As filed with the Securities and Exchange Commission on April 12, 2002
Registration No. 333-83310
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
To
Form S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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DIGITAL INSIGHT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0493142
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
26025 Mureau Road, Calabasas, California 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 and Chief Executive Officer
26025 Mureau Road, Calabasas, California 91302, (818) 871-0000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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With copies to:
Richard A. Boehmer, Esq. J. Robert Suffoletta, Esq.
O'Melveny & Myers LLP Wilson Sonsini Goodrich & Rosati,
400 South Hope Street Professional Corporation
Los Angeles, California 90071 8911 Capital of Texas Highway
Telephone: (213) 430-6643 Suite 3350
Fax: (213) 430-6407 Austin, Texas 78759
Telephone: (512) 338-5439
Fax: (512) 338-5499
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
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 of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, 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 offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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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 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. We may not sell these securities until +
+the registration statement is effective. This prospectus is not an offer to +
+sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Dated April 12, 2002
4,000,000 Shares
[LOGO OF DIGITAL INSIGHT]
Common Stock
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Digital Insight is offering 4,000,000 shares of its common stock. Our common
stock is quoted on the Nasdaq National Market under the symbol "DGIN." On April
11, 2002, the reported last sale price of our common stock on the Nasdaq
National Market was $26.15 per share.
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Investing in our common stock involves risks. See "Risk Factors" beginning on
page 4.
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Per
Share Total
----- -----
Public offering price.............................................. $ $
Underwriting discount.............................................. $ $
Proceeds, before expenses, to Digital Insight...................... $ $
We have granted the underwriters the right to purchase up to an additional
600,000 shares of our 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.
The underwriters expect to deliver the shares to purchasers on , 2002.
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Joint Book-Running Managers
Morgan Stanley Banc of America Securities LLC
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JPMorgan
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, 2002
TABLE OF CONTENTS
Page
----
Prospectus Summary....................................................... 1
Risk Factors............................................................. 4
Special Note Regarding Forward-Looking Statements........................ 12
Use of Proceeds.......................................................... 13
Price Range of Common Stock.............................................. 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Page
----
Business................................................................... 30
Management................................................................. 42
Principal Stockholders..................................................... 45
Description of Capital Stock............................................... 47
Underwriters............................................................... 49
Legal Matters.............................................................. 51
Experts.................................................................... 51
Additional Information..................................................... 51
Where You Can Find More Information........................................ 52
Index to Financial Statements.............................................. F-1
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In this prospectus, we use the terms "we," "us," "our" and "Digital Insight"
to refer to Digital Insight Corporation together with our subsidiaries.
References to this prospectus include the documents incorporated by reference
herein.
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 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.
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 a leading provider of Internet banking services to banks, credit
unions and savings and loans associations, 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 business customers, an authorized
loan decisioning and contact center, cash management and other supporting
products and services, such as electronic bill payment, portal web site
technology, wireless capability, advanced target marketing, and web site
development and maintenance. In general, we provide our solutions to financial
institutions over the Internet, from facilities hosted by us, which require
minimal software installation at the customer site. As of January 31, 2002, we
had contracts with 1,585 financial institutions, which represented
approximately 32.3 million potential end users. As of January 31, 2002,
approximately 3 million end users were actively using our Internet banking
applications.
Our target market consists primarily of the approximately 19,500 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 $2.3 trillion in deposits, or 42% of total U.S. customer
deposits. These financial institutions are increasingly offering Internet-based
banking services to create additional revenue opportunities, lower the cost of
delivering products and services and address customer demand. Internet banking
enables financial institutions to offer a web-based service channel through
which to cost-effectively deliver a broader portfolio of products, access a
larger addressable market and maintain service availability 24 hours a day, 7
days a week. These institutions also have a growing interest in offering
Internet-based banking services in order to avoid losing customers to other
Internet-enabled financial institutions that offer these services.
We provide a comprehensive portfolio of Internet banking solutions to
financial institutions on a subscription basis. Our Internet applications can
be installed rapidly and cost-effectively with a look and feel that preserves a
financial institution's unique brand identity. Our applications are deployed in
an environment hosted and maintained by us in our data centers. Our
applications are designed to scale as the number of end users and end user
transaction volume grows. We work closely with leading data processing vendors
so that financial institutions can leverage their investments in existing data
processing systems by fully integrating them with the Internet applications we
provide. Our solutions also offer high levels of security, up-time availability
and system back-up.
We generate recurring revenue from monthly service fees based primarily upon
the number of end users and user transaction volume, as well as fees for
hosting, developing and maintaining customer web sites. We also earn revenues
from implementation fees that our financial institution customers pay us for
establishing their Internet banking services.
Our objective is to enhance our position as the leading provider of Internet
banking services to financial institutions by providing these institutions with
a comprehensive platform that will enable them to generate additional revenue,
enhance long-term cost-efficiencies and improve customer service. To achieve
this objective, we intend to:
. attract more financial institution customers;
. pursue cross-selling opportunities within our existing customer base;
. increase end user penetration through marketing assistance programs and
training of financial institutions in marketing and promoting our
Internet banking services;
1
. pursue strategic merger and acquisition opportunities;
. continue to broaden product and service offerings to provide our
customers with a more comprehensive platform; and
. increase the number of our interfaces to core data processing systems to
allow our applications to interface with the systems of more financial
institutions.
We closed our acquisitions of nFront, Inc. in February 2000, 1View Network
Corporation in June 2000, and AnyTime Access, Inc. in July 2000. On January 28,
2002, we acquired Virtual Financial Services, Inc., or ViFi, a privately owned
company based in Indianapolis which provided Internet banking and related
financial services to community-based financial institutions. As a result of
the ViFi acquisition, we added over 150 new customers, over 425,000 active
Internet banking end users and approximately 4 million potential end users. We
are in the process of migrating the ViFi customers to our platform and are
aggressively pursuing cross-selling opportunities for our products and services
with these 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.
Our principal executive offices are located at 26025 Mureau Road, Calabasas,
California 91302, and our telephone number is (818) 871-0000.
THE OFFERING
Common stock offered........................ 4,000,000 shares
Common stock to be outstanding after this
offering................................... 36,029,304 shares
Use of proceeds............................. For general corporate purposes, including
possible acquisitions and the repayment of
$3.75 million of indebtedness. See "Use of
Proceeds."
Nasdaq National Market symbol............... DGIN
The foregoing information is based upon shares outstanding as of March 31,
2002 and excludes:
. 4,751,566 shares of common stock subject to outstanding options, at a
weighted average exercise price of $20.47 per share;
. 11,447 shares of common stock subject to outstanding warrants, at a
weighted average exercise price of $25.95 per share;
. 2,509,318 shares of common stock that have been reserved and remain
eligible for future stock options; and
. 698,220 shares of common stock that have been reserved for our employee
stock purchase plan and remain available for purchase through the
purchase plan.
In addition, unless otherwise indicated, all information in this prospectus
assumes no exercise of the underwriters' over-allotment option.
2
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31,
--------------------------------------------------------
Pro
Forma
1997 1998 1999 2000 2001 2001
------- ------- -------- -------- -------- --------
Consolidated Statement
of Operations Data:
Revenues............... $ 5,054 $13,195 $ 26,245 $ 54,428 $ 94,635 $107,853
Gross profit........... 2,300 5,331 10,563 21,147 39,258 45,388
Loss from operations... (3,086) (8,030) (19,459) (61,229) (53,947) (55,138)
Net loss attributable
to common stockholders
before cumulative
effect of change in
accounting method..... (3,011) (8,021) (18,154) (57,489) (51,948) (53,371)
Cumulative effect of
change in accounting
method................ -- -- -- (2,515) -- --
Net loss attributable
to common
stockholders.......... $(3,011) $(8,021) $(18,154) $(60,004) $(51,948) $(53,371)
Basic and diluted net
loss per share:
Before cumulative
effect of change in
accounting method... $ (.31) $ (.80) $ (1.26) $ (2.25) $ (1.77) $ (1.71)
Cumulative effect of
change in accounting
method.............. -- -- -- (.10) -- --
------- ------- -------- -------- -------- --------
$ (.31) $ (.80) $ (1.26) $ (2.35) $ (1.77) $ (1.71)
Shares used to compute
basic and diluted net
loss per share........ 9,651 10,055 14,389 25,534 29,301 31,203
As of December 31, 2001
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments................................... $ 53,634 $ 49,862 $148,701
Long-term investments.......................... 13,334 13,334 13,334
Working capital................................ 54,396 40,257 139,096
Total assets................................... 236,628 291,573 390,412
Long-term portion of capital lease obligations
and long-term debt............................ 6,293 6,293 6,293
Total liabilities.............................. 39,737 52,312 52,312
Total stockholders' equity..................... 196,891 239,261 338,100
The summary unaudited pro forma consolidated financial data above reflects
our acquisition of ViFi in January 2002 and shows the financial results as if
we had acquired ViFi at January 1, 2001 for the consolidated statement of
operations data and at December 31, 2001 for the consolidated balance sheet
data. You should not assume that the two companies would have achieved the
depicted results if they actually had been combined at the date and for the
period shown or that they will achieve these results in the future. This
summary unaudited pro forma consolidated financial data should be read along
with the unaudited pro forma condensed consolidated financial information
included in this prospectus. The unaudited pro forma condensed consolidated
financial information is based on a preliminary purchase price allocation which
is subject to change pending completion of the final purchase price allocation.
The Pro Forma As Adjusted column above gives effect to our sale of 4,000,000
shares of common stock in this offering at an assumed public offering price of
$26.15 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses, and the application of the net
proceeds as described under "Use of Proceeds."
3
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 history of losses, expect future losses and cannot assure you
that we will achieve or maintain 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
$18.2 million in the year ended December 31, 1999, $60.0 million in the year
ended December 31, 2000, and $51.9 million for the year ended December 31,
2001. As of December 31, 2001, we had an accumulated deficit of $139.1
million. We plan to broaden our customer support capabilities, increase our
market share, and continue to build our operational infrastructure. If growth
in our revenues does not significantly 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. Our revenue model
is based largely on recurring revenues derived from actual end user counts.
The number of our total end users is affected by many factors, many of which
are beyond our control, including the number of new user registrations, end
user turnover, loss of customers, and general consumer trends. We may expend
substantial funds and management resources to increase end user penetration
and still fail to achieve the targeted end user growth. Accordingly, our
results of operations for a particular period may be adversely affected if the
revenues based on the number of end users forecasted for that period are less
than expected. 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;
. loss of significant customers due to a non-renewal of the service
contract, an acquisition of the customer by another financial
institution, insolvency of the customer and other reasons;
. actions taken by our competitors, including the introduction of new
products or changes in their pricing models;
. 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;
. a negative outcome in any significant legal proceeding or prolonged
litigation;
. the timing of customer product implementations or our failure to timely
complete scheduled product implementations; and
. governmental actions affecting Internet operations or content.
4
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 closed the acquisitions of nFront, Inc., or nFront, on February 10, 2000,
1View Network Corporation, or 1View, on June 21, 2000, AnyTime Access, Inc.,
or ATA, on July 31, 2000 and ViFi on January 28, 2002. We must overcome
significant challenges in order to realize the benefits and synergies from
these and future acquisitions, including the timely, efficient and successful
execution of a number of post-acquisition events. Key events include:
. integrating the operations of the acquired companies with our
operations;
. retaining the existing customers and strategic partners of each company;
. retaining and assimilating the key personnel of each company;
. offering the existing services of each company to the combined company's
customers;
. 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-acquisition 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.
If we fail to effectively manage our recent and any future growth, our
results of operations and reputation could be harmed.
We have recently experienced significant growth. If we fail to effectively
manage this growth and any future growth, our results of operations and
reputation could be harmed. We continue to increase the scope of our
operations and have significantly increased the number of our customers from
approximately 400 as of September 30, 1999 to 1,585 as of January 31, 2002.
Moreover, we plan to continue to hire a significant number of employees this
year. This resulting growth has placed, and is expected to continue to place,
significant demands on our personnel, management and other resources. We must
continue to improve our operational, financial and management information
systems to keep pace with the growth of our business.
Our ability to sell our products and grow our business could be
significantly impaired if our management team is unable to work together
effectively or if we lose the services of key personnel.
Our business is highly dependent on our executive officers. We have entered
into compensation agreements with various personnel, but we do not have
employment agreements with any of our employees. The loss of the services of
any of our executive officers or the inability to identify, hire, train and
retain other qualified personnel in the future could harm our business. For
example, we have recently hired a new chief financial officer. There can be no
guarantee that our new chief financial officer will be able to work
effectively with our existing management team.
5
Competition for key personnel and other highly qualified technical and
managerial personnel in the Internet banking services industry is intense, and
we cannot assure you that we would be able to recruit management personnel to
replace these individuals in a timely manner, or at all, on acceptable terms.
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 related to our Internet
banking operation is currently located in Westlake Village, California and at
our regional center in Norcross, Georgia. We plan to maintain these two data
centers in a manner that will continue to provide system redundancy, fail-over
from one facility to the other and emergency backup capabilities. While the
architecture of the two systems was largely integrated by early 2001, the
process of failing over to a recovery site currently involves some manual
intervention, and there is some attendant delay and loss of use of non-key
features and functionality. We cannot assure you that these data centers will
continue to provide full system redundancy, fail-over and disaster recovery
capabilities as expected. In addition, we may experience problems during the
recovery or fail-over process that could cause system failures and decreased
levels of service. The final data center integration efforts are scheduled to
be substantially completed within six to eight months. The resulting
configuration will permit further development of the redundancy and recovery
mechanisms already in place. Although we perform testing on a periodic basis
to ensure that recovery mechanisms perform as planned, unexpected failure of
any of these mechanisms may prevent a successful recovery.
Although we have a disaster recovery plan in place, we do not currently have
the technology to provide instantly recovered, full Internet services if
either the Westlake Village 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.
Furthermore, our Westlake Village facility may be subject to rolling blackouts
if the California energy crisis returns. Although we maintain and regularly
test an uninterruptible power supply system for our critical systems,
consisting of a back-up battery and a diesel generator, there is no assurance
that this system will function properly, or at all, in case of a power loss.
In addition to a potential loss of power, our systems are vulnerable to
operational failures, telecommunications failure and similar events. For
example, in July 2000, logical corruption to our system in one of our data
centers caused an intermittent outage of approximately 48 hours while the
problem was corrected. We have contracted to provide a certain level of
service to our customers and, consequently, 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, we could experience a failure
or interruption in our systems, which could lead to delays, loss of data or
the inability to provide 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 is still in the early adoption stage.
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 community financial institutions, which are
part of our target market, 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.
6
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 and we may lose customers as a result. 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, their data processing vendors and bill
payment providers. 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, data processing
vendors and bill payment providers. Any operational problems or outages in
these systems would cause us to be unable to provide a real time connection to
these systems and we would be unable to process transactions for end users,
resulting in decreased revenues. In addition, any system delays, failures or
loss of data, whatever the cause, could reduce customer satisfaction with our
products and services and harm our sales.
We depend on cooperation from data processing vendors for financial
institutions, some of whom have resisted efforts in the past to allow the
integration of our products and services with their systems.
Our products involve integration with products and systems developed by data
processing vendors that serve financial institutions. If any of our products
fail to be supported by financial institutions' data processing vendors, we
would have to redesign our products to suit these financial institutions. 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, financial institutions' data processing vendors may develop
new products and systems that are incompatible with our products. Our failure
to integrate our products effectively with financial institutions' 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. 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
outsourced Internet banking offerings, vendors of data processing services to
financial institutions, and smaller, local online service outsourcing
companies. Also, vendors who primarily target the largest financial
institutions occasionally compete in our target market. 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.
7
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 adverse effects.
Concerns over security and the privacy of end users have intensified both
within and outside of the U.S., and may inhibit the growth of the Internet and
other online services generally, especially as a means of conducting
commercial transactions. Any well-publicized compromise of security could
deter people from using the Internet or using it to conduct transactions that
involve transmitting confidential information. We may need to expend
significant capital or other resources to protect against the threat of
security breaches or to alleviate problems caused by breaches. Although we
intend to continue to implement state-of-the-art security measures, persons
may be able to circumvent the measures that we implement in the future.
Eliminating computer viruses and alleviating other security problems may
result in interruptions, delays or cessation of service to users accessing web
sites that deliver our services, any of which could harm our business.
Our failure to respond to rapid change in the market for Internet banking
could cause us to lose revenue and harm our business.
The market for Internet banking services is new and unproven and is subject
to rapid change. Our success will depend substantially upon our ability to
enhance our existing products and to develop and introduce, on a 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.
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 support 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.
8
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 may be 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 and reputation. 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.
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 acquisitions or our announcements of
these transactions; 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.
Our lending operation could be adversely impacted by a downturn in the
credit industry, and seasonal demand.
A downturn in the credit industry, caused by increases in interest rates or
a tightening of credit, among other factors, could harm our lending division's
operations. A softening of demand for our outsourced solutions caused by a
weakening of the economy generally may result in decreased revenues or lower
growth rates. Also, the lending industry is generally subject to seasonal
trends affecting loan demand.
Government regulation of our business could cause us to incur significant
expenses, and failure to comply with certain regulations, if adopted, could
make our business less efficient or impossible.
The financial services industry is subject to extensive and complex federal
and state regulation. Financial institutions such as commercial banks, savings
and loans associations, savings banks, 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 federal
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. Although we
believe we are not subject to direct supervision by federal and state banking
agencies relating to other regulations, we have from time to time agreed to
examinations of our
9
business and operations by these agencies. 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
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.
Our limited ability to protect our proprietary technology may adversely
affect our ability to compete.
Our future success and ability to compete depend 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 may be found to infringe proprietary rights of others, which could harm
our business.
We are 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.
10
Terrorism and the possibility of further acts of violence may have a
material adverse effect on our operations.
Terrorist attacks, such as the attacks that occurred on September 11, 2001,
the response by the United States and further acts of violence or war may
affect the market on which our common stock will trade, the markets in which
we operate, and our operations and profitability. For example, prospective
customers may delay or cancel technology purchase commitments, such as
Internet banking, or shift their focus away from our products to security
related technology in response to the terrorist attacks. The potential near-
term and long-term effect of these attacks on our business, the market for our
common stock and the global economy is uncertain. The consequences of any
terrorist attacks, or any armed conflicts that may result, are unpredictable,
and we may not be able to foresee events that could have an adverse material
effect on our business or the trading price of our common stock.
Our past and potential future acquisitions involve risks.
We may acquire complementary technologies or businesses in the future. Due
to consolidation trends within the Internet banking services industry, our
failure to successfully implement a long-term acquisition strategy could
damage our competitive position. We closed our acquisitions of nFront on
February 10, 2000, 1View on June 21, 2000, ATA on July 31, 2000 and ViFi on
January 28, 2002. Future acquisitions may involve large one-time write-offs,
including goodwill impairment charges, and amortization expenses related to
intangible assets. In this regard, 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;
. loss of acquired customers and strategic partners beyond projected
thresholds;
. entering markets in which we have no direct prior experience; and
. losing key employees of the acquired company.
Some or all of these risks could result in a material adverse effect on our
business, financial condition and operating results. In addition, we cannot
assure you that we will be able to identify suitable acquisition candidates
that are available for sale at reasonable prices. We may elect to finance
future acquisitions 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.
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;
11
. 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.
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.
12
USE OF PROCEEDS
We estimate that our net proceeds from the sale of 4,000,000 shares of
common stock in this offering will be approximately $98.8 million, at an
assumed public offering price of $26.15 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 $113.7 million. We expect to use the net
proceeds from this offering for general corporate purposes and to repay
$3.75 million of promissory notes, due March 1, 2003, with an interest rate of
6% per annum, issued in connection with the acquisition of ViFi. A portion of
the proceeds may 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 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.
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 periods indicated.
Common Stock
Price
-------------
High Low
------ ------
2000
First Quarter................................................. $83.88 $33.25
Second Quarter................................................ 47.38 29.88
Third Quarter................................................. 43.50 23.38
Fourth Quarter................................................ 36.69 11.50
2001
First Quarter................................................. $22.13 $ 9.70
Second Quarter................................................ 22.10 7.52
Third Quarter................................................. 21.15 11.05
Fourth Quarter................................................ 23.76 9.95
2002
First Quarter ................................................ $28.30 $18.35
Second Quarter (through April 11, 2002)....................... 27.10 24.75
On April 11, 2002, the reported last sale price of our common stock on the
Nasdaq National Market was $26.15 per share. As of March 31, 2002, there were
190 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. 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. Currently, there are no contractual
limitations under our credit facility or otherwise that limit our payment of
dividends.
13
CAPITALIZATION
The following table sets forth our cash, cash equivalents and short-term
investments and capitalization as of December 31, 2001:
. on an actual basis;
. on a pro forma basis to give effect to our acquisition of ViFi on
January 28, 2002 for $3.75 million in cash, $3.75 million aggregate
principal amount of our promissory notes and 1,901,907 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 4,000,000 shares of common stock in this
offering, at an assumed public offering price of $26.15 per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, and the application of the net proceeds as described
under "Use of Proceeds."
The following table does not include:
. 4,904,641 shares of common stock subject to outstanding options;
. 11,447 shares of common stock subject to outstanding warrants;
. 1,823,873 shares of common stock that had been reserved and remain
eligible for future stock option grants; or
. 398,220 shares of common stock that had been reserved for our employee
stock purchase plan and remain available for purchase through the
purchase plan.
This information should be read in conjunction with our consolidated
financial statements and related notes thereto and the unaudited pro forma
condensed consolidated financial information included elsewhere in this
prospectus.
As of December 31, 2001
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------- --------- -----------
(in thousands, except share
data)
Cash, cash equivalents and short-term
investments................................. $ 53,634 $ 49,862 $ 148,701
========= ========= =========
Long-term portion of capital lease
obligations and long-term debt.............. $ 6,293 $ 6,293 $ 6,293
--------- --------- ---------
Stockholders' equity:
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; 29,638,479 shares
issued and outstanding--actual; 31,540,386
shares issued and outstanding--pro forma;
and 35,540,386 shares issued and
outstanding--pro forma, as adjusted....... 30 32 36
Additional paid-in capital................. 337,461 379,829 478,664
Stockholders' notes receivable............. (124) (124) (124)
Deferred stock-based compensation.......... (1,409) (1,409) (1,409)
Accumulated deficit........................ (139,067) (139,067) (139,067)
--------- --------- ---------
Total stockholders' equity............... 196,891 239,261 338,100
--------- --------- ---------
Total capitalization................... $ 203,184 $ 245,554 $ 344,393
========= ========= =========
14
DILUTION
Our pro forma net tangible book value as of December 31, 2001 was
approximately $83.6 million, or $2.65 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 ViFi in January 2002 for $3.75
million in cash, $3.75 million in promissory notes and 1,901,907 shares of our
common stock. After giving effect to our sale of 4,000,000 shares of common
stock in this offering, at an assumed public offering price of $26.15 per
share, after deducting estimated underwriting discounts and commissions and
estimated offering expenses, our pro forma net tangible book value as of
December 31, 2001 would have been $182.5 million or $5.13 per share. This
represents an immediate increase in pro forma net tangible book value of $2.48
per share to existing stockholders and an immediate dilution of $21.02 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:
Assumed public offering price per share........................... $26.15
Pro forma net tangible book value per share as of December 31,
2001........................................................... $2.65
Increase in pro forma net tangible book value per share
attributable to new investors.................................. 2.48
-----
Pro forma net tangible book value per share after this offering... 5.13
------
Dilution per share to new investors............................... $21.02
======
We had the following options and warrants outstanding as of December 31,
2001:
. 4,904,641 shares subject to outstanding options at a weighted average
exercise price of $19.44 per share; and
. 11,447 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $25.95 per share.
To the extent that outstanding options or the warrants 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.
15
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,
1999, 2000 and 2001 and the selected consolidated balance sheet data as of
December 31, 2000 and 2001 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
years ended December 31, 1997 and 1998 and the selected consolidated balance
sheet data as of December 31, 1997, 1998 and 1999 have been derived from our
audited consolidated financial statements not included herein.
The 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
2000 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 selected consolidated financial data includes the results of the
purchase method acquisitions of 1View Network Corporation and AnyTime Access,
Inc. for periods subsequent to their acquisition dates of June 2000 and July
2000, respectively. The selected consolidated financial data also includes the
impact of the cumulative effect adjustment for the adoption of Staff
Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial
Statements," which was adopted in the year ended December 31, 2000. SAB 101
changed the way that we recognize upfront implementation fees and related
direct incremental implementation costs and impacts the comparability to
historical results for periods prior to the year ended December 31, 2000.
The pro forma selected consolidated financial data are derived from our
unaudited pro forma condensed consolidated financial information included
elsewhere in this prospectus that reflects our acquisition of ViFi in January
2002 as if the transaction occurred as of January 1, 2001 for the consolidated
statement of operations data, and as of December 31, 2001 for the consolidated
balance sheet data. The acquisition is 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 transaction 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.
16
Year Ended December 31,
---------------------------------------------------------
Pro
Forma
1997(1) 1998(1) 1999(1) 2000(2) 2001(2) 2001
------- ------- -------- -------- -------- ---------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues................ $ 5,054 $13,195 $ 26,245 $ 54,428 $ 94,635 $107,853
Cost of revenues........ 2,754 7,864 15,682 33,281 55,377 62,465
------- ------- -------- -------- -------- ---------
Gross profit............ 2,300 5,331 10,563 21,147 39,258 45,388
Operating expenses...... 5,386 13,361 30,022 82,376 93,205 100,526
------- ------- -------- -------- -------- ---------
Loss from operations.... (3,086) (8,030) (19,459) (61,229) (53,947) (55,138)
Interest and other
income, net............ 111 282 1,441 3,740 1,999 1,767
Accretion of redeemable
convertible preferred
stock.................. (36) (273) (136) -- -- --
------- ------- -------- -------- -------- ---------
Net loss attributable to
common stockholders
before cumulative
effect of change in
accounting method...... (3,011) (8,021) (18,154) (57,489) (51,948) (53,371)
Cumulative effect of
change in accounting
method................. -- -- -- (2,515) -- --
------- ------- -------- -------- -------- ---------
Net loss attributable to
common stockholders.... $(3,011) $(8,021) $(18,154) $(60,004) $(51,948) $ (53,371)
======= ======= ======== ======== ======== =========
Basic and diluted net
loss per share before
cumulative effect of
change in accounting
method................. $ (.31) $ (.80) $ (1.26) $ (2.25) $ (1.77) $ (1.71)
Per share cumulative
effect of change in
accounting method...... -- -- -- (.10) -- --
------- ------- -------- -------- -------- ---------
Basic and diluted net
loss per share......... $ (.31) $ (.80) $ (1.26) $ (2.35) $ (1.77) $ (1.71)
======= ======= ======== ======== ======== =========
Shares used to compute
basic and diluted net
loss per share......... 9,651 10,055 14,389 25,534 29,301 31,203
======= ======= ======== ======== ======== =========
As of December 31,
------------------------------------------------------
Pro
Forma
1997 1998 1999 2000 2001 2001
------- -------- -------- -------- -------- --------
(in thousands)
Consolidated Balance
Sheet Data:
Cash, cash equivalents
and short-term
investments............ $ 3,407 $ 4,886 $ 79,031 $ 81,710 $ 53,634 $ 49,862
Long-term investments... -- -- -- -- 13,334 13,334
Working capital
(deficit).............. 1,941 (31) 73,921 73,569 54,396 40,257
Total assets............ 6,069 13,172 103,488 282,226 236,628 291,573
Long-term portion of
capital lease
obligations and long-
term debt.............. 92 390 393 3,928 6,293 6,293
Total liabilities....... 2,781 8,088 17,304 42,391 39,737 52,312
Redeemable convertible
preferred stock........ 6,819 15,092 -- -- -- --
Total stockholders'
equity (deficit)....... (3,531) (10,008) 86,184 239,835 196,891 239,261
17
--------
(1) In 2000, we adopted SAB 101, which changed the way we recognize upfront
implementation fees and related direct incremental implementation costs.
Previously, we recognized implementation fee revenue and related costs
upon the completion of the implementation process. Under SAB 101, we now
defer recognition of certain implementation fee revenue and related direct
incremental costs and recognize them ratably over the greater of the
initial life of the customer contract or the estimated life of the
customer service relationship, generally three to five years. The pro
forma net loss and net loss per share assuming this change of accounting
principal for SAB 101 for periods prior to the adoption are as follows:
1997 1998 1999
------- ------- --------
(in thousands, except
per share data)
Pro forma net loss............................ $(3,503) $(8,330) $(19,791)
Pro forma net loss per share.................. $ (.36) $ (.83) $ (1.38)
(2) Revenue recognized during 2000 and 2001 that was included in the SAB 101
cumulative effect adjustment was $3.1 million and $2.4 million,
respectively.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included in this prospectus.
Overview
We are a leading provider of Internet banking services to banks, credit
unions, and savings and loans associations, 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 business customers, an
authorized loan decisioning and contact center, and other supporting products
and services, such as electronic bill payment, portal web site technology,
wireless capability, advanced target marketing, and web site development and
maintenance. In general, we provide our solutions to our customers over the
Internet, from facilities hosted by us, which require minimal software
installation at the customer site.
In February 2000, we completed our merger with nFront. The merger was
accounted for as a pooling of interests and accordingly, our financial
statements for all prior periods have been restated to combine the results of
Digital Insight and nFront. No adjustments were necessary to conform
accounting policies of the entities. There were no intercompany transactions
requiring elimination in any period presented. During 2000, we also completed
our acquisitions of 1View and ATA. Both of these transactions were accounted
for under the purchase method of accounting. These acquisitions allowed us to
expand our product line to include an electronic bill presentment and payment
product and an online loan origination and decisioning product. The purchase
method of accounting differs from the pooling of interests method in that only
operating results for periods subsequent to the acquisition dates are included
in our consolidated results of operations, and a new basis of accounting is
established for tangible assets acquired and liabilities assumed, as well as
recording acquisition goodwill and identifiable intangible assets for the
portion of the purchase price in excess of tangible assets acquired and
liabilities assumed.
Revenues consist primarily of recurring service fees and to a lesser extent,
implementation fees and other revenues. We derive revenues primarily from
long-term service contracts with financial institution customers, which pay
recurring service fees based primarily on the number of end users or end user
transactions, or fixed monthly amounts for hosting and maintaining web sites,
as well as up-front implementation fees and optional services. Revenue from
recurring service fees are recognized as services are provided.
During the fourth quarter of 2000, we adopted Staff Accounting Bulletin No.
101, or SAB 101, "Revenue Recognition in Financial Statements." Prior to the
adoption of SAB 101, we recognized implementation fee revenue upon the
completion of the implementation process, which was typically 90 to 120 days
after contract initiation. We also deferred the direct implementation costs
and recognized them upon completion of the implementation. Under SAB 101, we
defer recognition of certain implementation fee revenue, which includes set up
fees for each service element purchased by customers and mandatory training,
that are not the culmination of a separate earnings process and recognize them
ratably over the greater of the initial life of the customer contract or the
estimated life of customer service relationship, generally three to five
years. We also defer recognition of the related direct incremental
implementation costs and recognize them ratably over the same period. Direct
incremental implementation costs are comprised primarily of salaries and
benefits of implementation personnel, consulting fees paid to third party
implementation consultants and set up fees paid to third party vendors. The
adoption of SAB 101 resulted in a $2.5 million cumulative effect adjustment at
January 1, 2000 and a $1.6 million increase in our net loss for 2000 to
reflect the increase in deferred implementation revenue partially offset by
the increase in deferred direct implementation costs. The revenue recognized
in 2000 and 2001 that was included in the SAB 101 cumulative effect adjustment
was $3.1 million and $2.4 million, respectively.
19
Other revenues are derived from the sale of hardware purchased from third
party vendors, web site design services, optional consulting and training
services purchased separately by customers after implementation and license
fees for licensing technology to non-service customers. These other revenues
are recognized upon the completion or delivery of the product or service
assuming we have no remaining obligations, the amounts due are fixed and
determinable and collection of the related receivable is probable.
Direct incremental implementation costs are comprised primarily of salaries
and benefits of implementation personnel, consulting fees paid to third party
implementation consultants and set up fees paid to third party vendors.
Cost of revenues 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 revenues also
include the recognition of deferred implementation costs which are being
recognized ratably over the term of the customer relationship as discussed
above.
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 have recorded aggregate deferred stock-based compensation of $14.6
million through December 31, 2001, including $6.6 million and $2.2 million of
deferred stock-based compensation recorded in connection with the acquisitions
of 1View and ATA, respectively. The remaining unamortized balance of deferred
stock-based compensation of $1.4 million will be fully amortized by March 31,
2003.
As of December 31, 2001, we had contracts with 1,438 financial institutions,
1,219 of which had contracted for Internet banking services, 499 of which had
contracted for cash management services and 154 of which had contracted for
lending services. We had approximately 2.4 million active Internet banking end
users at the end of the year, up 60% from 1.5 million from a year earlier. We
had a total of 992 Internet banking clients with live sites at December 31,
2001, which represented approximately 25.4 million potential end users and an
overall penetration of 9.5 %. The total number of potential end users of the
1,219 contracted Internet banking institutions was approximately 28.1 million.
During 2001, we strategically restructured our business to 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, 58 employee
positions were eliminated and our facility in San Francisco, California was
closed. In 2001, we recorded a restructuring charge of approximately $3.3
million, comprised of approximately $1.6 million for severance payments and
related benefits for employees whose positions were eliminated, approximately
$1.0 million in deferred stock-based compensation expense for the acceleration
of stock options and approximately $707,000 for exit costs as a result of the
closure of the San Francisco facility and related lease termination.
In January 2002, we announced another restructuring and cost reduction
program. During 2002, we plan to restructure certain operations by
geographically consolidating certain business functions. Although this
consolidation is expected to reduce costs by eliminating additional redundant
costs that resulted from our acquisitions, we do not expect the cost savings
to begin to occur until late in 2002. The restructuring program will require
an initial increase in staffing to manage the consolidated operations and we
plan to reduce excess staff upon completion of the consolidation. We expect to
record a restructuring charge of approximately $2.0 million to $2.3 million in
the first quarter of 2002.
20
We performed an impairment assessment of our long-lived assets in accordance
with Statement of Financial Accounting Standards, or SFAS, No. 121 at December
31, 2001 in connection with assessing the impact of implementation of SFAS No.
142 "Goodwill and Other Intangible Assets." No impairment was indicated by the
comparison of future undiscounted cash flows to the book value of the long-
lived assets. However, as discussed further in "New Accounting Standards"
below, we anticipate that, in the first quarter of 2002, there will be a
goodwill impairment charge of approximately $30.0 million relating to the ATA
acquisition as a result of applying the fair value method for assessing
impairment as required by the adoption of SFAS No. 142.
In addition to the SFAS No. 142 impairment charge noted above, we expect to
record an asset impairment charge of approximately $3.0 million in the first
quarter of 2002 for long-lived assets primarily comprised of purchased
computer software and equipment that were abandoned or removed from operations
in the first quarter of 2002.
Results of Operations
Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000
Results of Operations. Net loss for the years ended December 31, 2001 and
2000 was approximately $51.9 million and approximately $60.0 million,
respectively.
Revenues. Revenues for the year ended December 31, 2001 were approximately
$94.6 million, an increase of 74%, from approximately $54.4 million for the
prior year.
Revenues for the year ended December 31, 2001 included approximately $79.0
million related to the Internet banking division compared to approximately
$48.0 million for the prior year. This increase of approximately $31.0
million, or 65%, resulted from an increased number of new financial
institutions and end users combined with sales of additional services to our
existing customer base. During 2001, active Internet banking end users
increased 60% from approximately 1.5 million at December 31, 2000 to
approximately 2.4 million at December 31, 2001.
Revenues for the year ended December 31, 2001 included approximately $15.6
million related to the lending division compared to approximately $6.4 million
for the prior year. This increase of approximately $9.2 million resulted from
a full year of operations in 2001 compared to a partial year of operations
subsequent to the acquisition date in the prior year. 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. Internet applications produce slightly lower revenue per
transaction; however the costs associated with Internet applications are
relatively lower than those associated with our call center applications.
Therefore, the shift in mix resulted in slightly lower revenues, but higher
gross margins per transaction.
Cost of Revenues. Cost of revenues for the year ended December 31, 2001 was
approximately $55.4 million, an increase of 66%, from approximately $33.3
million for the prior year.
Cost of revenues for the year ended December 31, 2001 included approximately
$44.3 million related to the Internet banking division compared to
approximately $27.6 million for the prior year. This increase of approximately
$16.7 million, or 61%, was primarily due to the cost to implement and service
additional financial institutions and to a lesser extent, increased expense
due to increased depreciation expense related to assets purchased to support
our data center infrastructure.
Cost of revenues for the year ended December 31, 2001 included approximately
$11.1 million related to the lending division compared to approximately $5.7
million for the prior year. This increase of approximately $5.4 million
resulted from a full year of operations in 2001, compared to a partial year of
operations subsequent to the acquisition date in the prior year.
21
Gross Profit. Gross profit increased to approximately $39.3 million for the
year ended December 31, 2001 from approximately $21.1 million for the prior
year. Gross margin for the Internet banking division increased to 44% for the
year ended December 31, 2001 from 43% for the prior year. Gross margin for the
lending division increased to 29% for the year ended December 31, 2001 from
10% for the prior year. The increase in gross margin for the lending division
was due in part to the shift away from the lower margin telephone-supported
lending application services to the higher margin Internet-based lending
application services.
Sales, General and Administrative. Sales, general and administrative
expenses for the year ended December 31, 2001 were approximately $30.8
million, a decrease of approximately $700,000, compared to approximately $31.5
million for the prior year. As a percentage of revenue, sales, general and
administrative expenses were 33% for the year ended December 31, 2001 compared
to 58% for the prior year. This decrease was due primarily to a $1.1 million
decrease in advertising expenses, partially offset by a slight increase in
administrative expense to support the growth of our business.
Research and Development. Research and development expenses for the year
ended December 31, 2001 were approximately $23.4 million, an increase of
approximately $1.3 million, compared to approximately $22.1 million for the
prior year. This increase was primarily due to higher personnel expenses
required for the functional enhancements of existing products and the
development of new products. Research and development expenses, as a
percentage of revenue, decreased to 25% for the year ended December 31, 2001,
from 41% for the year ended December 31, 2000, primarily as a result of an
increase in revenues.
Amortization of Goodwill and Intangible Assets. Amortization of goodwill and
intangible assets increased to approximately $35.7 million for the year ended
December 31, 2001 from approximately $16.1 million for the year ended December
31, 2000, as a result of a full year of amortization in 2001 compared to a
partial year's amortization in the prior year. This increase was primarily due
to the acquisitions of 1View and ATA which 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 six years.
Restructuring Charge. In connection with our 2001 restructuring plan, we
recorded a restructuring charge of approximately $3.3 million for the year
ended December 31, 2001.
Interest and Other Income, Net. Interest and other income, net, was
approximately $2.0 million for the year ended December 31, 2001, a decrease of
$1.7 million, compared to approximately $3.7 million for the prior year. This
decrease was primarily due to lower rates of return on our investments, lower
average cash balances invested and an increase in interest expense due to
increased outstanding debt.
Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999
Results of Operations. Net loss for the years ended December 31, 2000 and
1999 was approximately $60.0 million and $18.2 million, respectively. Using
the historical method of revenue recognition, the net loss would have been
approximately $56.1 for the year ended December 31, 2000.
Revenues. Revenues for the year ended December 31, 2000 were approximately
$54.4 million, an increase of 107%, from approximately $26.2 million for the
prior year.
Revenues for the year ended December 31, 2000 included approximately $48.0
million related to the Internet banking division compared to approximately
$26.2 million for the prior year. This increase of approximately $21.8
million, or 83%, resulted from an increased number of new financial
institutions and end users combined with sales of additional services to our
existing customer base, partially offset by a SAB 101 revenue adjustment of
approximately $5.1 million. During 2000, active Internet banking end users
increased 100% from approximately 750,000 at December 31, 1999 to
approximately 1.5 million at December 31, 2000.
Revenues for the year ended December 31, 2000 included approximately $6.4
million related to the lending division acquired during the year.
22
Cost of Revenues. Cost of revenues for the year ended December 31, 2000 was
approximately $33.3 million, an increase of 112%, from approximately $15.7
million for the prior year.
Cost of revenues for the year ended December 31, 2000 included approximately
$27.6 million related to the Internet banking division compared to
approximately $15.7 million for the prior year. This increase of approximately
$11.9 million, or 76%, was primarily due to increased costs to implement and
service additional financial institutions combined with continued investment
in our data center infrastructure partially offset by a SAB 101 adjustment of
approximately $3.1 million.
Cost of revenue for the year ended December 31, 2000 included approximately
$5.7 million related to the lending division acquired during the year.
Gross Profit. Gross profit increased to approximately $21.1 million for the
year ended December 31, 2000 from approximately $10.6 million for the prior
year. Gross margin for the Internet banking division increased to 43% for the
year ended December 31, 2000 from 40% for the prior year. Gross margin for the
lending division was 10% for the year ended December 31, 2000.
Sales, General and Administrative. Sales, general and administrative
expenses were approximately $31.5 million for the year ended December 31, 2000
compared to approximately $22.3 million for the prior year. This increase was
primarily due to an increase in sales commissions associated with higher
revenues, higher personnel expenses for sales and marketing staff, increased
staffing for finance and accounting, new senior management positions and
growth in recruiting and human resource expenses. As a percentage of revenue,
sales, general and administrative expenses were 58% for the year ended
December 31, 2000 compared to 85% for the prior year.
Research and Development. Research and development expenses were
approximately $22.1 million for the year ended December 31, 2000 compared to
approximately $7.8 million for the prior year. This increase was primarily due
to higher personnel and consulting expenses required for the functional
enhancements of existing products and the development of new products.
Research and development expenses as a percentage of revenue were 41% for the
year ended December 31, 2000, compared to 30% for the prior year.
Amortization of Goodwill and Intangible Assets. Amortization of goodwill and
intangible assets was approximately $16.1 million for the year ended December
31, 2000.
Merger-Related Expenses. In connection with the merger of nFront, we
incurred related expenses of approximately $12.7 million comprised of direct
transaction costs and non-recurring redundant costs.
Interest and Other Income, Net. Interest and other income, net, was
approximately $3.7 million for the year ended December 31, 2000, an increase
of $2.3 million, compared to approximately $1.4 million for the prior year.
This increase was primarily due to interest earned on higher average cash
balances in the year ended December 31, 2000 as a result of our public
offerings in October 1999 and August 2000 and of nFront's public offering in
July 1999.
23
Selected Quarterly Results of Operations
The following tables present, in dollars and as a percentage of revenues,
our unaudited consolidated statements of operations for the eight quarters
ended December 31, 2001. This information reflects all adjustments, consisting
of only normal recurring adjustments, that we consider necessary for the 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.
Three Months Ended
--------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
2000 2000 2000 2000 2001 2001 2001 2001
-------- -------- --------- -------- -------- -------- --------- --------
Revenues................ $ 8,732 $11,125 $ 16,395 $ 18,176 $ 20,416 $ 22,686 $24,524 $27,009
Cost of revenues........ 5,155 6,033 9,849 12,244 13,630 13,225 13,827 14,695
-------- ------- -------- -------- -------- -------- ------- -------
Gross profit............ 3,577 5,092 6,546 5,932 6,786 9,461 10,697 12,314
-------- ------- -------- -------- -------- -------- ------- -------
Operating expenses:
Sales, general and
administrative........ 8,874 7,251 7,674 7,655 7,995 8,214 7,232 7,339
Research and
development........... 3,947 3,975 7,212 7,005 7,497 6,433 4,958 4,532
Amortization of
goodwill and
intangible assets..... -- 300 6,958 8,867 8,882 8,643 8,800 9,404
Restructuring charge... -- -- -- -- 3,276 -- -- --
Merger related
expense............... 12,658 -- -- -- -- -- -- --
-------- ------- -------- -------- -------- -------- ------- -------
Total operating
expenses............ 25,479 11,526 21,844 23,527 27,650 23,290 20,990 21,275
-------- ------- -------- -------- -------- -------- ------- -------
Loss from operations.... (21,902) (6,434) (15,298) (17,595) (20,864) (13,829) (10,293) (8,961)
Interest and other
income, net............ 995 652 1,045 1,048 838 546 355 260
-------- ------- -------- -------- -------- -------- ------- -------
Net loss before
cumulative effect of
change in accounting
method................. (20,907) (5,782) (14,253) (16,547) (20,026) (13,283) (9,938) (8,701)
Cumulative effect of
change in accounting
method................. (2,515) -- -- -- -- -- -- --
-------- ------- -------- -------- -------- -------- ------- -------
Net loss................ $(23,422) $(5,782) $(14,253) $(16,547) $(20,026) $(13,283) $(9,938) $(8,701)
======== ======= ======== ======== ======== ======== ======= =======
As a Percentage of
Revenues:
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 59.0 54.2 60.1 67.4 66.8 58.3 56.4 54.4
-------- ------- -------- -------- -------- -------- ------- -------
Gross profit............ 41.0 45.8 39.9 32.6 33.2 41.7 43.6 45.6
-------- ------- -------- -------- -------- -------- ------- -------
Operating expenses:
Sales, general and
administrative........ 101.6 65.2 46.8 42.1 39.2 36.2 29.5 27.2
Research and
development........... 45.2 35.7 44.0 38.5 36.7 28.4 20.2 16.8
Amortization of
goodwill and
intangible assets..... -- 2.7 42.4 48.8 43.5 38.1 35.9 34.8
Restructuring charge... -- -- -- -- 16.0 -- -- --
Merger-related
expenses.............. 145.0 -- -- -- -- -- -- --
-------- ------- -------- -------- -------- -------- ------- -------
Total operating
expenses............ 291.8 103.6 133.2 129.4 135.4 102.7 85.6 78.8
-------- ------- -------- -------- -------- -------- ------- -------
Loss from operations.... (250.8) (57.8) (93.3) (96.8) (102.2) (61.0) (42.0) (33.2)
Interest and other
income, net............ 11.4 5.8 6.4 5.8 4.1 2.4 1.5 1.0
-------- ------- -------- -------- -------- -------- ------- -------
Net loss before
cumulative effect of
change in accounting
method................. (239.4) (52.0) (86.9) (91.0) (98.1) (58.6) (40.5) (32.2)
Cumulative effect of
change in accounting
method................. (28.8) -- -- -- -- -- -- --
-------- ------- -------- -------- -------- -------- ------- -------
Net loss................ (268.2)% (52.0)% (86.9)% (91.0)% (98.1)% (58.6)% (40.5)% (32.2)%
======== ======= ======== ======== ======== ======== ======= =======
Our quarterly revenues, expenses and 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. As a result, 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 analyst or investors.
If this happens, the price of our stock would likely decrease. See "Risk
Factors."
24
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to revenue recognition, allowance for
doubtful accounts, investments, deferred taxes, impairment of long-lived
assets, and contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates.
We apply the following critical accounting policies in the preparation of
our consolidated financial statements:
. Revenue Recognition Policy. We recognize revenue as discussed in the
"Overview" section.
. Allowance for Doubtful Accounts. We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
. Investments. We record an impairment charge when we believe an asset has
experienced a decline in value that is other than temporary. Future
adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to recover
the carrying value of the investments that may not be reflected in an
investment's current carrying value, thereby possibly requiring an
impairment charge in the future.
. Deferred Taxes. We record a valuation allowance to reduce our deferred
tax assets to the amount that is more likely than not to be realized.
While we have considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation
allowance, in the event we were to subsequently determine that we would
be able to realize our deferred tax assets in the future in excess of
our net recorded amount, an adjustment to the deferred tax asset would
increase income in the period such determination was made. Similarly,
should determine that we would not be able to realize all or part of our
net deferred tax asset in the future, an adjustment to the deferred tax
asset would reduce income in the period such determination was made.
. Impairment of Long-Lived Assets. We evaluate the recoverability of our
identifiable intangible assets, goodwill and other long-lived assets in
accordance with SFAS No. 121 which generally requires us to assess these
assets for recoverability when events or circumstances indicate a
potential impairment by estimating the undiscounted cash flows to be
generated from the use and ultimate disposition of these assets. Upon
implementation of SFAS No. 142 on January 1, 2002, we will use the fair
value method to assess our goodwill on at least an annual basis and the
undiscounted cash flows method will continue to be used for qualifying
identifiable intangible assets and other long-lived assets. As discussed
in the "Overview" and "New Accounting Standards" sections, we anticipate
recording a goodwill impairment charge upon adoption of SFAS No. 142 in
the first quarter of 2002. These impairment assessments could result in
additional impairment charges to reduce the carry values of these assets
in the future.
. Contingencies and Litigation. We evaluate contingent liabilities
including threatened or pending litigation in accordance with SFAS No.
5, "Accounting for Contingencies" and record accruals when the outcome
of these matters is deemed probable and the liability is reasonably
estimable. We make these assessments based on the facts and
circumstances and in some instances based in part on the advice of
outside legal counsel.
25
Segment Reporting
Since the acquisition of ATA in July 2000, we have managed 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 years ended December 31, 2000 and 2001:
Internet
banking Lending Corporate
division(1) division(2) and other(3) Total
----------- ----------- ------------ --------
(in thousands)
Year ended December 31,
2000:
Revenues.................. $ 48,040 $ 6,388 $ -- $ 54,428
Gross profit.............. 20,477 670 -- 21,147
Loss from operations...... (30,457) (1,989) (28,783) (61,229)
Year ended December 31,
2001:
Revenues.................. $ 79,045 $ 15,590 $ -- $ 94,635
Gross profit.............. 34,793 4,465 -- 39,258
Loss from operations...... (13,391) (1,551) (39,005) (53,947)
Total assets at December 31,
2000....................... $173,253 $108,973 -- $282,226
Total assets at December 31,
2001....................... $148,153 $ 88,475 -- $236,628
--------
(1) Loss from operations includes amortization of deferred stock-based
compensation of $4.8 million and $3.8 million for the years ended December
31, 2000 and 2001, respectively.
(2) Loss from operations includes amortization of deferred stock-based
compensation of $453,000 and $1.0 million for the years ended December 31,
2000 and 2001, respectively. Amounts for the year end December 31, 2000
represent operations from the date of acquisition.
(3) Represents amortization of goodwill and intangible assets, a restructuring
charge and merger-related expenses. The restructuring charge includes
amortization of deferred stock-based compensation of $940,000 for the year
ended December 31, 2001.
For the year ended December 31, 2001, no customer accounted for more than
10% of our total revenues. We have no foreign operations.
Provision for Income Taxes
We incurred operating losses from inception through December 31, 2001, and
therefore have not recorded any significant provision for income taxes. Due to
the uncertainty surrounding the realization of the benefits in future tax
returns, we have recorded a valuation allowance for the full amount of our net
operating loss carryforwards and other deferred tax assets. As of December 31,
2001, we had net operating loss carryforwards for federal and state tax
purposes of approximately $100.5 million and $43.5 million, respectively. The
state tax loss carryforwards began to expire in 2001 and the federal tax loss
carryforwards begin to expire in 2011. Under the provisions of the Internal
Revenue Code of 1986, as amended, 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
At December 31, 2001, we had cash and cash equivalents of approximately
$15.3 million, short-term investments of approximately $38.3 million and long-
term investments of approximately $13.3 million. A $10.0 million certificate
of deposit is pledged as collateral against a multiple disbursement note we
signed in connection with an equipment line of credit with a bank. The
remaining investments are in commercial paper. Our intent is to hold these
investments to maturity. For financial statement presentation, we classify our
investments as short-term and long-term, based upon their maturity dates,
except for a portion of the $10.0 million certificate of deposit that has been
reclassified to long-term investments to correspond to the
26
long-term portion of the multiple disbursement note. All of our investments
except for the $10.0 million certificate of deposit are readily marketable.
The value of our commercial paper is sensitive to changes in the level of
U.S. interest rates and the market ratings of the underlying companies.
Therefore, if our commercial paper is sold prior to its maturity date, a gain
or loss may result.
In May 2001, we renewed a $10.0 million secured revolving credit commitment
from a bank, which matures in July 2002. Interest on the outstanding
borrowings is payable monthly. The interest rate on this credit commitment is
equal to the bank's prime rate. The credit commitment is collateralized by all
of our assets. As of December 31, 2001, we had no outstanding advances under
the credit commitment. As of January 31, 2002, we had $4.0 million of advances
under this credit commitment.
In August 2000, we obtained a $10.0 million equipment leasing line of credit
evidenced by a Multiple Disbursement Note from a bank, collateralized by the
participating equipment and a $10.0 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 and principal will be paid in 34 monthly installments,
commencing November 30, 2001. As of December 31, 2001, we had $9.4 million in
borrowings outstanding under this note and the interest rate on the note was
4.6% per annum.
Cash used in operating activities was approximately $10.0 million for the
year ended December 31, 1999, approximately $40.2 million for the year ended
December 31, 2000 and approximately $8.9 million for the year ended December
31, 2001. The decrease in cash used in operating activities from 2000 to 2001
was primarily due to the net changes in operating assets and liabilities and a
decrease in the net loss. The increase in cash used in operating activities
from 1999 to 2000 was primarily due to an increase in our net loss from
approximately $18.0 million in 1999 to approximately $60.0 million in 2000.
The net loss for the year ended December 31, 2000 included $12.7 million of
costs related to our merger with nFront.
Cash used in investing activities was approximately $37.3 million for the
year ended December 31, 1999, approximately $4.3 million for the year ended
December 31, 2000, and approximately $54.1 million for the year ended December
31, 2001. The increase in cash used in investing activities from 2000 to 2001
was primarily due to the purchasing of investments with excess cash. The
decrease in cash used in investing activities from 1999 to 2000 was primarily
due to the use of our invested excess cash, which was partially offset by
infrastructure expansion and expenditures for equipment for our back up data
centers.
Cash provided by financing activities was approximately $93.6 million for
the year ended December 31, 1999, approximately $64.7 million for the year
ended December 31, 2000, and approximately $6.8 million for the year ended
December 31, 2001. The decrease in cash provided by financing activities from
2000 to 2001 was primarily due to the public offering of our common stock in
2000, partially offset by increased debt payments. The decrease in cash
provided by financing activities from 1999 to 2000 was primarily due to the
difference in net proceeds of our secondary public offering, which was
completed in 2000, compared to the net proceeds of our public offerings in
1999.
27
We have no material commitments other than our revolving credit commitment,
our multiple disbursement note, obligations under our operating and capital
leases, and minimum vendor purchase commitments. Our commitments under these
obligations are as follows:
Payment Schedule
------------------------------------------------------
Total 2002 2003 2004 2005 2006 Thereafter
------- ------- ------- ------- ----- ----- ----------
(in thousands)
Long term debt.......... $ 9,411 $ 3,529 $ 3,529 $ 2,353 $ -- $ -- $ --
Capital lease
obligations............ 1,613 1,202 411 -- -- -- --
Operating leases........ 9,776 3,363 2,921 2,708 780 4 --
Minimum vendor purchase
commitments............ 16,917 5,667 6,000 5,167 83 -- --
------- ------- ------- ------- ----- ----- -----
Total obligations....... $37,717 $13,761 $12,861 $10,228 $ 863 $ 4 $ --
======= ======= ======= ======= ===== ===== =====
Future capital requirements will depend upon many factors, including the
timing of research and product development efforts and the expansion of our
marketing efforts. We expect to continue to expend significant amounts on
expansion of facility infrastructure, ongoing research and development,
computer and related data center equipment, and personnel.
We believe that our cash and cash equivalents balances and funds available
under our existing lines of credit 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
obligations.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board, or FASB, 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 adopted
SFAS No. 133 in the first quarter of 2001. To date, we have not engaged in any
hedging activity and therefore the adoption of this new standard has had no
significant impact on us.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 establishes a
new standard 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 anticipate recording
a goodwill impairment charge of approximately $30.0 million from the adoption
of SFAS No. 142 in the first quarter of 2002. In addition, excluding the
impact of the ViFi acquisition, annual amortization expense will decrease by
approximately $25.0 million in 2002.
In August of 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets," which establishes
accounting standards for the recognition and measurement of an asset
retirement obligation and its associated asset retirement cost. It also
provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002, with early adoption permitted. We expect
to adopt SFAS No. 143 effective January 1, 2003 and do not expect that the
adoption of this new standard will have a significant impact on our results of
operations and financial position.
28
In October 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, or 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. The impact to us of
adopting this new accounting standard is being assessed in conjunction with
SFAS No. 142, which is discussed above.
Quantitative and Qualitative Disclosure About Market Risk
We are exposed to the impact of interest rate changes and changes in the
market values of our investments. Our interest income is sensitive to changes
in 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. The fair value of our investment portfolio
would not be significantly impacted by either a 100 basis point increase or
decrease in interest rates, due mainly to the fixed-rate, short-term nature of
the substantial majority of our investment portfolio.
We are also exposed to the impact of interest rate changes as they affect
our revolving credit commitment and the multiple disbursement note. The
interest rate charged on these credit facilities varies with the bank's prime
rate and, consequently, our interest expense will fluctuate with changes in
the general level of U.S. interest rates. As of December 31, 2001, we had no
outstanding advances under our revolving credit commitment and $9.4 million
under the multiple disbursement note. The rate at December 31, 2001 on our
multiple disbursement note was 4.6%. If interest rates were to increase by 100
basis points, the impact on our multiple disbursement note would not be
significant.
There were no significant changes in our market risk during 2001.
29
BUSINESS
Overview
We are a leading provider of Internet banking services to banks, credit
unions and savings and loans associations, 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 business customers, an
authorized loan decisioning and contact center and other supporting products
and services, such as electronic bill payment, portal web site technology,
wireless capability, advanced target marketing, and web site development and
maintenance. In general, we provide our applications to financial institutions
over the Internet, from facilities hosted by us, which require minimal
software installation at the customer site. As of January 31, 2002, we had
contracted with 1,585 financial institutions. These financial institutions had
approximately 32.3 million potential Internet banking end users. As of January
31, 2002, approximately 3 million end users were actively using our Internet
banking applications.
We provide financial institutions with comprehensive Internet applications
that can be installed rapidly and cost-effectively with a look and feel that
preserves their unique brand identity. Our applications are designed to be
readily expandable, or scalable, as the number of end users grows. Our
applications also offer high levels of security, up-time availability and
system back-up. We work closely with leading data processing vendors so that
financial institutions can leverage their investments in existing data
processing systems by fully integrating them with the Internet applications we
provide.
Industry Background
Consumers, businesses and financial institutions are increasingly
recognizing that the Internet is a powerful and efficient medium for the
delivery of banking services, including Internet banking, bill payment and
other services for individuals, and cash management, payroll and other
services for the business customers of financial institutions. Consumers and
small businesses use Internet banking because of its 24 hours a day, 7 days a
week convenience and the ability to perform a wide range of transactions from
any personal computer or Internet-enabled device. Gartner Group, a technology
research and advisory firm, estimates that 18.3 million U.S. households were
banking online in 2001 according to its report published in October 2001.
Financial institutions are increasingly offering Internet-based banking
services to address end-customer demand, generate additional revenue
opportunities, reduce the cost of delivering their products and services
through alternative, more cost-effective channels, and improve customer
service. International Data Corporation, or IDC, estimates, in a report dated
October 2001, that the number of banks and credit unions offering online
banking services increased from 1,300 in 1998 to over 6,000 in 2001. IDC, a
provider of technology intelligence industry analysis and market data related
to information technology, estimates that 75% of all U.S. banks and credit
unions will offer online banking services by 2003, compared to 6% at the end
of 1998. Internet banking offers financial institutions a cost-effective means
to deliver their products and services to those customers who prefer to
interact with their financial institution electronically. Internet banking
enables financial institutions to generate additional revenue by providing a
web-based service channel through which to cost-effectively offer a broader
portfolio of products, access a larger addressable market and maintain service
availability 24 hours a day 7 days a week. Internet banking also allows
financial institutions to provide a primary financial destination to their
customers by collecting and consolidating financial and other kinds of data
from a number of sources, including all of the customer's accounts at that
institution as well as information from other Internet sources such as online
brokerage and insurance firms. Many financial institutions find that Internet
banking features attract and retain preferred banking clients and, over time,
Internet-based "branches" divert traffic away from more costly service
delivery channels.
Early Internet banking initiatives were undertaken primarily by large
financial institutions. However, there are approximately 19,500 credit unions,
banks, and savings and loans in the U.S. with assets of less than $10 billion
each. These community financial institutions hold approximately $2.3 trillion
in deposits, or 42% of
30
total U.S. customer deposits. Like their larger counterparts, these
institutions are increasingly seeking to provide Internet-based services to
enhance revenues, lower costs and improve customer service. Moreover, as a
result of the adoption of Internet banking services by their larger
competitors, community financial institutions are finding themselves under
growing pressure to offer Internet-based banking services in order to avoid
losing customers to other Internet-enabled financial institutions that offer
these services.
Some community financial institutions, which are part of our target market,
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, maintain security systems, processes and
technology 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 and maintain workable interfaces between its core systems
and its Internet applications.
In order to remain competitive and to manage costs, financial institutions
are seeking low-cost, outsourced Internet-based banking applications. The
application 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 application must also be reliable,
secure and scalable. Finally, the application should provide a platform for
expanded services which over time would provide additional revenue
opportunities to the financial institution and appeal to end users who are
increasingly using the Internet to research, evaluate and purchase a broad
array of products and services.
Digital Insight
We provide a comprehensive portfolio of cost-effective Internet banking
solutions to financial institutions over the Internet, from facilities hosted
by us, which require minimal software installation at the customer site. We
generate recurring revenue from financial institutions based upon the number
of end users and user transaction volume, as well as fees for hosting,
developing and maintaining customer web sites. Our products include separate
function-rich Internet banking applications for financial institutions' retail
and business banking customers. AXIS Internet Banking, our retail product,
includes account management, account transfers and interfaces to personal
financial management software, bill payment, stock quotes, check imaging and
other expanded services. AXIS Cash Management, our business banking product,
includes similar features as well as payroll/direct deposits, wire and inter-
account fund transfers and other services. Our AXIS Lending Services provide a
selection of automated lending products, including an Internet-based real time
loan decisioning product, multi-channel automated underwriting services and a
24 hours a day, 7 days a week contact center staffed with certified loan
officers. Supporting products and services include portal web site technology,
wireless capability, advanced target marketing, and web site development and
maintenance.
We offer the following benefits to financial institutions:
. Comprehensive and Customizable Solution. We offer a turnkey,
subscription-based solution with all critical applications hosted on our
system, including application and web site hosting, reporting tools and
customized online account presentations. Our Internet banking
applications can be configured to offer financial institutions and end
users a variety of standard and optional features. Our web site design
and implementation services also enable financial institutions to
establish Internet banking services with a look and feel that preserves
their unique brand identity.
. Rapid and Affordable Implementation. Our subscription-based applications
can be rapidly implemented and represent an affordable alternative to
internally developed Internet banking applications for financial
institutions. Average implementation times for our Internet banking
applications range from three to four months, depending on the
availability of an existing interface with a financial institution's
data processing vendor and the financial institution's schedule.
. Reliable, Secure, and Scalable Service. Our service is highly reliable,
with an up-time availability record for our Internet banking sites
averaging 99.52% during the twelve-month period ended January 31,
31
2002. Our systems incorporate sophisticated data encryption techniques,
a series of firewalls between the Internet and financial institutions,
and several layers of security technology in order to guard against
unauthorized access to our network. In addition, our systems 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.
. Real Time and Batch Online Architecture. Our architecture allows either
real time or batch communication with financial institutions' core data
processing systems. Our ability to offer both real time and batch
processing capabilities allows us to connect, or interface, with
whatever type of system the financial institution employs. Real time
data processing allows for transactions conducted on the web site to be
immediately reflected on the host system, and allows for transactions
conducted at the financial institution to be immediately reflected on
the web site. Batch processing systems transfer transaction data between
the Internet banking data center and the financial institution's host
system on a daily or periodic basis.
. Extensive Data Processing Vendor Relationships. We provide direct
connections, or interfaces, to multiple vendors of core banking software
and data processing services to financial institutions. As of January
31, 2002, we have developed interfaces to most of the major data
processing vendors representing nearly 75% of the major core processing
systems serving our addressable market of financial institutions. We
continue to develop and improve interfaces to existing and additional
systems. By working directly with these vendors, we can quickly and
cost-effectively install our systems with customers of these vendors
that purchase our applications. Once installed, these interfaces allow
relatively more rapid implementation of new customers to the same core
processing system. Our interfaces also allow for tight integration with
other functions supported by the data processing vendor, such as loan
origination, online statements and check imaging. We believe that the
number of data processing vendor interfaces we have developed provides
us with a significant competitive advantage.
. Platform for Value-Added Services. 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, bill presentment, check
imaging, account aggregation and training seminars. Our applications are
also capable of gathering relevant end user account activity information
and usage profiles, enabling financial institutions to market timely and
appropriate services to target customers, thereby creating additional
revenue opportunities. We believe that these additional product and
service offerings will allow financial institutions to derive additional
revenue from existing and new end users.
The Digital Insight Strategy
Our objective is to enhance our position as the leading provider of Internet
banking services to financial institutions as well as to provide these
institutions with a competitive platform that will permit them to recognize
additional revenue-producing opportunities, enhance long-term cost-
efficiencies and improve customer service. To achieve this objective, we
intend to:
. Increase the Number of Our Financial Institution Customers. Currently,
there are approximately 19,500 credit unions, banks and savings and
loans in the U.S. with assets of less than $10 billion. We intend to
leverage our leading market position to further penetrate the
substantial market for Internet banking applications. As of January 31,
2002, we had contracts with 1,585 financial institutions throughout the
U.S. We intend to attract financial institutions through one or more of
our three core product offerings, namely retail Internet banking,
business Internet banking and lending services.
. Pursue Cross-Selling Opportunities. We currently enable financial
institutions to offer Internet banking applications and automated
lending capabilities to their retail and business banking end users. For
those financial institutions that use these capabilities, we believe
that we have a significant opportunity to sell
32
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 January 31, 2002, financial
institutions offering our Internet banking applications had
approximately 32.3 million potential end users and an overall
penetration of 10%. We work with financial institutions to expand the
number of end users of our Internet banking and business banking
applications 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.
. Pursue Strategic Merger and Acquisition Opportunities. We intend to
continue to pursue opportunities to merge with or acquire businesses
that can provide us with revenue growth through the addition of
financial institution customers, complementary technologies or services,
or other benefits.
. Broaden Product and Service Offerings. We plan to continue to offer new
and enhanced products and services to provide our customers with a
comprehensive platform to market and distribute a broad range of
financial products over the Internet. We intend to enhance the
capabilities, or functionality, of our applications to further drive
end-user adoption and enable our customers to offer a broad portfolio of
products to better compete against larger financial institutions.
. Increase the Number of Our Interfaces to Core Data Processing
Systems. We intend to increase the number of our interfaces to core data
processing systems to allow our applications to interface with more
financial institutions. We currently interface with most of the major
vendors providing services to the major financial institutions in our
addressable market and our goal is to continually increase this
coverage. A group of our engineers is dedicated to developing interfaces
to new data processing vendors. We are currently developing interfaces
to additional systems and additional functionality to existing systems.
Products and Services
Our primary products are Internet retail and business banking and automated
lending applications. These applications allow a financial institution to
create a customized Internet banking presence using an array of standard and
optional features. We complement our primary banking applications with
additional tools, such as target marketing, check imaging, wireless
capability, online statements and portal web sites, and with implementation
and web site services.
AXIS Internet Banking
Our AXIS Internet Banking application is an Internet-based system through
which financial institutions are able to provide Internet 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 card, automobile and
mortgage loans.
. 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(R) and Microsoft
Money(R) through our personal financial management software, developed
and tested to be compatible with these popular personal finance software
under license from their respective manufacturers.
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, 7
days a week. End users can schedule one-time or recurring payments, and
can view payment history at their convenience.
33
. 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, request
check images 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. End users are generally able to access their statements more
quickly than with paper statements delivered through traditional
methods.
. Wireless banking. Through our wireless banking technology, end users can
access their account information through a variety of wireless devices,
including cellular phones, personal digital assistants and other
devices. This service offers two-way messaging, instant notifications
and technology that will allow viewer customization. Wireless devices
communicate with our secure wireless networks using a variety of device
and network dependent encryption technologies. Additional security
measures we have implemented include a set of device-specific
identifiers stored within our secure data center. Further measures, such
as account masking validation within Internet Banking, ensure that
digital phones are linked to the correctly validated user.
AXIS Cash Management
Our AXIS Cash Management application provides a full range of Internet
business banking services, which can be offered by financial institutions to
their business customers. We recently introduced an upgraded version of this
application that includes more robust standard features such as:
. 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. Businesses can better manage treasury and payroll
funding activities through real-time access to their 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.
Optional features of AXIS Cash Management include:
. Bill payment. Businesses can pay bills electronically 24 hours a day, 7
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 payments and payroll and other
direct deposit disbursements.
. 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 online forms, request photocopies, order checks, and track
portfolios.
AXIS Lending Services
Our AXIS Lending Services enable financial institutions to provide a
selection of automated lending products that offer rules-based underwriting on
behalf of our financial institution clients, applying client-specific
34
and client-defined rules to reach a credit decision. These products are
offered through various channels to match consumer preferences, including real
time loan evaluation over the Internet for consumer and real estate loans, and
a 24 hours a day, 7 days a week contact center staffed with certified loan
officers. Real-time loan evaluation over the Internet applies rules-based
underwriting to a loan application that is entered on the Internet by the
applicant. The underwriting process includes the retrieval of an electronic
credit report and a credit decision response to the applicant, generally in a
matter of minutes. Financial institutions can contract to have the entire loan
process managed through a loan officer at our contact center or have the loan
officer available only for special follow-up items raised in the Internet
application process. Through AXIS Lending Services, we can simplify complex
processes, such as tracking loan applications and delivering conditional
approvals or referral decisions on behalf of financial institutions. AXIS
Lending Services 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. We also recently introduced DeskTop Lender
which provides financial institutions' loan officers with desktop decisioning
through the Internet.
AXIS Management Console
Our Internet services management console provides financial institutions
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 site events. A financial institution can also use this
management console to configure the target marketing module for specific
promotions.
Additional Product Modules
Our AXIS Advanced Target Marketing module is designed to help make a
financial institution's web site a cost-effective sales tool. AXIS Advanced
Target Marketing allows financial institutions to individually target online
account holders and present them with opportunities to purchase Internet
banking products and services to fit their needs. Our AXIS Advanced Target
Marketing module enhances and expands the marketing capabilities of our
Internet Banking clients, which includes our Online Survey capability and
expanded targeting parameters.
AXIS eCommerce allows financial institutions to provide a financial portal
through which they can offer a wide array of financial products and
information 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, auto researching and buying, travel services, insurance,
credit reports, consumer tax services and IRA servicing.
For financial institutions without an existing web site, our team of experts
develops a fully interactive site with proprietary and value-added financial
services such as application forms, financial calculators and links to other
web sites. For financial institutions 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.
Systems Architecture
Our applications are designed to be easily and rapidly deployed in an
environment hosted and maintained by us in our data centers. Within our data
centers, we provide servers and data storage, as well as data transmission
capacity, known as bandwidth. The financial institution or data processing
vendor is connected to our systems through our private network, which is based
on a technology known as frame relay. Our systems architecture is designed to
provide both real time and batch data acquisition, processing and presentation
for Internet banking and other applications. Our application servers make use
of software known as information exchange brokers that retrieve and initiate
transactions using data located on financial institutions' host systems,
35
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 the
financial institution by supporting multiple languages and multiple web site
designs.
Data Centers
We currently provide our Internet banking services out of a data center
located in Westlake Village, California and at our regional center in
Norcross, Georgia. All financial institutions on our real time architecture
are served through the Westlake Village data center; most batch financial
institutions are served through the Norcross data center. In addition, we
operate a smaller data center in Sacramento in connection with our lending
division. All of our data centers currently have disaster recovery
capabilities. These data centers allow for emergency backup and disaster
recovery functions to each other in the event of system interruption or
shutdown involving one of the data centers.
Each of our data centers provides a controlled access environment with
security measures ranging from alarms, video cameras, security guards,
biometric access controls and a centrally monitored key card access system.
Our data centers are also equipped with a self-contained power system that
includes a high capacity battery backup system, providing continuous power to
all production systems. In addition, diesel power generators provide backup
power to each of our facilities in Westlake Village, Norcross and Sacramento
in the event of an extended power outage. We plan to maintain our Westlake
Village and Norcross data centers in a manner that will continue to provide
system redundancy, fail-over from one facility to the other and emergency
backup capabilities.
While the architecture of the two systems was largely integrated by early
2001, the process of failing over to a recovery site currently involves some
manual intervention and there is some attendant delay and loss of use of non-
key features and functionality. The final data center integration efforts are
scheduled to be substantially completed within six to eight months. The
resulting configuration will permit further development of the redundancy and
recovery mechanisms already in place.
Customers
Our target market is the approximately 19,500 financial institutions in the
United States with assets of less than $10 billion each. As of January 31,
2002, we had contracts with 1,585 financial institutions, 1,380 of which had
contracted with us for Internet banking services, 502 of which had contracted
for cash management services and 153 of which had contracted for lending
services. There were approximately 3 million active Internet banking end users
at January 31, 2002, up 80%, from 1.6 million at January 31, 2001. We had a
total of 1,171 Internet banking clients with live sites at January 31, 2002,
representing approximately 29.3 million potential end users and an overall
penetration rate of 10%. The total number of potential end users of the
1,380 contracted Internet banking institutions was approximately 32.3 million.
For the year ended December 31, 2001, no individual financial institution
accounted for over 10% of our total revenues.
Third-Party Relationships
We have relationships and have developed direct connections, or system
interfaces, with most of the major vendors of core data processing software
and outsourced data processing services to financial institutions. These
system interfaces enable us to access a financial institution's host system to
provide end users access to their account data. In addition to developing new
interfaces, we are currently proceeding with initiatives to significantly
enhance numerous existing interfaces in order to deliver more robust
connectivity and increase operating efficiencies. As of January 31, 2002, we
have developed interfaces to most of the major systems that provide services
to financial institutions, some of which are supported within joint marketing
arrangements that we have in place with data processing vendors.
36
We have a five-year marketing agreement with BISYS which began in April
1998, with automatic renewals for successive five-year terms unless terminated
by either party prior to renewal. BISYS, which provides transaction processing
and other administrative and computer processing services to banks and
financial institutions, offers our products to its customer base. BISYS is
entitled to retain a portion of the fees collected on implementation and
monthly service.
To deliver bill payment services, we have relationships with major providers
such as Metavante Corporation and CheckFree Services Corporation. Both
Metavante and CheckFree support single, one-time payments or recurring
payments via electronic payment methods, also known as Automated Clearing
House transfers, as well as paper-based checks. Under either method, the
payment is debited from a depositary account of the payor. Our agreements
require us to pay fixed, minimum and variable fees based on factors such as
the number of customers, end users and bill payment transactions.
Sales and Marketing
We utilize a direct sales model. As of January 31, 2002, our sales and
marketing staff consisted of 62 people, who are responsible for prospecting
and acquiring new accounts and cross-selling additional products to those
accounts. Our sales team is generally organized by geographic regions managed
by regional sales directors who manage individual sales staff assigned to
their region. We also have a dedicated national sales staff that targets
larger institutions without regard to regions. We also have an internal add-on
sales team to target existing customers for cross-selling opportunities.
Our typical sales cycle is approximately four to six months for new
financial institution customers and approximately two months for follow-on or
upgrade sales to existing financial institution 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 either home banking, cash
management or lending, depending upon the solution sold.
Our primary marketing efforts are focused on building brand awareness among
financial institutions and identifying potential customers. Our marketing
efforts include:
. telemarketing;
. press relations;
. 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 promotional
arrangements. We are exclusively endorsed by the American Bankers Association,
or ABA, for our Internet banking product. The ABA endorsement, issued by the
Corporation for American Banking, or CAB, an ABA subsidiary, was granted to us
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
37
for consecutive three-year terms. We are presently evaluating the terms of the
renewal or whether to renew our ABA endorsement. In addition, we have
promotional arrangements with several state banking associations that promote
our products to their constituents in exchange for referral fees.
Product Development
As of January 31, 2002, our product development staff consisted of 180
software developers and engineers, as well as product and project managers.
Their development efforts are focused on:
. Enhancements to Existing Products. We are continuously developing new
features and functions for our retail and business banking and lending
products in order to provide a broader range of functions. Additional
product enhancements will provide better and more streamlined usability
for both our financial institutions and for their end-users.
. Introduction of New Product Lines. We are adding new products to our
product line offerings, including consolidated bill presentment and
additional payments products. We are also in the final stages of
completing a new online lending platform, which will include an online
mortgage lending module. These new features and products are in final
testing on certain of our clients' beta sites, where we are monitoring
them for quality assurance.
. 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.
. 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. Our Advanced Target Marketing product
enables our financial institutions to better target their end-users.
Specific enhancements to this product include enabling our financial
institution administrators to create pre-packaged campaigns to increase
cross-selling of online products and services.
. Other Products and Services. We are working to expand our offerings to
include related financial service capabilities such as enhanced account
aggregation through more robust end user reporting metrics and single
sign-on capability; person-to-person payments which will allow end users
to transfer money between accounts and between friends, family and
associates; and personal financial management through tools embedded
within our products which allow end users to effectively manage finances
through such features as interest rate comparison and investment
optimization calculators.
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.
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 Online
Resources, S1 Community & Regional eFinance Group (a subsidiary of S1
Corporation and formerly known as Q-Up), FundsXpress, Financial Fusion (a
subsidiary of Sybase), NetZee, and Liberty. Also, vendors such as Corillian
and S1 Corporation, who primarily target the largest financial institutions,
occasionally compete with us in our market segment. 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
Metavante. Local competition for Internet banking services is provided by more
than 100 smaller online service outsourcing companies located throughout the
U.S.
38
Our primary competition for providing the business banking services that
financial institutions offer their business customers are vendors of cash
management systems for large corporations such as ADP, Magnet, Politzer &
HANEY and S1 Corporation.
We also face potential indirect competition from Internet portals such as
Quicken.com, MSN.com, and Yahoo! which might serve as an alternative to
financial institutions' web sites, particularly for bill payment, bill
presentment and account aggregation 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 believe these factors will help enhance our competitive position, grow
our market share and maintain our customer base. We also expect competition to
increase significantly as existing or 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
associations, credit unions and savings banks, operate in markets that are
also subject to rigorous regulatory oversight and supervision. Financial
institutions 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-savings
rules, usury laws, the Equal Credit Opportunity Act, the Home Mortgage
Disclosure Act, the Fair Housing Act, the Electronic Fund Transfer Act, the
Fair Credit Reporting Act, the Bank Secrecy Act, the USA Patriot Act of 2001,
the Real Estate Settlement Procedures Act of 1974, the Bank Service Company
Act, the Community Reinvestment Act, privacy and information security
regulations, laws against unfair or deceptive practices, the Electronic
Signatures in Global and National Commerce 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 financial
institution. 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 financial institutions regarding
applicable regulatory requirements, and rely on each financial institution 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 Federal Deposit Insurance Corporation, the National Credit
Union Administration or other federal or state agencies that regulate or
supervise depository institutions or other
39
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. Although we believe we are not subject to
direct supervision by federal and state banking agencies relating to other
regulations, we have from time to time agreed to examinations of our business
and operations by these agencies. 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.
Particularly in light of the recent terrorist attacks upon the U.S.,
federal, state or foreign authorities could adopt additional laws, rules or
regulations affecting our business operations, such as requiring us or
financial institutions to comply with data, record keeping, security, 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 pricing, content, characteristics, taxation and quality of services and
products. Existing regulations may be modified.
The Electronic Fund Transfer Act regulates certain electronic fund transfers
made by providers of access devices and electronic fund transfer services.
Under Regulation E of that Act, financial institutions 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 fund 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 that of financial institutions 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
and protect our proprietary technology. Some of our competitors have patents
or pending applications to obtain patents on their technology. Due to the
nature of the technology associated with our products and services, we do not
believe that our ability to compete currently depends to any significant
extent on whether or not our technology is patented or patentable. We enter
into confidentiality agreements with our employees, consultants, resellers and
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.
40
Employees
As of January 31, 2002, we had a total of 738 employees, including 19 part-
time employees. Of these employees, 419 work in operations, 62 in sales and
marketing, 180 in product development and 77 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.
Properties
Our principal offices currently occupy approximately 46,000 square feet in
Calabasas, California, pursuant to a lease that expires May 31, 2003. During
2000, we entered into an agreement, which expires April 7, 2005, to lease
approximately 52,130 square feet of office space in Westlake Village,
California. This facility houses one of our principal data centers.
We assumed leases in Athens and Norcross, Georgia in conjunction with our
acquisition of nFront. These leases have been sublet and the subtenants will
occupy and pay rent on these facilities in 2002. We currently lease and occupy
approximately 58,672 square feet of office space in Norcross, Georgia. This
lease expires July 5, 2005. We also currently occupy approximately 18,989
square feet of office space in Sacramento, California under a lease we assumed
in connection with our ATA acquisition which will expire February 28, 2005. We
also occupy approximately 17,265 square feet of office space at a second
location in Sacramento under a new lease which commenced on September 26, 2001
and which will expire December 31, 2004.
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. Although we are not a party to any litigation that we
believe would have a material adverse effect, individually or in the
aggregate, on our business or financial condition, it is possible that in the
future we could become a party to such proceedings.
On December 6, 2001, we and three of our current and former officers and
directors as well as most of the managing underwriters in our previous public
offerings were named as defendants in a class-action lawsuit filed in the
United States District Court for the Southern District of New York. The
lawsuit is captioned In re Initial Public Offering Securities Litigation, Joe
Curtis McCollum vs. Digital Insight Corp. et al., No. 01 CV 11231. The claims
are based on allegations that the underwriter defendants solicited and
received from certain investors, in exchange for allocating Digital Insight
shares to the investors in connection with the previous public offerings,
additional, excessive and undisclosed commissions and undisclosed commitments
to purchase additional Digital Insight shares in the aftermarket. The
complaint alleges claims based on Sections 11 and 15 of the Securities Act of
1933. The complaint also alleges claims solely against the underwriter
defendants under Section 12(2) of the Securities Act of 1933, and Section
10(b) of the Securities Exchange Act of 1934. We intend to defend this lawsuit
vigorously.
We are a party to a lawsuit captioned FundsXpress Financial Network, Inc.
vs. Digital Insight Corporation. The lawsuit was filed on March 4, 2002 in the
United States District Court for the Western District of Texas, Austin
Division. The plaintiff is a competing provider of Internet banking services
to financial institutions. The complaint asserts claims of trade secret
misappropriation and copyright infringement based on allegations that we hired
a former employee of the plaintiff, and that we used certain proprietary and
copyrighted materials of the plaintiff that were purportedly brought over by
the former employees and provided to certain of our employees. The complaint
seeks a permanent injunction, unspecified compensatory and exemplary damages,
cost and reasonable attorneys' fees. We intend to defend this lawsuit
vigorously.
41
MANAGEMENT
The following table sets forth information regarding our executive officers
and directors, including their ages as of December 31, 2001:
Name Age Position
---- --- --------
John Dorman.............. 51 Chairman of the Board and Chief Executive
Officer
Dale R. Walker........... 59 President, Chief Operating Officer and
Director
Elizabeth S.C.S. Murray.. 46 Executive Vice President and Chief Financial
Officer
Vincent R. Brennan....... 38 Senior Vice President of Sales
Drew Hyatt............... 40 Senior Vice President, Internet Banking
Client Services
Bruce Isaacson........... 38 Senior Vice President, Products, Marketing
and Alliances
William Kontgis.......... 52 Senior Vice President, Internet Banking
Operations
Joe McDoniel............. 60 Senior Vice President, Strategic
Opportunities
Robert Surridge.......... 38 Senior Vice President, Lending Division
Dr. Melvin Takata........ 48 Senior Vice President, Chief Technology
Officer
Betsy S. Atkins.......... 46 Director
Michael Hallman.......... 56 Director
James McGuire............ 58 Director
Robert North............. 66 Director
Michael R. Splinter...... 51 Director
John Dorman. Mr. Dorman has been our Chief Executive Officer and a director
since October 1998 and was our President from October 1998 to February 2001.
Mr. Dorman was appointed Chairman of the Board in June 1999. Prior to his
appointment as our 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, Chairman, 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.
Dale R. Walker. Mr. Walker has been a director since February 2001 and has
served as our President and Chief Operating Officer since then. Prior to
joining us, Mr. Walker was President of Personal Financial Services, Executive
Vice President and Director at Ford Motor Credit from June 1999 to May 2000
and President of AIG Consumer Finance Group, Inc. from July 1995 to May 1999.
Mr. Walker served as Chairman, President and CEO of ITT Lyndon Insurance
Group, Executive Vice President and Director at ITT Financial Corporation,
between 1993 and 1995. From 1983 to 1992, Mr. Walker held the position of
Executive Vice President and Group Head for the Real Estate Group at Wells
Fargo, N.A. Mr. Walker has a BS degree in mathematics from Wake Forest
University and an MBA from the University of North Carolina.
Elizabeth S.C.S. Murray. Ms. Murray became our Executive Vice President and
Chief Financial Officer on March 4, 2002. Ms. Murray previously served as
Executive Vice President, Chief Financial Officer and Treasurer of Korn/Ferry
International from July 1998 to March 2002. Prior to that, Ms. Murray served
as Executive Vice President and Chief Financial Officer of Tycom Inc. from
June 1997 to July 1998, and from 1994 to June 1997 she was the Chief Financial
Officer and Vice President of Hughes Communications, Inc., a subsidiary of
Hughes Electronics Corporation. Ms. Murray is a Chartered Accountant with the
Institute of Chartered Accountants in Scotland and holds a BA degree in
business studies from Robert Gordon University.
42
Vincent R. Brennan. Mr. Brennan has served as our Senior Vice President of
Sales since February 2001 and was our Vice President, Sales from February 2000
following the merger with nFront to February 2001. 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.
Drew Hyatt. Mr. Hyatt has served as our Senior Vice President, Internet
Banking Client Services since October 2001. Mr. Hyatt was President, Chief
Executive Officer and Director of ZMarket, an international business-to-
business channel management provider, from September 2000 to July 2001. From
November 1999 to July 2000, he was President and Chief Executive Officer of
ECash Technologies, a digital currency company. Mr. Hyatt was President of the
Financial Services Division of HNC Software, Inc., a provider of predictive
software solutions, from November 1997 to November 1999. Mr. Hyatt also worked
as a Senior Manager for Ernst & Young Strategic Advisory Services from 1993 to
October 1997. Mr. Hyatt received his BS degree in electrical engineering from
Lehigh University and his MBA from The Wharton School of Business at the
University of Pennsylvania.
Bruce Isaacson. Mr. Isaacson has served as our Senior Vice President,
Products, Marketing and Alliances since October 2001. Mr. Isaacson was
President of Home Services for Homestore.com, a provider of software and
marketing services to the real estate industry, from April 1999 to April 2001.
From September 1997 to April 1999, he was Vice President of Marketing for the
Mortgage Division of Cendant Corporation. Mr. Isaacson received his BS degree
in engineering from Northwestern University and his doctorate in business
administration and MBA from Harvard Business School.
William Kontgis. Mr. Kontgis has served as our Senior Vice President,
Internet Banking Operations since October 2001 and as our Vice President,
Internet Banking Operations since April 2001. Mr. Kontgis was Director of Data
Center Services at Oxford Health Plans from September 1998 to January 2001,
and a consultant to Computer Sciences Corporation from January 2001 to April
2001. From January 1991 to September 1998, he served as Senior Vice President
of First Nationwide Bank and from January 1990 to January 1991 he served as
Senior Vice President of California Federal Bank. Mr. Kontgis received his BS
degree in mathematics from the University of Utah.
Joe McDoniel. Mr. McDoniel has served as our Senior Vice President,
Strategic Opportunities since October 2001. He served as our Senior Vice
President, Operations from September 2000 to October 2001. Mr. McDoniel was
President of First Source Group, Inc. from August 1993 to September 2000.
First Source Group provides strategic planning and consulting services
relating to retail banking, bank operations, lending and information
technology to the financial services industry. Prior to joining us as an
executive officer, Mr. McDoniel, through First Source Group, provided
consulting services to us from October 1998 to September 2000.
Robert Surridge. Mr. Surridge joined us in November 2000 as Senior Vice
President, Lending Division. Prior to joining us, Mr. Surridge served in
various capacities at The Money Store Inc., a subsidiary of First Union
Corporation, which provides first and second mortgages, home equity and home
improvement loans, and lines of credit to customers with varying credit
quality. Most recently, he served as The Money Store's Vice President,
Strategic Implementation and Development from October 1999 to October 2000;
from June 1998 to September 1999, he served as Vice President, Direct Lending
Operations; from September 1995 to May 1998, he served as Vice President,
Centralized Lending; and from September 1994 to August 1995, he served as its
Vice President Sales, Central Region. Mr. Surridge holds a BS degree from the
University of Utah.
Dr. Melvin Takata. Dr. Takata has served as our Senior Vice President, Chief
Technology Officer since May 2001. Dr. Takata served as Vice President of
Operations and Technology at Yodlee, Inc., an account
43
aggregation service provider, from September 2000 to May 2001. He held various
positions at Citibank/Citigroup from July 1980 to September 2000, including
Director of Access Technologies from July 1995 to February 1998, Director of
Information Technology from February 1998 to August 1999, and Director of
Internet Platforms from August 1999 to September 2000. Dr. Takata received his
BS degree in computer science from the University of Michigan and his masters
and doctorate in computer science from the University of California at Los
Angeles.
Betsy S. Atkins. Ms. Atkins has served as a director since March 2001. She
currently serves as Chief Executive Officer of Baja LLC, a venture capital
company she founded in 1991 which focuses on investments in early stage, high-
tech companies. Since April 2000, Ms. Atkins has been a member of the Board of
Directors of Lucent Technologies Inc. and a member of its Audit and
Compensation Committees. She presently serves as a director of Polycom, Inc.
and a number of private companies. She has previously served on the Boards of
Directors of Olympic Steel from July 1998 to May 2000, Paradyne Networks, Inc.
from February 1999 to May 2000, Secure Computing, Inc. from October 1997 to
January 1999 and Selectica Inc. from May 1996 to June 2001. Ms. Atkins is a
presidential appointee to the Pension Benefit Guarantee Trust Corporation. Ms.
Atkins was a founder of Ascend Communications, Inc., and was a member of its
board prior to its acquisition by Lucent in 1999. She received a BA from the
University of Massachusetts.
Michael Hallman. Mr. Hallman has served as a director since April 2001. Mr.
Hallman founded The Hallman Group, a management consulting firm, in 1992 and
has served as President since then. From February 1990 to March 1992, he was
President and Chief Operating Officer of Microsoft Corporation. From 1987 to
early 1990, Mr. Hallman served as Vice President of the Boeing Company and
President of Boeing Computer Services. From 1967 to 1987, Mr. Hallman worked
for the IBM Corporation in various sales and marketing executive positions,
including his last assignment as Vice President of Field Operations, and was
responsible for half of IBM's United States sales volume. Mr. Hallman
currently serves as a director of Intuit, InFocus Corporation, WatchGuard
Technologies and Network Appliance Corporation. He received his BA degree and
MBA from the University of Michigan.
James McGuire. Mr. McGuire has been a director 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 BA degree in finance
from the University of Notre Dame.
Robert North. Mr. North has been a director since June 1997. Mr. North was a
member of the board from 1987 to January 2000 and Chairman of the Board of HNC
Software, Inc., a provider of predictive software solutions, from January to
May of 2000. Mr. North also served as the Chief Executive Officer of HNC
Software, Inc. from 1987 to January 2000. Mr. North is also a director of
Peerless Systems Corporation, a provider of software-based embedded imaging
systems; WebCapital, a provider of financial products; Center Software, a
provider of XML software products; and Neighborhood Bankcorp., a regional
banking institution. Mr. North holds BS and MS degrees in electrical
engineering from Stanford University.
Michael R. Splinter. Mr. Splinter has been a director since March 2001. Mr.
Splinter currently serves as Executive Vice President and General Manager,
Sales and Marketing Group, at Intel Corporation, a position he has held since
March 2001, and as its Vice President and General Manager, Technology and
Manufacturing Group, from 1998 to March 2001. Prior to that, Mr. Splinter was
Intel's Vice President and Assistant General Manager, Technology and
Manufacturing Group from 1996 to 1998, and General Manager, Components
Manufacturing from 1992 to 1996. Mr. Splinter is a graduate of the University
of Wisconsin, where he earned BS and MS degrees in electrical engineering.
44
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 31, 2002 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 our common
stock as to:
. each person known by us to own beneficially more than 5% of the
outstanding shares of our common stock;
. each of our executive officers;
. each of our directors; and
. all of our directors and executive officers as a group.
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 32,029,304 shares
of common stock outstanding as of March 31, 2002. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission, or SEC. Shares of common stock subject to options that are
presently exercisable or exercisable within 60 days of March 31, 2002 are
deemed outstanding for 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.
Percent Owned
-----------------
Number of Shares Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
------------------------ ------------------ -------- --------
5% Stockholders:
Waddell & Reed(1)....................... 3,813,800 11.9% 10.6%
Nasser J. Kazeminy(2)................... 2,710,905 8.5 7.5
Capital Group International, Inc.(3).... 2,484,500 7.8 6.9
David B. Becker(4)...................... 1,901,907 5.9 5.3
Directors and Executive Officers(5):
John Dorman............................. 674,118 2.1 1.9
Dale R. Walker.......................... 164,554 * *
Joe McDoniel............................ 103,643 * *
James McGuire........................... 79,349 * *
Robert North............................ 47,999 * *
Dr. Melvin Takata....................... 44,791 * *
Vincent R. Brennan...................... 43,990 * *
Michael Hallman......................... 20,555 * *
William Kontgis......................... 19,999 * *
Betsy S. Atkins......................... 19,444 * *
Michael R. Splinter..................... 19,444 * *
Robert Surridge......................... 5,626 * *
Drew Hyatt.............................. -- -- --
Bruce Isaacson.......................... -- -- --
Elizabeth S.C.S. Murray................. -- -- --
All directors and officers as a group
(15 persons)........................... 1,243,512 3.8 3.4
--------
* Less than 1%
(1) The address of record for Waddell & Reed is 6300 Lamar Avenue, Overland
Park, Kansas 66202. As disclosed on a Schedule 13G/A filed with the SEC on
January 7, 2002, the shares are beneficially owned by one or more open-end
investment companies or other managed accounts which are advised or sub-
advised
45
by Waddell & Reed Investment Management Company, an investment advisory
subsidiary of Waddell & Reed, Inc., which in turn is a broker-dealer and
underwriting subsidiary of Waddell & Reed Financial Services, Inc., a
parent holding company. Waddell & Reed Financial Services, Inc. is a
subsidiary of Waddell & Reed Financial, Inc. By contract, Waddell & Reed
Investment Management Company holds investment power over the shares owned
by its clients and, in most cases, voting power. Therefore, Waddell & Reed
Investment Management Company may be deemed the direct beneficial owner of
3,813,800 shares of our common stock. These companies are of the view that
they are not acting as a "group" for purposes of the Securities Exchange
Act of 1934. Indirect beneficial ownership is attributed to the respective
parent companies solely because of the parent companies' control
relationship to Waddell & Reed Investment Management Company.
(2) 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/A filed
with the SEC on February 14, 2002, 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. As disclosed on the
Schedule 13G/A, Exponential Partners II Limited Partnership beneficially
owns 1,766,413 shares of our common stock. In addition, Mr. Kazeminy,
Nader C. Kazeminy and James A. Vose are trustees of the Nasser J. Kazeminy
Irrevocable Trust and share voting authority over 472,146 shares of our
common stock held by that Trust. Mr. Kazeminy, Nader C. Kazeminy and James
A. Vose are trustees of the Yvonne P. Kazeminy-Mofrad Irrevocable Trust
and share voting authority over the 472,346 shares held in that Trust. Mr.
Kazeminy disclaims beneficial ownership of the shares held by these
Trusts.
(3) The address of record for Capital Group International, Inc. is 11100 Santa
Monica Boulevard, Los Angeles, California 90025. As disclosed on a
Schedule 13G filed on February 11, 2002, Capital Group International is
the parent holding company of a group of investment management companies,
including banks and investment advisers. These investment management
companies provide investment advisory and management services for their
respective clients which include registered investment companies and
institutional accounts. Capital Group International does not have
investment power or voting power over any of the 2,484,500 shares of our
common stock held by its clients, but may be deemed to "beneficially own"
such shares for purposes of the Securities Exchange Act of 1934 as a
result of its serving as the investment manager of various institutional
accounts.
(4) The address of record of David B. Becker is 7820 Innovation Boulevard,
Indianapolis, Indiana 46278. As disclosed on a Schedule 13G filed on
January 31, 2002, Mr. Becker owns 1,426,428 shares directly and 475,469
shares as trustee of the David B. Becker 2000 Grantor Retained Annuity
Trust u/a/d 10-27-2000.
(5) Unless otherwise indicated, the address of each director and officer is
c/o Digital Insight Corporation, 26025 Mureau Road, Calabasas, California
91302.
46
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 par share.
The following is a summary of the material terms of our common stock and
preferred stock. Please see our restated certificate of incorporation, filed
with the SEC, for more detailed information.
Common Stock
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 our company or make removal of
management more difficult. Additionally, the issuance of preferred stock may
have the effect of decreasing the market price of our 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 current
plans to issue any of the preferred stock.
Registration Rights
As of January 31, 2002, the holders of an aggregate of approximately 5.3
million shares of common stock were entitled to rights with respect to the
registration of shares under the Securities Act. Under the terms of the
agreements with respect to these rights, 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 the 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.
Delaware Anti-Takeover Law and Certain Charter and Bylaws Provisions
Provisions of our restated certificate of incorporation 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;
47
. 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 restated certificate of
incorporation 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;
. 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 EquiServe
Shareholder Services. The address for EquiServe Shareholder Services is P.O.
Box 43010, Providence, Rhode Island 02940, and its telephone number is (781)
575-3400.
48
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Banc of America Securities LLC and
J.P. Morgan Securities Inc. are acting as representatives, have severally
agreed to purchase, and we have agreed to sell to them, severally, the number
of shares of our common stock set forth below.
Number of
Name Shares
---- ---------
Morgan Stanley & Co. Incorporated..................................
Banc of America Securities LLC.....................................
J.P. Morgan Securities Inc.........................................
---------
Total............................................................ 4,000,000
=========
The underwriters are offering the shares of our common stock 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 our common stock
offered by this prospectus are subject to the approval of certain legal
matters by their counsel and to certain other conditions. The underwriters are
obligated to take and pay for all of the shares of our common stock offered by
this prospectus if any such shares are taken. However, the underwriters are
not required to take or pay for the shares covered by the underwriters' over-
allotment option described below.
The underwriters initially propose to offer part of the shares of our common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to certain dealers at a price that represents
a concession not in excess of $ a share to other underwriters or to
certain dealers. After the initial offering of the shares of our common stock,
the offering price and other selling terms may from time to time be varied by
the representatives of the underwriters.
We 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 our common stock at the public offering price listed 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 the offering of
the shares of our common stock offered by this prospectus. To the extent the
option is exercised, each underwriter will become obligated, subject to
specified conditions, to purchase about the same percentage of the additional
shares as the number listed next to the underwriter's name in the preceding
table bears to the total number of shares listed next to the names of all
underwriters in the preceding table. The estimated costs and expenses, other
than underwriting discounts and commissions, payable by us in connection with
this offering are estimated to be $ .
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us. The amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
Paid by Digital Insight
--------------------------
Full
No Exercise Exercise
----------- -----------
Per Share..................................... $ $
Total......................................... $ $
Our common stock is quoted on the Nasdaq National Market under the symbol
"DGIN."
49
We and our directors and executive officers have agreed that, without the
prior written consent of Morgan Stanley & Co. Incorporated and Banc of America
Securities LLC on behalf of the underwriters, we and they will not, during the
period ending 90 days after the date of this prospectus:
. 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 our 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 our
common stock, whether any transaction described above is to be settled by
delivery of the shares of our common stock or such other securities, in
cash or otherwise.
The restrictions described in this paragraph do not apply to:
. the sale of the shares to the underwriters;
. the sale of shares pursuant to our stock purchase plan;
. the issuance by us of shares of our common stock upon the exercise of an
option or warrant outstanding on the date of this prospectus;
. the issuance by us of stock options, restricted stock or other awards
granted pursuant to our employee benefit plans; or
. transactions by any person other than us relating to shares of our common
stock or other securities acquired in open market transactions after the
completion of this offering.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of our 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 our common stock, the underwriters may bid for, and purchase,
shares of our common stock in the open market. Finally, the underwriting
syndicate may reclaim concessions allowed to an underwriter or a dealer for
distributing our common stock in the offering, if the syndicate repurchases
previously distributed 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 our 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.
Some of the underwriters or their respective affiliates have provided, and
may in the future provide, investment banking, commercial banking and
financial advisory services in the ordinary course of business. These
underwriters and their affiliates have received, and may receive, customary
fees for their services.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
50
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by O'Melveny & Myers LLP, Los Angeles, California. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Austin, Texas.
EXPERTS
The consolidated financial statements and financial statement schedule of
Digital Insight Corporation as of December 31, 2000 and 2001 and for each of
the three years in the period ended December 31, 2001 included and
incorporated by reference in this registration statement/prospectus have been
so included and incorporated by reference 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 Virtual Financial Services, Inc., as of December
31, 2001 and for the year then ended, included and incorporated by reference
in this registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report, which is included and
incorporated by reference herein, and have been so included and incorporated
by reference in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-3, 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 the contract,
agreements or documents and are not necessarily complete. Complete exhibits
have been filed with the SEC.
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 are available at the SEC's
web site at www.sec.gov.
51
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports with the SEC. You may read and
copy any document we file at the SEC's public reference room in Washington,
D.C. Our SEC filings are also available to the public on the SEC's web site at
www.sec.gov.
The SEC allows us to "incorporate by reference" the information that we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus. We incorporate by reference:
(1) our Annual Report on Form 10-K for the year ended December 31, 2001;
and
(2) our Current Reports on Form 8-K, filed February 4, 2002 and February
25, 2002.
The information filed by us with the SEC in the future will update and
supersede this information.
We also incorporate by reference any filings we may make with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, after the date of the original filing of the registration statement,
of which this prospectus is part, and until our offering is completed.
You may request a copy of these filings, at no cost, by writing or calling
us at the following address or telephone number:
Investor Relations
Digital Insight Corporation
26025 Mureau Road
Calabasas, CA 91302
Telephone: (818) 871-0000
52
INDEX TO FINANCIAL STATEMENTS
Page
----
Digital Insight Corporation
Report of Independent Accountants, PricewaterhouseCoopers LLP........... F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)............... F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Schedule II--Valuation and Qualifying Accounts.......................... F-26
Unaudited Pro Forma Condensed Consolidated Financial Information
Introduction to Unaudited Pro Forma Condensed Consolidated Financial
Information............................................................ F-27
Unaudited Pro Forma Condensed Consolidated Balance Sheet................ F-28
Unaudited Pro Forma Condensed Consolidated Statement of Operations...... F-29
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information............................................................ F-30
Virtual Financial Services, Inc.
Independent Auditors' Report, Deloitte & Touche LLP..................... F-32
Balance Sheet........................................................... F-33
Statement of Operations................................................. F-34
Statement of Shareholders' Deficit...................................... F-35
Statement of Cash Flows................................................. F-36
Notes to Financial Statements........................................... F-37
F-1
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 subsidiaries (the "Company") at December 31,
2000 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule appearing on
page F-26 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, 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 our opinion.
As described in Note 2 to the consolidated financial statements, the Company
adopted Staff Account Bulletin No. 101 in the year ended December 31, 2000,
and changed its method of recognizing implementation revenue and related
direct incremental implementation costs.
/s/ PricewaterhouseCoopers LLP
Century City, California
January 29, 2002
F-2
DIGITAL INSIGHT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
-------------------
2000 2001
-------- ---------
ASSETS
------
Current assets:
Cash and cash equivalents............................... $ 71,523 $ 15,334
Short-term investments.................................. 10,187 38,300
Accounts receivable, net of allowance for doubtful
accounts of $221 and $518 at December 31, 2000 and
2001, respectively..................................... 14,403 19,133
Accumulated implementation costs........................ 4,551 4,973
Other current assets.................................... 3,907 2,893
-------- ---------
Total current assets.................................. 104,571 80,633
Property and equipment, net............................... 36,352 37,784
Goodwill and intangible assets, net....................... 135,067 98,382
Accumulated implementation costs.......................... 5,173 5,941
Long-term investments..................................... -- 13,334
Other assets.............................................. 1,063 554
-------- ---------
Total assets.......................................... $282,226 $ 236,628
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable........................................ $ 5,308 $ 3,142
Accrued compensation and related benefits............... 3,237 3,465
Customer deposits and deferred revenue.................. 12,442 7,434
Other accrued liabilities............................... 6,477 7,465
Line of credit.......................................... 1,000 --
Current portion of capital lease obligations............ 2,265 1,202
Current portion of long-term debt....................... 278 3,529
-------- ---------
Total current liabilities............................. 31,007 26,237
Capital lease obligations................................. 1,706 411
Long-term debt............................................ 2,222 5,882
Customer deposits and deferred revenue.................... 7,456 7,207
-------- ---------
Total liabilities..................................... 42,391 39,737
-------- ---------
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock; $.001 par value, 100,000,000 shared
authorized; 28,902,998 and 29,638,479 shares issued and
outstanding at December 31, 2000 and 2001,
respectively........................................... 29 30
Additional paid-in capital.............................. 333,845 337,461
Stockholders' notes receivable.......................... (115) (124)
Deferred stock-based compensation....................... (6,805) (1,409)
Accumulated deficit..................................... (87,119) (139,067)
-------- ---------
Total stockholders' equity............................ 239,835 196,891
-------- ---------
Total liabilities and stockholders' equity............ $282,226 $ 236,628
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
DIGITAL INSIGHT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the year ended
December 31,
----------------------------
1999 2000 2001
-------- -------- --------
Revenues........................................ $ 26,245 $ 54,428 $ 94,635
Cost of revenues (including amortization of
stock-based compensation of $78, $394 and $760
for the years ended December 31, 1999, 2000 and
2001, respectively)............................ 15,682 33,281 55,377
-------- -------- --------
Gross profit.................................... 10,563 21,147 39,258
-------- -------- --------
Operating expenses:
Sales, general and administrative (including
amortization of stock-based compensation of
$1,039, $1,195 and $1,134 for the years ended
December 31, 1999, 2000 and 2001,
respectively)................................ 22,250 31,454 30,780
Research and development (including
amortization of stock-based compensation of
$104, $3,626 and $2,923 for the years ended
December 31, 1999, 2000 and 2001,
respectively)................................ 7,772 22,139 23,420
Amortization of goodwill and intangible
assets....................................... -- 16,125 35,729
Restructuring charge (including amortization
of stock-based compensation of $940 for the
year ended December 31, 2001)................ -- -- 3,276
Merger-related expenses....................... -- 12,658 --
-------- -------- --------
Total operating expenses.................... 30,022 82,376 93,205
-------- -------- --------
Loss from operations............................ (19,459) (61,229) (53,947)
Interest and other income, net.................. 1,441 3,740 1,999
-------- -------- --------
Net loss before cumulative effect of change in
accounting method.............................. (18,018) (57,489) (51,948)
Accretion of redeemable convertible preferred
stock.......................................... (136) -- --
-------- -------- --------
Net loss attributable to common stockholders
before cumulative effect of change in
accounting method.............................. (18,154) (57,489) (51,948)
Cumulative effect of change in accounting
method......................................... -- (2,515) --
-------- -------- --------
Net loss attributable to common stockholders.... $(18,154) $(60,004) $(51,948)
======== ======== ========
Basic and diluted net loss per share before
cumulative effect of change in accounting
method......................................... $ (1.26) $ (2.25) $ (1.77)
Per share cumulative effect of change in
accounting method.............................. -- (0.10) --
-------- -------- --------
Basic and diluted net loss per share............ $ (1.26) $ (2.35) $ (1.77)
======== ======== ========
Shares used to compute basic and diluted net
loss per share................................. 14,389 25,534 29,301
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DIGITAL INSIGHT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
Total
Common Stock Additional Stockholders' Deferred Stockholders'
----------------- Paid-In Notes Stock-Based Accumulated Equity
Shares Amount Capital Receivable Compensation Deficit (Deficit)
---------- ------ ---------- ------------- ------------ ----------- -------------
Balance at December 31,
1998................... 10,636,377 $11 $ 4,618 $(201) $(2,732) $ (11,704) $(10,008)
Interest on
stockholders' 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
Issuance of common
stock and options in
acquisition of 1View
Network Corporation... 629,313 1 38,739 -- (6,568) -- 32,172
Issuance of common
stock, options and
warrants in
acquisition of AnyTime
Access, Inc. ......... 2,001,186 2 112,675 -- (2,173) -- 110,504
Issuance of common
stock in public
offerings............. 2,150,000 2 62,358 -- -- -- 62,360
Stock options
exercised............. 988,440 1 1,740 -- -- -- 1,741
Issuance of warrants to
purchase common
stock................. -- -- 473 -- -- -- 473
Proceeds from other
issuances of common
stock................. 115,344 -- 1,089 -- -- -- 1,089
Amortization of
deferred stock-based
compensation.......... -- -- -- -- 5,215 -- 5,215
Interest on
stockholders' notes... -- -- -- (12) -- -- (12)
Payment on
stockholders' notes... -- -- -- 113 -- -- 113
Net loss............... -- -- -- -- -- (60,004) (60,004)
---------- --- -------- ----- ------- --------- --------
Balance at December 31,
2000................... 28,902,998 29 333,845 (115) (6,805) (87,119) 239,835
Amortization of
deferred stock-based
compensation.......... -- -- -- -- 5,757 -- 5,757
Deferred stock-based
compensation.......... -- -- 361 -- (361) -- --
Proceeds from other
issuances of common
stock................. 147,404 -- 1,224 -- -- -- 1,224
Interest on
stockholders' notes... -- -- -- (9) -- -- (9)
Stock options
exercised............. 588,077 1 2,031 -- -- -- 2,032
Net loss............... -- -- -- -- -- (51,948) (51,948)
---------- --- -------- ----- ------- --------- --------
Balance at December 31,
2001................... 29,638,479 $30 $337,461 $(124) $(1,409) $(139,067) $196,891
========== === ======== ===== ======= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
DIGITAL INSIGHT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended
December 31,
----------------------------
1999 2000 2001
-------- -------- --------
Cash flows from operating activities:
Net loss........................................ $(18,018) $(60,004) $(51,948)
Adjustments to reconcile net loss to net cash
used in operating activities:
Cumulative effect of change in accounting
method......................................... -- 2,515 --
Depreciation and amortization of property and
equipment...................................... 1,914 5,983 11,258
Amortization of deferred stock-based
compensation................................... 1,221 5,215 5,757
Amortization of goodwill and intangible
assets......................................... -- 16,125 35,729
Interest income on stockholders note
receivable..................................... (15) (12) (9)
Loss from sale of property and equipment........ -- 167 --
Adjustment to conform fiscal year ends for
pooled acquisition............................. 3,275 -- --
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable............................ (5,337) (4,152) (4,730)
Accumulated implementation costs............... (144) (9,445) (1,190)
Other current assets........................... (3,539) 696 1,014
Other assets................................... 961 (602) 509
Accounts payable............................... 2,433 (621) (2,166)
Accrued compensation and related benefits...... 3,133 (1,644) 228
Customer deposits and deferred revenue......... 3,569 11,054 (5,257)
Other accruals................................. 566 (5,466) 1,944
-------- -------- --------
Net cash used in operating activities......... (9,981) (40,191) (8,861)
-------- -------- --------
Cash flows from investing activities:
Purchase of investments......................... (27,757) -- (59,447)
Acquisition of property and equipment........... (9,576) (19,846) (12,690)
Disposal of equipment........................... 69 -- --
Acquisition payment............................. -- (2,000) --
Proceeds from maturity of investments........... -- 17,570 18,000
-------- -------- --------
Net cash used in investing activities......... (37,264) (4,276) (54,137)
-------- -------- --------
Cash flows from financing activities:
Principal payments on debt...................... (1,378) (4,587) (8,946)
Proceeds from debt.............................. -- 4,000 12,499
Net proceeds from public issuance of common
stock.......................................... 86,567 62,360 --
Proceeds from other issuances of common stock... 204 2,943 3,256
Proceeds from issuance of redeemable convertible
preferred stock................................ 8,440 -- --
Repurchase of redeemable convertible preferred
stock.......................................... (200) -- --
-------- -------- --------
Net cash provided by financing activities..... 93,633 64,716 6,809
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents..................................... 46,388 20,249 (56,189)
Cash and cash equivalents, beginning of period... 4,886 51,274 71,523
-------- -------- --------
Cash and cash equivalents, end of period......... $ 51,274 $ 71,523 $ 15,334
======== ======== ========
Supplementary disclosures of cash flow
information:
Cash paid during the year for interest.......... $ 32 $ 188 $ 504
Supplemental non-cash investing and financing
activities:
Acquisition of property and equipment under
capital lease obligation....................... -- (6,610) --
Capital lease obligations incurred.............. 892 6,610 --
Warrants issued................................. 147 473 --
Conversion of mandatorily redeemable convertible
preferred stock to common stock................ 23,479 -- --
Effect of acquisitions:
Accounts receivable and other assets............ -- (3,062) --
Property and equipment.......................... -- (3,651) --
Goodwill and intangible assets.................. -- (151,189) --
Accounts payable, accrued compensation and
benefits and other accruals.................... -- 12,139 --
Capital lease obligation........................ -- 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.
F-6
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Digital Insight Corporation (the "Company"), which incorporated in March
1997 in Delaware, provides Internet banking services to credit unions, small
to mid-sized banks and savings and loans. Its Internet banking services
include Internet banking and bill payment services 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 and other services. In addition, the Company, through its
acquisition of AnyTime Access, Inc. ("ATA"), is a provider of services that
allow credit unions, banks and insurance companies to outsource their consumer
loan origination and processing functions. Substantially all of the Company's
revenues are 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; therefore, the financial
results for the Company and nFront have been combined for the historical
periods presented in accordance with the pooling of interests method.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 consolidated financial
statements in conformity with generally accepted accounting principles
generally accepted in the United States. Actual results could differ from
those estimates
Cash, cash equivalents and investments
The Company considers all highly liquid investments purchased with a
maturity at the time of purchase of three months or less to be cash
equivalents. Cash equivalents at December 31, 2001 consist of money-market
funds and commercial paper.
The Company considers all investments maturing after three months but within
12 months to be short-term investments and investments maturing after 12
months to be long-term investments. Investments are comprised primarily of
certificates of deposit and commercial paper. The Company classifies, at the
date of acquisition, its 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 investments as held-to-maturity. These securities
are stated at amortized cost plus accrued interest.
Property and equipment
Property and equipment is carried at cost. 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. Leasehold improvements are amortized using the straight-line method
over the lesser of the lease term or the estimated useful life of the asset.
When assets are sold or retired, the asset and related depreciation
allowance is eliminated from the records and any gain or loss on disposal is
included in operations. Expenditures for maintenance and repairs are charged
to operations when incurred.
F-7
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 purchased software licenses,
implementation costs, consulting and payroll-related costs for certain
projects that qualify for capitalization. The Company expenses costs related
to preliminary project assessment, research and development, re-engineering,
training and application maintenance as incurred. Costs capitalized at
December 31, 2000 and 2001 were approximately $11.6 million and approximately
$16.7 million, respectively. The capitalized software costs are being
depreciated on a straight-line method over a period of three years upon being
placed in service. Amortization of approximately $1.6 million and
approximately $3.9 million was charged for the years ended December 31, 2000
and 2001, respectively. No amortization had been charged for the year ended
December 31, 1999.
Goodwill and intangibles
Goodwill and intangible assets represent the excess purchase price over the
estimated fair value of the tangible assets acquired and liabilities assumed
in the acquisitions of 1View Network Corporation ("1View") ($38.7 million) and
ATA ($111.5 million). Goodwill and intangible assets are amortized using the
straight-line method over the periods benefited, one to six years. At December
31, 2001, goodwill and intangible assets are comprised of the following
components (in thousands):
1View ATA Total
-------- -------- --------
Goodwill....................................... $ 33,783 $ 85,301 $119,084
Assembled workforce............................ -- 1,490 1,490
Customer relationships......................... -- 20,230 20,230
Acquired technology............................ 4,900 4,140 9,040
Covenant not-to-compete........................ -- 380 380
-------- -------- --------
38,683 111,541 150,224
Less accumulated amortization.................. (19,642) (32,200) (51,842)
-------- -------- --------
$ 19,041 $ 79,341 $ 98,382
======== ======== ========
Impairment of long-lived assets
The Company assesses potential impairments to its long-lived assets,
including identifiable intangible assets and goodwill, periodically in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting For the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The Company also periodically assesses
the impairment of enterprise level goodwill for which separately identified
operating unit cash flows do not exist in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 17 "Intangible Assets." An
impairment review is performed whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors considered by
the Company include, but are not limited to: significant under performance
relative to expected historical or projected future operating results;
significant changes in the manner of use of the acquired assets or the
strategy for the Company's overall business; significant negative industry or
economic trends; a significant decline in the Company's stock price for a
sustained period of time; and the Company's market capitalization relative to
net book value. When the Company determines that the carrying value of a long-
lived asset may not be recoverable based upon the existence of one or more or
the above indicators of impairment, the Company estimates the future
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of
F-8
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the expected future undiscounted cash flows is less than the carrying amount
of the asset, then the Company recognizes an impairment loss. The impairment
loss is measured as the amount by which the carrying amount of the asset
exceeds the fair value of the asset, determined either based on the market
value if available, or discounted cash flows, if not. Goodwill and
identifiable intangible assets for the 1View acquisition are evaluated at the
enterprise level, as no separate identifiable cash flows exist for that
operation. Goodwill and identifiable intangible assets are evaluated at the
business unit level for the ATA business as the lending division generates
separately identifiable cash flows. The Company performed an impairment
assessment of its long lived assets, including goodwill and identifiable
intangibles, in accordance with SFAS No. 121 at December 31, 2001 in
connection with assessing the impact of implementation of SFAS No. 142
"Goodwill and Other Intangible Assets." No impairment was indicated by the
comparison of future undiscounted cash flows to the book value of the long-
lived assets, including goodwill and identifiable intangibles. However as
discussed further in the "New accounting standards" section of Note 2, the
Company anticipates that there will be an impairment of a portion of the ATA
goodwill as a result of applying the fair value method for assessing
impairment as required by the adoption of SFAS No. 142 in the first quarter of
2002.
Fair value of financial instruments
The Company's financial instruments include cash and cash equivalents,
short-term and long-term investments, accounts receivable, accounts payable,
liabilities and debt. The carrying value of these financial instruments
approximates fair value due to their short-term nature or the current market
trends.
Concentration of credit risk
The market for Internet banking in the United States, in which the Company
operates, is characterized by rapid technological developments, frequent new
product introductions and changes in end user requirements. The Company's
future success will depend on its ability to develop, introduce and market
enhancements to its existing products and services, to introduce new products
and services in a timely manner, which meet customer requirements, and to
respond to competitive pressures and technological advances. Further, the
emergence of new industry standards, whether through adoption by official
standards committees or widespread use by financial institutions or other
financial institution data processing vendors, could require the Company to
redesign its products and services.
During the years ended December 31, 1999, 2000 and 2001, no customer
accounted for 10% or more of total revenues.
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 nature of the customers being
financial institutions and credit unions as well as the number of its
customers and geographic areas. The Company maintains an allowance for
doubtful accounts. Write-offs of accounts receivable were insignificant during
the years ended December 31, 1999, 2000 and 2001.
The Company has cash in financial institutions which is insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $100,000 per institution.
At December 31, 2000 and 2001, the Company had cash and cash equivalent
accounts in excess of the FDIC insured limits.
F-9
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue recognition
The Company derives revenues primarily from long-term service contracts with
financial institution clients, who pay recurring fees based primarily on the
number of end users, end user transactions, or flat monthly amounts for
hosting and maintaining web sites, as well as up-front implementation fees and
optional services. Revenues from recurring service fees are recognized as
services are provided.
During the fourth quarter of 2000, the Company adopted Staff Accounting
Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements."
Prior to the adoption of SAB 101, the Company recognized implementation fee
revenue upon the completion of the implementation process, which was typically
90 to 120 days after contract initiation. The Company also deferred the direct
implementation costs and recognized them upon completion of the
implementation. Under SAB 101, the Company defers recognition of certain
implementation fee revenue, which includes set up fees for each service
element and mandatory training, that are not the culmination of a separate
earnings process and recognizes them ratably over the greater of the initial
life of the customer contract or the estimated life of the customer service
relationship, generally three to five years. The Company also defers the
recognition of the related direct implementation costs and recognizes them
ratably over the same period. The adoption of SAB 101 resulted in a $2.5
million cumulative effect adjustment at January 1, 2000 and a $1.6 million
increase in net loss for the 2000 operating results to reflect the increase in
deferred implementation revenue partially offset by the increase in deferred
implementation costs. The revenue recognized in 2000 and 2001 that was
included in the SAB 101 cumulative effect adjustment amounted to approximately
$3.1 million and $2.4 million, respectively. The net loss and net loss per
share under SAB 101 for 1999 on a pro forma basis would have been $19,791,000
and $1.38 per share, respectively.
Other revenues are derived from the sale of hardware purchased from third
party vendors, web site design, optional consulting and training services
purchased separately by customers after implementation, which represents the
culmination of a separate earnings process, and license fees for licensing
technology to non-service customers. These other revenues are recognized upon
the completion or delivery of the product or service assuming: no company
obligations remain; amounts are fixed and determinable; and collection of the
related receivable is reasonably assured.
Revenues are comprised of the following components:
1999 2000 2001
------- ------- -------
Recurring service fees............................. $16,894 $46,459 $81,347
Ratably recognized implementation fees............. -- 3,722 6,133
------- ------- -------
16,894 50,181 87,480
Implementation and other fees recognized prior to
SAB 101........................................... 9,351 -- --
Other revenues..................................... -- 4,247 7,155
------- ------- -------
Total revenues................................... $26,245 $54,428 $94,635
======= ======= =======
Direct incremental implementation costs are comprised primarily of salaries
and benefits of implementation personnel, consulting fees paid to third party
implementation consultants, and set up fees paid to third party vendors.
Deferred direct incremental implementation costs are included in accumulated
implementation costs in the accompanying balance sheets.
Advertising expense
The Company expenses advertising costs as incurred. Advertising expense for
the years ended December 31, 1999, 2000 and 2001 amounted to $246,700,
$1,142,000 and $68,900, respectively.
F-10
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Research and development
Research and development costs are charged to operations as incurred.
Income taxes
The Company uses the liability method to account for income taxes. Under
this method, deferred taxes are determined based on differences between the
financial statement and tax basis of assets and liabilities, and is measured
at the enacted tax rates that will be in effect when those differences are
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
Stock-based compensation
The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in APB 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. The
pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting defined in SFAS No. 123, "Accounting for
Stock-Based Compensation" had been applied, have been presented in Note 14.
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, less shares subject
to repurchase rights. 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.
Comprehensive income
The Company accounts for comprehensive income in accordance with SFAS No.
130, "Reporting Comprehensive Income" which establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in stockholders' equity
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income other
than net losses.
Segments
The Company discloses information for reportable segments and other
information required by SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company manages its business in two
reportable segments: the internet banking division and the lending division.
F-11
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New accounting standards
In June 1998, the Financial Accounting Standards Board ("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. The Company
adopted SFAS No. 133 in the first quarter of 2001. To date, the Company has
not engaged in any hedging activity, therefore the adoption of this new
standard did not have a significant impact on the Company.
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-interest
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 performed an impairment analysis
at December 31, 2001 under SFAS No. 121, and no impairment was indicated by
the comparison of future undiscounted cash flows to the book value of long-
lived assets, including goodwill and identifiable intangible assets, of ATA.
The Company also performed an impairment analysis by applying the fair value
method under SFAS No. 142 as of December 31, 2001, using both a discounted
cash flow approach and market approach; an impairment of goodwill is
anticipated for ATA. The Company anticipates recording an impairment charge of
approximately $30 million from the adoption of SFAS No. 142 in the first
quarter of 2002. In addition, annual amortization expense related to the
goodwill will decrease by approximately $25 million in 2002, excluding the
impact of the acquisition of Virtual Financial Services, Inc. ("ViFi")
discussed in Note 20.
In August of 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with The Retirement of Long-Lived Assets," which establishes
accounting standards for the recognition and measurement of an asset
retirement obligation and its associated asset retirement cost. It also
provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002, with early adoption permitted. The
Company expects to adopt SFAS No. 143 effective January 1, 2003 and does not
expect that the adoption of this new standard will have a significant impact
on its results of operations and financial position.
In October 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. The impact to the Company of adopting
this new accounting standard is being assessed in conjunction with SFAS No.
142, which is discussed above.
F-12
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for 1999 and 2000 in order to conform to the 2001 presentation.
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 and options to purchase 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, respectively. In
connection with the merger, the Company recorded a one-time charge 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 the Company's
consolidated financial statements for the year ended December 31, 1999 were
restated to conform year ends. 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 accumulated deficit in the
1999 consolidated financial statements. No adjustments were necessary to
conform accounting policies of the entities. There were no intercompany
transactions requiring elimination in any period presented.
4. ACQUISITIONS
On June 21, 2000, the Company completed its acquisition of 1View, a company
based in San Francisco, California that provides electronic information
aggregation solutions for the financial services market. The purchase price
consisted of $2 million in cash and 921,872 shares of common stock and shares
underlying options to purchase common stock in exchange for all of the
outstanding shares and options of 1View. The fair value of the common stock
issued in connection with the acquisition was valued at approximately $38.7
million. The estimated fair value of the Company stock issued was $42 per
share based on the average trading price for the 4 days before, 4 days after
and including the public announcement date of the transaction. Vested and
unvested employee stock options were valued using the Black-Scholes pricing
model and the intrinsic value related to unvested employee options was
allocated to deferred stock-based compensation. The acquisition was accounted
for using the purchase method of accounting. The purchase accounting resulted
in goodwill and identifiable intangible assets of approximately $38.7 million,
which is being amortized on a straight-line basis over the estimated useful
life of three years. Deferred stock-based compensation of approximately $6.6
million was included for the unvested stock options assumed in connection with
the acquisition, which is being amortized over the estimated service period of
the employees.
On July 31, 2000, the Company completed its acquisition of ATA, a company
based in Sacramento, California that provides services and solutions that
allow credit unions, banks and other financial institutions to outsource
certain consumer communication and other administrative functions associated
with consumer loan originations. The Company issued 2,121,862 shares of common
stock and shares underlying options and warrants to purchase common stock with
an estimated fair value of approximately $112.7 million in exchange for all of
the outstanding shares, options and warrants of ATA. The estimated fair value
of the Company stock issued was $53 per share based on the average trading
price for the 4 days before, 4 days after and including the public
announcement date of the transaction. Vested and unvested employee stock
options and warrants were valued using the Black-Scholes pricing model and the
intrinsic value related to unvested employee options was allocated to deferred
stock-based compensation. The acquisition was accounted for using the purchase
method of
F-13
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accounting. The purchase accounting resulted in goodwill and identifiable
intangible assets of approximately $111.5 million, which is being amortized
over the estimated useful lives of one to six years. Deferred stock-based
compensation in the amount of approximately $2.2 million was included for the
unvested stock options assumed in connection with the acquisition, which is
being amortized over the estimated service period of the employees.
5. CASH, CASH EQUIVALENTS AND INVESTMENTS
At December 31, 2001, cash and cash equivalents, short-term investments and
long-term investments consist of the following (in thousands):
Unrealized Unrealized Estimated
Cost losses Gains Fair Value
------- ---------- ---------- ----------
Cash and cash equivalents
Cash.............................. $ 4,085 $ -- $-- $ 4,085
Money market funds................ 4,729 -- -- 4,729
Commercial paper.................. 6,520 (3) -- 6,517
------- ---- ---- -------
$15,334 $ (3) $-- $15,331
======= ==== ==== =======
Short-term investments
Certificate of deposit............ $ 4,764 $ -- $-- $ 4,764
Commercial paper.................. 33,536 (7) 150 33,679
------- ---- ---- -------
$38,300 $ (7) $150 $38,443
======= ==== ==== =======
Long-term investments
Certificates of deposit........... $ 5,882 $ -- $-- $ 5,882
Commercial paper.................. 7,452 $ (2) $ 50 7,500
------- ---- ---- -------
$13,334 $ (2) $ 50 $13,382
======= ==== ==== =======
At December 31, 2000, cash and cash equivalents and short-term investments
consist of the following (in thousands):
Unrealized Unrealized Estimated
Cost losses Gains Fair Value
------- ---------- ---------- ----------
Cash and cash equivalents
Cash............................. $ 5,122 $-- $ -- $ 5,122
Money market funds............... 6,412 -- -- 6,412
Commercial paper................. 59,989 (27) 2 59,964
------- ---- ---- -------
$71,523 $(27) $ 2 $71,498
======= ==== ==== =======
Short-term investments
Certificate of deposit........... $10,187 $-- $ -- $10,187
======= ==== ==== =======
There were no realized gains or losses on investments for the years ended
December 31, 2000 and 2001 and a net realized gain of $758,000 for the year
ended December 31, 1999. The certificate of deposit held at December 31, 2001
is pledged as collateral for the Company's $10 million multiple disbursement
note, as further discussed in Note 8. Accordingly, we have classified a
portion of the certificate of deposit pledged as a long-term investment to
correspond to the long-term portion of the multiple disbursement note.
F-14
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. PROPERTY AND EQUIPMENT
December 31,
------------------
2000 2001
-------- --------
Property and equipment includes the following (in
thousands):
Leasehold improvements.............................. $ 4,618 $ 6,309
Equipment........................................... 23,383 33,589
Software............................................ 11,617 16,682
Furniture and fixtures.............................. 3,683 4,723
Construction in process............................. 5,886 574
-------- --------
49,187 61,877
Less accumulated depreciation and amortization...... (12,835) (24,093)
-------- --------
$ 36,352 $ 37,784
======== ========
Assets acquired under capitalized lease obligations are included in property
and equipment and totaled approximately $5,147,000 with related accumulated
amortization of approximately $901,000 and $1,919,000 at December 31, 2000 and
2001, respectively.
7. 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. The Company had $1 million outstanding as of
December 31, 2000 and no outstanding advances as of December 31, 2001 on the
Revolver.
Under covenants of the Revolver, the Company is required to (i) maintain a
tangible net worth of not less than $20 million at all times, (ii) maintain a
ratio of total senior liabilities to tangible net worth of not more than 1.5
to 1, (iii) ensure quarterly losses do not exceed specified amounts, and (iv)
maintain liquid assets of not less than the greater of (a) twice the amount of
Revolver and other bank debt outstanding, or (b) the total cash expenditures
(as defined). The Company was in compliance with the covenants at December 31,
2001.
8. 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 and principal will be paid in 34 monthly installments,
commencing November 30, 2001. As of December 31, 2001, the Company had $9.4
million in borrowings outstanding under this note and the interest rate on the
note was 4.6% per annum.
9. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under non-cancelable
operating and capital leases with various expiration dates through 2005.
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
F-15
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recognizes rent expense on a straight-line basis over the lease period. Rent
expense under the facility leases was approximately $768,000, $2,289,000 and
$3,335,000 for the years ended December 31, 1999, 2000 and 2001, respectively.
Future minimum lease payments under all noncancelable capitalized and
operating leases for the next five years ending December 31 are as follows (in
thousands):
Capital Operating
------- ---------
2002..................................................... $ 1,285 $3,363
2003..................................................... 430 2,921
2004..................................................... -- 2,708
2005..................................................... -- 780
2006..................................................... -- 4
------- ------
Total minimum lease payments............................. 1,715 $9,776
======
Amount representing interest............................. (102)
-------
Present value of capitalized lease obligations........... 1,613
Less: current portion of capitalized lease obligations... (1,202)
-------
Long-term portion of capitalized lease obligations....... $ 411
=======
In February 2001, the Company entered into a long-term contract with a
vendor to provide services. The contract includes minimum annual purchase
commitments as follows (in thousands):
2002............................................................... $ 5,667
2003............................................................... 6,000
2004............................................................... 5,167
2005............................................................... 83
-------
Total............................................................ $16,917
=======
Payments made to the vendor under the long-term contract amounted to
approximately $7,291,000 for the year ended December 31, 2001.
From time to time the Company may be involved in litigation arising in the
normal course of its business. Although the Company is not a party to any
litigation that it believes would have a material adverse effect, individually
or in the aggregate, on the Company's business, financial condition, results
of operation or liquidity, it is possible that in the future we could become a
party to such proceedings.
On December 6, 2001, the Company and three of the current and former
officers and directors as well as most of the managing underwriters in the
Company's previous public offerings were named as defendants in a class-action
lawsuit filed in the United States District Court for the Southern District of
New York. The lawsuit is captioned In re Initial Public Offering Securities
Litigation, Joe Curtis McCollum vs. Digital Insight Corp. et al.,
No. 01 CV 11231. The claims are based on allegations that the underwriter
defendants solicited and received from certain investors, in exchange for
allocating Digital Insight shares to the investors in connection with the
previous public offerings, additional, excessive and undisclosed commissions
and undisclosed commitments to purchase additional Digital Insight shares in
the aftermarket. The complaint alleges claims based on Sections 11 and 15 of
the Securities Act of 1933. The complaint also alleges claims solely against
the underwriter defendants under Section 12(2) of the Securities Act of 1933,
and Section 10(b) of the Securities Exchange Act of 1934. The Company intends
to defend this lawsuit vigorously.
F-16
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. INCOME TAXES
As of December 31, 2001, the Company had estimated net operating loss
carryforwards for federal and state purposes of approximately $100.5 million
and $43.5 million, respectively. State net operating loss carryforwards began
to expire in 2001 and federal tax net operating loss carryforwards begin to
expire in 2011.
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 as there is uncertainty surrounding
the realization of the benefits in future tax returns. Accordingly, the
accompanying statements of operations include no benefit for income taxes.
The components of the Company's deferred taxes are (in thousands):
December 31,
------------------
2000 2001
-------- --------
Deferred tax assets:
Net operating loss carryforwards....................... $ 34,683 $ 38,055
Research credit carryforwards.......................... 527 527
Stock compensation..................................... 3,371 (359)
Accruals, reserves and other........................... (1,561) (5,298)
Amortization of acquired intangible assets............. (9,791) --
-------- --------
27,229 32,925
Deferred tax asset valuation allowance................. (27,229) (32,925)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========
11. STOCKHOLDERS' NOTES RECEIVABLE
Effective October 23, 1997, under the Company's 1997 Stock Plan, two former
officers of the Company exercised their options to purchase 309,250 shares
each of the Company's common stock. In consideration, each former officer
executed a note payable to the Company for $93,000 at an annual interest rate
of 7%. The notes are payable at the earlier of ten years from the date of
execution or 30 days after termination. The former officers have the option to
prepay all or any portion of the principal or interest without penalty.
Upon separation from the Company in October 2000, one of these former
officers paid $113,000 in repayment of his note. Interest income realized for
the years ended December 31, 1999, 2000 and 2001 on the loans was $15,000,
12,000 and $9,000, respectively.
12. COMMON AND PREFERRED STOCK WARRANTS
In connection with certain borrowings in 1998 and 1999, the Company issued
warrants to purchase redeemable convertible preferred stock, which after the
Company's initial public offering resulted in warrants to purchase 28,819 and
22,222 shares of common stock for $3.47 and $2.70 per share, respectively.
Using the Black-Scholes pricing model, the Company estimated that the
aggregate fair value of the warrants was $211,000. The warrants were exercised
in 2000 and the Company issued 21,648 shares of common stock in March 2000,
for a purchase price equivalent to $75,119, and 20,819 shares of common stock
in May 2000 for a purchase price equivalent of $56,211. The Company recognized
interest expense of $60,000 related to the warrants in 1999.
On May 31, 2000, the Company issued a warrant to purchase 35,000 shares of
common stock at a price per share of $40.5625 in connection with the execution
of a vendor agreement. This warrant expired unexercised on
F-17
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
May 31, 2001. Using the Black-Scholes pricing model, the Company estimated
that the aggregate fair market value of the warrant was $473,000, and is
amortizing the charge over the 36-month term of the agreement.
In conjunction with its acquisition of ATA, the Company has assumed all
outstanding warrants of ATA, which converted into warrants to purchase 48,208
shares of common stock. The exercise price of these warrants range from $4.42
to $25.95 per share. These warrants expire in various periods through July
2009. The Company utilized the Black-Scholes pricing model to compute the fair
value of the ATA warrants at the date of acquisition and included this amount
in the purchase price of ATA.
Warrants to purchase 11,447 shares of common stock at an exercise price of
$25.95 per share remain outstanding at December 31, 2001.
13. COMMON STOCK
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.
In August 2000, Digital Insight completed its secondary public offering of
2,150,000 shares of common stock for net proceeds of approximately $62.3
million.
14. STOCK-BASED COMPENSATION PLANS
Options under the Company's stock-based compensation plans may be granted
for periods of up to ten years, with the exception of an incentive stock
option ("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, provided that (i)
the exercise price of an ISO and nonqualified stock option ("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.
1997 Stock Plan
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 ISO or NSO. ISOs may be granted only to Company employees
(including officers and directors who are also employees). NSOs may be granted
to Company employees and consultants. As of December 31, 2001, the Company has
reserved 3,000,000 shares of common stock for issuance under the 1997 Plan. At
December 31, 2001, there were 1,166,228 shares of common stock available for
future grant under the 1997 Plan.
1999 Stock Plan
In June 1999, the Company adopted the 1999 Stock Incentive Plan (the "1999
Plan"). At December 31, 2001, the Company has reserved 4,500,000 shares of
common stock for issuance under the 1999 Plan. The 1999
F-18
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Plan allows grants of ISOs, NSOs and restricted stock to employees, non-
employee board members and consultants. At December 31, 2001, there were
279,470 shares of common stock available for future grant under the 1999 Plan.
The 1999 Plan is subject to annual increases on March 1 of each year, equal
to 750,000 shares, 5% of the Company's shares outstanding on that date, or a
lesser amount determined by the board of directors.
1View Plan
In connection with the acquisition of 1View, the Company assumed the Stock
Option Plan of 1View, including incentive and non-statutory stock options to
purchase 292,559 shares of common stock with an exercise price of $0.44.
Options granted under the 1View Plan are exercisable over a maximum term of
ten years from the date of grant and generally vest over periods up to four
years. At December 31, 2001, there were 156,435 shares of common stock
available for future grant. The Company does not intend to grant any
additional options under this plan.
ATA Plan
In connection with the acquisition of with ATA, the Company assumed the
Stock Option Plan of ATA, including incentive and non-statutory stock options
to purchase 68,347 shares of common stock with exercise prices ranging from
$0.48 to $37.62. Options granted under the ATA Plan are exercisable over a
maximum term of ten years from the date of grant and generally vest over
periods up to four years. At December 31, 2001, there were 121,740 shares of
common stock available for future grant. The Company does not intend to grant
any additional options under this plan.
2001 Non-Employee Director Stock Option Plan
On May 3, 2001, the Company adopted the 2001 Non-Employee Director Stock
Option Plan, which provides for the granting of stock options to outside
directors who are not employees of the Company. The options granted under this
plan are NSOs. At December 31, 2001, the Company has reserved 250,000 shares
of common stock for issuance under this plan. The plan is subject to annual
increases on March 1 of each year, equal to the lesser of 50,000 shares, 1/10
of one percent of the outstanding common shares on such date, or a lesser
amount determined by the board of directors. As of December 31, 2001, there
were 100,000 shares of common stock available for future grant.
Stock option activity under the plans is as follows:
1999 2000 2001
------------------------ ------------------------ ------------------------
Exercise Exercise Exercise
Options Price Per Options Price Per Options Price Per
Outstanding Share Outstanding Share Outstanding Share
----------- ------------ ----------- ------------ ----------- ------------
Outstanding at
January 1.............. 1,436,204 $0.30-$ 1.00 2,042,276 $0.30-$44.50 4,091,681 $0.19-$83.88
Assumed from nFront..... -- -- 627,926 $2.12-$75.99 -- --
Assumed from 1View...... -- -- 292,559 $0.44 -- --
Assumed from ATA........ -- -- 68,347 $0.48-$37.62 -- --
Granted................. 1,061,785 $1.75-$44.50 2,529,142 $0.19-$83.88 2,357,450 $7.55-$22.81
Cancelled............... (110,765) $0.30-$13.00 (480,129) $0.19-$81.00 (956,413) $0.19-$80.00
Exercised............... (344,948) $0.30-$39.94 (988,440) $0.30-$22.45 (588,077) $0.19-$17.44
--------- ------------ --------- ------------ --------- ------------
Outstanding at
December 31............ 2,042,276 $0.30-$44.50 4,091,681 $0.19-$83.88 4,904,641 $0.19-$83.88
========= ============ ========= ============ ========= ============
F-19
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options outstanding and exercisable by price range as of December 31, 2001:
Options Outstanding Options Exercisable
-------------------------------------------------------------- ----------------------------
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- ---------------- ----------- ----------------
$ 0.00-
$ 8.50 974,831 7.1 $ 2.95 556,212 $ 1.76
$ 8.60-
$17.00 2,206,774 9.0 $12.47 259,505 $12.24
$17.10-
$25.50 494,653 8.5 $21.66 100,373 $23.03
$25.60-
$34.00 162,535 6.9 $30.49 66,302 $30.76
$34.10-
$42.50 754,385 7.8 $37.54 310,718 $37.52
$42.60-
$51.00 50,100 8.1 $45.73 22,798 $45.76
$51.10-
$59.50 500 8.3 $51.25 208 $51.25
$59.60-
$68.00 50,500 7.1 $62.40 22,776 $62.37
$68.10-
$76.50 197,863 7.3 $73.30 100,063 $73.30
$76.60-
$84.00 12,500 6.2 $79.50 5,726 $79.50
--------- --- ------ --------- ------
4,904,641 8.2 $19.44 1,444,681 $21.06
========= =========
1999 Employee Stock Purchase Plan
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 600,000
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 of each year. 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. During the year
ended December 31, 2001, 119,795 shares were purchased for approximately $1.2
million and 81,985 shares were purchased for approximately $1.1 million during
the year ended December 31, 2000. At December 31, 2001, there were 398,220
shares of common stock available for future purchase.
Deferred stock-based compensation
Through December 31, 2001, the Company recorded deferred stock-based
compensation of $14,597,000 (including deferred stock-based compensation of
$6,568,000 and $2,173,000 recorded in connection with the acquisitions of
1View and ATA, respectively) related to the issuance of stock options at
prices subsequently determined to be below fair market value. These charges
are being amortized over the estimated service period of the employees.
Amortization of $1,221,000, $5,215,000 and $5,757,000 has been recognized as
stock-based compensation expense in the years ended December 31, 1999, 2000
and 2001, respectively.
F-20
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value disclosures
The Company applies the provisions of APB 25 and related interpretations in
accounting for employee stock-based compensation arrangements. For the years
ended December 31, 1999, 2000 and 2001 had compensation cost been determined
pursuant to SFAS No. 123, the Company's net loss would have been as follows
(in thousands, except per share data):
Year Ended December 31,
----------------------------
1999 2000 2001
-------- -------- --------
Net loss:
As reported................................. $(18,154) $(60,004) $(51,948)
Pro forma................................... (20,893) (94,155) (83,243)
Net loss per share--basic and diluted:
As reported................................. $ (1.26) $ (2.35) $ (1.77)
Pro forma................................... (1.44) (3.69) (2.84)
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:
Year Ended
December 31,
----------------
1999 2000 2001
---- ---- ----
Expected life (years)...................................... 4 4 5
Risk free interest rate.................................... 5.5% 5.9% 4.39%
Expected volatility........................................ 80% 110% 90%
Dividend yield............................................. -- -- --
15. EMPLOYEE BENEFITS
Effective September 1, 1998, the Company adopted a Defined Contribution
Profit Sharing Plan. This plan includes a 401(k) salary deferral plan.
Employees are eligible to participate in the plan upon meeting minimum
eligibility requirements. Contributions to the 401(k) are in the form of
employee-salary deferrals. The plan allows the Company to make matching
contributions, in amounts determined by the Company, to an employee's
deferrals and provides for additional discretionary contributions by the
Company. Through December 31, 2001, the Company had not made any matching or
additional discretionary contributions under the plan.
F-21
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. RESTRUCTURING CHARGE
In February 2001, the Company strategically restructured its business to
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, 58 employee positions were eliminated and the Company's facility in
San Francisco, California was closed. During 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 as a result of the
closure of the San Francisco facility and related lease termination.
Deferred
Employee Exit stock-based
related costs compensation Total
-------- ----- ------------ -------
Restructuring accrual (in
thousands)
Restructuring accrual..... $ 1,629 $ 707 $ 940 $ 3,276
Cash payments............. (1,376) (707) -- (2,083)
Non-cash disposals........ -- -- (940) (940)
------- ----- ----- -------
Accrual at December 31,
2001................... $ 253 $ -- $ -- $ 253
======= ===== ===== =======
The remaining employee related portion of the restructuring reserve is
expected to be paid out in the first quarter of 2002.
17. REPORTABLE SEGMENTS
Since the acquisition of ATA in July 2000, the Company has managed 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 years ended December 31, 2000 and 2001 (in thousands):
Internet
banking Lending Corporate
division(1) division(2) and Other(3) Total
----------- ----------- ------------ --------
Year ended December 31,
2000:
Revenues.................. $ 48,040 $ 6,388 $ -- $ 54,428
Gross profit.............. 20,477 670 -- 21,147
Loss from operations...... (30,457) (1,989) (28,783) (61,229)
Year ended December 31,
2001:
Revenues.................. $ 79,045 $ 15,590 $ -- $ 94,635
Gross profit.............. 34,793 4,465 -- 39,258
Loss from operations...... (13,391) (1,551) (39,005) (53,947)
Total assets at December 31,
2000....................... $173,253 $108,973 -- $282,226
Total assets at December 31,
2001....................... $148,153 $ 88,475 -- $236,628
--------
(1) Loss from operations includes amortization of deferred stock-based
compensation of $4,762 and $3,800 for the years ended December 31, 2000
and 2001, respectively.
(2) Loss from operations includes amortization of deferred stock-based
compensation of $453 and $1,017 for the years ended December 31, 2000 and
2001, respectively. Amounts for the year end December 31, 2000 represent
operations from the date of acquisition.
(3) Represents amortization of goodwill and intangible assets, a restructuring
charge and merger-related expenses. The restructuring charge includes
amortization of deferred stock-based compensation of $940 for the year
ended December 31, 2001.
For the year ended December 31, 2001, no customer comprised more than 10% of
revenues. The Company has no foreign operations.
F-22
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss
per share for the years indicated (in thousands, except per share data):
Year Ended December 31,
----------------------------
1999 2000 2001
-------- -------- --------
Net loss attributable to common stockholders
before cumulative effect of accounting
change..................................... $(18,154) $(57,489) $(51,948)
Cumulative effect of change in accounting
method..................................... -- (2,515) --
-------- -------- --------
Net loss attributable to common
stockholders............................... $(18,154) $(60,004) $(51,948)
======== ======== ========
Weighted average shares..................... 14,710 25,724 29,301
Weighted average unvested common shares
subject to repurchase...................... (321) (190) --
-------- -------- --------
Denominator for basic and diluted
calculation................................ 14,389 25,534 29,301
======== ======== ========
Net loss per share:
Basic and diluted before cumulate effect
of change in accounting method........... $ (1.26) $ (2.25) $ (1.77)
Per share cumulative effect of change in
accounting method........................ -- (0.10) --
-------- -------- --------
Basic and diluted......................... $ (1.26) $ (2.35) $ (1.77)
======== ======== ========
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 (in thousands):
Year Ended
December 31,
-----------------
1999 2000 2001
----- ----- -----
Weighted average effect of common stock equivalents:
Redeemable convertible preferred stock.................. 3,827 -- --
Warrants................................................ 65 48 --
Unvested common shares subject to repurchase............ 321 190 --
Employee stock options.................................. 2,448 2,847 1,092
----- ----- -----
6,661 3,085 1,092
===== ===== =====
F-23
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following table presents summarized quarterly financial data for the
years ended December 31, 2000 and 2001 (in thousands, except per share data).
Quarter Ended
--------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
2000
Revenues............................... $ 8,732 $ 11,125 $ 16,395 $ 18,176
-------- -------- -------- --------
Gross profit........................... 3,577 5,092 6,546 5,932
-------- -------- -------- --------
Net loss before cumulative effect of
change in accounting method........... $(20,907) $ (5,782) $(14,253) $(16,547)
Basic and diluted net loss before
cumulative effect of change in
accounting method per share........... $ (0.92) $ (0.25) $ (0.53) $ (0.58)
Net loss............................... $(23,422) $ (5,782) $(14,253) $(16,547)
Basic and diluted net loss per share... $ (1.03) $ (0.25) $ (0.53) $ (0.58)
Shares used to compute basic and
diluted net loss per share............ 22,803 23,418 27,079 28,765
Quarter Ended
--------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
2001
Revenues............................... $ 20,416 $ 22,686 $ 24,524 $ 27,009
-------- -------- -------- --------
Gross profit........................... 6,786 9,461 10,697 12,314
-------- -------- -------- --------
Net loss............................... $(20,026) $(13,283) $ (9,938) $ (8,701)
Basic and diluted net loss per share... $ (0.69) $ (0.45) $ (0.34) $ (0.29)
Shares used to compute basic and
diluted net loss per share............ 28,924 29,276 29,429 29,565
During the fourth quarter of 2000, the Company adopted SAB 101. Quarterly
results for the year ended December 31, 2000 in the table above have been
restated to reflect the change in accounting method. The cumulated effect of
this change for the period prior to January 1, 2000 of $2.5 million is
included in net for the first quarter. The effect of this change on quarterly
net loss and related net loss per share in 2000 is as follows (in thousands,
except per share amount):
Effect of Change
for Year 2000
------------------
Net Net loss
Quarter loss per share
------- ------- ---------
First Quarter........................................... $ (511) $(0.02)
Second Quarter.......................................... (388) (0.02)
Third Quarter........................................... (169) (0.01)
Fourth Quarter.......................................... (491) (0.02)
------- ------
Full Year............................................... $(1,559) $(0.06)
======= ======
F-24
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
20. SUBSEQUENT EVENTS
On January 28, 2002, the Company completed the acquisition of Virtual
Financial Services, Inc. ("ViFi"), pursuant to an Agreement and Plan of
Merger, dated as of January 3, 2002. ViFi was a privately-owned company based
in Indianapolis, Indiana that provided retail and commercial Internet banking,
electronic bill payment, cash management services, credit and debit card
processing, online brokerage, document management, web site design, target
marketing and aggregation services via PC-based or wireless access. As a
result of the merger, all the outstanding shares of ViFi were converted into
an aggregate of $3,750,000 in cash, $3,750,000 in promissory notes, and
1,901,907 shares of the Company's common stock. In addition, the Company
assumed options to acquire ViFi stock that, as a result of the merger,
converted into options to purchase an aggregate of 111,978 shares of the
Company's common stock.
In January 2002, the Company announced a restructuring and cost reduction
program. During 2002, the Company plans to restructure certain operations by
geographically consolidating certain business functions. Although this
consolidation is expected to reduce costs by eliminating additional redundant
costs that resulted from new acquisitions, the cost savings is not expected to
begin to occur until late in 2002. The Company expects to record an estimated
restructuring charge of approximately $2.0 million to $2.3 million in the
first quarter of 2002.
21. SUBSEQUENT EVENT (Unaudited)
On March 4, 2002, FundsXpress Financial Network, Inc. filed a lawsuit
against the Company in the United States District Court for the Western
District of Texas, Austin Division. The plaintiff is a competing provider of
Internet banking services to financial institutions. The complaint asserts
claims of trade secret misappropriation and copyright infringement based on
allegations that the Company hired a former employee of the plaintiff, and
that the Company used certain proprietary and copyrighted materials of the
plaintiff that were purportedly brought over by the former employees and
provided to certain of the Company's employees. The complaint seeks a
permanent injunction, unspecified compensatory and exemplary damages, cost and
reasonable attorneys' fees. The Company intends to defend this lawsuit
vigorously.
F-25
DIGITAL INSIGHT CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Charged to Balance at
Beginning Costs and End of
of Year Expenses Write-offs Year
---------- ---------- ---------- ----------
Allowance for doubtful accounts
December 31, 1999............... $ 19 $ 67 $ -- $ 86
December 31, 2000............... 86 144 (9) 221
December 31, 2001............... 221 461 (164) 518
Valuation allowance for deferred
tax assets
December 31, 1999............... $ 4,601 $ 5,552 -- $10,153
December 31, 2000............... 10,153 17,076 -- 27,229
December 31, 2001............... 27,229 5,696 -- 32,925
F-26
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
On January 28, 2002, Digital Insight Corporation (the "Company") completed
its acquisition of Virtual Financial Services, Inc. ("ViFi"). ViFi was a
privately-owned company based in Indianapolis, Indiana that provided retail
and commercial Internet banking, electronic bill payment, cash management
services, credit and debit card processing, online brokerage, document
management, web site design, target marketing and aggregation services via PC-
based or wireless access. All the outstanding shares of ViFi were acquired in
exchange for approximately $3.8 million in cash, $3.8 million in promissory
notes, and the issuance of 1,901,907 shares of the Company's common stock,
with an estimated fair value of approximately $41.1 million. The fair value of
the common stock issued was based on the average trading price of the
Company's common stock for four days before, four days after and including the
public announcement date. In addition, the Company assumed fully vested common
stock options which were converted into options to purchase an aggregate of
111,978 shares of the Company's common stock with an estimated fair value of
$1.3 million. The Company did not acquire certain of the ViFi fixed assets and
the credit card processing product line which remained with the selling
shareholder of ViFi.
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 the assets acquired and liabilities assumed. The estimated fair value of
the tangible assets acquired and liabilities assumed approximated the
historical cost basis and the preliminary purchase price allocation indicates
estimated goodwill of approximately $47.3 million, which in accordance with
Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets", will no longer be amortized but rather will be
periodically evaluated for impairment on at least an annual basis.
Identifiable intangible assets are estimated to be $10.0 million and will be
amortized on a straight-line basis over the estimated aggregate lives of six
years.
The following unaudited pro forma condensed consolidated balance sheet
assumes that the acquisition of ViFi was consummated as of December 31, 2001.
The unaudited pro forma condensed consolidated statement of operations for the
year ended December 31, 2001 give effect to the acquisition as if it had
occurred on January 1, 2001. Unaudited pro forma condensed consolidated
financial information reflects the final purchase price allocation to the
assets acquired, including goodwill and identifiable intangibles.
The unaudited pro forma condensed consolidated financial information is for
illustrative purposes only and is not necessarily indicative of the results
that would have occurred if the acquisition had occurred as of the beginning
of the periods presented and should not be construed as being representative
of future consolidated operating results or financial position. The unaudited
pro forma condensed consolidated financial information should be read in
conjunction with the Company's consolidated financial statements and notes and
ViFi financial statements and notes thereto, included elsewhere in this
prospectus.
F-27
DIGITAL INSIGHT CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of December 31, 2001
(in thousands)
Digital Virtual
Insight Financial Pro Forma Pro Forma
Corporation Services Adjustments Consolidated
----------- --------- ----------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents.. $ 15,334 $ 146 $(3,918)(1) $ 11,562
Short-term investments..... 38,300 -- -- 38,300
Accounts receivable, net... 19,133 1,264 -- 20,397
Accounts receivable--
related party............. -- 452 (452)(1) --
Accumulated implementation
costs..................... 4,973 -- -- 4,973
Other current assets....... 2,893 209 -- 3,102
-------- ------ ------- --------
Total current assets..... 80,633 2,071 (4,370) 78,334
Property and equipment, net.. 37,784 2,396 (2,396)(2) 37,784
Goodwill and intangible
assets, net................. 98,382 -- 57,244 (3) 155,626
Accumulated implementation
costs....................... 5,941 -- -- 5,941
Long-term investments........ 13,334 -- -- 13,334
Deferred tax asset........... -- 544 (544)(4) --
Other assets................. 554 -- -- 554
-------- ------ ------- --------
Total assets............. $236,628 $5,011 $49,934 $291,573
======== ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable........... $ 3,142 $1,794 $ -- $ 4,936
Accrued compensation and
related benefits.......... 3,465 567 -- 4,032
Customer deposits and
deferred revenue.......... 7,434 1,029 -- 8,463
Other accrued liabilities.. 7,465 -- 4,700 (5) 12,165
Promissory notes........... -- -- 3,750 (6) 3,750
Current portion of capital
lease obligations......... 1,202 115 (115)(7) 1,202
Current portion of long-
term debt................. 3,529 415 (415)(7) 3,529
-------- ------ ------- --------
Total current
liabilities............. 26,237 3,920 7,920 38,077
Capital lease obligations.... 411 392 (392)(7) 411
Long-term debt............... 5,882 32 (32)(7) 5,882
Customer deposits and
deferred revenue............ 7,207 735 -- 7,942
Other liabilities............ -- 148 (148)(8) --
-------- ------ ------- --------
Total liabilities........ 39,737 5,227 7,348 52,312
-------- ------ ------- --------
Stockholders' equity:
Common stock and additional
paid-in capital........... 337,491 1,550 (1,550)(9) 379,861
42,370 (10)
Stockholders' notes
receivable................ (124) -- -- (124)
Deferred stock-based
compensation.............. (1,409) -- -- (1,409)
Accumulated deficit........ (139,067) (1,766) 1,766 (9) (139,067)
-------- ------ ------- --------
Total stockholders'
equity.................. 196,891 (216) 42,586 239,261
-------- ------ ------- --------
Total liabilities and
stockholders' equity.... $236,628 $5,011 $49,934 $291,573
======== ====== ======= ========
See accompanying notes to the unaudited pro forma condensed consolidated
financial information.
F-28
DIGITAL INSIGHT CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2001
(in thousands, except per share data)
Virtual
Digital Insight Financial Pro Forma Pro Forma
Corporation Services Adjustments Consolidated
--------------- --------- ----------- ------------
Revenues................ $ 94,635 $15,482 $(2,264)(11) $107,853
Cost of revenues........ 55,377 8,247 (402)(11) 62,465
(757)(12)
-------- ------- ------- --------
Gross profit............ 39,258 7,235 (1,105) 45,388
-------- ------- ------- --------
Operating expenses:
Sales, general and
administrative ...... 30,780 4,748 (27)(12) 35,501
Research and
development ......... 23,420 1,571 (104)(12) 24,887
Amortization of
goodwill and
intangible assets.... 35,729 -- 1,133 (13) 36,862
Restructuring charge.. 3,276 -- -- 3,276
-------- ------- ------- --------
Total operating
expenses............. 93,205 6,319 1,002 100,526
-------- ------- ------- --------
Loss from operations.... (53,947) 916 (2,107) (55,138)
Interest and other
income, net............ 1,999 (124) (225)(14) 1,767
-- -- 117 (15)
-------- ------- ------- --------
Net loss before
provision for income
tax.................... (51,948) 792 (2,215) (53,371)
Provision for income
tax.................... -- 203 (203)(16) --
-------- ------- ------- --------
Net loss................ $(51,948) $ 589 $(2,012) $(53,371)
======== ======= ======= ========
Basic and diluted net
loss per share......... $ (1.77)
========
Shares used to compute
basic and diluted net
loss per share......... 29,301
========
Pro forma basic and
diluted net loss per
share.................. $ (1.71)(17)
========
Shares used to compute
pro forma basic and
diluted net loss per
share.................. 31,203
========
See accompanying notes to the unaudited pro forma condensed consolidated
financial information.
F-29
DIGITAL INSIGHT CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
(Dollars in thousands)
The pro forma balance sheet adjustments give effect to the acquisition of
ViFi as if the transactions were consummated on December 31, 2001. The pro
forma statement of operations adjustments give effect to the acquisition of
ViFi as if the acquisition occurred on January 1, 2001. The estimated fair
value per share of the Company's stock issued to effect the acquisition was
approximately $21.60 per share. The fair value was based on the average
trading price for the public announcement date and the four days prior to and
after that date. The estimated fair value of the vested common stock options
issued was based on the Black-Scholes pricing model using the following
assumptions: two year expected life; 90% volatility; and 4.39% risk free
interest rate. The pro forma balance sheet adjustments are as follows:
1. To reflect the cash consideration paid net of monies received as a result
of the acquisition as follows:
Cash consideration paid........................................... $ (3,750)
Cash proceeds from sale of assets back to selling shareholder..... 334
Assumed cash collected in satisfaction of intercompany accounts
receivable from selling shareholder.............................. 452
Assumed cash used to retire capital lease obligations and long-
term debt........................................................ (954)
--------
Net cash consideration paid....................................... $ (3,918)
========
2. To adjust for the fixed assets retained by the selling shareholder of ViFi.
3. To reflect goodwill and intangible assets created as a result of the
acquisition, as follows:
Estimated fair value of issuance of 1,901,907 shares of the
Company's stock in consideration for the acquisition............. $41,080
Estimated fair value of the assumption of 111,978 vested common
stock options.................................................... 1,290
Additional cash consideration..................................... 3,750
Additional consideration in the form of promissory notes.......... 3,750
Direct transaction costs.......................................... 4,700
Negative net assets acquired after adjustments.................... 2,674
--------
Estimated goodwill and intangible assets created.................. $ 57,244
========
4. To reflect elimination of ViFi deferred tax assets due to net operating
loss position on a consolidated basis.
5. To reflect the accrual of the estimated direct transaction costs including
investment banking fees, legal fees, accounting fees and other direct
costs of the acquisition.
6. To reflect the promissory notes payable as consideration for the
acquisition of ViFi.
7. To reflect the retirement of the capital lease obligation and long-term
debt acquired from ViFi, as a condition of the acquisition.
8. To eliminate deferred rent on a ViFi lease not being assumed by the
Company.
9. To eliminate the historical stockholder's equity of ViFi.
10. To reflect issuance of the Company's common stock and vested stock options
with an estimated fair value of $42,370.
11. To reflect the elimination of revenues and direct cost of revenues
relating to the ViFi card services product line, which was not acquired by
the Company and remained with the selling shareholder.
12. To eliminate historical depreciation expense on ViFi fixed assets that
were purchased and sold back to the selling shareholder of ViFi.
F-30
DIGITAL INSIGHT CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION--(Continued)
(Dollars in thousands)
13. To reflect amortization of intangible assets created as a result of the
acquisition based on the preliminary purchase price allocation as follows:
Aggregate Annual
Amount Lives Amortization
------- --------- ------------
Goodwill..................................... $50,444 -- $ --
Customer relationships....................... 6,800 6 years 1,133
------- ------
$57,244 $1,133
======= ======
In accordance with SFAS No. 142 "Goodwill and Other Intangibles," goodwill
created in the ViFi acquisition will not be amortized. The identifiable
intangibles created as a result of the acquisition are comprised of
customer relationships which will be amortized over an estimated life of 6
years.
14. To reflect interest expense at an assumed interest rate of 6% on the
$3,750 of promissory notes issued as part of the acquisition
consideration.
15. To eliminate historical interest expense on capital lease and other long-
term debt of ViFi which was retired as a result of the acquisition.
16. To reflect the elimination of the ViFi provision for income taxes as a
result of the consolidated operating losses.
17. To reflect the pro forma basic and diluted net loss per common share
assuming the issuance of 1,901,907 shares of common stock to effect the
acquisition. Vested stock options issued were excluded from the
computation as they have an antidilutive effect.
F-31
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Virtual Financial Services, Inc.
Indianapolis, Indiana
We have audited the accompanying balance sheet of Virtual Financial
Services, Inc. (VIFI) as of December 31, 2001 and the related statements of
operations, shareholders' deficit, and cash flows for the year then ended.
These financial statements are the responsibility of VIFI'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, such financial statements present fairly, in all material
respects, the financial position of VIFI as of December 31, 2001 and the
results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States
of America.
/s/ Deloitte & Touche LLP
Indianapolis, Indiana
February 1, 2002
F-32
VIRTUAL FINANCIAL SERVICES, INC.
BALANCE SHEET
December 31,
2001
------------
ASSETS
------
Current assets:
Cash and cash equivalents....................................... $ 145,674
Accounts receivable............................................. 1,264,111
Accounts receivable--related party.............................. 451,548
Refundable income taxes......................................... 71,800
Other current assets............................................ 137,457
-----------
Total current assets.......................................... 2,070,590
Property and equipment, net of accumulated depreciation of
$2,284,303....................................................... 2,396,047
Deferred tax asset................................................ 543,950
-----------
Total assets.................................................. $ 5,010,587
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable................................................ $ 1,794,410
Accrued expenses................................................ 566,583
Customer deposits............................................... 388,325
Deferred revenue, net of deferred costs of $154,958............. 640,910
Current portion of long-term debt............................... 414,512
Current portion of capital lease obligations.................... 115,023
-----------
Total current liabilities..................................... 3,919,763
-----------
Long-term liabilities:
Long-term debt.................................................. 32,427
Long-term capital lease obligations............................. 391,708
Deferred revenue, net of deferred costs of $193,566............. 734,823
Other liabilities............................................... 148,000
-----------
Total long-term liabilities................................... 1,306,958
-----------
Shareholders' deficit:
Preferred stock, no par value, 50,000,000 shares authorized,
none issued and outstanding
Common stock, no par value, 450,000,000 shares authorized,
900,013.5 shares issued and outstanding........................ 1,000
Paid-in capital................................................. 1,548,603
Accumulated deficit............................................. (1,765,737)
-----------
Total shareholders' deficit................................... (216,134)
-----------
Total liabilities and shareholders' deficit................... $ 5,010,587
===========
See notes to financial statements.
F-33
VIRTUAL FINANCIAL SERVICES, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
Revenues:
Network access and connectivity fees............................. $12,778,524
Project and installation fees.................................... 1,734,189
Set-up fees...................................................... 968,959
-----------
Total revenues................................................. 15,481,672
Cost of revenues................................................... 8,246,322
-----------
Gross margin....................................................... 7,235,350
-----------
Operating expenses:
Research and development......................................... 1,570,803
Sales and marketing.............................................. 1,656,653
General and administrative....................................... 3,091,175
-----------
Total operating expenses....................................... 6,318,631
-----------
Other income (expense):
Interest income.................................................. 4,082
Interest expense................................................. (127,934)
-----------
Total other expense, net....................................... (123,852)
-----------
Income before provision for income taxes........................... 792,867
Provision for income taxes......................................... 203,512
-----------
Net income......................................................... $ 589,355
===========
Per share data:
Basic and diluted earnings per share............................... $ 0.65
===========
See notes to financial statements.
F-34
VIRTUAL FINANCIAL SERVICES, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2001
Common Common Paid-in Accumulated
Shares Stock Capital Deficit Total
--------- ------ ---------- ----------- ---------
Balance at December 31,
2000..................... 900,000.0 $1,000 $1,548,063 $(2,355,092) $(806,029)
Stock options exercised... 13.5 -- 540 -- 540
Net income................ -- -- -- 589,355 589,355
--------- ------ ---------- ----------- ---------
Balance at December 31,
2001..................... 900,013.5 $1,000 $1,548,603 $(1,765,737) $(216,134)
========= ====== ========== =========== =========
See notes to financial statements.
F-35
VIRTUAL FINANCIAL SERVICES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
Cash flows from operating activities:
Net income........................................................ $ 589,355
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation..................................................... 887,087
Deferred income taxes............................................ 173,717
Changes in assets and liabilities:
Accounts receivable............................................. 72,063
Accounts receivable-related party............................... (289,976)
Refundable income taxes......................................... 143,605
Other assets.................................................... 59,481
Accounts payable................................................ 301,017
Accrued expenses and other long-term liabilities................ 448,224
Customer deposits and deferred revenue.......................... (246,130)
----------
Net cash provided by operating activities...................... 2,138,443
----------
Cash flows from investing activities:
Capital expenditures.............................................. (807,393)
Proceeds from sale of property and equipment...................... 41,776
----------
Net cash used in investing activities.......................... (765,617)
----------
Cash flows from financing activities:
Net borrowings under revolving line of credit..................... (200,106)
Payments on long-term debt........................................ (955,595)
Payments on capital lease obligations............................. (85,387)
Stock options exercised........................................... 540
----------
Net cash used in financing activities.......................... (1,240,548)
----------
Net increase in cash and cash equivalents.......................... 132,278
Cash and cash equivalents, beginning of year....................... 13,396
----------
Cash and cash equivalents, end of year............................. $ 145,674
==========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............................ $ 128,000
Cash paid during the year for income taxes........................ $ 50,000
Property acquired under capital lease obligations................. $ 317,000
See notes to financial statements.
F-36
VIRTUAL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 2001
1. BUSINESS DESCRIPTION
Virtual Financial Services, Inc. ("VIFI or the Company") is an internet
banking financial services provider for various financial institutions
throughout the United States.
Prior to January 28, 2002, VIFI was a closely-held corporation located in
Indianapolis, Indiana. On January 28, 2002, VIFI was acquired by Digital
Insight Corporation, an internet banking service provider headquartered in
Calabasas, California (see Note 11).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition--The Company recognizes network access and connectivity
fees as services are provided. These recurring revenues are based primarily on
the number of end users or end user transactions, and fixed monthly amounts
for hosting and maintaining web sites. The Company performs separate projects
and installations outside the scope of the original services agreement for
existing customers and recognizes revenue as time and expenses are incurred.
The Company defers recognition of set-up fees, and the related direct
incremental costs associated with those fees, and recognizes both income and
expense over the life of the service agreement, generally three to five years.
Cash Equivalents--Cash and cash equivalents include deposits with an
original maturity of three months or less.
Accounts Receivable--An allowance for uncollectible accounts receivable was
not established at December 31, 2001 as management believes that it is not
considered necessary.
Research and Development--All costs associated with the continued
maintenance, development and support of all service applications are expensed
as incurred.
Property and Equipment--Property and equipment are stated at cost less
accumulated depreciation and consists primarily of office and computer
equipment. Depreciation is computed by the straight-line method over the
estimated useful life of the assets. Depreciation expense was $887,087 for the
year ended December 31, 2001.
Income Taxes--The Company records income tax expense based on the amount of
taxes due on its tax returns plus deferred taxes computed based on the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities, using enacted tax rates. A
valuation allowance is recorded, if necessary, to reduce deferred tax assets
to the amount considered more likely than not to be realized.
Use of Estimates in the Preparation of Financial Statements--The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the reporting period. Actual results could differ from those estimates.
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 asset 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.
F-37
VIRTUAL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the year ended December 31, 2001
Segment Information--The Company has determined that it has a single
reportable segment which is providing services to financial institutions
including the following service offerings: internet banking, credit and credit
card transaction processing, and web site hosting. These services are provided
to various financial institution customers.
Concentration of Credit Risk--As of and for the year ended December 31, 2001
one financial institution accounted for approximately 16% of total accounts
receivable and 18% of the total revenues, respectively. VIFI 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. VIFI believes that any risk of loss is significantly reduced due
to the number of its customers and diverse geographic areas.
Earnings Per Share--Earnings per share of common stock is based on the
weighted average number of common shares outstanding during the year. The
following table presents a reconciliation of VIFI's basic and weighted average
common shares:
Basic earnings per share:
Weighted average common shares..................................... 900,011
Diluted earnings per share:
Weighted average common shares..................................... 900,011
Dilutive effect of stock options................................... 1,196
-------
Weighted average common and incremental shares....................... 901,207
=======
Fair Value of Financial Instruments--VIFI's financial instruments included
cash and cash equivalents, receivables, accounts payable, accrued expenses and
other liabilities. The carrying value of these financial instruments
approximates fair value due to their short-term nature. The carrying value of
VIFI's capital lease obligations, revolving line of credit, and long-term debt
approximates their fair values given their market rates of interest and
maturity schedules.
New Accounting Standards--Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" 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 fair 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 on January 1, 2001. To date, the Company has not
engaged in any hedging activity. Application of SFAS No. 133 did not have any
impact on the Company's financial reporting.
In July 2001, SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets" were issued. 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 anticipates
that SFAS No. 141 and 142 will not have any impact on the results of its
operations and financial position.
In August 2001, 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
F-38
VIRTUAL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the year ended December 31, 2001
assets to be disposed of was issued. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of", and also supersedes the accounting and reporting
provisions of APB Opinion No. 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, and 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 is January 1, 2002.
3. REVOLVING LINE OF CREDIT
VIFI maintains a $2,500,000 revolving line of credit facility with a bank
due July 5, 2002. Interest is payable monthly at the bank's prime rate (4.75%
at December 31, 2001). A related company owned by the majority shareholder is
a co-borrower under this revolving line of credit facility. At December 31,
2001, outstanding borrowings were $1,673,106, and are payable by the co-
borrower for which VIFI is contingently liable. Borrowings are secured by
virtually all operating assets of VIFI and the co-borrower, and are personally
guaranteed by the majority shareholder.
On January 28, 2002, VIFI terminated this revolving line of credit facility
and paid all outstanding amounts due thereunder (see Note 11).
4. LONG-TERM DEBT
Long-term debt at December 31, 2001 consists of the following:
Note payable to bank in monthly installments of $22,980 through
July 2002 including interest at LIBOR plus 2.5% (4.525% at
December 31, 2001). The note payable to bank is secured by
virtually all operating assets and is personally guaranteed by
the majority shareholder...................................... $ 152,258
Note payable to bank in monthly installments of $22,513 through
February 2003 including interest at LIBOR plus 2.5% (4.625% at
December 31, 2001). The note payable to bank is secured by
virtually all operating assets and is personally guaranteed by
the majority shareholder...................................... 294,681
---------
446,939
Current portion (due in 2002).................................. (414,512)
---------
Long-term debt (due in 2003)................................... $ 32,427
=========
On January 28, 2002, notes payable to bank were paid in full (see Note 11).
5. CAPITAL LEASE OBLIGATIONS
VIFI leases certain equipment under capital leases and includes this
equipment in property and equipment at December 31, 2001 as follows:
Equipment.......................................................... $596,183
Accumulated depreciation........................................... (74,630)
--------
Equipment under capitalized leases, net............................ $521,553
========
F-39
VIRTUAL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the year ended December 31, 2001
The following is a schedule of future minimum lease payments under capital
leases together with the present value of the minimum lease payments at
December 31, 2001:
Year Ending December 31,
2002.......................................................... $ 165,818
2003.......................................................... 165,818
2004.......................................................... 165,818
2005.......................................................... 153,852
2006.......................................................... 18,593
---------
Total minimum lease payments...................................... 669,899
Amounts representing interest..................................... (163,168)
---------
Present value of minimum lease payments........................... 506,731
Current portion of capital lease obligations...................... (115,023)
---------
Long-term portion of capital lease obligations.................... $ 391,708
=========
6. LEASE COMMITMENTS AND RENTAL EXPENSE
VIFI is a co-signer with a related company owned by the majority shareholder
to lease an office building. There is no agreement between VIFI and the
related company to allocate the monthly rental payments. VIFI did not allocate
any rental payments to the related company during 2001. The commencement date
of the lease was January 1, 2001 and expires January 1, 2011. Future minimum
lease payments for this operating lease are as follows:
Year Ending December 31,
2002......................................................... $ 1,412,000
2003......................................................... 1,544,000
2004......................................................... 1,544,000
2005......................................................... 1,544,000
2006......................................................... 1,712,000
Thereafter................................................... 6,878,000
-----------
Total...................................................... $14,634,000
===========
Rental expense for the year ended December 31, 2001 was $1,198,000.
7. INCOME TAXES
Income tax expense is as follows at December 31:
Current expense................................................... $ 29,795
Deferred expense.................................................. 173,717
--------
$203,512
========
Income tax expense for the year ended December 31, 2001 differs from the
income tax expense that would result from applying statutory rates due
primarily to the effect of certain research and development tax credits.
F-40
VIRTUAL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the year ended December 31, 2001
Items that gave rise to significant elements of deferred tax assets
(liabilities) at December 31, 2001 are as follows:
Deferred revenue, net of deferred costs.......................... $544,790
Property and equipment........................................... (89,148)
Other............................................................ 88,308
--------
Deferred tax asset, net.......................................... $543,950
========
A reconciliation of the federal statutory rate to VIFI's effective tax rate
is as follows:
Federal statutory rate.............................................. 34.0%
State and local tax rate, net of federal benefit.................... 5.6
Research, development and other tax credits......................... (17.0)
Other permanent differences......................................... 3.1
-----
Total............................................................. 25.7%
=====
8. RELATED PARTY TRANSACTIONS
Revenues, accounts receivable, cost of revenues and accounts payable result
from transactions with two related companies in the ordinary course of
business, one of which is owned by the majority shareholder and the other with
which the majority shareholder serves as the Chairman of the Board. Related
party account balances and transactions as of and for the year ended December
31, 2001 are as follows:
Revenues......................................................... $1,008,000
Common expenses paid by affiliate and reimbursed by VIFI......... 541,000
Accounts receivable at December 31............................... 452,000
Costs of revenues................................................ 42,000
Interest expense, net............................................ 1,000
Proceeds from sale of property and equipment..................... 42,000
9. 401(k) PLAN
VIFI maintains a defined contribution 401(k) plan which covers all eligible
employees, as defined, with 1,000 hours of continuous service who are at least
21 years of age. The plan provides for discretionary employer contributions
determined by the Board of Directors. VIFI contributed $52,000 to the plan for
the year ended December 31, 2001.
F-41
VIRTUAL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the year ended December 31, 2001
10. STOCK OPTIONS
The Company has an incentive stock option plan for employees of the Company
(the Stock Option Plan) and has reserved 100,000 shares of common stock for
issuance under the Stock Option Plan. The stock options become exercisable in
four successive annual installments from the date of the grant: 10%, 15%, 25%,
and 50%. The option grant expires within ten years of the grant date. The
options are nontransferable and are forfeited upon termination of employment.
Stock option activity for the year ended December 31, 2001 is as follows:
Weighted
Average
Exercise
Price
Per
Shares Share
-------- --------
Outstanding at December 31, 2000.......................... 52,570.9 $45.80
Granted in 2001........................................... 2,500.0 20.00
Exercised in 2001......................................... (13.5) 40.00
Forfeited in 2001......................................... (2,066.5) 43.87
--------
Outstanding at December 31, 2001.......................... 52,990.9 44.66
========
At December 31, 2001, there were 5,049.1 options exercisable at a weighted
average price of $45.88, and options outstanding have a weighted average
remaining contractual life of 8.1 years. Options were granted at fair market
value on the grant date based upon independent stock price valuations.
The Company has elected to account for stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Had compensation cost for the plan been determined based on the fair value at
the grant dates for awards under the plan consistent with the fair value
method of Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation", the Company's proforma net income
per share would have been the following for the year ended December 31, 2001:
Net income:
As reported...................................................... $589,355
Proforma......................................................... $457,873
Basic and diluted earnings per share:
As reported...................................................... $ 0.65
Proforma......................................................... $ 0.51
Pro forma compensation costs were determined using the minimum value method
(no volatility) with the following assumptions:
Dividend yield....................................................... 0%
Risk-free interest rate.............................................. 6.7%
Expected life........................................................ 7 years
The pro forma amounts are for disclosure purposes and are not representative
of the effects on reported net income for future years.
F-42
VIRTUAL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the year ended December 31, 2001
11. SUBSEQUENT EVENT
On January 28, 2002, VIFI was acquired and became a wholly-owned subsidiary
of Digital Insight Corporation ("Digital Insight"), an internet banking
service provider headquartered in Calabasas, California, pursuant to an
Agreement and Plan of Merger, dated as of January 3, 2002. As a result of the
merger, all the outstanding shares of ViFi were converted into an aggregate of
$3,750,000 in cash, $3,750,000 in promissory notes, and 1,901,907 shares of
Digital Insight's common stock. In addition, Digital Insight assumed options
to acquire ViFi stock that, as a result of the merger, converted into options
to purchase an aggregate of 111,978 shares of Digital Insight's stock.
* * * * * *
F-43
[LOGO OF DIGITAL INSIGHT]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. 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.
Amount
To Be Paid
----------
SEC Registration Fee................................................. $ 9,908
NASD Fee............................................................. 11,269
Nasdaq National Market Listing Fee................................... *
Legal Fees and Expenses.............................................. *
Accounting Fees and Expenses......................................... *
Printing............................................................. *
Transfer Agent Fees.................................................. *
Miscellaneous........................................................ *
-------
Total.............................................................. $ *
=======
--------
* To be filed by amendment
Item 15. 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 the Registrant, 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. The
Registrant 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 the Registrant's Board of Directors or brought to
enforce a right to indemnification under the indemnity agreement,
II-1
the Registrant's Bylaws or any statute or law. Under the agreements, the
Registrant 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 the Registrant consents to a settlement; (3) with respect to
any proceeding brought by the Registrant 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 the Registrant 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 the
Registrant or its stockholders; (8) on account of conduct that constituted a
breach of the indemnified party's duty of loyalty to the Registrant 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.
Item 16. Exhibits
1 Form of Underwriting Agreement.
4.1 Specimen Common Stock Certificate (filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 333-
81547) and incorporated herein by reference).
4.2 Third Amended and Restated Rights Agreement dated February 10, 2000,
between the Registrant and the parties named therein (filed as an
exhibit to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by reference).
4.3 Warrant Agreement to Purchase Shares of Preferred Stock of AnyTime
Access, Inc., dated May 7, 1999, issued to Silicon Valley Bank
(filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2000 and incorporated
herein by reference).
4.4 Warrant Agreement to Purchase Shares of Preferred Stock of AnyTime
Access, Inc., dated July 1, 1999, issued to Silicon Valley Bank
(filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2000 and incorporated
herein by reference).
5 Opinion of O'Melveny & Myers LLP.
23.1 Consent of O'Melveny & Myers LLP (included in Exhibit 5).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Deloitte & Touche LLP.
24 Power of Attorney (See page II-4).
II-2
Item 17. Undertakings
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 15 above, 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 such 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 against the Registrant by such
director, officer or controlling person in connection with the securities
being registered, 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 such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
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-3
SIGNATURES
Pursuant to requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Los Angeles, State of California, on
the 12th day of April, 2002.
DIGITAL INSIGHT CORPORATION
/s/ John Dorman
By: _________________________________
Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John Dorman and Dale R. Walker, and each of
them, his true and lawful attorneys-in-fact and agents, each with full power
of substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities, to sign any and all amendments, including post-
effective amendments, to this Registration Statement, and any registration
statement relating to the offering covered by this Registration Statement and
filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done, as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents or
their substitute or substitutes may lawfully so or cause to be done by virtue
hereof.
Under the requirements of the Securities Act of 1933, this Amendment No. 1
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John Dorman Chairman of the Board and April 12, 2002
____________________________________ Chief Executive Officer
John Dorman (Principal Executive
Officer)
/s/ Dale R. Walker* President, Chief Operating April 12, 2002
____________________________________ Officer and Director
Dale R. Walker
/s/ Elizabeth S.C.S. Murray* Executive Vice President and April 12, 2002
____________________________________ Chief Financial Officer
Elizabeth S.C.S. Murray (Principal Financial and
Accounting Officer)
/s/ Betsy S. Atkins* Director April 12, 2002
____________________________________
Betsy S. Atkins
/s/ Michael Hallman* Director April 12, 2002
____________________________________
Michael Hallman
II-4
Signature Title Date
--------- ----- ----
/s/ James McGuire* Director April 12, 2002
____________________________________
James McGuire
/s/ Robert North* Director April 12, 2002
____________________________________
Robert North
/s/ Michael R. Splinter* Director April 12, 2002
____________________________________
Michael R. Splinter
/s/ John Dorman
*By: _____________________
John Dorman
Attorney-in-fact
II-5