<PAGE>
Filed pursuant to Rule 424(b)(1).
Registration No. 333-87985.
[eBenX LOGO]
5,000,000 Shares
Common Stock
This is our initial public offering. Prior to this offering, no public market
existed for our common stock. Our common stock has been approved for listing on
the Nasdaq National Market under the symbol "EBNX."
--------------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 4.
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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public Offering Price................................... $20.00 $100,000,000
Underwriting Discounts.................................. $ 1.40 $ 7,000,000
Proceeds to eBenX....................................... $18.60 $ 93,000,000
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
We have granted the underwriters a 30-day option to purchase up to an
additional 750,000 shares of our common stock to cover overallotments.
BancBoston Robertson Stephens Inc. expects to deliver the shares of our common
stock to purchasers on December 15, 1999.
--------------------
Robertson Stephens
Warburg Dillon Read LLC
Thomas Weisel Partners LLC
The date of this prospectus is December 9, 1999.
<PAGE>
We are offering to sell, and seeking offers to buy, shares of our common
stock only in jurisdictions where offers and sales are permitted. You should
rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. Information on the eBenX and Network Management Services,
Inc. Web sites are not part of this prospectus.
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TABLE OF CONTENTS
<TABLE>
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Page
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Summary.................................................................. 1
Risk Factors............................................................. 4
Forward-Looking Statements .............................................. 13
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 17
Business................................................................. 24
Management............................................................... 38
Certain Transactions..................................................... 46
Principal Shareholders................................................... 47
Description of Capital Stock............................................. 49
Shares Eligible for Future Sale.......................................... 50
Underwriting............................................................. 52
Legal Matters............................................................ 54
Experts.................................................................. 54
Additional Information................................................... 54
Index to Consolidated Financial Statements............................... F-1
</TABLE>
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BEN-NET(R) is a registered trademark and WebElect(R) is a registered service
mark of eBenX. eBenX(TM), BenX(TM) and Benefit Exchange Network(TM) are also
our trademarks.
<PAGE>
This graphic depicts eBenx, Inc.'s relationship to various other
organizations. The top left corner of the graphic contains the following title:
"The eBenX group health insurance e-commerce exchange." The bottom left corner
of the graphic contains a list with the heading "BUYER CUSTOMERS." This list
contains the following names: American Medical Response, American Red Cross,
Bass Hotels & Resorts, Bell Atlantic, Chevron, Dayton Hudson, Georgia-Pacific,
GE Capital Services, KPMG, Northwest Airlines, PepsiCo, Promus Hotels, Reader's
Digest, R.R. Donnelley, W.W. Grainger, and White Consolidated. The top right
corner of the graphic contains a list with the heading "HEALTH PLAN
CONNECTIONS." This list contains the following names: Aetna, Inc. Plans, Blue
Cross Blue Shield Plans, CIGNA Health Plans, Inc., Delta Dental, Harvard Pilgrim
Health Care, Kaiser Foundation Health Plan, Merck-Medco, PacifiCare Health
Systems and UnitedHealth Group Corporation Plans. The bottom right corner of the
graphic contains the word "eBenX" in large bold font. The first "e" in the word
"eBenX" is italicized. The large "X" in "eBenX" is comprised of two slashes. The
slash that rises from left to right is in unbolded font. The slash that lowers
from left to right is thick and contains six thin white spaces running through
it, parallel with the text of the word "eBenX." Additionally, the slash that
lowers from left to right ends slightly below the bottom of the rest of the word
"eBenX." Below the word "eBenX" and beginning immediately after the "B" in
"eBenX" in smaller font is the italicized phrase "The Benefit Exchange Network."
There are a number of icons in this graphic. Next to the list of "Buyer
Customers," there is one building labeled "Employer"; underneath the title "The
eBenX group health insurance e-commerce exchange" there are a row of four
servers labeled "Procurement," "Enrollment and Eligibility Maintenance,"
"Customer Service," and "Financial Engine"; and between the building labeled
"Employer" and the set of servers there is a server labeled "Human Resource
Systems." To the left of the list of "Health Plan Connections" there is a row of
four buildings labeled "Health Plans"; to the left of the large word "eBenX,"
there is a block figure that casts a shadow labeled "Employee"; and between the
block figure and the row of buildings labeled "Health Plans," there is a
computer terminal labeled in bold "eBenX.com." Between the building labeled
"Employer" and the block figure, there is a set of three block figures labeled
"Broker." Between the computer terminal and the row of four buildings located at
the top left corner of the graphic there is a server labeled "Data and Rules."
The computer terminal is connected to the following icons with slightly
curved yellow arrows that point both ways: the block figure labeled "Employee,"
the set of block figures labeled "Broker," the building labeled "Employer," and
one arrow for each of the buildings in the row of four buildings entitled
"Health Plans." There are four straight blue arrows connecting the server
labeled "Data and Rules" with each of the four servers located at the top left
corner. Finally, there is a line simulating a computer cable connecting the
computer terminal with the server labeled "Data and Rules."
<PAGE>
SUMMARY
Because this is only a summary, it does not contain all the information that
may be important to you. You should read the entire prospectus, especially
"Risk Factors" and the consolidated financial statements and notes, before
deciding to invest in shares of our common stock.
eBenX, Inc.
We provide business-to-business e-commerce and connectivity solutions to
employers and health plans for the purchase, eligibility administration and
premium payment of group health insurance benefits. Through our proprietary and
licensed technology, we facilitate the flow of employee and dependent
eligibility and financial data between employer purchasers of group health
insurance benefits and health plan suppliers. The plan information, data and
financial exchange requirements in this $600 billion market are extremely
complex. Our proven Web-enabled services and high volume eligibility and
financial data transmission systems, or pipelines, provide the critical
connectivity necessary for employers and health plans to communicate
electronically. Today, we connect customers such as Bell Atlantic Corporation,
PepsiCo, Inc., Northwest Airlines Corporation, GE Capital Services Corporation,
Promus Hotels Corporation and R.R. Donnelley & Sons Company to their wide array
of health plan trading partners. In 1998, Bell Atlantic, Northwest Airlines and
PepsiCo accounted for approximately 50% of our revenue.
The widespread acceptance of the Internet as a business communications
platform has created a foundation for business-to-business e-commerce that
enables employers and health plans to streamline complex processes, lower costs
and improve productivity. The purchasing, eligibility administration and
premium payment process is encumbered by inefficient procedures for gathering
and transferring data and executing payment transactions. These inefficiencies,
along with other factors unique to the group health insurance benefits market,
create an environment which is conducive to e-commerce solutions. However,
unlike other e-commerce products and services, such as buying books or
individual insurance, the complexities of the group health insurance benefits
market require an extensive understanding of the purchasing and administration
of, and payment for, group health insurance benefits and advanced technology.
Currently, employers and health plans face the following challenges:
. fragmented marketplace: multi-site, multi-state employers must purchase
health insurance from multiple, locally-based health plans;
. increasing costs: employers face pressure to purchase benefits more
effectively due to the escalating costs of providing group health
insurance benefits to employees and retirees;
. complex data: employers and health plans must exchange complex, detailed
and dynamic data in multiple formats using various system platforms;
. complex pricing and payment reconciliation: employers and health plans
must establish price on a case-by-case basis and continually reconcile
complex billing and settlement transactions; and
. government regulation: federal, state and local laws and regulations
burden the process of purchasing group health insurance benefits through
additional reporting and coverage requirements.
We are pioneering the use of the Internet to automate the purchase,
eligibility administration and premium payment process for the group health
insurance benefits market. By using our proprietary and licensed technology we
enable employers to streamline the administrative process and make purchasing
decisions in a more competitively priced market. Based on our six years of
industry experience with Fortune 1000 companies, we have developed a technology
platform that automates the data exchange, payment and reconciliation process
in this market. In 1999, we extended this technology platform to enable
enrollment data collection and plan information distribution, thus creating an
integrated end-to-end e-commerce solution consisting of front-end and back-end
processing components for the group health insurance benefits market.
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Our technology platform enables us to introduce what we believe is the first
fully integrated end-to-end e-commerce solution for the procurement of group
health insurance benefits. We believe that with this technology platform and
our industry expertise we can fundamentally change the way group health
insurance benefits are purchased. Using this e-commerce solution, our near-term
strategy is to increase our penetration of, and service offerings to, the
Fortune 1000 market, to leverage our technology through relationships with
insurance brokers to penetrate the mid-size employer market and to establish
additional strategic relationships.
The Offering
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<C> <S>
Common stock offered................................ 5,000,000 shares
Common stock to be outstanding after this offering.. 15,183,518 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."
Nasdaq National Market symbol....................... EBNX
</TABLE>
Common stock to be outstanding after this offering does not include:
. 3,222,963 shares issuable upon exercise of outstanding stock options
under existing stock option plans;
. 66,135 shares issuable upon exercise of outstanding warrants; and
. 3,958,362 shares available for future grant or issuance under our stock
option plans.
See "Management--Employee Benefit Plans," "Description of Capital Stock" and
Note 4 of "Notes to Consolidated Financial Statements" beginning on page F-9.
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Our headquarters are located at 5500 Wayzata Boulevard, Suite 1450,
Minneapolis, Minnesota 55416-1241 and our telephone number is (612) 525-2700.
Our Web site addresses are www.ebenx.com and www.networkmanagementinc.com. In
September 1999, we changed our name from Network Management Services, Inc. to
eBenX, Inc.
Unless otherwise indicated, all information contained in this prospectus
assumes that the underwriters' overallotment option is not exercised, reflects
the conversion of all outstanding preferred stock into common stock immediately
prior to the commencement of this offering and a three-for-one split of our
common stock effective immediately prior to this offering.
2
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Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
Ended September
Year Ended December 31, 30,
-------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue............. $ 904 $2,497 $4,360 $7,093 $10,122 $ 6,669 $11,746
(Loss) income from
operations............ (177) 31 (779) (713) (1,186) (1,125) (3,022)
Net (loss) income....... (166) 62 (581) (500) (1,042) (1,024) (2,702)
Basic and diluted net
(loss) income per
share................. $ (.05) $ .02 $ (.18) $ (.15) $ (.30) $ (.30) $ (.77)
Shares used in basic and
diluted net income
(loss) per share...... 3,234 3,298 3,313 3,376 3,463 3,457 3,517
Pro forma basic and
diluted net loss per
share................. (.16) (.33)
Shares used in pro forma
net loss
per share............. 6,485 8,103
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
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(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................... $7,290 $7,290 $ 99,540
Working capital.............................. 9,162 9,162 101,412
Total assets................................. 13,417 13,417 105,667
Long-term obligations, net of current
portion.................................... -- -- --
Total shareholders' equity (deficit)......... (4,694) 11,256 103,506
</TABLE>
The "Pro Forma As Adjusted" column in the Balance Sheet Data table gives
effect to the receipt and application of the estimated net proceeds from our
sale of the 5,000,000 shares of common stock offered by this prospectus at the
initial public offering price of $20.00 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
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before deciding whether to purchase shares of our common stock. If
any of the following risks actually occur, our business and operating results
could be harmed. This could cause the trading price of our common stock to
decline, and you may lose all or part of your investment.
Risks Related to Our Business
We have had net losses over the past several years and we may not be able to
achieve or maintain profitability in the future.
Our business strategy may be unsuccessful and we may never achieve or
maintain significant revenues or profitability. With the exception of fiscal
1995, we have incurred net losses each year since we began operations in 1993.
We had net losses of approximately $1.0 million for the year ended December 31,
1998 and $2.7 million for the nine month period ended September 30, 1999, and
an accumulated deficit of $4.9 million as of September 30, 1999. We expect to
continue to incur significant development, sales and marketing and other
operational expenses in connection with our business. We may also incur
expenses in connection with acquisitions or other strategic relationships. As a
result of these expenses, we will need to generate significant quarterly
revenue increases to achieve and maintain profitability. We expect that we will
incur net losses for the next several years.
We rely significantly on a limited number of customers and the loss of any
material customer could harm our business and operating results.
The loss of a material customer would significantly reduce our revenue and
harm our business and operating results. In 1998, three customers accounted for
approximately 50% of our total revenue. In 1999 to date, twelve customers have
accounted for approximately 90% of our total revenue. Further, because
increased employee participation from existing customers has contributed to our
revenue growth, the loss of any material customer would harm our prospects for
future growth. We may continue to depend upon a small number of customers for a
substantial percentage of our revenue in the future.
The failure of the industry to accept our products and services could limit our
revenue growth.
The failure of industry participants to accept our products and services as a
replacement for traditional methods of operation could limit our revenue
growth. Our success depends on our ability to provide products and services to
a large number of employers with a substantial base of participating employees
and to efficiently and accurately collect and process eligibility data and
execute payment transactions with numerous health plans. The acceptance by
employers of our products and services will require that all participants in
the group health insurance benefits market adopt new methods of administering
benefits, exchanging eligibility information and executing payment
transactions.
Further, our products and services facilitate competition among health plans
at the employer level by creating an infrastructure that allows multiple health
plans to service a single employer. Health plans have in the past resisted
servicing smaller companies on a non-exclusive basis. This resistance may
inhibit our growth, especially in the mid-size employer market.
We face intense competition in our industry and, if we are unable to compete
successfully, our business and operating results will be seriously harmed.
Increased competition in our industry could result in price reductions,
reduced gross margins or loss of market share which could seriously harm our
business and operating results. The group health insurance benefits industry is
intensely competitive, rapidly evolving and subject to sudden technological
change. We
4
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believe that the principal competitive factors in this market are health
and managed care expertise, data integration and transfer technology, benefits
processing technology, customer service and support and product and service
fees. We expect competition to increase in the future.
We compete with administrative service providers and benefits consultants
with administrative capabilities. We also compete with the human resource and
information systems departments of the Fortune 1000 companies that perform
their own health care administration services. In the mid-size employer market
we compete with health benefit brokers and regional brokers. In addition, many
human resource systems and service companies have the health care expertise and
financial strength to develop the technology necessary to compete with us. As
the market evolves we expect increased competition from Internet-based service
providers in both the health care connectivity market between suppliers and
providers (e.g., physicians, hospitals and pharmacies) and the online insurance
market.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base
of customers than we do. In addition, many of our competitors have well-
established relationships with our current and potential customers and have
extensive knowledge of our industry. Current and potential competitors have
established or may establish strategic relationships among themselves or with
third parties to increase the ability of their products and services to address
employer needs. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
Failure to manage our growth effectively could harm our business and operating
results.
Failure to manage our growth effectively could harm our business and
operating results. Continued rapid growth will place significant strain upon
our management and operational systems and resources. We will need to expand
our existing information systems or acquire new systems to meet the
requirements of our future operations. Any expansion or replacement of our
information systems may not be sufficient to meet our needs. In addition, we
may experience interruptions of service as we expand these systems.
We recently have hired a significant number of new employees, including key
executives. We will continue to add personnel to maintain our ability to grow
in the future. We must integrate our new employees and key executives into a
cohesive team and at the same time increase the total number of employees and
train and manage our employee work force in a timely and effective manner to
expand our business. We may not be able to do so successfully, which would
inhibit our ability to expand our business and harm our operating results.
Unsuccessful efforts or incurrence of unanticipated expenses in selling our
products and services could harm our business and operating results.
The time, expense and effort of securing customers may exceed our
expectations and may harm our business and operating results. The decision to
implement our products and services requires a substantial and technical
analysis of a customer's healthcare benefits offerings and requirements and
time-intensive education of the customer of the advantages of our products and
services. Due to the length of our sales cycle, which generally ranges from
three to twelve months, we often devote significant resources and incur costs
without any assurance that a prospective customer will purchase our products or
services. In the event that a prospective customer does not purchase our
products or services, we may have incurred substantial costs that cannot be
recovered and which will not result in future revenues.
Our failure to establish and maintain successful relationships with strategic
partners could limit our revenue growth.
We believe that our future revenue growth depends in part upon the successful
creation and maintenance of relationships with strategic partners such as
front-end healthcare information collection companies, human resources
information services firms, healthcare benefits consultants and brokers and
other industry participants. To date, we have established only a limited number
of strategic relationships. Strategic partners may offer
5
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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, which will increase our costs and
harm our operating results.
Our quarterly results likely will fluctuate which could cause the value of our
common stock to rapidly decline.
Any quarterly fluctuations in our operating results could subject the market
price of our common stock to rapid and unpredictable change. Historically, we
obtain 75% of each year's new customer commitments during the months of
February through May because most employers have open enrollment periods for
the selection of health plans by their employees in the fall. We expect this
seasonality in our business to continue. Our expenses are relatively fixed in
the short term and are based in part on our expectations of future revenues,
which may vary significantly. If we do not achieve expected revenue targets, we
may be unable to adjust our spending quickly enough to offset any revenue
shortfall which could harm our business and operating results.
Factors, including those discussed elsewhere in these risk factors, that may
cause these quarterly fluctuations include:
. the number and size of new customers starting services;
. the decision of one or more customers to delay implementation or cancel
ongoing services;
. our ability to design, develop and introduce new services and features
for existing services on a timely basis;
. costs associated with strategic acquisitions and alliances or
investments in technology;
. expenses incurred for geographic and service expansion;
. a reduction in the number of employees of our customers; and
. acquisitions of our customers by other companies.
Further, our agreements with customers generally do not have penalties for
cancellation. As a result, any decision by a customer to cancel our services
may cause significant variations in operating results in a particular quarter
and could result in losses for that quarter. As we secure larger customers, any
cancellation of services by a larger customer likely would result in larger
fluctuations in operating results than historically experienced.
Failure to retain our key executives or attract and retain qualified technical
personnel could harm our business and operating results.
The loss of one or more of our executive officers could inhibit the
development of our business and, accordingly, harm our business and operating
results. While we generally enter into employment agreements with our key
executive officers, we may not be able to retain them.
Qualified personnel are in great demand throughout the Internet and
healthcare industries. Our future growth and our ability to achieve our
financial and operational objectives will depend in large part upon our ability
to attract and retain highly skilled technical, engineering, sales and
marketing and customer support personnel. Our failure to attract and retain
personnel may limit the rate at which we can expand our business, including the
development of new products and services and the retention of additional
customers, which could harm our business and operating results.
6
<PAGE>
We could be subject to potential liability claims related to our products and
services which could harm our financial condition and results of operations.
Any liability claim brought against us, even if not successful, would likely
be time consuming and costly and could seriously harm our business and
operating results. Errors in the performance of our products or services on
behalf of an employer could result in the delay of processing of healthcare
eligibility information or execution of payment transactions or could otherwise
result in financial or other damages to our customers. These errors also may
result in the improper denial of healthcare benefits to employees. A liability
claim brought against us by an employer or an employee could seriously harm our
business and reputation.
Our customer agreements generally require that we indemnify our customers for
various losses and liabilities incurred by them that are caused by us. Any
indemnification payments required under these agreements may harm our business
and operating results.
We also may become party to litigation brought by a participating employee
against an employer or health plan. We may not successfully avoid liability for
problems related to the provision of healthcare benefits even though we do not
make medical determinations or coverage decisions. Any claims or litigation
also could require expenditures in terms of management time and other resources
to defend ourselves. This could require us to implement measures to reduce our
exposure to this liability, which may require us, among other things, to expend
substantial resources or to discontinue product or service offerings or to take
other precautions. Liability of this type could harm our business and operating
results.
Failure to raise additional capital to fund our future operations and satisfy
working capital needs could harm our business and operating results.
We do not currently generate sufficient cash to fully fund operations. To
date, we have financed our operations principally through the issuance of
equity securities and, to a limited extent, through borrowings. We may need to
raise additional capital in the future to fund our ongoing operations and to
support expansion of our business. We may not be able to obtain additional
financing when needed or on terms favorable to us. Any difficulty in obtaining
additional financing may require us to limit our operations or may inhibit our
future growth.
The failure to successfully integrate any future acquisitions could harm our
business and operating results.
If we acquire businesses in the future and are unable to successfully
integrate these businesses into our own, it could harm our business and
operating results. In order to remain competitive or to expand our business, we
may find it necessary or desirable to acquire other businesses, products or
technologies. If we identify an appropriate acquisition candidate, we may not
be able to negotiate the terms of the acquisition successfully, to finance the
acquisition or to integrate the acquired businesses, products or technologies
into our existing business and operations. Further, completing a potential
acquisition and integrating an acquired business may strain our resources and
require significant management time. In addition, we may be required to
amortize significant amounts of goodwill and other intangible assets in
connection with future acquisitions which would harm our operating results.
Consolidation in the healthcare industry could harm our future operating
results and opportunities for growth.
Our products and services are, in large part, beneficial to employers because
we are able to coordinate the exchange of eligibility and financial data and
execute payment transactions between an employer and its numerous health plans.
Consolidation in the healthcare industry may require us to reconfigure our
products, services and systems to accommodate a change in data formats and
codes utilized by recently acquired or consolidated health plans. Further, the
consolidation of health plans operating in the same geographic market may
substantially reduce the number of competitive health plans in that market.
Existing and potential customers, especially mid-size market employers that
operate in only one geographic market, may not find our products and services
beneficial if there is only limited competition among health plans.
7
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Our revenues could decrease if the integrity of our systems is inadequate.
Any failure of our systems could harm our business and operating results. Our
systems process vast amounts of eligibility and financial data and execute
large numbers of payment transactions. Any delay or failure in our systems or
in our ability to communicate electronically with employers and health plans or
in our ability to collect, store, analyze or process accurate eligibility and
financial data may result in the denial of healthcare benefits, or in the delay
or failure to execute payment transactions accurately. This type of denial or
failure would harm our business and operating results.
The occurrence of a catastrophic event or other system failure at our
facilities could interrupt our operations or result in the loss or corruption
of stored data. In addition, we depend on the efficient operation of Internet
and network connections among our systems, employers and health plans. These
connections depend on the efficient operation of data exchange tools, Web
browsers, Internet service providers and Internet and network backbone service
providers. In the past, Internet users have occasionally experienced
difficulties with Internet and online services due to system failures. Any
disruption in Internet or network access provided by third parties could harm
our business and operating results. Further, we are dependent on hardware
suppliers for prompt delivery, installation and service of equipment used to
deliver our services. The failure of these suppliers to promptly deliver,
install or service equipment could harm our business and operating results.
Our costs could increase or our revenues could decrease if we or our business
partners experience Year 2000 compliance problems or related system failures.
Year 2000 compliance problems could harm our business and operating results.
We may experience Year 2000 compliance problems requiring substantial revisions
to our systems. In addition, third party software, hardware or other technology
incorporated into our information systems or upon which our business depends
may need to be revised or replaced as a result of Year 2000 compliance
problems. Any revision to our systems or revision or replacement of third-party
software, hardware or other technology could be time consuming and expensive.
In addition, a failure to identify, fix and/or replace these systems or third-
party software, hardware or other technology in a timely manner could disrupt
our business operations and result in lost revenue, increased operating costs,
the loss of customers and other business interruptions.
Our customers may also experience Year 2000 compliance problems or related
system failures. These problems and failures could result in our inability to
properly collect eligibility and financial data and process payments on behalf
of employers and could generally interrupt our delivery of products and
services. Any inability to perform, or interruption in the performance of,
services on behalf of any employer or health plan could harm our business and
operating results.
Furthermore, our business depends upon products, services and technology
provided by third parties, such as health care providers and insurers,
insurance and health care brokers, information technology consultants, network
support providers, telecommunication companies, Internet service and access
providers, third-party service providers, vendors, business partners and others
outside our control. These parties' information and non-information systems may
not be Year 2000 compliant. Any failure by these parties to be Year 2000
compliant could result in a disruption of our business, or could result in a
systemic failure beyond our control. A prolonged Internet or communications
failure could also prevent us from performing services on behalf of customers.
A failure of any of these parties to be Year 2000 compliant could harm our
business and operating results. Also, a systemic failure could require
potential customers to dedicate substantial resources towards fixing or
resolving Year 2000 compliance problems and may make the sales and marketing of
our services more difficult.
Based on our assessments to date, we believe we will not experience any
material disruption as a result of Year 2000 problems with respect to our
services and the third-party systems we use for our internal functions. But if
certain critical third-party suppliers, such as those supplying electricity,
water or telephone service, experience difficulties resulting in disruption of
service to us, a shutdown of our operations could occur for the duration of the
disruption.
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Our business and reputation may be harmed if we are unable to protect the
privacy of our customer information.
Our information systems and Internet communications may be vulnerable to
damage from physical break-ins, computer viruses, programming errors, attacks
by computer hackers or similar disruptive problems. A user who is able to
access our computer or communication systems could gain access to confidential
employer, employee or health plan information or our own confidential
information. A material security breach could harm our business and our
reputation or could result in liability to us. Therefore, it is critical that
our facilities and infrastructure remain secure. The occurrence of any of these
events could result in the interruption, delay or cessation of our services,
which could harm our business or operating results. Further, our reputation may
suffer if third parties were to obtain this information and we may be liable
for this disclosure. Any effect on our reputation or any liability for any
disclosure could harm our business and operating results.
If the demand for Internet and e-commerce solutions does not increase, it could
limit our revenue growth and profitability.
Rapid growth in the use of the Internet is a recent phenomenon. As a result,
its acceptance and use may not continue to develop at historical rates and a
sufficiently broad base of business customers may not adopt or continue to use
the Internet as a medium of commerce. Demand and market acceptance for recently
introduced products and services over the Internet are subject to a high level
of uncertainty, and there exist few proven products and services.
Our future revenue growth and profitability depend, in part, upon increased
employer demand for additional Internet and e-commerce solutions that we are in
the process of developing or may develop in the future. If the demand for
Internet and e-commerce solutions does not increase, it could limit our revenue
growth and profitability.
If we are unable to adequately protect our intellectual property rights or if
we infringe upon the intellectual property rights of third parties, our results
of operations may be harmed.
Our success depends in part upon our intellectual property rights to products
and services which we develop. We rely on a combination of contractual rights
including non-disclosure agreements, trade secrets, copyrights and trademarks
to establish and protect our intellectual property rights in our names,
products, services and related technology. Loss of intellectual property
protection or inability to secure intellectual property protection on any of
our names, confidential information or technology could harm our business and
operating results.
We currently have no registered patents or pending patent applications
covering any of our technology. We have received a U.S. trademark registration
for BEN-NET and a U.S. service mark registration for WebElect. These
registrations may not be enforceable or effective in protecting the BEN-NET or
WebElect marks.
We typically enter into non-disclosure and confidentiality agreements with
our employees and consultants with access to sensitive information. These
agreements may not be adequate to protect our intellectual property rights or
prevent misappropriation of our technology. Products and services with features
similar to our products and services may be independently developed.
Although we believe that our core technology has been independently developed
and that none of our technology or intellectual property infringes on the
rights of others, third parties may assert infringement claims against us in
the future. We may be required to modify our products, services, internal
systems or technologies or to obtain a license to permit our continued use of
those rights. We may not be able to do either in a timely manner or upon
reasonable terms and conditions. Failure to do so could harm our business and
operating
9
<PAGE>
results. In addition, future litigation relating to these matters could result
in substantial cost to, and diversion of resources by, us. Adverse
determinations in any litigation or proceedings of this type also could subject
us to significant liabilities to third parties and could prevent us from using
some of our products, services, internal systems or technologies.
Rapidly changing technology may impair our financial performance.
We may encounter difficulties responding to technological changes that could
delay our introduction of products and services and we may not be able to
respond to these changes in a timely and cost-effective manner. Our business
depends upon the use of software, hardware, networking and Internet technology
and systems. These technologies and systems are rapidly evolving and are
subject to rapid change and obsolescence. As these technologies mature, we must
be able to quickly and successfully modify our products and services to adapt
to this change. We may encounter difficulties that could delay or harm the
performance of our products or services. We may not be able to respond to
technological changes in a timely and cost-effective manner. In addition, our
competitors may develop technologically superior products and services.
Further, data formatting and eligibility rules within a particular employer or
health plan, or within the group health benefits industry as a whole, may
change and may require substantial and expensive re-engineering of eligibility
data and adjustment of the tools we use to process this eligibility data.
State, federal and local laws could harm our business and operating results.
State, federal or local laws could harm our business and operating results by
requiring us to change the way we provide services and increase our cost of
performing services. Further, these laws could restrict our ability to continue
to develop our business as currently planned. The healthcare industry is highly
regulated by federal, state and local laws. The application of existing laws,
or the implementation of new laws, applicable to our business could harm our
business and operating results. For example, the confidentiality of patient
records and the circumstances under which records may be released for inclusion
in our databases may be subject to substantial regulation by state governments.
These state laws govern both the disclosure and the use of confidential patient
medical records. Although compliance with these laws currently is principally
the responsibility of health care providers and health plans, these regulations
may be extended to cover our business and the eligibility data and other
information that we include in our databases. If these laws are extended to
cover our business, we may be required to expend additional resources in order
to comply with these laws, including changes to our security practices, and may
be exposed to greater liability in the event we fail to comply with these laws.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
mandates the use by health plans of standard transactions, identifiers,
security and other provisions by the year 2000. We have designed our products
and services to comply with HIPAA, but any change in federal standards would
require us to expend additional resources.
Further, our role in facilitating payments by employers to health plans may
subject us to the Employee Retirement Income Security Act. This act imposes
fiduciary duties on employers and health plans with respect to payments made on
behalf of participating employees and it is possible that these fiduciary
duties could be deemed to apply to us. In that event, we may become subject to
greater liability with respect to these payments and may experience higher
operating costs in order to comply with this regulation. These increases in
operating costs may harm our business and operating results.
State laws and regulations concerning the sale, marketing or distribution of
insurance over the Internet could harm our business and operating results.
Should our business activities require our licensing as an insurance agent,
we would incur increased costs and become subject to greater restrictions which
could harm our business and financial results. Further, because the application
of e-commerce to the insurance market is relatively new, the impact of current
or future insurance laws and regulations on our business is difficult to
anticipate. The insurance industry is subject to
10
<PAGE>
extensive regulation under state laws. Insurance laws and regulations cover all
aspects of the insurance process, including sales techniques, underwriting for
eligibility, rates, claim payments and record keeping by licensed insurance
companies and insurance agents. A company that does business as an insurance
agent is generally required to be licensed in each state in which it conducts
that business. In the future, our business or other activities may be
considered by insurance regulatory authorities to fall under their licensing
jurisdiction.
Risks Related to this Offering and Ownership of Our Common Stock
The price for our common stock could decline.
Prior to this offering, there has not been a public market for our common
stock. An active trading market for our common stock may not develop or be
sustained after completion of this offering. The initial public offering price
of our common stock may not be indicative of the prices that will prevail in
the public market after the offering, and the market price of our common stock
could fall below the initial public offering price. You may not be able to
resell your shares at or above the initial public offering price due to a
number of factors, including:
. actual or anticipated quarterly variations in our operating results;
. changes in expectations as to our future financial performance or
changes in financial estimates, if any, of securities analysts;
. announcements of new healthcare products, services or technological
innovations;
. announcements relating to strategic relationships and transactions;
. customer relationship developments;
. strategic alliance developments;
. regulatory changes;
. conditions generally affecting the group health insurance benefits
industry;
. success of our operating strategy;
. competition; and
. the operating and stock price performance of other comparable companies.
In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
Internet and e-commerce companies and which have often been unrelated to the
operating performance of these companies.
Future sales of our common stock in the public market after the offering could
cause the price of our common stock to decline.
Our shareholders could sell substantial amounts of our common stock in the
public market following the offering. As a result, the aggregate number of
shares of our common stock available to the public would increase and,
consequently, the price of our common stock could fall. We cannot predict the
timing or amount of future sales of shares of our stock or the effect, if any,
that market sales of shares, or the availability of shares for sale, will have
on the prevailing market price of our common stock. Upon completion of the
offering, we will have 15,183,518 outstanding shares of common stock, assuming
no exercise of outstanding options or warrants. Of these shares, the 5,000,000
shares sold in this offering will be freely tradeable. This leaves 10,183,518
shares that will be eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
--------- ----
<S> <C>
61,800 Available for immediate sale on the date of this prospectus
404,730 Available for sale 90 days after the date of this prospectus
9,716,988 Available for sale 180 days after the date of this prospectus
</TABLE>
11
<PAGE>
Shortly after the closing of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register a total of 7,800,000
shares of common stock issuable under the 1993 Stock Option Plan, the 1999
Stock Incentive Plan and the Stock Purchase Plan.
The holders of 6,248,922 shares of our preferred shares have registration
rights for the shares of common stock issuable upon conversion of these
preferred shares. All preferred shares will be converted into a total of
6,248,922 shares of common stock immediately prior to the offering. After the
offering, the holders of 6,248,922 shares of our common stock, which represent
approximately 41.5% of our outstanding common stock after this offering
assuming no exercise of outstanding options or warrants after October 31, 1999,
will be entitled to have the resale of their shares registered under the
Securities Act. If these holders cause a large number of securities to be
registered and sold in the public market, these sales could harm the market
price for our common stock. In addition, if we include in a company-initiated
registration statement shares held by these holders pursuant to the exercise of
their registration rights and there is limited demand to purchase our shares,
this inclusion may harm our ability to raise needed capital by effectively
reducing the number of newly-issued shares we can sell to the public.
Concentration of ownership may give some shareholders substantial influence and
may prevent or delay a change in control.
We anticipate that some shareholders, including officers and directors of the
company, will, in the aggregate, beneficially own approximately 60.5% of our
outstanding common stock following completion of this offering. These
shareholders may be able to exercise substantial influence over all matters
requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also have the effect of discouraging third party offers to acquire our
company or of delaying or preventing a change in control of our company.
Our charter documents and Minnesota law may discourage unsolicited takeover
offers which could deprive our shareholders of opportunities to sell their
shares of common stock at prices higher than prevailing market prices.
Provisions of our articles of incorporation, bylaws and Minnesota law could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our shareholders. For instance, our bylaws provide for a
classified board of directors with each class of directors subject to re-
election every three years. This will make it more difficult for third parties
to insert their representatives on our board of directors and gain control of
our company. These provisions could also discourage proxy contests and make it
more difficult for you and other shareholders to elect directors and take other
corporate actions. Further, the Minnesota Control Share Acquisition Act and the
Minnesota Business Combination Act may make it more difficult for third parties
to secure control of our company or to complete an acquisition. These acts may
discourage unsolicited takeover offers which could deprive our shareholders of
opportunities to sell their shares of common stock at prices higher than
prevailing market prices.
You will incur immediate and substantial dilution.
If you purchase shares of our common stock, you will incur immediate and
substantial dilution in pro forma net tangible book value of $13.12 per share,
assuming no exercise of any options or warrants after September 30, 1999. If
the holders of outstanding options or warrants exercise those options or
warrants, you will experience dilution of $14.22 per share.
We do not intend to pay dividends.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding the development and
growth of our business and, therefore, do not expect to pay any dividends in
the foreseeable future.
12
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements based on our current
expectations and projections about future events. These statements are subject
to risks, uncertainties and assumptions about us, including, among other
things:
. uncertainty of our future operating results;
. delays or losses of sales due to long sales and implementation cycles for
our products and services;
. actions of our competitors; and
. other factors discussed under "Risk Factors."
USE OF PROCEEDS
We estimate our net proceeds from the sale of our common stock in this
offering will be approximately $92.3 million, or approximately $106.2 million
if the underwriters' overallotment option is exercised in full, based on the
initial public offering price of $20.00 per share and after deducting the
estimated underwriting discounts and offering expenses.
We intend to use the net proceeds from this offering for general corporate
purposes, including working capital, sales and marketing expenditures,
development of new products and services and investment in technology
infrastructure. In addition, a portion of the net proceeds may be used for
acquisitions of businesses, products and technologies that are complementary to
ours. We currently have no agreements with respect to any material acquisitions
as of the date of this prospectus. Pending use of the net proceeds for the
above purposes, we intend to invest the net proceeds from this offering in
short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and do
not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings to fund the development and growth
of our business.
13
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999
(a) on an actual basis, (b) on a pro forma basis to reflect the conversion of
all outstanding shares of preferred stock into shares of common stock
immediately prior to the commencement of this offering, and (c) on a pro forma,
as adjusted, basis to give effect to the receipt and application of the
estimated net proceeds from the sale of 5,000,000 shares of our common stock in
this offering at the initial public offering price per share of $20.00 after
deducting the estimated underwriting discounts and offering expenses.
<TABLE>
<CAPTION>
As of September 30, 1999
-----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- -------------- -----------
(in thousands)
<S> <C> <C> <C>
Long-term debt and capitalized lease
obligations, non-current
portion.................................. $ -- $ -- $ --
Redeemable convertible preferred stock,
$.01 par value per share; 6,266,922
shares authorized, 6,248,922 shares
outstanding, actual; no shares issued and
outstanding, pro forma and pro forma as
adjusted................................. 15,950 -- --
Shareholders' equity:
Common stock, $.01 par value per share;
7,000,000 shares authorized, 3,801,546
shares outstanding, actual;
100,000,000 shares authorized,
10,050,468 shares outstanding, pro
forma; 100,000,000 shares authorized,
15,050,468 shares outstanding, pro
forma as adjusted...................... 38 101 151
Additional paid-in capital............... 4,319 20,206 112,406
Deferred stock based compensation........ (4,127) (4,127) (4,127)
Accumulated deficit...................... (4,924) (4,924) (4,924)
------- ------- --------
Total shareholders' equity (deficit).. (4,694) 11,256 103,506
------- ------- --------
Total capitalization................ $11,256 $11,256 $103,506
======= ======= ========
</TABLE>
- --------
The preceding table excludes:
. 3,324,153 shares issuable upon exercise of stock options outstanding
under our stock option plans as of September 30, 1999;
. 66,135 shares issuable upon exercise of warrants outstanding as of
September 30, 1999; and
. 3,990,222 shares available for future grant or issuance under our stock
option plans as of September 30, 1999.
14
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock in this offering and the pro forma net tangible book value per
share of our common stock immediately after this offering. Pro forma net
tangible book value dilution per share represents the difference between the
amount per share paid by purchasers of shares of common stock in this offering
and the pro forma net tangible book value per share of common stock immediately
after completion of this offering.
Our pro forma net tangible book value as of September 30, 1999 was $11.3
million, or $1.12 per share of common stock, assuming the conversion of all
outstanding shares of preferred stock into shares of common stock. Pro forma
net tangible book value per share represents the amount of our shareholders'
equity, less intangible assets, divided by the total number of shares of common
stock outstanding for the period immediately prior to this offering. After
giving effect to the sale of the 5,000,000 shares of common stock offered in
this prospectus at the initial public offering price of $20.00 per share and
after deducting the estimated underwriting discounts and offering expenses, our
adjusted pro forma net tangible book value as of September 30, 1999 would have
been $103.5 million, or $6.88 per share of common stock. This represents an
immediate increase in net tangible book value of $5.76 per share to existing
shareholders and an immediate dilution of $13.12 per share to new investors
purchasing shares in this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share....................... $20.00
Pro forma net tangible book value per share as of September
30, 1999.................................................... $1.12
Increase per share attributable to new investors.............. 5.76
-----
Pro forma net tangible book value per share after this
offering.................................................... 6.88
------
Net tangible book value dilution per share to new investors... $13.12
======
</TABLE>
The following table summarizes as of September 30, 1999, on the pro forma
basis described above, the number of shares of common stock purchased from us,
the total consideration paid to us and the average price per share paid by
existing shareholders and by investors purchasing shares of common stock in
this offering and before deducting estimated underwriting discounts and
offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders........ 10,046,268 66.8% $ 16,069,000 13.8% $ 1.60
New investors................ 5,000,000 33.2 100,000,000 86.2 20.00
---------- ---- ------------ ----
Total...................... 15,046,268 100% $116,069,000 100%
========== ==== ============ ====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
or warrants after September 30, 1999. As of September 30, 1999, there were
outstanding options and warrants to purchase a total of 3,324,153 shares of
common stock. To the extent that all of these options or warrants are
exercised, there will be dilution to new investors in the amount of $14.22 per
share. See "Capitalization," "Management--Employee Benefit Plans," "Description
of Capital Stock" and Note 4 of "Notes to Consolidated Financial Statements."
15
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except per share data)
The following selected financial data should be read together with the
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus. The selected statement of operations data shown below for
the years ended December 31, 1996, 1997 and 1998 and the balance sheet data as
of December 31, 1997 and 1998 are derived from our audited financial statements
included elsewhere in this prospectus. The selected statement of operations
data shown below for the years ended December 31, 1994 and 1995 and the balance
sheet data as of December 31, 1994, 1995 and 1996 are derived from our audited
financial statements not included elsewhere in this prospectus. The selected
financial data for the nine months ended September 30, 1998 and 1999 has been
derived from our unaudited financial statements which, in the opinion of
management, include all adjustments, consisting solely of normal recurring
adjustments, necessary for a fair presentation of the financial information
shown in these statements. The results for the nine months ended September 30,
1999 are not necessarily indicative of the results to be expected for the full
year or for any future period.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------ ------- ------ ------ -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 904 $ 2,497 $4,360 $7,093 $ 10,122 $ 6,669 $ 11,746
Operating expenses
Cost of services....... 330 1,323 2,480 4,496 6,958 4,791 9,069
Selling, general &
administrative....... 358 538 1,796 2,068 2,831 1,986 3,338
Research and
development.......... 393 605 863 1,242 1,519 1,017 2,294
Amortization of stock-
based compensation... -- -- -- -- -- -- 67
------ ------- ------ ------ -------- -------- --------
Total operating
expenses............ 1,081 2,466 5,139 7,806 11,308 7,794 14,768
------ ------- ------ ------ -------- -------- --------
Operating income
(loss)................ (177) 31 (779) (713) (1,186) (1,125) (3,022)
Interest income......... 11 31 198 213 144 101 320
------ ------- ------ ------ -------- -------- --------
Net (loss) income....... $ (166) $ 62 $ (581) $ (500) $ (1,042) $ (1,024) $ (2,702)
====== ======= ====== ====== ======== ======== ========
Basic and diluted net
(loss) income per
share................. $ (.05) $ .02 $ (.18) $ (.15) $ (.30) $ (.30) $ (.77)
====== ======= ====== ====== ======== ======== ========
Shares used in basic and
diluted net income
(loss) per share...... 3,234 3,294 3,313 3,376 3,463 3,457 3,517
====== ======= ====== ====== ======== ======== ========
Pro forma basic and
diluted net loss per
share................. (.16) (.33)
======== ========
Shares used in pro forma
net loss per share.... 6,485 8,103
======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30,
December 31, 1999
---------------------------------------- ------------------
1994 1995 1996 1997 1998 Actual Pro Forma
------ ------ ------- ------- ------- ------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents........... $ 690 $ 472 $ 1,614 $ 1,009 $ 1,681 $ 7,290 $ 99,540
Working capital......... 482 411 3,981 3,102 1,782 9,162 101,412
Total assets............ 1,177 1,253 5,179 5,084 5,596 13,417 105,667
Long-term obligations,
net of current
portion............... -- -- -- -- -- -- --
Total shareholders'
equity (deficit)........ (109) 13 (564) (1,045) (2,077) (4,694) 103,506
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We were co-founded in 1993 by Mark Tierney, Michael Bingham and Barbara
Seykora, all of whom remain active with us today. From inception until June
1999, our activities principally involved providing back-office administration
and payment services, or what we refer to as back-end exchange services, for
large, multi-site employers such as Bell Atlantic, PepsiCo, Northwest Airlines,
GE Capital, Promus Hotels and R.R. Donnelley. In the second quarter of 1999, we
initiated activities to leverage our success in the large employer market to
also serve the mid-size employer market segment. From inception until September
1999, we were incorporated under the name Network Management Services, Inc. In
September 1999, we changed our name to eBenX, Inc.
Our principal source of revenue is derived from providing ongoing group
health eligibility and financial data exchange services. Exchange services
revenue is typically priced on a per employee per month basis with adjustments
made to accommodate the number of health plan communication and computer
connections, or interfaces, that the customer requires. In many cases, we allow
fixed and variable fee structures to permit volume-adjusted pricing. We
recognize revenue for exchange services as the services are performed. In
addition, we earn revenue from health benefit plan procurement fees as services
are performed. We typically enter into contracts with our large employer
customers that are three years in length. Customers may purchase some or all of
our services and the customer relationship may evolve from utilizing
procurement services to utilizing implementation services and per employee-
based exchange services. A significant percentage of our revenues are earned
from a few customers, most notably Bell Atlantic, PepsiCo and Northwest
Airlines.
The establishment of new customer relationships involves lengthy and
extensive sales and implementation processes. The sales process typically takes
four to six months, and the implementation process takes an additional two to
four months. The sales process is accounted for under the selling, general and
administrative expense category. The implementation process affects cost of
services but may also impact research and development expense to the extent new
customer relationships require new or enhanced service offerings.
Cost of services consists primarily of personnel costs for account
management, operations, production and procurement and information technology
costs for both ongoing procurement and exchange services and for customer
implementation expense. The information technology costs relate to personnel
costs for implementing and maintaining customer and health plan computer
interfaces and computer hardware and software expenses related to computer
processing. A significant portion of cost of services consists of new customer
implementation expenses. Therefore, increasing numbers of new customers will
cause the cost of services as a percentage of net revenue to increase.
Selling, general and administrative expenses consist primarily of payroll and
payroll-related expenses associated with sales and marketing, executive
management and corporate administrative personnel, as well as professional fees
and expenditures for advertising, public relations and promotional efforts. We
intend to significantly increase our sales and marketing expenses over the next
several years. We intend to invest substantially in an integrated marketing
program, including the expansion and enhancement of our penetration into the
mid-size employer market through broker partners. At the same time, we intend
to devote additional resources to develop partnerships and relationships with
human resource services and systems organizations. We expect that, in support
of the continued growth and operation of our business, selling, general and
administrative expenses will continue to increase for the foreseeable future.
Research and development expenses consist primarily of development personnel
and external contractor costs related to the development of new products and
services, enhancement of existing products and services, quality assurance and
testing. To date, we have not capitalized any of our software development
costs. Because the timing of the commercial release of our services has
substantially coincided with technological feasibility, all research and
development costs have been expensed as incurred. We intend to continue to
expand our
17
<PAGE>
product offerings by adding additional services. We expect these activities
will require additional personnel. Accordingly, we expect our research and
development expenses will continue to increase for the foreseeable future.
Since our inception, we have incurred losses. As of September 30, 1999, we
had an accumulated deficit of $4.9 million. These losses and this accumulated
deficit have resulted from the significant costs incurred in the development of
our technology platform, the establishment of relationships with our customers,
and the development and maintenance of our customer and health plan interfaces.
We intend to continue to invest heavily in research and development, sales and
marketing and in our computer and administrative infrastructure. As a result,
we believe that we will incur substantial operating losses for the foreseeable
future. Although we have experienced significant revenue growth in recent
periods, our operating results for future periods are subject to numerous
uncertainties. In view of the rapidly evolving nature of our business and our
limited operating history, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
Results of Operations
The following table sets forth for the periods indicated selected statement
of operations data expressed as a percentage of net revenues.
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended September 30,
--------------------- --------------------
1996 1997 1998 1998 1999
----- ----- ----- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues................. 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of services........... 56.9 63.4 68.7 71.9 77.2
Selling, general and
administrative........... 41.2 29.2 28.0 29.8 28.4
Research and development... 19.8 17.5 15.0 15.2 19.5
Amortization of stock-
based compensation....... -- -- -- -- 0.6
----- ----- ----- ---------- ----------
Total operating costs
and expenses.......... 117.9 110.1 111.7 116.9 125.7
----- ----- ----- ---------- ----------
Loss from operations......... (17.9) (10.1) (11.7) (16.9) (25.7)
Interest income (expense),
net........................ 4.5 3.0 1.4 1.5 2.7
----- ----- ----- ---------- ----------
Net loss..................... (13.4)% (7.1)% (10.3)% (15.4)% (23.0)%
===== ===== ===== ========== ==========
</TABLE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Net revenues. Net revenues increased from $6.7 million for the nine months
ended September 30, 1998 to $11.7 million for the same period in 1999,
representing an increase of $5.0 million, or 76.1%. This increase primarily was
due to a new contract with Bell Atlantic, the expansion of our relationship
with PepsiCo and new client implementations in the third quarter of 1999.
Cost of services. Cost of services increased from $4.8 million for the nine
months ended September 30, 1998 to $9.1 million for the same period in 1999,
representing an increase of $4.3 million, or 89.3%. This increase primarily was
due to increased personnel and computer-related infrastructure costs necessary
to support the increased demand for our services. Cost of services, as a
percentage of net revenues, increased from 71.9% for the nine months ended
September 30, 1998 to 77.2% for the same period in 1999 because of new customer
implementation expenses.
Selling, general and administrative. Selling, general and administrative
expenses increased from $2.0 million for the nine months ended September 30,
1998 to $3.3 million for the same period in 1999, representing an increase of
$1.3 million, or 68.1%. This increase primarily was due to the establishment of
a sales team in late 1998 and additions to management. We anticipate that sales
and marketing expenses will increase substantially in future periods as we
expand our sales and marketing efforts.
Research and development. Research and development expenses increased from
$1.0 million for the nine months ended September 30, 1998 to $2.3 million for
the same period in 1999, representing an increase of
18
<PAGE>
$1.3 million, or 125.6%. This increase primarily was due to additions to our
research and development staff. We anticipate that we will continue to devote
substantial resources to our research and development efforts and that research
and development expenses will increase for the foreseeable future.
Interest income (expense), net. Net interest income includes income earned
from our invested cash, income earned from facilitating our customers' payments
to their health plans and expenses related to outstanding debt obligations
under our bank credit facility. Net interest income increased from $101,000 for
the nine months ended September 30, 1998 to $320,000 for the same period in
1999. In the first nine months of 1999, interest expense was incurred for bank
borrowings. There were no borrowings in the first nine months of 1998.
Amortization of stock-based compensation. In connection with the granting of
stock options to employees, we recorded stock-based compensation totaling
approximately $67,000 in the quarter ended September 30, 1999. This amount
represents the difference between the exercise price and the deemed fair value
of our common stock for accounting purposes on the date these stock options
were granted. The amortization of additional deferred compensation will result
in $4.1 million of charges to operations through 2003.
Years Ended December 31, 1996, 1997 and 1998
Net revenues. Net revenues increased from $7.1 million in 1997 to $10.1
million in 1998, or 42.7%. Net revenues in 1997 represented a 62.7% increase
over 1996 net revenues of $4.4 million. The increase in 1998 primarily was due
to a new contract with Bell Atlantic and servicing additional divisions of
PepsiCo. The increase in 1997 primarily was due to new contracts with The Blue
Cross/Blue Shield Association and R.R. Donnelley & Sons and the sale of
additional services to PepsiCo and General Electric.
Cost of services. Cost of services increased from $4.5 million in 1997 to
$7.0 million in 1998, or 54.8%. Cost of services in 1997 represented an 81.3%
increase over 1996 cost of services of $2.5 million. The increase in 1998
primarily was due to increases in personnel and investments in computer
hardware and software infrastructure. The increase in 1997 primarily was due to
additions in personnel. Cost of services, as a percentage of net revenues,
increased from 56.9% in 1996 to 63.4% in 1997 and to 68.7% in 1998. A
significant portion of cost of services consists of new customer implementation
expenses. Therefore, increasing numbers of new customers will cause the cost of
services as a percentage of net revenue to increase.
Selling, general and administrative. Selling, general and administrative
expenses increased from $2.1 million in 1997 to $2.8 million in 1998, or 36.9%.
Selling, general and administrative expenses in 1997 represented a 15.1%
increase over 1996 selling, general and administrative expenses of $1.8
million. The 1998 increase primarily was due to the establishment of a sales
team. The 1997 increase primarily was due to additions to management. Selling,
general and administrative expenses, as a percentage of net revenues, decreased
from 41.2% in 1996 to 29.2% in 1997 and to 28.0% in 1998.
Research and development. Research and development expenses increased from
$1.2 million in 1997 to $1.5 million in 1998, or 22.3%. Research and
development expenses in 1997 represented a 43.9% increase over 1996 R&D
expenses of $0.9 million. These increases primarily were due to the hiring of
additional personnel.
Interest income (expense), net. Net interest income decreased from $213,000
in 1997 to $144,000 in 1998, or 32.4%. Net interest income in 1997 represented
a 7.6% increase over 1996 net interest income of $198,000. The decrease from
1997 to 1998 primarily was due to decreased cash reserves resulting from the
losses incurred in 1998. The increase from 1996 to 1997 primarily was due to
increased cash reserves resulting from the sale of preferred stock in mid-1996.
Income taxes. As of December 31, 1998, we had unused federal and state
research and development tax credit carryforwards of approximately $100,000
which expire at various times through 2011. In addition, we had unused federal
net operating loss carryforwards at December 31, 1998 of approximately $1.8
million which expire at various times through 2013. The utilization of these
carryforwards is dependent upon our ability to generate sufficient taxable
income during carryforward periods.
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<PAGE>
Selected Quarterly Operating Results
The following table shows unaudited statement of operations data expressed in
dollars (in thousands) and as a percentage of net revenues for the last two
quarters in our fiscal year ended December 31, 1998 and for the first three
quarters in our fiscal year ending December 31, 1999. In management's opinion,
this unaudited quarterly information has been prepared on the same basis as the
audited financial statements and related notes and includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the quarters presented, when read in
conjunction with the audited financial statements and related notes included
elsewhere in this prospectus. We believe that quarter-to-quarter comparisons of
our financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30,
1998 1998 1999 1999 1999
------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues............ $2,740 $3,454 $3,342 $3,766 $ 4,638
Operating expenses:
Cost of services...... 1,856 2,166 2,355 2,878 3,836
Selling, general and
administrative...... 667 845 859 1.151 1,328
Research and
development......... 345 502 545 582 1,167
Amortization of
stock-based
compensation........ -- -- -- -- 67
------ ------ ------ ------ -------
Total operating
expenses......... 2,808 3,513 3,759 4,611 6,398
------ ------ ------ ------ -------
Loss from operations.... (128) (59) (417) (845) (1,760)
Interest income
(expense), net........ 20 42 45 105 170
------ ------ ------ ------ -------
Net loss................ $ (108) $ (17) $ (372) $ (740) $(1,590)
====== ====== ====== ====== =======
<CAPTION>
Three Months Ended
-------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30,
1998 1998 1999 1999 1999
------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Costs of revenues..... 67.8 62.7 70.5 76.4 82.7
Selling, general and
administrative...... 24.3 24.5 25.7 30.6 28.6
Research and
development......... 12.6 14.5 16.3 15.5 25.2
Amortization of
stock-based
compensation........ -- -- -- -- 1.4
------ ------ ------ ------ -------
Total operating
expenses......... 104.7 101.7 112.5 122.5 137.9
------ ------ ------ ------ -------
Loss from operations.... (4.7) (1.7) (12.5) (22.5) (37.9)
Interest income
(expense), net........ 0.7 1.2 1.3 2.8 3.6
------ ------ ------ ------ -------
Net (loss) income....... (4.0)% (0.5)% (11.2)% (19.7)% (34.3)%
====== ====== ====== ====== =======
</TABLE>
Our business is characterized by seasonality. As a result, our revenue may be
subject to seasonal fluctuations, with the largest percentage of annual revenue
typically being realized in the fourth quarter. This is primarily due to
implementation of services to new customers in the third and fourth quarters
and providing open enrollment services to new and existing customers in the
fourth quarter. Further, our operating expenses typically increase in the
second and third quarters as we add personnel in anticipation of acquiring new
customers and implementing and providing services to these new customers, most
of which begin using our services in the third and fourth quarters. In
addition, cost of services typically increases as a percentage of net revenues
as we implement services for new customers.
20
<PAGE>
Our quarterly operating results have in the past, and will in the future,
vary significantly depending on a variety of factors, including:
.the number and size of new customers starting services;
.the decision of one or more customers to delay implementation or cancel
ongoing services;
.seasonality;
. our ability to design, develop and introduce new services and features
for existing services on a timely basis;
. costs associated with strategic acquisitions and alliances or
investments in technology;
. the success of any strategic acquisition, alliance or investment;
. costs to transition to new technologies;
. expenses incurred for geographic and service expansion;
. price competition;
. a reduction in the number of employees of our customers; and
. acquisitions of our customers by other companies.
A substantial majority of our operating expenses, particularly personnel and
related costs, depreciation and rent, are relatively fixed in advance of each
quarter. Our agreements with our customers generally do not have penalties for
cancellation. As a result, any decision by a customer to delay or cancel
implementation of our services or our underutilization of personnel may cause
significant variations in operating results in a particular quarter and could
result in losses for that quarter. It is possible that in some future quarter
our results of operations will be below the expectations of public market
analysts and investors. In either case, the market price of our common stock
could be materially adversely affected.
Liquidity and Capital Resources
Historically, we have funded operations primarily through the private sales
of preferred stock, with net proceeds of approximately $16.0 million, limited
bank borrowings and equipment leases. All shares of our preferred stock will
be converted automatically into common stock immediately prior to the closing
of this offering. As of September 30, 1999, we had $7.3 million in cash and
cash equivalents and a secured revolving line of credit of $1.5 million, which
bears a variable interest rate of 1% above the lender's base rate and expires
in December 1999. At September 30, 1999, there were no borrowings under the
line of credit.
Our operating activities used cash of $0.8 million in 1996, provided cash of
$67,000 in 1997 and used cash of $1.3 million in 1998. Our operating
activities used cash of approximately $3.2 million in the nine months ended
September 30, 1999. The use of cash from operations in 1998 and for the first
nine months of 1999 primarily was due to our net loss and an increase in
accounts receivable, partially offset by an increase in depreciation and
accrued expenses.
Our investing activities used cash of $2.5 million in 1996 and $0.7 million
in 1997, provided cash of $1.2 million in 1998 and used cash of $0.9 million
for the first nine months of 1999. In 1996, $0.5 million of the cash used for
investing activities was for additions to equipment and $2.0 million was for
the purchase of U.S. Treasury Notes using proceeds from the sale of preferred
stock. In 1997, our investing activities used cash for additions to equipment.
In 1998, our investing activities used cash of $0.8 million for additions to
equipment and we received proceeds of $2.0 million from the sale of U.S.
Treasury Notes. For the first nine months of 1999, our investing activities
used cash for additions to equipment.
Our financing activities provided cash of $4.5 million in 1996, $19,000 in
1997, $0.8 million in 1998 and $9.8 million in the first nine months of 1999.
For 1996, financing activities provided cash principally from the sale of
preferred stock. In 1997, financing activities provided cash from the exercise
of common stock options. In 1998, financing activities provided cash
principally from bank borrowings in December 1998 of $0.75 million. For the
first nine months of 1999, financing activities provided cash from the sale of
$10.5 million in preferred stock, partially offset by the repayment of bank
borrowings.
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<PAGE>
Our equipment additions consist primarily of computer hardware and software,
office furniture and equipment and leasehold improvements. We expect that our
equipment additions will continue to increase in the future. Since inception,
we have generally funded equipment additions either through the use of working
capital or with operating leases. We expect to continue to add computer
hardware and software and to use operating leases to finance these additions.
In connection with the planned relocation of our headquarters on May 1, 2000,
we expect to make approximately $3.0 million in leasehold improvements and also
need to purchase additional office furniture. We intend to enter into a real
estate lease agreement that will finance the leasehold improvements over the
term of the lease. We intend to enter into a loan agreement to finance the
office furniture. To the extent we are unable to secure this financing, we may
be required to apply a portion of the proceeds from this offering toward these
expenditures.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business plan. As a result, we
anticipate that these operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In
addition, we may utilize cash resources to fund acquisitions or investments in
complementary businesses, technologies or service lines. We believe that the
net proceeds from the sale of the common stock in this offering and cash from
operations will be sufficient to meet our working capital and operating
resource expenditure requirements for the foreseeable future. Thereafter, we
may find it necessary to obtain additional equity or debt financing. In the
event additional financing is required, we may not be able to raise it on
acceptable terms or at all.
Year 2000 Issue
Many currently installed computer systems and software are coded to accept
only two-digit entries in the date code fields. These date code fields will
need to accept four-digit entries to distinguish 21st century dates from 20th
century dates. This problem could result in system failures or miscalculations
causing disruptions of business operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in other
similar business activities. As a result, many companies' computer systems and
software will need to be upgraded or replaced in order to comply with Year 2000
requirements. The potential global impact of the Year 2000 problem is not
known, and, if not corrected in a timely manner, could affect us and the United
States and world economies generally.
We have analyzed the potential effect of the Year 2000 issue on both the
system software included in our services and our word processing, billing and
other internal systems software, including information technology ("IT") and
non-IT systems (which systems contain embedded technology in manufacturing or
process control equipment containing microprocessors or other similar
circuitry). Our Year 2000 compliance program includes the following phases:
identifying systems that need to be modified or replaced; carrying out
remediation work to modify existing systems or convert to new systems; and
conducting validation testing of systems and applications to ensure compliance.
We are currently in the final stages of the validation phase of this program
with respect to software purchased or licensed from software vendors by us and
used internally and have completed the validation phase of this program with
respect to our own products.
The amount of remediation work required to address Year 2000 problems is not
expected to be extensive. We have tested all of the system software included in
our services and determined that they are Year 2000 compliant. We also have
requested and received documentation from vendors supplying software for our
primary business applications addressing Year 2000 compliance. In all cases,
vendors' responses indicated that their applications were either currently Year
2000 compliant or that they would be compliant by the end of 1999. Therefore,
we will be required to modify some of our existing software applications in
order for our internal computer systems to function properly in the year 2000
and thereafter. We estimate that we will complete our Year 2000 compliance
program for all of our significant internal systems no later than December 31,
1999. We also have had numerous discussions with each of our major customers
regarding our Year 2000 compliance and whether their ability to transmit data
to us would be affected. Similarly, we have had discussions with all of the
health plans to which we connect electronically regarding their efforts to
address
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<PAGE>
the Year 2000 problem. All of our major customers and these health plans have
indicated that they are Year 2000 compliant or will be Year 2000 compliant by
December 31, 1999. These actions are intended to help mitigate the possible
external impact of the Year 2000 problem. However, it is impossible to fully
assess the potential consequences in the event service interruptions occur or
in the event that there are disruptions in such infrastructure areas as
utilities, communications, transportation, banking and government.
Because essentially all of our services and internal systems were created in
the last few years, our products and internal systems were designed to avoid
the year 2000 problem. As a result, the total cost for resolving our Year 2000
issues is expected to be less than $50,000. The total cost estimate includes
the cost of replacing or upgrading non-compliant systems that were otherwise
planned or which have significant improvements and benefits unrelated to Year
2000 issues. Estimates of Year 2000 costs are based on numerous assumptions,
and there can be no assurance that the estimates are correct or that actual
costs will not be materially greater than anticipated.
We are finalizing a contingency plan to provide for continuity of processing
in the event of various problem scenarios based on the outcome of the
validation phase of all of our systems and any additional results from surveys
of our major customers and their health plans with respect to their Year 2000
compliance. We expect to complete this plan by December 15, 1999.
Based on our assessments to date, we believe we will not experience any
material disruption as a result of Year 2000 problems with respect to our
services and the third-party systems we use for our internal functions, and, in
any event, we do not anticipate the Year 2000 issues we will encounter will be
significantly different from those encountered by other computer-related
service providers. For example, if critical third-party suppliers, such as
those supplying electricity, water or telephone service, experience
difficulties resulting in disruption of service to us, a shutdown of our
operations could occur for the duration of the disruption. Assuming no major
disruption in service from utility companies or other critical third-party
suppliers, we believe that we will be able to manage our total Year 2000
transition without any material effect on our results of operations or
financial condition.
Recent Accounting Pronouncements
In March 1998, the Accounting Standards Committee issued AICPA Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This statement provides guidance on accounting for
the costs of computer software developed or obtained for internal use and
identifies characteristics of internal use software as well as assists in
determining when computer software is for internal use. SOP 98-1 is effective
for fiscal years beginning after December 15, 1998, with earlier application
permitted. We do not expect the adoption of this SOP to have a material impact
on our financial statements.
In March 1998, the Accounting Standards Committee issued AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities." This statement
provides guidance on the financial reporting of start-up costs and organization
costs. It requires that the cost of start-up activities and organization costs
be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, with earlier application permitted. We do not expect the
adoption of this SOP to have a material impact on our financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
changes the previous accounting definition of derivatives which focused on
freestanding contracts, including, for example, options and forwards, futures
and swaps, expanding it to include embedded derivatives and many commodity
contracts. Under the statement, every derivative is recorded on the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. We do not anticipate
that the adoption of SFAS 133 will have a material impact on our financial
position or results of operations. We currently do not hold derivative
instruments or engage in hedging activities.
23
<PAGE>
BUSINESS
Overview
We provide business-to-business e-commerce and connectivity solutions to
employers and health plans for the purchase, eligibility administration and
premium payment of group health insurance benefits. Through our proprietary and
licensed technology, we facilitate the flow of eligibility and financial data
between employers and health plans. Our proven, Web-enabled and high volume
eligibility and financial data pipelines provide the critical connectivity
necessary for employers and health plans to communicate electronically. The
result is reduced administrative and medical costs for employers, reduced
administrative costs for health plans, and broader access and improved quality
of care for employees and dependents.
[Diagram]
This graphic depicts the group health insurance marketplace. There is a set
of three three-dimensional buildings labeled "Employers" located at the bottom
left corner of the graphic and a set of four three dimensional buildings set in
a row labeled "Health Plans" located at the top right corner. There is a thick
black arrow running from the bottom left corner to the top right corner of the
graphic labeled with white text "$600 Billion." The arrow points from the set
of buildings labeled "Employers" to the set of buildings labeled "Health
Plans." There are ten non-denominational bills suspended above, and set
parallel to, the arrow that cast shadows which tend to form a line
perpendicular to the arrow. Between the two sets of buildings and underneath
the suspended bills, there is a slightly skewed oval background which is
partially cut-off at the bottom right corner.
24
<PAGE>
Group Health Insurance Benefits
General Industry Background
Health care expenditures in the United States totaled more than $1.1 trillion
in 1997 and are expected to nearly double by 2007. Employers are a significant
purchaser of group health insurance benefits for their employees, retirees and
their dependents. Currently, more than half of the U.S. population receives
group health insurance benefits through their employers. In 1998, the group
health insurance benefits market generated more than $600 billion in services
and payments between the two trading partners, employers and health plans.
Employers can be segmented into three categories:
. large employers, such as Fortune 1000 companies and federal, state and
local governments;
. mid-size employers with 50 to 5,000 employees; and
. small employers with less than 50 employees.
In 1998, the average cost of providing coverage for active and retired
workers was approximately $4,168 per employee. We expect this average cost to
increase by 7% this year. In 1998, on average, each active employee contributed
approximately 25% of this amount through payroll deductions and co-payments. We
believe that this percentage will increase.
Broadly characterized, health plans consist of any organization that
reimburses physicians, hospitals, pharmacies and other direct providers of
health care. These organizations include:
. health maintenance organizations;
. preferred provider organizations;
. point of service plans;
. indemnity carriers;
. third party administrators; and
. pharmacy benefit managers.
Prior to the 1980s, employers typically purchased health benefits through a
single third-party administrator or national indemnity insurance carrier.
However, with the growth of managed care in the 1980s and 1990s, employers
began to purchase coverage through an increasing number of health plans because
the managed care system is comprised of numerous provider networks that have
limited geographic locations. Among HMOs alone, there are over 700 licensed
local health plans in the United States. Reflecting this proliferation of new
types of plans and payers, we estimate that each Fortune 500 employer today
contracts with an average of 30 different plans.
Purchasing, Eligibility Administration and Premium Payment Process
The purchasing, eligibility administration and premium payment process that
connects employers and health plans is complex, cumbersome, expensive and
highly inefficient. In particular, the financing arrangements are extremely
variable and complicated, making administration difficult. In general, health
plans either charge employers based on the number of projected enrolled
employees and their projected actuarial risk or, alternatively, pay providers
on behalf of the employer and then are reimbursed from the employer's account.
Therefore, depending on the financing arrangements, an individual employer is
subject to multiple administrative arrangements from multiple health plans.
The purchasing, eligibility administration and premium payment process
consists of two basic components commonly referred to as the "front-end" and
"back-end" processes.
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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 eligible to receive benefits under the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), in order to
accommodate diverse collection and payment processes for each category. This
data management is critical to accurate billing and reconciling of payments
between an employer and its health plans.
Eligibility data distribution. Eligibility data should be transferred on a
daily or weekly basis from employers to health plans and in a manner that
assures it will be correctly recorded. Today, however, this data is transferred
far less frequently and with little assurance that it will be correctly
interpreted. It is communicated electronically between legacy systems at best
and, at worst, via hard copy data entry. Ultimately, this eligibility data is
required when employees and dependents present themselves to physicians
26
<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. It is our belief, based on our experience, that employers
initially pay these multiple paper bills without auditing these bills. They
then manually reconcile the number of enrolled employees and their eligibility
status using their own internal data. Because of data discrepancies and delays
in transfer and billing cycles, the health plans' data and the employers' data
are rarely the same and thus ongoing payment disputes are common.
Factors influencing the marketplace and related issues
The purchasing, eligibility administration and premium payment process is
encumbered by inefficient procedures for rate setting, gathering and
transferring data and executing payment transactions. These inefficiencies,
together with other factors unique to health care delivery, result in the
following significant challenges:
Fragmented employers and health plans. There are more than 30,000 large and
mid-sized employers in the United States, many of which have a broadly
dispersed employee base frequently located in multiple sites across the United
States. In contrast, there are over 700 independent HMOs in the United States
today, which generally operate in a single or limited geographic area. As a
result, employers contract with multiple health plans to provide complete
geographic coverage for all of their employees.
Increasing group health insurance benefit costs. The average cost of employee
and retiree health care will increase by approximately 7% this year. As these
costs rise, we believe employers will seek more cost-effective health insurance
benefits solutions, will be more critical in their selection of health plans
and will demand a more competitive bidding process. In addition, we believe
they will need to be able to switch health plans when necessary, and they will
shift more costs to employees.
Complex data management. Health plans collect complex, detailed and dynamic
data in varying formats from multiple employers. Conversely, employers must
distribute this data in varying formats to multiple health plans. A failure to
accurately update eligibility and financial data in a timely fashion may result
in additional administrative costs and financial reconciliation problems and
can lead to employees and their dependents being wrongfully denied healthcare
services.
Varied data formats. Eligibility and financial data formats vary considerably
throughout the health care industry and typically are unique to each particular
employer and health plan. The collection, storage and transmission of this data
remains a labor-intensive, paper-based and error-prone process. As a result,
most health plans are unable to frequently update this data. Some efforts have
been made to develop a common standard. However, these standards do not meet
the complex needs of multiple purchasers and have not been widely accepted.
Varied systems platforms. Most employers use their own unique human resources
information systems and other benefit and payroll related systems to
communicate with multiple health plans. These health plans in turn rely on
their own unique legacy systems. Often, within a single employer or health
plan, there are several systems in place for collecting and storing this data
that are unable to communicate with one another. Each system has its own code
data rules, syntax and semantics, requiring substantial information technology
resources to interface.
Inefficient pricing, billing, reconciliation and settlement
processes. Employers must obtain rate quotes from health plans based on the
estimated risk of the employers' employee population. Rates are difficult to
compare because of differing plan designs and underwriting methodologies.
Employers receive bills from each of their health plans in different formats
and in some cases for different coverage periods. These bills are
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, we believe brokers must either embrace new technology or risk being
disintermediated.
Added complexity caused by government regulation. Numerous federal, state and
local laws and regulations govern the healthcare industry. These laws and
regulations change frequently. In recent years, the responsibilities of
employers to provide their employees with access to health care have increased
significantly. In particular, COBRA and HIPAA have added substantial burdens to
employers administering employee health insurance benefits. The proposed
legislation covering patients' bill of rights includes a provision that may put
health plans and employers at more risk of litigation. We believe this may have
the effect of pushing employers toward a defined contribution and voucher-based
approach to their employees' healthcare insurance benefits.
Opportunity for Business-to-Business E-Commerce Solutions for Group Health
Insurance Benefits
The ubiquitous nature, low cost and scalability of the Internet have created
new opportunities for conducting commerce. Recently, the widespread adoption of
intranets and the acceptance of the Internet as a business communications
platform has created a foundation for business-to-business e-commerce that
enables organizations to streamline complex processes, lower costs and improve
productivity. It is projected that e-commerce will grow from $50 billion in
revenue in 1998 to $1.3 trillion in 2003, and business-to-business e-commerce
will account for more than 74% of the value of e-commerce in the United States
in 2003.
Group health insurance benefits purchasing, eligibility administration and
premium payment transactions lend themselves to Internet processing since most
of these transactions are information-based and do not require delivery of
durable goods at the point of payment. However, unlike other e-commerce
opportunities, such as purchasing books or individual insurance, group health
insurance benefits transactions involve complex group insurance pricing,
complex product presentation, and ongoing data management between multiple
organizations.
We believe that business-to-business e-commerce technology solutions in this
market will require the following Internet-enabled components:
Front-end quote and enrollment:
. quote systems that provide quick rate information from multiple plans;
and
. annual and ongoing enrollment update tools that accommodate enrollment
in numerous health plans, and content engines that provide plan
descriptions, provider networks and rate information.
Back-end eligibility and financial exchange:
. exchange systems that transfer eligibility and financial data files
between trading partners and execute payment transactions with all
applicable parties.
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[Diagram]
This graphic depicts eBenx, Inc.'s relationship to various other organizations.
The top left corner of the graphic contains the following title: "The eBenX
group health insurance e-commerce exchange." There are a number of three-
dimensional icons in this graphic with each one casting a shadow. In the bottom
left corner of the graphic, there is one large building labeled "Employer";
underneath the title "The eBenX group health insurance e-commerce exchange"
there are a row of four servers labeled "Benefits Procurement Tool,"
"Enrollment and Eligibility Maintenance Tool," "Customer Service Tool," and
"Billing and Payment Tool"; and between these two sets of icons there is a
server labeled "Employer or Third-Party Human Resource Systems." In the top
right corner of the graphic, there is a row of four buildings entitled "Health
Plans"; in the bottom right corner of the graphic, there is a block figure
labeled "Employee"; and between the block figure and the row of buildings,
there is a computer terminal labeled in bold "eBenX.com." Between the building
labeled "Employer" and the block figure, there is a set of three block figures
labeled "Broker." Between the computer terminal and the row of four servers at
the top left corner of the graphic there is a server labeled "Data Editor and
Rules Translater."
The Computer terminal is connected to a number of icons with slightly curved
yellow arrows that point both ways. There is one labeled "Enrollment (through
Employer)" connecting the block figure labeled "Employee." There is one
unlabeled arrow connecting the set of block figures labeled "Broker." There is
one labeled "Eligibility Data, Invoice" connecting the server labeled
"Employer." There is one arrow for each of the buildings in the row of four
buildings entitled "Health Plans." Three of these arrows are labeled "Mapped
Eligibility Data," "Financial Payment and Reconciliation," and "Rate
Information," with the fourth arrow being unlabeled. There are four straight
unlabeled, blue arrows connecting the server labeled "Data Editor and Rules
Translater" with each of the four servers located underneath the title "The
eBenX group health insurance e-commerce exchange." Finally, there is a line
simulating a computer cable connecting the computer terminal with the server
labeled "Data and Rules."
Currently, there are numerous front-end Internet-based solutions that support
enrollment. However, we believe true e-commerce can only exist if there is
seamless end-to-end integration of the front- and back-end processes. We have
focused our efforts on developing our proprietary back-end eligibility and
financial data exchange platform, which we now are coupling with front-end
applications. As a result, we now are able to provide a fully integrated end-
to-end solution for group health insurance benefits e-commerce in addition to
our back-end exchange services. We currently do not plan to offer front-end
services on a stand alone basis.
Our Solution
We provide the business-to-business e-commerce and connectivity solutions for
the purchase, eligibility administration and premium payment of group health
insurance benefits. Our Internet-based enrollment, eligibility and financial
exchange addresses requirements of both front- and back-end processes. During
the first six years of our operations, we focused on data and financial
management systems and on building custom and electronic connections between
customers, such as PepsiCo, Bell Atlantic, Northwest Airlines, GE Capital,
Promus Hotels and R.R. Donnelley and the United States' largest regional and
local health plans. This effort has resulted in connectivity to health plans
that collectively serve approximately 85% of the managed care enrollment in the
United States.
In 1999, we began attaching this proprietary technology to multiple front-end
enrollment applications, including those offered by Healtheon,
PricewaterhouseCoopers and Watson Wyatt. It is this front-end/back-end
continuity that delivers the end-to-end business-to-business e-commerce
solutions for group health insurance benefits.
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<PAGE>
Value Proposition to Trading Partners
Our solution provides value to the trading partners through the collection,
management and storage of employee enrollment, eligibility and financial data
and the ongoing transmission of this data to health plans. Additionally, we
manage and execute the reconciling of payments between trading partners.
For employers, our e-commerce solution:
. streamlines the enrollment process by moving it from paper or
telephone voice response systems to self-service Internet
applications;
. reduces administrative costs associated with disseminating basic
health plan information to employees, the enrollment transaction,
and the management and transfer of data among parties;
. shifts the employer's responsibility to us for transmitting accurate
enrollment and eligibility information to a variety of health plans
and gives all trading partners access to real time eligibility via
Web-enabled tools;
. eliminates the traditional paper-based and labor-intensive payment
reconciling process used by both trading partners and delivers
automated, accurate and retroactively adjusted payments to health
plans;
. allows more choice of plans by lowering the barriers to entry for
health plans thereby significantly reducing the cost of switching
between competing health plans;
. reduces the cost of procuring health benefits by increasing health
plan competition in the bidding process; and
. increases the ability to attract and retain employees through more
diverse benefit offerings.
For health plans, our e-commerce solution:
. improves timeliness and accuracy and lowers the cost of receiving
eligibility and financial data;
. reduces the administrative burden associated with receiving
eligibility and financial data;
. provides improved customer service and provider claims adjudication
through twenty-four hour, seven day a week Web-enabled access to
employers' eligibility and financial data;
. reduces distribution costs for the delivery of health plan
information to employees; and
. opens new channels for them to distribute products and services over
the Web.
For group health insurance brokers, our e-commerce solution:
. allows access to technology without significant capital expense;
. moves services from a paper process to a more efficient Web-based
solution;
. allows them to more easily offer multiple health plans to employer
clients;
. provides significant differentiation from competing brokers; and
. allows them to retain a service position in a disintermediating
marketplace by increasing customer retention and market share.
For employees, our e-commerce solution:
. provides more opportunity for choice of plans and, through more
competitive pricing, lower costs;
. provides Web-based enrollment and plan information; and
. improves quality of services by reducing eligibility data errors
through the more timely and accurate transmission of eligibility
data to health plans which in turn transmit the data to doctors and
other health care providers.
Products and Services
Since 1993, we have been servicing the back-end processing requirements of
our Fortune 1000 customers using our proprietary BEN-NET technology platform.
This platform provides a connective infrastructure and neutral eligibility and
financial data exchange mechanism. Because we represent Fortune 1000 customers,
health plans have supported our efforts to build electronic connections to
their legacy systems.
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<PAGE>
We are able to receive complex and dynamic data from employers and transmit
this data to fragmented health plans. Our core eligibility data and financial
exchange technology incorporates the business rules of each of the relevant
trading partners, as well as the format translations needed to automatically
reconcile and pay bills. Our solution creates a standard for group health
connectivity without causing employers or health plans to make major changes to
their disparate systems. These changes, if required, usually consist only of
changes to their Internet and modem capabilities. Our technology enables the
employer to send data in whatever format and via whatever media the employer
chooses. Once received, our system edits and translates the data into a
standard format. To facilitate connectivity to the health plans, our systems
then translate that data into the format that is compatible with each of the
computer systems of the individual health plans utilized by our employer
customer. This translated information is then transmitted in whatever medium is
acceptable to the health plan. Our BEN-NET system electronically stores more
current eligibility data than the data held by the health plans to which we are
connected, which allows us to accurately bill the parties concerned.
In 1999, we extended our suite of product offerings to support the data
management, communications and online transaction requirements for successful
group health insurance benefits e-commerce. We have done this by partnering
with other front-end application developers and through internal development
efforts. We will provide end-to-end processing for employers, brokers, health
plans and employees through which they will exchange information and transact
business. Revenues generated from our exchange services were $3,467,000,
$5,432,000, $7,742,000, $4,828,000 and $9,193,000 for the years ended December
31, 1996, 1997 and 1998 and the nine months ended September 30, 1998 and 1999,
respectively.
This Internet-based solution will bring together the components necessary for
full transaction group health e-commerce: proposal requests, rate quotes,
online enrollment, eligibility management and financial exchange services.
Our Products and Services
<TABLE>
<CAPTION>
Process Front or
Product/Service solution Status Back-end
--------------- -------- ------ --------
<C> <S> <C> <C>
eBenX Import Export Two sets of In service Back-end
(BEN-NET platform) data
pipelines: one
to front-end
applications
and employer's
human resource
information
systems and
the other to
health plans
and payroll
companies
- --------------------------------------------------------------------------------
eBenX Financial eBenX In service Back-end
(BEN-NET platform) generated bill
to health
plans and
consolidated
invoice to
employer
supports full
financial
distribution;
self-insured
management;
automatic
payment
reconciliation
and
consolidated
premium
management
- --------------------------------------------------------------------------------
eBenX Inquiry Internet-based In service Back-end
(BEN-NET platform) real time,
enrollment
eligibility
database
access tool
- --------------------------------------------------------------------------------
eBenX Data Access Internet- In development: Back-end
(BEN-NET platform) based, real .Prototype scheduled for 12/1/99
time .Partial production planned for pilot
reporting; groups early-2000
standard .Full production planned to begin thereafter
consolidated
reports;
online
financial
reports
- --------------------------------------------------------------------------------
eBenX Enroll and Internet-based In service via license from Healtheon (initial Front-end
Member Maintenance employee and term of license is through 1/31/03).
human resource Proprietary tool also in development:
self-service .Proprietary tool currently is used by one
benefit of our clients
election; .Redesign of this tool is in process and
Internet-based is focused on mid-market
online daily .Prototype scheduled for mid-2000
manager of .Production planned for late-2000
employee adds,
deletes and
coverage
changes from
life events
- --------------------------------------------------------------------------------
eBenX RFP Internet-based In development: Front-end
census .Concept and design has been completed
acquisition .Prototype available
and proposal .Coding commenced on 11/1/99
request tools .Production planned for mid-2000
to support the
competitive
bidding
process
</TABLE>
We sell our products and services in selected packages designed to meet the
needs of each customer.
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<PAGE>
Health Benefit Plan Procurement Services
We provide health benefit plan procurement services to a number of our
Fortune 1000 customers. We undertake these services on a project basis. We
assist and advise our customers on selection of potential suppliers,
preparation of requests for proposals, evaluation of proposals, and rate
negotiations. Approximately 20 of our employees engage in delivering these
services. Our principal customers for these services are General Electric,
Eastman Kodak and Bell Atlantic. We view these activities as a complement to
exchange services. In addition, we gain valuable knowledge regarding market
conditions and processes from providing these services. Revenues generated from
our procurement services were $893,000, $1,661,000, $2,380,000, $1,841,000 and
$2,553,000 for the years ended December 31, 1996, 1997 and 1998 and the nine
month periods ended September 30, 1998 and 1999, respectively.
Our Strategy
Our objective is to be the leading provider of Internet-based business-to-
business e-commerce for the purchase, eligibility administration and premium
payment of group health insurance benefits. Key elements to our strategy
include the following:
Offer end-to-end e-commerce solution. We will continue to offer an end-to-end
e-commerce solution by connecting with front-end applications and developing
our own front-end applications where appropriate. In the Fortune 1000 and mid-
size employer markets, front-end applications are being deployed by human
resources information systems platforms, by human resources record keeping
service companies, and enrollment software companies. We will aggressively
pursue front-end application providers to together offer a complete solution to
employers by linking our back-end eligibility and financial exchange services
with their front-end applications. In addition, through licensed technology
from Healtheon and our internal development efforts, we are deploying our own
front-end applications.
Increase penetration of the Fortune 1000 market. We will continue to focus on
marketing our services to Fortune 1000 companies. We demonstrate to these
companies the administrative efficiencies, cost savings and participant
satisfaction that we provide. We now provide services to 20 of the
approximately 1,500 U.S. companies that have more than 5,000 employees,
including PepsiCo, Bell Atlantic, Northwest Airlines, General Electric, Eastman
Kodak, Chevron, Dayton Hudson, Georgia-Pacific and Reader's Digest. The
remaining companies provide us with substantial growth opportunities.
Expand service offerings to existing Fortune 1000 customers. We intend to
continue to aggressively expand our service offerings to our existing Fortune
1000 customers. We have been successful in increasing our revenues from most of
our current Fortune 1000 clients through an expanded level of services provided
to additional divisions, subsidiaries and locations of those clients.
Expand to the mid-size employer market. We intend to leverage our technology
through relationships with insurance brokers to penetrate the mid-size employer
market. Mid-size employers typically purchase group health insurance benefits
using insurance brokers.
Pursue key strategic relationships to further enhance our service offering
and client base. We intend to pursue key strategic relationships, including
partnerships and acquisitions. These partnership and acquisitions candidates
could include companies that provide payroll, front-end enrollment, voluntary
benefits and similar services. We believe that making strategic acquisitions
and developing strategic relationships will enable us to enhance our service
offerings and expand our client base.
Develop new products. We intend to use our market knowledge and experience to
develop new products to fully leverage the market channels opened by the
implementation of our technology. For example, we are in the prototype stage of
development of Preferred Plans.com, a prepackaged group health insurance
solution for multi-site, multi-state employers that will provide mid-size
employers with rate quotes and access to best-practice, best-value health plans
throughout the United States. This will give the health plan supplier access to
the purchaser via the Internet for the first time. We already have identified
several health plans that we believe
32
<PAGE>
may be interested in forming strategic partnerships with us for this
development-stage product. In addition, we are designing our technology to
support the sophisticated data and financial reconciling requirements implicit
in the post-enrollment risk-adjusted payments to health plans that would result
from defined contribution and voucher systems that may constitute the future of
the health care benefit system.
Customers
The following is a list of our customers who provided 10% or more of our
revenue during 1998.
Bell Atlantic Corporation
Northwest Airlines Corporation
PepsiCo, Inc.
The following is a representative list of our other major customers.
American Medical Response, Inc. GE Capital Services Corporation
American Red Cross General Electric Company
Bass Hotels & Resorts, Inc. Georgia-Pacific Corporation
Benefits Alliance, LLC KPMG LLP
Blue Cross Blue Shield Association Promus Hotel Corporation
Chevron Corporation R.R. Donnelley & Sons Company
Dayton Hudson Corporation Reader's Digest Association, Inc.
Eastman Kodak Company W.W. Grainger, Inc.
Federated Department Stores, Inc. White Consolidated Industries Inc.
In 1999 to date, twelve customers have accounted for approximately 90% of our
revenue. In 1996, Northwest Airlines and Johnson Controls, Inc. accounted for
22.6% and 17.7%, respectively, of our revenue. In 1997, Northwest Airlines,
PepsiCo, Johnson Controls and General Electric Company accounted for 14.5%,
16.1%, 12.8% and 10.4%, respectively, of our revenue. In 1998, Northwest
Airlines, PepsiCo and Bell Atlantic accounted for 14.0%, 19.1% and 17.1%,
respectively, of our revenue. From January 1, 1999 through September 30, 1999,
Bell Atlantic and PepsiCo accounted for 27.2% and 20.5%, respectively, of our
revenue.
Connected Health Plans
The following is a representative list of the health plans to which we have
built customized eligibility and financial data pipelines.
Aetna, Inc. Plans Kaiser Foundation Health Plan
Blue Cross Blue Shield Plans Merck-Medco
CIGNA Health Plans, Inc. PacifiCare Health Systems
Delta Dental UnitedHealth Group Corporation Plans
Harvard Pilgrim Health Care More than 25 Blue Cross/Blue Shield
Plans
Sales and Marketing
Our sales and marketing staff is organized according to our three key
targeted customer segments: Fortune 1000, brokers for mid-size employers, and
human resource service and systems companies. Our sales force targets
significant potential customers in the Fortune 1000 and mid-size employer
segments. Senior management plays an active role in our sales and marketing
efforts.
Due to the technical nature of our products and services, our typical sales
cycle in the Fortune 1000 market is four to six months and usually involves a
competitive bidding process, which starts with a request for proposal from the
employer. The employer often indicates that this request for proposal has been
sent to other benefits administration service companies, which may or may not
submit a proposal to the employer. Our sales process also is somewhat seasonal
because most large employers undergo the open enrollment process in the
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<PAGE>
fall of each year. We obtain approximately 75% of our customer commitments
during the months of February through May. The mutual intent is that our
systems will be integrated with the customer's system and become operational
prior to the open enrollment period later that year.
Fortune 1000. We sell directly to the Fortune 1000 market. As of October 31,
1999, we employed one senior vice president in charge of sales and marketing to
this market. He is supported by three sales people. We expect to hire two
additional sales personnel in the next several months. In addition, this senior
vice president is supported by two marketing assistants who assist him with
trade shows and developing prospective clients, and by a vice president and
four strategic procurement consultants who spend a portion of their time cross-
selling administrative services to the Fortune 1000 market.
Brokers for Mid-size Employers. We utilize existing brokerage distribution
systems to penetrate the market of mid-size employers. As of October 31, 1999,
we employed three senior staff members who are specifically focused on
developing our sales and marketing efforts to brokers. We intend to hire two
additional marketing employees to assist them and to further develop our broker
distribution network. We believe that emphasizing our collection and payment
capabilities to interface with numerous health plans will be a critical factor
in winning acceptance in this market.
Human Resource Service and Systems Companies. We partner with human resource
service and systems companies to re-sell our products and services as a
component of the products and services that they offer to employers. This
effort is being led by one of our co-founders. We expect to add personnel to
this area as our partnership efforts develop.
Customer Support
We believe a high level of customer support is necessary to broaden the
acceptance of our products and services. We provide a wide range of customer
support services through our call service center, our account managers, our
customer service staff and an e-mail help desk. By providing consolidated
customer service through our service center, we eliminate the need for our
customers to maintain numerous contact lists across benefit vendors in order to
resolve enrollment, eligibility and billing issues. We provide each customer
with a telephone number for it and its participants to use regarding enrollment
choices, grievances and benefit clarification. Our service center is open from
7:00 a.m. to 7:00 p.m. Central Time, Monday through Friday. When the service
center is closed, calls for existing clients are forwarded to our voice mail
system. We also offer Internet-based support services that are available 24
hours a day, 7 days a week. Finally, we use proprietary automated tracking
systems to ensure resolution of all inquiries. As of October 31, 1999, we had
38 employees in customer support functions.
Competition
The market for health care administration services is intensely competitive,
rapidly evolving and subject to sudden technological change. Many of our actual
and potential competitors have announced or introduced solutions that compete,
at least in part, with our products and services. We believe that the principal
competitive factors in this market are health and managed care expertise, data
integration and transfer technology, health insurance benefits processing
technology, customer service and support and price. We believe, based on our
experience, our products and services are competitive with respect to these
factors and that no other competitor has the Internet-based technology
capabilities combined with managed care expertise that we have. Further, we
believe we are currently the only participant in this market with both the
connectivity link between employers and health plans and our range of services.
However competitors may develop similar products or we may not be able to
successfully market our products or successfully develop and introduce products
that are less costly than or superior to those of our competitors.
We compete with administrative service providers and benefits consultants
with administrative capabilities. We also compete with the internal information
systems departments of the Fortune 1000 companies that perform their own health
care administration services. In the mid-size employer market, we compete with
other
34
<PAGE>
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 ability to update, transmit and
permanently store eligibility data at both the employee and dependent level
have provided additional benefit to our Fortune 1000 clients. We have
incorporated a number of enhancements to BEN-NET in three subsequent major
releases.
BEN-NET and its fully integrated attendant applications are delivered using a
multi-tier information system comprised of multiple midrange servers, PCs and
workstations. The midrange servers, Sun Enterprise Servers running Sun's
Solaris Unix operating system, are used to provide middle-tier application
component logic and as a platform for eBenX's relational database management
system. Batch and end-user local and Internet applications employ a number of
different languages, primarily PowerBuilder, C, and Java.
Our production processing environment, maintained at our Minneapolis
facility, is composed of multiple servers, permitting maximum flexibility in
organizing and protecting client data. The environment in which our database
runs, UNIX, is a highly scalable platform. Given this platform, we are able to
add capacity relatively easily, we can also physically organize our databases
on different servers to optimize the processing performed on each server. For
example, an entire production server can be dedicated to a single large client
if this client has extensive processing requirements. Within this processing
environment, we establish separate physical production databases for each of
our Fortune 1000 customers to ensure that customer data remains confidential
and secure. This also ensures that it maintains its integrity. In so doing, we
are able to provide customer data access to customer specified user groups.
Secure, real time Internet-based customer and health plan access to source data
brings trading partners into alignment and reduces support costs.
We believe our proprietary data import and export management application is a
key differentiator for our services. Electronic Vendor Interface Management
(EVIM) delivers the ability and flexibility to receive and transmit data
between trading partners. This application incorporates not only a library of
health plan data maps, but also a deep knowledge of the business rules that
must be incorporated in the complex managed care market.
Electronic imports and exports (an average of 1,000 files per week with each
file ranging from 500-50,000 records) are managed via EVIM, ensuring automated,
timely distribution of data, payments, and reports to clients and vendors. This
precise management of the flow of data also supports a key function of BEN-NET,
which is the dynamic application of customer-related business rules to
customer-delivered eligibility data, streamlining both health plan delivery of
service and payment.
Redundancy, System Backup, Security and Disaster Recovery
We believe our facilities and operations include sufficient redundancy, back-
up and security to ensure minimal exposure to systems failure or unauthorized
access. A disaster recovery plan has been prepared and will be put in place
should the need arise. Incremental backups of both software and databases are
performed on a daily basis and a full system backup is performed weekly. Backup
tapes are stored at an offsite location
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<PAGE>
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. As a result, we have invested heavily in the
research and development of our products and services, spending approximately
$863,000, $1,242,000 and $1,519,000 in 1996, 1997 and 1998, respectively. We
typically enter into non-disclosure and confidentiality agreements with our
employees and distributors with access to sensitive information. These
agreements may be breached and we may not have adequate remedies for any
breach. Others may acquire substantially equivalent proprietary technologies or
otherwise gain access to our proprietary technologies. In addition, any
particular technology may not be regarded as a trade secret under applicable
law. As a result of the reliance that we place on our trade secrets, loss of
our trade secret protection could harm our business and results of operations.
We have no registered patents or pending patent applications. The steps taken
by us to protect our proprietary rights may not be adequate to prevent
misappropriation of our technology or independent development or sale by others
of software products with features based upon, or otherwise similar to, our
products.
Although we believe that our technology has been independently developed and
that none of our technology or intellectual property infringes on the rights of
others, third parties may assert infringement claims against us in the future.
If infringement were established, we might be required to modify our products
or technologies or obtain a license to permit our continued use of those
rights. We may not be able to do either in a timely manner or upon acceptable
terms and conditions, and any failure to do so could harm our business and
results of operations. In addition, any future litigation necessary to protect
our trade secrets, know-how or other proprietary rights, to defend ourselves
against claimed infringement of the rights of others or to determine the scope
and validity of the proprietary rights of others could result in substantial
cost to us and diversion of our resources. Adverse determinations in any
litigation or proceedings also could subject us to significant liabilities to
third parties and could prevent us from producing, selling or using our
products or technologies. We may not have the resources to defend or prosecute
a proprietary rights infringement claim or other action.
Government Regulation
The healthcare industry is highly regulated by state, federal and local laws
and regulations, which are subject to change. Currently, few of these laws and
regulations apply directly to our business but rather apply primarily to health
plans or employers. For example, the confidentiality of patient records and the
circumstances under which records may be released for inclusion in our
databases may be subject to substantial regulation by state governments. These
state laws and regulations govern both the disclosure and the use of
confidential patient medical records. Although compliance with these laws and
regulations currently is principally the responsibility of health care
providers and we typically do not include confidential patient medical
information in our databases, these regulations may be extended to cover our
business and the eligibility and other data that we do include in our
databases. Additional legislation governing the dissemination of medical
records has been proposed at both the state and federal level. This legislation
may require holders of these records to implement security measures that may
require substantial expenditures by us. Changes to federal, state or local laws
may materially restrict employers' and health plans' ability to store and
transmit medical records using our products and services.
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<PAGE>
Laws and regulations may be adopted with respect to the Internet or other on-
line services covering issues such as user privacy, pricing, content,
copyrights, distribution and characteristics and quality of products and
services. The adoption of any additional laws or regulations may impede the
growth of the Internet or other on-line services. This could decrease the
demand for our products and services and increase our cost of doing business.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing property ownership, sales taxes and other forms of
taxation, libel and personal privacy is uncertain and may remain uncertain for
a considerable length of time.
HIPAA mandates the use of standard transactions, identifiers, security and
other provisions by the year 2000. We have designed our products and services
to comply with HIPAA. However, any change in federal standards would require us
to expend additional resources.
Finally, our function as a conduit for payment by employers to health plans
may subject us to the ERISA. ERISA imposes fiduciary duties on employers and
health plans with respect to payments made on behalf of participants. Although
we believe our role in the payment process is a purely mechanical one, it is
possible that these fiduciary duties could be deemed to apply to us. In that
event, we may become subject to greater liability with respect to these
payments and may experience higher operating costs in order to comply with
these regulation.
Properties
Our offices are located in Minneapolis, Minnesota where we lease or sublease
approximately 37,100 square feet of office space. Our lease for 29,630 square
feet of this space expires on April 30, 2000 and the lease for the remainder
expires on February 28, 2003. We believe our existing facilities are adequate
to meet our needs until the expiration of our principal lease. Any future
growth during this period can be accommodated through the leasing of additional
or alternative space near our current facilities. Due to our current sales and
marketing plan, we anticipate the need for additional office space in the year
2000 and we currently are negotiating to lease approximately 70,000 square feet
of office space located in the Minneapolis metropolitan area upon the
expiration of our principal lease on April 30, 2000.
Employees
As of October 31, 1999, we had 263 full-time employees, including 90 in
information technology, 89 in operations, 33 in account management, 10 in sales
and marketing, 24 in consulting and 17 in administration and executive
management. We have never had a work stoppage and none of our employees
currently are represented under collective bargaining agreements. We consider
our relations with our employees to be good. We believe that our future success
will depend in part on the continued service of our senior management and key
technical personnel and our ability to attract, integrate, retain and motivate
highly qualified technical and managerial personnel. This is particularly true
for sales and marketing personnel because of our plans to significantly expand
our sales and marketing groups. Competition for qualified personnel in our
industry and geographical location is intense. We may not continue to be
successful in attracting and retaining a sufficient number of qualified
personnel to conduct our business in the future.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table provides information as of October 31, 1999 regarding our
executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Mark W. Tierney... 51 Chairman and Director
John J. Davis..... 40 Chief Executive Officer and Director
Michael C.
Bingham......... 37 Senior Vice President, Business Development and Director
Scott P.
Halstead........ 36 Chief Financial Officer and Secretary
Paul V. Barber.... 38 Director
James P. Bradley.. 48 Director
Daniel M. Cain.... 54 Director
William J. Geary.. 40 Director
John M. Nehra..... 51 Director
</TABLE>
Mr. Tierney is one of our co-founders. He has been our Chairman since
September 1993 and a member of our board of directors since September 1993.
Prior to founding our company, Mr. Tierney founded a joint venture company with
UnitedHealth Group Corporation which specializes in patient demand management,
patient advocacy and case management services to Fortune 500 companies and
served as its President and Chief Executive Officer from July 1985 to August
1993. From July 1983 to July 1985, Mr. Tierney served as Senior Vice President
of Medical Services for Allina Health System, the largest HMO in the
Minneapolis-St. Paul metropolitan area. Prior to July 1983, he held management
positions with CIGNA Health Plans, Inc. and Kaiser Permenente Southern
California. Mr. Tierney holds a master's degree in Hospital and Health Care
Administration from the University of Minnesota and today serves on their
clinical faculty.
Mr. Davis has been our Chief Executive Officer since April 1999 and a member
of our board of directors since June 1999. From 1996 to 1999, Mr. Davis served
as President and Chief Executive Officer of MedManagement, L.L.C., a national
and leading provider of pharmacy management and medication use consulting
services to hospitals and health systems. Prior to his work with MedManagement,
L.L.C., Mr. Davis served for ten years in a number of operations and executive
management positions at UnitedHealth Group Corporation. Most recently, from
1994 to 1996, Mr. Davis served as President of Healthmarc, a UnitedHealth Group
Corporation specialty company providing innovative managed care services to
employers with populations resident outside health plan service areas. Mr.
Davis holds a bachelor's degree from St. John's University, Collegeville,
Minnesota.
Mr. Bingham is one of our co-founders. He has been our Senior Vice President,
Business Development since August 1999 and a member of our board of directors
since September 1993. In addition, Mr. Bingham has held leadership roles in
many aspects of our company since its inception. Prior to founding our company,
Mr. Bingham held various management positions at UnitedHealth Group
Corporation, McKinsey & Company and Maxicare Health Plans. Mr. Bingham holds an
M.B.A. degree from the Wharton School at the University of Pennsylvania and a
bachelor's degree in economics from Claremont McKenna College.
Mr. Halstead has been our Chief Financial Officer since February 1997. Prior
to joining our company, he spent six years with The Dun & Bradstreet
Corporation in various financial management positions in North America, Europe
and Asia. Most recently he was Chief Financial Officer of an operating division
of The Dun & Bradstreet Corporation. Mr. Halstead holds an M.B.A. degree from
the Wharton School at the University of Pennsylvania and a bachelor's degree in
Industrial Engineering from Northwestern University.
Mr. Barber has been a director since June 1999. Mr. Barber is a Managing
Member of JMI Associates III, LLC, the general partner of JMI Equity Fund III,
L.P., a venture capital limited partnership. From 1990 to 1998, he was Managing
Director and head of the software investment banking practice of Deutsche Bank
Alex.
38
<PAGE>
Brown, an investment banking firm. Mr. Barber serves on the board of directors
of several privately held companies. Mr. Barber holds an M.B.A. from Harvard
Business School and a bachelor's degree in Economics from Stanford University.
Mr. Bradley has been a director since 1997. Mr. Bradley has been Chairman and
Chief Executive Officer of Abaton.com, Inc., a Web-based healthcare information
company, since January 1997. From 1989 to October 1995, Mr. Bradley was Chief
Information Officer of UnitedHealth Group Corporation. From October 1995 to
January 1997, Mr. Bradley was President of Health Systems Integration, Inc., a
healthcare software information company. Mr. Bradley holds an M.S. degree in
Bio Statistics and Data Processing and a bachelor's degree in Genetics and
Statistics from the University of Illinois.
Mr. Cain has been one of our directors since March 1999. Mr. Cain is
President and Chief Executive Officer of Cain Brothers, LLC, a healthcare
investment bank which has served the financial and capital needs of the health
and medical industry since 1982, and a Manager of CB Health Ventures, L.L.C.
Mr. Cain is a director of New England Funds, a family of mutual funds and
Universal Health Realty Income Trust, a health care REIT. Mr. Cain is a trustee
of the Norman Rockwell Museum and Sharon Hospital and the National Committee
for Quality Health Care. Mr. Cain holds an M.B.A. degree from Columbia
University and a bachelor's degree in American Civilization from Brown
University.
Mr. Geary has been a director since June 1998. Mr. Geary has been a Principal
of North Bridge Venture Partners, L.P. since its inception in March 1994 and a
General Partner of North Bridge Venture Partners II, L.P., North Bridge Venture
Partners III, L.P. and North Bridge Venture Partners IV, L.P. since their
inceptions in September 1996, August 1998 and October 1999, respectively. Mr.
Geary also is a director of several private technology companies. Mr. Geary
holds a bachelor's degree from Boston College and is a C.P.A.
Mr. Nehra has been a director since 1996. Since 1989, Mr. Nehra has been the
managing general partner of Catalyst Ventures, Limited Partnership, a venture
capital limited partnership. Since December 1993, Mr. Nehra has also been a
general partner of New Enterprise Associates VI, VII, and VIII Limited
Partnerships, venture capital limited partnerships. Mr. Nehra has served as
Chairman of the Board of Directors of Celeris Corporation, a biomedical
contract research service company since July 1997 and as a director of Celeris
since November 1992. Mr. Nehra also has served as Chairman of the Board of
Iridex Corporation, a medical device company, since 1994, and as a director
since 1989. Mr. Nehra is also a director of several privately held companies.
Mr. Nehra holds a bachelor's degree from the University of Michigan.
Board Composition
Following this offering, our board of directors will consist of eight
directors divided into three classes with each class serving for a term of
three years. At each annual meeting of shareholders, directors will be elected
by the holders of common stock to succeed those directors whose terms are
expiring. Messrs. Geary and Nehra will be Class I directors whose terms will
expire in 2000; Messrs. Barber, Bradley and Cain will be Class II directors
whose terms will expire in 2001; and Messrs. Bingham, Davis and Tierney will be
Class III directors whose terms will expire in 2002. We intend to replace one
or two current directors with outside directors after this offering as soon as
we identify suitable candidates.
Board Committees
Our board of directors has established a compensation committee and an audit
committee.
Messrs. Bradley, Cain and Nehra are members of our compensation committee and
Mr. Nehra is its chairman. Our compensation committee makes recommendations to
the board of directors concerning executive compensation and administers our
stock option plans and our Employee Stock Purchase Plan.
Messrs. Barber, Geary and Nehra are members of our audit committee and Mr.
Geary is its chairman. Our audit committee reviews the results and scope of the
audit and other accounting related services and reviews our accounting
practices and systems of internal accounting controls.
39
<PAGE>
Director Compensation
We currently do not pay any compensation to directors for serving in that
capacity. We reimburse directors for out-of-pocket expenses incurred in
attending board meetings. Our board of directors has the discretion to grant
options to non-employee directors pursuant to our stock option plans. Mr.
Bradley currently holds options to purchase 46,695 shares of our common stock.
Compensation Committee Interlocks and Insider Participation
Messrs. Bradley, Cain and Nehra currently serve on the compensation
committee. None of these individuals has at any time been an officer or
employee of ours. Prior to formation of the compensation committee, all
decisions regarding executive compensation were made by the full board of
directors. No interlocking relationship exists between the board of directors
or the compensation committee and the board of directors or compensation
committee of any other company, nor has any interlocking relationship existed
in the past.
On March 19, 1996, we sold a total of 636,945 shares of our Series B
Preferred Stock at a purchase price of $7.065 per share, including 424,630
shares to New Enterprise Associates VI, Limited Partnership. On May 3, 1999, we
sold a total of 563,525 shares of our Series C Preferred Stock at a purchase
price of $9.76 per share, including 307,377 shares to CB Healthcare Fund, L.P.
and 102,459 shares to New Enterprise Associates VI, Limited Partnership. On
June 9, 1999, we sold a total of 512,295 shares of our Series C Preferred Stock
at a purchase price of $9.76 per share, including 102,459 shares to CB
Healthcare Fund, L.P. These share issuances do not reflect the three-for-one
stock split effective immediately prior to this offering.
Mr. Nehra is a general partner of NEA Partners VI, Limited Partnership, which
is the general partner of New Enterprise Associates VI, Limited Partnership.
Mr. Cain is a Manager of CB Health Ventures, L.L.C. which is the general
partner of CB Healthcare Fund, L.P. We believe that the shares issued in the
transactions described above were sold at the then fair market value of the
shares and that the terms of these transactions were no less favorable than we
could have obtained from unaffiliated third parties.
Indemnification Matters and Limitation of Liability
Minnesota law and our bylaws provide that we will, subject to limitations,
indemnify any person made or threatened to be made a party to a proceeding by
reason of that person's former or present official capacity with us. We will
indemnify that person against judgments, penalties, fines, settlements and
reasonable expenses, and, subject to limitations, we will pay or reimburse
reasonable expenses before the final disposition of the proceeding.
As permitted by Minnesota law, our articles of incorporation provide that our
directors will not be personally liable to us or our shareholders for monetary
damages for a breach of fiduciary duty as a director, subject to the following
exceptions:
. any breach of the director's duty of loyalty to us or our shareholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. liability for illegal distributions under section 302A.559 of the
Minnesota Business Corporation Act or for civil liabilities for state
securities law violations under section 80A.23 of the Minnesota
statutes;
. any transaction from which the director derived an improper personal
benefit; and
. any act or omission occurring prior to the effective date of Article
VIII of our articles of incorporation.
In addition, the employment agreements with our officers that are described
in this prospectus require us, to the extent permitted by law, to indemnify
each of these officers and to obtain directors' and officers' liability
insurance coverage in the amount that our board of directors determines to be
appropriate.
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 31,200
Michael C. Bingham
Senior Vice President,
Business Development.. $104,000 $28,580 23,400
Scott P. Halstead
Chief Financial
Officer and
Secretary............. $120,000 $12,000 11,700
</TABLE>
- --------
. The aggregate amount of perquisites and other personal benefits, securities
or property received by each named executive officer was less than either
$50,000 or 10% of the total annual salary and bonus reported for each
respective named executive officer.
. John Davis became Chief Executive Officer in April 1999. During the fiscal
year ended December 31, 1998, Mark Tierney was Chairman and Chief Executive
Officer. Michael Bingham has been Senior Vice President, Business
Development since August 1999. During the fiscal year ended December 31,
1998, Mr. Bingham was President.
41
<PAGE>
The following table provides information concerning the stock option grants
made to each of our named executive officers during the fiscal year ended
December 31, 1998.
Option Grants in Fiscal 1998
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------
Number of
Securities Percentage of Total
Underlying Options Granted to
Options Employees in Fiscal Exercise Price Expiration
Name Granted 1998 ($/Share) Date
- ---- ---------- ------------------- -------------- ----------
<S> <C> <C> <C> <C>
Mark W. Tierney....... 31,200 5.01% $0.75 6/10/2008
Michael C. Bingham.... 23,400 3.76% $0.75 6/10/2008
Scott P. Halstead..... 11,700 1.88% $0.75 6/10/2008
</TABLE>
- --------
. The above options have a 10-year term from the grant date, and were fully
vested and exerciseable as of the grant date. All stock options were granted
with an exercise price equal to the fair market value of the common stock as
determined by our board of directors on the date of grant.
. The data presented in the Percentage of Total Options Granted to Employees
in Fiscal 1998 column based on an aggregate of 622,950 shares of common
stock subject to options granted to our employees during fiscal 1998.
The following table provides information concerning the exercise of options
to purchase common stock by our named executive officers during fiscal 1998 and
the number and value of unexercised stock options held by these executive
officers as of December 31, 1998.
Aggregated Option Exercises in Fiscal 1998 and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year-End at Fiscal Year-End
----------------------- -------------------------
Shares
Acquired on
Name Exercise Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Mark W. Tierney......... -- 75,630 -- $33,174 $ --
Michael C. Bingham...... -- 27,105 -- $ 2,766 $ --
Scott P. Halstead....... -- 36,450 65,250 $ 3,713 $9,788
</TABLE>
- --------
. The value of unexercised in-the-money options is based on a value of $0.75,
the fair market value of our common stock as of December 31, 1998 as
determined by our board of directors, less the applicable per share exercise
price multiplied by the number of shares issued upon exercise of the option.
Benefit Plans
1993 Stock Option Plan
Our 1993 Stock Option Plan provides for the grant of options to purchase
shares of common stock and other long-term incentive awards to any of our full
or part-time employees, officers, directors, consultants and independent
contractors. Options granted under the 1993 Stock Option Plan may qualify as
incentive stock options under the Internal Revenue Code of 1986, or may be
options that do not qualify as incentive stock
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 3,900,000 shares of common stock for
issuance under the 1993 Stock Option Plan. The 1993 Stock Option Plan is
administered by our compensation committee. The committee has the discretion to
select the people to whom options are granted and to establish the terms and
conditions of each stock option, subject to the provisions of the 1993 Stock
Option Plan and to any special provisions approved by our board of directors.
The exercise price of an incentive stock option granted under the 1993 Stock
Option Plan must not be less than 100% of the fair market value of the common
stock on the date the option is granted. In the event that a proposed optionee
owns more than 10% of our common stock, any incentive stock option granted to
that optionee must have an exercise price not less than 110% of the fair market
value of our common stock on the grant date. The term of each option is
determined by the compensation committee. However, the term of an incentive
stock option may not exceed 10 years from the date of grant and the term of a
non-qualified stock option may not exceed 15 years from the date of grant. In
the case of an incentive option granted to an owner of more than 10% of our
common stock, the term may not exceed five years from the date of grant. The
1993 Stock Option Plan is subject to amendment by our board of directors,
except that the board may not increase the number of shares which may be issued
under the 1993 Stock Option Plan or decrease the minimum exercise price of
options granted under the 1993 Stock Option Plan without the approval of our
shareholders.
As of December 31, 1998, options to purchase an aggregate of 1,661,790 shares
of common stock, at a weighted average exercise price of $0.45 per share, were
outstanding under the 1993 Stock Option Plan and a total of 341,883 shares were
available for future option grants.
1999 Stock Incentive Plan
Our 1999 Stock Incentive Plan was approved by our board of directors and
shareholders in September 1999. The 1999 Stock Incentive Plan provides for the
granting of:
. stock options, including incentive stock options and non-qualified stock
options;
. stock appreciation rights, or SARs;
. restricted stock and restricted stock units;
. performance awards; and
. other stock-based awards.
We have reserved 3,000,000 shares of common stock for issuance under the 1999
Stock Incentive Plan. The 1999 Stock Incentive Plan is administered by our
compensation committee. The compensation committee has the authority
. to establish rules for the administration of the 1999 Incentive Plan;
. to select the persons to whom awards are granted;
. to determine the types of awards to be granted and the number of shares
of common stock covered by awards; and
. to set the terms and conditions of awards.
The compensation committee may also determine whether the payment of any
amounts received under any award shall be deferred. Awards may provide that
upon the grant or exercise, the holder will receive shares of common stock,
cash or any combination, as the compensation committee shall determine.
In order to meet the requirements of Section 162(m) of the Internal Revenue
Code, the 1999 Incentive Plan contains a limitation on the number of options
that may be granted to any single person in any one calendar year.
The exercise price per share under any incentive stock option or the grant
price of any SAR cannot be less than 100% of the fair market value of our
common stock on the date of the grant of that incentive stock option
43
<PAGE>
or SAR. In the event that a proposed optionee owns more than 10% of our common
stock, any incentive stock option granted to that optionee must have an
exercise price not less than 110% of the fair market value of our common stock
on the grant date and may not have a term longer than five years. Options may
be exercised by payment in full of the exercise price, either in cash or, at
the discretion of the compensation committee, in whole or in part by the
tendering of shares of common stock or other consideration having a fair market
value on the date the option is exercised equal to the exercise price.
Determinations of fair market value under the 1999 Stock Incentive Plan are
made in accordance with methods and procedures established by the compensation
committee.
The holder of an SAR is entitled to receive the excess of the fair market
value of a specified number of shares over the grant price of the SAR.
The holder of restricted stock may have all of the rights of a shareholder of
our company, including the right to vote the shares subject to the restricted
stock award and to receive any dividends, or these rights may be restricted.
Restricted stock may not be transferred by the holder until the restrictions
established by the compensation committee lapse. Holders of restricted stock
units have the right, subject to any restrictions imposed by the compensation
committee, to receive shares of common stock, or a cash payment equal to the
fair market value of such shares, at some future date. Upon termination of the
holder's employment during the restriction period, restricted stock and
restricted stock units shall be forfeited, unless the compensation committee
determines otherwise.
If any shares of common stock subject to any award or to which an award
relates are not purchased or are forfeited, or if any award terminates without
the delivery of shares or other consideration, the shares previously used for
these awards become available for future awards under the 1999 Stock Incentive
Plan. Except as otherwise provided under procedures adopted by the compensation
committee to avoid double counting with respect to awards granted in tandem
with or in substitution for other awards, all shares relating to awards granted
are counted against the aggregate number of shares available for granting
awards under the 1999 Stock Incentive Plan.
Our board of directors may amend, alter or discontinue the 1999 Stock
Incentive Plan at any time, provided that shareholder approval must be obtained
for any change that absent shareholder approval:
. would cause Rule 16b-3 of the Exchange Act or section 162(m) of the
Internal Revenue Code to become unavailable with respect to the 1999
Stock Incentive Plan;
. would violate any rules or regulations of the National Association of
Securities Dealers, Inc., the Nasdaq National Market or any securities
exchange applicable to us; or
. would cause us to be unable under the Internal Revenue Code to grant
incentive stock options under the 1999 Stock Incentive Plan.
Under the 1999 Stock Incentive Plan, the compensation committee may permit
participants receiving or exercising awards to surrender shares of common stock
to us to satisfy federal and state withholding tax obligations. In addition,
the compensation committee may grant a bonus to a participant in order to
provide funds to pay all or a portion of federal and state taxes due as a
result of the receipt, exercise or lapse of restrictions relating to an award.
Employee Stock Purchase Plan
Our employee stock purchase plan will become effective upon consummation of
this offering and is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Code. The stock purchase plan covers
an aggregate of 900,000 shares of common stock. In order to participate in the
stock purchase plan, employees must meet eligibility requirements.
Participating employees will be able to direct us to make payroll deductions of
up to 15% of their compensation during a purchase period for the purchase of
shares of common stock. Each purchase period, with the exception of the initial
offering period, will be six
44
<PAGE>
months. The stock purchase plan will provide participating employees with the
right, subject to specific limitations, to purchase our common stock at a price
equal to 85% of the lesser of the fair market value of our common stock on the
first day or the last day of the applicable purchase period. The price on the
first day of the initial purchase period will be the initial public offering
price of the shares of the common stock in this offering. The stock purchase
plan will terminate on the date our board of directors determines, or
automatically as of the date on which all of the shares of common stock
reserved for purchase under the stock purchase plan have been sold.
401(k) Plan
We have established a tax-qualified employee savings and retirement plan for
all of our employees who satisfy eligibility requirements, including
requirements relating to age and length of service. Pursuant to the 401(k)
plan, employees may elect to reduce their current compensation by up to the
lower of 20% or the statutory limit and have the amount of this reduction
contributed to the 401(k) plan. The 401(k) plan is intended to qualify under
Section 401 of the Code so that contributions by employees or by us to the
401(k) plan, and income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) plan. Our contributions, if any, will
be deductible by us when made.
45
<PAGE>
CERTAIN TRANSACTIONS
On March 19, 1996, we sold a total of 636,945 shares of our Series B
Preferred Stock at a purchase price of $7.065 per share as follows:
. 212,315 shares to North Bridge Venture Partners, L.P.; and
. 424,630 shares to New Enterprise Associates VI, Limited Partnership.
On May 3, 1999, we sold a total of 563,525 shares of our Series C Preferred
Stock at a purchase price of $9.76 per share, including:
. 307,377 shares to CB Healthcare Fund, L.P.;
. 102,459 shares to North Bridge Venture Partners, L.P.; and
. 102,459 shares to New Enterprise Associates VI, Limited Partnership.
On June 9, 1999, we sold a total of 512,295 shares of our Series C Preferred
Stock at a purchase price of $9.76 per shares as follows:
. 102,459 shares to CB Healthcare Fund, L.P.;
. 364,754 shares to JMI Equity Fund III, L.P.; and
. 45,082 shares to JMI Equity Side Fund, L.P.
The share issuances discussed above do not reflect the three-for-one stock
split effective immediately prior to this offering.
William J. Geary, who is one of our directors, is a principal of North Bridge
Venture Management, L.P. North Bridge Venture Management is a general partner
of North Bridge Venture Partners, L.P.
John M. Nehra, who is one of our directors, is a general partner of NEA
Partners VI, Limited Partnership. NEA Partners VI, Limited Partnership is the
general partner of New Enterprise Associates VI, Limited Partnership.
Daniel M. Cain, who is one of our directors, is a manager of CB Health
Ventures, L.L.C. CB Health Ventures, L.L.C. is the general partner of CB
Healthcare Fund, L.P.
Paul V. Barber, who is one of our directors, is a managing member of JMI
Associates III, LLC. JMI Associates III, LLC, is the general partner of JMI
Equity Fund III, L.P. JMI Equity Side Fund, L.P. is affiliated with JMI Equity
Fund III, L.P. Mr. Barber has no beneficial ownership interest in JMI Equity
Side Fund, L.P.
We believe that the shares issued in the transactions described above were
sold at the then fair market value of the shares and that the terms of these
transactions were no less favorable than we could have obtained from
unaffiliated third parties.
46
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table provides information concerning beneficial ownership of
our common stock as of October 31, 1999 by:
. each shareholder that we know owns more than 5% of our outstanding common
stock;
. each of our named executive officers;
. each of our directors; and
. all of our directors and named executive officers as a group.
The following table lists the applicable percentage of beneficial ownership
based on approximately 10,055,868 shares of common stock outstanding as of
October 31, 1999, as adjusted to reflect the conversion of the outstanding
shares of preferred stock immediately prior to this offering. The table also
lists the applicable percentage beneficial ownership based on 15,055,868 shares
of common stock outstanding upon completion of this offering, assuming no
exercise of the underwriters' overallotment option. Except where noted, the
persons or entities named have sole voting and investment power with respect to
all shares shown as beneficially owned by them. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities. Shares of common stock subject to options, warrants or issuable on
the conversion of preferred stock which are currently exercisable or
convertible or may be exercised or converted within 60 days of October 31, 1999
are deemed to be outstanding and to be beneficially owned by the person holding
these options, warrants or shares of convertible preferred stock for the
purpose of computing the number of shares beneficially owned and the percentage
ownership of the person or entity holding these securities but are not
outstanding for the purpose of computing the percentage ownership of any other
person or entity.
Unless otherwise indicated, the principal address of each listed 5%
shareholder is c/o eBenX, Inc., 5500 Wayzata Boulevard, Suite 1450,
Minneapolis, Minnesota 55416-1241.
<TABLE>
<CAPTION>
Percentage of
Shares Beneficially
Number of Owned
Shares --------------------
Beneficially Before the After the
Beneficial Owners Owned Offering Offering
- ----------------- ------------ ---------- ---------
<S> <C> <C> <C>
North Bridge Venture Partners, L.P.
950 Winter Street, Suite 4600
Waltham, MA 02451.......................... 2,054,949 20.4% 13.6%
New Enterprise Associates VI, Limited
Partnership
1119 St. Paul Street
Baltimore, MD 21202........................ 1,581,267 15.7% 10.5%
Entities associated with
JMI Equity Fund III, L.P. (1)
12680 High Bluff Drive
San Diego, CA 92130........................ 1,229,508 12.2% 8.2%
CB Healthcare Fund, L.P.
452 Fifth Avenue, 25th Floor
New York, NY............................... 1,229,508 12.2% 8.2%
Barbara J. Seykora (2)....................... 611,466 6.0% 4.0%
Mark W. Tierney (3).......................... 1,920,630 18.9% 12.7%
John J. Davis (4)............................ 148,827 1.5% 1.0%
Michael C. Bingham (5)....................... 1,227,105 12.2% 8.1%
Scott P. Halstead (6)........................ 70,200 * *
Paul V. Barber (7)........................... 1,094,262 10.9% 7.3%
James P. Bradley (8)......................... 25,017 * *
Daniel M. Cain (9)........................... 1,229,508 12.2% 8.2%
William J. Geary (10)........................ 2,054,949 20.4% 13.6%
John M. Nehra (11)........................... 1,581,267 15.7% 10.5%
All directors and executive officers as a
group (9 persons) (12)..................... 9,351,765 89.5% 60.5%
</TABLE>
47
<PAGE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of our common stock.
(1) Includes 1,094,262 shares held by JMI Equity Fund III, L.P. and 135,246
shares held by JMI Equity Side Fund, L.P. JMI Equity Side Fund, L.P. is
affiliated with JMI Equity Fund III, L.P.
(2) Includes 143,400 shares issuable upon exercise of stock options
exercisable within 60 days of October 31, 1999.
(3) Includes 76,200 shares issuable upon exercise of stock options
exerciseable within 60 days of October 31, 1999 and 44,430 shares issuable
upon exercise of immediately exerciseable warrants.
(4) Includes 148,827 shares issuable upon exercise of stock options
exerciseable within 60 days of October 31, 1999.
(5) Includes 23,400 shares issuable upon exercise of stock options
exerciseable within 60 days of October 31, 1999 and 3,705 shares issuable
upon exercise of immediately exerciseable warrants.
(6) Includes 70,200 shares issuable upon exercise of stock options
exerciseable within 60 days of October 31, 1999.
(7) Includes 1,094,262 shares held by JMI Equity Fund III, L.P. Mr. Barber,
one of our directors, is a Managing Member of JMI Associates III, LLC,
which is the general partner of JMI Equity Fund III, L.P. JMI Equity Side
Fund, L.P. is affiliated with JMI Equity Fund III, L.P. Mr. Barber
disclaims beneficial ownership of shares held by JMI Equity Fund III, L.P.
Mr. Barber has no beneficial ownership interest in JMI Equity Side Fund,
L.P.
(8) Includes 25,017 shares issuable upon exercise of stock options
exerciseable within 60 days of October 31, 1999.
(9) Includes 1,229,508 shares held by CB Healthcare Fund, L.P. Mr. Cain, one
of our directors, is a Manager of CB Health Ventures, L.L.C., which is the
general partner of CB Healthcare Fund, L.P. Mr. Cain disclaims beneficial
ownership of shares held by CB Healthcare Fund, L.P.
(10) Includes 2,054,949 shares held by North Bridge Venture Partners, L.P. Mr.
Geary, one of our directors, is a principal of North Bridge Venture
Management, L.P., which is a general partner of North Bridge Venture
Partners, L.P. Mr. Geary disclaims beneficial ownership of shares held by
North Bridge Venture Partners, L.P.
(11) Includes 1,581,267 shares held by New Enterprise Associates VI, Limited
Partnership. Mr. Nehra, one of our directors, is a general partner of NEA
Partners VI, Limited Partnership, which is the general partner of New
Enterprise Associates VI, Limited Partnership. Mr. Nehra disclaims
beneficial ownership of shares held by New Enterprise Associates VI.
(12) Includes 391,779 shares issuable upon exercise of stock options
exerciseable within 60 days of October 31, 1999 and 48,135 shares issuable
upon exercise of immediately exerciseable warrants. Includes 1,094,262
shares held by JMI Equity Fund III, L.P., 1,229,508 shares held by CB
Healthcare Fund, L.P., 2,054,949 shares held by North Bridge Venture
Partners, L.P. and 1,581,267 shares held by New Enterprise Associates VI,
Limited Partnership. Does not include shares beneficially owned by Barbara
J. Seykora, who is not an executive officer of our company.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective upon the filing of our amended and restated articles of
incorporation immediately prior to the closing of this offering, our authorized
capital stock will consist of 100,000,000 shares of capital stock, par value
$.01 per share. Unless otherwise designated by our board of directors, all
issued shares shall be deemed common stock with equal rights and preferences.
Common Stock
As of October 31, 1999, there were 10,055,868 shares of our common stock
outstanding.
Holders of our common stock do not have cumulative voting rights and are
entitled to one vote for each share held of record on all matters submitted to
a vote of the shareholders, including the election of directors. Holders of our
common stock are entitled to receive ratably the dividends, if any, as may be
declared by the board of directors out of legally available funds. These rights
are subject to the prior rights of any preferred stock then outstanding. See
"Dividend Policy" for a further description of dividend rights.
Upon our liquidation, dissolution or winding up, the holders of our common
stock will be entitled to share ratably in the net assets legally available for
distribution to shareholders after the payment of our debts and other
liabilities. These rights are subject to the prior rights of any preferred
stock then outstanding. Holders of our common stock have no preemptive or
conversion rights or other subscription rights and there are no redemption or
sinking funds provisions applicable to the common stock. All outstanding shares
of common stock are, and the common stock outstanding upon completion of this
offering will be, fully paid and nonassessable.
Preferred Stock
Effective upon the closing of this offering, our board of directors will have
the authority, without further action by the shareholders, to issue shares of
preferred stock in one or more series and to fix the number of shares,
designations and preferences, powers and relative, participating, optional or
other special rights and the qualifications or restrictions on those shares.
The preferences, powers, rights and restrictions of different series of
preferred stock may differ with respect to dividend rates, amounts payable on
liquidation, voting rights, conversion rights, redemption provisions, sinking
fund provisions and purchase funds and other matters.
The issuance of preferred stock could decrease the amount of earnings and
assets available for distribution to holders of common stock or adversely
affect the rights and powers, including voting rights, of the holders of common
stock. It may have the effect of delaying, deferring or preventing a change in
control our company. We currently do not plan to issue any shares of preferred
stock.
Registration Rights
After this offering, the holders of 6,248,922 shares of common stock will be
entitled to rights with respect to the registration of these shares under the
Securities Act as follows:
. Demand Registration Rights: At any time beginning six months following
our initial public offering, the holders of at least 30% of these shares
of common stock can request that we register all or a portion of their
shares. Upon this request, we must, subject to specific restrictions and
limitations, use our best efforts to cause a registration statement
covering the number of shares of common stock that are subject to the
request to become effective. The holders may only require us to file
three registration statements in response to their demand registration
rights.
. Piggyback Registration Rights: If we propose to register additional
shares of our common stock under the Securities Act, subject to specific
exceptions, the holders of the 6,248,922 shares can request that we
register their shares in connection with our registration. However, the
underwriter of the registration, if any, would have the right to limit
the number of the 6,248,922 shares that may be included in the
registration. These registration opportunities are unlimited.
49
<PAGE>
These registration rights terminate when all of these shares may be sold
during any 90-day period under Rule 144 under the Securities Act.
Provisions of our Restated Articles and Bylaws and State Law Provisions with
Potential Antitakeover Effects
The existence of authorized but unissued preferred stock, described above,
and specific provisions of Minnesota law, described below, could have an anti-
takeover effect. These provisions are intended to provide management with
flexibility, to enhance the likelihood of continuity and stability in the
composition of our board of directors and the policies of our board and to
discourage an unsolicited takeover of our company if our board of directors
determines that the takeover is not in the best interests of our company and
our shareholders. However, these provisions could have the effect of
discouraging attempts to acquire us, which could deprive our shareholders of
opportunities to sell their shares of common stock at prices higher than
prevailing market prices.
Upon the closing of this offering, our board of directors will be divided
into three classes serving staggered three-year terms. As a result of this
division, generally at least two shareholders' meetings will be required for
shareholders to effect a change in control of the board of directors. In
addition, our bylaws will contain provisions that establish specific procedures
for calling meetings of shareholders and appointing and removing members of the
board of directors.
Section 302A.671 of the Minnesota Business Corporation Act applies, with
exceptions, to any acquisition of our voting stock from a person other than us,
and other than in connection with specific types of mergers and exchanges to
which we are a party, that results in the beneficial ownership of 20% or more
of the voting stock then outstanding. Section 302A.671 requires approval of
these acquisitions by a majority vote of our shareholders to accord full voting
rights to the acquired shares. In general, shares acquired in the absence of
this approval are denied voting rights and are redeemable at their then fair
market value by us within 30 days after the acquiring person has failed to give
a timely information statement to us or the date the shareholders voted not to
grant voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Business Corporation Act generally
prohibits any business combination by us, or by any of our subsidiaries, with
any shareholder that purchases 10 percent or more of our voting shares within
four years following this interested shareholder's share acquisition date. The
business combination may be permitted if it is approved by a committee of all
of the disinterested members of our board of directors before the interested
shareholder's share acquisition date.
Listing
Our common stock has been approved for listing on the Nasdaq National Market
under the symbol "EBNX."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be Continental
Stock Transfer and Trust Company. Its address is 2 Broadway, New York, NY
10004, and its telephone number is (212) 509-4000.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, we will have 15,183,518 shares of common
stock outstanding, assuming no exercise of the underwriters' overallotment
option and no exercise of outstanding options to purchase common stock. All of
our directors and executive officers and 1% shareholders, holding in the
aggregate in excess of 64.0% of the outstanding shares of our common stock,
have agreed that they will not, without the prior written consent of the
representatives of the underwriters, sell or otherwise dispose of any shares of
common stock or options to acquire shares of common stock during the 180-day
period following the closing of this offering. See "Underwriting."
50
<PAGE>
The 5,000,000 shares of common stock being sold in this offering will be
freely tradeable without restriction or further registration under the
Securities Act, except for shares held by our affiliates which may generally
only be sold in compliance with the limitations of Rule 144 described below.
The remaining 10,183,518 shares were issued and sold by us in private
transactions and are deemed restricted securities under Rule 144. These shares
may be sold in the public market only if registered under the Securities Act
or if exempt from registration under Rules 144, 144(k) or 701 under the
Securities Act, which rules are summarized below. Subject to the agreements
between our shareholders and the underwriters, described above, and the
provisions of Rules 144, 144(k) and 701, additional shares will be available
for sale in the public market, subject in the case of shares held by
affiliates to compliance with volume restrictions, as follows:
. 61,800 shares will be available for immediate sale in the public market
on the date of this prospectus;
. 404,730 shares will be available for sale 90 days after the date of this
prospectus; and
. 9,716,988 shares will be available for sale under Rules 144 and 701 upon
the expiration of agreements between our shareholders and the
underwriters 180 days after the date of this prospectus.
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person or persons whose shares are aggregated, including an
affiliate, who has beneficially owned restricted shares for at least one year,
is entitled to sell within any three-month period a number of shares that does
not exceed the greater of 1% of the then outstanding shares of common stock,
or approximately 151,835 shares immediately after this offering, or the
average weekly trading volume of our common stock on the Nasdaq National
Market during the four calendar weeks preceding the date of the sale. Sales
under Rule 144 also are subject to requirements pertaining to the manner and
notice of the sales and the availability of current public information
concerning our company.
Under Rule 144(k), a person who is not deemed to have been an affiliate of
our company at any time during the 90 days before a sale and who has
beneficially owned the shares proposed to be sold for at least two years would
be entitled to sell these shares without regard to the requirements described
above. To the extent that shares were acquired from an affiliate of our
company, the transferee's holding period for the purpose of effecting a sale
under Rule 144(k) commences on the date of transfer from the affiliate.
Rule 701 provides that, beginning 90 days after the date of this prospectus,
persons other than affiliates may sell shares of common stock acquired from us
in connection with written compensatory benefit plans, including our 1993
Stock Option Plans, subject only to the manner of sale provisions of Rule 144.
Beginning 90 days after the date of this prospectus, affiliates may sell these
shares of common stock subject to all provisions of Rule 144 except the one-
year minimum holding period.
Shortly after the closing of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register all shares of
common stock issuable under the 1993 Stock Option Plan, the 1999 Stock
Incentive Plan and the Stock Purchase Plan. See "Management--Benefit Plans"
for a further discussion of these plans. This Form S-8 registration statement
is expected to become effective immediately upon filing and shares covered by
that registration statement will then be eligible for sale in the public
markets, subject to the Rule 144 limitations applicable to affiliates.
Prior to this offering there has been no public market for our common stock,
and no predictions can be made regarding the effect, if any, that sales of
shares in the open market or the availability of shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of our common stock in the public market could adversely
affect the prevailing market price.
After the closing of this offering, the holders of 6,248,922 shares of our
common stock will be entitled to rights with respect to the registration of
their shares under the Securities Act. Registration of these shares under the
Securities Act would result in these shares becoming freely tradeable without
restriction under the Securities Act, except for shares purchased by
affiliates, immediately upon the effectiveness of registration. For a
discussion of these rights, see "Description of Capital Stock--Registration
Rights."
51
<PAGE>
UNDERWRITING
The underwriters, through their representatives, BancBoston Robertson
Stephens Inc., Warburg Dillon Read LLC and Thomas Weisel Partners LLC, have
severally agreed to purchase from us the number of shares of common stock next
to their respective names below. The underwriters are committed to purchase and
pay for all the shares if any are purchased.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------ ---------
<S> <C>
BancBoston Robertson Stephens Inc. and BancBoston Robertson
Stephens International Limited..................................... 2,081,250
Warburg Dillon Read LLC and UBS AG, acting through
its division Warburg Dillon Read................................... 1,387,500
Thomas Weisel Partners LLC........................................... 1,156,250
E*trade Securities, Inc.............................................. 75,000
John G. Kinnard & Company, Incorporated.............................. 75,000
Legg Mason Wood Walker, Incorporated................................. 75,000
Punk, Ziegel & Company, L.P. ........................................ 75,000
Raymond James & Associates, Inc. .................................... 75,000
---------
Total.............................................................. 5,000,000
=========
</TABLE>
The underwriters propose to offer the shares of common stock to the public at
the public offering price set forth on the cover page of this prospectus and to
specific dealers at that price less a concession of $0.84 per share, of which
$0.10 may be reallowed to other dealers. After this offering, the public
offering price, concession and reallowance to dealers may be reduced by the
representatives. However, no reduction will change the amount of proceeds to be
received by us as set forth on the cover page of this prospectus. The common
stock is offered by the underwriters subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price
for the common stock will be determined by negotiation among us and the
representatives. Among the factors to be considered in determining the initial
public offering price are prevailing market and economic conditions, our
revenues and earnings, market valuations of other companies engaged in
activities similar to us, estimates of our business potential and prospects and
the present state of our business operations.
Overallotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 750,000 additional shares of our common stock at the same price
per share as we will receive for the 5,000,000 shares that the underwriters
have agreed to purchase. If the underwriters exercise this option, each of the
underwriters will have a firm commitment, subject to limited conditions, to
purchase approximately the same percentage of these additional shares that the
number of shares of common stock to be purchased by it shown in the above table
represents as a percentage of the total shares offered in this offering. If
purchased, these additional shares will be sold by the underwriters on the same
terms as those on which the shares offered hereby are being sold. We will be
obligated to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise this option only to cover over
allotments made in connection with the sale of the shares of common stock
offered in this offering.
The following table summarizes the compensation to be paid to the
underwriters by eBenX:
<TABLE>
<CAPTION>
Total
--------------------- -------
Without
Per Over- With Over-
Share allotment allotment
----- ---------- ----------
<S> <C> <C> <C> <C> <C>
Underwriting discounts and commissions
payable by eBenX........................ $1.40 $7,000,000 $8,050,000
</TABLE>
52
<PAGE>
We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $750,000.
Indemnity. The underwriting agreement among us and the underwriters contains
covenants of indemnity among the underwriters and us against identified civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
underwriting agreement.
Lock-up Agreements. Each of our executive officers and directors and some of
our shareholders have agreed, during the period of 180 days after the date of
this prospectus, not to offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to, any shares of
common stock, or any securities convertible into or exchangeable for shares of
common stock, owned as of the date of this prospectus or thereafter acquired
directly by these holders or with respect to which they have the power of
disposition, without the prior written consent of BancBoston Robertson
Stephens, Inc. However, BancBoston Robertson Stephens, Inc. may, in its sole
discretion and at any time or from time to time, without notice, release all
or any portion of the securities subject to these lock-up agreements. There
are no agreements between the representatives and any of our shareholders
providing consent by the representatives to the sale of shares prior to the
expiration of the 180-day lock-up period. BancBoston Robertson Stephens, Inc.
has indicated that some of the factors it will consider in deciding to release
all or a portion of the securities subject to these lock-up agreements include
the nature of the request, the individual or entity making such request,
number of shares requested to be released and general market conditions at the
time of the request. At this time, it is not believed that its own position in
the securities would be a factor.
In addition, we have agreed that during the lock-up period, we will not,
subject to specified exceptions, without the prior written consent of
BancBoston Robertson Stephens, Inc.:
. consent to the disposition of any shares held by shareholders prior to
the expiration of the lock-up period; or
. issue, sell, contract to sell or otherwise dispose of any shares of
common stock, any options or warrants to purchase any shares of common
stock, or any securities convertible into, exercisable for or
exchangeable for shares of common stock, other than the sale of shares
in this offering, the issuance of common stock upon the exercise of
outstanding options or warrants or our issuance of options or shares
under our 1993 Stock Option Plan.
Listing. The common stock has been approved for listing on the Nasdaq
National Market under the symbol "EBNX."
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act, some persons participating in this
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
stabilizing bid is a bid for or the purchase of common stock by the
underwriters for the purpose of fixing or maintaining the price of the common
stock. A syndicate covering transaction is the bid for or the purchase of
common stock by the underwriters to reduce a short position incurred by the
underwriters in connection with this offering. A penalty bid is an arrangement
permitting the representatives to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with this
offering if the common stock originally sold by the underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore not been effectively placed by the underwriter or syndicate
member. The representatives have advised us that these types of transactions
may be effected on the Nasdaq National Market or otherwise and if commenced
may be discontinued at any time.
Directed Share Program. The underwriters have reserved up to five percent
(5%) of the common stock to be issued by us, at the initial public offering
price, to our directors, officers, employees, business associates and other
persons related to us. The number of shares of our common stock available for
sale to the general
53
<PAGE>
public will be reduced to the extent these individuals purchase these reserved
shares. Any reserved shares that are not purchased will be offered to the
general public on the same basis as the other shares offered in the offering.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a lead or co-
manager on 94 filed public offerings of equity securities, of which 76 have
been completed, and has acted as a syndicate member in an additional 52 public
offerings of equity securities. Thomas Weisel Partners LLC does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.
LEGAL MATTERS
The validity of the issuance of shares of common stock offered by us in this
offering will be passed upon for us by Dorsey & Whitney LLP, Minneapolis,
Minnesota. Legal matters related to the offering will be passed upon for the
underwriters by Winston & Strawn, Chicago, Illinois.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements as of December 31, 1997 and 1998 and for each of the three years in
the period ended December 31, 1998, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the
registration statement or the exhibits and schedules which are part of the
registration statement. For further information about us and our common stock,
you should review the registration statement and exhibits and schedules
thereto. You may read and copy any document we file at the Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Commission at 1-800-SEC-0330 for further information on the public
reference room. Our filings are also available to the public from the
Commission's Web site at http://www.sec.gov.
Upon completion of this offering, we will be required to file periodic
reports, proxy statements and other information with the Commission. These
periodic reports, proxy statements and other information will be available for
inspection and copying at the Commission's public reference room and the Web
site of the Commission referred to above.
54
<PAGE>
EBENX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statement of Changes in Shareholders' Equity (Deficit).... F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
eBenX, Inc.
We have audited the accompanying consolidated balance sheets of eBenX, Inc.
(formerly known as Network Management Services, Inc.) as of December 31, 1998
and 1997, and the related consolidated statements of operations, changes in
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of eBenX, Inc. at
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 22, 1999
F-2
<PAGE>
EBENX, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31 Pro forma
---------------- September 30, September 30,
1997 1998 1999 1999
------- ------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 1,009 $ 1,681 $ 7,290 $ 7,290
Investments.................... 2,005 -- -- --
Accounts receivable, less
allowance of $51 at
December 31, 1997 and 1998
and September 30, 1999....... 573 1,964 3,321 3,321
Prepaid expenses............... 143 324 712 712
Other.......................... 33 18 -- --
------- ------- ------- -------
Total current assets........ 3,763 3,987 11,323 11,323
Property and equipment, net.... 1,288 1,568 2,032 2,032
Deposits....................... 33 41 62 62
------- ------- ------- -------
Total assets................ $ 5,084 $ 5,596 $13,417 $13,417
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable............... $ 181 $ 837 $ 724 $ 724
Accrued payroll................ 333 493 804 804
Accrued expenses............... 83 115 473 473
Deferred revenue............... 64 10 160 160
Note payable................... -- 750 -- --
------- ------- ------- -------
Total current liabilities... 661 2,205 2,161 2,161
Redeemable Convertible Preferred
Stock:
Series A, $.01 par value:
Authorized shares--1,128,627
Issued and outstanding
shares--1,110,627;
Liquidation value--$1,000.... 978 978 978 --
Series B, $.01 par value:
Authorized shares--1,910,835
Issued and outstanding
shares--1,910,835;
Liquidation value--$500...... 4,490 4,490 4,490 --
Series C, $.01 par value:
Authorized shares--3,227,460
Issued and outstanding
shares--3,227,460;
Liquidation value--$10,500... -- -- 10,482 --
Shareholders' equity (deficit):
Common Stock, $.01 par value:
Authorized shares--
7,000,000; Issued and
outstanding shares--
3,445,521--1997;
3,480,321--1998;
3,801,546--1999........... 34 35 38 101
Pro forma authorized
shares--100,000,000;
Pro forma issued and
outstanding shares--
10,050,468................
Additional paid-in capital..... 101 110 4,319 20,206
Deferred stock based
compensation................. -- -- (4,127) (4,127)
Retained deficit............... (1,180) (2,222) (4,924) (4,924)
------- ------- ------- -------
Total shareholders' equity
(deficit)...................... (1,045) (2,077) (4,694) 11,256
------- ------- ------- -------
Total liabilities and
shareholders' equity
(deficit)...................... $ 5,084 $ 5,596 $13,417 $13,417
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
EBENX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31 September 30,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue............. $ 4,360 $ 7,093 $ 10,122 $ 6,669 $ 11,746
Costs and expenses:
Cost of services...... 2,480 4,496 6,958 4,791 9,069
Selling, general and
administrative...... 1,796 2,068 2,831 1,986 3,338
Research and
development......... 863 1,242 1,519 1,017 2,294
Amortization of stock
based
compensation........ -- -- -- -- 67
---------- ---------- ---------- ---------- ----------
Total costs and
expenses......... 5,139 7,806 11,308 7,794 14,768
---------- ---------- ---------- ---------- ----------
Loss from operations.... (779) (713) (1,186) (1,125) (3,022)
Interest income......... 198 213 144 101 320
---------- ---------- ---------- ---------- ----------
Net loss................ $ (581) $ (500) $ (1,042) $ (1,024) $ (2,702)
========== ========== ========== ========== ==========
Net loss per share:
Basic and diluted..... $ (.18) $ (.15) $ (.30) $ (.30) $ (.77)
========== ========== ========== ========== ==========
Shares used in
calculation of net
loss per share:
Basic and diluted..... 3,312,981 3,375,732 3,463,116 3,457,455 3,516,747
========== ========== ========== ========== ==========
Pro forma net loss per
share:
Basic and diluted..... $ (.16) $ (.33)
========== ==========
Shares used in
calculation of pro
forma net loss per
share:
Basic and diluted..... 6,484,578 8,103,243
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
EBENX, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Deferred
---------------- Paid-In Stock Based Retained
Shares Amount Capital Compensation Deficit Total
--------- ------ ---------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995.................. 3,294,741 $33 $ 79 $ -- $ (99) $ 13
Exercise of stock
options.............. 31,680 -- 3 -- -- 3
Exercise of stock
warrants............. 4,800 -- 1 -- -- 1
Net loss............... -- -- -- -- (581) (581)
--------- --- ------ ------- ------- -------
Balance at December 31,
1996.................. 3,331,221 33 83 -- (680) (564)
Exercise of stock
options.............. 114,300 1 18 -- -- 19
Net loss............... -- -- -- -- (500) (500)
--------- --- ------ ------- ------- -------
Balance at December 31,
1997.................. 3,445,521 34 101 -- (1,180) (1,045)
Exercise of stock
options.............. 34,800 1 9 -- -- 10
Net loss............... -- -- -- -- (1,042) (1,042)
--------- --- ------ ------- ------- -------
Balance at December 31,
1998.................. 3,480,321 35 110 -- (2,222) (2,077)
Exercise of stock
options.............. 321,225 3 15 -- -- 18
Deferred stock-based
compensation......... -- -- 4,194 (4,194) -- --
Amortization of stock-
based compensation... -- -- -- 67 -- 67
Net loss............... -- -- -- -- (2,702) (2,702)
--------- --- ------ ------- ------- -------
Balance at September 30,
1999 (unaudited)...... 3,801,546 $38 $4,319 $(4,127) $(4,924) $(4,694)
========= === ====== ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
EBENX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months
ended
Year ended December 31 September 30
------------------------ ----------------
1996 1997 1998 1998 1999
------- ------ ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss........................... $ (581) $ (500) $(1,042) $(1,024) $(2,702)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Depreciation of property and
equipment....................... 192 327 481 347 475
Amortization of stock-based
compensation.................... -- -- -- -- 67
Noncash expense relating to
common stock issued............. 3 -- -- -- --
Changes in operating assets and
liabilities:
Accounts receivable.............. (440) 27 (1,391) (1,156) (1,357)
Other current assets............. 6 (151) (166) (232) (370)
Accounts payable................. (11) 84 656 14 (113)
Accrued expenses................. 62 238 192 92 669
Deferred revenue................. (50) 65 (55) 360 150
Deposits......................... -- (23) (6) -- (21)
------- ------ ------- ------- -------
Net cash (used in) provided by
operating activities.......... (819) 67 (1,331) (1,599) (3,202)
Investing activities:
Additions to property and
equipment........................ (523) (692) (761) (609) (939)
Purchase of investments............ (2,006) -- -- -- --
Sale of investments................ -- 1 2,005 2,005 --
------- ------ ------- ------- -------
Net cash (used in) provided by
investing activities............ (2,529) (691) 1,244 (1,396) (939)
Financing activities:
Proceeds from note payable......... -- -- 750 -- --
Payment of note payable............ -- -- -- -- (750)
Stock options and warrants
exercised........................ 1 19 9 8 18
Proceeds from issuance of preferred
stock............................ 4,490 -- -- -- 10,482
------- ------ ------- ------- -------
Net cash provided by financing
activities...................... 4,491 19 759 8 9,750
------- ------ ------- ------- -------
Net increase (decrease) in cash and
cash equivalents.................. 1,143 (605) 672 (195) 5,609
Cash and cash equivalents at
beginning of year................. 471 1,614 1,009 1,009 1,681
------- ------ ------- ------- -------
Cash and cash equivalents at end of
year.............................. $ 1,614 $1,009 $ 1,681 $ 814 $ 7,290
======= ====== ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Business Description and Summary of Significant Accounting Policies
Business Description
EBenX, Inc. (formerly known as Network Management Services, Inc.), a
Minnesota corporation incorporated in September 1993 (the Company), provides
business-to-business e-commerce and connectivity solutions to employers and
health plans for the purchase, eligibility administration and premium payment
of group health insurance benefits. The Company's customers are located
throughout the United States.
Principles of Consolidation
The consolidated financial statements include the Company and Managed Care
Buyer's Group, Inc., its wholly owned subsidiary. All intercompany accounts
and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are considered to be available for sale. The carrying value of
cash equivalents approximates fair value at December 31, 1998 and 1997.
Investments
Investments at December 31, 1997 consist of United States Treasury notes
which are classified as available for sale. The cost of investments
approximates fair value.
Property and Equipment
Property and equipment, including purchased software, is stated at cost for
items purchased and at estimated fair value for items contributed by the
founding shareholders. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets of five to seven years.
Leasehold improvements are amortized over the estimated life of the assets or
the related lease term, whichever is less, on a straight-line basis.
Income Taxes
Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between financial reporting and
tax bases of assets and liabilities.
Revenue Recognition
The Company generates revenue from providing data exchange and procurement
services. Data exchange services represent business-to-business e-commerce and
connectivity solutions to employers and health plans for the purchase,
eligibility administration and premium payment of group health insurance
benefits by utilizing proprietary and licensed technology. Fees related to
these services are billed on a per employee per month basis. Revenue is
recognized as services are performed. The Company also records revenue related
to implementation fees associated with its data exchange services. These fees
are recognized as revenue over the period of time the implementation services
are being provided. Procurement services consist of the Company assisting and
advising customers on the selection of potential suppliers, preparation of
requests for proposals, evaluation of proposals, and rate negotiations. The
Company's ongoing data exchange contracts range in duration from one to three
years. Procurement services agreements do not exceed five years in duration.
The Company earns revenue under the contracts and agreements as services are
performed. Revenues generated from data exchange services for the years ended
December 31, 1996, 1997 and 1998, and the nine months ended September 30, 1998
and 1999 were $3,467,000, $5,432,000, $7,742,000, $4,828,000, and $9,193,000,
respectively. Revenues generated from procurement services for the years ended
December 31, 1996, 1997 and 1998, and the nine months ended September 30, 1998
and 1999 were $893,000, $1,661,000, $2,380,000, $1,841,000, and $2,553,000,
respectively.
F-7
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business Description and Summary of Significant Accounting Policies
(Continued)
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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Advertising Costs
The Company expenses advertising costs as incurred. The amount of advertising
expensed during 1996, 1997 and 1998 was $15,006, $24,148 and $73,326,
respectively.
Impairment of Long-Lived Assets
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
Stock-Based Compensation
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25), and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for Stock-
Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Stock Split
The Company intends to effect a three-for-one stock split immediately prior
to the offering. Accordingly, all share, per share, weighted average share
information, and redeemable convertible preferred stock have been restated to
reflect the split.
Net Loss Per Share
Basic earnings per share is based on the weighted average shares outstanding
during the period. Diluted earnings per share increases the shares used in the
per share calculation by the dilutive effects of options, warrants, and
convertible securities. The Company's common stock equivalent shares
outstanding from stock options and warrants are excluded from the diluted
earnings per share computation as their effect is antidilutive.
Pro Forma Shareholders' Equity
Upon the closing of the Company's planned initial public offering, all
outstanding shares of Series A, B and C preferred stock will automatically
convert into 6,248,922 shares of common stock. The pro forma effects of these
transactions are unaudited and have been reflected in the accompanying pro
forma balance sheet at September 30, 1999.
Pro Forma Net Loss Per Share
Pro forma net loss per share for the year ended December 31, 1998 and the
nine months ended September 30, 1999 is computed using the weighted average
number of common shares outstanding, including the pro forma effects of the
automatic conversion of the Company's Series A, B and C preferred stock into
F-8
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business Description and Summary of Significant Accounting Policies
(Continued)
shares of the Company's common stock as if such conversion occurred on January
1, 1998, or at the date of original issuance, if later. The resulting pro
forma adjustment includes an increase in the weighted average shares used to
compute basic and diluted net loss per share of 3,021,462 shares for the year
ended December 31, 1998 and 4,586,496 shares for the nine months ended
September 30, 1999. The pro forma effects of these transactions are unaudited.
Interim Financial Statements
The interim financial statements for the nine months ended September 30,
1998 and 1999, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles. In the opinion of the Company's management,
the unaudited interim financial statements contain all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation.
The results of operations for the interim periods are not necessarily
indicative of the results of the entire year.
Reclassification
Certain prior year items have been reclassified to conform to the current year
presentation.
2. Property and Equipment, Net
Property and equipment as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Office equipment.................................... $1,198,887 $ 1,455,009
Purchased software.................................. 363,612 563,532
Furniture and fixtures.............................. 241,763 474,085
Leasehold improvements.............................. 154,488 227,321
---------- -----------
1,958,750 2,719,947
Less accumulated depreciation....................... (670,642) (1,151,684)
---------- -----------
$1,288,108 $ 1,568,263
========== ===========
</TABLE>
3. Note Payable
The Company has a $1,500,000 revolving promissory note with a bank with
interest at 1% over the bank's base rate (8.75% at December 31, 1998). The
promissory note is secured by all business assets of the Company and matures
on December 31, 1999. The loan is guaranteed by the Company's wholly owned
subsidiary. At December 31, 1998, the outstanding balance was $750,000. The
promissory note was repaid during 1999.
4. Shareholders' Equity
Common Stock
The Company had agreements with two founding shareholders which entitled the
Company to repurchase one-half of the shares held by these shareholders for
$.01 per share if the shareholders' employment was terminated with cause or in
the event that the employee terminated employment under certain circumstances.
These agreements expired in August 1997 and no shares were repurchased under
the agreements.
Convertible Preferred Stock
Under provisions of stock purchase agreements, the holders of the Company's
preferred stock are entitled to:
. liquidation preference of $.90 and $2.355 for each Series A and Series B
preferred share, respectively, plus unpaid accumulated dividends. After
payment of this preference amount, remaining distributable assets, if
any, will be distributed on a pro rata basis between the preferred and
common shareholders.
F-9
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Shareholder's Equity--(Continued)
. Annual preferential noncumulative dividends of $.09 (Series A) and $.236
(Series B) for each share payable only if declared by the Board of
Directors.
. Voting rights similar to common shareholders.
. One director each, to the Company's Board of Directors for Series A and
Series B.
Each preferred share may be converted to common shares at the option of the
holder. In addition, the preferred shares shall be automatically converted to
common shares if (i) the Company closes the issuance and sale of common shares
in a public offering in which the gross proceeds equal or exceed $10,000,000,
or (ii) 80% of the preferred stock has been converted. The number of shares
issuable in exchange for each preferred share upon either optional or automatic
conversion shall be equal to $.90 (Series A) and $2.355 (Series B) divided by
the conversion price then in effect, as defined. The initial conversion price
of $.90 (Series A) and $7.065 (Series B) will be adjusted as necessary to
prevent dilution resulting from, among other things, issuance of additional
common stock, options or convertible securities.
On April 30, 2004, and on each of the first and second anniversaries thereof,
the Company shall offer to redeem 33 1/3%, 50% and 100%, respectively, of the
Series A preferred shares for $.90 and Series B preferred shares for $2.355,
respectively, per share plus accrued but unpaid dividends.
The preferred stock purchase agreements contain certain restrictive covenants
which prohibit, among other things, the Company from authorizing additional
shares of Series A and Series B preferred stock or new classes of capital stock
with preferences greater than those given to the Series A and Series B
preferred shareholder, merging or consolidating with another corporation, or
effecting a change in control of the Company. In addition, capital expenditures
in excess of $100,000 for any item or related items require the approval of the
director elected by the preferred shareholders.
5. Income Taxes
At December 31, 1997 and 1998, the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 409,000 $ 665,000
Bonus and vacation................................. 127,000 188,000
Accounts receivable allowance...................... 19,000 19,000
--------- ---------
555,000 872,000
Deferred tax liabilities:
Depreciation....................................... (96,000) (93,000)
--------- ---------
(96,000) (93,000)
--------- ---------
Net deferred tax assets before valuation allowance... 459,000 779,000
Less valuation allowance............................. (459,000) (779,000)
--------- ---------
Net deferred tax assets.............................. $ -- $ --
========= =========
</TABLE>
The Company has established a valuation allowance to fully reserve for the net
deferred tax assets at December 31, 1997 and 1998, respectively. The valuation
allowance was established due to the available evidence indicating that it is
not more than likely that the deferred tax assets will be realized.
As of December 31, 1998, the Company has unused federal and state research and
development tax credit carryforwards of approximately $100,000 which expire at
various times through 2011. In addition, the Company has unused federal net
operating loss carryforwards at December 31, 1998 of approximately $1,751,000,
which expire at various times through 2013. The utilization of these
carryforwards is dependent upon the Company's ability to generate sufficient
taxable income during the carryforward periods.
F-10
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Operating Leases
The Company leases or subleases its office space and certain equipment under
terms of noncancelable operating lease agreements which expire through February
2003. Future lease payments for all operating leases, excluding executory
costs, such as management and maintenance fees are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999............................................................ $1,100,020
2000............................................................ 863,391
2001............................................................ 530,439
2002............................................................ 118,730
2003............................................................ 19,840
----------
$2,632,420
==========
</TABLE>
Rent expense, including the Company's pro rata share of certain operating
costs, was $239,042, $560,281 and $975,731 in 1996, 1997 and 1998,
respectively.
7. Significant Customers
Significant customer activity as a percent of the Company's net revenue in
1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Customer A................................................. 22.6% 14.5% 14.0%
Customer B................................................. -- 16.1% 19.1%
Customer C................................................. 17.7% 12.8% --
Customer D................................................. 9.7% 10.4% 8.6%
Customer E................................................. -- -- 17.1%
</TABLE>
8. Stock Options and Warrants
In 1993, the Company adopted the 1993 Stock Option Plan (the Plan) to encourage
stock ownership by employees, directors and other individuals as determined by
the Board of Directors. The Plan provides that options granted thereunder may
be either incentive stock options (ISOs), as defined by the Internal Revenue
Code, or nonqualified stock options.
The Board of Directors determines who will receive options under the Plan and
sets the terms, including vesting dates. Options may have a maximum term of no
more than ten years except in the case of a shareholder possessing more than
10% of the total voting power of all classes of stock (a 10% shareholder) in
which case the maximum term is five years. The exercise price of ISOs granted
under the Plan must be at least equal to the fair market value (or in the case
of a 10% shareholder, 110% of the fair market value) of the common stock on the
date of grant. The exercise price of nonqualified options is determined by the
Board of Directors.
The exercise price may be paid in cash, shares of previously owned common
stock, or by issuance of a promissory note. In addition, the Plan also contains
a provision allowing the Company to permit option holders to pay their
withholding obligation through share redirection. If an option expires,
terminates or is canceled, the shares not purchased thereunder may become
available for additional option awards under the Plan. The Plan expires in
2003.
F-11
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Stock Options and Warrants--(Continued)
In connection with the granting of stock options to employees, the Company
recorded stock-based compensation totaling approximately $67,000 in the quarter
ended September 30, 1999. This amount represents the difference between the
exercise price and the deemed fair value of the Company's common stock for
accounting purposes on the date these stock options were granted. Deferred
stock-based compensation of $4.1 million is included as a component of
stockholders' equity and is being amortized over the vesting period of the
options. The amortization of the remaining deferred stock-based compensation
will result in additional charges to operations through fiscal 2003. The
amortization of stock-based compensation is classified as a separate component
of operating expenses in the consolidated statement of operations.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
Shares Shares Weighted
Available for Outstanding Average Price
Grant Under the Plan Per Share
------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31,
1996..................... 683,028 1,169,745 $ .18
Granted.................. (613,845) 613,845 $ .60
Exercised................ -- (114,300) $ .16
Canceled................. 301,200 (301,200) $ .32
-------- --------- ----- ---
Balance at December 31,
1997..................... 370,383 1,368,090 $ .34
Additional shares
reserved for issuance.. 300,000 -- --
Granted.................. (622,950) 622,950 $ .71
Exercised................ -- (34,800) $ .27
Canceled................. 294,450 (294,450) $ .17
-------- --------- ----- ---
Balance at December 31,
1998..................... 341,883 1,661,790 $ .45
======== ========= ===== ===
</TABLE>
The weighted average fair value of options granted in 1997 and 1998 was $.14
and $.15 per share, respectively. The exercise prices are equal to the
estimated fair value of the common stock as determined by the Board of
Directors on the grant dates. The options are exercisable over a four-year to
five-year vesting period and expire at various dates through 2003. At December
31, 1997 and 1998, options to purchase 290,604 and 447,078 shares of common
stock are exercisable, respectively, at weighted average exercise prices of
$.13 and $.23, respectively. Exercise prices for options outstanding as of
December 31, 1997 and 1998, ranged from $.10 to $.75 and $.10 to $.60,
respectively. The weighted average remaining contractual life of those options
at December 31, 1997 and 1998 is 4.5 and 4.4 years, respectively.
Pro forma information regarding net loss and loss per share is required by
Statement 123, an has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the minimum
value option pricing model with the following weighted average assumptions for
1996, 1997 and 1998: risk free interest rate of 5.50%, dividend yield of 0%,
and a weighted average expected life of the option of five years.
Had the Company recorded compensation cost in accordance with Statement 123,
the net loss and loss per share would have been:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Net Loss:
As reported............................ $(580,857) $(500,453) $(1,041,632)
Pro forma.............................. $(584,915) $(518,244) $(1,078,880)
Basic and diluted net loss per share:
As reported............................ $(.18) $(.15) $(.30)
Pro forma.............................. $(.18) $(.15) $(.31)
</TABLE>
F-12
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Stock Options and Warrants--(Continued)
During September 1995, the Company entered into a line of credit agreement to
borrow up to $550,000, which expired in August 1996. In connection with the
agreement, the Company issued a warrant to purchase 18,000 shares of the
Company's Series A Convertible Preferred Stock at $.90 per share. The warrants
are exercisable over ten years.
During 1995, the Company granted three employees warrants to purchase 65,415
shares of common stock at $.01 per share. The warrants, which are immediately
exercisable and expire at various times between June 30, 2000 and August 31,
2000, were granted in lieu of cash compensation.
9. Employee Benefit Plans
The Company has a 401(k) plan covering substantially all employees. Under the
terms of the plan, participants may contribute 2% to 20% of their salary to the
plan. Employees are eligible after one day of service and upon attainment of
age 21. The Company may make matching contributions based on a discretionary
formula or may contribute a discretionary amount. The Company did not make any
contributions in 1996, 1997 or 1998.
10. Subsequent Event (Unaudited)
In May and June 1999, the Company sold a total of 3,227,460 shares of Series C
preferred stock resulting in net proceeds to the Company of $10,482,000. The
Series C shareholders have liquidation preference of $3.25 per share, plus
accumulated dividends. Annual preferential cumulative dividends of $.16 per
share are payable only if declared by the Board. The Series C preferred
shareholders are able to elect two members on the Company's Board of Directors.
The Series C preferred shares have voting rights similar to common
shareholders. The Series C preferred shares are convertible into common shares
at a conversion rate of $3.25 per share.
F-13
<PAGE>
[eBenX Logo]
<PAGE>
Until January 3, 2000 (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]
