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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
____________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
Commission file number 0-27459
Digital Insight Corporation
(Exact name of registrant as specified in its charter)
Delaware 77-0493142
(State of incorporation) (IRS Employer
Identification Number)
26025 Mureau Road, Calabasas, CA 91302
(Address of principal executive offices, including zip code)
(818) 871-0000
(Registrant's telephone number, including area code)
____________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock, $0.001 par value
29,497,670 shares outstanding as of October 31, 2001
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DIGITAL INSIGHT CORPORATION
FORM 10-Q
INDEX
Page
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PART I - FINANCIAL INFORMATION
ITEM 1 Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000......................................... 1
Consolidated Statements of Operations for the three and
nine months ended September 30, 2001 and 2000............. 2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and 2000......................... 3
Notes to Consolidated Financial Statements................. 4
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 7
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk...... 13
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings (not applicable)
ITEM 2 Changes in Securities and Use of Proceeds (not applicable)
ITEM 3 Defaults upon Senior Securities (not applicable)
ITEM 4 Submission of Matters to a Vote of Security Holders (not
applicable)
ITEM 5 Other Information (not applicable)
ITEM 6 Exhibits and Reports on Form 8-K................................ 13
SIGNATURES............................................................... 14
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
DIGITAL INSIGHT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share information)
September 30, December 31,
2001 2000
--------------------------
Assets
------
Current assets:
Cash and cash equivalents.......................... $ 21,516 $ 71,523
Short-term investments............................. 39,044 10,187
Accounts receivable, net of allowances for doubtful
accounts of $120 and $221 at September 30, 2001
and December 31, 2000, respectively............... 18,622 14,403
Accumulated implementation costs................... 5,032 4,551
Other current assets............................... 2,966 3,907
--------- --------
Total current assets............................ 87,180 104,571
Property and equipment, net of accumulated
depreciation of $20,853 and $12,835 at September
30, 2001 and December 31, 2000, respectively....... 38,469 34,702
Goodwill and intangible assets, net of amortization
of $42,450 and $16,125 at September 30, 2001 and
December 31, 2000, respectively.................... 107,777 135,067
Accumulated implementation costs.................... 6,488 5,173
Long-term investments............................... 4,599 -
Other assets........................................ 685 2,713
--------- --------
Total assets.................................... $ 245,198 $282,226
========= ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable................................... $ 3,620 $ 5,308
Accrued compensation and related benefits.......... 3,799 3,237
Customer deposits and deferred revenue............. 8,144 12,442
Other accrued liabilities.......................... 7,782 6,477
Line of credit..................................... - 1,000
Capital lease obligations.......................... 1,567 2,265
Current portion of long-term debt.................. 2,979 278
--------- --------
Total current liabilities....................... 27,891 31,007
Capital lease obligations........................... 620 1,706
Long-term debt...................................... 4,821 2,222
Customer deposits and deferred revenue.............. 7,810 7,456
--------- --------
Total liabilities............................... 41,142 42,391
--------- --------
Stockholders' equity:
Common stock, $.001 par value; 100,000,000 shares
authorized; 29,469,179 and 28,902,998 shares
issued and outstanding at September 30, 2001 and
December 31, 2000, respectively................... 29 29
Additional paid-in capital......................... 336,393 333,845
Stockholder note receivable........................ (121) (115)
Deferred stock-based compensation.................. (1,879) (6,805)
Accumulated deficit................................ (130,366) (87,119)
--------- --------
Total stockholders' equity...................... 204,056 239,835
--------- --------
Total liabilities and stockholders' equity...... $ 245,198 $282,226
========= ========
The accompanying notes are an integral part of these
consolidated financial statements.
1
DIGITAL INSIGHT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
2001 2000 2001 2000
-------- -------- -------- ---------
Revenue................................ $ 24,524 $ 16,395 $ 67,626 $ 36,252
Cost of revenue (including amortization
of deferred stock-based compensation
of $187 and $163 for the three months
ended September 30, 2001 and 2000,
respectively, and $577 and $225 for
the nine months ended September 30,
2001 and 2000, respectively).......... 13,827 9,849 40,682 21,037
-------- -------- -------- ---------
Gross profit........................ 10,697 6,546 26,944 15,215
-------- -------- -------- ---------
Operating expenses:
Sales, general and administrative
(including amortization of deferred
stock-based compensation of $278 and
$493 for the three months ended
September 30, 2001 and 2000,
respectively, and $901 and $681 for
the nine months ended September 30,
2001 and 2000, respectively)......... 7,232 7,674 23,441 23,799
Research and development (including
amortization of deferred stock-based
compensation of $59 and $1,496 for
the three months ended September 30,
2001 and 2000, respectively, and
$2,870 and $2,066 for the nine months
ended September 30, 2001 and 2000,
respectively)........................ 4,958 7,212 18,888 15,134
Amortization of goodwill and
intangible assets.................... 8,800 6,958 26,325 7,258
Restructuring charge (including
amortization of deferred stock-based
compensation of $940 for the nine
months ended September 30, 2001)..... - - 3,276 -
Merger-related expenses............... - - - 12,658
-------- -------- -------- ---------
Total operating expenses............ 20,990 21,844 71,930 58,849
-------- -------- -------- ---------
Loss from operations................... (10,293) (15,298) (44,986) (43,634)
Interest and other income, net......... 355 1,045 1,739 2,692
-------- -------- -------- ---------
Net loss before cumulative effect of
change in accounting method........... (9,938) (14,253) (43,247) (40,942)
Cumulative effect of change in
accounting method..................... - - - (2,515)
-------- -------- -------- ---------
Net loss............................... $ (9,938) $(14,253) $(43,247) $ (43,457)
======== ======== ======== =========
Basic and diluted net loss per share
before cumulative effect of change in
accounting method..................... $(0.34) $(0.53) $(1.48) $ (1.67)
Per share cumulative effect of change
in accounting method.................. - - - (0.11)
-------- -------- -------- ---------
Basic and diluted net loss per share... $(0.34) $(0.53) $(1.48) $ (1.78)
======== ======== ======== =========
Weighted average shares used in
computing basic and diluted net loss
per share............................. 29,429 27,079 29,211 24,449
======== ======== ======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
2
DIGITAL INSIGHT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine months ended
September 30,
-------------------
2001 2000
-------- ---------
Cash flows from operating activities:
Net loss................................................. $(43,247) $ (43,457)
Adjustments to reconcile net loss to net cash used in
operating activities:
Cumulative effect of change in accounting method........ - 2,515
Depreciation and amortization........................... 8,018 3,745
Amortization of goodwill and intangible assets.......... 26,325 7,258
Amortization of deferred stock-based compensation....... 5,288 2,972
Interest income on stockholder note receivable.......... (6) (10)
Changes in operating assets and liabilities:
Accounts receivable.................................... (4,219) (2,900)
Accumulated implementation costs....................... (1,796) (2,934)
Other current assets................................... 941 906
Other assets........................................... 378 (150)
Accounts payable....................................... (1,688) (3,721)
Accrued compensation and related benefits.............. 562 98
Customer deposits and deferred revenue................. (3,944) 5,529
Other accruals......................................... 2,270 (5,460)
-------- ---------
Net cash used in operating activities................. (11,118) (35,609)
-------- ---------
Cash flows from investing activities:
Purchase of investments.................................. (43,456) (49,707)
Proceeds from sale of investments........................ 10,000 44,752
Cash used in acquisition of subsidiary................... - (5,000)
Acquisition of property and equipment.................... (10,135) (14,495)
-------- ---------
Net cash used in investing activities................. (43,591) (24,450)
-------- ---------
Cash flows from financing activities:
Principal payments on debt............................... (7,784) (3,842)
Proceeds from debt....................................... 10,300 3,000
Net proceeds from issuance of common stock............... 2,186 64,738
-------- ---------
Net cash provided by financing activities............. 4,702 63,896
-------- ---------
Net decrease in cash and cash equivalents............. (50,007) 3,837
Cash and cash equivalents at beginning of the period...... 71,523 51,274
-------- ---------
Cash and cash equivalents at end of the period............ $ 21,516 $ 55,111
======== =========
Supplementary disclosures of cash flow information:
Cash paid during the year for interest................... $ 95 $ 201
Supplemental non-cash investing and financing activities:
Acquisition of property and equipment.................... - (3,143)
Capital lease obligation incurred........................ - 3,143
Warrants issued.......................................... - 473
Effect of Acquisition:
Accounts receivable and other assets..................... - (6,135)
Property and equipment................................... - (3,861)
Goodwill and intangible assets........................... - (150,464)
Accounts payable and accrued compensation and benefits
and other accruals...................................... - 11,697
Capital lease obligations................................ - 695
Customer deposits and deferred revenue................... - 392
Deferred stock based compensation........................ - (8,741)
Common stock issued in acquisition....................... - 151,417
The accompanying notes are an integral part of these
consolidated financial statements.
3
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Summary of Significant Accounting Policies
The Company
Digital Insight Corporation (the "Company") provides Internet banking services
to credit unions, banks and savings and loans. The Company offers financial
institutions cost-effective outsourced applications, branded in their name,
which include Internet banking for their retail customers and Internet cash
management for their commercial customers, a target marketing program to enable
them to effectively sell additional financial services to end users, a 24 by 7
loan decisioning and member services center, a customized e-commerce portal and
web site design and implementation services. Substantially all of the Company's
revenue is derived from these services.
On February 10, 2000, the Company merged with nFront, Inc. ("nFront"). The
merger was accounted for as a pooling of interests and was effectuated by a
stock-for-stock exchange. The financial results for the Company and nFront have
been combined for the historical periods presented in accordance with the
pooling of interests method. In addition, the Company acquired 1View Network
("1View") on June 21, 2000 and AnyTime Access Inc. ("ATA") on July 31, 2000.
Both acquisitions were accounted for using the purchase method of accounting.
The accompanying consolidated financial statements for the three and nine
months ended September 30, 2001 and 2000 have been prepared in accordance with
generally accepted accounting principles ("GAAP") and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote
disclosures normally included in financial statements in accordance with GAAP
have been omitted or condensed in accordance with quarterly reporting
requirements of the Securities and Exchange Commission (the "SEC"). Independent
accountants have not audited these consolidated financial statements. The
consolidated financial statements, however, include all adjustments (consisting
of normal recurring adjustments), which are, in the opinion of management,
necessary for a fair statement of the consolidated financial condition, results
of operations and cash flows for such periods. However, these results are not
necessarily indicative of results for any other interim period or for the full
year. The accompanying consolidated balance sheet as of December 31, 2000 has
been derived from the audited consolidated financial statements, but does not
include all disclosures required by GAAP.
Management believes that the disclosures included in the accompanying interim
consolidated financial statements and footnotes are adequate to make the
information not misleading, but should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 2000.
Revenue recognition
During the fourth quarter of 2000, the Company adopted Staff Accounting
Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements,"
issued by the SEC in December 1999. The Company's historical method of revenue
recognition for implementation services was upon completion of the
implementation process, which is typically 90 to 120 days after contract
initiation. The Company also deferred the implementation costs and recognized
them upon completion of the implementation. Under SAB 101, the Company now
defers recognition of certain implementation fees and related direct incremental
costs and recognizes them over the life of the service relationship, generally
three to five years. The change in accounting principle caused by SAB 101
resulted in a cumulative effect adjustment of approximately $2.5 million at
January 1, 2000. The consolidated financial statements previously reported as
of September 30, 2000 and for the three and nine months then ended have been
adjusted to reflect this change in accounting method.
Long-lived assets
The Company identifies and records impairment losses on long-lived assets
whenever events or changes in circumstances indicate the carrying amount of such
assets may not be recoverable. Recoverability of these assets is determined by
comparing the forecasted undiscounted cash flows attributable to such assets to
their carrying value. If the carrying value of the assets exceeds the forecasted
undiscounted cash flows, then the assets are written down to their fair value.
Fair value is determined based on discounted cash flows or appraised values,
depending upon the nature of the assets. To date, there have been no such
impairments.
4
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
New accounting standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The new standard requires
companies to record derivatives on their balance sheets 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 adopted
SFAS No. 133 in the first quarter of 2001. To date, the Company has not engaged
in any hedging activity. Application of SFAS No. 133 did not have an impact on
the Company's financial reporting.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 establishes new
standards for accounting and reporting requirements for business combinations
initiated after June 30, 2001 and prohibits the use of the pooling-of-interests
method for combinations initiated after June 30, 2001. SFAS No. 142 changes the
accounting for goodwill from an amortization method to an impairment only
approach. Upon adoption of SFAS No. 142, goodwill will be tested at the
reporting unit annually and whenever events or circumstances occur indicating
that goodwill might be impaired. Amortization of goodwill, including goodwill
from past business combinations will cease. The adoption date for SFAS No. 141
and 142 will be January 1, 2002. The Company is still assessing what the impact
of SFAS No. 141 and 142 will be on its results of operations and financial
position.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. This Statement supersedes FASB Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. This Statement also supersedes the accounting and reporting provisions of
APB Opinion No. 30 ("APB 30"), Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for segments of a business
to be disposed of. This Statement also amends ARB No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
temporarily controlled subsidiary. The adoption date for SFAS No. 144 will be
January 1, 2002.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements as of September 30, 2000 and for the three and nine months then ended
in order to conform to the 2001 presentation.
2. Revolving line of credit
In May 2001, the Company renewed its $10 million secured revolving credit
commitment (the "Revolver") from a bank, which matures in July 2002. Interest on
the outstanding borrowings is payable monthly. The interest rate on the Revolver
is equal to the bank's prime rate. The Revolver is collateralized by all of the
Company's assets. As of December 31, 2000, the Company had outstanding advances
under the Revolver of $1 million. As of September 30, 2001, the Company had no
outstanding advances under the Revolver.
3. Long-term debt
In August 2000, the Company obtained a $10 million equipment leasing line of
credit evidenced by a Multiple Disbursement Note from a bank, collateralized by
the participating equipment and a $10 million certificate of deposit. The terms
of the note were revised in August 2001 to allow principal to be borrowed from
time to time prior to October 31, 2001. Interest will accrue at either (i) the
bank's prime rate less 1% or (ii) 1.5% above the rate stated on the certificate
of deposit pledged as collateral for the note. Under the revised terms,
interest is paid monthly; principal will be paid in 34 monthly installments,
commencing November 30, 2001. As of September 30, 2001 and December 31, 2000,
the Company had $7.8 million and $2.5 million, respectively, in borrowings
outstanding under this note. At September 30, 2001, the interest rate on the
note was 5.5% per annum.
5
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
4. Restructuring charge
In February 2001, the Company announced a plan to strategically restructure
its business and reduce operating expenses. The process included a review of
potentially redundant functions and facilities. The majority of these
redundancies resulted from the three acquisitions completed by the Company in
2000. As a result of this process, the Company notified 58 employees that their
positions would be eliminated. The Company also anticipated the closure of its
facility in San Francisco, California. The Company has reached an agreement,
effective October 1, 2001, to terminate the lease on the San Francisco facility.
During the first quarter of 2001, the Company recorded a restructuring charge of
approximately $1,629,000 for severance payments and related benefits for
employees whose positions were eliminated, approximately $940,000 in deferred
stock-based compensation expense for the acceleration of stock options and
approximately $707,000 for exit costs to be incurred as a result of the closure
of the San Francisco facility. The following table sets forth the 2001
restructuring reserve activity:
Deferred
Employee Exit stock-based
related costs compensation Total
-------- ----- ------------ -----
Restructuring reserve (in thousands)
Restructuring reserve.............. $ 1,629 $ 707 $ 940 $ 3,276
Cash payments...................... (1,376) (150) - (1,526)
Non-cash disposals................. - - (940) (940)
------- ----- ----- -------
Reserve at September 30, 2001.... $ 253 $ 557 $ - $ 810
======= ===== ===== =======
5. Reportable segments
The Company manages its business in two reportable segments: the Internet
banking division and the lending division. The results of operations from these
reportable segments were as follows for the three and nine months ended
September 30, 2001 and 2000:
Internet
banking Lending Unallocated
division (1) division (2) expenses (3) Total
------------ ------------ ------------ ---------
(In thousands)
Three months ended September 30, 2001:
Revenue.............................. $ 20,427 $ 4,097 - $ 24,524
Gross profit......................... $ 9,285 $ 1,412 - $ 10,697
Loss from operations................. $ (1,410) $ (83) $ (8,800) $(10,293)
Three months ended September 30, 2000:
Revenue.............................. $ 13,541 $ 2,854 - $ 16,395
Gross profit......................... $ 5,842 $ 704 - $ 6,546
Loss from operations................. $ (8,063) $ (277) $ (6,958) $(15,298)
Nine months ended September 30, 2001:
Revenue.............................. $ 56,137 $11,489 - $ 67,626
Gross profit......................... $ 24,022 $ 2,922 - $ 26,944
Loss from operations................. $(13,755) $(1,630) $(29,601) $(44,986)
Nine months ended September 30, 2000:
Revenue.............................. $ 33,398 $ 2,854 $ 36,252
Gross profit......................... $ 14,511 $ 704 $ 15,215
Loss from operations................. $(23,441) $ (277) $(19,916) $(43,634)
------------
(1) Loss from operations includes amortization of deferred stock-based
compensation of $276 and $1,971 for the three months ended September 30,
2001 and 2000, respectively, and $3,580 and $2,791 for the nine months
ended September 30, 2001 and 2000, respectively.
(2) Loss from operations includes amortization of deferred stock-based
compensation of $248 and $181 for the three months ended September 30, 2001
and 2000, respectively, and $768 and $181 for the nine months ended
September 30, 2001 and 2000, respectively.
(3) Represents amortization of goodwill and intangible assets, restructuring
charge and merger-related expenses. The restructuring charge includes
amortization of deferred stock-based compensation of $940 for the nine
months ended September 30, 2001.
For the nine-month period ended September 30, 2001, no customer comprised more
than 10% of revenue. The Company has no foreign operations.
6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the accompanying
Consolidated Financial Statements and Notes thereto. The forward-looking
statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") involve certain risks and
uncertainties. These forward looking statements include statements regarding
anticipated financial performance, business prospects, anticipated capital
expenditures and other similar matters, which reflect management's best judgment
based on factors currently known. Actual results and experience could differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements as a result of a number of factors, including but not
limited to those discussed in the MD&A and under the caption "Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2000.
As of September 30, 2001, we had contracts with 1,385 financial institutions,
1,148 of which had contracted for Internet banking services, 477 of which had
contracted for cash management services and 162 of which had contracted for on-
line lending services. There were approximately 2.2 million active Internet
banking end users at the end of the quarter, up 69% from a year earlier and 10%
from the prior quarter. We had a total of 960 Internet banking clients with
live sites at September 30, 2001, which represented approximately 25.0 million
potential end users and an overall penetration rate of 8.8%. The total number
of potential end users of the 1,148 contracted Internet banking institutions was
approximately 27.6 million.
We manage our business in two reportable segments: the Internet banking
division and the lending division. The results of operations from these
reportable segments were as follows for the three and nine months ended
September 30, 2001 and 2000:
Internet
banking Lending Unallocated
division (1) division (2) expenses (3) Total
------------ ------------ ------------ ---------
(In thousands)
Three months ended September 30, 2001:
Revenue.............................. $ 20,427 $ 4,097 - $ 24,524
Gross profit......................... $ 9,285 $ 1,412 - $ 10,697
Loss from operations................. $ (1,410) $ (83) $ (8,800) $(10,293)
Three months ended September 30, 2000:
Revenue.............................. $ 13,541 $ 2,854 - $ 16,395
Gross profit......................... $ 5,842 $ 704 - $ 6,546
Loss from operations................. $ (8,063) $ (277) $ (6,958) $(15,298)
Nine months ended September 30, 2001:
Revenue.............................. $ 56,137 $11,489 - $ 67,626
Gross profit......................... $ 24,022 $ 2,922 - $ 26,944
Loss from operations................. $(13,755) $(1,630) $(29,601) $(44,986)
Nine months ended September 30, 2000:
Revenue.............................. $ 33,398 $ 2,854 $ 36,252
Gross profit......................... $ 14,511 $ 704 $ 15,215
Loss from operations................. $(23,441) $ (277) $(19,916) $(43,634)
------------------
(1) Loss from operations includes amortization of deferred stock-based
compensation of $276 and $1,971 for the three months ended September 30,
2001 and 2000, respectively, and $3,580 and $2,791 for the nine months
ended September 30, 2001 and 2000, respectively.
(2) Loss from operations includes amortization of deferred stock-based
compensation of $248 and $181 for the three months ended September 30, 2001
and 2000, respectively, and $768 and $181 for the nine months ended
September 30, 2001 and 2000, respectively.
(3) Represents amortization of goodwill and intangible assets, restructuring
charge and merger-related expenses. The restructuring charge includes
amortization of deferred stock-based compensation of $940 for the nine
months ended September 30, 2001.
For the nine-month period ended September 30, 2001, no customer comprised more
than 10% of revenue. We have no foreign operations.
7
Results of Operations
The discussion of the results of operations compares the three and nine months
ended September 30, 2001 with the three and nine months ended September 30,
2000. In February 2000, we merged with nFront in a pooling of interests
transaction. Accordingly, our financial results have been combined with the
financial results of nFront for the historical periods presented.
Comparison of Three Months Ended September 30, 2001 and September 30, 2000
Results of Operations: Net loss for the three months ended September 30, 2001
was approximately $9.9 million, compared to approximately $14.3 million for the
corresponding period in 2000.
Revenue: Revenue consists primarily of recurring monthly service fees and to a
lesser extent, one-time implementation fees, which are recognized over the term
of the service relationship. Our recurring revenue consists of services fees
based on the number of end users or end user transactions and fees for hosting
and maintaining customer websites and other monthly services. In addition, we
receive fixed fees for other services such as training, web development and
professional services. Revenue for the three months ended September 30, 2001
was approximately $24.5 million, an increase of 49%, from approximately $16.4
million for the same period last year.
Revenue for the three months ended September 30, 2001 included approximately
$20.4 million relating to the Internet banking division compared to
approximately $13.5 million for the same period last year. This increase of
approximately $6.9 million resulted from an increased number of end users
combined with sales of additional services to our existing client customer base.
The number of active Internet banking end users increased 69% to approximately
2.2 million at September 30, 2001 from approximately 1.3 million at September
30, 2000.
Revenue for the three months ended September 30, 2001 included approximately
$4.1 million relating to the lending division compared to approximately $2.9
million for the same period last year. This increase of approximately $1.2
million resulted from a full quarter of operations in 2001 compared to the
partial quarter of operations subsequent to the date of acquisition in 2000. In
addition, our lending division is experiencing a shift in the mix of our lending
application volumes toward Internet applications and away from the historical
emphasis on call center applications. The Internet applications produce a
slightly lower revenue stream; however the costs associated with the Internet
applications are relatively lower than the call center applications. Therefore,
the shift in mix resulted in slightly lower revenues, but higher margins.
Consolidations in the banking and financial services industry could result in
a smaller market for our products and services. Terminations of existing
customers through industry consolidation or other occurrences may result in one-
time termination fees and in some cases fees related to transition services,
which could affect our revenue mix and have a negative impact on our future
revenue.
Cost of Revenue: Cost of revenue is comprised primarily of salaries and
related personnel expenses, network costs, expenses related to the operation of
our data centers and fees paid to third parties, including bill payment vendors,
data processing vendors and communication services providers. Cost of revenue
for the three months ended September 30, 2001 was approximately $13.8 million,
an increase of 40%, from approximately $9.8 million for the same period last
year.
Cost of revenue for the three months ended September 30, 2001 included
approximately $11.1 million relating to the Internet banking division compared
to approximately $7.7 million for the same period last year. This increase of
approximately $3.4 million was primarily due to the cost of implementing and
servicing additional financial institutions combined with continued investment
in our data center infrastructure.
Cost of revenue for the three months ended September 30, 2001 included
approximately $2.7 million relating to the lending division compared to
approximately $2.1 million for the same period last year. This increase of
approximately $0.6 million resulted from a full quarter of operations in 2001,
compared to the partial quarter of operations subsequent to the date of
acquisition in 2000, partially offset by the effect of the shift in mix from the
historical call center applications to the lower cost Internet applications.
Gross Profit: Gross profit was approximately $10.7 million for the three
months ended September 30, 2001 compared to approximately $6.5 million for the
same period last year. Gross profit for the Internet banking division as a
percentage of revenue was 45% for the third quarter of 2001 compared to 43% for
the third quarter of 2000. Gross profit for the lending division as a percent
of revenue was 34% for the third quarter of 2001 compared to 25% for the third
quarter of 2000. The increase in gross profit for the lending division was the
result of the shift in
8
application mix, as discussed above, combined with the seasonal nature of the
business. Typically, lending application volume is slightly higher in the second
and third quarters as compared to the first and fourth quarters.
Sales, General and Administrative: Sales, general and administrative expenses
consist primarily of salaries and related expenses for executive, sales,
marketing, finance, human resources, administrative personnel and other general
corporate expenses. In addition, these expenses include marketing expenses, such
as trade shows and promotional costs.
Sales, general and administrative expenses were approximately $7.2 million for
the three months ended September 30, 2001 compared to approximately $7.7 million
for the three months ended September 30, 2000. As a percentage of revenue,
sales, general and administrative expenses were 29% for the three months ended
September 30, 2001 compared to 47% for the three months ended September 30,
2000.
Research and Development: Research and development expenses consist primarily
of salaries, related personnel expenses and consultant fees related to the
design, development, testing and enhancement of both our products and our data
processing vendor interface software.
Research and development expenses were approximately $5.0 million for the
three months ended September 30, 2001 compared to approximately $7.2 million for
the three months ended September 30, 2000. This decrease was primarily due to a
reduction in the use of outside consultants. Research and development expenses
as a percentage of revenue were 20% for the three months ended September 30,
2001, compared to 44% for the three months ended September 30, 2000.
Amortization of Goodwill and Intangible Assets: The acquisitions of 1View and
ATA generated goodwill and intangible assets of approximately $150.2 million,
which are being amortized on a straight-line basis over the estimated lives of
three to five years. We are assessing the impact of SFAS No. 142 on the
accounting of the goodwill generated from the acquisitions.
Interest and Other Income, Net: Interest and other income, net, was
approximately $355,000 for the three months ended September 30, 2001 and
approximately $1.0 million for the three months ended September 30, 2000. This
decrease was primarily due to a lower rate of return on our investments combined
with an increase in interest expense due to increased outstanding debt.
Comparison of Nine Months Ended September 30, 2001 and September 30, 2000
Results of Operations: Net loss for the nine months ended September 30, 2001
was approximately $43.2 million, compared to approximately $43.5 million for the
corresponding period in 2000.
Revenue: Revenue for the nine months ended September 30, 2001 was
approximately $67.6 million, an increase of 86%, from approximately $36.3
million for the same period last year.
Revenue for the nine months ended September 30, 2001 included approximately
$56.1 million relating to the Internet banking division compared to
approximately $33.4 million for the same period last year. This increase of
approximately $22.7 million resulted from an increased number of end users
combined with sales of additional services to our existing client customer base.
Revenue for the nine months ended September 30, 2001 included approximately
$11.5 million relating to the lending division compared to approximately $2.9
million for the same period last year. This increase of approximately $8.6
million resulted from a full nine months of operations in 2001 compared to
approximately two months of operations subsequent to the date of acquisition in
2000.
Cost of Revenue: Cost of revenue for the nine months ended September 30, 2001
was approximately $40.7 million, an increase of 93%, from approximately $21.0
million for the same period last year.
Cost of revenue for the nine months ended September 30, 2001 included
approximately $32.1 million relating to the Internet banking division compared
to approximately $18.9 million for the same period last year. This increase of
approximately $13.2 million was primarily due to the cost of implementing and
servicing additional financial institutions combined with continued investment
in our data center infrastructure.
Cost of revenue for the nine months ended September 30, 2001 included
approximately $8.6 million relating to the lending division compared to
approximately $2.2 million for the same period last year. This increase of
approximately $6.4 million resulted from a full nine months of operations in
2001, compared to approximately two months of operations subsequent to the date
of acquisition in 2000, partially offset by the effect of the shift in mix from
the historical call center applications to the lower cost Internet applications.
9
Gross Profit: Gross profit increased to approximately $26.9 million for the
nine months ended September 30, 2001 from approximately $15.2 million for the
nine months ended September 30, 2000. Gross profit for the Internet banking
division as a percentage of revenue remained stable at 43% for both the first
nine months of 2001 and 2000. Gross profit for the lending division as a
percent of revenue remained stable at 25% for both the first nine months of 2001
and 2000.
Sales, General and Administrative: Sales, general and administrative expenses
were approximately $23.4 million for the nine months ended September 30, 2001
compared to approximately $23.8 million for the nine months ended September 30,
2000. As a percentage of revenue, sales, general and administrative expenses
were 35% for the nine months ended September 30, 2001 compared to 66% for the
nine months ended September 30, 2000.
Research and Development: Research and development expenses were approximately
$18.9 million for the nine months ended September 30, 2001 compared to
approximately $15.1 million for the nine months ended September 30, 2000.
Research and development expenses as a percentage of revenue were 28% for the
nine months ended September 30, 2001, compared to 42% for the nine months ended
September 30, 2000. We expect these expenses, as a percentage of revenue, to
continue to decline in the fourth quarter as a result of the reduction in usage
of outside consultants.
Amortization of Goodwill and Intangible Assets: The acquisitions of 1View and
ATA generated goodwill and intangible assets of approximately $150.2 million,
which are being amortized on a straight-line basis over the estimated lives of
three to five years. We are assessing the impact of SFAS No. 142 on the
accounting of the goodwill generated from the acquisitions.
Restructuring Charge: In February 2001, we announced a plan to strategically
restructure our business and reduce operating expenses. The process included a
review of potentially redundant functions and facilities. The majority of these
redundancies resulted from the three acquisitions completed in 2000. As a
result of this process, we notified 58 employees that their positions would be
eliminated. We also anticipated the closure of our facility in San Francisco,
California. We have reached an agreement, effective October 1, 2001, to
terminate the lease on the San Francisco facility. During the first quarter of
2001, we recorded a restructuring charge of approximately $1,629,000 for
severance payments and related benefits for employees whose positions were
eliminated, approximately $940,000 in deferred stock-based compensation expense
for the acceleration of stock options and approximately $707,000 for exit costs
to be incurred as a result of the closure of the San Francisco facility.
Interest and Other Income, Net: Interest and other income, net, was
approximately $1.7 million for the nine months ended September 30, 2001, and
approximately $2.7 million for the nine months ended September 30, 2000. This
decrease was primarily due to a lower rate of return on our investments combined
with an increase in interest expense due to increased outstanding debt.
Liquidity and Capital Resources
At September 30, 2001, we had cash, cash equivalents and short-term
investments of $60.6 million and $4.6 million in long-term investments. In
addition, we have access to our $10 million Revolver and our $10 million
equipment leasing line of credit. As of September 30, 2001, we had no
outstanding advances under the Revolver and $7.8 million of outstanding advances
under the equipment leasing line of credit.
Net cash used in operating activities was approximately $11.1 million for the
nine months ended September 30, 2001 and approximately $35.6 million for the
nine months ended September 30, 2000. The decrease in cash used in operating
activities was primarily due to the decrease in non-recurring merger-related
expenses combined with a reduction in the loss from operations excluding non-
cash charges.
Net cash used in investing activities was approximately $43.6 million for the
nine months ended September 30, 2001 and approximately $24.5 million for the
nine months ended September 30, 2000. The increase in cash used in investing
activities was primarily due to the decrease in proceeds from the sale of
investments.
Net cash provided by financing activities was approximately $4.7 million for
the nine months ended September 30, 2001 and approximately $63.9 million for the
nine months ended September 30, 2000. The decrease in cash provided by
financing activities was primarily due to the decrease in proceeds from
issuances of common stock.
We have no material commitments other than the Revolver, equipment leasing
line of credit and obligations under operating and capital leases. Future
capital requirements will depend upon many factors, including the timing of
research and product development efforts and the expansion of our marketing
efforts. We expect to continue to
10
expend significant amounts on expansion of facility infrastructure, computer and
related data center equipment, and personnel.
We believe that our cash, cash equivalents and short-term investment balances
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 interest bearing, investment grade securities.
Pro Forma Net Loss
The following pro forma net loss calculation, which is derived by excluding
non-cash amortization of deferred stock-based compensation, amortization of
goodwill and intangible assets, merger-related expenses and restructuring
charge, is not a disclosure required by GAAP but is included for informational
purposes only.
Three months ended Nine months ended
September 30, September 30,
---------------------- ---------------------
2001 2000 2001 2000
---------- --------- ---------- ----------
(In thousands, except per share data)
Net loss $(9,938) $(14,253) $(43,247) $(43,457)
Amortization of goodwill and intangible assets...... 8,800 6,958 26,325 7,258
Amortization of deferred stock-based compensation... 524 2,152 5,288 2,972
Restructuring charge................................ - - 2,336 -
Merger-related expenses............................. - - - 12,658
------- -------- -------- --------
Pro forma net loss before cumulative effect of
change in accounting method......................... (614) (5,143) (9,298) (20,569)
Cumulative effect of change in accounting method... - - - 2,515
------- -------- -------- --------
Pro forma net loss................................... $ (614) $ (5,143) $ (9,298) $(18,054)
======= ======== ======== ========
Pro forma net loss per share before cumulative
effect of change in accounting method............... $ (0.02) $ (0.19) $ (0.32) $ (0.85)
Per share cumulative effect of change in
accounting method................................... - - - 0.11
------- -------- -------- --------
Pro forma net loss per share......................... $ (0.02) $ (0.19) $ (0.32) $ (0.74)
======= ======== ======== ========
Weighted average shares used in computing
pro forma net loss per share........................ 29,429 27,079 29,211 24,449
======= ======== ======== ========
Pro Forma EBITDA
The following calculation of pro forma earnings before interest, taxes,
depreciation and amortization, ("EBITDA") also excludes merger-related expenses,
restructuring charge and the cumulative effect of change in accounting method.
EBITDA is not a disclosure required by GAAP but is included for informational
purposes only.
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
------- -------- ------- --------
(In thousands)
Pro forma net loss................ $ (614) $(5,143) $(9,298) $(18,054)
Interest and other income, net... (355) (1,045) (1,739) (2,692)
Depreciation..................... 2,822 1,658 8,018 3,745
------ ------- ------- --------
Pro forma EBITDA.................. $1,853 $(4,530) $(3,019) $(17,001)
====== ======= ======= ========
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard requires companies to
record derivatives on their balance sheets 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. We adopted SFAS No. 133 in the first quarter of 2001. To
date, we have not engaged in any hedging activity. Application of SFAS No. 133
did not have an impact on our financial reporting.
11
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 establishes new
standards for accounting and reporting requirements for business combinations
initiated after June 30, 2001 and prohibits the use of the pooling-of-interests
method for combinations initiated after June 30, 2001. SFAS No. 142 changes the
accounting for goodwill from an amortization method to an impairment only
approach. Upon adoption of SFAS No. 142, goodwill will be tested at the
reporting unit annually and whenever events or circumstances occur indicating
that goodwill might be impaired. Amortization of goodwill, including goodwill
from past business combinations will cease. The adoption date for SFAS No. 141
and 142 will be January 1, 2002. We are still assessing what the impact of SFAS
No. 141 and 142 will be on our results of operations and financial position.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. This Statement supersedes FASB Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. This Statement also supersedes the accounting and reporting provisions of
APB Opinion No. 30 ("APB 30"), Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for segments of a business
to be disposed of. This Statement also amends ARB No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
temporarily controlled subsidiary. The adoption date for SFAS No. 144 will be
January 1, 2002.
Other Matters
We are currently party to various legal proceedings. Although litigation is
subject to inherent uncertainties, management, including internal counsel, does
not believe that the ultimate outcome of these legal proceedings will have a
material adverse effect on our financial position or overall trends in results
of operations. However, if an unfavorable ruling were to occur in any specific
period, there exists the possibility of a material adverse impact on the results
of operations of that period. Management believes that, given our current
liquidity and cash and investment balances, even an adverse judgment would not
have a material impact on cash and investments or liquidity.
Our future results of operations and the other forward-looking statements
contained in this MD&A section involve a number of risks and uncertainties -- in
particular the statements regarding expectations regarding the shift in the mix
of our lending division applications, plans to increase margins and lending
application revenue, declining expenses as a percentage of revenue, interest
income, future revenue, pricing, gross margin, anticipated earnings per share,
and pending legal proceedings. Factors that could cause actual results to
differ materially are the following: the possibility that we will fail to
realize reduced expenses through the restructuring as expected; our inability to
integrate ATA and its products into our operations on a cost-effective and
timely basis; the possibility that we will fail to realize the increased margins
from our lending application revenue through the shift from call center
applications to Internet applications; the possibility that costs or
difficulties related to the data center consolidation and product migration will
be greater than expected; the termination of significant customer contracts; a
general slowdown of the economy; changes in end user demand for Internet
banking; and litigation involving antitrust, intellectual property, consumer and
other issues.
We believe that we have the product offerings, facilities, personnel, and
competitive and financial resources for continued business success, but future
revenue, costs, margins and profits are all influenced by a number of factors,
including those discussed above, all of which are inherently difficult to
forecast.
12
ITEM 3. Quantitative and Qualitative Disclosures 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
the 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 that have declined in market value due to
changes in interest rates.
We are also exposed to the impact of interest rate changes as they affect our
Revolver and equipment leasing line of credit. The interest rate charged on
these credit facilities varies with the applicable lender's prime rate and,
consequently, our interest expense will fluctuate with changes in the general
level of U.S. interest rates. As of September 30, 2001, we had no outstanding
advances under the Revolver and $7.8 million outstanding under the equipment
leasing line of credit.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Letter dated September 24, 2001, detailing employment and option
agreement between Bruce Isaacson, Senior Vice President, Product
Management, Marketing and Alliances and the Registrant.
10.2 Letter dated October 8, 2001, detailing employment and option
agreement between Drew Hyatt, Senior Vice President, Internet
Banking Client Services and the Registrant.
10.3 Amendment No. 2 to the 2001 Nonemployee Directors Option Plan.
(b) Reports on Form 8-K
None
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL INSIGHT CORPORATION
Date: November 9, 2001 By: /s/ Kevin McDonnell
-------------------
Kevin McDonnell
Senior Vice President, Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
14