<PAGE>
As filed with the Securities and Exchange Commission on September 28, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 Number)
incorporation or Classification Code
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)
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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
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If 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>
Maximum
Aggregate
Titles of Each Class of Offering Price Amount of
Securities to be Registered (1) Registration Fee
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<S> <C> <C>
Common Stock, $.01 par value.................... $69,000,000 $19,182
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</TABLE>
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(1)Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o).
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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 [ ], 1999
[EBENX, INC. LOGO]
[ ] 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 $[ ] and $[ ] 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 [ ] 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.
--------------
BancBoston Robertson Stephens
Warburg Dillon Read LLC
Thomas Weisel Partners LLC
The date of this prospectus is [ ], 1999.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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. The information in this
document is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or of any sale of our common stock. Except
as the context otherwise requires, the terms "eBenX," "we," "us" and "our" as
used in this prospectus refer to eBenX, Inc., together with its consolidated
subsidiary (unless the context otherwise requires).
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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............................................................ 53
Experts.................................................................. 54
Additional Information................................................... 54
Index to 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. This prospectus contains other product names, trade names and
trademarks of eBenX and of other organizations.
<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 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 and GE Capital Services Corporation to their wide array of health
plan trading partners.
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 deep domain knowledge 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 for the group health insurance
benefits market.
Our technology platform enables us to introduce 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
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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................................ [ ] shares
Common stock to be outstanding after this offering.. [ ] 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:
. 1,098,366 shares issuable upon exercise of outstanding stock options
under existing stock option plans;
. 27,805 shares issuable upon exercise of outstanding warrants; and
. 1,118,974 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 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.
The foregoing information reflects a [ ]-for-one split of our common stock
on [ ], 1999. Unless otherwise indicated, all information contained in this
prospectus assumes that the underwriters' overallotment option is not exercised
and reflects the conversion of all outstanding preferred stock into common
stock immediately prior to the commencement of this offering.
2
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Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six months
Year Ended December 31, ended June 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 $3,929 $ 7,108
(Loss) income from
operations............ (177) 31 (779) (713) (1,186) (998) (1,262)
Net (loss) income....... (166) 62 (581) (500) (1,042) (915) (1,112)
Basic and diluted net
(loss) income per
share................. $ (.15) $ .06 $ (.53) $ (.45) $ (.90) $ (.80) $ (.95)
Shares used in basic and
diluted net income
(loss) per share...... 1,078 1,098 1,104 1,125 1,154 1,150 1,165
Pro forma basic and
diluted net loss per
share................. (.42) (.46)
Shares used in pro forma
net loss
per share............. 2,162 2,409
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
------------------------
Actual As Adjusted
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(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............................. $ 9,268 $
Working capital........................................ 10,821
Total assets........................................... 14,303
Long-term obligations, net of current portion.......... --
Total shareholders' equity............................. 12,772
</TABLE>
The "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 [
] shares of common stock offered by this prospectus at an assumed initial
public offering price of $[ ] 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 $1.1 million for the six month period ended June 30, 1999, and an
accumulated deficit of $3.3 million as of June 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.
In 1998, two customers accounted for approximately 40% of our total revenue.
In 1999 to date, ten customers have accounted for approximately 90% of our
total revenue. The loss of a material customer would significantly reduce our
revenue and harm our business and operating results. Further, because increased
employee participation from existing customers has substantially 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 success depends on industry acceptance of our products and services.
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. These industry participants may not accept our products and
services as a replacement for traditional methods of operation.
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.
The group health insurance benefits industry is intensely competitive,
rapidly evolving and subject to sudden technological change. We believe that
the principal competitive factors in this market are health
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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. Increased competition is
likely to result in price reductions, reduced gross margins and loss of market
share, any one of which could seriously harm our business and operating
results.
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 will harm our business and operating
results.
Continued rapid growth will place significant strain upon our management and
operational systems and resources. Failure to manage our growth effectively
will harm our business and operating results. 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.
Our future growth depends upon our establishment and maintenance of successful
relationships with strategic partners.
We believe that our future 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
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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 may 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. Quarterly fluctuations in our operating results may subject the market
price of our common stock to rapid and unpredictable change.
Other factors that may cause such 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;
. 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 such 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.
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.
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<PAGE>
We could be subject to potential liability claims related to our products and
services.
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, even if not successful, would
likely be time consuming and costly and could seriously harm our business and
reputation.
Our customer agreements generally require that we indemnify our customers for
certain 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 certain 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 may 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.
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. Acquisition financing may not be available on
terms that are favorable to us, if available at all. 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 may interfere with our business.
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.
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Our business will suffer if the integrity of our systems is inadequate.
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 will suffer if we or our business partners experience Year 2000
compliance problems or related system failures.
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 such entities to be Year 2000 ready
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 ready 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.
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
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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.
We depend 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, to a certain extent, 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.
We may be unable to adequately protect our intellectual property rights. We may
be subject to substantial claims if we infringe upon the intellectual property
rights of third parties.
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 products,
services and related technology. Loss of intellectual property protection on
any of our 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 may in the future file patent, trademark or service mark
applications. These applications may not be approved or, if approved, may not
be enforceable or effective in protecting our technology, trademarks or service
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 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 such litigation or proceedings also could subject us to
significant liabilities to third parties and could prevent us from using
certain of our products, services, internal systems or technologies.
Rapidly changing technology may impair our financial performance.
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
9
<PAGE>
and services to adapt to such 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.
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.
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. In addition, the success of our
compliance efforts may be dependent on the success of healthcare industry
participants in dealing with these new standards.
Further, our role in facilitating payments by employers to health plans may
subject us to the Employee Retirement Income Security Act. This act imposes
certain 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 such payments and may experience
higher operating costs in order to comply with such 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 may adversely affect our business and operating
results.
The insurance industry is subject to 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. Should our business
activities require our licensing as an insurance agent, we would incur
increased costs and restrictions on our business 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.
Risks Related to this Offering and Ownership of Our Common Stock
The price for our common stock may be volatile due to a number of variables.
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
10
<PAGE>
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.
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.
If our shareholders sell substantial amounts of our common stock in the public
market following the offering, the price of our common stock could fall. Upon
completion of the offering, we will have [ ] outstanding shares of common
stock, assuming no exercise of outstanding options or warrants. Of these
shares, the [ ] shares sold in this offering will be freely tradeable.
This leaves 3,265,481 shares that will be eligible for sale in the public
market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
--------- ----
<S> <C>
98,247 Available for immediate sale on the date of this prospectus
84,260 Available for sale 90 days after the date of this prospectus
3,082,974 Available for sale 180 days after the date of this prospectus
</TABLE>
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 2,600,000
shares of common stock issuable under the 1993 Stock Option Plan, the 1999
Stock Incentive Plan and the Stock Purchase Plan.
The holders of 2,082,974 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
2,082,974 shares of common stock immediately prior to the offering. After the
offering, the holders of 2,082,974 shares of our common stock, which represent
[ %] of our outstanding common stock after this offering assuming no exercise
of the underwriters' overallotment option and no exercise of outstanding
options or warrants after June 30, 1999, will be entitled to have the resale of
their shares registered under the Securities
11
<PAGE>
Act. If these holders cause a large number of securities to be registered and
sold in the public market, such 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, such sales may harm our ability to raise needed capital.
Concentration of ownership may give some shareholders substantial influence and
may prevent or delay a change in control.
We anticipate that certain shareholders, including officers and directors of
the company, will, in the aggregate, beneficially own approximately [ %] 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.
Management could use the proceeds of this offering in ways with which the
shareholders may not agree.
Our management can spend or invest the proceeds from this offering in ways
with which the shareholders may not agree. The investment of these proceeds may
not yield a favorable return.
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. If the holders of
outstanding options or warrants exercise those options or warrants, you will
experience further dilution.
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."
We undertake no obligation to publicly update or revise any forward-looking
statements. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus may not occur.
USE OF PROCEEDS
We estimate our net proceeds from the sale of our common stock in this
offering will be approximately $[ ] million, or approximately $[ ] million
based on an assumed initial public offering price of $[ ] 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 June 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 [ ] shares of our common stock in this offering
at an assumed initial public offering price per share of $[ ] after deducting
the estimated underwriting discounts and offering expenses.
<TABLE>
<CAPTION>
As of June 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.................................. $ -- $ --
Shareholders' equity:
Preferred stock, $.01 par value per
share; 2,088,974 shares authorized,
2,082,974 shares outstanding, actual;
no shares issued and outstanding, pro
forma and pro forma as adjusted........ 21 --
Common stock, $.01 par value per share;
7,000,000 shares authorized, 1,171,157
shares outstanding, actual;
100,000,000 shares authorized,
3,254,131 shares outstanding, pro
forma; 100,000,000 shares authorized,
[ ] shares outstanding, pro forma as
adjusted............................... 12 33
Additional paid-in capital............... 16,073 16,073
Accumulated deficit...................... (3,334) (3,334)
------- ------- ---
Total shareholders' equity............ 12,772 12,772
------- ------- ---
Total capitalization................ $12,772 $12,772 $
======= ======= ===
</TABLE>
- --------
The preceding table excludes:
. 928,616 shares issuable upon exercise of stock options outstanding under
our stock option plans as of June 30, 1999;
. 27,805 shares issuable upon exercise of warrants outstanding as of June
30, 1999; and
. 1,050,074 shares available for future grant or issuance under our stock
option plans as of June 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 June 30, 1999 was $12.8 million,
or $3.92 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 [ ] shares of common stock offered in this
prospectus at an assumed initial public offering price of $[ ] per share and
after deducting the estimated underwriting discounts and offering expenses, our
adjusted pro forma net tangible book value as of June 30, 1999 would have been
$[ ], or $[ ] per share of common stock. This represents an immediate
increase in net tangible book value of $[ ] per share to existing shareholders
and an immediate dilution of $[ ] 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................ $
Pro forma net tangible book value per share as of June 30,
1999......................................................... $ 3.92
Increase per share attributable to new investors...............
------
Pro forma net tangible book value per share after this
offering.....................................................
----
Net tangible book value dilution per share to new investors.... $
====
</TABLE>
The following table summarizes as of June 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>
Average
Price Per
Shares Purchased Total Consideration Share
----------------- ------------------- ---------
Number Percent Amount Percent Percent
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 3,254,131 % $16,062,000 % $4.94
New investors..................
--------- --- ----------- --- -----
Total........................ 100% $ 100% $
========= === =========== === =====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
or warrants after June 30, 1999. As of June 30, 1999, there were options and
warrants to purchase a total of 956,421 shares of common stock. To the extent
that any of these options or warrants are exercised, there will be further
dilution to new investors. See "Capitalization," "Management--Employee Benefit
Plans," "Description of Capital Stock" and Note 4 of "Notes to 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 six months ended June 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 six months ended June 30, 1999 are not
necessarily indicative of the results to be expected for the full year or for
any future period.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 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 $3,929 $ 7,108
Operating expenses
Cost of revenues....... 330 1,323 2,480 4,496 6,958 2,935 5,233
Selling, general &
administrative....... 358 538 1,796 2,068 2,831 1,319 2,010
Research and
development.......... 393 605 863 1,242 1,519 673 1,127
------ ------- ------ ------ -------- ------ --------
Total operating
expenses............ 1,081 2,466 5,139 7,806 11,308 4,927 8,370
------ ------- ------ ------ -------- ------ --------
Operating income
(loss)................ (177) 31 (779) (713) (1,186) (998) (1,262)
Interest income......... 11 31 198 213 144 83 150
------ ------- ------ ------ -------- ------ --------
Net (loss) income....... $ (166) $ 62 $ (581) $ (500) $ (1,042) $ (915) $ (1,112)
====== ======= ====== ====== ======== ====== ========
Basic and diluted net
(loss) income per
share................. $ (.15) $ .06 $ (.53) $ (.45) $ (.90) $ (.80) $ (.95)
Shares used in basic and
diluted net income
(loss) per share...... 1,078 1,098 1,104 1,125 1,154 1,150 1,165
Pro forma basic and
diluted net loss per
share................. (.42) (.46)
Shares used in pro forma
net loss per share.... 2,162 2,409
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------------- ----------
1994 1995 1996 1997 1998 1999
------ ------ ------- ------- ------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents... $ 690 $ 472 $ 1,614 $ 1,009 $ 1,681 $ 9,268
Working capital............. 482 411 3,981 3,102 1,782 10,821
Total assets................ 1,177 1,253 5,179 5,084 5,596 14,303
Long-term obligations, net
of current portion........ -- -- -- -- -- --
Total shareholders' equity.. 869 991 4,904 4,423 3,391 12,772
</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-end exchange services
for large, multi-site employers such as GE Capital, PepsiCo and Bell Atlantic.
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 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 and implementation fees for exchange services, which we recognize
on a percentage-of-completion basis or 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 and PepsiCo.
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 certain 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 June 30, 1999, we had an
accumulated deficit of $3.3 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 Six Months
December 31, Ended June 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 74.7 73.6
Selling, general and
administrative................. 41.2 29.2 28.0 33.6 28.3
Research and development......... 19.8 17.5 15.0 17.1 15.9
----- ----- ----- ------- -------
Total operating costs and
expenses.................... 117.9 110.1 111.7 125.4 117.8
----- ----- ----- ------- -------
Loss from operations............... (17.9) (10.1) (11.7) (25.4) (17.8)
Interest income (expense), net..... 4.5 3.0 1.4 2.1 2.1
----- ----- ----- ------- -------
Net loss........................... (13.4)% (7.1)% (10.3)% (23.3)% (15.7)%
===== ===== ===== ======= =======
</TABLE>
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net revenues. Net revenues increased from $3.9 million for the six months
ended June 30, 1998 to $7.1 million for the same period in 1999, representing
an increase of $3.2 million, or 80.9%. This increase primarily was due to a new
contract with Bell Atlantic and the expansion of our relationship with PepsiCo.
Cost of services. Cost of services increased from $2.9 million for the six
months ended June 30, 1998 to $5.2 million for the same period in 1999,
representing an increase of $2.3 million, or 78.3%. 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, decreased from 74.7% for the six months ended June
30, 1998 to 73.6% for the same period in 1999. Because a significant portion of
cost of services consists of new customer implementation expenses, we
anticipate that as we add new customers cost of services will increase as a
percentage of net revenues.
Selling, general and administrative. Selling, general and administrative
expenses increased from $1.3 million for the six months ended June 30, 1998 to
$2.0 million for the same period in 1999, representing an increase of $0.7
million, or 52.4%. 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
$0.7 million for the six months ended June 30, 1998 to $1.1 million for the
same period in 1999, representing an increase of
18
<PAGE>
$0.4 million, or 67.5%. 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 $83,000 for
the six months ended June 30, 1998 to $150,000 for the same period in 1999. In
the first six months of 1999, interest expense was incurred for bank
borrowings. There were no borrowings in the first six months of 1998.
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.
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 three
quarters in our fiscal year ended December 31, 1998 and for
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the first two 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
--------------------------------------------------------
June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1999 1999
-------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C>
Net revenues............ $2,158 $2,740 $3,454 $3,342 $3,766
Operating expenses:
Cost of services...... 1,585 1,856 2,166 2,355 2,878
Selling, general and
administrative...... 671 667 845 859 1.151
Research and
development......... 342 345 502 545 582
------ ------ ------ ------ ------
Total operating
expenses......... 2,598 2,808 3,513 3,759 4,611
------ ------ ------ ------ ------
Loss from operations.... (440) (128) (59) (417) (845)
Interest income
(expense), net........ 38 20 42 45 105
------ ------ ------ ------ ------
Net loss................ $ (402) $ (108) $ (17) $ (372) $ (740)
====== ====== ====== ====== ======
<CAPTION>
Three Months Ended
--------------------------------------------------------
June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1999 1999
-------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C>
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of services...... 73.4 67.8 62.7 70.5 76.4
Selling, general and
administrative...... 31.1 24.3 24.5 25.7 30.6
Research and
development......... 15.8 12.6 14.5 16.3 15.5
------ ------ ------ ------ ------
Total operating
expenses......... 120.3 104.7 101.7 112.5 122.5
------ ------ ------ ------ ------
Loss from operations.... (20.3) (4.7) (1.7) (12.5) (22.5)
Interest income
(expense), net........ 1.7 0.7 1.2 1.3 2.8
------ ------ ------ ------ ------
Net (loss) income....... (18.6)% (4.0)% (0.5)% (11.2)% (19.7)%
====== ====== ====== ====== ======
</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 such 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.
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;
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. 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 such 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.
Revenue typically increases in the third and fourth quarters due to open
enrollment periods and new customer implementations. 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 such quarter. As
we secure larger customers, the time required for implementing our services
increases, which could contribute to larger fluctuations in revenue. 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 June 30, 1999, we had $9.3 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 June 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 $1.5 million in the six months ended June 30, 1999.
The use of cash from operations in 1998 and for the first six months of 1999
primarily was due to our net loss and an increase in accounts receivable,
partially offset by an increase in depreciation.
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 $0.6 million
for the first six 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 six 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 six 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 six months of 1999, financing activities provided cash from the sale of
$10.5 million in preferred stock, partially offset by the repayment of bank
borrowings.
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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, 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 such 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 remediation 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 discussions with our customers and the vast majority of
their health plans regarding their efforts to address the Year 2000 problem.
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
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<PAGE>
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, such 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, a negligible amount of which has
been spent as of the date of the prospectus. 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 developing 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.
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 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. 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.
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<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 of Group Health Insurance Benefits Market Sector (to be provided)]
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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 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 60 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.
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<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 COBRA-eligible, in order to accommodate diverse
collection and payment processes for each category. This data management is
critical to accurate billing and reconciling of payments between an employer
and its health plans.
Eligibility data distribution. Eligibility data should be transferred on a
daily or weekly basis from employers to health plans and in a manner that
assures it will be correctly recorded. Today, however, this data is transferred
far less frequently and with little assurance that it will be correctly
interpreted. It is communicated electronically between legacy systems at best
and, at worst, via hard copy data entry. Ultimately, this eligibility data is
required when employees and dependents present themselves to physicians
26
<PAGE>
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. Employers 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, employers likely will seek more cost-effective health insurance
benefits solutions. Employers will be more critical in their selection of
health plans and will demand a more competitive bidding process. In addition,
they will need to be able to switch health plans when necessary, and they
likely 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
27
<PAGE>
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, brokers likely 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. 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 of Group Health Insurance Benefits e-Commerce (to be provided)]
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 are able to provide a fully integrated end-to-end
solution for group health insurance benefits e-commerce.
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 and GE Capital
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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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;
. eliminates the employer's responsibility 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 payment reconciling responsibilities currently
imposed on 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, including the reduction of instances
of wrongful denial of coverage due to eligibility data errors and
incorrect calculation of co-payments.
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
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neutral eligibility and financial data exchange mechanism. Leveraging our
client base, we have invested in building customized electronic connections
from our customers to their health plans.
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 the 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 employers or health plans that use our system, which helps 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. We will provide end-to-end
processing for employers, brokers, health plans and employees through which
they will exchange information and transact business.
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>
Front or
Product/Service Process solution Status Back-end
--------------- ---------------- ------ --------
<C> <S> <C> <C>
eBenX Import Export Two sets of data In service Back-end
(BEN-NET platform) pipelines: one to front- Mid-market interfaces
end applications and in development
employer's human resource
information systems and
the other to health plans
and payroll companies
- --------------------------------------------------------------------------------
eBenX Financial "Self bill" to health In service Back-end
(BEN-NET platform) plans and consolidated
invoice to employer
supports full financial
distribution; self-funded
management; auto-
adjudication and
consolidated premium
management
- --------------------------------------------------------------------------------
eBenX Inquiry Internet-based real time, In service Back-end
(BEN-NET platform) enrollment eligibility
database access tool
- --------------------------------------------------------------------------------
eBenX Data Access Internet-based, real time In development Back-end
(BEN-NET platform) reporting; standard
consolidated reports;
online financial reports
- --------------------------------------------------------------------------------
eBenX Enroll and Internet-based employee In service via Front-end
Member Maintenance and human resource self- front-end license
service benefit election;
Internet-based online
daily manager of employee
adds, deletes and
coverage changes from
life events
- --------------------------------------------------------------------------------
eBenX RFP Internet-based census In development Front-end
acquisition and proposal
request tools 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 also 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
the sales and customer development process for exchange services. In addition,
we gain valuable knowledge regarding market conditions and processes from
providing these services.
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:
Implement end-to-end e-commerce solution. We will implement 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, 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
customer agreements and acquisitions. 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 developing 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. 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.
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<PAGE>
Customers
The following is a representative list of our customers.
American Medical Response, Inc. Northwest Airlines Corporation
Bass Hotels & Resorts, Inc. PepsiCo, Inc.
Bell Atlantic Corporation Promus Hotel Corporation
Benefits Alliance, LLC R.R. Donnelley & Sons Company
Blue Cross Blue Shield Association Reader's Digest Association, Inc.
Dayton Hudson Corporation State of Kansas
Eastman Kodak Company W.W. Grainger, Inc.
GE Capital Services Corporation White Consolidated Industries Inc.
Georgia-Pacific Corporation Xerox Corporation
KPMG LLP
Connected Health Plans
The following is a representative list of the health plans to which we have
built customized electronic communication 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. 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 September
15, 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 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 September 15,
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.
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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 September 15, 1999, we had
35 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.
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 permanent, member level detail have
provided additional benefit to our Fortune 1000 clients. We have incorporated a
number of enhancements to BEN-NET in three subsequent major releases.
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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.
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. 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
35
<PAGE>
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 such infringement were established, we would, under certain circumstances,
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 certain of 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 such 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.
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. In addition, the success of our compliance
efforts may be dependent on the success of healthcare industry participants in
dealing with these new standards.
Finally, our function as a conduit for payment by employers to health plans
may subject us to the ERISA. ERISA imposes certain 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
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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 such payments
and may experience higher operating costs in order to comply with such
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 September 15, 1999, we had 238 full-time employees, including 83 in
information technology, 80 in operations, 30 in account management, 6 in sales
and marketing, 23 in consulting and 16 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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MANAGEMENT
Executive Officers and Directors
The following table provides information as of September 10, 1999 regarding
our executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Mark W. Tierney... 50 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.... 37 Director
James P. Bradley.. 47 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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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 add
additional outside directors.
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 15,565 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 such 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.
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 such 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 such 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 such amount as our board of directors determines to be
appropriate.
40
<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 10,400
Michael C. Bingham
Senior Vice President,
Business Development.. $104,000 $28,580 7,800
Scott P. Halstead
Chief Financial
Officer and
Secretary............. $120,000 $12,000 3,900
</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....... 10,400 5.01% $2.25 6/10/2008
Michael C. Bingham.... 7,800 3.76% $2.25 6/10/2008
Scott P. Halstead..... 3,900 1.88% $2.25 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 207,650 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......... -- 25,210 -- $33,174 $ --
Michael C. Bingham...... -- 9,035 -- $ 2,766 $ --
Scott P. Halstead....... -- 12,150 21,750 $ 3,713 $9,788
</TABLE>
- --------
. The value of unexercised in-the-money options is based on a value of $2.25,
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
42
<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 1,300,000 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
such 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 553,930 shares
of common stock, at a weighted average exercise price of $1.35 per share, were
outstanding under the 1993 Stock Option Plan and a total of 113,961 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 1,000,000 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 such awards; and
. to set the terms and conditions of such 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 such 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 such 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 such 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 such award terminates
without the delivery of shares or other consideration, the shares previously
used for such 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 such 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 300,000 shares of common stock. In order to participate in the
stock purchase plan, employees must meet certain 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,
44
<PAGE>
will be six months. The stock purchase plan will provide participating
employees with the right, subject to certain 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 such date as our board of
directors may determine, 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 such 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.
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 such
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 September 10, 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 3,265,481 shares of common stock outstanding as of
September 10, 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 [ ] 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.
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(1)
Shares --------------------
Beneficially Before the After the
Beneficial Owners Owned(1) Offering Offering
- ----------------- ------------ ---------- ---------
<S> <C> <C> <C>
North Bridge Venture Partners, L.P.
950 Winter Street, Suite 4600
Waltham, MA 02451.......................... 684,983 21.0%
New Enterprise Associates VI, Limited
Partnership
1119 St. Paul Street
Baltimore, MD 21202........................ 527,089 16.1
Entities associated with
JMI Equity Fund III, L.P. (2)
12680 High Bluff Drive
San Diego, CA 92130........................ 409,836 12.6
CB Healthcare Fund, L.P.
452 Fifth Avenue, 25th Floor
New York, NY............................... 409,836 12.6
Barbara J. Seykora (3)....................... 198,062 5.9
Mark W. Tierney (4).......................... 645,210 19.5
John J. Davis (5)............................ 49,609 1.5
Michael C. Bingham (6)....................... 409,035 12.5
Scott P. Halstead (7)........................ 22,400 *
Paul V. Barber (8)........................... 364,754 11.2
James P. Bradley (9)......................... 6,339 *
Daniel M. Cain (10).......................... 409,836 12.6
William J. Geary (11)........................ 684,983 21.0
John M. Nehra (12)........................... 527,089 16.1
All directors and executive officers as a
group (9 persons) (13)..................... 3,119,255 91.8
</TABLE>
47
<PAGE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of our common stock.
(1) 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 September 10, 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.
(2) Includes 364,754 shares held by JMI Equity Fund III, L.P. and 45,082
shares held by JMI Equity Side Fund, L.P. JMI Equity Side Fund, L.P. is
affiliated with JMI Equity Fund III, L.P.
(3) Includes 119,115 shares issuable upon exercise of stock options
exercisable within 60 days of September 10, 1999.
(4) Includes 30,400 shares issuable upon exercise of stock options
exerciseable within 60 days of September 10, 1999 and 14,810 shares
issuable upon exercise of immediately exerciseable warrants.
(5) Includes 49,609 shares issuable upon exercise of stock options
exerciseable within 60 days of September 10, 1999.
(6) Includes 7,800 shares issuable upon exercise of stock options exerciseable
within 60 days of September 10, 1999 and 1,235 shares issuable upon
exercise of immediately exerciseable warrants.
(7) Includes 22,400 shares issuable upon exercise of stock options
exerciseable within 60 days of September 10, 1999.
(8) Includes 364,754 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.
(9) Includes 6,339 shares issuable upon exercise of stock options exerciseable
within 60 days of September 10, 1999.
(10) Includes 409,836 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.
(11) Includes 684,983 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.
(12) Includes 527,089 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 NEA Partners VI, Limited
Partnership
(13) Includes 116,548 shares issuable upon exercise of stock options
exerciseable within 60 days of September 10, 1999 and 16,045 shares
issuable upon exercise of immediately exerciseable warrants. Includes
364,754 shares held by JMI Equity Fund III, L.P., 409,836 shares held by
CB Healthcare Fund, L.P., 684,983 shares held by North Bridge Venture
Partners, L.P. and 527,089 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 September 24, 1999, there were 3,265,481 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 such 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 2,082,974 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 such a 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 2,082,974 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 2,082,974 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 certain 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 such a 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 certain 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 any such
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
such 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 Norwest Bank
Minnesota, N.A. Its address is 161 North Concord Exchange, South Saint Paul,
Minnesota 55075, and its telephone number is (651) 450-4064.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, we will have [ ] 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 5% shareholders, holding
in the aggregate in excess of [ ]% 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 [ ] 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," as such term is defined in
Rule 144 under the Securities Act, which may generally only be sold in
compliance with the limitations of Rule 144, described below. The remaining
3,265,481 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:
. 98,247 shares will be available for immediate sale in the public market
on the date of this prospectus;
. 84,260 shares will be available for sale 90 days after the date of this
prospectus; and
. 3,082,974 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 [ ] 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 such sale. Sales under Rule 144
also are subject to requirements pertaining to the manner and notice of such
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 2,082,974 shares of our
common stock will be entitled to rights with respect to the registration of
such 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.......................................... [ ]
----------
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
certain 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.
Over allotment 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 [ ] additional shares of our common stock at the same price
per share as we will receive for the [ ] 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 certain 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 [ ] 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 certain 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 certain 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 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. 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.
52
<PAGE>
Future Sales. In addition, we have agreed that during the 180 days after the
date of this prospectus, we will not, subject to certain 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 public offering price for our
common stock has been determined through negotiations between us and the
representatives. Among the factors considered in these negotiations are
prevailing market conditions, financial information of our market valuations
of other companies that the representatives believe to be comparable to us,
estimates of our business potential, the present state of our development and
other factors deemed relevant.
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act, certain 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 such underwriter or
syndicate member is purchased by the representatives in a syndicate covering
transaction and has therefore not been effectively placed by such 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
$[ ].
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 70 filed public offerings of equity securities, of which 39 have
been completed, and has acted as a syndicate member in an additional 34 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.
53
<PAGE>
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 in Washington, D.C. 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............... 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, 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 June Pro forma
---------------- 30, June 30,
1997 1998 1999 1999
------- ------- ------- ---------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 1,009 $ 1,681 $ 9,268 $ 9,268
Investments............................. 2,005 -- -- --
Accounts receivable, less allowance of
$51 at December 31, 1997 and 1998 and
June 30, 1999......................... 573 1,964 2,445 2,445
Prepaid expenses........................ 143 324 639 639
Other................................... 33 18 -- --
------- ------- ------- -------
Total current assets................. 3,763 3,987 12,352 12,352
Property and equipment, net............. 1,288 1,568 1,908 1,908
Deposits................................ 33 41 43 43
------- ------- ------- -------
Total assets......................... $ 5,084 $ 5,596 $14,303 $14,303
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................ $ 181 $ 837 $ 793 $ 793
Accrued payroll......................... 333 493 590 590
Accrued expenses........................ 83 115 137 137
Deferred revenue........................ 64 10 11 11
Note payable............................ -- 750 -- --
------- ------- ------- -------
Total current liabilities............ 661 2,205 1,531 1,531
Shareholders' equity:
Redeemable Convertible Preferred Stock:
Series A, $.01 par value: Authorized
shares--376,209 Issued and
outstanding shares--370,209;
Liquidation value--$1,000.......... 4 4 4 --
Series B, $.01 par value: Authorized
shares--636,945 Issued and
outstanding shares--636,945;
Liquidation value--$500............ 6 6 6 --
Series C, $.01 par value: Authorized
shares--1,075,820 Issued and
outstanding shares--1,075,820;
Liquidation value--$10,500......... -- -- 11 --
Common Stock, $.01 par value:
Authorized shares--7,000,000; Issued
and outstanding shares--1,148,507--
1997; 1,160,107--1998; 1,171,157--
1999............................... 11 12 12 33
Pro forma issued and outstanding
shares--3,254,131..................
Additional paid-in capital.............. 5,582 5,591 16,073 16,073
Retained deficit........................ (1,180) (2,222) (3,334) (3,334)
------- ------- ------- -------
Total shareholders' equity................ 4,423 3,391 12,772 12,772
------- ------- ------- -------
Total liabilities and shareholders'
equity.................................. $ 5,084 $ 5,596 $14,303 $14,303
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
EBENX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended
Year ended December 31 June 30,
-------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- ---------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue............. $ 4,360 $ 7,093 $ 10,122 $ 3,929 $ 7,108
Costs and expenses:
Costs of revenues..... 2,480 4,496 6,958 2,935 5,233
Selling, general and
administrative...... 1,796 2,068 2,831 1,319 2,010
Research and
development......... 863 1,242 1,519 673 1,127
--------- --------- ---------- --------- ---------
Total costs and
expenses......... 5,139 7,806 11,308 4,927 8,370
--------- --------- ---------- --------- ---------
Loss from operations.... (779) (713) (1,186) (998) (1,262)
Interest income......... 198 213 144 83 150
--------- --------- ---------- --------- ---------
Net loss................ $ (581) $ (500) $ (1,042) $ (915) $ (1,112)
========= ========= ========== ========= =========
Net loss per share:
Basic and diluted..... $ (.53) $ (.45) $ (.90) $ (.80) $ (.95)
========= ========= ========== ========= =========
Shares used in
calculation of net
loss per share:
Basic and diluted..... 1,104,327 1,125,244 1,154,372 1,150,455 1,164,878
========= ========= ========== ========= =========
Pro forma net loss per
share:
Basic and diluted..... $ (.42) $ (.46)
========== =========
Shares used in
calculation of pro
forma net loss per
share:
Basic and diluted..... 2,161,526 2,409,216
========== =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
EBENX, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Convertible Preferred Stock
-----------------------------
Series A Series B Series C Common Stock Additional
-------------- -------------- ---------------- ---------------- Paid-In Retained
Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Total
------- ------ ------- ------ --------- ------ --------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 370,209 $ 4 -- $ -- -- $ -- 1,098,247 $11 $ 1,075 $ (99) $ 991
Issuance of Preferred
Stock (net of offering
costs of $10)......... -- -- 636,945 6 -- -- -- -- 4,484 -- 4,490
Exercise of stock
options............... -- -- -- -- -- -- 10,560 -- 3 -- 3
Exercise of stock
warrants.............. -- -- -- -- -- -- 1,600 -- 1 -- 1
Net loss............... -- -- -- -- -- -- -- -- -- (581) (581)
------- --- ------- ---- --------- ---- --------- --- ------- ------- -------
Balance at December 31,
1996................... 370,209 4 636,945 6 -- -- 1,110,407 11 5,563 (680) 4,904
Exercise of stock
options............... -- -- -- -- -- -- 38,100 -- 19 -- 19
Net loss............... -- -- -- -- -- -- -- -- -- (500) (500)
------- --- ------- ---- --------- ---- --------- --- ------- ------- -------
Balance at December 31,
1997................... 370,209 4 636,945 6 -- -- 1,148,507 11 5,582 (1,180) 4,423
Exercise of stock
options............... -- -- -- -- -- -- 11,600 1 9 -- 10
Net loss............... -- -- -- -- -- -- -- -- -- (1,042) (1,042)
------- --- ------- ---- --------- ---- --------- --- ------- ------- -------
Balance at December 31,
1998................... 370,209 4 636,945 6 -- -- 1,160,107 12 5,591 (2,222) 3,391
Issuance of Series C
Preferred Stock (net
of offering costs of
$29).................. -- -- -- -- 1,075,820 11 -- -- 10,471 -- 10,482
Exercise of stock
options............... -- -- -- -- -- -- 11,050 -- 11 -- 11
Net loss............... -- -- -- -- -- -- -- -- -- (1,112) (1,112)
------- --- ------- ---- --------- ---- --------- --- ------- ------- -------
Balance at June 30, 1999
(unaudited)............ 370,209 $ 4 636,945 $ 6 1,075,820 $ 11 1,171,157 $12 $16,073 $(3,334) $12,772
======= === ======= ==== ========= ==== ========= === ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
EBENX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Six months
Year ended December 31 ended June 30
------------------------ --------------
1996 1997 1998 1998 1999
------- ------ ------- ----- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss............................. $ (581) $ (500) $(1,042) $(915) $(1,112)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Depreciation of property and
equipment......................... 192 327 481 222 315
Noncash expense relating to common
stock issued...................... 3 -- -- -- --
Changes in operating assets and
liabilities:
Accounts receivable................ (440) 27 (1,391) (294) (483)
Other current assets............... 6 (151) (166) (120) (300)
Accounts payable................... (11) 84 656 36 (44)
Accrued expenses................... 62 238 192 21 119
Deferred revenue................... (50) 65 (55) 546 1
Deposits........................... -- (23) (6) -- (1)
------- ------ ------- ----- -------
Net cash (used in) provided by
operating activities............ (819) 67 (1,331) (504) (1,506)
Investing activities:
Additions to property and equipment.. (523) (692) (761) (352) (639)
Purchase of investments.............. (2,006) -- -- -- --
Sale of investments.................. -- 1 2,005 -- --
------- ------ ------- ----- -------
Net cash (used in) provided by
investing activities.............. (2,529) (691) 1,244 (352) (639)
Financing activities:
Proceeds from note payable........... -- -- 750 -- --
Payment of note payable.............. -- -- -- -- (750)
Stock options and warrants
exercised.......................... 1 19 9 1 11
Proceeds from issuance of preferred
stock.............................. 4,490 -- -- -- 10,471
------- ------ ------- ----- -------
Net cash provided by financing
activities........................ 4,491 19 759 1 9,732
------- ------ ------- ----- -------
Net increase (decrease) in cash and
cash equivalents.................... 1,143 (605) 672 (855) 7,587
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 $ 154 $ 9,268
======= ====== ======= ===== =======
</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
Revenues are recognized when the services are rendered to the customer.
Deferred revenue represents cash received from customers prior to services
being performed by the Company.
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.
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.
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 2,082,974 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 June 30, 1999.
Pro Forma Net Loss Per Share
Pro forma net loss per share for the year ended December 31, 1998 and the six
months ended June 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 1,007,154 shares for the year ended
December 31, 1998 and 1,244,370 shares for the six months ended June 30, 1999.
The pro forma effects of these transactions are unaudited.
Interim Financial Statements
The interim financial statements for the six months ended June 30, 1998 and
1999, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly,
F-8
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business Description and Summary of Significant Accounting Policies
(Continued)
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 $2.701 and $7.065 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 $.2701 (Series A) and
$.7065 (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 $2.701 (Series A) and $7.065 (Series B) divided by
the conversion price then in effect, as defined. The initial conversion price
of $2.701 (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 November 1, 1999 and March 19, 2001, 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 $2.701 and Series B
preferred shares for $7.065, 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>
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)
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..................... 227,676 389,915 $ .54
Granted.................. (204,615) 204,615 $1.80
Exercised................ -- (38,100) $ .49
Canceled................. 100,400 (100,400) $ .95
-------- -------- ----- ---
Balance at December 31,
1997..................... 123,461 456,030 $1.02
Additional shares
reserved for issuance.. 100,000 -- --
Granted.................. (207,650) 207,650 $2.13
Exercised................ -- (11,600) $ .81
Canceled................. 98,150 (98,150) $ .50
-------- -------- ----- ---
Balance at December 31,
1998..................... 113,961 553,930 $1.35
======== ======== ===== ===
</TABLE>
The weighted average fair value of options granted in 1998 and 1997 was $.45
and $.42 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, 1998 and 1997, options to purchase 159,026 and 96,868 shares of common
stock are exercisable, respectively, at weighted average exercise prices of
$.68 and $.39, respectively. Exercise prices for options outstanding as of
December 31, 1998 and 1997, ranged from $.30 to $1.80 and $.30 to $2.25,
respectively. The weighted average remaining contractual life of those options
at December 31, 1998 and 1997 is 4.4 and 4.5 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
1998 and 1997: risk free interest rate of 5.50%, dividend yield of 0%, and a
weighted average expected life of the option of five years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net loss is not materially different from the amounts reported for 1998,
1997 and 1996.
The pro forma effect on net loss of 1998 is not representative of the pro forma
effect on net loss in future years.
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 6,000 shares of the
Company's Series A Convertible Preferred Stock at $2.701 per share. The
warrants are exercisable over ten years.
During 1995, the Company granted three employees warrants to purchase 21,805
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.
F-12
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 1,075,820 shares of Series C
preferred stock resulting in net proceeds to the Company of $10,471,005. The
Series C shareholders have liquidation preference of $9.76 per share, plus
accumulated dividends. Annual preferential cumulative dividends of $.49 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 $9.76 per share.
F-13
<PAGE>
[Inside Back Cover]
<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................................................ $19,182
NASD filing fee..................................................... $ 7,400
Nasdaq National Market listing fee.................................. $
Legal fees and expenses............................................. $
Accounting fees and expenses........................................ $
Transfer Agent's and Registrar's fees............................... $
Printing and engraving expenses..................................... $
Miscellaneous....................................................... $
-------
Total............................................................. $
=======
</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* Services Agreement by and between the Company and The Blue Cross Blue
Shield Association, dated August 29, 1997.
10.7* 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* 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 9, 1997.
10.14* First Amendment to Office Sublease by and between the Company and The
Prudential Insurance Company of America, dated August 10, 1999.
10.15* Consent of Landlord to Office Sublease by and between the Company,
Teachers Insurance and Annuity Association (successor to Minnesota CC
Properties, Inc.), The Prudential Insurance Company of America, dated
August 30, 1999.
10.16* 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 Office Lease by and between the Company and ND
Properties, Inc., dated October 1, 1997.
10.18* Amendment No. 2 to Office Lease by and between the Company and ND
Properties, Inc., dated December 23, 1997.
10.19* Amendment No. 3 to Office Lease by and between the Company and
Teachers Insurance and Annuity Association of America (successor to ND
Properties, Inc.), dated January 19, 1999.
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.
(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
certifies that it has reasonable grounds to believe that it meets all if the
requirements for filing on Form S-1 and has duly caused this amendment 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 September
28, 1999.
EBENX, INC.
/s/ John J. Davis
By: _________________________________
John J. Davis,
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Mark Tierney, John Davis and Scott
Halstead, and each of them, his true and lawful attorney-in-fact and agents,
with full powers of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all (i) amendments
(including post-effective amendments) and additions to this Registration
Statement and (ii) Registration Statements, and any and all amendments thereto
(including post-effective amendments), relating to the offering contemplated
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, and hereby grants to
such attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement on Form S-1 has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Mark W. Tierney Chairman and Director September 28, 1999
____________________________________ (principal executive
Mark W. Tierney officer)
/s/ John J. Davis President, Chief Executive September 28, 1999
____________________________________ Officer and Director
John J. Davis (principal executive
officer)
/s/ Scott P. Halstead Chief Financial Officer and September 28, 1999
____________________________________ Secretary (principal
Scott P. Halstead financial officer and
principal accounting
officer)
/s/ Michael C. Bingham Senior Vice President, September 28, 1999
____________________________________ Business Development and
Michael C. Bingham Director
/s/ Paul V. Barber Director September 28, 1999
____________________________________
Paul V. Barber
/s/ James P. Bradley Director September 28, 1999
____________________________________
James P. Bradley
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Daniel M. Cain Director September 28, 1999
____________________________________
Daniel M. Cain
/s/ William J. Geary Director September 28, 1999
____________________________________
William J. Geary
/s/ John Nehra Director September 28, 1999
____________________________________
John Nehra
</TABLE>
II-5
<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* Services Agreement by and between the Company and The Blue Cross Blue
Shield Association, dated August 29, 1997.
10.7* 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* 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 9, 1997.
10.14* First Amendment to Office Sublease by and between the Company and The
Prudential Insurance Company of America, dated August 10, 1999.
10.15* Consent of Landlord to Office Sublease by and between the Company,
Teachers Insurance and Annuity Association (successor to Minnesota CC
Properties, Inc.), The Prudential Insurance Company of America, dated
August 30, 1999.
10.16* Office Lease by and between the Company and ND Properties, Inc., dated
March 12, 1997.
10.17* Amendment No. 1 to Office Lease by and between the Company and ND
Properties, Inc., dated October 1, 1997.
10.18* Amendment No. 2 to Office Lease by and between the Company and ND
Properties, Inc., dated December 23, 1997.
10.19* Amendment No. 3 to Office Lease by and between the Company and
Teachers Insurance and Annuity Association of America (successor to ND
Properties, Inc.), dated January 19, 1999.
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>
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*To be filed by amendment.
<PAGE>
EXHIBIT 3.1
FIFTH AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
EBENX, INC.
ARTICLE I
The name of this corporation is eBenX, Inc.
ARTICLE II
The registered office of this corporation is located at 5500 Wayzata
Boulevard, Suite 1275, Minneapolis, Minnesota 55416.
ARTICLE III
The aggregate number of authorized shares of the corporation is 100,000,000
shares, $.01 par value. The shares shall be divisible into classes and series,
have the designations, voting rights, and other rights and preferences, and be
subject to the restrictions, that the board of directors may from time to time
establish, fix, and determine, consistent with these articles of incorporation.
Unless otherwise designated by the board of directors, all issued shares shall
be deemed common stock with equal rights and preferences.
ARTICLE IV
The shareholders of the Corporation shall not have any preemptive rights to
subscribe for or acquire securities or rights to purchase securities of any
class, kind or series of the Corporation.
ARTICLE V
No shareholder of this Corporation shall have any cumulative voting rights.
ARTICLE VI
The shareholders shall take action by the affirmative vote of holders of a
majority of the voting power of the shares present, except where a larger
proportion is required by law, these Articles or a shareholder control
agreement.
<PAGE>
ARTICLE VII
Any action required or permitted to be taken by the Board of Directors of
this Corporation may be taken by written action signed by that number of
directors that would be required to take the same action at a meeting of the
Board at which all directors are present, except as to those matters requiring
shareholder approval, in which case the written action must be signed by all
members of the Board of Directors then in office.
ARTICLE VIII
No director of this Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director; provided, however, that this Article shall not eliminate or
limit the liability of a director to the extent provided by applicable law (i)
for any breach of the director's duty of loyalty to the Corporation or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under section
302A.559 or 80A.23 of the Minnesota Statutes, (iv) for any transaction from
which the director derived an improper personal benefit, or (v) for any act or
omission occurring prior to the effective date of this Article. No amendment to
or repeal of this Article shall apply to or have any effect on the liability or
alleged liability of any director of the Corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
EBENX, INC.
ARTICLE I.
OFFICES, CORPORATE SEAL
Section 1.01. Registered Office. The registered office of the corporation
in Minnesota shall be that set forth in the Articles of Incorporation or in the
most recent amendment of the Articles of Incorporation or resolution of the
directors filed with the Secretary of State of Minnesota changing the registered
office.
Section 1.02. Other Offices. The corporation may have such other offices,
within or without the State of Minnesota, as the directors shall, from time to
time, determine.
Section 1.03. Corporate Seal. The corporation shall have no corporate seal.
ARTICLE II.
MEETINGS OF SHAREHOLDERS
Section 2.01. Place and Time of Meetings. Except as provided otherwise by
Minnesota Statutes Chapter 302A, meetings of the shareholders may be held at any
place, within or without the State of Minnesota, as may from time to time be
designated by the directors and, in the absence of such designation, shall be
held at the registered office of the corporation in the State of Minnesota. The
directors shall designate the time of day for each meeting and, in the absence
of such designation, every meeting of shareholders shall be held at 10:00 a.m.
Section 2.02. Regular Meetings.
(a) A regular meeting of the shareholders shall be held on such date as the
Board of Directors shall by resolution establish.
(b) At a regular meeting the shareholders, voting as provided in the
Articles of Incorporation and these Bylaws, shall designate the number of
directors to constitute the Board of Directors (subject to the authority of the
Board of Directors thereafter to increase or decrease the number of directors as
permitted by law and these Bylaws), shall elect qualified successors for
directors who serve for an indefinite term or whose terms have expired or are
due to expire within six months after the date of the meeting and shall transact
such other business as may properly come before them.
Section 2.03. Special Meetings. Special meetings of the shareholders may be
held at any time and for any purpose and may be called by the President,
Treasurer, any two directors, or by a shareholder or shareholders holding 10% or
more of the shares entitled to vote on the matters to be presented to the
meeting; except that a special meeting for the purpose of considering any action
to directly or indirectly facilitate or affect a business combination,
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including any action to change or otherwise affect the composition of the board
of directors for that purpose, must be called by 25% or more of the voting power
of all shares entitled to vote. A shareholder or shareholders holding the
requisite percentage of the voting power of all shares entitled to vote may
demand a special meeting of the shareholders by written notice of demand given
to the chief executive officer or chief financial officer of the corporation and
containing the purposes of the meeting. Within 30 days after receipt of demand
by one of those officers, the board of directors shall cause a special meeting
of shareholders to be called and held on notice no later than 90 days after
receipt of the demand, at the expense of the corporation. Special meetings shall
be held on the date and at the time and place fixed by the chief executive
officer or the board of directors, except that a special meeting called by or at
demand of a shareholder or shareholders shall be held in the county where the
principal executive office is located. The business transacted at a special
meeting shall be limited to the purposes as stated in the notice of the meeting.
Section 2.04. Quorum, Adjourned Meetings. The holders of a majority of the
shares entitled to vote shall constitute a quorum for the transaction of
business at any regular or special meeting. In case a quorum shall not be
present at a meeting, those present may adjourn the meeting to such day as they
shall, by majority vote, agree upon, and a notice of such adjournment and the
date and time at which such meeting shall be reconvened shall be mailed to each
shareholder entitled to vote at least five days before such adjourned meeting.
If a quorum is present, a meeting may be adjourned from time to time without
notice other than announcement at the meeting. At adjourned meetings at which a
quorum is present, any business may be transacted which might have been
transacted at the meeting as originally noticed. If a quorum is present, the
shareholders may continue to transact business until adjournment notwithstanding
the withdrawal of enough shareholders to leave less than a quorum.
Section 2.05. Voting. At each meeting of the shareholders every shareholder
having the right to vote shall be entitled to vote either in person or by proxy.
Each shareholder, unless the Articles of Incorporation or statute provide
otherwise, shall have one vote for each share having voting power registered in
such shareholder's name on the books of the corporation. Jointly owned shares
may be voted by any joint owner unless the corporation receives written notice
from any one of them denying the authority of that person to vote those shares.
Upon the demand of any shareholder, the vote upon any question before the
meeting shall be by ballot. All questions shall be decided by a majority vote of
the number of shares entitled to vote and represented at the meeting at the time
of the vote except if otherwise required by statute, the Articles of
Incorporation, or these Bylaws.
Section 2.06. Closing of Books. The Board of Directors may fix a time, not
exceeding 60 days preceding the date of any meeting of shareholders, as a record
date for the determination of the shareholders entitled to notice of, and to
vote at, such meeting, notwithstanding any transfer of shares on the books of
the corporation after any record date so fixed. The Board of Directors may close
the books of the corporation against the transfer of shares during the whole or
any part of such period. If the Board of Directors fails to fix a record date
for determination of the shareholders entitled to notice of, and to vote at, any
meeting of shareholders, the record date shall be the 20th day preceding the
date of such meeting.
Section 2.07. Notice of Meetings. There shall be mailed to each
shareholder, shown by the books of the corporation to be a holder of record of
voting shares, at his address as
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<PAGE>
shown by the books of the corporation, a notice setting out the time and place
of each regular meeting and each special meeting, except where the meeting is an
adjourned meeting and the date, time and place of the meeting were announced at
the time of adjournment, which notice shall be mailed at least ten days prior
thereto; except that notice of a meeting at which an agreement of merger or
exchange is to be considered shall be mailed to all shareholders of record,
whether entitled to vote or not, at least fourteen days prior thereto. Every
notice of any special meeting called pursuant to Section 2.03 hereof shall state
the purpose or purposes for which the meeting has been called, and the business
transacted at all special meetings shall be confined to the purpose stated in
the notice.
Section 2.08. Waiver of Notice. Notice of any regular or special meeting
may be waived by any shareholder either before, at or after such meeting orally
or in a writing signed by such shareholder or a representative entitled to vote
the shares of such shareholder. A shareholder, by his attendance at any meeting
of shareholders, shall be deemed to have waived notice of such meeting, except
where the shareholder objects at the beginning of the meeting to the transaction
of business because the item may not lawfully be considered at that meeting and
does not participate in the consideration of the item at that meeting.
Section 2.09. Written Action. Any action which might be taken at a meeting
of the shareholders may be taken without a meeting if done in writing and signed
by all of the shareholders entitled to vote on that action.
Section 2.10 Conduct of Shareholder Meetings. The chairman of the meeting
shall have the right and authority to prescribe such rules, regulations and
procedures and to do all such acts as, in the judgment of such chairman, are
appropriate for conduct of the meeting. To the extent not prohibited by law,
such rules, regulations or procedures may include, without limitation,
establishment of (i) an agenda or order of business for the meeting and the
method by which business may be proposed, (ii) rules and procedures for
maintaining order at the meeting and the safety of those present, (iii)
limitations on attendance at or participation in the meeting to shareholders of
record of the corporation, their duly authorized proxies or such other persons
as the chairman of the meeting shall determine, (iv) restrictions on entry to
the meeting after the time fixed for the commencement thereof and (v)
limitations on the time allotted to questions or comments by participants. Any
proposed business contained in the notice of a regular meeting is deemed to be
on the agenda and no further motions or other actions shall be required to bring
such proposed business up for consideration. Unless and to the extent otherwise
determined by the chairman of the meeting, it shall not be necessary to follow
Robert's Rules of Order or any other rules of parliamentary procedure at the
meeting of the shareholders. Following completion of the business of the meeting
as determined by the chairman of the meeting, the chairman of the meeting shall
have the exclusive authority to adjourn the meeting.
Section 2.11 Shareholder Proposals. To be properly brought before a regular
meeting of shareholders, business must be (i) specified in the notice of the
meeting, (ii) directed to be brought before the meeting by the Board of
Directors or (iii) proposed at the meeting by a shareholder who (A) was a
shareholder of record at the time of giving of notice provided for in these
bylaws, (B) is entitled to vote at the meeting and (C) gives prior notice of the
matter, which must otherwise be a proper matter for shareholder action, in the
manner herein provided. For business to be properly brought before a regular
meeting by a shareholder, the shareholder must
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<PAGE>
give written notice to the Secretary of the corporation so as to be received at
the principal executive offices of the corporation at least 120 days before the
date that is one year after the date of the corporation's proxy statement for
the prior year's regular meeting. Such notice shall set forth (i) the name and
record address of the shareholder and of the beneficial owner, if any, on whose
behalf the proposal will be made, (ii) the class and number of shares of the
corporation owned by the shareholder and beneficially owned by the beneficial
owner, if any, on whose behalf the proposal will be made, (iii) a brief
description of the business desired to be brought before the regular meeting and
the reasons for conducting such business and (iv) any material interest in such
business of the shareholder and the beneficial owner, if any, on whose behalf
the proposal is made. The chairman of the meeting may refuse to acknowledge any
proposed business not made in compliance with the foregoing procedure.
ARTICLE III.
DIRECTORS
Section 3.01. General Powers. The business and affairs of the corporation
shall be managed by or under the direction of the Board of Directors, except as
otherwise permitted by statute.
Section 3.02. Number, Qualification and Term of Office. The Board of
Directors shall consist of one or more directors, the precise number to be
established by resolution of the shareholders (subject to the authority of the
Board of Directors to increase or decrease the number of directors as permitted
by law and these bylaws). In the absence of such shareholder resolution, the
number of directors shall be the number last fixed by the shareholders, the
Board of Directors, the incorporator or the Articles of Incorporation. Directors
need not be shareholders. The directors shall be divided into three classes, as
nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the 2000 regular meeting of shareholders, the term of
office of the second class to expire at the 2001 regular meeting of shareholders
and the term of office of the third class to expire at the 2002 regular meeting
of shareholders. At each regular meeting of shareholders following such initial
classification and election, directors elected to succeed those directors whose
terms expire shall be elected to hold office for a term of three consecutive
years. Each director of the corporation shall serve until such director's
successor shall have been elected and shall qualify, or until the earlier death,
resignation, removal or disqualification of such director. In case of an
increase or decrease in the number of directors, the increase or decrease shall
be distributed among the several classes as nearly equal as possible, as shall
be determined by the affirmative vote of a majority of the entire Board of
Directors or by the holders of at least two-thirds of the stock of the
corporation entitled to vote, considered as one class.
Section 3.03. Board Meetings. Meetings of the Board of Directors may be
held from time to time at such time and place within or without the State of
Minnesota as may be designated in the notice of such meeting.
Section 3.04. Calling Meetings; Notice. Meetings of the Board of Directors
may be called by the Chairman of the Board by giving at least 24 hours' notice,
or by any other director by giving at least five days' notice, of the date, time
and place thereof to each director by mail, telephone, telegram or in person.
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<PAGE>
Section 3.05. Waiver of Notice. Notice of any meeting of the Board of
Directors may be waived by any director either before, at, or after such meeting
orally or in a writing signed by such director. A director, by his attendance at
any meeting of the Board of Directors, shall be deemed to have waived notice of
such meeting, except where the director objects at the beginning of the meeting
to the transaction of business because the meeting is not lawfully called or
convened and does not participate thereafter in the meeting.
Section 3.06. Quorum. A majority of the directors holding office
immediately prior to a meeting of the Board of Directors shall constitute a
quorum for the transaction of business at such meeting.
Section 3.07. Absent Directors. A director may give advance written consent
or opposition to a proposal to be acted on at a meeting of the Board of
Directors. If such director is not present at the meeting, consent or opposition
to a proposal does not constitute presence for purposes of determining the
existence of a quorum, but consent or opposition shall be counted as a vote in
favor of or against the proposal and shall be entered in the minutes or other
record of action at the meeting, if the proposal acted on at the meeting is
substantially the same or has substantially the same effect as the proposal to
which the director has consented or objected.
Section 3.08. Conference Communications. Any or all directors may
participate in any meeting of the Board of Directors, or of any duly constituted
committee thereof, by any means of communication through which the directors may
simultaneously hear each other during such meeting. For the purposes of
establishing a quorum and taking any action at the meeting, such directors
participating pursuant to this Section 3.08 shall be deemed present in person at
the meeting, and the place of the meeting shall be the place of origination of
the conference communication.
Section 3.09. Vacancies; Newly Created Directorships. Vacancies in the
Board of Directors of this corporation occurring by reason of death,
resignation, removal or disqualification shall be filled for the unexpired term
by a majority of the remaining directors of the Board although less than a
quorum; newly created directorships resulting from an increase in the authorized
number of directors by action of the Board of Directors as permitted by Section
3.02 may be filled by a two-thirds vote of the directors serving at the time of
such increase; and each director elected pursuant to this Section 3.09 shall be
a director until such director's successor is elected by the shareholders at
their next regular or special meeting.
Section 3.10. Removal. Any or all of the directors may be removed from
office at any time, but only for cause, by the affirmative vote of the
shareholders holding a majority of the shares entitled to vote at an election of
directors. A director named by the Board of Directors to fill a vacancy may be
removed from office at any time, with or without cause, by the affirmative vote
of the remaining directors if the shareholders have not elected directors in the
interim between the time of the appointment to fill such vacancy and the time of
the removal. In the event that the entire Board or any one or more directors be
so removed, new directors shall be elected at the same meeting.
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<PAGE>
Section 3.11. Committees. A resolution approved by the affirmative vote of
a majority of the Board of Directors may establish committees having the
authority of the board in the management of the business of the corporation to
the extent provided in the resolution. A committee shall consist of one or more
persons, who need not be directors, appointed by affirmative vote of a majority
of the directors present. Committees are subject to the direction and control
of, and vacancies in the membership thereof shall be filled by, the Board of
Directors, except as provided by Minnesota Statutes Section 302A.243.
A majority of the members of the committee present at a meeting is a quorum
for the transaction of business, unless a larger or smaller proportion or number
is provided in a resolution approved by the affirmative vote of a majority of
the directors present.
Section 3.12. Written Action. Any action which might be taken at a meeting
of the Board of Directors, or any duly constituted committee thereof, may be
taken without a meeting if done in writing and signed by all of the directors or
committee members, unless the Articles provide otherwise and the action need not
be approved by the shareholders.
Section 3.13. Compensation. Directors who are not salaried officers of this
corporation shall receive such fixed sum per meeting attended or such fixed
annual sum as may be determined, from time to time, by resolution of the Board
of Directors. The Board of Directors may, by resolution, provide that all
directors shall receive their expenses, if any, of attendance at meetings of the
Board of Directors or any committee thereof. Nothing herein contained shall be
construed to preclude any director from serving this corporation in any other
capacity and receiving proper compensation therefor.
Section 3.14. Nomination of Directors. Nominations of persons for election
as directors may be made at a regular meeting of shareholders (i) by or at the
direction of the Board of Directors or (ii) by any shareholder who (A) was a
shareholder of record at the time of giving of notice provided for in these
bylaws, (B) is entitled to vote at the meeting and (C) gives prior notice of the
nomination in the manner herein provided. For a nomination to be properly made
by a shareholder, the shareholder must give written notice to the Secretary of
the corporation so as to be received at the principal executive offices of the
corporation at least 120 days before the date that is one year after the date of
the corporation's proxy statement for the prior year's regular meeting. Such
notice shall set forth (i) as to the shareholder giving the notice: (A) the name
and record address of the shareholder and of the beneficial owner, if any, on
whose behalf the nomination will be made, and (B) the class and number of shares
of the corporation owned by the shareholder and beneficially owned by the
beneficial owner, if any, on whose behalf the nomination will be made and (ii)
as to each person the shareholder proposes to nominate: (A) the name, age,
business address and residence address of the person, (B) the principal
occupation or employment of the person and (C) the class and number of shares of
the corporation's capital stock beneficially owned by the person. The chairman
of the meeting may refuse to acknowledge the nomination of any person not made
in compliance with the foregoing procedure.
ARTICLE IV.
OFFICERS
Section 4.01. Number. The officers of the corporation shall consist of a
Chairman of the Board (if one is elected by the Board), a President, a
Treasurer, a Secretary (if
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<PAGE>
one is elected by the Board) and such other officers and agents as may, from
time to time, be elected or appointed by the Board of Directors. Any number of
offices may be held by the same person.
Section 4.02. Election, Term of Office and Qualifications. The Board of
Directors shall elect or appoint, by resolution approved by the affirmative vote
of a majority of the directors present, from within or without their number, the
President, Treasurer and such other officers as may be deemed advisable, each of
whom shall have the powers, rights, duties, responsibilities, and terms in
office provided for in these Bylaws or a resolution of the Board of Directors
not inconsistent therewith. The President and all other officers who may be
directors shall continue to hold office until the election and qualification of
their successors, notwithstanding an earlier termination of their directorship.
Section 4.03. Removal and Vacancies. Any officer may be removed from his
office by the Board of Directors at any time, with or without cause. Such
removal, however, shall be without prejudice to the contract rights of the
person so removed. If there be a vacancy among the officers of the corporation
by reason of death, resignation or otherwise, such vacancy shall be filled for
the unexpired term by the Board of Directors.
Section 4.04. Chairman of the Board. The Chairman of the Board, if one is
elected, shall preside at all meetings of the shareholders and directors and
shall have such other duties as may be prescribed, from time to time, by the
Board of Directors.
Section 4.05. President. The President shall be the chief executive officer
and shall have general active management of the business of the corporation. In
the absence of the Chairman of the Board, he shall preside at all meetings of
the shareholders and directors. He shall see that all orders and resolutions of
the Board of Directors are carried into effect. He shall execute and deliver, in
the name of the corporation, any deeds, mortgages, bonds, contracts or other
instruments pertaining to the business of the corporation unless the authority
to execute and deliver is required by law to be exercised by another person or
is expressly delegated by the Articles or Bylaws or by the Board of Directors to
some other officer or agent of the corporation. He shall maintain records of
and, whenever necessary, certify all proceedings of the Board of Directors and
the shareholders, and in general, shall perform all duties usually incident to
the office of the President. He shall have such other duties as may, from time
to time, be prescribed by the Board of Directors.
Section 4.06. Vice President. Each Vice President, if one or more are
elected, shall have such powers and shall perform such duties as prescribed by
the Board of Directors or by the President. In the event of the absence or
disability of the President, Vice Presidents shall succeed to his power and
duties in the order designated by the Board of Directors.
Section 4.07. Secretary. The Secretary, if one is elected, shall be
secretary of and shall attend all meetings of the shareholders and Board of
Directors and shall record all proceedings of such meetings in the minute book
of the corporation. He shall give proper notice of meetings of shareholders and
directors. He shall perform such other duties as may, from time to time, be
prescribed by the Board of Directors or by the President.
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<PAGE>
Section 4.08. Treasurer. The Treasurer shall be the chief financial officer
and shall keep accurate financial records for the corporation. He shall deposit
all moneys, drafts and checks in the name of, and to the credit of, the
corporation in such banks and depositories as the Board of Directors shall, from
time to time, designate. He shall have power to endorse, for deposit, all notes,
checks and drafts received by the corporation. He shall disburse the funds of
the corporation, as ordered by the Board of Directors, making proper vouchers
therefor. He shall render to the President and the directors, whenever
requested, an account of all his transactions as Treasurer and of the financial
condition of the corporation, and shall perform such other duties as may, from
time to time, be prescribed by the Board of Directors or by the President.
Section 4.09. Compensation. The officers of this corporation shall receive
such compensation for their services as may be determined, from time to time, by
resolution of the Board of Directors.
ARTICLE V.
SHARES AND THEIR TRANSFER
Section 5.01. Certificates for Shares. All shares of the corporation shall
be certificated shares. Every owner of shares of the corporation shall be
entitled to a certificate, to be in such form as shall be prescribed by the
Board of Directors, certifying the number of shares of the corporation owned by
such shareholder. The certificates for such shares shall be numbered in the
order in which they shall be issued and shall be signed, in the name of the
corporation, by the President and by the Secretary or an Assistant Secretary or
by such officers as the Board of Directors may designate. If the certificate is
signed by a transfer agent or registrar, such signatures of the corporate
officers may be by facsimile if authorized by the Board of Directors. Every
certificate surrendered to the corporation for exchange or transfer shall be
cancelled, and no new certificate or certificates shall be issued in exchange
for any existing certificate until such existing certificate shall have been so
canceled, except in cases provided for in Section 5.04.
Section 5.02. Issuance of Shares. The Board of Directors is authorized to
cause to be issued shares of the corporation up to the full amount authorized by
the Articles of Incorporation in such amounts as may be determined by the Board
of Directors and as may be permitted by law. No shares shall be allotted except
in consideration of cash or other property, tangible or intangible, received or
to be received by the corporation under a written agreement, of services
rendered or to be rendered to the corporation under a written agreement, or of
an amount transferred from surplus to stated capital upon a share dividend. At
the time of such allotment of shares, the Board of Directors making such
allotments shall state, by resolution, their determination of the fair value to
the corporation in monetary terms of any consideration other than cash for which
shares are allotted.
Section 5.03. Transfer of Shares. Transfer of shares on the books of the
corporation may be authorized only by the shareholder named in the certificate,
or the shareholder's legal representative, or the shareholder's duly authorized
attorney-in-fact, and upon surrender of the certificate or the certificates for
such shares. The corporation may treat as the absolute owner of shares of the
corporation, the person or persons in whose name shares are registered on the
books of the corporation.
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<PAGE>
Section 5.04. Loss of Certificates. Except as otherwise provided by
Minnesota Statutes Section 302A.419, any shareholder claiming a certificate for
shares to be lost, stolen or destroyed shall make an affidavit or that fact in
such form as the Board of Directors shall require and shall, if the Board of
Directors so requires, give the corporation a bond of indemnity in form, in an
amount, and with one or more sureties satisfactory to the Board of Directors, to
indemnify the corporation against any claim which may be made against it on
account of the reissue of such certificate, whereupon a new certificate may be
issued in the same tenor and for the same number of shares as the one alleged to
have been lost, stolen or destroyed.
ARTICLE VI.
DIVIDENDS, RECORD DATE
Section 6.01. Dividends. Subject to the provisions of the Articles of
Incorporation, of these Bylaws, and of law, the Board of Directors may declare
dividends whenever, and in such amounts as, in its opinion, are deemed
advisable.
Section 6.02. Record Date. Subject to any provisions of the Articles of
Incorporation, the Board of Directors may fix a date not exceeding 120 days
preceding the date fixed for the payment of any dividend as the record date for
the determination of the shareholders entitled to receive payment of the
dividend and, in such case, only shareholders of record on the date so fixed
shall be entitled to receive payment of such dividend notwithstanding any
transfer of shares on the books of the corporation after the record date. The
Board of Directors may close the books of the corporation against the transfer
of shares during the whole or any part of such period.
ARTICLE VII.
BOOKS AND RECORDS, FISCAL YEAR
Section 7.01. Share Register. The Board of Directors of the corporation
shall cause to be kept at its principal executive office, or at another place or
places within the United States determined by the board:
(1) a share register not more than one year old, containing the names and
addresses of the shareholders and the number and classes of shares
held by each shareholder; and
(2) a record of the dates on which certificates or transaction statements
representing shares were issued.
Section 7.02. Other Books and Records. The Board of Directors shall cause
to be kept at its principal executive office, or, if its principal executive
office is not in Minnesota, shall make available at its registered office within
ten days after receipt by an officer of the corporation of a written demand for
them made by a shareholder or other person authorized by Minnesota Statutes
Section 302A.461, originals or copies of:
(1) records of all proceedings of shareholders for the last three years;
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(2) records of all proceedings of the board for the last three years;
(3) its articles and all amendments currently in effect;
(4) its bylaws and all amendments currently in effect;
(5) financial statements required by Minnesota Statutes Section 302A.463
and the financial statement for the most recent interim period
prepared in the course of the operation of the corporation for
distribution to the shareholders or to a governmental agency as a
matter of public record;
(6) reports made to shareholders generally within the last three years;
(7) a statement of the names and usual business addresses of its directors
and principal officers;.
(8) any shareholder voting or control agreements of which the corporation
is aware; and
(9) such other records and books of account as shall be necessary and
appropriate to the conduct of the corporate business.
Section 7.03. Fiscal Year. The fiscal year of the corporation shall be
determined by the Board of Directors.
ARTICLE VIII.
LOANS, GUARANTEES, SURETYSHIP
Section 8.01. General. The corporation may lend money to, guarantee an
obligation of, become a surety for, or otherwise financially assist a person if
the transaction, or a class of transactions to which the transaction belongs, is
approved by the affirmative vote of a majority of the directors present and:
(1) is in the usual and regular course of business of the corporation;
(2) is with, or for the benefit of, a related corporation, an organization
in which the corporation has a financial interest, an organization
with which the corporation has a business relationship, or an
organization to which the corporation has the power to make donations;
(3) is with, or for the benefit of, an officer or other employee of the
corporation or a subsidiary, including an officer or employee who is a
director of the corporation or a subsidiary, and may reasonably be
expected, in the judgment of the board, to benefit the corporation; or
(4) has been approved by the affirmative vote of the holders of two-thirds
of the outstanding shares.
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The loan, guarantee, surety contract or other financial assistance may be with
or without interest, and may be unsecured, or may be secured in the manner as a
majority of the directors approve, including, without limitation, a pledge of or
other security interest in shares of the corporation. Nothing in this section
shall be deemed to deny, limit, or restrict the powers of guaranty or warranty
of the corporation at common law or under a statute of the State of Minnesota.
ARTICLE IX.
INDEMNIFICATION OF CERTAIN PERSONS
Section 9.01. General. The corporation shall indemnify such persons, for
such expenses and liabilities, in such manner, under such circumstances, and to
such extent as permitted by Minnesota Statutes Section 302A.521, as now enacted
or hereafter amended.
Section 9.02. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person in such person's official capacity against any
liability asserted against and incurred by such person in or arising from that
capacity, whether or not the Corporation would otherwise be required to
indemnify the person against the liability.
ARTICLE X.
AMENDMENTS
Section 10.01. General. These Bylaws may be amended or altered by a vote of
the majority of the whole Board of Directors at any meeting provided that notice
of such proposed amendment shall have been given in the notice given to the
directors of such meeting. Such authority in the Board of Directors is subject
to the power of the shareholders to change or repeal such Bylaws by a majority
vote of the shareholders present or represented at any regular or special
meeting of shareholders called for such purpose, and the Board of Directors
shall not make or alter any, Bylaws fixing a quorum for meetings of
shareholders, prescribing procedures for removing directors or filling vacancies
in the Board of Directors, or fixing the number of directors or their
classifications, qualifications, or terms of office, except that the Board of
Directors may adopt or amend by unanimous action any Bylaw to increase the
number of directors.
ARTICLE XI.
SECURITIES OF OTHER CORPORATIONS
Section 11.01. Voting Securities Held by the Corporation. Unless otherwise
ordered by the Board of Directors, the President shall have full power and
authority on behalf of the corporation (a) to attend any meeting of security
holders of other corporations in which the corporation may hold securities and
to vote such securities on behalf of this corporation; (b) to execute any proxy
for such meeting on behalf of the corporation; or (c) to execute a written
action in lieu of a meeting of such other corporation on behalf of this
corporation. At such meeting, the President shall possess and may exercise any
and all rights and powers incident to the ownership of such securities that the
corporation possesses. The Board of Directors may, from time to time, grant such
power and authority to one or more other persons and may remove such power and
authority from the President upon any other person or persons.
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Section 11.02. Purchase and Sale of Securities. Unless otherwise ordered by
the Board of Directors, the President shall have full power and authority on
behalf of the corporation to purchase, sell, transfer or encumber any and all
securities of any other corporation owned by the corporation, and may execute
and deliver such documents as may be necessary to effectuate such purchase,
sale, transfer or encumbrance. The Board of Directors may, from time to time,
confer like powers upon any other person or persons.
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Exhibit 10.1
NETWORK MANAGEMENT SYSTEMS, INC.
1993 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 1993 Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or non-statutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees appointed
pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Company" means Network Management Systems, Inc., a Minnesota
corporation.
(g) "Consultant" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not, provided that if and in the event the
Company registers any class of any equity security pursuant to the Exchange Act,
the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the Company.
(h) "Continuous Status as an Employee" means the absence of any
interruption or termination of the employment relationship by the Company or any
Subsidiary. Continuous Status as an Employee shall not be considered interrupted
in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of
absence approved by the Company, provided that such leave is for a period of not
more than ninety (90) days, unless reemployment upon the expiration of such
leave is guaranteed by contract or statute, or unless provided otherwise
pursuant to Company policy adopted from time to time; or (iv) in the case of
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transfers between locations of the Company or between the Company, its
Subsidiaries or its successor.
(i) "Employee" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(k) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported, as quoted
on such system or exchange, or the exchange with the greatest volume of trading
in Common Stock, for the last market trading day prior to the time of
determination) as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not
on the National Market System thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(l) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(m) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(n) "Option" means a stock option granted pursuant to the Plan.
(o) "Optioned Stock" means the Common Stock subject to an Option.
(p) "Optionee" means an Employee or Consultant who receives an Option.
(q) "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(r) "Plan" means this 1993 Stock Option Plan.
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(s) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(t) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 208,451 shares of Common Stock. The shares may be authorized,
but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Administration With Respect to Directors and Officers. With
respect to grants of Options to Employees who are also officers or directors of
the Company, the Plan shall be administered by (A) the Board if the Board may
administer the Plan in compliance with Rule 16b-3 promulgated under the Exchange
Act or any successor thereto ("Rule 16b-3") with respect to a plan intended to
qualify thereunder as a discretionary plan, or (B) a committee designated by the
Board to administer the Plan, which committee shall be constituted in such a
manner as to permit the Plan to comply with Rule 16b-3 with respect to a plan
intended to qualify thereunder as a discretionary plan. Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by Rule 16b-3 with respect to a
plan intended to qualify thereunder as a discretionary plan.
(ii) Multiple Administrative Bodies. If permitted by Rule 16b-3,
the Plan may be administered by different bodies with respect to directors,
non-director officers and Employees who are neither directors nor officers.
(iii) Administration With Respect to Consultants and Other
Employees. With respect to grants of Options to Employees or Consultants who are
neither directors nor officers of the Company, the Plan shall be administered by
(A) the Board or (B) a committee designated by the Board, which committee shall
be constituted in such a manner as to satisfy the legal requirements relating to
the administration of incentive stock option plans, if any, of state corporate
and securities laws and of the Code (the "Applicable Laws"). Once appointed,
such
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Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan
and in the case of a Committee, the specific duties delegated by the Board to
such Committee, the Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom Options may
from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder (including, but not
limited to, the share price and any restriction or limitation, or any vesting
acceleration or waiver of forfeiture restrictions regarding any Option or other
award and/or the shares of Common Stock relating thereto, based in each case on
such factors as the Administrator shall determine, in its sole discretion);
(vii) to determine the terms and conditions, not consistent with
the terms of the Plan, of any award granted hereunder;
(viii) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(f) instead of Common Stock; and
(ix) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted.
(c) Effect of Administrator's Decision. All decisions, determinations
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options.
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5. Eligibility.
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if he is otherwise
eligible, be granted an additional Option or Options.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Options designated as Incentive Stock
Options are exercisable for the first time by any Optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the time the Option with respect
to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with respect
to continuation of employment or consulting relationship with the Company, nor
shall it interfere in any way with his right or the Company's right to terminate
his employment or consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to occur
of its adoption by the Board of Directors or its approval by the shareholders of
the Company as described in Section 19 of the Plan. It shall continue in effect
for a term of ten (10) years unless sooner terminated under Section 15 of the
Plan.
7. Term of Option. The term of each Option shall be the term stated in the
Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement. However, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five (5) years from the date of grant thereof or such shorter
term as may be provided in the Option Agreement.
8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
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(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised, (5) authorization from the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, (6) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price, (7) any
combination of the foregoing methods of payment, or (8) such other consideration
and method of payment for the issuance of Shares to the extent permitted under
Applicable Laws. In making its determination as to the type of consideration to
accept, the Board shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of the
Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
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Until the stock certificate evidencing such Shares is issued (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive dividends
or any other rights as a shareholder shall exist with respect to the optioned
Stock, notwithstanding the exercise of the Option. The Company shall issue (or
cause to be issued) such stock certificate promptly after the Option is
exercised. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the stock certificate is issued, except as
provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment. In the event of termination of an
Optionee's consulting relationship or Continuous Status as an Employee with the
Company, such Optionee may, but only within a period of thirty (30) days (or
such other period of time as is determined by the Board, which, in the case of
an Incentive Stock Option shall not exceed three (3) months) after the date of
such termination ( but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement), exercise his Option to the
extent that Optionee was entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise the Option
at the date of such termination, or if Optionee does not exercise such Option to
the extent so entitled within the time specified herein, the Option shall
terminate.
(c) Disability of Optionee. Notwithstanding the provisions of Section
9(b) above, in the event of termination of an Optionee's consulting relationship
or Continuous Status as an Employee as a result of his total and permanent
disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only
within twelve (12) months from the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise the Option to the extent otherwise entitled to
exercise it at the date of such termination. To the extent that Optionee was not
entitled to exercise the Option at the date of termination, or if Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee, the
Option may be exercised, at any time within twelve (12) months following the
date of death (but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement), by the Optionee's estate or
by a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent the Optionee was entitled to exercise the
Option at the date of death. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such option to the extent so entitled within the time specified herein, the
Option shall terminate.
(e) Rule 16b-3. Options granted to persons subject to Section 16(b) of
the Exchange Act must comply with Rule 16b-3 and shall contain such additional
conditions or
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restrictions as may be required thereunder to qualify for the maximum exemption
from Section 16 of the Exchange Act with respect to Plan transactions.
(f) Buyout Provisions. The Administrator may at any time offer to buy
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
10. Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Stock Withholding to Satisfy Withholding Tax Obligations. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option, which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by one or some combination of the
following methods: (i) by cash payment, or (ii) out of Optionee's current
compensation, or (iii) if permitted by the Administrator, in its discretion, by
surrendering to the Company Shares which (a) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (b) have a fair market value on the date of
surrender equal to or less than Optionee's marginal tax rate times the ordinary
income recognized, (iv) by electing to have the company withhold from the Shares
to be issued upon exercise of the Option that number of Shares having a fair
market value equal to the amount required to be withheld. For this purpose, the
fair market value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined (the "Tax Date").
If the Optionee is subject to Section 16 of the Exchange Act (an
"Insider"), any surrender of previously owned Shares to satisfy tax withholding
obligations arising upon exercise of this Option must comply with the applicable
provisions of Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3") and
shall be subject to such additional conditions or restrictions as may be
required thereunder to qualify for the maximum exemption from Section 16 of the
Exchange Act with respect to Plan transactions.
All election by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made;
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(c) all elections shall be subject to the consent or disapproval of
the Administrator;
(d) if the Optionee is an Insider, the election must comply with the
applicable provisions of Rule 16b-3 and shall be subject to such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option is exercised but such Optionee
shall be unconditionally obligated to tender back to the Company the proper
number of Shares on the Tax Date.
12. Adjustments Upon Changes in Capitalization or Merger.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option will terminate immediately prior to
the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
or into another corporation, or the sale of all or substantially all of the
assets of the Company, the Option shall be assumed or an equivalent option shall
be substituted by such successor corporation or a parent or subsidiary of such
successor corporation. In the event that such successor corporation does not
agree to assume the Option or to substitute an equivalent option, the Board
shall, in lieu of such assumption or substitution, provide for the Optionee to
have the
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right to exercise the Option as to all of the Optioned Stock, including Shares
as to which the Option would not otherwise be exercisable. If the Board makes an
Option fully exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of fifteen (15) days from the date of
such notice, and the Option will terminate upon the expiration of such period.
For the purposes of this paragraph, the Option shall be considered assumed if,
following the merger, the option confers the right to purchase, for each Share
of Optioned Stock subject to the Option immediately prior to the merger, the
consideration (whether stock, cash, or other securities or property) received in
the merger or asset sale by holders of Common Stock for each Share held on the
effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger or asset sale was not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation and the participant, provide for the consideration to be
received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or asset sale.
13. Timing of Granting Options. The date of grant of an Option shall, for
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option is so granted within a reasonable time after the date of such grant.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or discontinue the Plan, but no amendment, alteration, suspension or
discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of the NASD or an established stock exchange), the
Company shall obtain shareholder approval of any Plan amendment in such a manner
and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
15. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
to the exercise of an Option and the issuance and delivery of such
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Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
16. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect to the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
17. Agreements. Options shall be evidenced by written agreements in such
form as the Board shall approve from time to time.
18. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law.
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EXHIBIT 10.2
EBENX, INC.
1999 STOCK INCENTIVE PLAN
Section 1. Purpose. The purpose of the eBenX, Inc. 1999 Stock Incentive
Plan (the "Plan") is to aid in attracting and retaining employees, management
personnel and other personnel and members of the Board of Directors who are not
also employees ("Non-Employee Directors") of eBenX, Inc. (the "Company") capable
of assuring the future success of the Company, to offer such personnel and
Non-Employee Directors incentives to put forth maximum efforts for the success
of the Company's business and to afford such personnel and Non-Employee
Directors an opportunity to acquire a proprietary interest in the Company.
Section 2. Definitions. As used in the Plan, the following terms shall have
the meanings set forth below:
(a) "Affiliate" shall mean (i) any entity that, directly or indirectly
through one or more intermediaries, is controlled by the Company and (ii) any
entity in which the Company has a significant equity interest, as determined by
the Committee.
(b) "Award" shall mean any Option, Stock Appreciation Right, Restricted
Stock, Restricted Stock Unit, Performance Award or other Stock-Based Award
granted under the Plan.
(c) "Award Agreement" shall mean any written agreement, contract or other
instrument or document evidencing any Award granted under the Plan.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and any regulations promulgated thereunder.
(e) "Committee" shall mean a committee of the Board of Directors of the
Company designated by such Board to administer the Plan and composed of not less
than two directors, each of whom is a "Non-Employee Director" within the meaning
of Rule 16b-3 (which term "Non-Employee Director" is defined in this paragraph
for purposes of the definition of "Committee" only and is not intended to define
such term as used elsewhere in the Plan). Each member of the Committee shall
also be an "outside director" within the meaning of Section 162(m) of the Code.
(f) "Eligible Person" shall mean any employee, officer, director (including
any Non-Employee Director), consultant or independent contractor providing
services to the Company or any Affiliate who the Committee determines to be an
Eligible Person.
(g) "Fair Market Value" shall mean, with respect to any property
(including, without limitation, any Shares or other securities), the fair market
value of such property determined by such methods or procedures as shall be
established from time to time by the Committee.
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(h) "Incentive Stock Option" shall mean an option granted under Section
6(a) of the Plan that is intended to meet the requirements of Section 422 of the
Code or any successor provision.
(i) "Non-Qualified Stock Option" shall mean an option granted under Section
6(a) of the Plan, that is not intended to be an Incentive Stock Option.
(j) "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option.
(k) "Other Stock-Based Award" shall mean any right granted under Section
6(e) of the Plan.
(l) "Participant" shall mean an Eligible Person designated to be granted an
Award under the Plan.
(m) "Performance Award" shall mean any right granted under Section 6(d) of
the Plan.
(n) "Person" shall mean any individual, corporation, partnership,
association or trust.
(o) "Restricted Stock" shall mean any Share granted under Section 6(c) of
the Plan.
(p) "Restricted Stock Unit" shall mean any unit granted under Section 6(c)
of the Plan evidencing the right to receive a Share (or a cash payment equal to
the Fair Market Value of a Share) at some future date.
(q) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934.
(r) "Shares" shall mean shares of Common Stock, $.01 par value, of the
Company or such other securities or property as may become subject to Awards
pursuant to an adjustment made under Section 4(c) of the Plan.
(s) "Stock Appreciation Right" shall mean any right granted under Section
6(b) of the Plan.
Section 3. Administration. The Plan shall be administered by the Committee.
Subject to the terms of the Plan and applicable law, the Committee shall have
full power and authority to: (i) designate Participants; (ii) determine the type
or types of Awards to be granted to each Participant under the Plan; (iii)
determine the number of Shares to be covered by (or with respect to which
payments, rights or other matters are to be calculated in connection with) each
Award; (iv) determine the terms and conditions of any Award or Award Agreement;
(v) amend the terms and conditions of any Award or Award Agreement and
accelerate the exercisability of Options or the lapse of restrictions relating
to Restricted Stock or Restricted Stock Units; (vi) determine whether, to what
extent and under what circumstances Awards may be exercised
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in cash, Shares, other securities, other Awards or other property, or canceled,
forfeited or suspended; (vii) determine whether, to what extent and under what
circumstances cash, Shares, other securities, other Awards, other property and
other amounts payable with respect to an Award under the Plan shall be deferred
either automatically or at the election of the holder thereof or the Committee;
(viii) interpret and administer the Plan and any instrument or agreement
relating to, or Award made under, the Plan; (ix) establish, amend, suspend or
waive such rules and regulations and appoint such agents as it shall deem
appropriate for the proper administration of the Plan; and (x) make any other
determination and take any other action that the Committee deems necessary or
desirable for the administration of the Plan. Unless otherwise expressly
provided in the Plan, all designations, determinations, interpretations and
other decisions under or with respect to the Plan or any Award shall be within
the sole discretion of the Committee, may be made at any time and shall be
final, conclusive and binding upon any Participant, any holder or beneficiary of
any Award and any employee of the Company or any Affiliate.
Section 4. Shares Available for Awards.
(a) Shares Available. Subject to adjustment as provided in Section 4(c),
the total number of Shares available for granting Awards under the Plan shall be
1,000,000. If any Shares covered by an Award or to which an Award relates are
not purchased or are forfeited, or if an Award otherwise terminates without
delivery of any Shares, then the number of Shares counted against the aggregate
number of Shares available under the Plan with respect to such Award, to the
extent of any such forfeiture or termination, shall again be available for
granting Awards under the Plan.
(b) Accounting for Awards. For purposes of this Section 4, if an Award
entitles the holder thereof to receive or purchase Shares, the number of Shares
covered by such Award or to which such Award relates shall be counted on the
date of grant of such Award against the aggregate number of Shares available for
granting Awards under the Plan. Such Shares may again become available for
granting Awards under the Plan pursuant to the provisions of Section 4(a) of the
Plan, subject to the limitations set forth in Section 4(c) of the Plan.
(c) Adjustments. In the event that the Committee shall determine that any
dividend or other distribution (whether in the form of cash, Shares, other
securities or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase or exchange of Shares or other securities of the Company, issuance of
warrants or other rights to purchase Shares or other securities of the Company
or other similar corporate transaction or event affects the Shares such that an
adjustment is determined by the Committee to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan, then the Committee may, in such manner as it may
deem equitable, adjust any or all of (i) the number and type of Shares (or other
securities or other property) which thereafter may be made the subject of
Awards, (ii) the number and type of Shares (or other securities or other
property) subject to outstanding Awards and (iii) the purchase or exercise price
with respect to any Award; provided, however, that the number of Shares covered
by any Award or to which such Award relates shall always be a whole number.
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(d) Award Limitations Under the Plan. No Eligible Person may be granted any
Award or Awards, the value of which Awards are based solely on an increase in
the value of the Shares after the date of grant of such Awards, for more than
500,000 Shares, subject to adjustment as provided in the Plan, in any calendar
year. The foregoing annual limitation specifically includes the grant of any
"performance-based" Awards within the meaning of ss.162(m) of the Code.
Section 5. Eligibility. Any Eligible Person, including any Eligible Person
who is an officer or director of the Company or any Affiliate, shall be eligible
to be designated a Participant; provided, however, that an Incentive Stock
Option may only be granted to full or part-time employees (which term as used
herein includes, without limitation, officers and directors who are also
employees) and an Incentive Stock Option shall not be granted to an employee of
an Affiliate unless such Affiliate is also a "subsidiary corporation" of the
Company within the meaning of Section 424(f) of the Code or any successor
provision.
Section 6. Awards.
(a) Options. The Committee is hereby authorized to grant Options to
Participants with the following terms and conditions and with such additional
terms and conditions not inconsistent with the provisions of the Plan as the
Committee shall determine:
(i) Exercise Price. The purchase price per Share purchasable under an
Option shall be determined by the Committee; provided, however, that such
purchase price for Shares granted as Incentive Stock Options shall not be
less than 100% of the Fair Market Value of a Share on the date of grant of
such Incentive Stock Option.
(ii) Option Term. The term of each Option shall be fixed by the
Committee.
(iii) Time and Method of Exercise. The Committee shall determine the
time or times at which an Option may be exercised in whole or in part and
the method or methods by which, and the form or forms (including, without
limitation, cash, Shares, other securities, other Awards or other property,
or any combination thereof, having a Fair Market Value on the exercise date
equal to the relevant exercise price) in which, payment of the exercise
price with respect thereto may be made or deemed to have been made.
(iv) Reload Options. The Committee may grant "reload" options,
separately or together with another Option, pursuant to which, subject to
the terms and conditions established by the Committee and any applicable
requirements of Rule 16b-3 or any other applicable law, the Participant
would be granted a new Option when the payment of the exercise price of a
previously granted option is made by the delivery of shares of the
Company's Common Stock owned by the Participant pursuant to Section
6(a)(iii) hereof or the relevant provisions of another plan of the Company,
and/or when shares of the Company's Common Stock are tendered or forfeited
as payment of the amount to be withheld under applicable tax laws in
connection with the exercise of an option, which new Option would be an
option to purchase the number of Shares not exceeding the sum of (A) the
number of shares of the Company's Common Stock provided as consideration
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upon the exercise of the previously granted option to which such "reload"
option relates and (B) the number of shares of the Company's Common Stock
tendered or forfeited as payment of the amount to be withheld under
applicable tax laws in connection with the exercise of the option to which
such "reload" option relates. "Reload" options may be granted with respect
to options granted under this Plan or any other stock option plan of the
Company or any of its affiliates (which shall explicitly include plans
assumed by the Company in connection with mergers and the like). Such
"reload" options shall have a per share exercise price equal to the Fair
Market Value as of the date of grant of the new Option. Any such reload
options shall be subject to availability of sufficient shares for grant
under the Plan.
(b) Stock Appreciation Rights. The Committee is hereby authorized to grant
Stock Appreciation Rights to Participants subject to the terms of the Plan and
any applicable Award Agreement. A Stock Appreciation Right granted under the
Plan shall confer on the holder thereof a right to receive upon exercise thereof
the excess of (i) the Fair Market Value of one Share on the date of exercise
(or, if the Committee shall so determine, at any time during a specified period
before or after the date of exercise) over (ii) the grant price of the Stock
Appreciation Right as specified by the Committee, which price shall not be less
than 100% of the Fair Market Value of one Share on the date of grant of the
Stock Appreciation Right. Subject to the terms of the Plan and any applicable
Award Agreement, the grant price, term, methods of exercise, dates of exercise,
methods of settlement and any other terms and conditions of any Stock
Appreciation Right shall be as determined by the Committee. The Committee may
impose such conditions or restrictions on the exercise of any Stock Appreciation
Right as it may deem appropriate.
(c) Restricted Stock and Restricted Stock Units. The Committee is hereby
authorized to grant Awards of Restricted Stock and Restricted Stock Units to
Participants with the following terms and conditions and with such additional
terms and conditions not inconsistent with the provisions of the Plan as the
Committee shall determine:
(i) Restrictions. Shares of Restricted Stock and Restricted Stock
Units shall be subject to such restrictions as the Committee may impose
(including, without limitation, any limitation on the right to vote a Share
of Restricted Stock or the right to receive any dividend or other right or
property with respect thereto), which restrictions may lapse separately or
in combination at such time or times, in such installments or otherwise as
the Committee may deem appropriate.
(ii) Stock Certificates. Any Restricted Stock granted under the Plan
shall be evidenced by issuance of a stock certificate or certificates,
which certificate or certificates shall be held by the Company. Such
certificate or certificates shall be registered in the name of the
Participant and shall bear an appropriate legend referring to the
restrictions applicable to such Restricted Stock. In the case of Restricted
Stock Units, no Shares shall be issued at the time such Awards are granted.
(iii) Forfeiture; Delivery of Shares. Except as otherwise determined
by the Committee, upon termination of employment (as determined under
criteria established by the Committee) during the applicable restriction
period, all Shares of Restricted Stock
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and all Restricted Stock Units at such time subject to restriction shall be
forfeited and reacquired by the Company; provided, however, that the
Committee may, when it finds that a waiver would be in the best interest of
the Company, waive in whole or in part any or all remaining restrictions
with respect to Shares of Restricted Stock or Restricted Stock Units.
Shares representing Restricted Stock that is no longer subject to
restrictions shall be delivered to the holder thereof promptly after the
applicable restrictions lapse or are waived. Upon the lapse or waiver of
restrictions and the restricted period relating to Restricted Stock Units
evidencing the right to receive Shares, such Shares shall be issued and
delivered to the holders of the Restricted Stock Units.
(d) Performance Awards. The Committee is hereby authorized to grant
Performance Awards to Participants subject to the terms of the Plan and any
applicable Award Agreement. A Performance Award granted under the Plan (i) may
be denominated or payable in cash, Shares (including, without limitation,
Restricted Stock), other securities, other Awards or other property and (ii)
shall confer on the holder thereof the right to receive payments, in whole or in
part, upon the achievement of such performance goals during such performance
periods as the Committee shall establish. Subject to the terms of the Plan and
any applicable Award Agreement, the performance goals to be achieved during any
performance period, the length of any performance period, the amount of any
Performance Award granted and the amount of any payment or transfer to be made
pursuant to any Performance Award shall be determined by the Committee.
(e) Other Stock-Based Awards. The Committee is hereby authorized to grant
to Participants such other Awards that are denominated or payable in, valued in
whole or in part by reference to, or otherwise based on or related to, Shares
(including, without limitation, securities convertible into Shares), as are
deemed by the Committee to be consistent with the purpose of the Plan; provided,
however, that such grants must comply with applicable law. Subject to the terms
of the Plan and any applicable Award Agreement, the Committee shall determine
the terms and conditions of such Awards. Shares or other securities delivered
pursuant to a purchase right granted under this Section 6(e) shall be purchased
for such consideration, which may be paid by such method or methods and in such
form or forms (including without limitation, cash, Shares, other securities,
other Awards or other property or any combination thereof), as the Committee
shall determine, the value of which consideration, as established by the
Committee, shall not be less than 100% of the Fair Market Value of such Shares
or other securities as of the date such purchase right is granted.
(f) General.
(i) No Cash Consideration for Awards. Awards shall be granted for no
cash consideration or for such minimal cash consideration as may be
required by applicable law.
(ii) Awards May Be Granted Separately or Together. Awards may, in the
discretion of the Committee, be granted either alone or in addition to, in
tandem with or in substitution for any other Award or any award granted
under any plan of the Company or any Affiliate other than the Plan. Awards
granted in addition to or in tandem with other Awards or in addition to or
in tandem with awards granted under any such other
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plan of the Company or any Affiliate may be granted either at the same time
as or at a different time from the grant of such other Awards or awards.
(iii) Forms of Payment under Awards. Subject to the terms of the Plan
and of any applicable Award Agreement, payments or transfers to be made by
the Company or an Affiliate upon the grant, exercise or payment of an Award
may be made in such form or forms as the Committee shall determine
(including, without limitation, cash, Shares, other securities, other
Awards or other property or any combination thereof), and may be made in a
single payment or transfer, in installments or on a deferred basis, in each
case in accordance with rules and procedures established by the Committee.
Such rules and procedures may include, without limitation, provisions for
the payment or crediting of reasonable interest on installment or deferred
payments.
(iv) Limits on Transfer of Awards. No Award and no right under any
such Award shall be transferable by a Participant otherwise than by will or
by the laws of descent and distribution; provided, however, that, if so
determined by the Committee, a Participant may, in the manner established
by the Committee, designate a beneficiary or beneficiaries to exercise the
rights of the Participant and receive any property distributable with
respect to any Award upon the death of the Participant; and provided,
further, except in the case of an Incentive Stock Option, Awards may be
transferable as specifically provided in any applicable Award Agreement or
amendment thereto pursuant to terms determined by the Committee. Except as
otherwise provided in any applicable Award Agreement or amendment thereto
(other than an Award Agreement relating to an Incentive Stock Option),
pursuant to terms determined by the Committee, each Award or right under
any Award shall be exercisable during the Participant's lifetime only by
the Participant or, if permissible under applicable law, by the
Participant's guardian or legal representative. Except as otherwise
provided in any applicable Award Agreement or amendment thereto (other than
an Award Agreement or amendment thereto relating to an Incentive Stock
Option), no Award or right under any such Award may be pledged, alienated,
attached or otherwise encumbered, and any purported pledge, alienation,
attachment or encumbrance thereof shall be void and unenforceable against
the Company or any Affiliate.
(v) Term of Awards. The term of each Award shall be for such period as
may be determined by the Committee.
(vi) Restrictions; Securities Exchange Listing. All certificates for
Shares or other securities delivered under the Plan pursuant to any Award
or the exercise thereof shall be subject to such stop transfer orders and
other restrictions as the Committee may deem advisable under the Plan or
the rules, regulations and other requirements of the Securities and
Exchange Commission and any applicable federal or state securities laws,
and the Committee may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions. If the
Shares or other securities are traded on a securities exchange, the Company
shall not be required to deliver any Shares or other securities covered by
an Award unless and until such Shares or other securities have been
admitted for trading on such securities exchange.
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Section 7. Amendment and Termination; Adjustments. Except to the extent
prohibited by applicable law and unless otherwise expressly provided in an Award
Agreement or in the Plan:
(a) Amendments to the Plan. The Board of Directors of the Company may
amend, alter, suspend, discontinue or terminate the Plan; provided, however,
that, notwithstanding any other provision of the Plan or any Award Agreement,
without the approval of the shareholders of the Company, no such amendment,
alteration, suspension, discontinuation or termination shall be made that,
absent such approval:
(i) would cause Rule 16b-3 or Section 162(m) of the Code to become
unavailable with respect to the Plan;
(ii) would violate the rules or regulations of the NASDAQ National
Market, any other securities exchange or the National Association of
Securities Dealers, Inc. that are applicable to the Company; or
(iii) would cause the Company to be unable, under the Code, to grant
Incentive Stock Options under the Plan.
(b) Amendments to Awards. The Committee may waive any conditions of or
rights of the Company under any outstanding Award, prospectively or
retroactively. The Committee may not amend, alter, suspend, discontinue or
terminate any outstanding Award, prospectively or retroactively, without the
consent of the Participant or holder or beneficiary thereof, except as otherwise
herein provided or in the Award Agreement.
(c) Correction of Defects, Omissions and Inconsistencies. The Committee may
correct any defect, supply any omission or reconcile any inconsistency in the
Plan or any Award in the manner and to the extent it shall deem desirable to
carry the Plan into effect.
Section 8. Income Tax Withholding; Tax Bonuses.
(a) Withholding. In order to comply with all applicable federal or state
income tax laws or regulations, the Company may take such action as it deems
appropriate to ensure that all applicable federal or state payroll, withholding,
income or other taxes, which are the sole and absolute responsibility of a
Participant are withheld or collected from such Participant. In order to assist
a Participant in paying all or a portion of the federal and state taxes to be
withheld or collected upon exercise or receipt of (or the lapse of restrictions
relating to) an Award, the Committee, in its discretion and subject to such
additional terms and conditions as it may adopt, may permit the Participant to
satisfy such tax obligation by (i) electing to have the Company withhold a
portion of the Shares otherwise to be delivered upon exercise or receipt of (or
the lapse of restrictions relating to) such Award with a Fair Market Value equal
to the amount of such taxes or (ii) delivering to the Company Shares other than
Shares issuable upon exercise or receipt of (or the lapse of restrictions
relating to) such Award with a Fair Market Value equal to the amount of such
taxes. The election, if any, must be made on or before the date that the amount
of tax to be withheld is determined.
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(b) Tax Bonuses. The Committee, in its discretion, shall have the
authority, at the time of grant of any Award under this Plan or at any time
thereafter, to approve cash bonuses to designated Participants to be paid upon
their exercise or receipt of (or the lapse of restrictions relating to) Awards
in order to provide funds to pay all or a portion of federal and state taxes due
as a result of such exercise or receipt (or the lapse of such restrictions). The
Committee shall have full authority in its discretion to determine the amount of
any such tax bonus.
Section 9. General Provisions.
(a) No Rights to Awards. No Eligible Person, Participant or other Person
shall have any claim to be granted any Award under the Plan, and there is no
obligation for uniformity of treatment of Eligible Persons, Participants or
holders or beneficiaries of Awards under the Plan. The terms and conditions of
Awards need not be the same with respect to different Participants.
(b) Delegation. The Committee may delegate to one or more officers of the
Company or any Affiliate or a committee of such officers the authority, subject
to such terms and limitations as the Committee shall determine, to grant Awards
to Eligible Persons who are not officers or directors of the Company for
purposes of Section 16 of the Securities Exchange Act of 1934, as amended.
(c) Award Agreements. No Participant will have rights under an Award
granted to such Participant unless and until an Award Agreement shall have been
duly executed on behalf of the Company.
(d) No Limit on Other Compensation Arrangements. Nothing contained in the
Plan shall prevent the Company or any Affiliate from adopting or continuing in
effect other or additional compensation arrangements, and such arrangements may
be either generally applicable or applicable only in specific cases.
(e) No Right to Employment, Etc. The grant of an Award shall not be
construed as giving a Participant the right to be retained in the employ, or as
giving a Non-Employee Director the right to continue as a Director, of the
Company or any Affiliate. In addition, the Company or an Affiliate may at any
time dismiss a Participant from employment, or terminate the term of a
Non-Employee Director, free from any liability or any claim under the Plan,
unless otherwise expressly provided in the Plan or in any Award Agreement.
(f) Governing Law. The validity, construction and effect of the Plan and
any rules and regulations relating to the Plan shall be determined in accordance
with the laws of the State of Minnesota.
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(g) Severability. If any provision of the Plan or any Award is or becomes
or is deemed to be invalid, illegal or unenforceable in any jurisdiction or
would disqualify the Plan or any Award under any law deemed applicable by the
Committee, such provision shall be construed or deemed amended to conform to
applicable laws, or if it cannot be so construed or deemed amended without, in
the determination of the Committee, materially altering the purpose or intent of
the Plan or the Award, such provision shall be stricken as to such jurisdiction
or Award, and the remainder of the Plan or any such Award shall remain in full
force and effect.
(h) No Trust or Fund Created. Neither the Plan nor any Award shall create
or be construed to create a trust or separate fund of any kind or a fiduciary
relationship between the Company or any Affiliate and a Participant or any other
Person. To the extent that any Person acquires a right to receive payments from
the Company or any Affiliate pursuant to an Award, such right shall be no
greater than the right of any unsecured general creditor of the Company or any
Affiliate.
(i) No Fractional Shares. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Award, and the Committee shall determine whether
cash shall be paid in lieu of any fractional Shares or whether such fractional
Shares or any rights thereto shall be canceled, terminated or otherwise
eliminated.
(j) Headings. Headings are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Plan or any provision thereof.
(k) Section 16 Compliance. The Plan is intended to comply in all respects
with Rule 16b-3 or any successor provision, as in effect from time to time and
in all events the Plan shall be construed in accordance with the requirements of
Rule 16b-3. If any Plan provision does not comply with Rule 16b-3 as hereafter
amended or interpreted, the provision shall be deemed inoperative. The Board of
Directors, in its absolute discretion, may bifurcate the Plan so as to restrict,
limit or condition the use of any provision of the Plan with respect to persons
who are officers or directors subject to Section 16 of the Securities and
Exchange Act of 1934, as amended, without so restricting, limiting or
conditioning the Plan with respect to other Participants.
Section 10. Effective Date of the Plan. The Plan shall be effective as of
September 16, 1999, subject to approval by the Company's shareholders in
accordance with applicable law.
Section 11. Term of the Plan. New Awards shall only be granted under the
Plan during a 10-year period beginning on the effective date of the Plan.
However, unless otherwise expressly provided in the Plan or in an applicable
Award Agreement, any Award theretofore granted may extend beyond the end of such
10-year period, and the authority of the Committee provided for hereunder with
respect to the Plan and any Awards, and the authority of the Board of Directors
of the Company to amend the Plan, shall extend beyond the end of such period.
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EXHIBIT 10.3
EBENX, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I. INTRODUCTION
Section 1.01 Purpose. The purpose of the eBenX, Inc. 1999 Employee Stock
Purchase Plan (the "Plan") is to provide employees of eBenX, Inc., a Minnesota
corporation (the "Company"), and certain related corporations with an
opportunity to share in the ownership of the Company by providing them with a
convenient means for regular and systematic purchases of the Company's Common
Stock, par value $.01 per share, and, thus, to develop a stronger incentive to
work for the continued success of the Company.
Section 1.02 Rules of Interpretation. It is intended that the Plan be an
"employee stock purchase plan" as defined in Section 423(b) of the Internal
Revenue Code of 1986, as amended (the "Code"), and Treasury Regulations
promulgated thereunder. Accordingly, the Plan shall be interpreted and
administered in a manner consistent therewith if so approved. All Participants
in the Plan will have the same rights and privileges consistent with the
provisions of the Plan.
Section 1.03 Definitions. For purposes of the Plan, the following terms
will have the meanings set forth below:
(a) "Acceleration Date" means the earlier of the date of stockholder
approval or approval by the Company's Board of Directors of (i) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of Company
Common Stock would be converted into cash, securities or other property,
other than a merger of the Company in which stockholders of the Company
immediately prior to the merger have the same proportionate ownership of
stock in the surviving corporation immediately after the merger; (ii) 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; or
(iii) any plan of liquidation or dissolution of the Company.
(b) "Affiliate" means any subsidiary corporation of the Company, as
defined in Section 424(f) of the Code, whether now or hereafter acquired or
established.
(c) "Committee" means the committee described in Section 10.01.
(d) "Common Stock" means the Company's Common Stock, $.01 par value,
as such stock may be adjusted for changes in the stock or the Company as
contemplated by Article XI herein.
(e) "Company" means eBenX, Inc., a Minnesota corporation, and its
successors by merger or consolidation as contemplated by Article XI herein.
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(f) "Current Compensation" means all regular wage, salary and
commission payments paid by the Company to a Participant in accordance with
the terms of his or her employment, but excluding annual bonus payments and
all other forms of special compensation.
(g) "Effective Date" means the date immediately prior to the date on
which the Company's registration statement relating to its initial public
offering of Common Stock is declared effective by the Securities and
Exchange Commission.
(h) "Fair Market Value" as of a given date means such value of the
Common Stock as reasonably determined by the Committee, but shall not be
less than (i) the closing price of the Common Stock as reported for
composite transactions if the Common Stock is then traded on a national
securities exchange, (ii) the last sale price if the Common Stock is then
quoted on the NASDAQ National Market System, or (iii) the average of the
closing representative bid and asked prices of the Common Stock as reported
on NASDAQ on the date as of which the fair market value is being
determined; provided, however, that the Fair Market Value on the Effective
Date shall be the initial public offering price set forth on the cover of
the final prospectus used in connection with the Company's initial public
offering of Common Stock. If on a given date the shares of Common Stock are
not traded on an established securities market, the Committee shall make a
good faith attempt to satisfy the requirements of this Section 1.03 and in
connection therewith shall take such action as it deems necessary or
advisable.
(i) "Participant" means a Permanent Full-Time Employee who is eligible
to participate in the Plan under Section 2.01 and who has elected to
participate in the Plan.
(j) "Participating Affiliate" means an Affiliate which has been
designated by the Committee in advance of the Purchase Period in question
as a corporation whose eligible Permanent Full-Time Employees may
participate in the Plan.
(k) "Permanent Full-Time Employee" means an employee of the Company or
a Participating Affiliate as of the first day of a Purchase Period,
including an officer or director who is also an employee, but excluding an
employee (i) whose customary employment is less than 20 hours per week or
(ii) who has not been an employee of the Company or a Participating
Affiliate for at least 90 days as of the first day of the applicable
Purchase Period.
(l) "Plan" means the eBenX, Inc. 1999 Employee Stock Purchase Plan, as
amended, the provisions of which are set forth herein.
(m) "Purchase Period" means any of the approximate six-month periods
beginning on the first business day in January and July, as appropriate,
and ending on the last business day in June and December, respectively;
provided, however, that the initial Purchase Period will commence on the
Effective Date and will terminate on June 30, 2000, and that the then
current Purchase Period will end upon the occurrence of an Acceleration
Date.
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(n) "Stock Purchase Account" means the account maintained on the books
and records of the Company recording the amount received from each
Participant through payroll deductions made under the Plan and from the
Company through matching contributions.
ARTICLE II. ELIGIBILITY AND PARTICIPATION
Section 2.01 Eligible Employees. All Permanent Full-Time Employees shall be
eligible to participate in the Plan beginning on the first day of the first
Purchase Period to commence after such person becomes a Permanent Full-Time
Employee. Subject to the provisions of Article VI, each such employee will
continue to be eligible to participate in the Plan so long as he or she remains
a Permanent Full-Time Employee.
Section 2.02 Election to Participate. An eligible Permanent Full-Time
Employee may elect to participate in the Plan for a given Purchase Period by
filing with the Company, in advance of that Purchase Period and in accordance
with such terms and conditions as the Committee in its sole discretion may
impose, a form provided by the Company for such purpose (which authorizes
regular payroll deductions from Current Compensation beginning with the first
payday in that Purchase Period and continuing until the employee withdraws from
the Plan or ceases to be eligible to participate in the Plan).
Section 2.03 Limits on Stock Purchase. No employee shall be granted any
right to purchase Common Stock hereunder if such employee, immediately after
such a right to purchase is granted, would own, directly or indirectly, within
the meaning of Section 423(b)(3) and Section 424(d) of the Code, Common Stock
possessing 5% or more of the total combined voting power or value of all the
classes of the capital stock of the Company or of all Affiliates.
Section 2.04 Voluntary Participation. Participation in the Plan on the part
of a Participant is voluntary and such participation is not a condition of
employment nor does participation in the Plan entitle a Participant to be
retained as an employee.
ARTICLE III. PAYROLL DEDUCTIONS, COMPANY
CONTRIBUTIONS AND STOCK PURCHASE ACCOUNT
Section 3.01 Deduction from Pay. The form described in Section 2.02 will
permit a Participant to elect payroll deductions of any multiple of 1% but not
less than 1% or more than 15% of such Participant's Current Compensation for
each pay period, subject to such other limitations as the Committee in its sole
discretion may impose. A Participant may cease making payroll deductions at any
time, subject to such limitations as the Committee in its sole discretion may
impose. In the event that during a Purchase Period the entire credit balance in
a Participant's Stock Purchase Account exceeds the product of (a) 85% of the
Fair Market Value of the Common Stock on the first business day of that Purchase
Period, and (b) 7,500, then payroll deductions for such Participant shall
automatically cease, and shall resume on the first pay period of the next
Purchase Period.
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Section 3.02 Company Contributions. The Company may, in the sole discretion
of the Committee, from time to time contribute to each Participant's Stock
Purchase Account an amount equal to up to 50% of each payroll deduction credited
to such Account. No Company contributions shall be deemed to have been made
until such contributions are credited to the Participant's Stock Purchase
Account as provided in Section 3.03.
Section 3.03 Credit to Account. Payroll deductions will be credited to the
Participant's Stock Purchase Account on each payday, and Company contributions
will be credited to the Participant's Stock Purchase Account on the last
business day of the Purchase Period at the time of and in connection with the
purchase of shares of Common Stock in accordance with Articles IV and V hereof.
Section 3.04 Interest. No interest will be paid upon payroll deductions,
Company contributions or on any amount credited to, or on deposit in, a
Participant's Stock Purchase Account.
Section 3.05 Nature of Account. The Stock Purchase Account is established
solely for accounting purposes, and all amounts credited to the Stock Purchase
Account will remain part of the general assets of the Company or the
Participating Affiliate (as the case may be).
Section 3.06 No Additional Contributions. A Participant may not make any
payment into the Stock Purchase Account other than the payroll deductions made
pursuant to the Plan.
ARTICLE IV. RIGHT TO PURCHASE SHARES
Section 4.01 Number of Shares. Each Participant will have the right to
purchase on the last business day of the Purchase Period all, but not less than
all, of the largest number of shares of Common Stock, both whole and any
fractional share, that can be purchased at the price specified in Section 4.02
with the entire credit balance in the Participant's Stock Purchase Account,
subject to the limitations that (a) no more than 7,500 shares of Common Stock
may be purchased under the Plan by any one Participant for a given Purchase
Period and (b) in accordance with Section 423(b)(8) of the Code, no more than
$25,000 in Fair Market Value (determined at the beginning of each Purchase
Period) of Common Stock and other stock may be purchased under the Plan and all
other employee stock purchase plans (if any) of the Company and the Affiliates
by any one Participant for any calendar year. If the purchases for all
Participants would otherwise cause the aggregate number of shares of Common
Stock to be sold under the Plan to exceed the number specified in Section 10.03,
each Participant shall be allocated a pro rata portion of the Common Stock to be
sold.
Section 4.02 Purchase Price. The purchase price for any Purchase Period
shall be the lesser of (a) 85% of the Fair Market Value of the Common Stock on
the first business day of that Purchase Period or (b) 85% of the Fair Market
Value of the Common Stock on the last business day of that Purchase Period, in
each case rounded up to the next higher full cent.
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ARTICLE V. EXERCISE OF RIGHT
Section 5.01 Purchase of Stock. On the last business day of a Purchase
Period, the entire credit balance in each Participant's Stock Purchase Account
will be used to purchase the largest number of both whole and any fractional
shares of Common Stock purchasable with such amount (subject to the limitations
of Section 4.01), unless the Participant has filed with the Company, in advance
of that date and subject to such terms and conditions as the Committee in its
sole discretion may impose, a form provided by the Company which requests the
distribution of the entire credit balance in cash.
Section 5.02 Cash Distributions. Any amount remaining in a Participant's
Stock Purchase Account after the last business day of a Purchase Period will be
paid to the Participant in cash within 30 days after the end of that Purchase
Period.
Section 5.03 Notice of Acceleration Date. The Company shall use its best
efforts to notify each Participant in writing at least ten days prior to any
Acceleration Date that the then current Purchase Period will end on such
Acceleration Date.
ARTICLE VI. WITHDRAWAL FROM PLAN; SALE OF STOCK
Section 6.01 Voluntary Withdrawal. A Participant may, in accordance with
such terms and conditions as the Committee in its sole discretion may impose,
withdraw from the Plan and cease making payroll deductions by filing with the
Company a form provided for this purpose. In such event, the entire credit
balance in the Participant's Stock Purchase Account will be paid to the
Participant in cash within 30 days, provided that in no event shall any
Participant be entitled to withdraw from such Account any Company contributions
credited to such Account at the end of the Purchase Period pursuant to Section
3.03. A Participant who withdraws from the Plan will not be eligible to reenter
the Plan until the beginning of the next Purchase Period following the date of
such withdrawal.
Section 6.02 Death. Subject to such terms and conditions as the Committee
in its sole discretion may impose, upon the death of a Participant, no further
amounts shall be credited to the Participant's Stock Purchase Account.
Thereafter, on the last business day of the Purchase Period during which such
Participant's death occurred and in accordance with Section 5.01, the entire
credit balance in such Participant's Stock Purchase Account will be used to
purchase Common Stock, unless such Participant's estate has filed with the
Company, in advance of that day and subject to such terms and conditions as the
Committee in its sole discretion may impose, a form provided by the Company
which elects to have the entire credit balance in such Participant's Stock
Account distributed in cash within 30 days after the end of that Purchase Period
or at such earlier time as the Committee in its sole discretion may decide,
provided that in no event shall any Participant's estate be entitled to receive
from such Account any Company contributions credited to such Account at the end
of the Purchase Period pursuant to Section 3.03. Each Participant, however, may
designate one or more beneficiaries who, upon death, are to receive the Common
Stock or the amount that otherwise would have been distributed or paid to the
Participant's estate and may change or revoke any such designation from time to
time. No
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such designation, change or revocation will be effective unless made by the
Participant in writing and filed with the Company during the Participant's
lifetime. Unless the Participant has otherwise specified the beneficiary
designation, the beneficiary or beneficiaries so designated will become fixed as
of the date of the death of the Participant so that, if a beneficiary survives
the Participant but dies before the receipt of the payment due such beneficiary,
the payment will be made to such beneficiary's estate.
Section 6.03 Termination of Employment. Subject to such terms and
conditions as the Committee in its sole discretion may impose, upon a
Participant's normal or early retirement with the consent of the Company under
any pension or retirement plan of the Company or Participating Affiliate, no
further amounts shall be credited to the Participant's Stock Purchase Account.
Thereafter, on the last business day of the Purchase Period during which such
Participant's approved retirement occurred and in accordance with Section 5.01,
the entire credit balance in such Participant's Stock Purchase Account will be
used to purchase Common Stock, unless such Participant has filed with the
Company, in advance of that day and subject to such terms and conditions as the
Committee in its sole discretion may impose, a form provided by the Company
which elects to receive the entire credit balance in such Participant's Stock
Purchase Account in cash within 30 days after the end of that Purchase Period,
provided that (i) in no event shall any Participant be entitled to receive from
such Account any Company contributions credited to such Account at the end of
the Purchase Period pursuant to Section 3.03, and (ii) such Participant shall
have no right to purchase Common Stock in the event that the last day of such a
Purchase Period occurs more than three months following the termination of such
Participant's employment with the Company by reason of such an approved
retirement. In the event of any other termination of employment (other than
death) with the Company or a Participating Affiliate, participation in the Plan
will cease on the date the Participant ceases to be a Permanent Full-Time
Employee for any reason. In such event, the entire credit balance in such
Participant's Stock Purchase Account will be paid to the Participant in cash
within 30 days, provided that in no event shall any Participant be entitled to
receive from such Account any Company contributions credited to such Account at
the end of the Purchase Period pursuant to Section 3.03. For purposes of this
Section 6.03, a transfer of employment to any Affiliate, or a leave of absence
which has been approved by the Committee, will not be deemed a termination of
employment as a Permanent Full-Time Employee.
ARTICLE VII. NONTRANSFERABILITY
Section 7.01 Nontransferable Right to Purchase. The right to purchase
Common Stock hereunder may not be assigned, transferred, pledged or hypothecated
(whether by operation of law or otherwise), except as provided in Section 6.02,
and will not be subject to execution, attachment or similar process. Any
attempted assignment, transfer, pledge, hypothecation or other disposition or
levy of attachment or similar process upon the right to purchase will be null
and void and without effect.
Section 7.02 Nontransferable Account. Except as provided in Section 6.02,
the amounts credited to a Stock Purchase Account may not be assigned,
transferred, pledged or hypothecated in any way, and any attempted assignment,
transfer, pledge, hypothecation or other disposition of such amounts will be
null and void and without effect.
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ARTICLE VIII. STOCK CERTIFICATES
Section 8.01 Delivery. Promptly after the last day of each Purchase Period
and subject to such terms and conditions as the Committee in its sole discretion
may impose, the Company will cause to be delivered to or for the benefit of the
Participant a certificate representing the Common Stock purchased on the last
business day of such Purchase Period or cause to be made a book-entry credit
representing such Common Stock for the benefit of the Participant.
Section 8.02 Securities Laws. The Company shall not be required to issue or
deliver any certificate representing Common Stock prior to registration under
the Securities Act of 1933, as amended, or registration or qualification under
any state law if such registration is required. The Company shall use its best
efforts to accomplish such registration (if and to the extent required) not
later than a reasonable time following the Purchase Period, and delivery of
certificates may be deferred until such registration is accomplished.
Section 8.03 Completion of Purchase. A Participant shall have no interest
in the Common Stock purchased until a certificate representing the same is
issued to or for the benefit of the Participant.
Section 8.04 Form of Ownership. The certificates representing Common Stock
issued under the Plan will be registered in the name of the Participant or
jointly in the name of the Participant and another person, as the Participant
may direct on a form provided by the Company.
ARTICLE IX. EFFECTIVE DATE, AMENDMENT AND
TERMINATION OF PLAN
Section 9.01 Effective Date. The Plan was approved by the Board of
Directors on September 16, 1999 and shall be approved by the stockholders of the
Company prior to the Effective Date.
Section 9.02 Plan Commencement. The initial Purchase Period under the Plan
will commence on the Effective Date. Thereafter, each succeeding Purchase Period
will commence and terminate in accordance with Section 1.03(m).
Section 9.03 Powers of Board. The Board of Directors may amend or
discontinue the Plan at any time. No amendment or discontinuation of the Plan,
however, shall without stockholder approval be made that: (i) absent such
stockholder approval, would cause Rule 16b-3 under the Securities Exchange Act
of 1934, as amended (the "Act") to become unavailable with respect to the Plan,
(ii) requires stockholder approval under any rules or regulations of the
National Association of Securities Dealers, Inc. or any securities exchange that
are applicable to the Company, or (iii) permit the issuance of Common Stock
before payment therefor in full
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Section 9.04 Automatic Termination. The Plan shall automatically terminate
when all of the shares of Common Stock provided for in Section 10.03 have been
sold.
ARTICLE X. ADMINISTRATION
Section 10.01 The Committee. The Plan shall be administered by a committee
(the "Committee") of two or more directors of the Company, none of whom shall be
officers or employees of the Company and all of whom shall be "disinterested
persons" with respect to the Plan within the meaning of Rule 16b-3 under the
Act. The members of the Committee shall be appointed by and serve at the
pleasure of the Board of Directors.
Section 10.02 Powers of Committee. Subject to the provisions of the Plan,
the Committee shall have full authority to administer the Plan, including
authority to interpret and construe any provision of the Plan, to establish
deadlines by which the various administrative forms must be received in order to
be effective, and to adopt such other rules and regulations for administering
the Plan as it may deem appropriate. The Committee shall have full and complete
authority to determine whether all or any part of the Common Stock acquired
pursuant to the Plan shall be subject to restrictions on the transferability
thereof or any other restrictions affecting in any manner a Participant's rights
with respect thereto but any such restrictions shall be contained in the form by
which a Participant elects to participate in the Plan pursuant to Section 2.02.
Decisions of the Committee will be final and binding on all parties who have an
interest in the Plan.
Section 10.03 Stock to be Sold. The Common Stock to be issued and sold
under the Plan may be treasury shares or authorized but unissued shares, or the
Company may purchase Common Stock in the market for sale under the Plan. Except
as provided in Section 11.01, the aggregate number of shares of Common Stock to
be sold under the Plan will not exceed 300,000 shares.
Section 10.04 Notices. Notices to the Committee should be addressed as
follow:
eBenX, Inc.
5500 Wayzata Boulevard, Suite 1275
Minneapolis, Minnesota 55416
Attention: Chairman, Employee Stock Purchase Plan Committee
ARTICLE XI. ADJUSTMENT FOR CHANGES
IN STOCK OR COMPANY
Section 11.01 Stock Dividend or Reclassification. If the outstanding shares
of Common Stock are increased, decreased, changed into or exchanged for a
different number or kind of securities of the Company, or shares of a different
par value or without par value, through reorganization, recapitalization,
reclassification, stock dividend, stock split, amendment to the Company's
Certificate of Incorporation, reverse stock split or otherwise, an appropriate
adjustment shall be made in the maximum numbers and kind of securities to be
purchased under the Plan with a corresponding adjustment in the purchase price
to be paid therefor.
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Section 11.02 Merger or Consolidation. If the Company is merged into or
consolidated with one or more corporations during the term of the Plan,
appropriate adjustments will be made to give effect thereto on an equitable
basis in terms of issuance of shares of the corporation surviving the merger or
of the consolidated corporation, as the case may be.
ARTICLE XII. APPLICABLE LAW
Section 12.01 Minnesota Law. Rights to purchase Common Stock granted under
the Plan shall be construed and shall take effect in accordance with the laws of
the State of Minnesota.
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EXHIBIT 10.09
NETWORK MANAGEMENT SERVICES, INC.
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
This Amended and Restated Executive Employment Agreement (the "Agreement"),
dated as of September 28, 1999, amends and restates that certain Executive
Employment Agreement ("Agreement") dated as of April 22, 1999, made and
entered into between Network Management Services, Inc., a Minnesota corporation,
("the Company") and Mark Tierney, 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
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 this agreement 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 30% 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
(c) There should occur (i) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions)
of all or substantially all of the assets of the Company; or (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
<PAGE>
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 (iii),
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
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 as Executive Chairman of the Board; (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 Golden Valley, 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.
<PAGE>
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 offers to continue
to employ the Employee, and the Employee accepts such employment, as Chairman of
the Board and member of the Board, commencing on or about April 22, 1999, at the
Company's principal place of business in Golden Valley, 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, attention and efforts to the business and affairs of the Company
during the term of the Employee's employment. The Employee hereby confirms that
he 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 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. Employee
may telecommute for certain periods of the year.
Article 3.0 Compensation and Benefits.
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 ninety
thousand dollars ($190,000). 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 and Company greatly surpasses the objectives
for a given year. Company's Board of Directors will review Employee's bonus
target levels on an annual basis and, in its discretion, make upward
adjustments.
<PAGE>
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"). Company's Board of
Directors will periodically review Employee's stock option grants and, in its
discretion, make additional grants and awards. With the commencing of this
agreement 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 50,000 shares of common stock at a price of $2.25 per
share. 15,000 shares of such option shall vest with the signing of this
agreement. 15,000 shares shall vest after twelve (12) months after the signature
date; an additional 20,000 shares shall vest twenty-four (24) months from the
signature date. 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 24-month period a Change in Control
occurs, one hundred percent (100%) of any unvested option shares will
immediately vest.
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. Following the termination
of his employment employee shall have the right to purchase health care coverage
through the employers health benefit plan as a retiree at a rate equal to the
average per employee cost incurred by the employer until the employee reaches
Medicare eligibility.
3.05 Business Travel, During the term of the Employee's employment with the
company, the employee shall be entitled to travel business class or first class
when traveling on corporate business.
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.
<PAGE>
4.06 Compensation Upon Termination. As the Employee's sole and exclusive
compensation upon 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 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 for reasons as stated in Section 4.04 or
4.05, the Company shall pay the Employee his base salary and
bonus target 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. If due to
termination by the Company other than for Cause or by the
Employer for Good Reason, the Company shall pay the Employee his
base salary and bonus target in effect at the termination date
for a period of two (2) years and one hundred percent (100%) of
the Employee's unvested option shares will immediately vest.
(c) 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 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.
<PAGE>
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 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. 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 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.
<PAGE>
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 two (2) years 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 Employer, after the termination of the Employee's employment, may
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 Not with standing the provisions of 6.01 and 6.02 Employee shall not
be restricted after termination from serving as a consultant to purchasers and
suppliers of health care services.
6.04 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 worldwide 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 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.
6.05 Covenant Not to Solicit. The Employee hereby acknowledges that the
Company's customers constitute vital and valuable aspects of its business on a
worldwide 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.
<PAGE>
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 and who is familiar with the provisions in State of Minnesota law
designed minority shareholder protections. Such provisions shall be weighted and
considered in the arbitrator's resolution. 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
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.
<PAGE>
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.
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.
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
<PAGE>
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.
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/ John Nehra
-------------------------------
Its
-------------------------------
/s/ Mark Tierney
----------------------------------
Mark Tierney
Attachment
<PAGE>
Position Description for Chief Executive Officer of Network Management and its
accountability to the Executive
Chairmen of the Board
Position is accountable to the Executive 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 Finance, 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 Executive 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 10.10
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;
<PAGE>
(c) There should occur (i) 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 (i) 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; (ii) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all
or substantially all of the assets of the Company; or (iii) any
liquidation or dissolution of the Company; or
(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; (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.
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.
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.
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 198,436
shares of common stock at a price of $2.25 per share. 49,609 shares of such
option shall vest when the Employee commences employment with the Company.
29,766 shares of such option shall vest after the Employee has been
employed by the Company for a period of twelve (12) months; an additional
29,766 shares shall vest after the Employee has been employed by the
Company for a period of twenty-four (24) months; an additional 29,765
shares shall vest after the Employee has been employed by the Company for a
period of thirty-six (36) months; an additional 29,765 shares shall vest
after the Employee has been employed by the Company for a period of forty-
eight (48) months; and the remaining 29,765 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.
<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.
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 one (1) year 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) 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 two (2) years 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
<PAGE>
EXHIBIT 10.11
NETWORK MANAGEMENT SERVICES, INC.
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement ("Agreement") dated as of _April 22,
1999, is made and entered into between Network Management Services, Inc., a
Minnesota corporation, ("the Company") and Scott Halstead, 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
(c) There should occur (i) any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all or substantially all
of the assets of the Company; or (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
<PAGE>
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 (iii),
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
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 change in the employees job duties and
responsibilities, (b) a material reduction in the Employee's compensation,
including the Employee's salary, bonus target percentage, and stock option
grants and vesting; (b) 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 Golden Valley, 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.
2
<PAGE>
Article 2.0 Employment.
2.01 Service With The Company. Under the terms and conditions set forth
herein the Company hereby offers to continue to employ the Employee, and the
Employee accepts such employment, as Chief Financial Officer, commencing on or
about April 22, 1999, at the Company's principal place of business in Golden
Valley, 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 he 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 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.
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 thirty
thousand dollars (130,000) 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 CEO and Board of Directors will review Employee's salary
on an annual basis and, in its discretion, make 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 and Company greatly surpasses the objectives
for a given year. The CEO and the 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 CEO and the
Company's Board of Directors will periodically review Employee's stock option
grants and, in its discretion, make additional grants and awards. In the even of
a change of control, 50% of all unvested stock option shares will vest
immediately, and the vesting period for any remaining unvested shares will be
cut in half.
3
<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.
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 upon 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 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 six months 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 one year after a Change of Control, the Company shall pay
the Employee his base salary in effect at the termination date for a period of
six months and one hundred percent (100%) of the Employee's unvested option
shares will immediately vest.
4
<PAGE>
(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 six months 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 one year after a Change in Control, the Company shall pay
the Employee his base salary in effect at the termination date for a period of
six months 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 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 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
<PAGE>
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 two (2) 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 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
<PAGE>
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 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
7
<PAGE>
Employee's breach or a threatened breach of the covenants in 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.
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
<PAGE>
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.
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.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth in the first paragraph.
Dated: April 22, 1999 NETWORK MANAGEMENT SERVICES, INC.
--------------------
By /s/ Mark Tierney
--------------------------------
Its
-------------------------------
Dated: April 22, 1999 /s/ Scott Halstead
-------------------- ----------------------------------
Scott Halstead
10
<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 the Registration Statement (Form S-1)
and related Prospectus of eBenX, Inc. (formerly known as Network Management
Services, Inc.).
/s/ Ernst & Young LLP
Minneapolis, Minnesota
September 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EBENX, INC. FOR THE YEARS ENDED DECEMBER 31, 1996, 1997
AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<CASH> 1,614 1,009 1,681
<SECURITIES> 2,006 2,005 0
<RECEIVABLES> 650 624 2,015
<ALLOWANCES> (51) (51) (51)
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 4,256 3,763 3,987
<PP&E> 1,267 1,959 2,720
<DEPRECIATION> (344) (671) (1,152)
<TOTAL-ASSETS> 5,179 5,084 5,596
<CURRENT-LIABILITIES> 275 661 2,205
<BONDS> 0 0 0
0 0 0
10 10 10
<COMMON> 11 11 12
<OTHER-SE> 5,563 5,582 5,591
<TOTAL-LIABILITY-AND-EQUITY> 5,179 5,084 5,596
<SALES> 4,360 7,093 10,122
<TOTAL-REVENUES> 4,360 7,093 10,122
<CGS> 2,480 4,496 6,958
<TOTAL-COSTS> 5,139 7,806 11,308
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> (581) (500) (1,042)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (581) (500) (1,042)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (581) (500) (1,042)
<EPS-BASIC> (.53) (.45) (.90)
<EPS-DILUTED> (.53) (.45) (.90)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EBENX, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> JUN-30-1998 JUN-30-1999
<CASH> 0 9,268
<SECURITIES> 0 0
<RECEIVABLES> 0 2,496
<ALLOWANCES> 0 (51)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 12,352
<PP&E> 0 3,375
<DEPRECIATION> 0 (1,467)
<TOTAL-ASSETS> 0 14,303
<CURRENT-LIABILITIES> 0 1,531
<BONDS> 0 0
0 0
0 21
<COMMON> 0 12
<OTHER-SE> 0 16,073
<TOTAL-LIABILITY-AND-EQUITY> 0 14,303
<SALES> 3,929 7,108
<TOTAL-REVENUES> 3,929 7,108
<CGS> 2,935 5,233
<TOTAL-COSTS> 4,927 8,370
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (915) (1,112)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (915) (1,112)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (915) (1,112)
<EPS-BASIC> (.80) (.95)
<EPS-DILUTED> (.80) (.95)
</TABLE>
