-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R7jwGnhkPMrMXV7Y066UcB53fvFLLZ4XRZpdjw12xHivLB2h02D5pzBv1Dcj1+1n oOHs7VWKSnGdvVVCqk+liA== 0000944209-00-000442.txt : 20000329 0000944209-00-000442.hdr.sgml : 20000329 ACCESSION NUMBER: 0000944209-00-000442 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL INSIGHT CORP CENTRAL INDEX KEY: 0001037275 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 770493132 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-27459 FILM NUMBER: 581487 BUSINESS ADDRESS: STREET 1: 26025 MUREAU RD CITY: CALABASAS STATE: CA ZIP: 93012 BUSINESS PHONE: 8188710000 MAIL ADDRESS: STREET 1: 26025 MUREAU RD CITY: CALABASAS STATE: CA ZIP: 91302 10-K405 1 FORM 10-K 405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------------- [X]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-27459 ---------------- 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 No.) 26025 Mureau Road, Calabasas, California 91302 (Address of principal executive offices, including zip code) (818) 871-0000 (Registrant's telephone number, including area code) ---------------- 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) ---------------- 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 March 15, 2000, 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 as reported by the Nasdaq National Market System, was $541,701,300. 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 March 15, 2000, the registrant had 23,029,251 shares of its common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's proxy statement for the 2000 annual meeting of stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. The proxy statement will be filed within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- PART I Item 1. Business............................................................................... 4 Item 2. Properties............................................................................. 22 Item 3. Legal Proceedings...................................................................... 22 Item 4. Submission of Matters to a Vote of Security Holders.................................... 22 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters................... 23 Item 6. Selected Financial Data................................................................ 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 25 Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 28 Item 8. Financial Statements and Supplementary Data............................................ 29 Item 9. Changes In and Disagreements with Accountants On Accounting and Financial Disclosure... 29 PART III Item 10. Directors and Executive Officers of the Registrant..................................... 30 Item 11. Executive Compensation................................................................. 31 Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 31 Item 13. Certain Relationships and Related Transactions......................................... 31 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K........................ 32 Signatures...................................................................................... 34 Financial Statements............................................................................ F-1
2 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 forward-looking statements include, among other things, statements regarding our anticipated costs and expenses, our capital needs and financing plans, product and service development, our growth strategies, market demand for our products and services, relationships with our strategic marketing alliances, competition, and the reliability and security of our data center. These forward-looking statements include, among other things, those statements including the words "expects," "anticipates," "intends," "believes" and similar language. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed under the heading "Risk Factors" in Item 1 of Part I. You should also review the risk factors described in other documents we file from time to time with the Securities and Exchange Commission, including our quarterly reports on Form 10-Q. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements to reflect events or circumstances after the date of this Annual Report on Form 10-K. 3 PART I ITEM 1. BUSINESS Digital Insight is the leading provider of Internet banking services to credit unions, small to mid-sized banks, and savings and loans with assets of less than $10 billion, based on the number of home banking end users we serve as compared to our direct competitors. We offer these community financial institutions a cost-effective outsourced service, branded in their name, which includes home banking for their individual customers, business banking for their commercial customers, a targeted marketing program to enable them to effectively sell additional financial services to end users, and customized web site design and implementation services. As of December 31, 1999, we had contracted with over 467 financial institution customers. The contracted home banking customers had over 11.7 million potential end users. Of these potential end users, over 663,000 were actively using our home banking application. We provide community financial institutions with a comprehensive and secure Internet solution that can be installed rapidly with a high degree of customization. Our solution is designed to be readily expandable, or scalable, as the number of users grows. Our solution also offers high levels of service and system redundancy. We work closely with leading data processing vendors so that our financial institution customers can leverage the investment they have made in existing data processing systems by fully integrating them with an Internet solution. We earn revenues from implementation fees that our financial institution customers pay us for establishing their Internet banking services, and recurring service fees based on end user adoption and usage, as well as web site hosting and maintenance and other monthly services. During the year ended December 31, 1999, approximately 76.3% of our revenues came from recurring fees. The Digital Insight Solution We provide Internet banking services to community financial institutions. Our service includes a content-rich home banking application for retail customers and a business banking application for commercial customers. AXIS Home Banking, our consumer product, includes account management, account transfers and interfaces to personal financial management software, bill payment, stock quotes and other expanded services. AXIS Cash Management, our small business product, includes similar features as well as payroll/direct deposits and other services. To enable financial institutions to sell additional financial services to their end users based on individual profiles, we also offer target marketing programs to our customers. We also provide customized web site design, implementation, maintenance and hosting services. Our solution offers the following benefits to community financial institutions: . Comprehensive and Customizable Solution. We provide full service bureau support to customers who desire such an environment, including hosting of web sites, web site maintenance, reporting tools and customized online account presentations. Our home banking and business banking applications can be configured to offer end users a variety of standard and optional features. Our web site design and implementation services also enable customers to establish Internet banking services with a look and feel that preserves their unique brand identity. . Real Time and Batch Online Architecture. Our architecture allows either real time or batch communication with financial institutions' core data processing systems. Real time data processing allows for transactions conducted on the web site to be immediately reflected on the host system, and allows for transactions conducted at the financial institution to be immediately reflected on the web site. As a result, the information we present to consumers can be current with the financial institution's own data, with as much transaction history as is then available from the institution. For example, if an end user makes a withdrawal at a branch, it will be reflected instantaneously online. Meanwhile, batch processing systems transfer transaction data between the home banking data center and the financial 4 institution's host system on a daily basis, rather than sending transactions immediately to the host system for processing. Our ability to offer both real time and batch processing capabilities to financial institutions increases our potential customer base. . Extensive Data Processing Vendor Relationships. Our solution provides direct links, or interfaces, with multiple vendors of core banking software and data processing services to financial institutions. As of March 1, 2000, we have developed interfaces to data processing vendors representing 51 separate systems, serving more than 12,000 community financial institutions. We are currently developing interfaces to 16 additional systems provided by 12 separate data processing vendors that support more than 3,000 financial institutions. By working directly with these vendors, we enable our customers to offer either real time or batch presentations of end user account data and we can quickly and cost- effectively install our systems with customers of these vendors. Our interfaces also allow for tight integration with other functions supported by the data processing vendor, such as loan origination and statement and check imaging. . Scalable, Reliable and Secure Service. Our system can scale rapidly to accommodate increased numbers of end users. A financial institution can take advantage of our data center and the server infrastructure of its data processing vendor to scale to meet demand, without building its own separate server infrastructure. Our service is also highly reliable, with an up-time availability record averaging 99.41% during the twelve-month period ended December 31, 1999. Further, our systems incorporate sophisticated data encryption techniques, a series of firewalls between the Internet and our customers, and several layers of security technology in order to minimize unauthorized access to our network. . Rapid and Affordable Implementation. Our solution can be rapidly implemented and represents an affordable alternative to internally developed Internet banking services for community financial institutions. Average implementation times for our home banking application range from one to three months, depending on the complexity of web site design requests and the availability of an existing interface with a customer's data processing vendor. . Flexible Service Capabilities. Our applications are designed to be deployed in a variety of environments, depending on a customer's needs. A customer can use our data center in a service bureau arrangement, house its own dedicated hardware in our data center or host our systems in its own facility. Importantly, customers can migrate from one environment to another as their needs evolve. In addition, we have the flexibility to support data processing vendors whose systems are either batch or real time. . Platform for Value-Added Services and Target Marketing. We enable financial institutions to expand their Internet presence beyond their core banking functions by providing additional value-added products and services to their customers. These services include bill payment and delivery of third-party services such as stock quotes. Our real time and batch solutions are also capable of gathering relevant end-user account activity information and usage profiles, enabling financial institutions to target timely and appropriate services to their customers, thereby creating additional revenue opportunities. We believe that these additional product and service offerings will allow our customers to derive additional revenue from existing and new end users. Products and Services Our primary products are home banking and business banking applications. These applications allow a financial institution to create a customized Internet banking service using an array of standard and optional features. We complement our primary banking applications with additional tools, such as target marketing, and with implementation and web site services. 5 Home Banking Our AXIS Home Banking application is an Internet-based system through which community financial institutions are able to provide home banking to their retail customers. Standard features of this application include: . Account information: End users can view balance information and transaction history for deposit accounts, such as checking and savings, and loan accounts, such as consumer, credit cards, automobile and mortgage. . Funds transfer: End users can transfer funds among accounts, including making loan payments. . Interfaces with personal financial management software: End users can download their account information into Quicken and Microsoft Money. In addition to these standard features, financial institutions can also choose to include the following home banking optional features: . Bill payment: End users can pay bills electronically 24 hours a day, seven days a week. End users can schedule one-time or recurring payments, and can view payment history at their convenience. . Online applications: End users can submit electronic loan, credit card or other applications safely and securely to their financial institution. . Online services and additional features: End users can track stock prices, calculate portfolio values, order U.S. Savings Bonds, make check image requests and order checks. Business Banking Our AXIS Cash Management application provides a full range of Internet business banking services for commercial customers of community financial institutions. Standard features of this application include: . Administration platform: Businesses can control access to business banking and account features in order to provide financial and audit controls for their staff. . Account information: Businesses can view account balances and transaction history, and reconcile accounts instantly. . Funds transfer: Businesses can actively manage their accounts, setting up future-dated transfers and automatic transfers of available balances among accounts. . Stop payment placement: Businesses can place stop payment orders on checks. . File export: Businesses can export their account information into a computer file or into business financial management and accounting software such as QuickBooks. Optional features of AXIS Cash Management include: . Bill payment: End users can pay bills electronically 24 hours a day, seven days a week. End users can schedule one-time or recurring payments and can view payment history at their convenience. . Automated Clearing House services: Businesses can initiate electronic payments, including business-to-business, payroll direct deposit disbursements and electronic state and federal tax payments. . Wire transfers: Businesses can originate wire transfers of funds to accounts with other financial institutions or trade partners. . Online services and additional features: Businesses can complete predefined loan and other applications, make photocopy requests, order checks, and track portfolios. 6 Target Marketing Our Target Marketing module is designed to help make the financial institution's web site a cost-effective sales tool. This module is currently available for both our home banking application and our business banking application. Target Marketing allows financial institutions to individually target account holders and present the account holders with opportunities to buy products and services to fit their needs. The Target Marketing module gives financial institutions the ability to: . analyze end users' demographic and financial profiles and online activity, and apply a set of screening criteria to select appropriate marketing promotions; . present individually-targeted marketing promotions, such as advertisements for loans, to end users when it is most appropriate; . incorporate account sign-up forms and loan applications into specific promotions; . create time-limited promotions and seasonal messages; and . change messages daily, hourly or randomly. AXIS Management Console Our Internet services management console provides our customers with a set of tools to actively manage their Internet banking system. With this management console, a financial institution can remotely manage its web site, generate reports on daily activities and keep transaction logs and activity records for all site events. A financial institution can also use this management console to configure the Target Marketing module for specific promotions. Implementation Services and Web Site Development For financial institutions without an existing web site, our team of experts develops a fully interactive site. Working closely with the customer, the team designs the site to incorporate the features and capabilities required by the institution, including the integration of proprietary and value-added financial services such as application forms, financial calculators and links to other web sites. For customers with an existing web site, our implementation services are focused on integrating the home banking and/or business banking application into that site. In both instances, financial institutions can elect to have Digital Insight host and maintain their web site. We provide a team of web site experts who program the placement and formatting of digitized text for a financial institution's Internet site, including all connections to other web sites. Systems Architecture Our applications are designed to be deployed in a service bureau environment, resource managed environment, or an in-house environment. In a service bureau environment, the financial institution's web site and home banking application share resources with other financial institutions in our data center. These shared resources include hardware such as our servers, as well as data transmission capacity, known as bandwidth. In a resource-managed environment, a financial institution has dedicated bandwidth and hardware but the system is still located in our data center. In an in-house environment, a financial institution runs the system out of its own data center. In all environments, the financial institution or data processing vendor is connected to Digital Insight through our private frame relay network. Our systems architecture is designed to provide both real time and batch data acquisition, processing and presentation for Internet home banking and other applications. Our application servers make use of information exchange brokers that retrieve and initiate transactions using data located on financial institutions' host systems, bill payment providers' servers, stock information databases or relational databases. Our applications are driven by templates which define how data is to be presented. This template driven approach allows customization by our financial institution customers by supporting multiple languages and multiple web site designs. 7 Our real time architecture is highly scalable, and allows end users to communicate in real time through a private frame relay network to retrieve account information as needed. Real time data processing allows for transactions conducted on the web site to be immediately reflected on the host system and vice versa. In contrast, in batch systems, home banking transactions are not immediately sent to the financial institution's host system for processing but are instead transferred between the home banking data center and the host system on a daily basis. Our recent acquisition of nFront, Inc. enables us to offer both real time and batch processing capabilities to financial institutions, thus expanding our potential customer base. We currently provide most of our services out of one data center located at our headquarters in Calabasas, California. We launched a second data center that we will manage at an Exodus Communications facility in Herndon, Virginia. This second data center was put into operation in the fourth quarter of 1999 with functionality to be added throughout 2000. When fully operational, this data center will allow for greater scalability and increased functionality by providing backup functions to the Calabasas data center. Customers Our target market is the approximately 22,000 community financial institutions in the United States with assets of less than $10 billion each. Within our target market, we focus on community financial institutions that rely on one or more of the data processing vendors with whom we have developed interfaces. As of March 1, 2000, we have interfaces with data processing vendors serving over 12,000 community financial institutions. We are seeking to expand the number of vendors with whom we have interfaces. As of December 31, 1999, we had contracts with over 467 financial institutions to provide one or more of our products and services. Of these institutions, over 350 have contracted with us for home banking, with more than 663,000 active end users. Based on publicly available regulatory submissions, as of December 31 1999, our home banking customers had more than 11.7 million potential end users. For the years ended December 31, 1998 and December 31, 1999, no individual customer accounted for 10% or more of our revenues. The table below sets forth our ten largest home banking customers as of March 1, 2000 in the categories of banks/savings and loans (based on asset size) and credit unions (based on the number of potential end users).
Banks/Savings and Loans Credit Unions ----------------------- ------------- City National Bank of California The Golden 1 Credit Union Trust Company Bank Government Employees Federal Credit Union Sun National Bank Truliant Federal Credit Union East West Bank Teachers Credit Union California Commerce Bank ESL Federal Credit Union City National Bank of Florida Community Credit Union West Coast Bank Portland Teachers Federal Credit Union Commercial Bank of New York Mountain America Credit Union Pacific Century Bank North Island Federal Credit Union San Diego National Bank San Diego County Credit Union
Third-Party Relationships We have relationships with multiple vendors of core data processing software and outsourced data processing services to financial institutions. Agreements with these vendors allow us to interface to the financial institutions' host systems to provide access to a financial institution's account data. As of March 1, 2000, we have developed interfaces to the systems of 31 data processing vendors who provide services to more than 12,000 community financial institutions. We are currently developing interfaces for 16 additional systems provided by 12 different vendors. Among the data processing vendors with whom we interface are: BancTec, CSI, CUC Inc., EDS Cube, EDS Miser, Fiserv divisions such as Aftech, CBS, Galaxy and Summit, Helvetia de Caribe, Jack Henry, OSI, Symitar Systems, USERS Inc. and XP Systems. Among the interfaces under development are ALLTEL and M&I Data Services. 8 To deliver bill payment services, we have relationships with major providers such as M&I Data Services and CheckFree. Our agreement with M&I Data Services, as successor to Moneyline Express, has a one-year renewable term and provides for payment of fees based on the number of customers, end users and bill payment transactions. We also have relationships with third parties, including the U.S. Treasury, DecisionOne, 800 Support, Intuit and Microsoft, to provide other related functions to our customers. Sales and Marketing We utilize a direct sales model. As of December 31, 1999, our sales and marketing staff consisted of 31 professionals, who are regionally based to facilitate the development of strong relationships with customers. The sales staff is responsible for prospecting and acquiring new accounts as well as managing current accounts and cross-selling additional products into those accounts. We expect to significantly increase our sales and marketing infrastructure over the next 12 months. Our typical sales cycle is approximately six months for new customers and approximately two months for follow-on or upgrade sales to existing customers. Our primary customer contact for new sales in smaller community 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 community 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 for the community financial institution or the direct manager of Internet banking for that institution. Our primary marketing efforts are focused on building brand awareness among community financial institutions and identifying potential customers. Our marketing efforts include: . telemarketing; . press relations, which are managed by an outside public relations firm that specializes in banking and financial industries; . direct mail, which uses product and service literature as well as reprints of news articles; . trade shows; and . meetings with national and regional user groups of Internet banking services and third-party data processing vendors. Product Development As of December 31, 1999, our product development staff consisted of 51 software developers and engineers. Their development efforts are focused on: . Enhancements to Existing Products. We are developing new features and functions for our home banking and business banking products in order to provide a broader range of functions, including Internet loan origination and bill presentment. . Interfaces with Data Processing Vendors. We are continuing to enhance and expand our interfaces to financial institutions' core data processing systems. A variety of different systems are utilized by both banks and credit unions. . Additional Web Site Customization. We intend to offer financial institutions additional options and capabilities for customization of their web sites by creating more templates and making these templates more flexible. . Enhancements to Target Marketing. We intend to add features to Target Marketing to support a broader range of electronic commerce activities. . Other Products and Services. We are working to expand our offerings to include related financial service capabilities such as online insurance, brokerage, credit history management, tax preparation and filing and merchant services. 9 Competition The market for Internet banking services is highly competitive, and we expect that competition will intensify in the future. In the area of home banking, we primarily compete with other companies that provide outsourced Internet banking services to community financial institutions, including FundsXpress, HomeCom, Home Financial Network, NetZee, Online Resources, Q-Up and Virtual Financial. Also, vendors such as Corillian, Integrion and Security First Technologies, who primarily target the largest financial institutions, occasionally compete with us for community financial institution customers. In addition, several of the vendors offering data processing services to financial institutions offer their own Internet banking solutions, including EDS, Fiserv, Jack Henry and M&I Data Services. Local competition for home banking services is provided by more than 100 smaller online service outsourcing companies located throughout the United States. Our primary competition for providing the business banking services that financial institutions offer their commercial customers are vendors of cash management systems for large corporations such as ADP, Magnet and Pulitzer & Haney. We also face potential indirect competition from Internet portals such as E*TRADE and Yahoo! which might serve as an alternative to financial institutions' web sites, particularly for bill presentment services. In addition, we could experience competition from our customer financial institutions and potential customers who develop their own online banking solutions. Rather than purchasing Internet banking products and services from third-party vendors, community 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 community financial institutions and related scale advantages; . the reliability, security, speed and capacity of our systems and technical infrastructure; . the comprehensiveness, scalability, ease of use and service level of our products and services; . our ability to interface with vendors of data processing software and services; . our pricing policies and the pricing policies of our competitors and suppliers; . the timing of introductions of new products and services by us and our competitors; and . our ability to support unique customer requirements. We expect competition to increase significantly as new companies enter our market and current competitors expand their product lines and services. Government Regulation The financial services industry is subject to extensive and complex federal and state regulation. Our current and prospective customers, which consist of financial institutions such as commercial banks, savings and loans, credit unions, thrifts, securities brokers, finance companies, other loan originators, insurers and other providers of financial services, operate in markets that are also subject to rigorous regulatory oversight and supervision. Our customers must ensure that our services and related products work within the extensive and evolving regulatory requirements applicable to them, including those under federal and state truth-in-lending and truth-in-deposit rules, usury laws, the Equal Credit Opportunity Act, the Fair Housing Act, the Electronic Fund Transfer Act, the Fair Credit Reporting Act, the Bank Secrecy Act and the Community Reinvestment Act. The compliance of our products and services with these requirements depends on a variety of factors including the particular functionality, the interactive design and the classification of the customer. Our financial services customers must assess and determine what is required of them under these regulations and are responsible for ensuring that our system and the design of their site conform to their regulatory needs. We do not make 10 representations to customers regarding applicable regulatory requirements, and rely on each customer to identify its regulatory issues and to adequately specify appropriate responses. It is not possible to predict the impact that any of these regulations could have on our business. We are not licensed by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, the National Credit Union Administration or other federal or state agencies that regulate or supervise depository institutions or other providers of financial services. We are subject to examination by federal depository institution regulators under the Bank Service Company Act and the Examination Parity and Year 2000 Readiness for Financial Institutions Act. These regulators have broad supervisory authority to remedy any shortcomings identified in any such examination. We are also subject to encryption and security export laws and regulations which, depending on future developments, could render our business or operations more costly, less efficient or impossible. Federal, state or foreign authorities could adopt laws, rules or regulations affecting our business operations, such as requiring us to comply with data, record keeping and other processing requirements. We may become subject to additional regulation as the market for our business evolves. It is possible that laws and regulations may be enacted with respect to the Internet, covering issues such as user privacy, pricing, content, characteristics and quality of services and products. Existing regulations may be modified. For example, we are not subject to the disclosure requirements of Regulation E of the Federal Reserve Board under the Electronic Fund Transfer Act, because we do not agree with consumers to provide them with electronic funds transfer services or provide access devices such as cards, codes or other means of accessing accounts to initiate electronic funds transfers. Regulation E regulates certain electronic funds transfers made by providers of access devices and electronic fund transfer services. Under Regulation E, our customers are required, among other things, to provide certain disclosures to retail customers using electronic transfer services, to comply with certain notification periods regarding changes in the terms of service provided and to follow certain procedures for dispute resolutions. The Federal Reserve Board could adopt new rules and regulations for electronic funds transfers that could lead to increased operating costs and could also reduce the convenience and functionality of our services, possibly resulting in reduced market acceptance. If enacted or deemed applicable to us, the laws, rules or regulations applicable to financial services activities would render our business or operations more costly, burdensome, less efficient or impossible. We cannot assure that federal, state or foreign governmental authorities will not adopt new regulations addressing electronic financial services or operations generally that could require us to modify our current or future products and services. The adoption of laws or regulations affecting our business or our customer financial institutions' business could have a material adverse effect on our business, financial condition and operating results. A number of proposals at the federal, state and local level and by certain foreign governments would, if enacted, expand the scope of regulation of Internet-based financial services and could impose taxes on the sale of goods and services and certain other Internet activities. Any development that substantially impairs the growth of the Internet or its acceptance as a medium for transaction processing could have a material adverse effect on our business, financial condition and operating results. Proprietary Rights Although we believe that our success is more dependent upon our technical expertise than our proprietary rights, our future success and ability to compete is 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 11 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 December 31, 1999, we had a total of 161 full-time employees, including 60 in operations, 31 in sales and marketing, 51 in research and development and 19 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 February 10, 2000, we completed the acquisition of nFront, Inc., a provider of Internet banking and other financial services to small to mid-sized banks and credit unions. Through the transaction, we expanded our client base, increased the number of interfaces that we support and acquired complementary technology. On a pro forma combined basis, upon completion of the acquisition we had more than 730 financial institution clients, with a total customer base of 17 million potential end users. These clients include 650 Internet banking contracts with 13.6 million potential end users. As a result of the acquisition, we now have interfaces with data processing vendors providing coverage of more than 80 percent of community financial institutions. With the addition of nFront's "fat server" architecture to our technology capabilities, we are now able to offer unparalleled expertise in both real time and batch processing. Fat Server Architecture. The technology acquired from nFront is based on a system architecture that is commonly referred to as a "fat server" design. A "server" is the computer or collection of computers that store information and handle many of the more complex data processing functions. A "fat server" refers to a server that has been configured to handle significant volumes of data storage and retrieval, as well as complex data processing functions. With "fat server" architecture, the system utilizes a relational database located on our system server to receive and store customer data from a financial institution's core computer system. This data storage architecture allows our system to store and organize the financial institution customer's account data locally, without a continuous, direct connection between the customer and the financial institution's core system. The fat server architecture allows us to provide an alternative to our real time architecture. The fat server technology provides the following benefits: . Access to historical financial information. Information stored on the fat server allows a customer to generate consolidated reports on financial transactions spanning an extended period of time. Our fat server system currently stores up to two years of customer data, whereas "thin server" systems typically provide access to 60 to 90 days of financial data. . Analysis of customer information. A fat server solution enhances the financial institution's ability to extract and analyze relevant customer account information and more efficiently cross-sell products. . Effective consolidation of financial services. The fat server enables consolidation of the customer's financial data from disparate host systems in one place. These host systems include banking, brokerage and insurance financial data. We assumed nFront's leases in the acquisition. As a result, we now have an additional data center and sales, marketing and development facilities in Norcross, Georgia. 12 Risk Factors You should carefully consider the following risks in your evaluation of Digital Insight. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties may also adversely impact and impair our business. If any of the following risks actually occur, our business, results of operations or financial condition would likely suffer. In such case, the trading price of our common stock could decline. We have a limited operating history in an early-stage market and, as a result, our business strategy may not prove to be successful. We began operations in July 1995. Accordingly, we have a limited operating history, and our business and prospects must be considered in light of the early-stage, rapidly evolving and uncertain Internet banking market in which we operate. As a result: . fluctuations in our operating results may be significant relative to our revenues; . community financial institutions may not widely adopt Internet banking in general or our solution in particular; . the Internet and the systems and networks of third parties may not operate efficiently; and . competition and rapid technological change in the industry could adversely affect market acceptance of all of our products and services. As a result, our business strategy may not prove to be successful. We have a history of losses, expect future losses and cannot assure you that we will achieve profitability. Although our revenues have increased in every quarter since 1996, we have not achieved profitability and cannot be certain that we will realize sufficient revenue to achieve profitability. We incurred net losses of $712,000 in the year ended December 31, 1996, $2.5 million in the year ended December 31, 1997, $4.4 million in the year ended December 31, 1998 and $7.5 million in the year ended December 31, 1999. As of December 31, 1999, we had an accumulated deficit of $15.5 million. We plan to increase our operating expenses to expand our sales and marketing operations, broaden our customer support capabilities and continue to build our operational infrastructure. If growth in our revenues does not outpace the increase in these expenses, we may not achieve or sustain profitability. The expected fluctuations of our operating results could cause our stock price to fluctuate. We expect that our operating results may fluctuate significantly in the future based upon a number of factors, many of which are not within our control. We base our operating expenses on anticipated revenue growth and our operating expenses are relatively fixed in the short term. The implementation and utilization of our products involves a commitment of resources and recurring expense by our customers and us. Among other things, we generally provide a significant level of education to prospective customers regarding the use and benefits of our products. We may expend substantial funds and management resources during the sales cycle and fail to make the sale. Accordingly, our results of operations for a particular period may be adversely affected if the sales forecasted for that period are delayed or do not occur. As a result, if our revenues are lower than we expect in some future period, our operating results may be below the expectations of market analysts or investors. If this occurs, the price of our common stock would likely decrease. Our operating results may also fluctuate in the future due to a variety of other factors, including: . the overall level of demand for Internet banking services by consumers and businesses and the demand for our products, product enhancements and services in particular; 13 . spending patterns and budgetary resources of community financial institutions and their end user customers; . technical difficulties, system downtime, system failures or reductions in service levels; . the timing of upgrades to our computer hardware infrastructure; . increases in operating costs beyond anticipated levels; . the timing of customer product implementations or our failure to timely complete scheduled product implementations; . delays in purchasing decisions or product implementations or decreases in demand for Internet banking by financial institutions due to Year 2000 concerns; and . governmental actions affecting Internet operations or content. We may not achieve the benefits we expected from the acquisition of nFront, which may have a material adverse effect on our business, financial condition and operating results and/or could result in loss of key personnel. We completed our acquisition of nFront, Inc. on February 10, 2000. We are continuing to overcome significant challenges in order to realize the benefits and synergies from the acquisition, including the timely, efficient and successful execution of a number of post-merger events. Key events include: . integrating the operations of the two companies; . retaining and assimilating the key personnel of each company; . offering the existing services of each company to the other company's customers; . retaining the existing customers and strategic partners of each company; . developing new services that utilize the assets of both companies; and . maintaining uniform standards, controls, procedures and policies. The successful execution of these post-merger events involves considerable risk and we may not be successful in executing them. These risks include: . the potential disruption of our ongoing business and distraction of its management; . the difficulty of incorporating acquired technology and rights into the combined company's 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 business. We may not succeed in addressing these risks or any other problems encountered during the integration process. We currently rely on one data center to provide all of our Internet banking products and services; any failure in this data center could cause us to lose customers. In the event of a failure or interruption in our systems, our reputation could be materially adversely harmed and we could lose many of our current and potential customers. All of our communications and network equipment is currently located at our corporate headquarters in Calabasas, California. We have contracted to establish a second functional backup Internet banking data center in Herndon, Virginia, which was put into initial operation during the fourth quarter of 1999 with functionality to be added throughout 2000. 14 We cannot assure that this data center will become fully operational as scheduled or that, when fully operational, this data center will perform as expected. We do not currently have sufficient backup facilities to provide Internet services if the Calabasas facility is not functioning. A natural disaster, such as a fire, an earthquake or a flood, at our facility could result in failures or interruptions in providing our Internet banking products and services to our customers. In addition, our systems are vulnerable to computer viruses, physical or electronic break-ins, power loss, telecommunications failure and similar events. For example, in April 1999, a failure of a critical router in our Internet banking data center caused an outage of approximately six hours while the problem was corrected. We have also contracted to provide a certain level of service to our customers and a failure or interruption of our system has in the past caused and in the future could cause us to refund fees to some of our customers to compensate for decreased levels of service. Even with the second data center, we could experience a failure or interruption in our systems, which could lead to delays, loss of data or the inability to provide our services to our customers. We are dependent on the widespread adoption of Internet banking by community financial institutions, which have historically been slow to do so. We expect that we will continue to depend on Internet banking products and services for substantially all of our revenues in the foreseeable future. However, the market for Internet banking has only recently begun to develop. To date, Internet banking has developed slowly within financial institutions, and purchasing decisions for Internet banking products are often delayed due to uncertainties relating to cost, return on investment and customer acceptance. In particular, community financial institutions have been slower to adopt Internet banking than larger banks. We cannot predict the size of the market for Internet banking among community 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 those of Digital Insight. We also depend on our financial institution customers to market and promote our products to their end user customers. Neither Digital Insight nor its financial institution customers may be successful in marketing our current or future Internet banking products and services. Moreover, financial institutions generally agree to use our products and services pursuant to contracts with durations that range from one to five years. Upon expiration, these contracts may be discontinued. Unless our Internet banking products and services are successfully deployed and marketed by a large number of community financial institutions and achieve widespread market acceptance by their end user customers for a significant period of time, we will not be able to achieve our business objectives and increase our revenues. We depend on the efficient operation of the Internet, other networks and systems of third parties; if they do not operate efficiently, we will not be able to effectively provide our products and services. We depend on the efficient operation of network connections from our customer financial institutions and their data processing vendors to our systems. Further, portions of our revenue are dependent on continued usage by end users of Internet banking services and their connections to the Internet. Each of these connections, in turn, depends on the efficient operation of web browsers, Internet service providers and Internet backbone service providers, all of which have had periodic operational problems or have experienced outages. In addition, the majority of our services depend on real time connections to the systems of financial institutions and data processing vendors. Any operational problems or outages in these systems would cause us to be unable to provide a real time connection to these systems and we would be unable to process transactions for end users, resulting in decreased revenues. In addition, any system delays, failures or loss of data, whatever the cause, could reduce customer satisfaction with our products and services and harm our sales. We depend on cooperation from data processing vendors for financial institutions, some of whom have resisted efforts in the past to allow the integration of our products and services with their systems. Our products involve integration with products and systems developed by data processing vendors that serve financial institutions. If any of our products fail to be supported by our customers' data processing 15 vendors, we would have to redesign our products to suit these customers. We cannot assure that any redesign could be accomplished in a cost-effective or timely manner. We rely on these vendors to jointly develop technology with us and to disclose source code specifications to enable our products to integrate effectively with their products and systems. In the past, some vendors have resisted integrating our products or have caused delays or other disruptions in the implementation process. Several of these data processing vendors offer or are planning to offer Internet banking products and services that are directly competitive with our products and services and have resisted efforts to allow us to integrate our products and services with their systems in the past. In addition, our customers' data processing vendors may develop new products and systems that are incompatible with our products. Our failure to integrate our products effectively with our customers' data processing vendors could result in higher implementation costs or the loss of potential customers. Competition from third parties could reduce or eliminate demand for our products and services. The market for Internet banking services is highly competitive, and we expect that competition will intensify in the future. We may not be able to compete successfully against our current or future competitors and, accordingly, we cannot be certain that we will be able to expand the number of our customers and end users, or retain our current customers or third-party service providers. We face competition from four main areas: other companies with Internet banking products aimed at community financial institutions, vendors who primarily target the largest financial institutions, vendors of data processing services to financial institutions, and smaller, local online service outsourcing companies. Many of our current and potential competitors have longer operating histories and may be in a better position to produce and market their services due to their greater financial, technical, marketing and other resources, as well as their significantly greater name recognition and larger installed bases of customers. In addition, many of our competitors have well-established relationships with our current and potential community financial institution customers 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 that our facilities and infrastructure are perceived by the marketplace to be secure. A material security breach affecting Digital Insight could damage our reputation, deter financial institutions from purchasing our products, deter their customers from using our products, or result in liability to Digital Insight. Further, any material security breach affecting our competitors could affect the marketplace's perception of Internet banking in general and have the same effects. Concerns over security and the privacy of users may inhibit the growth of the Internet and other online services generally, especially as a means of conducting commercial transactions. Any well-publicized compromise of security could deter people from using the Internet or using it to conduct transactions that involve transmitting confidential information. We may need to expend significant capital or other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. Although we intend to continue to implement state of the art security measures, persons may be able to circumvent the measures that we implement in the future. Eliminating computer viruses and alleviating other security problems may result in interruptions, delays or cessation of service to users accessing web sites that deliver our services, any of which could harm our business. 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 16 timely and cost-effective basis, new products and features that meet changing financial institution and end user requirements and incorporate technological advancements. If we are unable to develop new products and enhanced functionalities or technologies to adapt to these changes or if we cannot offset a decline in revenues of existing products by sales of new products, our business would suffer. In addition, our product development process involves a number of risks. Developing technologically advanced products is a complex and uncertain process requiring innovation as well as the accurate anticipation of technology and market trends. We budget our research and development expenditures based on planned product introductions and enhancements. If we fail to timely and cost-effectively develop new products that respond to new technologies and the needs of the Internet banking services market, we will lose revenue and our business will suffer. Newly introduced products may contain undetected or unresolved defects. Any new or enhanced products we introduce may contain undetected or unresolved software or hardware defects when they are first introduced or as new versions are released. In the past, we have discovered errors in our products and it is possible that design defects will occur in new products. These defects could result in a loss of sales and additional costs as well as damage to our reputation and the loss of relationships with our customers. The demand for our products and services could be negatively affected by reduced growth of commerce over the Internet or delays in the development of the Internet infrastructure. Our future success depends heavily on the Internet being accepted and widely used for commerce. If Internet commerce does not continue to grow or grows more slowly than expected, our business would suffer. There are a number of reasons that consumers and businesses may reject the Internet as a viable commercial medium in general, or as a suitable vehicle for banking transactions in particular. These reasons include potentially inadequate network infrastructure, security concerns, slow development of enabling technologies, reliability and quality problems, and issues relating to ease and cost of access. In particular, the Internet infrastructure may not be able to support the demands placed on it by increased Internet usage and data transmission capacity requirements. In addition, delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or increased government regulation could cause the Internet to lose its viability as a commercial medium. Even if the required infrastructure, standards, protocols or complementary products, services or facilities are developed, we may incur substantial expenses adapting our solutions to changing or emerging technologies. We could be subject to potential liability claims related to use of our products and services. Financial institutions use our products and services to provide Internet banking services to their customers. Any errors, defects or other performance problems in our products and services could result in financial or other damages to these financial institutions for which we are liable. A product liability claim brought against Digital Insight, even if not successful, would likely be time consuming, result in costly litigation and could seriously harm our business. Although our contracts typically contain provisions designed to limit our exposure to liability claims, existing or future laws or unfavorable judicial decisions could negate these limitation of liability provisions. Moreover, we may be liable for transactions executed using Internet services based on our products and services even if the errors, defects or other problems are unrelated to our products and services. We are currently experiencing a period of significant growth that is placing a strain on our resources. We have recently experienced significant growth, including expansion in the number of our employees, and we anticipate that additional expansion may be required in order to continue our growth. This growth places a significant demand on our management and operational resources. Our management, personnel, systems, procedures, controls and customer service may be inadequate to support our existing and future operations. We continue to invest heavily in our technological infrastructure and to build and scale our systems in order to meet the demands of our growing customer base. 17 Our stock price is volatile. The market price of our common stock could fluctuate widely 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; . future equity or debt offerings or our announcements of these offerings; and . economic well being of community financial institutions. In addition, in recent years, the stock market in general, and the Nasdaq National Market and the securities of technology companies in particular, have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may materially adversely affect our stock price, regardless of our operating results. Government regulation of our business could cause it to incur significant expenses, and failure to comply with certain regulations, if adopted, could make our business less efficient or impossible. The financial services industry is subject to extensive and complex federal and state regulation. Financial institutions such as commercial banks, savings and loans and credit unions operate under high levels of governmental supervision. Our customers must ensure that our services and related products work within the extensive and evolving regulatory requirements applicable to them. We do not represent that our systems comply with such regulations. Neither federal depository institution regulators nor other regulators of financial services require us to obtain any licenses. We are subject to examination by federal depository institution regulators under the Bank Service Company Act and the Examination Parity and Year 2000 Readiness for Financial Institutions Act. These regulators have broad supervisory authority to remedy any shortcomings identified in any such examination. 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 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 user privacy, pricing, content, characteristics, taxation and quality of services and products. Existing regulations may be modified. If enacted or deemed applicable to us, these laws, rules or regulations could be imposed on our activities or our business, thereby rendering our business or operations more costly, burdensome, less efficient or impossible and requiring us to modify our current or future products or services. Failure to attract and retain experienced personnel and senior management could harm our ability to grow. We believe that our future success will depend in large part upon our continued ability to identify, hire, retain and motivate highly skilled employees, who are in great demand. In particular, we believe that we must expand our research and development, marketing, sales and customer support capabilities in order to effectively serve the evolving needs of our present and future customers. Competition for these employees is intense and we may not be able to hire additional qualified personnel in a timely manner and on reasonable terms. In addition, our success depends on the continuing contributions of our senior management and technical personnel, all of whom would be difficult to replace. The loss of any one of them could adversely affect our ability to execute our business strategy. 18 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 depends in part upon our proprietary technology. None of our technology is currently patented. Instead, we rely on a combination of contractual rights and copyright, trademark and trade secret laws to establish and protect our proprietary technology. We generally enter into confidentiality agreements with our employees, consultants, resellers, customers and potential customers. We also limit access to and distribution of our source code, and further limit the disclosure and use of other proprietary information. We cannot assure that the steps taken by us in this regard will be adequate to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain or use our products or technology. Monitoring unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. We are also subject to the risk of claims and litigation alleging infringement of the intellectual property rights of others. Third parties may assert infringement claims in the future with respect to our current or future products. Any assertion, regardless of its merit, could require us to pay damages or settlement amounts and could require us to develop non-infringing technology or pay for a license for the technology that is the subject of the asserted infringement. Any litigation or potential litigation could result in product delays, increased costs or both. In addition, the cost of litigation and the resulting distraction of our management resources could adversely affect our operating results. We also cannot assure that any licenses for technology necessary for our business will be available or that, if available, these licenses can be obtained on commercially reasonable terms. Consolidation of the banking and financial services industry could cause our sales to fall. Consolidation of the banking and financial services industry could result in a smaller market for our products and services. A variety of factors could cause our customers to reassess their purchase or potential purchase of our products and could result in termination of services by existing customers. After consolidation, banks and other financial institutions may experience a realignment of management responsibilities and a reexamination of strategic and purchasing decisions. We may lose relationships with key constituencies within our customer's organization due to budget cuts, layoffs, or other disruptions following a consolidation. In addition, consolidation may result in a change in the technological infrastructure of the combined entity. Our products and services may not integrate with this new technological infrastructure. The acquiring institution may also have its own in-house system or outsource to competitors. For example, in May 1999, we lost Home Savings of America as a customer after it was acquired by Washington Mutual, which decided to integrate Home Savings' end users into its existing home banking system. 19 Future sales of our shares could affect the stock price. The market price of our common stock could fall dramatically if stockholders sell large amounts of stock in the public market. These sales, or the possibility that these sales may occur, could affect the market price of our common stock and could make it more difficult for us to sell equity or equity- related securities in the future. As of March 15, 2000, there were 23,029,251 shares of our common stock outstanding. Of these, 7,590,592 shares are freely tradable. The remaining 15,438,659 shares are limited by restrictions under the securities laws and "lock-up" agreements with underwriters and/or Digital Insight. These shares will be eligible for sale in the public market as follows:
First Eligible Sale Date Number of Shares ------------------------ ---------------- March 29, 2000............................................ 1,872,787 Two trading days after Digital Insight publicly announces financial results covering at least 30 days of combined operations of Digital Insight and nFront................. 12,200,436 May 25, 2000.............................................. 521,400 May 26, 2000.............................................. 844,036
Approximately 13,504,833 shares held by our affiliates are subject to certain conditions and restrictions under federal securities laws, including satisfying applicable holding periods and complying with limitations on the volume of sales. As of March 15, 2000, options to purchase 3,167,793 shares of common stock were outstanding and 1,206,992 shares of common stock were available for future grant pursuant to our stock plans. Our 1999 Stock Plan is subject to annual increases beginning on March 1, 2001, equal to the lesser of 750,000 shares, 5% of our shares on that date, or a lesser amount determined by the board of directors. We have registered the shares of common stock underlying outstanding options and those reserved for issuance under our stock option plans and under our employee stock purchase plans. Accordingly, shares underlying vested options and stock purchase rights will be eligible for resale upon their exercise. In addition, there are 51,041 shares underlying outstanding warrants, also subject to lock-ups, that will be eligible for resale in the public market upon expiration of the warrant holders' respective one-year holding periods under Rule 144, which will begin upon the date of exercise, or, in the case of a net exercise, on the date of grant of the warrant. Morgan Stanley & Co., Inc., our underwriter, may, in its sole discretion and at any time without prior notice, release all or any portion of the common stock subject to lock-up agreements. Potential acquisitions involve risks. We intend to continuously evaluate our position within our industry, and we may acquire complementary technologies or businesses in the future. Due to consolidation trends within the Internet banking services industry, failure to adopt and successfully implement a long-term acquisition strategy could damage our competitive position. Future acquisitions may involve large one-time write- offs and amortization expenses related to goodwill and other intangible assets. Any of these factors could adversely affect our operating results or stock price. Acquisitions involve numerous risks, including: . difficulties in assimilating the operations, products, technology, information systems and personnel of the acquired company with our operations; . diverting our management's attention from other business concerns; . impairing relationships with our employees, affiliates, strategic marketing alliances and content providers; . inability to maintain uniform standards, controls, procedures and policies; 20 . 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 using some or all of the proceeds from our initial public offering. We may also elect to finance future acquisitions with debt financing, which would increase our debt service requirements, or through the issuance of additional common or preferred stock, which could result in dilution to our stockholders. There can be no assurance that we will be able to arrange adequate financing 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 stockholder. The preceding provisions of our charter and bylaws, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our management. Members of management and our board of directors, and their affiliates, control 39.1% of our common stock. As of March 15, 2000, members of our executive management team and our board of directors and their affiliates control approximately 39.1% of our common stock. As a result, these management members and directors will be able to significantly influence matters requiring stockholder approval. Moreover, this concentration of ownership could have the effect of delaying or preventing a change in control. 21 ITEM 2. PROPERTIES Our principal offices currently occupy approximately 30,385 square feet in Calabasas, California, pursuant to a lease that expires in 2003. In August 1999, we entered into a sublease to occupy an additional 16,085 square feet in our principal facility in Calabasas, California, beginning on December 1, 1999. Our principal data center is located in this facility. We have also entered into a service agreement for a second data center serviced by Exodus Communications in Herndon, Virginia. We believe that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed. We also occupy two properties in Georgia under leases that we took over in connection with our recent acquisition of nFront, Inc. The first property consists of approximately 13,800 square feet of office space in Norcross, Georgia, where we now have an additional data center and sales, marketing and development facilities. Our lease on this property expires August 1, 2003. The second property consists of approximately 1,000 square feet in a facility in Bogart, Georgia, and serves as a location for some of our graphic designers. ITEM 3. LEGAL PROCEEDINGS From time to time we may be involved in litigation arising in the normal course of our business. We are not a party to any litigation, individually or in the aggregate, that we believe would have a material adverse effect on our financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted for vote by our stockholders during the fourth quarter of the year ended December 31, 1999. 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the Nasdaq National Market under the symbol "DGIN." Our common stock began trading on Nasdaq on October 1, 1999, the date of our initial public offering. The following table sets forth the range of high and low closing sale prices reported on the Nasdaq National Market for our common stock for the period indicated.
Fiscal Period High Price Low Price ------------- ---------- --------- October 1, 1999-December 31, 1999...................... $52.38 $19.00
As of March 15, 2000, there were 133 holders of record of our common stock. We have never paid any cash dividends on our stock, and we anticipate that, for the foreseeable future, we will continue to retain any earnings for use in the operation of our business. Changes in Securities and Use of Proceeds The effective date of our first registration statement, filed on Form S-1 under the Securities Act of 1933 (File No. 333-81547), relating to our initial public offering of our common stock, was September 30, 1999. A total of 4,025,000 shares of our common stock were sold at the closing at a price of $15.00 per share to an underwriting syndicate led by Morgan Stanley Dean Witter, Incorporated, Deutsche Bank Securities Inc., Banc of America Securities LLC and Friedman, Billings, Ramsey & Co., Inc. Public trading commenced on October 1, 1999, and the offering closed on October 6, 1999. The initial offering resulted in gross proceeds of $60.4 million, $4.2 million of which was applied toward underwriting discounts and commissions. Expenses related to the offering totaled approximately $1.7 million. Net proceeds to Digital Insight were $54.5 million. We incurred the following expenses with respect to the offering through December 31, 1999:
Underwriting Discounts and Underwriters' Commissions Finders' Fees Expenses Other Expenses Total Expenses ------------- ------------- -------- -------------- -------------- $4,200,000 $ 0 $ 0 $1,700,000 $5,900,000
The net proceeds from this offering were used for general corporate purposes, including working capital, capital expenditures, and to fund operating losses, although we have no specific purposes for the proceeds of the offering. A portion of the proceeds was used to acquire or invest in complementary businesses or products, or to obtain the right to use complementary technologies. On November 21, 1999, we announced a merger agreement with nFront, Inc., of Norcross, Georgia, a leading Internet banking services company in a tax-free, stock for stock transaction. We incurred expenses of approximately $87,000 as of December 31, 1999 in connection with the acquisition of nFront. Pending use of the net proceeds for the above purposes, we have invested these funds in short-term, interest-bearing, investment grade obligations. None of the foregoing expenses constituted direct or indirect payments to our directors, officers, general partners or their associates or to persons owning 10% or more of any class of our equity securities or to our affiliates. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with our financial statements and related notes thereto, and "Management Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Annual Report on Form 10-K. The selected statement of operations data for the four years ended December 31, 1999 and the selected balance sheet data as of December 31, 1996, 1997, 1998, and 1999 have been derived from our audited financial statements. The selected statement of operations data for the period from July 17, 1995 (inception) to 23 December 31, 1995 has not been audited. In the opinion of management, such unaudited financial statements have been prepared on the same basis as the audited financial statements referred to above and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results of operations for the indicated periods.
Period from July 17, 1995 (inception) through Year ended December 31, December 31, --------------------------------- 1995 1996 1997 1998 1999 ------------ ------ ------- ------- ------- (in thousands, except per share data) Statement of Operations Data: Revenues: Implementation fees......... $ 85 $1,053 $ 1,926 $ 2,420 $ 4,142 Service fees................ 3 508 2,046 5,810 13,364 ------ ------ ------- ------- ------- Total revenues............ 88 1,561 3,972 8,230 17,506 ------ ------ ------- ------- ------- Cost of revenues: Implementation.............. 141 643 1,217 1,631 3,058 Service..................... 1 261 1,014 3,616 7,545 ------ ------ ------- ------- ------- Total cost of revenues.... 142 904 2,231 5,247 10,603 ------ ------ ------- ------- ------- Gross profit.................. (54) 657 1,741 2,983 6,903 ------ ------ ------- ------- ------- Operating expenses: Sales, general and administrative............. 167 809 2,516 4,183 9,420 Research and development.... 94 565 1,612 2,555 4,546 Amortization of stock-based compensation............... 151 844 1,221 ------ ------ ------- ------- ------- Total operating expenses.. 261 1,374 4,279 7,582 15,187 ------ ------ ------- ------- ------- Loss from operations.......... (315) (717) (2,538) (4,599) (8,284) Interest income............... 89 262 778 Other income (expense), net... 5 (3) (19) ------ ------ ------- ------- ------- Net loss...................... $ (315) $ (712) $(2,452) $(4,356) $(7,506) ====== ====== ======= ======= ======= Basic and diluted net loss per share........................ $(0.06) $(0.14) $ (0.49) $ (0.85) $ (0.97) ====== ====== ======= ======= ======= Shares used to compute basic and diluted net loss per share........................ 5,000 5,000 5,000 5,108 7,765 ====== ====== ======= ======= ======= Pro forma basic and diluted loss per share............... $ (0.50) $ (0.68) ======= ======= Shares used in computing pro forma basic and diluted net loss per share............... 8,712 11,001 ======= =======
December 31, -------------------------------- 1996 1997 1998 1999 ----- ------- ------- ------- (in thousands) Balance Sheet Data: Cash and cash equivalents.................... $ 28 $ 886 $ 4,758 $42,249 Working capital (deficit).................... (243) (16) 3,067 55,236 Total assets................................. 433 3,071 8,077 71,438 Total liabilities............................ 422 1,949 2,417 9,033 Mandatory redeemable convertible preferred stock....................................... 4,444 12,444 Total stockholders equity (deficit).......... (3,322) (6,784) 62,405
24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are the leading provider of Internet banking solutions for community financial institutions, with over 467 financial institution customers as of December 31, 1999. We offer these community financial institutions an outsourced service, branded in their name, which includes home banking for their individual customers, business banking for their commercial customers, a target marketing program to enable them to sell additional financial services, and customized web site design and implementation services. Since inception, substantially all of our revenues have been derived from our Internet home banking services, associated features and web site development. As of December 31, 1999, we had an accumulated deficit of approximately $15.5 million. Our revenues consist primarily of recurring monthly service fees and, to a lesser extent, one-time implementation fees. Revenues increased from $88,000 in 1995 to $8.2 million in 1998, and were $17.5 million in 1999. Our recurring revenues consist of service fees paid to us by our financial institution customers based on the number of end users or end user transactions, and fees for hosting and maintaining their web sites and other monthly services. Recurring service fees as a percentage of revenues have grown from approximately 32.5% in 1996 to 76.3% for the year ended December 31, 1999. To the extent that our installed base of customers continues to grow, we expect recurring service fees to represent an increasing percentage of our revenues in the future. Our customer contracts range from one to five years. We require a 50% non-refundable cash deposit of product implementation fees, payable at the time that a contract is signed. We record these deposits as deferred revenues and, together with the balance of the implementation fees, we recognize them upon completion of implementation and customer approval. Recognition is usually two to four months from the contract date. Upon completion of implementation and customer approval, we begin to receive and recognize recurring service fees. For the year ended December 31, 1999, no single customer accounted for more than 10% of our revenues. Cost of revenues consists of implementation and service costs. Implementation costs are comprised primarily of salaries for implementation personnel and fees paid to third parties, including bill payment and data processing vendors. Service costs consist primarily of salaries and related personnel expenses, network costs, expenses related to the operation of our data center and fees paid to third parties, including bill payment vendors, data processing vendors and communication services providers. Gross margin is affected by the relative proportion of lower margin implementation fees and higher margin service fees we generate, the mix of products we sell, competitive pricing pressures and the size and complexity of our implementations. 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 and promotional costs. Research and development expenses consist primarily of salaries, related personnel expenses and consultant fees related to the design, development, testing and enhancement of both our products and our data processing vendor interface software. We expense all research and development costs as incurred. We have recorded aggregate deferred stock-based compensation of $5.5 million through December 31, 1999. The remaining unamortized balance of $3.3 million will be fully amortized by the quarter ended March 31, 2003. Comparisons of Years Ended December 31, 1998 and December 31, 1999 Revenues. Revenues increased from $8.2 million for the year ended December 31, 1998 to $17.5 million for the year ended December 31, 1999. This increase was primarily due to the growth in service fees from $5.8 million to $13.4 million. The number of active home banking end users increased over the same period from over 273,000 to approximately 663,000, and implementation fees increased from $2.4 million to $4.1 million. 25 Gross Profit. Gross profit increased from $3.0 million for the year ended December 31, 1998 to $6.9 million for the year ended December 31, 1999. Gross margin improved from 36.2% to 39.4% primarily due to leverage of our implementation costs as a result of higher implementation fees generated during the year, and service fees margin improved due to continued end user growth without a corresponding increase in costs. Implementation gross margin decreased from 32.6% to 26.2% and service gross margin improved from 37.8% to 43.5%. Implementation gross margin may vary from one period to another based upon fluctuations in our implementation revenues and increases in our implementation infrastructure. Sales, General and Administrative. Sales, general and administrative expenses increased from $4.2 million for the year ended December 31, 1998 to $9.4 million for the year ended December 31, 1999. This increase was primarily due to an increase in sales commissions associated with higher revenues and higher personnel expenses for sales and marketing staff, and to a lesser extent due to our national user conference, corporate branding effort, other promotional expenses and expenses for additional marketing support programs. This increase was also due to increased staffing for finance and accounting, new senior management positions and growth in recruiting and human resources expenses. Sales, general and administrative expenses as a percentage of revenues increased from 50.8% for the year ended December 31, 1998 to 53.8% for the year ended December 31, 1999. Research and Development. Research and development expenses increased from $2.6 million for the year ended December 31, 1998 to $4.5 million for the year ended December 31, 1999. This increase was primarily due to higher personnel expenses related to more full-time software engineering staff required for the functional enhancement of existing products, and to a lesser extent due to the development of new products. Research and development expenses as a percentage of revenues decreased from 31.0% for the year ended December 31, 1998 to 26.0% for the year ended December 31, 1999, primarily as a result of an increase in revenues. Interest Income. Interest income increased from $262,000 for the year ended December 31, 1998 to $778,000 for the year ended December 31, 1999. This increase was primarily due to higher average cash balances in the year ended December 31, 1999. Amortization of Stock-Based Compensation. Amortization of stock-based compensation increased from $844,000 for the year ended December 31, 1998 to $1.2 million for the year ended December 31, 1999. This increase was primarily due to the hiring of new employees and related stock option grants, as well as an increase in the difference between the grant price and the deemed fair value of our common stock. Comparisons of Years Ended December 31, 1997 and December 31, 1998 Revenues. Revenues increased from $4.0 million for the year ended December 31, 1997 to $8.2 million for the year ended December 31, 1998. This increase was driven primarily by growth in service fees, which increased from $2.0 million in 1997 to $5.8 million in 1998. To a lesser extent, the increase in revenues during these periods was the result of growth in implementation fees related to new contracts. The total number of active home banking end users rose from 83,000 at December 31, 1997 to 273,000 at December 31, 1998. Gross Profit. Gross profit increased from $1.7 million for the year ended December 31, 1997 to $3.0 million for the year ended December 31, 1998. This increase was primarily the result of the increase in revenues, particularly from service fees. Gross margin declined from 43.8% in 1997 to 36.2% in 1998. This decline was primarily due to increased investments in our data center and network operations in order to improve system reliability and significantly enhance customer support, quality assurance and security. Sales, General and Administrative. Sales, general and administrative expenses increased from $2.5 million for the year ended December 31, 1997 to $4.2 million for the year ended December 31, 1998. This increase was primarily the result of increases in personnel and personnel-related costs to support our expanded operations. 26 Research and Development. Research and development expenses increased from $1.6 million for the year ended December 31, 1997 to $2.6 million for the year ended December 31, 1998. This increase was primarily due to increases in personnel and personnel-related costs, product testing and enhancement, new interface development expenses and expenses related to the completion and commercial release of new products. Interest Income. Interest income increased from $89,000 for the year ended December 31, 1997 to $262,000 for the year ended December 31, 1998. This increase was primarily due to higher average cash balances as a result of our Series A preferred stock financing, which concluded in March 1997, and our Series B preferred stock financing, which concluded in February 1998. Amortization of Stock-Based Compensation. Amortization of stock-based compensation increased from $151,000 for the year ended December 31, 1997 to $844,000 for the year ended December 31, 1998. This increase was primarily due to the hiring of new employees and related stock option grants, as well as an increase in the difference between the grant price and the deemed fair value of our common stock. Provision for Income Taxes We incurred operating losses from inception through December 31, 1999, and therefore have not recorded any significant provision for income taxes. We have recorded a valuation allowance for the full amount of our net operating loss carry-forwards, as the future realization of the tax benefit is not currently likely. As of December 31, 1999, we had net operating loss carry-forwards for federal and state tax purposes of approximately $10.8 million. The state tax loss carry-forwards expire in 2004 and the federal tax loss carry-forwards expire in 2011. Under the provisions of the Internal Revenue Code, certain substantial changes in ownership may limit the amount of net operating loss carry-forwards that could be utilized annually in the future to offset taxable income. Liquidity and Capital Resources Since inception, we had financed our operations primarily through the private placement of equity securities, raising approximately $20.8 million. On October 6, 1999, we completed our initial public offering by issuing 4,025,000 shares of common stock (including the exercise of the underwriters' over- allotment option) and realized proceeds, net of underwriting discounts, commissions and issuance costs, of $54.5 million. In conjunction with the initial public offering, our mandatory convertible preferred stock converted to common stock and all warrants to purchase preferred stock became warrants to purchase common stock. At December 31, 1999, we had cash and cash equivalents of $42.2 million. We have a $2.0 million equipment leasing line of credit with a bank, under which $892,000 was outstanding at December 31, 1999. At December 31, 1999, we also had an additional $103,000 in equipment financing outstanding with an equipment leasing company. Cash used in operating activities was $1.5 million for the year ended December 31, 1997, $2.1 million for the year ended December 31, 1998 and $3.9 million for the year ended December 31, 1999. The increases in cash used in operating activities were primarily due to increases in the net loss. Cash used in investing activities was $768,000 for the year ended December 31, 1997, $1.7 million for the year ended December 31, 1998 and $21.3 million for the year ended December 31 1999. The increases in cash used in investing activities were primarily due to infrastructure expansion to meet end user growth and a $6.8 million expenditure for computers and other equipment for our second data center. We have no material commitments other than obligations under our credit facilities and operating and capital leases, including a sublease we entered into in August 1999 to occupy additional space in our principal facility in Calabasas, California beginning on December 1, 1999. See note 12 of notes to financial statements included elsewhere in this report. Commitments under our new facility sublease are $528,000 for the next three years. Future capital requirements will depend upon many factors, including the timing of research and product 27 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, together with the proceeds of this offering, will be sufficient to satisfy our cash requirements for at least the next 18 months. We intend to invest our cash in excess of current operating requirements in short-term, interest-bearing, investment grade securities. On November 21, 1999, we announced the signing of a definitive agreement to acquire nFront, Inc., a publicly traded company. The acquisition received regulatory and stockholder approval on February 10, 2000. Under the terms of the acquisition, which has been accounted for as a pooling of interests, we exchanged 8,253,735 shares of our common stock for 14,255,194 shares of nFront common stock. Additionally, we converted 1,084,741 nFront stock options into 627,926 of our stock options. We expect to record a one-time charge in the first quarter of 2000 relating to non-recurring merger costs of $12.1 million, consisting of $11.1 million of direct transaction costs, comprised primarily of investment banking, legal, printing, registration, and accounting fees, and $1.0 million of other merger-related expenses, comprised primarily of severance and closing costs of redundant functions and operations. Impact of Year 2000 Many computers, software and other equipment include computer code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of these systems may have failed to operate or produce correct results if "00" is interpreted to mean 1900, rather than 2000. These problems were commonly referred to as the "Year 2000" problem. The Year 2000 problem affects the computers, software and other equipment that we use, operate or maintain for our operations, and services provided by third-party vendors. As a result, we formalized our Year 2000 compliance plan, which was implemented by a team of employees led by our internal information technology staff. This staff was responsible for monitoring the assessment, including potential effects and costs, of our Year 2000 projects and remediation of any Year 2000 problems. As part of our Year 2000 compliance plan, we contacted our third-party vendors of products and services integrated into our products to identify and, to the extent possible, resolve issues relating to the Year 2000 problem. To date, we have not experienced any significant Year 2000 problems in our operations or services provided by third- party vendors. However, we cannot assure you that problems will not develop in the future. Our costs to address Year 2000 compliance have been approximately $250,000 and are included in operating expenses. 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 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. 28 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. 29 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information required by this item is incorporated by reference from the information contained in our Proxy Statement for the 2000 Annual Meeting of Stockholders expected to be filed with the Securities and Exchange Commission not later than April 31, 2000 (the "2000 Proxy Statement") under the captions "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance." Executive Officers and Directors The following table sets forth information regarding our executive officers and directors as of December 31, 1999:
Name Age Position ---- --- -------- John Dorman................. 49 Chairman of the Board, Chief Executive Officer and President Paul Fiore.................. 35 Executive Vice President, Co-Founder and Director Mehariar Hasan.............. 41 Vice President, Product Management Daniel Jacoby............... 34 Vice President, Chief Technology Officer and Co-Founder Kevin McDonnell............. 38 Vice President, Finance, Chief Financial Officer and Secretary Steven Reich................ 40 Vice President, Sales and Marketing Stephen Zarate.............. 53 Vice President and Chief Information Officer
John Dorman. Mr. Dorman has been our President and Chief Executive Officer and a director since October 1998. Mr. Dorman was appointed Chairman of the Board in June 1999. Prior to his appointment as our President and Chief Executive Officer, Mr. Dorman was Senior Vice President for Oracle Worldwide Financial Services from August 1997 to October 1998. Prior to joining Oracle, Mr. Dorman was founder, President, and Chief Executive Officer of Treasury Services Corporation, known as TSC, a provider of management information solutions to the financial services industry, from 1983 to 1997. TSC was sold to Oracle in 1997. Prior to serving at TSC, Mr. Dorman spent 11 years in the banking industry as a senior financial executive for Union Bank of California. Mr. Dorman holds a BA degree in business administration and philosophy from Occidental College and an MBA in finance from the University of Southern California. Paul Fiore. Mr. Fiore is a co-founder of Digital Insight and has served as our Executive Vice President since October 1998 and as a director since March 1997. From March 1997 to October 1998, Mr. Fiore was President of Digital Insight and from July 1995 to March 1997, Mr. Fiore served as President of Digital Insight LLC, the predecessor of Digital Insight. Prior to co-founding Digital Insight LLC in July 1995, Mr. Fiore was Vice President, Strategy & Plans for XP Systems, and a provider of turnkey data processing solutions for credit unions, from March 1994 to July 1995. Before joining XP Systems, Mr. Fiore was Vice President and Chief Financial Officer for AT&T Employees Federal Credit Union from October 1989 to March 1994. Prior to joining AT&T, Mr. Fiore was a financial analyst for Lehman Brothers. Mr. Fiore graduated from New York University with a BS degree in management and finance. Mehariar Hasan. Mr. Hasan joined Digital Insight as Vice President, Product Management in July 1999. Prior to joining Digital Insight, Mr. Hasan was Senior Vice President, Strategic Marketing for Transamerica Corporation from June 1996 to July 1999. Prior to joining Transamerica, Mr. Hasan served as Director of Consulting for TSC, a provider of management information solutions to the financial services industry, from November 1994 to June 1996. Prior to joining TSC, Mr. Hasan served in a variety of management roles for American Savings Bank from November 1986 to November 1994. Mr. Hasan holds a BA in Economics and an MS in Finance from the University of Arizona. 30 Daniel Jacoby. Mr. Jacoby is a co-founder of Digital Insight and has served as Vice President and Chief Technology Officer since March 1997. From July 1995 to March 1997, Mr. Jacoby served as Chief Technology Officer of Digital Insight LLC. Prior to co-founding Digital Insight in 1995, Mr. Jacoby served in various technical and managerial positions for XP Systems from February 1989 to June 1995. Mr. Jacoby holds a BS degree in biomechanical engineering from the University of California, San Diego. Kevin McDonnell. Mr. McDonnell joined Digital Insight as Vice President, Chief Financial Officer and Secretary in March of 1999. Prior to joining Digital Insight, Mr. McDonnell was Executive Vice President and Chief Financial Officer for Rockford Industries, a specialty finance company, from July 1997 to February 1999. From October 1995 to July 1997, Mr. McDonnell served as Vice President and Chief Financial Officer for Printrak International, a provider of automated fingerprint identification systems. From October 1992 to October 1995, Mr. McDonnell served as Vice President and Chief Financial Officer of Mobile Technology, Inc., a medical services company. Mr. McDonnell has a BA degree in business administration from Loyola Marymount University and a JD degree from Loyola Law School. Steven Reich. Mr. Reich joined Digital Insight as Vice President of Sales and Marketing in May 1998. Prior to joining Digital Insight, Mr. Reich served as a management consultant and spent ten years from 1987 to 1997 with TSC, a provider of management information solutions to the financial services industry, in a variety of management roles. Before joining TSC, Mr. Reich worked at the consulting firm of Kaplan Smith and Associates as a Senior Consulting Associate. He holds a BS degree in business administration from Arizona State University and an MBA from Claremont Graduate School. Stephen Zarate. Mr. Zarate has served as Vice President and Chief Information Officer since March 1999. Prior to joining Digital Insight, Mr. Zarate was Chief Information Officer for PeopleSoft from June 1993 to March 1999, where he was responsible for the company's worldwide internal applications, communications, infrastructure and technology. Prior to joining PeopleSoft, Mr. Zarate was the Managing Director of Golden Gate Bank from October 1988 to April 1993. Mr. Zarate has a BA degree in political science and history from San Francisco State University. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the information contained in the 2000 Proxy Statement under the caption "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the information contained in the 2000 Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the information contained in the 2000 Proxy Statement under the caption "Certain Transactions." 31 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Schedule The financial statements are submitted as a separate section of this Annual Report beginning on page F-1. The financial statement schedules have been omitted because they are not applicable, not required, or the information is included elsewhere in the financial statements or notes thereto. (b) Reports on Form 8-K On November 22, 1999, we filed a Form 8-K regarding the merger between Digital Insight Corporation and nFront, Inc. of Norcross, Georgia. (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 and Reorganization by and among Digital Insight Corporation, Black Transitory Corporation and nFront, Inc., as amended. 3.1* Third Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect. 3.2* Restated Bylaws of the Registrant, as currently in effect. 4.1* Specimen Common Stock certificate. 4.2 Third Amended and Restated Rights Agreement, dated as of February 10, 2000, between the Registrant and the parties named therein. 4.3* Warrant to Purchase Stock, dated February 18, 1999, issued to Silicon Valley Bank. 4.4* Warrant Agreement, dated January 31, 1998, issued to Comdisco, Inc. 4.5 Shareholder Agreement, dated as of May 13, 1998, as amended. 10.1* Form of Indemnification Agreement entered into by the Registrant with each of its directors and executive officers. 10.2* Stock Option Agreement, dated October 13, 1998, between John Dorman and the Registrant. 10.3* Stock Option Agreement, dated March 30, 1999, between Kevin McDonnell and the Registrant. 10.4* Stock Option Agreement, dated March 30, 1999, between Stephen Zarate and the Registrant. 10.5* 1997 Stock Plan. 10.6* 1999 Stock Plan and related agreements, as amended. 10.7* 1999 Employee Stock Purchase Plan and related agreements. 10.8* Commercial Office Lease by and between Arden Realty Limited Partnership, a Maryland Limited Partnership and the Registrant, dated August 4, 1997. 10.9* Master Lease Agreement, dated March 1, 1999, between the Registrant and Silicon Valley Bank. 10.10* Internet Data Center Services Agreement, dated March 1, 1999, between the Registrant and Exodus Communications, Inc. 10.11+/* Moneyline Express (M&I) Agreement, dated February 27, 1997.
32 10.12+/** License Agreement with HNC Software Inc. 11.1 Statement of computation of net loss per share and pro forma net loss per share (see note 1 of notes to financial statements). 21.1 List of Subsidiaries of the Registrant. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants. 27.1 Financial Data Schedule.
- -------- + Confidential treatment has been granted for portions of these agreements. Omitted portions have been filed separately with the Commission. * 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. ** Incorporated by reference to the exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the period ending September 30, 1999. *** Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-4 (File No. 333-94341), filed on January 10, 2000. 33 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: March 27, 2000 Digital Insight Corporation /s/ John Dorman By: _________________________________ John Dorman Chairman of the Board of Directors, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ John Dorman Chairman of the Board, Chief March 27, 2000 ___________________________________ Executive Officer and President John Dorman (Principal Executive Officer) /s/ Kevin McDonnell Senior Vice President, Finance & March 27, 2000 ___________________________________ Administration, Chief Financial Kevin McDonnell Officer and Secretary (Principal Financial and Accounting Officer) /s/ Paul Fiore March 27, 2000 ___________________________________ Executive Vice President, Paul Fiore New Ventures and Director /s/ John Jarve ___________________________________ John Jarve Director March 27, 2000 /s/ James McGuire ___________________________________ James McGuire Director March 27, 2000 /s/ Robert North ___________________________________ Robert North Director March 27, 2000 /s/ Brady L. "Tripp" Rackley III ___________________________________ Brady L. "Tripp" Rackley III Vice Chairman March 27, 2000
34 INDEX TO FINANCIAL STATEMENTS
Page ---- Report of PricewaterhouseCoopers LLP, Independent Accountants.............. F-2 Balance Sheets............................................................. F-3 Statements of Operations................................................... F-4 Statement of Stockholders' Deficit......................................... F-5 Statements of Cash Flows................................................... F-6 Notes to Financial Statements.............................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Digital Insight Corporation In our opinion, the accompanying balance sheets and the related statements of operations, stockholders' equity (deficit) and cash flows present fairly, in all material respects, the financial position of Digital Insight Corporation at December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Woodland Hills, California January 28, 2000, except as to note 13, as to which the date is March 6, 2000 F-2 DIGITAL INSIGHT CORPORATION BALANCE SHEETS (in thousands except share data)
December 31, ----------------- 1999 1998 -------- ------- ASSETS ------ Current assets: Cash and cash equivalents................................. $ 42,249 $ 4,758 Short-term investments.................................... 15,841 -- Accounts receivable, net.................................. 4,276 356 Tax refund receivable..................................... -- 73 Inventory................................................. 162 -- Accumulated implementation costs.......................... 21 135 Other current assets...................................... 1,327 80 -------- ------- Total current assets.................................... 63,876 5,402 Property and equipment, net................................. 7,381 2,353 Deposits.................................................... 119 240 Intangible assets, net...................................... -- 53 Other assets................................................ 62 29 -------- ------- $ 71,438 $ 8,077 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- Current liabilities Accounts payable.......................................... $ 1,876 $ 214 Accrued compensation and related benefits................. 2,099 542 Current portion of lease obligation....................... 360 71 Customer deposits......................................... 3,293 1,036 Other accruals............................................ 1,012 472 -------- ------- Total current liabilities............................... 8,640 2,335 Long-term portion of lease obligation....................... 393 82 -------- ------- 9,033 2,417 -------- ------- Commitments and contingencies (Note 11)..................... Mandatorily redeemable convertible preferred stock: $.001 par value, 4,846,496 and 3,973,641 shares authorized; zero and 3,951,419 shares issued and outstanding, respectively.. -- 12,444 Stockholders' equity (deficit): Preferred stock; $.001 par value, 5,000,000 shares authorized, no shares issued and outstanding............. Common stock; $.001 par value, 100,000,000 and 16,250,000 shares authorized; 14,766,184 and 5,621,156 shares issued and outstanding, respectively............................ 15 6 Additional paid-in-capital................................ 81,371 3,977 Notes receivable from stockholders........................ (216) (201) Deferred stock-based compensation......................... (3,279) (2,732) Accumulated deficit....................................... (15,486) (7,834) -------- ------- Total stockholders' equity (deficit).................... 62,405 (6,784) -------- ------- $ 71,438 $ 8,077 ======== =======
See accompanying notes to financial statements. F-3 DIGITAL INSIGHT CORPORATION STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
Year Ended December 31, -------------------------------- 1999 1998 1997 ---------- --------- --------- Revenues: Implementation fees....................... $ 4,142 $ 2,420 $ 1,926 Service fees.............................. 13,364 5,810 2,046 ---------- --------- --------- Total revenues.......................... 17,506 8,230 3,972 ---------- --------- --------- Cost of revenues: Implementation............................ 3,058 1,631 1,217 Service................................... 7,545 3,616 1,014 ---------- --------- --------- Total cost of revenues.................. 10,603 5,247 2,231 ---------- --------- --------- Gross profit................................ 6,903 2,983 1,741 ---------- --------- --------- Operating expenses: Sales, general and administrative......... 9,420 4,183 2,516 Research and development.................. 4,546 2,555 1,612 Amortization of stock-based compensation.. 1,221 844 151 ---------- --------- --------- Total operating expenses................ 15,187 7,582 4,279 ---------- --------- --------- Loss from operations........................ (8,284) (4,599) (2,538) Interest and other income, net.............. 778 243 86 ---------- --------- --------- Net loss.................................... $ (7,506) $ (4,356) $ (2,452) ========== ========= ========= Basic and diluted net loss per share........ $ (.97) $ (.85) $ (.49) ========== ========= ========= Shares used to compute basic and diluted net loss per share............................. 7,764,762 5,108,444 5,000,000 ========== ========= ========= Pro forma basic and diluted net loss per share...................................... $ (.68) $ (.50) ========== ========= Shares used to compute pro forma basic and diluted net loss per share................. 11,001,239 8,712,463 ========== =========
See accompanying notes to financial statements F-4 DIGITAL INSIGHT CORPORATION STATEMENT OF STOCKHOLDERS' DEFICIT (in thousands except share data)
Common Stock Additional Stockholders' Deferred Total Members' ----------------- Paid-In Notes Stock-Based Accumulated Stockholders' Capital Shares Amount Capital Receivable Compensation Deficit Deficit -------- ---------- ------ ---------- ------------- ------------ ----------- ------------- Balance at December 31, 1996................... $ 27 -- $-- $ -- $ -- $ -- $ -- $ -- Contribution of capital................ 192 -- -- -- -- -- -- -- Distribution............ (50) -- -- -- -- -- -- -- LLC loss from January 1, 1997 through March 17, 1997................... (23) -- -- -- -- -- -- -- Conversion of members' capital to Series A preferred and common stock.................. (146) 5,000,000 5 -- -- -- (1,049) (1,044) Stock options exercised with note receivable .. -- 618,500 1 185 (186) -- -- -- Deferred stock-based compensation........... -- -- -- 1,809 -- (1,809) -- -- Amortization of deferred stock-based compensation........... -- -- -- -- -- 151 -- 151 Net loss................ -- -- -- -- -- -- (2,429) (2,429) ----- ---------- ---- ------- ----- ------- -------- ------- Balance at December 31, 1997................... -- 5,618,500 6 1,994 (186) (1,658) (3,478) (3,322) Interest on stockholder notes.................. -- -- -- -- (15) -- -- (15) Stock options exercised.............. -- 2,656 -- 1 -- -- -- 1 Warrants to purchase Series A preferred stock.................. -- -- -- 64 -- -- -- 64 Deferred stock-based compensation........... -- -- -- 1,918 -- (1,918) -- -- Amortization of deferred stock-based compensation........... -- -- -- -- -- 844 -- 844 Net loss................ -- -- -- -- -- -- (4,356) (4,356) ----- ---------- ---- ------- ----- ------- -------- ------- Balance at December 31, 1998................... -- 5,621,156 6 3,977 (201) (2,732) (7,834) (6,784) Interest on stockholder notes.................. -- -- -- -- (15) -- -- (15) Stock options exercised.............. -- 344,573 -- 204 -- -- -- 204 Warrants to purchase Series B preferred stock.................. -- -- -- 147 -- -- -- 147 Repurchase of Series A preferred stock........ -- -- -- -- -- -- (146) (146) Deferred stock-based compensation........... -- -- -- 1,768 -- (1,768) -- -- Amortization of deferred stock-based compensation........... -- -- -- -- -- 1,221 -- 1,221 Conversion of mandatorily redeemable convertible preferred stock to common stock.. -- 4,775,455 5 20,825 -- -- -- 20,830 Issuance of common stock in initial public offering............... -- 4,025,000 4 54,450 -- -- -- 54,454 Net loss................ -- -- -- -- -- -- (7,506) (7,506) ----- ---------- ---- ------- ----- ------- -------- ------- Balance at December 31, 1999................... $ -- 14,766,184 $ 15 $81,371 $(216) $(3,279) $(15,486) $62,405 ===== ========== ==== ======= ===== ======= ======== =======
See accompanying notes to financial statements. F-5 DIGITAL INSIGHT CORPORATION STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, -------------------------- 1999 1998 1997 -------- ------- ------- Cash flows from operating activities: Net loss.......................................... $ (7,506) $(4,356) $(2,452) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization..................... 1,326 587 166 Amortization of debt issuance cost................ 60 20 -- Amortization of deferred stock-based compensation..................................... 1,221 844 151 Interest income on stockholder notes.............. (15) (15) -- Net loss from sale of property and equipment...... -- 33 -- Changes in operating assets and liabilities: Accounts receivable............................... (3,920) 410 (654) Tax refund receivable............................. 73 -- (73) Inventory......................................... (162) -- -- Accumulated implementation costs.................. 114 (64) (43) Other assets...................................... (1,193) (18) (36) Deposits.......................................... 121 -- (240) Accounts payable.................................. 1,662 (373) 582 Accrued compensation and related benefits......... 1,557 451 12 Customer deposits................................. 2,257 251 779 Other accruals.................................... 540 119 341 -------- ------- ------- Net cash used in operating activities............ (3,865) (2,111) (1,467) -------- ------- ------- Cash flows used in investing activities: Proceeds from sale of assets...................... -- 29 -- Acquisition of property and equipment............. (5,478) (1,774) (488) Disposal of equipment............................. 69 -- -- Purchase of short-term investments................ (15,841) -- -- Acquisition of customer base...................... -- -- (280) -------- ------- ------- Net cash used in investing activities............ (21,250) (1,745) (768) -------- ------- ------- Cash flows provided by financing activities: Principal payments on lease obligations........... (292) (273) -- Distribution...................................... -- -- (50) Proceeds form issuance of common stock............ 54,454 1 -- Proceeds from exercise of stock options........... 204 -- -- Proceeds from issuance of Series A preferred stock............................................ -- -- 3,143 Proceeds from issuance of Series B preferred stock............................................ -- 8,000 -- Proceeds from issuance of Series C preferred stock............................................ 8,440 -- -- Repurchase of Series A preferred stock............ (200) -- -- -------- ------- ------- Net cash provided by financing activities........ 62,606 7,728 3,093 -------- ------- ------- Net increase in cash and cash equivalents.......... 37,491 3,872 858 Cash and cash equivalents, beginning of period..... 4,758 886 28 -------- ------- ------- Cash and cash equivalents, end of period........... $ 42,249 $ 4,758 $ 886 ======== ======= ======= Supplementary disclosures of cash flow information: Cash paid during the year for interest............ $ -- $ 12 $ -- Non-cash financing activities:.................... Capital lease obligations incurred................ 892 293 133 Series A warrants issued in conjunction with capital lease.................................... -- 64 -- Series B warrants issued in conjunction with capital lease.................................... 147 -- -- Conversion of members' capital to Series A preferred and common stock....................... -- -- 1,305 Notes receivable from stockholders................ -- -- 186 Conversion of mandatorily redeemable convertible preferred stock to common stock.................. 20,830 -- --
See accompanying notes to financial statements F-6 DIGITAL INSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS 1. THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES The Company Digital Insight Corporation (the "Company"), incorporated in March 1997, provides Internet banking services to credit unions, small to mid-sized banks and savings and loans. Its Internet banking services include home banking for individual customers, business banking for commercial customers, a target marketing program to increase financial services to end users, and customized web site design and implementation services. Substantially all of the Company's revenues are derived from these services. The Company originally operated as Digital Insight LLC, a Minnesota limited liability company, which was formed in July 1995. On March 18, 1997, all members of Digital Insight LLC converted their capital balances to shares of Series A mandatorily redeemable convertible preferred and common stock of Digital Insight Corporation, a Delaware corporation, in accordance with a Member Control Agreement. Cash equivalents and short-term investments The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents, and investments maturing in 12 months or less to be short-term investments. Cash equivalents at December 31, 1999 consist of money-market funds and commercial paper totaling $40,842,000. At December 31, 1999, the Company had short-term investments of $15,841,000. The Company classifies, at the date of acquisition, its short-term investments into categories in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Currently, the Company classifies its short-term investments as held to maturity. These securities are stated at amortized cost plus accrued interest. Net unrealized gains (losses) on held-to-maturity investments have not been recognized in the accompanying financial statements. Net realized gains on short-term investments for the year ended December 31, 1999 were $758,000. Inventories Inventories, which consist principally of finished goods, are stated at the lower of cost or market, cost being determined under the first-in, first-out method. Property and equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. Assets held under capital leases are recorded at the present value of the minimum lease payments at lease inception. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, generally three to five years. Use of estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Revenue recognition Recurring fees are recognized as services are provided, and relate to the number of end users or end user transactions and for hosting and maintaining web sites. One-time implementation fees consist of salaries for implementation personnel and fees for third parties, including bill payment and data processing vendors. These F-7 DIGITAL INSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) fees are recognized upon completion of implementation and customer approval. Implementation generally occurs over a two to four month period. Costs and related revenues are deferred on the balance sheet until that time. Accumulated implementation costs consist primarily of salaries for implementation personnel in advance of related billings. Losses on implementation, if any, are recognized in the period when such losses are identified. Income taxes The Company accounts for income taxes under the liability method. Deferred income tax assets are provided for as temporary differences between financial and income tax reporting. The Company has not recorded any deferred tax assets or liabilities prior to the conversion of members' capital pursuant to the Member Control Agreement, since Digital Insight LLC was a limited liability company treated as a partnership for federal and Minnesota income tax purposes. As a result, prior to March 18, 1997, federal and Minnesota income tax attributes passed to the Digital Insight LLC members. Stock-based compensation SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair market value of options granted. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation for stock options is measured as the excess, if any, of the fair market value of the Company's stock price at the date of grant as determined by the Board of Directors over the amount an employee must pay to acquire the stock. Research and development Research and development costs are charged to operations as incurred. Comprehensive income Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components in the financial statements. Comprehensive income, as defined, includes the Company's net losses and all other changes in equity during a period from non-owner sources. To date, the Company has not had any material transactions that are required to be reported as other comprehensive income. Net loss per share The Company computes net loss per share in accordance with SFAS No. 128, "Earnings per Share," and Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. Shares of common stock issued in connection with the conversion of members' capital pursuant to the Member Control Agreement have been considered outstanding for all periods presented. The calculation of diluted net loss per share excludes potential common shares if the effect is antidilutive. Potential common shares are composed of common stock subject to repurchase rights and incremental shares of common stock issuable upon the exercise of stock options and warrants and upon conversion of Series A, Series B, and Series C mandatorily redeemable convertible preferred stock. F-8 DIGITAL INSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) Pursuant to SAB 98, common shares issued in each of the periods presented for nominal consideration, if any, would be included in the per share calculations as if they were outstanding for all periods presented. No such shares have been issued. The following table sets forth the computation of basic and diluted net loss per share for the years indicated (in thousands, except share and per share data):
Year Ended December 31, ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- Numerator: Net loss............................. $ (7,506) $ (43,256) $ (2,452) ---------- ---------- ---------- Weighted average shares............ 8,085,705 5,348,183 5,000,000 Weighted average unvested common shares subject to repurchase...... (320,943) (239,739) ---------- ---------- ---------- Denominator for basic and diluted calculation......................... 7,764,762 5,108,444 5,000,000 ---------- ---------- ---------- Net loss per share: Basic and diluted.................. $ (.97) $ (.85) $ (.49) ========== ========== ==========
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:
Year Ended December 31, ----------------------------- 1999 1998 1997 --------- --------- --------- Weighted average effect of common stock equivalents: Series A mandatorily redeemable convertible preferred stock........................... -- 1,645,944 1,307,736 Series B mandatorily redeemable convertible preferred stock........................... -- 1,958,075 -- Warrants................................... 46,372 21,065 -- Unvested common shares subject to repurchase................................ 320,943 239,739 -- Employee stock options..................... 1,866,452 1,086,292 439,923 --------- --------- --------- 2,233,767 4,951,115 1,747,659 ========= ========= =========
Pro forma net loss per share (unaudited) Pro forma net loss per share for the years ended December 31, 1999 and 1998 is computed using the weighted average number of common shares outstanding, including the pro forma effects of the automatic conversion of the Company's mandatorily redeemable convertible Series A, Series B, and Series C preferred stock into shares of the Company's common stock effective upon the closing of the Company's initial public offering as if such conversion occurred on January 1, 1999 and January 1, 1998, or at date of original issuance, if later. The resulting pro forma adjustment includes increases in the weighted average shares used to compute basic and diluted net loss per share of 3,236,477 and 3,604,019, respectively, for the years ended December 31, 1999 and 1998. Intangible assets Intangible assets include a non-compete agreement and an acquired customer base. The non-compete agreement is being amortized over the term of the agreement, which is two years. The acquired customer base is being amortized over one year. All intangibles are amortized using the straight-line method. F-9 DIGITAL INSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) Long-lived assets In 1997, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of." The statement requires the recognition of an impairment loss on a long-lived asset held for use when events and circumstances indicate that the estimate of undiscounted future cash flows expected to be generated by the asset are less than its carrying amount. Fair value of financial instruments The Company's financial instruments include cash and cash equivalents, short-term investments, accounts receivable, accumulated implementation costs, deposits and other assets, accounts payable, accrued and other current liabilities. The carrying value of these financial instruments approximates fair value due to their short-term nature. The carrying value of the Company's capital lease obligations approximates their fair values given their market rates of interest and maturity schedules. Concentration of credit risk The market for Internet banking in the United States, in which the Company operates, is characterized by rapid technological developments, frequent new product introductions and changes in end user requirements. The Company's future success will depend on its ability to develop, introduce and market enhancements to its existing products and services, to introduce new products and services in a timely manner which meet customer requirements and to respond to competitive pressures and technological advances. Further, the emergence of new industry standards, whether through adoption by official standards committees or widespread use by financial institutions or other financial institution data processing vendors, could require the Company to redesign its products and services. During the years ended December 31, 1999, 1998 and 1997, no customer accounted for more than 10% of net revenues or net accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition and limits the amount of credit extended when deemed necessary, but generally does not require collateral. Management believes that any risk of loss is significantly reduced due to the number of its customers and geographic sales areas. The Company maintains a provision for potential credit losses, and write-offs of accounts receivable were insignificant during the years ended December 31, 1999, 1998 and 1997. The Company from time to time maintains a substantial portion of its cash and cash equivalents in money market accounts with one financial institution. The Company has not experienced any significant losses on its cash equivalents. New accounting standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Under SFAS No. 133, gains or losses resulting from changes in the values of derivatives are to be reported in the statement of operations or as a deferred item, depending on the use of the derivatives and whether they qualify for hedge accounting. The Company is required to adopt SFAS No. 133 in the first quarter of 2001. To date, the Company has not engaged in any hedging activity and does not expect adoption of this new standard to have a significant impact on the Company. In December 1999, the SEC issued Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and F-10 DIGITAL INSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) provides guidance for disclosure related to revenue recognition policies. At this time, the Company is still assessing the impact of SAB 101 and its effect (if any) on the Company's financial position, results of operations and cash flows. Capitalized Software Costs The Company capitalizes the costs of computer software developed or obtained for internal use in accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Capitalized computer software costs consist of a purchased software license and implementation costs. Costs capitalized at December 31, 1999 of $1,032,000 are included in construction in progress. The capitalized software costs will be amortized on a straight-line method over a period of three years. No amortization has been charged for the years ended December 31, 1999, 1998, and 1997. 2. RELATED PARTY TRANSACTIONS The Company paid royalties totaling $167,000, $162,000 and $37,000 for the years ended December 31, 1999, 1998 and 1997, respectively, to a business partner who is also a stockholder. The Company paid $169,000 and $60,000 for the years ended December 31, 1998 and 1997, respectively, to a business partner who is also a stockholder, primarily for employee medical benefits coverage under the affiliates plan and other reimbursable costs. No such payments were made in 1999. The Company entered into a Software License Agreement (the "Agreement") with a software company whose CEO and Director is also a director of the Company. The Agreement is for the license of customized software for approximately $1.4 million, plus additional implementation, and usage fees based on user volume. 3. BALANCE SHEET COMPONENTS
December 31, ------------ 1999 1998 ------- ---- Short-term investments (in thousands): U.S. government obligations.................................. $11,939 $ -- Commercial paper............................................. 3,902 -- ------- ---- $15,841 $ -- ======= ====
Property and equipment includes the following (in thousands):
December 31, --------------- 1999 1998 ------- ------ Construction in progress.................................... $ 1,125 $ -- Leasehold improvements...................................... 420 282 Data processing equipment................................... 6,800 2,128 Furniture and fixtures...................................... 964 597 ------- ------ 9,309 3,007 Less accumulated depreciation and amortization.............. (1,928) (654) ------- ------ $ 7,381 $2,353 ======= ======
Assets acquired under capitalized lease obligations are included in property and equipment and totaled $1,105,000 and $213,000 with related accumulated amortization of $272,000 and $85,000 at December 31, 1999 and 1998, respectively. F-11 DIGITAL INSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) 4. ACQUISITION On August 18, 1997, the Company acquired the customer base of RJE Internet Services, Inc. ("RJE"). RJE develops, hosts and maintains web sites. The acquisition of this customer base was accounted for as a purchase. The results of operations and cash flows of the acquisition have been included from the date of the acquisition of the customer base. The purchase price of the customer base totaled $100,000 plus $180,000 for a covenant not to compete. The customer base was fully amortized at December 31, 1998. Accumulated amortization of the covenant not to compete totaled $180,000 and $128,000 at December 31, 1999 and 1998, respectively. 5. INCOME TAXES Prior to March 18, 1997, Digital Insight was a limited liability company that was treated as a partnership for federal and Minnesota income tax purposes. As a result, all federal and Minnesota tax matters for Digital Insight LLC, prior to March 18, 1997, are the responsibility of the members. As of December 31, 1999 and 1998, the Company had net operating loss carry- forwards for federal and state purposes of $10,752,112 and $5,395,411, respectively. Federal and state net operating loss carry-forwards begin to expire in the years 2011 and 2004, respectively. Given its history of operating losses, the Company has recorded a full valuation allowance against its deferred tax assets generated from operating losses because it is more likely than not that the deferred tax benefits will not be utilized. Accordingly, the accompanying statements of operations include no benefit for income taxes. The components of the Company's deferred taxes are (in thousands):
December 31, -------------- 1999 1998 ------ ------ Net operating loss carryforwards............................. $4,222 $2,093 Research credit carryforwards................................ 702 392 Stock compensation........................................... 879 398 Accruals and reserves........................................ 555 171 ------ ------ Gross deferred tax assets.................................... 6,358 3,054 ------ ------ Gross deferred tax liabilities............................... -- -- ------ ------ Net deferred tax assets...................................... 6,358 3,054 ------ ------ Deferred tax asset valuation allowance....................... (6,358) (3,054) ------ ------ Deferred tax assets.......................................... $ -- $ -- ====== ======
6. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK Mandatorily redeemable convertible preferred stock at December 31, 1998 consists of the following:
Issued and Authorized Outstanding ---------- ----------- Series A.............................................. 1,668,166 1,645,944 Series B.............................................. 2,305,475 2,305,475 --------- --------- 3,973,641 3,951,419 ========= =========
F-12 DIGITAL INSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) In May 1999, the Company completed the private placement of 844,036 shares of its Series C mandatorily redeemable convertible preferred stock at a price per share of $10.00. The holders of mandatorily redeemable convertible preferred stock were entitled to voting rights equivalent to the number of shares of common stock into which it was convertible. In addition, holders of Series A, Series B, and Series C mandatorily redeemable convertible preferred stock were entitled to receive noncumulative dividends at the per annum rate of $0.24, $0.31 and $0.90 per share, respectively, when and if declared by the Board of Directors, as well as a liquidation preference of $2.70, $3.47 and $10.00 per share, respectively, in the event of the dissolution of the Company. In June 1999, the Company repurchased 20,000 shares of Series A mandatorily redeemable convertible preferred stock at $10.00 per share from a former executive officer. All shares of Series A, Series B and Series C mandatorily redeemable convertible preferred stock were converted into common stock upon the closing of the Company's initial public offering in October 1999. 7. NOTES RECEIVABLE FROM STOCKHOLDERS Effective October 23, 1997, under the Company's 1997 Stock Plan, two officers of the Company exercised their options to purchase 309,250 shares each, of the Company's common stock. In consideration, each officer executed a note payable to the Company for $93,000. The note is payable at the earlier of ten years from the date of execution or 30 days after termination. Interest is being charged at the rate of 7% per annum. Interest income realized for the years ended December 31, 1999, 1998 and 1997 on the loans was $15,000, $15,000 and $0, respectively. The officers have the option to prepay all or any portion of the principal or interest without penalty. 8. PREFERRED STOCK WARRANTS In connection with certain borrowings in 1999 and 1998, the Company issued warrants to purchase Series A and Series C mandatorily redeemable convertible preferred stock which, after conversion, resulted in warrants to purchase 22,222 and 28,819 shares of common stock for $2.70 and $3.47 per share, respectively. Such warrants expire through 2006. Using the Black-Scholes pricing model, the Company estimated that the aggregate fair value of the warrants was $211,000. The Company recognized $60,000 and $20,000 of interest expense associated with these warrants for the years ended December 31, 1999 and 1998, respectively. In connection with the Company's initial public offering, the warrants were converted to warrants to purchase common stock. Warrants to purchase 51,041 shares of common stock remain outstanding at December 31, 1999. 9. COMMON STOCK In June 1999, the Board of Directors approved a resolution to increase the number of shares of authorized common stock to 100,000,000 shares. In October 1999, the Company completed its initial public offering of 4,025,000 shares of common stock for net proceeds of approximately $54.5 million. F-13 DIGITAL INSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) 10. STOCK-BASED COMPENSATION PLANS In August 1997, the Company adopted the 1997 Stock Plan (the "1997 Plan"). The 1997 Plan provides for the granting of stock options and common stock to employees and consultants of the Company. Options granted under the 1997 Plan may be either incentive stock options or nonqualified stock options. Incentive stock options ("ISOs") may be granted only to Company employees (including officers and directors who are also employees). Nonqualified stock options ("NSOs") may be granted to Company employees and consultants. As of December 31, 1999, the Company has reserved 3,000,000 shares of common stock for issuance under the 1997 Plan. In June 1999, the Company adopted the 1999 Stock Incentive Plan (the "1999 Plan") and has reserved 1,500,000 shares of common stock for issuance under the 1999 Plan. Shares not yet issued under the 1997 Plan are also available under the 1999 Plan. The 1999 Plan allows grants of ISOs, NSOs and restricted stock to employees, non-employee board members and consultants. Options under the Plans may be granted for periods of up to ten years, with the exception of an ISO granted to an optionee who owns stock representing more than 10% of the voting power of all classes of stock of the parent or subsidiary, in which case the term of the option shall be five years, and at prices no less than 85% of the estimated fair value of the shares on the date of grant, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than 100% and 85% of the estimated fair value of the shares on the date of grant, respectively, and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. Options generally vest in monthly installments over four years following the date of grant, subject to the optionee's continuous service. However, for first time grants, the initial vesting shall occur twelve months from the vesting start date, at which time 25% of the shares will be vested. The remaining shares are vested over the remaining three years. Effective June 21, 1999, the Company adopted the 1999 Employee Stock Purchase Plan (the "Purchase Plan"), which provides for the issuance of a maximum of 300,000 shares of Common Stock. Eligible employees can have up to 15% of their earnings withheld, up to certain maximums, to be used to purchase shares of the Company's common stock on every May 1 and November 1. The price of the common stock purchased under the Purchase Plan is equal to 85% of the lower of the fair market value of the common stock on the offering date of each two year offering period or the specified purchase date. No shares have been purchased under the Purchase Plan for the year ended December 31, 1999. F-14 DIGITAL INSIGHT CORPORATION NOTES TO 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. Had compensation cost for the Company's stock-based compensation plan been determined based on the fair value at the grant dates for the awards under the method prescribed by SFAS No. 123, for the years ended December 31, 1998 and 1997, the Company's net loss would not have been materially different. For the year ended December 31, 1999, had compensation cost been determined pursuant to SFAS No. 123, the Company's net loss would have been as follows:
Year Ended December 31, 1999 --------------------- (In thousands, except per share data) Net loss: As reported.......................................... $(7,506) ------- Pro forma............................................ $(9,913) ------- Net loss per share--basic and diluted: As reported.......................................... $ (.97) ------- Pro forma............................................ $ (1.28) -------
The Company calculated the minimum fair value of each option grant on the date of grant using the Black-Scholes pricing model with the following assumptions:
Year Ended December 31, ---------------- 1999 1998 1997 ---- ---- ---- Expected life (years)...................................... 4 4 4 Risk free interest rate.................................... 5.5% 6.2% 5.8% Expected volatility........................................ 80% -- -- Dividend yield............................................. -- -- --
F-15 DIGITAL INSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) Deferred stock-based compensation In the years ended December 31, 1999, 1998 and 1997, the Company recorded deferred stock-based compensation expense of $1,768,000, $1,918,000 and $1,809,000, respectively, related to the issuance of stock options at prices subsequently determined to be below fair market value. These charges are being amortized over a period of four years from the date of grant. Amortization of $1,221,000, $844,000 and $151,000 has been recognized as stock-based compensation expense in the years ended December 31, 1999, 1998 and 1997, respectively. Stock option activity under the Plans is as follows:
Exercise Options Price Per Outstanding Share ----------- ------------ Granted.......................................... 1,210,500 $0.30 Canceled......................................... (44,500) $0.30 Exercised........................................ (618,500) $0.30 --------- ------------ Balance December 31, 1997........................ 547,500 $0.30 Granted.......................................... 996,000 $0.30-$ 1.00 Canceled......................................... (104,640) $0.30-$ 0.50 Exercised........................................ (2,656) $0.30 --------- ------------ Balance December 31, 1998........................ 1,436,204 $0.30-$ 1.00 Granted.......................................... 1,061,785 $1.75-$44.50 Canceled......................................... (110,765) $0.30-$13.00 Exercised........................................ (344,948) $0.30-$39.94 --------- ------------ Balance December 31, 1999........................ 2,042,276 $0.30-$44.50 --------- ------------
Options Outstanding Options Exercisable --------------------------------------------------------------------------------------- Weighted-Average Weighted- Weighted- Remaining Contractual Average Average Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price --------------- --------- --------------------- -------------- ------- -------------- $0.30 260,479 7.7 $0.30 96,713 $0.30 $0.50 181,579 8.5 $0.50 46,946 $0.50 $1.00 575,000 8.8 $1.00 167,708 $1.00 $1.75 107,400 9.1 $1.75 15,643 $1.75 $2.25 401,285 9.2 $2.25 -- -- $9.00 165,533 9.3 $9.00 13,630 $9.00 $13.00 272,000 9.6 $13.00 1,333 $13.00 $31.00-$44.50 79,000 9.9 $31.00-$44.50 93 $31.00-$44.50 ------------- --------- --- ------------- ------- ------------- $0.30-$44.50 2,042,276 8.9 $4.89 342,066 $2.68 ========= === ============= ======= =============
11. EMPLOYEE BENEFITS Effective September 1, 1998, the Company adopted a Defined Contribution Profit Sharing Plan. This plan includes a 401(k) salary deferral plan. All employees are eligible to participate in the plan after six months of continued service. Contributions to the 401(k) are in the form of employee-salary deferrals which are not subject to employer-matching contributions. F-16 DIGITAL INSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) 12. COMMITMENTS AND CONTINGENCIES The Company leases its facilities and certain equipment under noncancelable operating and capital leases with various expiration dates through 2004 and 2002, respectively. Certain of the facilities leases have renewal options. Additionally, the terms of the facilities leases provide generally for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period. Rent expense under the leases was $365,000, $174,000 and $71,000 for the years ended December 31, 1999, 1998 and 1997, respectively. At December 31, 1999, the Company had $1,108,000 available under a capital lease line for the acquisition of equipment. Future minimum lease payments under all noncancelable capitalized and operating leases are as follows (in thousands):
Capital Operating ------- --------- 2000.................................................... $401 $ 670 2001.................................................... 338 708 2002.................................................... 74 609 2003.................................................... -- 201 2004.................................................... -- 55 ---- ------ Total minimum lease payments............................ 813 $2,243 ====== Amounts representing interest........................... 60 ---- Present value of capitalized lease obligations.......... 753 Less: current portion................................... 360 ---- Noncurrent portion of capitalized lease obligations..... $393 ====
In December 1997, the Company entered into a Business Continuity Services Master Agreement, which provides backup capability. The agreement is for a term of five years with monthly payments of $6,000. Future minimum payments under the agreement are $72,000 for each of the years through 2002. 13. SUBSEQUENT EVENTS On November 21, 1999, the Company announced the signing of a definitive agreement to acquire nFront, Inc., a publicly traded company. The acquisition received regulatory and stockholder approval on February 10, 2000. Under the terms of the acquisition, which has been accounted for as a pooling of interests, the Company exchanged 8,253,735 shares of Digital Insight Corporation common stock for 14,255,194 shares of nFront common stock. Additionally, the Company converted 1,084,741 nFront stock options into 627,926 Digital Insight Corporation stock options. The Company expects to record a one- time charge in the first quarter of 2000 relating to non-recurring merger costs of $12.1 million, consisting of $11.1 million of direct transaction costs, comprised primarily of investment banking, legal, printing, registration, and accounting fees, and $1.0 million of other merger-related expenses, comprised primarily of severance and closing costs of redundant functions and operations. On March 6, 2000, the Company entered into a five-year facility lease agreement. Minimum annual payments under the lease agreement are $845,000. The lease agreement requires the Company to establish a $760,000 line of credit in the form of a security deposit. F-17 EXHIBIT INDEX
Sequentially Exhibit Numbered Number Description Page ------- ----------- ------------ 4.2 Third Amended and Restated Rights Agreement, dated as of February 10, 2000, between the Registrant and the parties named therein................................... 4.5 Shareholder Agreement, dated as of May 13, 1998, as amended................................................. 21.1 List of Subsidiaries of the Registrant.................. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants............................................. 27.1 Financial Data Schedule.................................
EX-4.2 2 THIRD AMENDED AND RESTATED RIGHTS AGREEMENT DATED FEB 10, 2000 EXHIBIT 4.2 ---------------------------------- DIGITAL INSIGHT CORPORATION THIRD AMENDED AND RESTATED RIGHTS AGREEMENT February 10, 2000 ---------------------------------- TABLE OF CONTENTS
Page ---- Section 1 Certain Definitions........................................... 1 Section 2 Piggyback Rights.............................................. 2 2.1 Notice of Registration........................................ 2 2.2 Underwriting.................................................. 3 2.3 Right to Terminate Registration............................... 4 2.4 Termination of Piggy-back Rights.............................. 4 Section 3 Demand Registration............................................ 4 3.1 Demand Registration........................................... 4 3.2 Underwritten Public Offering.................................. 5 3.3 Inclusion of Additional Shares................................ 5 3.4 Limitations................................................... 6 3.5 Termination of Demand Rights.................................. 6 Section 4 Form S-3 Registration.......................................... 6 4.1 Registrations on Form S-3..................................... 6 4.2 Termination of S-3 Rights..................................... 7 Section 5 Obligations of Company......................................... 7 Section 6 Expenses of Registration....................................... 8 Section 7 Indemnification................................................ 8 7.1 The Company................................................... 8 7.2 Holders....................................................... 9 7.3 Defense of Claims............................................. 9 Section 8 Rule 144 Reporting............................................. 10 Section 9 Limitations on Subsequent Registration Rights.................. 10 Section 10 Covenants..................................................... 10 10.1 Directors and Officers Insurance.............................. 10 10.2 Key Man Life Insurance........................................ 11 10.3 Proprietary Information Agreements............................ 11 Section 11 Merger........................................................ 11 11.1 Merger Holders................................................ 11 Section 12 Miscellaneous................................................. 11 12.1 Assignment.................................................... 12 12.2 Governing Law................................................. 12
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TABLE OF CONTENTS (continued) Page ---- 12.3 Counterparts.................................................. 12 12.4 Titles and Subtitles.......................................... 12 12.5 Notices....................................................... 12 12.6 Attorney's Fees............................................... 13 12.7 Amendments and Waivers........................................ 13 12.8 Severability.................................................. 13 12.9 Delays or Omissions........................................... 13 12.10 Entire Agreement.............................................. 13
-ii- DIGITAL INSIGHT CORPORATION THIRD AMENDED AND RESTATED RIGHTS AGREEMENT THIS THIRD AMENDED AND RESTATED RIGHTS AGREEMENT (the "Agreement") is effective as of February 10, 2000 among DIGITAL INSIGHT CORPORATION, a Delaware corporation (the "Company"), Paul Fiore and Daniel Jacoby (the "Management Holders"), Ole Eichhorn, Nasser J. Kazeminy, Edward Harris, Robert Newkirk, Gary Mason, the Nasser J. Kazeminy Irrevocable Trust, the Yvonne P. Kazeminy-Mofrad Irrevocable Trust, Kevin Savage, Robert Lucas, XP Systems Corporation, Menlo Ventures VII, L.P., Menlo Entrepreneurs Fund VII, L.P., HarbourVest Partners V- Direct Fund, L.P., John Dorman, Steve Zarate, Steve Reich, Kevin McDonnell, Silicon Valley Bank and Comdisco, Inc. (the "Investor Holders"), Noro-Moseley Partners IV, L.P. (the "Merger Investor Holders"), Brady L. Rackley III and Brady L. Rackley (the "Merger Management Holders"). The Management Holders and the Investor Holders are sometimes referred to herein as (the "Holders") and the Merger Management Holder and the Merger Investor Holders are sometimes referred to herein as (the "Merger Holders"). This Agreement amends and restates in its entirety that certain Second Amended and Restated Rights Agreement dated May 26, 1999, as amended to date, (the "Second Rights Agreement") which amended and restated in its entirety that certain Rights Agreement dated February 27, 1998. Pursuant to Section 12.7 of the First Rights Agreement and Section 13.7 of the Second Rights Agreement, this Agreement shall benefit and bind all Holders who signed the First Rights Agreement or Second Rights Agreement, regardless of whether or not they sign this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the parties agree that the Second Rights Agreement shall be amended and restated to read in its entirety as follows: Section 1 Certain Definitions ------------------- Certain Definitions. As used in this Agreement, the following terms shall ------------------- have the following respective meanings: 1.1 "SEC" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. 1.2 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder, all as the same shall be in effect at that time. 1.3 "Initial Public Offering" or "IPO" means the Company's sale of its Common Stock in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act. 1.4 "Merger Agreement" shall mean that certain Plan of Merger and Reorganization by and among the Company, Black Transitory Corporation and nFront Inc. of even date herewith. 1.5 The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act (as defined below), and the declaration or ordering of the effectiveness of such registration statement. 1.6 "Registrable Securities" means: (a) with respect to the Holders, (i) the shares of Common Stock of the Company outstanding on May 26, 1999 and the shares of Common Stock of the Company issuable or issued upon conversion of the Series A Preferred Stock (the "Series A Preferred"), the Series B Preferred (the "Series B Preferred") or the Series C Preferred (the Series A Preferred, the Series B Preferred and the Series C Preferred being collectively referred to hereinafter as the "Stock") outstanding as of May 26, 1999, and (ii) any other shares of the Company's Common Stock issued as (or issuable upon conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to or in exchange for or replacement of the Stock; (b) with respect to the Merger Holders, the shares of Common Stock of the Company issued (or issuable upon exercise of a warrant) to the Merger Holders pursuant to the Merger Agreement; provided, however, (c) in all cases, any -------- ------- shares that would otherwise be Registrable Securities sold by a person in a transaction in which that person's rights under this Agreement are not assigned or to or through (other than to the Merger Holders) a broker, dealer or underwriter in a public distribution or a public securities transaction shall not be Registrable Securities. 1.7 "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder, all as the same shall be in effect at the time. 1.8 An "Affiliate" of an entity referenced herein shall mean (i) any entity who controls, is controlled by, or is under common control with such entity, or (ii) any constituent partner or stockholder of such entity. Section 2 Piggyback Rights ---------------- 2.1 Notice of Registration. If at any time or from time to time, but with ---------------------- no obligation to do so, the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its equity securities under the Securities Act in connection with the firm commitment underwritten public offering of such securities solely for cash (other than a registration relating solely to the sale of securities of participants in a Company stock plan, or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company will: (i) promptly give to the Holders written notice thereof; and (ii) use its reasonable best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), and underwriting, all the Registrable Securities (subject to cutback as set forth in Section 2.2) specified in a written request or requests made within thirty (30) days after receipt of such written notice from the Company by any Holder. In connection with any registration pursuant to this Section 2, the Holders participating in such registration shall provide all information to the Company as may be required in order to permit the Company to comply with all applicable requirements of the SEC in connection with such registration. 2.2 Underwriting. The right of any Holder to registration pursuant to ------------ this Section 2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting to the extent provided herein. If any Holder proposes to distribute its securities through such underwriting, such Holder shall (together with the Company and any other stockholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this Section 2, if the managing underwriter advises the Holders registering shares of Common Stock in writing that marketing factors require a limitation on the number of shares to be underwritten, then the Registrable Securities of the Holders, the securities of the Company and the securities held by any other stockholders distributing their securities through such underwriting shall be excluded from the underwriting by reason of the underwriter's marketing limitation to the extent so required by such limitation as follows: (a) first, the securities held by such other stockholders distributing their securities through such underwriting shall be excluded in a manner such that the number of any shares that may be included by such holders are allocated in proportion, as nearly as practicable to the amounts of such securities proposed to be offered by such persons in such registration, (b) if after all securities held by such other stockholders have been excluded and additional shares shall be excluded, Registrable Securities of the Holders shall be excluded in a manner such that the number of any Registrable Securities that may be included by such Holders are allocated in proportion, as nearly as practicable to the amounts of Registrable Securities held by such Holders, and (c) if after all securities held by the Holders and such other stockholders have been excluded and additional shares shall be excluded, securities of the Company shall be excluded. If any Holder or other stockholders disapprove of the terms of any such underwriting, he or she may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution prior to ninety (90) days after the effective date of the registration statement relating thereto. 2.3 Right to Terminate Registration. The Company shall have the right to ------------------------------- terminate or withdraw any registration initiated by it under this Section 2 prior to the effectiveness of such registration, whether or not any Holder has elected to include securities in such registration. -3- 2.4 Termination of Piggy-back Rights. The rights of any Holder to receive -------------------------------- notice and to participate in a registration pursuant to the terms of this Section 2 shall terminate at such time as such Holder could sell all of the Registrable Securities held by such Holder in any one three month period under the terms of Rule 144 under the Securities Act; provided, that such Investor Holder holds fewer than 1% of the Company's outstanding capital stock; and provided further, that the Company is subject to the reporting requirements of the Securities Exchange Act of 1934. Section 3 Demand Registration ------------------- 3.1 Demand Registration. At any time after the earlier of (a) January 1, ------------------- 2000, or (b) six months after the closing of the Company's IPO, the Investor Holders shall be entitled to have the Company effect two (2) demand registrations of Registrable Securities then owned by such Investor Holders requesting such registration. A request for such registration (a "Registration Request") must be made in writing and such Registrable Securities must have an offering value of at least $10,000,000. The Company shall give notice of such requested registration to all Investor Holders and shall use its reasonable best efforts to cause the Registrable Securities specified in such Registration Request to be registered as soon as reasonably practicable so as to permit the sale thereof, and in connection therewith, shall prepare and file a registration statement (on any appropriate form selected by the Company) with the SEC under the Securities Act to effect such registration. Such registration statement shall contain such required information pursuant to the rules and regulations promulgated under the Securities Act and such additional information as deemed necessary by the managing underwriter or if there is no managing underwriter, as deemed necessary by mutual agreement between the Investor Holders requesting registration and the Company. Such Registration Request shall (i) specify the number of shares intended to be offered and sold; (ii) express the present intention of the requesting Investor Holders to offer or cause the offering of such shares for distribution; (iii) describe the nature or method of the proposed offer and sale thereof; and (iv) contain the undertaking of the requesting Investor Holders to provide all such information and materials and take all such action as may be required in order to permit the Company to comply with all applicable requirements of the SEC and to obtain any desired acceleration of the effective date of such registration statement. 3.2 Underwritten Public Offering. If requested in the Registration ---------------------------- Request, and provided that the underwriter or underwriters are reasonably satisfactory to the Company, the Company (together with all officers, directors and other third parties proposing to distribute their securities through such underwriting pursuant to Section 3.3 hereof) shall enter into an underwriting agreement with an investment banking firm or firms containing representations, warranties, indemnities and agreements then customarily included by an issuer in underwriting agreements with respect to secondary distributions. The Company shall not cause the registration under the Securities Act of any other shares of its Common Stock to become effective (other than registration of an employee stock plan, or registration in connection with any Rule 145 or similar transaction) during the effectiveness of a registration requested hereunder for an underwritten public offering if, in the judgment of the underwriter or underwriters, marketing factors would adversely affect the price of the Registrable Securities subject to such underwritten registration. -4- 3.3 Inclusion of Additional Shares. The Company may include in a ------------------------------ registration pursuant to this Section 3 securities for its own account and by other third parties (including officers and employees of the Company), in amounts as determined by the Company's Board of Directors (the "Additional Securities"). In the event that such Additional Securities are included in a registration pursuant to this Section 3, and if the underwriter of such registration advises the stockholders or the Company registering shares of Common Stock in writing that marketing factors require a limitation on the number of shares to be underwritten, then the Registrable Securities of the Investor Holders, the securities of the Company and the securities held by stockholders other than the Investor Holders shall be excluded from the underwriting by reason of the underwriter's marketing limitation to the extent so required by such limitation as follows: (a) first, the securities held by stockholders other than the Investor Holders shall be excluded in a manner such that the number of any shares that may be included by such holders are allocated in proportion, as nearly as practicable to the amounts of such securities proposed to be offered by such persons in such registration, (b) if after all securities held by stockholders other than the Investor Holders have been excluded and additional shares shall be excluded, securities of the Company shall be excluded, and (c) last, if after all securities of the Company and securities held by stockholders other than the Investor Holders have been excluded and additional shares shall be excluded, Registrable Securities of the Investor Holders shall be excluded in a manner such that the number of any Registrable Securities that may be included by such Investor Holders are allocated in proportion, as nearly as practicable to the amounts of Registrable Securities held by such Investor Holders. No securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any officer, director or other stockholder (including Investor Holders) who has requested inclusion in such registration as provided above disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Investor Holders requesting registration. In the event that the Company has substantially prepared and has filed, or is in a position to file, a registration statement pursuant to this Section 3, and such registration does not become effective by reason of the refusal of the Investor Holders to proceed (other than refusal to proceed based upon the existence in the registration statement, or the prospectus contained therein, of an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading), then a demand registration shall be deemed to have been effected by the Company at the request of the Investor Holders. In the event that 50% or more of the Registrable Securities proposed to be offered by any Investor Holder in a registration pursuant to this Section 3 are excluded from such proposed registration as a result of the underwriter's marketing limitation, then the Investor Holders shall be entitled to an additional demand registration pursuant to the terms of this Section 3. 3.4 Limitations. Notwithstanding the foregoing, if at the time of any ----------- request to register Registrable Securities pursuant to this Section 3, the Company is engaged, or has formal plans to engage within ninety (90) days of the time of the request, in a registered public offering or any other activity that, in the good faith determination of the Board of Directors of the Company, would be adversely affected by the requested registration to the material detriment of the Company, then the Company may, at its option, direct that such request be delayed for a period not in excess of ninety (90) days from the effective date of such offering, or the date of commencement of such other material activity, as the case may be. Such rights to delay a request may not be exercised more than once in any twelve month period. -5- 3.5 Termination of Demand Rights. The rights of any Investor Holder to ---------------------------- request a registration pursuant to the terms of this Section 3 shall terminate upon the earlier of (i) such time as such Holder could sell all of the Registrable Securities held by such Holder in any one three month period under the terms of Rule 144 under the Securities Act; provided, that such Investor Holder holds fewer than 1% of the Company's outstanding capital stock; and provided further, that the Company is subject to the reporting requirements of the Securities Exchange Act of 1934l; and (ii) three years following the closing of the Company's IPO. Section 4 Form S-3 Registration --------------------- 4.1 Registrations on Form S-3. Any Investor Holders shall be entitled to ------------------------- request (an "S-3 Registration Request") an unlimited number of registrations of Registrable Securities then owned by such requesting Investor Holders on a Form S-3 registration statement under the Securities Act (an "S-3 Registration"). The S-3 Registration Request must be made in writing and the S-3 Registration Request shall (i) specify the number of shares intended to be offered and sold; (ii) express the present intention of the requesting Investor Holders to offer or cause the offering of such shares for distribution; (iii) describe the nature or method of the proposed offer and sale thereof and (iv) contain the undertaking of the requesting Investor Holders to provide all such information and materials and take all such action as may be required in order to permit the Company to comply with all applicable requirements of the SEC and to obtain any desired acceleration of the effective date of such registration statement. The Company shall, as soon as practicable, file an S-3 Registration and proceed to obtain all such qualifications and compliance as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of the requesting Investor Holders' Registrable Securities as are specified in the S-3 Registration Request, within 30 days after receipt of such written notice by the Company; provided, however, that the Company shall not be obligated to -------- ------- effect any such registration, qualification or compliance, pursuant to this Section 4 if (i) Form S-3 is not available for such offering by the requesting Investor Holders; or (ii) the Company has, within the twelve (12) month period preceding the date of such request, already effected two registrations on Form S-3 for any Investor Holders pursuant to this Section 4. 4.2 Termination of S-3 Rights. The rights of any Investor Holder to ------------------------- request a registration pursuant to the terms of this Section 4 shall terminate upon the earlier of (such time as such Holder could sell all of the Registrable Securities held by such Holder in any one three month period under the terms of Rule 144 under the Securities Act; provided, that such Investor Holder holds fewer than 1% of the Company's outstanding capital stock; and provided further, that the Company is subject to the reporting requirements of the Securities Exchange Act of 1934; and (ii) three years following the closing of the Company's IPO. Section 5 Obligations of Company ---------------------- -6- Whenever the Company is required by the provisions of this Agreement to use its reasonable best efforts to effect the registration of the Registrable Securities, the Company shall (i) prepare and, as soon as possible, file with the SEC a registration statement with respect to the Registrable Securities, and use its reasonable best efforts to cause such registration statement to become effective and to remain effective until the earlier of the sale of the Registrable Securities so registered or ninety (90) days subsequent to the effective date of such registration; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to make and to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all securities proposed to be registered in such registration statement until the earlier of the sale of the Registrable Securities so registered or ninety (90) days subsequent to the effective date of such registration statement, (iii) furnish to any Holder such number of copies of any prospectus (including any preliminary prospectus and any amended or supplemented prospectus), in conformity with the requirements of the Securities Act, as such Holder may reasonably request in order to effect the offering and sale of the Registrable Securities to be offered and sold, but only while the Company shall be required under the provisions hereof to cause the registration statement to remain current; (iv) use its commercially reasonable efforts to register or qualify the Registrable Securities covered by such registration statement under the securities or blue sky laws of such states as any Holder shall reasonably request, maintain any such registration or qualification current until the earlier of the sale of the Registrable Securities so registered or ninety (90) days subsequent to the effective date of the registration statement, and take any and all other actions either necessary or reasonably advisable to enable the Holders to consummate the public sale or other disposition of the Registrable Securities in jurisdictions where such Holders desire to effect such sales or other disposition; and (v) take all such other actions either necessary or reasonably desirable to permit the Registrable Securities held by a Holder to be registered and disposed of in accordance with the method of disposition described herein. Notwithstanding the foregoing, the Company shall not be required to register or to qualify an offering of the Registrable Securities under the laws of a state if as a condition to so doing the Company is required to qualify to do business or to file a general consent to service of process in any such state or jurisdiction, unless the Company is already subject to service in such jurisdiction. Section 6 Expenses of Registration ------------------------ The Company shall pay all of the reasonable out-of-pocket expenses incurred in connection with any registration statements that are initiated pursuant to this Agreement, including, without limitation, all SEC and blue sky registration and filing fees, printing expenses, transfer agent and registrar fees, the fees and disbursements of the Company's legal counsel and independent accountants. Any underwriting discounts, fees and disbursements of counsel to the Holders, selling commissions and stock transfer taxes applicable to the Registrable Securities registered on behalf of any Holders shall be borne by the Holders of the Registrable Securities included in such registration. Section 7 Indemnification --------------- -7- 7.1 The Company. The Company will indemnify the Holders and each person ----------- controlling any Holders within the meaning of Section 15 of the Securities Act, and each underwriter if any, of the Company's securities, with respect to any registration, qualification or compliance which has been effected pursuant to this Agreement, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse the Holders and each person controlling any Holders, and each underwriter, if any, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by such Holder or controlling person or underwriter seeking indemnification. 7.2 Holders. Each Holder will, if Registrable Securities held by such ------- Holder are included in the securities as to which such registration, qualification or compliance is being effected (the "Indemnifying Holder"), indemnify the Company, each of its directors and officers and each underwriter, if any, of the Company's securities covered by such registration statement and each person who controls the Company within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof), arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by such Holder of any rule or regulation promulgated under the Securities Act applicable to such Holder in connection with any such registration, qualification or compliance, and will reimburse the Company, such directors, officers or control persons or underwriters for any legal or any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Indemnifying Holder, provided that in no event shall any indemnity under this Section 7.2 exceed the gross proceeds of the offering received by such Indemnifying Holder. 7.3 Defense of Claims. Each party entitled to indemnification under this ----------------- Section 7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of -8- any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense; provided, however, that the Indemnifying Party -------- ------- shall pay such expense if representation of the Indemnified Party by counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between the Indemnified Party and any other party represented by such counsel in such proceeding, and provided further that the -------- ------- failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 7 unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action. No Indemnifying Party, in the defense of any such claim or litigation shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. No Indemnifying Party shall be required to indemnify any Indemnified Party with respect to any settlement entered into without such Indemnifying Party's prior consent. Section 8 Rule 144 Reporting ------------------ With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after ninety (90) days following the effective date of the IPO; (b) File with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements; and (c) So long as an Investor Holder owns any Registrable Securities, furnish to such Investor Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time from and after ninety (90) days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company, and such other reports and documents so filed as an Investor Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing such Investor Holder to sell any such securities without registration. -9- Section 9 Limitations on Subsequent Registration Rights --------------------------------------------- From and after the date of this Agreement, the Company shall not, without the prior written consent of the Investor Holder(s) of at least a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder any registration rights the terms of which are more favorable than the registration rights granted to any Holders hereunder or to require the Company to effect a registration earlier than the date on which the Holders can first require a registration under Section 3.1. Section 10 Covenants --------- 10.1 Directors and Officers Insurance. The Company shall use its -------------------------------- commercially reasonable efforts to promptly obtain and maintain for so long as any Venture Holder or any representative thereof shall serve on the Board of Directors of the Company, directors' and officers' liability insurance policies in favor of the Board of Directors of the Company in an amount not less than $1,000,000. 10.2 Key Man Life Insurance. The Company shall use its commercially ---------------------- reasonable efforts to promptly obtain and maintain for so long as Paul D. Fiore shall remain an employee of the Company, a key man life insurance policy in favor of the Company in an amount not less than $1,000,000. 10.3 Proprietary Information Agreements. The Company will use its ---------------------------------- commercially reasonable efforts to have each current and former employee and officer of the Company execute an agreement with the Company regarding confidentiality and proprietary information substantially in the form attached to the Purchase Agreement as Exhibit H and will thereafter use its commercially --------- reasonable efforts to prevent any violations thereof. Section 11 Merger ------ 11.1 Merger Holders. In the event that the Merger as defined in the Merger -------------- Agreement is consummated, the Merger Holders shall be treated as Investor Holders for purposes of Sections 3 of this Agreement (except that the definition of Registrable Securities applicable to Merger Holders shall apply) and as Holders for purposes of Sections 2 through 10 and 12 of this Agreement (except that the definition of Registrable Securities applicable to Merger Holders shall apply); Provided, however, that (a) the Company will not be obligated to provide -------- ------- the Merger Management Holders with demand registration rights pursuant to Section 3 or S-3 registration rights pursuant to Section 4 -10- until the earlier of (i) the one-year anniversary of the Closing Date as defined in the Merger Agreement and (ii) the date on which Brady L. Rackley III ceases to be employed by the Company as a result of being terminated without "Cause" by the Company, or the Surviving Corporation as defined in the Merger Agreement, or his termination for "Good Reason" (as such terms are defined in Mr. Rackley III's Employment Agreement), (b) any exercise of demand registration rights by either of the Merger Management Holders must be pursuant to a firm commitment underwritten offering led by an underwriter of the Company's choice (which choice shall be reasonably satisfactory to the Merger Management Holders), and (c) Merger Investor Holder hereby waives its rights under that certain Shareholder Agreement dated May 13, 1998, as amended, to which it and nFront Inc. are among the parties. Section 12 Miscellaneous ------------- 12.1 Assignment. The rights to cause the Company to register Registrable ---------- Securities granted to the Investor Holders by the Company under this Agreement may be transferred or assigned (but only with all related obligations) by the Investor Holders to an Affiliate of any Investor Holder or a transferee which acquires at least 10% of the Registrable Securities held by such Investor Holder at any time; provided (i) that the Company is given written notice at the time -------- of or within a reasonable time after said transfer or assignment, stating the name and address of the transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned, and, (ii) provided further, that the transferee or assignee of such -------- ------- rights assumes in writing the obligations of such Holder under this Agreement. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Any transferee or assignee shall thereafter be treated as an Investor Holder, subject to the limitations herein. Until the Company receives actual notice of any transfer or assignment, it shall be entitled to rely on the then existing list of Holders and the failure to notify the Company of any transfer or assignment shall not affect the validity of a notice properly given by the Company to the Holders pursuant to lists maintained by the Company. 12.2 Governing Law. This Agreement shall be governed by and construed ------------- under the laws of the State of Delaware as applied to agreements entered into solely between residents of, and to be performed entirely within, such state. 12.3 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.4 Titles and Subtitles. The titles and subtitles used in this Agreement -------------------- are used for convenience only and are not to be considered in construing or interpreting this Agreement. 12.5 Notices. ------- (a) All notices, requests, demands and other communications under this Agreement or in connection herewith shall be given to or made upon the Holder at the addresses set -11- forth in the Company's records with a copy to Debevoise & Plimpton, 875 Third Avenue, New York, New York 10022, attention: David Schwartz, and, if to the Company, to: Digital Insight Corporation, 28025 Mureau Road, Calabasas, California 91302, attention: Chief Financial Officer with a copy to Wilson Sonsini Goodrich & Rosati, P.C. at 650 Page Mill Road, Palo Alto, California 94304, attention: Steven E. Bochner. (b) All notices, requests, demands and other communications given or made in accordance with the provisions of this Agreement shall be in writing, and shall be sent by airmail, return receipt requested, or by facsimile with confirmation of receipt, and shall be deemed to be given or made when receipt is so confirmed. (c) Any party may, by written notice to the other, alter its address or respondent, and such notice shall be considered to have been given three (3) days after the airmailing or faxing thereof. 12.6 Attorney's Fees. If any action at law or in equity (including --------------- arbitration) is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees costs and necessary disbursements in addition to any other relief to which such party may be entitled. 12.7 Amendments and Waivers. Any term of this Agreement may be amended ---------------------- with the written consent of the Company and the holders of at least two-thirds in interest of the Holders. Any amendment or waiver effected in accordance with this Section 12.7 shall be binding upon the Holders and each transferee of the Registrable Securities, each future holder of all such Registrable Securities, and the Company. 12.8 Severability. If one or more provisions of this Agreement are held ------------ to be unenforceable under applicable law, portions of such provisions, or such provisions in their entirety, to the extent necessary, shall be severed from this Agreement, and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 12.9 Delays or Omissions. No delay or omission to exercise any right, ------------------- power or remedy accruing to any party to this Agreement, upon any breach or default of the other party, shall impair any such right, power or remedy of such non-breaching party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any Holder, shall be cumulative and not alternative. 12.10 Entire Agreement. This Agreement and the documents referred to ---------------- herein constitute the entire agreement between the parties hereto pertaining to the subject matter hereof and any other written or oral agreements between the parties hereto are expressly canceled. -12- IN WITNESS WHEREOF, the parties hereto have executed this Agreement of the day and year first above written. COMPANY: HOLDERS: Digital Insight Corporation Menlo Ventures VII, L.P. By: /s/ John Dorman By: MV Management VII, L.L.C. ----------------------- John Dorman Its General Partner Chief Executive Officer By: /s/ John Jarve ----------------------------------- John Jarve Its Managing Member Menlo Entrepreneurs Fund VII, L.P. By: MV Management VII, L.L.C. Its General Partner By: /s/ John Jarve ----------------------------------- John Jarve Its Managing Member HarbourVest Partners V-Direct Fund, L.P. By: HVP V-Direct Associates, L.L.C. Its Managing Member By: /s/ Ofer Nemirovsky ----------------------------------- Name: Ofer Nemirovsky ---------------------------------- Title: Member --------------------------------- [Signature Page to Third Amended and Restated Rights Agreement] __________________________________ XP Systems Corporation Ole Eichhorn By:______________________________________ Name: ___________________________________ Title: __________________________________ /s/ Paul D. Fiore /s/ Daniel Jacoby __________________________________ _________________________________________ Paul Fiore Dan Jacoby /s/ Nasser Kazeminy __________________________________ _________________________________________ Nasser J. Kazeminy Edward Harris __________________________________ _________________________________________ Robert Newkirk Gary Mason The Nasser J. Kazeminy Irrevocable The Yvonne P. Kazeminy-Mofrad Irrevocable Trust Trust By: /s/ Nasser Kazeminy By: /s/ Yvonne Kazeminy-Mofrad __________________________________ ____________________________________ Name: Nasser J. Kazeminy Name: Yvonne P. Kazeminy-Mofrad _____________________________ ___________________________________ Title: Co-Trustee Title: Co-Trustee ____________________________ __________________________________ __________________________________ _________________________________________ Kevin Savage Robert Lucas /s/ John Dorman /s/ Stephen Zarate __________________________________ _________________________________________ John Dorman Steve Zarate /s/ Kevin McDonnell __________________________________ _________________________________________ Steve Reich Kevin McDonnell [Signature Page to Third Amended and Restated Rights Agreement] SILICON VALLEY BANK - ------------------- By: _______________________________________ Name:______________________________________ Title:_____________________________________ COMDISCO, Inc. - -------------- By:________________________________________ Name:______________________________________ Title:_____________________________________ [Signature Page to Third Amended and Restated Rights Agreement] MEMBER INVESTOR HOLDERS MERGER MANAGEMENT HOLDERS Noro-Moseley Partners IV, L.P. By MKFJ-IV. L.L.C., General Partner Its General Partner By /s/ Brady L. Rackley III ------------------------------- -------------------------------- Charles D. Moseley, Jr., Member Brady L. Rackley III /s/ Brady L. Rackley -------------------------------- Brady L. Rackley The Brady Rackley Grantor Retained Annuity Trust By: /s/ Katharine S. Rackley -------------------------- Name: Katharine S. Rackley -------------------------- Title: Trustee -------------------------- The Katharine and Brady Rackley Charitable Remainder Unitrust By: /s/ Brady L. Rackley -------------------------- Name: Brady L. Rackley -------------------------- Title: Trustee -------------------------- /s/ Katharine S. Rackley --------------------------------- Katharine S. Rackley The Katharine Rackley Grantor Retained Annuity Trust By: /s/ Brady L. Rackley -------------------------- Name: Brady L. Rackley -------------------------- Title: Trustee -------------------------- [Signature page to Third Amended and Restated Rights Agreement] EX-4.5 3 SHAREHOLDER AGREEMENT DATED MAY 13, 1998 EXHIBIT 4.5 SHAREHOLDER AGREEMENT THIS SHAREHOLDER AGREEMENT is made and entered into this 13th day of May 1998, by and among NFRONT, INC. a Georgia corporation (the "Company"), BRADY L. RACKLEY, III, a resident of the State of Georgia ("Rackley"), Brady L. Rackley, a resident of the State of Georgia ("B. Rackley"), Tom E. Greene ("greene"), James A. Verbrugge ("Verbrugge"), Warren Derek Porter ("Porter"), Steve Scott Neel ("Neel"), CNL Financial Corporation ("CNL"), and NORO-MOSELEY PARTNERS IV, L.P., a Georgia limited partnership ("Investor" and, together with Rackley, B. Rackley, Greene, Verbrugge, Porter, Neel, and CNL the "Shareholders"). BACKGROUND A. Pursuant to a Series A Convertible Preferred Stock Purchase Agreement of even date herewith (the "Stock Purchase Agreement"), Investor has purchased Two Hundred Fifty Five Thousand Eight Hundred Eighty Five (255,885) shares of the Company's Preferred Stock (as hereinafter defined). B. Pursuant to a Common Stock Purchase Agreement of even date herewith (the "Common Stock Agreement"), Investor has purchased Thirty Five Thousand Eight Hundred Twenty Four (35,824) shares of the Company's Common Stock from B. Rackley. C. The execution ad delivery of this Agreement by the Company and each of the Shareholders, each of whom owns the number of shares of Common Stock set forth adjacent to such person's name on the signature page hereto and who, collectively, own all of the shares of Common Stock (as hereinafter defined) outstanding on the date hereof, is a condition precedent to the obligation of Investor to purchase the Preferred Stock pursuant to the Stock Purchase Agreement. D. The parties hereto wish to state herein their mutual agreements and obligations and to impose certain restrictions on the rights and benefits with respect to the voting and disposition of the Shares (as hereinafter defined) now or hereafter owned by the Shareholders, and to set forth certain agreements with respect to the management of the Company. AGREEMENT For and in consideration of the foregoing, the agreements set forth below, and other good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties agree as follows: SECTION 1. DEFINITIONS The following capitalized terms are used in this Agreement with meanings thereafter ascribed: "AFFILIATE" means any person, firm, corporation, partnership, association, or other entity that, directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with a specified person, firm, corporation, partnership, association, or entity. "AGREEMENT" means this Agreement, together with any addenda and amendments made in the manner described in this Agreement. "BUSINESS" means the business of selling Internet banking services to community banks. -1- "BUSINESS DAY" means any Monday, Tuesday, Wednesday, Thursday, or Friday on which banks are open in Atlanta, Georgia. "COMMISSION" means the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act. "COMMON STOCK" means the common stock, no par value, of the Company of which Five Million (5,000,000) shares are authorized and One Million Twenty Three Thousand Eighteen (1,023,018) shares are issued and outstanding as of the date hereof. "COMMON STOCK EQUIVALENTS" means the sum of (x) the number of shares of Common Stock outstanding, PLUS (y) the number of shares of Common Stock issuable upon (i) conversion or exchange of all outstanding securities convertible into or exchangeable for Common Stock, (ii) the exercise of all vested and outstanding warrants, options, and rights to purchase Common Stock or securities convertible into or exchangeable for Common Stock, and (iii) the conversion or exchange of all convertible or exchangeable securities purchased upon such exercise, all as of the date upon which the number of Common Stock Equivalents is being determined. "COMPANY BENEFIT PLAN" means any stock purchase or stock option plan which the Company maintains for the benefit of its employees. "COMPETITOR" means a person or entity that is substantially engaged in the Business. For purposes hereof, "substantially engaged" shall mean that the average annual revenues of such person or entity derived from the conduct of the Business during the three most recent completed fiscal years of such person or entity (or if such person or entity has conducted such business for less than three completed fiscal years, then for such lesser period) is in excess of $30 million and is equal to or greater than thirty percent (30%) of the average annual gross revenues of such person or entity over such fiscal years (or such lesser period). "CONFIDENTIAL INFORMATION" means information, other than Trade Secrets, that is of value to its owner and is treated as confidential, including, but not limited to, information concerning the customers, suppliers, products, pricing strategies of the Company, personnel assignments and policies of the Company, matters concerning the financial affairs and management of the Company or any parent, subsidiary, or affiliate of the Company, future business plans, licensing strategies, advertising campaigns, and information regarding executives or employees of the Company. "DISPOSITION" means any transfer of all or any part of the rights and incidents of ownership of the Shares, including the right to vote, and the right to possession of Shares as collateral for indebtedness, whether such transfer is outright or conditional, inter vivos or testamentary, voluntary or involuntary, or for or without consideration, but in any event shall exclude any transfer pursuant to the Prior Agreements, as amended hereby. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "EXISTING SHAREHOLDERS' AGREEMENTS" means those certain Shareholders' Agreements between the Company and each of Greene, Verbrugge, Porter, and Neel, respectively, each dated March 31, 1997. -2- "FAIR VALUE" means the value of one share of Common Stock determined as set forth below, as of the business day which immediately precedes the date for which Fair Value is determined. (a) If the Common Stock IS NOT Publicly Traded, the Fair Value of one share of Common Stock shall be equal to: (i) the value of the Company, DIVIDED BY (II) the number of Common Stock Equivalents (assuming in such case the conversion or exercise of only such convertible securities or options or warrants that are, as of the date of such calculation, then convertible or exercisable). The value of the Company will initially be determined in good faith by the Board of Directors of the Company, with the approval of the Series A Director (his or her approval not to be unreasonably withheld). If Board of Directors and the Series A Director shall be unable to agree as to the value of the Company, within ten (10) business days from the first meeting to determine the value of the Company, then the value of the Company will be determined by appraisal as follows: the Company and the Series A Director shall each select an appraiser experienced in the business of evaluating or appraising the market value of stock of privately held companies, and the two appraisers so selected shall, within thirty (30) days of selection, appraise the fair market value of the Company. Each of the Company and the Series A Director shall pay the fees and expenses of their respective appraisers so chosen. If the difference between the two appraisals is not greater than ten percent (10%) of the higher appraisal, the average of the two appraisals shall be deemed the value of the Company; otherwise, the two appraisers shall select a third appraiser, who shall be experienced in a manner similar to the initial appraisers. If the initial appraisers fail to select such third appraiser as provided above, either the Series A Director, or the Company, may apply, after written notice to the other, to any judge of any court of general jurisdiction for the appointment of such third appraiser. The third appraiser so selected shall appraise the fair market value of the Company as of the date Fair Value is to be determined, and shall forthwith give written notice of his determination to the Company and the Series A Director. The value of the Company shall then be established by averaging the three determinations of value, and then, disregarding the value determination which deviates most from such average, and averaging the remaining two value determinations. The Company and the Series A Director shall each pay one-half (1/2) the expenses and fees of the third appraiser. In making the determination of the Fair Value pursuant to this subsection, the Board of Directors and/or the appraisers, as the case may be, shall assume that fair market value of the Company is equal to the amount which would be paid in cash for the Company, as a going concern, by an unaffiliated third party buyer, without any discount for factors such as the absence of a trading market, the minority status of the shares, or any other factors would might otherwise be applicable. In the event of a Liquidation which is occasioned by a transaction such as a sale of assets, a sale of securities by the holders thereof, or a merger or share exchange, Fair Value shall be determined by reference to the transaction which gives rise to the Liquidation. (b) If the Common Stock IS Publicly Traded, "Fair Value" means the average Daily Price (as such term is defined below) over a twenty (20) trading day period consisting of the day as of which Fair Value is being determined and the nineteen (19) consecutive trading days prior to such date. For the purposes of computing Fair Value, the "Daily Price" for each of the twenty (20) consecutive trading days shall be determined as follows: (i) If the Common Stock is listed on a securities exchange, the "Daily Price" is the closing price of the Common Stock on the securities exchange having the greatest trading volume over the preceding thirty (30) calendar day period, OR, if there have been -3- no sales on a particular trading day, the average of the last reported bid and asked quotations on such exchange at the close of business for such trading day. (ii) If the Common Stock is quoted on the NASDAQ National Market System, the "Daily Price" is the average of the representative bid and asked prices of the Common Stock quoted in the NASDAQ National Market System as of 4:00 p.m., Eastern Time. (iii) If the Common Stock is quoted on the over-the-counter market as reported by the National Quotation Bureau, the "Daily Price" is the average of the highest bid and asked prices of the Common Stock on the over-the-counter market as reported by the National Quotation Bureau. "MANAGEMENT SHAREHOLDERS" means Rackley and B. Rackley. "PERMITTED DISPOSITION" means a Disposition effected: (a) by a Shareholder to which Investor and other Shareholders holding at least a majority of the Shares held by such other Shareholders consent in writing; (b) pursuant to Section 2.2 hereof, or Section 2.4 hereof; (c) by a Shareholder to a member of such person's immediate family, as defined in the regulations promulgated under Section 16 of the Exchange Act, or to any trust for his or their benefit; (d) by a Shareholder effective at the closing of a Transaction or a Qualifying Public Offering; and (e) by Investor to an Affiliate of Investor. The foregoing notwithstanding, no Disposition described in (a), (b), (c) or (e) above shall be a Permitted Disposition unless the transferor shall have obtained the written agreement of the proposed transferee, that such transferee will be bound by, and the Shares proposed to be transferred will be subject to, this Agreement. Such written agreement shall be attached as an addendum to this Agreement and thereby incorporated as a part of this Agreement, whereupon the proposed transferee shall have adopted this Agreement, and thereafter shall be a party hereto, and the term "Shareholders" as used herein shall thereafter mean and include such transferee. "PREFERRED STOCK" means 255,885 shares of Series A Convertible Preferred Stock issued and outstanding upon closing. "PRIME RATE" means the "prime rate" as published in The Wall Street Journal (Eastern Edition) under its "Money Rates" column or, if no longer published as such, the rate of interest announced from time to time by NationsBank, N.A., as its prime rate, base rate, or reference rate. If the Wall Street Journal publishes more than one "prime rate" under its "Money Rates" column or a range of rates, then the Prime Rate shall be the average of such rates. "PRIOR AGREEMENTS" means collectively the Existing Shareholders Agreements and the Voting Trust Agreements. -4- "PROPRIETARY INFORMATION" means Trade Secrets and Confidential Information. "PUBLIC OFFERING" means any offering by the Company of its securities to the public pursuant to a registration statement filed with the Commission under the Securities Act. "PUBLICLY TRADED" means that the Common Stock of the Company is: (i) listed on any securities exchange, (ii) quoted in the NASDAQ National Market System or Bulletin Board, or (iii) quoted on the over-the-counter marker as reported by the National Quotation Bureau. "QUALIFYING PUBLIC OFFERING" means one or a series of firm-commitment underwritten Public Offerings by the Company whereby the Company and/or one or more of its Shareholders completes a sale of Common Stock such that the gross proceeds resulting from such sale exceed Fifteen Million Dollars ($15,000,000) before deduction of expenses and commissions, and the price per share (before deduction of expenses and commissions) is not less than three (3) times the then effective Series A Conversion Price (as defined in the Articles of Amendment designating the Series A Convertible Preferred Stock). "REGISTRATION EXPENSES" has the meaning ascribed in Section 4.5 hereof. "REGISTRABLE SECURITIES" means all shares of Common Stock held by Investor and issued upon conversion of the Preferred Stock purchased under the Stock Purchase Agreement, excluding in each case securities which have been (a) registered under the Securities Act pursuant to an effective registration statement filed thereunder and disposed of in accordance with the registration statement covering them or (b) publicly sold pursuant to Rule 144 under the Securities Act. "RESTRICTIONS TERMINATION DATE" means the first to occur of (a) the date on which Investor shall first hold less than (i) twenty-five percent (25%) of the shares of Series A Convertible Preferred Stock issued on the date hereof or (ii) twenty-five percent (25%) of the shares of Common Stock issued upon conversion of the Series A Convertible Preferred Stock or (b) the date of closing of the first Qualified Public Offering. "SECURITIES ACT" means the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "SELLING EXPENSES" has the meaning ascribed in Section 4.5 hereof. "SERIES A DIRECTOR" means the member of the Board of Directors elected by the holders of Preferred Stock pursuant to Section 3 hereof. "SHARES" means and includes as to each Shareholder, all shares of the capital stock of the Company, including without limitation the Common Stock and the Preferred Stock, now or in the future owned of record or beneficially by such Shareholder (including without limitation, all Common Stock, Preferred Stock, or other securities of the Company hereafter acquired pursuant to the exercise of any option, warrant, or other right granted by the Company to such Shareholder), and all securities of the Company that may be issued in exchange for or in respect of such capital stock or securities (including, without limitation, all securities issued or resulting from any stock dividend, stock split, recapitalization, or merger effected by the Company). -5- "TRADE SECRET(S)" means information if any form which derives economic value, actual or potential, from not being generally known and not being readily ascertainable to other persons who can obtain economic value from its disclosure or use and which is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality. Trade Secrets may include either technical or non-technical data, including without limitation: (a) any useful process, machine, chemical formula, composition of matter, or other device which: (i) is new or which the Shareholder has a reasonable basis to believe may be new, (ii) is being used or studied by the Company and is not described in a patent or in any literature already published and distributed externally by the Company, and (iii) is not readily ascertainable from inspection of a product of the Company; (b) any engineering, technical, or product specifications including those of features used in any current product of the Company, or to be used, or the use of which is contemplated, in a future product of the Company; (c) any application, operating system, communication system, or other computer software (whether in source or object code) and all flow charts, algorithms, coding sheets, routines, subroutines, compilers, assemblers, design concepts, test data, documentation, or manuals related thereto, whether or not copyrighted, patented or patentable, related to or used in the business of the company; and (d) information concerning the customers, suppliers, products, pricing strategies of the Company, personnel assignments, and policies of the Company, or matters concerning the financial affairs and management of the Company or any parent, subsidiary, or affiliate of the Company; PROVIDED HOWEVER, that Trade Secrets shall not include any information that: (A) has been voluntarily disclosed to the public by the Company or has become generally known to the public (except where such public disclosure has been made by or through such Shareholder or by a third person or entity with the knowledge of such Shareholder without authorization by the Company); (B) has been independently developed and disclosed by parties other than such Shareholder or the Company, without a breach of any obligation of confidentiality by any such person running directly or indirectly to the Company; or (C) otherwise enters the public domain through lawful means. "VOTING TRUST AGREEMENTS" means those certain Voting Trust Agreements between Rackley and each of Greene, Verbrugge, Porter, and Neel, respectively, each dated March 31, 1997. SECTION 2. SHARE CONTROL SECTION 2.1. RESTRICTIONS UPON TRANSFER OF SHARES. At all times prior to the Restrictions Termination Date, no Shareholder shall make any Disposition of Shares, except a Permitted Disposition as provided in this Agreement. SECTION 2.2. RIGHT OF FIRST REFUSAL. (a) If any Shareholder (other than Investor as to any transfer after May 13, 1999) (the "Offering Shareholder"), desires to make a transfer of Shares prior to the Restrictions Termination Date, which is not a Permitted Disposition until the provisions of this Section 2.2 have been observed, shall receive a bona fide written offer from a third party that is not a Competitor (the "Proposed Transferee") to purchase all or part of the Shares then owned by the Offering Shareholder that the Offering Shareholder desires to accept (an "Offer"), the Offering Shareholder shall, as a condition precedent to accepting the Offer, offer to the Company, and each of the other Shareholders (such other Shareholders are hereinafter collectively referred to as the "Other Shareholders" and individually as an "Other Shareholder"), in the manner set forth below, the right to purchase, individually or in the aggregate, all of the Shares that are the subject of the Offer for the same price and the same terms as contained in the Offer. -6- (b) Within ten (10) Business Days after receipt of the Offer, the Offering Shareholder shall notify the Company and each of the Other Shareholders in writing of the Offer, stating in such notice (the "Transfer Notice") the details of the Offer, including (i) the name and address of the Proposed Transferee, (ii) the number of Shares to which the Offer pertains (the "Offered Shares"), (iii) the price per share offered by the Proposed Transferee for the Offered Shares (the "Price"), and (iv) the terms and method of payment. A copy of the Offer shall be attached to the Transfer Notice. The Transfer Notice shall constitute an offer (the "Right of First Refusal") by the Offering Shareholder to sell the Offered Shares to the Company and, if and to the extent that the Company shall not accept the Right of First Refusal, to the Other Shareholders at the Price and upon the terms and conditions set forth in the Transfer Notice, which offer shall be irrevocable for thirty (30) Business Days (the "Offer Period") from the date the Transfer Notice is delivered to the Company (the "Commencement Date"), subject to satisfaction of the conditions specified in Section 2(g) hereof. (c) The Company shall have the first option to purchase all or any portion of the Offered Shares. If the Company desires to purchase all or any part of the Offered Shares, the Company shall communicate, in writing, its election to purchase to the Offering Shareholder, which communication shall state the number of Offered Shares the Company desires to purchase and the Price and terms of payment (which shall be identical to the terms described in the Transfer Notice), and shall be delivered to the Offering Shareholder at the address set forth in the Transfer Notice or if no address is set forth in the Transfer Notice, at the address reflected in the Company's stock transfer records (with a copy being contemporaneously delivered to each of the Other Shareholders) within ten (10) Business Days of the Commencement Date (such ten (10) Business Day period is hereinafter referred to as the "Company Acceptance Period"). Such communication shall, when taken in conjunction with the Transfer Notice, be deemed to constitute a valid, legally binding, and enforceable agreement for the sale and purchase of all or that portion of the Offered Shares which the Company has so elected to purchase, subject to satisfaction to the conditions specified in Section 2.2(g) hereof. (d) If the Company does not exercise its option to purchase all of the Offered Shares from the Offering Shareholder within the Company Acceptance Period, each Other Shareholder shall have an option to purchase all or any portion of the Offered Shares not purchased by the Company (the "Remaining Shares"), exercisable by giving written notice of exercise to the Offering Shareholder, each Other Shareholder, and the Company. Such written notice shall state the number of Remaining Shares such Other Shareholder elects to purchase, and shall be delivered to the Offering Shareholder with a copy delivered substantially contemporaneously to the Company and to each Other Shareholder at the addresses reflected in the Company's stock transfer records within the ten (10) Business Day period which commences on the first day after the expiration of the Company Acceptance Period (such ten (10) Business Day period is hereinafter referred to as the "Shareholder Acceptance Period"). Such communication shall, when taken in conjunction with the Transfer Notice, be deemed to constitute a valid, legally binding, and enforceable agreement for the sale and purchase of all or that portion of the Offered Shares which each such Other Shareholder has so elected to purchase, subject to the satisfaction of the conditions specified in Section 2.2(f) of this Agreement, and to the terms set forth in the remainder of this paragraph. In the event that more than one Other Shareholder exercises the right to purchase the Remaining Shares, each Other Shareholder may only purchase up to such Other Shareholder's pro rata share of the Remaining Shares (based upon the ratio of the number of Common Stock Equivalents owned by such exercising Other Shareholder to the number of Common Stock Equivalents owned by all Other Shareholders). -7- (e) If one or more Other Shareholders fails to timely exercise such Other Shareholder's option to purchase the full pro rata share of Offered Shares to which such Other Shareholder is entitled within the Shareholder Acceptance Period, the Other Shareholders which did exercise their respective options to purchase the full pro rata share of Remaining Shares (an "Eligible Other Shareholder") shall have an option to purchase that portion of the Remaining Shares which remain available for purchase (the "Available Shares"), exercisable by giving written notice of exercise to the Offering Shareholder, each Eligible Other Shareholder, and the Company. Such written notice shall state the number of Available Shares such Eligible Other Shareholder elects to purchase, and shall be delivered to the Offering Shareholder with a copy delivered substantially contemporaneously to the Company and to each Eligible Other Shareholder at the addresses reflected in the Company's stock transfer records within the five (5) Business Day period which commences on the first day after the expiration of the Shareholder Acceptance Period (such five (5) Business Day period is hereinafter referred to as the "Overallotment Acceptance Period") Each Eligible Other Shareholder may purchase a pro rata share of the Available Shares (based upon the ratio of the number of Common Stock Equivalents owned by each Eligible Other Shareholder to the number of Common Stock Equivalents owned by all Eligible Other Shareholders). This method of allocation shall continue to apply to options to purchase all of the Available Shares until the first to occur of the following: (i) all options have been exercised by one or more Eligible Other Shareholders (which exercises shall constitute the valid, legally binding, and enforceable agreement as provided above), (ii) the Eligible Other Shareholders elect not to exercise their rights to purchase any additional Available Shares, or (iii) the Overallotment Acceptance Period expires. (f) The closing of the purchase of any Offered Shares by the Company, any Remaining Shares by the Other Shareholders, and any Available Shares by the Eligible Other Shareholders (as the case may be) shall be held at the principal office of the Company. The Company shall designate a closing date and time, which date shall be later than thirty (30) Business Days after the date of the Transfer Notice or such other date as may be agreed upon by the Company (after consultation with any Other Shareholder who has exercised such Other Shareholder's option to purchase Remaining Shares or Available Shares) and the Offering Shareholder (such date is hereinafter the "Share Transfer Date"). At the closing, the Offering Shareholder shall deliver certificates duly endorsed or accompanied by duly executed stock powers for the Offered Shares being purchased pursuant to this Section 2.2 and shall transfer the Offered Shares being purchased pursuant to this Section 2.2 to the purchasers thereof, free and clear of all liens, claims, charges, or encumbrances, against payment for the Offered Shares in accordance with the terms of the Transfer Notice. If the Company shall be the purchaser of any of the Offered Shares, the Company shall have the right to set off against any payment made to the Offering Shareholder by the Company in respect of such Offered Shares the amount by which the Offering Shareholder is then indebted to the Company. (g) Notwithstanding the foregoing, if the Right of First Refusal is not exercised with respect to all of the Offered Shares (i) on or before the expiration of the Overallotment Acceptance Period, or (ii) if the Company and the Other Shareholders do not purchase all of the Offered Shares on the Share Transfer Date, then the Offering Shareholder shall be under no obligation to sell any Offered Shares to the Company or the Other Shareholders, and the Offered Shares may be sold by the Offering Shareholder to the Proposed Transferee at any time during a thirty (30) Business Day period which commences the day after (x) the expiration of the Offer Period (if the condition in clause (i) of this subparagraph (g) is not satisfied) or (y) the Share Transfer Date (if the condition in clause (i) of this subparagraph (g) is satisfied but the condition -8- in clause (ii) of this subparagraph (g) is not satisfied (such thirty (30) Business Day Period is hereinafter referred to as the "Free Transfer Period"). Any such sale shall be only to the Proposed Transferee at not less than the Price and upon other terms and conditions not more favorable to the Proposed Transferee than those specified in the Transfer Notice. No transfer of the Offered Shares or any portion thereof shall be made to any Competitor. (h) As a condition precedent to the sale and transfer of any Offered Shares by the Offering Shareholder, the Offering Shareholder shall obtain (i) the written agreement of the Proposed Transferee that the Proposed Transferee will be bound by, and that the Offered Shares transferred to the Proposed Transferee will be subject to, this Agreement as provided in Section 2.1 above, except that, notwithstanding any other provision of this Agreement, the Proposed Transferee shall not be subject to Section 2.4 of this Agreement and (ii) (unless waived by the Company) an opinion of counsel, satisfactory to the Company, that such transfer of interest does not require registration under the Securities Act, and any applicable state securities laws. The Company shall not give effect on its books to any transfer or purported transfer of Offered Shares held or owned by any Offering Shareholder to the Proposed Transferee unless each and all of the conditions hereof effecting such transfer shall have been satisfied. If the transfer by the Offering Shareholder to the Proposed Transferee of that portion of the Offered Shares as to which the Right of First Refusal has not been exercised and consummated, is not made within the Free Transfer Period, the right to transfer in accordance with this Section 2.2 shall expire. In such event, the restrictions of this Section 2.2 shall be reinstated as to all Shares which have not been so transferred, and any subsequent transfer of such Shares, whether or not to the same Proposed Transferee, must be made strictly in compliance with the provisions of this Section 2.2. SECTION 2.3. FAILURE TO DELIVER SHARES TO THE COMPANY. If a Shareholder becomes obligated to sell any Shares to the Company or to the Other Shareholders under this Agreement (the "Obligated Shareholder") and fails to deliver such Shares in accordance with the terms of this Agreement, the Company or such Other Shareholder may, in addition to all other remedies it may have, tender to the Obligated Shareholder, at the address set forth in the stock transfer records of the Company, the purchase price for such Offered Shares as is herein specified, and (i) in the case of shares to be sold to the Company pursuant to this Agreement, cancel such shares on its books and records whereupon all of the Obligated Shareholder's right, title, and interest in and to such Shares shall terminate, (ii) in the case of Shares to be sold to an Other Shareholder under this Agreement, issue certificates representing such shares to the Other Shareholder and register the Other Shareholder on its Company's books and records as the record owner of the shares whereupon all of the Obligated Shareholder's right, title, and interest in and to such shares shall terminate. SECTION 2.4. CO-SALE RIGHTS. (a) If at any time prior to the Restrictions Termination Date a Shareholder proposes to effect a Disposition of any or all of the Shares owned by such Shareholder to a third party (such transferee for purposes of this Section 2.4 is referred to as the "Transferee") other than a transaction described in paragraphs(a), (c) and (d) of the definition "Permitted Disposition," and such Shareholder shall have complied with the provisions of Section 2.2 hereof (for the purposes of this Section 2.4, such Shares to be sold are hereinafter referred to as the "Transfer Shares"), such Shareholder shall require the Transferee, as a condition precedent to the consummation of the sale or disposition of the Transfer Shares of such Shareholder to the Transferee, to offer to acquire from Investor on the same terms as the proposed sale or disposition from Shareholder a number of Common Stock Equivalents equal to the product of (i) the number of Common Stock -9- Equivalents owned of record by Investor MULTIPLIED BY (ii) a fraction, the numerator of which is the number of Transfer Shares such Shareholder proposes to sell or otherwise dispose of to the Transferee, and the denominator of which is the total number of Common Stock Equivalents owned beneficially and of record by such Shareholder and Investor (for the purposes of this Section 2.4, such number of Common Stock Equivalents is hereinafter referred to as the "Allocation Shares"). (b) Such Shareholder shall give written notice (for the purposes of this Section 2.4, the "Co-Sale Notice") to Investor which shall describe fully the terms of the proposed sale or disposition, the number of Transfer Shares to be sold or otherwise disposed of, and the number of Allocation Shares of Investor eligible for co-sale, the name and address of the Transferee or the Company, as applicable, and the proposed closing date of the purchase and sale. The Co-Sale Notice shall be signed by such Shareholder and by the Transferee or the Company, as applicable, and shall be an irrevocable offer, open for fifteen (15) days after receipt, to Investor to acquire, as provided above, all Allocation Shares. Investor shall have fifteen (15) days after receipt of the Co-Sale Notice to accept such offer as to all or a portion of the Allocation Shares and notify the Transferee and such Shareholder in writing of the number of Allocation Shares, if any, Investor wishes to sell to the Transferee. Such Shareholder may not consummate the proposed sale or disposition to the Transferee unless (x) the sale of Allocation Shares pursuant to the co-sale right of Investor (but only if an Investor timely accepts the offer of such Shareholder and the Transferee) is consummated; (y) an Investor waives the right of co-sale as to all or part of the Allocation Shares; or (z) the irrevocable offer expires without acceptance by an Investor after the fifteen (15) day period. SECTION 3. GOVERNANCE PROVISIONS SECTION 3.1. ELECTION OF DIRECTORS. At all times prior to the Restrictions Termination Date, each Shareholder agrees to: (a) Vote all Shares the voting of which is under the control of such Shareholder to: (i) maintain a Board of Directors consisting of five (5) members; (ii) cause one (1) person designated as the Series A Director and nominated by the Investor to be elected as directors of the Company; (iii) cause two (2) persons designated in writing by the Management Shareholders (the "Management Shareholder Nominees") to be elected as directors of the Company; and (iv) cause two (2) persons, each of whom either meet the definition of "non-employee director" as defined in Rule 16b-3 of the Securities Exchange Act of 1934 and is not an "interested person" of the Investor as defined in Section 2(a)(19) of the Investment Company Act of 1940 OR would otherwise be qualified to serve on the Audit Committee of the Company if the Company were listed on the New York Stock Exchange (the "Outside Nominees"), designated in writing by the Management Shareholder Nominees and approved by the Series A Director, such approval not to be unreasonably withheld or delayed. -10- (b) As of the date hereof, the Investor Nominee is Charles D. Moseley; the Management Shareholder Nominees are Rackley and B. Rackley and the Outside Nominees are Greene and Verbrugge. These designations shall remain in effect until a new designation is delivered in writing to the Company and each party to this Agreement. A new designation shall be effective when delivered. The Company will use reasonable efforts to notify all Shareholders at least three (3) days prior to any meeting (or written action in lieu of a meeting) of the Shareholders at or by which directors are to be elected, if the director nominees will change from the nominees designated in this Section 3.1(b). (c) In the event that any of the Series A Director, and the Management Shareholder Nominees, shall cease to serve as a director of the Company for any reason, Investor, or the Management Shareholders, as applicable, shall have the right to appoint a successor nominee. If any Outside Nominee shall cease to serve as a director of the Company for any reason, the Management Shareholder Nominees, with the approval of the Series A Director, such approval not to be unreasonably withheld or delayed, shall appoint a successor nominee who meets the eligibility criteria set forth in Section 3.1(a)(iv) hereof. The Shareholders shall use their best efforts to ensure that such successor nominee is duly appointed and elected to fill such vacancy in the manner provided in the Bylaws of the Company. (d) Each director shall be entitled to one (1) vote on each matter on which the Board of Directors takes action. SECTION 3.2. RIGHT TO PURCHASE NEW SECURITIES. The Company hereby grants to Investor the right to purchase a pro rata share of any New Securities, as hereinafter defined, which the Company may, at any time prior to the Restrictions Termination Date, propose to sell and issue (the "Purchase Right"). A pro rata share, for purposes of this Purchase Right, is a fraction, the numerator of which is the number of Common Stock Equivalents then held by Investor, and the denominator of which is the total number of Common Stock Equivalents then outstanding. (a) Except as set forth below, "New Securities" means any shares of capital stock of the Company including Common Stock, whether now or hereafter authorized, and any rights, options, or warrants to purchase said shares of capital stock, and any securities of any type that are, or may become, convertible into said shares of capital stock. Notwithstanding the foregoing, "New Securities" does not include: (i) securities offered to the public generally pursuant to a registration statement filed pursuant to the Securities Act, or pursuant to Regulation A under the Securities Act; (ii) securities issued pursuant to any merger or share exchange in which the Company is the survivor or parent, or pursuant to the purchase of substantially all of the assets of another person; (iii) shares of Common Stock or related options convertible into such Common Stock issued to employees, officers, and directors of the Company pursuant to any plan or arrangement approved by the Board of Directors, (including options outstanding on the date hereof) as adjusted for stock splits, stock dividends, and similar transactions; (iv) securities issued pursuant to any rights or agreements including without limitation convertible securities, options, and warrants, provided that the Purchase Right under this Section 3.2 applies with respect to the initial sale of New Securities or the grant by the Company of such rights or agreements; (v) securities issued in connection with any stock split, stock dividend, or recapitalization by the Company; and (vi) securities issuable to CNL pursuant to that certain Stock Purchase and Stock Option Agreement dated January 15, 1998 between the Company and CNL (the "CNL Agreement"). -11- (b) In the event the Company proposes to undertake an issuance of New Securities, it shall give Investor written notice of its intention, describing the type of New Securities and the price and terms upon which the Company proposes to issue the New Securities. Investor shall have fifteen (15) days from the date of receipt of any such notice to agree to purchase up to its respective pro rata portion of shares of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Company of Investor's intentions, and stating therein the quantity of New Securities to be purchased by Investor. Investor shall have fifteen (15) days to complete the purchase. If Investor fails to close such purchase within the fifteen (15) day period, Investor shall have forfeited Investor's right to buy a pro-rata share of that particular issuance of New Securities. (c) In the event Investor fails to exercise the Purchase Right as provided herein within said fifteen (15) day period, the Company shall have ninety (90) days thereafter to sell or enter into a written agreement (pursuant to which the sale of New Securities covered thereby shall be completed, if at all, within sixty (60) days from the date of said agreement) to sell the New Securities not elected to be purchased by Investor at a price and upon such terms which are no more favorable to the purchaser of such New Securities than specified in the Company's notice to Investor. In the event the Company has not sold the New Securities or entered into a written agreement to sell the New Securities within said ninety (90) day period (or completed the sale of the New Securities within sixty (60) days from the date of said agreement, as provided above), the Company shall not thereafter issue or sell any New Securities without first offering such securities in the manner provided in this Section 3.2. SECTION 3.3. VOTING AGREEMENT. The holders of the then outstanding shares of Series A Convertible Preferred Stock will not withhold their approval of any merger ("Business Combination") and shall vote as a class in favor of such Business Combination, if (A) such Business Combination receives the approval of the holders of a majority of the outstanding shares of Common Stock, the holders of Series A Convertible voting with the holders of Common Stock (as if that all Series A Convertible Preferred Stock were fully converted) and (B) all Merger Consideration (as such term is defined below) is distributed pro-rata (other than as may be necessary under Section 2D of the Amended and Restated Articles of Incorporation of the Company, as amended, to pay to holders of Series A Convertible Preferred Stock the full amount of the "Senior Liquidation Payments" to which such holders are entitled) to all Shareholders. As used herein "Merger Consideration" means all consideration (i) distributed to Shareholders and (ii) paid to Shareholders of the Corporation in respect of a Business Combination (including, without limitation, amounts paid in respect of noncompetition covenants), required by the terms of the Business Combination to be held in escrow, or is otherwise not immediately available for distribution to Shareholders (including, without limitation, (x) amounts payable in conjunction with any "earn-out" or other type of contingent consideration based in whole or in part upon future performance, and (y) amounts payable pursuant to promissory notes or other forms of seller financing) and all amounts paid to Shareholders for consulting services, transition bonuses, stay-on bonuses, excluding, however, amounts paid to Shareholders that are not in excess of reasonable compensation for services actually performed for the surviving entity in the Business Combination by such Shareholder. SECTION 4. REGISTRATION RIGHTS. SECTION 4.1. DEMAND REGISTRATION. At any time following a Public Offering, Investor may request the Company to register under the Securities Act not less than forty percent (40%) of all shares of Registrable Securities then held by Investor for sale in the manner specified in such notice. Notwithstanding anything to the contrary contained herein, no request may be made under this -12- Section 4.1 within six months after the effective date of a registration statement filed by the Company covering a firm commitment underwritten public offering in which Investor shall have been entitled to join pursuant to Section 4.2 hereof, and in which there shall have been effectively registered all shares of Registrable Securities as to which registration shall have been requested by Investor and permitted by the managing underwriter. If the Company receives a notice from Investor that imposes on the Company the registration obligations of this Section 4.1, and if, in the reasonable opinion of the Board of Directors of the Company the general market conditions are not appropriate at the time for an offering, the Company may, at its option, delay the commencement of the performance of the Company's obligation pursuant to this Section 4.1 for up to one hundred twenty (120) days. If Investor specifies in the notice, that the method of disposition of the Registrable Securities shall be an underwritten public offering, Investor may designate the managing underwriter of such offering, subject to the approval of the Company, which approval shall not be unreasonably withheld or delayed. The Company shall be obligated to prepare and file a registration statement with respect to Registrable Securities pursuant to this Section 4.1 on one occasion only PROVIDED HOWEVER, that such obligation shall be deemed satisfied only when a registration statement covering shares of Registrable Securities, for sale in accordance with the method of disposition specified by the requesting Investor, shall have become effective (or is in a position to be declared effective but for Investor's election not to proceed with the contemplated offering). The Company shall be entitled to include in any registration statement referred to in this Section 4.1 for sale in accordance with the method of disposition specified by Investor, shares of Common Stock to be sold by the Company for its own account and for the accounts of other holders of Common Stock, except as and to the extent that in the opinion of the managing underwriter (if such method of disposition shall be an underwritten public offering), such inclusion would adversely affect the marketing of the Registrable Securities to be sold. Except for registration statements on Forms S-4 or S-8, or any successor thereto, the Company will not file with the Commission any other registration statement with respect to its Common Stock, whether for its own account or that of other shareholders, from the date of receipt of a notice from Investor pursuant to this Section 4.1 until the completion of the period of distribution of the registration contemplated thereby (determined as provided in Section 4.3 hereof, but in no event to exceed ninety (90) days following the effective date of the applicable registration statement). SECTION 4.2. PIGGYBACK REGISTRATION. At any time following a Public Offering, if the Company at any time proposes to register any Common Stock under the Securities Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to registration statements on Forms S-4 or S-8 or another form not available for registering the Registrable Securities for sale to the public), each such time it will give written notice to Investor of its intention so to do. Upon the written request of an Investor received by the Company within 10 days after the giving of any such notice by the Company, to register such number of shares of Registrable Securities held by Investor (or by persons taking from Investor pursuant to a Permitted Disposition) specified in such written request, the Company will cause the Registrable Securities as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent requisite to permit the sale or other disposition by Investor (in accordance with its written request) of such Registrable Securities so registered. In the event that any registration pursuant to this Section 4.2 shall be, in whole or in part, an underwritten public offering of Common Stock, the number of shares of Registrable Securities to be included in such an underwriting may be reduced if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein. In the event such a reduction is necessary, the reduction shall be borne first by holders of Registrable Securities who are not Investor, and if a further reduction is necessary in the judgment of the managing underwriter, then, Investor proposing to sell Registrable Securities in the offering shall bear the reduction on a pro-rata basis, based on the number of shares of Registrable Securities that Investor -13- proposed to offer for sale in the Offering, or if Investor holds a majority of the shares of Registrable Securities that Investor may elect to withdraw from such registration all shares of Registrable Securities held by Investor as to which registration was requested. Notwithstanding the foregoing provisions, the Company may for any reason and without the consent of Investor withdraw any registration statement referred to in this Section 4.2 without thereby incurring any liability to Investor. SECTION 4.3. REGISTRATION PROCEDURES. If and whenever the Company is required by the provisions of Section 4.1 or 4.2 hereof to use its best efforts to effect the registration of any shares of Registrable Securities under the Securities Act, the Company will, as expeditiously as possible: (a) prepare and file with the Commission a registration statement (which, in the case of an underwritten public offering pursuant to Section 4.1 or 4.2 hereof, shall be on Form S-1, Form S-2, Form S-3, any successor forms thereto, or other form of general applicability satisfactory to the managing underwriter selected as herein provided) with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as hereinafter provided); (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period of distribution and comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement in accordance with the intended method of disposition set forth in such registration statement for such period; (c) furnish to each Shareholder and to each underwriter such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such persons reasonably may request in order to facilitate the public sale or other disposition of the Registrable Securities covered by such registration statement; (d) use its best efforts to register or qualify the Registrable Securities covered by such registration statement under the securities or "blue sky" laws of such jurisdictions as the Shareholders, or, in the case of an underwritten public offering, the managing underwriter reasonably shall request, PROVIDED HOWEVER, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; (e) use its best efforts to list the Registrable Securities covered by such registration statement with any securities exchange or NASDAQ on which the Common Stock of the Company is then listed or quoted; (f) notify each selling Shareholder at any time when a prospectus relating to Registrable Securities is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such Shareholder, the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; -14- (g) notify the selling Shareholders immediately, and confirm the notice in writing, (1) when the registration statement becomes effective, (2) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceedings for that purpose, (3) of the receipt by the Company of any notification with respect to the suspension of qualification of the Restricted Stock for sale in any jurisdiction or of the initiation, or the threatening, of any proceedings for that purpose, and (4) of the receipt of any comments, or requests for additional information, from the Commission or any state regulatory authority. If the Commission or any state regulatory authority shall enter such a stop order or order suspending qualification at any time, the Company will promptly use its best reasonable efforts to obtain the lifting of such order; and (h) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders as soon as reasonably practicable, but not later than eighteen (18) months after the effective date of the registration statement, an earnings statement covering a period of at least twelve (12) months beginning after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. For purposes hereof, the period of distribution of Registrable Securities in a firm commitment underwritten public offering shall be deemed to extend until each underwriter has completed the distribution of all securities purchased by it, and the period of distribution of Registrable Securities in any other registration shall be deemed to extend until the earlier of the sale of all Registrable Securities covered thereby or 180 days after the effective date thereof. In connection with each registration hereunder, each Shareholder will furnish to the Company in writing such information with respect to it as a shareholder as reasonably shall be necessary in order to assure compliance with federal and applicable state securities laws. In connection with each registration pursuant to Section 4.1 or 4.2 hereof covering an underwritten public offering, the Company and each Shareholder agree to enter into a written agreement with the managing underwriter selected in the manner herein provided in such form and containing such provisions as are customary in the securities business for such an arrangement between such underwriter and companies of the Company's size and investment stature. SECTION 4.4. EXPENSES. All reasonable expenses incurred by the Company in complying with Section 4.1 or 4.2 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including counsel fees) incurred in connection with complying with state securities or "blue sky" laws, fees of the National Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents and registrars, and in the case of Section 4.1 the reasonable fees and disbursements of one counsel for the sellers of Restricted Stock , but excluding any Selling Expenses, are called "Registration Expenses." All underwriting discounts and selling commissions applicable to the sale of Restricted Stock are called "Selling Expenses." (a) The Company shall pay all Registration Expenses attributable to the shares of Restricted Stock of Shareholders included in the Registration in connection with each registration statement under Section 4.1 or 4.2 hereof. -15- (b) All Selling Expenses in connection with each registration statement under Section 4.1 or 4.2 hereof shall be borne by Investor and any other selling shareholder in proportion to the number of shares sold by Investor or by such other selling shareholders. SECTION 4.5. INDEMNIFICATION AND CONTRIBUTION. (a) In the event of a registration of any of the Registrable Securities under the Securities Act pursuant to Section 4.1 or 4.2 hereof, the Company will indemnify and hold harmless Investor, its directors and its officers (provided Investor is a seller of Registrable Securities thereunder), each underwriter of such Registrable Securities thereunder, and each other person, if any, who controls Investor, its directors and its officers or underwriter within the meaning of the Securities Act, against any losses, claims, damages, or liabilities, joint or several, to which Investor, its directors and officers, such underwriter or such person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which any shares of Registrable Securities were registered under the Securities Act pursuant to Section 4.1, 4.2, or 4.3 hereof, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse Investor, its directors and officers, each such underwriter and each such controlling person for any legal or other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability, or action; PROVIDED, HOWEVER, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage, or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by an Investor, its directors and its officers, such underwriter and such controlling person in writing specifically for use in such registration statement or prospectus. (b) In the event of a registration of any of the shares of Registrable Securities under the Securities Act pursuant to Section 4.1 or 4.2 hereof, Investor including Shares of Registrable Securities in such registration, severally but not jointly, will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of the Securities Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter, and each person who controls any underwriter within the meaning of the Securities Act, against all losses, claims, damages, or liabilities, joint or several, to which the person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which any shares of Registrable Securities were registered under the Securities Act pursuant to Section 4.1 or 4.2 hereof, any preliminary prospectus, or final prospectus contained therein, or any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such officer, director, underwriter, and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action, PROVIDED, HOWEVER, that Investor will be liable hereunder in any such case if and -16- only to the extent that any such loss, claim, damage, or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to Investor, as such, respectively, furnished in writing to the Company by Investor specifically for use in such registration statement or prospectus, and PROVIDED, FURTHER, HOWEVER, that the respective liability of an Investor hereunder shall be limited to the proportion of any such loss, claim, damage, liability, or expense which is equal to the proportion that the public offering price of the shares sold by Investor, under such registration statement bears to the total public offering price of all securities sold thereunder, but not in any event to exceed the proceeds received by an Investor from the sale of shares of Registrable Securities or covered by such registration statement. In no event will any Shareholder be required to enter into any agreement or undertaking in connection with any registration under this Agreement providing for any indemnification or contribution obligation on the part of Investor greater than Investor's obligation under this Section 4. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 5 and shall only relieve it from any liability which it may have to such indemnified party under this Section 5 if and to the extent the indemnifying party is prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 4.6 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected, PROVIDED, HOWEVER, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which indemnification is unavailable to any indemnified party then, and in each such case, the intended indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities, in such proportion as is appropriate to reflect the relative fault of the intended indemnifying party on the one hand and of the indemnified parties on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the intended indemnifying party and of the indemnified parties shall be determined by reference to, among other things, whether the untrue -17- or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the intended indemnifying party, or by the indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or present such statement or omission. The Company and Investor agree that it would not be just and equitable if contribution pursuant to this Section 4.6(d) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph, PROVIDED HOWEVER, that (i) Investor shall not be required to contribute any amounts in excess of the limitations in Section 4.6(b) and (ii) no person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. SECTION 4.6. CHANGES IN COMMON STOCK. If, and as often as, there is any change in the Common Stock by way of a stock split, stock dividend, combination or reclassification, or through a merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions hereof so that the registration rights granted in this Section 4 shall continue with respect to the Common Stock as so changed. SECTION 4.7. RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Registrable Securities to the public without registration, at all times after ninety (90) days after any registration statement covering a Public Offering shall have become effective (provided that the public offering, contemplated thereby is in fact consummated), the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act; (b) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to Investor holding Registrable Securities forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of such Rule 144 and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports as an Investor may reasonably request in availing itself of any rule or regulation of the Commission allowing Investor to sell any Registrable Securities without registration. SECTION 4.8. TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Corporation to register securities granted the Investor under Section 4 hereof may be assigned to a transferee or assignee in connection with any transfer or assignment of Registrable Securities or Preferred Stock provided that: (i) such transfer may otherwise be effected in accordance with applicable securities laws, and (ii) such assignee or transferee acquires at least one-half of the shares of Registrable Securities or Preferred Stock (appropriately adjusted for stock split or recapitalization) then held by such Investor. Notwithstanding the foregoing, the rights to cause the Company to register securities may be assigned to any shareholder, partner, or affiliate of an Investor without compliance with item (ii) above, provided written notice thereof is promptly given to the Company. -18- SECTION 4.9. STANDOFF AGREEMENT. (a) Management Shareholders agree, so long as Management Shareholders in the aggregate, hold at least five percent (5%) of the outstanding Common Stock, in connection with the Company's initial Public Offering, upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Common Stock (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed ninety (90) days from the effective date of such registration) as may be requested by the underwriters. (b) Investor agrees, so long as Investor holds at least five percent (5%) of the outstanding Common Stock, in connection with the Company's initial public offering, upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed ninety (90) days from the effective date of such registration) as may be requested by the underwriters. SECTION 5. GENERAL PROVISIONS SECTION 5.1. TERM. This Agreement shall terminate and be of no force and effect, unless extended as provided herein, upon the first to occur of (a) the passage of ten (10) years from the date of this Agreement or (b) the effective date of a written agreement signed by all of the parties hereto providing for the termination of this Agreement. SECTION 5.2. PARTIAL TERMINATION UPON QUALIFIED PUBLIC OFFERING. The restrictions in Sections 2.1, 2.2, and 2.4, and Section 3 shall terminate upon the Restriction Termination Date. SECTION 5.3. LEGEND. During the term of this Agreement, each certificate representing the Shares shall bear the following legend, or a similar legend deemed by the Company to constitute an appropriate notice of the provisions hereof and the applicable security laws (any such certificate not having such legend shall be surrendered upon demand by the Company and so endorsed): On the face of the certificate: "TRANSFER OF THIS STOCK IS RESTRICTED IN ACCORDANCE WITH CONDITIONS PRINTED ON THE REVERSE OF THIS CERTIFICATE." On the reverse: "THE SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO AND TRANSFERABLE ONLY IN ACCORDANCE WITH THAT CERTAIN SHAREHOLDER AGREEMENT BY AND AMONG NFRONT, INC. (ISSUER) (THE "COMPANY") AND CERTAIN SHAREHOLDERS THEREOF, DATED MAY 13, 1998 A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY AND MAY BE INSPECTED DURING NORMAL BUSINESS HOURS. NO TRANSFER OR PLEDGE OF THE SHARES EVIDENCED HEREBY MAY BE MADE EXCEPT IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF SAID AGREEMENT. BY ACCEPTANCE OF THIS CERTIFICATE, ANY HOLDER, TRANSFEREE OR PLEDGEE HEREOF AGREES TO BE BOUND BY ALL OF THE PROVISIONS OF SAID AGREEMENT." "SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED BY THE HOLDER FOR INVESTMENT PURPOSES ONLY AND NOT FOR RESALE, TRANSFER OR DISTRIBUTION, HAVE BEEN -19- ISSUED PURSUANT TO EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF APPLICABLE STATE AND FEDERAL SECURITIES LAWS, AND MAY NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED OTHER THAN PURSUANT TO EFFECTIVE REGISTRATION UNDER SUCH LAWS, OR IN TRANSACTIONS OTHERWISE IN COMPLIANCE WITH OR EXEMPT FROM SUCH LAWS, AND UPON EVIDENCE SATISFACTORY TO THE COMPANY OF COMPLIANCE WITH OR EXEMPTION FROM SUCH LAWS, AS TO WHICH THE COMPANY MAY RELY UPON AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY." Each Shareholder shall promptly surrender the certificates representing his/her Shares to the Company so that the Company may affix the foregoing legends thereto. A copy of this Agreement shall be kept on file in the principal office of the Company. Upon termination of all applicable restrictions set forth herein and upon tender to the Company of the appropriate stock certificates, the Company shall reissue to the holder of such stock certificates new stock certificates which shall contain only the second paragraph of the restrictive legend set forth above. The parties to this Agreement intend that the legend conform to the applicable provisions of the Georgia Business Corporation Code. This legend may be modified from time to time by the Board of Directors of the Company to conform to such statutes or to this Agreement. SECTION 5.4. WAIVER OF PRE-EMPTIVE RIGHTS; PRIOR AGREEMENTS. (a) All Shareholders other than the Investor hereby irrevocably waive any pre-emptive or other rights, including, without limitation, any rights of first refusal or similar rights any of them have or may have with respect to the issuance of the Preferred Stock (b) Each of the Shareholders who are parties to the Prior Agreements hereby acknowledge that the Prior Agreements remain unaffected by the execution and delivery of the Stock Purchase Agreement and this Agreement, except that, with respect to the Existing Shareholders' Agreements, the provisions of Section 2 of each such Existing Shareholders' Agreements shall be superseded only to the extent that such transfer is a "Permitted Transfer" (as defined in the Existing Shareholders' Agreements) by the provisions of Section 2 of this Agreement until the earlier of the Restrictions Termination Date or the termination of this Agreement, at which time all of the provisions of Section 2 of each of the Existing Shareholders' Agreements shall again be effective. In the event of any conflict between the Prior Agreements and the terms and conditions of this Agreement, the terms and conditions of this Agreement shall control. SECTION 5.5. PROPRIETARY INFORMATION. (a) Each Shareholder acknowledges and agrees that all Proprietary Information, and all physical embodiments thereof, are confidential to and shall be and remain the sole and exclusive property of the Company and that any Proprietary Information produced by the Shareholder during the period of the Shareholder's employment by the Company shall be considered "work for hire" as such term is defined in 17 U.S.C. Section 101, et. seq., the ownership and, if applicable, the copyright of which shall be vested solely in the Company. Each Shareholder agrees (i) immediately to disclose to the Company all Proprietary Information developed in whole or part by such Shareholder during the term of such Shareholder's employment by the Company, and (ii) at the request and expense of the Company, to do all things and sign all documents or instruments reasonably necessary in the opinion of the Company to eliminate any ambiguity as to the exclusive rights of the Company in such Proprietary Information including, without limitation, providing to the Company such Shareholder's full cooperation in any litigation or other proceeding to establish, protect, or obtain such exclusive rights. Upon request by the Company, and in any event upon termination of employment, or -20- cessation of ownership of Shares, as the case may be, such Shareholder shall promptly deliver to the Company, and shall not retain or transmit to any other party or parties, all property belonging to the Company including, without limitation, all Proprietary Information (and all embodiments thereof) then in such Shareholder's custody, control, or possession. (b) Each Shareholder agrees that all Proprietary Information received or developed by such Shareholder as a result of such Shareholder's employment or association with the Company will be held in trust and kept in the strictest confidence, that such Shareholder will protect such Proprietary Information from disclosure, and that such Shareholder will not use, reproduce, distribute, disclose, or otherwise disseminate, by electronic or other means, the Proprietary Information or any physical embodiments thereof, except in connection with such Shareholder's employment hereunder, without the Company's prior written consent. The obligations of confidentiality contained in this Agreement with respect to all Proprietary Information will apply during such Shareholder's employment by the Company, or cessation of ownership of Shares, as the case may be, and at any and all times after expiration or termination (for whatever reason) of such or ownership. (c) In the event of final adjudication of a breach or contemplated breach of the covenants and agreements set forth in subsections (a) and (b) above, the Company shall have the right, in addition to all other rights or remedies available to it at law or in equity, to set off against and deduct from any monies then payable or thereafter to become payable to the breaching Shareholder pursuant to Section 2 hereof, the amount of any damages suffered or incurred by the Company as a result of such breach. In addition, the Company shall be entitled to preliminary and permanent injunctive relief against the breaching Shareholder to prevent or enjoin an actual or threatened breach of such covenants and agreements or the continuation thereof by such Shareholder. SECTION 5.6. EXTENSION OF TERM. This Agreement may be extended for additional ten (10) year periods if all Shareholders bound by this Agreement at the time of the extension so agree in writing. SECTION 5.7. CONTINUATION OF EMPLOYMENT. Nothing in this Agreement shall create an obligation on the Company to continue the employment of a Shareholder with the Company or any Affiliate of the Company. SECTION 5.8. SPECIFIC ENFORCEMENT. The Shareholders expressly agree that they will be irreparably damaged if this Agreement is not specifically enforced. Upon a breach or threatened breach of the terms, covenants and/or conditions of this Agreement by any Shareholder, any other Shareholder shall, in addition to all other remedies available with respect to such breach, be entitled to a temporary or permanent injunction, without showing any actual damage, and/or a decree for specific performance, in accordance with the provisions hereof. SECTION 5.9. NOTICES. All notices, requests, consents, and other communications required or permitted hereunder shall be in writing and shall be effective when delivered in person or by "confirmed" facsimile transmission or one day after deposit with a nationally recognized overnight delivery carrier properly addressed and deposited prior to the applicable deadline for receipt of overnight packages, or five days after deposit in the U.S. Mail, certified or registered mail, return receipt requested, postage prepaid, in each case addressed as follows (or at such other address for the parties as shall be specified by like notice): -21- (a) if to the Company: nFront, Inc. 1551 Jennings Mill Road, Suite 800A Bogart, Georgia 30622 Attention: Tripp Rackley Facsimile: (706) 369-8611 with a copy (which shall not constitute notice) to: Rogers & Hardin, LLP 229 Peachtree Street 2700 International Tower, Peachtree Center Atlanta, Georgia 30303 Attention: Alan C. Leet, Esq. Facsimile: (404) 525-2224 (b) if to a Shareholder other than NMP, such Shareholder's address as reflected in the stock records of the Company or as such Shareholder shall designate to the Company in writing. (c) if to NMP: Noro-Moseley Partners, IV, L.P. 9 North Parkway Square 4200 Northside Pkwy Atlanta, GA 30327 Attention: Charles D. Moseley, Jr. Facsimile: (404) 239-9280 with a copy (which shall not constitute notice) to: Balboni Law Group LLC 990 One Live Oak Center 3475 Lenox Road, N.E. Atlanta, Georgia 30326 Attention: Gerardo M. Balboni II, Esq. Facsimile: (404) 812-3101 SECTION 5.10. ASSIGNMENT. This Agreement shall not be assignable by any of the parties hereto without the written consent of the other parties. SECTION 5.11. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the internal laws of the State of Georgia, irrespective of the choice of law provisions thereof. The parties agree that any appropriate state court located in Fulton County, Georgia, or any Federal Court located in the Northern District of Georgia-Atlanta Division, shall have exclusive jurisdiction of any case or controversy arising under or in connection with this Agreement and shall be a proper forum in which to adjudicate such case or controversy. The parties consent to the jurisdiction of such courts. SECTION 5.12. AMENDMENT. Except as otherwise provided herein, this Agreement may be amended, supplemented, or interpreted at any time, but only by a written instrument executed by the -22- Company, the Investor, and Shareholders holding at least sixty-seven percent (67%) of the Shares held by such Shareholders in the aggregate. SECTION 5.13. FACSIMILE SIGNATURE; COUNTERPARTS. This Agreement may be executed by facsimile signature and in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. SECTION 5.14. ENTIRE AGREEMENT. Subject to Section 5.4 hereof with regard to the Prior Agreements, this Agreement, together with other documents delivered pursuant hereto or incorporated by reference herein, contain the entire agreement between the parties hereto concerning the transactions contemplated herein and supersede all prior agreements or understandings between the parties hereto relating to the subject matter hereof. No oral representation, agreement, or understanding made by any party hereto shall be valid or binding upon such party or any other party hereto. SECTION 5.15. EFFECT OF OTHER LAWS AND AGREEMENTS. The rights and obligations of the parties under this Agreement shall be subject to any restrictions on the purchase of stock which may be imposed by the Georgia Business Corporation Code or any agreement now or hereafter entered into between the Company and any financial institution with respect to loans or other financial accommodations made to the Company. Nothing contained herein shall be deemed to limit the obligations and duties imposed upon officers and directors in accordance with state and federal laws. SECTION 5.16. FURTHER ASSURANCE. Each party hereto shall do and perform, or cause to be done and performed, all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments and documents as any other party hereto may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. SECTION 5.17. CAPTIONS AND SECTION HEADINGS. Except as used in Section 1, captions and section headings used herein are for convenience only and are not a part of this Agreement and shall not be used in construing it. SECTION 5.18. WAIVER. Any waiver by any party hereto of any of his or its rights hereunder shall be without prejudice of his or its future assertion of any such rights, and any delay in exercising any rights shall not operate as a waiver thereof. SECTION 5.19. SEVERABILITY OF PROVISIONS. If any one or more of the provisions of this Agreement shall be determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provision of this Agreement shall not be impaired in any way. SECTION 5.20. SPECIFIC PERFORMANCE. In any action or proceeding to specifically enforce the provisions of this Agreement, any person (including the Company) against whom such action or proceeding is brought hereby waives the claim or defense therein that the plaintiff or claimant has an adequate remedy at law, and such person shall not urge in any such action or proceeding the claim or defense that such remedy at law exists. The provisions of this paragraph shall not prevent any party from seeking a remedy at law in connection with any breach of this Agreement. SECTION 5.21. SHAREHOLDER OBLIGATIONS. The obligations of the Shareholders hereunder are several and not joint. -23- IN WITNESS WHEREOF, this Agreement has been executed as of the date and year first above written. nFront, Inc. By: /s/ Brady L. Rackley III ----------------------------------------------------- Brady L. Rackley, III, President Noro-Moseley Partners IV, L.P. By: MKFJ IV., L.L.C., General Partner By: /s/ Charles D. Moseley, Jr. ----------------------------------------------------- Charles D. Moseley, Jr., Member 35,824 Shares (Common) 255,885 Shares (Preferred) /s/ Brady L. Rackley III --------------------------------------------------------- Brady L. Rackley, III 435,000 Shares /s/ Brady L. Rackley --------------------------------------------------------- Brady L. Rackley 435,000 Shares /s/ Steve J. Smith, COO/CFO --------------------------------------------------------- CNL Financial Corporation 23,018 Shares /s/ Tom E. Greene --------------------------------------------------------- Tom E. Greene 15,000 Shares /s/ James A. Verbrugge --------------------------------------------------------- James A. Verbrugge 15,000 Shares /s/ Warren Derek Porter --------------------------------------------------------- Warren Derek Porter 75,000 Shares /s/ Steven Scott Neel --------------------------------------------------------- Steven Scott Neel 25,000 Shares EX-21.1 4 LIST OF SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 LIST OF SUBSIDIARIES OF THE REGISTRANT
Names under which Name of Subsidiary does Subsidiary State of incorporation business ---------- ---------------------- --------------- nFront, Inc. Georgia Digital Insight
EX-23.1 5 CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-90053 and 333-30876) of Digital Insight Corporation of our report dated January 28, 2000, except as to note 13, as to which the date is March 6, 2000, relating to the financial statements that appear in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP - ----------------------------------- PricewaterhouseCoopers LLP Woodlands Hills, California March 27, 2000 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 DEC-31-1999 DEC-31-1998 42,249 4,758 15,841 0 4,276 429 0 0 183 135 63,876 5,402 7,381 2,353 1,326 587 71,438 8,077 8,640 2,335 0 0 0 12,444 0 0 15 6 62,390 (6,790) 71,438 8,077 17,506 8,230 17,506 8,230 10,603 5,247 10,603 5,247 15,187 7,582 0 0 0 0 (7,506) (4,356) 0 0 (7,506) (4,356) 0 0 0 0 0 0 (7,506) (4,356) (.97) (.85) (.97) (.85)
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