<PAGE>
--------------------------------------------------------------------------------
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 SEPTEMBER 30, 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 0-28365
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 November 1, 2000 there were 19,490,224 shares of the registrant's common
stock outstanding.
--------------------------------------------------------------------------------
<PAGE>
EBENX, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2000
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2000
and December 31, 1999
Condensed Consolidated Statements of Operations for the three
and nine month periods ended September 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows for the nine
month period ended September 30, 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
2
<PAGE>
EBENX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 496 $ 98,611
Accounts receivable, net of allowance of $236 and $45 4,340 3,415
Unbilled revenue .................................... 2,074 446
Prepaid expenses and other .......................... 1,785 609
Short-term investments .............................. 79,319 --
--------- ---------
Total current assets ............................. 88,014 103,081
Property and equipment, net ......................... 11,169 2,456
Deposits ............................................ 140 62
Goodwill and other intangibles, net ................. 66,812 --
--------- ---------
Total assets ..................................... $ 166,135 $ 105,599
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 888 $ 1,353
Accrued compensation ................................ 1,209 960
Accrued expenses .................................... 3,241 864
Accrued offering costs .............................. 166 1,113
Deferred revenue .................................... 266 183
--------- ---------
Total current liabilities ........................ 5,770 4,473
Shareholders' equity:
Common stock ........................................ 192 152
Additional paid-in capital .......................... 182,356 112,937
Deferred stock-based compensation ................... (7,598) (4,714)
Accumulated other comprehensive loss ................ (9) --
Retained deficit .................................... (14,576) (7,249)
--------- ---------
Total shareholders' equity ....................... 160,365 101,126
--------- ---------
Total liabilities and shareholders' equity ............ $ 166,135 $ 105,599
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
EBENX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue ....................................... $ 7,644 $ 4,638 $ 19,614 $ 11,746
Cost of services .................................. 5,590 3,836 14,685 9,069
-------- -------- -------- --------
Gross profit ................................. 2,054 802 4,929 2,677
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative ............. 3,198 1,328 8,510 3,338
Research and development ........................ 1,964 1,167 5,376 2,294
Amortization of stock-based compensation ........ 672 67 1,811 67
Amortization of goodwill and other intangibles... 1,518 -- 1,518 --
-------- -------- -------- --------
Total operating expenses ..................... 7,352 2,562 17,215 5,699
-------- -------- -------- --------
Loss from operations .............................. (5,298) (1,760) (12,286) (3,022)
Interest income and other, net .................... 1,648 170 4,959 320
-------- -------- -------- --------
Net loss .......................................... $ (3,650) $ (1,590) $ (7,327) $ (2,702)
======== ======== ======== ========
Net loss per share:
Basic and diluted ............................... $ (.21) $ (.45) $ (.44) $ (.77)
======== ======== ======== ========
Shares used in calculation of net loss per share:
Basic and diluted ............................... 17,202 3,553 16,518 3,517
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
EBENX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net loss .............................................. $ (7,327) $ (2,702)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation of property and equipment ............... 954 475
Amortization of stock-based compensation,
goodwill and other intangibles ..................... 3,329 67
Loss on sale of property and equipment ............... 210 --
Changes in operating assets and liabilities:
Accounts receivable ................................. (638) (1,357)
Other current assets ................................ (1,749) (370)
Accounts payable .................................... (979) (113)
Accrued expenses .................................... 1,276 669
Deferred revenue .................................... 83 150
Deposits ............................................ (32) (21)
--------- ---------
Net cash used in operating activities ............. (4,873) (3,202)
Investing activities:
Additions to property and equipment ................... (7,866) (939)
Purchases of investments .............................. (602,396) --
Sales of investments .................................. 523,068 --
Cost of acquisition, net of cash acquired ............. (20,424) --
--------- ---------
Net cash used in investing activities ............ (107,618) (939)
Financing activities:
Stock options and warrants exercised .................. 819 18
Proceeds from issuance of common stock, net of costs .. 13,557 --
Proceeds from issuance of preferred stock, net
of costs............................................ -- 10,482
Repayment of note payable ............................. -- (750)
--------- ---------
Net cash provided by financing activities ........ 14,376 9,750
--------- ---------
Net increase (decrease) in cash and cash equivalents ... (98,115) 5,609
Cash and cash equivalents at beginning of period ....... 98,611 1,681
--------- ---------
Cash and cash equivalents at end of period ............. $ 496 $ 7,290
========= =========
Noncash investing and financing activities:
Issuance of common stock for acquisition ............. $ 49,440 $ --
Deferred compensation related to options granted ..... $ 5,169 $ 4,194
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
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 for the purchase, administration and payment of group health and
welfare benefits. The Company applies technology to simplify and automate the
complex, ongoing and multiple transactions associated with the exchange of data
and dollars between parties in the health and welfare benefits supply chain. The
result is reduced administrative and health care costs for employers; improved
efficiencies and strengthened client relationships for brokers and advisors;
reduced administrative costs and more robust service offerings for health plans
and other carriers; 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 and nine month
periods ended September 30, 2000 are not necessarily indicative of the results
to be expected for any subsequent quarter or for the entire year ending 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, brokers and other employee benefit advisors, and health
plans and other carriers. The Company's customers are located throughout the
United States.
Principles of Consolidation
The consolidated financial statements include the Company and its
wholly owned subsidiaries, Arbor Associates, Inc. and Managed Care Buyer's
Group, Inc. 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.
6
<PAGE>
2. Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," establishes standards for the reporting and
display of comprehensive income and its components. Comprehensive loss for the
nine months ended September 30, 2000 was $9,000, consisting solely of an
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. Acquisition
On September 6, 2000, the Company completed its acquisition of Arbor
Administrative Services, Inc. ("Arbor"). Arbor provides benefits administration
and related Web-based services to employers. Arbor distributes its services
primarily through brokers and employee benefit advisors. The Company paid $17
million in cash and exchanged approximately 2,596,000 shares of eBenX stock with
a fair value of $44.6 million for all of the outstanding common stock of Arbor.
The common stock was valued using eBenX's average closing stock price on the
date prior to and the date of the announcement. The Company also assumed all of
the outstanding restricted stock, stock options and warrants of Arbor at a fair
value of $4.8 million. The options and warrants were valued using the
Black-Scholes option pricing model with inputs of .90 for volatility, 2 years
for expected life, 6.35% for the risk-free interest rate, and a market value of
$17.19. The restricted stock was valued at a market value of $17.19 per share.
In connection with the acquisition, the Company incurred transaction costs
consisting primarily of professional fees of $1.4 million, bringing the total
purchase price for the acquisition to $67.8 million.
The acquisition was accounted for under the purchase method of
accounting in accordance with APB Opinion No. 16. Under the purchase method of
accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values. Preliminary estimates
based on management's best estimates of the fair values of the assets and
liabilities of Arbor have been combined with the recorded values of the assets
and liabilities of eBenX in the unaudited condensed consolidated financial
information. These allocations are subject to change pending a final analysis of
the value of the assets acquired and liabilities assumed.
The total purchase price paid for the Arbor acquisition was allocated
as follows:
Net assets acquired $ (504)
Goodwill and other intangibles 68,331
Goodwill and other intangible assets are being amortized over a
three-year period. At September 30, 2000, accumulated amortization related to
goodwill and other intangible assets acquired in the Arbor acquisition totaled
$1.5 million.
7
<PAGE>
The following summary, prepared on an unaudited pro forma basis,
reflects the condensed consolidated results of operations for the nine month
periods ended September 30, 2000 and 1999, assuming Arbor had been acquired at
the beginning of the periods presented (in thousands, except per share data):
Nine months ended
September 30
-------------------------
2000 1999
--------- ---------
Revenue $ 24,591 $ 15,037
Net loss $ (23,152) $(19,889)
Basic and diluted net loss per share $ (1.23) $ (3.25)
The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the periods presented. They
are not intended to be a projection of future results and do not reflect any
synergies that might be affected from combined operations.
5. Deferred stock-based compensation
In connection with the granting of stock options to employees prior to
the Company's initial public offering, the Company recorded deferred stock-based
compensation of 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. In connection with the acquisition of Arbor in
September 2000, the Company recorded deferred stock-based compensation of $5.2
million. 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 all outstanding unvested options and restricted stock of Arbor were
converted to Company options and restricted stock. 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 $1.8 million of
amortization expense was recognized in the nine months ended September 30, 2000.
The amortization of the remaining deferred stock-based compensation will result
in additional charges to operations through 2004.
6. 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 101B, which amended SAB 101 and superseded
SAB 101A, further delaying the implementation date of SAB 101 for registrants
with fiscal years that end after December 15, 1999. The Company is required to
be in conformity with the provisions of SAB 101, as amended by SAB 101B, by
December 31, 2000. The adoption of SAB 101 is not expected to have a material
effect on the financial position or results of operations of the Company.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
Except for historical information, this document contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements involve risks and uncertainties,
including, among other things, statements regarding our revenue mix, anticipated
costs and expenses, service development, relationships with strategic partners
and pending acquisitions. These forward-looking statements include declarations
regarding our belief or current expectations of management, such as statements
indicating that "we expect," "we anticipate," "we intend," "we believe," and
similar language. We caution that any forward-looking statement made by us in
this Form 10-Q or in other announcements made by us are further qualified by
important factors that could cause actual results to differ materially from
those projected in the forward-looking statements, including without limitation
the factors set forth on Exhibit 99.1 to eBenX's Form 10-Q for the quarter ended
March 31, 2000, as filed with the Securities and Exchange Commission.
The following discussion and analysis of the financial condition and
results of operations of eBenX should be read in conjunction with the
consolidated financial statements and related notes for the year ended December
31, 1999, and included in our Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
Overview
We provide specialized business-to-business e-commerce solutions to
employers, brokers and other employee benefit advisors, and health plans and
other carriers for the purchase, administration, and payment of group health and
welfare benefits. We apply the Internet and other technology to simplify and
automate the complex, ongoing and multiple transactions associated with the
exchange of data and dollars between parties in the health and welfare benefit
supply chain.
In September 2000, we acquired Arbor Administrative Services, Inc,
which merged into our wholly owned subsidiary, Arbor Associates, Inc. Arbor is a
web-based benefits administrator that offers one of the most functionally rich
Web/IVR benefits platforms available in the market today, and provides full
service benefit administration for mid-sized employers. Arbor distributes its
services primarily through brokers and other employee benefits advisors. With
the acquisition of Arbor, we add deep domain expertise in benefits
administration, established mid-market broker relationships, and a strong mid-
market customer base.
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.
Revenue is derived primarily from providing ongoing annual enrollment
and health and welfare eligibility administration and premium billing and
payment exchange services. Exchange services revenue typically is priced on a
per employee per month basis with adjustments made to accommodate the number of
health plan and other carriers required by the customer. 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 three-year contracts with our large
employer customers. Customers may purchase some or all of our services, and the
customer relationship may evolve from utilizing procurement services to
utilizing exchange services.
The establishment of new large employer and carrier 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 establishment of new
mid-market customer relationships is coordinated through the broker or employee
benefit advisor that has an existing relationship with the customer. The
implementation process for mid-market customers typically takes one to three
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
9
<PAGE>
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
employee benefit advisors and to health plans and other carriers through direct
efforts. 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 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 September 30, 2000,
we had an accumulated deficit of $14.6 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 carrier
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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue .................................... 100.0% 100.0% 100.0% 100.0%
Cost of services ............................... 73.1 82.7 74.9 77.2
------- ------- ------- -------
Gross margin .............................. 26.9 17.3 25.1 22.8
Operating expenses:
Selling, general and administrative .......... 41.8 28.6 43.4 28.4
Research and development ..................... 25.7 25.2 27.4 19.5
Amortization of stock-based compensation ..... 8.8 1.4 9.2 0.6
Amortization of goodwill and other
intangibles................................ 19.9 -- 7.8 --
------- ------- ------- -------
Total operating expenses .................. 96.2 55.2 87.8 48.5
------- ------- ------- -------
Loss from operations ........................... (69.3) (37.9) (62.7) (25.7)
Interest income and other, net ................. 21.6 3.6 25.3 2.7
------- ------- ------- -------
Net loss ....................................... (47.7)% (34.3)% (37.4)% (23.0)%
======= ======= ======= =======
</TABLE>
10
<PAGE>
Comparison of the three months ended September 30, 2000 and 1999
Net revenue. Net revenue for the three months ended September 30, 2000
increased to $7.6 million from $4.6 million for the same period in 1999,
representing an increase of $3.0 million, or 64.8%. Growth in exchange services
revenue resulted from our success in direct sales of exchange services to new
customers in late 1999 and 2000, as well as through the expansion of exchange
services to our existing customers in 2000. In addition, exchange services
revenue includes approximately one month of revenue resulting from our
acquisition of Arbor in September 2000. Revenue from procurement services
increased primarily from new customer sales of service agreements beginning in
2000.
Cost of services. Cost of services for the three months ended September
30, 2000 increased to $5.6 million, from $3.8 million for the same period in
1999, representing an increase of $1.8 million, or 45.7%. Cost of services, as a
percentage of net revenues, decreased to 73.1% for the three months ended
September 30, 2000, from 82.7% for the same period in 1999. The decrease can be
attributed to cost efficiencies gained through our concerted efforts to
streamline exchange processes and electronic interfaces and through our
accelerated presence in the mid-market segment.
Selling, general and administrative. Selling, general and
administrative expenses increased to $3.2 million for the three months ended
September 30, 2000, from $1.3 million for the same period in 1999. The $1.9
million increase, or 140.8%, primarily was due to additions to management
infrastructure and corporate personnel, as well as the expansion of our sales
staff and marketing efforts. Selling, general and administrative expenses, as a
percentage of net revenues, increased to 41.8% for the three months ended
September 30, 2000, from 28.6% 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 September 30, 2000 increased to $2.0 million, from $1.2
million for the same period in 1999, representing an increase of $800,000, or
68.3%. This increase primarily was due to additions to our research and
development staff and external contractors 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 25.7% for the three
months ended September 30, 2000, from 25.2% 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.
Amortization of stock-based compensation. In connection with the
granting of stock options to employees, we recorded deferred stock-based
compensation in 1999, with an additional amount recorded in 2000 related to our
acquisition of Arbor. For the three months ended September 30, 2000, we recorded
$672,000 in amortization expense related to the deferred stock-based
compensation. The amortization of deferred stock-based compensation will result
in an additional $7.6 million of charges to operations through 2004.
Amortization of goodwill and other intangibles. Related to our
acquisition of Arbor, goodwill and other intangibles of $68.3 million was
recorded. Goodwill and other intangibles will be amortized over 36 months. For
the three months ended September 30, 2000, we recorded $1.5 million in
amortization expense related to these assets.
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 and other carriers.
Net interest income increased to $1.6 million for the three months ended
September 30, 2000, from $170,000 for the same period in 1999. The increase in
interest income 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 and
other carriers.
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.
11
<PAGE>
Comparison of the nine months ended September 30, 2000 and 1999
Net revenue. Net revenue for the nine months ended September 30, 2000
increased to $19.6 million from $11.7 million for the same period in 1999,
representing an increase of $7.9 million, or 67.0%. This increase was due to our
success in direct sales of both our exchange and procurement services to new
customers in late 1999 and early 2000, as well as the expansion of exchange
services to our existing customers.
Cost of services. Cost of services for the nine months ended September
30, 2000 increased to $14.7 million, from $9.1 million for the same period in
1999, representing an increase of $5.6 million, or 61.9%. Cost of services, as a
percentage of net revenues, decreased to 74.9% for the nine months ended
September 30, 2000 from 77.2% for the same period in 1999, primarily due to
efficiencies gained from our efforts to standardize and streamline our
rules-based interfaces with customers and health plans and other carriers.
Selling, general and administrative. Selling, general and
administrative expenses increased to $8.5 million for the nine months ended
September 30, 2000, from $3.3 million for the same period in 1999. The $5.2
million increase, or 154.9%, primarily was due to additions to management
infrastructure and sales and marketing staff. The relocation of the corporate
headquarters resulted in a one-time charge of $210,000 for the write-off of
property and equipment. Selling, general and administrative expenses, as a
percentage of net revenues, increased to 43.4% for the nine months ended
September 30, 2000, from 28.4% 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
nine months ended September 30, 2000 increased to $5.4 million, from $2.3
million for the same period in 1999, representing an increase of $3.1 million,
or 134.4%. This increase primarily was due to additions to our research and
development staff and external contractors 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 27.4% for the nine
months ended September 30, 2000, from 19.5% 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.
Amortization of stock-based compensation. In connection with the
granting of stock options to employees, we recorded deferred stock-based
compensation in 1999, with an additional amount recorded in 2000 related to our
acquisition of Arbor. For the nine months ended September 30, 2000, we recorded
$1.8 million in amortization expense related to the deferred stock-based
compensation. The amortization of deferred stock-based compensation will result
in an additional $7.6 million of charges to operations through 2004.
Amortization of goodwill and other intangibles. Related to our
acquisition of Arbor, goodwill and other intangibles of $68.3 million was
recorded. Goodwill and other intangibles will be amortized over 36 months. For
the nine months ended September 30, 2000, we recorded $1.5 million in
amortization expense related to these assets.
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 and other carriers.
Net interest income increased to $5.0 million for the nine months ended
September 30, 2000, from $320,000 for the same period in 1999. Net interest
income for the nine months ended September 30, 1999 included interest expenses
related to outstanding debt obligations under our bank credit facility, which
was repaid during 1999. The increase in interest income 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 and other carriers.
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.
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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. Approximately $20.4 million of these
proceeds were used in connection with our acquisition of Arbor in September
2000. We intend to use the remaining 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 other
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 September 30, 2000, we had $79.8 million in short-term
investments and cash and cash equivalents. Short-term investments consisted
primarily of commercial paper and corporate and government bonds. Cash
equivalents consisted primarily of money market funds.
Our operating activities used cash of $4.9 million and $3.2 million in
the nine months ended September 30, 2000 and 1999, respectively. The use of cash
in operations in 2000 was due primarily to our net loss, an increase in other
current assets and accounts receivable, and a decrease in accounts payable,
partially offset by an increase in accrued expenses and non-cash charges for
depreciation and amortization of goodwill, intangibles, and stock-based
compensation. The use of cash in operations in 1999 was due primarily to the net
loss for the period and an increase in accounts receivable, partially offset by
a non-cash charge for depreciation.
Our investing activities used cash of $107.6 million and $0.9 million
in the nine months ended September 30, 2000 and 1999, respectively. In 2000, our
investing activities used $602.4 million for purchases of investments, generated
$523.1 million from the sale of investments, and used $7.9 million for additions
to property and equipment. These additions were made in connection with the move
of the corporate headquarters in April 2000, and consisted primarily of
leasehold improvements and additional office furniture and equipment. The
acquisition of Arbor used an additional $20.4 million, net of cash acquired, in
the nine months ending September 30, 2000. In 1999, our investing activities
used cash of $0.9 million for additions to equipment.
Our financing activities provided cash of $14.4 million and $9.8
million in the nine months ended September 30, 2000 and 1999, respectively.
Proceeds from the issuance of common stock generated $13.6 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 $0.8
million in 2000. In 1999, proceeds from the issuance of preferred stock provided
$10.5 million in cash, while the repayment of a note payable used $0.8 million
of cash. The exercise of stock options generated an additional $18,000 in cash.
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 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.
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.
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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
principal 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 September 30, 2000 (in thousands):
2000 2001 Total
-------- ------ -------
Cash equivalents $ 496 $ -- $ 496
Average interest rate 6.18% -- 6.18%
Short-term investments $74,137 $5,182 $79,319
Average interest rate 6.65% 6.92% 6.67%
Exchange Rate and Commodity Price Sensitivity
eBenX does not conduct business outside of the United States and 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
In connection with the merger of Arbor Administrative Services, Inc.
with and into our wholly owned subsidiary, Arbor Associates, Inc. on September
6, 2000, and pursuant to Section 4(2) of the Securities Act of 1933, we issued
and sold 2,595,758 shares of common stock and 303,000 shares of common stock
subject to restrictions or vesting provisions. Additional consideration for the
merger included $17 million in cash and our assumption of all options and
warrants of Arbor and the conversion of such options and warrants to acquire
shares of eBenX Common Stock at an exchange ratio of .31528.
The recipients of the securities in these transactions represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof, and appropriate
legends were affixed to the share certificates issued in such transactions. The
recipients had adequate access, through their relationship with us, to
information about us. No placement agents were used in the foregoing
transaction.
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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. After deducting underwriting
discounts and commissions and other offering expenses of $9.5 million, we
received net proceeds of approximately $105.5 million from the offering.
We have used the net offering proceeds for the following purposes in
the approximate amounts set forth below (in millions):
Short-term investments $ 72.3
Acquisition of Arbor 20.4
Purchase of furniture and equipment 7.9
Working capital 4.9
------
Total $105.5
In connection with our acquisition of Arbor, the eBenX President of
Mid-Market, formerly President of Arbor, received approximately $11.4 million in
his capacity as the majority shareholder of Arbor. Otherwise, none of the net
proceeds were paid, directly or indirectly to (i) officers or directors of eBenX
or its affiliates, (ii) persons owning 10% or more of our equity securities or
(iii) affiliates.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None.
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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 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.*
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended
September 30, 2000:
August 31, 2000 - Item 5, Other Events, and Item 7, Financial
Statements and Exhibits. eBenX, Inc. filed a press release announcing
the signing of a definitive agreement to acquire Arbor Administrative
Services, Inc.
September 14, 2000 - Item 2, Acquisition or Disposition of Assets, and
Item 7, Financial Statements, Pro Forma Financial Information and
Exhibits. eBenX, Inc. provided a summary of the acquisition of Arbor
Administrative Services, Inc. and filed the definitive agreement
providing for the acquisition.
* 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: November 14, 2000 By /s/ Scott P. Halstead
-------------------------------------
Scott P. Halstead
Chief Financial Officer and Secretary
(principal financial officer)
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