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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 333-87985
eBenX, Inc.
41-1758843
Minnesota (IRS Employer
(State or other jurisdiction of Identification Number)
incorporation or organization)
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5500 Wayzata Boulevard, Suite 500
Minneapolis, Minnesota 55416
(Address of principal executive offices)
Telephone Number: (612) 525-2700
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Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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 past 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 [_]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 1, 2000 (based upon the last reported sale price on The
Nasdaq National Market as of such date) was $400,841,413.
As of March 1, 2000 there were 16,091,137 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for its May 25, 2000 Annual Meeting
of Shareholders are incorporated by reference in Part III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
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TABLE OF CONTENTS
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PART I
Business................................................................. 1
Properties............................................................... 13
Legal Proceedings........................................................ 13
Submission of Matters to a Vote of Security Holders...................... 13
PART II
Market for Registant's Common Equity and Related Stockholder Matters..... 13
Selected Consolidated Financial Data..................................... 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Quantitative and Qualitative Disclosures about Market Risk............... 27
Financial Statements and Supplementary Data.............................. 28
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. 43
PART III
Directors and Executive Officers of the Registrant....................... 43
Executive Compensation................................................... 43
Security Ownership of Certain Beneficial Owners and Management........... 43
Certain Relationships and Related Transactions........................... 43
PART IV
Exhibits, Financial Statement Schedules and Reports on Form 8-K.......... 43
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FORWARD-LOOKING STATEMENTS
This document includes forward-looking statements based on our current
expectations and projections about future events. These statements are subject
to risks, uncertainties and assumptions about us, including, among other
things:
. uncertainty of our future operating results;
. delays or losses of sales due to long sales and implementation cycles
for our services;
. actions of our competitors; and
. other factors discussed under "Risks Related to Our Business."
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PART I
Item 1. Business
Overview
We provide business-to-business e-commerce solutions to employers and health
plans for the procurement of group health insurance. Our group health insurance
exchange provides an end-to-end solution for all aspects of the procurement
process, 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. Our enrollment
capabilities provide employees with the ability to make health plan choices and
enroll online. Our 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.
Group Health Insurance Benefits
General Industry Background
Health care expenditures in the United States totaled more than $1.1
trillion in 1997 and are expected to nearly double by 2007. More than half of
the U.S. population currently receives group health insurance benefits through
their employers. In 1998, the group health insurance benefits market generated
more than $600 billion in services and payments between the two trading
partners, employers and health plans.
Employers can be segmented into three categories:
. large employers, such as Fortune 1000 companies and federal, state and
local governments;
. mid-size employers, generally defined as those with 50 to 5,000
employees; and
. small employers with less than 50 employees.
In 1998, the average annual cost of providing coverage for active and
retired workers was approximately $4,168 per employee. This average cost
increased by approximately 7.3% in 1999. In 1998, on average, each active
employee contributed approximately 25% of this amount through payroll
deductions and co-payments.
Broadly characterized, health plans consist of any organization that
reimburses physicians, hospitals, pharmacies and other direct providers of
health care. These organizations include:
. health maintenance organizations;
. preferred provider organizations;
. point of service plans;
. indemnity carriers;
. third party administrators; and
. pharmacy benefit managers.
Prior to the 1980s, employers typically purchased health benefits through a
single third-party administrator or national indemnity insurance carrier. The
growth of managed care in the 1980s and 1990s provided an increasing number of
employers with the ability to purchase coverage for their employees through
local and regional health plans. In the United States there are more than 700
licensed HMOs alone. With the proliferation of new types of plans and payers,
we estimate that each Fortune 500 employer contracts with an average of 30
different plans today.
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Purchasing, Eligibility Administration and Premium Payment Process
The procurement process encompasses purchasing, eligibility administration
and premium payment. It connects employers and health plans, and is currently
complex, cumbersome, expensive and highly inefficient. In particular, the
financing arrangements are extremely variable and complicated, making
administration difficult. In general, health plans either charge employers
based on the number of projected enrolled employees and their projected
actuarial risk or, alternatively, pay providers on behalf of the employer and
then are reimbursed by the employer. Depending on the financing arrangements,
an individual employer may be subject to multiple administrative arrangements
from multiple health plans.
The purchasing, eligibility administration and premium payment process
consists of two basic components commonly referred to as the "front-end" and
"back-end" processes.
Front-end
The front-end process refers to the selection of various health plans by an
employer, the communication of health plan information to employees, and the
collection and ongoing maintenance of enrollment and eligibility data.
Health plan selection. Employers annually solicit rate quotes from health
plans and then select which plans will be made available to their employees.
Employers may choose as few as one health plan, or as many as 150 or more,
depending on the employers' geographic locations and desire to offer health
plan choices. Large and mid-size employers usually offer multiple health plans
to provide greater choice, geographic coverage and access to specialized
services for their employees. Employers choose various financing mechanisms
depending on the level of risk they wish to retain. Financing mechanisms
include self funded, fully insured, partially insured, or a combination of all
three. Benefit managers of large employers usually are supported by consultants
when making these decisions, while benefit managers of mid-size employers
generally rely on brokers.
Communication of health plan information to employees. Employers annually
provide information to employees regarding available health plans and the
material features of each plan. The process entails distribution of printed
materials, mailings and other manual, paper-based communications at an average
cost of $8 to $12 per employee. Due to the continuous changes in the list of
providers utilized by health plans, printed materials usually are outdated by
the time of delivery.
Collection of enrollment and eligibility information. Employees enroll in
one of the available health plans during an annual open enrollment period.
Employers collect enrollment and eligibility data using a wide variety of
methods, including paper forms, telephone-based systems and Web-based self-
service enrollment systems. Enrollment data includes information on the
employee's health plan choice and primary care provider. Eligibility
information is basic information about the employee and his or her
dependent(s), such as name, address, date of birth, Social Security number,
employment code, benefit status, coverage level and eligibility period.
Ongoing member management. In addition to collecting annual enrollment and
eligibility information, employers need to obtain and communicate daily life
event changes that affect coverage status. These changes include employee
marriages, divorces, births and address changes, as well as career events such
as new hires, terminations and movements from hourly to salaried status. No
other benefit offered by employers requires as high a level of information
collection and continuous monitoring and modification as group health
insurance, because it is the only benefit that must maintain and store precise
family history.
Back-end
While the front-end process focuses on communication of information between
employers and employees, the back-end process focuses on managing and storing
eligibility and financial data for communication with health plans and
reconciliation of payments.
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Enrollment and eligibility data management. Once enrollment and eligibility
data is collected, employers undertake a cumbersome process to authenticate,
edit, categorize and organize the data. This process requires the ongoing
classification of employees by employment status, such as active, retired,
surviving spouse, student and eligible to receive benefits under the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), in order to
accommodate diverse collection and payment processes for each category. This
data management is critical to accurate billing and reconciling of payments
between an employer and its health plans.
Eligibility data distribution. Eligibility data should be transferred on a
daily or weekly basis from employers to health plans to ensure accuracy.
Typically, however, this data is transferred less frequently and with little
assurance of correct interpretation. At best, it is communicated electronically
between legacy systems and, at worst, via hard copy data entry. This
eligibility data is required when employees and dependents present themselves
to physicians and other health care service providers. Providers must obtain
eligibility information via telephone or computer from patients' health plans
prior to rendering services.
Billing, reconciliation and settlement. Health plans bill employers on a
weekly or monthly basis based on either enrollment numbers and quoted rates or
on claims paid. We believe, based on our experience, that employers initially
pay these multiple paper bills without auditing them, and later manually
reconcile the number of enrolled employees and their eligibility status using
internal data. The health plans' data and the employers' data are rarely the
same because of data discrepancies and delays in transfer and billing cycles.
Ongoing payment disputes are common.
Factors influencing the marketplace and related issues
The purchasing, eligibility administration and premium payment process is
encumbered by inefficient procedures for rate setting, gathering and
transferring data and executing payment transactions. These inefficiencies,
together with other factors unique to health care delivery, result in the
following significant challenges:
Fragmented employers and health plans. There are more than 30,000 large and
mid-sized employers in the United States, many of which have broadly dispersed
employees often located in multiple sites. In contrast, there are over 700
independent HMOs in the United States today, which generally operate in a
single or limited geographic area. Employers must often contract with multiple
health plans to provide complete geographic coverage for all of their
employees.
Increasing group health insurance costs. Health care costs are expected to
increase by 10% to 12% in 2000. As the average cost of employee and retiree
health care increases, employers will seek more cost-effective health insurance
solutions and demand a more competitive bidding process when selecting health
plans. Employers will want the ability to switch health plans when necessary,
and shift more costs to their employees.
Complex data management. Health plans collect complex, detailed and dynamic
data in varying formats from multiple employers. Conversely, employers must
distribute this data in varying formats to multiple health plans. A failure to
accurately update eligibility and financial data in a timely fashion may result
in additional administrative costs and financial reconciliation problems and
can lead to the wrongful denial of health care services.
Varied data formats. Eligibility and financial data formats vary
considerably throughout the health care industry and typically are unique to
each particular employer and health plan. The collection, storage and
transmission of this data remains a labor-intensive, paper-based and error-
prone process. As a result, most health plans are unable to frequently update
this data. Some efforts have been made to develop a common standard. However,
these standards do not meet the complex needs of multiple purchasers and have
not been widely accepted.
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Varied systems platforms. Most employers use their own unique human resource
information systems and other benefit and payroll-related systems to
communicate with multiple health plans. Health plans, in turn, rely on their
own unique legacy systems. Often, within a single employer or health plan,
there are several systems for collecting and storing data that cannot
communicate with one another. The unique code data rules, syntax and semantics
of these systems require substantial information technology resources in order
to interface with other internal and external systems.
Inefficient pricing, billing, reconciliation and settlement
processes. Employers obtain rate quotes from health plans based on the
estimated risk of their employee population. Differing plan designs and
underwriting methodologies make it difficult to compare rates. Employers
receive bills from each of their health plans in different formats and, in some
cases, for different coverage periods. These bills are calculated using data
provided by health plans. If a plan is late in recognizing an employee's
termination, the employer must perform an audit to determine this. The number
of health plans and the diversity of the payment arrangements can make this an
arduous task. Inaccurate payments require significant manual intervention by
employers and health plans to reconcile accounts.
Brokers have limited transaction processing capability. In the mid-size
employer market, employers and health plans trade primarily through brokers.
Since brokers generally do not have the capital to develop electronic
purchasing, administration and payment systems, this process remains labor-
intensive, paper-based and highly inefficient. Brokers need to respond to the
demand for business-to-business e-commerce solutions or risk being
disintermediated.
Added complexity caused by government regulation. Numerous federal, state
and local laws and regulations govern the health care industry. These laws and
regulations change frequently. In recent years, the responsibilities of
employers to provide their employees with access to health care increased
significantly. In particular, COBRA and the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") added substantial burdens to employers
administering employee health insurance benefits. The proposed legislation
covering the patients' bill of rights includes a provision that may put health
plans and employers at greater risk of litigation. We believe this may have the
effect of pushing employers toward a defined contribution and voucher-based
approach to their employees' health insurance.
Opportunity for Business-to-Business E-Commerce Solutions for Group Health
Insurance
The Internet's ubiquitous nature, low cost and scalability has created new
opportunities for conducting commerce. The widespread adoption of intranets and
the acceptance of the Internet as a business communications platform has
created a foundation for business-to-business e-commerce that enables
organizations to streamline complex processes, lower costs and improve
productivity. It is projected that e-commerce will grow from $50 billion in
revenue in 1998 to $1.3 trillion in 2003, and business-to-business e-commerce
will account for more than 74% of the value of e-commerce in the United States
in 2003.
Group health insurance purchasing, eligibility administration and premium
payment transactions are ideally suited to be conducted over the Internet
because most of these transactions are information-based and do not require
delivery of durable goods at the point of service or payment. However, unlike
other e-commerce opportunities, such as purchasing books or individual
insurance, group health insurance transactions involve complex pricing and
product presentation, as well as ongoing data management among multiple
organizations.
We believe that business-to-business e-commerce technology solutions in this
market will require the following Internet-enabled components:
Front-end procurement and enrollment:
. Bid and quote systems that enable employers or their advisors to present
requests for bids to health plans, and for health plans to respond with
proposals and rates; and
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. annual and ongoing enrollment update tools that accommodate enrollment
in numerous health plans, and content engines that provide plan
descriptions, provider networks and rate information.
Back-end eligibility and financial exchange:
. exchange systems that translate eligibility and financial information
between trading partners and execute payment transactions with all
applicable parties.
Currently there are numerous front-end Internet-based solutions that support
enrollment primarily in the large employer market. However, we believe true e-
commerce can exist only if there is seamless end-to-end integration of the
front- and back-end processes. We historically have focused on developing our
proprietary back-end eligibility and financial data exchange platform which we
are coupling with front-end applications. As a result, we can provide a fully
integrated end-to-end group health insurance e-commerce solution.
Our Solution
We provide business-to-business e-commerce solutions for the purchase,
eligibility administration and premium payment of group health insurance. Our
purchasing, enrollment, eligibility and financial exchange addresses both
front- and back-end e-commerce requirements. During the first six years of
operation, we focused on eligibility data and financial management capabilities
and on building custom, rules-based interfaces between employers, such as
PepsiCo, Bell Atlantic, Northwest Airlines, GE Capital, Promus Hotels and
R.R. Donnelley, and the United States' largest regional and local health plans.
This effort resulted in connectivity to health plans that collectively serve
approximately 85% of the managed care enrollment in the United States.
In 1999, we began to interface with multiple front-end human resource
systems and service providers, including those offered by Healtheon,
PricewaterhouseCoopers and Watson Wyatt. We deliver our end-to-end business-to-
business e-commerce solution for group health insurance through this front-
end/back-end continuity. We also began to expand our services to the mid-sized
employer market.
Value Proposition to Trading Partners
Our solution provides value to the trading partners through the collection,
management and storage of employee enrollment, eligibility and financial data
and the ongoing transmission of this data to health plans. Additionally, we
manage and execute the reconciling of payments between trading partners.
For employers, our e-commerce solution:
. streamlines the enrollment process by moving it from paper or telephone
voice response systems to self-service Internet applications;
. reduces administrative costs associated with disseminating basic health
plan information to employees, the enrollment transaction, and the
management and transfer of data among parties;
. shifts the employer's responsibility to us for transmitting accurate
enrollment and eligibility information to a variety of health plans and
gives all trading partners access to real time eligibility via Web-
enabled tools;
. eliminates the traditional paper-based and labor-intensive payment
reconciling process used by both trading partners and delivers
automated, accurate and retroactively-adjusted payments to health plans;
. allows more choice of plans by lowering the barriers to entry for health
plans thereby significantly reducing the cost of switching between
competing health plans;
. reduces the cost of procuring health benefits by increasing health plan
competition in the bidding process; and
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. increases the ability to attract and retain employees through more
diverse benefit offerings.
For health plans, our e-commerce solution:
. improves timeliness and accuracy while lowering the cost of receiving
eligibility and financial data;
. reduces the administrative burden associated with receiving eligibility
and financial data;
. provides improved customer service and provider claims adjudication
through 24 hour, seven day a week Web-enabled access to employers'
eligibility and financial data;
. reduces distribution costs for the delivery of health plan information
to employees; and
. opens new channels for them to distribute products and services over the
Web.
For group health insurance brokers, our e-commerce solution:
. allows access to technology without significant capital expense;
. moves services from a paper process to a more efficient Web-based
solution;
. allows them to more easily offer multiple health plans to employer
clients;
. provides significant differentiation from competing brokers; and
. allows them to retain a service position in a disintermediating
marketplace by increasing customer retention and market share.
For employees, our e-commerce solution:
. provides more opportunity for choice of plans and, through more
competitive pricing, lower costs;
. provides convenient Web-based enrollment and plan information; and
. improves access to services by reducing eligibility data errors through
the more timely and accurate transmission of eligibility data to health
plans, which in turn transmit the data to doctors and other health care
providers.
Exchange Services
Since 1993, we have serviced the back-end eligibility and financial exchange
requirements of our large employer customers using our proprietary BEN-NET(TM)
technology platform. This platform provides a connective infrastructure and
neutral eligibility and financial data exchange mechanism. Due to our
representation of these large employers, health plans have supported our
efforts to build these rules-based interfaces with their legacy systems.
We are able to receive complex, dynamic data from employers and translate
and communicate it to fragmented health plans. Our core eligibility data and
financial exchange technology incorporates the business rules of each relevant
trading partner, as well as the format translations needed to automatically
reconcile and pay bills. Our solution creates a standard for group health
connectivity without causing employers or health plans to make major changes to
their disparate legacy systems. Our technology enables the employer to send
data using its rules structure, in any format and via the media the employer
chooses. Once received, our system edits and translates the data into a
standard format. To facilitate connectivity to the health plans, our system
then translates that data into a format compatible with the individual health
plan's systems. The translated information is transmitted in the medium
acceptable to the health plan. The eligibility data stored on BEN-NET is more
current than the data held by the health plans, allowing us to accurately bill
the appropriate parties. This financial billing and reconciliation capability
allows us to consolidate invoices for the employer and generate payment records
to the health plans that are tied directly to the eligibility data flowing
through our system.
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In 1999, we extended our suite of offerings to support the data management,
communications and online transaction requirements for successful group health
insurance e-commerce. We did this by working with front-end application
providers and through internal development efforts. In 2000, our development
activities will include an Internet-based tool that will provide employers and
brokers or advisors with the ability to make employee coverage changes via the
Web. In addition, we are creating an Internet-based census acquisition and
proposal request tool to support the employer's competitive bidding process.
We sell our products and services in selected packages designed to meet the
needs of each customer. We currently do not plan to offer front-end services on
a stand-alone basis.
Revenues generated from our exchange services were $5,432,000, $7,742,000,
$13,823,000 for December 31, 1997, 1998 and 1999, respectively.
Procurement Services
We provide health benefit plan procurement services to a number of our large
employer customers on a project basis. We assist and advise customers on
selection of potential suppliers, preparation of requests for proposals,
evaluation of proposals, and rate negotiations. Approximately 25 of our
employees engage in delivering these services. Our principal customers for
these services are General Electric, Eastman Kodak and Bell Atlantic. We view
these activities as a complement to our exchange services. In addition, we gain
valuable knowledge regarding market conditions and processes from providing
these services. Revenues generated from our procurement services were
$1,661,000, $2,380,000, $3,703,000 for the years ended December 31, 1997, 1998
and 1999, respectively.
Our Strategy
Our objective is to be the leading Internet-based business-to-business e-
commerce exchange for the purchase, eligibility administration and premium
payment of group health insurance. Key elements to our strategy include the
following:
Offer end-to-end e-commerce solution. We will continue to offer an end-to-
end e-commerce solution to the large and mid-size employer markets by
interfacing with the front-end applications deployed by human resource
information systems and record keeping service companies, as well as enrollment
software companies. We will aggressively pursue relationships with front-end
application providers to link our back-end eligibility and financial exchange
services with their front-end applications. In addition, for the mid-market, we
will deploy front-end services for procurement and enrollment that will be
integrated into our exchange.
Increase penetration of the large employer market. We will continue to
market our services to large employers by demonstrating the administrative
efficiencies, cost savings and participant satisfaction provided by our
services. We now provide services to 20 of the approximately 1,500 U.S.
employers with more than 5,000 employees, including PepsiCo, Bell Atlantic,
Northwest Airlines, General Electric, Eastman Kodak, Chevron, Target and
Georgia-Pacific. Substantial growth opportunities remain in the large employer
market.
Expand service offerings to existing large employer customers. We will
continue to aggressively expand our service offerings to our existing large
employer customers. We have successfully increased our revenues by expanding
the level of services for most of our current large employer customers, and by
providing services to additional divisions, subsidiaries and locations.
Expand in the mid-size employer market. We intend to continue to penetrate
the mid-size employer market by leveraging a standardized version of our
technology through relationships with brokers and other advisors. Mid-size
employers in the U.S. typically purchase group health insurance using brokers.
Pursue key strategic relationships to further enhance our service offerings
and employer base. We intend to pursue key strategic relationships with
organizations that provide payroll, front-end enrollment, voluntary
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benefits and similar services. We believe that making strategic acquisitions
and developing strategic alliances will enable us to enhance our service
offerings and expand our employer base.
Develop new products. We intend to use our market knowledge and experience
to develop new products to fully leverage the market channels opened by the
implementation of our technology. For example, we are working with partners to
develop a prepackaged group health insurance solution designed to provide mid-
size, multi-site, multi-state employers with rate quotes and access to health
plans throughout the United States. We have identified several health plans
that may be interested in forming strategic relationships for the development
of this and other products and services. We also are in discussions with health
plans regarding their use of our exchange to support their procurement process
with employer customers and brokers. In addition, we are designing our
technology to support the sophisticated data and financial reconciling
requirements implicit in the post-enrollment risk-adjusted payments to health
plans resulting from the defined contribution and voucher systems that may
constitute a future health care system.
Customers
The following is a list of our customers who provided 10% or more of our
revenue during 1999.
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Bell Atlantic Corporation
PepsiCo, Inc.
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The following is a representative list of our other major customers.
Benefits Alliance, LLC Georgia-Pacific Corporation
Blue Cross Blue Shield Association KPMG LLP
Eastman Kodak Company Northwest Airlines, Inc.
GE Capital Services Corporation Promus Hotel Corporation
General Electric Company Target Corporation
Connected Health Plans
The following is a representative list of the health plans to which we have
built customized eligibility and financial data interfaces.
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Aetna, Inc. Plans Kaiser Foundation Health Plan
Blue Cross/Blue Shield Plans Merck-Medco
CIGNA Health Plans, Inc. PacifiCare Health Systems
Delta Dental Plans UnitedHealth Group Incorporated
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Sales, Marketing and Business Development
Our sales and marketing effort is organized according to our key targeted
customer segments: large and mid-size employers. In addition, business
development is focused on growing our large employer business through the
creation of strategic relationships. Senior management plays an active role in
our sales, marketing and business development efforts.
Large Employer Market
Sales cycle. Due to the nature of our technology-based service offering, our
typical sales cycle in the large employer market is four to six months and
usually involves a competitive bidding process, which
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frequently starts with a request for proposal ("RFP") from the employer. Our
sales process is somewhat seasonal because most large employers undergo the
open enrollment process in the fall of each year. We obtain approximately 75%
of our customer commitments during the months of February through May, with the
intent of being integrated with the customer's system prior to the open
enrollment period.
Direct sales. We sell directly to the large employer market. As of March 1,
2000, we employed one senior vice president in charge of sales and marketing,
supported by five sales people and two marketing assistants. In addition, a
vice president and four procurement consultants spend a portion of their time
cross selling exchange services to the large employer market.
Strategic Alliances. We also are pursuing large employers through strategic
alliances with organizations such as human resource service and systems
companies. This effort, led by one of our co-founders, focuses on bringing
additional employers to our exchange via these alliances. Human resource
service and systems companies include payroll companies, consulting and record
keeping companies and enterprise-wide system companies. Our services are
intended to be offered as a component of the products and services available
from these companies.
Mid-size Employer Market
We utilize existing brokerage distribution systems to continue our
penetration of the market of mid-size employers. As of March 1, 2000, we
employed four senior staff members who are specifically focused on developing
our sales and marketing efforts to brokers and other advisors. We intend to
hire two additional marketing employees to assist them and to further develop
this distribution network. We believe that emphasizing our collection and
payment capabilities to interface with numerous health plans will be a critical
factor in winning acceptance in this market.
Customer Support
A high level of customer support is necessary to broaden the acceptance of
our products and services. We provide a wide range of customer support services
through our Internet-based tools, account managers, and customer service staff.
Our Internet-based support services are available 24 hours a day, seven days a
week. Our consolidated customer service center eliminates the need for
employers to maintain numerous contact lists across benefit vendors in order to
resolve enrollment, eligibility and billing issues. Each customer is provided
with a telephone number for use regarding enrollment, eligibility, grievances
and benefit clarification. In some cases, participants in our customers'
benefit plans may access the service center. As of March 1, 2000, we had 70
employees in customer support and related functions.
Competition
The market for health insurance administration services is intensely
competitive, rapidly evolving and subject to sudden technological change. Many
of our actual and potential competitors have announced or introduced solutions
that compete, at least in part, with our products and services. We believe the
principal competitive factors in this market are health and managed care
expertise, data integration and transfer technology, health insurance
administration technology, customer service and support, and price. Based on
our experience, our products and services are competitive with respect to these
factors, and we believe no other competitor can match our combination of
Internet-based technology, rules-based interfaces and managed care expertise.
We compete with administrative service providers and benefits consultants
with administrative capabilities. We also compete with the internal information
systems departments of the large employers that perform their
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own health insurance administration services. In the mid-size employer market,
we compete with other technology solutions that serve the automation and
administration needs of health benefit brokers and other advisors. In addition,
many human resource service and systems companies have the health care
expertise and financial strength to develop the technology necessary to compete
with us. As the market evolves, we expect increasing competition from Internet-
based service providers in both the health care connectivity market and the
online insurance market. We believe our established and proven technology, as
well as our knowledge of the health care market, provide us with the necessary
capabilities to adapt to the evolving market and increasing competition.
Systems and Technology
Primary Information Systems
Historically, our services have been delivered using our proprietary BEN-
NET(TM) technology as the core eligibility and financial exchange engine. BEN-
NET was originally designed and implemented in 1994 to serve two distinct
customer bases: large employers and health insurance purchasing coalitions.
Though the latter market never fully developed, the business requirements and
attendant system capabilities, such as our ability to update, transmit and
permanently store eligibility data at both the employee and dependent level,
have provided additional benefit to our customers. We have incorporated a
number of enhancements to BEN-NET in subsequent major releases.
BEN-NET and its fully integrated attendant applications are delivered using
a multi-tier information system comprised of multiple midrange servers, PCs and
workstations. The midrange servers, Sun Enterprise Servers running Sun's
Solaris Unix operating system, are used to provide middle-tier application
component logic and as a platform for our relational database management
system. The component approach, used and extended in the last major release of
BEN-NET, positions us well to take advantage of emerging Internet standards
such as eXtensible Markup Language (XML). Batch and end-user local and Internet
applications employ a number of different languages, primarily PowerBuilder,
C/C++, and Java.
We believe our proprietary data import and export management application is
a key differentiator for our services. We have developed a set of specialized
processes and tools to receive and translate data into the formats and
semantics of our trading partners. These applications incorporate a library of
health plan data interfaces, as well as a deep knowledge of the business rules
that must be incorporated in these interfaces to address the complexities of
the managed care market. Our Electronic Vendor Interface Management (EVIM) is
more than just an automation and scheduling tool; it monitors and manages
process dependencies and electronic imports and exports (approximately 1,000
files per week with each file ranging from 500-50,000 records). EVIM ensures
automated, timely distribution of data, payments, and reports to employers and
health plans. This precise management of data flow also supports a key function
of BEN-NET, the dynamic application of business rules for eligibility data that
streamlines both health plan delivery of service and payment.
Our production processing environment, maintained across two sites, provides
maximum flexibility in organizing and protecting client data. Our UNIX
operating system is a highly scalable platform. With this platform and our
flexible architecture, we are able to add capacity relatively easily and
physically organize our databases on different servers for optimal processing.
Within this processing environment, we establish separate physical production
databases for each of our customers to ensure that customer data remains
confidential, secure, and maintains its integrity. We are able to provide
secure, real time, Internet access to data for employers, health plans and
other participants.
Redundancy, System Backup, Security and Disaster Recovery
We believe our facilities and operations have sufficient redundancy, back-up
and security to ensure minimal exposure to systems failure or unauthorized
access. Our primary data processing production site is
10
<PAGE>
equipped with two diesel-powered generators feeding two building-wide
uninterruptible power systems (UPS). These generators are automatically
activated when the UPS detects power degradation or loss. Our production
services and infrastructure components are proactively monitored seven days a
week, 24 hours a day, with emergency notification to key staff for
troubleshooting and recovery. All of our data are stored in a completely
redundant disk storage environment that includes disk mirroring. Incremental
backups of both software and databases are performed on a daily basis, and a
full system backup is performed weekly. Backup tapes are stored at an offsite
location along with copies of schedules/production control procedures,
procedures for recovery using an off-site data center, documentation and other
critical information necessary for recovery and continued operation. In
addition to our separate data processing production site, we have a data
processing production center at our headquarters facility that can handle
production in the event that our primary production environment is unavailable.
In the event of a disaster, we have prepared a disaster recovery plan that can
be activated immediately.
We employ rigorous physical and electronic security to protect customer
data. Both of our data processing environments are isolated within their
physical locations with restricted card key access, and appropriate additional
physical security measures. Electronic protections include encryption,
firewalls, multi-level access controls and separate customer databases.
Proprietary Rights
We rely upon a combination of contractual rights, trade secrets, copyrights,
technical measures, nondisclosure agreements and trademarks to establish and
protect proprietary rights in our products, services and technologies. However,
we believe that intellectual property protection is less important than our
ability to continue to develop new applications and services that meet the
requirements of our industry. As a result, we have invested heavily in the
research and development of our products and services, spending approximately
$1.2 million, $1.5 million and $4.0 million in 1997, 1998 and 1999,
respectively. We typically enter into nondisclosure and confidentiality
agreements with our employees, vendors and distributors with access to
sensitive information. These agreements may be breached and we may not have
adequate remedies for any breach. Others may acquire substantially equivalent
proprietary technologies or otherwise gain access to our proprietary
technologies. In addition, any particular technology may not be regarded as a
trade secret under applicable law. As a result of the reliance that we place on
our trade secrets, loss of our trade secret protection could harm our business
and results of operations. We have no registered patents or pending patent
applications. The steps taken by us to protect our proprietary rights may not
be adequate to prevent misappropriation of our technology or independent
development or sale by others of software products with features based upon, or
otherwise similar to, our products.
Although we believe that our technology has been independently developed and
that none of our technology or intellectual property infringes on the rights of
others, third parties may assert infringement claims against us in the future.
If infringement were established, we might be required to modify our products
or technologies or obtain a license to permit our continued use of those
rights. We may not be able to do either in a timely manner or upon acceptable
terms and conditions, and any failure to do so could harm our business and
results of operations. In addition, any future litigation necessary to protect
our trade secrets, know-how or other proprietary rights, to defend ourselves
against claimed infringement of the rights of others or to determine the scope
and validity of the proprietary rights of others could result in substantial
cost to us and diversion of our resources. Adverse determinations in any
litigation or proceedings also could subject us to significant liabilities to
third parties and could prevent us from producing, selling or using our
products, services or technologies. We may not have the resources to defend or
prosecute a proprietary rights infringement claim or other action.
Government Regulation
The health care industry is highly regulated by federal, state and local
laws and regulations, which are subject to change. Currently, few of these laws
and regulations apply directly to our business but rather apply
11
<PAGE>
primarily to health plans or employers. For example, the confidentiality of
patient records and the circumstances under which records may be released for
inclusion in our databases are subject to substantial regulation by some state
governments. These state laws and regulations govern both the disclosure and
the use of confidential patient medical records. While compliance with these
laws and regulations is principally the responsibility of health care
providers, at least some current state laws and proposed federal rules, impose
such responsibility on other health industry participants. We typically do not
include confidential patient medical information in our databases. These
regulations may be extended to cover our business and the eligibility and other
data included in our databases.
Additional legislation and regulation governing the dissemination of medical
records has been proposed at both the state and federal level. This legislation
may require holders of these records to implement security measures that may
require substantial expenditures by us. Changes to federal, state or local laws
may materially restrict employers' and health plans' ability to store and
transmit medical records using our products and services. In addition, under
HIPAA, the U.S. Department of Health and Human Services has issued proposed
rules that, if adopted, would impose significant restrictions on the disclosure
of electronic personal health information.
Laws and regulations may be adopted with respect to the Internet or other
on-line services covering issues such as user privacy, pricing, content,
copyrights, distribution and characteristics and quality of products and
services. The adoption of any additional laws or regulations may impede the
growth of the Internet or other online services. This could decrease the demand
for our services and increase our cost of doing business. Moreover, the
applicability to the Internet of existing laws in various jurisdictions
governing property ownership, sales taxes and other forms of taxation, libel
and personal privacy is uncertain and may remain uncertain for a considerable
length of time.
HIPAA mandates the use of standard transactions, identifiers, security and
other provisions during the year 2000. We have designed our products and
services to comply with HIPAA. However, any change in federal standards would
require us to expend additional resources.
Finally, our function as a conduit for payment by employers to health plans
may subject us to the Employee Retirement Income Security Act ("ERISA"). ERISA
imposes fiduciary duties on employers and health plans with respect to payments
made on behalf of participants. Although we believe our role in the payment
process is ministerial, it is possible that these fiduciary duties could be
deemed to apply to us. In that event, we may become subject to greater
liability with respect to these payments and may experience higher operating
costs in order to comply with these regulations.
Properties
Our headquarters are located at 5500 Wayzata Boulevard, Suite 500,
Minneapolis, Minnesota 55416-1241 and our telephone number is (612) 525-2700.
Effective on or before May 1, 2000, our headquarters will be located at 605
North Hwy 169, Suite LL, Minneapolis, MN 55441-6465. Our new telephone number
will be (763) 614-2000. Our Web site address is www.ebenx.com.
Employees
As of March 1, 2000, we had 294 full-time employees, including 94 in
information technology, 98 in operations, 34 in account management, 25 in sales
and marketing, 24 in procurement and 19 in administration and executive
management. We have never had a work stoppage and none of our employees are
currently represented under collective bargaining agreements. We consider our
relations with our employees to be good. We believe that our future success
will depend in part on the continued service of our senior management and key
technology personnel, and our ability to attract, integrate, retain and
motivate highly qualified technology, sales and marketing, and managerial
personnel. This is particularly true for sales and marketing personnel
12
<PAGE>
because of our plans to significantly expand our sales and marketing groups.
Competition for qualified personnel in our industry and primary geographical
location is intense. We may not continue to be successful in attracting and
retaining a sufficient number of qualified personnel to conduct our business in
the future.
Item 2. Properties
Our corporate headquarters are currently located in Minneapolis, Minnesota
where we lease or sublease approximately 37,100 square feet of office space.
Our lease for 29,600 square feet of this space expires on April 30, 2000 and
the lease for the remainder expires on February 28, 2003. On January 21, 2000,
we signed a lease for our new corporate headquarters, located in Plymouth,
Minnesota. This lease commences May 1, 2000, and provides us with office space
comprising 91,100 square feet. An additional 18,100 square feet will be added
before May 1, 2001.
We also lease approximately 5,600 square feet of office space for our
primary data processing production facility in Minneapolis, Minnesota. The term
of this lease is ten years, with the right to renew this lease for two
additional five-year terms.
In addition, we lease office space of approximately 6,800 square feet in
Atlanta, Georgia for 18 professionals focused on providing procurement
services.
Item 3. Legal Proceedings
The Company is not involved in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
On December 14, 1999, the Company held a special meeting of the shareholders
to vote on a proposal to amend the Company's 1999 Employee Stock Purchase Plan
(the "Purchase Plan") in order to permit recently hired employees to fully
participate in the Purchase Plan on the same basis as all other employees from
the date of the Purchase Plan's inception. The amendment was approved, with
2,504,224 votes cast in favor of the amendment, no votes cast against the
amendment and no votes to abstain, out of a total of 2,504,224 votes present
and entitled to vote.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock, $.01 par value, of eBenX is traded on the Nasdaq National
Market tier of The Nasdaq Stock Market under the symbol "EBNX". Prior to
December 10, 1999, there was no public market for the common stock of eBenX.
The following table sets forth the high and low bid quotations for the period
indicated as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
Period from
December 10, 1999 to
December 31, 1999
--------------------
<S> <C>
Bid quotation per share:
Low................................................ $34.00
High............................................... $53.84
</TABLE>
As of March 1, 2000, the Company had 16,091,137 shares of Common Stock held
by 84 shareholders of record. This does not reflect persons or entities that
hold their stock in a nominee or a "street" name through various brokerage
firms.
13
<PAGE>
Dividend Policy
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings to fund the development and growth
of our business.
Use of Proceeds
On December 15, 1999, we closed our initial public offering of 5,000,000
shares of common stock. The managing underwriters in the offering were
BancBoston Robertson Stephens Inc., Warburg Dillon Read LLC and Thomas Weisel
Partners LLC. 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). The Securities and Exchange Commission declared the
Registration Statement effective on December 9, 1999.
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.
We paid a total of $8.0 million in underwriting discounts and commissions,
and approximately $1.5 million has been or will be paid for costs and expense
related to the offering.
After deducting the underwriting discounts and commissions and the offering
expenses, the estimated total net proceeds to us from the offering were
approximately $105.5 million. The net proceeds from the offering will be used
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,
the funds have been invested in short-term, interest-bearing, investment-grade
securities.
Recent Sales of Unregistered Securities
During the fiscal year 1999 we issued and sold the following securities that
were not registered under the Securities Act of 1933:
1. From March until December 1999, pursuant to Rule 701 promulgated under
the Securities Act of 1933, we issued and sold 146,335 shares of common
stock to employees for aggregate consideration of $93,000 upon the
exercise of stock options issued pursuant to the 1993 Stock Option Plan,
and pursuant to Section 4(2) of the Securities Act of 1933, we issued
and sold 5,760 shares of common stock to an employee for aggregate
consideration of $58 upon the exercise of a warrant for shares of common
stock.
2. In May and June 1999, we issued and sold 1,075,820 shares of Series C
Convertible Preferred Stock to certain accredited investors for
aggregate consideration of $10.5 million pursuant to Rule 506 of
Regulation D promulgated under the Securities Act of 1933.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates issued in such transactions. All
recipients had adequate access, through their relationships with us, to
information about us. No placement agents were used in any of the foregoing
transactions. The share numbers set forth above have not been adjusted to
reflect the three-for-one stock split of our common stock effected on December
8, 1999.
Item 6. Selected Consolidated Financial Data
The following selected financial data should be read together with the
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," appearing elsewhere
in this document. The selected statement of operations data shown below for the
years ended December 31, 1997, 1998 and 1999 and the balance sheet data as of
December 31, 1998 and 1999 are
14
<PAGE>
derived from our audited financial statements included elsewhere in this
document. The selected statement of operations data shown below for the years
ended December 31, 1995 and 1996 and the balance sheet data as of December 31,
1995, 1996 and 1997 are derived from our audited financial statements not
included elsewhere in this document.
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------- -------
(In thousands, except per share
data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue........................ $2,497 $4,360 $7,093 $10,122 $17,526
Operating expenses:
Cost of services................. 1,323 2,480 4,496 6,958 13,372
Selling, general and
administrative.................. 538 1,796 2,068 2,831 5,118
Research and development......... 605 863 1,242 1,519 4,012
Amortization of stock-based
compensation -- -- -- -- 767
------ ------ ------ ------- -------
Total operating expenses....... 2,466 5,139 7,806 11,308 23,269
------ ------ ------ ------- -------
Income (loss) from operations...... 31 (779) (713) (1,186) (5,743)
Interest income, net............... 31 198 213 144 716
------ ------ ------ ------- -------
Net income (loss).................. $ 62 $ (581) $ (500) $(1,042) $(5,027)
====== ====== ====== ======= =======
Basic and diluted net income (loss)
per share........................... $ .02 $ (.18) $ (.15) $ (.30) $ (1.18)
====== ====== ====== ======= =======
Shares used in basic and diluted net
income (loss) per share............. 3,294 3,313 3,376 3,463 4,253
====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31
---------------------------------------
1995 1996 1997 1998 1999
------ ------ -------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............ $ 472 $1,614 $ 1,009 $ 1,681 $ 98,611
Working capital...................... 411 3,981 3,102 1,782 98,608
Total assets......................... 1,253 5,179 5,084 5,596 105,599
Redeemable Convertible Preferred
Stock............................... 978 5,468 5,468 5,468 --
Total shareholders' equity
(deficit)........................... 13 (564) (1,045) (2,077) 101,126
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the financial condition and results
of operations of eBenX should be read in conjunction with "Selected
Consolidated Financial Data" and our consolidated financial statements and
related notes appearing elsewhere in this report. This discussion and analysis
contains forward-looking statements that involve risks, uncertainties, and
assumptions. The actual results may differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including but
not limited to the risks discussed in our other SEC filings including our
Registration Statement on Form S-1 declared effective December 9, 1999 by the
SEC (File No. 333-87985).
Overview
Our activities principally involve providing eligibility administration and
premium billing and payment services, or what we refer to as back-end exchange
services, for large, multi-site employers such as Bell Atlantic, PepsiCo, GE
Capital, Promus Hotels and R.R. Donnelley. In the second quarter of 1999, we
initiated activities to leverage our success in the large employer market to
expand our services in the mid-size employer market segment. From inception
until September 1999, we were incorporated under the name Network Management
Services, Inc. In September 1999, we changed our name to eBenX, Inc.
15
<PAGE>
Our principal source of revenue is derived from providing ongoing group
health eligibility administration and premium billing and payment exchange
services. Exchange services revenue is typically priced on a per employee per
month basis with adjustments made to accommodate the number of health plan
communication and computer connections, or interfaces, that the customer
requires. In many cases, we allow fixed and variable fee structures to permit
volume-adjusted pricing. We recognize revenue for exchange services as the
services are performed. In addition, we earn revenue from health benefit plan
procurement fees as services are performed. We typically enter into contracts
with our large employer customers that are three years in length. Customers may
purchase some or all of our services, and the customer relationship may evolve
from utilizing procurement services to utilizing implementation services and
per employee-based exchange services.
The establishment of new customer relationships involves lengthy and
extensive sales and implementation processes. The sales process typically takes
four to six months, and the implementation process takes an additional two to
four months. The sales process is accounted for under the selling, general and
administrative expense category. The implementation process affects cost of
services but may also impact research and development expense to the extent new
customer relationships require new or enhanced service offerings.
Cost of services consists primarily of personnel costs for account
management, operations, production and procurement and information technology
costs for both ongoing procurement and exchange services and for customer
implementation expense. The information technology costs relate to personnel
costs for implementing and maintaining customer and health plan computer
interfaces and computer hardware and software expenses related to computer
processing. A significant portion of cost of services consists of new customer
implementation expenses. Therefore, increasing numbers of new customers will
cause the cost of services as a percentage of net revenue to increase.
Selling, general and administrative expenses consist primarily of payroll
and payroll-related expenses associated with sales and marketing, executive
management and corporate administrative personnel, as well as professional fees
and expenditures for advertising, public relations and promotional efforts. We
intend to significantly increase our sales and marketing expenses over the next
several years. We intend to invest substantially in an integrated marketing
program, including the expansion and enhancement of our penetration into the
mid-size employer market through broker partners and other advisors. At the
same time, we intend to devote additional resources to develop partnerships and
relationships with human resource service and systems organizations. We expect
that, in support of the continued growth and operation of our business,
selling, general and administrative expenses will continue to increase for the
foreseeable future.
Research and development expenses consist primarily of development personnel
and external contractor costs related to the development of new products and
services, enhancement of existing products and services, quality assurance 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 December 31, 1999, we
had an accumulated deficit of $7.2 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.
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<PAGE>
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>
Years Ended
December 31
---------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net revenue................. 100.0% 100.0% 100.0%
Operating expenses:
Cost of services.......... 63.4 68.7 76.3
Selling, general and
administrative........... 29.2 28.0 29.2
Research and development.. 17.5 15.0 22.9
Amortization of stock-
based compensation....... -- -- 4.4
----- ----- -----
Total operating costs
and expenses........... 110.1 111.7 132.8
----- ----- -----
Loss from operations........ (10.1) (11.7) (32.8)
Interest income, net........ 3.0 1.4 4.1
----- ----- -----
Net loss.................... (7.1)% (10.3)% (28.7)%
===== ===== =====
</TABLE>
Years Ended December 31, 1998 and 1999
Net revenues. Net revenues increased from $10.1 million in 1998 to $17.5
million in 1999, representing an increase of $7.4 million, or 73.3%. This
increase primarily was due to a new contract with Bell Atlantic entered into in
late 1998, the expansion of our relationship with PepsiCo and new client
implementations in 1999.
Cost of services. Cost of services increased from $7.0 million in 1998 to
$13.4 million in 1999, representing an increase of $6.4 million, or 91.4%. Cost
of services, as a percentage of net revenues, increased from 68.7% in 1998 to
76.3% in 1999, primarily due to new customer implementations, as personnel and
computer-related infrastructure costs were incurred to meet the increased
demand for our services. Increasing numbers of new customers will cause the
cost of services as a percentage of net revenue to increase.
Selling, general and administrative. Selling, general and administrative
expenses increased from $2.8 million in 1998 to $5.1 million in 1999,
representing an increase of $2.3 million, or 82.1%. This increase primarily was
due to the establishment of a sales team in late 1998 and additions to
management. Selling, general and administrative expenses, as a percentage of
net revenues, increased from 28.0% in 1998 to 29.2% in 1999. We anticipate that
sales and marketing expenses will increase substantially in future periods as
we expand our sales and marketing efforts.
Research and development. Research and development expenses increased from
$1.5 million in 1998 to $4.0 million in 1999, representing an increase of $2.5
million, or 166.7%. This increase primarily was due to additions to our
research and development staff. We anticipate that we will continue to devote
substantial resources to our research and development efforts and that research
and development expenses will increase for the foreseeable future.
Interest income, net. Net interest income includes income earned from our
invested cash, income earned from facilitating our customers' payments to their
health plans and expenses related to outstanding debt obligations under our
bank credit facility. Net interest income increased from $144,000 in 1998 to
$716,000 in 1999, or 397.2%, primarily as a result of the completion of our
initial public offering on December 10, 1999 and increased income earned from
customer payments to health plans. Interest expense was incurred for bank
borrowings which were repaid during 1999.
Amortization of stock-based compensation. In connection with the granting of
stock options to employees, we recorded stock-based compensation totaling
approximately $767,000 in 1999. This amount
17
<PAGE>
represents the difference between the exercise price and the deemed fair value
of our common stock for accounting purposes on the date these stock options
were granted. The amortization of additional deferred compensation will result
in an additional $4.7 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.
Years Ended December 31, 1997 and 1998
Net revenues. Net revenues increased from $7.1 million in 1997 to $10.1
million in 1998, or 42.7%. The increase in 1998 primarily was due to a new
contract with Bell Atlantic and servicing additional divisions of PepsiCo.
Cost of services. Cost of services increased from $4.5 million in 1997 to
$7.0 million in 1998, or 54.8%. The increase in 1998 primarily was due to
increases in personnel and investments in computer hardware and software
infrastructure. Cost of services, as a percentage of net revenues, increased
from 63.4% in 1997 to 68.7% in 1998. A significant portion of cost of services
consists of new customer implementation expenses.
Selling, general and administrative. Selling, general and administrative
expenses increased from $2.1 million in 1997 to $2.8 million in 1998, or 36.9%.
The increase primarily was due to the establishment of a sales team. Selling,
general and administrative expenses, as a percentage of net revenues, decreased
from 29.2% in 1997 to 28.0% in 1998.
Research and development. Research and development expenses increased from
$1.2 million in 1997 to $1.5 million in 1998, or 22.3%. This increase primarily
was due to the hiring of additional personnel.
Interest income, net. Net interest income decreased from $213,000 in 1997 to
$144,000 in 1998, or 32.4%. The decrease from 1997 to 1998 primarily was due to
decreased cash reserves resulting from the losses incurred in 1998.
Liquidity and Capital Resources
Our initial public offering on December 10, 1999 generated $100 million in
cash, excluding the January 2000 exercise of the underwriter's over-allotment
option to purchase an additional 750,000 shares at $20.00 per share. After
underwriting discounts and commissions and other costs, the net proceeds from
the offering, excluding the exercise of the over-allotment option, totaled
$91.5 million. The exercise of the over-allotment option generated an
additional $14 million in net proceeds in 2000. 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 intend to invest the net proceeds from this offering in short-
term, interest-bearing, investment-grade securities.
Prior to our public offering we funded operations primarily through private
sales of preferred stock and limited bank borrowings. Computer and
communications equipment was funded primarily through operating leases.
As of December 31, 1999, we had $98.6 million in cash and cash equivalents.
Cash equivalents consisted primarily of a U.S. Treasury money market fund.
Our operating activities provided cash of $67,000 in 1997 and used cash of
$1.3 million in 1998 and $3.8 million in 1999. The use of cash from operations
in 1998 and 1999 was due primarily to our net loss and an increase in accounts
receivable, partially offset by an increase in depreciation and accrued
expenses.
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<PAGE>
Our investing activities used cash of $0.7 million in 1997, provided cash of
$1.2 million in 1998 and used cash of $1.6 million in 1999. In 1997 and 1999,
our investing activities used cash for additions to equipment. In 1998, our
investing activities used cash of $0.8 million for additions to equipment and
we received proceeds of $2.0 million from the sale of U.S. Treasury Notes.
Our financing activities provided cash of $19,000 in 1997, $0.8 million in
1998 and $102.4 million in 1999. In 1997, financing activities provided cash
from the exercise of common stock options. In 1998, financing activities
provided cash principally from bank borrowings in December 1998 of $0.8
million. In 1999, financing activities provided cash principally from the sale
of $10.4 million in preferred stock and $92.6 million in common stock,
partially offset by the repayment of bank borrowings.
Our equipment additions consist primarily of computer hardware and software,
office furniture and equipment and leasehold improvements. We expect that our
equipment additions will continue to increase in the future. Since inception,
we have generally funded equipment additions either through the use of working
capital or with operating leases. We expect to continue to add computer
hardware and software and to use operating leases to finance these additions.
In connection with the planned relocation of our headquarters on or before May
1, 2000, we expect to use working capital of approximately $7.3 million for
leasehold improvements and additional office furniture and equipment.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business plan. As a result, we
anticipate that these operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In
addition, we may utilize cash resources to fund acquisitions or investments in
complementary businesses, technologies or service lines. We believe that the
net proceeds from the sale of the common stock in our initial public offering
and cash from operations will be sufficient to meet our working capital and
operating resource expenditure requirements for the foreseeable future.
However, to the extent that cash is used to fund acquisitions or investments in
complementary businesses, we may find it necessary to obtain additional equity
or debt financing.
Year 2000 Issue
In prior years, we developed and implemented plans to become Year 2000
ready. Because essentially all of our services and internal systems were
created in the last few years, our services and internal systems were designed
to avoid the Year 2000 problem. In 1999, we completed testing and remediation
on any systems not yet compliant. As a result of these efforts, we experienced
no significant disruptions in either the system software used in the
performance of our services or our word processing, billing and other internal
systems software, including information technology ("IT") and non-IT systems.
The related expense resulting from our Year 2000 efforts was not material. We
are not aware of any material problems resulting from Year 2000 issues, either
with our services, our internal systems, or the products and services of third
parties. We will continue to monitor our critical computer applications and
those of our suppliers and vendors throughout the year 2000 to ensure that any
Year 2000 matters that may arise are addressed promptly.
Risks Related to Our Business
We have had net losses over the past several years and we may not be able to
achieve or maintain profitability in the future.
Our business strategy may be unsuccessful and we may never achieve or
maintain significant revenues or profitability. With the exception of fiscal
1995, we have incurred net losses each year since we began operations in 1993.
We had net losses of approximately $0.5 million, $1.0 million and $5.0 million
for the years ended December 31, 1997, 1998 and 1999. As of December 31, 1999
we had an accumulated deficit of $7.2 million. We expect to continue to incur
significant development, sales and marketing and other operational expenses in
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connection with our business. We may also incur expenses in connection with
acquisitions or other strategic relationships. As a result of these expenses,
we will need to generate significant quarterly revenue increases to achieve and
maintain profitability. We expect that we will incur net losses for the next
several years.
We rely significantly on a limited number of customers and the loss of any
material customer could harm our business and operating results.
The loss of a material customer would significantly reduce our revenue and
harm our business and operating results. In 1999, nine customers accounted for
approximately 80% of our total revenue. Further, because increased employee
participation from existing customers has contributed to our revenue growth,
the loss of any material customer would harm our prospects for future growth.
We may continue to depend upon a small number of customers for a substantial
percentage of our revenue in the future.
The failure of the industry to accept our services could limit our revenue
growth.
The failure of industry participants to accept our services as a replacement
for traditional methods of operation could limit our revenue growth. Our
success depends on our ability to provide services to a large number of
employers with a substantial base of participating employees and to efficiently
and accurately collect and process eligibility data and execute payment
transactions with numerous health plans. The acceptance by employers of our
services will require that all participants in the group health insurance
market adopt new methods of administering benefits, exchanging eligibility
information and executing payment transactions.
Further, our services facilitate competition among health plans at the
employer level by creating an infrastructure that allows multiple health plans
to service a single employer. Health plans have in the past resisted servicing
smaller companies on a non-exclusive basis. This resistance may inhibit our
growth, especially in the mid-size employer market.
We face intense competition in our industry and, if we are unable to compete
successfully, our business and operating results will be seriously harmed.
Increased competition in our industry could result in price reductions,
reduced gross margins or loss of market share which could seriously harm our
business and operating results. The group health insurance industry is
intensely competitive, rapidly evolving and subject to sudden technological
change. We believe that the principal competitive factors in this market are
health and managed care expertise, data integration and transfer technology,
benefits processing technology, customer service and support and service fees.
We expect competition to increase in the future.
We compete with administrative service providers and benefits consultants
with administrative capabilities. We also compete with the human resource and
information systems departments of the large employer companies that perform
their own health care administration services. In the mid-size employer market
we compete with health benefit brokers and regional brokers. In addition, many
human resource service and systems companies have the health care expertise and
financial strength to develop the technology necessary to compete with us. As
the market evolves we expect increased competition from Internet-based service
providers in both the health care connectivity market between suppliers and
providers (e.g., physicians, hospitals and pharmacies) and the online insurance
market.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base
of customers than we do. In addition, many of our competitors have well-
established relationships with our current and potential customers and have
extensive knowledge of our industry. Current and potential competitors have
established or may establish strategic relationships among themselves or with
third parties to increase the ability of their products and services to address
employer needs. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
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<PAGE>
Failure to manage our growth effectively could harm our business and operating
results.
Failure to manage our growth effectively could harm our business and
operating results. Continued rapid growth will place significant strain upon
our management and operational systems and resources. We will need to expand
our existing information systems or acquire new systems to meet the
requirements of our future operations. Any expansion or replacement of our
information systems may not be sufficient to meet our needs. In addition, we
may experience interruptions of service as we expand these systems.
We recently have hired a significant number of new employees, including key
executives. We will continue to add personnel to maintain our ability to grow
in the future. We must integrate our new employees and key executives into a
cohesive team. At the same time, we must increase the total number of employees
and train and manage our employee work force in a timely and effective manner
to expand our business. We may not be able to do so successfully, which would
inhibit our ability to expand our business and harm our operating results.
Unsuccessful efforts or incurrence of unanticipated expenses in selling our
services could harm our business and operating results.
The time, expense and effort of securing customers may exceed our
expectations and may harm our business and operating results. The decision to
implement our services requires a substantial and technical analysis of an
employer's health care benefits offerings and requirements, and time-intensive
education of the advantages of our services. Due to the length of our sales
cycle, which ranges from three to twelve months, we often devote significant
resources and incur costs without any assurance that a prospective employer
will purchase our services. In the event that a prospective employer does not
purchase our services, we may have incurred substantial costs that cannot be
recovered and which will not result in future revenues.
Our failure to establish and maintain successful relationships with strategic
partners could limit our revenue growth.
We believe that our future revenue growth depends in part upon the
successful creation and maintenance of relationships with strategic partners
such as front-end health care information collection companies, human resource
information services firms, health care benefits consultants and brokers and
other industry participants. To date, we have established only a limited number
of strategic relationships. Strategic partners may offer products or services
of several different companies, including products and services that compete
with our services. Strategic partners and potential strategic partners may be
influenced by our competitors to scale back or end their relationships with us.
We may not establish additional strategic relationships and these relationships
may not be ultimately successful. Our strategic partners may not devote
adequate resources to selling our services.
If we are unable to establish and maintain successful strategic
relationships, we may have to devote substantially more resources to the sales
and marketing of our services, which will increase our costs and harm our
operating results.
Our quarterly results likely will fluctuate which could cause the value of our
common stock to rapidly decline.
Any quarterly fluctuations in our operating results could subject the market
price of our common stock to rapid and unpredictable change. Historically, we
obtain 75% of each year's new customer commitments during the months of
February through May because most employers have open enrollment periods for
the selection of health plans by their employees in the fall. We expect this
seasonality in our business to continue. Our expenses are relatively fixed in
the short term and are based in part on our expectations of future revenues,
which may vary significantly. If we do not achieve expected revenue targets, we
may be unable to adjust our spending quickly enough to offset any revenue
shortfall which could harm our business and operating results.
21
<PAGE>
Factors that may cause these quarterly fluctuations include:
. the number and size of new customers starting services;
. the decision of one or more employers to delay implementation or cancel
ongoing services;
. our ability to design, develop and introduce new services and features
for existing services on a timely basis;
. costs associated with strategic acquisitions and alliances or
investments in technology;
. expenses incurred for geographic and service expansion;
. a reduction in the number of employees of our customers; and
. acquisitions of our customers by other companies.
Further, our agreements with customers generally do not have penalties for
cancellation. As a result, any decision by a customer to cancel our services
may cause significant variations in operating results in a particular quarter
and could result in losses for that quarter. As we secure larger customers, any
cancellation of services by a larger customer likely would result in greater
fluctuations in operating results than historically experienced.
Failure to retain our key executives or attract and retain qualified technical
personnel could harm our business and operating results.
The loss of one or more of our executive officers could inhibit the
development of our business and, accordingly, harm our business and operating
results. While we generally enter into employment agreements with our key
executive officers, we may not be able to retain them.
Qualified personnel are in great demand throughout the Internet and health
care industries. Our future growth and our ability to achieve our financial and
operational objectives will depend in large part upon our ability to attract
and retain highly skilled technical, engineering, sales and marketing and
customer support personnel. Our failure to attract and retain personnel may
limit the rate at which we can expand our business, including the development
of new products and services and the retention of additional customers, which
could harm our business and operating results.
We could be subject to potential liability claims related to our services which
could harm our financial condition and results of operations.
Any liability claim brought against us, even if not successful, would likely
be time consuming and costly and could seriously harm our business and
operating results. Errors in the performance of our services on behalf of an
employer could result in the delay of processing of health care eligibility
information or execution of payment transactions or could otherwise result in
financial or other damages to our customers. These errors also may result in
the improper denial of health care benefits to employees. A liability claim
brought against us by an employer or an employee could seriously harm our
business and reputation.
Our customer agreements generally require that we indemnify our customers
for various losses and liabilities incurred by them that are caused by us. Any
indemnification payments required under these agreements may harm our business
and operating results.
We also may become party to litigation brought by a participating employee
against an employer or health plan. We may not successfully avoid liability for
problems related to the provision of health care benefits even though we do not
make medical determinations or coverage decisions. Any claims or litigation
also could require expenditures in terms of management time and other resources
to defend ourselves. This could require
22
<PAGE>
us to implement measures to reduce our exposure to this liability, which may
require us, among other things, to expend substantial resources or to
discontinue service offerings or to take other precautions. Liability of this
type could harm our business and operating results.
Failure to raise additional capital to fund future expansion of our business
could harm our business and operating results.
We do not currently generate sufficient cash to fully fund operations. To
date, we have financed our operations principally through the issuance of
equity securities and, to a limited extent, through borrowings. We may need to
raise additional capital in the future to fund the expansion of our business.
We may not be able to obtain additional financing when needed or on terms
favorable to us. Any difficulty in obtaining additional financing may require
us to limit our operations or may inhibit our future growth.
The failure to successfully integrate any future acquisitions could harm our
business and operating results.
If we acquire businesses in the future and are unable to successfully
integrate these businesses into our own, it could harm our business and
operating results. In order to remain competitive or to expand our business, we
may find it necessary or desirable to acquire other businesses, products or
technologies. If we identify an appropriate acquisition candidate, we may not
be able to negotiate the terms of the acquisition successfully, to finance the
acquisition or to integrate the acquired businesses, products or technologies
into our existing business and operations. Further, completing a potential
acquisition and integrating an acquired business may strain our resources and
require significant management time. In addition, we may be required to
amortize significant amounts of goodwill and other intangible assets in
connection with future acquisitions which would harm our operating results.
Consolidation in the health care industry could harm our future operating
results and opportunities for growth.
Our services are, in large part, beneficial to employers because we are able
to coordinate the exchange of eligibility and financial data and execute
payment transactions between an employer and its numerous health plans.
Consolidation in the health care industry may require us to reconfigure our
services and systems to accommodate a change in data formats and codes utilized
by recently acquired or consolidated health plans. Further, the consolidation
of health plans operating in the same geographic market may substantially
reduce the number of competitive health plans in that market. Existing and
potential customers, especially mid-size market employers that operate in only
one geographic market, may not find our services beneficial if there is only
limited competition among health plans.
Our revenues could decrease if our system is inadequate.
Any failure of our system could harm our business and operating results. Our
system processes vast amounts of eligibility and financial data and executes
large numbers of payment transactions. Any delay or failure in our system, in
our ability to communicate electronically with employers and health plans, or
in our ability to collect, store, analyze or process accurate eligibility and
financial data may result in the denial of health care benefits, or in the
delay or failure to execute payment transactions accurately. This type of
denial or failure would harm our business and operating results.
The occurrence of a catastrophic event or other system failure at our
facilities could interrupt our operations or result in the loss or corruption
of stored data. In addition, we depend on the efficient operation of Internet
and network connections among our system, employers and health plans. These
connections depend on the efficient operation of data exchange tools, Web
browsers, Internet service providers and Internet and network backbone service
providers. In the past, Internet users have occasionally experienced
difficulties with Internet and online services due to system failures. Any
disruption in Internet or network access provided by third parties could harm
our business and operating results. Further, we are dependent on hardware
suppliers for prompt delivery, installation and service of equipment used to
deliver our services. The failure of these suppliers to promptly deliver,
install or service equipment could harm our business and operating results.
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<PAGE>
Furthermore, our business depends upon products, services and technology
provided by third parties, such as health care providers and insurers,
insurance and health care brokers, information technology consultants, network
support providers, telecommunication companies, Internet service and access
providers, third-party service providers, vendors, business partners and others
outside our control. A prolonged Internet or communications failure also could
prevent us from performing services on behalf of customers. Also, a systemic
failure could require potential customers to dedicate substantial resources
towards fixing or resolving problems and may make the sales and marketing of
our services more difficult.
Our business and reputation may be harmed if we are unable to protect the
privacy of our information.
Our information systems and Internet communications may be vulnerable to
damage from physical break-ins, computer viruses, programming errors, attacks
by computer hackers or similar disruptive problems. A user who is able to
access our computer or communication systems could gain access to confidential
employer, employee or health plan information or our own confidential
information. A material security breach could harm our business and our
reputation or could result in liability to us. Therefore, it is critical that
our facilities and infrastructure remain secure. The occurrence of any of these
events could result in the interruption, delay or cessation of our services,
which could harm our business or operating results. Further, our reputation may
suffer if third parties were to obtain this information and we may be liable
for this disclosure. Any effect on our reputation or any liability for any
disclosure could harm our business and operating results.
If the demand for Internet and e-commerce solutions does not increase, it could
limit our revenue growth and profitability.
Rapid growth in the use of the Internet is a recent phenomenon. As a result,
its acceptance and use may not continue to develop at historical rates and a
sufficiently broad base of business customers may not adopt or continue to use
the Internet as a medium of commerce. Demand and market acceptance for
recently-introduced products and services over the Internet are subject to a
high level of uncertainty, and few proven products and services exist.
Our future revenue growth and profitability depend, in part, upon increased
employer demand for additional Internet and e-commerce solutions that we are in
the process of developing or may develop in the future. If the demand for
Internet and e-commerce solutions does not increase, it could limit our revenue
growth and profitability.
If we are unable to adequately protect our intellectual property rights or if
we infringe upon the intellectual property rights of third parties, our results
may be harmed.
Our success depends in part upon our intellectual property rights to
products and services which we develop. We rely on a combination of contractual
rights including non-disclosure agreements, trade secrets, copyrights and
trademarks to establish and protect our intellectual property rights in our
names, products, services and related technology. Loss of intellectual property
protection or inability to secure intellectual property protection on any of
our names, confidential information or technology could harm our business and
operating results.
We currently have no registered patents or pending patent applications
covering any of our technology. We have received a U.S. trademark registration
for BEN-NET and a U.S. service mark registration for WebElect. In addition, we
have applied for trademark and service mark protection for benX, eBenX, and The
Benefit Exchange Network. These registrations may not be enforceable or
effective in protecting the marks.
We typically enter into non-disclosure and confidentiality agreements with
our employees and consultants with access to sensitive information. These
agreements may not be adequate to protect our intellectual property rights or
prevent misappropriation of our technology. Products and services with features
similar to our services may be independently developed.
Although we believe that our core technology has been independently
developed and that none of our technology or intellectual property infringes on
the rights of others, third parties may assert infringement claims
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<PAGE>
against us in the future. We may be required to modify our products, services,
internal systems or technologies or to obtain a license to permit our continued
use of those rights. We may not be able to do either in a timely manner or upon
reasonable terms and conditions. Failure to do so could harm our business and
operating results. In addition, future litigation relating to these matters
could result in substantial cost diversion of resources by us. Adverse
determinations in any litigation or proceedings of this type also could subject
us to significant liabilities to third parties and could prevent us from using
some of our products, services, internal systems or technologies.
Rapidly changing technology may impair our financial performance.
We may encounter difficulties responding to technological changes that could
delay our introduction of products and services and we may not be able to
respond to these changes in a timely and cost-effective manner. Our business
depends upon the use of software, hardware, networking and Internet technology
and systems. These technologies and systems are rapidly evolving and are
subject to rapid change and obsolescence. As these technologies mature, we must
be able to quickly and successfully modify our products and services to adapt
to this change. We may encounter difficulties that could delay or harm the
performance of our products or services. We may not be able to respond to
technological changes in a timely and cost-effective manner. In addition, our
competitors may develop technologically superior products and services.
Further, data formatting and eligibility rules within a particular employer or
health plan, or within the group health benefits industry as a whole, may
change and may require substantial and expensive re-engineering of eligibility
data and adjustment of the tools we use to process this eligibility data.
Federal, state and local laws could harm our business and operating results.
Federal, state or local laws could harm our business and operating results
by requiring us to change the way we provide services and increase our cost of
performing services. Further, these laws could restrict our ability to continue
to develop our business as currently planned. The health care industry is
highly regulated by federal, state and local laws. The application of existing
laws, or the implementation of new laws applicable to our business could harm
our business and operating results. For example, the confidentiality of patient
records and the circumstances under which records may be released for inclusion
in our databases may be subject to substantial regulation. Although compliance
with current laws is principally the responsibility of health care providers
and health plans, these regulations may be extended to cover our business and
the eligibility data and other information included in our databases. If these
laws are extended to cover our business, we may be required to expend
additional resources in order to comply with these laws, including changes to
our security practices, and may be exposed to greater liability in the event we
fail to comply with these laws.
HIPAA mandates that health plans use standard transactions, identifiers,
security and other provisions during 2000. We have designed our products and
services to comply with HIPAA, but any change in federal standards would
require us to expend additional resources. In addition, under HIPAA, the U.S.
Department of Health and Human Services has issued proposed rules that, if
adopted, would impose significant restrictions on the disclosure of electronic
personal health information.
Further, our ministerial role in facilitating payments by employers to
health plans may subject us to ERISA. This act imposes fiduciary duties on
employers and health plans with respect to payments made on behalf of
participating employees and it is possible that these fiduciary duties could be
deemed to apply to us. In that event, we may become subject to greater
liability and constraints with respect to these payments and may experience
higher operating costs in order to comply with this regulation. These increases
in operating costs may harm our business and operating results.
Laws and regulations concerning the sale, marketing or distribution of
insurance over the Internet could harm our business and operating results.
Should our business activities require our licensing as an insurance agent,
we would incur increased costs and become subject to greater restrictions which
could harm our business and financial results. Further, because
25
<PAGE>
the application of e-commerce to the insurance market is relatively new, the
impact of current or future insurance laws and regulations on our business is
difficult to anticipate. The insurance industry is subject to extensive
regulation under state laws. Insurance laws and regulations cover all aspects
of the insurance process, including sales techniques, underwriting for
eligibility, rates, claim payments, and record keeping by licensed insurance
companies and insurance agents. A company that does business as an insurance
agent is generally required to be licensed in each state in which it conducts
that business. In the future, our business or other activities may be
considered by insurance regulatory authorities to fall under their licensing
jurisdiction.
Future sales of our common stock in the public market could cause the price of
our common stock to decline.
We cannot predict the timing or amount of future sales of shares of our
stock or the effect, if any, that market sales of shares, or the availability
of shares for sale, will have on the prevailing market price of our common
stock. Our shareholders could sell substantial amounts of our common stock in
the public market. Currently 9.7 million shares are subject to certain lock-up
agreements related to our initial public offering. Upon the expiration of these
agreements, these shares will be available for public trading. Consequently,
the price of our common stock could fall.
Concentration of ownership may give some shareholders substantial influence and
may prevent or delay a change in control.
Some shareholders, including officers and directors of the company,
beneficially own a substantial portion of our outstanding common stock. These
shareholders may be able to exercise substantial influence over all matters
requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also have the effect of discouraging third party offers to acquire our
company or of delaying or preventing a change in control of our company.
Our charter documents and Minnesota law may discourage unsolicited takeover
offers which could deprive our shareholders of opportunities to sell their
shares of common stock at prices higher than prevailing market prices.
Provisions of our articles of incorporation, bylaws and Minnesota law could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our shareholders. For instance, our bylaws provide for a
classified board of directors with each class of directors subject to re-
election every three years. This will make it more difficult for third parties
to insert their representatives on our board of directors and gain control of
our company. These provisions also could discourage proxy contests and make it
more difficult for shareholders to elect directors and take other corporate
actions. Further, the Minnesota Control Share Acquisition Act and the Minnesota
Business Combination Act may make it more difficult for third parties to secure
control of our company or to complete an acquisition. These acts may discourage
unsolicited takeover offers which could deprive our shareholders of
opportunities to sell their shares of common stock at prices higher than
prevailing market prices.
Recent Accounting Pronouncements
In March 1998, the Accounting Standards Committee issued AICPA Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This statement provides guidance on accounting for
the costs of computer software developed or obtained for internal use and
identifies characteristics of internal use software as well as assists in
determining when computer software is for internal use. SOP 98-1 is effective
for fiscal years beginning after December 15, 1998, with earlier application
permitted. The adoption of this SOP did not have a material impact on our
financial statements.
In March 1998, the Accounting Standards Committee issued AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities." This statement
provides guidance on the financial reporting of start-up costs and organization
costs. It requires that the cost of start-up activities and organization costs
be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, with earlier application permitted. The adoption of this SOP
did not have a material impact on our financial statements.
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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 our
financial position or results of operations. We currently do not hold
derivative instruments or engage in hedging activities.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
Our exposure to market risk for changes in interest rates relate primarily
to eBenX's investment portfolio. eBenX does not use derivative financial
instruments in its investment portfolio. The primary objective of our
investment activities is to preserve principle while maximizing yields without
significantly increasing risk. Due to the nature of our investments, we believe
that there is no material risk exposure. All investments are held at market
value, which approximates cost.
The table below represents principal (or notional) amounts and related
weighted-average interest rates by year of maturity for the Company's
investment portfolio (in thousands):
<TABLE>
<CAPTION>
Year 2000
---------
<S> <C>
Cash equivalents................................................ $98,600
Average interest rate........................................... 4.9%
</TABLE>
Exchange Rate and Commodity Price Sensitivity
The Company 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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Item 8. Financial Statements and Supplementary Data
Selected Quarterly Operating Results
The following table shows unaudited statement of operations data for each
quarter in our last two fiscal years ended December 31, 1998 and 1999. In
management's opinion, this unaudited quarterly information has been prepared on
the same basis as the audited financial statements and related notes and
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the quarters
presented, when read in conjunction with the audited financial statements and
related notes included elsewhere in this prospectus. We believe that quarter-
to-quarter comparisons of our financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance.
<TABLE>
<CAPTION>
1999
Three Months Ended
----------------------------------
March June September December
31 30 30 31
------ ------ --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net revenue............................. $3,342 $3,766 $ 4,638 $ 5,780
Operating expenses:
Cost of services...................... 2,355 2,878 3,836 4,303
Selling, general and administrative... 859 1,151 1,328 1,780
Research and development.............. 545 582 1,167 1,718
Amortization of stock-based
compensation......................... -- -- 67 700
------ ------ ------- -------
Total operating expenses............ 3,759 4,611 6,398 8,501
------ ------ ------- -------
Loss from operations.................... (417) (845) (1,760) (2,721)
Interest income, net.................... 45 105 170 396
------ ------ ------- -------
Net loss................................ $ (372) $ (740) $(1,590) $(2,325)
====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
1998
Three Months Ended
----------------------------------
March June September December
31 30 30 31
------ ------ --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net revenue.............................. $1,771 $2,157 $2,740 $3,454
Operating expenses:
Cost of services....................... 1,350 1,586 1,856 2,166
Selling, general and administrative.... 648 671 667 845
Research and development............... 331 341 345 502
------ ------ ------ ------
Total operating expenses............. 2,329 2,598 2,868 3,513
------ ------ ------ ------
Loss from operations..................... (558) (441) (128) (59)
Interest income, net..................... 45 37 20 42
------ ------ ------ ------
Net loss................................. $ (513) $ (404) $ (108) $ (17)
====== ====== ====== ======
</TABLE>
28
<PAGE>
EBENX, INC.
FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................. 30
Audited Financial Statements
Consolidated Balance Sheets.............................................. 31
Consolidated Statements of Operations.................................... 32
Consolidated Statements of Shareholders' Equity (Deficit)................ 33
Consolidated Statements of Cash Flows.................................... 34
Notes to Consolidated Financial Statements............................... 35
</TABLE>
29
<PAGE>
EBENX, INC.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
eBenX, Inc.
We have audited the accompanying consolidated balance sheets of eBenX, Inc.
(formerly known as Network Management Services, Inc.) as of December 31, 1998
and 1999, and the related consolidated statements of operations, changes in
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of eBenX, Inc. at
December 31, 1998 and 1999, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 10, 2000
30
<PAGE>
EBENX, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31
-----------------
1998 1999
------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 1,681 $ 98,611
Accounts receivable, net of allowance of $51 and $45...... 1,964 3,415
Prepaid expenses and other................................ 342 1,055
------- --------
Total current assets.................................... 3,987 103,081
Property and equipment, net................................. 1,568 2,456
Deposits.................................................... 41 62
------- --------
Total assets............................................ $ 5,596 $105,599
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 837 $ 1,353
Accrued compensation...................................... 493 960
Accrued expenses.......................................... 115 864
Accrued offering costs.................................... -- 1,113
Deferred revenue.......................................... 10 183
Note payable.............................................. 750 --
------- --------
Total current liabilities............................... 2,205 4,473
Redeemable Convertible Preferred Stock:
Series A, $.01 par value: Authorized shares--0;
Issued and outstanding shares--1,110,627-1998; 0-1999.... 978 --
Series B, $.01 par value: Authorized shares--0;
Issued and outstanding shares--1,910,835-1998; 0-1999.... 4,490 --
Series C, $.01 par value: Authorized shares--0;
Issued and outstanding shares--0......................... -- --
Shareholders' equity (deficit):
Common Stock, $.01 par value: Authorized shares--
100,000,000;
Issued and outstanding shares--3,480,321-1998;
15,183,518-1999.......................................... 35 152
Additional paid-in capital.................................. 110 112,937
Deferred stock-based compensation........................... -- (4,714)
Retained deficit............................................ (2,222) (7,249)
------- --------
Total shareholders' equity (deficit).................... (2,077) 101,126
------- --------
Total liabilities and shareholders' equity.............. $ 5,596 $105,599
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
EBENX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31
-------------------------
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Net revenue......................................... $7,093 $10,122 $17,526
Operating expenses:
Cost of services.................................. 4,496 6,958 13,372
Selling, general and administrative............... 2,068 2,831 5,118
Research and development.......................... 1,242 1,519 4,012
Amortization of stock-based compensation.......... -- -- 767
------ ------- --------
Total operating expenses........................ 7,806 11,308 23,269
------ ------- --------
Loss from operations................................ (713) (1,186) (5,743)
Interest income and other........................... 213 144 716
------ ------- --------
Net loss............................................ $ (500) $(1,042) $(5,027)
====== ======= ========
Net loss per share:
Basic and diluted................................. $ (.15) $ (.30) $ (1.18)
====== ======= ========
Shares used in calculation of net loss per share:
Basic and diluted................................. 3,376 3,463 4,253
====== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
EBENX, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(amounts in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Deferred
------------- Paid-In Stock-Based Retained
Shares Amount Capital Compensation Deficit Total
------ ------ ---------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 3,331 $ 33 $ 83 $ -- $ (680) $ (564)
Exercise of stock
options.............. 114 1 18 -- -- 19
Net loss.............. -- -- -- -- (500) (500)
------ ---- -------- ------- ------- ---------
Balance at December 3
1997................... 3,445 34 101 -- (1,180) (1,045)
Exercise of stock
options.............. 35 1 9 -- -- 10
Net loss.............. -- -- -- -- (1,042) (1,042)
------ ---- -------- ------- ------- ---------
Balance at December 31,
1998................... 3,480 35 110 -- (2,222) (2,077)
Exercise of stock
options.............. 455 5 88 -- -- 93
Deferred stock-based
compensation......... -- -- 5,481 (5,481) -- --
Amortization of stock-
based compensation... -- -- -- 767 -- 767
Initial Public
Offering............. 5,000 50 91,406 -- -- 91,456
Conversion of
preferred stock to
common stock......... 6,249 62 15,852 -- -- 15,914
Net loss.............. -- -- -- -- (5,027) (5,027)
------ ---- -------- ------- ------- ---------
Balance at December 31,
1999................... 15,184 $152 $112,937 $(4,714) $(7,249) $ 101,126
====== ==== ======== ======= ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
EBENX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31
-------------------------
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Operating activities:
Net loss........................................... $ (500) $(1,042) $ (5,027)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation of property and equipment............ 327 481 721
Amortization of stock-based compensation.......... -- -- 767
Changes in operating assets and liabilities:
Accounts receivable.............................. 27 (1,391) (1,451)
Other current assets............................. (151) (166) (713)
Accounts payable................................. 84 656 516
Accrued expenses................................. 238 192 1,216
Deferred revenue................................. 65 (55) 173
Deposits......................................... (23) (6) (21)
------ ------- --------
Net cash provided by (used in) operating
activities..................................... 67 (1,331) (3,819)
Investing activities:
Additions to property and equipment................ (692) (761) (1,609)
Sale of investments................................ 1 2,005 --
------ ------- --------
Net cash provided by (used in) investing
activities..................................... (691) 1,244 (1,609)
Financing activities:
Proceeds from note payable......................... -- 750 --
Payment of note payable............................ -- -- (750)
Stock options and warrants exercised............... 19 9 93
Proceeds from issuance of preferred stock, net of
costs............................................. -- -- 10,446
Proceeds from issuance of common stock, net of
costs............................................. -- -- 92,569
------ ------- --------
Net cash provided by financing activities....... 19 759 102,358
Net increase (decrease) in cash and cash
equivalents........................................ (605) 672 96,930
Cash and cash equivalents at beginning of year...... 1,614 1,009 1,681
------ ------- --------
Cash and cash equivalents at end of year............ $1,009 $ 1,681 $ 98,611
====== ======= ========
Supplemental disclosures of cash flow information:
Cash paid for interest............................. $ -- $ -- $ 27
Noncash investing and financing activities:
Deferred stock-based compensation................. $ -- $ -- $ 5,481
Conversion of preferred stock to common stock..... $ -- $ -- $ 15,914
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
1. Business Description and Summary of Significant Accounting Policies
Business Description
eBenX, Inc., a Minnesota corporation incorporated in September 1993 (the
"Company"), provides business-to-business e-commerce solutions to employers and
health plans for the procurement of group health insurance. 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.
From inception until September 1999, the Company was incorporated under the
name Network Management Services, Inc. In September 1999, the Company changed
its name to eBenX, Inc.
Principles of Consolidation
The consolidated financial statements include the Company and Managed Care
Buyer's Group, Inc., its wholly owned subsidiary. All intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are stated at cost, which approximates market value.
Property and Equipment
Property and equipment, including purchased software, is stated at cost for
items purchased and at estimated fair value for items contributed by the
founding shareholders. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets of five to seven years. Leasehold
improvements are amortized over the estimated life of the assets or the related
lease term, whichever is less, on a straight-line basis.
Income Taxes
Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between financial reporting and
tax bases of assets and liabilities.
Revenue Recognition
The Company generates revenue from providing exchange and procurement
services. Exchange services represent business-to-business e-commerce solutions
to employers and health plans for the procurement of group health insurance.
Fees related to these services are generally billed on a per employee per month
basis. Revenue is recognized as services are performed. The Company also
records revenue related to implementation fees associated with its exchange
services. These fees are recognized as revenue over the period of time the
implementation services are being provided. Procurement services consist of the
Company assisting and advising customers on the selection of potential health
care suppliers, preparation of requests for proposals, evaluation of proposals,
and rate negotiations. The Company's ongoing exchange contracts range in
duration from one to five years. Procurement services agreements do not exceed
five years in duration. The Company earns revenue under the contracts and
agreements as services are performed. Revenues generated from exchange services
for the years ended December 31, 1997, 1998 and 1999 were $5,432,000,
$7,742,000, and $13,823,000 respectively. Revenues generated from procurement
services for the years ended December 31, 1997, 1998 and 1999 were $1,661,000,
$2,380,000, and $3,703,000 respectively.
Research and Development and Software Development
Research and development costs are expensed when incurred. Software
development costs are expensed as incurred. Such costs are required to be
expensed until the point that technological feasibility and proven
marketability of the product are established.
35
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Advertising Costs
The Company expenses advertising costs as incurred. The amount of
advertising expensed during 1997, 1998 and 1999 was approximately $24,000,
$73,000 and $71,000, respectively.
Impairment of Long-Lived Assets
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
Stock-Based Compensation
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25), and related interpretations in
accounting for its employee stock options. Under APB 25, expense is recognized
for the excess of the market price of the underlying stock on the date of grant
over the exercise price of the Company's employee stock options.
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.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires certain disclosures regarding the fair value of financial instruments.
Cash and cash equivalents, accounts receivable, accounts payable, and accrued
liabilities are reflected in the consolidated financial statements at fair
value due to the short-term maturity of these instruments.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all nonowner changes in equity
during a period. To date, no items have been required to be reported as
comprehensive income transactions.
Reclassification
Certain prior year items have been reclassified to conform to the current
year presentation.
36
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued AICPA
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This statement provides guidance on
accounting for the costs of computer software developed or obtained for
internal use and identifies characteristics of internal use software as well as
assists in determining when computer software is for internal use. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998, with earlier
application permitted. The adoption of this SOP did not have a material impact
on our financial statements.
In March 1998, the Accounting Standards Executive Committee issued AICPA
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities."
This statement provides guidance on the financial reporting of start-up costs
and organization costs. It requires that the cost of start-up activities and
organization costs be expensed as incurred. SOP 98-5 is effective for fiscal
years beginning after December 15, 1998, with earlier application permitted.
The adoption of this SOP did not have a material impact on our financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
changes the previous accounting definition of derivatives which focused on
freestanding contracts, including, for example, options and forwards, futures
and swaps, expanding it to include embedded derivatives and many commodity
contracts. Under the statement, every derivative is recorded on the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS 133 is
effective for fiscal years beginning after June 15, 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 our
financial position or results of operations. We currently do not hold
derivative instruments or engage in hedging activities.
2. Property and Equipment, Net
Property and equipment as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Office equipment........................................ $ 1,455 $ 2,016
Purchased software...................................... 564 1,174
Furniture and fixtures.................................. 474 718
Leasehold improvements.................................. 227 420
------- -------
2,720 4,328
Less accumulated depreciation........................... (1,152) (1,872)
------- -------
$ 1,568 $ 2,456
======= =======
</TABLE>
3. Note Payable
The Company had a $1,500,000 revolving promissory note with a bank carrying
interest at 1% over the bank's base rate (8.75% at December 31, 1998). The
promissory note was secured by all business assets of the Company and matured
on December 31, 1999. The loan was guaranteed by the Company's wholly owned
subsidiary. At December 31, 1998, the outstanding balance was $750,000. The
promissory note was repaid during 1999.
4. Redeemable Preferred Stock
In May and June 1999, the Company sold a total of 1,075,820 shares of Series
C preferred stock resulting in net proceeds to the Company of $10.4 million.
The Series C shareholders had liquidation preference of $9.76
37
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
per share, plus accumulated dividends. Annual preferential cumulative dividends
of $.16 per share were payable only if declared by the Board. The Series C
preferred shareholders had voting rights similar to common shareholders, and
were able to elect two members to the Company's Board of Directors. The Series
C preferred shares were convertible into common shares at a conversion rate of
$3.25 per share.
Prior to the closing of the Company's initial public offering in December
1999, the Company's Series A, Series B, and Series C preferred stock converted
into 6,248,922 shares of common stock.
5. Shareholders' Equity
Common Stock
On December 8, 1999, the Company effected a three-for-one stock split
whereby each shareholder received two additional shares for each share owned.
Accordingly, all share, per share and weighted average share information have
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.
Employee Stock Purchase Plan
The Company's board of directors approved the 1999 Employee Stock Purchase
Plan, effective December 10, 1999, under which 900,000 shares of common stock
have been reserved for issuance. The Plan permits an eligible employee to
purchase common stock at a price equal to 85% of the lesser of the fair market
value of the common stock at the beginning of the purchase period and the fair
market value of the common stock at the end of the purchase period. Under the
Plan, employees may purchase stock at a maximum amount of 15% of their
compensation per annum, not to exceed $21,250. The first purchase period
commenced on December 8, 1999, and concludes on June 30, 2000.
6. Income Taxes
At December 31, 1998 and 1999, the Company's deferred taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1999
----- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 665 $ 2,126
Bonus and vacation...................................... 188 364
Accounts receivable allowance........................... 19 17
----- -------
872 2,507
Deferred tax liabilities:
Depreciation............................................ (93) (122)
Net deferred tax assets before valuation allowance........ 779 2,385
Less valuation allowance................................ (779) (2,385)
----- -------
Net deferred tax assets................................... $ -- $ --
===== =======
</TABLE>
38
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has established a valuation allowance to fully reserve for the
net deferred tax assets at December 31, 1998 and 1999, respectively. The
valuation allowance was established due to the available evidence indicating
that it is not more than likely that the deferred tax assets will be realized.
As of December 31, 1999, the Company has unused federal and state research
and development tax credit carryforwards of approximately $100,000 which begin
to expire in 2009. In addition, the Company has 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 the Company's ability to generate sufficient taxable income during the
carryforward periods, and are subject to limitations imposed under Section 382
of the Internal Revenue Code.
7. Operating Leases
The Company leases or subleases its office space and certain equipment under
terms of noncancelable operating lease agreements which expire through November
2009. Future lease payments for all operating leases, excluding executory
costs, such as management and maintenance fees are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31:
2000............................................................. $1,972
2001............................................................. 1,582
2002............................................................. 872
2003............................................................. 161
2004............................................................. 125
Thereafter....................................................... 599
------
$5,311
======
</TABLE>
Rent expense, including the Company's pro rata share of certain operating
costs, was $560,000, $976,000 and $2,096,000 in 1997, 1998, and 1999
respectively.
On January 21, 2000, the Company entered into a 63-month operating lease for
its new corporate office buildings located in Plymouth, Minnesota. The lease
term commences on May 1, 2000, with lease payments based on square footage at
an annual rate of approximately $1.3 million. In addition, the Company will pay
its pro rata share of operating expenses, including property taxes, insurance,
and maintenance. The lease includes additional space to be occupied by the
Company within one year. This space will result in additional lease expense of
approximately $250,000 annually.
8. Significant Customers
Significant customer activity as a percent of the Company's net revenue in
1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Customer A.............................................. 16.1% 19.1% 20.3%
Customer B.............................................. 14.6% 14.0% 8.9%
Customer C.............................................. 12.9% -- --
Customer D.............................................. 12.6% 9.5% 6.2%
Customer E.............................................. -- 17.1% 28.0%
</TABLE>
39
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Stock Options and Warrants
In 1993, the Company adopted the 1993 Stock Option Plan (the 1993 Plan) to
encourage stock ownership by employees, directors and other individuals as
determined by the Board of Directors. The Plan provides that options granted
thereunder may be either incentive stock options (ISOs), as defined by the
Internal Revenue Code, or nonqualified stock options. A maximum of 3,900,000
shares may be granted under the 1993 plan. At December 31, 1999, 35,862 shares
were available for grant under the 1993 Plan.
In 1999, the Company adopted the 1999 Stock Incentive Plan (the 1999 Plan).
The 1999 Plan provides for the granting of incentive stock options and non-
qualified stock options, stock appreciation rights, restricted stock,
performance awards, and other stock-based awards. The Company has reserved
3,000,000 shares for issuance under the 1999 plan. At December 31, 1999,
2,883,125 shares were available for grant under the 1999 Plan.
The compensation committee of the board of directors determines who will
receive options under the Plans and sets the terms, including vesting dates.
Options may have a maximum term of no more than ten years except in the case of
a shareholder possessing more than 10% of the total voting power of all classes
of stock (a 10% shareholder) in which case the maximum term is five years. The
exercise price of ISOs granted under the Plan must be at least equal to the
fair market value (or in the case of a 10% shareholder, 110% of the fair market
value) of the common stock on the date of grant. The exercise price of
nonqualified options is determined by the board of directors.
The exercise price may be paid in cash, shares of previously owned common
stock, or by issuance of a promissory note. In addition, the Plan also contains
a provision allowing the Company to permit option holders to pay their
withholding obligation through share redirection. If an option expires,
terminates or is canceled, the shares not purchased thereunder may become
available for additional option awards under the Plan. The 1993 Plan expires in
2003, while the 1999 Plan expires in 2009.
In connection with the granting of stock options to employees, the Company
recorded stock-based compensation totaling approximately $767,000 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. Additional
deferred stock-based compensation of $4.7 million is included as a component of
stockholders' equity and is being amortized over the vesting period of the
options. The amortization of the remaining deferred stock-based compensation
will result in additional charges to operations through 2004. The amortization
of stock-based compensation is classified as a separate component of operating
expenses in the consolidated statement of operations.
40
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Option activity is summarized as follows:
<TABLE>
<CAPTION>
Weighted average
1993 Plan 1999 Plan exercise price
--------- --------- ----------------
<S> <C> <C> <C>
Outstanding at December 31, 1996.. 1,171,245 -- $ .18
Granted......................... 610,845 -- $ .60
Exercised....................... (114,300) -- $ .16
Canceled........................ (226,950) -- $ .32
--------- -------
Outstanding at December 31, 1997.. 1,440,840 -- $ .34
Granted......................... 630,750 -- $ .71
Exercised....................... (34,800) -- $ .27
Canceled........................ (346,800) -- $ .17
--------- -------
Outstanding at December 31, 1998.. 1,689,990 -- $ .45
Granted at market value......... 1,412,358 116,875 $2.24
Granted at less than market
value.......................... 805,350 -- $1.42
Exercised....................... (436,995) -- $ .22
Canceled........................ (225,240) -- $ .62
--------- -------
Outstanding at December 31, 1999.. 3,245,463 116,875 $1.51
========= =======
Exercisable at:
December 31, 1997............... 290,604 -- $ .13
December 31, 1998............... 477,078 -- $ .23
December 31, 1999............... 845,744 27,375 $1.16
</TABLE>
Summary information about the Company's stock options outstanding at
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
average Weighted Weighted
contractual average average
Number life exercise Number exercise
Range of Exercise price outstanding remaining price exercisable price
----------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .10-$.23............. 360,300 1.80 $ .22 279,300 $ .22
.60.................. 329,055 3.77 .60 165,567 .60
.75.................. 1,820,058 8.41 .75 400,877 .75
1.33-2.67............. 736,050 9.49 1.48 -- --
$20.00-$42.94........... 116,875 9.94 $20.20 27,375 $20.00
--------- -------
3,362,338 873,119
========= =======
</TABLE>
Exercise prices for grants are equal to the market price of common stock on
the date of grant. Prior to the Company's public offering, the board of
directors established exercise prices for grants based on the board's
estimation of the fair value of the common stock on the date of grant. Options
vest over periods of one to ten years, and expire five to ten years after the
date of grant.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was calculated as of the date of grant using the
minimum value option pricing model with the following weighted average
assumptions: risk free interest rates of 5.50% for 1997 and 1998, and 5.2%-
6.1% for 1999; no anticipated dividends and an expected life of five years.
The fair
41
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
value calculations do not include a volatility factor, because the options were
granted prior to the Company's initial public offering.
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- -----
<S> <C> <C> <C>
Weighted average fair value:
Options granted at estimated fair value................ $.14 $.15 $ .55
Options granted at less than estimated fair value...... $-- $-- $7.26
</TABLE>
Had the Company recorded compensation cost in accordance with Statement 123,
the net loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
December 31
-----------------------
1997 1998 1999
----- ------- -------
<S> <C> <C> <C>
Net Loss:
As reported................................... $(500) $(1,042) $(5,027)
Pro forma..................................... $(518) $(1,079) $(5,114)
Basic and diluted net loss per share:
As reported................................... $(.15) $ (.30) $ (1.18)
Pro forma..................................... $(.15) $ (.31) $ (1.20)
</TABLE>
During September 1995, the Company entered into a line of credit agreement
to borrow up to $550,000, which expired in August 1996. In connection with the
agreement, the Company issued a warrant to purchase 6,000 shares of the
Company's Series A Convertible Preferred Stock at $2.701 per share. These
warrants are convertible into 18,000 shares of common stock, and are
exercisable over ten years.
During 1995, the Company granted three employees warrants to purchase 65,415
shares of common stock at $.0333 per share. The warrants, which are immediately
exercisable and expire at various times between June 30, 2000 and August 31,
2000, were granted in lieu of cash compensation. Warrants for the purchase of
48,135 shares of common stock were outstanding at December 31, 1999.
10. Employee Benefit Plans
The Company has a 401(k) plan covering substantially all employees. Under
the terms of the plan, participants may contribute 2% to 20% of their salary to
the plan. Employees are eligible after one day of service and upon attainment
of age 21. The Company may make matching contributions based on a discretionary
formula or may contribute a discretionary amount. The Company did not make any
contributions in 1997, 1998, or 1999.
42
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended December 31,
1999.
Item 11. Executive Compensation
Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended December 31,
1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended December 31,
1999.
For purposes of computing the market value of eBenX Common Stock held by
non-affiliates of eBenX on the cover page of this report, all executive
officers, directors and shareholders affiliated with directors of eBenX are
considered to be affiliates of eBenX. This does not represent an admission by
eBenX or any such person as to the affiliate status of such person.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended December 31,
1999.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) The following financial statements are filed herewith in Item 8:
(i) Consolidated Balance Sheets as of December 31, 1998 and 1999.
(ii) Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.
(iii) Consolidated Statement of Shareholders' Equity for the
years ended December 31, 1997, 1998 and 1999.
(iv) Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.
(v) Notes to consolidated financial statements at December 31, 1999.
(a)(2) Financial Statement Schedule. None
(a)(3) Exhibits
The following exhibits are submitted herewith:
<TABLE>
<C> <S>
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).
</TABLE>
43
<PAGE>
<TABLE>
<C> <S>
4.1 Form of Certificate of Common Stock of the Company (incorporated
by reference to Exhibit 4.1 of Registrant's Registration
Statement on Form S-1, Registration Number 333-87985).
10.1 1993 Stock Option Plan (incorporated by reference to Exhibit 4.4
of Registrant's Registration Statement on Form S-8, Registration
Number 333-94081).
10.2 1999 Stock Incentive Plan (incorporated by reference to Exhibit
4.5 of Registrant's Registration Statement on Form S-8,
Registration Number 333-94081).
10.3 1999 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 4.6 of Registrant's Registration Statement on Form S-8,
Registration Number 333-94081).
10.4 Services Agreement by and between the Company and PepsiCo, Inc.,
dated June 1, 1997 (incorporated by reference to Exhibit 10.4 of
Registrant's Registration Statement on Form S-1, Registration
Number 333-87985).
10.5 Services Agreement by and between the Company and Bell Atlantic
Corporation, dated July 1, 1998 (incorporated by reference to
Exhibit 10.5 of Registrant's Registration Statement on Form S-1,
Registration Number 333-87985).
10.6 Administrative Services Agreement by and between the Company and
The Blue Cross Blue Shield Association, dated May 6, 1999
(incorporated by reference to Exhibit 10.6 of Registrant's
Registration Statement on Form S-1, Registration Number 333-
87985).
10.7 Administrative Services Agreement by and between the Company and
GE Capital Services Corporation, dated January 1, 1996
(incorporated by reference to Exhibit 10.7 of Registrant's
Registration Statement on Form S-1, Registration Number
333-87985).
10.8 Services Agreement by and between the Company and General
Electric Company, dated January 1, 1997 (incorporated by
reference to Exhibit 10.8 of Registrant's Registration Statement
on Form S-1, Registration Number 333-87985).
10.9 Employment Agreement by and between the Company and Mark Tierney,
dated as of April 22, 1999, and amended and restated on September
28, 1999 (incorporated by reference to Exhibit 10.9 of
Registrant's Registration Statement on Form S-1, Registration
Number 333-87985).
10.10 Employment Agreement by and between the Company and John Davis,
dated as of April 12, 1999 (incorporated by reference to Exhibit
10.10 of Registrant's Registration Statement on Form S-1,
Registration Number 333-87985).
10.11 Employment Agreement by and between the Company and Scott
Halstead, dated as of April 22, 1999 (incorporated by reference
to Exhibit 10.11 of Registrant's Registration Statement on Form
S-1, Registration Number 333-87985).
10.12 Standard Office Lease by and between Minnesota CC Properties,
Inc. and The Prudential Insurance Company of America, dated
December 31, 1993 (incorporated by reference to Exhibit 10.12 of
Registrant's Registration Statement on Form S-1, Registration
Number 333-87985).
10.13 Office Sublease by and between the Company and The Prudential
Insurance Company of America, dated March 19, 1997 (incorporated
by reference to Exhibit 10.13 of Registrant's Registration
Statement on Form S-1, Registration Number 333-87985).
10.14 First Amendment of Sublease, by and between the Company and The
Prudential Insurance Company of America, dated August 10, 1999
(incorporated by reference to Exhibit 10.14 of Registrant's
Registration Statement on Form S-1, Registration Number 333-
87985).
</TABLE>
44
<PAGE>
<TABLE>
<C> <S>
10.15 Consent of Landlord, by and among the Company, Teachers Insurance
and Annuity Association (successor to Minnesota CC Properties,
Inc.), and The Prudential Insurance Company of America, dated
August 30, 1999 (incorporated by reference to Exhibit 10.15 of
Registrant's Registration Statement on Form S-1, Registration
Number 333-87985).
10.16 Standard Office Lease by and between the Company and ND
Properties, Inc., dated March 12, 1997 (incorporated by reference
to Exhibit 10.16 of Registrant's Registration Statement on Form
S-1, Registration Number 333-87985).
10.17 Amendment No. 1 to Lease Agreement by and between the Company and
ND Properties, Inc., dated October 1, 1997 (incorporated by
reference to Exhibit 10.17 of Registrant's Registration Statement
on Form S-1, Registration Number 333-87985).
10.18 Amendment No. 2 to Lease Agreement by and between the Company and
ND Properties, Inc., dated December 23, 1997 (incorporated by
reference to Exhibit 10.18 of Registrant's Registration Statement
on Form S-1, Registration Number 333-87985).
10.19 Amendment No. 3 to Lease Agreement by and between the Company and
Teachers Insurance and Annuity Association of America (successor
to ND Properties, Inc.), dated January 19, 1999 (incorporated by
reference to Exhibit 10.19 of Registrant's Registration Statement
on Form S-1, Registration Number 333-87985).
10.20 Healtheon Service Employer Group Distribution Agreement by and
between the Company and Healtheon Corporation, dated September
30, 1999 (incorporated by reference to Exhibit 10.20 of
Registrant's Registration Statement on Form S-1, Registration
Number 333-87985).
10.21 Second Amended and Restated Investors' Rights Agreement, dated
June 9, 1999 (relating to the registration rights relating to
Series A, Series B and Series C Preferred Stock) (incorporated by
reference to Exhibit 10.21 of Registrant's Registration Statement
on Form S-1, Registration Number 333-87985).
21.1 Subsidiaries of the Company.*
23.1 Consent of Ernst & Young LLP.*
24.1 Power of Attorney.*
27.1 Financial Data Schedule.*
</TABLE>
- --------
* Filed herewith.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 27, 2000 By ________/s/ John J. Davis_________
John J. Davis
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
__________/s/ Mark W. Tierney__________ Chairman and Director March 27, 2000
Mark W. Tierney (principal executive
officer)
___________/s/ John J. Davis___________ President, Chief March 27, 2000
John J. Davis Executive Officer and
Director (principal
executive officer)
_________/s/ Scott P. Halstead_________ Chief Financial Officer March 27, 2000
Scott P. Halstead and Secretary (principal
financial officer)
_________/s/ Scott P. Halstead_________ Chief Financial Officer March 27, 2000
Scott P. Halstead and Secretary (principal
accounting officer)
________/s/ Michael C. Bingham_________ Senior Vice President, March 27, 2000
Michael C. Bingham Business Development and
Director
__________/s/ Paul V. Barber___________ Director March 27, 2000
Paul V. Barber
_________/s/ James P. Bradley__________ Director March 27, 2000
James P. Bradley
__________/s/ Daniel M. Cain___________ Director March 27, 2000
Daniel M. Cain
_________/s/ William J. Geary__________ Director March 27, 2000
William J. Geary
____________/s/ John Nehra_____________ Director March 27, 2000
John Nehra
</TABLE>
46
<PAGE>
INDEX TO EXHIBITS
Exhibit
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney
27.1 Financial Data Schedule
<PAGE>
Exhibit 21.1
Subsidiaries of the Company
<TABLE>
<CAPTION>
State of
Subsidiary Name Organization
--------------- ------------
<S> <C>
Managed Care Buyer's Group, Inc. Minnesota
</TABLE>
The above subsidiary does business under the name Managed Care Buyer's
Group, Inc.
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-94081) of our report dated March 10, 2000, with respect to
the financial statements of eBenX, Inc. included in the Annual Report (Form 10-
K) for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 24, 2000
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints each of John J. Davis and Scott P. Halstead, with full
power to each to act without the other, his or her true and lawful attorney-in-
fact and agent with full power of substitution, for him or her and in his or
her name, place and stead, in any and all capacities, to sign the Annual Report
on Form 10-K of eBenX, Inc. (the "Company") for the Company's fiscal year ended
December 31, 1999, and any or all amendments to said Annual Report, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, and to file the same
with such other authorities as necessary, granting unto each such attorney-in-
fact and agent full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that each such attorney-in-fact and agent,
or his substitute, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on this 27th day
of March, 2000, by the following persons.
<TABLE>
<S> <C>
____________/s/ Mark W. Tierney_____ _______/s/ James P. Bradley_______
Mark W. Tierney James P. Bradley
_____________/s/ John J. Davis______ ______/s/ Daniel M. Cain__________
John J. Davis Daniel M. Cain
___________/s/ Scott P. Halstead____ ______/s/ William J. Geary________
Scott P. Halstead William J. Geary
__________/s/ Michael C. Bingham____ ______/s/ John Nehra_______________
Michael C. Bingham John Nehra
____________/s/ Paul V. Barber______
Paul V. Barber
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EBENX, INC. FOR THE YEAR ENDED DECEMBER 31, 1998 AND
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 1,681 98,611
<SECURITIES> 0 0
<RECEIVABLES> 2,015 3,460
<ALLOWANCES> (51) (45)
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,987 103,081
<PP&E> 2,720 4,328
<DEPRECIATION> (1,152) (1,872)
<TOTAL-ASSETS> 5,596 105,599
<CURRENT-LIABILITIES> 2,205 4,473
<BONDS> 0 0
0 0
5,468 0
<COMMON> 35 152
<OTHER-SE> 110 108,223
<TOTAL-LIABILITY-AND-EQUITY> 5,596 105,599
<SALES> 10,122 17,526
<TOTAL-REVENUES> 10,122 17,526
<CGS> 6,958 13,372
<TOTAL-COSTS> 11,308 23,269
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,042) (5,027)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,042) (5,027)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,042) (5,027)
<EPS-BASIC> .30<F1> 1.18<F1>
<EPS-DILUTED> .30 1.18
<FN>
<F1>THE COMPANY EFFECTED A THREE FOR ONE STOCK SPLIT ON DECEMBER 8, 1999. PRIOR
FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED TO REFLECT THE SPLIT.
</FN>
</TABLE>
