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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission File Number 0-27459
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DIGITAL INSIGHT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0493142
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
26025 Mureau Road, Calabasas, California 91302
(Address of principal executive offices, including zip code)
(818) 871-0000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of January 31, 2002, the aggregate market value of the voting stock held
by non-affiliates of the registrant, based upon the closing sales price of the
registrant's common stock of $23.44 as reported by the Nasdaq National Market
System, was approximately $675 million. The shares of common stock held by each
officer and director and by each person known to the registrant who owns 5% or
more of the outstanding common stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. As of January 31,
2002, the registrant had 31,583,686 shares of its common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the 2002 annual meeting of
stockholders are incorporated by reference into Part III of this Annual Report
on Form 10-K to the extent stated herein. The proxy statement will be filed
within 120 days after the end of the fiscal year covered by this Annual Report
on Form 10-K.
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INDEX
Page
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PART I
Item 1. Business...................................................... 2
Item 2. Properties.................................................... 21
Item 3. Legal Proceedings............................................. 21
Item 4. Submission of Matters to a Vote of Security Holders........... 21
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder 22
Matters.......................................................
Item 6. Selected Financial Data....................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition 24
and Results of Operations.....................................
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..... 33
Item 8. Financial Statements and Supplementary Data................... 33
Item 9. Changes In and Disagreements with Accountants on Accounting 33
and Financial Disclosure......................................
PART III
Item 10. Directors and Executive Officers of the Registrant............ 34
Item 11. Executive Compensation........................................ 34
Item 12. Security Ownership of Certain Beneficial Owners and 34
Management....................................................
Item 13. Certain Relationships and Related Transactions................ 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8- 35
K.............................................................
Signatures.............................................................. 38
Index to Financial Statements........................................... F-1
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements that involve risks and uncertainties. These
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" in Item 1 of Part I.
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 Annual Report on Form
10-K.
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PART I
ITEM 1. BUSINESS
Overview
We are a leading provider of Internet banking services to banks, credit
unions and savings and loans associations. 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, eCommerce portal 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 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 estimates that 18.3
million U.S. households were banking online in 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 ("IDC") estimates the number of banks
and credit unions offering online banking services increased from 1,300 in 1998
to over 6,000 in 2001. IDC 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 revenues 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 believe that 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
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$10 billion each. These community financial institutions hold approximately
$2.3 trillion in deposits, or 42% of 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 financial institutions have been slow to adopt Internet banking
services as a result of several factors. A financial institution undertaking
its own Internet banking service must develop or acquire the relevant
expertise, dedicate appropriate information technology resources, 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 application.
In order to remain competitive and to manage costs, financial institutions
are seeking a low-cost, outsourced Internet-based banking application. 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 websites. 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 eCommerce portal technology, wireless
capability, advanced target marketing, web site development and maintenance.
We offer the following benefits to financial institutions:
. Comprehensive and Customizable Solution. We offer a turnkey,
subscription-based solutions 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
application 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.
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. 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, 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 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 quicker
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.
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For those financial institutions that use these capabilities, we believe
that we have a significant opportunity to sell them additional offerings
as their needs evolve and their customer base grows. We intend to cross-
sell additional products and services to our current customers.
. Increase End User Penetration. As of 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 and 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 websites, 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).
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.
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. Online applications. End users can submit electronic loan, credit card or
other applications safely and securely to their financial institution.
. Online services and additional features. End users can track stock
prices, calculate portfolio values, order U.S. Savings Bonds, make check
image requests and order checks.
. Online statements. End users can receive online account statements
through AXIS Internet Banking. Online statement capabilities help
financial institutions reduce operating expenses associated with paper
statements while enhancing their customers' experience with online
banking. 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.
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, make photocopy requests, 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 the financial institutions through various channels, including real
time decisioning 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.
Through AXIS Lending Services, we can
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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 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 frame relay network. 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 information exchange brokers
that retrieve and initiate transactions using data located on financial
institutions' host systems, bill payment providers' servers, stock information
databases or relational databases. Our applications are driven by templates
which define how data is to be presented. This template-driven approach allows
customization by 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
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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 scalability and functionality by
providing backup and disaster recovery functions in the event of system
interruption or shutdown involving one of the data centers.
Each of our data centers provides a controlled access environment that
includes a high capacity battery backup system, providing continuous power to
all production systems. In addition, 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 integrate our Westlake
Village and Norcross data centers to provide full system redundancy, instant
fail-over and emergency backup capabilities.
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 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.
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. 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
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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 strategic
alliances. 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
for consecutive three-year terms. We are presently evaluating the terms of the
renewal or whether to renew our ABA endorsement.
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.
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. 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, person-to-person payments, and personal financial
management.
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.
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 expect competition to increase significantly as existing or new companies
enter our market and current competitors expand their product lines and
services.
10
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 Transfers Act, the Fair Credit
Reporting Act, the Bank Secrecy Act, the USA Patriot Act of 2001, the Real
Estate Settlement Procedure Act, 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 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.
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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. We generally enter into confidentiality
agreements with our employees, consultants, resellers, customers and potential
customers. We also limit access to and distribution of our source code, and
further limit the disclosure and use of other proprietary information. We
cannot assure that the steps taken by us in this regard will be adequate to
prevent misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or
superior to our technology. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain or use our
products or technology. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States.
Employees
As of January 31, 2002, we had a total of 738 full-time employees, including
419 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.
Recent Developments
On January 28, 2002, we acquired Virtual Financial Services, Inc. ("ViFi"),
a privately owned company based in Indianapolis which provides Internet banking
and related financial services to community-based financial institutions. As a
result of that acquisition, we added over 150 new customers, over 425,000
active Internet banking end-users and approximately 4 million potential
Internet banking end-users. We plan to migrate the ViFi customers to our AXIS
platform and aggressively pursue cross-selling opportunities for our products
and services with these customers.
Risk Factors
You should carefully consider the following risk factors in your evaluation
of us. 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.
12
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.
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. ("nFront") on February 10, 2000,
1View Network Corporation ("1View") on June 21, 2000, AnyTime Access, Inc.
("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.
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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.
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 integrate these two data
centers to provide full system redundancy, instant fail-over and emergency
backup capabilities. We cannot assure you that when fully integrated, these
data centers will provide full system redundancy, instant fail-over and
disaster recovery capabilities as expected. In addition, we may experience
problems during this integration that could cause system failures and decreased
levels of service.
Although we have a disaster recovery plan in place, we do not currently have
sufficient backup facilities to provide full Internet services if either the
Westlake Village facility or the Norcross facility is not functioning. A
14
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 uninterrupted 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 smaller financial institutions have been slower to adopt
Internet banking than larger banks. We cannot predict the size of the market
for Internet banking among financial institutions, the rate at which that
market will grow, or whether there will be widespread end user acceptance of
Internet banking products and services such as ours.
We also depend on our financial institution customers to market and promote
our products to their end user customers. Neither we nor our financial
institution customers may be successful in marketing our current or future
Internet banking products and services. Moreover, financial institutions
generally agree to use our products and services pursuant to contracts with
durations that range from one to five years. Upon expiration, these contracts
may be discontinued 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.
15
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.
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.
16
Our failure to respond to rapid change in the market for Internet banking
could cause us to lose revenue and harm our business.
The market for Internet banking services is new and unproven and is subject
to rapid change. Our success will depend substantially upon our ability to
enhance our existing products and to develop and introduce, on a timely and
cost-effective basis, new products and features that meet changing financial
institution and end user requirements and incorporate technological
advancements. If we are unable to develop new products and enhanced
functionalities or technologies to adapt to these changes or if we cannot
offset a decline in revenues of existing products by sales of new products, our
business would suffer. In addition, our product development process involves a
number of risks. Developing technologically advanced products is a complex and
uncertain process requiring innovation as well as the accurate anticipation of
technology and market trends. We budget our research and development
expenditures based on planned product introductions and enhancements. If we
fail to timely and cost-effectively develop new products that respond to new
technologies and the needs of the Internet banking services market, we will
lose revenue and our business will suffer.
Newly introduced products may contain undetected or unresolved defects.
Any new or enhanced products we introduce may contain undetected or
unresolved software or hardware defects when they are first introduced or as
new versions are released. In the past, we have discovered errors in our
products and it is possible that design defects will occur in new products.
These defects could result in a loss of sales and additional costs as well as
damage to our reputation and the loss of relationships with our customers.
The demand for our products and services could be negatively affected by
reduced growth of commerce over the Internet or delays in the development of
the Internet infrastructure.
Our future success depends heavily on the Internet being accepted and widely
used for commerce. If Internet commerce does not continue to grow or grows more
slowly than expected, our business would suffer. There are a number of reasons
that consumers and businesses may reject the Internet as a viable commercial
medium in general, or as a suitable vehicle for banking transactions in
particular. These reasons include potentially inadequate network
infrastructure, security concerns, slow development of enabling technologies,
reliability and quality problems, and issues relating to ease and cost of
access. In particular, the Internet infrastructure may not be able to support
the demands placed on it by increased Internet usage and data transmission
capacity requirements. In addition, delays in the development or adoption of
new standards and protocols required to 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.
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.
17
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 by 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 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
by requiring us or our customers to comply with data, record keeping and
processing and other requirements. It is possible that laws and regulations may
be enacted with respect to the Internet, covering issues such as end user
privacy, pricing, content, characteristics, taxation and quality of services
and products. Existing regulations may be modified. If enacted or deemed
applicable to us, these laws, rules or regulations could be imposed on our
activities or our
18
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, and we may be found to infringe proprietary
rights of others, which could harm our business.
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 are also subject to the risk of claims and litigation alleging
infringement of the intellectual property rights of others. Third parties may
assert infringement claims in the future with respect to our current or future
products. Any assertion, regardless of its merit, could require us to pay
damages or settlement amounts and could require us to develop non-infringing
technology or pay for a license for the technology that is the subject of the
asserted infringement. Any litigation or potential litigation could result in
product delays, increased costs or both. In addition, the cost of litigation
and the resulting distraction of our management resources could adversely
affect our operating results. We also cannot assure that any licenses for
technology necessary for our business will be available or that, if available,
these licenses can be obtained on commercially reasonable terms.
Consolidation of the banking and financial services industry could cause our
sales to fall.
Consolidation of the banking and financial services industry could result in
a smaller market for our products and services. A variety of factors could
cause our customers to reassess their purchase or potential purchase of our
products and could result in termination of services by existing customers.
After consolidation, banks and other financial institutions may experience a
realignment of management responsibilities and a reexamination of strategic and
purchasing decisions. We may lose relationships with key constituencies within
our customer's organization due to budget cuts, layoffs, or other disruptions
following a consolidation. In addition, consolidation may result in a change in
the technological infrastructure of the combined entity. Our products and
services may not integrate with this new technological infrastructure. The
acquiring institution may also have its own in-house system or outsource to
competitors.
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. Further terrorist attacks
against the United States or other countries may occur. 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.
19
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;
. 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
20
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.
ITEM 2. 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 of office space at a second location in
Sacramento under a new lease commencing September 26, 2001 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.
ITEM 3. 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 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 believe the lawsuit is without legal merit
and intend to defend it vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) Market Information
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
We have never paid dividends on our common stock, and we anticipate that, in
the foreseeable future, we will continue to retain any earnings for use in the
operations of our business.
(b) Holders
As of January 31, 2002, there were 213 holders of record of our common
stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data included in this table is derived from our
consolidated financial statements for the years presented, which have been
audited and reflect 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.
22
During the fourth quarter of 2000, we adopted Staff Accounting Bulletin No.
101 ("SAB 101") "Revenue Recognition in Financial Statements." Prior to the
adoption of SAB 101, we recognized implementation fee income upon completion of
the implementation process, which was typically 90 to 120 days after contract
initiation. We also deferred the implementation costs and recognized them upon
completion of the implementation. Under SAB 101, we now defer recognition of
certain up front implementation fees and related direct incremental
implementation costs and recognize them ratably over the greater of the initial
contract term or the estimated life of the service relationship, generally four
to five years. The adoption of SAB 101 resulted in a negative cumulative effect
adjustment of approximately $2.5 million at January 1, 2000 to reflect the
increase in deferred implementation revenue, which was partially offset by the
increase in deferred direct implementation costs.
Year Ended December 31,
-----------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- -------
(In thousands, except per share data)
Consolidated Statement of
Operations Data
Revenues...................... $ 94,635 $ 54,428 $ 26,245 $ 13,195 $ 5,054
Cost of revenues.............. 55,377 33,281 15,682 7,864 2,754
-------- -------- -------- -------- -------
Gross profit.................. 39,258 21,147 10,563 5,331 2,300
Operating expenses............ 93,205 82,376 30,022 13,361 5,386
-------- -------- -------- -------- -------
Loss from operations.......... (53,947) (61,229) (19,459) (8,030) (3,086)
Interest and other income,
net.......................... 1,999 3,740 1,441 282 111
Accretion of redeemable
convertible preferred stock.. -- -- (136) (273) (36)
-------- -------- -------- -------- -------
Net loss attributable to
common stockholders before
cumulative effect of change
in accounting method......... (51,948) (57,489) (18,154) (8,021) (3,011)
Cumulative effect of change in
accounting method............ -- (2,515) -- -- --
-------- -------- -------- -------- -------
Net loss attributable to
common stockholders.......... $(51,948) $(60,004) $(18,154) $ (8,021) $(3,011)
======== ======== ======== ======== =======
Basic and diluted net loss per
share before cumulative
effect of change in
accounting method............ $ (1.77) $ (2.25) $ (1.26) $ (0.80) $ (0.31)
Per share cumulative effect of
change in accounting method.. -- (0.10) -- -- --
-------- -------- -------- -------- -------
Basic and diluted net loss per
share........................ $ (1.77) $ (2.35) $ (1.26) $ (0.80) $ (0.31)
======== ======== ======== ======== =======
Shares used to compute basic
and diluted net loss per
share........................ 29,301 25,534 14,389 10,055 9,651
======== ======== ======== ======== =======
As of December 31,
-----------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- -------
(In thousands)
Consolidated Balance Sheet
Data
Cash, cash equivalents and
short-term investments....... $ 53,634 $ 81,710 $ 79,031 $ 4,886 $ 3,407
Long-term investments......... 13,334 -- -- -- --
Working capital (deficit)..... 54,396 73,569 73,921 (31) 1,941
Total assets.................. 236,628 282,226 103,488 13,172 6,069
Total liabilities............. 39,737 42,391 17,304 8,088 2,781
Redeemable convertible
preferred stock.............. -- -- -- 15,092 6,819
Total stockholders' equity
(deficit)..................... 196,891 239,835 86,184 (10,008) (3,531)
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
Consolidated Financial Statements and Notes thereto. The forward-looking
statements included in this section relating to certain matters involve risks
and uncertainties, including anticipated financial performance, business
prospects, anticipated capital expenditures and other similar matters, which
reflect management's best judgment based on factors currently known. Actual
results and experience could differ materially from the anticipated results or
other expectations expressed in our forward-looking statements as a result of a
number of factors, including but not limited to those discussed under this
caption and under the caption "Risk Factors" in Item 1 of Part I.
Overview
We are a leading provider of Internet banking services to banks, credit
unions, and savings and loans associations. 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, eCommerce portal 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. 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. We accounted for these
acquisitions as purchases.
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 ("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 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. 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.
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.
24
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 $1.0 million to $1.5 million in
the first quarter of 2002.
We performed an impairment assessment of our long-lived assets in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121 at December
31, 2001 in connection with assessing the
25
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
$25.0 million to $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.
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 relating 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 transactions.
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 combined with continued investment in 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.
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 as a percent of revenue 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.
26
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 a result of an increase in
revenues without a corresponding increase in sales, general and administrative
expenses.
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.
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
27
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.
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.
28
We apply to following critical accounting policies in the preparation of our
consolidated financial 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 we 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.
29
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, 2001 and 2000:
Internet banking Lending Corporate and
division(1) division(2) other(3) Total
---------------- ----------- ------------- --------
(in thousands)
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)
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)
--------
(1) Loss from operations includes amortization of deferred stock-based
compensation of $3.8 million and $4.8 million for the years ended December
31, 2001 and 2000, respectively.
(2) Loss from operations includes amortization of deferred stock-based
compensation of $1.0 million and $453,000 for the years ended December 31,
2001 and 2000, 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 2004 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 long-term portion of the multiple
disbursement note. All of our investments except for the $10.0 million
certificate of deposit are readily marketable.
30
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.
31
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 (the "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 $25.0 million to $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.
32
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 us of adopting this new
accounting standard is being assessed in conjunction with SFAS No. 142, which
is discussed above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to the impact of interest rate changes and changes in the
market values of our investments. Our interest income is sensitive to changes
in the general level of U.S. interest rates. In this regard, changes in U.S.
interest rates affect the interest earned on our cash equivalents. Our exposure
to market rate risk for changes in interest rates relates primarily to our
investment portfolio. We have not used derivative financial instruments in our
investment portfolio. We invest our excess cash in debt instruments of the
U.S. government and its agencies, and in high-quality corporate issuers and, by
policy, limit the amount of credit exposure to any one issuer. We protect and
preserve our invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates, or we may suffer losses in
principal if forced to sell securities, which have declined in market value due
to changes in interest rates.
We are also exposed to the impact of interest rate changes as they affect
our 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements are submitted as a separate section of this Annual
Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
sections and subsections entitled (i) "Proposal One Election of Directors,"
(ii) "Executive Compensation" and (iii) "Section 16(a) Beneficial Ownership
Reporting Compliance" contained in our Proxy Statement for the 2002 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A.
On February 14, 2002, we announced the appointment of Elizabeth Murray as
our executive vice president and chief financial officer. Ms. Murray is
expected to start her employment with us on March 1, 2002. On February 12,
2002, Paul Fiore resigned from our board of directors to pursue other
interests.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
section entitled "Executive Compensation" contained in our Proxy Statement for
the 2002 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" contained in our Proxy Statement for the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
section entitled "Certain Relationships and Related Transactions" contained in
our Proxy Statement for the 2002 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The financial statements are submitted as a separate section of this Annual
Report beginning on page F-1.
The financial statement schedules are submitted as part of the financial
information included within the financial statements or notes thereto.
(b) Reports on Form 8-K filed during the last quarter:
None.
(c) Exhibits
The following exhibits are filed as part of, or are incorporated by
reference into, this Annual Report on Form 10-K:
Exhibit
Number Description
------- -----------
2.1 Agreement and Plan of Merger, dated January 3, 2002, by and among
Registrant, ViFi LLC and Virtual Financial Services, Inc./1/
3.1 Third Amended and Restated Certificate of Incorporation of Registrant,
as currently in effect./2/
3.2 Restated Bylaws of Registrant, as currently in effect./2/
3.3 First, Second and Third Amendments to the Bylaws of Registrant. Filed
herewith.
4.1 Specimen Common Stock Certificate./2/
4.2 Third Amended and Restated Rights Agreement dated February 10, 2000,
between the Registrant and the parties named therein./3/
4.3 Warrant Agreement to Purchase Shares of Preferred Stock of AnyTime
Access, Inc., dated May 7, 1999, issued to Silicon Valley Bank./4/
4.4 Warrant Agreement to Purchase Shares of Preferred Stock of AnyTime
Access, Inc., dated July 1, 1999, issued to Silicon Valley Bank./4/
10.1* Form of Indemnification Agreement entered into by Registrant with each
of its directors and executive officers./2/
10.2* Stock Option Agreement dated October 13, 1998, between John Dorman and
the Registrant./2/
10.3* Stock Option Agreement dated March 30, 1999, between Kevin McDonnell
and the Registrant./2/
10.4* Stock Option Agreement dated March 30, 1999, between Stephen Zarate
and the Registrant./2/
10.5* 1997 Stock Plan./2/
10.6* 1999 Stock Plan and related agreements./2/
10.7* First, Second and Third Amendments to 1999 Stock Plan./9/
10.8* 1999 Stock Plan, as amended, of 1View Network Corporation./4/
10.9* 1997 Stock Plan, as amended, of AnyTime Access, Inc./5/
10.10* 2001 Non-Employee Directors Stock Option Plan, as amended, First and
Second Amendments./9/,/11/,/12/
10.11* 1999 Employee Stock Purchase Plan and related agreements./2/
10.12 Commercial Office Lease dated August 4, 1997, by and between Arden
Realty Limited Partnership, a Maryland Limited Partnership, and
Registrant./2/
35
Exhibit
Number Description
------- -----------
10.13 Master Lease Agreement dated March 1, 1999, between Registrant and
Silicon Valley Bank./2/
10.14 Moneyline Express (Metavante) Agreement dated February 27, 1997.
(Confidential treatment has been requested for portions of this
agreement)./2/
10.15 Lease, dated as of July 9, 1998, between Schneider Atlanta, L.P. and
nFront, Inc./6/
10.16 Standard Office Lease, dated as of March 6, 2000, by and between Arden
Realty Finance Partnership, L.P. and the Registrant./6/
10.17 Revolving Note and Commercial Security Agreement and Agreement for
Issuance of Letters of Credit, dated May 31, 2000, between City
National Bank and the Registrant./7/,/10/
10.18 Sublease Agreement, dated November 23, 1999, as amended, between Antec
Corporation and nFront, Inc./7/
10.19 Multiple Disbursement Note dated August 18, 2000 between City National
Bank and the Registrant./4/
10.20 Security Agreement dated August 18, 2000 between City National Bank
and the Registrant./4/
10.21 Letter dated September 5, 2000 from City National Bank to Registrant
regarding the Security Agreement dated August 18, 2000./4/
10.22* Letter dated September 11, 2000, detailing employment agreement
between Joe McDoniel, Senior Vice President Operations, and the
Registrant./4/
10.23* Letter dated September 28, 2000 detailing employment agreement between
Robert Surridge, Senior Vice President, Lending Division, and the
Registrant./4/
10.24* Option Agreement dated September 14, 2000 between Joe McDoniel and
Registrant./4/
10.25* Letter dated February 1, 2001, detailing employment agreement between
Dale Walker, President and Chief Operating Officer, and the
Registrant. /8/
10.26* Option Agreement dated March 5, 2001 between Dale Walker and
Registrant./8/
10.27 Letter dated April 17, 2001, detailing employment and option agreement
between Melvin Takata, Senior Vice President and Chief Technology
Officer and the Registrant./10/
10.28 Letter dated September 24, 2001, detailing employment and option
agreement between Bruce Isaacson, Senior Vice President, Product
Management, Marketing and Alliances and the Registrant./11/
10.29 Letter dated October 8, 2001, detailing employment and option
agreement between Drew Hyatt, Senior Vice President, Internet Banking
Client Services and the Registrant./11/
10.30 Shareholder Agreement, dated as of May 13, 1998, as amended./3/
10.31 Stockholder Agreement, dated January 3, 2002./1/
10.32 Letter dated February 1, 2002, detailing employment and option
agreement between Elizabeth Murray, Executive Vice President and Chief
Financial Officer and the Registrant. Filed herewith.
21.1 Subsidiaries of the Registrant. Filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants. Filed
herewith.
--------
* Management contract or compensatory plan or arrangement.
1 Incorporated by reference to the exhibits filed with the Registrant's
Current Report on Form 8-K dated February 5, 2002.
2 Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-81547), which was declared
effective on September 30, 1999.
36
3 Incorporated by reference to the exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999.
4 Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
5 Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-43636), which was filed
with the SEC on August 11, 2000.
6 Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
7 Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-41196), which was declared
effective on August 1, 2000.
8 Incorporated by reference to the exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2000.
9 Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
10 Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
11 Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
12 Incorporated by reference to Appendix A of the Registrant's Definitive Proxy
Statement filed with the SEC on March 23, 2001.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: February 22, 2002 Digital Insight Corporation
/s/ John Dorman
By: _________________________________
John Dorman
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ John Dorman Chairman of the Board February 22, 2002
____________________________________ and Chief Executive
John Dorman Officer (Principal
Executive Officer)
/s/ Dale R. Walker President, Chief February 22, 2002
____________________________________ Operating Officer and
Dale R. Walker Director
/s/ Michael Dunn Vice President, Finance February 22, 2002
____________________________________ (Principal Financial
Michael Dunn and Accounting Officer)
/s/ James McGuire February 22, 2002
____________________________________
James McGuire Director
/s/ Robert North February 22, 2002
____________________________________
Robert North Director
/s/ Betsy S. Atkins February 22, 2002
____________________________________
Betsy S. Atkins Director
/s/ Michael Hallman February 22, 2002
____________________________________
Michael Hallman Director
/s/ Michael R. Splinter February 22, 2002
____________________________________
Michael R. Splinter Director
38
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
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,
2001 and 2000, 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 listed on the
index and 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,
------------------
2001 2000
-------- --------
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 15,334 $ 71,523
Short-term investments................................... 38,300 10,187
Accounts receivable, net of allowance for doubtful
accounts of $518 and $221 at December 31, 2001 and 2000,
respectively............................................ 19,133 14,403
Accumulated implementation costs......................... 4,973 4,551
Other current assets..................................... 2,893 3,907
-------- --------
Total current assets................................... 80,633 104,571
Property and equipment, net................................ 37,784 36,352
Goodwill and intangible assets, net........................ 98,382 135,067
Accumulated implementation costs........................... 5,941 5,173
Long-term investments...................................... 13,334 --
Other assets............................................... 554 1,063
-------- --------
Total assets........................................... $236,628 $282,226
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................... $ 3,142 $ 5,308
Accrued compensation and related benefits................ 3,465 3,237
Customer deposits and deferred revenue................... 7,434 12,442
Other accrued liabilities................................ 7,465 6,477
Line of credit........................................... -- 1,000
Current portion of capital lease obligations............. 1,202 2,265
Current portion of long-term debt........................ 3,529 278
-------- --------
Total current liabilities.............................. 26,237 31,007
Capital lease obligations.................................. 411 1,706
Long-term debt............................................. 5,882 2,222
Customer deposits and deferred revenue..................... 7,207 7,456
-------- --------
Total liabilities...................................... 39,737 42,391
-------- --------
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock; $.001 par value, 100,000,000 shared
authorized; 29,638,479 and 28,902,998 shares issued and
outstanding at December 31, 2001 and 2000,
respectively............................................ 30 29
Additional paid in-capital............................... 337,461 333,845
Stockholders' notes receivable........................... (124) (115)
Deferred stock-based compensation........................ (1,409) (6,805)
Accumulated deficit...................................... (139,067) (87,119)
-------- --------
Total stockholders' equity............................. 196,891 239,835
-------- --------
Total liabilities and stockholders' equity............. $236,628 $282,226
======== ========
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,
----------------------------
2001 2000 1999
-------- -------- --------
Revenues........................................ $ 94,635 $ 54,428 $ 26,245
Cost of revenues (including amortization of
stock-based compensation of $760, $394 and $78
for the years ended December 31, 2001, 2000 and
1999, respectively)............................ 55,377 33,281 15,682
-------- -------- --------
Gross profit.................................... 39,258 21,147 10,563
-------- -------- --------
Operating expenses:
Sales, general and administrative (including
amortization of stock-based compensation of
$1,134, $1,195 and $1,039 for the years ended
December 31, 2001, 2000 and 1999,
respectively)................................ 30,780 31,454 22,250
Research and development (including
amortization of stock-based compensation of
$2,923, $3,626 and $104 for the years ended
December 31, 2001, 2000 and 1999,
respectively)................................ 23,420 22,139 7,772
Amortization of goodwill and intangible
assets....................................... 35,729 16,125 --
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.................... 93,205 82,376 30,022
-------- -------- --------
Loss from operations............................ (53,947) (61,229) (19,459)
Interest and other income, net.................. 1,999 3,740 1,441
-------- -------- --------
Net loss before cumulative effect of change in
accounting method.............................. (51,948) (57,489) (18,018)
Accretion of redeemable convertible preferred
stock.......................................... -- -- (136)
-------- -------- --------
Net loss attributable to common stockholders
before cumulative effect of change in
accounting method.............................. (51,948) (57,489) (18,154)
Cumulative effect of change in accounting
method......................................... -- (2,515) --
-------- -------- --------
Net loss attributable to common stockholders.... $(51,948) $(60,004) $(18,154)
======== ======== ========
Basic and diluted net loss per share before
cumulative effect of change in accounting
method......................................... $ (1.77) $ (2.25) $ (1.26)
Per share cumulative effect of change in
accounting method.............................. -- (0.10) --
-------- -------- --------
Basic and diluted net loss per share............ $ (1.77) $ (2.35) $ (1.26)
======== ======== ========
Shares used to compute basic and diluted net
loss per share................................. 29,301 25,534 14,389
======== ======== ========
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,
-----------------------------
2001 2000 1999
-------- --------- --------
Cash flows from operating activities:
Net loss....................................... $(51,948) $ (60,004) $(18,018)
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..................................... 11,258 5,983 1,914
Amortization of deferred stock-based
compensation.................................. 5,757 5,215 1,221
Amortization of goodwill and intangible
assets........................................ 35,729 16,125 --
Interest income on stockholders note
receivable.................................... (9) (12) (15)
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........................... (4,730) (4,152) (5,337)
Accumulated implementation costs.............. (1,190) (9,445) (144)
Other current assets.......................... 1,014 696 (3,539)
Other assets.................................. 509 (602) 961
Accounts payable.............................. (2,166) (621) 2,433
Accrued compensation and related benefits..... 228 (1,644) 3,133
Customer deposits and deferred revenue........ (5,257) 11,054 3,569
Other accruals................................ 1,944 (5,466) 566
-------- --------- --------
Net cash used in operating activities......... (8,861) (40,191) (9,981)
-------- --------- --------
Cash flows from investing activities:
Purchase of investments........................ (59,447) -- (27,757)
Acquisition of property and equipment.......... (12,690) (19,846) (9,576)
Disposal of equipment.......................... -- -- 69
Acquisition payment............................ -- (2,000) --
Proceeds from sale of investments.............. 18,000 17,570 --
-------- --------- --------
Net cash used in investing activities......... (54,137) (4,276) (37,264)
-------- --------- --------
Cash flows from financing activities:
Principal payments on debt..................... (8,946) (4,587) (1,378)
Proceeds from debt............................. 12,499 4,000 --
Net proceeds from public issuance of common
stock......................................... -- 62,360 86,567
Proceeds from other issuances of common stock.. 3,256 2,943 204
Proceeds from issuance of redeemable
convertible preferred stock................... -- -- 8,440
Repurchase of redeemable convertible preferred
stock......................................... -- -- (200)
-------- --------- --------
Net cash provided by financing activities..... 6,809 64,716 93,633
-------- --------- --------
Net (decrease) increase in cash and cash
equivalents.................................... (56,189) 20,249 46,388
Cash and cash equivalents, beginning of period.. 71,523 51,274 4,886
-------- --------- --------
Cash and cash equivalents, end of period........ $ 15,334 $ 71,523 $ 51,274
======== ========= ========
Supplementary disclosures of cash flow
information:
Cash paid during the year for interest......... $ 504 $ 188 $ 32
Supplemental non-cash investing and financing
activities:
Acquisition of property and equipment under
capital lease obligation...................... -- (6,610) --
Capital lease obligations incurred............. -- 6,610 892
Warrants issued................................ -- 473 147
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 business 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") in 2000, 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, 2001 and 2000 were approximately $16.7 million and approximately $11.6
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 $3.9 million and approximately $1.6
million was charged for the years ended December 31, 2001 and 2000,
respectively. No amortization had been charged for the year ended December 31,
1999.
Goodwill and intangible assets
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 assesses the impairment
of enterprise level goodwill periodically 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 the expected future undiscounted cash flows is less
than the carrying amount of the asset, then the Company recognizes an
F-8
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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. 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,
accrued 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, 2001, 2000 and 1999, 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, 2001, 2000 and 1999.
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, 2001 and 2000, the Company had cash and cash equivalent
accounts in excess of the FDIC insured limits.
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. Revenue from recurring service fees are recognized as services are
provided.
F-9
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 incremental 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.
Other revenue 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:
2001 2000 1999
------- ------- -------
Recurring service fees............................. $81,347 $46,459 $16,894
Ratably recognized implementation fees............. 6,133 3,722 --
------- ------- -------
87,480 50,181 16,894
Implementation and other fees recognized prior to
SAB 101........................................... -- -- 9,351
Other revenues..................................... 7,155 4,247 --
------- ------- -------
Total revenues................................... $94,635 $54,428 $26,245
======= ======= =======
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, 2001, 2000 and 1999 amounted to $68,900,
$1,142,000 and $246,700, respectively.
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
F-10
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. 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.
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
F-11
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
anticipates recording an impairment charge of approximately $25 million to $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.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for 2000 and 1999 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
F-12
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
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.
F-13
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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):
Estimated
Unrealized Unrealized Fair
Cost losses Gains 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, 2001 and 2000 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,
------------------
2001 2000
-------- --------
Property and equipment includes the following (in
thousands):
Leasehold improvements............................ $ 6,309 $ 4,618
Equipment......................................... 33,589 23,383
Software.......................................... 16,682 11,617
Furniture and fixtures............................ 4,723 3,683
Construction in process........................... 574 5,886
-------- --------
61,877 49,187
Less accumulated depreciation and amortization.... (24,093) (12,835)
-------- --------
$ 37,784 $ 36,352
======== ========
Assets acquired under capitalized lease obligations are included in property
and equipment and totaled approximately $5,147,000 with related accumulated
amortization of approximately $1,919,000 and $901,000 at December 31, 2001 and
2000, 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 no outstanding advances as of
December 31, 2001 and $1 million outstanding as of December 31, 2000 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 $3,335,000, $2,289,000 and
$768,000 for the years ended December 31, 2001, 2000 and 1999, 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 bill payment 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
=======
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
operations or liquidity, it is possible that in the future we could become a
party to such proceedings.
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. Federal and state net operating loss
carryforwards begin to expire in the years 2011 and 2004, respectively.
Given its history of operating losses and potential limitations on the
utilization of net operating losses, the Company has recorded a full valuation
allowance against its deferred tax assets 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.
F-16
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the Company's deferred taxes are (in thousands):
December 31,
------------------
2001 2000
-------- --------
Deferred tax assets:
Net operating loss carryforwards....................... $ 38,055 $ 34,683
Research credit carryforwards.......................... 527 527
Stock compensation..................................... (359) 3,371
Accruals, reserves and other........................... (5,298) (1,561)
Amortization of acquired intangible assets............. -- (9,791)
-------- --------
32,925 27,229
Deferred tax asset valuation allowance................. (32,925) (27,229)
-------- --------
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, 2001, 2000 and 1999 on the loans was $9,000,
12,000 and $15,000, 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 to Aurum Technologies, Inc. in
connection with the execution of a vendor agreement. This warrant expired
unexercised on 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 for 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.
F-17
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The Company does not intend to grant any
additional options under this 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 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.
F-18
DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 per
share. 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 per share to $37.62 per share. 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
------------------------------------------------------------------------ ----------------------------
Range of Weighted-Average Weighted-Average Weighted-Average
Exercise Prices Outstanding Remaining Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- -------------------------- ---------------- ----------- ----------------
$ 0.0000-$ 8.50 974,831 7.1 $ 2.95 556,212 $ 1.7577
$ 8.6000-$17.00 2,206,774 9.0 $12.47 259,505 $12.2427
$17.1000-$25.50 494,653 8.5 $21.66 100,373 $23.0258
$25.6000-$34.00 162,535 6.9 $30.49 66,302 $30.7590
$34.1000-$42.00 754,385 7.8 $37.54 310,718 $37.5152
$42.6000-$51.00 50,100 8.1 $45.73 22,798 $45.7647
$51.1000-$59.50 500 8.3 $51.25 208 $51.2500
$59.6000-$68.00 50,500 7.1 $62,40 22,776 $62.3747
$68.1000-$76.50 197,863 7.3 $73.30 100,063 $73.2996
$76.6000-$84.00 12,500 6.2 $79.50 5,726 $79.5048
--------- --- -------- --------- --------
4,904,641 8.2 $19.4433 1,444,681 $21.0610
========= =========
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
$5,757,000, $5,215,000 and $1,221,000 has been recognized as stock-based
compensation expense in the years ended December 31, 2001, 2000 and 1999,
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, 2001, 2000 and 1999 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,
----------------
2001 2000 1999
---- ---- ----
Expected life (years)...................................... 5 4 4
Risk free interest rate.................................... 4.39% 5.9% 5.5%
Expected volatility........................................ 90% 110% 80%
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, 2001 and 2000 (in thousands):
Internet
banking Lending Corporate
division(1) division(2) and Other(3) Total
----------- ----------- ------------ --------
Year ended December 31, 2001:
Revenue....................... $ 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)
Year ended December 31, 2000:
Revenue....................... $ 48,040 $ 6,388 $ -- $ 54,428
Gross Profit.................. 20,477 670 -- 21,147
Loss from operations.......... (30,457) (1,989) (28,783) (61,229)
--------
(1) Loss from operations includes amortization of deferred stock-based
compensation of $3,800 and $4,762 for the years ended December 31, 2001 and
2000, respectively.
(2) Loss from operations includes amortization of deferred stock-based
compensation of $1,017 and $453 for the years ended December 31, 2001 and
2000, 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,
----------------------------
2001 2000 1999
-------- -------- --------
Net loss attributable to common stockholders
before cumulative effect of accounting
change..................................... $(51,948) $(57,489) $(18,154)
Cumulative effect of change in accounting
method..................................... -- (2,515) --
-------- -------- --------
Net loss attributable to common
stockholders............................... $(51,948) $(60,004) $(18,154)
======== ======== ========
Weighted average shares..................... 29,301 25,724 14,710
Weighted average unvested common shares
subject to repurchase...................... -- (190) (321)
-------- -------- --------
Denominator for basic and diluted
calculation................................ 29,301 25,534 14,389
======== ======== ========
Net loss per share:
Basic and diluted before cumulate effect
of change in accounting method........... $ (1.77) $ (2.25) $ (1.26)
Per share cumulative effect of change in
accounting method........................ -- (0.10) --
-------- -------- --------
Basic and diluted......................... $ (1.77) $ (2.35) $ (1.26)
======== ======== ========
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,
-----------------
2001 2000 1999
----- ----- -----
Weighted average effect of common stock equivalents:
Redeemable convertible preferred stock.................. -- -- 3,827
Warrants................................................ -- 48 65
Unvested common shares subject to repurchase............ -- 190 321
Employee stock options.................................. 1,092 2,847 2,448
----- ----- -----
1,092 3,085 6,661
===== ===== =====
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, 2001 and 2000 (in thousands, except per share data).
Quarter Ended
--------------------------------------
2001 Mar. 31 June 30 Sept. 30 Dec. 31
---- -------- -------- -------- --------
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
Quarter Ended
--------------------------------------
2000 Mar. 31 June 30 Sept. 30 Dec. 31
---- -------- -------- -------- --------
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
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)
======= ======
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
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DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 our 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 $1.0 million to $1.5 million in the first
quarter of 2002.
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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, 2001.............. $ 221 $ 461 $(164) $ 518
December 31, 2000.............. 86 144 (9) 221
December 31, 1999.............. 19 67 -- 86
Valuation allowance for deferred
tax assets
December 31, 2001.............. $27,229 $5,696 -- $32,925
December 31, 2000.............. 10,153 17,076 -- 27,229
December 31, 1999.............. 4,601 5,552 -- 10,153
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