<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 JUNE 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 August 1, 2000 there were 16,514,621 shares of the registrant's common
stock outstanding.
--------------------------------------------------------------------------------
<PAGE>
EBENX, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2000
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2000 and
December 31, 1999
Condensed Consolidated Statements of Operations for the three and six
month periods ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows for the six
month period ended June 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>
June 30, December 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 921 $ 98,611
Accounts receivable, net of allowance of $176 and $45 3,815 3,415
Unbilled revenue .................................... 824 446
Prepaid expenses and other .......................... 1,267 609
Short-term investments .............................. 102,377 --
--------- ---------
Total current assets ............................. 109,204 103,081
Property and equipment, net ......................... 7,964 2,456
Deposits ............................................ 99 62
--------- ---------
Total assets ..................................... $ 117,267 $ 105,599
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 420 $ 1,353
Accrued compensation ................................ 672 960
Accrued expenses .................................... 2,561 864
Accrued offering costs .............................. 166 1,113
Deferred revenue .................................... 190 183
--------- ---------
Total current liabilities ........................ 4,009 4,473
Shareholders' equity:
Common stock ........................................ 164 152
Additional paid-in capital .......................... 127,306 112,937
Deferred stock-based compensation ................... (3,262) (4,714)
Accumulated other comprehensive loss ................ (24) --
Retained deficit .................................... (10,926) (7,249)
--------- ---------
Total shareholders' equity ....................... 113,258 101,126
--------- ---------
Total liabilities and shareholders' equity ............ $ 117,267 $ 105,599
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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EBENX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue ..................................... $ 6,394 $ 3,766 $ 11,970 $ 7,108
Cost of services ................................ 4,824 2,878 9,095 5,233
-------- -------- -------- --------
Gross profit ............................... 1,570 888 2,875 1,875
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative ........... 2,908 1,151 5,309 2,010
Research and development ...................... 1,824 582 3,413 1,127
Amortization of stock-based compensation ...... 508 -- 1,140 --
-------- -------- -------- --------
Total operating expenses ................... 5,240 1,733 9,862 3,137
-------- -------- -------- --------
Loss from operations ............................ (3,670) (845) (6,987) (1,262)
Interest income and other, net .................. 1,778 105 3,310 150
-------- -------- -------- --------
Net loss ........................................ $ (1,892) $ (740) $ (3,677) $ (1,112)
======== ======== ======== ========
Net loss per share:
Basic and diluted ............................. $ (.12) $ (.21) $ (.23) $ (.32)
======== ======== ======== ========
Shares used in calculation of net loss per share:
Basic and diluted ............................. 16,355 3,509 16,173 3,499
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
EBENX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net loss .............................................. $ (3,677) $ (1,112)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation of property and equipment ............... 456 300
Amortization of stock-based compensation ............. 1,140 --
Loss on sale of property and equipment ............... 210 --
Changes in operating assets and liabilities:
Accounts receivable ................................. (400) (481)
Other current assets ................................ (1,036) (297)
Accounts payable .................................... (933) (44)
Accrued expenses .................................... 1,409 119
Deferred revenue .................................... 7 1
Deposits ............................................ (37) (2)
--------- ---------
Net cash used in operating activities ............. (2,861) (1,516)
Investing activities:
Additions to property and equipment ................... (6,174) (640)
Purchases of investments .............................. (432,083) --
Sales of investments .................................. 329,682 --
--------- ---------
Net cash used in investing activities ............. (108,575) (640)
Financing activities:
Stock options and warrants exercised .................. 758 11
Proceeds from issuance of common stock, net of costs .. 12,988 --
Proceeds from issuance of preferred stock, net of costs -- 10,482
Repayment of note payable ............................. -- (750)
--------- ---------
Net cash provided by financing activities ......... 13,746 9,743
--------- ---------
Net increase (decrease) in cash and cash equivalents ... (97,690) 7,587
Cash and cash equivalents at beginning of period ....... 98,611 1,681
--------- ---------
Cash and cash equivalents at end of period ............. $ 921 $ 9,268
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest ............................... $ -- $ 27
</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 to employers and health plans for the purchase, administration, and
payment of group health insurance. The Company's group health insurance exchange
provides an end-to-end solution, from request for proposal through premium
payment. Our 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 and six month
periods ended June 30, 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.
2. Comprehensive Income
6
<PAGE>
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
six months ended June 30, 2000 was $24,000, consisting 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 $1.1 million of amortization expense was recognized in
the six months ended June 30, 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 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.
7
<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 business-to-business e-commerce solutions to employers and
health plans for the purchase, administration, and payment of group health
insurance. Our 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 typically is priced on a per employee per
month basis with adjustments made to accommodate the number of health plan
communication and computer connections, or interfaces, 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 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,
8
<PAGE>
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 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 June 30, 2000, we
had an accumulated deficit of $10.9 million. These losses and this accumulated
deficit have resulted from the significant costs incurred in the development of
our technology platform, the establishment of relationships with our customers,
and the development and maintenance of our customer and health plan interfaces.
We intend to continue to invest heavily in research and development, sales and
marketing, and in our computer and administrative infrastructure. As a result,
we believe that we will incur 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 Six Months Ended
June 30 June 30
--------------- ---------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenue .............................. 100.0% 100.0% 100.0% 100.0%
Cost of services ......................... 75.4 76.4 76.0 73.6
----- ----- ----- -----
Gross margin ........................ 24.6 23.6 24.0 26.4
Operating expenses:
Selling, general and administrative .... 45.5 30.6 44.4 28.3
Research and development ............... 28.5 15.4 28.5 15.8
Amortization of stock-based compensation 8.0 -- 9.5 --
----- ----- ----- -----
Total operating expenses ............ 82.0 46.0 82.4 44.1
----- ----- ----- -----
Loss from operations ..................... (57.4) (22.4) (58.4) (17.7)
Interest income and other, net ........... 27.8 2.8 27.7 2.1
----- ----- ----- -----
Net loss ................................. (29.6)% (19.6)% (30.7)% (15.6)%
===== ===== ===== =====
</TABLE>
Comparison of the three months ended June 30, 2000 and 1999
Net revenue. Net revenue for the three months ended June 30, 2000
increased to $6.4 million from $3.8 million for the same period in 1999,
representing an increase of $2.6 million, or 69.8%. Growth in exchange revenue
resulted from our success in direct sales of exchange services to new customers
in late 1999 and first quarter of 2000, as well as through the
9
<PAGE>
expansion of exchange services to our existing customers in 2000. Revenue from
procurement services increased primarily from new customer sales of service
agreements beginning in the first or second quarter of 2000.
Cost of services. Cost of services for the three months ended June 30,
2000 increased to $4.8 million, from $2.9 million for the same period in 1999,
representing an increase of $1.9 million, or 67.6%. Cost of services, as a
percentage of net revenues, decreased to 75.4% for the three months ended June
30, 2000 from 76.4% 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.
Selling, general and administrative. Selling, general and
administrative expenses increased to $2.9 million for the three months ended
June 30, 2000, from $1.1 million for the same period in 1999. The $1.8 million
increase, or 152.6%, primarily was due to additions to management infrastructure
and corporate personnel, as well as the expansion of our sales staff and
marketing efforts. In addition, we incurred costs associated with the move of
our corporate headquarters in April 2000. These costs included $210,000 for the
write-off of leasehold improvements at the former premises and replaced
furniture and equipment. Selling, general and administrative expenses, as a
percentage of net revenues, increased to 45.5% for the three months ended June
30, 2000, from 30.6% 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 June 30, 2000 increased to $1.8 million, from $0.6 million
for the same period in 1999, representing an increase of $1.2 million, or
213.4%. 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 June 30, 2000, from
15.4% 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 $1.8 million for the three months ended June 30, 2000, from
$105,000 for the same period in 1999. Net interest income for the three months
ended June 30, 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 in 1999. For the three months ended June 30, 2000, we recorded
$508,000 in amortization expense related to the deferred stock-based
compensation. The amortization of deferred compensation will result in an
additional $3.3 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.
Comparison of the six months ended June 30, 2000 and 1999
Net revenue. Net revenue for the six months ended June 30, 2000
increased to $12.0 million from $7.1 million for the same period in 1999,
representing an increase of $4.9 million, or 68.4%. This increase was due to our
success in direct sales of both our exchange and procurement services to new
customers in late 1999 and the first and second quarters of 2000, as well as the
expansion of exchange services to our existing customers.
Cost of services. Cost of services for the six months ended June 30,
2000 increased to $9.1 million, from $5.2 million for the same period in 1999,
representing an increase of $3.9 million, or 73.8%. Cost of services, as a
percentage of net revenues, increased to 76.0% for the six months ended June 30,
2000 from 73.6% 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.
10
<PAGE>
Selling, general and administrative. Selling, general and
administrative expenses increased to $5.3 million for the six months ended June
30, 2000, from $2.0 million for the same period in 1999. The $3.3 million
increase, or 164.1%, 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 44.4% for the six months ended June 30, 2000, from 28.3%
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 six
months ended June 30, 2000 increased to $3.4 million, from $1.1 million for the
same period in 1999, representing an increase of $2.3 million, or 202.8%. 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 six months ended June 30, 2000, from 15.8% 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 $3.3 million for the six months ended June 30, 2000, from $150,000
for the same period in 1999. Net interest income for the six months ended June
30, 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 in 1999. For the six months ended June 30, 2000, we recorded $1.1
million in amortization expense related to the deferred stock-based
compensation. The amortization of deferred compensation will result in an
additional $3.3 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 June 30, 2000, we had $103.3 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 $2.9 million and $1.5 million in
the six months ended June 30, 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 accounts payable, partially offset by an increase in accrued
expenses and non-cash charges for depreciation, amortization, and the loss on
sale of property and equipment. The use of cash in operations in 1999 was due
primarily to the net loss for the period, along with an increase in accounts
receivable and other current assets, partially offset by non-cash charge for
depreciation.
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Our investing activities used cash of $108.6 million and $0.6 million
in the six months ended June 30, 2000 and 1999, respectively. In 2000, our
investing activities used $432.1 million for purchases of investments, generated
$329.7 million from the sale of investments, and used $6.2 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. In 1999,
our investing activities used cash of $0.6 million for additions to equipment.
Our financing activities provided cash of $13.7 million and $9.7
million in the six months ended June 30, 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. 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 $11,000 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.
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 June 30, 2000 (in thousands):
2000 2001 Total
----------- ----------- -----------
Cash equivalents $ 921 $ -- $ 921
Average interest rate 5.91% -- 5.91%
Short-term investments $ 100,199 $ 2,178 $ 102,377
Average interest rate 6.56% 6.74% 6.56%
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.
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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 six months ended June 30, 2000 and pursuant to Section 4(2)
of the Securities Act of 1933, we issued and sold 48,135 shares of common stock
that were not registered under the Securities Act of 1933. The shares were
issued to two employees for aggregate consideration of $160 upon the exercise of
warrants for shares of common stock.
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.
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 $ 96.4
Working capital 2.9
Purchase of furniture and equipment 6.2
-------
Total $ 105.5
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
The Company held its annual meeting of stockholders in Minneapolis,
Minnesota on May 25, 2000. Of the 16,192,687 shares outstanding as of the record
date, 12,663,015 shares were present or represented by proxy at the meeting. The
following actions were voted upon:
A. A proposal to elect the following directors to serve for a term
ending upon the 2003 Annual Meeting of Stockholders or until their
successors are elected and qualified.
Director Votes For Votes Withheld
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---------------------- -------------- -------------------
William J. Geary 12,656,090 6,925
John M. Nehra 12,648,765 14,250
B. A proposal to approve an amendment which increased the number of
shares of Common Stock authorized for issuance pursuant to the
Company's 1993 Stock Option Plan to 3,900,000 shares.
Votes For Votes Against Abstentions
------------- ----------------- ---------------
10,546,810 2,066,043 50,162
Item 5. Other Information
None.
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).
10.5 Multi-Tenant Office Lease Agreement by and between the Company
and Utah State Retirement Investment Fund, dated January 21,
2000.*
27.1 Financial Data Schedule.*
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three-month period ended
June 30, 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: August 11, 2000 By /s/ John J. Davis
---------------------------------------
John J. Davis
Chief Executive Officer and President
(principal executive officer)
Date: August 11, 2000 By /s/ Scott P. Halstead
---------------------------------------
Scott P. Halstead
Chief Financial Officer and Secretary
(principal financial officer)
15
