<PAGE>
As filed with the Securities and Exchange Commission on November 29, 1999
Registration No. 333-87985
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
under
The Securities Act of 1933
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eBenX, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 7389 41-1758843
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification
incorporation or Classification Code Number)
organization) Number)
--------------------
5500 Wayzata Boulevard, Suite 1450
Minneapolis, Minnesota 55416-1241
(612) 525-2700
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Scott P. Halstead
eBenX, Inc.
5500 Wayzata Boulevard, Suite 1450
Minneapolis, Minnesota 55416-1241
(612) 525-2700
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
--------------------
Copies to:
KENNETH L. CUTLER LELAND E. HUTCHINSON
SCOTT L. BARRINGTON GREGORY J. BYNAN
SCOTT A. NICHOLAS Winston & Strawn
Dorsey & Whitney LLP 35 West Wacker Drive
220 South Sixth Street Chicago, Illinois 60601
Minneapolis, Minnesota 55402-1498 (312) 558-5600
(612) 340-2600
--------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
--------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 29, 1999
[eBenX LOGO]
5,000,000 Shares
Common Stock
This is our initial public offering and no public market currently exists for
our common stock. We expect that our common stock will trade on the Nasdaq
National Market under the symbol "EBNX." We anticipate that the initial public
offering price will be between $10.50 and $12.50 per share.
--------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 4.
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<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price.......................................... $ $
Underwriting Discounts......................................... $ $
Proceeds to eBenX.............................................. $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
We have granted the underwriters a 30-day option to purchase up to an
additional 750,000 shares of our common stock to cover overallotments.
BancBoston Robertson Stephens Inc. expects to deliver the shares of our common
stock to purchasers on , 1999.
--------------
Robertson Stephens
Warburg Dillon Read LLC
Thomas Weisel Partners LLC
The date of this prospectus is , 1999.
<PAGE>
We are offering to sell, and seeking offers to buy, shares of our common
stock only in jurisdictions where offers and sales are permitted. You should
rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. Information on the eBenX and Network Management Services,
Inc. Web sites are not part of this prospectus.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 4
Forward-Looking Statements .............................................. 13
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 17
Business................................................................. 24
Management............................................................... 38
Certain Transactions..................................................... 46
Principal Shareholders................................................... 47
Description of Capital Stock............................................. 49
Shares Eligible for Future Sale.......................................... 50
Underwriting............................................................. 52
Legal Matters............................................................ 54
Experts.................................................................. 54
Additional Information................................................... 54
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------------
BEN-NET(R) is a registered trademark and WebElect(R) is a registered service
mark of eBenX. eBenX(TM), BenX(TM) and Benefit Exchange Network(TM) are also
our trademarks.
<PAGE>
This graphic depicts eBenx, Inc.'s relationship to various other
organizations. The top left corner of the graphic contains the following title:
"The eBenX group health insurance e-commerce exchange." The bottom left corner
of the graphic contains a list with the heading "BUYER CUSTOMERS." This list
contains the following names: American Medical Response, American Red Cross,
Bass Hotels & Resorts, Bell Atlantic, Chevron, Dayton Hudson, Georgia-Pacific,
GE Capital Services, KPMG, Northwest Airlines, PepsiCo, Promus Hotels, Reader's
Digest, R.R. Donnelley, W.W. Grainger, and White Consolidated. The top right
corner of the graphic contains a list with the heading "HEALTH PLAN
CONNECTIONS." This list contains the following names: Aetna, Inc. Plans, Blue
Cross Blue Shield Plans, CIGNA Health Plans, Inc., Delta Dental, Harvard Pilgrim
Health Care, Kaiser Foundation Health Plan, Merck-Medco, PacifiCare Health
Systems and UnitedHealth Group Corporation Plans. The bottom right corner of the
graphic contains the word "eBenX" in large bold font. The first "e" in the word
"eBenX" is italicized. The large "X" in "eBenX" is comprised of two slashes. The
slash that rises from left to right is in unbolded font. The slash that lowers
from left to right is thick and contains six thin white spaces running through
it, parallel with the text of the word "eBenX." Additionally, the slash that
lowers from left to right ends slightly below the bottom of the rest of the word
"eBenX." Below the word "eBenX" and beginning immediately after the "B" in
"eBenX" in smaller font is the italicized phrase "The Benefit Exchange Network."
There are a number of icons in this graphic. Next to the list of "Buyer
Customers," there is one building labeled "Employer"; underneath the title "The
eBenX group health insurance e-commerce exchange" there are a row of four
servers labeled "Procurement," "Enrollment and Eligibility Maintenance,"
"Customer Service," and "Financial Engine"; and between the building labeled
"Employer" and the set of servers there is a server labeled "Human Resource
Systems." To the left of the list of "Health Plan Connections" there is a row of
four buildings labeled "Health Plans"; to the left of the large word "eBenX,"
there is a block figure that casts a shadow labeled "Employee"; and between the
block figure and the row of buildings labeled "Health Plans," there is a
computer terminal labeled in bold "eBenX.com." Between the building labeled
"Employer" and the block figure, there is a set of three block figures labeled
"Broker." Between the computer terminal and the row of four buildings located at
the top left corner of the graphic there is a server labeled "Data and Rules."
The computer terminal is connected to the following icons with slightly
curved yellow arrows that point both ways: the block figure labeled "Employee,"
the set of block figures labeled "Broker," the building labeled "Employer," and
one arrow for each of the buildings in the row of four buildings entitled
"Health Plans." There are four straight blue arrows connecting the server
labeled "Data and Rules" with each of the four servers located at the top left
corner. Finally, there is a line simulating a computer cable connecting the
computer terminal with the server labeled "Data and Rules."
<PAGE>
SUMMARY
Because this is only a summary, it does not contain all the information that
may be important to you. You should read the entire prospectus, especially
"Risk Factors" and the consolidated financial statements and notes, before
deciding to invest in shares of our common stock.
eBenX, Inc.
We provide business-to-business e-commerce and connectivity solutions to
employers and health plans for the purchase, eligibility administration and
premium payment of group health insurance benefits. Through our proprietary and
licensed technology, we facilitate the flow of employee and dependent
eligibility and financial data between employer purchasers of group health
insurance benefits and health plan suppliers. The plan information, data and
financial exchange requirements in this $600 billion market are extremely
complex. Our proven Web-enabled services and high volume eligibility and
financial data transmission systems, or pipelines, provide the critical
connectivity necessary for employers and health plans to communicate
electronically. Today, we connect customers such as Bell Atlantic Corporation,
PepsiCo, Inc., Northwest Airlines Corporation, GE Capital Services Corporation,
Promus Hotels Corporation and R.R. Donnelley & Sons Company to their wide array
of health plan trading partners. In 1998, Bell Atlantic, Northwest Airlines and
PepsiCo accounted for approximately 50% of our revenue.
The widespread acceptance of the Internet as a business communications
platform has created a foundation for business-to-business e-commerce that
enables employers and health plans to streamline complex processes, lower costs
and improve productivity. The purchasing, eligibility administration and
premium payment process is encumbered by inefficient procedures for gathering
and transferring data and executing payment transactions. These inefficiencies,
along with other factors unique to the group health insurance benefits market,
create an environment which is conducive to e-commerce solutions. However,
unlike other e-commerce products and services, such as buying books or
individual insurance, the complexities of the group health insurance benefits
market require an extensive understanding of the purchasing and administration
of, and payment for, group health insurance benefits and advanced technology.
Currently, employers and health plans face the following challenges:
. fragmented marketplace: multi-site, multi-state employers must purchase
health insurance from multiple, locally-based health plans;
. increasing costs: employers face pressure to purchase benefits more
effectively due to the escalating costs of providing group health
insurance benefits to employees and retirees;
. complex data: employers and health plans must exchange complex, detailed
and dynamic data in multiple formats using various system platforms;
. complex pricing and payment reconciliation: employers and health plans
must establish price on a case-by-case basis and continually reconcile
complex billing and settlement transactions; and
. government regulation: federal, state and local laws and regulations
burden the process of purchasing group health insurance benefits through
additional reporting and coverage requirements.
We are pioneering the use of the Internet to automate the purchase,
eligibility administration and premium payment process for the group health
insurance benefits market. By using our proprietary and licensed technology we
enable employers to streamline the administrative process and make purchasing
decisions in a more competitively priced market. Based on our six years of
industry experience with Fortune 1000 companies, we have developed a technology
platform that automates the data exchange, payment and reconciliation process
in this market. In 1999, we extended this technology platform to enable
enrollment data collection and plan information distribution, thus creating an
integrated end-to-end e-commerce solution consisting of front-end and back-end
processing components for the group health insurance benefits market.
1
<PAGE>
Our technology platform enables us to introduce what we believe is the first
fully integrated end-to-end e-commerce solution for the procurement of group
health insurance benefits. We believe that with this technology platform and
our industry expertise we can fundamentally change the way group health
insurance benefits are purchased. Using this e-commerce solution, our near-term
strategy is to increase our penetration of, and service offerings to, the
Fortune 1000 market, to leverage our technology through relationships with
insurance brokers to penetrate the mid-size employer market and to establish
additional strategic relationships.
The Offering
<TABLE>
<C> <S>
Common stock offered................................ 5,000,000 shares
Common stock to be outstanding after this offering.. 15,054,068 shares
Use of proceeds..................................... We intend to use the net
proceeds of this offering
for general corporate
purposes, including
working capital, sales
and marketing
expenditures, development
of new products and
services, investment in
technology infrastructure
and possible
acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.............. EBNX
</TABLE>
Common stock to be outstanding after this offering does not include:
. 3,346,353 shares issuable upon exercise of outstanding stock options
under existing stock option plans;
. 66,135 shares issuable upon exercise of outstanding warrants; and
. 3,964,422 shares available for future grant or issuance under our stock
option plans.
See "Management--Employee Benefit Plans," "Description of Capital Stock" and
Note 4 of "Notes to Consolidated Financial Statements" beginning on page F-9.
--------------------
Our headquarters are located at 5500 Wayzata Boulevard, Suite 1450,
Minneapolis, Minnesota 55416-1241 and our telephone number is (612) 525-2700.
Our Web site addresses are www.ebenx.com and www.networkmanagementinc.com. In
September 1999, we changed our name from Network Management Services, Inc. to
eBenX, Inc.
Unless otherwise indicated, all information contained in this prospectus
assumes that the underwriters' overallotment option is not exercised, reflects
the conversion of all outstanding preferred stock into common stock immediately
prior to the commencement of this offering and a three-for-one split of our
common stock effective immediately prior to this offering.
2
<PAGE>
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
Ended September
Year Ended December 31, 30,
-------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue............. $ 904 $2,497 $4,360 $7,093 $10,122 $ 6,669 $11,746
(Loss) income from
operations............ (177) 31 (779) (713) (1,186) (1,125) (3,022)
Net (loss) income....... (166) 62 (581) (500) (1,042) (1,024) (2,702)
Basic and diluted net
(loss) income per
share................. $ (.05) $ .02 $ (.18) $ (.15) $ (.30) $ (.30) $ (.77)
Shares used in basic and
diluted net income
(loss) per share...... 3,234 3,298 3,313 3,376 3,463 3,457 3,517
Pro forma basic and
diluted net loss per
share................. (.16) (.33)
Shares used in pro forma
net loss
per share............. 6,485 8,103
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
---------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................... $7,290 $7,290 $60,015
Working capital.............................. 9,162 9,162 61,887
Total assets................................. 13,417 13,417 66,142
Long-term obligations, net of current
portion.................................... -- -- --
Total shareholders' equity (deficit)......... (4,694) 11,256 63,981
</TABLE>
The "Pro Forma As Adjusted" column in the Balance Sheet Data table gives
effect to the receipt and application of the estimated net proceeds from our
sale of the 5,000,000 shares of common stock offered by this prospectus at an
assumed initial public offering price of $11.50 per share, after deducting the
estimated underwriting discount and offering expenses that we will pay. See
"Use of Proceeds" and "Capitalization" for a further description of the
estimated proceeds of this offering.
See Note 1 of "Notes to Financial Statements," beginning on page F-7, for an
explanation of the methods used to compute basic and diluted net (loss) income
per share data and pro forma basic and diluted net loss per share data.
3
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before deciding whether to purchase shares of our common stock. If
any of the following risks actually occur, our business and operating results
could be harmed. This could cause the trading price of our common stock to
decline, and you may lose all or part of your investment.
Risks Related to Our Business
We have had net losses over the past several years and we may not be able to
achieve or maintain profitability in the future.
Our business strategy may be unsuccessful and we may never achieve or
maintain significant revenues or profitability. With the exception of fiscal
1995, we have incurred net losses each year since we began operations in 1993.
We had net losses of approximately $1.0 million for the year ended December 31,
1998 and $2.7 million for the nine month period ended September 30, 1999, and
an accumulated deficit of $4.9 million as of September 30, 1999. We expect to
continue to incur significant development, sales and marketing and other
operational expenses in connection with our business. We may also incur
expenses in connection with acquisitions or other strategic relationships. As a
result of these expenses, we will need to generate significant quarterly
revenue increases to achieve and maintain profitability. We expect that we will
incur net losses for the next several years.
We rely significantly on a limited number of customers and the loss of any
material customer could harm our business and operating results.
The loss of a material customer would significantly reduce our revenue and
harm our business and operating results. In 1998, three customers accounted for
approximately 50% of our total revenue. In 1999 to date, twelve customers have
accounted for approximately 90% of our total revenue. Further, because
increased employee participation from existing customers has contributed to our
revenue growth, the loss of any material customer would harm our prospects for
future growth. We may continue to depend upon a small number of customers for a
substantial percentage of our revenue in the future.
The failure of the industry to accept our products and services could limit our
revenue growth.
The failure of industry participants to accept our products and services as a
replacement for traditional methods of operation could limit our revenue
growth. Our success depends on our ability to provide products and services to
a large number of employers with a substantial base of participating employees
and to efficiently and accurately collect and process eligibility data and
execute payment transactions with numerous health plans. The acceptance by
employers of our products and services will require that all participants in
the group health insurance benefits market adopt new methods of administering
benefits, exchanging eligibility information and executing payment
transactions.
Further, our products and services facilitate competition among health plans
at the employer level by creating an infrastructure that allows multiple health
plans to service a single employer. Health plans have in the past resisted
servicing smaller companies on a non-exclusive basis. This resistance may
inhibit our growth, especially in the mid-size employer market.
We face intense competition in our industry and, if we are unable to compete
successfully, our business and operating results will be seriously harmed.
Increased competition in our industry could result in price reductions,
reduced gross margins or loss of market share which could seriously harm our
business and operating results. The group health insurance benefits industry is
intensely competitive, rapidly evolving and subject to sudden technological
change. We
4
<PAGE>
believe that the principal competitive factors in this market are health
and managed care expertise, data integration and transfer technology, benefits
processing technology, customer service and support and product and service
fees. We expect competition to increase in the future.
We compete with administrative service providers and benefits consultants
with administrative capabilities. We also compete with the human resource and
information systems departments of the Fortune 1000 companies that perform
their own health care administration services. In the mid-size employer market
we compete with health benefit brokers and regional brokers. In addition, many
human resource systems and service companies have the health care expertise and
financial strength to develop the technology necessary to compete with us. As
the market evolves we expect increased competition from Internet-based service
providers in both the health care connectivity market between suppliers and
providers (e.g., physicians, hospitals and pharmacies) and the online insurance
market.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base
of customers than we do. In addition, many of our competitors have well-
established relationships with our current and potential customers and have
extensive knowledge of our industry. Current and potential competitors have
established or may establish strategic relationships among themselves or with
third parties to increase the ability of their products and services to address
employer needs. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
Failure to manage our growth effectively could harm our business and operating
results.
Failure to manage our growth effectively could harm our business and
operating results. Continued rapid growth will place significant strain upon
our management and operational systems and resources. We will need to expand
our existing information systems or acquire new systems to meet the
requirements of our future operations. Any expansion or replacement of our
information systems may not be sufficient to meet our needs. In addition, we
may experience interruptions of service as we expand these systems.
We recently have hired a significant number of new employees, including key
executives. We will continue to add personnel to maintain our ability to grow
in the future. We must integrate our new employees and key executives into a
cohesive team and at the same time increase the total number of employees and
train and manage our employee work force in a timely and effective manner to
expand our business. We may not be able to do so successfully, which would
inhibit our ability to expand our business and harm our operating results.
Unsuccessful efforts or incurrence of unanticipated expenses in selling our
products and services could harm our business and operating results.
The time, expense and effort of securing customers may exceed our
expectations and may harm our business and operating results. The decision to
implement our products and services requires a substantial and technical
analysis of a customer's healthcare benefits offerings and requirements and
time-intensive education of the customer of the advantages of our products and
services. Due to the length of our sales cycle, which generally ranges from
three to twelve months, we often devote significant resources and incur costs
without any assurance that a prospective customer will purchase our products or
services. In the event that a prospective customer does not purchase our
products or services, we may have incurred substantial costs that cannot be
recovered and which will not result in future revenues.
Our failure to establish and maintain successful relationships with strategic
partners could limit our revenue growth.
We believe that our future revenue growth depends in part upon the successful
creation and maintenance of relationships with strategic partners such as
front-end healthcare information collection companies, human resources
information services firms, healthcare benefits consultants and brokers and
other industry participants. To date, we have established only a limited number
of strategic relationships. Strategic partners may offer
5
<PAGE>
products or services of several different companies, including products and
services that compete with our products or services. Strategic partners and
potential strategic partners may be influenced by our competitors to scale back
or end their relationships with us. We may not establish additional strategic
relationships and these relationships may not be ultimately successful. Our
strategic partners may not devote adequate resources to selling our products
and services.
If we are unable to establish and maintain successful strategic
relationships, we may have to devote substantially more resources to the sales
and marketing of our products and services, which will increase our costs and
harm our operating results.
Our quarterly results likely will fluctuate which could cause the value of our
common stock to rapidly decline.
Any quarterly fluctuations in our operating results could subject the market
price of our common stock to rapid and unpredictable change. Historically, we
obtain 75% of each year's new customer commitments during the months of
February through May because most employers have open enrollment periods for
the selection of health plans by their employees in the fall. We expect this
seasonality in our business to continue. Our expenses are relatively fixed in
the short term and are based in part on our expectations of future revenues,
which may vary significantly. If we do not achieve expected revenue targets, we
may be unable to adjust our spending quickly enough to offset any revenue
shortfall which could harm our business and operating results.
Factors, including those discussed elsewhere in these risk factors, that may
cause these quarterly fluctuations include:
. the number and size of new customers starting services;
. the decision of one or more customers to delay implementation or cancel
ongoing services;
. our ability to design, develop and introduce new services and features
for existing services on a timely basis;
. costs associated with strategic acquisitions and alliances or
investments in technology;
. expenses incurred for geographic and service expansion;
. a reduction in the number of employees of our customers; and
. acquisitions of our customers by other companies.
Further, our agreements with customers generally do not have penalties for
cancellation. As a result, any decision by a customer to cancel our services
may cause significant variations in operating results in a particular quarter
and could result in losses for that quarter. As we secure larger customers, any
cancellation of services by a larger customer likely would result in larger
fluctuations in operating results than historically experienced.
Failure to retain our key executives or attract and retain qualified technical
personnel could harm our business and operating results.
The loss of one or more of our executive officers could inhibit the
development of our business and, accordingly, harm our business and operating
results. While we generally enter into employment agreements with our key
executive officers, we may not be able to retain them.
Qualified personnel are in great demand throughout the Internet and
healthcare industries. Our future growth and our ability to achieve our
financial and operational objectives will depend in large part upon our ability
to attract and retain highly skilled technical, engineering, sales and
marketing and customer support personnel. Our failure to attract and retain
personnel may limit the rate at which we can expand our business, including the
development of new products and services and the retention of additional
customers, which could harm our business and operating results.
6
<PAGE>
We could be subject to potential liability claims related to our products and
services which could harm our financial condition and results of operations.
Any liability claim brought against us, even if not successful, would likely
be time consuming and costly and could seriously harm our business and
operating results. Errors in the performance of our products or services on
behalf of an employer could result in the delay of processing of healthcare
eligibility information or execution of payment transactions or could otherwise
result in financial or other damages to our customers. These errors also may
result in the improper denial of healthcare benefits to employees. A liability
claim brought against us by an employer or an employee could seriously harm our
business and reputation.
Our customer agreements generally require that we indemnify our customers for
various losses and liabilities incurred by them that are caused by us. Any
indemnification payments required under these agreements may harm our business
and operating results.
We also may become party to litigation brought by a participating employee
against an employer or health plan. We may not successfully avoid liability for
problems related to the provision of healthcare benefits even though we do not
make medical determinations or coverage decisions. Any claims or litigation
also could require expenditures in terms of management time and other resources
to defend ourselves. This could require us to implement measures to reduce our
exposure to this liability, which may require us, among other things, to expend
substantial resources or to discontinue product or service offerings or to take
other precautions. Liability of this type could harm our business and operating
results.
Failure to raise additional capital to fund our future operations and satisfy
working capital needs could harm our business and operating results.
We do not currently generate sufficient cash to fully fund operations. To
date, we have financed our operations principally through the issuance of
equity securities and, to a limited extent, through borrowings. We may need to
raise additional capital in the future to fund our ongoing operations and to
support expansion of our business. We may not be able to obtain additional
financing when needed or on terms favorable to us. Any difficulty in obtaining
additional financing may require us to limit our operations or may inhibit our
future growth.
The failure to successfully integrate any future acquisitions could harm our
business and operating results.
If we acquire businesses in the future and are unable to successfully
integrate these businesses into our own, it could harm our business and
operating results. In order to remain competitive or to expand our business, we
may find it necessary or desirable to acquire other businesses, products or
technologies. If we identify an appropriate acquisition candidate, we may not
be able to negotiate the terms of the acquisition successfully, to finance the
acquisition or to integrate the acquired businesses, products or technologies
into our existing business and operations. Further, completing a potential
acquisition and integrating an acquired business may strain our resources and
require significant management time. In addition, we may be required to
amortize significant amounts of goodwill and other intangible assets in
connection with future acquisitions which would harm our operating results.
Consolidation in the healthcare industry could harm our future operating
results and opportunities for growth.
Our products and services are, in large part, beneficial to employers because
we are able to coordinate the exchange of eligibility and financial data and
execute payment transactions between an employer and its numerous health plans.
Consolidation in the healthcare industry may require us to reconfigure our
products, services and systems to accommodate a change in data formats and
codes utilized by recently acquired or consolidated health plans. Further, the
consolidation of health plans operating in the same geographic market may
substantially reduce the number of competitive health plans in that market.
Existing and potential customers, especially mid-size market employers that
operate in only one geographic market, may not find our products and services
beneficial if there is only limited competition among health plans.
7
<PAGE>
Our revenues could decrease if the integrity of our systems is inadequate.
Any failure of our systems could harm our business and operating results. Our
systems process vast amounts of eligibility and financial data and execute
large numbers of payment transactions. Any delay or failure in our systems or
in our ability to communicate electronically with employers and health plans or
in our ability to collect, store, analyze or process accurate eligibility and
financial data may result in the denial of healthcare benefits, or in the delay
or failure to execute payment transactions accurately. This type of denial or
failure would harm our business and operating results.
The occurrence of a catastrophic event or other system failure at our
facilities could interrupt our operations or result in the loss or corruption
of stored data. In addition, we depend on the efficient operation of Internet
and network connections among our systems, employers and health plans. These
connections depend on the efficient operation of data exchange tools, Web
browsers, Internet service providers and Internet and network backbone service
providers. In the past, Internet users have occasionally experienced
difficulties with Internet and online services due to system failures. Any
disruption in Internet or network access provided by third parties could harm
our business and operating results. Further, we are dependent on hardware
suppliers for prompt delivery, installation and service of equipment used to
deliver our services. The failure of these suppliers to promptly deliver,
install or service equipment could harm our business and operating results.
Our costs could increase or our revenues could decrease if we or our business
partners experience Year 2000 compliance problems or related system failures.
Year 2000 compliance problems could harm our business and operating results.
We may experience Year 2000 compliance problems requiring substantial revisions
to our systems. In addition, third party software, hardware or other technology
incorporated into our information systems or upon which our business depends
may need to be revised or replaced as a result of Year 2000 compliance
problems. Any revision to our systems or revision or replacement of third-party
software, hardware or other technology could be time consuming and expensive.
In addition, a failure to identify, fix and/or replace these systems or third-
party software, hardware or other technology in a timely manner could disrupt
our business operations and result in lost revenue, increased operating costs,
the loss of customers and other business interruptions.
Our customers may also experience Year 2000 compliance problems or related
system failures. These problems and failures could result in our inability to
properly collect eligibility and financial data and process payments on behalf
of employers and could generally interrupt our delivery of products and
services. Any inability to perform, or interruption in the performance of,
services on behalf of any employer or health plan could harm our business and
operating results.
Furthermore, our business depends upon products, services and technology
provided by third parties, such as health care providers and insurers,
insurance and health care brokers, information technology consultants, network
support providers, telecommunication companies, Internet service and access
providers, third-party service providers, vendors, business partners and others
outside our control. These parties' information and non-information systems may
not be Year 2000 compliant. Any failure by these parties to be Year 2000
compliant could result in a disruption of our business, or could result in a
systemic failure beyond our control. A prolonged Internet or communications
failure could also prevent us from performing services on behalf of customers.
A failure of any of these parties to be Year 2000 compliant could harm our
business and operating results. Also, a systemic failure could require
potential customers to dedicate substantial resources towards fixing or
resolving Year 2000 compliance problems and may make the sales and marketing of
our services more difficult.
Based on our assessments to date, we believe we will not experience any
material disruption as a result of Year 2000 problems with respect to our
services and the third-party systems we use for our internal functions. But if
certain critical third-party suppliers, such as those supplying electricity,
water or telephone service, experience difficulties resulting in disruption of
service to us, a shutdown of our operations could occur for the duration of the
disruption.
8
<PAGE>
Our business and reputation may be harmed if we are unable to protect the
privacy of our customer information.
Our information systems and Internet communications may be vulnerable to
damage from physical break-ins, computer viruses, programming errors, attacks
by computer hackers or similar disruptive problems. A user who is able to
access our computer or communication systems could gain access to confidential
employer, employee or health plan information or our own confidential
information. A material security breach could harm our business and our
reputation or could result in liability to us. Therefore, it is critical that
our facilities and infrastructure remain secure. The occurrence of any of these
events could result in the interruption, delay or cessation of our services,
which could harm our business or operating results. Further, our reputation may
suffer if third parties were to obtain this information and we may be liable
for this disclosure. Any effect on our reputation or any liability for any
disclosure could harm our business and operating results.
If the demand for Internet and e-commerce solutions does not increase, it could
limit our revenue growth and profitability.
Rapid growth in the use of the Internet is a recent phenomenon. As a result,
its acceptance and use may not continue to develop at historical rates and a
sufficiently broad base of business customers may not adopt or continue to use
the Internet as a medium of commerce. Demand and market acceptance for recently
introduced products and services over the Internet are subject to a high level
of uncertainty, and there exist few proven products and services.
Our future revenue growth and profitability depend, in part, upon increased
employer demand for additional Internet and e-commerce solutions that we are in
the process of developing or may develop in the future.
If we are unable to adequately protect our intellectual property rights or if
we infringe upon the intellectual property rights of third parties, our results
of operations may be harmed.
Our success depends in part upon our intellectual property rights to products
and services which we develop. We rely on a combination of contractual rights
including non-disclosure agreements, trade secrets, copyrights and trademarks
to establish and protect our intellectual property rights in our names,
products, services and related technology. Loss of intellectual property
protection or inability to secure intellectual property protection on any of
our names, confidential information or technology could harm our business and
operating results.
We currently have no registered patents or pending patent applications
covering any of our technology. We have received a U.S. trademark registration
for BEN-NET and a U.S. service mark registration for WebElect. These
registrations may not be enforceable or effective in protecting the BEN-NET or
WebElect marks.
We typically enter into non-disclosure and confidentiality agreements with
our employees and consultants with access to sensitive information. These
agreements may not be adequate to protect our intellectual property rights or
prevent misappropriation of our technology. Products and services with features
similar to our products and services may be independently developed.
Although we believe that our core technology has been independently developed
and that none of our technology or intellectual property infringes on the
rights of others, third parties may assert infringement claims against us in
the future. We may be required to modify our products, services, internal
systems or technologies or to obtain a license to permit our continued use of
those rights. We may not be able to do either in a timely manner or upon
reasonable terms and conditions. Failure to do so could harm our business and
operating
9
<PAGE>
results. In addition, future litigation relating to these matters could result
in substantial cost to, and diversion of resources by, us. Adverse
determinations in any litigation or proceedings of this type also could subject
us to significant liabilities to third parties and could prevent us from using
some of our products, services, internal systems or technologies.
Rapidly changing technology may impair our financial performance.
We may encounter difficulties responding to technological changes that could
delay our introduction of products and services and we may not be able to
respond to these changes in a timely and cost-effective manner. Our business
depends upon the use of software, hardware, networking and Internet technology
and systems. These technologies and systems are rapidly evolving and are
subject to rapid change and obsolescence. As these technologies mature, we must
be able to quickly and successfully modify our products and services to adapt
to this change. We may encounter difficulties that could delay or harm the
performance of our products or services. We may not be able to respond to
technological changes in a timely and cost-effective manner. In addition, our
competitors may develop technologically superior products and services.
Further, data formatting and eligibility rules within a particular employer or
health plan, or within the group health benefits industry as a whole, may
change and may require substantial and expensive re-engineering of eligibility
data and adjustment of the tools we use to process this eligibility data.
State, federal and local laws could harm our business and operating results.
State, federal or local laws could harm our business and operating results by
requiring us to change the way we provide services and increase our cost of
performing services. Further, these laws could restrict our ability to continue
to develop our business as currently planned. The healthcare industry is highly
regulated by federal, state and local laws. The application of existing laws,
or the implementation of new laws, applicable to our business could harm our
business and operating results. For example, the confidentiality of patient
records and the circumstances under which records may be released for inclusion
in our databases may be subject to substantial regulation by state governments.
These state laws govern both the disclosure and the use of confidential patient
medical records. Although compliance with these laws currently is principally
the responsibility of health care providers and health plans, these regulations
may be extended to cover our business and the eligibility data and other
information that we include in our databases. If these laws are extended to
cover our business, we may be required to expend additional resources in order
to comply with these laws, including changes to our security practices, and may
be exposed to greater liability in the event we fail to comply with these laws.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
mandates the use by health plans of standard transactions, identifiers,
security and other provisions by the year 2000. We have designed our products
and services to comply with HIPAA, but any change in federal standards would
require us to expend additional resources.
Further, our role in facilitating payments by employers to health plans may
subject us to the Employee Retirement Income Security Act. This act imposes
fiduciary duties on employers and health plans with respect to payments made on
behalf of participating employees and it is possible that these fiduciary
duties could be deemed to apply to us. In that event, we may become subject to
greater liability with respect to these payments and may experience higher
operating costs in order to comply with this regulation. These increases in
operating costs may harm our business and operating results.
State laws and regulations concerning the sale, marketing or distribution of
insurance over the Internet could harm our business and operating results.
Should our business activities require our licensing as an insurance agent,
we would incur increased costs and become subject to greater restrictions which
could harm our business and financial results. Further, because the application
of e-commerce to the insurance market is relatively new, the impact of current
or future insurance laws and regulations on our business is difficult to
anticipate. The insurance industry is subject to
10
<PAGE>
extensive regulation under state laws. Insurance laws and regulations cover all
aspects of the insurance process, including sales techniques, underwriting for
eligibility, rates, claim payments and record keeping by licensed insurance
companies and insurance agents. A company that does business as an insurance
agent is generally required to be licensed in each state in which it conducts
that business. In the future, our business or other activities may be
considered by insurance regulatory authorities to fall under their licensing
jurisdiction.
Risks Related to this Offering and Ownership of Our Common Stock
The price for our common stock could decline.
Prior to this offering, there has not been a public market for our common
stock. An active trading market for our common stock may not develop or be
sustained after completion of this offering. The initial public offering price
of our common stock may not be indicative of the prices that will prevail in
the public market after the offering, and the market price of our common stock
could fall below the initial public offering price. You may not be able to
resell your shares at or above the initial public offering price due to a
number of factors, including:
. actual or anticipated quarterly variations in our operating results;
. changes in expectations as to our future financial performance or
changes in financial estimates, if any, of securities analysts;
. announcements of new healthcare products, services or technological
innovations;
. announcements relating to strategic relationships and transactions;
. customer relationship developments;
. strategic alliance developments;
. regulatory changes;
. conditions generally affecting the group health insurance benefits
industry;
. success of our operating strategy;
. competition; and
. the operating and stock price performance of other comparable companies.
In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
Internet and e-commerce companies and which have often been unrelated to the
operating performance of these companies.
Future sales of our common stock in the public market after the offering could
cause the price of our common stock to decline.
Our shareholders could sell substantial amounts of our common stock in the
public market following the offering. As a result, the aggregate number of
shares of our common stock available to the public would increase and,
consequently, the price of our common stock could fall. We cannot predict the
timing or amount of future sales of shares of our stock or the effect, if any,
that market sales of shares, or the availability of shares for sale, will have
on the prevailing market price of our common stock. Upon completion of the
offering, we will have 15,054,068 outstanding shares of common stock, assuming
no exercise of outstanding options or warrants. Of these shares, the 5,000,000
shares sold in this offering will be freely tradeable. This leaves 10,054,068
shares that will be eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
--------- ----
<S> <C>
61,800 Available for immediate sale on the date of this prospectus
275,280 Available for sale 90 days after the date of this prospectus
9,716,988 Available for sale 180 days after the date of this prospectus
</TABLE>
11
<PAGE>
Shortly after the closing of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register a total of 7,800,000
shares of common stock issuable under the 1993 Stock Option Plan, the 1999
Stock Incentive Plan and the Stock Purchase Plan.
The holders of 6,248,922 shares of our preferred shares have registration
rights for the shares of common stock issuable upon conversion of these
preferred shares. All preferred shares will be converted into a total of
6,248,922 shares of common stock immediately prior to the offering. After the
offering, the holders of 6,248,922 shares of our common stock, which represent
approximately 41.5% of our outstanding common stock after this offering
assuming no exercise of outstanding options or warrants after October 31, 1999,
will be entitled to have the resale of their shares registered under the
Securities Act. If these holders cause a large number of securities to be
registered and sold in the public market, these sales could harm the market
price for our common stock. In addition, if we include in a company-initiated
registration statement shares held by these holders pursuant to the exercise of
their registration rights and there is limited demand to purchase our shares,
this inclusion may harm our ability to raise needed capital by effectively
reducing the number of newly-issued shares we can sell to the public.
Concentration of ownership may give some shareholders substantial influence and
may prevent or delay a change in control.
We anticipate that some shareholders, including officers and directors of the
company, will, in the aggregate, beneficially own approximately 60.5% of our
outstanding common stock following completion of this offering. These
shareholders may be able to exercise substantial influence over all matters
requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also have the effect of discouraging third party offers to acquire our
company or of delaying or preventing a change in control of our company.
Our charter documents and Minnesota law may discourage unsolicited takeover
offers which could deprive our shareholders of opportunities to sell their
shares of common stock at prices higher than prevailing market prices.
Provisions of our articles of incorporation, bylaws and Minnesota law could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our shareholders. For instance, our bylaws provide for a
classified board of directors with each class of directors subject to re-
election every three years. This will make it more difficult for third parties
to insert their representatives on our board of directors and gain control of
our company. These provisions could also discourage proxy contests and make it
more difficult for you and other shareholders to elect directors and take other
corporate actions. Further, the Minnesota Control Share Acquisition Act and the
Minnesota Business Combination Act may make it more difficult for third parties
to secure control of our company or to complete an acquisition. These acts may
discourage unsolicited takeover offers which could deprive our shareholders of
opportunities to sell their shares of common stock at prices higher than
prevailing market prices.
You will incur immediate and substantial dilution.
If you purchase shares of our common stock, you will incur immediate and
substantial dilution in pro forma net tangible book value of $7.25 per share,
assuming no exercise of any options or warrants after September 30, 1999. If
the holders of outstanding options or warrants exercise those options or
warrants, you will experience dilution of $7.89 per share.
We do not intend to pay dividends.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding the development and
growth of our business and, therefore, do not expect to pay any dividends in
the foreseeable future.
12
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements based on our current
expectations and projections about future events. These statements are subject
to risks, uncertainties and assumptions about us, including, among other
things:
. uncertainty of our future operating results;
. delays or losses of sales due to long sales and implementation cycles for
our products and services;
. actions of our competitors; and
. other factors discussed under "Risk Factors."
USE OF PROCEEDS
We estimate our net proceeds from the sale of our common stock in this
offering will be approximately $52.7 million, or approximately $60.7 million if
the underwriters' overallotment option is exercised in full, based on an
assumed initial public offering price of $11.50 per share and after deducting
the estimated underwriting discounts and offering expenses.
We intend to use the net proceeds from this offering for general corporate
purposes, including working capital, sales and marketing expenditures,
development of new products and services and investment in technology
infrastructure. In addition, a portion of the net proceeds may be used for
acquisitions of businesses, products and technologies that are complementary to
ours. We currently have no agreements with respect to any material acquisitions
as of the date of this prospectus. Pending use of the net proceeds for the
above purposes, we intend to invest the net proceeds from this offering in
short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and do
not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings to fund the development and growth
of our business.
13
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999
(a) on an actual basis, (b) on a pro forma basis to reflect the conversion of
all outstanding shares of preferred stock into shares of common stock
immediately prior to the commencement of this offering, and (c) on a pro forma,
as adjusted, basis to give effect to the receipt and application of the
estimated net proceeds from the sale of 5,000,000 shares of our common stock in
this offering at an assumed initial public offering price per share of $11.50
after deducting the estimated underwriting discounts and offering expenses.
<TABLE>
<CAPTION>
As of September 30, 1999
-----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- -------------- -----------
(in thousands)
<S> <C> <C> <C>
Long-term debt and capitalized lease
obligations, non-current
portion.................................. $ -- $ -- $ --
Redeemable convertible preferred stock,
$.01 par value per share; 6,266,922
shares authorized, 6,248,922 shares
outstanding, actual; no shares issued and
outstanding, pro forma and pro forma as
adjusted................................. 15,950 -- --
Shareholders' equity:
Common stock, $.01 par value per share;
7,000,000 shares authorized, 3,797,346
shares outstanding, actual;
100,000,000 shares authorized,
10,046,268 shares outstanding, pro
forma; 100,000,000 shares authorized,
15,046,268 shares outstanding, pro
forma as adjusted...................... 38 100 150
Additional paid-in capital............... 4,319 20,207 72,882
Deferred stock based compensation........ (4,127) (4,127) (4,127)
Accumulated deficit...................... (4,924) (4,924) (4,924)
------- ------- -------
Total shareholders' equity (deficit).. (4,694) 11,256 63,981
------- ------- -------
Total capitalization................ $11,256 $11,256 $63,981
======= ======= =======
</TABLE>
- --------
The preceding table excludes:
. 3,388,953 shares issuable upon exercise of stock options outstanding
under our stock option plans as of September 30, 1999;
. 66,135 shares issuable upon exercise of warrants outstanding as of
September 30, 1999; and
. 3,927,222 shares available for future grant or issuance under our stock
option plans as of September 30, 1999.
14
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock in this offering and the pro forma net tangible book value per
share of our common stock immediately after this offering. Pro forma net
tangible book value dilution per share represents the difference between the
amount per share paid by purchasers of shares of common stock in this offering
and the pro forma net tangible book value per share of common stock immediately
after completion of this offering.
Our pro forma net tangible book value as of September 30, 1999 was $11.3
million, or $1.12 per share of common stock, assuming the conversion of all
outstanding shares of preferred stock into shares of common stock. Pro forma
net tangible book value per share represents the amount of our shareholders'
equity, less intangible assets, divided by the total number of shares of common
stock outstanding for the period immediately prior to this offering. After
giving effect to the sale of the 5,000,000 shares of common stock offered in
this prospectus at an assumed initial public offering price of $11.50 per share
and after deducting the estimated underwriting discounts and offering expenses,
our adjusted pro forma net tangible book value as of September 30, 1999 would
have been $64.0 million, or $4.25 per share of common stock. This represents an
immediate increase in net tangible book value of $3.13 per share to existing
shareholders and an immediate dilution of $7.25 per share to new investors
purchasing shares in this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $11.50
Pro forma net tangible book value per share as of September
30, 1999.................................................... $1.12
Increase per share attributable to new investors.............. 3.13
-----
Pro forma net tangible book value per share after this
offering.................................................... 4.25
------
Net tangible book value dilution per share to new investors... $ 7.25
======
</TABLE>
The following table summarizes as of September 30, 1999, on the pro forma
basis described above, the number of shares of common stock purchased from us,
the total consideration paid to us and the average price per share paid by
existing shareholders and by investors purchasing shares of common stock in
this offering and before deducting estimated underwriting discounts and
offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders......... 10,046,268 66.8% $16,069,000 21.8% $ 1.60
New investors................. 5,000,000 33.2 57,500,000 78.2 11.50
---------- ---- ----------- ----
Total....................... 15,046,268 100% $73,569,000 100%
========== ==== =========== ====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
or warrants after September 30, 1999. As of September 30, 1999, there were
outstanding options and warrants to purchase a total of 3,455,088 shares of
common stock. To the extent that all of these options or warrants are
exercised, there will be dilution to new investors in the amount of $7.89 per
share. See "Capitalization," "Management--Employee Benefit Plans," "Description
of Capital Stock" and Note 4 of "Notes to Consolidated Financial Statements."
15
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except per share data)
The following selected financial data should be read together with the
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus. The selected statement of operations data shown below for
the years ended December 31, 1996, 1997 and 1998 and the balance sheet data as
of December 31, 1997 and 1998 are derived from our audited financial statements
included elsewhere in this prospectus. The selected statement of operations
data shown below for the years ended December 31, 1994 and 1995 and the balance
sheet data as of December 31, 1994, 1995 and 1996 are derived from our audited
financial statements not included elsewhere in this prospectus. The selected
financial data for the nine months ended September 30, 1998 and 1999 has been
derived from our unaudited financial statements which, in the opinion of
management, include all adjustments, consisting solely of normal recurring
adjustments, necessary for a fair presentation of the financial information
shown in these statements. The results for the nine months ended September 30,
1999 are not necessarily indicative of the results to be expected for the full
year or for any future period.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------ ------- ------ ------ -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 904 $ 2,497 $4,360 $7,093 $ 10,122 $ 6,669 $ 11,746
Operating expenses
Cost of services....... 330 1,323 2,480 4,496 6,958 4,791 9,069
Selling, general &
administrative....... 358 538 1,796 2,068 2,831 1,986 3,338
Research and
development.......... 393 605 863 1,242 1,519 1,017 2,294
Amortization of stock-
based compensation... -- -- -- -- -- -- 67
------ ------- ------ ------ -------- -------- --------
Total operating
expenses............ 1,081 2,466 5,139 7,806 11,308 7,794 14,768
------ ------- ------ ------ -------- -------- --------
Operating income
(loss)................ (177) 31 (779) (713) (1,186) (1,125) (3,022)
Interest income......... 11 31 198 213 144 101 320
------ ------- ------ ------ -------- -------- --------
Net (loss) income....... $ (166) $ 62 $ (581) $ (500) $ (1,042) $ (1,024) $ (2,702)
====== ======= ====== ====== ======== ======== ========
Basic and diluted net
(loss) income per
share................. $ (.05) $ .02 $ (.18) $ (.15) $ (.30) $ (.30) $ (.77)
====== ======= ====== ====== ======== ======== ========
Shares used in basic and
diluted net income
(loss) per share...... 3,234 3,294 3,313 3,376 3,463 3,457 3,517
====== ======= ====== ====== ======== ======== ========
Pro forma basic and
diluted net loss per
share................. (.16) (.33)
======== ========
Shares used in pro forma
net loss per share.... 6,485 8,103
======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30,
December 31, 1999
---------------------------------------- ------------------
1994 1995 1996 1997 1998 Actual Pro Forma
------ ------ ------- ------- ------- ------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents........... $ 690 $ 472 $ 1,614 $ 1,009 $ 1,681 $ 7,290 $ 7,290
Working capital......... 482 411 3,981 3,102 1,782 9,162 9,162
Total assets............ 1,177 1,253 5,179 5,084 5,596 13,417 13,417
Long-term obligations,
net of current
portion............... -- -- -- -- -- -- --
Total shareholders'
equity (deficit)........ (109) 13 (564) (1,045) (2,077) (4,694) 11,256
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We were co-founded in 1993 by Mark Tierney, Michael Bingham and Barbara
Seykora, all of whom remain active with us today. From inception until June
1999, our activities principally involved providing back-office administration
and payment services, or what we refer to as back-end exchange services, for
large, multi-site employers such as Bell Atlantic, PepsiCo, Northwest Airlines,
GE Capital, Promus Hotels and R.R. Donnelley. In the second quarter of 1999, we
initiated activities to leverage our success in the large employer market to
also serve the mid-size employer market segment. From inception until September
1999, we were incorporated under the name Network Management Services, Inc. In
September 1999, we changed our name to eBenX, Inc.
Our principal source of revenue is derived from providing ongoing group
health eligibility and financial data exchange services. Exchange services
revenue is typically priced on a per employee per month basis with adjustments
made to accommodate the number of health plan communication and computer
connections, or interfaces, that the customer requires. In many cases, we allow
fixed and variable fee structures to permit volume-adjusted pricing. We
recognize revenue for exchange services as the services are performed. In
addition, we earn revenue from health benefit plan procurement fees as services
are performed. We typically enter into contracts with our large employer
customers that are three years in length. Customers may purchase some or all of
our services and the customer relationship may evolve from utilizing
procurement services to utilizing implementation services and per employee-
based exchange services. A significant percentage of our revenues are earned
from a few customers, most notably Bell Atlantic, PepsiCo and Northwest
Airlines.
The establishment of new customer relationships involves lengthy and
extensive sales and implementation processes. The sales process typically takes
four to six months, and the implementation process takes an additional two to
four months. The sales process is accounted for under the selling, general and
administrative expense category. The implementation process affects cost of
services but may also impact research and development expense to the extent new
customer relationships require new or enhanced service offerings.
Cost of services consists primarily of personnel costs for account
management, operations, production and procurement and information technology
costs for both ongoing procurement and exchange services and for customer
implementation expense. The information technology costs relate to personnel
costs for implementing and maintaining customer and health plan computer
interfaces and computer hardware and software expenses related to computer
processing. A significant portion of cost of services consists of new customer
implementation expenses. Therefore, increasing numbers of new customers will
cause the cost of services as a percentage of net revenue to increase.
Selling, general and administrative expenses consist primarily of payroll and
payroll-related expenses associated with sales and marketing, executive
management and corporate administrative personnel, as well as professional fees
and expenditures for advertising, public relations and promotional efforts. We
intend to significantly increase our sales and marketing expenses over the next
several years. We intend to invest substantially in an integrated marketing
program, including the expansion and enhancement of our penetration into the
mid-size employer market through broker partners. At the same time, we intend
to devote additional resources to develop partnerships and relationships with
human resource services and systems organizations. We expect that, in support
of the continued growth and operation of our business, selling, general and
administrative expenses will continue to increase for the foreseeable future.
Research and development expenses consist primarily of development personnel
and external contractor costs related to the development of new products and
services, enhancement of existing products and services, quality assurance and
testing. To date, we have not capitalized any of our software development
costs. Because the timing of the commercial release of our services has
substantially coincided with technological feasibility, all research and
development costs have been expensed as incurred. We intend to continue to
expand our
17
<PAGE>
product offerings by adding additional services. We expect these activities
will require additional personnel. Accordingly, we expect our research and
development expenses will continue to increase for the foreseeable future.
Since our inception, we have incurred losses. As of September 30, 1999, we
had an accumulated deficit of $4.9 million. These losses and this accumulated
deficit have resulted from the significant costs incurred in the development of
our technology platform, the establishment of relationships with our customers,
and the development and maintenance of our customer and health plan interfaces.
We intend to continue to invest heavily in research and development, sales and
marketing and in our computer and administrative infrastructure. As a result,
we believe that we will incur substantial operating losses for the foreseeable
future. Although we have experienced significant revenue growth in recent
periods, our operating results for future periods are subject to numerous
uncertainties. In view of the rapidly evolving nature of our business and our
limited operating history, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
Results of Operations
The following table sets forth for the periods indicated selected statement
of operations data expressed as a percentage of net revenues.
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended September 30,
--------------------- --------------------
1996 1997 1998 1998 1999
----- ----- ----- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues................. 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of services........... 56.9 63.4 68.7 71.9 77.2
Selling, general and
administrative........... 41.2 29.2 28.0 29.8 28.4
Research and development... 19.8 17.5 15.0 15.2 19.5
Amortization of stock-
based compensation....... -- -- -- -- 0.6
----- ----- ----- ---------- ----------
Total operating costs
and expenses.......... 117.9 110.1 111.7 116.9 125.7
----- ----- ----- ---------- ----------
Loss from operations......... (17.9) (10.1) (11.7) (16.9) (25.7)
Interest income (expense),
net........................ 4.5 3.0 1.4 1.5 2.7
----- ----- ----- ---------- ----------
Net loss..................... (13.4)% (7.1)% (10.3)% (15.4)% (23.0)%
===== ===== ===== ========== ==========
</TABLE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Net revenues. Net revenues increased from $6.7 million for the nine months
ended September 30, 1998 to $11.7 million for the same period in 1999,
representing an increase of $5.0 million, or 76.1%. This increase primarily was
due to a new contract with Bell Atlantic, the expansion of our relationship
with PepsiCo and new client implementations in the third quarter of 1999.
Cost of services. Cost of services increased from $4.8 million for the nine
months ended September 30, 1998 to $9.1 million for the same period in 1999,
representing an increase of $4.3 million, or 89.3%. This increase primarily was
due to increased personnel and computer-related infrastructure costs necessary
to support the increased demand for our services. Cost of services, as a
percentage of net revenues, increased from 71.9% for the nine months ended
September 30, 1998 to 77.2% for the same period in 1999 because of new customer
implementation expenses.
Selling, general and administrative. Selling, general and administrative
expenses increased from $2.0 million for the nine months ended September 30,
1998 to $3.3 million for the same period in 1999, representing an increase of
$1.3 million, or 68.1%. This increase primarily was due to the establishment of
a sales team in late 1998 and additions to management. We anticipate that sales
and marketing expenses will increase substantially in future periods as we
expand our sales and marketing efforts.
Research and development. Research and development expenses increased from
$1.0 million for the nine months ended September 30, 1998 to $2.3 million for
the same period in 1999, representing an increase of
18
<PAGE>
$1.3 million, or 125.6%. This increase primarily was due to additions to our
research and development staff. We anticipate that we will continue to devote
substantial resources to our research and development efforts and that research
and development expenses will increase for the foreseeable future.
Interest income (expense), net. Net interest income includes income earned
from our invested cash, income earned from facilitating our customers' payments
to their health plans and expenses related to outstanding debt obligations
under our bank credit facility. Net interest income increased from $101,000 for
the nine months ended September 30, 1998 to $320,000 for the same period in
1999. In the first nine months of 1999, interest expense was incurred for bank
borrowings. There were no borrowings in the first nine months of 1998.
Amortization of stock-based compensation. In connection with the granting of
stock options to employees, we recorded stock-based compensation totaling
approximately $67,000 in the quarter ended September 30, 1999. This amount
represents the difference between the exercise price and the deemed fair value
of our common stock for accounting purposes on the date these stock options
were granted. The amortization of additional deferred compensation will result
in $4.1 million of charges to operations through 2003.
Years Ended December 31, 1996, 1997 and 1998
Net revenues. Net revenues increased from $7.1 million in 1997 to $10.1
million in 1998, or 42.7%. Net revenues in 1997 represented a 62.7% increase
over 1996 net revenues of $4.4 million. The increase in 1998 primarily was due
to a new contract with Bell Atlantic and servicing additional divisions of
PepsiCo. The increase in 1997 primarily was due to new contracts with The Blue
Cross/Blue Shield Association and R.R. Donnelley & Sons and the sale of
additional services to PepsiCo and General Electric.
Cost of services. Cost of services increased from $4.5 million in 1997 to
$7.0 million in 1998, or 54.8%. Cost of services in 1997 represented an 81.3%
increase over 1996 cost of services of $2.5 million. The increase in 1998
primarily was due to increases in personnel and investments in computer
hardware and software infrastructure. The increase in 1997 primarily was due to
additions in personnel. Cost of services, as a percentage of net revenues,
increased from 56.9% in 1996 to 63.4% in 1997 and to 68.7% in 1998. A
significant portion of cost of services consists of new customer implementation
expenses. Therefore, increasing numbers of new customers will cause the cost of
services as a percentage of net revenue to increase.
Selling, general and administrative. Selling, general and administrative
expenses increased from $2.1 million in 1997 to $2.8 million in 1998, or 36.9%.
Selling, general and administrative expenses in 1997 represented a 15.1%
increase over 1996 selling, general and administrative expenses of $1.8
million. The 1998 increase primarily was due to the establishment of a sales
team. The 1997 increase primarily was due to additions to management. Selling,
general and administrative expenses, as a percentage of net revenues, decreased
from 41.2% in 1996 to 29.2% in 1997 and to 28.0% in 1998.
Research and development. Research and development expenses increased from
$1.2 million in 1997 to $1.5 million in 1998, or 22.3%. Research and
development expenses in 1997 represented a 43.9% increase over 1996 R&D
expenses of $0.9 million. These increases primarily were due to the hiring of
additional personnel.
Interest income (expense), net. Net interest income decreased from $213,000
in 1997 to $144,000 in 1998, or 32.4%. Net interest income in 1997 represented
a 7.6% increase over 1996 net interest income of $198,000. The decrease from
1997 to 1998 primarily was due to decreased cash reserves resulting from the
losses incurred in 1998. The increase from 1996 to 1997 primarily was due to
increased cash reserves resulting from the sale of preferred stock in mid-1996.
Income taxes. As of December 31, 1998, we had unused federal and state
research and development tax credit carryforwards of approximately $100,000
which expire at various times through 2011. In addition, we had unused federal
net operating loss carryforwards at December 31, 1998 of approximately $1.8
million which expire at various times through 2013. The utilization of these
carryforwards is dependent upon our ability to generate sufficient taxable
income during carryforward periods.
19
<PAGE>
Selected Quarterly Operating Results
The following table shows unaudited statement of operations data expressed in
dollars (in thousands) and as a percentage of net revenues for the last two
quarters in our fiscal year ended December 31, 1998 and for the first three
quarters in our fiscal year ending December 31, 1999. In management's opinion,
this unaudited quarterly information has been prepared on the same basis as the
audited financial statements and related notes and includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the quarters presented, when read in
conjunction with the audited financial statements and related notes included
elsewhere in this prospectus. We believe that quarter-to-quarter comparisons of
our financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30,
1998 1998 1999 1999 1999
------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues............ $2,740 $3,454 $3,342 $3,766 $ 4,638
Operating expenses:
Cost of services...... 1,856 2,166 2,355 2,878 3,836
Selling, general and
administrative...... 667 845 859 1.151 1,328
Research and
development......... 345 502 545 582 1,167
Amortization of
stock-based
compensation........ -- -- -- -- 67
------ ------ ------ ------ -------
Total operating
expenses......... 2,808 3,513 3,759 4,611 6,398
------ ------ ------ ------ -------
Loss from operations.... (128) (59) (417) (845) (1,760)
Interest income
(expense), net........ 20 42 45 105 170
------ ------ ------ ------ -------
Net loss................ $ (108) $ (17) $ (372) $ (740) $(1,590)
====== ====== ====== ====== =======
<CAPTION>
Three Months Ended
-------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30,
1998 1998 1999 1999 1999
------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Costs of revenues..... 67.8 62.7 70.5 76.4 82.7
Selling, general and
administrative...... 24.3 24.5 25.7 30.6 28.6
Research and
development......... 12.6 14.5 16.3 15.5 25.2
Amortization of
stock-based
compensation........ -- -- -- -- 1.4
------ ------ ------ ------ -------
Total operating
expenses......... 104.7 101.7 112.5 122.5 137.9
------ ------ ------ ------ -------
Loss from operations.... (4.7) (1.7) (12.5) (22.5) (37.9)
Interest income
(expense), net........ 0.7 1.2 1.3 2.8 3.6
------ ------ ------ ------ -------
Net (loss) income....... (4.0)% (0.5)% (11.2)% (19.7)% (34.3)%
====== ====== ====== ====== =======
</TABLE>
Our business is characterized by seasonality. As a result, our revenue may be
subject to seasonal fluctuations, with the largest percentage of annual revenue
typically being realized in the fourth quarter. This is primarily due to
implementation of services to new customers in the third and fourth quarters
and providing open enrollment services to new and existing customers in the
fourth quarter. Further, our operating expenses typically increase in the
second and third quarters as we add personnel in anticipation of acquiring new
customers and implementing and providing services to these new customers, most
of which begin using our services in the third and fourth quarters. In
addition, cost of services typically increases as a percentage of net revenues
as we implement services for new customers.
20
<PAGE>
Our quarterly operating results have in the past, and will in the future,
vary significantly depending on a variety of factors, including:
.the number and size of new customers starting services;
.the decision of one or more customers to delay implementation or cancel
ongoing services;
.seasonality;
. our ability to design, develop and introduce new services and features
for existing services on a timely basis;
. costs associated with strategic acquisitions and alliances or
investments in technology;
. the success of any strategic acquisition, alliance or investment;
. costs to transition to new technologies;
. expenses incurred for geographic and service expansion;
. price competition;
. a reduction in the number of employees of our customers; and
. acquisitions of our customers by other companies.
A substantial majority of our operating expenses, particularly personnel and
related costs, depreciation and rent, are relatively fixed in advance of each
quarter. Our agreements with our customers generally do not have penalties for
cancellation. As a result, any decision by a customer to delay or cancel
implementation of our services or our underutilization of personnel may cause
significant variations in operating results in a particular quarter and could
result in losses for that quarter. It is possible that in some future quarter
our results of operations will be below the expectations of public market
analysts and investors. In either case, the market price of our common stock
could be materially adversely affected.
Liquidity and Capital Resources
Historically, we have funded operations primarily through the private sales
of preferred stock, with net proceeds of approximately $16.0 million, limited
bank borrowings and equipment leases. All shares of our preferred stock will
be converted automatically into common stock immediately prior to the closing
of this offering. As of September 30, 1999, we had $7.3 million in cash and
cash equivalents and a secured revolving line of credit of $1.5 million, which
bears a variable interest rate of 1% above the lender's base rate and expires
in December 1999. At September 30, 1999, there were no borrowings under the
line of credit.
Our operating activities used cash of $0.8 million in 1996, provided cash of
$67,000 in 1997 and used cash of $1.3 million in 1998. Our operating
activities used cash of approximately $3.2 million in the nine months ended
September 30, 1999. The use of cash from operations in 1998 and for the first
nine months of 1999 primarily was due to our net loss and an increase in
accounts receivable, partially offset by an increase in depreciation and
accrued expenses.
Our investing activities used cash of $2.5 million in 1996 and $0.7 million
in 1997, provided cash of $1.2 million in 1998 and used cash of $0.9 million
for the first nine months of 1999. In 1996, $0.5 million of the cash used for
investing activities was for additions to equipment and $2.0 million was for
the purchase of U.S. Treasury Notes using proceeds from the sale of preferred
stock. In 1997, our investing activities used cash for additions to equipment.
In 1998, our investing activities used cash of $0.8 million for additions to
equipment and we received proceeds of $2.0 million from the sale of U.S.
Treasury Notes. For the first nine months of 1999, our investing activities
used cash for additions to equipment.
Our financing activities provided cash of $4.5 million in 1996, $19,000 in
1997, $0.8 million in 1998 and $9.8 million in the first nine months of 1999.
For 1996, financing activities provided cash principally from the sale of
preferred stock. In 1997, financing activities provided cash from the exercise
of common stock options. In 1998, financing activities provided cash
principally from bank borrowings in December 1998 of $0.75 million. For the
first nine months of 1999, financing activities provided cash from the sale of
$10.5 million in preferred stock, partially offset by the repayment of bank
borrowings.
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<PAGE>
Our equipment additions consist primarily of computer hardware and software,
office furniture and equipment and leasehold improvements. We expect that our
equipment additions will continue to increase in the future. Since inception,
we have generally funded equipment additions either through the use of working
capital or with operating leases. We expect to continue to add computer
hardware and software and to use operating leases to finance these additions.
In connection with the planned relocation of our headquarters on May 1, 2000,
we expect to make approximately $3.0 million in leasehold improvements and also
need to purchase additional office furniture. We intend to enter into a real
estate lease agreement that will finance the leasehold improvements over the
term of the lease. We intend to enter into a loan agreement to finance the
office furniture. To the extent we are unable to secure this financing, we may
be required to apply a portion of the proceeds from this offering toward these
expenditures.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business plan. As a result, we
anticipate that these operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In
addition, we may utilize cash resources to fund acquisitions or investments in
complementary businesses, technologies or service lines. We believe that the
net proceeds from the sale of the common stock in this offering and cash from
operations will be sufficient to meet our working capital and operating
resource expenditure requirements for the foreseeable future. Thereafter, we
may find it necessary to obtain additional equity or debt financing. In the
event additional financing is required, we may not be able to raise it on
acceptable terms or at all.
Year 2000 Issue
Many currently installed computer systems and software are coded to accept
only two-digit entries in the date code fields. These date code fields will
need to accept four-digit entries to distinguish 21st century dates from 20th
century dates. This problem could result in system failures or miscalculations
causing disruptions of business operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in other
similar business activities. As a result, many companies' computer systems and
software will need to be upgraded or replaced in order to comply with Year 2000
requirements. The potential global impact of the Year 2000 problem is not
known, and, if not corrected in a timely manner, could affect us and the United
States and world economies generally.
We have analyzed the potential effect of the Year 2000 issue on both the
system software included in our services and our word processing, billing and
other internal systems software, including information technology ("IT") and
non-IT systems (which systems contain embedded technology in manufacturing or
process control equipment containing microprocessors or other similar
circuitry). Our Year 2000 compliance program includes the following phases:
identifying systems that need to be modified or replaced; carrying out
remediation work to modify existing systems or convert to new systems; and
conducting validation testing of systems and applications to ensure compliance.
We are currently in the final stages of the validation phase of this program
with respect to software purchased or licensed from software vendors by us and
used internally and have completed the validation phase of this program with
respect to our own products.
The amount of remediation work required to address Year 2000 problems is not
expected to be extensive. We have tested all of the system software included in
our services and determined that they are Year 2000 compliant. We also have
requested and received documentation from vendors supplying software for our
primary business applications addressing Year 2000 compliance. In all cases,
vendors' responses indicated that their applications were either currently Year
2000 compliant or that they would be compliant by the end of 1999. Therefore,
we will be required to modify some of our existing software applications in
order for our internal computer systems to function properly in the year 2000
and thereafter. We estimate that we will complete our Year 2000 compliance
program for all of our significant internal systems no later than December 31,
1999. We also have had numerous discussions with each of our major customers
regarding our Year 2000 compliance and whether their ability to transmit data
to us would be affected. Similarly, we have had discussions with all of the
health plans to which we connect electronically regarding their efforts to
address
22
<PAGE>
the Year 2000 problem. All of our major customers and these health plans have
indicated that they are Year 2000 compliant or will be Year 2000 compliant by
December 31, 1999. These actions are intended to help mitigate the possible
external impact of the Year 2000 problem. However, it is impossible to fully
assess the potential consequences in the event service interruptions occur or
in the event that there are disruptions in such infrastructure areas as
utilities, communications, transportation, banking and government.
Because essentially all of our services and internal systems were created in
the last few years, our products and internal systems were designed to avoid
the year 2000 problem. As a result, the total cost for resolving our Year 2000
issues is expected to be less than $50,000. The total cost estimate includes
the cost of replacing or upgrading non-compliant systems that were otherwise
planned or which have significant improvements and benefits unrelated to Year
2000 issues. Estimates of Year 2000 costs are based on numerous assumptions,
and there can be no assurance that the estimates are correct or that actual
costs will not be materially greater than anticipated.
We are finalizing a contingency plan to provide for continuity of processing
in the event of various problem scenarios based on the outcome of the
validation phase of all of our systems and any additional results from surveys
of our major customers and their health plans with respect to their Year 2000
compliance. We expect to complete this plan by December 15, 1999.
Based on our assessments to date, we believe we will not experience any
material disruption as a result of Year 2000 problems with respect to our
services and the third-party systems we use for our internal functions, and, in
any event, we do not anticipate the Year 2000 issues we will encounter will be
significantly different from those encountered by other computer-related
service providers. For example, if critical third-party suppliers, such as
those supplying electricity, water or telephone service, experience
difficulties resulting in disruption of service to us, a shutdown of our
operations could occur for the duration of the disruption. Assuming no major
disruption in service from utility companies or other critical third-party
suppliers, we believe that we will be able to manage our total Year 2000
transition without any material effect on our results of operations or
financial condition.
Recent Accounting Pronouncements
In March 1998, the Accounting Standards Committee issued AICPA Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This statement provides guidance on accounting for
the costs of computer software developed or obtained for internal use and
identifies characteristics of internal use software as well as assists in
determining when computer software is for internal use. SOP 98-1 is effective
for fiscal years beginning after December 15, 1998, with earlier application
permitted. We do not expect the adoption of this SOP to have a material impact
on our financial statements.
In March 1998, the Accounting Standards Committee issued AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities." This statement
provides guidance on the financial reporting of start-up costs and organization
costs. It requires that the cost of start-up activities and organization costs
be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, with earlier application permitted. We do not expect the
adoption of this SOP to have a material impact on our financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
changes the previous accounting definition of derivatives which focused on
freestanding contracts, including, for example, options and forwards, futures
and swaps, expanding it to include embedded derivatives and many commodity
contracts. Under the statement, every derivative is recorded on the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. We do not anticipate
that the adoption of SFAS 133 will have a material impact on our financial
position or results of operations. We currently do not hold derivative
instruments or engage in hedging activities.
23
<PAGE>
BUSINESS
Overview
We provide business-to-business e-commerce and connectivity solutions to
employers and health plans for the purchase, eligibility administration and
premium payment of group health insurance benefits. Through our proprietary and
licensed technology, we facilitate the flow of eligibility and financial data
between employers and health plans. Our proven, Web-enabled and high volume
eligibility and financial data pipelines provide the critical connectivity
necessary for employers and health plans to communicate electronically. The
result is reduced administrative and medical costs for employers, reduced
administrative costs for health plans, and broader access and improved quality
of care for employees and dependents.
[Diagram]
This graphic depicts the group health insurance marketplace. There is a set
of three three-dimensional buildings labeled "Employers" located at the bottom
left corner of the graphic and a set of four three dimensional buildings set in
a row labeled "Health Plans" located at the top right corner. There is a thick
black arrow running from the bottom left corner to the top right corner of the
graphic labeled with white text "$600 Billion." The arrow points from the set
of buildings labeled "Employers" to the set of buildings labeled "Health
Plans." There are ten non-denominational bills suspended above, and set
parallel to, the arrow that cast shadows which tend to form a line
perpendicular to the arrow. Between the two sets of buildings and underneath
the suspended bills, there is a slightly skewed oval background which is
partially cut-off at the bottom right corner.
24
<PAGE>
Group Health Insurance Benefits
General Industry Background
Health care expenditures in the United States totaled more than $1.1 trillion
in 1997 and are expected to nearly double by 2007. Employers are a significant
purchaser of group health insurance benefits for their employees, retirees and
their dependents. Currently, more than half of the U.S. population receives
group health insurance benefits through their employers. In 1998, the group
health insurance benefits market generated more than $600 billion in services
and payments between the two trading partners, employers and health plans.
Employers can be segmented into three categories:
. large employers, such as Fortune 1000 companies and federal, state and
local governments;
. mid-size employers with 50 to 5,000 employees; and
. small employers with less than 50 employees.
In 1998, the average cost of providing coverage for active and retired
workers was approximately $4,168 per employee. We expect this average cost to
increase by 7% this year. In 1998, on average, each active employee contributed
approximately 25% of this amount through payroll deductions and co-payments. We
believe that this percentage will increase.
Broadly characterized, health plans consist of any organization that
reimburses physicians, hospitals, pharmacies and other direct providers of
health care. These organizations include:
. health maintenance organizations;
. preferred provider organizations;
. point of service plans;
. indemnity carriers;
. third party administrators; and
. pharmacy benefit managers.
Prior to the 1980s, employers typically purchased health benefits through a
single third-party administrator or national indemnity insurance carrier.
However, with the growth of managed care in the 1980s and 1990s, employers
began to purchase coverage through an increasing number of health plans because
the managed care system is comprised of numerous provider networks that have
limited geographic locations. Among HMOs alone, there are over 700 licensed
local health plans in the United States. Reflecting this proliferation of new
types of plans and payers, we estimate that each Fortune 500 employer today
contracts with an average of 30 different plans.
Purchasing, Eligibility Administration and Premium Payment Process
The purchasing, eligibility administration and premium payment process that
connects employers and health plans is complex, cumbersome, expensive and
highly inefficient. In particular, the financing arrangements are extremely
variable and complicated, making administration difficult. In general, health
plans either charge employers based on the number of projected enrolled
employees and their projected actuarial risk or, alternatively, pay providers
on behalf of the employer and then are reimbursed from the employer's account.
Therefore, depending on the financing arrangements, an individual employer is
subject to multiple administrative arrangements from multiple health plans.
The purchasing, eligibility administration and premium payment process
consists of two basic components commonly referred to as the "front-end" and
"back-end" processes.
25
<PAGE>
Front-end
The front-end process refers to the selection of various health plans by an
employer, the communication of health plan information to employees and the
collection and ongoing maintenance of enrollment and eligibility data.
Health plan selection. Employers annually solicit rate quotes from health
plans and select which plans will be made available to their employees.
Employers may choose as few as one health plan or as many as 150 or more health
plans depending on the employers' geographic locations and the employers'
desire to offer health plan choices. Large and mid-size employers usually offer
multiple health plans to provide greater choice, geographic coverage and access
to specialized services for their employees. Employers choose various financing
mechanisms depending on the level of risk they wish to retain. These include
self funded, fully insured, partially insured, or a combination of all three
financing mechanisms. To make these decisions, benefit managers of large
employers usually are supported by consultants while benefit managers of mid-
size employers generally use brokers.
Communication of health plan information to employees. Employers annually
provide information to employees regarding which health plans are available and
the material features of each plan. The process entails distribution of printed
materials, mailings and other manual, paper-based communications. On average,
this distribution costs $8 to $12 per employee. Due to the continuous changes
in the list of providers utilized by health plans, printed materials usually
are outdated by the time of delivery.
Collection of enrollment and eligibility information. Employees enroll in one
of the available health plans during an annual open enrollment period.
Employers collect enrollment and eligibility data using a wide variety of
methods, including paper forms, telephone-based systems and Web-based self-
service enrollment systems. Enrollment data includes information on the
employee's health plan choice and primary care provider. Eligibility
information is basic information about the employee and his or her
dependent(s), such as name, address, date of birth, social security number,
employment code, benefit status, coverage level and eligibility period.
Ongoing member management. In addition to collecting annual enrollment and
eligibility information, employers need to obtain and communicate daily life
event changes that affect coverage status. These changes include employee
marriages, divorces, child births and address changes, as well as career events
such as new hires, terminations and movements from hourly to salaried status.
No other benefit offered by employers requires as high a level of information
collection and continuous monitoring and modification because group health
insurance is the only benefit that must maintain and store precise family
history.
Back-end
While the front-end process focuses on communication of information between
employers and employees, the back-end process focuses on managing and storing
eligibility and financial data for communication with health plans and using
this data to reconcile payments.
Enrollment and eligibility data management. Once enrollment and eligibility
data is collected, employers undertake a cumbersome process to authenticate,
edit, categorize and organize the data. This process also requires the ongoing
classification of employees by employment status, such as active, retired,
surviving spouse, student and eligible to receive benefits under the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), in order to
accommodate diverse collection and payment processes for each category. This
data management is critical to accurate billing and reconciling of payments
between an employer and its health plans.
Eligibility data distribution. Eligibility data should be transferred on a
daily or weekly basis from employers to health plans and in a manner that
assures it will be correctly recorded. Today, however, this data is transferred
far less frequently and with little assurance that it will be correctly
interpreted. It is communicated electronically between legacy systems at best
and, at worst, via hard copy data entry. Ultimately, this eligibility data is
required when employees and dependents present themselves to physicians
26
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and other providers for health care services. Providers obtain patient
eligibility information via telephone or computer from patients' health plans
prior to rendering services.
Billing, reconciliation and settlement. Health plans bill employers on a
weekly or monthly basis based on either enrollment numbers and quoted rates or
on claims paid. It is our belief, based on our experience, that employers
initially pay these multiple paper bills without auditing these bills. They
then manually reconcile the number of enrolled employees and their eligibility
status using their own internal data. Because of data discrepancies and delays
in transfer and billing cycles, the health plans' data and the employers' data
are rarely the same and thus ongoing payment disputes are common.
Factors influencing the marketplace and related issues
The purchasing, eligibility administration and premium payment process is
encumbered by inefficient procedures for rate setting, gathering and
transferring data and executing payment transactions. These inefficiencies,
together with other factors unique to health care delivery, result in the
following significant challenges:
Fragmented employers and health plans. There are more than 30,000 large and
mid-sized employers in the United States, many of which have a broadly
dispersed employee base frequently located in multiple sites across the United
States. In contrast, there are over 700 independent HMOs in the United States
today, which generally operate in a single or limited geographic area. As a
result, employers contract with multiple health plans to provide complete
geographic coverage for all of their employees.
Increasing group health insurance benefit costs. The average cost of employee
and retiree health care will increase by approximately 7% this year. As these
costs rise, we believe employers will seek more cost-effective health insurance
benefits solutions, will be more critical in their selection of health plans
and will demand a more competitive bidding process. In addition, we believe
they will need to be able to switch health plans when necessary, and they will
shift more costs to employees.
Complex data management. Health plans collect complex, detailed and dynamic
data in varying formats from multiple employers. Conversely, employers must
distribute this data in varying formats to multiple health plans. A failure to
accurately update eligibility and financial data in a timely fashion may result
in additional administrative costs and financial reconciliation problems and
can lead to employees and their dependents being wrongfully denied healthcare
services.
Varied data formats. Eligibility and financial data formats vary considerably
throughout the health care industry and typically are unique to each particular
employer and health plan. The collection, storage and transmission of this data
remains a labor-intensive, paper-based and error-prone process. As a result,
most health plans are unable to frequently update this data. Some efforts have
been made to develop a common standard. However, these standards do not meet
the complex needs of multiple purchasers and have not been widely accepted.
Varied systems platforms. Most employers use their own unique human resources
information systems and other benefit and payroll related systems to
communicate with multiple health plans. These health plans in turn rely on
their own unique legacy systems. Often, within a single employer or health
plan, there are several systems in place for collecting and storing this data
that are unable to communicate with one another. Each system has its own code
data rules, syntax and semantics, requiring substantial information technology
resources to interface.
Inefficient pricing, billing, reconciliation and settlement
processes. Employers must obtain rate quotes from health plans based on the
estimated risk of the employers' employee population. Rates are difficult to
compare because of differing plan designs and underwriting methodologies.
Employers receive bills from each of their health plans in different formats
and in some cases for different coverage periods. These bills are
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calculated using data provided by health plans. If a plan is late in
recognizing an employee's termination, the employer must perform an audit to
determine this. Depending on the number of health plans and the diversity of
the payment arrangements, this can be an arduous task. Inaccurate payments
require significant manual intervention by employers and health plans to
reconcile accounts.
Brokers have limited transaction processing capability. In the mid-size
employer market, employers and health plans trade primarily through brokers. As
a result, brokers have been positioned to administer the processes required to
facilitate this trading. However, brokers generally do not have access to the
capital needed to develop e-commerce systems. Consequently, this process
essentially remains a labor-intensive, paper-based and highly inefficient
process. Because of increasing demand for business-to-business e-commerce
solutions, we believe brokers must either embrace new technology or risk being
disintermediated.
Added complexity caused by government regulation. Numerous federal, state and
local laws and regulations govern the healthcare industry. These laws and
regulations change frequently. In recent years, the responsibilities of
employers to provide their employees with access to health care have increased
significantly. In particular, COBRA and HIPAA have added substantial burdens to
employers administering employee health insurance benefits. The proposed
legislation covering patients' bill of rights includes a provision that may put
health plans and employers at more risk of litigation. We believe this may have
the effect of pushing employers toward a defined contribution and voucher-based
approach to their employees' healthcare insurance benefits.
Opportunity for Business-to-Business E-Commerce Solutions for Group Health
Insurance Benefits
The ubiquitous nature, low cost and scalability of the Internet have created
new opportunities for conducting commerce. Recently, the widespread adoption of
intranets and the acceptance of the Internet as a business communications
platform has created a foundation for business-to-business e-commerce that
enables organizations to streamline complex processes, lower costs and improve
productivity. It is projected that e-commerce will grow from $50 billion in
revenue in 1998 to $1.3 trillion in 2003, and business-to-business e-commerce
will account for more than 74% of the value of e-commerce in the United States
in 2003.
Group health insurance benefits purchasing, eligibility administration and
premium payment transactions lend themselves to Internet processing since most
of these transactions are information-based and do not require delivery of
durable goods at the point of payment. However, unlike other e-commerce
opportunities, such as purchasing books or individual insurance, group health
insurance benefits transactions involve complex group insurance pricing,
complex product presentation, and ongoing data management between multiple
organizations.
We believe that business-to-business e-commerce technology solutions in this
market will require the following Internet-enabled components:
Front-end quote and enrollment:
. quote systems that provide quick rate information from multiple plans;
and
. annual and ongoing enrollment update tools that accommodate enrollment
in numerous health plans, and content engines that provide plan
descriptions, provider networks and rate information.
Back-end eligibility and financial exchange:
. exchange systems that transfer eligibility and financial data files
between trading partners and execute payment transactions with all
applicable parties.
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[Diagram]
This graphic depicts eBenx, Inc.'s relationship to various other organizations.
The top left corner of the graphic contains the following title: "The eBenX
group health insurance e-commerce exchange." There are a number of three-
dimensional icons in this graphic with each one casting a shadow. In the bottom
left corner of the graphic, there is one large building labeled "Employer";
underneath the title "The eBenX group health insurance e-commerce exchange"
there are a row of four servers labeled "Benefits Procurement Tool,"
"Enrollment and Eligibility Maintenance Tool," "Customer Service Tool," and
"Billing and Payment Tool"; and between these two sets of icons there is a
server labeled "Employer or Third-Party Human Resource Systems." In the top
right corner of the graphic, there is a row of four buildings entitled "Health
Plans"; in the bottom right corner of the graphic, there is a block figure
labeled "Employee"; and between the block figure and the row of buildings,
there is a computer terminal labeled in bold "eBenX.com." Between the building
labeled "Employer" and the block figure, there is a set of three block figures
labeled "Broker." Between the computer terminal and the row of four servers at
the top left corner of the graphic there is a server labeled "Data Editor and
Rules Translater."
The Computer terminal is connected to a number of icons with slightly curved
yellow arrows that point both ways. There is one labeled "Enrollment (through
Employer)" connecting the block figure labeled "Employee." There is one
unlabeled arrow connecting the set of block figures labeled "Broker." There is
one labeled "Eligibility Data, Invoice" connecting the server labeled
"Employer." There is one arrow for each of the buildings in the row of four
buildings entitled "Health Plans." Three of these arrows are labeled "Mapped
Eligibility Data," "Financial Payment and Reconciliation," and "Rate
Information," with the fourth arrow being unlabeled. There are four straight
unlabeled, blue arrows connecting the server labeled "Data Editor and Rules
Translater" with each of the four servers located underneath the title "The
eBenX group health insurance e-commerce exchange." Finally, there is a line
simulating a computer cable connecting the computer terminal with the server
labeled "Data and Rules."
Currently, there are numerous front-end Internet-based solutions that support
enrollment. However, we believe true e-commerce can only exist if there is
seamless end-to-end integration of the front- and back-end processes. We have
focused our efforts on developing our proprietary back-end eligibility and
financial data exchange platform, which we now are coupling with front-end
applications. As a result, we now are able to provide a fully integrated end-
to-end solution for group health insurance benefits e-commerce in addition to
our back-end exchange services. We currently do not plan to offer front-end
services on a stand alone basis.
Our Solution
We provide the business-to-business e-commerce and connectivity solutions for
the purchase, eligibility administration and premium payment of group health
insurance benefits. Our Internet-based enrollment, eligibility and financial
exchange addresses requirements of both front- and back-end processes. During
the first six years of our operations, we focused on data and financial
management systems and on building custom and electronic connections between
customers, such as PepsiCo, Bell Atlantic, Northwest Airlines, GE Capital,
Promus Hotels and R.R. Donnelley and the United States' largest regional and
local health plans. This effort has resulted in connectivity to health plans
that collectively serve approximately 85% of the managed care enrollment in the
United States.
In 1999, we began attaching this proprietary technology to multiple front-end
enrollment applications, including those offered by Healtheon,
PricewaterhouseCoopers and Watson Wyatt. It is this front-end/back-end
continuity that delivers the end-to-end business-to-business e-commerce
solutions for group health insurance benefits.
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<PAGE>
Value Proposition to Trading Partners
Our solution provides value to the trading partners through the collection,
management and storage of employee enrollment, eligibility and financial data
and the ongoing transmission of this data to health plans. Additionally, we
manage and execute the reconciling of payments between trading partners.
For employers, our e-commerce solution:
. streamlines the enrollment process by moving it from paper or
telephone voice response systems to self-service Internet
applications;
. reduces administrative costs associated with disseminating basic
health plan information to employees, the enrollment transaction,
and the management and transfer of data among parties;
. shifts the employer's responsibility to us for transmitting accurate
enrollment and eligibility information to a variety of health plans
and gives all trading partners access to real time eligibility via
Web-enabled tools;
. eliminates the traditional paper-based and labor-intensive payment
reconciling process used by both trading partners and delivers
automated, accurate and retroactively adjusted payments to health
plans;
. allows more choice of plans by lowering the barriers to entry for
health plans thereby significantly reducing the cost of switching
between competing health plans;
. reduces the cost of procuring health benefits by increasing health
plan competition in the bidding process; and
. increases the ability to attract and retain employees through more
diverse benefit offerings.
For health plans, our e-commerce solution:
. improves timeliness and accuracy and lowers the cost of receiving
eligibility and financial data;
. reduces the administrative burden associated with receiving
eligibility and financial data;
. provides improved customer service and provider claims adjudication
through twenty-four hour, seven day a week Web-enabled access to
employers' eligibility and financial data;
. reduces distribution costs for the delivery of health plan
information to employees; and
. opens new channels for them to distribute products and services over
the Web.
For group health insurance brokers, our e-commerce solution:
. allows access to technology without significant capital expense;
. moves services from a paper process to a more efficient Web-based
solution;
. allows them to more easily offer multiple health plans to employer
clients;
. provides significant differentiation from competing brokers; and
. allows them to retain a service position in a disintermediating
marketplace by increasing customer retention and market share.
For employees, our e-commerce solution:
. provides more opportunity for choice of plans and, through more
competitive pricing, lower costs;
. provides Web-based enrollment and plan information; and
. improves quality of services by reducing eligibility data errors
through the more timely and accurate transmission of eligibility
data to health plans which in turn transmit the data to doctors and
other health care providers.
Products and Services
Since 1993, we have been servicing the back-end processing requirements of
our Fortune 1000 customers using our proprietary BEN-NET technology platform.
This platform provides a connective infrastructure and neutral eligibility and
financial data exchange mechanism. Because we represent Fortune 1000 customers,
health plans have supported our efforts to build electronic connections to
their legacy systems.
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<PAGE>
We are able to receive complex and dynamic data from employers and transmit
this data to fragmented health plans. Our core eligibility data and financial
exchange technology incorporates the business rules of each of the relevant
trading partners, as well as the format translations needed to automatically
reconcile and pay bills. Our solution creates a standard for group health
connectivity without causing employers or health plans to make major changes to
their disparate systems. Our technology enables the employer to send data in
whatever format and via whatever media the employer chooses. Once received, our
system edits and translates the data into a standard format. To facilitate
connectivity to the health plans, our systems then translate that data into the
format that is compatible with each of the computer systems of the individual
health plans utilized by our employer customer. This translated information is
then transmitted in whatever medium is acceptable to the health plan. Our BEN-
NET system electronically stores more current eligibility data than the data
held by the health plans to which we are connected, which allows us to
accurately bill the parties concerned.
In 1999, we extended our suite of product offerings to support the data
management, communications and online transaction requirements for successful
group health insurance benefits e-commerce. We have done this by partnering
with other front-end application developers and through internal development
efforts. We will provide end-to-end processing for employers, brokers, health
plans and employees through which they will exchange information and transact
business. Revenues generated from our exchange services were $3,467,000,
$5,432,000, $7,742,000, $4,828,000 and $9,193,000 for the years ended December
31, 1996, 1997 and 1998 and the nine months ended September 30, 1998 and 1999,
respectively.
This Internet-based solution will bring together the components necessary for
full transaction group health e-commerce: proposal requests, rate quotes,
online enrollment, eligibility management and financial exchange services.
Our Products and Services
<TABLE>
<CAPTION>
Process Front or
Product/Service solution Status Back-end
--------------- -------- ------ --------
<C> <S> <C> <C>
eBenX Import Export Two sets of In service Back-end
(BEN-NET platform) data
pipelines: one
to front-end
applications
and employer's
human resource
information
systems and
the other to
health plans
and payroll
companies
- --------------------------------------------------------------------------------
eBenX Financial eBenX In service Back-end
(BEN-NET platform) generated bill
to health
plans and
consolidated
invoice to
employer
supports full
financial
distribution;
self-insured
management;
automatic
payment
reconciliation
and
consolidated
premium
management
- --------------------------------------------------------------------------------
eBenX Inquiry Internet-based In service Back-end
(BEN-NET platform) real time,
enrollment
eligibility
database
access tool
- --------------------------------------------------------------------------------
eBenX Data Access Internet- In development: Back-end
(BEN-NET platform) based, real .Prototype scheduled for 12/1/99
time .Partial production planned for pilot
reporting; groups early-2000
standard .Full production planned to begin thereafter
consolidated
reports;
online
financial
reports
- --------------------------------------------------------------------------------
eBenX Enroll and Internet-based In service via license from Healtheon (initial Front-end
Member Maintenance employee and term of license is through 1/31/03).
human resource Proprietary tool also in development:
self-service .Proprietary tool currently is used by one
benefit of our clients
election; .Redesign of this tool is in process and
Internet-based is focused on mid-market
online daily .Prototype scheduled for mid-2000
manager of .Production planned for late-2000
employee adds,
deletes and
coverage
changes from
life events
- --------------------------------------------------------------------------------
eBenX RFP Internet-based In development: Front-end
census .Concept and design has been completed
acquisition .Prototype available
and proposal .Coding commenced on 11/1/99
request tools .Production planned for mid-2000
to support the
competitive
bidding
process
</TABLE>
We sell our products and services in selected packages designed to meet the
needs of each customer.
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Health Benefit Plan Procurement Services
We provide health benefit plan procurement services to a number of our
Fortune 1000 customers. We undertake these services on a project basis. We
assist and advise our customers on selection of potential suppliers,
preparation of requests for proposals, evaluation of proposals, and rate
negotiations. Approximately 20 of our employees engage in delivering these
services. Our principal customers for these services are General Electric,
Eastman Kodak and Bell Atlantic. We view these activities as a complement to
exchange services. In addition, we gain valuable knowledge regarding market
conditions and processes from providing these services. Revenues generated from
our procurement services were $893,000, $1,661,000, $2,380,000, $1,841,000 and
$2,553,000 for the years ended December 31, 1996, 1997 and 1998 and the nine
month periods ended September 30, 1998 and 1999, respectively.
Our Strategy
Our objective is to be the leading provider of Internet-based business-to-
business e-commerce for the purchase, eligibility administration and premium
payment of group health insurance benefits. Key elements to our strategy
include the following:
Offer end-to-end e-commerce solution. We will continue to offer an end-to-end
e-commerce solution by connecting with front-end applications and developing
our own front-end applications where appropriate. In the Fortune 1000 and mid-
size employer markets, front-end applications are being deployed by human
resources information systems platforms, by human resources record keeping
service companies, and enrollment software companies. We will aggressively
pursue front-end application providers to together offer a complete solution to
employers by linking our back-end eligibility and financial exchange services
with their front-end applications. In addition, through licensed technology
from Healtheon and our internal development efforts, we are deploying our own
front-end applications.
Increase penetration of the Fortune 1000 market. We will continue to focus on
marketing our services to Fortune 1000 companies. We demonstrate to these
companies the administrative efficiencies, cost savings and participant
satisfaction that we provide. We now provide services to 20 of the
approximately 1,500 U.S. companies that have more than 5,000 employees,
including PepsiCo, Bell Atlantic, Northwest Airlines, General Electric, Eastman
Kodak, Chevron, Dayton Hudson, Georgia-Pacific and Reader's Digest. The
remaining companies provide us with substantial growth opportunities.
Expand service offerings to existing Fortune 1000 customers. We intend to
continue to aggressively expand our service offerings to our existing Fortune
1000 customers. We have been successful in increasing our revenues from most of
our current Fortune 1000 clients through an expanded level of services provided
to additional divisions, subsidiaries and locations of those clients.
Expand to the mid-size employer market. We intend to leverage our technology
through relationships with insurance brokers to penetrate the mid-size employer
market. Mid-size employers typically purchase group health insurance benefits
using insurance brokers.
Pursue key strategic relationships to further enhance our service offering
and client base. We intend to pursue key strategic relationships, including
partnerships and acquisitions. These partnership and acquisitions candidates
could include companies that provide payroll, front-end enrollment, voluntary
benefits and similar services. We believe that making strategic acquisitions
and developing strategic relationships will enable us to enhance our service
offerings and expand our client base.
Develop new products. We intend to use our market knowledge and experience to
develop new products to fully leverage the market channels opened by the
implementation of our technology. For example, we are in the prototype stage of
development of Preferred Plans.com, a prepackaged group health insurance
solution for multi-site, multi-state employers that will provide mid-size
employers with rate quotes and access to best-practice, best-value health plans
throughout the United States. This will give the health plan supplier access to
the purchaser via the Internet for the first time. We already have identified
several health plans that we believe
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<PAGE>
may be interested in forming strategic partnerships with us for this
development-stage product. In addition, we are designing our technology to
support the sophisticated data and financial reconciling requirements implicit
in the post-enrollment risk-adjusted payments to health plans that would result
from defined contribution and voucher systems that may constitute the future of
the health care benefit system.
Customers
The following is a list of our customers who provided 10% or more of our
revenue during 1998.
Bell Atlantic Corporation
Northwest Airlines Corporation
PepsiCo, Inc.
The following is a representative list of our other major customers.
American Medical Response, Inc.
American Red Cross GE Capital Services Corporation
General Electric Company
Bass Hotels & Resorts, Inc. Georgia-Pacific Corporation
Benefits Alliance, LLC KPMG LLP
Blue Cross Blue Shield Association Promus Hotel Corporation
Chevron Corporation R.R. Donnelley & Sons Company
Dayton Hudson Corporation Reader's Digest Association, Inc.
Eastman Kodak Company W.W. Grainger, Inc.
Federated Department Stores, Inc. White Consolidated Industries Inc.
In 1999 to date, twelve customers have accounted for approximately 90% of our
revenue.
Connected Health Plans
The following is a representative list of the health plans to which we have
built customized eligibility and financial data pipelines.
Aetna, Inc. Plans Kaiser Foundation Health Plan
Blue Cross Blue Shield Plans Merck-Medco
CIGNA Health Plans, Inc. PacifiCare Health Systems
Delta Dental UnitedHealth Group Corporation Plans
Harvard Pilgrim Health Care More than 25 Blue Cross/Blue Shield
Plans
Sales and Marketing
Our sales and marketing staff is organized according to our three key
targeted customer segments: Fortune 1000, brokers for mid-size employers, and
human resource service and systems companies. Our sales force targets
significant potential customers in the Fortune 1000 and mid-size employer
segments. Senior management plays an active role in our sales and marketing
efforts.
Due to the technical nature of our products and services, our typical sales
cycle in the Fortune 1000 market is four to six months and usually involves a
competitive bidding process, which starts with a request for proposal from the
employer. The employer often indicates that this request for proposal has been
sent to other benefits administration service companies, which may or may not
submit a proposal to the employer. Our sales process also is somewhat seasonal
because most large employers undergo the open enrollment process in the fall of
each year. We obtain approximately 75% of our customer commitments during the
months of February through May. The mutual intent is that our systems will be
integrated with the customer's system and become operational prior to the open
enrollment period later that year.
Fortune 1000. We sell directly to the Fortune 1000 market. As of October 31,
1999, we employed one senior vice president in charge of sales and marketing to
this market. He is supported by three sales people. We expect to hire two
additional sales personnel in the next several months. In addition, this senior
vice president
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<PAGE>
is supported by two marketing assistants who assist him with trade shows and
developing prospective clients, and by a vice president and four strategic
procurement consultants who spend a portion of their time cross-selling
administrative services to the Fortune 1000 market.
Brokers for Mid-size Employers. We utilize existing brokerage distribution
systems to penetrate the market of mid-size employers. As of October 31, 1999,
we employed three senior staff members who are specifically focused on
developing our sales and marketing efforts to brokers. We intend to hire two
additional marketing employees to assist them and to further develop our broker
distribution network. We believe that emphasizing our collection and payment
capabilities to interface with numerous health plans will be a critical factor
in winning acceptance in this market.
Human Resource Service and Systems Companies. We partner with human resource
service and systems companies to re-sell our products and services as a
component of the products and services that they offer to employers. This
effort is being led by one of our co-founders. We expect to add personnel to
this area as our partnership efforts develop.
Customer Support
We believe a high level of customer support is necessary to broaden the
acceptance of our products and services. We provide a wide range of customer
support services through our call service center, our account managers, our
customer service staff and an e-mail help desk. By providing consolidated
customer service through our service center, we eliminate the need for our
customers to maintain numerous contact lists across benefit vendors in order to
resolve enrollment, eligibility and billing issues. We provide each customer
with a telephone number for it and its participants to use regarding enrollment
choices, grievances and benefit clarification. Our service center is open from
7:00 a.m. to 7:00 p.m. Central Time, Monday through Friday. When the service
center is closed, calls for existing clients are forwarded to our voice mail
system. We also offer Internet-based support services that are available 24
hours a day, 7 days a week. Finally, we use proprietary automated tracking
systems to ensure resolution of all inquiries. As of October 31, 1999, we had
38 employees in customer support functions.
Competition
The market for health care administration services is intensely competitive,
rapidly evolving and subject to sudden technological change. Many of our actual
and potential competitors have announced or introduced solutions that compete,
at least in part, with our products and services. We believe that the principal
competitive factors in this market are health and managed care expertise, data
integration and transfer technology, health insurance benefits processing
technology, customer service and support and price. We believe, based on our
experience, our products and services are competitive with respect to these
factors and that no other competitor has the Internet-based technology
capabilities combined with managed care expertise that we have. Further, we
believe we are currently the only participant in this market with both the
connectivity link between employers and health plans and our range of services.
However competitors may develop similar products or we may not be able to
successfully market our products or successfully develop and introduce products
that are less costly than or superior to those of our competitors.
We compete with administrative service providers and benefits consultants
with administrative capabilities. We also compete with the internal information
systems departments of the Fortune 1000 companies that perform their own health
care administration services. In the mid-size employer market, we compete with
other technology solutions that serve the automation and administration needs
of health benefit brokers. In addition, many human resource service and systems
companies have the healthcare expertise and financial strength to develop the
technology necessary to compete with us. As the market evolves we expect
increasing competition from Internet-based service providers in both the health
care connectivity market and the online insurance market. We believe that our
established and proven technology and our knowledge of the healthcare market
provide us with the necessary capabilities to adapt to the evolving market and
to increasing competition.
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Systems and Technology
Primary Systems Information
Historically, our services have been delivered using our proprietary BEN-NET
technology as the core eligibility and financial exchange engine. BEN-NET was
originally designed and implemented in 1994 to serve two distinct customer
bases: Fortune 1000 employers and health insurance purchasing coalitions.
Though the latter market never fully developed, the business requirements and
attendant system capabilities such as our ability to update, transmit and
permanently store eligibility data at both the employee and dependent level
have provided additional benefit to our Fortune 1000 clients. We have
incorporated a number of enhancements to BEN-NET in three subsequent major
releases.
BEN-NET and its fully integrated attendant applications are delivered using a
multi-tier information system comprised of multiple midrange servers, PCs and
workstations. The midrange servers, Sun Enterprise Servers running Sun's
Solaris Unix operating system, are used to provide middle-tier application
component logic and as a platform for eBenX's relational database management
system. Batch and end-user local and Internet applications employ a number of
different languages, primarily PowerBuilder, C, and Java.
Our production processing environment, maintained at our Minneapolis
facility, is composed of multiple servers, permitting maximum flexibility in
organizing and protecting client data. The environment in which our database
runs, UNIX, is a highly scalable platform. Given this platform, we are able to
add capacity relatively easily, we can also physically organize our databases
on different servers to optimize the processing performed on each server. For
example, an entire production server can be dedicated to a single large client
if this client has extensive processing requirements. Within this processing
environment, we establish separate physical production databases for each of
our Fortune 1000 customers to ensure that customer data remains confidential
and secure. This also ensures that it maintains its integrity. In so doing, we
are able to provide customer data access to customer specified user groups.
Secure, real time Internet-based customer and health plan access to source data
brings trading partners into alignment and reduces support costs.
We believe our proprietary data import and export management application is a
key differentiator for our services. Electronic Vendor Interface Management
(EVIM) delivers the ability and flexibility to receive and transmit data
between trading partners. This application incorporates not only a library of
health plan data maps, but also a deep knowledge of the business rules that
must be incorporated in the complex managed care market.
Electronic imports and exports (an average of 1,000 files per week with each
file ranging from 500-50,000 records) are managed via EVIM, ensuring automated,
timely distribution of data, payments, and reports to clients and vendors. This
precise management of the flow of data also supports a key function of BEN-NET,
which is the dynamic application of customer-related business rules to
customer-delivered eligibility data, streamlining both health plan delivery of
service and payment.
Redundancy, System Backup, Security and Disaster Recovery
We believe our facilities and operations include sufficient redundancy, back-
up and security to ensure minimal exposure to systems failure or unauthorized
access. A disaster recovery plan has been prepared and will be put in place
should the need arise. Incremental backups of both software and databases are
performed on a daily basis and a full system backup is performed weekly. Backup
tapes are stored at an offsite location along with copies of
schedules/production control procedures, procedures for recovery using an off-
site data center, documentation and other critical information necessary for
recovery and continued operation. Our current facility has two separate power
feeds to provide a level of redundancy should a power outage occur.
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We employ rigorous physical and electronic security to protect customer data.
Our data center is isolated within our corporate offices with restricted card
key access, and appropriate additional physical security measures. Electronic
protections include encryption, firewalls, multi-level access controls and
separate customer databases.
Proprietary Rights
We rely upon a combination of contractual rights, trade secrets, copyrights,
technical measures, non-disclosure agreements and trademarks to establish and
protect proprietary rights in our products and technologies. However, we
believe that intellectual property protection is less important than our
ability to continue to develop new applications and services that meet the
requirements of our industry. As a result, we have invested heavily in the
research and development of our products and services, spending approximately
$863,000, $1,242,000 and $1,519,000 in 1996, 1997 and 1998, respectively. We
typically enter into non-disclosure and confidentiality agreements with our
employees and distributors with access to sensitive information. These
agreements may be breached and we may not have adequate remedies for any
breach. Others may acquire substantially equivalent proprietary technologies or
otherwise gain access to our proprietary technologies. In addition, any
particular technology may not be regarded as a trade secret under applicable
law. As a result of the reliance that we place on our trade secrets, loss of
our trade secret protection could harm our business and results of operations.
We have no registered patents or pending patent applications. The steps taken
by us to protect our proprietary rights may not be adequate to prevent
misappropriation of our technology or independent development or sale by others
of software products with features based upon, or otherwise similar to, our
products.
Although we believe that our technology has been independently developed and
that none of our technology or intellectual property infringes on the rights of
others, third parties may assert infringement claims against us in the future.
If infringement were established, we might be required to modify our products
or technologies or obtain a license to permit our continued use of those
rights. We may not be able to do either in a timely manner or upon acceptable
terms and conditions, and any failure to do so could harm our business and
results of operations. In addition, any future litigation necessary to protect
our trade secrets, know-how or other proprietary rights, to defend ourselves
against claimed infringement of the rights of others or to determine the scope
and validity of the proprietary rights of others could result in substantial
cost to us and diversion of our resources. Adverse determinations in any
litigation or proceedings also could subject us to significant liabilities to
third parties and could prevent us from producing, selling or using our
products or technologies. We may not have the resources to defend or prosecute
a proprietary rights infringement claim or other action.
Government Regulation
The healthcare industry is highly regulated by state, federal and local laws
and regulations, which are subject to change. Currently, few of these laws and
regulations apply directly to our business but rather apply primarily to health
plans or employers. For example, the confidentiality of patient records and the
circumstances under which records may be released for inclusion in our
databases may be subject to substantial regulation by state governments. These
state laws and regulations govern both the disclosure and the use of
confidential patient medical records. Although compliance with these laws and
regulations currently is principally the responsibility of health care
providers and we typically do not include confidential patient medical
information in our databases, these regulations may be extended to cover our
business and the eligibility and other data that we do include in our
databases. Additional legislation governing the dissemination of medical
records has been proposed at both the state and federal level. This legislation
may require holders of these records to implement security measures that may
require substantial expenditures by us. Changes to federal, state or local laws
may materially restrict employers' and health plans' ability to store and
transmit medical records using our products and services.
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<PAGE>
Laws and regulations may be adopted with respect to the Internet or other on-
line services covering issues such as user privacy, pricing, content,
copyrights, distribution and characteristics and quality of products and
services. The adoption of any additional laws or regulations may impede the
growth of the Internet or other on-line services. This could decrease the
demand for our products and services and increase our cost of doing business.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing property ownership, sales taxes and other forms of
taxation, libel and personal privacy is uncertain and may remain uncertain for
a considerable length of time.
HIPAA mandates the use of standard transactions, identifiers, security and
other provisions by the year 2000. We have designed our products and services
to comply with HIPAA. However, any change in federal standards would require us
to expend additional resources.
Finally, our function as a conduit for payment by employers to health plans
may subject us to the ERISA. ERISA imposes fiduciary duties on employers and
health plans with respect to payments made on behalf of participants. Although
we believe our role in the payment process is a purely mechanical one, it is
possible that these fiduciary duties could be deemed to apply to us. In that
event, we may become subject to greater liability with respect to these
payments and may experience higher operating costs in order to comply with
these regulation.
Properties
Our offices are located in Minneapolis, Minnesota where we lease or sublease
approximately 37,100 square feet of office space. Our lease for 29,630 square
feet of this space expires on April 30, 2000 and the lease for the remainder
expires on February 28, 2003. We believe our existing facilities are adequate
to meet our needs until the expiration of our principal lease. Any future
growth during this period can be accommodated through the leasing of additional
or alternative space near our current facilities. Due to our current sales and
marketing plan, we anticipate the need for additional office space in the year
2000 and we currently are negotiating to lease approximately 70,000 square feet
of office space located in the Minneapolis metropolitan area upon the
expiration of our principal lease on April 30, 2000.
Employees
As of October 31, 1999, we had 263 full-time employees, including 90 in
information technology, 89 in operations, 33 in account management, 10 in sales
and marketing, 24 in consulting and 17 in administration and executive
management. We have never had a work stoppage and none of our employees
currently are represented under collective bargaining agreements. We consider
our relations with our employees to be good. We believe that our future success
will depend in part on the continued service of our senior management and key
technical personnel and our ability to attract, integrate, retain and motivate
highly qualified technical and managerial personnel. This is particularly true
for sales and marketing personnel because of our plans to significantly expand
our sales and marketing groups. Competition for qualified personnel in our
industry and geographical location is intense. We may not continue to be
successful in attracting and retaining a sufficient number of qualified
personnel to conduct our business in the future.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table provides information as of October 31, 1999 regarding our
executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Mark W. Tierney... 51 Chairman and Director
John J. Davis..... 40 Chief Executive Officer and Director
Michael C.
Bingham......... 37 Senior Vice President, Business Development and Director
Scott P.
Halstead........ 36 Chief Financial Officer and Secretary
Paul V. Barber.... 38 Director
James P. Bradley.. 48 Director
Daniel M. Cain.... 54 Director
William J. Geary.. 40 Director
John M. Nehra..... 51 Director
</TABLE>
Mr. Tierney is one of our co-founders. He has been our Chairman since
September 1993 and a member of our board of directors since September 1993.
Prior to founding our company, Mr. Tierney founded a joint venture company with
UnitedHealth Group Corporation which specializes in patient demand management,
patient advocacy and case management services to Fortune 500 companies and
served as its President and Chief Executive Officer from July 1985 to August
1993. From July 1983 to July 1985, Mr. Tierney served as Senior Vice President
of Medical Services for Allina Health System, the largest HMO in the
Minneapolis-St. Paul metropolitan area. Prior to July 1983, he held management
positions with CIGNA Health Plans, Inc. and Kaiser Permenente Southern
California. Mr. Tierney holds a master's degree in Hospital and Health Care
Administration from the University of Minnesota and today serves on their
clinical faculty.
Mr. Davis has been our Chief Executive Officer since April 1999 and a member
of our board of directors since June 1999. From 1996 to 1999, Mr. Davis served
as President and Chief Executive Officer of MedManagement, L.L.C., a national
and leading provider of pharmacy management and medication use consulting
services to hospitals and health systems. Prior to his work with MedManagement,
L.L.C., Mr. Davis served for ten years in a number of operations and executive
management positions at UnitedHealth Group Corporation. Most recently, from
1994 to 1996, Mr. Davis served as President of Healthmarc, a UnitedHealth Group
Corporation specialty company providing innovative managed care services to
employers with populations resident outside health plan service areas. Mr.
Davis holds a bachelor's degree from St. John's University, Collegeville,
Minnesota.
Mr. Bingham is one of our co-founders. He has been our Senior Vice President,
Business Development since August 1999 and a member of our board of directors
since September 1993. In addition, Mr. Bingham has held leadership roles in
many aspects of our company since its inception. Prior to founding our company,
Mr. Bingham held various management positions at UnitedHealth Group
Corporation, McKinsey & Company and Maxicare Health Plans. Mr. Bingham holds an
M.B.A. degree from the Wharton School at the University of Pennsylvania and a
bachelor's degree in economics from Claremont McKenna College.
Mr. Halstead has been our Chief Financial Officer since February 1997. Prior
to joining our company, he spent six years with The Dun & Bradstreet
Corporation in various financial management positions in North America, Europe
and Asia. Most recently he was Chief Financial Officer of an operating division
of The Dun & Bradstreet Corporation. Mr. Halstead holds an M.B.A. degree from
the Wharton School at the University of Pennsylvania and a bachelor's degree in
Industrial Engineering from Northwestern University.
Mr. Barber has been a director since June 1999. Mr. Barber is a Managing
Member of JMI Associates III, LLC, the general partner of JMI Equity Fund III,
L.P., a venture capital limited partnership. From 1990 to 1998, he was Managing
Director and head of the software investment banking practice of Deutsche Bank
Alex.
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<PAGE>
Brown, an investment banking firm. Mr. Barber serves on the board of directors
of several privately held companies. Mr. Barber holds an M.B.A. from Harvard
Business School and a bachelor's degree in Economics from Stanford University.
Mr. Bradley has been a director since 1997. Mr. Bradley has been Chairman and
Chief Executive Officer of Abaton.com, Inc., a Web-based healthcare information
company, since January 1997. From 1989 to October 1995, Mr. Bradley was Chief
Information Officer of UnitedHealth Group Corporation. From October 1995 to
January 1997, Mr. Bradley was President of Health Systems Integration, Inc., a
healthcare software information company. Mr. Bradley holds an M.S. degree in
Bio Statistics and Data Processing and a bachelor's degree in Genetics and
Statistics from the University of Illinois.
Mr. Cain has been one of our directors since March 1999. Mr. Cain is
President and Chief Executive Officer of Cain Brothers, LLC, a healthcare
investment bank which has served the financial and capital needs of the health
and medical industry since 1982, and a Manager of CB Health Ventures, L.L.C.
Mr. Cain is a director of New England Funds, a family of mutual funds and
Universal Health Realty Income Trust, a health care REIT. Mr. Cain is a trustee
of the Norman Rockwell Museum and Sharon Hospital and the National Committee
for Quality Health Care. Mr. Cain holds an M.B.A. degree from Columbia
University and a bachelor's degree in American Civilization from Brown
University.
Mr. Geary has been a director since June 1998. Mr. Geary has been a Principal
of North Bridge Venture Partners, L.P. since its inception in March 1994 and a
General Partner of North Bridge Venture Partners II, L.P., North Bridge Venture
Partners III, L.P. and North Bridge Venture Partners IV, L.P. since their
inceptions in September 1996, August 1998 and October 1999, respectively. Mr.
Geary also is a director of several private technology companies. Mr. Geary
holds a bachelor's degree from Boston College and is a C.P.A.
Mr. Nehra has been a director since 1996. Since 1989, Mr. Nehra has been the
managing general partner of Catalyst Ventures, Limited Partnership, a venture
capital limited partnership. Since December 1993, Mr. Nehra has also been a
general partner of New Enterprise Associates VI, VII, and VIII Limited
Partnerships, venture capital limited partnerships. Mr. Nehra has served as
Chairman of the Board of Directors of Celeris Corporation, a biomedical
contract research service company since July 1997 and as a director of Celeris
since November 1992. Mr. Nehra also has served as Chairman of the Board of
Iridex Corporation, a medical device company, since 1994, and as a director
since 1989. Mr. Nehra is also a director of several privately held companies.
Mr. Nehra holds a bachelor's degree from the University of Michigan.
Board Composition
Following this offering, our board of directors will consist of eight
directors divided into three classes with each class serving for a term of
three years. At each annual meeting of shareholders, directors will be elected
by the holders of common stock to succeed those directors whose terms are
expiring. Messrs. Geary and Nehra will be Class I directors whose terms will
expire in 2000; Messrs. Barber, Bradley and Cain will be Class II directors
whose terms will expire in 2001; and Messrs. Bingham, Davis and Tierney will be
Class III directors whose terms will expire in 2002. We intend to replace one
or two current directors with outside directors after this offering as soon as
we identify suitable candidates.
Board Committees
Our board of directors has established a compensation committee and an audit
committee.
Messrs. Bradley, Cain and Nehra are members of our compensation committee and
Mr. Nehra is its chairman. Our compensation committee makes recommendations to
the board of directors concerning executive compensation and administers our
stock option plans and our Employee Stock Purchase Plan.
Messrs. Barber, Geary and Nehra are members of our audit committee and Mr.
Geary is its chairman. Our audit committee reviews the results and scope of the
audit and other accounting related services and reviews our accounting
practices and systems of internal accounting controls.
39
<PAGE>
Director Compensation
We currently do not pay any compensation to directors for serving in that
capacity. We reimburse directors for out-of-pocket expenses incurred in
attending board meetings. Our board of directors has the discretion to grant
options to non-employee directors pursuant to our stock option plans. Mr.
Bradley currently holds options to purchase 46,695 shares of our common stock.
Compensation Committee Interlocks and Insider Participation
Messrs. Bradley, Cain and Nehra currently serve on the compensation
committee. None of these individuals has at any time been an officer or
employee of ours. Prior to formation of the compensation committee, all
decisions regarding executive compensation were made by the full board of
directors. No interlocking relationship exists between the board of directors
or the compensation committee and the board of directors or compensation
committee of any other company, nor has any interlocking relationship existed
in the past.
On March 19, 1996, we sold a total of 636,945 shares of our Series B
Preferred Stock at a purchase price of $7.065 per share, including 424,630
shares to New Enterprise Associates VI, Limited Partnership. On May 3, 1999, we
sold a total of 563,525 shares of our Series C Preferred Stock at a purchase
price of $9.76 per share, including 307,377 shares to CB Healthcare Fund, L.P.
and 102,459 shares to New Enterprise Associates VI, Limited Partnership. On
June 9, 1999, we sold a total of 512,295 shares of our Series C Preferred Stock
at a purchase price of $9.76 per share, including 102,459 shares to CB
Healthcare Fund, L.P. These share issuances do not reflect the three-for-one
stock split effective immediately prior to this offering.
Mr. Nehra is a general partner of NEA Partners VI, Limited Partnership, which
is the general partner of New Enterprise Associates VI, Limited Partnership.
Mr. Cain is a Manager of CB Health Ventures, L.L.C. which is the general
partner of CB Healthcare Fund, L.P. We believe that the shares issued in the
transactions described above were sold at the then fair market value of the
shares and that the terms of these transactions were no less favorable than we
could have obtained from unaffiliated third parties.
Indemnification Matters and Limitation of Liability
Minnesota law and our bylaws provide that we will, subject to limitations,
indemnify any person made or threatened to be made a party to a proceeding by
reason of that person's former or present official capacity with us. We will
indemnify that person against judgments, penalties, fines, settlements and
reasonable expenses, and, subject to limitations, we will pay or reimburse
reasonable expenses before the final disposition of the proceeding.
As permitted by Minnesota law, our articles of incorporation provide that our
directors will not be personally liable to us or our shareholders for monetary
damages for a breach of fiduciary duty as a director, subject to the following
exceptions:
. any breach of the director's duty of loyalty to us or our shareholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. liability for illegal distributions under section 302A.559 of the
Minnesota Business Corporation Act or for civil liabilities for state
securities law violations under section 80A.23 of the Minnesota
statutes;
. any transaction from which the director derived an improper personal
benefit; and
. any act or omission occurring prior to the effective date of Article
VIII of our articles of incorporation.
In addition, the employment agreements with our officers that are described
in this prospectus require us, to the extent permitted by law, to indemnify
each of these officers and to obtain directors' and officers' liability
insurance coverage in the amount that our board of directors determines to be
appropriate.
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<PAGE>
Presently, there is no pending litigation or proceeding involving any of our
directors, officers, employees or agents where indemnification will be required
or permitted. We are not aware of any threatened litigation or proceeding that
might result in a claim for indemnification.
Employment Agreements
We entered into employment agreements with Mark Tierney, John Davis and Scott
Halstead in April 1999 that govern their employment with us. The agreements set
forth their compensation levels and eligibility for salary increases, bonuses,
benefits and option grants under our stock option plans. The initial employment
term is five years. During the term of their employment agreements, either
party may terminate the agreement by providing at least 30 days written notice
to the other party.
Mr. Tierney's employment agreement provides for a payment of one year's base
salary and an immediate vesting of 100% of any remaining unvested stock options
in the event of termination of employment by mutual agreement or due to Mr.
Tierney's death or disability. Also, if we terminate his employment other than
for cause, other than as set forth in the preceding sentence, or Mr. Tierney
terminates his employment agreement because of a material reduction in his
duties or compensation or because we require him to relocate, then the
agreement provides for a payment of two years' base salary and an immediate
vesting of 100% of any remaining unvested stock options. If a change in control
occurs prior to April 22, 2001, his employment agreement provides for an
immediate vesting of 100% of any remaining unvested stock options.
Mr. Davis' employment agreement provides for a payment of one year's base
salary and an immediate vesting of 50% of any remaining unvested stock options
in the event of termination of employment other than for cause. If, however,
the termination of employment occurs within two years of a change in control,
the employment agreements provide for severance pay of one year's base salary
and an immediate vesting of 100% of any remaining unvested stock options.
Mr. Halstead's employment agreement provides for a payment of six months'
base salary and an immediate vesting of 50% of any remaining unvested stock
options in the event of termination of employment other than for cause. If,
however, the termination of employment occurs within one year of a change in
control, his employment agreement provides for severance pay of six months'
base salary and an immediate vesting of 100% of any remaining unvested stock
options.
Executive Compensation
The following table provides information concerning compensation paid or
accrued by us to or on behalf of our chief executive officer and each of our
two other most highly compensated executive officers whose salary and bonus
during the fiscal year ended December 31, 1998 was more than $100,000:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation
---------------- ------------
Shares
Name and Principal Underlying
Position Salary Bonus Options
- ------------------ -------- ------- ------------
<S> <C> <C> <C>
Mark W. Tierney
Chairman and
Director.............. $152,000 $42,040 31,200
Michael C. Bingham
Senior Vice President,
Business Development.. $104,000 $28,580 23,400
Scott P. Halstead
Chief Financial
Officer and
Secretary............. $120,000 $12,000 11,700
</TABLE>
- --------
. The aggregate amount of perquisites and other personal benefits, securities
or property received by each named executive officer was less than either
$50,000 or 10% of the total annual salary and bonus reported for each
respective named executive officer.
. John Davis became Chief Executive Officer in April 1999. During the fiscal
year ended December 31, 1998, Mark Tierney was Chairman and Chief Executive
Officer. Michael Bingham has been Senior Vice President, Business
Development since August 1999. During the fiscal year ended December 31,
1998, Mr. Bingham was President.
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<PAGE>
The following table provides information concerning the stock option grants
made to each of our named executive officers during the fiscal year ended
December 31, 1998.
Option Grants in Fiscal 1998
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------
Number of
Securities Percentage of Total
Underlying Options Granted to
Options Employees in Fiscal Exercise Price Expiration
Name Granted 1998 ($/Share) Date
- ---- ---------- ------------------- -------------- ----------
<S> <C> <C> <C> <C>
Mark W. Tierney....... 31,200 5.01% $0.75 6/10/2008
Michael C. Bingham.... 23,400 3.76% $0.75 6/10/2008
Scott P. Halstead..... 11,700 1.88% $0.75 6/10/2008
</TABLE>
- --------
. The above options have a 10-year term from the grant date, and were fully
vested and exerciseable as of the grant date. All stock options were granted
with an exercise price equal to the fair market value of the common stock as
determined by our board of directors on the date of grant.
. The data presented in the Percentage of Total Options Granted to Employees
in Fiscal 1998 column based on an aggregate of 622,950 shares of common
stock subject to options granted to our employees during fiscal 1998.
The following table provides information concerning the exercise of options
to purchase common stock by our named executive officers during fiscal 1998 and
the number and value of unexercised stock options held by these executive
officers as of December 31, 1998.
Aggregated Option Exercises in Fiscal 1998 and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year-End at Fiscal Year-End
----------------------- -------------------------
Shares
Acquired on
Name Exercise Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Mark W. Tierney......... -- 75,630 -- $33,174 $ --
Michael C. Bingham...... -- 27,105 -- $ 2,766 $ --
Scott P. Halstead....... -- 36,450 65,250 $ 3,713 $9,788
</TABLE>
- --------
. The value of unexercised in-the-money options is based on a value of $0.75,
the fair market value of our common stock as of December 31, 1998 as
determined by our board of directors, less the applicable per share exercise
price multiplied by the number of shares issued upon exercise of the option.
Benefit Plans
1993 Stock Option Plan
Our 1993 Stock Option Plan provides for the grant of options to purchase
shares of common stock and other long-term incentive awards to any of our full
or part-time employees, officers, directors, consultants and independent
contractors. Options granted under the 1993 Stock Option Plan may qualify as
incentive stock options under the Internal Revenue Code of 1986, or may be
options that do not qualify as incentive stock
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<PAGE>
options. Other long-term incentive awards that may be granted under the 1993
Stock Option Plan include stock appreciation rights, or SARs, restricted stock
and performance awards. We have reserved 3,900,000 shares of common stock for
issuance under the 1993 Stock Option Plan. The 1993 Stock Option Plan is
administered by our compensation committee. The committee has the discretion to
select the people to whom options are granted and to establish the terms and
conditions of each stock option, subject to the provisions of the 1993 Stock
Option Plan and to any special provisions approved by our board of directors.
The exercise price of an incentive stock option granted under the 1993 Stock
Option Plan must not be less than 100% of the fair market value of the common
stock on the date the option is granted. In the event that a proposed optionee
owns more than 10% of our common stock, any incentive stock option granted to
that optionee must have an exercise price not less than 110% of the fair market
value of our common stock on the grant date. The term of each option is
determined by the compensation committee. However, the term of an incentive
stock option may not exceed 10 years from the date of grant and the term of a
non-qualified stock option may not exceed 15 years from the date of grant. In
the case of an incentive option granted to an owner of more than 10% of our
common stock, the term may not exceed five years from the date of grant. The
1993 Stock Option Plan is subject to amendment by our board of directors,
except that the board may not increase the number of shares which may be issued
under the 1993 Stock Option Plan or decrease the minimum exercise price of
options granted under the 1993 Stock Option Plan without the approval of our
shareholders.
As of December 31, 1998, options to purchase an aggregate of 1,661,790 shares
of common stock, at a weighted average exercise price of $0.45 per share, were
outstanding under the 1993 Stock Option Plan and a total of 341,883 shares were
available for future option grants.
1999 Stock Incentive Plan
Our 1999 Stock Incentive Plan was approved by our board of directors and
shareholders in September 1999. The 1999 Stock Incentive Plan provides for the
granting of:
. stock options, including incentive stock options and non-qualified stock
options;
. stock appreciation rights, or SARs;
. restricted stock and restricted stock units;
. performance awards; and
. other stock-based awards.
We have reserved 3,000,000 shares of common stock for issuance under the 1999
Stock Incentive Plan. The 1999 Stock Incentive Plan is administered by our
compensation committee. The compensation committee has the authority
. to establish rules for the administration of the 1999 Incentive Plan;
. to select the persons to whom awards are granted;
. to determine the types of awards to be granted and the number of shares
of common stock covered by awards; and
. to set the terms and conditions of awards.
The compensation committee may also determine whether the payment of any
amounts received under any award shall be deferred. Awards may provide that
upon the grant or exercise, the holder will receive shares of common stock,
cash or any combination, as the compensation committee shall determine.
In order to meet the requirements of Section 162(m) of the Internal Revenue
Code, the 1999 Incentive Plan contains a limitation on the number of options
that may be granted to any single person in any one calendar year.
The exercise price per share under any incentive stock option or the grant
price of any SAR cannot be less than 100% of the fair market value of our
common stock on the date of the grant of that incentive stock option
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<PAGE>
or SAR. In the event that a proposed optionee owns more than 10% of our common
stock, any incentive stock option granted to that optionee must have an
exercise price not less than 110% of the fair market value of our common stock
on the grant date and may not have a term longer than five years. Options may
be exercised by payment in full of the exercise price, either in cash or, at
the discretion of the compensation committee, in whole or in part by the
tendering of shares of common stock or other consideration having a fair market
value on the date the option is exercised equal to the exercise price.
Determinations of fair market value under the 1999 Stock Incentive Plan are
made in accordance with methods and procedures established by the compensation
committee.
The holder of an SAR is entitled to receive the excess of the fair market
value of a specified number of shares over the grant price of the SAR.
The holder of restricted stock may have all of the rights of a shareholder of
our company, including the right to vote the shares subject to the restricted
stock award and to receive any dividends, or these rights may be restricted.
Restricted stock may not be transferred by the holder until the restrictions
established by the compensation committee lapse. Holders of restricted stock
units have the right, subject to any restrictions imposed by the compensation
committee, to receive shares of common stock, or a cash payment equal to the
fair market value of such shares, at some future date. Upon termination of the
holder's employment during the restriction period, restricted stock and
restricted stock units shall be forfeited, unless the compensation committee
determines otherwise.
If any shares of common stock subject to any award or to which an award
relates are not purchased or are forfeited, or if any award terminates without
the delivery of shares or other consideration, the shares previously used for
these awards become available for future awards under the 1999 Stock Incentive
Plan. Except as otherwise provided under procedures adopted by the compensation
committee to avoid double counting with respect to awards granted in tandem
with or in substitution for other awards, all shares relating to awards granted
are counted against the aggregate number of shares available for granting
awards under the 1999 Stock Incentive Plan.
Our board of directors may amend, alter or discontinue the 1999 Stock
Incentive Plan at any time, provided that shareholder approval must be obtained
for any change that absent shareholder approval:
. would cause Rule 16b-3 of the Exchange Act or section 162(m) of the
Internal Revenue Code to become unavailable with respect to the 1999
Stock Incentive Plan;
. would violate any rules or regulations of the National Association of
Securities Dealers, Inc., the Nasdaq National Market or any securities
exchange applicable to us; or
. would cause us to be unable under the Internal Revenue Code to grant
incentive stock options under the 1999 Stock Incentive Plan.
Under the 1999 Stock Incentive Plan, the compensation committee may permit
participants receiving or exercising awards to surrender shares of common stock
to us to satisfy federal and state withholding tax obligations. In addition,
the compensation committee may grant a bonus to a participant in order to
provide funds to pay all or a portion of federal and state taxes due as a
result of the receipt, exercise or lapse of restrictions relating to an award.
Employee Stock Purchase Plan
Our employee stock purchase plan will become effective upon consummation of
this offering and is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Code. The stock purchase plan covers
an aggregate of 900,000 shares of common stock. In order to participate in the
stock purchase plan, employees must meet eligibility requirements.
Participating employees will be able to direct us to make payroll deductions of
up to 15% of their compensation during a purchase period for the purchase of
shares of common stock. Each purchase period, with the exception of the initial
offering period, will be six
44
<PAGE>
months. The stock purchase plan will provide participating employees with the
right, subject to specific limitations, to purchase our common stock at a price
equal to 85% of the lesser of the fair market value of our common stock on the
first day or the last day of the applicable purchase period. The price on the
first day of the initial purchase period will be the initial public offering
price of the shares of the common stock in this offering. The stock purchase
plan will terminate on the date our board of directors determines, or
automatically as of the date on which all of the shares of common stock
reserved for purchase under the stock purchase plan have been sold.
401(k) Plan
We have established a tax-qualified employee savings and retirement plan for
all of our employees who satisfy eligibility requirements, including
requirements relating to age and length of service. Pursuant to the 401(k)
plan, employees may elect to reduce their current compensation by up to the
lower of 20% or the statutory limit and have the amount of this reduction
contributed to the 401(k) plan. The 401(k) plan is intended to qualify under
Section 401 of the Code so that contributions by employees or by us to the
401(k) plan, and income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) plan. Our contributions, if any, will
be deductible by us when made.
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<PAGE>
CERTAIN TRANSACTIONS
On March 19, 1996, we sold a total of 636,945 shares of our Series B
Preferred Stock at a purchase price of $7.065 per share as follows:
. 212,315 shares to North Bridge Venture Partners, L.P.; and
. 424,630 shares to New Enterprise Associates VI, Limited Partnership.
On May 3, 1999, we sold a total of 563,525 shares of our Series C Preferred
Stock at a purchase price of $9.76 per share, including:
. 307,377 shares to CB Healthcare Fund, L.P.;
. 102,459 shares to North Bridge Venture Partners, L.P.; and
. 102,459 shares to New Enterprise Associates VI, Limited Partnership.
On June 9, 1999, we sold a total of 512,295 shares of our Series C Preferred
Stock at a purchase price of $9.76 per shares as follows:
. 102,459 shares to CB Healthcare Fund, L.P.;
. 364,754 shares to JMI Equity Fund III, L.P.; and
. 45,082 shares to JMI Equity Side Fund, L.P.
The share issuances discussed above do not reflect the three-for-one stock
split effective immediately prior to this offering.
William J. Geary, who is one of our directors, is a principal of North Bridge
Venture Management, L.P. North Bridge Venture Management is a general partner
of North Bridge Venture Partners, L.P.
John M. Nehra, who is one of our directors, is a general partner of NEA
Partners VI, Limited Partnership. NEA Partners VI, Limited Partnership is the
general partner of New Enterprise Associates VI, Limited Partnership.
Daniel M. Cain, who is one of our directors, is a manager of CB Health
Ventures, L.L.C. CB Health Ventures, L.L.C. is the general partner of CB
Healthcare Fund, L.P.
Paul V. Barber, who is one of our directors, is a managing member of JMI
Associates III, LLC. JMI Associates III, LLC, is the general partner of JMI
Equity Fund III, L.P. JMI Equity Side Fund, L.P. is affiliated with JMI Equity
Fund III, L.P. Mr. Barber has no beneficial ownership interest in JMI Equity
Side Fund, L.P.
We believe that the shares issued in the transactions described above were
sold at the then fair market value of the shares and that the terms of these
transactions were no less favorable than we could have obtained from
unaffiliated third parties.
46
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table provides information concerning beneficial ownership of
our common stock as of October 31, 1999 by:
. each shareholder that we know owns more than 5% of our outstanding common
stock;
. each of our named executive officers;
. each of our directors; and
. all of our directors and named executive officers as a group.
The following table lists the applicable percentage of beneficial ownership
based on approximately 10,054,068 shares of common stock outstanding as of
October 31, 1999, as adjusted to reflect the conversion of the outstanding
shares of preferred stock immediately prior to this offering. The table also
lists the applicable percentage beneficial ownership based on 15,054,068 shares
of common stock outstanding upon completion of this offering, assuming no
exercise of the underwriters' overallotment option. Except where noted, the
persons or entities named have sole voting and investment power with respect to
all shares shown as beneficially owned by them. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities. Shares of common stock subject to options, warrants or issuable on
the conversion of preferred stock which are currently exercisable or
convertible or may be exercised or converted within 60 days of October 31, 1999
are deemed to be outstanding and to be beneficially owned by the person holding
these options, warrants or shares of convertible preferred stock for the
purpose of computing the number of shares beneficially owned and the percentage
ownership of the person or entity holding these securities but are not
outstanding for the purpose of computing the percentage ownership of any other
person or entity.
Unless otherwise indicated, the principal address of each listed 5%
shareholder is c/o eBenX, Inc., 5500 Wayzata Boulevard, Suite 1450,
Minneapolis, Minnesota 55416-1241.
<TABLE>
<CAPTION>
Percentage of
Shares Beneficially
Number of Owned
Shares --------------------
Beneficially Before the After the
Beneficial Owners Owned Offering Offering
- ----------------- ------------ ---------- ---------
<S> <C> <C> <C>
North Bridge Venture Partners, L.P.
950 Winter Street, Suite 4600
Waltham, MA 02451.......................... 2,054,949 20.4% 13.7%
New Enterprise Associates VI, Limited
Partnership
1119 St. Paul Street
Baltimore, MD 21202........................ 1,581,267 15.7% 10.5%
Entities associated with
JMI Equity Fund III, L.P. (1)
12680 High Bluff Drive
San Diego, CA 92130........................ 1,229,508 12.2% 8.2%
CB Healthcare Fund, L.P.
452 Fifth Avenue, 25th Floor
New York, NY............................... 1,229,508 12.2% 8.2%
Barbara J. Seykora (2)....................... 611,466 6.0% 4.0%
Mark W. Tierney (3).......................... 1,920,630 18.9% 12.7%
John J. Davis (4)............................ 148,827 1.5% 1.0%
Michael C. Bingham (5)....................... 1,227,105 12.2% 8.1%
Scott P. Halstead (6)........................ 70,200 * *
Paul V. Barber (7)........................... 1,094,262 10.9% 7.3%
James P. Bradley (8)......................... 25,017 * *
Daniel M. Cain (9)........................... 1,229,508 12.2% 8.2%
William J. Geary (10)........................ 2,054,949 20.4% 13.7%
John M. Nehra (11)........................... 1,581,267 15.7% 10.5%
All directors and executive officers as a
group (9 persons) (12)..................... 9,351,765 89.5% 60.5%
</TABLE>
47
<PAGE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of our common stock.
(1) Includes 1,094,262 shares held by JMI Equity Fund III, L.P. and 135,246
shares held by JMI Equity Side Fund, L.P. JMI Equity Side Fund, L.P. is
affiliated with JMI Equity Fund III, L.P.
(2) Includes 143,400 shares issuable upon exercise of stock options
exercisable within 60 days of October 31, 1999.
(3) Includes 76,200 shares issuable upon exercise of stock options
exerciseable within 60 days of October 31, 1999 and 44,430 shares issuable
upon exercise of immediately exerciseable warrants.
(4) Includes 148,827 shares issuable upon exercise of stock options
exerciseable within 60 days of October 31, 1999.
(5) Includes 23,400 shares issuable upon exercise of stock options
exerciseable within 60 days of October 31, 1999 and 3,705 shares issuable
upon exercise of immediately exerciseable warrants.
(6) Includes 70,200 shares issuable upon exercise of stock options
exerciseable within 60 days of October 31, 1999.
(7) Includes 1,094,262 shares held by JMI Equity Fund III, L.P. Mr. Barber,
one of our directors, is a Managing Member of JMI Associates III, LLC,
which is the general partner of JMI Equity Fund III, L.P. JMI Equity Side
Fund, L.P. is affiliated with JMI Equity Fund III, L.P. Mr. Barber
disclaims beneficial ownership of shares held by JMI Equity Fund III, L.P.
Mr. Barber has no beneficial ownership interest in JMI Equity Side Fund,
L.P.
(8) Includes 25,017 shares issuable upon exercise of stock options
exerciseable within 60 days of October 31, 1999.
(9) Includes 1,229,508 shares held by CB Healthcare Fund, L.P. Mr. Cain, one
of our directors, is a Manager of CB Health Ventures, L.L.C., which is the
general partner of CB Healthcare Fund, L.P. Mr. Cain disclaims beneficial
ownership of shares held by CB Healthcare Fund, L.P.
(10) Includes 2,054,949 shares held by North Bridge Venture Partners, L.P. Mr.
Geary, one of our directors, is a principal of North Bridge Venture
Management, L.P., which is a general partner of North Bridge Venture
Partners, L.P. Mr. Geary disclaims beneficial ownership of shares held by
North Bridge Venture Partners, L.P.
(11) Includes 1,581,267 shares held by New Enterprise Associates VI, Limited
Partnership. Mr. Nehra, one of our directors, is a general partner of NEA
Partners VI, Limited Partnership, which is the general partner of New
Enterprise Associates VI, Limited Partnership. Mr. Nehra disclaims
beneficial ownership of shares held by New Enterprise Associates VI.
(12) Includes 391,779 shares issuable upon exercise of stock options
exerciseable within 60 days of October 31, 1999 and 48,135 shares issuable
upon exercise of immediately exerciseable warrants. Includes 1,094,262
shares held by JMI Equity Fund III, L.P., 1,229,508 shares held by CB
Healthcare Fund, L.P., 2,054,949 shares held by North Bridge Venture
Partners, L.P. and 1,581,267 shares held by New Enterprise Associates VI,
Limited Partnership. Does not include shares beneficially owned by Barbara
J. Seykora, who is not an executive officer of our company.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective upon the filing of our amended and restated articles of
incorporation immediately prior to the closing of this offering, our authorized
capital stock will consist of 100,000,000 shares of capital stock, par value
$.01 per share. Unless otherwise designated by our board of directors, all
issued shares shall be deemed common stock with equal rights and preferences.
Common Stock
As of October 31, 1999, there were 10,054,068 shares of our common stock
outstanding.
Holders of our common stock do not have cumulative voting rights and are
entitled to one vote for each share held of record on all matters submitted to
a vote of the shareholders, including the election of directors. Holders of our
common stock are entitled to receive ratably the dividends, if any, as may be
declared by the board of directors out of legally available funds. These rights
are subject to the prior rights of any preferred stock then outstanding. See
"Dividend Policy" for a further description of dividend rights.
Upon our liquidation, dissolution or winding up, the holders of our common
stock will be entitled to share ratably in the net assets legally available for
distribution to shareholders after the payment of our debts and other
liabilities. These rights are subject to the prior rights of any preferred
stock then outstanding. Holders of our common stock have no preemptive or
conversion rights or other subscription rights and there are no redemption or
sinking funds provisions applicable to the common stock. All outstanding shares
of common stock are, and the common stock outstanding upon completion of this
offering will be, fully paid and nonassessable.
Preferred Stock
Effective upon the closing of this offering, our board of directors will have
the authority, without further action by the shareholders, to issue shares of
preferred stock in one or more series and to fix the number of shares,
designations and preferences, powers and relative, participating, optional or
other special rights and the qualifications or restrictions on those shares.
The preferences, powers, rights and restrictions of different series of
preferred stock may differ with respect to dividend rates, amounts payable on
liquidation, voting rights, conversion rights, redemption provisions, sinking
fund provisions and purchase funds and other matters.
The issuance of preferred stock could decrease the amount of earnings and
assets available for distribution to holders of common stock or adversely
affect the rights and powers, including voting rights, of the holders of common
stock. It may have the effect of delaying, deferring or preventing a change in
control our company. We currently do not plan to issue any shares of preferred
stock.
Registration Rights
After this offering, the holders of 6,248,922 shares of common stock will be
entitled to rights with respect to the registration of these shares under the
Securities Act as follows:
. Demand Registration Rights: At any time beginning six months following
our initial public offering, the holders of at least 30% of these shares
of common stock can request that we register all or a portion of their
shares. Upon this request, we must, subject to specific restrictions and
limitations, use our best efforts to cause a registration statement
covering the number of shares of common stock that are subject to the
request to become effective. The holders may only require us to file
three registration statements in response to their demand registration
rights.
. Piggyback Registration Rights: If we propose to register additional
shares of our common stock under the Securities Act, subject to specific
exceptions, the holders of the 6,248,922 shares can request that we
register their shares in connection with our registration. However, the
underwriter of the registration, if any, would have the right to limit
the number of the 6,248,922 shares that may be included in the
registration. These registration opportunities are unlimited.
49
<PAGE>
These registration rights terminate when all of these shares may be sold
during any 90-day period under Rule 144 under the Securities Act.
Provisions of our Restated Articles and Bylaws and State Law Provisions with
Potential Antitakeover Effects
The existence of authorized but unissued preferred stock, described above,
and specific provisions of Minnesota law, described below, could have an anti-
takeover effect. These provisions are intended to provide management with
flexibility, to enhance the likelihood of continuity and stability in the
composition of our board of directors and the policies of our board and to
discourage an unsolicited takeover of our company if our board of directors
determines that the takeover is not in the best interests of our company and
our shareholders. However, these provisions could have the effect of
discouraging attempts to acquire us, which could deprive our shareholders of
opportunities to sell their shares of common stock at prices higher than
prevailing market prices.
Upon the closing of this offering, our board of directors will be divided
into three classes serving staggered three-year terms. As a result of this
division, generally at least two shareholders' meetings will be required for
shareholders to effect a change in control of the board of directors. In
addition, our bylaws will contain provisions that establish specific procedures
for calling meetings of shareholders and appointing and removing members of the
board of directors.
Section 302A.671 of the Minnesota Business Corporation Act applies, with
exceptions, to any acquisition of our voting stock from a person other than us,
and other than in connection with specific types of mergers and exchanges to
which we are a party, that results in the beneficial ownership of 20% or more
of the voting stock then outstanding. Section 302A.671 requires approval of
these acquisitions by a majority vote of our shareholders to accord full voting
rights to the acquired shares. In general, shares acquired in the absence of
this approval are denied voting rights and are redeemable at their then fair
market value by us within 30 days after the acquiring person has failed to give
a timely information statement to us or the date the shareholders voted not to
grant voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Business Corporation Act generally
prohibits any business combination by us, or by any of our subsidiaries, with
any shareholder that purchases 10 percent or more of our voting shares within
four years following this interested shareholder's share acquisition date. The
business combination may be permitted if it is approved by a committee of all
of the disinterested members of our board of directors before the interested
shareholder's share acquisition date.
Listing
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "EBNX."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be Continental
Stock Transfer and Trust Company. Its address is 2 Broadway, New York, NY
10004, and its telephone number is (212) 509-4000.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, we will have 15,054,068 shares of common
stock outstanding, assuming no exercise of the underwriters' overallotment
option and no exercise of outstanding options to purchase common stock. All of
our directors and executive officers and 1% shareholders, holding in the
aggregate in excess of 64.6% of the outstanding shares of our common stock,
have agreed that they will not, without the prior written consent of the
representatives of the underwriters, sell or otherwise dispose of any shares of
common stock or options to acquire shares of common stock during the 180-day
period following the closing of this offering. See "Underwriting."
50
<PAGE>
The 5,000,000 shares of common stock being sold in this offering will be
freely tradeable without restriction or further registration under the
Securities Act, except for shares held by our affiliates which may generally
only be sold in compliance with the limitations of Rule 144 described below.
The remaining 10,054,068 shares were issued and sold by us in private
transactions and are deemed restricted securities under Rule 144. These shares
may be sold in the public market only if registered under the Securities Act
or if exempt from registration under Rules 144, 144(k) or 701 under the
Securities Act, which rules are summarized below. Subject to the agreements
between our shareholders and the underwriters, described above, and the
provisions of Rules 144, 144(k) and 701, additional shares will be available
for sale in the public market, subject in the case of shares held by
affiliates to compliance with volume restrictions, as follows:
. 61,800 shares will be available for immediate sale in the public market
on the date of this prospectus;
. 275,280 shares will be available for sale 90 days after the date of this
prospectus; and
. 9,716,988 shares will be available for sale under Rules 144 and 701 upon
the expiration of agreements between our shareholders and the
underwriters 180 days after the date of this prospectus.
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person or persons whose shares are aggregated, including an
affiliate, who has beneficially owned restricted shares for at least one year,
is entitled to sell within any three-month period a number of shares that does
not exceed the greater of 1% of the then outstanding shares of common stock,
or approximately 150,540 shares immediately after this offering, or the
average weekly trading volume of our common stock on the Nasdaq National
Market during the four calendar weeks preceding the date of the sale. Sales
under Rule 144 also are subject to requirements pertaining to the manner and
notice of the sales and the availability of current public information
concerning our company.
Under Rule 144(k), a person who is not deemed to have been an affiliate of
our company at any time during the 90 days before a sale and who has
beneficially owned the shares proposed to be sold for at least two years would
be entitled to sell these shares without regard to the requirements described
above. To the extent that shares were acquired from an affiliate of our
company, the transferee's holding period for the purpose of effecting a sale
under Rule 144(k) commences on the date of transfer from the affiliate.
Rule 701 provides that, beginning 90 days after the date of this prospectus,
persons other than affiliates may sell shares of common stock acquired from us
in connection with written compensatory benefit plans, including our 1993
Stock Option Plans, subject only to the manner of sale provisions of Rule 144.
Beginning 90 days after the date of this prospectus, affiliates may sell these
shares of common stock subject to all provisions of Rule 144 except the one-
year minimum holding period.
Shortly after the closing of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register all shares of
common stock issuable under the 1993 Stock Option Plan, the 1999 Stock
Incentive Plan and the Stock Purchase Plan. See "Management--Benefit Plans"
for a further discussion of these plans. This Form S-8 registration statement
is expected to become effective immediately upon filing and shares covered by
that registration statement will then be eligible for sale in the public
markets, subject to the Rule 144 limitations applicable to affiliates.
Prior to this offering there has been no public market for our common stock,
and no predictions can be made regarding the effect, if any, that sales of
shares in the open market or the availability of shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of our common stock in the public market could adversely
affect the prevailing market price.
After the closing of this offering, the holders of 6,248,922 shares of our
common stock will be entitled to rights with respect to the registration of
their shares under the Securities Act. Registration of these shares under the
Securities Act would result in these shares becoming freely tradeable without
restriction under the Securities Act, except for shares purchased by
affiliates, immediately upon the effectiveness of registration. For a
discussion of these rights, see "Description of Capital Stock--Registration
Rights."
51
<PAGE>
UNDERWRITING
The underwriters, through their representatives, BancBoston Robertson
Stephens Inc., Warburg Dillon Read LLC and Thomas Weisel Partners LLC, have
severally agreed to purchase from us the number of shares of common stock next
to their respective names below. The underwriters are committed to purchase and
pay for all the shares if any are purchased.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------ ---------
<S> <C>
BancBoston Robertson Stephens Inc......................................
Warburg Dillon Read LLC................................................
Thomas Weisel Partners LLC.............................................
<CAPTION>
International Underwriters
- --------------------------
<S> <C>
BancBoston Robertson Stephens International Ltd........................
UBS AG, acting through its division Warburg Dillon Read................
Thomas Weisel Partners LLC.............................................
---------
Total................................................................ 5,000,000
=========
</TABLE>
The underwriters propose to offer the shares of common stock to the public at
the public offering price set forth on the cover page of this prospectus and to
specific dealers at that price less a concession of $ per share, of which
$ may be reallowed to other dealers. After this offering, the public
offering price, concession and reallowance to dealers may be reduced by the
representatives. However, no reduction will change the amount of proceeds to be
received by us as set forth on the cover page of this prospectus. The common
stock is offered by the underwriters subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price
for the common stock will be determined by negotiation among us and the
representatives. Among the factors to be considered in determining the initial
public offering price are prevailing market and economic conditions, our
revenues and earnings, market valuations of other companies engaged in
activities similar to us, estimates of our business potential and prospects and
the present state of our business operations.
Overallotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 750,000 additional shares of our common stock at the same price
per share as we will receive for the 5,000,000 shares that the underwriters
have agreed to purchase. If the underwriters exercise this option, each of the
underwriters will have a firm commitment, subject to limited conditions, to
purchase approximately the same percentage of these additional shares that the
number of shares of common stock to be purchased by it shown in the above table
represents as a percentage of the total shares offered in this offering. If
purchased, these additional shares will be sold by the underwriters on the same
terms as those on which the shares offered hereby are being sold. We will be
obligated to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise this option only to cover over
allotments made in connection with the sale of the shares of common stock
offered in this offering.
The following table summarizes the compensation to be paid to the
underwriters by eBenX:
<TABLE>
<CAPTION>
Total
------------------- -------
Without With
Per Over- Over-
Share allotment allotment
----- --------- ---------
<S> <C> <C> <C> <C> <C>
Underwriting discounts and commissions
payable by eBenX.......................... $-- $-- $--
</TABLE>
52
<PAGE>
We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $750,000.
Indemnity. The underwriting agreement among us and the underwriters contains
covenants of indemnity among the underwriters and us against identified civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
underwriting agreement.
Lock-up Agreements. Each of our executive officers and directors and some of
our shareholders have agreed, during the period of 180 days after the date of
this prospectus, not to offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to, any shares of
common stock, or any securities convertible into or exchangeable for shares of
common stock, owned as of the date of this prospectus or thereafter acquired
directly by these holders or with respect to which they have the power of
disposition, without the prior written consent of BancBoston Robertson
Stephens, Inc. However, BancBoston Robertson Stephens, Inc. may, in its sole
discretion and at any time or from time to time, without notice, release all
or any portion of the securities subject to these lock-up agreements. There
are no agreements between the representatives and any of our shareholders
providing consent by the representatives to the sale of shares prior to the
expiration of the 180-day lock-up period. BancBoston Robertson Stephens, Inc.
has indicated that some of the factors it will consider in deciding to release
all or a portion of the securities subject to these lock-up agreements include
the nature of the request, the individual or entity making such request,
number of shares requested to be released and general market conditions at the
time of the request. At this time, it is not believed that its own position in
the securities would be a factor.
In addition, we have agreed that during the lock-up period, we will not,
subject to specified exceptions, without the prior written consent of
BancBoston Robertson Stephens, Inc.:
. consent to the disposition of any shares held by shareholders prior to
the expiration of the lock-up period; or
. issue, sell, contract to sell or otherwise dispose of any shares of
common stock, any options or warrants to purchase any shares of common
stock, or any securities convertible into, exercisable for or
exchangeable for shares of common stock, other than the sale of shares
in this offering, the issuance of common stock upon the exercise of
outstanding options or warrants or our issuance of options or shares
under our 1993 Stock Option Plan.
[Listing. The common stock has been approved for quotation on the Nasdaq
National Market under the symbol "EBNX."]
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act, some persons participating in this
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
stabilizing bid is a bid for or the purchase of common stock by the
underwriters for the purpose of fixing or maintaining the price of the common
stock. A syndicate covering transaction is the bid for or the purchase of
common stock by the underwriters to reduce a short position incurred by the
underwriters in connection with this offering. A penalty bid is an arrangement
permitting the representatives to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with this
offering if the common stock originally sold by the underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore not been effectively placed by the underwriter or syndicate
member. The representatives have advised us that these types of transactions
may be effected on the Nasdaq National Market or otherwise and if commenced
may be discontinued at any time.
Directed Share Program. The underwriters have reserved up to five percent
(5%) of the common stock to be issued by us, at the initial public offering
price, to our directors, officers, employees, business associates and other
persons related to us. The number of shares of our common stock available for
sale to the general
53
<PAGE>
public will be reduced to the extent these individuals purchase these reserved
shares. Any reserved shares that are not purchased will be offered to the
general public on the same basis as the other shares offered in the offering.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a lead or co-
manager on 85 filed public offerings of equity securities, of which 58 have
been completed, and has acted as a syndicate member in an additional 41 public
offerings of equity securities. Thomas Weisel Partners LLC does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.
LEGAL MATTERS
The validity of the issuance of shares of common stock offered by us in this
offering will be passed upon for us by Dorsey & Whitney LLP, Minneapolis,
Minnesota. Legal matters related to the offering will be passed upon for the
underwriters by Winston & Strawn, Chicago, Illinois.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements as of December 31, 1997 and 1998 and for each of the three years in
the period ended December 31, 1998, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the
registration statement or the exhibits and schedules which are part of the
registration statement. For further information about us and our common stock,
you should review the registration statement and exhibits and schedules
thereto. You may read and copy any document we file at the Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Commission at 1-800-SEC-0330 for further information on the public
reference room. Our filings are also available to the public from the
Commission's Web site at http://www.sec.gov.
Upon completion of this offering, we will be required to file periodic
reports, proxy statements and other information with the Commission. These
periodic reports, proxy statements and other information will be available for
inspection and copying at the Commission's public reference room and the Web
site of the Commission referred to above.
54
<PAGE>
EBENX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statement of Changes in Shareholders' Equity (Deficit).... F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
eBenX, Inc.
We have audited the accompanying consolidated balance sheets of eBenX, Inc.
(formerly known as Network Management Services, Inc.) as of December 31, 1998
and 1997, and the related consolidated statements of operations, changes in
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of eBenX, Inc. at
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 22, 1999
F-2
<PAGE>
EBENX, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31 Pro forma
---------------- September 30, September 30,
1997 1998 1999 1999
------- ------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 1,009 $ 1,681 $ 7,290 $ 7,290
Investments.................... 2,005 -- -- --
Accounts receivable, less
allowance of $51 at
December 31, 1997 and 1998
and September 30, 1999....... 573 1,964 3,321 3,321
Prepaid expenses............... 143 324 712 712
Other.......................... 33 18 -- --
------- ------- ------- -------
Total current assets........ 3,763 3,987 11,323 11,323
Property and equipment, net.... 1,288 1,568 2,032 2,032
Deposits....................... 33 41 62 62
------- ------- ------- -------
Total assets................ $ 5,084 $ 5,596 $13,417 $13,417
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable............... $ 181 $ 837 $ 724 $ 724
Accrued payroll................ 333 493 804 804
Accrued expenses............... 83 115 473 473
Deferred revenue............... 64 10 160 160
Note payable................... -- 750 -- --
------- ------- ------- -------
Total current liabilities... 661 2,205 2,161 2,161
Redeemable Convertible Preferred
Stock:
Series A, $.01 par value:
Authorized shares--1,128,627
Issued and outstanding
shares--1,110,627;
Liquidation value--$1,000.... 978 978 978 --
Series B, $.01 par value:
Authorized shares--1,910,835
Issued and outstanding
shares--1,910,835;
Liquidation value--$500...... 4,490 4,490 4,490 --
Series C, $.01 par value:
Authorized shares--3,227,460
Issued and outstanding
shares--3,227,460;
Liquidation value--$10,500... -- -- 10,482 --
Shareholders' equity (deficit):
Common Stock, $.01 par value:
Authorized shares--
7,000,000; Issued and
outstanding shares--
3,445,521--1997;
3,480,321--1998;
3,797,346--1999........... 34 35 38 100
Pro forma authorized
shares--100,000,000;
Pro forma issued and
outstanding shares--
10,046,268................
Additional paid-in capital..... 101 110 4,319 20,207
Deferred stock based
compensation................. -- -- (4,127) (4,127)
Retained deficit............... (1,180) (2,222) (4,924) (4,924)
------- ------- ------- -------
Total shareholders' equity
(deficit)...................... (1,045) (2,077) (4,694) 11,256
------- ------- ------- -------
Total liabilities and
shareholders' equity
(deficit)...................... $ 5,084 $ 5,596 $13,417 $13,417
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
EBENX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31 September 30,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue............. $ 4,360 $ 7,093 $ 10,122 $ 6,669 $ 11,746
Costs and expenses:
Cost of services...... 2,480 4,496 6,958 4,791 9,069
Selling, general and
administrative...... 1,796 2,068 2,831 1,986 3,338
Research and
development......... 863 1,242 1,519 1,017 2,294
Amortization of stock
based
compensation........ -- -- -- -- 67
---------- ---------- ---------- ---------- ----------
Total costs and
expenses......... 5,139 7,806 11,308 7,794 14,768
---------- ---------- ---------- ---------- ----------
Loss from operations.... (779) (713) (1,186) (1,125) (3,022)
Interest income......... 198 213 144 101 320
---------- ---------- ---------- ---------- ----------
Net loss................ $ (581) $ (500) $ (1,042) $ (1,024) $ (2,702)
========== ========== ========== ========== ==========
Net loss per share:
Basic and diluted..... $ (.18) $ (.15) $ (.30) $ (.30) $ (.77)
========== ========== ========== ========== ==========
Shares used in
calculation of net
loss per share:
Basic and diluted..... 3,312,981 3,375,732 3,463,116 3,457,455 3,516,747
========== ========== ========== ========== ==========
Pro forma net loss per
share:
Basic and diluted..... $ (.16) $ (.33)
========== ==========
Shares used in
calculation of pro
forma net loss per
share:
Basic and diluted..... 6,484,578 8,103,243
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
EBENX, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Deferred
---------------- Paid-In Stock Based Retained
Shares Amount Capital Compensation Deficit Total
--------- ------ ---------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995.................. 3,294,741 $33 $ 79 $ -- $ (99) $ 13
Exercise of stock
options.............. 31,680 -- 3 -- -- 3
Exercise of stock
warrants............. 4,800 -- 1 -- -- 1
Net loss............... -- -- -- -- (581) (581)
--------- --- ------ ------- ------- -------
Balance at December 31,
1996.................. 3,331,221 33 83 -- (680) (564)
Exercise of stock
options.............. 114,300 1 18 -- -- 19
Net loss............... -- -- -- -- (500) (500)
--------- --- ------ ------- ------- -------
Balance at December 31,
1997.................. 3,445,521 34 101 -- (1,180) (1,045)
Exercise of stock
options.............. 34,800 1 9 -- -- 10
Net loss............... -- -- -- -- (1,042) (1,042)
--------- --- ------ ------- ------- -------
Balance at December 31,
1998.................. 3,480,321 35 110 -- (2,222) (2,077)
Exercise of stock
options.............. 317,025 3 15 -- -- 18
Deferred stock-based
compensation......... -- -- 4,194 (4,194) -- --
Amortization of stock-
based compensation... -- -- -- 67 -- 67
Net loss............... -- -- -- -- (2,702) (2,702)
--------- --- ------ ------- ------- -------
Balance at September 30,
1999 (unaudited)...... 3,797,346 $38 $4,319 $(4,127) $(4,924) $(4,694)
========= === ====== ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
EBENX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months
ended
Year ended December 31 September 30
------------------------ ----------------
1996 1997 1998 1998 1999
------- ------ ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss........................... $ (581) $ (500) $(1,042) $(1,024) $(2,702)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Depreciation of property and
equipment....................... 192 327 481 347 475
Amortization of stock-based
compensation.................... -- -- -- -- 67
Noncash expense relating to
common stock issued............. 3 -- -- -- --
Changes in operating assets and
liabilities:
Accounts receivable.............. (440) 27 (1,391) (1,156) (1,357)
Other current assets............. 6 (151) (166) (232) (370)
Accounts payable................. (11) 84 656 14 (113)
Accrued expenses................. 62 238 192 92 669
Deferred revenue................. (50) 65 (55) 360 150
Deposits......................... -- (23) (6) -- (21)
------- ------ ------- ------- -------
Net cash (used in) provided by
operating activities.......... (819) 67 (1,331) (1,599) (3,202)
Investing activities:
Additions to property and
equipment........................ (523) (692) (761) (609) (939)
Purchase of investments............ (2,006) -- -- -- --
Sale of investments................ -- 1 2,005 2,005 --
------- ------ ------- ------- -------
Net cash (used in) provided by
investing activities............ (2,529) (691) 1,244 (1,396) (939)
Financing activities:
Proceeds from note payable......... -- -- 750 -- --
Payment of note payable............ -- -- -- -- (750)
Stock options and warrants
exercised........................ 1 19 9 8 18
Proceeds from issuance of preferred
stock............................ 4,490 -- -- -- 10,482
------- ------ ------- ------- -------
Net cash provided by financing
activities...................... 4,491 19 759 8 9,750
------- ------ ------- ------- -------
Net increase (decrease) in cash and
cash equivalents.................. 1,143 (605) 672 (195) 5,609
Cash and cash equivalents at
beginning of year................. 471 1,614 1,009 1,009 1,681
------- ------ ------- ------- -------
Cash and cash equivalents at end of
year.............................. $ 1,614 $1,009 $ 1,681 $ 814 $ 7,290
======= ====== ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Business Description and Summary of Significant Accounting Policies
Business Description
EBenX, Inc. (formerly known as Network Management Services, Inc.), a
Minnesota corporation incorporated in September 1993 (the Company), provides
business-to-business e-commerce and connectivity solutions to employers and
health plans for the purchase, eligibility administration and premium payment
of group health insurance benefits. The Company's customers are located
throughout the United States.
Principles of Consolidation
The consolidated financial statements include the Company and Managed Care
Buyer's Group, Inc., its wholly owned subsidiary. All intercompany accounts
and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are considered to be available for sale. The carrying value of
cash equivalents approximates fair value at December 31, 1998 and 1997.
Investments
Investments at December 31, 1997 consist of United States Treasury notes
which are classified as available for sale. The cost of investments
approximates fair value.
Property and Equipment
Property and equipment, including purchased software, is stated at cost for
items purchased and at estimated fair value for items contributed by the
founding shareholders. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets of five to seven years.
Leasehold improvements are amortized over the estimated life of the assets or
the related lease term, whichever is less, on a straight-line basis.
Income Taxes
Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between financial reporting and
tax bases of assets and liabilities.
Revenue Recognition
The Company generates revenue from providing data exchange and procurement
services. Data exchange services represent business-to-business e-commerce and
connectivity solutions to employers and health plans for the purchase,
eligibility administration and premium payment of group health insurance
benefits by utilizing proprietary and licensed technology. Procurement
services consist of the Company assisting and advising customers on the
selection of potential suppliers, preparation of requests for proposals,
evaluation of proposals, and rate negotiations. The Company's ongoing data
exchange contracts range in duration from one to three years. Procurement
services agreements do not exceed five years in duration. The Company earns
revenue under the contracts and agreements as services are performed. Revenues
generated from data exchange services for the years ended December 31, 1996,
1997 and 1998, and the nine months ended September 30, 1998 and 1999 were
$3,467,000, $5,432,000, $7,742,000, $4,828,000, and $9,193,000, respectively.
Revenues generated from procurement services for the years ended December 31,
1996, 1997 and 1998, and the nine months ended September 30, 1998 and 1999
were $893,000, $1,661,000, $2,380,000, $1,841,000, and $2,553,000,
respectively.
Research and Development and Software Development
Research and development costs are expensed when incurred. Software
development costs are expensed as incurred. Such costs are required to be
expensed until the point that technological feasibility and proven
marketability of the product are established.
F-7
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business Description and Summary of Significant Accounting Policies
(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Advertising Costs
The Company expenses advertising costs as incurred. The amount of advertising
expensed during 1996, 1997 and 1998 was $15,006, $24,148 and $73,326,
respectively.
Impairment of Long-Lived Assets
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
Stock-Based Compensation
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25), and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for Stock-
Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Stock Split
The Company intends to effect a three-for-one stock split immediately prior
to the offering. Accordingly, all share, per share, weighted average share
information, and redeemable convertible preferred stock have been restated to
reflect the split.
Net Loss Per Share
Basic earnings per share is based on the weighted average shares outstanding
during the period. Diluted earnings per share increases the shares used in the
per share calculation by the dilutive effects of options, warrants, and
convertible securities. The Company's common stock equivalent shares
outstanding from stock options and warrants are excluded from the diluted
earnings per share computation as their effect is antidilutive.
Pro Forma Shareholders' Equity
Upon the closing of the Company's planned initial public offering, all
outstanding shares of Series A, B and C preferred stock will automatically
convert into 6,248,922 shares of common stock. The pro forma effects of these
transactions are unaudited and have been reflected in the accompanying pro
forma balance sheet at September 30, 1999.
Pro Forma Net Loss Per Share
Pro forma net loss per share for the year ended December 31, 1998 and the
nine months ended September 30, 1999 is computed using the weighted average
number of common shares outstanding, including the pro forma effects of the
automatic conversion of the Company's Series A, B and C preferred stock into
shares of the Company's common stock as if such conversion occurred on January
1, 1998, or at the date of original issuance, if later. The resulting pro forma
adjustment includes an increase in the weighted average shares used to compute
basic and diluted net loss per share of 3,021,462 shares for the year ended
December 31, 1998 and 4,586,496 shares for the nine months ended September 30,
1999. The pro forma effects of these transactions are unaudited.
F-8
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business Description and Summary of Significant Accounting Policies
(Continued)
Interim Financial Statements
The interim financial statements for the nine months ended September 30,
1998 and 1999, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles. In the opinion of the Company's management,
the unaudited interim financial statements contain all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation.
The results of operations for the interim periods are not necessarily
indicative of the results of the entire year.
Reclassification
Certain prior year items have been reclassified to conform to the current year
presentation.
2. Property and Equipment, Net
Property and equipment as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Office equipment.................................... $1,198,887 $ 1,455,009
Purchased software.................................. 363,612 563,532
Furniture and fixtures.............................. 241,763 474,085
Leasehold improvements.............................. 154,488 227,321
---------- -----------
1,958,750 2,719,947
Less accumulated depreciation....................... (670,642) (1,151,684)
---------- -----------
$1,288,108 $ 1,568,263
========== ===========
</TABLE>
3. Note Payable
The Company has a $1,500,000 revolving promissory note with a bank with
interest at 1% over the bank's base rate (8.75% at December 31, 1998). The
promissory note is secured by all business assets of the Company and matures
on December 31, 1999. The loan is guaranteed by the Company's wholly owned
subsidiary. At December 31, 1998, the outstanding balance was $750,000. The
promissory note was repaid during 1999.
4. Shareholders' Equity
Common Stock
The Company had agreements with two founding shareholders which entitled the
Company to repurchase one-half of the shares held by these shareholders for
$.01 per share if the shareholders' employment was terminated with cause or in
the event that the employee terminated employment under certain circumstances.
These agreements expired in August 1997 and no shares were repurchased under
the agreements.
Convertible Preferred Stock
Under provisions of stock purchase agreements, the holders of the Company's
preferred stock are entitled to:
. liquidation preference of $.90 and $2.355 for each Series A and Series B
preferred share, respectively, plus unpaid accumulated dividends. After
payment of this preference amount, remaining distributable assets, if
any, will be distributed on a pro rata basis between the preferred and
common shareholders.
. Annual preferential noncumulative dividends of $.09 (Series A) and $.236
(Series B) for each share payable only if declared by the Board of
Directors.
F-9
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Shareholder's Equity--(Continued)
. Voting rights similar to common shareholders.
. One director each, to the Company's Board of Directors for Series A and
Series B.
Each preferred share may be converted to common shares at the option of the
holder. In addition, the preferred shares shall be automatically converted to
common shares if (i) the Company closes the issuance and sale of common shares
in a public offering in which the gross proceeds equal or exceed $10,000,000,
or (ii) 80% of the preferred stock has been converted. The number of shares
issuable in exchange for each preferred share upon either optional or automatic
conversion shall be equal to $.90 (Series A) and $2.355 (Series B) divided by
the conversion price then in effect, as defined. The initial conversion price
of $.90 (Series A) and $7.065 (Series B) will be adjusted as necessary to
prevent dilution resulting from, among other things, issuance of additional
common stock, options or convertible securities.
On April 30, 2004, and on each of the first and second anniversaries thereof,
the Company shall offer to redeem 33 1/3%, 50% and 100%, respectively, of the
Series A preferred shares for $.90 and Series B preferred shares for $2.355,
respectively, per share plus accrued but unpaid dividends.
The preferred stock purchase agreements contain certain restrictive covenants
which prohibit, among other things, the Company from authorizing additional
shares of Series A and Series B preferred stock or new classes of capital stock
with preferences greater than those given to the Series A and Series B
preferred shareholder, merging or consolidating with another corporation, or
effecting a change in control of the Company. In addition, capital expenditures
in excess of $100,000 for any item or related items require the approval of the
director elected by the preferred shareholders.
5. Income Taxes
At December 31, 1997 and 1998, the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 409,000 $ 665,000
Bonus and vacation................................. 127,000 188,000
Accounts receivable allowance...................... 19,000 19,000
--------- ---------
555,000 872,000
Deferred tax liabilities:
Depreciation....................................... (96,000) (93,000)
--------- ---------
(96,000) (93,000)
--------- ---------
Net deferred tax assets before valuation allowance... 459,000 779,000
Less valuation allowance............................. (459,000) (779,000)
--------- ---------
Net deferred tax assets.............................. $ -- $ --
========= =========
</TABLE>
The Company has established a valuation allowance to fully reserve for the net
deferred tax assets at December 31, 1997 and 1998, respectively. The valuation
allowance was established due to the available evidence indicating that it is
not more than likely that the deferred tax assets will be realized.
As of December 31, 1998, the Company has unused federal and state research and
development tax credit carryforwards of approximately $100,000 which expire at
various times through 2011. In addition, the Company has unused federal net
operating loss carryforwards at December 31, 1998 of approximately $1,751,000,
which expire at various times through 2013. The utilization of these
carryforwards is dependent upon the Company's ability to generate sufficient
taxable income during the carryforward periods.
F-10
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Operating Leases
The Company leases or subleases its office space and certain equipment under
terms of noncancelable operating lease agreements which expire through February
2003. Future lease payments for all operating leases, excluding executory
costs, such as management and maintenance fees are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999............................................................ $1,100,020
2000............................................................ 863,391
2001............................................................ 530,439
2002............................................................ 118,730
2003............................................................ 19,840
----------
$2,632,420
==========
</TABLE>
Rent expense, including the Company's pro rata share of certain operating
costs, was $239,042, $560,281 and $975,731 in 1996, 1997 and 1998,
respectively.
7. Significant Customers
Significant customer activity as a percent of the Company's net revenue in
1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Customer A................................................. 22.6% 14.5% 14.0%
Customer B................................................. -- 16.1% 19.1%
Customer C................................................. 17.7% 12.8% --
Customer D................................................. 9.7% 10.4% 8.6%
Customer E................................................. -- -- 17.1%
</TABLE>
8. Stock Options and Warrants
In 1993, the Company adopted the 1993 Stock Option Plan (the Plan) to encourage
stock ownership by employees, directors and other individuals as determined by
the Board of Directors. The Plan provides that options granted thereunder may
be either incentive stock options (ISOs), as defined by the Internal Revenue
Code, or nonqualified stock options.
The Board of Directors determines who will receive options under the Plan and
sets the terms, including vesting dates. Options may have a maximum term of no
more than ten years except in the case of a shareholder possessing more than
10% of the total voting power of all classes of stock (a 10% shareholder) in
which case the maximum term is five years. The exercise price of ISOs granted
under the Plan must be at least equal to the fair market value (or in the case
of a 10% shareholder, 110% of the fair market value) of the common stock on the
date of grant. The exercise price of nonqualified options is determined by the
Board of Directors.
The exercise price may be paid in cash, shares of previously owned common
stock, or by issuance of a promissory note. In addition, the Plan also contains
a provision allowing the Company to permit option holders to pay their
withholding obligation through share redirection. If an option expires,
terminates or is canceled, the shares not purchased thereunder may become
available for additional option awards under the Plan. The Plan expires in
2003.
F-11
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Stock Options and Warrants--(Continued)
In connection with the granting of stock options to employees, the Company
recorded stock-based compensation totaling approximately $67,000 in the quarter
ended September 30, 1999. This amount represents the difference between the
exercise price and the deemed fair value of the Company's common stock for
accounting purposes on the date these stock options were granted. Deferred
stock-based compensation of $4.1 million is included as a component of
stockholders' equity and is being amortized over the vesting period of the
options. The amortization of the remaining deferred stock-based compensation
will result in additional charges to operations through fiscal 2003. The
amortization of stock-based compensation is classified as a separate component
of operating expenses in the consolidated statement of operations.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
Shares Shares Weighted
Available for Outstanding Average Price
Grant Under the Plan Per Share
------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31,
1996..................... 683,028 1,169,745 $ .18
Granted.................. (613,845) 613,845 $ .60
Exercised................ -- (114,300) $ .16
Canceled................. 301,200 (301,200) $ .32
-------- --------- ----- ---
Balance at December 31,
1997..................... 370,383 1,368,090 $ .34
Additional shares
reserved for issuance.. 300,000 -- --
Granted.................. (622,950) 622,950 $ .71
Exercised................ -- (34,800) $ .27
Canceled................. 294,450 (294,450) $ .17
-------- --------- ----- ---
Balance at December 31,
1998..................... 341,883 1,661,790 $ .45
======== ========= ===== ===
</TABLE>
The weighted average fair value of options granted in 1997 and 1998 was $.14
and $.15 per share, respectively. The exercise prices are equal to the
estimated fair value of the common stock as determined by the Board of
Directors on the grant dates. The options are exercisable over a four-year to
five-year vesting period and expire at various dates through 2003. At December
31, 1997 and 1998, options to purchase 290,604 and 447,078 shares of common
stock are exercisable, respectively, at weighted average exercise prices of
$.13 and $.23, respectively. Exercise prices for options outstanding as of
December 31, 1997 and 1998, ranged from $.10 to $.75 and $.10 to $.60,
respectively. The weighted average remaining contractual life of those options
at December 31, 1997 and 1998 is 4.5 and 4.4 years, respectively.
Pro forma information regarding net loss and loss per share is required by
Statement 123, an has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the minimum
value option pricing model with the following weighted average assumptions for
1996, 1997 and 1998: risk free interest rate of 5.50%, dividend yield of 0%,
and a weighted average expected life of the option of five years.
Had the Company recorded compensation cost in accordance with Statement 123,
the net loss and loss per share would have been:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Net Loss:
As reported............................ $(580,857) $(500,453) $(1,041,632)
Pro forma.............................. $(584,915) $(518,244) $(1,078,880)
Basic and diluted net loss per share:
As reported............................ $(.18) $(.15) $(.30)
Pro forma.............................. $(.18) $(.15) $(.31)
</TABLE>
F-12
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Stock Options and Warrants--(Continued)
During September 1995, the Company entered into a line of credit agreement to
borrow up to $550,000, which expired in August 1996. In connection with the
agreement, the Company issued a warrant to purchase 18,000 shares of the
Company's Series A Convertible Preferred Stock at $.90 per share. The warrants
are exercisable over ten years.
During 1995, the Company granted three employees warrants to purchase 65,415
shares of common stock at $.01 per share. The warrants, which are immediately
exercisable and expire at various times between June 30, 2000 and August 31,
2000, were granted in lieu of cash compensation.
9. Employee Benefit Plans
The Company has a 401(k) plan covering substantially all employees. Under the
terms of the plan, participants may contribute 2% to 20% of their salary to the
plan. Employees are eligible after one day of service and upon attainment of
age 21. The Company may make matching contributions based on a discretionary
formula or may contribute a discretionary amount. The Company did not make any
contributions in 1996, 1997 or 1998.
10. Subsequent Event (Unaudited)
In May and June 1999, the Company sold a total of 3,227,460 shares of Series C
preferred stock resulting in net proceeds to the Company of $10,482,000. The
Series C shareholders have liquidation preference of $3.25 per share, plus
accumulated dividends. Annual preferential cumulative dividends of $.16 per
share are payable only if declared by the Board. The Series C preferred
shareholders are able to elect two members on the Company's Board of Directors.
The Series C preferred shares have voting rights similar to common
shareholders. The Series C preferred shares are convertible into common shares
at a conversion rate of $3.25 per share.
F-13
<PAGE>
[eBenX Logo]
<PAGE>
Until , 1999 (25 days after the date of this prospectus), all dealers that
buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This requirement is in
addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
[eBenX LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Except as set forth below the following fees and expenses will be paid by
eBenX in connection with the issuance and distribution of the securities
registered hereby and do not include underwriting commissions and discounts.
All such expenses, except for the SEC registration, NASD filing and Nasdaq
listing fees, are estimated.
<TABLE>
<S> <C>
SEC registration fee............................................... $ 19,982
NASD filing fee.................................................... $ 7,400
Nasdaq National Market listing fee................................. $ 85,500
Legal fees and expenses............................................ $275,000
Accounting fees and expenses....................................... $125,000
Transfer Agent's and Registrar's fees.............................. $ 10,000
Printing and engraving expenses.................................... $125,000
Miscellaneous...................................................... $102,118
--------
Total............................................................ $750,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 302A.521 of the Minnesota Statutes provides that a corporation shall
indemnify any person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of such person against
judgments, penalties, fines (including, without limitation, excise taxes
assessed against such person with respect to any employee benefit plan),
settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person (1) has not been indemnified therefor by another
organization or employee benefit plan for the same judgments, penalties or
fines; (2) acted in good faith; (3) received no improper personal benefit and
Section 302A.255 (with respect to director conflicts of interest), if
applicable, has been satisfied; (4) in the case of a criminal proceeding, had
no reasonable cause to believe the conduct was unlawful; and (5) in the case of
acts or omissions in such person's official capacity for the corporation,
reasonably believed that the conduct was in the best interests of the
corporation, or in the case of acts or omissions in such person's official
capacity for other affiliated organizations, reasonably believed that the
conduct was not opposed to the best interests of the corporation. Section
302A.521 also requires payment by a corporation, upon written request, of
reasonable expenses in advance of final disposition of the proceeding in
certain instances. A decision as to required indemnification is made by a
disinterested majority of the Board of Directors present at a meeting at which
a disinterested quorum is present, or by a designated committee of the Board,
by special legal counsel, by the shareholders or by a court.
Provisions regarding indemnification of officers and directors of eBenX to
the extent permitted by Section 302A.521 are contained in eBenX's Bylaws.
In addition, the employment agreements with officers of eBenX that are
described in this prospectus require eBenX, to the extent permitted by law, to
indemnify each of these officers and to obtain directors' and officers'
liability insurance coverage in such amount as the board of directors of eBenX
determines to be appropriate.
Item 15. Recent Sales of Unregistered Securities
During the three years prior to the date of this Registration Statement, we
have sold and issued the following securities:
(1) In December 1997, pursuant to Rule 701 of the Securities Act, we
issued and sold 38,100 shares of common stock to employees for aggregate
consideration of $18,670 upon the exercise of stock options issued
pursuant to our 1993 Stock Option Plan.
II-1
<PAGE>
(2) From May until August 1998, pursuant to Rule 701 of the Securities
Act, we issued and sold 11,100 shares of common stock to employees for
aggregate consideration of $8,415 upon the exercise of stock options
issued pursuant to our 1993 Stock Option Plan.
(3) From March until September 1999, pursuant to Rule 701 of the
Securities Act, we issued and sold 19,450 shares of common stock to
employees for aggregate consideration of $16,200 upon the exercise of
stock options issued pursuant to our 1993 Stock Option Plan.
(4) In May and June 1999, we issued and sold 1,075,820 shares of
Series C Convertible Preferred Stock to certain accredited investors for
aggregate consideration of $10,500,003.20 pursuant to Rule 506 of
Regulation D of the Securities Act.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view
to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates issued in such transactions.
All recipients had adequate access, through their relationships with us, to
information about us. No placement agents were used in any of the foregoing
transactions.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Fifth Amended and Restated Articles of Incorporation of the Company
(proposed to be effective immediately prior to the offering).
3.2** Amended and Restated Bylaws of the Company (proposed to be effective
immediately prior to the offering).
3.3 Fourth Amended and Restated Articles of Incorporation of the Company,
as amended (effective until immediately prior to the offering).
4.1** Form of Certificate of Common Stock of the Company.
5.1** Opinion of Dorsey & Whitney LLP.
10.1** 1993 Stock Option Plan.
10.2** 1999 Stock Incentive Plan.
10.3** 1999 Employee Stock Purchase Plan.
10.4**+ Services Agreement by and between the Company and PepsiCo, Inc.,
dated June 1, 1997.
10.5**+ Services Agreement by and between the Company and Bell Atlantic
Corporation, dated July 1, 1998.
10.6**+ Administrative Services Agreement by and between the Company and The
Blue Cross Blue Shield Association, dated May 6, 1999.
10.7**+ Administrative Services Agreement by and between the Company and GE
Capital Services Corporation, dated January 1, 1996.
10.8**+ Services Agreement by and between the Company and General Electric
Company, dated January 1, 1997.
10.9** Employment Agreement by and between the Company and Mark Tierney,
dated as of April 22, 1999 and amended and restated on September 28,
1999.
10.10** Employment Agreement by and between the Company and John Davis, dated
as of April 12, 1999.
10.11** Employment Agreement by and between the Company and Scott Halstead,
dated as of April 22, 1999.
10.12** Standard Office Lease by and between Minnesota CC Properties, Inc.
and The Prudential Insurance Company of America, dated December 31,
1993.
10.13** Office Sublease by and between the Company and The Prudential
Insurance Company of America, dated March 19, 1997.
10.14** First Amendment of Sublease by and between the Company and The
Prudential Insurance Company of America, dated August 10, 1999.
10.15** Consent of Landlord, by and among the Company, Teachers Insurance and
Annuity Association (successor to Minnesota CC Properties, Inc.), and
The Prudential Insurance Company of America, dated August 30, 1999.
10.16** Standard Office Lease by and between the Company and ND Properties,
Inc., dated March 12, 1997.
</TABLE>
II-2
<PAGE>
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.17** Amendment No. 1 to Lease Agreement by and between the Company and ND
Properties, Inc., dated October 1, 1997.
10.18** Amendment No. 2 to Lease Agreement by and between the Company and ND
Properties, Inc., dated December 23, 1997.
10.19** Amendment No. 3 to Lease Agreement by and between the Company and
Teachers Insurance and Annuity Association of America (successor to
ND Properties, Inc.), dated January 19, 1999.
10.20**+ Healtheon Service Employer Group Distribution Agreement by and
between the Company and Healtheon Corporation, dated September 30,
1999.
10.21** Second Amended and Restated Investors' Rights Agreement, dated June
9, 1999 (relating to the registration rights relating to Series A,
Series B and Series C Preferred Stock).
21.1** Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
24.1** Powers of Attorney (included on signature page).
27.1** Financial Data Schedule.
</TABLE>
- --------
**Previously filed.
+ Confidential information has been omitted from these exhibits and filed
separately with the Securities and Exchange Commission accompanied by a
confidential treatment request pursuant to Rule 406 under the Securities Act
of 1933, as amended.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on November 29, 1999.
EBENX, INC.
/s/ John J. Davis
By: _________________________________
John J. Davis,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed on November 29, 1999 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ Mark W. Tierney Chairman and Director
____________________________________ (principal executive
Mark W. Tierney officer)
/s/ John J. Davis President, Chief Executive
____________________________________ Officer and Director
John J. Davis (principal executive
officer)
/s/ Scott P. Halstead Chief Financial Officer and
____________________________________ Secretary (principal
Scott P. Halstead financial officer and
principal accounting
officer)
/s/ Michael C. Bingham Senior Vice President,
____________________________________ Business Development and
Michael C. Bingham Director
* Director
____________________________________
Paul V. Barber
* Director
____________________________________
James P. Bradley
* Director
____________________________________
Daniel M. Cain
* Director
____________________________________
William J. Geary
* Director
____________________________________
</TABLE> John Nehra
/s/ Scott P. Halstead
*By: __________________________
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Fifth Amended and Restated Articles of Incorporation of the Company
(proposed to be effective immediately prior to the offering).
3.2** Amended and Restated Bylaws of the Company (proposed to be effective
immediately prior to the offering).
3.3 Fourth Amended and Restated Articles of Incorporation of the
Company, as amended (effective until immediately prior to the
offering).
4.1** Form of Certificate of Common Stock of the Company.
5.1** Opinion of Dorsey & Whitney LLP.
10.1** 1993 Stock Option Plan.
10.2** 1999 Stock Incentive Plan.
10.3** 1999 Employee Stock Purchase Plan.
10.4**+ Services Agreement by and between the Company and PepsiCo, Inc.,
dated June 1, 1997.
10.5**+ Services Agreement by and between the Company and Bell Atlantic
Corporation, dated July 1, 1998.
10.6**+ Administrative Services Agreement by and between the Company and The
Blue Cross Blue Shield Association, dated May 6, 1999.
10.7**+ Administrative Services Agreement by and between the Company and GE
Capital Services Corporation, dated January 1, 1996.
10.8**+ Services Agreement by and between the Company and General Electric
Company, dated January 1, 1997.
10.9** Employment Agreement by and between the Company and Mark Tierney,
dated as of April 22, 1999, and amended and restated on September
28, 1999.
10.10** Employment Agreement by and between the Company and John Davis,
dated as of April 12, 1999.
10.11** Employment Agreement by and between the Company and Scott Halstead,
dated as of April 22, 1999.
10.12** Standard Office Lease by and between Minnesota CC Properties, Inc.
and The Prudential Insurance Company of America, dated December 31,
1993.
10.13** Office Sublease by and between the Company and The Prudential
Insurance Company of America, dated March 19, 1997.
10.14** First Amendment of Sublease, by and between the Company and The
Prudential Insurance Company of America, dated August 10, 1999.
10.15** Consent of Landlord, by and among the Company, Teachers Insurance
and Annuity Association (successor to Minnesota CC Properties,
Inc.), and The Prudential Insurance Company of America, dated August
30, 1999.
10.16** Standard Office Lease by and between the Company and ND Properties,
Inc., dated March 12, 1997.
10.17** Amendment No. 1 to Lease Agreement by and between the Company and ND
Properties, Inc., dated October 1, 1997.
10.18** Amendment No. 2 to Lease Agreement by and between the Company and ND
Properties, Inc., dated December 23, 1997.
10.19** Amendment No. 3 to Lease Agreement by and between the Company and
Teachers Insurance and Annuity Association of America (successor to
ND Properties, Inc.), dated January 19, 1999.
10.20**+ Healtheon Service Employer Group Distribution Agreement by and
between the Company and Healtheon Corporation, dated September 30,
1999.
10.21** Second Amended and Restated Investors' Rights Agreement, dated June
9, 1999 (relating to the registration rights relating to Series A,
Series B and Series C Preferred Stock).
21.1** Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
24.1** Powers of Attorney (included on signature page).
27.1** Financial Data Schedule.
</TABLE>
- --------
**Previously filed.
+Confidential information has been omitted from these exhibits and filed
separately with the Securities and Exchange Commission accompanied by a
confidential treatment request pursuant to Rule 406 under the Securities Act
of 1933, as amended.
<PAGE>
EXHIBIT 1.1
Form of Underwriting Agreement
December ___, 1999
BancBoston Robertson Stephens Inc.
Warburg Dillon Read LLC
Thomas Weisel Partners LLC
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104
Ladies and Gentlemen:
Introductory. eBenX, Inc., a Minnesota corporation (the "Company"),
proposes to issue and sell to the several underwriters named in Schedule A (the
"Underwriters") an aggregate of 5,000,000 shares (the "Firm Shares") of its
Common Stock, par value $.01 per share (the "Common Shares"). In addition, the
Company has granted to the Underwriters an option to purchase up to an
additional 750,000 Common Shares (the "Option Shares") as provided in Section 2.
The Firm Shares and, if and to the extent such option is exercised, the Option
Shares are collectively called the "Shares". BancBoston Robertson Stephens Inc.,
Warburg Dillon Read LLC and Thomas Weisel Partners LLC have agreed to act as
representatives of the several Underwriters (in such capacity, the
"Representatives") in connection with the offering and sale of the Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-87985), which contains a form of prospectus to be used in connection with
the public offering and sale of the Shares. Such registration statement, as
amended, including the financial statements, exhibits and schedules thereto, in
the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement". Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement", and from and
after the date and time of filing of the Rule 462(b) Registration Statement the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Shares, is called the "Prospectus"; provided, however, if
the Company has, with the consent of BancBoston Robertson Stephens Inc., elected
to rely upon Rule 434 under the Securities Act, the term "Prospectus" shall mean
the Company's prospectus subject to completion (each, a "preliminary
prospectus") dated November 5, 1999 (such preliminary prospectus is called the
"Rule 434 preliminary prospectus"), together with the applicable term sheet
<PAGE>
(the "Term Sheet") prepared and filed by the Company with the Commission under
Rules 434 and 424(b) under the Securities Act and all references in this
Agreement to the date of the Prospectus shall mean the date of the Term Sheet.
All references in this Agreement to the Registration Statement, the Rule 462(b)
Registration Statement, a preliminary prospectus, the Prospectus or the Term
Sheet, or any amendments or supplements to any of the foregoing, shall include
any copy thereof filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
Section 1. Representations and Warranties.
A. Representations and Warranties of the Company. The Company hereby
represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration Statement
and any Rule 462(b) Registration Statement have been declared effective by the
Commission under the Securities Act. The Company has complied to the
Commission's satisfaction with all requests of the Commission for additional or
supplemental information. No stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement is in effect
and no proceedings for such purpose have been instituted or are pending or, to
the best knowledge of the Company, are contemplated or threatened by the
Commission.
Each preliminary prospectus and the Prospectus when filed complied in all
material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Shares. Each
of the Registration Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus, as
amended or supplemented, as of its date and at all subsequent times, did not and
will not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives expressly
for use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has delivered
to each Representative one complete conformed copy of the Registration
2
<PAGE>
Statement and of each consent and certificate of experts filed as a part
thereof, and conformed copies of the Registration Statement (without exhibits)
and preliminary prospectuses and the Prospectus, as amended or supplemented, in
such quantities and at such places as the Representatives have reasonably
requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has not
distributed and will not distribute, prior to the later of the Second Closing
Date (as defined below) and the completion of the Underwriters' distribution of
the Shares, any offering material in connection with the offering and sale of
the Shares other than a preliminary prospectus, the Prospectus or the
Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors or by
general equitable principles.
(e) Authorization of the Shares. The Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and sale
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
(g) No Material Adverse Change. Subsequent to the respective dates as of
which information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to result
in a material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiary, considered as one entity (any such change or effect, where the
context so requires, is called a "Material Adverse Change" or a "Material
Adverse Effect"); (ii) the Company and its subsidiary, considered as one entity,
have not incurred any material liability or obligation, indirect, direct or
contingent, not in the ordinary course of business nor entered into any material
transaction or agreement not in the ordinary course of business; and (iii) there
has been no dividend or distribution of any kind declared, paid or made by the
Company or, except for dividends paid to the Company its subsidiary on any class
of capital stock or repurchase or redemption by the Company or its subsidiary of
any class of capital stock.
(h) Independent Accountants. Ernst & Young LLP, who have expressed their
opinion with respect to the financial statements (which term as used in this
Agreement includes the related notes thereto) and supporting schedules filed
with the Commission as a part of the Registration Statement and included in the
Prospectus, are independent public or certified public accountants as required
by the Securities Act.
3
<PAGE>
(i) Preparation of the Financial Statements. The financial statements filed
with the Commission as a part of the Registration Statement and included in the
Prospectus present fairly the consolidated financial position of the Company and
its subsidiary as of and at the dates indicated and the results of their
operations and cash flows for the periods specified. The supporting schedules
included in the Registration Statement present fairly the information required
to be stated therein. Such financial statements and supporting schedules have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved, except as may be
expressly stated in the related notes thereto. No other financial statements or
supporting schedules are required to be included in the Registration Statement.
The financial data set forth in the Prospectus under the captions "Prospectus
Summary--Summary Financial Data", "Selected Financial Data" and "Capitalization"
fairly present the information set forth therein on a basis consistent with that
of the audited financial statements contained in the Registration Statement.
(j) Company's Accounting System. Each of the Company and its subsidiary
maintain a system of accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(k) Subsidiaries of the Company. The Company does not own or control,
directly or indirectly, any corporation, association or other entity other than
Managed Care Buyers Group, Inc.
(l) Incorporation and Good Standing of the Company and its Subsidiary. Each
of the Company and its subsidiary has been duly organized and is validly
existing as a corporation or limited liability company, as the case may be, in
good standing under the laws of the jurisdiction in which it is organized with
full corporate power and authority to own its properties and conduct its
business as described in the prospectus, and is duly qualified to do business as
a foreign corporation and is in good standing under the laws of each
jurisdiction which requires such qualification.
(m) Capitalization of Subsidiary. All the outstanding shares of capital
stock of the Company's subsidiary have been duly and validly authorized and
issued and are fully paid and nonassessable, and, except as otherwise set forth
in the Prospectus, all outstanding shares of capital stock of the subsidiary are
owned by the Company either directly or through wholly owned subsidiaries free
and clear of any security interests, claims, liens or encumbrances.
(n) No Prohibition on Subsidiaries from Paying Dividends or Making Other
Distributions. The Company's subsidiary is not currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as described in or contemplated by the
Prospectus.
4
<PAGE>
(o) Capitalization and Other Capital Stock Matters. The authorized, issued
and outstanding capital stock of the Company is as set forth in the Prospectus
under the caption "Capitalization" (other than for subsequent issuances, if any,
pursuant to employee benefit plans described in the Prospectus or upon exercise
of outstanding options or warrants described in the Prospectus). The Common
Shares (including the Shares) conform in all material respects to the
description thereof contained in the Prospectus. All of the issued and
outstanding Common Shares have been duly authorized and validly issued, are
fully paid and nonassessable and have been issued in compliance with federal and
state securities laws. None of the outstanding Common Shares were issued in
violation of any preemptive rights, rights of first refusal or other similar
rights to subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of first
refusal or other rights to purchase, or equity or debt securities convertible
into or exchangeable or exercisable for, any capital stock of the Company or of
its subsidiary other than those accurately described in the Prospectus. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted thereunder, set forth in
the Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(p) Stock Exchange Listing. The Shares have been approved for inclusion on
the Nasdaq National Market, subject only to official notice of issuance.
(q) No Consents, Approvals or Authorizations Required. No consent,
approval, authorization, filing with or order of any court or governmental
agency or regulatory body is required in connection with the transactions
contemplated herein, except such as have been obtained or made under the
Securities Act and such as may be required (i) under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the Shares by
the Underwriters in the manner contemplated here and in the Prospectus, (ii) by
the National Association of Securities Dealers, LLC and (iii) by the federal and
provincial laws of Canada.
(r) Non-Contravention of Existing Instruments Agreements. Neither the issue
and sale of the Shares nor the consummation of any other of the transactions
herein contemplated nor the fulfillment of the terms hereof will conflict with,
result in a breach or violation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or its subsidiary pursuant to, (i)
the charter or by-laws of the Company or its subsidiary, (ii) the terms of any
indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or instrument to
which the Company or its subsidiary is a party or bound or to which its or their
property is subject or (iii) any statute, law, rule, regulation, judgment, order
or decree applicable to the Company or its subsidiary of any court, regulatory
body, administrative agency, governmental body, arbitrator or other authority
having jurisdiction over the Company or its subsidiary or any of their
properties.
(s) No Defaults or Violations. Neither the Company nor its subsidiary is in
violation or default of (i) any provision of its charter or by-laws, (ii) the
terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition, covenant or
instrument to which it is a party or bound or to which its property is subject
or (iii) any statute, law, rule, regulation, judgment, order or decree of any
court, regulatory body, administrative agency,
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governmental body, arbitrator or other authority having jurisdiction over the
Company or such subsidiary or any of its properties, as applicable, except any
such violation or default which would not, singly or in the aggregate, result in
a Material Adverse Change except as otherwise disclosed in the Prospectus.
(t) No Actions, Suits or Proceedings. No action, suit or proceeding by or
before any court or governmental agency, authority or body or any arbitrator
involving the Company or its subsidiary or its or their property is pending or,
to the best knowledge of the Company, threatened that (i) could reasonably be
expected to have a Material Adverse Effect on the performance of this Agreement
or the consummation of any of the transactions contemplated hereby or (ii) could
reasonably be expected to result in a Material Adverse Effect.
(u) All Necessary Permits, Etc. The Company and its subsidiary each possess
such valid and current certificates, authorizations or permits issued by the
appropriate state, federal or foreign regulatory agencies or bodies necessary to
conduct their respective businesses, and neither the Company nor its subsidiary
has received any notice of proceedings relating to the revocation or
modification of, or non-compliance with, any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, could result in a Material Adverse Change.
(v) Title to Properties. Each of the Company and its subsidiary has good
and marketable title to all the properties and assets reflected as owned in the
financial statements referred to in Section 1(A)(i) above (or elsewhere in the
Prospectus), in each case free and clear of any security interests, mortgages,
liens, encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not materially
interfere with the use made or proposed to be made of such property by the
Company or such subsidiary. The real property, improvements, equipment and
personal property held under lease by the Company or its subsidiary are held
under valid and enforceable leases, with such exceptions as are not material and
do not materially interfere with the use made or proposed to be made of such
real property, improvements, equipment or personal property by the Company or
such subsidiary.
(w) Tax Law Compliance. Each of the Company and subsidiary has filed all
necessary federal, state and foreign income and franchise tax returns and have
paid all taxes required to be paid by any of them and, if due and payable, any
related or similar assessment, fine or penalty levied against any of them. The
Company has made adequate charges, accruals and reserves in the applicable
financial statements referred to in Section 1(A)(i) above in respect of all
federal, state and foreign income and franchise taxes for all periods as to
which the consolidated tax liability of the Company and its subsidiary has not
been finally determined. The Company is not aware of any tax deficiency that has
been or might be asserted or threatened against the Company that could result in
a Material Adverse Change.
(x) Intellectual Property Rights. (i) Each of the Company and its
subsidiary owns or possesses adequate rights to use all patents, patent rights
or licenses, inventions, collaborative research agreements, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus; (ii) the
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expiration of any patents, patent rights, trade secrets, trademarks, service
marks, trade names or copyrights would not result in a Material Adverse Change
that is not otherwise disclosed in the Prospectus; (iii) the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of the Company by others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights; and (iv) the Company has not received any notice of, and
has no knowledge of, any infringement of or conflict with asserted rights of
others with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
that could have a Material Adverse Change. There is no claim being made against
the Company or its subsidiary regarding patents, patent rights or licenses,
inventions, collaborative research, trade secrets, know-how, trademarks, service
marks, trade names or copyrights. The Company and its subsidiary do not in the
conduct of their business as now or proposed to be conducted as described in the
Prospectus infringe or conflict with any right or patent of any third party, or
any discovery, invention, product or process which is the subject of a patent
application filed by any third party, known to the Company or its subsidiary,
which such infringement or conflict is reasonably likely to result in a Material
Adverse Change.
(y) Year 2000 Preparedness. There are no issues related to the Company's or
its subsidiary's preparedness for the Year 2000 that (i) are of a character
required to be described or referred to in the Registration Statement or
Prospectus by the Securities Act or by the Exchange Act or the rules and
regulations of the Commission thereunder which have not been accurately
described in the Registration Statement or (ii) might reasonably be expected to
result in any Material Adverse Change or that might materially affect their
properties, assets or rights. All internal computer systems and each Constituent
Component (as defined below) of those systems and all computer-related products
and each Constituent Component (as defined below) of those products of the
Company and its subsidiary fully comply with Year 2000 Qualification
Requirements. "Year 2000 Qualifications Requirements" means that the internal
computer systems and each Constituent Component (as defined below) of those
systems and all computer-related products and each Constituent Component (as
defined below) of those products of the Company and of its subsidiary (i) have
been reviewed to confirm that they store, process (including sorting and
performing mathematical operations, calculations and computations), input and
output data containing date and information correctly regardless of whether the
date contains dates and times before, on or after January 1, 2000, (ii) have
been designated to ensure date and time entry recognition and calculations, and
date data interface values that reflect the century, (iii) accurately manage and
manipulate data involving dates and times, including single century formulas and
multi-century formulas, and will not cause an abnormal ending scenario within
the application or generate incorrect values or invalid results involving such
dates, (iv) accurately process any date rollover, and (v) accept and respond to
two-digit year date input in a manner that resolves any ambiguities as to the
century. "Constituent Component" means all software (including operating
systems, programs, packages and utilities), firmware, hardware, networking
components, and peripherals provided as part of the configuration. The Company
has inquired of material vendors as to their preparedness for the Year 2000 and
has disclosed in the Registration Statement or Prospectus any issues that might
reasonably be expected to result in any Material Adverse Change.
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(z) No Transfer Taxes or Other Fees. There are no transfer taxes or other
similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by the Company
of the shares.
(aa) Company Not an "Investment Company". The Company has been advised of
the rules and requirements under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). The Company is not, and after receipt of payment
for the Shares will not be, an "investment company" or an entity "controlled" by
an "investment company" within the meaning of the Investment Company Act and
will conduct its business in a manner so that it will not become subject to the
Investment Company Act.
(bb) Insurance. Each of the Company and its subsidiary is insured by
recognized, financially sound and reputable institutions with policies in such
amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
and its subsidiary against theft, damage, destruction, acts of vandalism and
earthquakes, general liability and directors and officers liability. The Company
has no reason to believe that it or its subsidiary will not be able (i) to renew
its existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that would
not result in a Material Adverse Change. Neither of the Company nor its
subsidiary has been denied any insurance coverage which it has sought or for
which it has applied.
(cc) Labor Matters. To the best of Company's knowledge, no labor
disturbance by the employees of the Company or its subsidiary exists or is
imminent; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers, customers,
subcontractors or original equipment manufacturers that might be expected to
result in a Material Adverse Change.
(dd) No Price Stabilization or Manipulation. The Company has not taken and
will not take, directly or indirectly, any action designed to or that might be
reasonably expected to cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the Shares.
(ee) Lock-Up Agreements. Each officer and director of the Company and each
beneficial owner of one percent (1%) or more of the outstanding issued share
capital of the Company has agreed to sign an agreement substantially in the form
attached hereto as Exhibit A (the "Lock-up Agreements"). The Company has
provided to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the Lock-up Agreements presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release any of its officers, directors or other stockholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of BancBoston Robertson Stephens Inc.
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(ff) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or its subsidiary or any other
person required to be described in the Prospectus which have not been described
as required.
(gg) No Unlawful Contributions or Other Payments. Neither the Company nor
its subsidiary nor, to the best of the Company's knowledge, any employee or
agent of the Company or its subsidiary, has made any contribution or other
payment to any official of, or candidate for, any federal, state or foreign
office in violation of any law or of the character required to be disclosed in
the Prospectus.
(hh) ERISA Compliance. The Company and its subsidiary and any "employee
benefit plan" (as defined under the Employee Retirement Income Security Act of
1974, as amended, and the regulations and published interpretations thereunder
(collectively, "ERISA")) established or maintained by the Company, its
subsidiary or their "ERISA Affiliates" (as defined below) are in compliance in
all material respects with ERISA. "ERISA Affiliate" means, with respect to the
Company or its subsidiary, any member of any group of organizations described in
Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended,
and the regulations and published interpretations thereunder (the "Code") of
which the Company or such subsidiary is a member. No "reportable event" (as
defined under ERISA) has occurred or is reasonably expected to occur with
respect to any "employee benefit plan" established or maintained by the Company,
its subsidiary or any of their ERISA Affiliates. No "employee benefit plan"
established or maintained by the Company, its subsidiary or any of their ERISA
Affiliates, if such "employee benefit plan" were terminated, would have any
"amount of unfounded benefit liabilities" (as defined under ERISA). Neither the
Company, its subsidiary nor any of their ERISA Affiliates has incurred or
reasonably expects to incur any liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan"
established or maintained by the Company, its subsidiary or any of their ERISA
Affiliates that is intended to be qualified under Section 401(a) of the Code is
so qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
Section 2. Purchase, Sale and Delivery of the Shares.
(a) The Firm Shares. The Company agrees to issue and sell to the several
Underwriters the Firm Shares upon the terms herein set forth. On the basis of
the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase from the Company the respective number of
Firm Shares set forth opposite their names on Schedule A. The purchase price per
Firm Share to be paid by the several Underwriters to the Company shall be $[___]
per share.
(b) The First Closing Date. Delivery of the Firm Shares to be purchased by
the Underwriters and payment therefor shall be made by the Company and the
Representatives at 6:00 a.m. San Francisco time, at the offices of Dorsey &
Whitney LLP, Pillsbury Center South, 220 South Sixth Street, Minneapolis,
Minnesota 55402-1498 (or at such other place as may be agreed upon among the
Representatives and the Company), (i) on the third (3rd) full business day
following the first day that Shares are traded, (ii) if this Agreement is
executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th)
full business day following the day that this Agreement is
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executed and delivered or (iii) at such other time and date not later than the
seventh (7th) full business day following the first day that Shares are traded
as the Representatives and the Company may determine (or at such time and date
to which payment and delivery shall have been postponed pursuant to Section 8
hereof), such time and date of payment and delivery being herein called the
"Closing Date;" provided, however, that if the Company has not made available to
the Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later than the second (2nd) full business day following
delivery of copies of the Prospectus to the Representatives.
(c) The Option Shares; the Second Closing Date. In addition, on the basis
of the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Company hereby grants
an option to the several Underwriters to purchase, severally and not jointly, up
to an aggregate of 750,000 Option Shares from the Company at the purchase price
per share to be paid by the Underwriters for the Firm Shares. The option granted
hereunder is for use by the Underwriters solely in covering any over-allotments
in connection with the sale and distribution of the Firm Shares. The option
granted hereunder may be exercised at any time upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. The time and date of delivery of the
Option Shares, if subsequent to the First Closing Date, is called the "Second
Closing Date" and shall be determined by the Representatives and shall not be
earlier than the third (3rd) nor later than the fifth (5th) full business day
after delivery of such notice of exercise. If any Option Shares are to be
purchased, each Underwriter agrees, severally and not jointly, to purchase the
number of Option Shares (subject to such adjustments to eliminate fractional
shares as the Representatives may determine) that bears the same proportion to
the total number of Option Shares to be purchased as the number of Firm Shares
set forth on Schedule A opposite the name of such Underwriter bears to the total
number of Firm Shares. The Representatives may cancel the option at any time
prior to its expiration by giving written notice of such cancellation to the
Company.
(d) Public Offering of the Shares. The Representatives hereby advise the
Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Shares as soon
after this Agreement has been executed and the Registration Statement has been
declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
(e) Payment for the Shares. Payment for the Shares shall be made at the
First Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer in immediately available-funds to the order of the Company.
It is understood that the Representatives have been authorized, for their
own account and the accounts of the several Underwriters, to accept delivery of
and receipt for, and make payment of the purchase price for, the Firm Shares and
any Option Shares the Underwriters have agreed to purchase. BancBoston Robertson
Stephens Inc., individually and not as a Representative of the Underwriters, may
(but shall not be obligated to) make payment for any Shares to be purchased by
any Underwriter whose funds shall not have been received by the Representatives
by the First Closing Date or the Second Closing Date, as the case may be, for
the account of
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such Underwriter, but any such payment shall not relieve such Underwriter from
any of its obligations under this Agreement.
(f) Delivery of the Shares. The Company shall deliver, or cause to be
delivered, a credit representing the Firm Shares to an account or accounts at
The Depository Trust Company, as designated by the Representatives for the
accounts of the Representatives and the several Underwriters at the First
Closing Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company shall
also deliver, or cause to be delivered a credit representing the Option Shares
the Underwriters have agreed to purchase at the First Closing Date (or the
Second Closing Date, as the case may be), to an account or accounts at The
Depository Trust Company as designated by the Representatives for the accounts
of the Representatives and the several Underwriters, against the irrevocable
release of a wire transfer of immediately available funds for the amount of the
purchase price therefor. Time shall be of the essence, and delivery at the time
and place specified in this Agreement is a further condition to the obligations
of the Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than 12:00 noon
on the second (2nd) business day following the date the Shares are released by
the Underwriters for sale to the public, the Company shall deliver or cause to
be delivered copies of the Prospectus in such quantities and at such places as
the Representatives shall request.
Section 3. Covenants of the Company.
A. Covenants of the Company. The Company further covenants and agrees with
each Underwriter as follows:
(a) Registration Statement Matters. The Company will (i) use its best
efforts to cause a registration statement on Form 8-A (the "Form 8-A
Registration Statement") as required by the Securities Exchange Act of 1934 (the
"Exchange Act") to become effective simultaneously with the Registration
Statement, (ii) use its best efforts to cause the Registration Statement to
become effective or, if the procedure in Rule 430A of the Securities Act is
followed, to prepare and timely file with the Commission under Rule 424(b) under
the Securities Act a Prospectus in a form approved by the Representatives
containing information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Securities Act and (iii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been advised
and furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Securities Act. If
the Company elects to rely on Rule 462(b) under the Securities Act, the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) under the Securities Act prior to the time
confirmations are sent or given, as specified by Rule 462(b)(2) under the
Securities Act, and shall pay the applicable fees in accordance with Rule 111
under the Securities Act.
(b) Securities Act Compliance. The Company will advise the Representatives
promptly (i) when the Registration Statement or any post-effective amendment
thereto shall have become effective, (ii) of receipt of any comments from the
Commission, (iii) of any request of the Commission for amendment of the
Registration
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Statement or for supplement to the Prospectus or for any additional information
and (iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the use of the Prospectus or of
the institution of any proceedings for that purpose. The Company will use its
commercially reasonable best efforts to prevent the issuance of any such stop
order preventing or suspending the use of the Prospectus and to obtain as soon
as possible the lifting thereof, if issued.
(c) Blue Sky Compliance. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(d) Amendments and Supplements to the Prospectus and Other Securities Act
Matters. The Company will comply with the Securities Act and the Exchange Act,
and the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this Agreement
and the Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in the reasonable opinion of
the Representatives or counsel for the Underwriters, it becomes necessary to
amend or supplement the Prospectus in order to make the statements therein, in
the light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with any law, the Company promptly will
prepare and file with the Commission, and furnish at its own expense to the
Underwriters and to dealers, an appropriate amendment to the Registration
Statement or supplement to the Prospectus so that the Prospectus as so amended
or supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with the law.
(e) Copies of any Amendments and Supplements to the Prospectus. The Company
agrees to furnish each Representative, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing Date
or such date, as in the opinion of counsel for the Underwriters, the Prospectus
is no longer required by law to be delivered in connection with sales by an
Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the
Prospectus and any amendments and supplements thereto as the Representatives may
reasonably request.
(f) Insurance. The Company shall (i) obtain directors and officers
liability insurance in the minimum amount of $10 million which shall apply to
the offering contemplated hereby and (ii) shall cause BancBoston Robertson
Stephens Inc. to be added as an additional insured to such policy in respect of
the offering contemplated hereby.
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(g) Notice of Subsequent Events. If at any time during the ninety (90) day
period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Company Shares has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(h) Use of Proceeds. The Company shall apply the net proceeds from the sale
of the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.
(i) Transfer Agent. The Company shall engage and maintain, at its expense,
a registrar and transfer agent for the Company Shares.
(j) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month period
ending December 31, 2000 that satisfies the provisions of Section 11(a) of the
Securities Act.
(k) Periodic Reporting Obligations. During the Prospectus Delivery Period
the Company shall file, on a timely basis, with the Commission and the Nasdaq
National Market all reports and documents required to be filed under the
Exchange Act.
(l) Agreement Not to Offer or Sell Additional Securities. The Company will
not, without the prior written consent of BancBoston Robertson Stephens Inc.,
for a period of 180 days following the date of the Prospectus, offer, sell or
contract to sell, or otherwise dispose of or enter into any transaction which is
designed to, or could be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, or announce the offering of, any other Common Shares or any
securities convertible into, or exchangeable for, Common Shares; provided,
however, that the Company may (i) issue and sell Common Shares pursuant to any
director or employee stock option plan, stock ownership plan or dividend
reinvestment plan of the Company in effect at the date of the Prospectus and
described in the Prospectus so long as none of those shares may be transferred
on during the period of 180 days from the date that the Registration Statement
is declared effective (the "Lock-Up Period") and the Company shall enter stop
transfer instructions with its transfer agent and registrar against the transfer
of any such Common Shares and (ii) the Company may issue Common Shares issuable
upon the conversion of securities or the exercise of warrants outstanding at the
date of the Prospectus and described in the Prospectus.
(m) Future Reports to the Representatives. During the period of five years
hereafter the Company will furnish to the Representatives (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon
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as practicable after the filing thereof, copies of each proxy statement, Annual
Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K
or other report filed by the Company with the Commission, the National
Association of Securities Dealers, LLC or any securities exchange; and (iii) as
soon as available, copies of any report or communication of the Company mailed
generally to holders of its capital stock.
(n) Exchange Act Compliance. During the Prospectus Delivery Period, the
Company will file all documents required to be filed with the Commission
pursuant to Section 13, 14 or 15 of the Exchange Act in the manner and within
the time periods required by the Exchange Act.
Section 4. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company set forth in Section
1(A) hereof as of the date hereof and as of the First Closing Date as though
then made and, with respect to the Option Shares, as of the Second Closing Date
as though then made, to the timely performance by the Company of its covenants
and other obligations hereunder, and to each of the following additional
conditions:
(a) Compliance with Registration Requirements; No Stop Order; No Objection
from the National Association of Securities Dealers, LLC. The Registration
Statement shall have become effective prior to the execution of this Agreement,
or at such later date as shall be consented to in writing by you; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company or any Underwriter, threatened by the Commission, and any request of
the Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of Underwriters' Counsel; and the National Association of
Securities Dealers, LLC shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(b) Corporate Proceedings. All corporate proceedings and other legal
actions taken in connection with this Agreement, the form of Registration
Statement and the Prospectus, and the registration, authorization, issue, sale
and delivery of the Shares, shall have been reasonably satisfactory to
Underwriters' legal counsel, and such counsel shall have been furnished with
such papers and information as they may reasonably have requested to enable them
to pass upon the matters referred to in this Section.
(c) No Material Adverse Change. Subsequent to the execution and delivery of
this Agreement and prior to the First Closing Date, or the Second Closing Date,
as the case may be, there shall not have been any Material Adverse Change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiary considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus.
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(d) Opinion of Counsel for the Company. You shall have received on the
First Closing Date, or the Second Closing Date, as the case may be, an opinion
of Dorsey & Whitney, LLP, counsel for the Company substantially in the form of
Exhibit B attached hereto, dated the First Closing Date, or the Second Closing
Date, addressed to the Underwriters and with reproduced copies or signed
counterparts thereof for each of the Underwriters.
Counsel rendering the opinion contained in Exhibit B may rely as to
questions of law not involving the laws of the United States or the State of
Minnesota upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company and of government
officials, in which case their opinion is to state that they are so relying and
that they have no knowledge of any material misstatement or inaccuracy in any
such opinion, representation or certificate. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.
(e) Opinion of Counsel for the Underwriters. You shall have received on the
First Closing Date or the Second Closing Date, as the case may be, an opinion of
Winston & Strawn, substantially in the form of Exhibit C hereto. The Company
shall have furnished to such counsel such documents as they may have requested
for the purpose of enabling them to pass upon such matters.
(f) Accountants' Comfort Letter. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
Ernst & Young LLP, addressed to the Underwriters, dated the First Closing Date
or the Second Closing Date, as the case may be, confirming that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations and based
upon the procedures described in such letter delivered to you concurrently with
the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than four (4) business days prior to the First
Closing Date or the Second Closing Date, as the case may be, (i) confirming, to
the extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the First Closing Date or the Second Closing Date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiary considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus. The Original Letter from Ernst & Young LLP
shall be addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent, to the extent true,
that they are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their examination of
the consolidated balance sheet of the Company as of December 31, 1998 and
related consolidated statements of operations, shareholders' equity, and cash
flows for the twelve (12) months ended December 31, 1998, (iii) state that Ernst
& Young LLP has performed the procedures set out in Statement on Auditing
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Standards No. 71 ("SAS 71") for a review of interim financial information and
providing the report of Ernst & Young LLP as described in SAS 71 on the
financial statements for each of the quarters in the three-quarter period ended
September 30, 1999 (the "Quarterly Financial Statements"), (iv) state that in
the course of such review, nothing came to their attention that leads them to
believe that any material modifications need to be made to any of the Quarterly
Financial Statements in order for them to be in compliance with generally
accepted accounting principles consistently applied across the periods
presented, and address other matters agreed upon by Ernst & Young LLP and you.
In addition, you shall have received from Ernst & Young LLP a letter addressed
to the Company and made available to you for the use of the Underwriters stating
that their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their examination
of the Company's consolidated financial statements as of December 31, 1998, did
not disclose any weaknesses in internal controls that they considered to be
material weaknesses.
(g) Officers' Certificate. You shall have received on the First Closing
Date and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this Agreement are
true and correct, as if made on and as of the First Closing Date or the
Second Closing Date, as the case may be, and the Company has complied with
all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the First Closing Date or the Second
Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or, to the knowledge of the Company, threatened
under the Act;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
contained all material information required to be included therein by the
Securities Act and the applicable rules and regulations of the Commission
thereunder, as the case may be, and in all material respects conformed to
the requirements of the Securities Act and the applicable rules and
regulations of the Commission thereunder, as the case may be, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, did not and does not include any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; and,
since the effective date of the Registration Statement, there has occurred
no event required to be set forth in an amended or supplemented Prospectus
which has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been (a) Material
Adverse Change, (b) any transaction that is material to the Company and its
subsidiary considered as one enterprise, except transactions entered into
in the ordinary
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course of business, (c) any obligation, direct or contingent, that is
material to the Company and its subsidiary considered as one enterprise,
incurred by the Company or its subsidiaries, except obligations incurred in
the ordinary course of business, (d) any change in the capital stock or
outstanding indebtedness of the Company or of its subsidiary that is
material to the Company and its subsidiary considered as one enterprise, or
(e) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or of its subsidiary.
(h) Lock-up Agreement from Certain Stockholders of the Company. The Company
shall have obtained and delivered to you an agreement substantially in the form
of Exhibit A attached hereto from each officer and director of the Company, and
each beneficial owner of one percent (1%) or more of the outstanding issued
share capital of the Company.
(i) Stock Exchange Listing. The Shares shall have been approved for
inclusion on the Nasdaq National Market, subject only to official notice of
issuance.
(j) Compliance with Prospectus Delivery Requirements. The Company shall
have complied with the provisions of Sections 2(g) and 3(e) hereof with respect
to the furnishing of Prospectuses.
(k) Additional Documents. On or before each of the First Closing Date and
the Second Closing Date, as the case may be, the Representatives and counsel for
the Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Shares as contemplated herein, or in order to evidence
the accuracy of any of the representations and warranties, or the satisfaction
of any of the conditions or agreements, herein contained.
If any condition specified in this Section 4 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Option Shares, at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 5 (Payment of Expenses),
Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification
and Contribution) and Section 10 (Representations and Indemnities to Survive
Delivery) shall at all times be effective and shall survive such termination.
Section 5. Payment of Expenses. The Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel, independent public or certified public accountants and other
advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all
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amendments and supplements thereto, and this Agreement, (vi) all filing fees,
attorneys' fees and expenses incurred by the Company or the Underwriters in
connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Shares for offer and
sale under the state securities or blue sky laws or the provincial securities
laws of Canada or any other country, and, if requested by the Representatives,
preparing and printing a "Blue Sky Survey", an "International Blue Sky Survey"
or other memorandum, and any supplements thereto, advising the Underwriters of
such qualifications, registrations and exemptions, (vii) the filing fees
incident to, and the reasonable fees and expenses of counsel for the
Underwriters in connection with, the National Association of Securities Dealers,
LLC's review and approval of the Underwriters' participation in the offering and
distribution of the Common Shares, (viii) the fees and expenses associated with
including the Common Shares on the Nasdaq National Market, (ix) all costs and
expenses incident to the preparation and undertaking of "road show" preparations
to be made to prospective investors, and (x) all other fees, costs and expenses
referred to in Item 13 of Part II of the Registration Statement. Except as
provided in this Section 5, Section 6, and Section 7 hereof, the Underwriters
shall pay their own expenses, including the fees and disbursements of their
counsel.
Section 6. Reimbursement of Underwriters' Expenses. If this Agreement is
terminated by the Representatives pursuant to Section 4, Section 7, Section 8 or
Section 9, or if the sale to the Underwriters of the Shares on the First Closing
Date is not consummated because of any refusal, inability or failure on the part
of the Company to perform any agreement herein or to comply with any provision
hereof, the Company agrees to reimburse the Representatives and the other
Underwriters (or such Underwriters as have terminated this Agreement with
respect to themselves), severally, upon demand for all out-of-pocket expenses
that shall have been reasonably incurred by the Representatives and the
Underwriters in connection with the proposed purchase and the offering and sale
of the Shares, including but not limited to fees and disbursements of counsel,
printing expenses, travel expenses, postage, facsimile and telephone charges.
Section 7. Indemnification and Contribution.
(a) Indemnification of the Underwriters.
The Company agrees to indemnify and hold harmless each Underwriter, its
officers and employees, and each person, if any, who controls any Underwriter
within the meaning of the Securities Act and the Exchange Act against any loss,
claim, damage, liability or expense, as incurred, to which such Underwriter or
such controlling person may become subject, under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, or at common
law or otherwise (including in settlement of any litigation, if such settlement
is effected with the written consent of the Company, which consent shall not be
unreasonably withheld), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based (i) upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, or any amendment thereto,
including any information deemed to be a part thereof pursuant to Rule 430A or
Rule 434 under the Securities Act, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statement or alleged
untrue statement of a
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material fact contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; or (iii)
in whole or in part upon any inaccuracy in the representations and warranties of
the Company contained herein; or (iv) in whole or in part upon any failure of
the Company to perform its obligations hereunder or under law; or (v) any act or
failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Shares or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon any matter
covered by clause (i), (ii), (iii) or (iv) above, provided that the Company
shall not be liable under this clause (v) to the extent that a court of
competent jurisdiction shall have determined by a final judgment that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter through
its bad faith or willful misconduct; and to reimburse each Underwriter and each
such controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by BancBoston Robertson Stephens Inc.) as such
expenses are reasonably incurred by such Underwriter or such controlling person
in connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; provided, however,
that the foregoing indemnity agreement shall not apply to any loss, claim,
damage, liability or expense to the extent, but only to the extent, arising out
of or based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives expressly for use in
the Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto); and provided, further, that with respect to
any preliminary prospectus, the foregoing indemnity agreement shall not inure to
the benefit of any Underwriter from whom the person asserting any loss, claim,
damage, liability or expense purchased Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 7(a) shall be in addition to any liabilities that the
Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
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<PAGE>
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is 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, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company, or any
such director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The indemnity
agreement set forth in this Section 7(b) shall be in addition to any liabilities
that each Underwriter may otherwise have.
(c) Information Provided by the Underwriters. The Company hereby
acknowledges that the only information that the Underwriters have furnished to
the Company expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are the
statements set forth in the table in the first, second, third and last
paragraphs under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct.
(d) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
to so notify the indemnifying party will not relieve such indemnifying party
from any liability which it may have to any indemnified party under the
indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, 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 a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next
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preceding sentence (it being understood, however, that the indemnifying party
shall not be liable for the expenses of more than one separate counsel (together
with local counsel), approved by the indemnifying party (BancBoston Robertson
Stephens Inc. in the case of Section 7(b) and Section 8), representing the
indemnified parties who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party, in each of which cases the fees and expenses of counsel
shall be at the expense of the indemnifying party.
(e) Settlements. The indemnifying party under this Section 7 shall not be
liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes (i) an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(f) Contribution. If the indemnification provided for in this Section 7 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) then each
indemnifying party shall contribute to the aggregate amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law then each indemnifying party shall contribute to such amount paid or payable
by such indemnified party in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, (or
actions or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriter on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bears to the total underwriting discounts and
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commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 7(f) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7(f). The amount paid
or payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 7(f) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (f), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter and (ii) no person guilty of fraudulent
misrepresentation (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. The Underwriters' obligations in this Section 7(f)
to contribute are several in proportion to their respective underwriting
obligations and not joint.
(g) Timing of Any Payments of Indemnification. Any losses, claims, damages,
liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than thirty
(30) days after invoice to the indemnifying party.
(h) Survival. The indemnity and contribution agreements contained in this
Section 7 and the representations and warranties of the Company set forth in
this Agreement shall remain operative and in full force and effect, regardless
of (i) any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 7.
(i) Acknowledgements of Parties. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 7 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Securities Act and the Exchange Act.
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Section 8. Default of One or More of the Several Underwriters. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Shares that it
or they have agreed to purchase hereunder on such date, and the aggregate number
of Common Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase does not exceed 10% of the aggregate number of the
Shares to be purchased on such date, the other Underwriters shall be obligated,
severally, in the proportions that the number of Firm Common Shares set forth
opposite their respective names on Schedule A bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Representatives with the consent of the non-defaulting Underwriters, to purchase
the Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase on such date. If, on the First Closing Date or the Second
Closing Date, as the case may be, any one or more of the Underwriters shall fail
or refuse to purchase Shares and the aggregate number of Shares with respect to
which such default occurs exceeds 10% of the aggregate number of Shares to be
purchased on such date, and arrangements satisfactory to the Representatives and
the Company for the purchase of such Shares are not made within 48 hours after
such default, this Agreement shall terminate without liability of any party to
any other party except that the provisions of Section 5, and Section 7 shall at
all times be effective and shall survive such termination. In any such case
either the Representatives or the Company shall have the right to postpone the
First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven (7) days in order that the required changes, if any,
to the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
8. Any action taken under this Section 8 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
Section 9. Termination of this Agreement. Prior to the First Closing Date,
this Agreement may be terminated by the Representatives by notice given to the
Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq Stock Market, or trading in securities generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the National Association of
Securities Dealers, LLC; (ii) a general banking moratorium shall have been
declared by any of federal, New York, Minnesota or California authorities; (iii)
there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective change in United States' or international
political, financial or economic conditions, as in the judgment of the
Representatives is material and adverse and makes it impracticable or
inadvisable to market the Common Shares in the manner and on the terms described
in the Prospectus or to enforce contracts for the sale of securities; (iv) in
the judgment of the Representatives there shall have occurred any Material
Adverse Change; or (v) the Company shall have sustained a loss by strike, fire,
flood, earthquake, accident or other calamity of such character as in the
judgment of the
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Representatives may interfere materially with the conduct of the business and
operations of the Company regardless of whether or not such loss shall have been
insured. Any termination pursuant to this Section 9 shall be without liability
on the part of (a) the Company to any Underwriter, except that the Company shall
be obligated to reimburse the expenses of the Representatives and the
Underwriters pursuant to Sections 5 and 6 hereof, (b) any Underwriter to the
Company, or (c) of any party hereto to any other party except that the
provisions of Section 7 shall at all times be effective and shall survive such
termination.
Section 10. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Shares sold hereunder and any termination of this Agreement.
Section 11. Notices. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representative:
BANCBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2696
Attention: General Counsel
If to the Company:
eBenX, Inc.
5500 Wayzata Boulevard
Suite 1450
Minneapolis, MN 55416
Facsimile: (612) 525-2701
Attention: Chairman
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
Section 12. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 9 hereof, and to the benefit of the employees, officers and directors
and controlling persons referred to in Section 7, and to their respective
successors, and no other person will have any right or obligation hereunder. The
term "successors" shall not
24
<PAGE>
include any purchaser of the Shares as such from any of the Underwriters merely
by reason of such purchase.
Section 13. Partial Unenforceability. The invalidity or unenforceability of
any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
Section 14. Governing Law Provisions.
(a) Governing Law. This agreement shall be governed by and construed in
accordance with the internal laws of the state of New York applicable to
agreements made and to be performed in such state.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding arising
out of or based upon this Agreement or the transactions contemplated hereby
("Related Proceedings") may be instituted in the federal courts of the United
States of America located in the City and County of San Francisco or the courts
of the State of California in each case located in the City and County of San
Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not located in the
United States irrevocably appoints CT Corporation System, which currently
maintains a San Francisco office at 49 Stevenson Street, San Francisco,
California 94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the City and
County of San Francisco.
Section 15. General Provisions. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
[The remainder of this page has been intentionally left blank.]
25
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company the enclosed copies hereof, whereupon this
instrument, along with all counterparts hereof, shall become a binding agreement
in accordance with its terms.
Very truly yours,
eBenX, Inc.
By:_________________________________
[Title]
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives as of the date first above written.
BANCBOSTON ROBERTSON STEPHENS INC.
WARBURG DILLON READ LLC
THOMAS WEISEL PARTNERS LLC
On their behalf and on behalf of each of the several underwriters named in
Schedule A hereto.
By BANCBOSTON ROBERTSON STEPHENS INC.
By:_________________________________
Authorized Signatory
26
<PAGE>
SCHEDULE A
Number of
Firm Common Shares
Underwriters To be Purchased
------------ ------------------
BancBoston Robertson Stephens Inc......................... [___]
Warburg Dillon Read LLC................................... [___]
Thomas Weisel Partners LLC................................ [___]
Total............................................ [___]
S-A
<PAGE>
Exhibit A
Lock-Up Agreement
BancBoston Robertson Stephens Inc.
Warburg Dillon Read LLC
Thomas Weisel Partners LLC
As Representatives of the Several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, California 94104
RE: eBenX, Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
common stock, par value .01 per share, of the Company ("Common Stock") or
securities convertible into or exchangeable or exercisable for Common Stock. The
Company proposes to carry out a public offering of Common Stock (the "Offering")
for which you will act as the Representatives (the "Representatives") of the
underwriters. The undersigned recognizes that the Offering will be of benefit to
the undersigned and will benefit the Company by, among other things, raising
additional capital for its operations. The undersigned acknowledges that you and
the other underwriters are relying on the representations and agreements of the
undersigned contained in this letter in carrying out the Offering and in
entering into underwriting arrangements with the Company with respect to the
Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exchangeable
for shares of Common Stock (collectively, "Securities") now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or shareholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, (iii) with respect to dispositions of Common
Shares acquired on the open market or (iv) with the prior written consent of
BancBoston Robertson Stephens Inc., for a period commencing on the date hereof
and continuing to a date 180 days after the Registration Statement is declared
effective by the Securities and Exchange Commission (the "Lock-up Period"). The
foregoing restriction has been expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is designed
to or reasonably expected to lead to or result in a Disposition of Securities
during the Lock-up Period, even if such Securities would be
A-1
<PAGE>
disposed of by someone other than such holder. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
included, relates to or derives any significant part of its value from
Securities. The undersigned also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the transfer of shares of Common Stock or Securities held by the undersigned
except in compliance with the foregoing restrictions. BancBoston Robertson
Stephens Inc., acting alone and in its sole discretion, may waive any provisions
of this Lock-Up Agreement without notice to any third party
This agreement is irrevocable and will be binding on the undersigned and
the respective successors, heirs, personal representatives, and assigns of the
undersigned. In the event that the Registration Statement shall not have been
declared effective on or before December 31, 1999, this Lock-Up Agreement shall
be of no further force or effect.
Dated:_____________________________
___________________________________
Printed Name of Holder
By:________________________________
Signature
___________________________________
Printed Name of Person Signing (and
indicate capacity of person signing
if signing as custodian, trustee,
or on behalf of an entity)
A-2
<PAGE>
Exhibit B
Matters to be Covered in the Opinion of Company Counsel
(i) Each of the Company and Managed Care Buyer's Group, Inc. ("MCBG") has
been duly incorporated and is validly existing as a corporation in good
standing under the laws of the State of Minnesota;
(ii) Each of the Company and MCBG has the corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus;
(iii) Each of the Company and MCBG is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction, if any,
in which the ownership or leasing of its properties or the conduct of its
business requires such qualification, except where the failure to be so
qualified or be in good standing would not have a Material Adverse Effect.
To such counsel's knowledge, the Company does not own or control, directly
or indirectly, any corporation, association or other entity other than
MCBG;
(iv) The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization" as of the
dates stated therein (except for subsequent issuances, if any, pursuant to
employee benefit plans described in the Prospectus or upon exercise of
outstanding options or warrants described in the Prospectus), the issued
and outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable, and, to
such counsel's knowledge, were not issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of first refusal
or other similar right;
(v) All issued and outstanding shares of capital stock of MCBG have been
duly authorized and validly issued and are fully paid and nonassessable,
and, to such counsel's knowledge, were not issued in violation of or
subject to any preemptive right, co-sale right, registration right, right
of first refusal or other similar right and, to such counsel's knowledge,
are owned by the Company free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest;
(vi) The Firm Shares or the Option Shares, as the case may be, to be issued
by the Company pursuant to the terms of the Underwriting Agreement (the
"Agreement") have been duly authorized and, upon issuance and delivery
against payment therefor in accordance with the terms hereof, will be duly
authorized and validly issued and fully paid and nonassessable, and will
not be issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar right.
(vii) The Company has the corporate power and authority to enter into the
Agreement and to issue, sell and deliver to the Underwriters the Shares to
be issued and sold by the Company hereunder;
B-1
<PAGE>
(viii) The Agreement has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed and delivered
by the Company;
(ix) The Registration Statement has become effective under the Securities
Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Securities Act;
(x) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm Shares
or the Option Shares have been validly registered under the Securities Act
and the rules and regulations of the Exchange Act and the applicable rules
and regulations of the Commission thereunder;
(xi) The Registration Statement and the Prospectus, and each amendment or
supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which such
counsel need express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material respects with
the requirements of the Securities Act and the rules and regulations of the
Exchange Act and the applicable rules and regulations of the Commission
thereunder;
(xii) The information in the Prospectus under the caption "Description of
Capital Stock," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair summary of
such matters and conclusions; and the form of certificate evidencing the
Common Stock and filed as an exhibit to the Registration Statement comply
in all material respects with Minnesota law;
(xiii) The description in the Registration Statement and the Prospectus of
the articles of incorporation and bylaws of the Company and of statutes are
accurate and fairly present the information required to be presented by the
Securities Act;
(xiv) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character required
to be described or referred to in the Registration Statement or Prospectus
or to be filed as an exhibit to the Registration Statement which are not
described or referred to therein or filed as required;
(xv) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the Company's
indemnification obligations hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the Company's articles
of incorporation or bylaws or (b) to such counsel's knowledge, result in a
material breach or violation of any of the terms and provisions of, or
constitute a default
B-2
<PAGE>
under, any bond, debenture, note or other evidence of indebtedness, or any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel to which the
Company is a party or by which its properties are bound, or any applicable
statute, rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court, government or
governmental agency or body having jurisdiction over the Company or MCBG,
or over any of their properties or operations;
(xvi) No consent, approval, authorization or order of or qualification with
any court, government or governmental agency or body having jurisdiction
over the Company MCBG, or over any of their properties or operations is
necessary in connection with the consummation by the Company of the
transactions herein contemplated, except (i) such as have been obtained
under the Securities Act, (ii) such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the
distribution of the Shares by the Underwriters, (iii) such as may be
required by the National Association of Securities Dealers, LLC and (iv)
such as may be required under the federal or provincial laws of Canada;
(xvii) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or MCBG of a
character required to be disclosed in the Registration Statement or the
Prospectus by the Securities Act or by the Exchange Act or the applicable
rules and regulations of the Commission thereunder, other than those
described therein;
(xviii) To such counsel's knowledge, neither the Company nor MCBG is
presently (a) in material violation of its respective charter or bylaws, or
(b) in material breach of any applicable statute, rule or regulation known
to such counsel or, to such counsel's knowledge, any order, writ or decree
of any court or governmental agency or body having jurisdiction over the
Company or MCBG, or over any of their properties or operations;
(xix) To such counsel's knowledge, except as set forth in the Registration
Statement and Prospectus, no holders of Company Shares or other securities
of the Company have registration rights with respect to securities of the
Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights known to
such counsel to registration of such shares of Company Shares or other
securities, because of the filing of the Registration Statement by the
Company have, with respect to the offering contemplated thereby, waived
such rights or such rights have expired by reason of lapse of time
following notification of the Company's intent to file the Registration
Statement; and
(xx) The Company is not and, after giving effect to the offering and the
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
B-3
<PAGE>
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto (other than the
financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the First Closing Date or the Second
Closing Date, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
B-4
<PAGE>
Exhibit C
Matters to be Covered in the Opinion of Underwriters' Counsel
(i) The Shares to be issued by the Company have been duly authorized and,
upon issuance and delivery and payment therefor in accordance with the
terms of the Underwriting Agreement, will be validly issued, fully paid and
non-assessable.
(ii) The Registration Statement complied as to form in all material
respects with the requirements of the Act; the Registration Statement has
become effective under the Act and, to such counsel's knowledge, no stop
order proceedings with respect thereto have been instituted or threatened
or are pending under the Act.
(iii) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm Shares
or the Option Shares have been validly registered under the Securities Act
and the Rules and Regulations of the Exchange Act and the applicable rules
and regulations of the Commission thereunder;
(iv) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
Such counsel shall state that such counsel has reviewed the opinions
addressed to the Representatives from Dorsey & Whitney LLP, each dated the date
hereof, and furnished to you in accordance with the provisions of the
Underwriting Agreement. Such opinions appear on their face to be appropriately
responsive to the requirements of the Underwriting Agreement.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto (other than the
financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the First Closing Date or the Second
Closing Date, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the
C-1
<PAGE>
statements therein, in the light of the circumstances under which they
were made, not misleading.
C-2
<PAGE>
EXHIBIT 3.3
FOURTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
NETWORK MANAGEMENT SERVICES, INC.
The following Fourth Amended and Restated Articles of Incorporation
supersede the previous Amended and Restated Articles of Incorporation and shall
be the current Articles of Incorporation of the corporation.
ARTICLE I.
Name: The name of this corporation shall be Network Management
Services, Inc. (the "Corporation").
ARTICLE II.
Registered Office: The address of the Corporation's registered office
in the State of Minnesota is 5500 Wayzata Boulevard, Minneapolis, Minnesota
55416.
ARTICLE III.
A. This Corporation is authorized to issue two classes of shares to be
designated respectively preferred stock ("Preferred Stock") and common stock
("Common Stock"). The total number of shares of capital stock that the
Corporation is authorized to issue is nine million thirteen thousand four
hundred eighty-six (9,013,486). The total number of shares of Preferred Stock
this Corporation shall have authority to issue is one million nine hundred
eighty-six thousand five hundred fifty-two (1,986,552). The total number of
shares of Common Stock this Corporation shall have authority to issue is seven
million (7,000,000). The Preferred Stock shall have a par value of $.01 per
share and the Common Stock shall have a par value of $.01 per share.
B. The Preferred Stock shall be issued in one or more series. The first
series shall consist of three hundred seventy-six thousand two hundred nine
(376,209) shares and is designated "Series A Preferred Stock." The second series
shall consist of six hundred thirty-six thousand nine hundred forty-five
(636,945) shares and is designated "Series B Preferred Stock." The third series
shall consist of nine hundred seventy-three thousand, three hundred ninety-eight
(973,398) shares and is designated "Series C Preferred Stock". The Series A,
Series B and Series C Preferred Stock are collectively referred to herein as the
"Designated Preferred Stock." The term "Designated Preferred Stock" as used
herein without reference to the Series A Preferred Stock, the Series B Preferred
Stock or the Series C Preferred Stock shall mean all of the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock, share for share
alike and without distinction as to series, except as otherwise expressly
provided.
C. The powers, preferences, rights, restrictions, qualifications,
limitations and other matters relating to the Designated Preferred Stock are as
follows:
<PAGE>
1. Dividends.
a. The holders of shares of the Series C Preferred Stock shall
be entitled to receive, out of funds legally available therefor,
cumulative dividends, calculated without compounding, at the annual
rate of 5% per share of Series C Preferred Stock or $.4875 per share
(subject to appropriate adjustment in the event of any stock dividend,
stock split, combination or other similar recapitalization affecting
such shares), per annum, payable in cash upon liquidation, dissolution
or winding up as provided in Section 2 or upon redemption as provided
in Section 6. The right of holders of Series C Preferred Stock to
receive dividends shall be cumulative and shall accrue from day to day,
whether or not earned or declared, so that if such dividends in respect
of any previous or current annual dividend period, at the annual rate
specified above, shall not have been paid or declared and a sum
sufficient for the payment thereof set apart, the deficiency shall
first be fully paid before any dividend or other distribution shall be
paid or declared and set apart for any other class or series of capital
stock of the Corporation.
b. The holders of shares of the Series A and Series B
Preferred Stock shall be entitled to receive dividends of $.2701 and
$.7065 per share (subject to appropriate adjustment in the event of any
stock dividend, stock split, combination or other similar
recapitalization affecting such shares), per annum, respectively,
payable when, as and if declared by the Board of Directors of the
Corporation. The right to receive dividends on Series A and Series B
Preferred Stock shall not be cumulative, and no right to dividends
shall accrue by reason of the fact that no dividend has been declared
on the Series A and/or Series B Preferred Stock in any prior year. No
dividend shall be paid on or declared and set apart for the shares of
Series A and Series B Preferred Stock for any dividend period without
the consent of at least two-thirds of the holders of Series C Preferred
Stock for so long as there are shares of Series C Preferred Stock
outstanding, and unless, at the same time, a like proportionate
dividend for the same dividend period, ratably in proportion to the
respective annual dividend rates fixed therefor, shall be paid on or
declared and set apart for the shares of all other such series of
Preferred Stock.
c. After payment of the aforesaid preferential dividend to the
holders of the Designated Preferred Stock as described in paragraphs a.
and b. of this Section 1, dividends or other distributions (as defined
below) may then be paid to the holders of Designated Preferred Stock
and Common Stock (the "Additional Dividend"), pro rata based on the
number of shares of Common Stock held by each such holder or issuable
upon conversion of shares of Series A Preferred Stock, Series B
Preferred Stock and/or Series C Preferred Stock. Any Additional
Dividend must be paid in an amount such that the holders of each share
of Designated Preferred Stock will receive an amount which is no less
than the amount paid to the holders of each share of Common Stock.
d. For purposes of this Section 1, unless the context requires
otherwise, "distribution" shall mean the transfer of cash or property
without consideration, whether by way of dividend or otherwise, payable
other than in Common Stock or other securities of the Corporation, or
the purchase or redemption of shares of the Corporation (other than
-2-
<PAGE>
repurchases of Common Stock held by employees or directors of, or
consultants to, the Corporation upon termination of their employment or
services pursuant to agreements providing for such repurchase at a
price equal to the original issue price of such shares and other than
redemptions in liquidation or dissolution of the Corporation) for cash
or property, including any such transfer, purchase or redemption by a
subsidiary of this Corporation.
2. Liquidation, Dissolution or Winding Up; Certain Mergers,
Consolidations and Asset Sales.
a. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of
Designated Preferred Stock then outstanding shall be entitled to be
paid out of the assets of the Corporation available for distribution to
its stockholders, before any payment shall be made to the holders of
Common Stock by reason of their ownership thereof,
(1) A holder of shares of Series A Preferred Stock
will be entitled to the following preferential amount:
(a) if the amount the holder would be
entitled to receive per share of Series A Preferred
Stock as a participating amount as calculated in
Section 2.b. below (assuming no preferential amounts
are paid under this Section 2.a.) (the "Gross
Participation Amount") is not greater than $8.103,
such holder of Series A Preferred Stock will be paid
a full preferential amount equal to $ 2.701 per
share, plus any dividends declared thereon but
unpaid, plus the participating amount as calculated
in Section 2.b. below, with all of such amounts being
subject to appropriate adjustment in the event of any
stock dividend, stock split, combination or other
similar recapitalization affecting such shares;
(b) if the holder's Gross Participation
Amount is equal to or greater than $13.506 (subject
to appropriate adjustment in the event of any stock
dividend, stock split, combination or other similar
capitalization affecting the Series A Preferred
Stock) such holder of Series A Preferred Stock will
not receive any preferential amount but will still
participate with the holders of Common Stock as
calculated in Section 2.b. below; or
(c) if the holder's Gross Participation
Amount is greater than $8.103 but not greater than
$13.506 such holder of Series A Preferred Stock will
be paid a partial preferential amount equal to $2.701
multiplied by a fraction (A) the numerator of which
is (X-Y), where X equals 13.506 (or five times the
initial purchase price of the Series A Preferred
Stock) for each share of Series A Preferred Stock,
and where Y equals the Gross Participation Amount,
and (B) the denominator of which is Z, where Z equals
5.402 (or the difference between 3 times and 5 times
the initial
-3-
<PAGE>
purchase price of the Series A Preferred Stock), with
all of such amounts being subject to appropriate
adjustment in the event of any stock dividend, stock
split, combination or other similar recapitalization
affecting the Series A Preferred Stock.
provided, however, that no amounts shall be paid to the holders of
Series A Preferred Stock pursuant to this Section 2a.(1) until the
holders of Series C Preferred Stock have been paid all amounts due
under Section 2a.(3) below.
(2) A holder of shares of Series B Preferred Stock
will be entitled to receive a full preferential amount equal
to $7.065 per share, plus any dividends declared thereon but
unpaid, subject to appropriate adjustment in the event of any
stock dividend, stock split, combination or other similar
recapitalization affecting such shares or, if greater, an
amount that would be payable pursuant to Section 2.b. below
assuming the conversion of Shares of Series B Preferred Stock
into shares of Common Stock; provided, however, that no
amounts shall be paid to the holders of Series B Preferred
Stock pursuant to this Section 2a.(2) until the holders of
Series C Preferred Stock have been paid all amounts due under
Section 2a.(3) below.
(3) A holder of shares of Series C Preferred Stock
will be entitled to receive, prior to any payments under
Sections 2a.(1) and (2) above, a full preferential amount
equal to $9.76 per share, plus any dividends declared thereon
but unpaid, subject to appropriate adjustment in the event of
any stock dividend, stock split, combination or other similar
recapitalization affecting such shares or, if greater, an
amount that would be payable pursuant to Section 2.b. below
assuming the conversion of Shares of Series C Preferred Stock
into shares of Common Stock.
(4) If upon any such liquidation, dissolution or
winding up of the Corporation the remaining assets of the
Corporation available for distribution to its stockholders
shall be insufficient to pay the holders of shares of Series C
Preferred Stock the full amount to which they shall be
entitled, pursuant to Section 2.a.(3) as aforesaid, then the
entire assets of the Corporation to be so distributed shall be
distributed pro rata among the holders of Series C Preferred
Stock in accordance with the respective amounts which would
have been distributed to such holders if such assets had been
sufficient to pay in full the liquidation preference due to
the holders of Series C Preferred Stock pursuant to Section
2.a.(3). Upon any such liquidation, dissolution or winding up
of the Corporation, after the holders of Series C Preferred
Stock shall have been paid in full the amounts to which they
shall be entitled, the remaining net assets of the Corporation
may be distributed ratably to the holders of shares of
Designated Preferred Stock ranking junior to the Series C
Preferred Stock in proportion to the respective amounts which
would otherwise be payable pursuant to subsections 2.a.(1)(a)
and 2.a.(2) in respect of the shares held by them upon such
distribution.
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b. After the payment of all preferential amounts required to
be paid to the holders of Designated Preferred Stock, upon the
dissolution, liquidation or winding up of the Corporation as described
in Section 2.a. above, the holders of shares of Common Stock, Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
then outstanding shall be entitled to receive the remaining assets and
funds of the Corporation available for distribution to its
stockholders, pro rata based on the number of shares of Common Stock
held by each such holder or issuable upon conversion of shares of
Series A Preferred Stock, Series B Preferred Stock and/or Series C
Preferred Stock held by each such holder.
c. In the event of (i) any merger or consolidation of the
Corporation into or with another corporation (except one in which the
holders of capital stock of the Corporation immediately prior to such
merger or consolidation continue to hold at least 50% by voting power
of the capital stock of the surviving corporation), (ii) the sale of
all or substantially all, or a Significant Portion of, the assets of
the Corporation, and (iii) the purchase of more than 50% of the
Corporation's Common Stock by a third party, then such merger,
consolidation, asset sale or other event described above shall be
deemed to be a liquidation of the Corporation, and all consideration
payable to the stockholders of the Corporation (in the case of a merger
or consolidation), or all consideration payable to the Corporation,
together with all other available assets of the Corporation (in the
case of an asset sale), shall be distributed to the holders of capital
stock of the Corporation in accordance with Subsections 2.a. and 2.b.
above. For purposes of this Articles of Incorporation, "Significant
Portion" shall mean assets with a fair market value equal to more than
50% of the book value of the Corporation's total assets as of the end
of the most recent fiscal quarter. The amount deemed distributed to the
holders of Designated Preferred Stock upon any such merger or
consolidation shall be the cash or the value of the property, rights or
securities distributed to such holders by the acquiring person, firm or
other entity. The value of such property, rights or other securities
shall be determined in good faith by the Board of Directors of the
Corporation. In connection with any such transaction contemplated by
this Subsection 2.c., all consideration payable to the stockholders of
the Corporation, in connection with a merger or consolidation, or all
consideration payable to the Corporation, together with all other
available assets of the Corporation (net of obligations owed by the
Corporation), in the case of an asset sale, shall be paid to and deemed
(to the fullest extent permitted by law) distributed (in the case of a
merger or consolidation) or available for distribution and payment as
provided herein (in the case of a sale of assets), as applicable, to
the holders of capital stock of the Corporation in accordance with the
preference and priorities set forth in this Section 2, with such
preferences and priorities specifically intended to be applicable in
any such merger, consolidation or sale transaction as if the same were
a liquidation, dissolution or winding up. If applicable, the
Corporation shall either (i) cause the agreement and plan of merger or
consolidation to provide as a consequence of such merger or
consolidation for the conversion of the Designated Preferred Stock into
the right to receive an amount (either in cash or in property, rights
or securities as provided above) equal to the applicable amount payable
under this Section 2; or (ii) immediately concurrent with the
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consummation with the sale of all or substantially all of the assets of
the Corporation, the redemption of all outstanding shares of the
Designated Preferred Stock for an amount (either in cash or in
property, rights or securities as provided above) equal in value to the
applicable amount payable under this Section 2. In the event of the
foregoing redemption, (i) the Corporation shall revalue its assets and
liabilities to the fullest extent permitted by law to determine
lawfully available funds for such redemption, and (ii) if the
Corporation shall not have such funds available to redeem all such
shares, the Corporation shall redeem such shares to the fullest extent
of available funds as the same became available.
3. Voting.
a. Each holder of outstanding shares of Series A, Series B and
Series C Preferred Stock shall be entitled to the number of votes equal
to the number of whole shares of Common Stock into which the shares of
Series A, Series B and Series C Preferred Stock held by such holder are
then convertible (as adjusted from time to time pursuant to Section 4
hereof), at each meeting of stockholders of the Corporation (and
written actions of stockholders in lieu of meetings) with respect to
any and all matters presented to the stockholders of the Corporation
for their action or consideration. Except as provided by law or by the
provisions of Subsection 3.b., 3.c. or Section 7 below, holders of
Series A, Series B and Series C Preferred Stock shall vote together
with the holders of Common Stock as a single class.
b. The number of directors of the Company shall not exceed
nine. The holders of record of the shares of Series A Preferred Stock,
exclusively and as a separate class, shall be entitled to elect one
director. At any meeting held for the purpose of electing directors,
the presence in person or by proxy of the holders of a majority of the
shares of Series A Preferred Stock then outstanding shall constitute a
quorum of the Series A Preferred Stock for the purpose of electing a
director by holders of the Series A Preferred Stock. A vacancy in any
directorship filled by the holders of Series A Preferred Stock shall be
filled only by vote or written consent in lieu of a meeting of the
holders of the Series A Preferred Stock or by any remaining director or
directors elected by the holders of Series A Preferred Stock pursuant
to this Subsection 3.b.
c. The holders of record of the shares of Series B Preferred
Stock, exclusively and as a separate class, shall be entitled to elect
one director. At any meeting held for the purpose of electing
directors, the presence in person or by proxy of the holders of a
majority of the shares of Series B Preferred Stock then outstanding
shall constitute a quorum of the Series B Preferred Stock for the
purpose of electing a director by holders of the Series B Preferred
Stock. A vacancy in any directorship filled by the holders of Series B
Preferred Stock shall be filled only by vote or written consent in lieu
of a meeting of the holders of the Series B Preferred Stock or by any
remaining director or directors elected by the holders of Series B
Preferred Stock pursuant to this Subsection 3.c.
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d. The holders of record of the shares of Series C Preferred
Stock, exclusively and as a separate class, shall be entitled to elect
one director. At any meeting held for the purpose of electing
directors, the presence in person or by proxy of the holders of a
majority of the shares of Series C Preferred Stock then outstanding
shall constitute a quorum of the Series C Preferred Stock for the
purpose of electing a director by holders of the Series C Preferred
Stock. A vacancy in any directorship filled by the holders of Series C
Preferred Stock shall be filled only by vote or written consent in lieu
of a meeting of the holders of the Series C Preferred Stock or by any
remaining director or directors elected by the holders of Series C
Preferred Stock pursuant to this Subsection 3.d.
4. Optional Conversion. The holders of the Designated Preferred Stock
shall have conversion rights as follows (the "Conversion Rights"):
a. Right to Convert. Each share of Series A, Series B and
Series C Preferred Stock shall be convertible, at the option of the
holder thereof, at any time and from time to time, and without the
payment of additional consideration by the holder thereof, into such
number of fully paid and nonassessable shares of Common Stock as is
determined by dividing $2.701, $7.065 and $9.76, respectively, by the
Conversion Price (as defined below) in effect at the time of
conversion. The "Conversion Price" shall initially be $2.701 for each
share of Series A Preferred Stock, $7.065 for each share of Series B
Preferred Stock and $9.76 for each share of Series C Preferred Stock.
Such initial Conversion Price, and the rate at which shares of
Designated Preferred Stock may be converted into shares of Common
Stock, shall be subject to adjustment as provided below.
b. Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of the Designated Preferred Stock. In
lieu of any fractional shares to which the holder would otherwise be
entitled, the Corporation shall pay cash equal to such fraction
multiplied by the then effective Conversion Price.
c. Mechanics of Conversion.
(1) In order for a holder of Designated Preferred
Stock to convert shares of Designated Preferred Stock into
shares of Common Stock, such holder shall surrender the
certificate or certificates for such shares of Designated
Preferred Stock, at the office of the transfer agent for the
Designated Preferred Stock (or at the principal office of the
Corporation if the Corporation serves as its own transfer
agent), together with written notice that such holder elects
to convert all or any number of the shares of the Designated
Preferred Stock represented by such certificate or
certificates. Such notice shall state such holder's name or
the names of the nominees in which such holder wishes the
certificate or certificates for shares of Common Stock to be
issued. If required by the Corporation, certificates
surrendered for conversion shall be endorsed or accompanied by
a written instrument or instruments of transfer, in form
satisfactory to the
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Corporation, duly executed by the registered holder or his or
its attorney duly authorized in writing. The date of receipt
of such certificates and notice by the transfer agent (or by
the Corporation if the Corporation serves as its own transfer
agent) shall be the conversion date ("Conversion Date"). The
Corporation shall, as soon as practicable after the Conversion
Date, issue and deliver at such office to such holder of
Designated Preferred Stock, or to his or its nominees, a
certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled, together with
cash in lieu of any fraction of a share.
(2) The Corporation shall at all times when the
Designated Preferred Stock shall be outstanding, reserve and
keep available out of its authorized but unissued stock, for
the purpose of effecting the conversion of the Designated
Preferred Stock, such number of its duly authorized shares of
Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding Designated Preferred
Stock. Before taking any action which would cause an
adjustment reducing the Conversion Price below the then par
value of the shares of Common Stock issuable upon conversion
of the Designated Preferred Stock, the Corporation will take
any corporate action which may, in the opinion of its counsel,
be necessary in order that the Corporation may validly and
legally issue fully paid and nonassessable shares of Common
Stock at such adjusted Conversion Price.
(3) Upon any such conversion, no adjustment to the
Conversion Price shall be made for any declared or accrued but
unpaid dividends on the Designated Preferred Stock surrendered
for conversion or on the Common Stock delivered upon
conversion.
(4) All shares of Designated Preferred Stock which
shall have been surrendered for conversion as herein provided
shall no longer be deemed to be outstanding and all rights
with respect to such shares, including the rights, if any, to
receive notices and to vote, shall immediately cease and
terminate on the Conversion Date, except only the right of the
holders thereof to receive shares of Common Stock in exchange
therefor and payment of any dividends declared but unpaid
thereon. Any shares of Designated Preferred Stock so converted
shall be retired and canceled and shall not be reissued, and
the Corporation (without the need for stockholder action) may
from time to time take such appropriate action as may be
necessary to reduce the authorized Designated Preferred Stock
accordingly.
(5) The Corporation shall pay any and all issue taxes
and other taxes that may be payable in respect of any issuance
or delivery of shares of Common Stock upon conversion of
shares of Designated Preferred Stock pursuant to this Section
4.
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d. Adjustments to Conversion Price for Certain Diluting
Issues:
(1) Special Definitions. For purposes of this
Subsection 4.d., the following definitions shall apply:
(a) "Option" shall mean rights, options or
warrants to subscribe for, purchase or otherwise
acquire Common Stock or Convertible Securities,
excluding options described in subsection
4.d.(l)(d)(iv) below.
(b) "Original Issue Date" shall mean the
date on which a share of Series A, Series B or Series
C Preferred Stock was first issued.
(c) "Convertible Securities" shall mean any
evidences of indebtedness, shares or other securities
directly or indirectly convertible into or
exchangeable for Common Stock.
(d) "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued (or,
pursuant to Subsection 4.d.(3) below, deemed to be
issued) by the Corporation after the Original Issue
Date, other than shares of Common Stock issued or
issuable:
(i) upon conversion of shares of
any Designated Preferred Stock of the
Corporation outstanding from time to time;
(ii) as a dividend or distribution
on Designated Preferred Stock;
(iii) by reason of a dividend, stock
split, split-up or other distribution on
shares of Common Stock that is covered by
Subsection 4.e. or 4.f. below;
(iv) to employees or directors of,
or consultants to, the Corporation pursuant
to a plan adopted by the Board of Directors
of the Corporation, provided, that any
increase in the authorized number of shares
of Common Stock issuable under any such plan
shall require the unanimous vote of the
members of the Board of Directors nominated
solely by the holders of Designated
Preferred Stock; or
(v) upon exercise of (a) warrants
issued in lieu of compensation to certain
officers of the Corporation as provided in
subsection 7.6(b) of the Series A Preferred
Stock Purchase Agreement dated September 2,
1994, and any amendments thereto (the
"Purchase Agreement"); and (b) a warrant
issued to Dominion Fund III, a California
Limited Partnership, as provided in Article
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<PAGE>
1.8 of the Loan Agreement dated September
11, 1995 (the "Loan Agreement").
(2) No Adjustment of Conversion Price. No adjustment
in the number of shares of Common Stock into which the
Designated Preferred Stock is convertible shall be made, by
adjustment in the applicable Conversion Price thereof: (a)
unless the consideration per share (determined pursuant to
Subsection 4.d.(4) for an Additional Share of Common Stock
issued or deemed to be issued by the Corporation is less than
the applicable Conversion Price in effect on the date of, and
immediately prior to, the issue of such Additional Shares, (b)
as to shares of Series A Preferred Stock, if prior to such
issuance, the Corporation receives written notice from the
holders of at least 70% of the then outstanding shares of
Series A Preferred Stock agreeing that no such adjustment
shall be made as the result of the issuance of Additional
Shares of Common Stock, (c) as to shares of Series B Preferred
Stock, if prior to such issuance, the Corporation receives
written notice from the holders of at least 70% of the then
outstanding shares of Series B Preferred Stock agreeing that
no such adjustment shall be made as the result of the issuance
of Additional Shares of Common Stock or (d) as to shares of
Series C Preferred Stock, if prior to such issuance, the
Corporation receives written notice from the holders of at
least 70% of the then outstanding shares of Series C Preferred
Stock agreeing that no such adjustment shall be made as in the
result of the issuance of Additional Shares of Common Stock.
(3) Issue of Securities Deemed Issue of Additional
Shares of Common Stock. If the Corporation at any time or from
time to time after the Original Issue Date shall issue any
Options or Convertible Securities or shall fix a record date
for the determination of holders of any class of securities
entitled to receive any such Options or Convertible
Securities, then the maximum number of shares of Common Stock
(as set forth in the instrument relating thereto without
regard to any provision contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such
Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common
Stock issued as of the time of such issue or, in case such a
record date shall have been fixed, as of the close of business
on such record date, provided that Additional Shares of Common
Stock shall not be deemed to have been issued unless the
consideration per share (determined pursuant to Subsection
4.d.(5) hereof) of such Additional Shares of Common Stock
would be less than the applicable Conversion Price in effect
on the date of and immediately prior to such issue, or such
record date, as the case may be, and provided further that in
any such case in which Additional Shares of Common Stock are
deemed to be issued:
(a) No further adjustment in the Conversion
Price shall be made upon the subsequent issue of
Convertible Securities or shares of
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Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible
Securities;
(b) If such Options or Convertible
Securities by their terms provide, with the passage
of time or otherwise, for any increase in the
consideration payable to the Corporation, upon the
exercise, conversion or exchange thereof, the
Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with
respect thereto), and any subsequent adjustments
based thereon, shall, upon any such increase becoming
effective, be recomputed to reflect such increase
insofar as it affects such Options or the rights of
conversion or exchange under such Convertible
Securities;
(c) Upon the expiration or termination of
any unexercised Option, the Conversion Price shall
not be readjusted, but the Additional Shares of
Common Stock deemed issued as the result of the
original issue of such Option shall not be deemed
issued for the purposes of any subsequent adjustment
of the Conversion Price;
(d) In the event of any change in the number
of shares of Common Stock issuable upon the exercise,
conversion or exchange of any Option or Convertible
Security, including, but not limited to, a change
resulting from the anti-dilution provisions thereof,
the Conversion Price then in effect shall forthwith
be readjusted to such Conversion Price as would have
obtained had the adjustment which was made upon the
issuance of such Option or Convertible Security not
exercised or converted prior to such change been made
upon the basis of such change; and
(e) No readjustment pursuant to clause (b)
or (d) above shall have the effect of increasing the
Conversion Price to an amount which exceeds the lower
of (i) the Conversion Price on the original
adjustment date, or (ii) the Conversion Price that
would have resulted from any issuances of Additional
Shares of Common Stock between the original
adjustment date and such readjustment date.
(4) Adjustment of Conversion Price Upon Issuance of
Additional Shares of Common Stock. In the event the
Corporation shall at any time after the Original Issue Date
issue Additional Shares of Common Stock (including Additional
Shares of Common Stock deemed to be issued pursuant to
Subsection 4.d.(3), but excluding shares issued as a dividend
or distribution as provided in Subsection 4.f. or upon a stock
split or combination as provided in Subsection 4.e., without
consideration or for a consideration per share less than the
applicable Conversion Price in effect on the date of and
immediately prior to such issue, then and in such event, such
Conversion Price shall be reduced, concurrently with such
issue, to a price (calculated to the nearest cent) determined
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by multiplying such Conversion Price by a fraction, (A) the
numerator of which shall be (1) the number of shares of Common
Stock outstanding immediately prior to such issue plus (2) the
number of shares of Common Stock which the aggregate
consideration received or to be received by the Corporation
for the total number of Additional Shares of Common Stock so
issued would purchase at such Conversion Price; and (B) the
denominator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so issued;
provided that (i) for the purpose of this Subsection 4.d.(4),
all shares of Common Stock issuable upon exercise or
conversion of Options or Convertible Securities outstanding
immediately prior to such issue shall be deemed to be
outstanding (other than shares excluded from the definition of
"Additional Shares of Common Stock" by virtue of clause (iv)
of Subsection 4.d.(1)(d), and (ii) the number of shares of
Common Stock deemed issuable upon conversion of such
outstanding Options and Convertible Securities shall not give
effect to any adjustments to the conversion price or
conversion rate of such Options or Convertible Securities
resulting from the issuance of Additional Shares of Common
Stock that is the subject of this calculation.
Notwithstanding the foregoing, the applicable
Conversion Price shall not be so reduced at such time if the
amount of such reduction would be an amount less than $.01,
but any such amount shall be carried forward and reduction
with respect thereto made at the time of and together with any
subsequent reduction which, together with such amount and any
other amount or amounts so carried forward, shall aggregate
$.01 or more.
(5) Determination of Consideration. For purposes of
this Subsection 4.d., the consideration received by the
Corporation for the issue of any Additional Shares of Common
Stock shall be computed as follows:
(a) Cash and Property: Such consideration
shall:
(i) insofar as it consists of cash,
be computed at the aggregate of cash
received by the Corporation, excluding
amounts paid or payable for accrued interest
or accrued dividends;
(ii) insofar as it consists of
property other than cash, be computed at the
fair market value thereof at the time of
such issue, as determined in good faith by
the Board of Directors; and
(iii) in the event Additional Shares
of Common Stock are issued together with
other shares or securities or other assets
of the Corporation for consideration which
covers both, be the proportion of such
consideration so received, computed as
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provided in clauses (i) and (ii) above, as
determined in good faith by the Board of
Directors.
(b) Options and Convertible Securities. The
consideration per share received by the Corporation
for Additional Shares of Common Stock deemed to have
been issued pursuant to Subsection 4.d.(3), relating
to Options and Convertible Securities, shall be
determined by dividing
(x) the total amount, if any,
received or receivable by the Corporation as
consideration for the issue of such Options
or Convertible Securities, plus the minimum
aggregate amount of additional consideration
(as set forth in the instruments relating
thereto, without regard to any provision
contained therein for a subsequent
adjustment of such consideration) payable to
the Corporation upon the exercise of such
Options or the conversion or exchange of
such Convertible Securities, or in the case
of Options for Convertible Securities, the
exercise of such Options for Convertible
Securities and the conversion or exchange of
such Convertible Securities, by
(y) the maximum number of shares of
Common Stock (as set forth in the
instruments relating thereto, without regard
to any provision contained therein for a
subsequent adjustment of such number)
issuable upon the exercise of such Options
or the conversion or exchange of such
Convertible Securities.
(6) Multiple Closing Dates. In the event the
Corporation shall issue on more than one date Additional
Shares of Common Stock which are comprised of shares of the
same series or class of Preferred Stock, and such issuance
dates occur within a period of no more than 120 days, then the
Conversion Price shall be adjusted only once on account of
such issuances, with such adjustment to occur upon the final
such issuance and to give effect to all such issuances as if
they occurred on the date of the final such issuance.
e. Adjustment for Stock Splits and Combinations. If the
Corporation shall at any time or from time to time after the Original
Issue Date effect a subdivision of the outstanding Common Stock, the
Conversion Price then in effect immediately before that subdivision
shall be proportionately decreased. If the Corporation shall at any
time or from time to time after the Original Issue Date effect a
subdivision of the Designated Preferred Stock, the Conversion Price
then in effect immediately before that subdivision shall be
proportionately increased. If the Corporation shall at any time or from
time to time after the Original Issue Date combine the outstanding
shares of Common Stock, the Conversion Price then in effect immediately
before the combination shall be proportionately increased. If the
Corporation shall at any time or from time to time after the Original
Issue Date combine the outstanding shares of Designated Preferred
Stock,
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the Conversion Price then in effect immediately before the combination
shall be proportionately decreased. Any adjustment under this paragraph
shall become effective at the close of business on the date the
subdivision or combination becomes effective.
f. Adjustment for Certain Dividends and Distributions. In the
event the Corporation at any time, or from time to time after the
Original Issue Date shall make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in additional shares of Common
Stock, then and in each such event the Conversion Price for the
Designated Preferred Stock then in effect shall be decreased as of the
time of such issuance or, in the event such a record date shall have
been fixed, as of the close of business on such record date, by
multiplying the Conversion Price for the Designated Preferred Stock
then in effect by a fraction:
(1) the numerator of which shall be the total number
of shares of Common Stock issued and outstanding immediately
prior to the time of such issuance or the close of business on
such record date, and
(2) the denominator of which shall be the total
number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of
Common Stock issuable in payment of such dividend or
distribution;
provided, however, if such record date shall have been fixed and such
dividend is not fully paid or if such distribution is not fully made on
the date fixed therefor, the Conversion Price for the Designated
Preferred Stock shall be recomputed accordingly as of the close of
business on such record date and thereafter the Conversion Price for
the Designated Preferred Stock shall be adjusted pursuant to this
paragraph as of the time of actual payment of such dividends or
distributions; and provided further, however, that no such adjustment
shall be made if the holders of Designated Preferred Stock
simultaneously receive a dividend or other distribution of shares of
Common Stock in a number equal to the number of shares of Common Stock
as they would have received if all outstanding shares of Designated
Preferred Stock had been converted into Common Stock on the date of
such event.
g. Adjustments for Other Dividends and Distributions. In the
event the Corporation at any time or from time to time after the
Original Issue Date for the Designated Preferred Stock shall make or
issue, or fix a record date for the determination of holders of Common
Stock entitled to receive, a dividend or other distribution payable in
securities of the Corporation other than shares of Common Stock, then
and in each such event provision shall be made so that the holders of
the Designated Preferred Stock shall receive upon conversion thereof in
addition to the number of shares of Common Stock receivable thereupon,
the amount of securities of the Corporation that they would have
received had the Designated Preferred Stock been converted into Common
Stock on the date of such event and had they thereafter, during the
period from the date of such event to and including the conversion
date, retained such securities receivable by them as
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aforesaid during such period, giving application to all adjustments
called for during such period under this paragraph with respect to the
rights of the holders of the Designated Preferred Stock; and provided
further, however, that no such adjustment shall be made if the holders
of Designated Preferred Stock simultaneously receive a dividend or
other distribution of such securities in an amount equal to the amount
of such securities as they would have received if all outstanding
shares of Designated Preferred Stock had been converted into Common
Stock on the date of such event.
h. Adjustment for Reclassification, Exchange, or Substitution.
If the Common Stock issuable upon the conversion of the Designated
Preferred Stock shall be changed into the same or a different number of
shares of any class or classes of stock, whether by capital
reorganization, reclassification, or otherwise (other than a
subdivision or combination of shares or stock dividend provided for
above, or a reorganization, merger, consolidation, or sale of assets
provided for below), then and in each such event the holder of each
such share of Designated Preferred Stock shall have the right
thereafter to convert such share into the kind and amount of shares of
stock and other securities and property receivable upon such
reorganization, reclassification, or other change, by holders of the
number of shares of Common Stock into which such shares of Designated
Preferred Stock might have been converted immediately prior to such
reorganization, reclassification, or change, all subject to further
adjustment as provided herein.
i. Adjustment for Merger or Reorganization, etc. In case of
any consolidation or merger of the Corporation with or into another
corporation or the sale of all or substantially all of the assets of
the Corporation to another corporation (other than a consolidation,
merger or sale which is covered by Subsection 2.c.), each share of
Designated Preferred Stock shall thereafter be convertible (or shall be
converted into a security which shall be convertible) into the kind and
amount of shares of stock or other securities or property to which a
holder of the number of shares of Common Stock of the Corporation
deliverable upon conversion of such Designated Preferred Stock would
have been entitled upon such consolidation, merger or sale; and, in
such case, appropriate adjustment (as determined in good faith by the
Board of Directors) shall be made in the application of the provisions
in this Section 4 set forth with respect to the rights and interest
thereafter of the holders of the Designated Preferred Stock, to the end
that the provisions set forth in this Section 4 (including provisions
with respect to changes in and other adjustments of the Conversion
Price) shall thereafter be applicable, as nearly as reasonably may be,
in relation to any shares of stock or other property thereafter
deliverable upon the conversion of the Designated Preferred Stock.
j. No Impairment. The Corporation will not, by amendment of
its Articles of Incorporation or through any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good
faith assist in the carrying out of all the provisions of this Section
4 and in the taking of all such action as may be necessary or
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appropriate in order to protect the Conversion Rights of the holders of
the Designated Preferred Stock against impairment.
k. Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this
Section 4, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and
furnish to each holder of Designated Preferred Stock a certificate
setting forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder
of Designated Preferred Stock, furnish or cause to be furnished to such
holder a similar certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price then in effect, and (iii) the
number of shares of Common Stock and the amount, if any, of other
property which then would be received upon the conversion of Designated
Preferred Stock.
l. Notice of Record Date. In the event:
(1) that the Corporation declares a dividend (or any
other distribution) on its Common Stock payable in Common
Stock or other securities of the Corporation;
(2) that the Corporation subdivides or combines its
outstanding shares of Common Stock;
(3) of any reclassification of the Common Stock of
the Corporation (other than a subdivision or combination of
its outstanding shares of Common Stock or a stock dividend or
stock distribution thereon), or of any consolidation or merger
of the Corporation into or with another corporation, or of the
sale of all or substantially all of the assets of the
Corporation; or
(4) of the involuntary or voluntary dissolution,
liquidation or winding up of the Corporation;
then the Corporation shall cause to be filed at its principal office or
at the office of the transfer agent of the Designated Preferred Stock,
and shall cause to be mailed or faxed to the holders of the Designated
Preferred Stock at their last addresses as shown on the records of the
Corporation or such transfer agent, at least seven days prior to the
date specified in (a) below or twenty days before the date specified in
(b) below, (or if faxed three and seven days, respectively) a notice
stating:
(a) the record date of such dividend, distribution,
subdivision or combination, or, if a record is not to be
taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution,
subdivision or combination are to be determined, or
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(b) the date on which such reclassification,
consolidation, merger, sale, dissolution, liquidation or
winding up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record
shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such
reclassification, consolidation, merger, sale, dissolution or
winding up.
5. Mandatory Conversion.
a. Upon the earlier of (i) the closing of the sale of shares
of Common Stock, at a per share price of at least $8.10 (subject to
appropriate adjustment for stock splits, stock dividends, combinations
and other similar recapitalizations affecting such shares), in a public
offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, resulting in at least $10,000,000
of gross proceeds to the Corporation or (ii) the conversion of 80% of
the outstanding Series A Preferred Stock into Common Stock (the "Series
A Mandatory Conversion Date"), (A) all outstanding shares of Series A
Preferred Stock shall automatically be converted into shares of Common
Stock, at the then effective conversion rate and (B) the number of
authorized shares of Preferred Stock shall be automatically reduced by
the number of shares of Preferred Stock that had been designated as
Series A Preferred Stock, and all provisions included under Article
III, Section C which relate to Series A Preferred Stock and all
references thereto, shall be deleted and shall be of no further force
or effect.
b. Upon the earlier of (i) the closing of the sale of Common
Stock, at a per share price of at least $21.20 (subject to appropriate
adjustment for stock splits, stock dividends, combinations and other
similar recapitalizations affecting such shares), in a public offering
pursuant to an effective registration statement under the Securities
Act of 1933, as amended, resulting in at least $10,000,000 of net
proceeds to the Corporation, or (ii) the conversion of 80% of the
outstanding Series B Preferred Stock into Common Stock (the "Series B
Mandatory Conversion Date"), (A) all outstanding shares of Series B
Preferred Stock shall automatically be converted into shares of Common
Stock, at the then effective conversion rate and (B) the number of
authorized shares of Preferred Stock shall be automatically reduced by
the number of shares of Preferred Stock that had been designated as
Series B Preferred Stock, and all provisions included under Article
III, Section C which relate to Series B Preferred Stock and all
references thereto, shall be deleted and shall be of no further force
or effect.
c. Upon the earlier of (i) the closing of the sale of shares
of Common Stock in a public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended,
resulting in at least $30,000,000 of gross proceeds to the Corporation
and a market capitalization of at least $120,000,000 or (ii) the
conversion of 80% of the outstanding Series C Preferred Stock into
Common Stock (the "Series C Mandatory Conversion Date"), (A) all
outstanding shares of Series C Preferred Stock shall automatically be
converted into shares of Common Stock, at the then effective conversion
rate and (B) the number of authorized shares of Preferred Stock shall
be
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automatically reduced by the number of shares of Preferred Stock that
had been designated as Series C Preferred Stock, and all provisions
included under Article III, Section C which relate to Series C
Preferred Stock and all references thereto, shall be deleted and shall
be of no further force or effect. The Series A Mandatory Conversion
Date, the Series B Mandatory Conversion Date and the Series C Mandatory
Conversion Date are collectively referred to herein as the "Mandatory
Conversion Date."
d. All holders of record of shares of Designated Preferred
Stock will be given written notice of the Mandatory Conversion Date and
the place designated for mandatory conversion of any such shares of
Designated Preferred Stock pursuant to this Section 5. Such notice
shall be sent by first class registered mail, postage prepaid, or
overnight mail (such as Federal Express) to each record holder of
Designated Preferred Stock at such holder's address last shown on the
records of the transfer agent for the Designated Preferred Stock (or
the records of the Corporation, if it serves as its own transfer
agent). Upon receipt of such notice, each holder of shares of
Designated Preferred Stock so converted shall surrender his or its
certificate or certificates for all such shares to the Corporation at
the place designated in such notice, and shall thereafter receive
certificates for the number of shares of Common Stock to which such
holder is entitled pursuant to this Section 5. On the Mandatory
Conversion Date, all rights with respect to the Designated Preferred
Stock so converted, including the rights, if any, to receive notices
and vote, will terminate, except only the rights of the holders
thereof, upon surrender of their certificate or certificates therefor,
to receive certificates for the number of shares of Common Stock into
which such Designated Preferred Stock has been converted, and payment
of any declared but unpaid dividends thereon (all of which shall be
deemed to be declared by the Board of Directors on the Mandatory
Conversion Date). If so required by the Corporation, certificates
surrendered for conversion shall be endorsed or accompanied by written
instrument or instruments of transfer, in form satisfactory to the
Corporation, duly executed by the registered holder or by his or its
attorney duly authorized in writing. As soon as practicable after the
Mandatory Conversion Date and the surrender of the certificate or
certificates for Designated Preferred Stock so converted, the
Corporation shall cause to be issued and delivered to such holder, or
on his or its written order, a certificate or certificates for the
number of full shares of Common Stock issuable on such conversion in
accordance with the provisions hereof and cash as provided in
Subsection 4.b. in respect of any fraction of a share of Common Stock
otherwise issuable upon such conversion.
e. All certificates evidencing shares of Designated Preferred
Stock which are required to be surrendered for conversion in accordance
with the provisions hereof shall, from and after the Mandatory
Conversion Date, be deemed to have been retired and canceled and the
shares of Designated Preferred Stock represented thereby converted into
Common Stock for all purposes, notwithstanding the failure of the
holder or holders thereof to surrender such certificates on or prior to
such date. The Corporation may thereafter take such appropriate action
(without the need for stockholder action) as may be necessary to reduce
the authorized Designated Preferred Stock accordingly.
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6. Redemption.
a. The Corporation will, subject to the conditions set forth
in Subsection 6.f. below, On April 30, 2004 and on each of the first
and second anniversaries thereof (each such date being referred to
hereinafter as a "Series A Mandatory Redemption Date"), redeem from
each holder of shares of Series A Preferred Stock, at a price equal to
$2.701 per share, plus any dividends declared but unpaid thereon,
subject to appropriate adjustment in the event of any stock dividend,
stock split, combination or other similar recapitalization affecting
such shares (the "Series A Mandatory Redemption Price"), the following
respective portions of the number of shares of Series A preferred Stock
held by such holder on the applicable Series A Mandatory Redemption
Date:
Series A Portion of then outstanding Shares
Redemption Date of Series A Preferred Stock
--------------- To Be Redeemed
--------------
April 30, 2004 33 1/3%
April 30, 2005 50%
April 30, 2006 All outstanding shares of
Series A Preferred Stock
b. The Corporation will, subject to the conditions set forth
in Subsection 6.f. below, on April 30, 2004 and on each of the first
and second anniversaries thereof (each such date being referred to
hereinafter as a "Series B Mandatory Redemption Date"), redeem from
each holder of shares of Series B preferred Stock, at a price equal to
$7.065 per share, plus any dividends declared but unpaid thereon,
subject to appropriate adjustment in the event of any stock dividend,
stock split, combination or other similar recapitalization affecting
such shares (the "Series B Mandatory Redemption Price"), the following
respective portions of the number of shares of Series B preferred Stock
held by such holder on the applicable Series B Mandatory Redemption
Date:
Series B Portion of then outstanding Shares
Redemption Date of Series B Preferred Stock
--------------- To Be Redeemed
--------------
April 30, 2004 33 1/3%
April 30, 2005 50%
April 30, 2006 All outstanding shares of
Series B Preferred Stock
c. The Corporation will, subject to the conditions set forth
in Subsection 6.f. below, on April 30, 2004 and on each of the first
and second anniversaries thereof (each such date being referred to
hereinafter as a "Series C Mandatory Redemption Date"), redeem from
each holder of shares of Series C Preferred Stock, at a price equal to
$9.76 per share, plus any dividends declared but unpaid thereon,
subject to appropriate adjustment in the event of any stock dividend,
stock split, combination or other similar
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<PAGE>
recapitalization affecting such shares (the "Series C Mandatory
Redemption Price"), the following respective portions of the number of
shares of Series C Preferred Stock held by such holder on the
applicable Series C Mandatory Redemption Date:
Series C Portion of then outstanding Shares
Redemption Date of Series C Preferred Stock
--------------- To Be Redeemed
--------------
April 30, 2004 33 1/3%
April 30, 2005 50%
April 30, 2006 All outstanding shares of
Series C Preferred Stock
d. If the funds of the Corporation legally available for
redemption of Designated Preferred Stock on any Mandatory Redemption
Date are insufficient to redeem the number of shares of Designated
Preferred Stock required under this Section 6 to be redeemed on such
date, those funds which are legally available will be used to redeem
the maximum possible number of such shares of Designated Preferred
Stock ratably according to the respective amounts which would be
payable with respect to the full number of shares of Designated
Preferred Stock owned by them if the funds of the Corporation legally
available therefor had been sufficient to redeem all shares of
Designated Preferred Stock required to be redeemed on such date. At any
time thereafter when additional funds of the Corporation become legally
available for the redemption of Designated Preferred Stock, such funds
will be used, at the end of the next succeeding fiscal quarter, to
redeem the balance of the shares which the Corporation was theretofore
obligated to redeem, ratably on the basis set forth in the preceding
sentence.
e. The Corporation shall provide notice of any redemption of
Designated Preferred Stock pursuant to Section 6.a. or 6.b. above
specifying the time and place of redemption and the Mandatory
Redemption Price, by first class registered mail, postage prepaid, or
by overnight mail (such as Federal Express) to each holder of record of
Designated Preferred Stock at the address for such holder last shown on
the records of the transfer agent therefor (or the records of the
Corporation, if it serves as its own transfer agent), not more than 30
nor less than 10 days prior to the date on which such redemption is to
be made. If less than all Designated Preferred Stock owned by such
holder is then to be redeemed, the notice will also specify the number
of shares which are to be redeemed. Upon mailing any such notice of
redemption, the Corporation will become obligated to redeem at the time
of redemption specified therein all Designated Preferred Stock
specified therein (other than such shares of Designated Preferred Stock
as are duly converted pursuant to Section 4 prior to the close of
business on the day preceding the Mandatory Redemption Date). In case
less than all Designated Preferred Stock represented by any certificate
is redeemed in any redemption pursuant to this Section 6, a new
certificate will be issued representing the unredeemed Designated
Preferred Stock without cost to the holder thereof.
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<PAGE>
f. Unless there shall have been a failure to pay the Mandatory
Redemption Price, no share of Designated Preferred Stock shall be
entitled to any dividends declared after its Mandatory Redemption Date,
and on such Mandatory Redemption Date all rights of the holder of such
share as a stockholder of the Corporation by reason of the ownership of
such share will cease, except the right to receive the Mandatory
Redemption Price of such share, without interest, upon presentation and
surrender of the certificate representing such share, and such share
will not from and after such Mandatory Redemption Date be deemed to be
outstanding.
g. Notwithstanding anything to the contrary in this Section 6,
the Corporation shall not redeem any shares of Designated Preferred
Stock on any Mandatory Redemption Date if the holders of at least 75%
of the shares of Common Stock issuable upon conversion of then
outstanding shares of Designated Preferred Stock, within five (5) days
prior to the applicable Mandatory Redemption Date, provide written
notice to the Corporation that no such redemption shall be made. In the
event of any such notice to the Corporation, no holder of Designated
Preferred Stock shall have the right to require that any of its shares
of shares of Designated Preferred Stock be redeemed on such Mandatory
Redemption Date.
7. Negative Covenants. In addition to any other rights provided by law,
so long as any Designated Preferred Stock shall be outstanding, the Corporation
shall not, without first obtaining the affirmative vote or written consent of
the holders of not less than two-thirds of the shares of Common Stock issuable
upon conversion of then outstanding shares of Designated Preferred Stock:
a. Amend or repeal any provision of, or add any provision to,
the Corporation's Articles of Incorporation or By-Laws, if such action
would adversely affect the preferences, rights, privileges or powers
of, or the restrictions provided for the benefit of, Designated
Preferred Stock;
b. Authorize any additional shares of Designated Preferred
Stock or any new class or classes or series of capital stock having any
preference or priority as to dividends or assets superior to or on a
parity with any such preference or priority of the Designated Preferred
Stock, or authorize shares of stock of any class or any bonds,
debentures, notes or other obligations convertible into or exchangeable
for, or having rights to purchase, any shares of stock of the
Corporation having any preference or priority as to dividends or assets
superior to or on a parity with any such preference or priority of the
Designated Preferred Stock;
c. Reclassify any Common Stock into shares having any
preference or priority as to dividends or assets superior to or on a
parity with any such preference or priority of the Designated Preferred
Stock;
d. Pay or declare any dividend or distribution on any shares
of its capital stock (except dividends payable solely in shares of
Common Stock), or apply any of its
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<PAGE>
assets to the redemption, retirement, purchase or acquisition, directly
or indirectly, through subsidiaries or otherwise, of any shares of its
capital stock, except that the Company may repurchase shares of Common
Stock from employees, directors or consultants at cost upon termination
of employment or services and may redeem shares pursuant to Section 6
above; or
e. Merge or consolidate into or with any other corporation or
other entity, sell all or substantially all of, or any Significant
Portion of, the Corporation's assets or liquidate or wind up the
affairs or business of the Corporation.
f. Effect a change in control of the Company. "Change in
Control" shall occur or be deemed to have occurred only if any of the
following events occur: (i) any "person," as such term is used in
Section 13 (d) and 14 (d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), (other than a shareholder as of the date
of that certain Series C Preferred Stock Purchase Agreement among the
Company and the other signatories thereto (the "Series C Purchase
Agreement"), their permitted transferees under the Right of First
Refusal and Co-Sale Agreement dated September 1, 1994, the Company, any
trustee or other fiduciary holding securities under an employee benefit
plan of the Company, or any corporation owned directly or indirectly by
the stockholders of the Company in substantially the same proportion as
their ownership of stock of the Company) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 50% or more of
the combined voting power of the Company's then outstanding securities;
(ii) individuals who, as of the date of the Series B Purchase
Agreement, constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board, provided that
any person becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board (other than an election or nomination of
an individual whose initial assumption of office is in connection with
an actual or threatened election context relating to the election of
the directors of the Company, as such terms are used in Rule 14a-11 of
Regulation 14A under the Exchange Act) shall be, for purposes of this
Agreement, considered as though such person were a member of the
Incumbent Board.
ARTICLE IV.
Certain Shareholder Rights: Except as set forth in the Amended and
Restated Investors' Rights Agreement between the Corporation and the Series A,
Series B and Series C Preferred Stockholders, shareholders shall have no
preemptive rights to purchase, subscribe for or otherwise acquire any new or
additional securities of the Corporation. No shareholder shall be entitled to
any cumulative voting rights.
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<PAGE>
ARTICLE V.
Nonliability of Directors for Certain Actions: To the full extent
permitted by the Minnesota Business Corporation Act, Minnesota Statutes, Chapter
302A, as it exists on the date hereof or may hereafter be amended, a director of
this Corporation shall not be liable to the Corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director. No amendment to or
repeal of this Article shall apply to or have any effect on the liability or
alleged liability of any director of the Corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
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<PAGE>
ARTICLES OF CORRECTION
OF
NETWORK MANAGEMENT SERVICES, INC.
In order to correct the Fourth Amended and Restated Articles of
Incorporation as filed with the Minnesota Secretary of State on May 3, 1999, in
accordance with the provisions set forth in Minnesota Statute Section 5.16, the
undersigned hereby makes the following statements.
1. The name of the person who filed the instrument is: Scott P.
Halstead.
2. The instrument to be corrected is the Fourth Amended and
Restated Articles of Incorporation of Network Management
Services, Inc. filed with the Minnesota Secretary of State on
May 3, 1999.
3. The error to be corrected is the number of shares of capital
stock that the Corporation is authorized to issue.
4. Paragraph A of Article III of the Fourth Amended and Restated
Articles of Incorporation is hereby amended in its entirety to
read as follows:
"A. This Corporation is authorized to issue two classes of shares to be
designated respectively preferred stock ("Preferred Stock") and common stock
("Common Stock"). The total number of shares of capital stock that the
Corporation is authorized to issue is eight million nine hundred eighty-six
thousand five hundred fifty-two (8,986,552). The total number of shares of
Preferred Stock this Corporation shall have authority to issue is one million
nine hundred eighty-six thousand five hundred fifty-two (1,986,552). The total
number of shares of Common Stock this Corporation shall have authority to issue
is seven million (7,000,000). The Preferred Stock shall have a par value of $.01
per share and the Common Stock shall have a par value of $.01 per share."
Dated: May 19, 1999
/s/ Scott P. Halstead
--------------------------------
Scott P. Halstead, Secretary
<PAGE>
ARTICLES OF AMENDMENT
TO
FOURTH AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
NETWORK MANAGEMENT SERVICES, INC.
1. The name of the corporation is Network Management Services, Inc.
2. The following is the full text of the amendment to Article III,
Paragraphs A and B of the Fourth Amended and Restated Articles of
Incorporation of Network Management Services, Inc.:
"A. This Corporation is authorized to issue two classes of
shares to be designated respectively preferred stock ("Preferred
Stock") and common stock ("Common Stock"). The total number of shares
of capital stock that the Corporation is authorized to issue is nine
million eighty-eight thousand, nine hundred seventy-four (9,088,974).
The total number of shares of Preferred Stock this Corporation shall
have authority to issue is two million eighty-eight thousand, nine
hundred seventy-four (2,088,974). The total number of shares of Common
Stock this Corporation shall have authority to issue is seven million
(7,000,000). The Preferred Stock shall have a par value of $.01 per
share and the Common Stock shall have a par value of $.01 per share.
B. The Preferred Stock shall be issued in one or more series.
The first series shall consist of three hundred seventy-six thousand
two hundred nine (376,209) shares and is designated "Series A Preferred
Stock." The second series shall consist of six hundred thirty-six
thousand nine hundred forty-five (636,945) shares and is designated
"Series B Preferred Stock." The third series shall consist of one
million seventy-five thousand, eight hundred twenty (1,075,820) shares
and is designated "Series C Preferred Stock." The Series A, Series B
and Series C Preferred Stock are collectively referred to herein as the
"Designated Preferred Stock." The term "Designated Preferred Stock" as
used herein without reference to the Series A Preferred Stock, the
Series B Preferred Stock or the Series C Preferred Stock shall mean all
of the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock, share for share alike and without distinction as to
series, except as otherwise expressly provided."
3. The foregoing amendment to the Fourth Amended and Restated Articles of
Incorporation was approved by Written Action of the Board of Directors
on May 18, 1999 and by Special Meeting of the Shareholders on May 26,
1999.
4. The foregoing amendment was adopted according to Chapter 302A of the
Minnesota Business Corporation Act.
IN WITNESS WHEREOF, the undersigned, Secretary of Network
Management Services, Inc., being duly authorized on behalf of such corporation,
has executed this certificate this 8th day of June, 1999.
/s/ Scott P. Halstead
---------------------------------
Scott P. Halstead, Secretary
<PAGE>
ARTICLES OF CORRECTION
OF
NETWORK MANAGEMENT SERVICES, INC.
In order to correct the Fourth Amended and Restated Articles of
Incorporation as filed with the Minnesota Secretary of State on May 3, 1999 (and
corrected on May 19, 1999 and amended on June 8, 1999), in accordance with the
provisions set forth in Minnesota Statute Section 5.16, the undersigned hereby
makes the following statements.
1. The name of the person who filed the instrument is: Scott P.
Halstead.
2. The instrument to be corrected is the Fourth Amended and Restated
Articles of Incorporation of Network Management Services, Inc. filed
with the Minnesota Secretary of State on May 3, 1999 (and corrected on
May 19, 1999 and amended on June 8, 1999).
3. The following errors are to be corrected in the Fourth Amended and
Restated Articles of Incorporation by these Articles of Correction:
a. To correct the per share dividend rate to be $.488.
The first sentence of Article III, Paragraph C, Section 1(a)
of the Fourth Amended and Restated Articles of Incorporation
is hereby amended in its entirety to read as follows:
"The holders of share of the Series C Preferred Stock
shall be entitled to receive, out of funds legally
available therefor, cumulative dividends, calculated
without compounding, at the annual rate of 5% per
share of Series C Preferred Stock, or $.488 per share
(subject to appropriate adjustment in the event of
any stock dividend, stock split, combination or other
similar recapitalization affecting such shares), per
annum, payable in cash upon liquidation, dissolution
ro winding up as provided in Section 2 or upon
redemption as provided in Section 6."
b. That the payment terms of the Additional Dividend is
clarified.
The last sentence of Article III, Paragraph C, Section 1(c) of
the Fourth Amended and Restated Articles of Incorporation is
hereby amended in its entirety to read as follows:
"Any Additional Dividend must be paid in an amount
such that the holders of shares of Designated
Preferred Stock will receive with respect to each
share of Designated Preferred Stock an amount which
is no less than the amount paid with respect to the
shares of Common Stock into which such share of
Designated Preferred Stock is then convertible."
c. That the word "shares" be changed to lower case.
<PAGE>
Article III, Paragraph C, Section 2(a)(3) of the Fourth
Amended and Restated Articles of Incorporation is hereby
amended in its entirety to read as follows:
"(3) A holder of shares of Series C Preferred Stock
will be entitled to receive, prior to any payments
under Sections 2a.(1) and (2) above, a full
preferential amount equal to $9.76 per share, plus
any dividends declared thereon but unpaid, subject to
appropriate adjustment in the event of any stock
dividend, stock split, combination or other similar
recapitalization affecting such shares or, if
greater, an amount that would be payable pursuant to
Section 2.b. below assuming the conversion of shares
of Series C Preferred Stock into shares of Common
Stock."
d. That the subsection of 3.d. be added.
The last sentence of Article III, Paragraph C, Section 3(a) of
the Fourth Amended and Restated Articles of Incorporation is
hereby amended in its entirety to read as follows:
"Except as provided by law or by the provisions of
Subsection 3.b., 3.c., 3.d. or Section 7 below,
holders of Series A, Series B and Series C Preferred
Stock shall vote together with the holders of Common
Stock as a single class."
e. That the definition of Original Issue Date be clarified.
Article III, Paragraph C, Section 4(d)(1)(b) of the Fourth
Amended and Restated Articles of Incorporation is hereby
amended in its entirety to read as follows:
"(b) "Original Issue Date" shall mean the date on
which a share of Series C Preferred Stock was first
issued."
f. That the definition of Additional Shares of Common Stock be
clarified.
Article III, Paragraph C, Section 4(d)(1)(d)(iv) of the Fourth
Amended and Restated Articles of Incorporation is hereby
amended in its entirety to read as follows:
"(iv) to employees or directors of, or consultants to, the
Corporation pursuant to a plan adopted by the Board of
Directors of the Corporation, provided, that any increase in
the authorized number of shares of Common Stock issuable under
any such plan shall require the unanimous vote of the members
of the Board of Directors elected solely by the holders of
Designated Preferred Stock; or"
g. That a closing parenthetical be added.
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<PAGE>
Article III, Paragraph C, Section 4(d)(2) of the Fourth
Amended and Restated Articles of Incorporation is hereby
amended in its entirety to read as follows:
"(2) No Adjustment of Conversion Price. No adjustment
in the number of shares of Common Stock into which
the Designated Preferred Stock is convertible shall
be made, by adjustment in the applicable Conversion
Price thereof: (a) unless the consideration per share
(determined pursuant to Subsection 4.d.(4)) for an
Additional Share of Common Stock issued or deemed to
be issued by the Corporation is less than the
applicable Conversion Price in effect on the date of,
and immediately prior to, the issue of such
Additional Shares, (b) as to shares of Series A
Preferred Stock, if prior to such issuance, the
Corporation receives written notice from the holders
of at least 70% of the then outstanding shares of
Series A Preferred Stock agreeing that no such
adjustment shall be made as the result of the
issuance of Additional Shares of Common Stock, (c) as
to shares of Series B Preferred Stock, if prior to
such issuance, the Corporation receives written
notice from the holders of at least 70% of the then
outstanding shares of Series B Preferred Stock
agreeing that no such adjustment shall be made as the
result of the issuance of Additional Shares of Common
Stock or (d) as to shares of Series C Preferred
Stock, if prior to such issuance, the Corporation
receives written notice from the holders of at least
70% of the then outstanding shares of Series C
Preferred Stock agreeing that no such adjustment
shall be made as in the result of the issuance of
Additional Shares of Common Stock."
h. That an unnecessary parenthetical be removed to correctly
punctuate the paragraph.
The first paragraph of Article III, Paragraph C, Section
4(d)(4) of the Fourth Amended and Restated Articles of
Incorporation is hereby amended in its entirety to read as
follows:
"(4) Adjustment of Conversion Price Upon Issuance of
Additional Shares of Common Stock. In the event the
Corporation shall at any time after the Original
Issue Date issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed
to be issued pursuant to Subsection 4.d.(3), but
excluding shares issued as a dividend or distribution
as provided in Subsection 4.f. or upon a stock split
or combination as provided in Subsection 4.e.,
without consideration or for a consideration per
share less than the applicable Conversion Price in
effect on the date of and immediately prior to such
issue, then and in such event, such Conversion Price
shall be reduced, concurrently with such issue, to a
price (calculated to the nearest cent) determined by
multiplying such Conversion Price by a fraction, (A)
the numerator of which shall be (1) the number of
shares of Common Stock outstanding immediately prior
to such issue plus (2) the number of shares of Common
Stock which the aggregate
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<PAGE>
consideration received or to be received by the
Corporation for the total number of Additional Shares
of Common Stock so issued would purchase at such
Conversion Price; and (B) the denominator of which
shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so
issued; provided that (i) for the purpose of this
Subsection 4.d.(4), all shares of Common Stock
issuable upon exercise or conversion of Options or
Convertible Securities outstanding immediately prior
to such issue shall be deemed to be outstanding
(other than shares excluded from the definition of
"Additional Shares of Common Stock" by virtue of
clause (iv) of Subsection 4.d.(1)(d)), and (ii) the
number of shares of Common Stock deemed issuable upon
conversion of such outstanding Options and
Convertible Securities shall not give effect to any
adjustments to the conversion price or conversion
rate of such Options or Convertible Securities
resulting from the issuance of Additional Shares of
Common Stock that is the subject of this
calculation."
i. That the Subsection reference be revised to 6.g and the
capitalization be changed to lower case for the word "on".
The first sentence of Article III, Paragraph C, Section 6(a)
of the Fourth Amended and Restated Articles of Incorporation
is hereby amended in its entirety to read as follows:
"a. The Corporation will, subject to the conditions
set forth in Subsection 6.g below, on April 30, 2004
and on each of the first and second anniversaries
thereof (each such date being referred to hereinafter
as a "Series A Mandatory Redemption Date"), redeem
from each holder of shares of Series A Preferred
Stock, at a price equal to $2.701 per share, plus any
dividends declared but unpaid thereon, subject to
appropriate adjustment in the event of any stock
dividend, stock split, combination or other similar
recapitalization affecting such shares (the "Series A
Mandatory Redemption Price"), the following
respective portions of the number of shares of Series
A preferred Stock held by such holder on the
applicable Series A Mandatory Redemption Date:"
j. That the Subsection reference be revised to 6.g.
The first sentence of Article III, Paragraph C, Section 6(b)
of the Fourth Amended and Restated Articles of Incorporation
is hereby amended in its entirety to read as follows:
"b. The Corporation will, subject to the conditions
set forth in Subsection 6.g below, on April 30, 2004
and on each of the first and second anniversaries
thereof (each such date being referred to hereinafter
as a "Series B Mandatory Redemption Date"), redeem
from each holder of
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<PAGE>
shares of Series B preferred Stock, at a price equal
to $7.065 per share, plus any dividends declared but
unpaid thereon, subject to appropriate adjustment in
the event of any stock dividend, stock split,
combination or other similar recapitalization
affecting such shares (the "Series B Mandatory
Redemption Price"), the following respective portions
of the number of shares of Series B preferred Stock
held by such holder on the applicable Series B
Mandatory Redemption Date:"
k. That the Subsection reference be revised to 6.g.
The first sentence of Article III, Paragraph C, Section 6(c)
of the Fourth Amended and Restated Articles of Incorporation
is hereby amended in its entirety to read as follows:
"c. The Corporation will, subject to the conditions
set forth in Subsection 6.g below, on April 30, 2004
and on each of the first and second anniversaries
thereof (each such date being referred to hereinafter
as a "Series C Mandatory Redemption Date"), redeem
from each holder of shares of Series C Preferred
Stock, at a price equal to $9.76 per share, plus any
dividends declared but unpaid thereon, subject to
appropriate adjustment in the event of any stock
dividend, stock split, combination or other similar
recapitalization affecting such shares (the "Series C
Mandatory Redemption Price"), the following
respective portions of the number of shares of Series
C Preferred Stock held by such holder on the
applicable Series C Mandatory Redemption Date:"
l. That the Subsection reference be revised to include 6.c.
The first sentence of Article III, Paragraph C, Section 6(e)
of the Fourth Amended and Restated Articles of Incorporation
is hereby amended in its entirety to read as follows:
"e. The Corporation shall provide notice of any
redemption of Designated Preferred Stock pursuant to
Section 6.a., 6.b. or 6.c. above specifying the time
and place of redemption and the Mandatory Redemption
Price, by first class registered mail, postage
prepaid, or by overnight mail (such as Federal
Express) to each holder of record of Designated
Preferred Stock at the address for such holder last
shown on the records of the transfer agent therefor
(or the records of the Corporation, if it serves as
its own transfer agent), not more than 30 nor less
than 10 days prior to the date on which such
redemption is to be made."
m. That the Subsection reference be revised to include 6.a.,
6.b. and 6.c.
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<PAGE>
The first sentence of Article III, Paragraph C, Section 6(g)
of the Fourth Amended and Restated Articles of Incorporation
is hereby amended in its entirety to read as follows:
"g. Notwithstanding anything to the contrary in
Sections 6.a, 6.b and 6.c, the Corporation shall not
redeem any shares of Designated Preferred Stock on
any Mandatory Redemption Date if the holders of at
least 75% of the shares of Common Stock issuable upon
conversion of then outstanding shares of Designated
Preferred Stock, within five (5) days prior to the
applicable Mandatory Redemption Date, provide written
notice to the Corporation that no such redemption
shall be made."
n. That the word "or" be added to clarify the definition of
Change in Control of the Company.
Article III, Paragraph C, Section 7(f) of the Fourth Amended
and Restated Articles of Incorporation is hereby amended in
its entirety to read as follows:
"f. Effect a change in control of the Company.
"Change in Control" shall occur or be deemed to have
occurred only if any of the following events occur:
(i) any "person," as such term is used in Section 13
(d) and 14 (d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), (other than a
shareholder as of the date of that certain Series C
Preferred Stock Purchase Agreement among the Company
and the other signatories thereto (the "Series C
Purchase Agreement"), their permitted transferees
under the Right of First Refusal and Co-Sale
Agreement dated September 1, 1994, the Company, any
trustee or other fiduciary holding securities under
an employee benefit plan of the Company, or any
corporation owned directly or indirectly by the
stockholders of the Company in substantially the same
proportion as their ownership of stock of the
Company) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power
of the Company's then outstanding securities; or (ii)
individuals who, as of the date of the Series B
Purchase Agreement, constitute the Board (the
"Incumbent Board") cease for any reason to constitute
at least a majority of the Board, provided that any
person becoming a director subsequent to the date
hereof whose election, or nomination for election by
the Company's stockholders, was approved by a vote of
at least a majority of the directors then comprising
the Incumbent Board (other than an election or
nomination of an individual whose initial assumption
of office is in connection with an actual or
threatened election context relating to the election
of the directors of the Company, as such terms are
used in Rule 14a-11 of Regulation 14A under the
Exchange Act) shall be, for purposes of this
Agreement, considered as though such person were a
member of the Incumbent Board."
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<PAGE>
Dated: June 14, 1999
/s/ Scott P. Halstead
--------------------------------
Scott P. Halstead, Secretary
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<PAGE>
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
NETWORK MANAGEMENT SERVICES, INC.
The undersigned, Scott P. Halstead, Secretary and Chief Financial
Officer of Network Management Services, Inc., a Minnesota Corporation, hereby
certifies that the following resolution was duly adopted by the shareholders and
the board of directors of the corporation pursuant to Chapter 302A of the
Minnesota Business Corporation Act and that such resolution has not been
subsequently modified or rescinded:
NAME CHANGE
RESOLVED, that Article 1 of the Articles of Incorporation of the
corporation is hereby amended in its entirety to read as follows:
ARTICLE 1. NAME
---------------
The name of the corporation is "eBenX, Inc."
IN WITNESS WHEREOF, the undersigned, the Secretary and Chief Financial
Officer of Network Management Services, Inc. being duly authorized on behalf of
Network Management Services, Inc., has executed this document on this 28th day
of September, 1999.
/s/ Scott P. Halstead
-------------------------------------
Scott P. Halstead
Secretary and Chief Financial Officer
<PAGE>
EXHIBIT 5.1
eBenX, Inc.
5500 Wayzata Boulevard, Suite 1450
Minneapolis, Minnesota 55416-1241
Re: eBenX, Inc.
Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have acted as counsel to eBenX, Inc., a Minnesota corporation (the
"Company"), in connection with a Registration Statement on Form S-1 (the
"Registration Statement") relating to the issuance and sale by the Company of up
to 5,750,000 shares of common stock, $.01 par value per share (including 750,000
shares to be subject to the Underwriters' over-allotment option) (the "Common
Stock"). The Common Stock will be issued pursuant to an Underwriting Agreement
(the "Underwriting Agreement") to be entered into among the Company and
BancBoston Robertson Stephens Inc., Warburg Dillon Read LLC and Thomas Weisel
Partners LLC, as representatives of the several underwriters named therein (the
"Underwriters").
We have examined such documents and have reviewed such questions of law
as we have considered necessary and appropriate for the purposes of our opinions
set forth below. In rendering our opinions set forth below, we have assumed the
authenticity of all documents submitted to us as originals, the genuineness of
all signatures and the conformity to authentic originals of all documents
submitted to us as copies. We have also assumed the legal capacity for all
purposes relevant hereto of all natural persons and, with respect to all parties
to agreements or instruments relevant hereto other than the Company, that such
parties had the requisite power and authority (corporate or otherwise) to
execute, deliver and perform such agreements or instruments, that such
agreements or instruments have been duly authorized by all requisite action
(corporate or otherwise), executed and delivered by such parties and that such
agreements or instruments are the valid, binding and enforceable obligations of
such parties. As to questions of fact material to our opinions, we have relied
upon certificates of officers of the Company and of public officials. We have
also assumed that the Common Stock will be sold for a price per share not less
than the par value per share of the Common Stock, will be priced by the Pricing
Committee established by the authorizing resolutions adopted by the Company's
Board
<PAGE>
eBenX, Inc.
Page 2
of Directors in accordance with such resolutions and will be issued and sold as
described in the Registration Statement.
Based on the foregoing, we are of the opinion that the shares of Common
Stock to be sold by the Company pursuant to the Registration Statement have been
duly authorized by all requisite corporate action and, upon issuance, delivery
and payment therefor as described in the Registration Statement, will be validly
issued, fully paid and nonassessable.
Our opinions expressed above are limited to the laws of the State of
Minnesota.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm under the caption
"Legal Matters" in the Prospectus constituting part of the Registration
Statement.
Dated: November 29, 1999
Very truly yours,
/s/ Dorsey & Whitney LLP
KLC
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 22, 1999 in Amendment No. 3 to the Registration
Statement (Form S-1) and related Prospectus of eBenX, Inc. (formerly known as
Network Management Services, Inc.) for the registration of 5,750,000 shares of
its common stock.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
November 29, 1999
