<PAGE>
As filed with the Securities and Exchange Commission on November 5, 1999
Registration No. 333-87985
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
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)
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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: [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Titles of Each Class of Maximum Aggregate Amount of
Securities to be Amount to be Offering Price Offering Price Registration
Registered Registered(1) Per Share(2) (2) Fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 5,750,000 $12.50 $71,875,000 $19,982(3)
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</TABLE>
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(1) Includes 750,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(a).
(3) $19,182 of this fee was previously paid with the original filing.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until 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 5, 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>
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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.
Our revenue growth depends on industry acceptance of our products and services.
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.
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. Consequently, the length of our sales cycle generally varies from
three to twelve months. We, therefore, 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. While
historically we have been able to secure sales contracts with the vast majority
of our customers after we have committed significant resources in our sales
efforts, we may not be able to do this in the future.
Our future revenue growth depends upon our establishment and maintenance of
successful relationships with strategic partners.
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.
Our quarterly results likely will fluctuate which could subject the market
price of our common stock to rapid and unpredictable change.
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.
Other factors, excluding those discussed elsewhere in this prospectus, 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 business could suffer 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.
Our business could suffer 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. 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 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.
Our future revenue growth depends in part on increasing use of the Internet and
on the growth of e-commerce.
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 profitability depends, 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 may be volatile.
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 an acquisition of our
company.
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.
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.
21
<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 effected. 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 and all of them have indicated that they are Year 2000
compliant. 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 1998 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 1000 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 COBRA benefits, 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
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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. Based on our experience 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 business-to-business e-commerce, which is
estimated to grow from $50 billion in revenue in 1998 to $1.3 trillion in 2003,
will account for more than 74% of the value of e-commerce in the United States.
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 "Procurement," "Enrollment and
Eligibility Maintenance," "Customer Service," and "Financial Engine"; and
between these two sets of icons there is a server labeled "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 Scrubber 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"
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 Scrubber 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.
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.
GE Capital Services Corporation
American Red Cross
Bass Hotels & Resorts, Inc. General Electric Company
Benefits Alliance, LLC Georgia-Pacific Corporation
Blue Cross Blue Shield Association KPMG LLP
Promus Hotel Corporation
R.R. Donnelley & Sons Company
Chevron Corporation
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 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. since its inception
in September 1996 and in North Bridge Venture Partners II, L.P. since its
inception in August 1998. 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
43
<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.
45
<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........................
Warburg Dillon Read....................................................
Thomas Weisel Partners LLC.............................................
---------
Total................................................................ 5,000,000
=========
</TABLE>
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by eBenX. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by eBenX
-----------------
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per share.................................................. $ $
Total...................................................... $ $
</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 the public offering price less a concession of $ per
share, of which $ may be reallowed to other dealers. After the initial
public 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.
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. These
additional shares will be sold by the underwriters on the same terms as those
on which the 5,000,000 shares are being sold. We will be obligated to sell
shares 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.
Indemnity. Our underwriting agreement among us and the underwriter 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. Under the terms of lock-up agreements, each of our
officers and directors and some of our shareholders have agreed with the
representatives, for a 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
52
<PAGE>
with respect to, any shares of common stock, or any securities convertible
into or exchangeable for shares of common stock, owned by these holders or
with respect to which they have the power of disposition, without the prior
written consent of BancBoston Robertson Stephens, Inc. BancBoston Robertson
Stephens, Inc. may, in its sole discretion, release all or any portion of the
securities subject to the lock-up agreements. 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 the lock-up agreement
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. 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
period 180 days after this prospectus.
Future Sales. In addition, we have agreed that during the 180 days after the
date of this prospectus, 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 period of 180 days after the date of this
prospectus; or
. issue, sell, contract to sell or otherwise dispose of 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.
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. The estimated public
offering price range set forth on the cover of the prospectus is subject to
change as a result of market conditions.
Directed Share Program. At our request, the underwriters have reserved up to
250,000 shares of our 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 public will be reduced to the extent these
individuals purchase these reserved shares. The underwriters will offer any
reserved shares that are not purchased in the directed share program to the
general public on the same basis as the other shares offered in the offering.
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act, several 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.
Costs of Offering. We estimate that total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$750,000.
53
<PAGE>
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 1997
and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Customer A................................................... 21% 13% 19%
Customer B................................................... 17% -- 17%
Customer C................................................... 13% 14% 14%
Customer D................................................... 7% 6% 10%
Customer E................................................... -- 10% 9%
Customer F................................................... -- 13% --
</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* 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).
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>
- --------
*To be filed by amendment.
**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. 2 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 5, 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. 2 to the Registration Statement has been signed on November 5, 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* 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).
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>
<PAGE>
- --------
*To be filed by amendment.
**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 4.1
NUMBER SHARES
See reverse for
certain definitions
CUSIP 278668 10 8
[LOGO]
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
THIS CERTIFIES that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
$.01 PAR VALUE,
EBENX, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent and Registrar.
WITNESS the facsimile signatures of its duly authorized officers.
Dated:
SECRETARY CHIEF EXECUTIVE OFFICER
THE BOARD OF THIS CORPORATION HAS THE AUTHORITY TO CREATE AND DETERMINE THE
RELATIVE RIGHTS AND PREFERENCES OF CLASSES OR SERIES OF SHARES OF CAPITAL STOCK
OTHER THAN COMMON STOCK. THIS CORPORATION WILL FURNISH TO ANY SHAREHOLDER UPON
WRITTEN REQUEST SENT TO ITS PRINCIPAL EXECUTIVE OFFICES, AND WITHOUT CHARGE, A
FULL STATEMENT OF THE BOARD'S AUTHORITY TO CREATE AND DETERMINE THE RELATIVE
RIGHTS AND PREFERENCES OF CLASSES OR SERIES OF SHARES OF CAPITAL STOCK AS WELL
AS THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF THE SHARES
OF EACH CLASS OR SERIES THEN OUTSTANDING OR AUTHORIZED TO BE ISSUED.
--------------------------
<PAGE>
TEN COM --as tenants in common
TEN ENT --as tenants by the entireties
JT TEN --as joint tenants with right of
survivorship and not as tenants
in common
UTMA GIFT MIN ACT--........Custodian........
(Cust) (Minor)
under Uniform Gifts to Minors
Act............
(State)
Additional abbreviations may also be used though not in the above list.
For value received ______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- --------------------------------------- --------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
________________________________________________________________________ Shares
of capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said shares on the books of the within-named Corporation with
full power of substitution in the premises.
Dated ----------------------------------------------
----------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WIT THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
SIGNATURE GUARANTEED
-------------------------
ALL GUARANTEES MUST BE MADE BY A FINANCIAL INSTITUTION (SUCH AS A BANK OR
BROKER) WHICH IS A PARTICIPANT IN THE SECURITIES TRANSFER AGENTS MEDALLION
PROGRAM ("STAMP"), THE NEW YORK STOCK EXCHANGE, INC. MEDALLION SIGNATURE PROGRAM
("MSP"), OR THE STOCK EXCHANGE MEDALLION PROGRAM ("SEMP") AND MUST NOT BE DATED.
GUARANTEES BY A NOTARY PUBLIC ARE NOT ACCEPTABLE.
<PAGE>
EXHIBIT 10.5
SERVICES AGREEMENT
THIS SERVICES AGREEMENT (the "Agreement") is entered into as of July 1, 1998 by
and between Bell Atlantic Corporation, with an address of 240 East 38th Street,
New York, NY 10016, ("Bell Atlantic"), and Network Management Services, Inc.,
with an address of 5500 Wayzata Boulevard, Suite 1450, Minneapolis, MN 55416-
1241 ("NMS").
RECITALS
WHEREAS, Bell Atlantic desires to retain NMS to provide certain administrative
and other services for certain Participant benefit plans maintained by Bell
Atlantic; and
WHEREAS, NMS desires to provide such services on the terms and conditions set
forth in this Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual promises
contained herein, and subject to the terms and conditions set forth below, NMS
and Bell Atlantic hereby agree as follows:
ARTICLE 1. CERTAIN DEFINITIONS
- -------------------------------
As used in this Agreement, the following terms shall have the following
meanings:
"BEN-NET(TM)" shall mean NMS' proprietary technology services software program,
which provides certain benefit plan services and includes the following
features: group set-up, Vendor set-up, enrollment management, enrollment data
edits, eligibility distribution to Vendors, retroactive enrollment adjustments,
payments to Vendors, and COBRA and other direct individual billing
administration.
"Participant" shall mean an individual identified by Bell Atlantic as being
eligible to participate in one or more of Bell Atlantic's Plans. A Participant
includes both primary subscribers and their eligible dependents.
"Plan" or "Plans" shall mean any of the Participant benefit plans of Bell
Atlantic with respect to which NMS provides services, as described in Appendix A
to this Agreement or any amendment or supplement thereto.
"Vendor" shall mean a licensed organization authorized to provide or arrange for
health care or other welfare services for Participants that has contracted with
Bell Atlantic, including health maintenance organizations, preferred provider
organizations, pharmacy benefits managers, indemnity insurance organizations,
third-party administrators, mental health/substance abuse service
organizations, short- and long-term disability managers, life insurance
organizations, retiree plan administrators, flexible benefit administrators and
employee assistance program administrators.
ARTICLE 2. NMS RESPONSIBILITIES
- ---------------------------------
During the term of this Agreement:
2.1. NMS will be responsible for ensuring that all services are rendered as
described in Appendix A to this Agreement.
2.2. NMS will be responsible for the performance standards as described in
Appendix B to this Agreement.
2.3. NMS will maintain all appropriate regulatory approvals necessary to
provide the services specified in this Agreement. NMS will promptly
notify Bell Atlantic of the commencement of any disciplinary proceeding
against it or any of its principal officers relating to any state or
federal health care regulation.
2.4. NMS will be responsible for the overall management of Bell Atlantic's
Vendors relating to communicating eligibility, enrollment, financial and
performance data between Bell Atlantic and the Vendors.
<PAGE>
2.5. NMS will provide to the Vendors summaries and detailed enrollment and
premium payment information on an agreed upon basis, including full
retroactivity data according to Bell Atlantic and Vendor payment rules.
2.6. NMS will provide a customer service telephone number for use by Bell
Atlantic, the Vendors and Participants between 7:00 a.m. and 4:00 p.m.
(Central Time) each business day and between 7:00 a.m. and 7:00 p.m.
(Central Time) on Thursday during open enrollment. The number will be
staffed with personnel trained to answer eligibility, premium and
service fee payment, invoice and status questions relating to Plans.
2.7. NMS will promptly respond to all inquiries from Bell Atlantic and the
Vendors regarding eligibility, premium, service fees, invoice and status
questions. NMS will promptly refer inquiries not related to its duties
under this Agreement (e.g., coverage issues) to the appropriate Vendor
or to Bell Atlantic and Bell Atlantic will direct Participants to call
such Vendor or Bell Atlantic regarding all such inquiries.
2.8. NMS will be the primary contact for most Vendor issues and will promptly
respond to all inquiries from Vendors, whether directly from the Vendor
or Bell Atlantic, regarding the status of enrollees, billing, receipt
and disbursement of premiums, and reconciliation issues. NMS shall
promptly notify Bell Atlantic of any concerns or problems identified by
a Vendor.
2.9. NMS will send to Bell Atlantic (via facsimile or other means) an invoice
that provides a detailed account of the payments to be made to the
Vendors and NMS. Bell Atlantic shall review the invoice and contact NMS
to resolve questions with respect thereto. NMS will endeavor to respond
to such inquiries within one business day. Based on such invoice, Bell
Atlantic will then notify NMS of the amounts to be withdrawn from the
fiduciary account(s) for transmission to the following parties: (a) the
Vendors for premiums or ASO fees or claims payments due, and (b) NMS for
administrative fees due. Payments to Vendors and NMS shall be made via
electronic transfer to the account designated by each party. Premiums
and other service fees shall be billed monthly, while claims funding
requests submitted by Vendors shall be billed weekly.
2.10. NMS will utilize the BEN-NET(TM) system for performing its obligations
under this Agreement. NMS hereby represents that such system will be
fully capable of performing all systems functions necessary to fulfill
NMS' responsibilities under this Agreement. NMS shall be solely
responsible for the upkeep and maintenance of the BEN-NET(TM) system.
2.11 NMS will release system enhancements that can be used as a standard
feature of BEN-NET(TM) across clients at no charge. Bell Atlantic will
be fully responsible for the cost, if approved in advance by Bell
Atlantic, of enhancements that are made to accommodate the unique
requirements of Bell Atlantic operations and that are generally not to
be incorporated into BEN-NET(TM) as standard features to be used by
other clients of NMS
ARTICLE 3. BELL ATLANTIC RESPONSIBILITIES
- --------------------------------------------
During the term of this Agreement:
3.1. Bell Atlantic, or its designee, will supply to NMS, according to a
mutually agreed to schedule, regular updates relating to Participant's
selection of Vendors and other information required to perform services
as described in Appendix A. If Bell Atlantic does not transmit data in a
timely fashion or sends incomplete or inaccurate data, Bell Atlantic
agrees and acknowledges that NMS may not be able to administer its
services in complete conformity to the terms of this Agreement.
3.2. Bell Atlantic will respond to inquiries from NMS, relating to
administering the services described in this Agreement, in a timely and
complete fashion that will allow NMS to fulfill its obligations
contained herein.
3.3. Bell Atlantic shall reasonably communicate to Participants instructions
for completing enrollment forms and otherwise communicating with NMS.
Bell Atlantic shall comply with reasonable NMS requests to
2
<PAGE>
improve Bell Atlantic's communication with its Participants and its
general human resource policies that affect the administrative services
provided by NMS hereunder.
3.4. Bell Atlantic will execute all requests for fund transfers from NMS to
Vendors and NMS within 24 hours unless, in the Bell Atlantic's
reasonable opinion, the request is materially inaccurate or incomplete.
3.5. Bell Atlantic, not NMS, will pay any late payment or reinstatement fees
levied by Vendors against Bell Atlantic or NMS relating to improper or
late payment of premiums, service fees or claims funding requests.
3.6 Bell Atlantic shall reimburse NMS for services rendered hereunder
according to the fees set forth in Appendix A of this Agreement and also
subject to the following:
A. Fees and expenses for routine administrative services, including
Participant enrollment, distribution of enrollment data to
Vendors, payment of fees and reconciliation of payment to
Vendors, and customer service and general program management,
will be immediately and fully payable to NMS on a monthly basis
at the time Bell Atlantic reimburses Vendors.
B. Fees and expenses not reimbursed to NMS on a regular monthly
basis, including consulting services and special projects, are
due to NMS 30 days after the invoice date.
C. Bell Atlantic will reimburse NMS for all approved travel related
expense, including airfare, ground transportation and hotel and
meal expenses. Expense reimbursements are due to NMS 30 days
after the invoice date.
D. All bank charges imposed in connection with the establishment and
maintenance of bank accounts in connection with this Agreement
shall be paid by Bell Atlantic.
E. All costs for printing, mailing or overnight delivery relating to
the distribution of information to Bell Atlantic, Participants or
Vendors are the sole responsibility of Bell Atlantic unless
otherwise described in Appendix A.
ARTICLE 4. INDEMNIFICATION, INSURANCE AND FIDUCIARY STATUS
- -----------------------------------------------------------
4.1 Indemnification by NMS. NMS agrees to indemnify and hold harmless Bell
Atlantic and its officers, agents, directors and employees, against any
and all claims, actions, proceedings, penalties, expenses, damages,
liabilities and losses (including any governmental investigations,
complaints and actions) and reasonable attorneys' fees with respect
thereto, arising out of or in connection with (1) any breach of this
Agreement by NMS, including its representations, warranties and
covenants, (2) any claim or action involving product liability claims
arising from or relating to the design or use of BEN-NET(TM) or other
software or intellectual property provided by NMS to Participants, Plans
or Vendors, including any enhancements, upgrades or supplements to BEN-
NET(TM), such other software or such other intellectual property, (3)
any claim or action arising from or relating to the gross negligence or
wilful misconduct of NMS and (4) any use of NMS's software, written
material or other intellectual property by Bell Atlantic as permitted
herein.
3
<PAGE>
4.2 Indemnification by Bell Atlantic. Bell Atlantic agrees to indemnify and
hold harmless NMS, including its officers, agents, directors and
employees, against any and all claims, actions, proceedings, penalties,
expenses, damages, liabilities and losses (including any governmental
investigations, complaints and actions) and reasonable attorneys' fees
with respect thereto, resulting solely, directly and independent of all
other causes from (1) any material breach of this Agreement by Bell
Atlantic, including its representations, warranties and covenants, (2)
the improper payment or late payment of premiums, service fees or claims
funding requests, (3) the gross negligence or wilful misconduct of Bell
Atlantic and (4) any use of Bell Atlantic's software, written material
or other intellectual property by NMS as permitted herein.
4.3 Insurance. During the term of this Agreement, NMS shall maintain in
force the following insurance coverage:
A. Workers' Compensation insurance as required by the State(s) in
which the service is to be performed.
B. Employer's Liability insurance with limits of not less than ***
per occurrence.
C. Commercial General Liability Insurance, on an occurrence basis,
including but not limited to (premises-operations, broad form
property damage, contractual liability, independent contractors,
personal injury) with limits of at *** combined single limit for
each occurrence.
D. Commercial Automobile Liability, on an occurrence basis with
limits not less than ***
E. Crime and Fidelity Coverage on an occurrence basis, with limits of
at least *** per occurrence.
F. Professional Liability, Errors and Omissions, with limits of not
less than *** per occurrence.
Upon Bell Atlantic's request, NMS shall provide certificates of
insurance evidencing the aforementioned coverages.
4.4 Fiduciary Status. Bell Atlantic and NMS acknowledge and agree that NMS
shall not be a fiduciary within the meaning of the Employee Retirement
Income Security Act of 1974, as amended, or any state or federal law
with respect to any Plan. NMS shall not have any discretion with respect
to the management or administration of any Plan or with respect to
determining or changing the rules or policies pertaining to eligibility
or entitlement of any Participant in any Plan to benefits under such
Plan. NMS also shall not have any control or authority with respect to
any assets of any Plan, including the investment or disposition thereof.
All discretion and control with respect to the terms, administration or
assets of any Plan shall remain with Bell Atlantic or with the named
fiduciaries under such Plan.
NMS shall not be responsible or liable for any claims decisions made by
Vendors based on eligibility information provided to Vendors by NMS. The
determination as to whether claims shall be paid under the Plan shall be
the responsibility of Bell Atlantic and Vendor in accordance with each
applicable Plan.
ARTICLE 5. TERM AND TERMINATION
- --------------------------------
5.1. The term of this Agreement will be five years commencing on the
effective date hereof and thereafter Bell Atlantic may extend the term
for an additional twelve (12) month period by providing NMS with 120
days written notice of its intention to renew this Agreement.
5.2. In the event that NMS materially breaches the performance of any of its
obligations under this Agreement, Bell Atlantic shall provide notice to
NMS of such breach. NMS shall have 30 days to cure the breach. If the
breach is not cured within 30 days of the notice, Bell Atlantic may
immediately terminate this Agreement.
***Pursuant to Rule 406 of the Securities Act of 1933,as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
4
<PAGE>
5.3. In the event that Bell Atlantic fails to perform its payment obligations
hereunder, NMS shall provide notice to Bell Atlantic of such failure.
Bell Atlantic shall have 30 days to cure the failure. If the failure is
not cured within 30 days of the notice, NMS may immediately terminate
this Agreement.
5.4. Notwithstanding the foregoing, either party may terminate this Agreement
at any time by giving notice in writing to the other party, which notice
shall be effective upon dispatch, should the other party file a petition
of any type as to its bankruptcy, be declared bankrupt, become
insolvent, make an assignment for the benefit of creditors, go into
liquidation or receivership, or otherwise lose legal control of its
business.
5.5. Termination without Cause. Bell Atlantic may, at its convenience and
without cause, at any time, terminate all or part of this Agreement by
giving NMS 180 calendar days prior written notice. NMS may terminate
this Agreement without cause by giving Bell Atlantic 180 calendar days
prior written notice. RESERVED -- In the event of termination without
cause of this Agreement prior to its expiration by Bell Atlantic under
this provision, Bell Atlantic shall pay to NMS, in addition to all other
amounts currently due to NMS for services performed and accepted by Bell
Atlantic hereunder, the remaining balance of all set-up, conversion and
implementation fees set forth below.
The total amount for set-up, conversion, and implementation fees which
is being absorbed by NMS, as an investment in this business, as part of
this Agreement is fixed at ***. This amount will be amortized by NMS on
a monthly basis over the sixty (60) months of the Agreement. Each month,
or part thereof, during which NMS continues to perform services under
this Agreement, NMS will decrease by 1.67% for each month or *** for
each month the amount of the set-up, conversion, and implementation fees
owed by Bell Atlantic upon termination of this Agreement (without
cause). In the event Bell Atlantic requests to terminate without cause,
Bell Atlantic agrees to pay the remaining unamortized balance as
immediately due and payable.
In the event NMS gives notice of early termination without cause the
remaining unamortized balance will be forfeited by NMS and is not
payable by Bell Atlantic. Furthermore, no such set-up, conversion, and
implementation fees shall be owed by Bell Atlantic in the event Bell
Atlantic terminates this Agreement for cause.
5.6. Obligations Upon Termination. Upon any termination or non-renewal of
this Agreement, each party shall deliver to the other party all data or
information (in whatever form or media decided by the delivering party)
that is owned or licensed to or was developed by the other and that was
supplied hereunder. Each party shall reimburse the other party for its
reasonable costs associated with such transfer. Furthermore, NMS shall
provide reasonable assistance to Bell Atlantic in the transfer of NMS'
obligations hereunder to a replacement service provider.
ARTICLE 6. CONFIDENTIALTY AND PROPERTY RIGHTS
- ----------------------------------------------
6.1. Confidential Information.
A. Bell Atlantic Information
--------------------------
Confidential. Any Bell Atlantic information furnished to NMS under
------------
this Agreement or that NMS comes in contact with on Bell Atlantic
premises or under Bell Atlantic control shall remain Bell Atlantic
property. All copies of such information in written, graphic or
other tangible form, and all Work Product derived from or
reflecting such information, shall be returned to Bell Atlantic at
its request, and in any event within thirty (30) days after the
expiration or termination of this Agreement. No copies shall be
made of any documents or other media provided by Bell Atlantic
without the prior written consent of Bell Atlantic. Unless such
information was previously known to NMS free of any obligation to
keep it confidential, or has been or is subsequently made public
by Bell Atlantic or a third party without breach of any agreement,
it shall be kept strictly confidential and shall be used only in
performing services under this Agreement, and may not be used for
other purposes except upon such terms as may be agreed upon
between NMS and Bell Atlantic in writing. NMS shall require all
parties accessing Bell Atlantic information including its
employees, agents and representatives to sign a separate written
agreement protecting Bell Atlantic information substantially in
the form of this provision .
***Pursaunt to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchn Exchange Commission pursuant to a request for confidential
treatment
5
<PAGE>
B. NMS Information
Confidential. NMS Confidential Information shall include all
------------
information relating to the design and data storage components of BEN-
NET(TM) and any additional information disclosed by NMS (the
"Discloser") to Bell Atlantic (the "Recipient") in writing and marked
"Confidential" or disclosed visually or orally and confirmed in
writing to be confidential within 20 days after the first disclosure.
Confidential Information shall not, however, include the following:
i. Information which is now or hereafter comes into the public
domain through no fault of the Recipient;
ii. Information learned by the Recipient from third parties;
iii. Information previously known to the Recipient or developed by
the Recipient independently of information disclosed by the
Discloser; or
iv. Information required to be disclosed by Recipient pursuant to
requirements of law.
Confidential Treatment. The Recipient shall treat the NMS
----------------------
Confidential Information as confidential, using the same standard of
care that it uses to protect its own proprietary or confidential
information (but not less than a reasonable standard of care), and
shall use reasonable measures to prevent disclosure of the NMS
Confidential Information to any third party without the Discloser's
consent. The Recipient shall disclose the NMS Confidential
Information only to those of its Participants, agents or
subcontractors who have a reasonable need for access thereto.
Return of Information. All NMS Confidential Information shall remain
----------------------
the property of the Discloser. Upon the Discloser's request, the
Recipient shall promptly return the NMS Confidential Information,
provided, however, that the Recipient may retain copies solely for
archival purposes only.
6.2. NMS Intellectual Property. Nothing contained in this Agreement shall
confer to Bell Atlantic any property rights, proprietary interest or
licenses in the software, written materials, techniques or know-how used
by NMS and its BEN-NET(TM) system.
6.3. Non-Solicitation. For the term of this Agreement (including any renewal
term) and a period of one year thereafter, neither party shall in any way
solicit or employ directly or indirectly an employee of the other party
without the written consent of the other party.
ARTICLE 7. DISPUTE RESOLUTION
- -----------------------------
7.1. Informal Management Mediation. Should any disagreement, dispute or claim
-----------------------------
of breach, nonperformance, or repudiation arise from, or in connection
with, this Agreement or any of the terms and conditions hereof
("Dispute") between Bell Atlantic and NMS either during this Agreement or
after termination of this Agreement, either party may give to the other
notice of the Dispute, specifically referencing this provision and
request resolution of the Dispute. At the expiration of ten (10) business
days, unless it shall have been settled, such Dispute may be referred by
either party to the Bell Atlantic Sourcing Director and Supplier
[Supplier's Contact] for resolution. The parties agree to exchange
relevant information and cooperate in good faith to resolve the Dispute
under this provision. If within an additional ten (10) business days,
such dispute shall not have been settled the parties shall have the right
to proceed under provision 7.3 below. The parties may also seek
injunctive relief to preserve the status quo pending resolution under
this provision or provision 7.3.
7.1. Settlement Purposes. ALL DISCUSSIONS AND DOCUMENTS PREPARED PURSUANT TO
-------------------
ANY ATTEMPT TO RESOLVE A DISPUTE THROUGH INFROMAL MANAGEMENT ESCALATION
ARE CONFIDENTIAL AND FOR SETTLEMENT PURPOSES ONLY AND SHALL NOT BE
ADMITTED IN ANY COURT OR OTHER FORUM AS AN ADMISSION OR
6
<PAGE>
OTHERWISE AGAINST A PARTY FOR ANY PURPOSE INCLUDING THE APPLICABILITY OF
FEDERAL AND STATE COURT RULES.
7.3. Before either party may proceed under this provision 7.3, the parties
must in good faith attempt to resolve their dispute through Informal
Management Mediation described above. Any dispute that cannot be resolved
through Informal Management Mediation shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association ("AAA"), and judgment upon the award rendered by
the arbitrator(s) may be entered in any court having jurisdiction
thereof. The arbitration shall be held in New York, NY. The arbitration
will be conducted before a panel of three arbitrators, with one
arbitrator named by each party and the third named by the two party-
appointed arbitrators, or (if they should fail to agree on the third) by
the AAA. The arbitrators may not award non-monetary or equitable relief
of any sort. They shall have no power to award punitive damages or any
other damages not measured by the prevailing party's actual damages. All
aspects of the arbitration shall be treated as confidential. Neither the
parties nor the arbitrators may disclose the existence, content or
results of the arbitration, except as necessary to comply with legal or
regulatory requirements. Before making any such disclosure, a party shall
give written notice to all other parties and shall afford such parties a
reasonable opportunity to protect their interests.
ARTICLE 8. BOOKS AND RECORDS
- -----------------------------
8.1. Bell Atlantic may audit the books and records of NMS pertaining to NMS'
services rendered hereunder no more than once every 18 months, upon
reasonable notice thereof to NMS. Such right to audit shall survive the
termination of this Agreement by six months. All audits shall be at Bell
Atlantic's expense.
8.2. NMS will make available for audit by either Bell Atlantic or its designee
("Auditor") its files, books, procedures and records (including computer
terminal access to same) pertaining to the services provided by NMS under
this Agreement during the hours of 9 a.m. to 5 p.m. (Central Time) ,
Monday through Friday, excluding holidays. NMS shall fully cooperate
with such audit and shall make available for interview with the Auditor
those personnel with material involvement or responsibility with respect
to the services provided by NMS under this Agreement. Bell Atlantic will
give NMS reasonable notice of each audit prior to commencement of the
audit. The audit shall be conducted at NMS' offices.
8.3. Notwithstanding anything herein to the contrary, in the event that the
Auditor is to be a designee of Bell Atlantic, Bell Atlantic must first
obtain the consent of NMS with respect to such designee, which consent
shall not be unreasonably withheld.
8.4. NMS shall have the opportunity, prior to the release of the audit report
resulting from the audit described above, to review the draft and to
include in the report its responses to issues raised by the report.
ARTICLE 9. NOTICES
- -------------------
9.1. General. All notices, requests, demands and other communications required
to be given hereunder shall be in writing and shall be deemed to have
been duly given one day after delivery by hand or via a nationally
recognized overnight courier or five days after mailing, certified or
registered mail, return receipt requested to the party for whom intended
at the address specified in this Article. Either party may designate an
alternate address for notices by given written notice thereof in
accordance with the provisions of this Article.
9.2. Notices to NMS. All notices to NMS shall be directed as follows:
Network Management Services
5500 Wayzata Blvd., Suite 1450
Minneapolis, MN 55416-1241
Attn: Chief Financial Officer
9.3. Notices to Bell Atlantic. All notices to client shall be directed as
follows:
7
<PAGE>
Bell Atlantic
240 East 38th Street
New York, NY 10016
Attn: Richard A. Fisher
ARTICLE 10. GENERAL PROVISIONS
- -------------------------------
10.1. Control of Work. NMS shall be solely responsible for the conduct and
control of the work to be performed under this Agreement by NMS and its
agents or employees.
10.2. Applicable Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York without giving effect
to such State's choice of law rules.
10.3. Publicity. Each party shall obtain the prior written consent of the
other party concerning the content and plan of distribution of any
public announcement, press release or advertisement concerning this
Agreement, provided that NMS may include references to Bell Atlantic in
client lists, general press releases not specifically pertaining to Bell
Atlantic, proposals, and other non-public communications concerning NMS
or its services. No prior consent shall be required regarding the
inclusion of the other party's name in notices, disclosure documents, or
other filing or publications required by law or regulations.
10.4. Headings. Article and section headings are for convenience only and
shall not be considered part of the terms and conditions of this
Agreement.
10.5. Modification. No modification, waiver or amendment of any term or
condition of this Agreement shall be effective unless and until it shall
be reduced to writing and signed on behalf of NMS and Bell Atlantic.
10.6. Waiver. Failure by either party at any time to require full performance
by the other party or to claim a breach of any term of this Agreement
will not (1) be construed as a waiver of any right under this Agreement,
(2) affect any subsequent breach, or (3) affect the validity of this
Agreement or any part thereof.
10.7. Severability. Whenever possible, each provision of this Agreement will
be interpreted in such a manner as to be effective and valid under
application law but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable
law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision as if such invalid,
illegal or unenforceable provision had never been contained herein.
10.8. Complete Agreement. The Agreement, including the appendices hereto,
constitutes the entire agreement between the parties with respect to the
subject matter hereof and supersedes all prior proposals, negotiations,
conversations, discussions and agreements between the parties. This
Agreement may be modified only by a written instrument executed on
behalf of both of the parties hereto.
10.9. Assignment. Neither party may assign any of its rights under this
Agreement without the prior written consent of the other party, however,
upon written notice to the other party, either party may assign this
Agreement to a successor in title to substantially all of its business
or assets. Subject to the foregoing, all of the terms and provisions of
this Agreement shall be binding upon and insure to the benefit of and be
enforceable by the successors and permitted assigns of Bell Atlantic and
NMS.
10.10 Survival. The respective obligations of each party that would by their
nature continue after the termination or expiration of this Agreement,
including without limitation those contained in Confidentiality,
Indemnification and Intellectual Property Indemnification sections and
shall survive the termination or expiration of this Agreement.
8
<PAGE>
10.11 Counterparts. This Agreement may be executed in one or more
counterparts each of which shall be deemed to be an original and all of
which, taken together, shall constitute a single instrument.
10.12 Benefit of the Parties. This Agreement is for the sole and exclusive
benefit of the parties hereto and is not intended to, nor does it,
confer any benefit upon any third party.
10.13 Jurisdiction and Venue. This Agreement may be enforced in any federal
court or New York state court sitting in the County of New York in the
State of New York, and each party hereto consents to the jurisdiction
and venue of any such court and waives any argument that venue in such
forums in not convenient. If any party hereto commences any action
arising from this Agreement in another jurisdiction or venue, any other
party to this Agreement shall have the option of transferring the case
to the above-described venue or jurisdiction or if such transfer cannot
be accomplished, to have such case dismissed without prejudice.
IN WITNESS WHEREOF, the parties hereto, through their duly authorized
representatives, have executed this Agreement effective as of the day and year
first set forth above.
NETWORK MANAGEMENT SERVICES, INC.
BY: /s/ Scott P. Halstead
------------------------------
Name: Scott P. Halstead
------------------------
Title: Chief Financial Officer
-----------------------
BELL ATLANTIC CORPORATION
By: /s/ Richard A. Fisher
------------------------------
Name: Richard A. Fisher
------------------------
Title: SPL
-----------------------
9
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
ADMINISTRATION
CONVERSION SERVICES AND FEES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Conversion 1998 1999 2000 Comments
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Data Import - Set-up *** Assumes 1 BEN-IN (import) from
Description: Analysis of group reporting, rate and benefit ***
structure required by client. Data mapping imports from
Kwasha's system, database enhancements for customized
data capture. Pre-import edit logic and reports
development.
- ---------------------------------------------------------------------------------------------------------------------------------
Data Export- Set-Up
Level I Level I Interfaces are *** per
Description: Interface with program vendors to deliver *** *** *** interface
consolidated electronic data feed where employee Assumed electronic interfaces
population is 1000+. Assumes comprehensive data (minimum)
elements, single line of coverage (medical), translating ***
into or converting from existing group structures.
Fee to set-up remaining,
Level II non-electronic interfaces in 1998.
Description: Interface with program vendors (with less Going forward, new Level II
than 1000 employees) to deliver hard copy "Smart" paper *** TBD TBD interfaces *** per interface
data feeds.
- ---------------------------------------------------------------------------------------------------------------------------------
MDElect Set-up NA for Not applicable for 1999 Plan Year,
1999 scope TBD for Plan Year 2000.
- ---------------------------------------------------------------------------------------------------------------------------------
PlanSelect Set-up *** This tool will mirror the
Description: Initialization of benefit communication tool information contained within the HMO
to be used by NMS Customer Service Call Center Fact Sheets provided to Bell
representatives Atlantic employees/retirees during
open enrollment.
- ---------------------------------------------------------------------------------------------------------------------------------
Fulfillment IVR Set-up *** This tool will offset the call
Description: Analysis, design and development of volumes to the Customer Service reps
Interactive Voice Response (IVR) system to handle Bell for routine fulfillment requests.
Atlantic retirees and actives requesting HMO Provider
Directories. System will off-load call volume from
Customer Service Call Center. Features include opt-out
to Customer Service. Will develop data file to send to
3rd party fulfillment provider.
- ---------------------------------------------------------------------------------------------------------------------------------
COBRA Administrative Services (CAS) Set-up ***
Description: Interface with CAS, Bell Atlantic's COBRA,
HIPAA and FSA Vendor.
- ---------------------------------------------------------------------------------------------------------------------------------
AIS Set-up (Kwasha's "Account Information System") *** Set-up includes the connections via
Description: Interface with Kwasha's system to enable NMS T1 line and necessary programming
customer service representatives to check enrollment and technical support to implement
options. set-up of AIS within NMS.
- ---------------------------------------------------------------------------------------------------------------------------------
Project Management *** ***
Description: Project Planning, Management, and
coordination with client and vendors to initialize
consolidated administration services, data Gathering,
Process Mapping, Implementation meetings, program
management, training.
- ---------------------------------------------------------------------------------------------------------------------------------
Total Implementation/Start-Up *** *** ***
- ---------------------------------------------------------------------------------------------------------------------------------
NMS Start-up Investment *** ***
- ---------------------------------------------------------------------------------------------------------------------------------
Bell Atlantic Start-up Investment ***
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and files separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
ADMINISTRATION
ONGOING SERVICES AND FEES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
On-Going Fee Basis Billing Projected Comments
Administration Basis Annual Fees
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Data Import - On-Going N/A N/A N/A Assumes 1 weekly import file from ***.
Description: Receipt and Included in other fees
processing of enrollment Includes access and maintenance of
adds, changes, and connection. Special technical support
terminations via electronic will be billed at *** per hour as
import from Kwasha. needed.
Receipt and processing of *** per month Billed *** Assumes 1 import file from *** on a
COBRA, HIPAA and FSA adds, monthly weekly basis.
changes and terminations
via electronic import from
CAS.
- ----------------------------------------------------------------------------------------------------------------------------------
Customer Service Call Center Center Operation Fee Billed COF Center Operation Fee is charged on a
Description: Receive and (COF) monthly - Ongoing fixed monthly basis to operate the Call
respond to inquiries from - ***/month in *** Center including management,
active employees, retirees, ongoing plus advance - Open Enroll recruiting , coaching, development and
Bell Atlantic HR additional *** reporting.
representatives, and - ***/month
vendors. Respond to during Open
inquiries regarding Enrollment
enrollment, eligibility,
and plan benefits.
Staff Station Rate (SSR) Billed SSR Fees Staff Station Rate (SSR) is a charge per
- ***/hour monthly - Ongoing hour per representative or "workstation"
based on *** to Bell Atlantic. This rate includes
hours - Open Enroll salary, benefits, standard desktop
*** technology and space at standard
non-overtime hours. Estimate *** ongoing
hours plus *** during Open Enrollment.
Productivity improvements will be
reflected in fewer dedicated
representatives. The SSR will be adjusted
each year in July/August by ECI (see
notes at end of Description of Services)
System Access Rate (SAR) is a charge per
System Access Rate Billed SAR Fees hour per representative dedicated to
(SAR) monthly - Ongoing Bell Atlantic for access to unique
- AIS ***/hour based on *** system modules. Access to Microsoft
- Mcare ***/hour hours - Open Enroll Office or similar desktop tools is
*** included in SSR. Includes access to Core
BEN-NETTM Enrollment Module. Estimate ***
ongoing hours plus *** during Open
Enrollment
*** per year Fees to 1998 Costs for telephone, printing, postage
be billed *** will be passed back.
Includes: PlanSelect 1/12 per
Description: On-line month or 1999-2003 This tool will mirror the information
communication tool to be *** per *** contained within the HMO Fact Sheets
used by NMS customer month provided to Bell Atlantic
service representatives to employees/retirees during open
support Bell Atlantic enrollment.
employees and retirees
throughout open enrollment
and ongoing.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and files separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
On-Going Admin Fee Basis Billing Annual Comments
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior Source Center Center Operation Fee Billed COF ***
Description: Receive and *** per month Monthly - Enrollment
respond to inquiries from in ***
Medicare eligible retirees Advance
regarding enrollment,
eligibility, and plan Billed SSR Fees
benefits relating to Staff Station Rate (SSR) monthly - ***
Medicare HMO enrollment. ***/hour based on
Includes inbound and hours
outbound telemarketing System Access Rate SAR Fees
support. ***/hour for Meeting - ***
Management
- ----------------------------------------------------------------------------------------------------------------------------------
Fulfillment IVR *** per month when Monthly in Monthly Fee This tool will offset call volumes
Description: Ongoing Operational Advance *** to Customer Service reps for routine
support of Interactive fulfillment requests.
Voice Response (IVR) system plus
to handle Bell Atlantic Project that the application will be up
retirees and actives and running three months of the year
requesting HMO Provider ***/call Billed Call Charge
Directories. System will monthly ***
Customer Service. Features based on ***
include opt-out to customer hours
service and sending data
file to 3/rd/ party
fulfillment provider.
- -----------------------------------------------------------------------------------------------------------------------------------
Delivery of Enrollment Data Active Fees Billed Active Commercial ***
to HMOs Commercial monthly in 1998
Description: Distribution *** pepm conjunction *** Vendor Audit assumes ***% of vendors
and confirmation of with participate (to be jointly determined)
enrollment adds, changes, "self-bill." 1999-2003 Above ***% participation will be
and terminations via *** priced upon request on a per vendor per
electronic export or paper quarter basis with initial set-up fees
on a weekly or as Medicare Risk Medicare Risk per vendor. ***% membership. The
appropriate basis. *** pepm 1998 Copy Return component relies on vendor
*** cooperation in meeting the file
Includes Vendor Audit: specifications and returning the file
Confirmation of data on a quarterly basis. Copy Return is
integrity using NMS Vendor 1999-2003 an electronic audit of ***% plan
Audit: program in two parts *** membership on a quarterly basis.
Enrollment Audit and Copy
Return Audit. Quarterly
performance summaries
provided.
- ------------------------------------------------------------------------------------------------------------------------------------
Medicare HMO Enrollment *** per HCFA form sent Billed 1998 *** during open enrollment
Support monthly ***
Description: NMS will based on
receive Medicare HMO forms
enrollment designations
from Kwasha on a regular
basis which will trigger
the distribution of HMO
specific HCFA enrollment
forms to enrollees. NMS
will generate an enrollee
letter, maintain stock and
coordinate mailings.
====================================================================================================================================
On-Going Admin Fee Basis Billing Annual Comments
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consolidated Premium Active Fees Active Assumes 79,500 Active Commercial
Remittance, Reconciliation, Commercial billed Commercial employees
and Distribution *** pepm monthly 1998
Description: Calculation and in *** Assumes 8,700 Medicare Risk retirees
distribution of conjunction
consolidated monthly with
"self-bill" to client using "self-bill." 1999-2003 Ongoing service to start in
NMS standard invoice *** December 1998.
format, with fully
adjudicated retroactive Assumes Bell Atlantic sets up and
adjustment processing and owns a bank account and gives NMS debit
reconciliation. Medicare Risk Medicare Risk authority and assumes NMS is not
Distribution of payments *** pepm 1998 responsible for bank account
with fully reconciled *** reconciliation or monthly service fees.
supporting backup via ACH
to vendors 1999-2003 NMS is responsible for initiating the
*** funding transaction on a monthly
basis.
- ----------------------------------------------------------------------------------------------------------------------------------
Claims Transfer of Funds Active and Medicare Risk Fees billed TBD based on Pricing based on assumption of
Request (CTFR) *** pepm monthly in volume and following breakdowns:
Definition: On a weekly for those enrolled in ASO conjunction number of Bell Atlantic North and South
basis, NMS coordinates all plan with self-funded 4 level group structure
claims funding requests and "self-bill." plans
provides a single Note that pepm applies only to those
consolidated invoice to employees/retirees in a Self-funded
Bell Atlantic. This (ASO) plan.
invoice identifies the
total funds that need to be
distributed to each
self-funded vendor.
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Reporting Active Fees billed Active Assumes 79,500 Active Commercial
Standard Commercial monthly in Commercial employees
"Standard" reporting package *** pepm conjunction 1998 ***
includes monthly enrollment with Assumes 8,700 Medicare Risk retirees
detail and summary, monthly "self-bill." 1999-2003
cash flow report, *** Ongoing service to start in
consolidated self-bill, September 1998.
consolidated transfer of
funds request, and call Medicare Risk Medicare Risk
tracking reports. *** pepm 1998 ***
1999-2003
***
Ad Hoc
Description: Analysis and ***/hour Fees to be Ad Hoc Assumes 20 reports at 1.5 hours per
programming of custom billed 1/12 1998 *** report.
reports to support data per month or Requests beyond 30 hours annually to
management and decision *** per 1999-2003 be billed at ***/hour
making outside of the month ***
standard reporting package
(e.g. Y-T-D Enrollment,
Monthly Enrollment and
Payment summary).
- -----------------------------------------------------------------------------------------------------------------------------------
Routine Correspondence *** per year Fees to be 1998 Ongoing service to start in
Description: To include: billed 1/12 *** January 1, 1999.
direct member per month or
correspondence, electronic *** 1999-2003
mail, faxes and Bell ***
Atlantic Medicare HMO
Enrollment Forms (HCFA).
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
- --------------------------------------------------------------------------------
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
On-Going Admin Fee Basis Billing Annual Comments
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Produce Schedule As for Form *** per year Fees to be 1998 The following information will be
5500 billed 1/12 *** provided to Bell Atlantic within 60
Description: NMS shall per month or days after the completion of the
provide Bell Atlantic *** 1999-2003 contract year.
summary level data to ***
assist them in their . Vendor name
production of their Form . Vendor contract identifier
5500 Schedule A. . Contract year dates
. Type of benefit (i.e. medical)
. Enrollment at the end of the
contract for contract year
. Gross premiums paid for contract
year
. Total agent/broker commissions
paid act (including fees paid, if
any) for contract year, if
applicable
- -----------------------------------------------------------------------------------------------------------------------------------
Service Team Included in fees N/A N/A
Description: Client Team
Management, including
measuring and reporting of
performance standards, call
statistics, solving vendor
process issues,
recommending strategic
enhancements to system or
service, communication with
client and vendors.
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
5
<PAGE>
- --------------------------------------------------------------------------------
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE ADDED SERVICES
- ---------------------------------------------------------------------------------------------------------------------------------
Value added Service Fee Basis Billing Projected Comments
Basis Annual Fees
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fulfillment General Management fees for 1998
Description: NMS to "General 10% of pass *** to be NMS *** assumed at *** given forecasted 3rd
Manage" third party fulfillment through 3rd billed during party fees.
services for HMO Provider party printing/ Open 3/rd/ party fees
Directories for the Medicare HMO fulfillment Enrollment estimated at *** General management fee does not
and Commercial HMO population. costs Process annually include additional systems and
Provider Directories to be + + operational resources required for
offered on-demand only except for Pass through of Pass through execution.
the "age-in" populations for CWA 3/rd/ party costs as incurred
over age 65 retirees. NMS will NMS to subcontract fulfillment with
provide fulfillment general 3rd party vendor
management on an as requested
basis. NMS will pass through 3rd party
costs to Bell Atlantic
- ---------------------------------------------------------------------------------------------------------------------------------
ScoreCard ***
Description *** /plan/ Fees billed TBD
. Quarterly and Annual data month per month
collection and validation of
self-reported data elements from
vendors and markets where
appropriate for selected measures.
. Provider Access phone calls and
evaluations for targeted provider
clinics within the appropriate
health plans.
. Member services evaluation of
vendor's customer service
department(s)
. Member Satisfaction survey
administration on a semi-annual
basis.
. Evaluation and scoring of plan
performance on a quarterly basis.
. Reporting of results back to
Bell Atlantic and it's vendors on
a Quarterly basis.
. Facilitation of quarterly
conference calls with Bell
Atlantic and individual vendors
to discuss results, engage plans
in action plan development and
process improvement initiatives.
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
6
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
STRATEGY AND RATE SOLICITATION
COMMERCIAL HMOs
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Strategy and Rate Solicitation Fee Basis Billing Basis Projected Comments
Annual Fees
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Strategic planning and analysis of Per hour fees 1999 Assumed hours by year in original proposal
HMO offerings *** per hour to be billed *** . ***
Description: Collaborate with Bell monthly based Activities in 1998 are underway
Atlantic staff to develop Bell on previous 2000
Atlantic's 2002 strategic vision month's hours *** Fees for 2002 and 2003 to be increased by
including: CPI adjustment over previous year (e.g.
. 2002 vision statement that 2001 2002 vs. 2001, 2003 vs. 2002)
addresses landscape, marketplace ***
pricing, migration strategies and
corporate sign-off
. Market by market definition and
HMO consolidation strategy
. Finalize standard plan design
. Finalize vendor performance
standards for scorecard
. Evaluate MCBG participation in
select markets (price quotes and
participation fees are extra)
- ------------------------------------------------------------------------------------------------------------------------------------
Communication Strategy and *** per hour Initially part of Hewitt duties.
Execution for technical Billed monthly Transferred to NMS.
Description: Work with Bell writing as incurred
Atlantic staff and external
consultants to develop and *** per hour
execute employee and retiree for systems and
communication documents including operational
Open Enrollment materials and support
other projects as requested
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HMO rate solicitation and *** annually Fees to be 1999-2001 Monthly charges to start January 1999
negotiation billed 1/12 ***
Description: Customize and per month or Fees for 2002 and 2003 to be increased
implement selection and renewal *** per month by CPI adjustment over previous year
RFP packets. Services include (e.g. 2002 vs. 2001, 2003 vs. 2002)
. Coordinate renewals and
selections across multiple Key terms agreement refers to rates,
markets and vendors performance guarantees and services
. Conduct zip code, PCP and included in ASO arrangements.
facilities network matches
. Collect and analyze actuary and
underwriting data/assumptions for
rate negotiations
. Evaluate funding
appropriateness for claims targets
. Analyze and score HMO bids,
market by market
. Negotiate premiums and/or ASO
fees and claims targets
. Negotiate performance guarantees
. Conduct conference calls with
Bell Atlantic
. Finalize financial terms
. Secure key terms agreements
. Prepare final analysis binder
- ------------------------------------------------------------------------------------------------------------------------------------
Strategy and Rates Fee Basis Billing Annual Fees Comments
Commercial HMOs
- ------------------------------------------------------------------------------------------------------------------------------------
Financial analysis of Per market fees 1999-2001 ***
alternatively funded HMO *** per to be billed as ***
arrangements market percentage Fees for 2002 and 2003 to be increased
Description: NMS will conduct a completion per by CPI adjustment over previous year (e.g.
self-funding feasibility analysis market vs. 2002 2001, 2003 vs.2002)
to evaluate the relevant factors
and estimate a reasonable cost on
such factors. NMS will appraise
key factors like plan design,
stop-loss, group longevity and
predictability, employer's
financial condition, reserves,
plan administration, employee
communication, etc.
- ------------------------------------------------------------------------------------------------------------------------------------
Confirm benefit plan design for *** Fees to be 1999-2001 Bid for service was *** allocated 50% to
enrollment annually billed 1/12 *** Commercial HMOs and 50% to Medicare Risk
Description: NMS will collect and per month or HMOs
finalize all HMO benefit plan *** per month Monthly charges to start January 1999
design changes due to state
and/or federal mandates and/or Fees for 2002 and 2003 to be increased by
requested by Bell Atlantic. CPI adjustment over previous year (e.g.
2002 vs. 2001, 2003 vs. 2002)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provide data for HMO report cards *** Fees to be 1999-2001 Bid for service was *** allocated 50% to
Description: NMS to gather HMO annually billed 1/12 *** Commercial HMOs and 50% to Medicare Risk HMOs
benefit plan detail annually, to per month or
assist in the completion of the *** per Monthly charges to start January 1999
HMO Report Card ("What You Told month
Us About Your HMO"). Fees for 2002 and 2003 to be increased by CPI
adjustment over previous year (e.g. 2002 vs.
2001, 2003 vs. 2002)
- ------------------------------------------------------------------------------------------------------------------------------------
Analysis, confirmation and *** Fees to be 1999-2003 Bid for service was *** allocated 50% to
clean-up of zip code data/service annually billed 1/12 *** Commercial HMOs and 50% to Medicare Risk HMOs
areas per month or
Description: NMS will collect and *** per Monthly charges to start January 1999
confirm health plan service area month
zip code ranges, annually. NMS
will confirm and document all
changes, with explanations. NMS
will feed updated zip code files
to Bell Atlantic and/or Kwasha.
- ------------------------------------------------------------------------------------------------------------------------------------
Coordination of Commercial *** per FTE Fees to be TBD 1998 Resources estimates for Commercial and
Enrollment Seminars for billed per Medicare HMOs
Description: NMS will manage and Management/ month at . ***
coordinate Commercial HMO Coordination *** per FTE
meetings including: per month Resources beyond 1998 to be determined during
. Meeting set-up Additional planning process
. Health Plan and Ambassador resources at
Training and Coordination for *** per hour
meeting attendance Number of Onsite meetings TBD
. "On the ground" meeting presence Onsite mtg
management
. Billing activities related to ***/day/ Fees to be increased each year by CPI
meeting management person (plus adjustment
. Collect refunds from HMOs T&E)
. Reporting and documentation
- ------------------------------------------------------------------------------------------------------------------------------------
Strategy and Rates Fee Basis Billing Annual Fees Comments
Commercial HMOs
- ------------------------------------------------------------------------------------------------------------------------------------
Manage contracts between HMO and Per hour fees 1999-2001 1998 activity: NMS is proposing Hewitt, on
Bell Atlantic *** per hour to be billed *** behalf of Bell Atlantic put in place contracts
Description: NMS will incorporate monthly based 1999 activity: NMS will assume
HMO contracting into the renewal on previous responsibility for contract development and
and selection process. NMS will month's hours negotiation
negotiate and prepare a legal
document that defines the terms ***
and conditions of Bell Atlantic's
relationship with its HMO Fees for 2002 and 2003 to be increased by CPI
vendors. NMS will facilitate adjustment over previous year (e.g. 2002 vs.
securing principle signatures 2001, 2003 vs. 2002)
from Bell Atlantic and its vendor
representatives.
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed seperately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
STRATEGY AND RATE SOLICITATION
MEDICARE HMOs
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Strategy and Rate Solicitation Fee Basis Billing Projected Comments
Basis Annual Fees
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Strategic planning and analysis of Per hour fees 1999 Assumed hours by year
HMO offerings ***per hour to be billed *** . ***
Description: Collaborate with Bell monthly based
Atlantic staff to develop Bell on previous 2000 Fees for 2002 and 2003 to be increased
Atlantic's 2002 strategic vision month's hours *** by CPI adjustment over previous year
including: (e.g. 2002 vs.2001, 2003 vs. 2002)
. 2002 vision statement that 2001
addresses landscape, marketplace ***
pricing, migration strategies and
corporate sign-off
. Market by market definition and
HMO consolidation strategy
. Finalize standard plan design
. Finalize vendor performance
standards for scorecard
. Evaluate MCBG participation in
select markets (price quotes and
participation fees are extra)
- ------------------------------------------------------------------------------------------------------------------------------------
Communication Strategy and *** per hour for Initially part of Hewitt duties.
Execution technical Billed monthly Transferred to NMS.
Description: Work with Bell writing as incurred
Atlantic staff and external *** per hour for
consultants to develop and systems and
execute employee and retiree operational
communication documents including support
Open Enrollment materials and
other projects as requested
- ------------------------------------------------------------------------------------------------------------------------------------
HMO rate solicitation and *** annually Fees to be 1999-2001 Monthly charges to start January 1999
negotiation billed 1/12 ***
Description: Customize and per month or Fees for 2002 and 2003 to be increased
implement selection and renewal *** per by CPI adjustment over previous year
RFP packets. Services include month (e.g. 2002 vs. 2001, 2003 vs. 2002)
. Coordinate renewals and
selections across multiple Key terms agreement refers to rates,
markets and vendors performance guarantees and services
. Conduct zip code, PCP and included in ASO arrangements.
facilities network matches
. Collect and analyze actuary and
underwriting data/assumptions for
rate negotiations
. Evaluate funding
appropriateness for claims targets
. Analyze and score HMO bids,
market by market
. Negotiate premiums and/or ASO
fees and claims targets
. Negotiate performance guarantees
. Conduct conference calls with
Bell Atlantic
. Finalize financial terms
. Secure key terms agreements
. Prepare final analysis binder
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed seperately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
Notes:
. NMS has included up to *** per calendar year without charge back to Bell
Atlantic. Additional travel expenses will be passed back to Bell Atlantic for
reimbursement.
. Set-Up fees may be billed throughout the contract period, with initial
invoicing commencing with implementation kick-off.
. On-Going fees are invoiced and collected on a monthly basis as a component of
the HMO premium distribution process.
. NMS reserves the right to charge client for expenses incurred relating to
overnight or express delivery if the method of delivery requested varies from
NMS standard distribution protocol.
. NMS reserves the right to charge client's vendors for expenses incurred
relating to failure to return 9 track tapes should this media be the vendor's
preferred transmission method.
. Ad Hoc consulting projects will be charged at an hourly rate of *** (i.e.
vendor performance guarantee review and analysis for 1999 open enrollment.
. NMS supports a five-year contract with Bell Atlantic for Administrative
Services commencing on 7/1/98. Certain rates escalated by CPI are identified
in the comments. Pricing for Administration is "protected" for 1999, 2000,
and 2001.
. Pepm is defined as "per employee per month" or per subscriber (either retiree
or employee) per month.
. The Staff Station Rate (SSR) will be adjusted each year in July/August when
the 2/nd/ quarter changes to the U.S. Bureau of Labor Statistics Employment
Cost Index (ECI) for all Workers in Private Industry Region IV - Chicago
(which includes Minneapolis) is published. As a reference point, the 1998
2/nd/ quarter versus 1997 2/nd/ quarter change was 4.0% [(134.9-
129.7)/129.7].
12
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed seperately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
APPENDIX B
Network Management Services
Performance Objectives
1
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
The following is a statement of Performance Objectives, which Bell Atlantic will
require of NMSS:
Note: This section is subject to review by Bell Atlantic sourcing and may be
revised.
General
The performance standards described below (the "Performance Standards") shall
apply to the NMSS delivery of HMO Administration and Consulting Services during
the Service Period. The Performance Standards shall be subject to amendment by
mutual written agreement of the parties. As used in this Section, the Term NMSS
shall also refer to its subcontractors.
Penalties
The penalties described in this section shall be assessed at the discretion of
Bell Atlantic against NMS for failure of NMS to achieve its respective
Performance Standards. If penalty assessment is necessary, Bell Atlantic will
notify NMS of needed adjudication.
The amount of the penalty is noted throughout this document, subject to a
maximum penalty of 10% of the monthly administrative service charge for the last
month of the measuring period.
Reporting
The data necessary to determine whether the Performance Standards have been met
shall be reported to Bell Atlantic monthly as part of the performance reports to
be delivered pursuant to this Statement of Work. Within *** days following the
end of the fourth and all subsequent calendar months of the Service Period, NMS
shall determine whether the Performance Standards have been met during the
preceding month. NMS shall report its findings to Bell Atlantic and the parties
shall confer promptly to reconcile any discrepancies in NMS calculations. In the
event any penalties are due under this section, they shall be reflected as a
credit or charge on the next monthly invoice for Services (upon request from
Bell Atlantic).
The Performance Standards shall not apply and NMS shall not be subject to the
penalties provided for herein with respect to any failure to meet the
Performance Standards prior to the completion of the first three full calendar
months of the Service Period.
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
2
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
Relief from the Performance Standards
NMS and Bell Atlantic shall negotiate in good faith to provide prospective
relief from the foregoing penalties or to amend the Performance Standards in the
event NMS is taking all reasonable actions to promptly remedy the cause of the
failure to achieve the Performance Standards.
Performance Standards
The following lists the ongoing Performance Standards:
1) Telephone Answer Speed
2) Percentage of Calls Resolved During First Contact
3) Staff Availability
4) Customer Service Staff Responsiveness
5) Correspondence Responsiveness
6) Consumer Satisfaction
7) Bell Atlantic Staff satisfaction
8) Data Posting/Manual Processing
9) Eligibility and Enrollment Transmission Posting
10) Bell Atlantic Support Response
11) Availability and Accuracy of Information Sent to Outside
Organizations
12) Premium Payments
13) Action Gram
14) Performance Guarantee Adjudication Process
15) Solicitation and Negotiation of HMO Premium Rates
16) Fulfillment of Requests for Printed Materials and Routine
Correspondence
17) System Availability
18) Telephone Abandon Rate
19) Routine Testing and Maintenance of Disaster Recovery Plan
20) Vendor Score Card
3
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 1 - Telephone Answer Speed
- --------------------------------------------------------------------------------
Definition Telephone Answer Speed for any month shall mean the number
of calls received during the month directed to NMS's service
center or administrative staff which are answered within ***
seconds of the first ring (*** seconds is the maximum time
placed on hold after the voice response system recorded
message is complete), expressed as a percentage of all such
telephone calls received during the month.
- --------------------------------------------------------------------------------
Standard The average of the Telephone Answer Speed for one month of
the measuring period shall be greater than or equal to ***.
- --------------------------------------------------------------------------------
Penalty The monthly service charge will be reduced *** for each full
*** by which the average of the Telephone Answer Speed for
the month of the measuring period is less than the Standard.
Maximum monthly penalty is ***.
- --------------------------------------------------------------------------------
Exceptions The Telephone Answer Speed shall be deemed to be equal to
its Performance Standard for any month in which the number
of the telephone calls directed to NMS's service center or
administrative staff exceed *** (within the exception of
annual enrollment).
- --------------------------------------------------------------------------------
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
4
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 2 - Percentage of Calls Resolved During First Contact
- --------------------------------------------------------------------------------
Definition Calls Resolved During First Contact for any month shall mean
the number of calls received during the month directed to
NMS's service center or administrative staff which are
resolved within the first phone call, expressed as a
percentage of all such telephone calls directed to the
service center or administrative staff during the month.
- --------------------------------------------------------------------------------
Standard The percentage of Calls Resolved During First Contact shall
be greater than or equal to ***.
- --------------------------------------------------------------------------------
Penalty The monthly service charge will be reduced *** for each full
*** which the percentage of Calls Resolved During First is
less than the Standard.
There will be no penalty assessment for open enrollment ***
or for 1st quarter ***. NMS shall report 2nd quarter ***
results by July ***. These results will be used to amend or
adjust the Performance Standard and its definition if
necessary.
Maximum monthly penalty is ***.
- --------------------------------------------------------------------------------
Exceptions No exceptions.
- --------------------------------------------------------------------------------
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
5
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 3 - Staff Availability
- --------------------------------------------------------------------------------
Definition The Staff Availability Percentage shall mean for any month
the number of scheduled minutes that the service team (HMO
Counselors and Senior Source Representatives) is actually
available, expressed as a percentage of the total number of
minutes scheduled to have been available. No more than ***
of the overall staff should be scheduled for vacation or
other scheduled days off at the same time (*** of staff is
available at all times).
- --------------------------------------------------------------------------------
Standard The average of the Staff Availability Percentage for each
month of the measuring period shall be ***.
- --------------------------------------------------------------------------------
Penalty The monthly service charge will be reduced *** for each full
*** by which the average Staff Availability Percentage for
each month of the measuring period is less than ***.
Maximum monthly penalty is ***.
- --------------------------------------------------------------------------------
Exceptions The Staff Availability Percentage shall be deemed to be
equal to the Performance Standard for the period of time in
which a third party's facility problem occurs (e.g., a power
failure, fire, or other natural disaster).
- --------------------------------------------------------------------------------
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
6
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 4 - Customer Service Staff Responsiveness
- --------------------------------------------------------------------------------
Definition The Customer Service Staff Responsiveness Percentage shall
mean for any month the number of return phone calls to
employees regarding outstanding research items, expressed as
a percentage of the total number of outstanding customer
service issues. These are the total of issues that cannot be
resolved during the first contact.
- --------------------------------------------------------------------------------
Standard The average of the Customer Service Staff responsiveness for
each month of the measuring period shall be *** of calls
resolved within *** hours (or ***) and *** of calls resolved
within *** hours (or within *** business days). The customer
service representative must specify a return call time to
the caller at the time an unresolved issue is identified. If
the issue is not resolved within the established time
period, the customer service representative will continue to
call the caller each day until resolution.
- --------------------------------------------------------------------------------
Penalty The monthly service charge will be reduced *** for each full
*** by which the average Customer Service Staff
Responsiveness Percentage for each month of the measuring
period is less than the Standard.
Maximum monthly penalty is ***.
- --------------------------------------------------------------------------------
Exceptions The Customer Service Staff Responsiveness Percentage shall
be deemed to be equal to the Performance Standard for the
period of time in which a third party's facility problem
occurs (e.g., a power failure, fire, or other natural
disaster).
- --------------------------------------------------------------------------------
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
7
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 5 - Correspondence Responsiveness
- --------------------------------------------------------------------------------
Definition The Correspondence response Percentage for any month shall
mean the number of pieces of correspondence received from or
in reference to Bell Atlantic employees, retirees, surviving
spouses, and dependents to whom a response has been directed
by mail or telephone within *** business days following
NMS's receipt of the correspondence, expressed as a
percentage of the total number of pieces of such
correspondence received during the month. For purposes of
this Standard, the term correspondence shall mean items
received by mail or fax that require a reply but shall not
include items that can be processed immediately that do not
require confirmation. A response will not necessarily
include a resolution of the issue raised in the
correspondence. Correspondence to include: direct member
correspondence, faxes, electronic mail messages and HCFA
medicare HMO Enrollment Forms.
- --------------------------------------------------------------------------------
Standard The average of the Correspondence Response Percentage for
one month of the measuring period shall be greater than or
equal to *** within *** business days. The remaining ***
must be responded to within *** business days.
- --------------------------------------------------------------------------------
Penalty The monthly service charge will be reduced *** for each full
*** by which the average of the Correspondence Response
Percentage for the month the measuring period does not meet
the Standard.
Maximum monthly penalty is ***.
- --------------------------------------------------------------------------------
Exceptions Correspondence associated with a Bell Atlantic communication
error.
- --------------------------------------------------------------------------------
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
8
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 6 - Customer Satisfaction
- --------------------------------------------------------------------------------
Definition Consumer Satisfaction shall mean the percentage of consumers
(i.e., persons who use the service - employees, retirees,
dependents) who rate the service provided to them by NMS as
"satisfactory" or better. This rating will be measured by
sampling consumers through the use of periodic surveys.
NMS will begin to collect this information during the first
year following implementation of the contract (Plan Year
2000). The information will be forwarded to Bell Atlantic
along with the other Performance Standards. NMS and Bell
Atlantic will negotiate a Consumer Satisfaction Performance
Standard (and applicable penalties) following the first year
of the Service Period.,
- --------------------------------------------------------------------------------
Standard The tool to be used to measure consumer satisfaction is a
postcard used as part of the Score Card Program. Variations
in survey tool or measure will require additional
discussions between Bell Atlantic and NMS.
- --------------------------------------------------------------------------------
Penalty *** of fees.
- --------------------------------------------------------------------------------
Exceptions No exceptions.
- --------------------------------------------------------------------------------
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
9
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 7 - Bell Atlantic Staff Satisfaction
- --------------------------------------------------------------------------------
Definition Bell Atlantic Staff Satisfaction shall mean the percentage
of staff (i.e., staff members who use the service) who rate
the service provided to them by NMS as "satisfactory" or
better. This rating will be measured by sampling staff
through the use of periodic surveys.
NMS will begin to collect this information during the first
year following implementation of the contract. The
information will be forwarded to Bell Atlantic along with
the other Performance Standards. NMS and Bell Atlantic will
negotiate a Bell Atlantic Staff Satisfaction Performance
Standard (and applicable penalties) following the first year
of the Service Period.
- --------------------------------------------------------------------------------
Standard The tool to be used to measure Client Satisfaction will be
the NMS's annual Client Satisfaction Survey. Annual survey
tentatively scheduled for the third quarter of each year.
- --------------------------------------------------------------------------------
Penalty *** of fees.
- --------------------------------------------------------------------------------
Exceptions No exceptions.
- --------------------------------------------------------------------------------
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
10
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 8 - Data Posting/Manual Processing
- --------------------------------------------------------------------------------
Definition The Data Posting Percentage for any month shall mean the
manual updates correctly posted to the database, expressed
as a percentage of all manual data items received during the
month.
- --------------------------------------------------------------------------------
Standard The average of the Data Posting Percentage for the month of
the measuring period shall be greater than or equal to ***.
- --------------------------------------------------------------------------------
Penalty The monthly service charge will be reduced *** for each full
*** by which the average of the Data Posting Percentage for
the month the measuring period is less than ***.
- --------------------------------------------------------------------------------
Exceptions No exceptions.
- --------------------------------------------------------------------------------
Note: This Performance Standard does not apply. There are no manual updates.
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
11
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 9 - Eligibility and Enrollment Transmission Posting
- --------------------------------------------------------------------------------
Definition NMS will post Bell Atlantic's eligibility and enrollment
information (from Kwasha Lipton) to the system per the
agreed-upon schedule below. NMS will process this
information accurately using the data passed by Kwasha
Lipton.
NMS will receive enrollment information for the active and
retiree populations weekly from ***. Weekly imports to be
received each Tuesday by *** CST and will be posted within
*** business days.
- --------------------------------------------------------------------------------
Standard Enrollment information will be posted within *** business
days, following receipt of file from Kwasha Lipton, *** of
the time.
The Accuracy of all updates to the system shall be equal to
***.
- --------------------------------------------------------------------------------
Penalty The monthly fee will be reduced by *** for each full *** by
which the timing of the posting is less than the Standard.
The monthly fee will be reduced by *** for each full *** by
which the Accuracy of information is less than the Standard.
Maximum monthly penalty is ***.
- --------------------------------------------------------------------------------
Exceptions There will be no penalty for incorrect information passed to
NMS by Kwasha Lipton.
There will be no penalty for eligibility and enrollment
information received later than the agree-upon schedule.
- --------------------------------------------------------------------------------
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
12
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 10 - Bell Atlantic Support Response
- --------------------------------------------------------------------------------
Definition The Support Response Rate for any month shall mean the
number of ad hoc reports and/or files completed within the
agreed-upon schedule. Standard reporting requests will be
filled within *** business days of NMS's receipt of Bell
Atlantic's request, expressed as a percentage of all such
requests received during the month. Ad Hoc reports requiring
additional resources and programming will be subject to a
predetermined due date as agreed upon by Bell Atlantic and
NMS based on the scope of the request.,
Samples of Standard Reports
- Premiums Paid by HMO (Financial Services)
- Type of Issues/Inquiries (Call Tracking Reports)
Samples of potential Ad Hoc Reports
- Migration Reports
- --------------------------------------------------------------------------------
Standard The Support Response Rate for each month shall be ***. ***
of all requests will be computed within two business days of
the agreed-upon time schedule.
- --------------------------------------------------------------------------------
Penalty The monthly service charge for the month following any month
in which this Standard is not met shall be reduced *** for
each day a report is late, up to a maximum of *** per report
or file request.
- --------------------------------------------------------------------------------
Exceptions No exceptions.
- --------------------------------------------------------------------------------
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
13
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 11 - Availability and Accuracy of Information Sent to
Outside Organizations
- --------------------------------------------------------------------------------
Definition Information sent to outside organizations includes Bell
Atlantic, Kwasha Lipton, and HMOs. This includes periodic
reports (Score Card, other standard reports, and interface
files) and ad-hoc report files produced weekly, monthly,
quarterly, annually, or at any other defined interval.
- --------------------------------------------------------------------------------
Standard Information sent to outside organizations will be processed
based on the agreed-upon schedule *** of the time.
Information sent to outside organizations will be processed
based on the agreed-upon schedule and delivered within one
business day following the agreed-upon schedule dates *** of
the time.
The average of Accuracy for the month of the measuring
period shall be greater than or equal to ***.
- --------------------------------------------------------------------------------
Penalty The monthly service charge will be reduced *** for each full
*** by which the Accuracy of information sent to outside
organizations is less than the Standard.
The monthly fee will be reduced *** for each full *** by
which the timing of the information sent to outside
organizations is less than the Standard.
Maximum monthly penalty is ***.
- --------------------------------------------------------------------------------
Exceptions No exceptions.
- --------------------------------------------------------------------------------
Note: Vendor Score Card to be implemented for Plan Year 2000.
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
14
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 12 - Premium Payments
- --------------------------------------------------------------------------------
Definition NMS will pay premiums to HMOs on behalf of Bell Atlantic.
- --------------------------------------------------------------------------------
Standard Premiums will be paid based on the agreed-upon schedule
(monthly) *** of the time.*
The average of Accuracy for the month of the measuring
period shall be equal to ***.
*Funds must arrive at NMS account by *** to be considered
-received- on that date. If after ***, funds will be
considered -received- the following business day. Funds will
be distributed within *** following receipt of funds.
- --------------------------------------------------------------------------------
Penalty The monthly fee will be reduced *** for each full *** by
which the Premium Payment Percentage for the month of the
measuring period is less than *** and/or by which the
average of Accuracy for the month is less than ***.
Maximum monthly penalty is ***.
- --------------------------------------------------------------------------------
Exceptions No exceptions.
- --------------------------------------------------------------------------------
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
15
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 13 - Action Gram
- --------------------------------------------------------------------------------
Definition The Action Gram is a notice that NMS sends to an HMO after
NMS is notified of a significant participant issue.
- --------------------------------------------------------------------------------
Standard Action Grams will be sent to the HMO within *** after a
significant issue has been discovered *** of the time.
Action Grams will be sent to the HMO within *** business
days after a significant issue has been discovered *** of
the time.
Resolution of the Action Gram is expected within *** hours.
NMS will follow up with the HMO receiving the Action Gram
within the *** period to assure resolution *** of the time.
- --------------------------------------------------------------------------------
Penalty The monthly fee will be reduced *** for each full *** by
which the Action Gram Production Schedule does not meet the
Standard.
Maximum monthly penalty is ***.
- --------------------------------------------------------------------------------
Exceptions No exceptions.
- --------------------------------------------------------------------------------
Note: Not applicable for year ***.
Action Grams to be forwarded to: Marianne Clements and Jessica Bennett at Bell
Atlantic.
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
16
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 14 - Performance Guarantee Adjudication Process
- --------------------------------------------------------------------------------
Definition NMS will conduct a performance guarantee adjudication
process with each HMO quarterly.
- --------------------------------------------------------------------------------
Standard The performance guarantee adjudication process will be
conducted on time and according to mutually agreed-upon
guidelines each quarter.
- --------------------------------------------------------------------------------
Penalty Fees for the quarter will be reduced *** if the Standard is
not met.
- --------------------------------------------------------------------------------
Exceptions No exceptions.
- --------------------------------------------------------------------------------
Note: Not applicable for the 1999 Plan Year. No adjudication of penalties to be
assessed during the 1999 Plan Year.
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
17
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 15 - Solicitation and Negotiation of HMO Premium Rates
- --------------------------------------------------------------------------------
Definition NMS will solicit and negotiate HMO premium rates with every
Bell Atlantic HMO each year.
NMS commits to reviewing annually the contracts between Bell
Atlantic and its vendors. However, NMS reserves the right to
secure multi-year contracts with HMOs as appropriate.
- --------------------------------------------------------------------------------
Standard Rates will be negotiated and provided to Bell Atlantic and
Kwasha Lipton based on a mutually agreed-upon schedule each
year.
- --------------------------------------------------------------------------------
Penalty Fees for the year will be reduced *** if the Standard is not
met.
- --------------------------------------------------------------------------------
Exceptions No exceptions.
- --------------------------------------------------------------------------------
Note: Not applicable for the 1999 Plan Year.
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
18
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 16 - Fulfillment of Requests for Printed Materials and
Routine Correspondence
- --------------------------------------------------------------------------------
Definition Printed materials shall include forms, provider directories,
routine correspondence, and other plan-related materials.
For the 1999 Plan Year, printed materials shall mean HMO
provider directories. The fulfillment of the provider
directory requests is contingent upon the receipt of stock
from the targeted HMO.
- --------------------------------------------------------------------------------
Standard *** of all printed materials shall be distributed/mailed
within *** business days.
- --------------------------------------------------------------------------------
Penalty The monthly fee will be reduced *** for each full *** by
which the response rate for the month of the measuring
period is less than the Standard.
Maximum monthly penalty is ***.
- --------------------------------------------------------------------------------
Exceptions No exceptions.
- --------------------------------------------------------------------------------
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
19
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 17 - System Availability
- --------------------------------------------------------------------------------
Definition The System Availability Percentage shall mean for any month
the number of scheduled minutes that the systems used to
support standard operations are available for use, expressed
as a percentage of the total number of minutes scheduled
have been available.
NMS scheduled availability time shall mean systems will be
available between the hours of *** and ***.
Systems used to support standard operations are defined as
all UNIX systems, telecommunications systems, data
communications systems, voice conversion systems, system
access via reporting tool, and Internet/Intranet used to
deliver customer service and/or systems used directly by the
client during normal operating hours (e.g., BEN-NET). This
does not include connections not supported by NMS (e.g.,
Client WAN/LAN, etc.).
- --------------------------------------------------------------------------------
Standard The average of the System Availability Percentage for each
month of the measuring period shall be greater than or equal
to ***.
- --------------------------------------------------------------------------------
Penalty The monthly service charge will be reduced *** for each full
*** by which the average System Availability Percentage for
each month of the measuring period is less than ***.
Maximum monthly penalty is ***.
- --------------------------------------------------------------------------------
Exceptions There is an expectation that systems will be unavailable for
*** hours each *** for periodic maintenance. In addition,
there will be mutually agreed-upon instances (with at least
one week's notice) when systems will not be available.
The System Availability Percentage shall be deemed to be
equal to the Performance Standard for the period of time in
which a third party's facility problem occurs (e.g., a power
failure, fire, or other natural disaster).
- --------------------------------------------------------------------------------
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
20
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 18 - Telephone Abandon Rate
- --------------------------------------------------------------------------------
Definition Telephone Abandon Rate for any month shall be defined as the
number of telephone calls abandoned after being directed to
NMS's service center or administrative staff, expressed as a
percentage of all such telephone calls received during the
month.
- --------------------------------------------------------------------------------
Standard The average of the Telephone Abandon Rate for *** of the
measuring period shall be less than or equal to ***.
- --------------------------------------------------------------------------------
Penalty No penalty if the rate is above *** for one month. If the
abandoNMSent rate is greater than *** for ***, there will be
a *** penalty for all consecutive months following the first
month of greater than *** abandoNMSent rate. NMS will define
and implement corrective action to reduce the rate.
- --------------------------------------------------------------------------------
Exceptions No exceptions.
- --------------------------------------------------------------------------------
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
21
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 19 - Routine Testing and Maintenance of Disaster
Recovery Plan
- --------------------------------------------------------------------------------
Definition The disaster recovery plan must include details for
providing business continuation in the event of an
emergency. These details must include redundant systems
(hardware and software), telecommunications, data backup and
recovery plans, staffing, and alternate power supplies.
- --------------------------------------------------------------------------------
Standard The disaster recovery plan must be tested annually, with
results reported to Bell Atlantic each year.
- --------------------------------------------------------------------------------
Penalty *** of annual fees.
- --------------------------------------------------------------------------------
Exceptions No exceptions.
- --------------------------------------------------------------------------------
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
22
<PAGE>
Bell Atlantic
Performance Standards
- --------------------------------------------------------------------------------
NMS Performance Standard 20 - Vendor Score Card
- --------------------------------------------------------------------------------
Definition NMS will collect all information required to produce the
Vendor Score Card and produce the Score Card based on an
agreed-upon schedule.
- --------------------------------------------------------------------------------
Standard *** of all information must be collected and included in the
Vendor Score Card. The Vendor Score Card must be produced
within 48 hours of the agreed-upon schedule.
- --------------------------------------------------------------------------------
Penalty There will be a penalty of *** if the Vendor Score Card is
incomplete or received by Bell Atlantic more than 48 hours
after the anticipated delivery date.
- --------------------------------------------------------------------------------
Exceptions No exceptions.
- --------------------------------------------------------------------------------
Note: Not applicable for 1999 Plan Year.
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
23
<PAGE>
EXHIBIT 10.10
NETWORK MANAGEMENT SERVICES, INC.
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement ("Agreement") dated as of April 12,
1999, is made and entered into between Network Management Services, Inc., a
Minnesota corporation, ("the Company") and John Davis, an individual resident of
the State of Minnesota, ("the Employee").
WHEREAS, the Company wishes to employ the Employee to render services for
the Company on the terms and conditions set forth in this Agreement, and the
Employee wishes to be retained and employed by the Company on such terms and
conditions.
NOW, THEREFORE, in consideration of the premises and the respective
undertakings of the Company and the Employee set forth below, the Company and
the Employee agree as follows:
Article 1.0 Definition. Capitalized terms in this Agreement shall have
their defined meaning throughout the Agreement. The following terms shall have
the meaning set forth below, unless the context clearly requires otherwise.
1.01 Board. "Board" shall mean the Board of Directors of the Company.
1.02 Cause. "Cause" shall mean termination by the Company of the
Employee's employment based upon: (i) the Employee's willful misconduct,
dishonesty, or other material violation of law or Company policies; or (ii)
actions (or failures to act) by the Employee in bad faith and to the
detriment of the Company.
1.03 Change in Control. A "Change in Control" of the Company shall be
deemed to have occurred if:
(a) Any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) who did not own shares of the capital stock of
the Company on the date of grant of the Option shall, together
with his, her or its "Affiliates" and "Associates" (as such terms
are defined in Rule 12b-2 promulgated under the Exchange Act),
become the "Beneficial Owner" (as such term is defined in Rule
13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company representing fifty
percent 50% or more of the combined voting power of the Company's
then outstanding securities (any such person being hereinafter
referred to as an "Acquiring Person");
(b) The "Continuing Directors" (as hereinafter defined) shall
cease to constitute a majority of the Board; or
<PAGE>
(c) There should occur (i) any sale, exchange or other transfer
(in one transaction or a series of related transactions) of all
or substantially all of the assets of the Company; (ii) any
liquidation or dissolution of the Company; or (iii) any
consolidation or merger involving the Company and the Company
shall not be the continuing or surviving corporation or the
shares of the Company's capital stock shall be converted into
cash, securities or other property; provided, however, that this
subclause (iii) shall not apply to a merger or consolidation in
which (A) the Company is the surviving corporation and (B) the
shareholders of the Company immediately prior to the transaction
have the same proportionate ownership of the capital stock of the
surviving corporation immediately after the transaction.
(d) The number of directors on the Board exceeds nine (9).
In the case of a Change of Control as described in Subsections (c)(i) or
(ii), the Options will be assumed by the surviving or acquiring
corporation, as the case may be.
1.04 Confidential Information. "Confidential Information" shall mean
information that is proprietary to the Company, or to others and is
entrusted to the Company, whether or not trade secrets. Confidential
Information includes, but is not limited to, information relating to
designs, software (in source and object code), technology strategies,
business plans as to the business as conducted or anticipated to be
conducted by the Company, and to past or current or anticipated products or
services of the Company. Confidential Information also includes, without
limitation, information concerning the Company's research, development,
purchasing, accounting, marketing, selling, and services. All information
that the Employee has a reasonable basis to consider confidential is
Confidential Information, whether or not originated by the Employee and
without regard to the manner in which the Employee obtains access to it.
1.05 Continuing Director. "Continuing Director" shall mean any person
who is a member of the Board, while such person is a member of the Board,
who is not an Acquiring Person, an Affiliate or Associate of an Acquiring
Person or a representative of an Acquiring Person or of any such Affiliate
or Associate and who (i) was a member of the Board on the date of grant of
the Option or (ii) subsequently became a member of the Board, upon the
nomination or recommendation, or with the approval of, a majority of the
Continuing Directors.
1.06 Disability. "Disability" shall mean the Employee's inability to
perform the essential functions of the Employee's position, with or without
<PAGE>
reasonable accommodation, provided the Employee has exhausted the
Employee's entitlement to any applicable leave, if the Employee desires to
take and satisfies all eligibility requirements for such leave.
1.07 Effective Date. "Effective Date" shall mean the date on page one
hereof.
1.08 Good Reason. "Good Reason" shall mean the occurrence of any of
the following events, except for the occurrence of such an event in
connection with the termination of the Employee's employment by the Company
for Cause, for Disability, or for death: (a) a material reduction in the
Employee's duties and/or responsibilities (see attached Job description);
(b) a material reduction in the Employee's compensation, including the
Employee's salary, bonus target percentage, and stock option grants and
vesting; (c) a requirement that the Employee relocate the Employee's place
of work more than twenty-five (25) miles from the Company's current
location in St. Louis Park, Minnesota.
1.09 Inventions. "Inventions" shall mean ideas, improvements, and
discoveries, whether or not such are patentable or copyrightable, and
whether or not in writing or reduced to practice.
1.10 Works of Authorship. "Works of Authorship" shall mean any
writings, drawings, diagrams, charts, tables, databases, software (in
object or source code and recorded on any medium), and any other works of
authorship, whether or not such are copyrightable.
Article 2.0 Employment.
2.01 Service With The Company. Under the terms and conditions set
forth herein and his appointment by the Board, the Company hereby employs
the Employee, and the Employee accepts such employment, as Chief Executive
Officer and member of the Board, commencing on or about April 12, 1999, at
the Company's principal place of business in St. Louis Park, Minnesota.
2.02 Performance of Duties. The Employee agrees to serve the Company
faithfully and to the best of the Employee's ability and to devote the
Employee's full-time, attention, and efforts to the business and affairs of
the Company during the term of the Employee's employment. The Employee
hereby confirms that is under no contractual commitments inconsistent with
the Employee's obligation set forth in this Agreement and that, during the
term of this Agreement, the Employee will not render or perform any
services for compensation for any other corporation, firm, entity, or
person. Notwithstanding the exclusivity of Employee's duties to the
Company, Employee may serve on the board(s) of directors of non-
competitive companies, and receive remuneration for such service, but will
obtain the approval of Company's Board of Directors in advance. Such
approval will not be unreasonably withheld. To the extent permitted by law,
the Company shall indemnify Employee and will obtain, within 180 days,
officers' and directors' liability insurance coverage in such amount as the
Company's Board of Directors shall determine to be appropriate.
Article 3.0 Compensation and Benefits.
<PAGE>
3.01 Base Salary. As base compensation for all services to be rendered
by the Employee under this Agreement during the term of this Agreement, the
Company shall pay to the Employee an annualized salary of one hundred and
seventy-five thousand dollars ($175,000). The Employee's salary shall be
paid in accordance with the Company's normal payroll procedures and
policies, as such procedures and policies may be modified from time to time
and the Employee shall be eligible for annual salary increases consistent
with such policies and procedures. Company's Board of Directors will review
Employee's salary on an annual basis and, in its discretion, make upward
adjustments.
3.02 Incentive Compensation. The Company shall make the Employee
eligible for an annual bonus payment. Payment of an annual bonus to the
Employee will be subject to the Employee's achieving certain objectives set
annually by the Board. Subject to the foregoing, the Employee's target
bonus for each year of this Agreement will be thirty-five percent (35%) of
the Employee's base salary, with an opportunity for the Employee to receive
as much as fifty percent (50%) of his base salary if the Employee greatly
surpasses the objectives for a given year. The Employee's bonus amount for
calendar year 1999 will be calculated as if the Employee had worked for the
Company for the entire calendar year of 1999. Company's Board of Directors
will review Employee's bonus target levels on an annual basis and, in its
discretion, make upward adjustments.
3.03 Equity Participation. The Company shall make the Employee
eligible to receive options to purchase the Company's common stock, subject
to the terms and conditions of the Company's stock option plan ("the
Plan"). The Company shall offer the Employee an option to purchase ________
(___5% post series C______) shares of common stock at a price of $2.25 per
share. ___________ (____25%____) shares of such option shall vest when the
Employee commences employment with the Company. ___________ (20% of the
post commencement balance_______) shares of such option shall vest after
the Employee has been employed by the Company for a period of twelve (12)
months; an additional ___________ ((20% of the post commencement balance
___________) shares shall vest after the Employee has been employed by the
Company for a period of twenty-four (24) months; an additional ___________
(___(20% of the post commencement balance _________) shares shall vest
after the Employee has been employed by the Company for a period of thirty-
six (36) months; an additional ___________ (___(20% of the post
commencement balance _________) shares shall vest after the Employee has
been employed by the Company for a period of forty-eight (48) months; and
the remaining ___________ (___( 20% of the post commencement balance
_________) shares shall vest after the Employee has been employed by the
Company for a period of sixty (60) months. Any vested option shares that
have not been exercised by the Employee will be canceled if not exercised
by the Employee within the time set forth in the Plan. If at any time
during the sixty (60) month period a Change in Control occurs, fifty
percent (50%) of any unvested option shares will immediately vest, and the
vesting period for the balance of the unvested option shares will be
reduced by half. Company's Board of Directors will periodically review
Employee's stock option grants and, in its discretion, make additional
grants and awards.
Notwithstanding the above, if Employee voluntarily terminates his
employment with the Company without Good Reason (excluding a termination
due to death or disability) prior to the first anniversary of this
Agreement, Employee will return the options granted to him by this Section
3.03 and any shares purchased upon the exercise thereof to the Company and
the Company will reimburse Employee for the amount of the exercise price,
if any, paid by Employee in connection with any such exercise of the
option.
<PAGE>
3.04 Participation in Benefits. During the term of the Employee's
employment with the Company, the Employee shall be entitled to participate
in the employee benefits offered generally by the Company to its employees,
to the extent that the Employee's position, tenure, salary, health, and
other qualifications make the Employee eligible to participate. The
Employee's participation in such benefits shall be subject to the terms of
the applicable plans, as the same may be amended from time to time. The
Company does not guarantee the adoption or continuance of any particular
employee benefit plan during the Employee's employment, and nothing in this
Agreement is intended to, or shall in any way restrict the right of the
Company, to amend, modify, or terminate any of its benefits during the term
of the Employee's employment. Notwithstanding the above, the Company agrees
to provide Employee with four weeks annual paid vacation.
Article 4.0 Term; Termination.
4.01 Term. The Term of this Agreement shall be five (5) years from the
Effective Date. The Employee's employment under this Agreement shall
commence upon the Effective Date and shall be terminable during the term of
this Agreement by either party for any reason or no reason upon a notice of
thirty (30) days.
4.02 Termination by the Company for Cause. Notwithstanding Section
4.01 above, the Company may terminate this Agreement without notice for
Cause.
4.03 Termination by the Employee for Good Reason. Notwithstanding
Section 4.01 above, the Employee may terminate this Agreement without
notice for Good Reason.
4.04 Termination in the Event of the Employee's Death or Disability.
Notwithstanding Section 4.01 above, the Employee's employment under this
Agreement shall terminate in the event of the Employee's death or
Disability.
4.05 Termination by Mutual Agreement. Notwithstanding Section 4.01
above, the parties may terminate this Agreement at any time and upon any
other terms or conditions by mutual written agreement.
4.06 Compensation Upon Termination. As the Employee's sole and
exclusive compensation the termination of the Employee's employment by
either party during the term of this Agreement, the Company shall pay the
Employee as follows:
(a) If due to termination by the Company for Cause or by the
Employee without Good Reason, within ten (10) days after the
termination date, the Company shall pay the Employee any amounts
due to him for base salary through the termination date together
with
<PAGE>
any other unpaid and pro rata amounts of accrued vacation pay,
sick leave, and/or business expenses reimbursements that may be
due under the Company's policies, and all unvested option shares
will be canceled immediately.
(b) If due to termination by the Company other than for Cause,
the Company shall pay the Employee his base salary in effect at
the termination date for a period of one (1) year and fifty
percent (50%) of the Employee's unvested option shares will
immediately vest. If such termination by the Company other than
for Cause occurs within two (2) years after a Change of Control,
the Company shall pay the Employee his base salary in effect at
the termination date for a period of one (1) year and one hundred
percent (100%) of the Employee's unvested option shares will
immediately vest.
(c) If due to termination by the Employee for Good Reason, the
Company shall pay the Employee his base salary in effect at the
termination date for a period of two (2) years and fifty percent
(50%) of the Employee's unvested option shares will immediately
vest. If such termination by the Employee for Good Reason occurs
within two (2) years after a Change in Control, the Company shall
pay the Employee his base salary in effect at the termination
date for a period of one (1) year and one hundred percent (100%)
of the Employee's unvested options shares will vest immediately.
(d) Company shall continue to pay or reimburse Employee's
premiums for health coverage accorded to Employee under Article
3.04 during any period of salary continuation pursuant to
subclause (b) or (c) above. In the event that any payment or
benefit required to be made by Company under this Article 4.06,
either alone or in combination with any other payment or benefit
Employee is then entitled to receive, would constitute a
"parachute payment" (under Section 280(g) of the Internal Revenue
Code), the Company and Employee will negotiate in good faith a
modification of this Article with the intention of maximizing
Employee's net after-tax benefit, while at the same time not
adversely affecting the Company. The Company shall have no duty
or obligation to employ the Employee following any such
termination by the Company or the Employee.
4.07 Survival. The provisions of Article 4.0 (relating to termination
rights and the provision of compensation and benefits beyond the
termination of this Agreement) shall survive termination of this Agreement
for any reason. The provisions of Article 5.0 (relating to confidential
information and intellectual property rights of the Company), the
provisions of Article 6.0 (relating to non-competition, no raiding, and
non-solicitation), the provisions of Article 7.0 (relating to dispute
resolution) and the provisions of Article 8.0 (relating to miscellaneous
terms and conditions) shall survive the expiration of the term of this
Agreement and the termination of this Agreement for any reason.
Article 5.0 Confidential Information; Intellectual Property.
5.01 Prohibitions Against Unauthorized Use. The Employee shall not use
or disclose, other than in connection with the Employee's employment with
the Company, any Confidential Information to any person not employed by the
<PAGE>
Company or not authorized by the Company to receive such Confidential
Information, without the prior written consent of the Company during the
term of this Agreement or at any time thereafter. The Employee shall use
reasonable and prudent care to safeguard and prevent the unauthorized use
and disclosure of Confidential Information.
5.02 Exclusions. The obligations under Section 5.01 above shall not
apply to any information that: (a) is now or becomes generally available to
the public through no fault of the Employee; (b) was already known to the
Employee, as shown by his books and records, prior to disclosure of same by
the Company; (c) is or was independently developed or acquired by the
Employee without any use of or reliance on Confidential Information; (d) is
or was provided to the Employee by a third party not under any obligation
of confidentiality to the Company; or (e) is required to be disclosed by
law, provided, however, the Employee shall render reasonable cooperation,
at the Company's expense, to lawfully prevent or minimize any such public
disclosure of Confidential Information through protective orders or other
similar matters.
5.03 Ownership and Return of Company Property. All Confidential
Information or other Company property in the Employee's possession,
custody, or control, including, without limitation, all documents, reports,
manuals, business plans, minutes, memoranda, computer software, computer
databases, computer print-outs, member or customer lists, credit cards,
keys, identification, products, access cards, and all other tangible or
intangible property relating in any way to the business of the Company are
the exclusive property of the Company, even if the Employee authored,
created, or assisted in authoring or creating such property. The Employee
shall return to the Company all such Confidential Information or other
property immediately upon termination of employment for any reason
whatsoever or at such earlier time as the Company reasonably requests.
5.04 Disclosure and Assignment of Inventions and Other Works. The
Employee shall promptly disclose to the Company in writing all Inventions
and Works of Authorship, which are conceived, made, discovered, written, or
created by the Employee alone or jointly with another person, group, or
entity, whether during the normal hours of his employment at the Company or
on the Employee's own time, during the term of this Agreement and for one
(1) year following the termination of the Employee's employment with the
Company for any reason whatsoever. The Employee hereby assigns all rights
to such Inventions and Works of Authorship to the Company. The Employee
shall give the Company all the assistance it reasonably requires for the
Company to perfect, protect, and use its rights to such Inventions and
Works of Authorship. The Employee shall sign all documents, take all
actions, and supply all information that the Company considers necessary or
desirable to transfer or record the transfer of the Employee's entire
right, title, and interest in such Inventions and Works of Authorship and
to enable
<PAGE>
the Company to obtain exclusive patent, copyright, or other legal
protection for Inventions and Works of Authorship anywhere in the world,
provided, that the Company shall bear all reasonable expenses of the
Employee in rendering such cooperation.
5.05 Exclusions. Notwithstanding Section 5.04 above, the following
shall not be deemed Inventions or Works of Authorship assigned to the
Company by the Employee hereunder: any Invention or Work of Authorship for
which no equipment, supplies, facility, or Confidential Information of the
Company was used and which was developed entirely on the Employee's own
time, and which (a) does not relate (i) directly to the business of the
Company or (ii) to the Company's actual or demonstrably anticipated
research or development, or (b) does not result from any work performed by
the Employee for the Company.
Article 6.0 Non-Competition, No Raid, and Non-Solicitation Covenants.
6.01 Non-Competition Covenant. Subject to Section 6.02 below, during
the term of this Agreement and for a period of one (1) year following the
termination of the Employee's employment with the Company for any reason
whatsoever, the Employee shall not, directly or indirectly, engage in any
business activity on his own behalf or as a partner, shareholder, director,
trustee, principle, agent, officer, employee, consultant, or otherwise of
any person or entity the business of which is the same as, similar to, or
competitive with any business of the Company, or which is engaged in the
development or production of products intended to compete with the Company,
or assist, solicit, entice, or induce any other person to engage in any
such activity. For purposes hereof, "shareholder" shall not include
beneficial ownership of less than five percent (5%) of the combined voting
power of all issued and outstanding voting securities of a publicly-held
corporation whose stock is traded on a major stock exchange or quoted on
NASDAQ.
6.02 Company's Option to Revise. At its sole option, the Company may,
by written notice to the Employee, after the termination of the Employee's
employment, waive or limit the line of business, time period, and/or
geographic area in which the Employee is prohibited from engaging in
competitive activity under Section 6.01 above.
6.03 Covenant Not to Recruit. The Employee hereby acknowledges that
the Company's employees, consultants, and other contractors constitute
vital and valuable aspects of its business and missions on a world-wide
basis. In recognition of that fact, for a period of two (2) years following
the termination of the Employee's employment with the Company for any
reason whatsoever, the Employee shall not solicit, or assist anyone else in
the solicitation of, any of the Company's then current employees,
consultants, or other contractors to terminate
<PAGE>
their respective relationships with the Company and to become employees,
consultants, or contractors of any enterprise with which the Employee may
then be associated, affiliated, or connected.
6.04 Covenant Not to Solicit. The Employee hereby acknowledges that
the Company's customers constitute vital and valuable aspects of its
business on a world-wide basis. In recognition of that fact, for a period
of two (2) years following the termination of the Employee's employment
with the Company for any reason whatsoever, the Employee shall not solicit,
or assist anyone else in the solicitation of, any of the Company's then
current customers to terminate their respective relationships with the
Company and to become customers of any enterprise with which the Employee
may then be associated, affiliated, or connected.
Article 7.0 Dispute Resolution.
7.01 Procedure for Arbitration. Except as provided in Section 7.02
below, any dispute arising out of or relating to this Agreement or the
alleged breach of it, or the making of this Agreement, including claims of
fraud in the inducement, or any dispute arising from or related in any way
to the Employee's employment, including any statutory or tort claims, which
has not been settled through negotiation within a period of thirty (30)
days after the date on which either party shall first have notified the
other party in writing of the existence of a dispute, shall be settled by
final and binding arbitration pursuant to the provisions of this Agreement
and under the then applicable arbitration rules of the American Arbitration
Association ("AAA"), unless such rules are inconsistent with the provisions
of this Agreement. Any such arbitration shall be conducted by: (a) neutral
arbitrator appointed by mutual agreement of the parties; or (b) failing
such agreement, in accordance with said rules. The arbitrator shall be an
experienced attorney with a background in employment law. An arbitral award
may be enforced in any court of competent jurisdiction. Each party shall be
permitted reasonable discovery, including the production of relevant
documents by the other party, the exchange of witness lists, and a limited
number of depositions, including depositions of any expert who will testify
at the arbitration. The summary judgment procedure applicable in Hennepin
County, Minnesota, District Court, shall be available and apply to any
arbitration conducted pursuant to this Agreement. The arbitrator shall have
the authority to award to the prevailing party any remedy or relief that a
court of the State of Minnesota could order or grant, including costs and
attorneys' fees. Unless otherwise agreed by the parties, the place of any
arbitration proceeding shall be Minneapolis, Minnesota.
7.02 Litigation Rights Reserved. If any dispute arises with regard to
the unauthorized use or infringement of Confidential Information by the
Employee or with regard to the Employee's breach or a threatened breach of
the covenants in
<PAGE>
Article 6.0 hereof, the Company may seek any available remedy at law or in
equity from a court of competent jurisdiction.
Article 8.0 General Provisions.
8.01 Governing Law. This Agreement is made under and shall be governed
by and construed in accordance with the laws of the State of Minnesota
without regard to conflicts of laws principles thereof.
8.02 Prior Agreements. This Agreement (including other agreements
specifically mentioned in this Agreement) contains the entire agreement of
the parties relating to the employment of the Employee by the Company and
the other matters discussed herein and supercedes all prior promises,
contracts, agreements, and understandings of any kind, whether express or
implied, oral or written, with respect to such subject matter (including,
but not limited to, any promise, contract, or understanding, whether
express or implied, oral or written, by and between the Company and the
Employee) and the parties hereto have made no agreements, representations,
or warranties relating to the subject matter of this Agreement which are
not set forth herein or in the other agreements mentioned herein.
8.03 Withholding Taxes. The Company may take such action as it deems
appropriate to ensure that all applicable federal, state, city, and other
payroll, withholding, income, or other taxes arising from any compensation,
benefits, or any other payments made pursuant to this Agreement, or any
other contract, agreement, or understanding which relates, in whole or in
part, to the Employee's employment with the Company, are withheld or
collected from the Employee. In connection with the foregoing, the Employee
agrees to notify the Company promptly upon entering into any contract,
agreement, or understanding relating to the Employee's employment with the
Company and also to notify the Company promptly of any payments or benefits
paid or otherwise made available pursuant to any such agreements.
8.04 Amendments. No amendment or modification of this Agreement shall
be deemed effective unless made in writing and signed by the Employee and
the Company.
8.05 No Waiver. No term or condition of this Agreement shall be deemed
to have been waived, nor shall there be any estoppel to enforce any
provisions of this Agreement, except by a statement in writing signed by
the party against whom enforcement of the waiver or estoppel is sought. Any
written waiver shall not be deemed a continuing waiver unless specifically
stated, shall operate only as to the specific term or condition waived, and
shall not constitute a waiver of such term or condition for the future or
as to any act other than as specifically set forth in the waiver.
<PAGE>
8.06 Assignment. This Agreement shall not be assignable, in whole or
in part, by any party without the written consent of the other party,
except that the Company may, without the consent of the Employee, assign
its rights and obligations under this Agreement to any corporation, firm,
or other business entity with or into which the Company may merge or
consolidate, or to which the Company may sell or transfer all or
substantially all of its assets, or of which fifty percent (50%) or more of
the equity investment and of the voting control is owned, directly or
indirectly, by, or is under common ownership with, the Company. After any
such assignment by the Company, the Company shall be discharged from all
further liability hereunder and such assignee shall thereafter be deemed to
be the Company for the purposes of all provisions of this Agreement
including this Section 8.06.
8.07 Injunctive Relief. The Employee acknowledges and agrees that the
services to be rendered by the Employee hereunder are of a special, unique,
and extraordinary character, that it would be difficult to replace such
services and that any breach or threatened breach of the covenants in
Article 6.0 hereof would be highly injurious to the Company and that it
would be extremely difficult to compensate the Company fully for damages
for any such violation. Accordingly, the Employee specifically agrees that
the Company shall be entitled to temporary and permanent injunctive relief
to enforce the provisions of the covenants of Article 6.0 hereof, and that
such relief may be granted without the necessity of proving actual damages
and without necessity of posting any bond. This provision with respect to
injunctive relief shall not, however, diminish the right of the Company to
claim and recover damages, or to seek and obtain any other relief available
to it at law or in equity, in addition to injunctive relief.
8.08 Construction. Where ever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or the remaining provisions of
this Agreement. In furtherance of and not in limitation of the foregoing,
the parties agree that, should the duration of, geographical extent of, or
business activities covered by, any provision of this Agreement be in
excess of that which is valid or enforceable under applicable law in a
given jurisdiction, then such provision, as to such jurisdiction only,
shall be construed to cover only that duration, extent, or activities that
may validly or enforceably be covered. The Employee acknowledges the
uncertainty of the law in this respect and expressly stipulates that this
Agreement shall be construed in a manner that renders its provisions valid
and enforceable to the maximum extent (not exceeding its express terms)
possible under applicable law in each applicable jurisdiction.
<PAGE>
8.09 Captions. The various headings or captions in this Agreement are
for convenience only and shall not affect the meaning or interpretation of
this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth in the first paragraph.
NETWORK MANAGEMENT SERVICES, INC.
By /s/ Mark Tierney
-------------------------------------
Its
/s/ John Davis
---------------------------------------
John Davis
Attachment
Position Description for Chief Executive Officer of Network Management
Position is accountable to the Chairman and the Board
Responsibilities include:
1. Design and implementation of a successful organization infrastructure
which will lead the transition of Network Management from its start-up
culture to a mature technology service company, Culture to include
disciplined and routine processes that deliver predictable service
results, effective internal project management accountability, and
cutting edge product enhancement methodologies.
2. Overall development and execution of the company's business and
operating strategy across all fronts, including Finace, HR, Sales and
Marketing, Operations, Client Relations, Consulting, Product
Development, and IT.
3. Securing and allocating resources to assure that the company meets
core client commitments and simultaneously develops leading edge
product enhancements.
4. Meeting company growth targets and financial objectives.
5. Shared responsibility with the Chairman of the Board for strategic
positioning of the company, development of PreferredPlans.com, merger
and acquisition strategy, and for external relations with the
financial community.
6. It is understood that as long as mark Tierney is Chairman of the
Board, Mark will remain actively involved in the development of
company strategy. Mark will maintain primary responsibility for the
PreferredPlans.com initiative, for merger and acquisition strategy,
and for relations with the external financial community.
<PAGE>
EXHIBIT 10.20
HEALTHEON SERVICE
EMPLOYER GROUP DISTRIBUTION AGREEMENT
This Healtheon Service Employer Group Distribution Agreement ("Agreement")
is entered into by and between Healtheon Corporation, a corporation organized
under the laws of Delaware, with principal offices at 4600 Patrick Henry Drive,
Santa Clara, CA 95954 ("Healtheon"), and Network Management Services, Inc.
("NMS"), effective as of September 30, 1999 (the "Effective Date").
1. Definitions. For purposes of this Agreement, the following terms shall
have the following meanings:
(a). "NMS Accounts" shall mean those customers that entered into a contract
with NMS to obtain the Healtheon Service and that are enrolled to access and use
the Healtheon Service.
(b). "Benefits Carriers" shall mean any benefit carrier which is designated
by NMS Account and/or NMS to receive enrollment data from NMS.
(c) "Employee" shall mean an employee of a NMS Account who is eligible for
benefits under the terms of a NMS Account's benefit plan who is enabled by NMS
and/or NMS Account to access and use the Healtheon Service or whose enrollment
or other benefit data is entered into and resides on the System.
(d). "End User" shall mean any person who is eligible for benefits under
the terms of a NMS Account's benefits plan who is enabled by NMS and/or a NMS
Account to access and use the Healtheon Service or whose enrollment or other
benefit data is entered into and resides on the System.
(e). "Healtheon Service" shall mean Healtheon's Internet-based benefit
enrollment service, as described on Exhibits A-1 and A-2 hereto, as well as all
updates, improvements, and modifications thereto. The Healtheon Service may not
include new or additional applications, services, or features that may be
offered by Healtheon in connection with Healtheon Service in the future.
(f). "System" shall mean the entire system, including all related hardware
and software, now or hereafter developed by or for Healtheon which enables NMS
Accounts and End Users to obtain access to, and use of, the Healtheon Service,
including all updates, improvements, and modifications thereto.
2. Licenses.
(a). Distribution of Healtheon Service. Subject to the terms and conditions
of this Agreement, during the Term (as defined herein), Healtheon hereby grants
and NMS hereby accepts, a nonexclusive and nontransferable right and license to
distribute to NMS Accounts headquartered in North America the Healtheon Service,
in each case for the purpose of permitting NMS Accounts to offer the Healtheon
Service to End Users. NMS shall not sublicense or otherwise distribute the
Healtheon Service except to NMS Accounts and pursuant to a written agreement
which contains the provisions substantially in the form set forth in Exhibit B
(the "Service Terms"). The written agreement of any NMS Account to the Service
Terms may be included as part of the service or administration agreement
obtained by NMS from a NMS Account. NMS shall have no right to distribute the
Healtheon Service directly to End Users or to distribute the Healtheon Service
in any other manner except as expressly stated herein. The Service Terms may be
changed by Healtheon upon prior written notice to NMS. NMS agrees to implement
the modified Service Terms for prospective or renewal NMS Accounts as soon as
possible after such notification, and in no event later than ninety (90) days
after Healtheon provides such notice. Implementation of the modified Service
Terms for
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<PAGE>
existing NMS Accounts shall be mutually agreed to by the parties, with such
agreement not to be unreasonably withheld.
(b). Intellectual Property License. Healtheon hereby grants and NMS hereby
accepts, a nonexclusive and nontransferable right and license, exercisable only
within the United States and only in conjunction with providing the
Implementation Services (as defined in Section 6(b) below), to use all elements
of Healtheon's Intellectual Property (as defined in Section 8(a) below) which
are necessary in order for NMS to perform the Implementation Services to enable
NMS Accounts and their End Users to have access to the Healtheon Service and to
perform any related maintenance and support services. NMS shall have no right to
use Healtheon's Intellectual Property for any purpose other than limited purpose
expressly stated herein.
3. Restrictions.
(a). Source Code Restrictions. NMS agrees not to copy, modify, translate,
decompile, reverse engineer, disassemble, or otherwise determine or attempt to
determine source code from the System, the Healtheon Service and the
Intellectual Property pertaining thereto or to create any derivative works based
upon the System, the Healtheon Service and/or the Intellectual Property
pertaining thereto, and agrees not to permit or authorize anyone else to do so.
Notwithstanding the foregoing, Healtheon acknowledges and agrees that this in no
way prohibits NMS from independently developing a system, software, application
or tool that is similar in feature and functionality to the Healtheon Service
without using any of Healtheon's Confidential Information or Intellectual
Property. Healtheon acknowledges that NMS asserts that it began a development
project that may have included similar features and functionality to the
Healtheon Service, and that such project has been suspended. NMS agrees to
provide Healtheon with written notice at least thirty (30) days prior to NMS (i)
committing resources to develop a Web-based benefits enrollment application or
service with a project plan and deliverables; (ii) making a written or oral
commitment to an existing or prospective customer that it is developing and/or
will provide a non-Healtheon Web-based benefits enrollment application or
service; or (iii) communicating in its sales and marketing program or materials
that NMS is developing or will provide a non-Healtheon Web-based benefits
enrollment application or service. Healtheon has the right to terminate this
Agreement immediately upon receipt of such notice or the discovery of any of the
foregoing events. Healtheon acknowledges that NMS, on a regular basis, enhances
its capabilities to provide employer/broker self-service capabilities to its
existing benefits administration systems and that these types of enhancements
are not subject to this Section.
(b). Other Restrictions. NMS shall comply with all applicable laws, rules
and regulations to preclude the acquisition of unlimited rights to technical
data, software and documentation provided with the Healtheon Service to a
governmental agency, and to ensure the inclusion of the appropriate "U.S.
Government End Users" notice required by the U.S. Government agencies or other
applicable agencies. Each party hereto shall comply with all legal requirements
applicable to it with respect to the offering of the Healtheon Service, and
access to and use of the Healtheon Service, to NMS Accounts and End Users as
contemplated herein.
(c). Nonsolicitation of Employees. During the Term and for one year
thereafter, neither party may solicit or employ, directly or indirectly, the
employees of the other party for employment or engagement (as an independent
contractor or otherwise) by such party, or otherwise induce or recommend any
employee of the other party to terminate their employment with such party.
4. NMS Training Services and Qualification of NMS Personnel.
(a). Training Services. If NMS requires additional training sessions,
Healtheon will use commercially reasonable efforts to accommodate such requests.
The cost of any such additional training is set
2
<PAGE>
forth in Exhibit A. All travel and living expenses of NMS's personnel to attend
any off-site training and/or other start up sessions shall be the responsibility
of NMS.
(b). Qualification of Personnel. NMS shall ensure that (i) the
Implementation Services and all other services performed by NMS under this
Agreement, including any Legacy Information Systems Integration Services,
(collectively, "NMS Services") will be performed by persons who are employees or
authorized personnel of NMS, each of whom will have entered into a proprietary
rights assignment and confidentiality agreement with NMS; (ii) each person
assigned to perform the NMS Services shall have the proper skill, training and
background so as to be able to perform the such services in a competent and
professional manner; and (iii) all work product and any other materials,
documentation and other items delivered under this Agreement shall have been
completed in a thorough and professional manner in conformance with any
specifications applicable thereto.
(c). Co-branding of Healtheon Service User Interface. Healtheon agrees that
NMS may Co-brand the Healtheon Service with one or more NMS Marks (or the Marks
of NMS Accounts), and may market and sell the Co-branded Healtheon Service to
NMS Accounts. "Co-branding" means the placement of NMS's trade names,
trademarks, logos, service marks, and/or such other business identifiers ("NMS
Marks") on certain areas of the Healtheon Service using the Customizer service
and on Information Materials. Co-branding shall be subject to the "Healtheon
Co-branding Guidelines", which Healtheon may modify from time to time. Except as
expressly permitted in this Agreement, NMS shall not delete, remove, or
otherwise disable the Healtheon Marks from the Healtheon Service or co-brand the
Healtheon Service in any other way. NMS shall not offer NMS Accounts the option
of removing the Healtheon Marks from the Healtheon Service, and shall use all
reasonable commercial efforts to convince any prospective NMS Account that makes
such a request to accept Healtheon's standard co-branding strategy and to
communicate the advantages of such strategy. Under special circumstances,
Healtheon agrees that it will accommodate a particular NMS Account's demand to
remove the Healtheon Marks from the Healtheon Service for that NMS Account if
there are compelling business reasons.
5. Development. NMS may request custom development of the System and the
Healtheon Service to meet NMS's particular requirements. Healtheon may, in its
sole discretion, provide or agree to perform such custom development work on
terms as may be mutually agreed upon by the parties. All such custom development
work shall be described in a written Statement of Work ("SOW") signed by
authorized representatives of both parties. The SOW shall specify each party's
responsibilities, the intellectual property rights with respect to such custom
development work, any other special terms applicable to the SOW, and a reference
to this Agreement. Unless otherwise agreed to by the parties, NMS will pay
Healtheon's then current time and materials rates, plus reasonable and necessary
expenses for the custom development work. The terms of this Agreement will apply
to the SOW. If there is a conflict between the SOW and this Agreement, the SOW
will control.
6. Implementation of the Healtheon Service at NMS Accounts.
(a). Initiation of Healtheon Service. NMS shall provide written notice to
Healtheon at least ten (10) business days prior to distributing the Healtheon
Service to a NMS Account. Such notice shall contain the name of the NMS Account,
and the anticipated "go live" date. Healtheon will use commercially reasonable
efforts to accommodate any reasonable request made by NMS with respect to the
anticipated "go live" date. NMS shall provide Healtheon with assurances that
each NMS Account has executed an agreement that contains the Service Terms
within thirty (30) business days of the execution of such agreement. Healtheon
shall have the right to terminate the Healtheon Service for a NMS Account if NMS
does not provide Healtheon with assurance that each NMS Account has executed
such agreement within one hundred fifty (150) days of the "go live" date for the
NMS Account.
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<PAGE>
(b). Implementation Services. NMS shall be solely responsible for providing
and/or coordinating all services necessary to implement the Healtheon Service
with the appropriate benefit plan options, including but not limited to Legacy
Information Systems Integration described on Exhibit A-4 and customization of
the Healtheon Service using Healtheon's Customizer application, at each NMS
Account (collectively, the "Implementation Services"). In the event that NMS
needs the assistance of Healtheon in performing any such Implementation
Services, then, subject to Healtheon's other commitments and priorities,
Healtheon will use commercially reasonable efforts to make appropriate Healtheon
personnel available to assist NMS. NMS shall pay Healtheon the fees set forth in
Exhibit A for such services, in addition to reimbursement of all reasonable
expenses incurred by Healtheon in performing such services.
(c). Access to the Healtheon Service. Subject to NMS's compliance with the
terms of this Agreement, Healtheon will provide each NMS Account and its End
Users specified by NMS with access to and use of the Healtheon Service during
the term of this Agreement and the "runoff" period described in Section 11(e)
below.
(d). Responsibilities. Additional relative responsibilities of NMS, each
NMS Account, and Healtheon, relating to the System, the Healtheon Service, and
Implementation Services are set forth in Exhibit C. NMS shall be solely
responsible for providing customer support to the NMS Accounts and their End
Users, as described in Exhibit C. At the request of NMS, Healtheon may, at its
sole discretion, provide customer support directly to NMS Accounts and End
Users.
(e). Enforcement of Service Terms. NMS shall use commercially reasonable
efforts to enforce the Service Terms with at least the same degree of diligence
used in enforcing its own similar agreements with others. NMS shall be
responsible for enforcing the on-line End User agreements for the Healtheon
Service ("End User Agreement"), a copy of which is attached hereto as Exhibit B.
NMS shall not modify, delete or otherwise remove or disable such End User
Agreement, and shall provide reasonable assistance to Healtheon in the
enforcement of any such End User Agreement. NMS shall use commercially
reasonable efforts to protect Healtheon's intellectual property rights, and NMS
shall notify Healtheon of any breach of a material obligation under a Service
Terms and/or End User Agreement which comes to the attention of NMS, and will
use commercially reasonable efforts to cooperate with Healtheon in any legal
action pertaining thereto.
(f). NMS's Relationship with NMS Accounts. NMS shall have the sole right to
charge NMS Accounts for any fees for the Healtheon Service at NMS Accounts,
including but not any fees for Implementation Services. Healtheon shall not be
allowed to charge or assess any fees directly against any NMS Accounts or End
Users unless otherwise agreed to by the parties. NMS's payment obligations under
this Agreement are independent of any fee arrangement between NMS and NMS
Accounts, and NMS shall pay Healtheon for all fees incurred under this Agreement
as set forth herein.
7. Fees and Payment.
(a). Fees. NMS will pay Healtheon the fees specified in Exhibit A for the
services obtained by NMS (collectively referred to as the "Fees"). The Fees
shall be paid as follows:
(i) Service Fees. NMS will pay Healtheon Service Fees at the rates
specified in Exhibit A (the "Service Fees") for providing the NMS Accounts
(and all of their End Users) designated by NMS with access to and use of
the Healtheon Service. This Service Fee includes the basic support services
provided by Healtheon as described in Exhibit A-5. The Service Fee will be
computed on a monthly basis based on the number of Employees for each NMS
Account eligible to receive the Healtheon Service as of the 15th day of the
preceding month. Service Fees shall be due and payable by NMS within thirty
(30) days after receipt of the invoice, and Healtheon will invoice NMS each
month for such Service Fees. An Employee shall be deemed "eligible" for the
purposes of calculating the monthly Service Fees when Healtheon enables
NMS,
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<PAGE>
NMS Account and/or the Employee to access and use the Healtheon Service.
Irrespective of the number of actual Employees eligible for the Healtheon
Service, NMS agrees that it shall pay to Healtheon at least the minimum
Service Fees identified in Exhibit A.
(ii). Miscellaneous Fees. NMS shall pay Healtheon the Miscellaneous
Fees set forth on Exhibit A for the additional implementation, maintenance,
and support services which may be provided to NMS, as set forth in Exhibit
A (the "Miscellaneous Fees") as compensation for additional services
hereafter requested by NMS and provided by Healtheon.
(b). Changes to the Fees. The Service Fees set forth in Exhibit A may not
be changed by Healtheon during the Term of the Agreement. Thereafter, Healtheon
may change the Service Fees upon sixty (60) days prior written notice. Healtheon
may change all other fees annually during the Term (and any renewal term) upon
sixty (60) days prior written notice to NMS, with such fee changes to become
effective on January 1 of the applicable calendar year.
(c). Taxes. All Fees are exclusive of all taxes, duties or levies, however
designated or computed, excepting any tax measured on the net income of
Healtheon. NMS shall be responsible for and pay all taxes based upon NMS's
distribution of the Healtheon Service to NMS Accounts or upon payments due under
this Agreement including, but not limited to, sales, use, or value-added taxes,
duties, withholding taxes and other assessments now or hereafter imposed on or
in connection with this Agreement, exclusive of taxes based upon Healtheon's net
income.
(d). Records. During the Term and for a period of three (3) years
thereafter, NMS shall keep and maintain full, true, and accurate records
pertaining to each NMS Account using the Healtheon Service, including the name,
address of each NMS Account and containing all data reasonably required for the
calculation and verification of the Fees.
(e) Late Fees. If NMS fails to pay any Fees when due, the unpaid balance of
the Fees shall bear interest at the lower of (x) one and one-half percent (1.5%)
per month, or (y) the maximum lawful rate.
8. Proprietary Rights.
(a). Proprietary Rights. NMS acknowledges and agrees that Healtheon and/or
its suppliers own all right, title and interest in the Healtheon Services, the
related System, and any invention or confidential or other information contained
therein (other than data supplied by NMS, NMS Accounts, Employees or End Users),
including, but not limited to all software, in both machine-readable and printed
form, and all derivative works thereof other than as may be expressly set forth
in a SOW, and any copyrighted material which resides on the System or which is
incorporated as part of the Healtheon Services or which is distributed in
conjunction therewith, and all related technical know-how and all rights
therein, including, without limitation, rights in patents, copyrights, and trade
secrets applicable thereto, (collectively, the "Intellectual Property").
Accordingly, NMS hereby assigns and shall assign to Healtheon all right, title
and interest it may have in and to the Intellectual Property and all inventions
that may be embodied therein, and all copyrights, patent rights, trade secret
rights, or other intellectual property rights therein. All right, title and
interest in and to the Intellectual Property shall remain in Healtheon and its
suppliers. All such Intellectual Property is protected by copyright, trade
secret and other intellectual property laws and treaties. NMS may not reverse
engineer, decompile, disassemble, modify in any way or create derivative works
of the Intellectual Property. NMS shall not knowingly take any actions, to
jeopardize, limit or interfere in any manner with Healtheon's ownership of and
rights with respect to any Intellectual Property, the Healtheon Service, the
System and any related documentation. NMS shall require that each NMS Account
agree to the Service Terms. NMS shall have only those rights in and to the
Healtheon Service and the related Intellectual Property granted to it pursuant
to this Agreement.
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(b). Trademarks; Proprietary Notices. Healtheon's trademarks or trade names
are the property of Healtheon and NMS agrees that it shall not use any of
Healtheon's trademarks or trade names without Healtheon's prior written consent.
NMS agrees not to register any Healtheon trademarks or trade names without
Healtheon's express prior written consent. Subject to the provisions of Section
10(a) relating to private labeling of marketing materials for the Healtheon
Service, (i) NMS shall not remove or alter any trademark, trade name, copyright,
or other proprietary notices, legends, symbols, or labels appearing on or in
materials pertaining to the Healtheon Service and the documentation related
thereto delivered to NMS by Healtheon, and (ii) Each portion of the Healtheon
Service documentation reproduced by NMS shall include the intellectual property
notice or notices appearing in or on the corresponding portion of such materials
as delivered by Healtheon hereunder, if any.
(c). Data. Healtheon acknowledges and agrees that NMS and/or its NMS
Accounts and/or End Users own all right, title and interest in the data that is
entered into the System. Healtheon shall be entitled only to store such data on
the System, to enable NMS-designated NMS Accounts and their End Users to access
and use the data, and to otherwise use the data in connection with providing the
Healtheon Service hereunder, or as otherwise may be agreed to in writing by the
parties. Notwithstanding the foregoing, nothing herein shall prohibit Healtheon
from using aggregate data for any purpose whatsoever.
9. Confidential Information.
(a). Confidential Information. The parties acknowledge that in the course
of performing under this Agreement, each party may be exposed to or acquire
information, which is proprietary to or confidential to the other party, its
suppliers or customers. Any and all such information of one party in any form
obtained by the other party or its employees, agents, or representatives in the
performance of this Agreement (including but not limited to the Intellectual
Property and any and all health care data of End Users) shall be deemed to be
confidential and proprietary information of such party. The parties agree to
hold such information in strict confidence and in conformance with all
applicable legal requirements, to only permit use of such information by its
employees and agents having a need to know in connection with performance under
this Agreement, and not to copy, reproduce, sell, assign, license, market,
transfer, give or otherwise disclose such information to third parties or to use
such information for any purposes whatsoever, without the express written
permission of the other party and to advise each of their employees, agents, and
representatives of their obligations to keep such information confidential. All
such confidential and proprietary information described herein in whatever form
is hereinafter collectively referred to as "Confidential Information."
(b). Exceptions to Confidential Information. Notwithstanding the
obligations set forth in Section 9(a), above, the confidentiality obligations of
Healtheon and NMS shall not extend to information that (i) was, as of the time
of its disclosure, or thereafter becomes part of the public domain through a
source other than the receiving party; (ii) the receiving party can demonstrate
was known to the receiving party as of the time of its disclosure; (iii) the
receiving party can demonstrate was independently developed by the receiving
party without use of the Confidential Information; or (iv) the receiving party
can demonstrate was subsequently learned from a third party not under a
confidentiality obligation to the providing party. In the event that a receiving
party is required to disclose certain Confidential Information of a disclosing
party pursuant to court order or government authority, the receiving party shall
provide reasonable notice to the disclosing party prior to such disclosure and
shall cooperate with the disclosing party in an attempt it may make to obtain
protection from such disclosure.
(c). Additional Confidentiality Commitments. Notwithstanding the provisions
of this Section 9, neither party shall have the right to disclose the other
party's Confidential Information to third parties without written permission
from the other party and subject to such party obtaining from such third parties
a confidentiality agreement reasonably acceptable to the other party and
protecting the Confidential Information
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in accordance with the terms of this Agreement, except as otherwise required by
law or legal process. Neither party shall disclose the terms and conditions of
this Agreement with any person or entity, without the other party's prior
written consent, except for disclosure to such party's employees who have a need
to know the terms of this Agreement or as otherwise required by law or legal
process. In the event a party is required by law or legal process to disclose
the Confidential Information of the other party, it shall provide reasonable
notice to the disclosing party prior to such disclosure and shall cooperate with
the disclosing party in any attempt it may make to obtain protection from such
disclosure.
10. Marketing.
(a) Marketing Materials. Healtheon will provide NMS with information
materials to use in creating brochure(s) describing the Healtheon Services and
the System. NMS may modify such materials to make them consistent with its other
material but may not substantially change the content of such materials without
Healtheon's prior written approval. NMS may (but is not required to) "co-brand"
(i.e., market the Healtheon Service under NMS's own name or brand, as opposed to
Healtheon's) the marketing materials in accordance with guidelines to be
mutually agreed upon by the parties. Pre-production samples of any advertising,
merchandising, promotional or display materials containing all or a portion of
the marketing materials or describing the Healtheon Service and/or the System
(collectively referred to as "Information Materials") shall be submitted by NMS
to Healtheon, for Healtheon's timely approval as to quality, style, appearance,
usage of any Healtheon trademarks and accuracy of the information, prior to any
actual production, use or distribution of any Information Materials by NMS or on
its behalf. Subject to Healtheon's prior written approval, NMS shall have the
right to distribute such approved Information Materials to NMS Accounts and End
Users.
(b) Publicity. Any public announcement regarding the parties' relationship
and the nature of this Agreement shall be coordinated between the parties and
shall be in a form, which is mutually agreeable to the parties.
11. Term and Termination.
(a). Term. The initial term of this Agreement (the "Term") shall commence
on the Effective Date and shall end on (i) January 31, 2003 unless the parties
mutually agree to extend the term ("renewal term"), or (ii) such earlier date
upon which this Agreement may be rightfully terminated in accordance with the
provisions of this Section 11.
(b). Default. Subject to the cure periods contained herein, either party
has the right to terminate this Agreement if the other party breaches or is in
default of any material obligation hereunder, which default is incapable of cure
or which, being capable of cure, has not been cured within forty-five (45) days
after receipt of notice of such default from the non-defaulting party or within
such additional cure period as the non-defaulting party may authorize. In the
event NMS breaches Section 2, 3, 8 or 9 of this Agreement, Healtheon may
terminate this Agreement upon ten (10) days prior written notice. In the event
Healtheon breaches Section 3, 6(g), 8 or 9 of this Agreement, NMS may terminate
this Agreement upon ten (10) days prior written notice.
(c) Right to Terminate with Notice. Each party has the right to terminate
this Agreement upon one hundred eighty (180) days prior written notice to the
other party. In the event Healtheon terminates this Agreement without cause, the
applicable terms and conditions of this Agreement shall continue to apply, at
NMS's option, to existing NMS Accounts in accordance with the "runoff"
procedures described in Section 11(e) below, provided that NMS remains in
material compliance with this Agreement during the runoff period.
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(d). Insolvency. Either party may terminate this Agreement by written
notice to the other, and may regard the defaulting party as in default of this
Agreement, if the defaulting party becomes insolvent, makes a general assignment
for the benefit of creditors, suffers or permits the appointment of a receiver
for its business or assets, becomes subject to any proceeding under any
bankruptcy or insolvency law, which is not dismissed within sixty (60) days,
whether domestic or foreign, or has wound up or liquidated, voluntarily or
otherwise. Any event described in the immediately preceding sentence shall be
deemed a breach of this Agreement that is incapable of cure for purposes of
Section 11.
(e) Rights and Obligations of the Parties on Termination. Upon the
expiration or earlier rightful termination of this Agreement, the provisions of
this Agreement shall continue to apply and be enforceable to allow for the
orderly runoff of all NMS Accounts and End Users, on a NMS Account basis, until
the next annual anniversary or renewal date of such NMS Account's contract with
NMS occurring immediately after the expiration or termination of this Agreement
but not to exceed twelve (12) months from the effective date of expiration or
termination. Upon the expiration or earlier rightful termination of this
Agreement: (i) at the end of the last runoff period, NMS shall forthwith return
to Healtheon all papers, materials, and other properties of Healtheon then in
its possession or under its control, including but not limited to any elements
of the System, the related documentation and any Intellectual Property,
including any copies which have been distributed to any third parties; (ii) at
the end of each applicable runoff period, Healtheon shall return to NMS all data
(in such format and on such media as may be reasonably required by NMS) or other
property of NMS, NMS Accounts, Employees or End Users relating to the foregoing,
and shall thereafter delete or otherwise destroy any copies of such data and
property, except to the extent such information is contained in Healtheon's
backup systems, and (iii) thereafter each party shall furnish to the other party
an affidavit signed by an officer of such party certifying that, to the best of
his or her knowledge, such delivery or destruction has been fully effected.
Notwithstanding the foregoing, Healtheon shall not be obligated to provide NMS
Accounts access to and use of the Healtheon Service during the applicable runoff
periods if NMS defaults on its material obligations under this Agreement and
fails to cure such default within fifteen (15) days after such written notice
thereof from Healtheon. This Agreement, and each Healtheon Service Agreement and
all related End User License Agreements granted hereunder shall terminate upon
the effective termination date of this Agreement or at the end of the applicable
runoff period, whichever is later.
(f). Effect on Rights. Termination of this Agreement by either party shall
not act as a waiver of any breach of this Agreement and shall not act as a
release of either party from any liability for breach of such party's
obligations under this Agreement. Within thirty (30) calendar days of
termination of this Agreement with respect to any particular NMS Account and
following the return of all NMS Account data as aforesaid, NMS shall pay to
Healtheon all sums then due and owing. Upon termination of this Agreement (or at
the end of applicable runoff periods for NMS Accounts, if any), all licenses for
Healtheon Service and Intellectual Property granted under this Agreement shall
terminate. The respective rights and obligations of Healtheon and NMS under the
provisions of Sections 3(a), 3(b), 6(g), 7, 8, 9, 11, 13, 14 and 15 shall
survive any termination of this Agreement.
(g) Nonsolicitation of NMS Accounts. During the Term of this Agreement,
Healtheon agrees that it will not directly solicit or service (other than
pursuant to this Agreement) any then currently active NMS Account to access and
use the Healtheon Service through a direct contract with Healtheon, instead of
through such NMS Account's existing contract with NMS. Nothing herein prohibits
Healtheon from providing the Healtheon Service to any NMS Account (active or
inactive) through the competitive efforts of another distributor or other third
party.
12. Representations and Warranties.
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(a). The System and Services. NMS acknowledges that complex computer
systems and software, such as the System, and on-line services such as the
Healtheon Service are rarely free of defects, perform without interruption and
provide complete security, and Healtheon does not warrant the same. However,
Healtheon does warrant that during the Term, the System shall function in
conformance with the specifications in all material respects and that the
Healtheon Service will provide the functions described on Exhibit A-2, excepting
only temporary (not to exceed up to four (4) consecutive hours per occurrence)
interruptions in service, except for Scheduled Downtime, unavailability excused
under Section 16(i) (Force Majeure) or interruptions resulting from problems
with the software, hardware, and other equipment of third parties including NMS,
NMS Account, or End User. As used herein, "Scheduled Downtime" refers to that
period of time when the Healtheon Service is unavailable to End Users to allow
Healtheon to perform any necessary maintenance, repair, upgrades, and updates.
Healtheon shall, at its sole cost and expense, make all corrections necessary to
correct any "High Priority Errors" which cause the System not to function in
accordance with the specifications in any material respect and the Healtheon
Service to remain unavailable for more than four (4) consecutive hours between 4
a.m. and 6 p.m. PST and Healtheon shall update the System to include any
required maintenance modifications as soon as commercially practicable. A "High
Priority Error" shall mean an error resulting in a catastrophic failure, system
down, data corruption or loss of data, or a major loss of functionality without
a known work around. Errors that are not High Priority Errors will be addressed
in conformance with assessment, prioritization and scheduling criteria to be
mutually agreed upon by Healtheon and NMS. NMS further acknowledges and agrees
that certain information which is provided to NMS Accounts and End Users as part
of the Healtheon Service is provided by third parties, such as health plans,
other Benefits Carriers and the NMS Accounts themselves (the "Third Party
Material"), and that Healtheon has not reviewed any such material for its
accuracy or appropriateness and Healtheon makes no representations or warranties
of any nature whatsoever regarding any Third Party Material and Healtheon
assumes no liability of any kind with respect to any Third Party Material.
(b). Healtheon Ownership. Healtheon represents and warrants (i) Healtheon
has full and sufficient rights to grant the rights and license granted to NMS in
this Agreement; and (ii) that the elements of the System developed by Healtheon
(i.e., excluding third party hardware and software) does not infringe any U.S.
issued patent, copyright, trademark or trade secrets or rights of any third
party of which, after due inquiry, Healtheon is aware, nor has any claim
(whether or not embodied in an action, past or present) of such infringement
been threatened or asserted, and no such claim is pending against Healtheon or,
insofar as Healtheon is aware against any entity from which Healtheon has
obtained such rights. Healtheon's sole obligation to NMS, for a breach by
Healtheon of the foregoing representations and warranties shall be Healtheon's
obligations under Section 13.
(c). NMS's Services and Warranty. NMS represents and warrants that (i) the
Implementation Services and all other NMS Services which relate to the Healtheon
Service will be performed by persons who are employees or other authorized and
trained personnel, each of whom will have entered into a proprietary rights
assignment and confidentiality agreement with NMS; (ii) each person assigned to
perform the NMS Services shall have the proper skill, training and background so
as to be able to perform such services in a competent and professional manner
and (iii) all work product and any other materials, documentation and other
items delivered under this Agreement shall have been completed in a thorough and
professional manner in conformance with any specifications applicable thereto.
NMS further warrants that its provision of the NMS Services hereunder will be in
compliance with all applicable laws, rules and regulations. NMS warrants that
for a period of one hundred eighty (180) days following each Implementation (or
any part thereof) performed by NMS, such Implementation (or any part thereof)
shall function in conformance with any applicable specifications and
requirements in all material respects. NMS shall, at its expense, make or have
an authorized integrator make all reasonable corrections requested by Healtheon
or the applicable NMS Account to correct any errors which cause the
Implementation to fail to function in accordance with the specifications or
requirements in any material respect.
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(d). Compliance with Applicable Laws. NMS acknowledges that the information
conveyed through the Healtheon System and Service may constitute confidential or
proprietary information of End Users or other persons or entities, and NMS
agrees that it (and not Healtheon) is solely responsible at all times for
obtaining all End User and any other legally or contractually required consents
or permissions necessary or advisable to disclose, transmit and process such
information through the Healtheon System and Service. NMS represents and
warrants that all information that it or its NMS Accounts and End Users provide
through NMS and any consents required for such information shall be in
compliance with all applicable laws, rules and regulations and contractual
obligations that may now or hereafter govern. NMS further represents and
warrants that its offer and sale of the employee benefits enrollment through the
Healtheon Service hereunder will be in compliance with all applicable laws,
rules and regulations.
(e). Authority. Healtheon and NMS each hereby represents and warrants to
the other that it is duly organized and validly existing under the laws of the
jurisdiction in which it is organized, in good standing therein, and has the
power to enter into this Agreement and to perform its obligations hereunder and,
furthermore, that the performance by it of its obligations under this Agreement
has been duly authorized by all necessary corporate or other action and will not
violate any provision of law or regulation or of any corporate charter or
bylaws.
(f). Back-up. Healtheon warrants that it shall maintain reasonable
safeguards against the destruction, loss and alteration of software and data
that is in the possession of Healtheon. In the event that additional safeguards
for NMS data are reasonably requested by NMS, Healtheon shall provide such
additional safeguards, and NMS shall reimburse Healtheon for any reasonable
additional fees and costs incurred by Healtheon. Healtheon, at no additional
cost to NMS, shall perform (i) incremental daily backups and (ii) weekly full
backup of all NMS and NMS Account data in its possession. In the event of loss
of data by Healtheon, Healtheon shall regenerate the lost data at Healtheon's
sole cost and expense as soon as practicable within ten (10) business days from
notification of the loss.
(g) Y2K Compliance. Healtheon hereby certifies that it has made reasonable
inquiry and investigation into whether the Healtheon Service and System are Year
2000 ("Y2K") Compliant (as defined below) such that the availability and
provision of the Healtheon Service will continue in accordance with the
requirements of this Agreement into the year 2000. Should Healtheon become aware
of any Y2K compliance issue that would or could have a material negative impact
on its ability to provide the Healtheon Service as contemplated herein, it shall
diligently work to minimize such negative impact on the Healtheon Service and
NMS (and its End Users). In case of breach of the foregoing, Healtheon promptly
shall correct the problem and provide NMS (and its End Users) with access to and
use of a corrected Healtheon Service. "Year 2000 Compliant" means that the
ability to calculate and compare date data between the twentieth and
twenty-first centuries (including calendar dates for the Leap Year), without
impairment in the functioning of the Healtheon Service, when used in accordance
with any documentation provided by Healtheon, but only if all associated
products, such as hardware, software and firmware, used in combination with the
Healtheon Service properly exchange date data with the Healtheon Service and
System.
(h) Representations Regarding the Healtheon Service. NMS represents and
warrants that it will not, directly or indirectly, make any representations to
any third parties, including NMS Accounts, of the services provided under this
Agreement in any manner which is inconsistent with Healtheon's specifications or
representations and warranties provided hereunder.
(i). No Other Representations or Warranties. EXCEPT AS EXPRESSLY PROVIDED
HEREIN, HEALTHEON MAKES NO REPRESENTATIONS OR WARRANTIES OF CONDITION OF ANY
KIND WHETHER EXPRESS, IMPLIED OR STATUTORY (EITHER IN FACT OR BY OPERATION OF
LAW) WITH RESPECT TO THE HEALTHEON SERVICE, THE SYSTEM AND THE DOCUMENTATION
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RELATED THERETO. TO THE EXTENT PERMITTED BY APPLICABLE LAW, HEALTHEON EXPRESSLY
DISCLAIMS ALL IMPLIED WARRANTIES OR CONDITIONS OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE. HEALTHEON DOES NOT WARRANT THAT THE HEALTHEON SERVICE, THE
SYSTEM OR THE DOCUMENTATION ARE ERROR-FREE OR THAT OPERATION OF THE HEALTHEON
SERVICE OR THE SYSTEM WILL BE SECURE OR UNINTERRUPTED AND HEALTHEON HEREBY
DISCLAIMS ANY AND ALL LIABILITIES ON ACCOUNT THEREOF EXCEPT FOR SUCH LIABILITIES
EXPRESSLY ASSUMED PURSUANT TO THIS AGREEMENT.
(j). EXCLUSIVE REMEDIES. NMS' EXCLUSIVE REMEDY FOR ANY DEFAULT OR BREACH OF
THE WARRANTIES PROVIDED IN SECTIONS 12(a), 12(f), AND 12(g), OR ANY OTHER
EXPRESS OR IMPLED WARRANTY RELATING TO THE HEALTHEON SERVICE (EXCLUDING THE
WARRANTIES SPECIFIED IN SECTION 12(b)) OR THE HEALTHEON SYSTEM SHALL BE LIMITED
TO INVOCATION, AT HEALTHEON'S EXPENSE, OF THE ERROR CORRECTION PROCEDURES SET
FORTH IN THOSE SECTIONS (E.G., CORRECTION OF HIGH PRIORITY ERRORS, REGENERATION
OF LOST DATA, AND CORRECTION OF Y2K COMPLIANCE ISSUES), AND IN THE EVENT THE
ERROR IS NOT CORRECTED WITHIN NINETY (90) DAYS, TERMINATION OF THIS AGREEMENT
AND A PRO-RATA REFUND OF THE ONE-TIME START UP FEES STATED IN EXHIBIT A OF THIS
AGREEMENT PRORATED BASED UPON A FIVE (5) YEAR STRAIGHT LINE DEPRECIATION METHOD.
Healtheon may deduct from any such payment all other sums due Healtheon from
NMS.
13. Indemnification.
(a) Intellectual Property Indemnification by Healtheon. Healtheon will, at
its expense, defend or settle any claim, action or allegation brought against
NMS by a third party, other than a NMS Account, that the System and/or Healtheon
Service infringes any patent, copyright, trademark or trade secret or other
intellectual property right of any third party excluding NMS Accounts, and will
pay any final judgments awarded or settlements entered into, provided that NMS
gives prompt written notice to Healtheon after it receives notice of such claim,
action or allegation of infringement and gives Healtheon the authority to
proceed as contemplated herein. The failure to gove such notice shall not affect
NMS' indemnification rights hereunder unless the failure to prompt notice has
materially and adversely affected Healtheon's ability to successfully defend
against such claim, action or allegation. NMS may, at its own expense,
participate in the defense of any such claim with counsel reasonably acceptable
to Healtheon. However, Healtheon will have the exclusive right to control the
defense of any such claim, action or allegation and make settlements thereof at
its own discretion, and Distributor may not settle or compromise such claim,
action or allegation, except with prior written consent of Healtheon. NMS will
give such assistance and information as Healtheon may reasonably require to
settle or oppose such claims, at Healtheon's expense.
In addition, Healtheon may, at its sole option and expense: (i) provide NMS and
its Company Accounts access to a system and service which is functionally
equivalent to the System and Healtheon Service, without additional charge; (ii)
modify the System and/or the Healtheon Service to avoid the infringement; or
(iii) obtain a license for NMS to continue use of the Healtheon Service for the
Term of this Agreement and pay for any additional fee required for such license.
In the event that, in Healtheon's reasonable judgment, none of the foregoing
options are feasible, Healtheon shall have the right to terminate this
Agreement. [MOVED FROM BELOW
(b). Limitations on Infringement Indemnities. Healtheon shall have no
indemnity obligation for claims resulting from the Implementation Services
performed by NMS which results or which is alleged to result from (i)
development work performed by Healtheon in compliance with NMS' specifications
where Healtheon's method of compliance has been compelled by the terms of NMS'
specifications; (ii) NMS' use of the System and/or Healtheon Service in
combination with any hardware or software not furnished by,
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authorized by, or generally approved by Healtheon hereunder or any modifications
which have been made by Distributor; or (iii) for any claims which relate to any
Third-Party Material or any other information or data which has been supplied by
Distributor or its affiliates, including NMS Accounts and , End Users or which
has been provided by any health plans and/or other Benefits Carriers, which is
incorporated into the System and/or the Healtheon Service. In addition,
Healtheon shall have no indemnity obligation for claims of infringement
resulting from NMS' failure within a reasonable time frame to implement any
replacement or modification of the System which conforms to the requirements of
Section 13(d) herein. Healtheon's obligations under this Section 13 are
Healtheon's entire liability with respect to any third-party claim, action or
allegation infringement of any patent, copyright, trade secret or other
proprietary right by the System and/or Healtheon Service.
(c). Indemnification by NMS. NMS agrees to indemnify and hold harmless and
defend Healtheon and its suppliers from and against any and all claims,
liabilities, losses, damages expenses and costs (including reasonable attorneys'
fees and costs) arising out of, in connection with or relating to (i)
Distributor's breach of any representation or warranty to a third party
(including NMS Accounts) relating to the Healtheon Service or System; (ii) any
use of the Healtheon Service by NMS Accounts or End Users (excluding patent and
copyright infringement claims resulting from such use in accordance with
Healtheon documentation); (iii) any data or information provided by NMS which
was incorrect (excluding all such information provided to NMS by Healtheon) or
was not delivered in a timely manner or which violates any rights of any third
party or any claim based on NMS' noncompliance with any law, regulation or other
government requirement (other than resulting from its noncompliance); (iv) the
use of or the failure of NMS' proprietary benefits administration system, if
applicable, in conjunction with the System and/or the Healtheon Service; (v) any
modifications to the System or Healtheon Service which were requested by NMS and
performed by Healtheon in accordance with NMS' specifications and/or any
unauthorized modifications made by NMS to the Healtheon Service or System or the
use of the Healtheon Service or System in combination with any hardware or
software not authorized by Healtheon.
(d) Method of Asserting Claims; Payment of Claims. As used herein, an
"Indemnified Party" shall refer to a "Healtheon Indemnified Party" or a "NMS
Indemnified Party," as applicable, the "Notifying Party" shall refer to the
party hereto whose Indemnified Parties are entitled to indemnification
hereunder, and the "Indemnifying Party" shall refer to the party hereto
obligated to indemnify such Notifying Party's Indemnified Parties.
In the event that any of the Indemnified Parties is made a defendant in or party
to any action or proceeding, judicial or administrative, instituted by any third
party (any such third party action or proceeding being referred to as a
"Claim"), the Notifying Party shall give the Indemnifying Party prompt notice
thereof. The failure to give such notice shall not affect any Indemnified
Party's ability to seek reimbursement unless such failure has materially and
adversely affected the Indemnifying Party's ability to defend successfully a
Claim. The Indemnifying Party shall be entitled to control, contest and defend
such Claim; provided, that the Indemnifying Party (i) has a reasonable basis for
concluding that such defense may be successful and (ii) diligently contests and
defends such Claim. Notice of the intention so to contest and defend shall be
given by the Indemnifying Party to the Notifying Party within 20 business days
after the Notifying Party's notice of such Claim (but, in all events, at least
five business days prior to the date that an answer to such Claim is due to be
filed). Such contest and defense shall be conducted by reputable attorneys
employed by the Indemnifying Party. The Notifying Party shall be entitled at any
time, at its own cost and expense (which expense shall not constitute an
indemnifiable loss), to participate in such contest and defense and to be
represented by attorneys reasonably acceptable to Indemnifying Party of its or
their own choosing. If the Notifying Party elects to participate in such
defense, the Notifying Party will cooperate with the Indemnifying Party in the
conduct of such defense. . If a party is entitled to indemnification hereunder,
such party's costs and expenses that are reimbursable pursuant to this Section
shall be promptly reimbursed by the Indemnifying Party following the receipt of
notice with respect to such costs and expenses by the Indemnifying Party.
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14. Disclaimer; Limitation of Liabilities.
(a). Limitation of Liabilities. TO THE EXTENT ALLOWED BY APPLICABLE LAW, IN
NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY LOSS OF PROFITS, LOSS OF BUSINESS,
LOSS OF USE OR DATA, INTERRUPTION OF BUSINESS, OR FOR INDIRECT, SPECIAL,
INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, EVEN IF SUCH PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF
ESSENTIAL PURPOSE OF ANY LIMITED REMEDY, OR FOR ANY CLAIM AGAINST A PARTY BY ANY
THIRD PARTY, INCLUDING ANY NMS ACCOUNTS. In addition, in no event will Healtheon
or any of its suppliers be liable for (i) any representation or warranty made to
any third party by NMS or any agent of NMS; (ii) the failure of the Healtheon
Service to perform except as, and solely to the extent, otherwise expressly
provided herein; or (iii) the failure of the Healtheon Service to provide
security; (iv) any use of the Healtheon Service or the related documentation or
the results or information obtained or decisions made by End Users of the
Healtheon Service; or (v) any claims based on or arising from Third-Party Data.
Notwithstanding anything in this Agreement to the contrary, Healtheon's entire
liability to NMS for damages concerning the performance or nonperformance by
Healtheon or in any way related to the subject matter of this Agreement, and
regardless of whether the claim for such damages is based in contract or tort,
shall not exceed the amount received by Healtheon from NMS during the six (6)
months immediately preceding the day the act or omission occurred that gave rise
to the claim. Either party may obtain equitable or injunctive relief in addition
to the other remedies available under this agreement.
15. Dispute Resolution. Any disputes between the parties under this
Agreement that cannot be resolved by direct negotiations between the parties
shall be submitted to and determined by binding arbitration. The arbitration
shall be conducted under the commercial arbitration rules of the American
Arbitration Association then in effect. The arbitrator will be chosen from a
panel of persons with knowledge of industry practices in the health care data
information processing and admitted to practice law in at least one state. In
connection with any arbitration hearings, the parties shall be entitled to
submit written legal briefs for consideration by the arbitrator in accordance
with a schedule to be negotiated by the parties or to be established by the
arbitrator if the parties are unable to agree. The parties agree that the
arbitrator may award any remedy consistent with the commercial arbitration
rules; provided that the arbitrator will not have the authority to award any
punitive, exemplary or other non-compensatory damages, or any penalties relating
to any dispute arbitrated or litigated. The arbitrator may award reasonable
attorneys' fees and costs to the prevailing party. The arbitration will be held
in Santa Clara, California or any other mutually agreeable location. The parties
will be entitled to discovery to the same extent provided for civil actions in
the federal district court of the jurisdiction in which the arbitration is held.
The parties agree to endeavor in good faith to select an arbitrator within (30)
days after either party provides written notice to the other of its demand for
arbitration and to endeavor in good faith to complete the arbitration within
ninety (90) days following such notice. If the parties cannot mutually agree
upon an arbitrator within such 30-day period, one will be selected in accordance
with the rules of the AAA.
16. Miscellaneous.
(a). Entire Agreement. This Agreement, together with all appendices or
other attachments referenced herein, constitutes the entire agreement between
Healtheon and NMS regarding the subject matter of this Agreement and supersedes
any memorandums of understanding, written proposals, terms sheets and any other
oral discussions or agreements.
(b). Severability. Any invalidity, in whole or in part, of any provision of
this Agreement shall not affect the validity of any other of its provisions.
13
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(c). Notices. Wherever under this Agreement one party is required or
permitted to give notice to the other party, such notice shall be deemed given
when delivered by hand, when telecopied or faxed and receipt confirmed, when
sent by overnight courier service to the address set forth above, or on the
third business day after mailing when mailed by United States Registered or
Certified Mail, Return Receipt Requested, postage prepaid, and addressed
attention: President with a copy attention: General Counsel. Either party hereto
may from time to time change its address for notification purposes by giving the
other party prior written notice of the new address and the date upon which such
new address will become effective.
(d). Insurance. During the Term of this Agreement, each party shall
maintain, either through external insurance coverage or internal self insurance,
such capability to bear the risks associated with the performance of this
Agreement as is reasonable, prudent and advisable under the circumstances.
(e). Assignment. This Agreement and the licenses granted hereunder are to
NMS as a specific legal entity , and are not assignable by NMS, nor are the
obligations imposed on NMS delegable without Healtheon's prior written consent.
Any attempt to sublicense (except as expressly permitted herein) assign or
transfer any of the rights, duties or obligations under this Agreement in
derogation hereof by either party shall be null and void.
(f). Amendment. No alteration, amendment, waiver, cancellation or any other
change in any term or condition of this Agreement shall be valid or binding on
either party unless mutually agreed to in a writing signed by both parties.
(g). Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the state of California, without reference to
conflict of laws principles.
(h). Independent Contractors. The parties hereto are independent
contractors. Nothing contained herein or done in pursuance of this Agreement
shall constitute either party the agent of the other party for any purpose or in
any sense whatsoever, or constitute the parties as partners or joint venturers.
(i). Force Majeure. Either party shall be excused from any delay or failure
in performance hereunder, except for the payment of monies, caused by reason of
any occurrence or contingency beyond its reasonable control, including but not
limited to, acts of God, earthquake, riots, war, actions or decrees of
governmental bodies or communications line or power failures. The obligations
and rights of the party so excused shall be extended on a day-to-day basis for
the period of time equal to that of the underlying the cause of the delay,
provided that Healtheon shall exercise commercially reasonable efforts to resume
the provision of the Healtheon Services and the availability of the System as
quickly as is practicable under the circumstances.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and do each hereby warrant and represent that their respective signatory whose
signature appears below has been and is on the date of this Agreement duly
authorized by all necessary and appropriate corporate action to execute this
Agreement.
Healtheon Corporation NMS
By: /s/ Rajesh Radhakrishnan By: /s/ Mike Bingham
------------------------------- ----------------------------------
Name: Rajesh Radhakrishnan Name: Mike Bingham
------------------------- ---------------------------
Title: Title: Senior Vice President
------------------------- ---------------------------
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EXHIBIT A
---------
HEALTHEON SERVICES AND FEES
1. Service Fees
The Service Fees described below in this part 1 constitute compensation for the
distribution by Distributor, and the access and use, by any Company Account and
its respective End Users, of the Healtheon Service, and specifically for the
functionality described on Exhibits A-1 attached hereto (the "Core Benefits
Administration Module" and "Data Distribution"), being all three components (the
Web Employee Self-Service, Administrator and Data Distribution)
For the term of the contract, the Service Fee will be calculated:
* At $*** Per eligible Employee Per Year (PEPY) for eBenX Accounts that use
the Healtheon Service for one a one-time open enrollment only use and
* At $*** Per eligible Employee Per Year (PEPY) for all other eBenX Accounts
2. Miscellaneous Fees (See Exhibit A-2)
The Miscellaneous Fees described below in this part 2 constitute compensation
for any services to be provided by Healtheon in connection with the
miscellaneous services described on Exhibit A-2 attached hereto.
Implementation Services- as requested $*** per hour
Refresher Training $***
Miscellaneous Technical Support $*** per hour
4. Support Services (See Exhibit A-3)
The Support Services described on Exhibit A-3 attached hereto are included in
the Service Fees.
5. Travel & Other Expenses
In addition to the other fees provided in this Exhibit A, Distributor shall be
responsible for Healtheon's travel and related expenses and other reasonable and
customary out-of-pocket expenses, which are incurred by Healtheon personnel in
performing any of the foregoing services.
1
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.20 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
Exhibit A-1
-----------
Core Benefit Administration Module Description
Healtheon provides a suite of Internet-based applications that are accessible by
employees, human resource (HR) managers, external administrators and benefits
providers. Release 3.1 of this service includes the following components:
BenefitCentral(TM)
Web Employee Self-Service
Self-service on-line benefits enrollment and administration that presents
employees with a customized presentation of their personal benefits options with
a decision-support environment to aid in their benefits selection. Employees go
through a point-and-click process to enroll in their benefits. Employees can
make yearly benefits selections during open enrollment, make benefits changes as
the result of qualifying events and can review and update personal and benefit
information as needed anytime during the benefit year. Benefits which can be
supported include: medical plans, prescription drug plan, mental
health/substance abuse plan, vision plan, dental plan, basic life, supplemental
life, long term disability, short term disability, AD&D, 401 (k), employee
savings and retirement accounts, vacation sell/purchase, dependent care flexible
spending accounts, health care flexible spending accounts, group legal, long
term care, and other benefits. Specific functional capabilities include:
On-line employee communications - including summary plan descriptions and
benefit comparison charts for health care benefits
Personalized presentation - the presentation of benefit choices for each
participant is specific to the benefits for which they are eligible, based
on their unique dependent, demographic and employment information
Dynamic enrollment workflow - the workflow a participant is led through is based
upon business rules and options associated with benefit plan, benefit
provider and employer requirements as well as their unique situation of
open enrollment/new hire/change enrollment
Real time calculations - eligibility rules and cost calculations are based on
real-time evaluations of customized business rules
Personal information - entering and managing demographic and dependent
information
Beneficiaries - choosing primary and contingent beneficiaries and itemizing
percentages for different beneficiaries across benefits
Coordination of Benefits - supplying coordination of benefits information
regarding other health policies that may cover the participant.
Administrator
An on-line application which provides access to perform the day-to-day
activities required to effectively administer a benefits program. Some of the
features of the Administrator are:
2
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Data Maintenance - Ability to review and update personal, dependent, employment,
benefits elections, and benefit plan data. This includes the capability to
enter new hires directly into the system.
.Multi Year Support - Ability to manage both current year and next year's
enrollments and enrollment activities though one interface.
Improved Query Capabilities - Ability to perform quick and complex searches to
support efficient and more flexible queries. Results of queries will remain
available for repetitive references.
EventMonitor - Full control over the events, activities, and all associated
parameters for each participant in an easy to use interface.
Viewing History - Ability to view person, employment, and election history at a
specific point in time or on a sequential basis. To support this, effective
dating has been added to the participants demographic and employment data.
Overrides - Multiple levels of overrides to manage different types of exception
processing on a participant's enrollment records.
Approvals - Approval service for handling EOI, Student, HMO forms, and other
back-office follow-up
Defaults Assignments - Ability for administrator to assign the default benefit
elections to participant(s) if the participant(s) do not make elections
through BenefitCentral(TM).
Reporter (part of Administrator)
An on-line application which allows administrators to select, configure,
schedule, run, view, download, and print standard or custom reports. Some
of the features of Reporter are:
Configurability - Reports can be configured through parameters which allow
users to broaden or minimize the scope of the data that is display on
the report, thus retrieving data that better meet their needs.
Scheduler - Once configured, reports can be scheduled to run once at a
specific time, or on a repetitive basis.
Internet Report Viewer - Viewing a report is through a viewer plug in that
the user downloads for free from Healtheon. This viewer supports
demand paging, pagination, searches, extracts, and printing.
Customizer (provided to Distributor only)
An on-line application which allows for the setup and definition of the end-user
environment for online benefits enrollment. Customer supports the setup of
company information, business rules, benefit plan details and presentation,
including :
Benefit Packages - Ability to categorize benefit plans by benefit groups if
necessary. For example, the benefits for union employees may be different
than the benefits for non-union employees.
MultiYear Support - Ability to setup the next enrollment period rules
independent of the current year rules. The Customizer can access through
one interface, both the current year and the subsequent year's rules for
easier setup and implementation.
Components - Ability to perform setup on components (i.e. rules, costs, events,
assets, etc.) and subsequently map those components to the desired
customized benefits. This allows components to be used across benefits.
Asset Management - Ability to consolidate graphics, text, marketing pages, etc.
in one location for easy reference when creating the Web content for the
overall presentation as well as the specific benefit presentation.
Rule Templates - The ability to create rules (i.e. eligibility rules) from a set
of comprehensive rule templates which provide for point and click
completion. This results in a more user friendly interface with less rules
creation and more point and click functionality.
3
<PAGE>
Cost Tables - Easier setup and maintenance of costs through new costs tables.
These cost tables provide the ultimate flexibility in calculating a
participant's specific cost.
Event Customization - Benefit related events are customizable with an option to
allow each company to specify system behavior and the allowable options a
participant has as a result of the determined event.
Standard and Default Benefits - Ability to customize the standard and default
benefits that can be assigned by the administrator to the appropriate
participants.
Effective Dating - Rules are effective dated to ensure the appropriate rule for
the time is used for the transaction being processed.
Signoff - Provides the Customizer with a validation mechanism to ensure
customization was performed accurately and consistently within
predetermined boundaries.
4
<PAGE>
Exhibit A-2
-----------
Miscellaneous Services
Implementation Services
For the stated hourly fee, Healtheon can assist Distributor in performing the
Implementation Services including:
Account set up customization
Healtheon can provide optional account set up services which may include
any activities related to customizing a Company Account on the Healtheon
Service.
Legacy Information Systems Integration
Through a one-time set-up process that is a separate option for the Company
Account, certain legacy information systems (LIS's) at the Company Account,
such as human resources information systems (HRIS) or payroll systems, can
transmit data to and receive data from the Healtheon Service. This file
exchange process can allow data to be synchronized between the LIS and
Healtheon. File exchange can be processed manually through the use of
Healtheon's Administrator.
Worksheet and report design
Healtheon can provide optional consultation services to custom design the
necessary End User benefit enrollment worksheet, confirmation report and
other forms necessary for the enrollment process.
Refresher Training
For the stated flat rate fee, Healtheon will also provide a Refresher Training ,
which includes up to *** hours of additional/refresher training of the following
processes:
Deployment
- ----------
Project Planning
Data Gathering
Using the Healtheon Customizer
Data Distribution
Testing
Sales & Marketing
- -----------------
Target Market Definition
Sales Strategies
Client Qualification
Presentation Materials
Product Demonstrations
Administrative & Maintenance Processes
- --------------------------------------
Using the Healtheon Administrator
Using the Healtheon Customizer
5
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.20 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
The Refresher Training sessions will occur at locations to be mutually decided
by the parties. No more than 8 of Distributor's personnel may attend such
sessions.
Miscellaneous Technical Support
- -------------------------------
Healtheon may perform, at additional cost based on time and material rates, the
following additional services, in accordance with a mutually agreeable schedule:
* For the systems and data integration portion of a project, Healtheon can
review implementation plans, schedules and provide general counseling and
support while researching the nuances of the interface details.
* For Company Account setup, Healtheon can provide "sanity" checks on
customization activities and help in implementing complex rules within the
Healtheon environment.
* For the each end-to-end Company Account solution, Healtheon can provide a
technical review of implementation.
* Perform QA "sanity" checks on customization modifications. Help with
implementing complex rules within the Healtheon environment.
* Aid Distributor in researching the nuances of the interface details.
* Provide support to designated Distributor personnel to confirm that access
problems are within the employer's network or ISP connection. Aid in
managing Company Account's ISP connection. Trace source of exact problem
causing access problem potentially resident in desktop (e.g., inadequate
memory), LAN (e.g., security proxy not set or packet loss), ISP connection.
Develop trouble-shooting guides.
* Healtheon can provide marketing and pre-sales support in Company Account
presentations for business development opportunities initiated by
Distributor.
* For systems and data integration, Healtheon can provide project management
of system and data integration activities.
* For Account Customization, Healtheon can provide analysis and processing of
data to ensure consistency with coded rules. Turnkey customization
projects, including dedicated personnel to perform analysis of
requirements.
* Provision of technical assistance for data mapping and other generic SI
issues.
* Review interface changes to ensure proper overall data management.
* Develop new custom reports not available in standard offering.
* Develop and manage billing system for Distributor to bill their Company
Accounts.
6
<PAGE>
Exhibit A-3
-----------
Support Services Description
Basic Technical Support:
2nd Tier Support to Distributor for systems and data integration, account
customization, and all end-to-end Activities involved in deploying a
Company Account solution. Maintain integration documentation, customization
documentation, and requirements and implementation specifications.
Healtheon will provide 2nd tier Company Account support to Distributor. If
Distributor cannot answer questions posed by Company Accounts, Healtheon
will aid Distributor in deriving the answer. Distributor will then
communicate the necessary resolution with the Company Account.
Resolve questions arising from initial training provided by Healtheon to
Distributor personnel
Resolve questions regarding customization guidelines and tools. Move modified
rules, logos or text from test area to production area. Maintain copies of
customization documentation
Provide reports with detailed transaction statistics regarding data file
transfers. Maintain copies of legacy interface documentation.
Provide 7x24 access support to ensure that the Healtheon Service is available
and accessible from the Internet and operating properly.
Resolve questions associate with on-going enhancement/release. Receive and
document requests for feature enhancements in future releases. Provide
"key" Distributor personnel aid in their Healtheon account management
(e.g., forgotten passwords, access privilege changes, etc.). Provide all
necessary support and assistance in connection with any upgrades or System
enhancements.
On a semi-annual basis or in conjunction with major releases, provide updated
documentation and release implementation.
7
<PAGE>
EXHIBIT B
SERVICE TERMS
Company acknowledges that by subscribing to utilize the [System Name to
Come] Service, Company has agreed to the following terms and conditions for the
Term of the Company's subscription of the Service.
1. Proprietary Rights. Company acknowledges and agrees that the Administrator's
vendor and/or the Administrator and/or their suppliers (and not the
Company)(collectively, the "Providers"), own all right, title and interest in
the System, the benefit enrollment and administration services included in the
System (collectively, the "Service") and any invention or confidential or other
information contained therein, including, but not limited to the software and
any copyrighted material which resides on the System and/or the Services and all
trademarks which pertain thereto (the "Intellectual Property"). Accordingly,
Company hereby assigns and shall assign to the Providers, as appropriate, all
right, title and interest it may have in and to the Intellectual Property and
all inventions that may be embodied therein, and all copyrights, patent rights,
trade secret rights, or other intellectual property rights therein. All right,
title and interest in and to the Intellectual Property shall remain in the
Providers. All such Intellectual Property is protected by copyright, trade
secret, trademark and other intellectual property laws and treaties. Company may
not reverse engineer, decompile, disassemble, modify in any way or create
derivative works of the Intellectual Property.
2. Confidential Information. Company acknowledges that, in receiving the
Service, Company may be exposed to or acquire information which is proprietary
to or confidential to the Providers. Any and all such information in any form
obtained by Company or its employees or agents shall be deemed to be
confidential and proprietary information of the Providers, as appropriate.
Company agrees to hold such information in strict confidence and to only permit
use of such information by its employees and agents having a need to know in
connection implementing the Service, and not to copy, reproduce, sell, assign,
license, market, transfer, give or otherwise disclose such information to third
parties or to use such information for any other purpose whatsoever. The
confidentiality obligations of Company shall not extend to information that (i)
is part of the public domain through a source other than Company; (ii) was known
to Company as of the time of its disclosure; or (iii) is independently developed
by Company. In the event that Company is required to disclose any of such
information pursuant to court order, Company shall provide reasonable notice to
the Administrator, prior to such disclosure and shall cooperate with
Administrator to obtain protection from such disclosure.
3. Service Warranty. Company acknowledges that complex computer systems and
software, such as the System, and on-line services such as the Service, are
rarely free of defects, perform without interruption and provide complete
security, and neither Administrator nor its vendor warrants the same. However,
Administrator and its vendor do warrant that the Service shall function in
conformance with the applicable specifications in all material respects and they
shall promptly respond to "high priority errors" reported by Company to
Administrator in accordance with the terms of the agreement between
Administrator and its vendor.
4. Third Party Material. Company acknowledges and agrees that information which
is provided to Company and its end users as part of the Service is provided by
third parties, such as health plans, other benefit carriers and the Company (the
"Third Party Material"), and that neither the Administrator nor its vendor has
reviewed any such material for its accuracy or appropriateness and neither
Administrator nor its vendor makes any representations or warranties of any
nature whatsoever regarding any Third Party Material, nor assumes any liability
of any kind with respect to any Third Party Material.
8
<PAGE>
5. Company's Acknowledgment and Warranty. Company acknowledges that the
information conveyed through the System and Service may constitute confidential
or proprietary information of plan participants or other persons or entities,
and Company agrees that it (and not Administrator or its vendor) is responsible
at all times for obtaining all end user and any other legally or contractually
required consents or permissions necessary or advisable to disclose, transmit,
and process such information through the System and Service. Company represents
and warrants that all information that it and, to the best of its knowledge, its
end users provide through Company to be incorporated into the Service and stored
on the System, and any consents required for such information, shall be in
compliance with all applicable laws, rules and regulations and contractual
obligations. Company acknowledges and agrees that Administrator and its vendor
shall have the right to remove any material which is put on the Service or
System which they reasonably believe infringes the rights of a third party or
which in violation of any applicable law.
6. Disclaimer of Warranties and Limitation of Liability. TO THE EXTENT PERMITTED
BY APPLICABLE LAW, NEITHER ADMINISTRATOR NOR ITS VENDOR MAKES ANY WARRANTY,
EITHER EXPRESS, IMPLIED OR STATUTORY, WITH RESPECT TO EITHER THE SYSTEM OR THE
SERVICE AND ALL IMPLIED WARRANTIES, INCLUDING THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ARE HEREBY DISCLAIMED.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, NEITHER ADMINISTRATOR
NOR ITS VENDOR SHALL BE LIABLE TO COMPANY FOR ANY CONSEQUENTIAL, INDIRECT,
INCIDENTAL, OR SPECIAL OR ANY OTHER DAMAGES, INCLUDING LOST PROFITS OR LOST
DATA, EVEN IF ADMINISTRATOR AND/OR ITS VENDOR HAS BEEN APPRISED OF THE
LIKELIHOOD OF SUCH DAMAGES OCCURRING. IN NO EVENT SHALL ADMINISTRATOR, ITS
VENDOR, OR ANY OF THEIR RESPECTIVE SUPPLIERS BE HELD LIABLE FOR AMOUNTS IN
EXCESS OF THE TOTAL AMOUNT OF CONSIDERATION WHICH VENDOR RECEIVED FROM
ADMINISTRATOR DURING THE PREVIOUS SIX (6) MONTHS FOR THE SERVICES PROVIDED WHICH
GAVE RISE TO SUCH CLAIM.
7. Intellectual Property Indemnification. (a) Administrator will cause its
vendor, at its expense, to defend or settle any claim, action or allegation
brought against Company that the System and/or Service infringes any patent,
copyright, trademark or trade secret of any third party excluding Administrator
and Company, and to pay any final judgments awarded or settlements entered into,
provided that Company gives prompt written notice to Administrator within ten
(10) days after it receives notice of such claim, action or allegation of
infringement and gives Administrator and its vendor the authority to proceed as
contemplated herein. Company may, at its own expense, participate in the defense
of any such claim with counsel reasonably acceptable to Administrator's vendor.
However, Administrator's vendor will have the exclusive right to control the
defense of any such claim, action or allegation and make settlements thereof at
its own discretion, and Company may not settle or compromise such claim, action
or allegation, except with prior written consent of Administrator's vendor.
Company will give such assistance and information as Administrator or its vendor
may reasonably require to settle or oppose such claims, at Administrator's
expense.
(b). Limitations. Administrator's vendor shall have no idemnity obligation for
claims resulting from any implementation services performed by Administrator.
Neither Administrator nor its vendor shall have any indemnity obligation for
claims resulting from or which results or which is alleged to result from (i)
development work performed by them in compliance with Company's specifications
where their method of compliance has been compelled by the terms of Company's
specifications; (ii) Company's use of the System and/or Service in combination
with any hardware or software not furnished by or authorized by Administrator
hereunder or any modifications which have been made by Company; or (iii)
9
<PAGE>
for any claims which relate to any third-party material or any other information
or data which has been supplied by Company, end users or which has been provided
by any health plans and/or other benefit carriers, which is incorporated into
the System and/or the Service. In addition, neither shall have any indemnity
obligation for claims of infringement resulting or alleged to result from
Company's failure within a reasonable time frame to implement any replacement or
modification of the System which conforms to the requirements of paragraph 7(c)
herein.
(c) Infringement Remedy. In the event of any infringement claim, action or
allegation is brought or threatened by a third party other than Company,
Administrator and its vendor may, at their sole option and expense: (i) provide
Company access to a system and service which is functionally equivalent to the
System and Service, without additional charge; (ii) modify the System and/or the
Service to avoid the infringement; or (iii) obtain a license for Company to
continue use of the Service for the term of this Agreement and pay for any
additional fee required for such license. In the event that, in Administrator's
reasonable judgment, none of the foregoing options are feasible, Administrator
shall have the right to terminate this Agreement.
8. Source Code Restrictions. Company agrees not to copy, modify, translate,
decompile, reverse engineer, disassemble, or otherwise determine or attempt to
determine source code from the System, the Service and the Intellectual Property
pertaining thereto or to create any derivative works based upon the System, the
Service and/or the Intellectual Property pertaining thereto, and agrees not to
permit anyone under Company's control or to authorize anyone else to do so.
9. Third Party Beneficiary. Administrator's vendor of the Service is an express
and intended third party beneficiary of any agreements between Company and
Administrator relating to the System or Service.
[Insert Signature Block]
10
<PAGE>
EXHIBIT C
---------
CLARIFICATION OF COSTS AND RESPONSIBILITIES
The purpose of this Exhibit is to help clarify costs and responsibilities which
may or may not have been explicitly stated in the body or other Exhibits of this
Agreement.
Costs/Responsibility of Distributor
- -----------------------------------
The Distributor is fully responsible for the following:
Integration of the Healtheon System with Distributor's legacy system
Maintenance/support costs not specified as a deliverable
Providing Healtheon with reasonable access to Distributor personnel appropriate
to support Healtheon's implementation, deployment and operation of the
Service, which will include designating business and/or information systems
staff members responsible for expediting and coordinating the project
interactions with Healtheon.
Costs/Responsibility of Each Company Account
- --------------------------------------------
Each Company Account is fully responsible for providing enrollment information
to Healtheon. When the Company Account uses the Healtheon Service, the Company
Account is also responsible for the following:
Providing the initial load of employee and enrollment information.
Providing information to enable the Distributor to customize the Healtheon
Service including their benefits, plan descriptions, eligibility criteria,
etc.
Providing Internet access to Members
Providing Healtheon and/or Distributor with reasonable access to information and
Company Account personnel reasonably necessary or appropriate to support
the implementation, deployment and operation of the Service, which will
include designating business and/or information systems staff members
responsible for expediting and coordinating the project interactions with
Healtheon.
Integration of the Healtheon System with their own HRIS and/or payroll system,
if desired
Communications to Employees on use, initiation and termination of System
Providing front-line support to Company Account's end users of the Healtheon
Service, unless designated by Company
11
<PAGE>
EXHIBIT 10.21
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
This Agreement dated as of June 9, 1999 is entered into by and among
Network Management Services, Inc., a Minnesota corporation (the "Company"), Mark
Tierney, Michael Bingham and Barbara Seykora (the "Founders") and the entities
and persons set forth under the heading "Purchasers" on Exhibit A to this
Agreement (the "Purchasers").
WHEREAS, the Company and the Purchasers have entered into an Amended and
Restated Series C Preferred Stock Purchase Agreement of even date herewith (the
"Purchase Agreement"); and
WHEREAS, the Company, the Founders and certain of the Purchasers have
previously executed an Investors' Rights Agreement dated March 19, 1996 and an
Amended and Restated Investors' Rights Agreement dated as of May 3, 1999 (the
"Investors' Rights Agreement"); and
WHEREAS, the Company and the Purchasers desire to provide for certain
arrangements with respect to the registration of shares of capital stock of the
Company under the Securities Act of 1933, certain rights of first refusal with
respect to future issuances of stock, and to amend and restate the Investors'
Rights Agreement in its entirety;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, the parties hereto agree as follows:
1. Registration Rights.
1.1 Certain Definitions. As used in this Agreement, the following
terms shall have the following respective meanings:
"Commission" means the Securities and Exchange Commission, or any
other Federal agency at the time administering the Securities Act.
"Common Stock" means the common stock, $.01 par value per share,
of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar Federal statute, and the rules and regulations
of the Commission issued under such act, as they each may, from time
to time, be in effect.
"Registration Statement" means a registration statement filed by
the Company with the Commission for a public offering and sale of
Common Stock (other than a registration statement on Form S-8 or Form
S-4, or their successors, or any other form for a similar limited
purpose, or any registration statement covering only securities
proposed to be issued in exchange for securities or assets of another
corporation).
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"Registration Expenses" means the expenses described in Section
1.5.
"Registrable Shares" means (i) the shares of Common Stock issued
or issuable upon conversion of the Shares, (ii) any shares of Common
Stock, and any shares of Common Stock issued or issuable upon the
conversion or exercise of any other securities, acquired by the
Purchasers pursuant to Section 2 of this Agreement and (iii) any other
shares of Common Stock issued in respect of such shares (because of
stock splits, stock dividends, reclassifications, recapitalizations,
or similar events); provided, however, that shares of Common Stock
which are Registrable Shares shall cease to be Registrable Shares (i)
upon any sale pursuant to a Registration Statement or Rule 144 under
the Securities Act or (ii) upon any sale in any manner to a person or
entity which, by virtue of Section 3 of this Agreement, is not
entitled to the rights provided by this Agreement. Wherever reference
is made in this Agreement to a request or consent of holders of a
certain percentage of Registrable Shares, the determination of such
percentage shall include shares of Common Stock issuable upon
conversion of the Shares even if such conversion has not yet been
effected.
"Securities Act" means the Securities Act of 1933, as amended, or
any similar Federal statute, and the rules and regulations of the
Commission issued under such act, as they each may, from time to time,
be in effect.
"Shares" means shares of Series A Convertible Preferred Stock,
$0.01 par value per share (the "Series A Preferred Stock"), Series B
Convertible Preferred Stock, $0.01 par value per share (the "Series B
Preferred Stock") and Series C Convertible Preferred Stock, $0.01 par
value per share (the "Series C Preferred Stock") of the Company.
"Stockholders" means the Purchasers and any persons or entities
to whom the rights granted under this Agreement are transferred by any
Purchasers, their successors or assigns pursuant to Section 3 hereof.
1.2 Required Registrations.
(a) At any time after the earlier of April 30, 2002 or six months
after the closing of the Company's first underwritten public offering of
shares of Common Stock pursuant to a Registration Statement, a Stockholder
or Stockholders holding in the aggregate at least 30% of the Registrable
Shares may request, in writing, that the Company effect the registration on
Form S-1 or Form S-2 (or any successor form) of Registrable Shares owned by
such Stockholder or Stockholders having an aggregate offering price of at
least $30,000,000 (based on the then current market price or fair value).
If the holders initiating the registration intend to distribute the
Registrable Shares by means of an underwriting, they shall so advise the
Company in their request. In the event such registration is underwritten,
the right of other Stockholders to participate shall be conditioned on such
Stockholders' participation in such underwriting. Upon receipt of any such
request, the Company shall promptly give written notice of such proposed
registration to all of the other Stockholders. Such Stockholders shall have
the right, by giving written notice to the Company within 20 days after the
Company provides its notice, to elect to have included in such registration
such of their Registrable Shares as such
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Stockholders may request in such notice of election; provided that if the
underwriter (if any) managing the offering determines that, because of
marketing factors, all of the Registrable Shares requested to be registered
by all Stockholders may not be included in the offering, then all
Stockholders who have requested registration shall participate in the
registration pro rata based upon the number of Registrable Shares which
they have requested to be so registered. Thereupon, the Company shall, as
expeditiously as possible, use its best efforts to effect the registration
on Form S-1 or Form S-2 (or any successor form) of all Registrable Shares
which the Company has been requested to so register.
(b) At any time after the Company becomes eligible to file a
Registration Statement on Form S-3 (or any successor form relating to
secondary offerings), a Stockholder or Stockholders may request the
Company, in writing, to effect the registration on Form S-3 (or such
successor form), of Registrable Shares having an aggregate offering price
of at least $10,000,000 (based on the then current public market price).
Upon receipt of any such request, the Company shall promptly give written
notice of such proposed registration to all Stockholders. Such Stockholders
shall have the right, by giving written notice to the Company within 20
days after the Company provides its notice, to elect to have included in
such registration such of their Registrable Shares as such Stockholders may
request in such notice of election; provided that if the underwriter (if
any) managing the offering determines that, because of marketing factors,
all of the Registrable Shares requested to be registered by all
Stockholders may not be included in the offering, then all Stockholders who
have requested registration shall participate in the registration pro rata
based upon the number of Registrable Shares which they have requested to be
so registered. Thereupon, the Company shall, as expeditiously as possible,
use its best efforts to effect the registration on Form S-3 (or such
successor form) of all Registrable Shares which the Company has been
requested to so register.
(c) The Company shall not be required to effect more than three
registrations pursuant to paragraph (a) above.
(d) If at the time of any request to register Registrable Shares
pursuant to this Section 1.2, the Company is engaged or has fixed plans to
engage within 30 days of the time of the request in a registered public
offering as to which the Stockholders may include Registrable Shares
pursuant to Section 1.3 or is engaged in any other activity which, in the
good faith determination of the Company's Board of Directors, would be
adversely affected by the requested registration to the material detriment
of the Company, then the Company may at its option direct that such request
be delayed for a period not in excess of six months from the effective date
of such offering or the date of commencement of such other material
activity, as the case may be, such right to delay a request to be exercised
by the Company not more than once in any two-year period.
1.3 Incidental Registration.
(a) Whenever the Company proposes to file a Registration Statement
(other than pursuant to Section 1.2) at any time and from time to time, it
will, prior to such filing, give written notice to all Stockholders of its
intention to do so and, upon the written request of a
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Stockholder or Stockholders given within 20 days after the Company provides
such notice (which request shall state the intended method of disposition
of such Registrable Shares), the Company shall use its best efforts to
cause all Registrable Shares which the Company has been requested by such
Stockholder or Stockholders to register to be registered under the
Securities Act to the extent necessary to permit their sale or other
disposition in accordance with the intended methods of distribution
specified in the request of such Stockholder or Stockholders; provided that
the Company shall have the right to postpone or withdraw any registration
effected pursuant to this Section 1.3 without obligation to any
Stockholder.
(b) In connection with any registration under this Section 1.3
involving an underwriting, the Company shall not be required to include any
Registrable Shares in such registration unless the holders thereof accept
the terms of the underwriting as agreed upon between the Company and the
underwriters selected by it, provided terms of the underwriting are
consistent with this Agreement. If in the opinion of the managing
underwriter it is appropriate because of marketing factors to limit the
number of Registrable Shares to be included in the offering, then the
Company shall be required to include in the registration only that number
of Registrable Shares, if any, which the managing underwriter believes
should be included therein; provided that (i) in no event shall the number
of Registrable Shares included in the offering (other than the initial
public offering of Common Stock) be reduced below 30% of the total number
of shares of Common Stock (giving effect to the conversion into Common
Stock of all securities convertible thereinto) included in the offering,
and (ii) no persons or entities other than the Company, the Stockholders
and persons or entities holding registration rights granted in accordance
with Section 1.10 hereof shall be permitted to include securities in the
offering. If the number of Registrable Shares to be included in the
offering in accordance with the foregoing is less than the total number of
shares which the holders of Registrable Shares have requested to be
included, then the holders of Registrable Shares who have requested
registration and other holders of securities entitled to include them in
such registration shall participate in the registration pro rata based upon
their total ownership of shares of Common Stock (giving effect to the
conversion into Common Stock of all securities convertible thereinto). If
any holder would thus be entitled to include more securities than such
holder requested to be registered, the excess shall be allocated among
other requesting holders pro rata in the manner described in the preceding
sentence.
1.4 Registration Procedures. If and whenever the Company is required
by the provisions of this Agreement to use its best efforts to effect the
registration of any of the Registrable Shares under the Securities Act, the
Company shall:
(a) file with the Commission a Registration Statement with
respect to such Registrable Shares and use its best efforts to cause
that Registration Statement to become and remain effective;
(b) as expeditiously as possible prepare and file with the
Commission any amendments and supplements to the Registration
Statement and the prospectus included in the Registration Statement as
may be necessary to keep the Registration Statement effective, in the
case of a firm commitment underwritten public offering, until each
underwriter has
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completed the distribution of all securities purchased by it and, in
the case of any other offering, until the earlier of the sale of all
Registrable Shares covered thereby or 120 days after the effective
date thereof;
(c) as expeditiously as possible furnish to each selling
Stockholder such reasonable numbers of copies of the prospectus,
including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as the
selling Stockholder may reasonably request in order to facilitate the
public sale or other disposition of the Registrable Shares owned by
the selling Stockholder; and
(d) as expeditiously as possible use its best efforts to register
or qualify the Registrable Shares covered by the Registration
Statement under the securities or Blue Sky laws of such states as the
selling Stockholders shall reasonably request, and do any and all
other acts and things that may be necessary or desirable to enable the
selling Stockholders to consummate the public sale or other
disposition in such states of the Registrable Shares owned by the
selling Stockholder; provided, however, that the Company shall not be
required in connection with this paragraph (d) to qualify as a foreign
corporation or execute a general consent to service of process in any
jurisdiction.
If the Company has delivered preliminary or final prospectuses to the
selling Stockholders and after having done so the prospectus is amended to
comply with the requirements of the Securities Act, the Company shall
promptly notify the selling Stockholders and, if requested, the selling
Stockholders shall immediately cease making offers of Registrable Shares
and return all prospectuses to the Company. The Company shall promptly
provide the selling Stockholders with revised prospectuses and, following
receipt of the revised prospectuses, the selling Stockholders shall be free
to resume making offers of the Registrable Shares.
1.5 Allocation of Expenses. The Company will pay all Registration
Expenses of all registrations under this Agreement; provided, however, on a
one time only basis, that if a registration under Section 1.2 is withdrawn
at the request of the Stockholders requesting such registration (other than
as a result of information concerning the business or financial condition
of the Company which is made known to the Stockholders after the date on
which such registration was requested) and if the requesting Stockholders
elect not to have such registration counted as a registration requested
under Section 1.2, the requesting Stockholders shall pay the Registration
Expenses of such registration pro rata in accordance with the number of
their Registrable Shares included in such registration. For purposes of
this Section 1.5, the term "Registration Expenses" shall mean all expenses
incurred by the Company in complying with this Agreement, including,
without limitation, all registration and filing fees, exchange listing
fees, printing expenses, fees and expenses of counsel for the Company and
the fees and expenses of one counsel selected by the selling Stockholders
to represent the selling Stockholders, state Blue Sky fees and expenses,
and the expense of any special audits incident to or required by any such
registration, but excluding underwriting discounts, selling commissions and
the fees and expenses of selling Stockholders' own counsel (other than the
counsel selected to represent all selling Stockholders).
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1.6 Indemnification and Contribution.
(a) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, the
Company will indemnify and hold harmless the seller of such
Registrable Shares, each underwriter of such Registrable Shares, and
each other person, if any, who controls such seller or underwriter
within the meaning of the Securities Act or the Exchange Act against
any losses, claims, damages or liabilities, joint or several, to which
such seller, underwriter or controlling person may become subject
under the Securities Act, the Exchange Act, state securities or Blue
Sky laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement under which such
Registrable Shares were registered under the Securities Act, any
preliminary prospectus or final prospectus contained in the
Registration Statement, or any amendment or supplement to such
Registration Statement, or arise out of or are based upon the omission
or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
and the Company will reimburse such seller, underwriter and each such
controlling person for any legal or any other expenses reasonably
incurred by such seller, underwriter or controlling person in
connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company will
not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any untrue
statement or omission made in such Registration Statement, preliminary
prospectus or final prospectus, or any such amendment or supplement,
in reliance upon and in conformity with information furnished to the
Company, in writing, by or on behalf of such seller, underwriter or
controlling person specifically for use in the preparation thereof.
(b) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, each
seller of Registrable Shares, severally and not jointly, will
indemnify and hold harmless the Company, each of its directors and
officers and each underwriter (if any) and each person, if any, who
controls the Company or any such underwriter within the meaning of the
Securities Act or the Exchange Act, against any losses, claims,
damages or liabilities, joint or several, to which the Company, such
directors and officers, underwriter or controlling person may become
subject under the Securities Act, Exchange Act, state securities or
Blue Sky laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement under which such
Registrable Shares were registered under the Securities Act, any
preliminary prospectus or final prospectus contained in the
Registration Statement, or any amendment or supplement to the
Registration Statement, or arise out of or are based upon any omission
or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, if
the statement or omission was made in reliance upon and in conformity
with information relating to such seller furnished in writing to the
Company by or on behalf of such seller specifically for use in
connection with the preparation of such Registration Statement,
prospectus, amendment or supplement;
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<PAGE>
(c) Each party entitled to indemnification under this Section 1.6
(the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting
therefrom; provided, that counsel for the Indemnifying Party, who
shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be
unreasonably withheld); and, provided, further, that the failure of
any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Section
1.6. The Indemnified Party may participate in such defense at such
party's expense; provided, however, that the Indemnifying Party shall
pay such expense if representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would be inappropriate due
to actual or potential differing interests between the Indemnified
Party and any other party represented by such counsel in such
proceeding. No Indemnifying Party, in the defense of any such claim or
litigation shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which
does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all
liability in respect of such claim or litigation, and no Indemnified
Party shall consent to entry of any judgment or settle such claim or
litigation without the prior written consent of the Indemnifying
Party.
(d) In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which either
(i) any holder of Registrable Shares exercising rights under this
Agreement, or any controlling person of any such holder, makes a claim
for indemnification pursuant to this Section 1.6 but it is judicially
determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not
be enforced in such case notwithstanding the fact that this Section
1.6 provides for indemnification in such case, or (ii) contribution
under the Securities Act may be required on the part of any such
selling Stockholder or any such controlling person in circumstances
for which indemnification is provided under this Section 1.6; then, in
each such case, the Company and such Stockholder will contribute to
the aggregate losses, claims, damages or liabilities to which they may
be subject (after contribution from others) in such proportions so
that such holder is responsible for the portion represented by the
percentage that the public offering price of its Registrable Shares
offered by the Registration Statement bears to the public offering
price of all securities offered by such Registration Statement, and
the Company is responsible for the remaining portion; provided,
however, that, in any such case, (i) no such holder will be required
to contribute any amount in excess of the net proceeds to it of all
the Registrable Shares sold by it pursuant to such Registration
Statement, (ii) no person or entity guilty of fraudulent
misrepresentation, within the meaning of Section 11(f) of the
Securities Act, shall be entitled to contribution from any person or
entity who is not guilty of such fraudulent misrepresentation.
1.7 Indemnification with Respect to Underwritten Offering. In the
event that Registrable Shares are sold pursuant to a Registration Statement
in an underwritten offering pursuant to Section 1.2, the Company agrees to
enter into an underwriting agreement containing customary representations
and warranties with respect to the business and operations of an issuer
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of the securities being registered and customary covenants and agreements
to be performed by such issuer, including without limitation customary
provisions with respect to indemnification by the Company of the
underwriters of such offering.
1.8 Information by Holder. Each Stockholder including Registrable
Shares in any registration shall furnish to the Company such information
regarding such Stockholder and the distribution proposed by such
Stockholder as the Company may reasonably request in writing and as shall
be required in connection with any registration, qualification or
compliance referred to in this Agreement.
1.9 "Stand-Off" Agreement. Each Stockholder, if requested by the
Company and the managing underwriter of an offering by the Company of
Common Stock or other securities of the Company pursuant to a Registration
Statement, shall agree not to sell publicly or otherwise transfer or
dispose of any Registrable Shares or other securities of the Company held
by such Stockholder for a period of 180 days following the effective date
of such Registration Statement; provided, that:
(a) such agreement shall only apply to the Registration Statement
covering the Company's initial public offering of Common Stock in an
underwritten offering; and
(b) all officers and directors of the Company shall enter into
similar agreements.
1.10 Limitations on Subsequent Registration Rights. The Company shall
not, without the prior written consent of Stockholders holding at least 80%
of the Registrable Shares, enter into any agreement (other than this
Agreement) with any holder or prospective holder of any securities of the
Company which would allow such holder or prospective holder to (i) include
securities of the Company in any Registration Statement, unless under the
terms of such agreement, such holder or prospective holder includes such
securities in a registration statement in which the registration rights of
such holder or prospective holder are subordinate to the holders of
Registrable Shares, or (ii) make a demand registration which could result
in such registration statement being declared effective prior to May 3,
2005.
1.11 Rule 144 Requirements. After the earliest of (i) the closing of
the sale of securities of the Company pursuant to a Registration Statement,
(ii) the registration by the Company of a class of securities under Section
12 of the Exchange Act, or (iii) the issuance by the Company of an offering
circular pursuant to Regulation A under the Securities Act, the Company
agrees to:
(a) comply with the requirements of Rule 144(c) under the
Securities Act with respect to current public information about the
Company;
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(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under
the Securities Act and the Exchange Act (at any time after it has
become subject to such reporting requirements); and
(c) furnish to any holder of Registrable Shares upon request (i)
a written statement by the Company as to its compliance with the
requirements of said Rule 144(c), and the reporting requirements of
the Securities Act and the Exchange Act (at any time after it has
become subject to such reporting requirements), (ii) a copy of the
most recent annual or quarterly report of the Company, and (iii) such
other reports and documents of the Company as such holder may
reasonably request to avail itself of any similar rule or regulation
of the Commission allowing it to sell any such securities without
registration.
1.12 Mergers, Etc. The Company shall not, directly or indirectly,
enter into any merger, consolidation or reorganization in which the Company
shall not be the surviving corporation unless the proposed surviving
corporation shall, prior to such merger, consolidation or reorganization,
agree in writing to assume the obligations of the Company under this
Agreement, and for that purpose references hereunder to "Registrable
Shares" shall be deemed to be references to the securities which the
Stockholders would be entitled to receive in exchange for Registrable
Shares under any such merger, consolidation or reorganization; provided,
however, that the provisions of this Section 1.12 shall not apply in the
event of any merger, consolidation or reorganization in which the Company
is not the surviving corporation if all Stockholders are entitled to
receive in exchange for their Registrable Shares consideration consisting
solely of (i) cash, (ii) securities of the acquiring corporation which may
be immediately sold to the public without registration under the Securities
Act, or (iii) securities of the acquiring corporation which the acquiring
corporation has agreed to register within 90 days of completion of the
transaction for resale to the public pursuant to the Securities Act.
1.13 Termination. All of the Company's obligations to register
Registrable Shares under this Agreement shall terminate seven years after
the closing of the Company's initial public offering of Common Stock
pursuant to a Registration Statement, or as to any Purchaser, when all of
the Registrable Shares of such Purchaser may be sold under Rule 144 in any
three month period.
2. Right of First Refusal
(a) The Company shall not issue, sell or exchange, agree to issue,
sell or exchange, or reserve or set aside for issuance, sale or exchange,
(i) any shares of its Common Stock, (ii) any other equity securities of the
Company, (iii) any option, warrant or other right to subscribe for,
purchase or otherwise acquire any equity securities of the Company, or (iv)
any debt securities convertible into capital stock of the Company
(collectively, the "Offered Securities"), unless in each such case the
Company shall have first complied with this Section 2. The Company shall
deliver to each Purchaser, who then holds shares of Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock (or shares of
Common Stock into which such shares have been converted) that had an
aggregate purchase price of $500,000 or more ("Qualifying Purchaser") and
each Founder a written notice of any proposed or intended
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issuance, sale or exchange of Offered Securities (the "Offer"), which Offer
shall (i) identify and describe the Offered Securities, (ii) describe the
price and other terms upon which they are to be issued, sold or exchanged,
and the number or amount of the Offered Securities to be issued, sold or
exchanged, and (iii) offer to issue and sell to or exchange with such
Qualifying Purchaser or Founder (A) such portion of the Offered Securities
as the aggregate number of shares of Common Stock issuable upon conversion
of Shares then held by such Qualifying Purchaser or Common Stock then held
by such Founder, plus any shares of Common Stock issued upon conversion of
Shares held by such Qualifying Purchaser or Common Stock then held by such
Founder, bears to the total number of shares of Common Stock issuable upon
conversion of Shares then held by all Purchasers and Common Stock then held
by all Founders plus any outstanding shares of Common Stock issued upon
conversion of Shares held by the Purchasers and Common Stock then held by
all Founders (the "Basic Amount"), and (B) any additional portion of the
Offered Securities as such Qualifying Purchaser or Founder shall indicate
it will purchase or acquire should the other Qualifying Purchasers and
Founders subscribe for less than their Basic Amounts (the
"Undersubscription Amount"). For purposes of this Section 2, (x) JMI Equity
Fund III, L.P. and JMI Equity Side Fund, L.P. shall be deemed to be one
Qualifying Purchaser which owns all the Shares owned by JMI Equity Fund
III, L.P. and JMI Equity Side Fund, L.P., (y) any Offered Securities
purchasable by such Qualifying Purchaser may be purchased by JMI Equity
Fund III, L.P., JMI Equity Side Fund, L.P. or any combination thereof; and
(z) and all notices to be delivered to such Qualifying Purchaser shall be
delivered to JMI Equity Fund III, L.P. Each Qualifying Purchaser or Founder
shall have the right, for a period of 30 days following delivery of the
Offer, to purchase or acquire, at a price and upon the other terms
specified in the Offer, the number or amount of Offered Securities
described above. The Offer by its term shall remain open and irrevocable
for such 30-day period.
(b) To accept an Offer, in whole or in part, a Qualifying Purchaser or
Founder must deliver a written notice to the Company prior to the end of
the 30-day period of the Offer, setting forth the portion of the Qualifying
Purchaser's or Founder's Basic Amount that such Qualifying Purchaser or
Founder elects to purchase and, if such Qualifying Purchaser or Founder
shall elect to purchase all of its Basic Amount, the Undersubscription
Amount (if any) that such Qualifying Purchaser or Founder elects to
purchase (the "Notice of Acceptance"). If the Basic Amounts subscribed for
by all Qualifying Purchasers and Founders are less than the total Offered
Securities, then each Qualifying Purchaser or Founder who has set forth
Undersubscription Amounts in its Notice of Acceptance shall be entitled to
purchase, in addition to the Basic Amounts subscribed for, all
Undersubscription Amounts it has subscribed for; provided, however that
should the Undersubscription Amounts subscribed for exceed the difference
between the Offered Securities and the Basic Amounts subscribed for (the
"Available Undersubscription Amount"), each Qualifying Purchaser or Founder
who has subscribed for any Undersubscription Amount shall be entitled to
purchase only that portion of the Available Undersubscription Amount as the
Undersubscription Amount subscribed for by such Qualifying Purchaser or
Founder bears to the total Undersubscription Amounts subscribed for by all
Purchasers and Founder, subject to rounding by the Board of Directors to
the extent it reasonably deems necessary.
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(c) In the event that Notices of Acceptance are not given by the
Qualifying Purchasers or Founders in respect of all the Offered Securities,
the Company shall have 90 days from the expiration of the period set forth
in Section 1(a) above to issue, sell or exchange all or any part of such
Offered Securities as to which a Notice of Acceptance has not been given by
the Qualifying Purchasers or Founders (the "Refused Securities"), but only
upon terms and conditions which are not more favorable, in the aggregate,
to the acquiring person or persons or less favorable to the Company than
those set forth in the Offer.
(d) In the event the Company shall propose to sell less than all the
Refused Securities (any such sale to be in the manner and on the terms
specified in Section 2.1(c) above), then each Qualifying Purchaser or
Founder may, at its sole option and in its sole discretion, reduce the
number or amount of the Offered Securities specified in its Notice of
Acceptance to an amount that shall be not less than the number or amount of
the Offered Securities that the Qualifying Purchaser or Founder elected to
purchase pursuant to Section 2.1(b) above multiplied by a fraction, (i) the
numerator of which shall be the number or amount of Offered Securities the
Company actually proposes to issue, sell or exchange (including Offered
Securities to be issued or sold to Qualifying Purchasers or Founders
pursuant to Section 2.1(b) above prior to such reduction) and (ii) the
denominator of which shall be the amount of all Offered Securities. In the
event that any Qualifying Purchaser or Founder so elects to reduce the
number or amount of Offered Securities specified in its Notice of
Acceptance, the Company may not issue, sell or exchange more than the
reduced number or amount of the Offered Securities unless and until such
Securities have again been offered to the Qualifying Purchasers or Founders
in accordance with Section 2.1(a) above.
(e) Upon the closing of the issuance, sale or exchange of all or less
than all the Refused Securities, the Qualifying Purchasers or Founders
shall acquire from the Company, and the Company shall issue to the
Qualifying Purchasers or Founders, the number or amount of Offered
Securities specified in the Notices of Acceptance, as reduced pursuant to
Section 2.1(d) above if the Qualifying Purchasers or Founders have so
elected, upon the terms and conditions specified in the Offer. The purchase
by the Qualifying Purchasers or Founders of any Offered Securities is
subject in all cases to the preparation, execution and delivery by the
Company and the Qualifying Purchasers or Founders of a purchase agreement
relating to such Offered Securities reasonably satisfactory in form and
substance to the Qualifying Purchasers or Founders and their respective
counsel.
(f) Any Offered Securities not acquired by the Qualifying Purchasers
or Founders or other persons in accordance with Section 2.1(c) above may
not be issued, sold or exchanged until they are again offered to the
Qualifying Purchasers or Founders under the procedures specified in this
Agreement.
(g) The rights of the Qualifying Purchasers or Founders under this
Agreement shall not apply to:
(1) Common Stock issued as a stock dividend to holders of Common
Stock or upon any subdivision or combination of shares of Common
Stock,
-11-
<PAGE>
(2) the issuance of shares of Common Stock upon conversion of
outstanding shares of Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock,
(3) shares of Common Stock, or options exercisable therefor,
including options outstanding on the date of this Agreement (such
number to be proportionately adjusted in the event of any stock
splits, stock dividends, recapitalizations or similar events occurring
on or after the date of this Agreement) issuable to officers,
directors, consultants and employees of the Company and any subsidiary
pursuant to any plan, agreement or arrangement approved by a vote of
not less than a majority of the Board of Directors of the Company
including the unanimous vote of the members of the Board of Directors
nominated solely by the holders of the Shares,
(4) securities issued solely in consideration for the acquisition
(whether by merger or otherwise) by the Company or any of its
subsidiaries of all or substantially all of the stock or assets of any
other entity,
(5) shares of Common Stock sold by the Company in a firm
commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act, or
(6) shares of Common stock issued upon exercise of any warrants
or options that are issued and outstanding as of the date of this
Agreement.
2.2 Termination of Agreement. The Right of First Refusal in this
Section 2 shall terminate upon the earliest of the following events:
(a) The sale of all or substantially all of the assets or
business of the Company, by merger, sale of assets or otherwise; or
(b) The closing of the Company's initial public offering of
shares of Common Stock pursuant to an effective registration statement
under the Securities Act resulting in at least $30,000,000 of gross
proceeds to the Company and a market capitalization of at least
$120,000,000; or
(c) With respect to the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, respectively, upon less
than fifteen percent of such authorized class being outstanding.
3. Transfers of Rights. This Agreement, and the rights and obligations of
each Purchaser hereunder, may be assigned by such Purchaser to any person or
entity to which Shares are transferred by such Purchaser, and such transferee
shall be deemed a "Purchaser" for purposes of this Agreement; provided that the
transferee provides written notice of such assignment to the Company.
-12-
<PAGE>
4. Investor Rights Agreement Superseded. This Agreement shall supersede the
terms of the Investor Rights Agreement, which is hereby terminated. By executing
this Agreement, each party waives any rights it may have or be deemed to have
under Section 2 of the Investor Rights Agreement with respect to the issuance of
the Series C Preferred Stock of the Company or any shares issuable upon the
conversion thereof.
5. Amendment to the Investor Rights Agreement. The Investor Rights
Agreement is hereby amended and restated on the terms and conditions contained
in this Agreement to read in its entirety as provided herein.
6. General.
(a) Notices. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be delivered by hand or
mailed by first class certified or registered mail, return receipt
requested, postage prepaid:
If to the Company, at 5500 Wayzata Boulevard, Minneapolis, Minnesota
55416, Attention: President, with a copy to Ken Cutler, Esq., Dorsey &
Whitney LLP, 220 South 6th Street, Minneapolis, Minnesota 55402,
If to a Founder, at his or her address set forth under his or her name
on the signature page attached hereto.
If to a Purchaser, at his or its address set forth on Exhibit A, with
a copy to Testa, Hurwitz & Thibeault, LLP, 125 High Street, Boston, MA
02110, Attention: Rufus C. King, Esq. and Mark H. Burnett, Esq.
or, in any such case at such other address or addresses as shall have been
furnished in writing by such party to the others.
(b) Entire Agreement. This Agreement embodies the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to
such subject matter.
(c) Amendments and Waivers. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the holders of
at least 80% of the then outstanding Shares (including shares issued upon
conversion thereof); provided, that this Agreement may be amended with the
consent of the holders of less than all Shares only in a manner which
affects all Shares in the same fashion. No waivers of or exceptions to any
term, condition or provision of this Agreement, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, condition or provision.
-13-
<PAGE>
(d) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of
which shall be one and the same document.
(e) Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement.
(f) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Minnesota.
[Remainder of Page Intentionally Left Blank]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed the Investors' Rights
Agreement as of the date first written above.
COMPANY:
--------
NETWORK MANAGEMENT SERVICES, INC.
By: /s/ John Davis
------------------------------------
Name: John Davis
Title: Chief Executive Officer
PURCHASERS:
-----------
CB HEALTHCARE FUND, L.P.
By: CB Health Ventures, L.L.C.
By: /s/ Frederick Blume
------------------------------------
Name: Frederick Blume
Title: Manager
NORTH BRIDGE VENTURE PARTNERS, L.P.
By: North Bridge Venture Management, L.P.,
its General Partner
By: /s/ Edward T. Anderson
------------------------------------
Name: Edward T. Anderson
Title: General Partner
NEW ENTERPRISE ASSOCIATES VI,
LIMITED PARTNERSHIP
By: NEA Partners VI, Limited Partnership
its General Partner
By: /s/ John M. Nehra
------------------------------------
Name: John M. Nehra
Title: General Partner
<PAGE>
TRELLIS HEALTH VENTURES L.P.
By: THV Management LLC
its General Partner
By: /s/ Paul Felton
------------------------------------
Name: Paul Felton
Title: Manager
JMI EQUITY FUND III, L.P.
By: JMI Associates III, LLC
Its General Partner
By: /s/ Paul V. Barber
------------------------------------
Paul V. Barber
Managing Member
JMI EQUITY SIDE FUND, L.P.
By: JMI Side Associates, L.L.C.
Its General Partner
By: /s/ Paul V. Barber
------------------------------------
Paul V. Barber
Managing Member
FOUNDERS:
---------
/s/ Mark Tierney
----------------------------------------
Mark Tierney
Address: 1787 Dupont Ave. So.
Minneapolis, MN 55403
/s/ Michael Bingham
----------------------------------------
Michael Bingham
Address: 4827 Thomas Ave. S.
Minneapolis, MN 55410
<PAGE>
/s/ Barbara Seykora
----------------------------------------
Barbara Seykora
Address: 3408 134 St. W.
Burnsville, MN 55337
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Company
Subsidiary Name State of Organization
- --------------- ---------------------
Managed Care Buyer's Group, Inc. Minnesota
The above subsidiary does business under the name Managed Care Buyer's Group,
Inc.
<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. 2 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 4, 1999
