<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ to
_____________.
Commission file number 333-87985
eBenX, Inc.
(Exact name of registrant
as specified in its charter)
Minnesota 41-1758843
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
605 North Highway 169 Suite LL
Minneapolis, Minnesota 55441
(Address of principal executive offices)
Telephone Number: (763) 614-2000
(Registrant's telephone number, including area code)
5500 Wayzata Boulevard, Suite 500
Minneapolis, Minnesota 55416
(Address of former principal executive offices)
----------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of May 1, 2000 there were 16,227,972 shares of the registrant's common stock
outstanding.
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EBENX, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2000
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2000 and December
31, 1999
Condensed Consolidated Statements of Operations for the three-month
periods ended March 31, 2000 and 1999
Condensed Consolidated Statements of Cash Flows for the three-month
periods ended March 31, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
FORWARD-LOOKING STATEMENTS
This document 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 the risks discussed
in this Form 10Q and eBenX's other SEC filings including its Form 10-K filed
March 28, 2000 (File No. 333-87985).
2
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EBENX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 3,024 $ 98,611
Accounts receivable, net of allowance of $86 and $45...................... 2,573 3,415
Unbilled revenue.......................................................... 655 446
Prepaid expenses and other................................................ 1,481 609
Short-term investments.................................................... 106,644 --
-------- --------
Total current assets................................................... 114,377 103,081
Property and equipment, net............................................... 3,107 2,456
Deposits.................................................................. 715 62
-------- --------
Total assets........................................................... $118,199 $105,599
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 932 $ 1,353
Accrued compensation...................................................... 710 960
Accrued expenses.......................................................... 1,769 864
Accrued offering costs.................................................... 166 1,113
Deferred revenue.......................................................... 76 183
-------- --------
Total current liabilities.............................................. 3,653 4,473
Shareholders' equity:
Common Stock.............................................................. 162 152
Additional paid-in capital................................................ 127,552 112,937
Deferred stock-based compensation......................................... (4,107) (4,714)
Accumulated other comprehensive loss...................................... (27) --
Retained deficit.......................................................... (9,034) (7,249)
-------- --------
Total shareholders' equity............................................. 114,546 101,126
-------- --------
Total liabilities and shareholders' equity.................................. $118,199 $105,599
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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EBENX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
-------- --------
<S> <C> <C>
Net revenue ........................................... $ 5,575 $ 3,342
Operating expenses:
Cost of services .................................... 4,271 2,355
Selling, general and administrative ................. 2,405 859
Research and development ............................ 1,589 545
Amortization of stock-based compensation ............ 631 --
-------- --------
Total operating expenses ......................... 8,896 3,759
-------- --------
Loss from operations .................................. (3,321) (417)
Interest income and other, net ........................ 1,536 45
-------- --------
Net loss .............................................. $ (1,785) $ (372)
======== ========
Net loss per share:
Basic and diluted ................................... $ (.11) $ (.11)
======== ========
Shares used in calculation of net loss per share:
Basic and diluted ................................... 15,992 3,389
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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EBENX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net loss ............................................................................ $ (1,785) $ (372)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation of property and equipment .......................................... 160 140
Amortization of stock-based compensation ........................................ 631 --
Changes in operating assets and liabilities:
Accounts receivable .......................................................... 842 59
Other current assets ......................................................... (1,081) (308)
Accounts payable ............................................................. (421) (280)
Accrued expenses ............................................................. 655 168
Deferred revenue ............................................................. (107) 1
Deposits...................................................................... (653) 1
--------- ---------
Net cash used in operating activities .................................... (1,759) (591)
Investing activities:
Additions to property and equipment ................................................. (811) (390)
Purchases of investments ............................................................ (225,457) --
Sales of investments ................................................................ 118,786 --
--------- ---------
Net cash used in investing activities .................................... (107,482) (390)
Financing activities:
Stock options and warrants exercised ................................................ 666 10
Proceeds from issuance of common stock, net of costs ................................ 12,988 --
--------- ---------
Net cash provided by financing activities ................................ 13,654 10
--------- ---------
Net decrease in cash and cash equivalents .............................................. (95,587) (971)
Cash and cash equivalents at beginning of period ....................................... 98,611 1,681
--------- ---------
Cash and cash equivalents at end of period ............................................. $ 3,024 $ 710
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest ............................................................... $ -- $ 27
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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EBENX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Business Description and Summary of Significant Accounting Policies
Business Description
eBenX, Inc. (the "Company") provides business-to-business e-commerce
solutions to employers and health plans for the procurement of group health
insurance. The Company's group health insurance exchange provides an end-to-end
solution for all aspects of the procurement process, from request for proposal
through premium payment. Its solution encompasses the assessment of health plans
for employers, as well as a streamlined channel for the quoting, rating and
selection of new and renewal group health insurance by employers and health
plans. The Company's enrollment capabilities provide employees with the ability
to make health plan choices and enroll online. The Company's Web-enabled, high
volume rules-based interfaces allow employers and health plans to exchange
eligibility information throughout the benefit year, and to complete premium
billings and payments on a regular basis. The result is reduced administrative
and health care costs for employers, reduced administrative costs for health
plans, and more choice, convenience and improved service for employees and their
dependents.
Basis of Presentation
The condensed consolidated financial statements included herein, except for
the December 31, 1999 balance sheet which was extracted from the audited
financial statements of December 31, 1999, have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (all of which are
normal and recurring in nature) that are necessary for a fair presentation of
the interim periods presented. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The results of operations for the three month period
ended March 31, 2000 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire year ended December 31,
2000. These unaudited consolidated financial statements and notes included
herein should be read in conjunction with the financial statements and the notes
thereto included in the Company's Form 10-K for the year ended December 31,
1999.
The Company currently operates in a single business segment providing
services to employers and health plans. 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.
Net Loss Per Share
Basic net loss per share is based on the weighted-average shares
outstanding during the period. Diluted net loss 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 net
loss per share computation for all periods because their effect would be
antidilutive.
Reclassification
Certain prior year items have been reclassified to conform to the current
year presentation.
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2. Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
the reporting and display of comprehensive income and its components.
Comprehensive loss for the three months ended March 31, 2000 was $27,000, and
consisted solely of unrealized loss on available-for-sale securities. The tax
effects of the other comprehensive loss were not considered to be material.
3. Shareholders' Equity
On December 8, 1999, the Company effected a three-for-one stock split
whereby each share was split into three shares. Accordingly, except as otherwise
noted, all share, per share, and weighted average share information has been
restated to reflect the split.
On December 15, 1999, the Company closed its initial public offering of
5,000,000 shares of common stock sold at $20.00 per share. The Company received
$91.5 million in proceeds from the offering, net of underwriting discounts,
commissions, and other costs. An additional 750,000 shares were sold under the
exercise of the underwriter's over-allotment option in January 2000, resulting
in additional net proceeds to the Company of $14 million.
4. Deferred stock-based compensation
In connection with the granting of stock options to employees, the Company
recorded deferred stock-based compensation totaling approximately $5.5 million
in the year ended December 31, 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. The
deferred stock-based compensation is included as a component of stockholders'
equity and is being amortized over the vesting period of the options.
Approximately $631,000 of amortization expense was recognized in the three
months ended March 31, 2000. The amortization of the remaining deferred
stock-based compensation will result in additional charges to operations through
2004.
5. Recent Accounting Pronouncements
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, 2000, in accordance with
SFAS No. 137, which delays the required implementation of SFAS 133 for one year.
The adoption of SFAS 133 is not expected to have an impact on the Company's
financial position or results of operations. The Company currently does not hold
derivative instruments or engage in hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. Subsequently,
the SEC released SAB 101A, which delayed the implementation date of SAB 101 for
registrants with fiscal years that begin between December 16, 1999 and March 15,
2000. The Company is required to be in conformity with the provisions of SAB
101, as amended by SAB 101A. The adoption of SAB 101 is not expected to have a
material effect on the financial position or results of operations of the
Company.
7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the financial condition and
results of operations of eBenX should be read in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this
report. This discussion and analysis contains forward-looking statements that
involve risks, uncertainties, and assumptions. The actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including but not limited to the risks discussed in
our Exhibit 99.1 to this Form 10-Q and other SEC filings including our Form 10-K
filed March 28, 2000 (File No. 333-87985).
Overview
We provide business-to-business e-commerce solutions to employers and
health plans for the procurement of group health insurance. Our group health
procurement solution includes assessing health plans, quoting, rating and
selecting new and renewal group health insurance, providing enrollment
capabilities which give employees the ability to make health plan choices and
enroll online, and allowing employers and health plans to exchange eligibility
information and complete premium billings and payments.
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 administration and premium billing and payment 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.
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 and other advisors. At the same
time, we intend to devote additional resources to develop partnerships and
relationships with human resource service 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
8
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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. As a result, all
research and development costs have been expensed as incurred. We intend to
continue to expand our 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 March 31, 2000, we had
an accumulated deficit of $9.0 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 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.
Three Months Ended
March 31
------------------
2000 1999
------ ------
Net revenue...................................... 100.0% 100.0%
Operating expenses:
Cost of services............................... 76.6 70.5
Selling, general and administrative............ 43.1 25.7
Research and development....................... 28.5 16.3
Amortization of stock-based compensation....... 11.3 --
----- -----
Total operating expenses.................... 159.5 112.5
----- -----
Loss from operations............................. (59.5) (12.5)
Interest income and other, net................... 27.5 1.4
----- -----
Net loss......................................... (32.0)% (11.1)%
===== =====
Net revenue. Net revenue for the three months ended March 31, 2000
increased to $5.6 million from $3.3 million for the same period in 1999,
representing an increase of $2.3 million, or 66.8%. This increase was due to our
success in direct sales to new customers throughout 1999, as well as the
expansion of exchange services to our existing customers.
Cost of services. Cost of services for the three months ended March 31,
2000 increased to $4.3 million, from $2.4 million for the same period in 1999,
representing an increase of $1.9 million, or 81.4%. Cost of services, as a
percentage of net revenues, increased to 76.6% for the three months ended March
31, 2000 from 70.5% for the same period in 1999, primarily due to additional
amounts invested to standardize and streamline our rules-based interfaces with
clients and healthplans, as well as increased personnel and computer-related
infrastructure costs to establish a second data center.
Selling, general and administrative. Selling, general and administrative
expenses increased to $2.4 million for the three months ended March 31, 2000,
from $0.9 million for the same period in 1999. The $1.5 million increase, or
180.0%, primarily was due to additions to management infrastructure and the
expansion of sales staff and marketing efforts. Selling,
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general and administrative expenses, as a percentage of net revenues, increased
to 43.1% for the three months ended March 31, 2000, from 25.7% for the same
period in 1999. We anticipate that sales and marketing expenses will increase in
future periods as we continue to expand our sales and marketing efforts.
Research and development. Research and development expenses for the three
months ended March 31, 2000 increased to $1.6 million, from $0.5 million for the
same period in 1999, representing an increase of $1.1 million, or 191.6%. This
increase primarily was due to additions to our research and development staff to
enhance product offerings and expand services to the mid-size employer market.
Research and development expenses, as a percentage of net revenues, increased to
28.5% for the three months ended March 31, 2000, from 16.3% for the same period
in 1999. We anticipate that we will continue to devote substantial resources to
our research and development efforts and related expenses will increase for the
foreseeable future.
Interest income and other, net. Net interest income includes income earned
from our invested cash and short-term securities and income earned from
facilitating our customers' payments to their health plans. Net interest income
increased to $1.5 million for the three months ended March 31, 2000, from
$45,000 for the same period in 1999. Net interest income for the three months
ended March 31, 1999 included interest expenses related to outstanding debt
obligations under our bank credit facility, which was repaid during 1999. The
large increase in interest income between periods is primarily a result of the
income earned on the proceeds received from the completion of our initial public
offering on December 10, 1999, and increased income earned from customer
payments to health plans.
Amortization of stock-based compensation. In connection with the granting
of stock options to employees, we recorded deferred stock-based compensation
totaling approximately $5.5 million in 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. For
the three months ended March 31, 2000, we recorded $631,000 in amortization
related to the deferred stock-based compensation. The amortization of deferred
compensation will result in an additional $4.1 million of charges to operations
through 2004.
Income taxes. As of December 31, 1999, we had unused federal and state
research and development tax credit carryforwards of approximately $100,000
which begin to expire in 2009. In addition, we had unused federal net operating
loss carryforwards at December 31, 1999 of approximately $5.6 million which
begin to expire in 2009. The utilization of these carryforwards is dependent
upon our ability to generate sufficient taxable income during carryforward
periods.
Liquidity and Capital Resources
Our initial public offering on December 10, 1999 generated gross proceeds
of $100 million in cash. The January 2000 exercise of the underwriter's
over-allotment option to purchase an additional 750,000 shares at $20.00 per
share generated additional gross proceeds of $15 million in cash. After
underwriting discounts and commissions and other costs, the net proceeds from
the offering totaled $105.5 million. We intend to use the proceeds from the
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. Pending use of the net proceeds for the above purposes,
we have invested the proceeds from this offering in short-term,
interest-bearing, investment-grade securities.
As of March 31, 2000, we had $109.7 million in short-term investments and
cash and cash equivalents. Short-term investments consisted primarily of
commercial paper and corporate bonds. Cash equivalents consisted primarily of
money market funds.
Our operating activities used cash of $1.8 million and $0.6 million in the
three months ended March 31, 2000 and 1999, respectively. The use of cash in
operations in 2000 was due primarily to our net loss and an increase in other
current assets and deposits, partially offset by non-cash charges for
depreciation and amortization and a decrease in accounts receivable. The use of
cash in operations in 1999 was due primarily to the net loss for the quarter,
along with an increase in other current assets and a decrease in accounts
payable.
Our investing activities used cash of $107.5 million and $0.4 million in
the three months ended March 31, 2000 and 1999, respectively. In 2000, our
investing activities used $225.5 million for purchases of investments, generated
$118.8
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million from the sale of investments, and used $0.8 million for additions to
equipment. In 1999, our investing activities used cash of $0.4 million for
additions to equipment.
Our financing activities provided cash of $13.7 million and $10,000 in the
three months ended March 31, 2000 and 1999, respectively. Proceeds from the
issuance of common stock generated $13.0 million in cash, comprised of net
proceeds of $14 million from the underwriter's exercise of the over-allotment
option to purchase 750,000 shares of common stock, offset by additional payments
of expenses related to our initial public offering. Stock issued under the
exercise of options and warrants generated net cash of $0.7 million in 2000, and
$10,000 in 1999.
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 relocation of our headquarters, we expect to
use working capital of approximately $5.8 million for leasehold improvements and
additional office furniture and equipment.
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 our public offering and cash from
operations will be sufficient to meet our working capital and operating resource
expenditure requirements for the foreseeable future. However, to the extent that
cash is used to fund acquisitions or investments in complementary businesses, we
may find it necessary to obtain additional equity or debt financing.
Year 2000 Issue
In prior years, we developed and implemented plans to become Year 2000
ready. Because essentially all of our services and internal systems were created
in the last few years, our services and internal systems were designed to avoid
the Year 2000 problem. In 1999, we completed testing and remediation on any
systems not yet compliant. As a result of these efforts, we experienced no
significant disruptions in either the system software used in the performance of
our services or our word processing, billing and other internal systems
software, including information technology ("IT") and non-IT systems. The
related expense resulting from our Year 2000 efforts was not material. We are
not aware of any material problems resulting from Year 2000 issues, either with
our services, our internal systems, or the products and services of third
parties. We will continue to monitor our critical computer applications and
those of our suppliers and vendors throughout the year 2000 to ensure that any
Year 2000 matters that may arise are addressed promptly.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
- -------------------------
Our exposure to market risk for changes in interest rates relate primarily
to our short-term investments. We do not use derivative financial instruments.
The primary objective of our investment activities is to preserve principle
while maximizing yields without significantly increasing risk. Due to the nature
of our investments, we believe that there is no material risk exposure. All
investments are held at market value, with unrealized gains and losses included
in other comprehensive income.
The table below represents principal (or notional) amounts and related
weighted-average interest rates by year of maturity for the Company's
investments at March 31, 2000 (in thousands):
2000 2001 Total
-------- -------- ---------
Cash equivalents $ 3,024 $ -- $ 3,024
Average interest rate 5.87% -- 5.87%
Short-term investments $104,462 $2,182 $106,644
Average interest rate 6.19% 6.55% 6.20%
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Exchange Rate and Commodity Price Sensitivity
- ---------------------------------------------
eBenX does not invest in foreign instruments or commodities and,
therefore, has no direct exposure related to either foreign currency exchange
rate fluctuation or commodity price fluctuation.
PART II
Item 1. Legal Proceedings
eBenX is not involved in any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the first quarter of 2000, we issued and sold the following
securities that were not registered under the Securities Act of 1933:
1. Pursuant to Section 4(2) of the Securities Act of 1933, we issued and sold
3,705 shares of common stock to an employee for aggregate consideration of
$12 upon the exercise of a warrant for shares of common stock.
The recipient of the securities in this transaction represented his
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate legends
were affixed to the share certificates issued in such transactions. The
recipient had adequate access, through his relationship with us, to information
about us. No placement agents were used in the foregoing transaction.
Use of Proceeds
On December 15, 1999, we closed our initial public offering of 5,000,000
shares of common stock. The shares of the common stock sold in the offering were
registered under the Securities Act of 1933 on a registration statement on Form
S-1 (No. 333-87985).
In January 2000, the underwriters exercised their over-allotment option to
purchase 750,000 shares at the initial offering price of $20.00 per share. With
the over-allotment option, the aggregate initial public offering proceeds
totaled $115 million.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
12
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are submitted herewith:
3.1 Fifth Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of Registrant's Registration
Statement on Form S-1, Registration Number 333-87985).
3.2 Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 of Registrant's Registration Statement on Form S-1,
Registration Number 333-87985).
4.1 Form of Certificate of Common Stock of the Company (incorporated by
reference to Exhibit 4.1 of Registrant's Registration Statement on
Form S-1, Registration Number 333-87985).
10.1 1993 Stock Option Plan (incorporated by reference to Exhibit 4.4 of
Registrant's Registration Statement on Form S-8, Registration Number
333-94081).
10.2 1999 Stock Incentive Plan (incorporated by reference to Exhibit 4.5 of
Registrant's Registration Statement on Form S-8, Registration Number
333-94081).
10.3 1999 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 4.6 of Registrant's Registration Statement on Form S-8,
Registration Number 333-94081).
10.4 Services Agreement by and between the Company and PepsiCo, Inc., dated
June 1, 1997 (incorporated by reference to Exhibit 10.4 of
Registrant's Registration Statement on Form S-1, Registration Number
333-87985).
10.5 Services Agreement by and between the Company and Bell Atlantic
Corporation, dated July 1, 1998 (incorporated by reference to Exhibit
10.5 of Registrant's Registration Statement on Form S-1, Registration
Number 333-87985).
10.6 Administrative Services Agreement by and between the Company and The
Blue Cross Blue Shield Association, dated May 6, 1999 (incorporated by
reference to Exhibit 10.6 of Registrant's Registration Statement on
Form S-1, Registration Number 333- 87985).
10.7 Administrative Services Agreement by and between the Company and GE
Capital Services Corporation, dated January 1, 1996 (incorporated by
reference to Exhibit 10.7 of Registrant's Registration Statement on
Form S-1, Registration Number 333-87985).
10.8 Services Agreement by and between the Company and General Electric
Company, dated January 1, 1997 (incorporated by reference to Exhibit
10.8 of Registrant's Registration Statement on Form S-1, Registration
Number 333-87985).
10.9 Employment Agreement by and between the Company and Mark Tierney,
dated as of April 22, 1999, and amended and restated on September 28,
1999 (incorporated by reference to Exhibit 10.9 of Registrant's
Registration Statement on Form S-1, Registration Number 333-87985).
10.10 Employment Agreement by and between the Company and John Davis, dated
as of April 12, 1999 (incorporated by reference to Exhibit 10.10 of
Registrant's Registration Statement on Form S-1, Registration Number
333-87985).
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10.11 Employment Agreement by and between the Company and Scott Halstead,
dated as of April 22, 1999 (incorporated by reference to Exhibit 10.11
of Registrant's Registration Statement on Form S-1, Registration
Number 333-87985).
10.12 Standard Office Lease by and between Minnesota CC Properties, Inc.
and The Prudential Insurance Company of America, dated December 31,
1993 (incorporated by reference to Exhibit 10.12 of Registrant's
Registration Statement on Form S-1, Registration Number 333-87985).
10.13 Office Sublease by and between the Company and The Prudential
Insurance Company of America, dated March 19, 1997 (incorporated by
reference to Exhibit 10.13 of Registrant's Registration Statement on
Form S-1, Registration Number 333-87985).
10.14 First Amendment of Sublease, by and between the Company and The
Prudential Insurance Company of America, dated August 10, 1999
(incorporated by reference to Exhibit 10.14 of Registrant's
Registration Statement on Form S-1, Registration Number 333- 87985).
10.15 Consent of Landlord, by and among the Company, Teachers Insurance and
Annuity Association (successor to Minnesota CC Properties, Inc.), and
The Prudential Insurance Company of America, dated August 30, 1999
(incorporated by reference to Exhibit 10.15 of Registrant's
Registration Statement on Form S-1, Registration Number 333-87985).
10.16 Standard Office Lease by and between the Company and ND Properties,
Inc., dated March 12, 1997 (incorporated by reference to Exhibit 10.16
of Registrant's Registration Statement on Form S-1, Registration
Number 333-87985).
10.17 Amendment No. 1 to Lease Agreement by and between the Company and ND
Properties, Inc., dated October 1, 1997 (incorporated by reference to
Exhibit 10.17 of Registrant's Registration Statement on Form S-1,
Registration Number 333-87985).
10.18 Amendment No. 2 to Lease Agreement by and between the Company and ND
Properties, Inc., dated December 23, 1997 (incorporated by reference
to Exhibit 10.18 of Registrant's Registration Statement on Form S-1,
Registration Number 333-87985).
10.19 Amendment No. 3 to Lease Agreement by and between the Company and
Teachers Insurance and Annuity Association of America (successor to ND
Properties, Inc.), dated January 19, 1999 (incorporated by reference
to Exhibit 10.19 of Registrant's Registration Statement on Form S-1,
Registration Number 333-87985).
10.20 Healtheon Service Employer Group Distribution Agreement by and
between the Company and Healtheon Corporation, dated September 30,
1999 (incorporated by reference to Exhibit 10.20 of Registrant's
Registration Statement on Form S-1, Registration Number 333-87985
10.21 Second Amended and Restated Investors' Rights Agreement, dated June
9, 1999 (relating to the registration rights relating to Series A,
Series B and Series C Preferred Stock) (incorporated by reference to
Exhibit 10.21 of Registrant's Registration Statement on Form S-1,
Registration Number 333-87985).
27.1 Financial Data Schedule.*
99.1 Risk Factors *
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three-month period ended March
31, 2000.
- ----------
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EBENX, INC.
Date: May 12, 2000 By /s/ John J. Davis
------------------------------------------
John J. Davis
Chief Executive Officer and President
(principal executive officer)
Date: May 12, 2000 By /s/ Scott P. Halstead
------------------------------------------
Scott P. Halstead
Chief Financial Officer and Secretary
(principal financial officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EBENX, INC. CONTAINED ELSEWHERE IN THIS FORM 10-Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,024
<SECURITIES> 106,644
<RECEIVABLES> 2,659
<ALLOWANCES> (86)
<INVENTORY> 0
<CURRENT-ASSETS> 114,377
<PP&E> 3,107
<DEPRECIATION> 160
<TOTAL-ASSETS> 118,199
<CURRENT-LIABILITIES> 3,653
<BONDS> 0
0
0
<COMMON> 162
<OTHER-SE> 123,418
<TOTAL-LIABILITY-AND-EQUITY> 118,199
<SALES> 5,575
<TOTAL-REVENUES> 5,575
<CGS> 4,271
<TOTAL-COSTS> 8,896
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,785)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,785)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,785)
<EPS-BASIC> (.11)
<EPS-DILUTED> (.11)
</TABLE>
<PAGE>
Exhibit 99.1
Risks Related to Our Business
Potential investors of eBenX should carefully consider the risks and
uncertainties described below and the other information contained in eBenX's
filings with the Securities and Exchange Commission before deciding whether to
purchase shares of eBenX common stock. If any of the following risks actually
occur, eBenX's business and operating results could be harmed. This could cause
the trading price of eBenX common stock to decline.
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 $0.5 million, $1.0 million and $5.0 million
for the years ended December 31, 1997, 1998 and 1999. As of March 31, 2000, we
had an accumulated deficit of $9.0 million. 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 1999, nine customers accounted for
approximately 80% 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 services could limit our revenue
growth.
The failure of industry participants to accept our services as a
replacement for traditional methods of operation could limit our revenue growth.
Our success depends on our ability to provide 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
services will require that all participants in the group health insurance market
adopt new methods of administering benefits, exchanging eligibility information
and executing payment transactions.
Further, our 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 industry is intensely
competitive, rapidly evolving and subject to sudden technological change. We
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 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 large employer 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 service and systems companies have the health care expertise and
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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. At the same time, we must 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
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 services requires a substantial and technical analysis of an
employer's health care benefits offerings and requirements, and time-intensive
education of the advantages of our services. Due to the length of our sales
cycle, which ranges from three to twelve months, we often devote significant
resources and incur costs without any assurance that a prospective employer will
purchase our services. In the event that a prospective employer does not
purchase our 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 health care information collection companies, human resource
information services firms, health care benefits consultants and brokers and
other industry participants. To date, we have established only a limited number
of strategic relationships. Strategic partners may offer products or services of
several different companies, including products and services that compete with
our 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 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 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
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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 that may cause these quarterly fluctuations include:
o the number and size of new customers starting services;
o the decision of one or more employers to delay implementation or cancel
ongoing services;
o our ability to design, develop and introduce new services and features for
existing services on a timely basis;
o costs associated with strategic acquisitions and alliances or investments
in technology;
o expenses incurred for geographic and service expansion;
o a reduction in the number of employees of our customers; and
o 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 greater
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 health
care 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.
We could be subject to potential liability claims related to our 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 services on behalf of an
employer could result in the delay of processing of health care 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 health care 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 health care benefits even though we do not
3
<PAGE>
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 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 future expansion of our business
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 the 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 health care industry could harm our future operating
results and opportunities for growth.
Our 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 health care industry may require us to reconfigure our
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 services beneficial if there is only limited
competition among health plans.
Our revenues could decrease if our system is inadequate.
Any failure of our system could harm our business and operating results.
Our system processes vast amounts of eligibility and financial data and executes
large numbers of payment transactions. Any delay or failure in our system, 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 health care 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 system, 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.
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. A prolonged Internet or communications failure also could prevent us
from
4
<PAGE>
performing services on behalf of customers. Also, a systemic failure could
require potential customers to dedicate substantial resources towards fixing or
resolving problems and may make the sales and marketing of our services more
difficult.
Our business and reputation may be harmed if we are unable to protect the
privacy of our 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 few proven products and services exist.
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 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-NETTM and a U.S. service mark registration for WebElectTM. In addition,
we have applied for trademark and service mark protection for benX, eBenX, and
The Benefit Exchange Network. These applications may not be granted. Our
trademark and service mark registrations may not be enforceable or effective in
protecting the 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 services may be independently developed.
Although we believe that our core technology has been independently
developed and that none of our technology or intellectual property infringes on
the rights of others, third parties may assert infringement claims against us in
the future. We may be required to modify our products, services, internal
systems or technologies or to obtain a license to permit our continued use of
those rights. We may not be able to do either in a timely manner or upon
reasonable terms and conditions. Failure to do so could harm our business and
operating results. In addition, future litigation relating to these matters
could result in substantial cost 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.
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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.
Federal, state and local laws could harm our business and operating results.
Federal, state 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 health care 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. Although compliance
with current laws 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 included 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.
HIPAA mandates that health plans use standard transactions, identifiers,
security and other provisions during 2000. We have designed our products and
services to comply with HIPAA, but any change in federal standards would require
us to expend additional resources. In addition, under HIPAA, the U.S. Department
of Health and Human Services has issued proposed rules that, if adopted, would
impose significant restrictions on the disclosure of electronic personal health
information.
Further, our ministerial role in facilitating payments by employers to
health plans may subject us to ERISA. 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
and constraints 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.
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 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.
Future sales of our common stock in the public market could cause the price of
our common stock to decline.
We cannot predict the timing or amount of future sales of shares of our
stock or the effect, if any, that market sales of shares, or the availability of
shares for sale, will have on the prevailing market price of our common stock.
Our shareholders could sell substantial amounts of our common stock in the
public market. Currently 9.7 million shares are
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subject to certain lock-up agreements related to our initial public offering.
Upon the expiration of these agreements, these shares will be available for
public trading. Consequently, the price of our common stock could fall.
Concentration of ownership may give some shareholders substantial influence and
may prevent or delay a change in control.
Some shareholders, including officers and directors of the company,
beneficially own a substantial portion of our outstanding common stock. 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 also could discourage proxy contests
and make it more difficult for 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.
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