
Digital Insight consists of the following:
<TABLE>
<CAPTION>
Redemption
and
Issued and Liquidation
Authorized Outstanding Preference
---------- ----------- -----------
<S> <C> <C> <C>
Series A.................................. 1,668,166 1,645,944 $ 4,444,049
Series B.................................. 2,305,475 2,305,475 7,999,998
--------- --------- -----------
3,973,641 3,951,419 $12,444,047
========= ========= ===========
</TABLE>
F-15
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 1999 and 2000 is
unaudited)
In May 1999, the Company completed the private placement of 844,036 shares
of its Series C redeemable convertible preferred stock at a price per share of
$10.00. The holders of 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
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 addition, the redeemable
preferred stockholders had the option to require the Company to repurchase all
of the preferred shares upon written request of at least 60% of the preferred
holders. The shares were redeemable on the earlier of February 28, 2002 or 180
days following the date of election at a redemption price of $2.70 per share
for Series A, $3.47 per share for Series B and $10.00 per share for Series C,
which equal the original issuance price, plus all declared but unpaid
dividends, if any, through the redemption date. No dividends were declared.
In June 1999, the Company repurchased 20,000 shares of Series A redeemable
convertible preferred stock at $10.00 per share from a former executive
officer.
All shares of Series A, Series B and Series C redeemable convertible
preferred stock were converted into common stock upon the closing of the
Company's initial public offering in October 1999.
In May 1998, nFront sold 1,177,851 shares (adjusted for subsequent stock
splits) of Series A redeemable preferred stock for $2.12 per share. The
holders of the Series A redeemable preferred stock had the right to convert
all or part of the shares into common stock initially on a one-for-one basis
subject to certain conversion ratio adjustments should the price of the common
stock for any transaction subsequent to the financing be lower than $2.12 per
share or automatically if the Company were to complete an initial public
offering at a specified price per share of common stock which results in
aggregate gross proceeds of not less than $15.0 million. The redemption price
of the Series A redeemable preferred stock was equal to the original issuance
price plus a 10% compound annual rate of return. The carrying amount is being
adjusted by periodic accretions to the redemption amount. In connection with
the closing of the initial public offering in July 1999, the Series A
redeemable preferred stock was converted into common stock.
8. 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, 1997, 1998 and 1999 and the three months ended March
31, 2000 on the loans was $0, $15,000, $15,000 and $3,000, respectively. The
officers have the option to prepay all or any portion of the principal or
interest without penalty.
9. PREFERRED STOCK WARRANTS
In connection with certain borrowings in 1998 and 1999, the Company issued
warrants to purchase redeemable convertible preferred stock which, after
conversion, resulted in warrants to purchase 28,819 and 22,222 shares of
common stock for $3.47 and $2.70 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 $20,000 and $60,000 of interest expense associated with these
warrants for the years ended December 31, 1998 and 1999, respectively.
In connection with the Digital Insight'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.
F-16
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 1999 and 2000 is
unaudited)
During January 1998, the Company entered into a transaction with a reseller
of the Company's services to purchase 105,953 shares of the Company's common
stock at $2.82 per share in cash. In connection with this transaction, the
Company agreed to issue warrants to purchase shares of common stock based on
the number of customer contracts the reseller is able to enter into prior to
September 30, 1998 and January 1, 2000. The reseller did not enter into the
required number of contracts at these target dates and the agreement expired
with no warrants being issued.
10. 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 July 1999, nFront completed its initial public offering of 2,026,500
shares for net proceeds of approximately $31.6 million.
In October 1999, Digital Insight completed its initial public offering of
4,025,000 shares of common stock for net proceeds of approximately $54.5
million.
11. 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.
On 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-17
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 1999 and 2000 is
unaudited)
Deferred stock-based compensation
In the years ended December 31, 1997, 1998 and 1999, the Company recorded
deferred stock-based compensation expense of $1,809,000, $1,918,000 and
$1,768,000, 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
$151,000, $844,000 and $1,221,000 has been recognized as stock-based
compensation expense in the years ended December 31, 1997, 1998 and 1999,
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
Granted......................................... 721,844 $33.03-$83.88
nFront options assumed.......................... 627,926 $ 2.12-$75.99
Canceled........................................ (110,520) $ 0.30-$73.31
Exercised....................................... (29,383) $ 0.30-$ 9.00
--------- -------------
Balance March 31, 2000 (unaudited).............. 3,252,143 $ 0.30-$83.88
========= =============
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding at December 31, 1999 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>
F-18
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 1999 and 2000 is
unaudited)
nFront Stock Plan
In connection with the merger with nFront, the Company assumed the Stock
Option Plan of nFront, including incentive and non-statutory stock options to
purchase 627,926 shares of common stock with exercise prices ranging from
$2.12 to $75.99. The Company will not grant any additional options under the
nFront plan. Options granted under the nFront Plan are exercisable over a
maximum term of ten years from the date of grant and generally vest over
periods up to four years. The outstanding nFront options assumed were rolled
into the Company's 1999 Plan in February 2000.
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, 1997 and
1998, 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.......................................... $(18,018)
========
Pro forma............................................ $(20,757)
========
Net loss per share--basic and diluted:
As reported.......................................... $ (1.26)
========
Pro forma............................................ $ (1.44)
========
</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,
----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected life (years)...................................... 4 4 4
Risk free interest rate.................................... 5.8% 6.2% 5.5%
Expected volatility........................................ -- -- 80%
Dividend yield............................................. -- -- --
</TABLE>
12. 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.
In April 1998, nFront adopted a Retirement Plan (the "Plan"), which
qualifies under Section 401(k) of the Internal Revenue Code. Employees are
eligible to participate in the plan after three months of service.
Participants may contribute a percentage of their base salaries up to the
maximum allowable under Section 401(k). Company contributions made to the Plan
are discretionary. No employer contributions to the Plan have been made
through March 31, 2000 and the plan was subsequently terminated.
F-19
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 1999 and 2000 is
unaudited)
13. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under noncancelable
operating and capital leases with various expiration dates through 2005 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
approximately $123,000, $407,000 and $768,000 for the years ended December 31,
1997, 1998 and 1999, respectively. Rent expense for the three months ended
March 31, 1999 and 2000 amounted to $121,000 and $414,000, 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 $1,859
2001.................................................... 338 1,932
2002.................................................... 74 1,836
2003.................................................... -- 1,369
2004.................................................... -- 1,031
Thereafter.............................................. -- 489
---- ------
Total minimum lease payments............................ 813 $8,516
======
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.
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.
14. nFRONT LONG TERM DEBT
In August 1998, nFront entered into a loan agreement with a bank under which
it could borrow up to $750,000. Amounts borrowed under this agreement were
charged interest at the bank's prime rate plus 1% per annum. This loan was
repaid as of year end 1998.
On April 22, 1999, nFront executed a senior subordinated debenture agreement
with a stockholder under which nFront may borrow up to $5.0 million through
the earlier of April 22, 2000 or the closing of an underwritten public
offering of nFront common stock. Unanimous approval of the nFront's Board of
Directors is required to borrow in excess of $3 million under the agreement.
Interest on any borrowings under the senior subordinated debenture accrues at
the prime rate plus 3% per annum, payable at maturity. In exchange for the
F-20
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 1999 and 2000 is
unaudited)
stockholder's commitment under this agreement, nFront agreed to issue a three-
year warrant to purchase shares of common stock, the number of shares and
exercise price of which were determined by reference to the price per share in
the initial public stock offering. Based on the price per share in the initial
public stock offering, the warrant entitles the stockholder to purchase 28,950
shares of common stock at $17.27 per share. These warrants were exercised in
February 2000.
On June 17, 1999, nFront entered into a loan agreement which is comprised of
a $4,425,000 revolving line of credit (the "Line"), which bears interest at
LIBOR plus 1.75% per annum, and a $575,000 term loan (the "Loan"), which bears
interest at the Prime Rate plus 1.0% per annum. The Line is due on the
earliest to occur of: (i) December 31, 1999; (ii) the consummation of a public
offering of the Company's common stock; or (iii) 25 days after request for
payment made by the lender. The Loan is due in 26 equal monthly installments
commencing on July 15, 1999. The Line and the Loan are secured by
substantially all of the assets of nFront, and nFront used the proceeds of the
Loan to repay long-term debt. As of December 31, 1998, the outstanding
borrowings under the Line and the Loan were $512,000 and $572,946,
respectively. All outstanding borrowings under this loan agreement were repaid
in July 1999 using proceeds from the initial public stock offering. As a
result of the consummation of the initial public offering, this loan agreement
is no longer in existence.
15. SUBSEQUENT EVENTS (Unaudited)
On March 30, 2000, the Company entered into a definitive agreement to
acquire all of the outstanding stock of AnyTime Access, Inc., a company based
in Sacramento, California that provides services and solutions that allow
credit unions, banks and other financial institutions to outsource certain
customer communication and other administrative functions associated with
consumer loan originations. Upon the closing of the transaction, the Company
will issue approximately 2,126,759 shares of common stock and shares
underlying vested and unvested options and warrants to purchase common stock
with an estimated fair value of $112.7 million in exchange for all of the
outstanding shares, options and warrants of AnyTime Access. The acquisition is
to be accounted for using the purchase method of accounting and will be
consummated upon the receipt of necessary regulatory and shareholder
approvals, which are anticipated to be obtained by the third quarter of 2000.
On June 21, 2000, the Company completed its acquisition of the outstanding
shares of 1View Network Corporation ("1View"), a company based in San
Francisco that provides electronic information aggregation solutions for the
financial services market. The purchase price is comprised of $5 million in
cash and 1.1 million in shares of common stock and shares underlying vested
and unvested options to purchase common stock with an estimated fair value of
$38.7 million (excluding the value of 178,112 shares subject future
performance requirements) in exchange for all the outstanding shares and
options of 1View. The acquisition is to be accounted for using the purchase
method of accounting.
F-21
<PAGE>
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
On March 30, 2000, the Company entered into a definitive agreement to
acquire all of the outstanding stock 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 customer communication and other administrative functions
associated with consumer loan originations. Upon the closing of the
transaction, the Company will issue approximately 2,126,759 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 is to be
accounted for using the purchase method of accounting and will be consummated
upon the receipt of necessary regulatory and shareholder approvals, which are
anticipated to be obtained by July 2000. 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 we estimate 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 June 21, 2000, the Company completed its acquisition of the outstanding
shares 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 is comprised
of $5 million in cash and 1.1 million shares of common stock and shares
underlying options to purchase common stock in exchange for all the
outstanding shares and options of 1View. The Company's common stock to affect
the acquisition was valued at approximately $46.2 million. The acquisition is
to 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 approximated the historical cost basis and the preliminary
purchase price allocation indicates goodwill of approximately $36.9 million
which will be amortized on a straight-line basis over an estimated life of
three years. In addition, deferred compensation will be recorded in the amount
of $6.6 million for the unvested stock options to be issued 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
2000, the former majority stockholder of 1View has agreed to return to the
Company $3.0 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.
The following unaudited pro forma condensed consolidated balance sheet
assumes that the acquisitions of AnyTime Access and 1View were consummated as
of March 31, 2000 and present a preliminary allocation of the purchase prices
over historical net book values and are for illustrative purposes only. Actual
fair values will be based on financial information as of the acquisition
dates. The following unaudited pro forma consolidated statements of operations
for the year ended December 31, 1999 and the three months ended March 31, 2000
give effect to the acquisition as if it had occurred on January 1, 1999 and
2000, respectively.
The unaudited pro forma condensed consolidated financial information is not
necessarily indicative of the results that would have occurred if the
acquisitions had occurred as of the beginning of the periods presented and
should not be construed as being representative of future operating results or
financial position. The unaudited pro forma condensed consolidated financial
information should be read in conjunction with the Digital Insight
Corporation, AnyTime Access and 1View financial statements and notes thereto,
included elsewhere in this prospectus.
F-22
<PAGE>
DIGITAL INSIGHT CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of March 31, 2000
(in thousands)
<TABLE>
<CAPTION>
Digital 1View AnyTime
Insight Network Access, Pro Forma Pro Forma
Corporation Corporation Inc. Adjustments Consolidated
----------- ----------- -------- ----------- ------------
ASSETS
------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents
and short-term
investments.......... $ 57,467 $ 96 $ 3,500 $ (5,000)(1) $ 56,063
Accounts receivable,
net.................. 8,975 140 1,487 10,602
Accumulated
implementation
costs................ 33 -- -- 33
Other current assets.. 2,312 2 802 3,000 (1) 6,116
-------- ------- -------- -------- --------
Total current
assets............. 68,787 238 5,789 (2,000) 72,814
Property and equipment,
net.................... 15,400 337 3,195 18,932
Goodwill and intangible
assets................. -- -- -- 144,937 (2) 144,937
Other assets............ 521 118 166 805
-------- ------- -------- -------- --------
$ 84,708 $ 693 $ 9,150 $142,937 $237,488
======== ======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable...... $ 4,021 $ 280 $ 526 $ -- $ 4,827
Accrued compensation
and related
benefits............. 2,128 126 474 2,728
Current portion of
capital lease
obligation and long-
term debt............ 355 -- 1,002 1,357
Convertible notes and
loan payable......... -- 1,352 -- (1,352)(3) --
Customer deposits and
deferred revenue..... 7,316 50 -- 7,366
Other accruals........ 3,739 376 669 6,559 (4) 11,343
-------- ------- -------- -------- --------
Total current
liabilities........ 17,559 2,184 2,671 5,207 27,621
Long term portion of
capital lease
obligation and long-
term debt............ 998 -- 41 1,039
Stockholders' equity
(deficit):
Preferred stock....... -- -- 33,540 (33,540)(5) --
Common stock and
additional paid-in
capital.............. 116,831 5,908 4,302 (10,210)(5) 268,249
142,677 (6)
8,741 (7)
Notes receivable from
stockholders......... (219) -- (152) 152 (5) (219)
Deferred stock-based
compensation......... (2,950) (5,225) (992) 6,217 (5) (11,691)
(8,741)(7)
Accumulated deficit... (47,511) (2,174) (30,260) 32,434 (5) (47,511)
-------- ------- -------- -------- --------
Total stockholders'
equity (deficit)... 66,151 (1,491) 6,438 137,730 208,828
-------- ------- -------- -------- --------
$ 84,708 $ 693 $ 9,150 $142,937 $237,488
======== ======= ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
information.
F-23
<PAGE>
DIGITAL INSIGHT CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For The Three Months Ended March 31, 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
Digital Insight 1View Network AnyTime Access, Pro Forma Pro Forma
Corporation Corporation Inc. Adjustments Consolidated
--------------- ------------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Implementation fees... $ 3,078 $ -- $ -- $ -- $ 3,078
Service fees.......... 7,341 -- -- 7,341
Transaction fees and
other................ -- 621 3,013 3,634
-------- ------- ------- -------- --------
Total revenues........ 10,419 621 3,013 -- 14,053
-------- ------- ------- -------- --------
Cost of revenues:
Implementation........ 2,380 -- -- 2,380
Service............... 3,709 -- -- 3,709
Transaction fees and
other................ -- 333 2,052 2,385
-------- ------- ------- -------- --------
Total cost of
revenues............. 6,089 333 2,052 -- 8,474
-------- ------- ------- -------- --------
Gross profit............ 4,330 288 961 -- 5,579
-------- ------- ------- -------- --------
Operating expenses:
Sales, general and
administrative....... 9,016 762 1,447 11,225
Research and
development.......... 3,718 299 917 4,934
Amortization of stock-
based compensation... 329 376 57 1,914 (8) 2,676
Amortization of
goodwill and
intangibles.......... -- -- -- 8,477 (9) 8,477
Merger related
expenses............. 12,658 -- -- 12,658
-------- ------- ------- -------- --------
Total operating
expense.............. 25,721 1,437 2,421 10,391 39,970
-------- ------- ------- -------- --------
Loss from operations.... (21,391) (1,149) (1,460) (10,391) (34,391)
Interest and other
income, net............ 995 (13) 19 -- 1,001
-------- ------- ------- -------- --------
Net loss ............... $(20,396) $(1,162) $(1,441) $(10,391) $(33,390)
======== ======= ======= ======== ========
Basic and diluted net
loss per share......... $ (0.89)
========
Shares used in computing
basic and diluted net
loss per share......... 22,803
========
Pro forma basic and
diluted net loss per
share.................. $ (1.31)(10)
========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 25,420 (10)
========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
information.
F-24
<PAGE>
DIGITAL INSIGHT CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For The Year Ended December 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Digital Insight 1View Network AnyTime Access, Pro Forma Pro Forma
Corporation Corporation Inc. Adjustments Consolidated
--------------- ------------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Implementation fees... $ 9,351 $ -- $ -- $ -- $ 9,351
Service fees.......... 16,894 -- -- 16,894
Transaction fees and
other................ -- 976 10,384 11,360
-------- ------- ------- -------- --------
Total revenues.......... 26,245 976 10,384 -- 37,605
-------- ------- ------- -------- --------
Cost of revenues:
Implementation........ 5,548 -- -- 5,548
Service............... 10,056 -- -- 10,056
Transaction fees and
other................ -- 577 7,978 8,555
-------- ------- ------- -------- --------
Total cost of revenues.. 15,604 577 7,978 -- 24,159
-------- ------- ------- -------- --------
Gross profit............ 10,641 399 2,406 -- 13,446
-------- ------- ------- -------- --------
Operating expenses:
Sales, general and
administrative....... 21,211 898 7,187 29,296
Research and
development.......... 7,668 216 4,641 12,525
Amortization of stock-
based compensation... 1,221 293 34 7,655 (8) 9,203
Amortization of
goodwill and
intangibles.......... -- -- -- 33,908 (9) 33,908
-------- ------- ------- -------- --------
Total operating
expense................ 30,100 1,407 11,862 41,563 84,932
-------- ------- ------- -------- --------
Loss from operations.... (19,459) (1,008) (9,456) (41,563) (71,486)
Interest and other
income, net............ 1,441 (4) (144) -- 1,293
-------- ------- ------- -------- --------
Net loss ............... (18,018) (1,012) (9,600) (41,563) (70,193)
Accretion on redeemable
convertible preferred
stock.................. (136) -- -- -- (136)
-------- ------- ------- -------- --------
Net loss attributable to
common stockholders.... $(18,154) $(1,012) $(9,600) $(41,563) $(70,329)
======== ======= ======= ======== ========
Basic and diluted net
loss per share......... $ (1.26)
========
Shares used in computing
basic and diluted net
loss per share......... 14,389
========
Pro forma basic and
diluted net loss per
common share........... $ (1.00) $ (3.38)(10)
======== ========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 18,216 20,833 (10)
======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
information.
F-25
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
(Dollars in thousands)
The pro forma adjustments give effect to the acquisitions of 1View and
AnyTime Access as if the transactions were consummated on March 31, 2000. The
estimated fair value per share of the Digital Insight stock assumed to be
issued to effect the acquisitions was approximately $42 per share and $53 per
share for 1View and AnyTime Access, respectively. The fair values were based
on the average trading price for the public announcement dates and the four
days prior to and after those dates. The pro forma balance sheet adjustments
are as follows:
(1) To reflect the $5,000 cash consideration paid for 1View. $3,000 of the
cash consideration was deposited in escrow and is contingent upon certain
performance goals that must be achieved by September 2000 and will be
accounted for as contingent consideration upon resolution of the
performance goals.
(2) To reflect goodwill and intangible assets created as a result of the
acquisitions as follows:
<TABLE>
<CAPTION>
AnyTime
1View Access Total
------- -------- --------
<S> <C> <C> <C>
Estimated fair value of the assumed issuance
of 629,313 (excluding 178,112 contingent
shares in escrow) and 1,987,557 shares of the
Company's common stock for the acquisitions
of 1View and AnyTime Access, respectively.... $26,452 $105,341 $131,793
Estimated fair value of 136,183 and 97,837
shares underlying vested stock options (net
of estimated proceeds on exercise) assumed
upon the acquisitions of 1View convertible
notes and AnyTime Access, respectively....... 5,720 5,164 10,884
Additional cash consideration excluding cash
in escrow ................................... 2,000 -- 2,000
Direct transaction costs ..................... 2,600 3,959 6,559
Conversion of 1View convertible notes and
shareholder loan............................. (1,352) -- (1,352)
Net assets acquired........................... 1,491 (6,438) (4,947)
------- -------- --------
Estimated goodwill and intangibles created.... $36,911 $108,026 $144,937
======= ======== ========
</TABLE>
(3) To reflect conversion of 1View convertible notes and loan from shareholder
upon consummation of the acquisition of 1View.
(4) To reflect the accrual of the estimated direct acquisition costs of $2,600
and $3,959 related to the acquisitions of 1View and AnyTime Access,
respectively.
(5) To eliminate the historical stockholders equity of 1View and AnyTime
Access.
(6) To reflect the increase in additional paid-in capital for the step-up in
basis and deferred stock-based compensation related to the acquisitions as
follows:
<TABLE>
<CAPTION>
AnyTime
1View Access Total
------- -------- --------
<S> <C> <C> <C>
Estimated fair value of the assumed issuance of
shares underlying the Company's common stock and
vested stock options for the 1View and AnyTime
Access acquisitions ............................. $32,172 $110,505 $142,677
Estimated fair value of 156,376 and 41,365 shares
underlying vested stock options (net of estimated
proceeds on exercise) assumed upon acquisitions
of 1View and AnyTime Access, respectively,
recorded as deferred stock-based compensation.... 6,568 2,173 8,741
------- -------- --------
$38,740 $112,678 $151,418
======= ======== ========
</TABLE>
(7) To reflect deferred stock-based compensation for the assumed issuance of
shares underlying unvested stock options for 1View and AnyTime Access.
F-26
<PAGE>
DIGITAL INSIGHT CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION--(Continued)
(Dollars in thousands)
The pro forma statement of operations adjustments to give effect to the
acquisitions of AnyTime Access and 1View as if the acquisitions occurred on
January 1, 1999 and 2000, respectively, are as follows:
(8) To reflect the amortization of stock-based compensation created as result
of the acquisitions as follows:
<TABLE>
<CAPTION>
Amortization
For The Three
Annual Months Ended
Amortization March 31, 2000
------------ --------------
<S> <C> <C>
1View............................................ $6,568 $1,642
AnyTime Access................................... 1,087 272
------ ------
$7,655 $1,914
====== ======
</TABLE>
(9) To reflect the amortization of goodwill and intangible assets created as a
result of the acquisitions as follows:
<TABLE>
<CAPTION>
Estimated
Amortization
Goodwill and Estimated Estimated For The Three
Intangible Aggregate Annual Months Ended
Assets Life Amortization March 31, 2000
------------ --------- ------------ --------------
<S> <C> <C> <C> <C>
1View..................... $ 36,911 3 years $12,303 $3,076
AnyTime Access............ 108,026 5 years 21,605 5,401
-------- ------- ------
$144,937 $33,908 $8,477
======== ======= ======
</TABLE>
(10) To reflect the pro forma basic and diluted net loss per common share
assuming the issuance of 629,313 (excluding 178,112 contingent shares in
escrow) and 1,987,557 shares of common stock to effect the acquisitions
of 1View and AnyTime Access, respectively. Vested and unvested stock
options were excluded from the computation as they have an antidilutive
effect.
F-27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Director of
1View Network Corporation (A Development Stage Enterprise)
In our opinion, the accompanying balance sheet of 1View Network Corporation
(A Development Stage Enterprise) (the "Company") as of December 31, 1999, and
the related statements of operations, stockholders' deficit and cash flows for
the period from commencement of operations (May 21, 1999) through December 31,
1999 present fairly, in all material respects, the financial position of the
Company as of December 31, 1999, and the results of its operations and its
cash flows for the period from commencement of operations (May 21, 1999)
through December 31, 1999, 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 audit. We conducted our
audit 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 audit provides a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
June 23, 2000
F-28
<PAGE>
1VIEW NETWORK CORPORATION
(A Development Stage Enterprise)
BALANCE SHEETS
<TABLE>
<CAPTION>
December March 31,
31, 1999 2000
----------- -----------
(Unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash................................................ $ 455,377 $ 96,442
Accounts receivable................................. 451,050 140,100
Other current assets................................ 1,637 1,637
----------- ----------
Total current assets.............................. 908,064 238,179
Furniture and equipment, net.......................... 211,124 336,678
Other assets.......................................... 118,500 118,500
----------- ----------
$ 1,237,688 $ 693,357
=========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable.................................... $ 248,299 $ 279,827
Accrued liabilities................................. 123,160 376,110
Accrued compensation and related expenses........... 120,116 125,859
Loan payable--stockholder........................... 60,374 80,651
Deferred revenue.................................... 384,000 50,000
----------- ----------
Total current liabilities......................... 935,949 912,447
----------- ----------
Convertible notes..................................... 1,013,250 1,271,213
Commitments and contingencies (Note 9)................
Stockholders' deficit:
Common stock, $0.001 par value; 5,000,000 shares
authorized; 3,051,333 and 3,124,041 shares issued
and outstanding at December 31, 1999 and March 31,
2000 (unaudited), respectively..................... 3,051 3,124
Additional paid-in capital.......................... 5,358,093 5,905,470
Deferred stock compensation......................... (5,060,183) (5,224,836)
Deficit accumulated during the development stage.... (1,012,472) (2,174,061)
----------- ----------
Total stockholders' deficit....................... (711,511) (1,490,303)
----------- ----------
Total liabilities and stockholders' deficit....... $ 1,237,688 $ 693,357
=========== ==========
</TABLE>
See accompanying notes to financial statements
F-29
<PAGE>
1VIEW NETWORK CORPORATION
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The For The
Period From Period From
May 21, May 21,
1999 For The 1999
(Inception) Three Months (Inception)
Through Ended Through
December March 31, March 31,
31, 1999 2000 2000
----------- ------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenue.................................. $ 975,850 $ 621,200 $ 1,597,050
Cost of sales............................ 577,024 332,631 909,655
----------- ----------- -----------
Gross profit......................... 398,826 288,569 687,395
----------- ----------- -----------
Operating expenses:
Development expenses................... 216,006 299,402 515,408
General and administrative expenses.... 898,446 762,118 1,660,564
Stock-based compensation............... 292,828 375,526 668,354
----------- ----------- -----------
Total operating expenses............. 1,407,280 1,437,046 2,844,326
----------- ----------- -----------
Loss from operations................. (1,008,454) (1,148,477) (2,156,931)
Interest expense, net.................... (4,018) (13,112) (17,130)
----------- ----------- -----------
Net loss............................. $(1,012,472) $(1,161,589) $(2,174,061)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-30
<PAGE>
1VIEW NETWORK CORPORATION
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Period from May 21, 1999 (Inception) to December 31, 1999
and The Three Months Ended March 31, 2000 (Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional Deferred During The Total
---------------- Paid In Stock Development Stockholders'
Shares Amount Capital Compensation Stage Deficit
--------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 21, 1999
(inception)............ -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock.................. 3,051,333 3,051 5,082 -- -- 8,133
Deferred stock
compensation........... -- -- 5,353,011 (5,353,011) -- --
Amortization of deferred
stock compensation..... -- -- -- 292,828 -- 292,828
Net loss................ -- -- -- -- (1,012,472) (1,012,472)
--------- ------ ---------- ----------- ----------- -----------
Balance at December 31,
1999................... 3,051,333 3,051 5,358,093 (5,060,183) (1,012,472) (711,511)
Issuance of common stock
(unaudited)............ 72,708 73 7,198 -- -- 7,271
Deferred stock
compensation
(unaudited)............ -- -- 540,179 (540,179) -- --
Amortization of deferred
stock compensation
(unaudited)............ -- -- -- 375,526 -- 375,526
Net loss (unaudited).... -- -- -- (1,161,589) (1,161,589)
--------- ------ ---------- ----------- ----------- -----------
Balance at March 31,
2000 (unaudited)....... 3,124,041 $3,124 $5,905,470 $(5,224,836) $(2,174,061) $(1,490,303)
========= ====== ========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-31
<PAGE>
1VIEW NETWORK CORPORATION
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The
For The Period From
Period From May
May 21, 1999 For The 21, 1999
(Inception) Three Months (Inception)
Through Ended Through
December 31, March 31, March 31,
1999 2000 2000
------------ ------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................... $(1,012,472) $(1,161,589) $(2,174,061)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation.......................... 15,251 24,080 39,331
Stock-based compensation.............. 292,828 375,526 668,354
Changes in assets and liabilities:
Accounts receivable.................. (451,050) 310,950 (140,100)
Other current assets................. (1,637) -- (1,637)
Other assets......................... (118,500) -- (118,500)
Accounts payable and accrued
liabilities......................... 371,459 284,478 655,937
Accrued interest on bridge loan and
loan payable stockholder............ 9,286 13,617 22,903
Accrued compensation and related
expense............................. 120,116 5,743 125,859
Deferred revenue..................... 384,000 (334,000) 50,000
----------- ----------- -----------
Net cash used in operating activities... (390,719) (481,195) (871,914)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment.... (226,375) (149,635) (376,010)
----------- ----------- -----------
Net cash used in investing activities... (226,375) (149,635) (376,010)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from loan payable to
stockholder........................... 59,338 19,624 78,962
Proceeds from issuance of common
stock................................. 8,133 7,271 15,404
Proceeds from Bridge Note borrowings... 1,005,000 245,000 1,250,000
----------- ----------- -----------
Net cash provided by financing
activities......................... 1,072,471 271,895 1,344,366
----------- ----------- -----------
Net increase (decrease) in cash......... 455,377 (358,935) 96,442
Cash, beginning of period............... -- 455,377 --
----------- ----------- -----------
Cash, end of period..................... $ 455,377 $ 96,442 $ 96,442
=========== =========== ===========
Supplemental disclosures of cash flow
information
Interest received...................... $ 5,377 $ 505 $ 5,882
=========== =========== ===========
Income taxes paid...................... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-32
<PAGE>
1VIEW NETWORK CORPORATION
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
For the Period from May 21, 1999 (Inception) to December 31, 1999
and The Three Months Ended March 31, 2000 (Unaudited)
1. THE COMPANY
1View Network Corporation (the "Company") was incorporated in the State of
Delaware on May 21, 1999 as 1Vue Network, Inc. and changed its name in
September 1999. The Company is engaged in developing Internet banking
solutions to banks, consisting of consulting and programming. This includes
home banking for individual customers and business banking for commercial
customers of banks. In 1999 the Company had one main customer together with
whom the Internet banking solutions were developed in a partnership-type of
relationship. Substantially all of the Company's revenues are derived from
these services on a per-hour basis. In addition the Company develops its own
software product.
As of December 31, 1999, the Company is a development stage enterprise as
defined by Financial Accounting Standards Board Statement No. 7. Since
inception, the Company has devoted substantial attention toward the
development of its product. The Company's business is extremely competitive
and characterized by rapid technological change, new product development, and
a competitive business environment for the attraction and retention of
knowledge workers. The Company is an early stage enterprise and is subject to
all the risks associated with development stage companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and notes payable are carried at cost,
which approximates their fair value because of the short-term maturity of
these instruments and the relatively stable interest rate environment. The
amounts shown for loan payable--stockholder and convertible notes also
approximate fair value because current interest rates offered to the Company
for loans of similar maturities are substantially the same.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company maintains
cash deposits at banks that are insured by the Federal Deposit Insurance
Corporation up to $100,000. As of December 31, 1999, uninsured balances held
at these financial institutions totaled $355,000. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
Accounts Receivable
Accounts receivable consist primarily of short-term amounts due from one
customer. The Company does not provide for an allowance as the customer is a
reputable bank.
F-33
<PAGE>
1VIEW NETWORK CORPORATION
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the Period from May 21, 1999 (Inception) to December 31, 1999
and The Three Months Ended March 31, 2000 (Unaudited)
Property and Equipment
Furniture and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
as follows:
<TABLE>
<S> <C>
Furniture and equipment......................................... 3 to 5 years
Computer software and hardware.................................. 3 years
</TABLE>
Other Assets
Other assets consist primarily of deposits on leased facility which expires
in January 2005.
Revenue Recognition
1View's historical revenues to date have been from one development contract,
which provides for the Company to bill on a time and materials basis. The
Company recognizes revenue on this contract as services are performed on a per
hour basis plus out-of-pocket expenses. Amounts invoiced in advance of
services are recorded as deferred revenue and will be recognized at the time
services are performed.
Research and Product Development
Research and product development costs incurred to research and develop the
Company's products are expensed as incurred.
Advertising
To date, the Company has not incurred any significant advertising costs.
Income Taxes
The Company utilizes Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences
of events that have been included in the financial statements or tax returns.
Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each period end based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the period in deferred tax assets
and liabilities.
Risk Concentrations
Substantially all of the Company's revenues are generated from the sale of
one product to one customer. The loss of, or an economic event related to this
product, most likely would have a substantial impact on the Company's
revenues. As of December 31, 1999, accounts receivable from one significant
customer accounted for 100% of the Company's total accounts receivable.
F-34
<PAGE>
1VIEW NETWORK CORPORATION
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the Period from May 21, 1999 (Inception) to December 31, 1999
and The Three Months Ended March 31, 2000 (Unaudited)
Comprehensive Income
Comprehensive income generally represents all changes in stockholders'
equity (deficit) during the period except those resulting from investments by,
or distributions to, stockholders. For the period from commencement of
operations (May 21, 1999) through December 31, 1999, there were no such
changes in stockholders' equity other than net loss amounts.
Accounting for Start-up costs
The Company accounts for start-up costs in accordance with AICPA Statement
of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-Up Activities".
Under SOP No. 98-5 all start-up costs related to new operations must be
expensed as incurred.
Accounting For Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is recognized over the
vesting period based on the difference, if any, on the date of grant between
the deemed fair value for accounting purposes of the Company's stock and the
exercise price on the date of grant. The Company accounts for equity awards
issued to non-employees in accordance with the provisions SFAS No. 123 and
Emerging Issues Task Force ("EITF") 96-18.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133" is effective for
financial statements with fiscal years beginning after June 15, 2000. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company does not expect adoption of SFAS No. 133 to
have a material effect, if any, on its financial position or results of
operations.
3. FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<S> <C>
Furniture and equipment............................................ $203,891
Computer hardware and software..................................... 22,484
--------
226,375
Less accumulated depreciation...................................... 15,251
--------
Total............................................................ $211,124
========
</TABLE>
Depreciation expense was $15,251 for the period from May 21, 1999
(inception) to December 31, 1999.
F-35
<PAGE>
1VIEW NETWORK CORPORATION
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the Period from May 21, 1999 (Inception) to December 31, 1999
and The Three Months Ended March 31, 2000 (Unaudited)
4. RELATED-PARTY TRANSACTIONS
As of December 31, 1999, the Company had a loan payable outstanding to one
of its stockholders/officers, of which the balance including accrued interest
was $60,374. The loan was unsecured, with interest accruing at a rate of 6%
per annum, and was payable on demand.
5. CONVERTIBLE NOTES
During the period from May 21, 1999 (inception) through December 31, 1999
and the three months ended March 31, 2000, the Company issued several series
of convertible notes for proceeds of $1,005,000 and $245,000 (unaudited),
respectively, bearing interest at a rate of 5%. The convertible notes
contained conversion features, which allowed for the conversion of the notes
and accrued interest into equity of the Company if certain future events
occurred including the Company raising financing in the amount of more than
$3,000,000. In that case the conversion rate would be dependent on the price
per equity securities sold in this financing. If the Company does not close
such a financing round before the due date of each note, the note plus accrued
interest becomes payable at due date. The notes issued had a term of two
years.
Attached to the Convertible Notes issued were warrants, which, only upon
conversion of the notes, give the investors the right to purchase the same
type of equity security at the same price per share as the originally issued
(convertible) securities. No separate value was placed on the warrants as
their vesting and exercizability was contingent on the future events.
See Note 10 for further details.
6. INCOME TAXES
As a result of the Company's net operating losses, no provision for income
taxes has been recognized.
The Company has a net deferred tax asset of approximately $285,000 at
December 31, 1999. The deferred tax asset is primarily comprised of net
operating loss carryforwards. Due to uncertainty surrounding the realization
of the benefits in the future tax returns, the Company has placed a full
valuation allowance against its deferred tax asset at December 31, 1999.
As of December 31, 1999, the Company had net operating loss carryforwards
for federal and state purposes of approximately $720,000. Federal and state
net operating loss carryforwards begin to expire in the years 2019 and 2004,
respectively.
7. CAPITALIZATION
The Company is authorized to issue 5,000,000 shares of common stock. The
holders of common stock are afforded equal voting rights on matters to be
voted on by the stockholders of the Company. Common stockholders are entitled
to receive ratably such dividends, if any, as may be declared by the Board of
Directors. The Company has not declared or paid any dividends during its
operating history.
F-36
<PAGE>
1VIEW NETWORK CORPORATION
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the Period from May 21, 1999 (Inception) to December 31, 1999
and The Three Months Ended March 31, 2000 (Unaudited)
The Company is required to reserve and keep available out of its authorized
but unissued shares of common stock such number of shares sufficient to allow
the exercise of shares granted and available for grant under the Company's
stock option plan. The amount of such shares of common stock reserved for
these purposes is as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
Outstanding stock options........................... 1,312,000 1,294,292
Additional shares available for grant under
the Company's stock option plan.................... 488,000 433,000
--------- ---------
1,800,000 1,727,292
========= =========
</TABLE>
8. STOCK OPTIONS
In June 1999, the Company adopted the 1999 Stock Plan (the "Plan") which
provides for the grant of nonstatutory stock options to the Company's
employees, consultants and directors and the grant of incentive stock options
to employees of the Company. The Company's Board of Directors administers the
Plan, selects the individuals to whom options will be granted, determines the
number of options to be granted and sets the term and exercise price of each
option.
An aggregate of 1,800,000 shares of common stock have been reserved for
issuance under the Plan of which 488,000 shares were available for future
grant at December 31, 1999 and 1,312,000 options were outstanding at December
31, 1999.
A summary of the status of the Company's stock options and related changes
is presented below:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Shares Price
--------- ---------
<S> <C> <C>
Outstanding at May 21, 1999 (Inception)................. -- --
Granted............................................... 1,312,000 $0.10
Exercised............................................. -- --
Canceled.............................................. -- --
--------- -----
Outstanding at December 31, 1999........................ 1,312,000 $0.10
Granted (unaudited)................................... 55,000 $0.10
Exercised (unaudited)................................. (72,708) $0.10
Canceled (unaudited).................................. -- --
--------- -----
Outstanding at March 31, 2000 (Unaudited)............... 1,294,292 $0.10
========= =====
</TABLE>
In connection with the option grants made during the period ended December
31,1999 and the three month period ended March 31, 2000, the Company recorded
approximately $5.4 million and $0.5 million (unaudited), respectively, of
deferred stock compensation charges which are being amortized in accordance
with the vesting period of the options (4 years) on a straight-line basis.
F-37
<PAGE>
1VIEW NETWORK CORPORATION
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the Period from May 21, 1999 (Inception) to December 31, 1999
and The Three Months Ended March 31, 2000 (Unaudited)
Additional information with respect to stock options outstanding at December
31, 1999 and March 31, 2000 (unaudited) is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Period ended Prices Outstanding Life Price Outstanding Price
------------ ------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999....... $0.10 1,312,000 9.78 $0.10 -- --
March 31, 2000
(unaudited)............ $0.10 1,294,000 9.75 $0.10 -- --
</TABLE>
The Company determined the compensation expense of options granted using the
methodology prescribed in SFAS No. 123 and determined the results to be
immaterial. The fair value of these awards was estimated at the date of grant
using a minimum value option pricing model with the following assumptions:
risk-free interest rate of 5.5%; no dividend yield; no volatility factor; a
forfeiture rate of 5%; and an expected average life of 4 years. The effects of
applying SFAS No. 123 are not indicative of future amounts and additional
awards in future years are anticipated.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
Rent expense was $10,500 for the period from May 21, 1999 to December 31,
1999. During the period May 1999 to October 1999, the Company was operated in
the President's apartment, whereby he charged the Company $1,100 per month for
rent. The remainder is attributed to rent paid to a third party for subleased
rent expenses.
In January 2000, the Company entered into a five year operating lease for
its office facilities commencing on January 24, 2000 and expiring on January
31, 2005. Monthly rent under this agreement will total approximately $19,750
for the first year, and $21,330 for the second to fifth years.
Consulting Agreements
In October, 1999, the Company entered into an agreement with a software
consultant, which provides for the consultant to make staff resources
available to 1View at a rate of $1,000 per person per day plus expenses. Under
the terms of the contract the cost of these resources will initially be
invested by the consultant and 1View will not have to pay back the investment
until license fees are received, if any, on the software developed using the
consultant's resources. This compensation will be paid by way of a 10% royalty
on the future license fees up to the aggregate amount of the investment.
Although no license income has been recognized yet, the Company fully
accrues the estimated cost of consulting services received to date.
10. SUBSEQUENT EVENTS (UNAUDITED)
On April 8, 2000 the Company entered into a purchase agreement with Digital
Insight Corporation ("Digital Insight"), which provided for the purchase of
all the Company's outstanding common stock and stock options,
F-38
<PAGE>
1VIEW NETWORK CORPORATION
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the Period from May 21, 1999 (Inception) to December 31, 1999
and The Three Months Ended March 31, 2000 (Unaudited)
to be paid partly in shares of Digital Insight and partly in cash. In
connection with the sale, on March 23, 2000, the Company offered to amend each
individual Convertible Note holder's subscription agreement such that the
Convertible Notes outstanding at March 31, 2000 would be converted into a
total of 445,600 common shares immediately prior to the consummation of the
sale, at conversion rates ranging from approximately $2 to $6 per share
(dependent on the commencement date of the note) at a weighted average price
per common share of $3.03. All Convertible Note holders accepted their offers
within the next two weeks. Since the value per common share of the Company on
a fully diluted basis, based on the acquisition price offered by Digital
Insight, can be calculated at $10.54, the Convertible Note holders will
receive an amount in excess of their conversion price of approximately
$3.4 million, which will be recorded as part of the purchase price upon
consummation of the acquisition.
F-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
AnyTime Access, Inc.
We have audited the accompanying consolidated balance sheet of AnyTime
Access, Inc. (the Company) and its subsidiary as of December 31, 1999 and the
related consolidated statements of operations, shareholders' deficit and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AnyTime
Access, Inc. and its subsidiary as of December 31, 1999, and the results of
their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
As described in Note 10 to the financial statements, on March 30, 2000, the
Company agreed to enter into a transaction to be acquired.
/s/ Deloitte & Touche LLP
Sacramento, California
March 30, 2000
F-40
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
AnyTime Access, Inc.
We have audited the accompanying consolidated balance sheet of AnyTime
Access, Inc. as of December 31, 1998, and the related consolidated statements
of operations, shareholders' deficit and cash flows for the years ended
December 31, 1998 and 1997. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AnyTime
Access, Inc. as of December 31, 1998, and the results of its consolidated
operations and its cash flows for the years ended December 31, 1998 and 1997
in conformity with generally accepted accounting principles.
Since the date of completion of our audit of the accompanying consolidated
financial statements and initial issuance of our report thereon dated March
17, 1999 (except for the second paragraph of Note 3, as to which the date is
July 1, 1999), which report contained an explanatory paragraph regarding the
Company's ability to continue as a going concern, the Company, as discussed in
Note 6, has completed additional issuances of its equity securities in 1999
which resulted in net proceeds of approximately $15.4 million. Therefore, the
conditions that raised substantial doubt about whether the Company will
continue as a going concern no longer exist.
/s/ Ernst & Young LLP
March 17, 1999,
except for the second paragraph
of Note 3 as to which the date
is July 1, 1999 and Note 6 as to
which the date is July 7, 2000
F-41
<PAGE>
ANYTIME ACCESS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------------ March 31,
1998 1999 2000
-------- -------- -----------
(Unaudited)
ASSETS
------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and equivalents......................... $ 676 $ 6,113 $ 3,500
Accounts receivable, net of allowance for
doubtful accounts of $54 in 1998............ 1,019 917 1,487
Prepaid expenses............................. 232 339 802
-------- -------- -------
Total current assets....................... 1,927 7,369 5,789
PROPERTY AND EQUIPMENT, net.................... 3,184 3,299 3,195
OTHER ASSETS................................... 157 170 166
-------- -------- -------
TOTAL.......................................... $ 5,268 $ 10,838 $ 9,150
======== ======== =======
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accrued liabilities.......................... $ 317 $ 818 669
Accounts payable............................. 626 485 526
Short-term borrowings........................ 400 -- --
Accrued payroll and related obligations...... 326 407 474
Current portion of capital lease
obligations................................. 1,250 1,002 1,002
-------- -------- -------
Total current liabilities.................. 2,919 2,712 2,671
CAPITAL LEASE OBLIGATIONS...................... 1,179 309 41
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
24,064,683 shares authorized; 13,315,479,
20,827,074 and 20,827,074 shares issued and
outstanding as of December 31, 1998 and
1999, and March 31, 2000 respectively,
liquidation preference of $30,799 at
December 31, 1999........................... 14,971 32,915 33,540
SHAREHOLDERS' DEFICIT:
Common stock, stated value $.025 per share;
50,000,000 shares authorized; 5,464,403,
6,289,288 and 6,279,956 shares issued and
outstanding as of December 31, 1998, 1999
and March 31, 2000 (unaudited),
respectively................................ 137 157 157
Additional paid-in capital................... 2,967 3,648 4,145
Accumulated deficit.......................... (16,839) (28,194) (30,260)
Deferred compensation--stock options......... -- (518) (992)
Notes receivable from shareholders........... (66) (191) (152)
-------- -------- -------
Total shareholders' deficit................ (13,801) (25,098) (27,102)
-------- -------- -------
TOTAL.......................................... $ 5,268 $ 10,838 $ 9,150
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
ANYTIME ACCESS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended Three Months
December 31, Ended
------------------------- March 31,
1997 1998 1999 2000
------- ------- ------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES............................... $ 4,538 $ 9,298 $10,384 $ 3,013
COST OF REVENUES....................... 3,995 7,379 7,978 2,052
------- ------- ------- -------
GROSS MARGIN........................... 543 1,919 2,406 961
OPERATING EXPENSES:
Technology development and
integration......................... 1,225 2,611 4,641 917
Customer production information...... 532 1,253 1,993 374
Sales and marketing.................. 1,770 3,080 2,803 630
General and administrative........... 1,307 1,693 2,425 500
------- ------- ------- -------
Loss from operations............... (4,291) (6,718) (9,456) (1,460)
OTHER INCOME (EXPENSE):
Noncash interest charges............. (72) (2,673) (150) (18)
Interest expense..................... (178) (426) (207) (25)
Interest income...................... 140 50 195 62
Other (net).......................... -- -- 18 --
------- ------- ------- -------
NET LOSS............................... $(4,401) $(9,767) $(9,600) $(1,441)
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE>
ANYTIME ACCESS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
Years Ended December 31, 1998 and 1999 and the three months ended March 31,
2000 (unaudited) (in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Shareholder
------------------ Paid-in Accumulated Notes Deferred
Shares Amount Capital Deficit Receivable Compensation Total
---------- ------ ---------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31,
1996................... 4,727,266 $119 $ 179 $ (1,569) $ (50) $ -- $ (1,321)
Stock options exercised
for note receivable
from
officer/shareholder.... 400,000 10 -- -- (10) -- --
Sale of Series B
Redeemable Convertible
Preferred Stock........ -- -- -- -- -- -- --
Accretion of Series A
and Series B Redeemable
Convertible Preferred
Stock discount......... -- -- -- (448) -- -- (448)
Warrants issued......... -- -- 164 -- -- -- 164
Net loss................ -- -- -- (4,401) -- -- (4,401)
---------- ---- ------ -------- ----- ----- --------
BALANCES, December 31,
1997................... 5,127,266 129 343 (6,418) (60) -- (6,006)
Exercise of stock
options................ 155,324 4 11 -- -- -- 15
Stock options exercised
for shareholder notes
receivable............. 250,000 6 -- -- (6) -- --
Common shares canceled.. (68,187) (2) 2 -- -- -- --
Accretion of redeemable
preferred stock........ -- -- -- (654) -- -- (654)
Issuance of Series B
Redeemable Convertible
Preferred Stock
warrants.............. -- -- 2,611 -- -- -- 2,611
Net loss................ -- -- -- (9,767) -- -- (9,767)
---------- ---- ------ -------- ----- ----- --------
BALANCES, December 31,
1998................... 5,464,403 137 2,967 (16,839) (66) -- (13,801)
Exercise of stock
options................ 356,718 9 12 -- -- -- 21
Stock options exercised
for shareholder note
receivable............. 400,000 10 115 -- (125) -- --
Issuance of common
stock.................. 136,334 3 -- -- -- -- 3
Common shares canceled.. (68,167) (2) 2 -- --
Deferred stock
compensation........... -- -- 552 -- -- (552) --
Amortization of deferred
stock compensation..... -- -- -- -- -- 34 34
Accretion of redeemable
preferred stock........ -- -- -- (1,755) -- -- (1,755)
Net loss................ -- -- -- (9,600) -- -- (9,600)
---------- ---- ------ -------- ----- ----- --------
BALANCES, December 31,
1999................... 6,289,288 157 3,648 (28,194) (191) (518) (25,098)
Exercise of stock
options................ 149,418 4 1 -- -- -- 5
Stock options execised
for note receivable.... 60,000 1 14 -- (15) -- --
Common shares
cancelled.............. 218,750 (5) (49) -- 54 -- --
Deferred stock
compensation........... -- -- 531 -- -- (531) --
Amortization of deferred
stock compensation..... -- -- -- -- -- 57 57
Accretion of redeemable
preferred stock
(unaudited)............ -- -- -- (625) -- -- (625)
Net loss (unaudited).... -- -- -- (1,441) -- -- (1,441)
---------- ---- ------ -------- ----- ----- --------
BALANCES, March 31, 2000
(unaudited)............ $6,279,956 $157 $4,145 $(30,260) $(152) $(992) $(27,102)
========== ==== ====== ======== ===== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE>
ANYTIME ACCESS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three
Years Ended December Months
31, Ended
------------------------- March 31,
1997 1998 1999 2000
------- ------- ------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................... $(4,401) $(9,767) $(9,600) $(1,441)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization......... 555 1,262 1,435 375
Noncash interest charges.............. 94 2,673 134 18
Loss on disposal of equipment......... -- -- 116 --
Amortization of deferred stock
compensation......................... -- -- 34 57
Effect of changes in assets and
liabilities:
Accounts receivable, net............. (596) (274) 102 (570)
Prepaid expenses and other assets.... (47) (123) (120) (459)
Accounts payable..................... 105 289 (141) 41
Accrued payroll and related
obligations......................... 188 104 81 67
Accrued liabilities.................. 2 189 501 (149)
------- ------- ------- -------
Net cash used in operating
activities......................... (4,100) (5,647) (7,458) (2,061)
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.... (379) (480) (1,669) (271)
Proceeds from sale of equipment........ -- -- 3 --
------- ------- ------- -------
Net cash used in investing
activities......................... (379) (480) (1,666) (271)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shareholder notes
payable............................... 1,000 5,000 780 29
Net proceeds from issuance of
redeemable convertible preferred
stock................................. 6,000 -- 13,409 --
Net proceeds from issuance of common
stock and stock option exercise....... -- 15 24 (24)
Proceeds (payments) from short-term
borrowings............................ -- 400 (400) --
Collection of preferred stock
subscription receivable............... -- -- 2,000 --
Payments on capital lease obligations.. (267) (943) (1,252) (286)
------- ------- ------- -------
Net cash provided by financing
activities......................... 6,733 4,472 14,561 (281)
------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS............................ 2,254 (1,655) 5,437 (2,613)
CASH AND EQUIVALENTS, beginning of
period................................. 77 2,331 676 6,113
------- ------- ------- -------
CASH AND EQUIVALENTS, end of period..... $ 2,331 $ 676 $ 6,113 $ 3,500
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest................. $ 167 $ 410 $ 364 $ 48
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Property and equipment acquired under
capital lease......................... $ 1,765 $ 1,664 $ -- $ --
Conversion of shareholder notes payable
into shares of Redeemable Convertible
Preferred Stock....................... $ -- $ 5,000 $ 780 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE>
ANYTIME ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All information for the three months ended March 31, 2000 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--AnyTime Access, Inc., (the "Company") was incorporated in
California in September 1990. The Company is a provider of services that allow
credit unions, banks and insurance companies to outsource their consumer loan
origination and processing functions.
Basis of Presentation--The accompanying consolidated financial statements
for 1999 include the Company and its wholly-owned subsidiary, AnyTime Access
Acceptance, which was formed during 1999. All significant intercompany
balances and transactions have been eliminated.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Cash and Equivalents--The Company considers highly liquid investments with
remaining maturities of three months or less when acquired to be cash
equivalents. Cash and equivalents include cash on hand, demand deposits and
money market funds.
Certain Significant Risks and Uncertainties--The Company operates in a
dynamic industry, and accordingly, can be affected by a variety of factors.
For example, management of the Company believes that changes in any of the
following areas could have a negative effect on the Company in terms of its
future financial position and results of operations: ability to obtain
additional financing; regulatory changes; fundamental changes in the
technology underlying the Company's products; market acceptance of the
Company's products under development; development of sales channels;
litigation or other claims against the Company; the hiring, training and
retention of key employees; successful and timely completion of product
development efforts; and new product introductions by competitors.
Concentration of Credit Risk and Major Customers--The Company sells its
services to financial institutions including credit unions, banks and
insurance companies. During the years ended December 31, 1998 and 1999, one
customer accounted for 15% and 16% of revenues, respectively. The loss of this
customer or any substantial reduction in business with this customer could
have a material adverse affect on the Company's operating results.
The Company periodically evaluates the credit worthiness of its customers
using publicly available data. The Company believes that adequate provision
for uncollectible accounts receivable has been provided for by the Company.
Property and Equipment--Property and equipment consists of office furniture
and equipment, leasehold improvements and software purchased or developed for
internal use. The Company capitalizes costs associated with software developed
or obtained for internal use when the preliminary project stage is completed
and it is deemed probable that the project will be completed and used for the
intended function. Office furniture and equipment and software are depreciated
on a straight-line basis over the estimated useful lives of the assets or the
lease term, whichever is shorter. Leasehold improvements are depreciated on a
straight-line basis over the lease term or the estimated useful life of the
improvement, whichever is shorter. The estimated useful lives range from three
to five years.
Revenue Recognition--Revenues consist primarily of loan application fees,
which the Company charges its customers on a per loan application basis. Such
fees are recognized at the time loan applications are processed.
F-46
<PAGE>
ANYTIME ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 2000 is unaudited)
Income Taxes--Deferred taxes are recognized based on the expected future tax
consequences of temporary differences between the amounts carried on the
financial statements and the tax bases of those assets and liabilities. A
valuation allowance is established to reduce deferred tax assets to an amount
the realization of which is more likely than not.
Stock-Based Compensation--The Company accounts for its stock-based awards
using the intrinsic value method of accounting in accordance with Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees" and
related interpretations. As such, deferred compensation is recorded on the
date of issuance or grant of stock options on any excess of the current
estimated fair value of the underlying stock over the purchase or exercise
price. Amortization of deferred compensation is charged to operations over the
vesting period of the options. The Company has adopted the disclosure
provisions of Statement of Financial Accounting Standards No. 123, ("SFAS No.
123"), "Accounting for Stock-Based Compensation," which permits entities to
provide pro forma net loss and net loss per share disclosure for stock-based
compensation as if the minimum value method defined in SFAS no. 123 had been
applied.
Recent Accounting Pronouncement
Statement of Financial Accounting Standard (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities," as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all
derivative instruments be measured at fair value and recognized in the balance
sheet as either assets or liabilities. The Company does not expect the
implementation of SFAS No. 133 to have a material effect on its financial
statements.
Reclassifications--Certain amounts in the 1997 and 1998 financial statements
have been reclassified to conform with the 1999 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------- March 31,
1998 1999 2000
------ ------- -----------
(in thousands) (unaudited)
<S> <C> <C> <C>
Furniture and office equipment................ $4,086 $ 4,893 $5,070
Software...................................... 915 1,623 1,717
Leasehold improvements........................ 291 252 252
------ ------- ------
5,292 6,768 7,039
Less: Accumulated depreciation and
amortization................................. (2,108) (3,469) (3,844)
------ ------- ------
$3,184 $ 3,299 $3,195
====== ======= ======
</TABLE>
Amortization of property and equipment acquired under capital leases and
leasehold improvements has been included with depreciation and amortization
expense.
3. LINE OF CREDIT
In June 1998, the Company entered into a revolving line of credit agreement
(the "Agreement") with a bank. Borrowings under the Agreement were secured by
substantially all of the Company's assets and accrued interest at the prime
rate plus .5%. At December 31, 1998, the Company had $400,000 outstanding
under the line of credit. In August 1999, the outstanding balance was repaid
and the line of credit terminated.
F-47
<PAGE>
ANYTIME ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 2000 is unaudited)
In May 1999, the Company entered into a bridge loan agreement (the "Bridge
Loan") with a bank. As amended, the Bridge Loan provided for borrowings up to
$1,500,000 and accrued interest at prime plus 3.0%. In connection with the
Bridge Loan, the Company issued detachable warrants to the bank, exercisable
for ten years, to purchase 16,500 shares of the Company's Series B Redeemable
Convertible Preferred Stock at a price of $2.25 per share. The estimated fair
value of the warrants as of the date of issue was insignificant. In August
1999, in conjunction with the sale of the Company's Series C Preferred Stock,
the outstanding balance of the Bridge Loan was paid in full.
4. CAPITAL LEASE OBLIGATIONS
The Company leases office and computer equipment under capital lease
arrangements which have terms of three to five years.
In 1996, the Company entered into a master lease agreement. The initial
lease obligation of $2,000,000 was discounted by $398,000 representing the
estimated fair value of Series A and B Preferred Stock warrants issued
pursuant to the master lease agreement (Note 6). The discount is amortized on
a straight-line basis over the life of the leases. The unamortized discount as
of December 31, 1999 was $37,000.
Future minimum lease payments under capital leases are as follows (in
thousands):
<TABLE>
<S> <C>
Years ending December 31:
2000............................................................... $1,039
2001............................................................... 318
------
Total minimum lease payments......................................... 1,357
Less: amount representing interest/discounts......................... (46)
------
Present value of future minimum lease payments....................... 1,311
Less: current portion................................................ 1,002
------
Long-term portion.................................................... $ 309
======
</TABLE>
5. COMMITMENTS--OPERATING LEASES
The Company leases office space and equipment under operating leases
expiring through 2002. Aggregated annual minimum rental payments are $713,000
in 2000, $236,000 in 2001 and $14,000 in 2002. Rental expense recorded under
all operating leases was $247,000, 704,000 and $719,000 during the years ended
December 31, 1997, 1998 and 1999, respectively.
6. STOCKHOLDERS' EQUITY
Common Stock
The Company's common stock includes a liquidation preference of $.025 per
share, including any declared, unpaid dividends, subordinate to the
liquidation preferences of preferred stockholders.
Common Stock Warrants
In 1997, the Company issued warrants to purchase 150,000 shares of the
Company's common stock at $2.25 per share. The warrants are exercisable and
expire on the earlier of the fifth anniversary of the date of grant or
F-48
<PAGE>
ANYTIME ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 2000 is unaudited)
completion of an initial public offering exceeding a specified value. The
estimated fair value of the warrants as of the date of issuance was
insignificant.
Redeemable Convertible Preferred Stock
Redeemable Convertible Preferred Stock consisted of the following (including
accretion to redemption value) as of December 31, 1998 and 1999 and March 31,
2000 (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------- March 31,
1998 1999 2000
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Series A Redeemable Convertible Preferred Stock
("Series A") 7,743,256 shares authorized;
7,093,256 issued and outstanding................ $ 2,139 $ 2,301 $ 2,340
Series B Redeemable Convertible Preferred Stock
("Series B") 6,304,927 shares authorized; 1999:
6,233,818 issued and outstanding 1998:
6,222,223....................................... 14,832 16,031 16,341
Series C Redeemable Convertible Preferred Stock
("Series C"), 10,016,500 shares authorized;
1999: 7,500,000 issued and outstanding.......... -- 14,583 14,859
------- ------- -------
16,971 32,915 33,540
Less Preferred Stock Subscription Receivable..... (2,000) -- --
------- ------- -------
$14,971 $32,915 $33,540
======= ======= =======
</TABLE>
During 1999, the Company sold 7,110,000 shares of Series C in a private
placement for net proceeds (after offering fees and expenses) of $13,383,000.
Also during 1999, the Company issued 390,000 shares of Series C in a non-cash
transaction in lieu of payments of notes payable to shareholder in the amount
of $780,000.
The Company also sold 11,595 shares of Series B in 1999 for net proceeds of
$26,000.
On December 23, 1998, $5,000,000 in short-term convertible notes payable to
a shareholder were converted to 2,222,222 shares of Series B. Also on that
date, the same shareholder purchased 888,889 shares of Series B in exchange
for a receivable totaling $2,000,000. The stock purchase receivable was
collected in full on February 17, 1999.
Significant terms of the outstanding Preferred Stock are as follows:
Voting Rights--The holders of shares of Series A, B and C are entitled to
voting rights equal to the number of shares of common stock issuable upon
their conversion. In addition, holders of preferred stock are entitled to
certain protective voting rights including restrictions on the sale of the
Company without the approval of two-thirds of preferred stockholders voting
as a class.
Liquidation Preferences--In the event of liquidation or dissolution of
the Company, the preferred shareholders are entitled to priority over
common shareholders with respect to distribution of company assets or
payments to shareholders. The liquidation preference is equal to $0.25,
$2.25 and $2.00 per share for Series A, B and C, respectively. In addition,
the liquidation preference will include any declared and unpaid dividends
at the date of liquidation or dissolution. The aggregate liquidation
preferences as of December 31, 1999 for all series of preferred stock was
$30,799,000.
Redemption--The preferred stock is mandatorily redeemable upon the
request of a majority of the holders of Series A, B and C at any time
following the sixth anniversary of the date of issuance and will be
F-49
<PAGE>
ANYTIME ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 2000 is unaudited)
made in three annual installments. The redemption prices for Series A, B
and C are $0.40, $3.60 and $3.20 per share, respectively, plus any declared
and unpaid dividends. The excess of the preferred stock's redemption price
over its carrying value is being accreted by periodic charges to the
accumulated deficit, using the interest method, during the six years after
the date of issuance.
Conversion Rights--Each share of Series A, B and C is convertible into
shares of common stock at a conversion rate of 1:1 as of December 31, 1999,
subject to adjustment. In the event of an initial public offering which
meets certain size requirements, all shares of all series of preferred
stock will automatically convert into shares of common stock at the then
applicable conversion ratio. Those shares of preferred will automatically
convert upon election of 67% of Series A, B and C voting together as a
single class.
Dividends--The holders of Series A, B and C shall be entitled to receive
noncumulative dividends, payable in the amount of $0.015, $0.135 and $0.16
per share, respectively, when and as declared by the board of directors of
the Company. No dividends had been declared on Series A, B or C through
December 31, 1999.
Other--All shares of preferred stock are subject to certain transfer
restrictions and are entitled to certain registration rights.
Preferred Stock Warrants
In July and October 1996 and April 1997, the Company issued warrants to
purchase 60,000, 280,000 and 240,000 shares of the Company's Series A,
respectively. These warrants are exercisable for ten years after the date of
issuance or five years after an initial public offering, whichever is longer.
All are exercisable at a price of $0.25 per share as of December 31, 1999. The
estimated fair value of the warrants as of their dates of issuance was $8,000,
$171,000 and $146,000, respectively. These amounts have been included in
additional paid-in capital.
In September 1997 and March and August 1998, the Company issued warrants to
purchase 17,777, 26,666 and 26,666 shares of the Company's Series B. The
warrants are exercisable for ten years after the dates of issuance or five
years after an initial public offering, whichever is longer, at a price of
$2.25 per share. The estimated fair values of the warrants as of the dates of
issuance were $18,000, $27,500 and $27,500, respectively. These amounts have
been included in additional paid-in capital.
The Company issued warrants to purchase 888,889 shares and 1,333,333 shares
of Series B in July and October 1998, respectively, in connection with loans
from a principal shareholder. The warrants were subsequently canceled and were
not outstanding as of December 31, 1998. Management of the Company estimated
that the aggregate fair value of the warrants as of the dates of issue was
$2,556,000, which amount was recorded on a noncash interest charge in the 1998
statement of operations. The valuation was based on the Black-Scholes model.
Stock Option Plans
As of December 31, 1999, a total of 5,000,000 shares of common stock were
reserved for issuance upon exercise of stock options granted under the
Company's 1996 and 1997 Incentive Stock Option Plans ("the Plans"). The Plans
provide for the grant of Incentive and Nonstatutory Stock Options to employees
and consultants of the Company. Generally, incentive stock options granted
under the Plans vest over a 48-month period and are exercisable for ten years
from the date of grant. The exercise price of option grants must be at least
equal to the estimated fair market value of common stock at the date of grant,
as determined at the time of grant by the Company's Board of Directors. Under
the 1997 Plan, in the event of a merger of the Company with
F-50
<PAGE>
ANYTIME ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 2000 is unaudited)
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding option or stock purchase right shall be assumed
or an equivalent option or right substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute the option or stock
purchase right, the optionee shall fully vest in and have the right to
exercise the option or stock purchase right as to all of the optioned stock,
including shares as to which the optionee would not otherwise be vested or
exercisable.
Under the 1996 Stock Option Plan, in the event of a merger of the company
with or into another corporation, each outstanding option may be assumed or an
equivalent option may be substituted by such successor corporation or a parent
or subsidiary of such successor corporation. If, in such event, the option is
not assumed or substituted, the option shall terminate as of the date of the
closing of the merger.
The following table summarizes stock options available for grant during the
years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
---------- -------- ----------
<S> <C> <C> <C>
Balance, beginning of year................. 2,500,000 849,500 920,947
Options granted............................ (1,973,000) (553,167) (1,257,166)
Options canceled........................... 322,500 624,614 354,698
---------- -------- ----------
Options available for future grant......... 849,500 920,947 18,479
========== ======== ==========
</TABLE>
A summary of the status of the Plans is presented below:
<TABLE>
<CAPTION>
1997 1998 1999
------------------- ------------------- -------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year................ 500,000 $0.025 1,750,500 $0.102 1,273,729 $0.129
Granted................. 1,973,000 0.097 553,167 $0.222 1,257,166 $0.382
Exercised............... (400,000) 0.025 (405,324) $0.053 (756,718) $0.192
Canceled................ (322,500) 0.046 (624,614) $0.187 (354,698) $0.249
--------- --------- ---------
Outstanding, end of
year................... 1,750,500 0.102 1,273,729 $0.129 1,419,479 $0.307
========= ========= =========
</TABLE>
The following table summarizes information about stock options as of
December 31, 1999:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
------------------------------------------------
Weighted
Average Weighted Weighted
Shares Remaining Average Shares Average
Under Contractual Exercise Under Exercise
Option Life Prices Option Prices
--------- ----------- -------- ------- --------
<S> <C> <C> <C> <C>
419,855 7.4 $0.025 358,251 $0.025
899,624 9.1 $0.250 143,226 $0.250
100,000 9.8 $2.000 -- $2.000
--------- --- ------ -------
1,419,479 8.7 $0.307 501,477 $0.090
========= === ====== =======
</TABLE>
F-51
<PAGE>
ANYTIME ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 2000 is unaudited)
Stock option activity for the three months ended March 31, 2000 is as
follows:
<TABLE>
<S> <C>
Plan option shares increased by an additional.................. 500,000
Options Granted................................................ (411,500)
Options Canceled............................................... 170,270
Options available for future grants............................ 277,249
</TABLE>
Deferred Stock Compensation--The Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and
related interpretations in accounting for its stock option plans. The Company
recorded deferred compensation related to option grants totaling $552,000 and
an additional $531,000 (unaudited) for the three months ended March 31, 2000
which will be amortized ratably over the vesting periods of the related stock
options. Amortization amounted to $34,000 in 1999 and $57,000 (unaudited) for
the three months ended March 31, 2000.
Pro forma information is required by Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123"), which also requires
that the information be determined as if the Company had accounted for its
employees stock options granted subsequent to December 31, 1994 under the fair
value method of SFAS No. 123. The fair value of these options was estimated at
the date of grant using the Minimum Value Method with a risk-free interest
rate of 6.7% and 6.1% for 1999 and 1998, respectively, with no dividends
expected. The weighted average expected life of options granted in 1999 and
1998 was ten years. For purpose of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the vesting period of the
options. The effect of applying the Minimum Value method required by SFAS No.
123 to the Company's employee stock options grants results in pro forma net
losses that are not materially different from the amounts reported.
7. RELATED PARTY TRANSACTIONS
In conjunction with the exercise of options to purchase 3,150,000 shares of
common stock, the Company received four full recourse notes receivable
("Notes") totaling $191,250 from shareholders who are also members of
management. Principal and interest on the Notes are due and payable on dates
ranging from March 2000 to December 2002. The Notes are secured by the common
stock purchased and have been reflected as increases to the shareholders'
deficit on the accompanying balance sheets.
8. INCOME TAXES
The Company has available approximately $21,788,000 and $6,932,000 of
federal and state net operating loss carryforwards ("NOL's") as of December
31, 1999. The federal NOL's expire between the years 2006 and 2014 and the
state NOL's expire between 2000 and 2004. Future utilization of the Company's
NOL's may be subject to annual limitations due to the ownership change
provisions of Section 382 of the Internal Revenue Code of 1986, as amended.
As of December 31, 1998 and 1999, the Company had net deferred tax assets of
approximately $4,895,000 and $8,615,000, respectively, which resulted
primarily from net operating loss carryforwards and the use of differing
accounting methods for financial reporting and income tax purposes. The
Company has fully reserved all net deferred tax assets because of uncertainty
as to the ultimate realization of such assets. The valuation allowance
increased by $2,895,000 and $3,720,000 during 1998 and 1999, respectively.
F-52
<PAGE>
ANYTIME ACCESS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information for the three months ended March 31, 2000 is unaudited)
9. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan ("the Plan") covering
substantially all employees who have both reached age 21 and completed 6
months of service. The Company may match a portion of the employee's
contribution. The Company may also make discretionary profit sharing
contributions. Employees are 100% vested in the amounts they contribute to the
Plan. Matching and discretionary contributions vest on a graduated scale
beginning at two years with full vesting after 6 years of service. The Company
made no contributions during the years ended December 31, 1998 and 1999.
10. SUBSEQUENT EVENT
On March 30, 2000, the Company agreed to sell all of the Company's
outstanding common and preferred stock to Digital Insight Corporation
("Digital Insight") in exchange for shares of Digital Insight's common stock.
The sale is subject to customary closing conditions, including approval of the
Company's shareholders.
F-53
<PAGE>
[LOGO OF DIGITAL INSIGHT]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of common stock being registered. All amounts are
estimates except the registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<CAPTION>
Amount
To Be Paid
----------
<S> <C>
SEC Registration Fee................................................. $39,241
NASD Fee............................................................. 15,364
Nasdaq National Market Listing Fee................................... *
Legal Fees and Expenses.............................................. *
Accounting Fees and Expenses......................................... *
Printing............................................................. *
Transfer Agent Fees.................................................. *
Miscellaneous........................................................ *
-------
Total.............................................................. $ *
=======
</TABLE>
--------
*To be filed by amendment
Item 14. Indemnification of Directors and Officers
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors for monetary damages for breach of
their fiduciary duty as a director. In addition, as permitted by Section 145
of the Delaware General Corporation Law, the Bylaws of the Registrant provide
that: (1) the Registrant is required to indemnify its directors and executive
officers and persons serving in these capacities in other business enterprises
(including, for example, subsidiaries of the Registrant) at the Registrant's
request, to the fullest extent permitted by Delaware law, including in those
circumstances in which indemnification would otherwise be discretionary; (2)
the Registrant may, in its discretion, indemnify employees and agents in those
circumstances where indemnification is not required by law; (3) the rights
conferred in the Bylaws are not exclusive, and the Registrant is authorized to
enter into indemnification agreements with its directors, executive officers
and employees; and (4) the Registrant may not retroactively amend the Bylaw
provisions in a way that is adverse to the directors, executive officers and
employees who benefit from these protections.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers that provide the maximum
indemnity allowed to directors and executive officers by Section 145 of the
Delaware General Corporation Law and the Bylaws, as well as certain additional
procedural protections. In addition, these indemnity agreements provide that
parties to the indemnification agreements will be indemnified to the fullest
possible extent not prohibited by law against any and all expenses such as
federal, state, local or foreign taxes imposed on the Indemnitee as a result
of the actual or deemed receipt of any payments under the indemnification
agreement, judgments, fines, penalties and amounts paid in settlement, as long
as the settlement is approved in advance by Digital Insight, which approval
shall not be unreasonably withheld, actually and reasonably incurred in
relation to the Indemnitee's position as a director, officer, employee, agent
or fiduciary of the Registrant, or any subsidiary of the Registrant, or in
relation to the Indemnitee's service at the request of the Registrant as a
director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust or other enterprise or in relation to
Indemnitee's action or inaction while serving in such a capacity. Digital
Insight will not be obligated pursuant to the indemnity agreements to
indemnify or advance expenses to an indemnified party with respect to
proceedings or claims initiated by the indemnified party and not by way of
defense, counterclaim or crossclaim, except with respect to proceedings
specifically authorized by Digital
II-1
<PAGE>
Insight's Board of Directors or brought to enforce a right to indemnification
under the indemnity agreement, Digital Insight's Bylaws or any statute or law.
Under the agreements, Digital Insight is not obligated to indemnify the
indemnified party (1) for any expenses incurred by the indemnified party with
respect to any proceeding instituted by the indemnified party to enforce or
interpret the agreement, if a court of competent jurisdiction determines that
each of the material assertions made by the indemnified party in that
proceeding was not made in good faith or was frivolous; (2) for any amounts
paid in settlement of a proceeding unless Digital Insight consents to the
settlement; (3) with respect to any proceeding brought by Digital Insight
against the indemnified party for willful misconduct, unless a court
determines that each of the claims was not made in good faith or was
frivolous; (4) on account of any suit in which judgment is rendered against
the indemnified party for an accounting of profits made from the purchase or
sale by the indemnified party of securities of Digital Insight under the
provisions of (S) 16(b) of the Securities Exchange Act of 1934 and related
laws; (5) on account of the indemnified party's conduct which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest, or to
constitute willful misconduct or a knowing violation of the law; (6) an
account of any conduct from which the indemnified party derived an improper
personal benefit; (7) on account of conduct the indemnified party believed to
be contrary to the best interests of Digital Insight or its stockholders; (8)
on account of conduct that constituted a breach of the indemnified party's
duty of loyalty to Digital Insight or its stockholders; or (9) if a final
decision by a court having jurisdiction in the matter shall determine that the
indemnification is not lawful.
The indemnification provision in the Certificate of Incorporation, Bylaws
and the indemnification agreements entered into between the Registrant and its
directors and executive officers, may be sufficiently broad to permit
indemnification of the Registrant's officers and directors for liabilities
arising under the Securities Act of 1933.
The underwriting agreement included as Exhibit 1.1 provides for
indemnification of the Registrant and its directors and officers from some
liabilities arising under the Securities Act of 1933 and affords some rights
of contribution with respect thereto. In addition, the Third Amended and
Restated Rights Agreement included as Exhibit 4.2 and the Shareholder
Agreement included as Exhibit 4.5 provide for indemnification of the
Registrant and its directors and officers by certain selling stockholders from
some liabilities arising under the Securities Act of 1933 and affords some
rights of contribution with respect thereto.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant has issued and sold the
following securities:
(a) During the past three years, the Registrant sold an aggregate of
229,212 shares of unregistered common stock to directors, officers,
employees, former employees and consultants at prices ranging from
$0.30 to $9.00 per share, for aggregate cash consideration of $87,915.
These shares were sold pursuant to the exercise of options granted by
the Board. As to each director, officer, employee, former employee and
consultant of the Registrant who was issued these securities, the
Registrant relied upon Rule 701 of the Securities Act of 1933, as
amended (the "Securities Act"). Each of these persons purchased
securities of the Registrant under a written contract between that
person and the Registrant. In addition, the Registrant met the
conditions imposed under Rule 701(b).
(b) On October 23, 1997, the Registrant sold 618,500 shares of unregistered
common stock at a price per share of $0.30 to two officers for
aggregate consideration of $185,550. These shares were sold under a
restricted stock purchase agreement between the Registrant and each
officer following the exercise of a stock purchase right. The
purchasers of the shares paid the aggregate consideration in the form
of full-recourse promissory notes bearing interest at 7.0% per year.
The Registrant relied upon Rule 701 of the Securities Act in connection
with the sale of these shares.
(c) On January 31, 1998, the Registrant issued a warrant to purchase up to
22,222 shares of unregistered Series A Preferred Stock at a price per
share of $2.70 in connection with an equipment leasing transaction to
Comdisco, Inc. The warrant was issued in consideration for the
extension of credit by Comdisco, Inc. under an equipment lease. This
issuance was made in reliance upon Section 4(2) of the Securities Act.
II-2
<PAGE>
(d) On February 27, 1998, the Registrant sold in the aggregate 2,305,475
shares of unregistered Series B Preferred Stock at a price per share of
$3.47 to Menlo Ventures and HarbourVest Partners V-Direct Fund, L.P.
for aggregate cash consideration of $7,999,998.25. The Registrant
relied upon Section 4(2) of the Securities Act in connection with the
sale of these shares.
(e) On February 1, 1999, the Registrant issued a warrant to purchase up to
28,819 shares of unregistered Series B Preferred Stock at a price per
share of $3.47 in connection with an equipment leasing transaction to
Silicon Valley Bank. The warrant was issued in consideration for the
extension of credit by Silicon Valley Bank under an equipment lease.
This issuance was made in reliance upon Section 4(2) of the Securities
Act.
(f) On February 3, 1999, the Registrant sold 115,000 shares of unregistered
common stock at a price per share of $1.00 to an officer for aggregate
cash consideration of $115,000. These shares were sold to the officer
pursuant to the exercise of a stock purchase right. The Registrant
relied upon Rule 701 of the Securities Act in connection with the sale
of these shares.
(g) On May 26, 1999, the Registrant sold in the aggregate 844,036 shares of
unregistered Series C Preferred Stock at a price per share of $10.00 to
Menlo Ventures, HarbourVest Partners V-Direct Fund, L.P., current
stockholders and officers of the Registrant for aggregate cash
consideration of $8,440,360. The Registrant relied upon Section 4(2) of
the Securities Act in connection with the sale of these shares.
(h) On March 3, 2000, the Registrant issued 21,648 unregistered shares of
common stock at a price per share of $3.47 to Silicon Valley Bank upon
exercise of an outstanding warrant. The Registrant relied upon Sections
3(a)(9) and 4(2) of the Securities Act in connection with the issuance.
(i) On May 23, 2000, the Registrant issued 20,819 unregistered shares of
common stock at a price per share of $2.70 to Comdisco, Inc. upon
exercise of an outstanding warrant. The Registrant relied upon Sections
3(a)(9) and 4(2) of the Securities Act in connection with the issuance.
(j) On May 31, 2000, the Registrant 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 Registrant relied upon Section 4(2) of the
Securities Act in connection with the issuance.
(k) On June 21, 2000, the Registrant 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 Registrant. The
Registrant relied upon Section 3(a)(10) of the Securities Act in
connection with the issuance.
Appropriate legends were affixed to the share certificates issued in the
transactions described above. All recipients had adequate access, through
their relationships with the Registrant, to information about the Registrant.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<C> <S>
1 Form of Underwriting Agreement.
2.1 Agreement and Plan Merger, dated as of March 30, 2000, by and
among the Registrant, ATA Acquisition Corp. and AnyTime Access,
Inc.(1)
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.(2)
+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.
+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.
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.(1)
3.1 Third Amended and Restated Certificate of Incorporation of
Registrant, as currently in effect.(3)
3.2 Restated Bylaws of Registrant, as currently in effect.(3)
4.1 Specimen Common Stock Certificate.(3)
4.2 Third Amended and Restated Rights Agreement, dated February 10,
2000, between the Registrant and the parties named therein.(4)
4.3 Warrant to Purchase Stock dated February 18, 1999 issued to
Silicon Valley Bank.(3)
4.4 Warrant Agreement dated January 31, 1998 issued to Comdisco,
Inc.(3)
4.5 Shareholder Agreement, dated as of May 13, 1998, as amended.(4)
5 Opinion of O'Melveny & Myers LLP.
10.1 Form of Indemnification Agreement entered into by Registrant with
each of its directors and executive officers.(3)
10.2 Stock Option Agreement, dated October 13, 1998, between John
Dorman and the Registrant.(3)
10.3 Stock Option Agreement, dated March 30, 1999, between Kevin
McDonnell and the Registrant.(3)
10.4 Stock Option Agreement, dated March 30, 1999, between Stephen
Zarate and the Registrant.(3)
10.5 1997 Stock Plan.(3)
10.6 1999 Stock Plan and related agreements.(3)
10.7 1999 Stock Plan, as amended, of 1View Network Corporation.(5)
10.8 1999 Employee Stock Purchase Plan and related agreements.(3)
10.9 Commercial Office Lease by and between Arden Realty Limited
Partnership, a Maryland Limited Partnership, and Registrant
dated August 4, 1997.(3)
10.10 Master Lease Agreement, dated March 1, 1999, between Registrant
and Silicon Valley Bank.(3)
10.11 Internet Data Center Services Agreement, dated March 1, 1999,
between Registrant and Exodus Communications, Inc.(3)
+10.12 Internet Data Center Services Agreement, dated March 31, 1999,
between nFront, Inc. and Exodus Communications, Inc.
10.13 Moneyline Express (M&I) Agreement dated February 27, 1997.
(Confidential treatment has been granted for portions of this
agreement).(6)
10.14 License Agreement with HNC Software Inc. (Confidential treatment
has been granted for portions of this agreement).(4)
10.15 Lease, dated as of July 9, 1998, between Schneider Atlanta, L.P.
and nFront, Inc.(2)
10.16 Standard Office Lease, dated as of March 6, 2000, by and between
Arden Realty Finance Partnership, L.P. and the Registrant.(2)
+10.17 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.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.18 Sublease Agreement, dated November 23, 1999, as amended, between
Antec Corporation and nFront, Inc.
+11 Statement of computation of net loss per share and pro forma net
loss per share (see note 1 of notes to financial statements).
+21 Subsidiaries of the Registrant.
23.1 Consent of O'Melveny & Myers LLP (to be included in Exhibit 5).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Ernst & Young LLP, Independent Auditors.
23.4 Consent of Ernst & Young LLP, Independent Auditors.
23.5 Consent of Deloitte & Touche LLP.
+24 Power of Attorney.
+27.1 Restated Financial Data Schedule for the years ended December 31,
1999 and December 31, 1998.
+27.2 Restated Financial Data Schedule for the three month periods ended
March 31, 2000 and March 31, 1999.
</TABLE>
--------
+ Previously filed.
(1) Incorporated by reference to the exhibits filed with the Registrant's
Current Report on Form 8-K dated April 14, 2000.
(2) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
(3) 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.
(4) Incorporated by reference to the exhibits filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999.
(5) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-41044), which was
filed with the SEC on July 10, 2000.
(6) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1999.
Schedules have been omitted because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
under the provisions referenced in Item 14 of this Registration Statement or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against those liabilities, other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding, is asserted by a director, officer or controlling
person in connection with the securities being registered hereunder, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether the indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of that issue.
II-5
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of those securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement on Form S-1 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Calabasas, State of California, on this 27th day of July, 2000.
DIGITAL INSIGHT CORPORATION
/s/ Kevin McDonnell
By: _________________________________
Kevin McDonnell
Senior Vice President, Finance &
Administration, Chief Financial
Officer and Secretary
Under the requirements of the Securities Act of 1933, this Amendment No. 2
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board, Chief July 27, 2000
____________________________________ Executive Officer and
John Dorman President (Principal
Executive Officer)
* Vice Chairman of the Board July 27, 2000
____________________________________
Brady L. "Tripp" Rackley III
/s/ Kevin McDonnell Senior Vice President, July 27, 2000
____________________________________ Finance & Administration,
Kevin McDonnell Chief Financial Officer,
Secretary and Director
(Principal Financial and
Accounting Officer)
* Executive Vice President and July 27, 2000
__________________________________ Director
Paul Fiore
* Director July 27, 2000
____________________________________
John Jarve
* Director July 27, 2000
____________________________________
James McGuire
* Director July 27, 2000
____________________________________
Robert North
</TABLE>
*By:/s/ Kevin McDonnell
____________________________
Kevin McDonnell
(Attorney-in-fact)
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1 Form of Underwriting Agreement.
2.1 Agreement and Plan Merger, dated as of March 30, 2000, by and
among the Registrant, ATA Acquisition Corp. and AnyTime Access,
Inc.(1)
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.(2)
+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.
+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.
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.(1)
3.1 Third Amended and Restated Certificate of Incorporation of
Registrant, as currently in effect.(3)
3.2 Restated Bylaws of Registrant, as currently in effect.(3)
4.1 Specimen Common Stock Certificate.(3)
4.2 Third Amended and Restated Rights Agreement, dated February 10,
2000, between the Registrant and the parties named therein.(4)
4.3 Warrant to Purchase Stock dated February 18, 1999 issued to
Silicon Valley Bank.(3)
4.4 Warrant Agreement dated January 31, 1998 issued to Comdisco,
Inc.(3)
4.5 Shareholder Agreement, dated as of May 13, 1998, as amended.(4)
5 Opinion of O'Melveny & Myers LLP.
10.1 Form of Indemnification Agreement entered into by Registrant with
each of its directors and executive officers.(3)
10.2 Stock Option Agreement, dated October 13, 1998, between John
Dorman and the Registrant.(3)
10.3 Stock Option Agreement, dated March 30, 1999, between Kevin
McDonnell and the Registrant.(3)
10.4 Stock Option Agreement, dated March 30, 1999, between Stephen
Zarate and the Registrant.(3)
10.5 1997 Stock Plan.(3)
10.6 1999 Stock Plan and related agreements.(3)
10.7 1999 Stock Plan, as amended, of 1View Network Corporation.(5)
10.8 1999 Employee Stock Purchase Plan and related agreements.(3)
10.9 Commercial Office Lease by and between Arden Realty Limited
Partnership, a Maryland Limited Partnership, and Registrant dated
August 4, 1997.(3)
10.10 Master Lease Agreement, dated March 1, 1999, between Registrant
and Silicon Valley Bank.(3)
10.11 Internet Data Center Services Agreement, dated March 1, 1999,
between Registrant and Exodus Communications, Inc.(3)
+10.12 Internet Data Center Services Agreement, dated March 31, 1999,
between nFront, Inc. and Exodus Communications, Inc.
10.13 Moneyline Express (M&I) Agreement dated February 27, 1997.
(Confidential treatment has been granted for portions of this
agreement).(6)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.14 License Agreement with HNC Software Inc. (Confidential treatment
has been granted for portions of this agreement).(4)
10.15 Lease, dated as of July 9, 1998, between Schneider Atlanta, L.P.
and nFront, Inc.(2)
10.16 Standard Office Lease, dated as of March 6, 2000, by and between
Arden Realty Finance Partnership, L.P. and the Registrant.(2)
+10.17 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.
10.18 Sublease Agreement, dated November 23, 1999, as amended, between
Antec Corporation and nFront, Inc.
+11 Statement of computation of net loss per share and pro forma net
loss per share (see note 1 of notes to financial statements).
+21 Subsidiaries of the Registrant.
23.1 Consent of O'Melveny & Myers LLP (to be included in Exhibit 5).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Ernst & Young LLP, Independent Auditors.
23.4 Consent of Ernst & Young LLP, Independent Auditors.
23.5 Consent of Deloitte & Touche LLP.
+24 Power of Attorney.
+27.1 Restated Financial Data Schedule for the years ended December 31,
1999 and December 31, 1998.
+27.2 Restated Financial Data Schedule for the three-month periods ended
March 31, 2000 and March 31, 1999.
</TABLE>
--------
+ Previously filed.
(1) Incorporated by reference to the exhibits filed with the Registrant's
Current Report on Form 8-K dated April 14, 2000.
(2) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
(3) 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.
(4) Incorporated by reference to the exhibits filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999.
(5) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-41044), which was
filed with the SEC on July 10, 2000.
(6) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1999.
