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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ to _____________.
Commission file number 333-87985
eBenX, Inc.
(Exact name of registrant
as specified in its charter)
Minnesota 41-1758843
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
605 North Highway 169 Suite LL
Minneapolis, Minnesota 55441
(Address of principal executive offices)
Telephone Number: (763) 614-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of August 1, 2001 there were 19,856,767 shares of the registrant's common
stock outstanding.
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EBENX, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2001
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2001 and
December 31, 2000 1
Condensed Consolidated Statements of Operations for the
three- and six-month periods ended June 30, 2001 and 2000 2
Condensed Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 2001 and 2000 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
EBENX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
June 30, December 31,
2001 2000
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 388 $ 764
Short-term investments 70,176 76,744
Accounts receivable, net of allowance of $243 and $178 4,060 3,973
Unbilled revenue 1,527 3,477
Prepaid expenses and other 1,567 1,234
--------- ---------
Total current assets 77,718 86,192
Property and equipment, net 10,853 9,800
Loans receivable from employees 574 492
Deposits 108 103
Goodwill and other intangibles, net 49,398 60,639
--------- ---------
Total assets $ 138,651 $ 157,226
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 179 $ 150
Accrued compensation 961 585
Accrued expenses 2,767 2,928
Deferred revenue 343 93
--------- ---------
Total current liabilities 4,250 3,756
Shareholders' equity:
Common stock 198 196
Additional paid-in capital 181,924 182,246
Deferred stock-based compensation (4,466) (6,241)
Accumulated other comprehensive income 13 8
Retained deficit (43,268) (22,739)
--------- ---------
Total shareholders' equity 134,401 153,470
--------- ---------
Total liabilities and shareholders' equity $ 138,651 $ 157,226
========= =========
See accompanying notes to condensed consolidated financial statements.
-1-
EBENX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net revenue $ 7,828 $ 6,394 $ 15,144 $ 11,970
Cost of services (exclusive of stock-based compensation
expense of $242 and $148 for the three months ended
June 30, 2001 and 2000 and $491 and $350 for the six months
ended June 30, 2001 and 2000, respectively) 6,654 4,824 13,305 9,095
-------- -------- -------- --------
Gross profit 1,174 1,570 1,839 2,875
Operating expenses:
Selling, general and administrative (exclusive of stock-
based compensation expense of $285 and $206 for the
three months ended June 30, 2001 and 2000 and
$626 and $474 for the six months ended June 30, 2001 and
2000, respectively) 3,766 2,908 7,660 5,309
Research and development (exclusive of stock-based
compensation expense of $103 and $154 for the three
months ended June 30, 2001 and 2000 and $225 and $316 for
the six months ended June 30, 2001 and 2000, respectively) 2,193 1,824 4,399 3,413
Amortization of stock-based compensation 630 508 1,342 1,140
Amortization of goodwill and other intangibles 5,650 -- 11,313 --
-------- -------- -------- --------
Total operating expenses 12,239 5,240 24,714 9,862
-------- -------- -------- --------
Loss from operations (11,065) (3,670) (22,875) (6,987)
Interest income and other, net 1,058 1,778 2,346 3,310
-------- -------- -------- --------
Net loss $(10,007) $ (1,892) $(20,529) $ (3,677)
======== ======== ======== ========
Net loss per share:
Basic and diluted $ (0.51) $ (0.12) $ (1.06) $ (0.23)
======== ======== ======== ========
Shares used in calculation of net loss per share:
Basic and diluted 19,479 16,355 19,410 16,173
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
-2-
EBENX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Six Months Ended
June 30,
------------------------
2001 2000
---------- ---------
Operating activities:
Net loss $ (20,529) $ (3,677)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 1,131 456
Amortization of stock-based compensation,
goodwill and other intangibles 12,655 1,140
Loss on sale of property and equipment -- 210
Changes in operating assets and liabilities:
Accounts receivable (112) (400)
Other current assets 1,609 (1,036)
Accounts payable 29 (933)
Accrued expenses 169 1,409
Deferred revenue 250 7
Deposits (5) (37)
--------- ---------
Net cash used in operating activities (4,803) (2,861)
Investing activities
Additions to property and equipment (2,187) (6,174)
Purchases of investments (222,368) (432,083)
Sales of investments 228,941 329,682
Advances to employees (72) --
--------- ---------
Net cash provided by (used in) investing activities 4,314 (108,575)
Financing activities:
Stock options and warrants exercised 113 758
Proceeds from issuance of common stock, net of costs -- 12,988
--------- ---------
Net cash provided by financing activities 113 13,746
Net decrease in cash and cash equivalents (376) (97,690)
Cash and cash equivalents at beginning of period 764 98,611
--------- ---------
Cash and cash equivalents at end of period $ 388 $ 921
========= =========
See accompanying notes to condensed consolidated financial statements.
-3-
EBENX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business Description and Summary of Significant Accounting Policies
Business Description
eBenX, Inc., a Minnesota corporation incorporated in September 1993 (the
"Company"), provides technology-based solutions for the purchase, administration
and payment of group health and welfare benefits. The Company currently operates
in a single business segment providing services to employers, brokers and other
employee benefit advisors, and health plans and other carriers. The Company's
customers are located throughout the United States.
Basis of Presentation
The condensed consolidated financial statements included herein, except for
the December 31, 2000 balance sheet which was extracted from the audited
financial statements of December 31, 2000, have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (all of which are
normal and recurring in nature) that are necessary for a fair presentation of
the interim periods presented. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The results of operations for the three- and six-month
periods ended June 30, 2001 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire year ended December 31,
2001. These unaudited consolidated financial statements and notes included
herein should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
Principles of Consolidation
The consolidated financial statements include the Company and its wholly
owned subsidiaries, Arbor Associates, Inc. and Managed Care Buyer's Group, Inc.
All intercompany accounts and transactions have been eliminated in
consolidation.
Net Loss Per Share
Basic net loss per share is based on the weighted-average shares
outstanding during the period. Diluted net loss per share increases the shares
used in the per share calculation by the dilutive effects of options, warrants,
and convertible securities. The Company's common stock equivalent shares
outstanding from stock options and warrants are excluded from the diluted net
loss per share computation for all periods because their effect would be
antidilutive.
Reclassification
Certain prior year items have been reclassified to conform to the current
year presentation.
2. Comprehensive Income
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for the reporting and display of
comprehensive income and its components. Adjustments to comprehensive loss for
the six months ended June 30, 2001 consisted of unrealized gains on
available-for-sale securities of $5,000, resulting in a total comprehensive loss
of $20,524,000. Adjustments to comprehensive loss for the six months ended June
30, 2000 consisted of unrealized losses on available-for-sale securities of
$24,000, resulting in a total comprehensive loss of $3,701,000. The tax effects
of these other comprehensive adjustments were not considered to be material.
-4-
3. Shareholders' Equity
On December 15, 1999, the Company closed its initial public offering of
5,000,000 shares of common stock sold at $20.00 per share. The Company received
$91.5 million in proceeds from the offering, net of underwriting discounts,
commissions, and other costs. An additional 750,000 shares were sold under the
exercise of the underwriter's over-allotment option in January 2000, resulting
in additional net proceeds to the Company of $14 million.
4. Acquisition
On September 6, 2000, the Company completed its acquisition of Arbor
Administrative Services, Inc. ("Arbor"). Arbor provides benefits administration
and related Web-based services to employers. Arbor distributes its services
primarily through brokers and employee benefit advisors. The Company paid $17
million in cash and exchanged approximately 2,596,000 shares of eBenX stock with
a fair value of $44.6 million for all of the outstanding common stock of Arbor.
The Company also assumed all of the outstanding restricted stock, stock options
and warrants of Arbor at a fair value of $4.8 million. In connection with the
acquisition, the Company incurred transaction costs consisting primarily of
professional fees of $1.4 million, bringing the total purchase price for the
acquisition to $67.8 million.
The acquisition was accounted for under the purchase method of accounting
in accordance with APB Opinion No. 16. Under the purchase method of accounting,
the purchase price is allocated to the assets acquired and liabilities assumed
based on their estimated fair values.
The total purchase price paid for the Arbor acquisition was allocated as
follows (in thousands):
Net assets acquired $ (48)
Intangible assets $ 5,600
Goodwill $62,275
Goodwill and other intangible assets are being amortized over a three-year
period. At June 30, 2001, accumulated amortization related to goodwill and other
intangible assets acquired in the Arbor acquisition totaled $18.5 million.
The following summary, prepared on an unaudited pro forma basis, reflects
the condensed consolidated results of operations for the three- and six-month
periods ended June 30, 2001 and 2000, assuming Arbor had been acquired at the
beginning of fiscal 2000 (in thousands, except per share data):
Three months ended Six months ended
June 30, June 30,
----------------------- ------------------------
2001 2000 2001 2000
-------- ------- -------- --------
Revenue $ 7,828 $ 7,805 $ 15,144 $ 14,168
Net loss $(10,007) $(8,423) $(20,529) $(16,611)
Basic and diluted net loss per share $ (0.51) $ (0.44) $ (1.06) $ (0.89)
The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the three- and six-month
periods ended June 30, 2000. They are not intended to be a projection of future
results and do not reflect any synergies that might be affected from combined
operations.
-5-
5. Deferred stock-based compensation
In connection with the granting of stock options to employees prior to the
Company's initial public offering, the Company recorded deferred stock-based
compensation of approximately $5.5 million in the year ended December 31, 1999.
This amount represents the difference between the exercise price and the deemed
fair value of the Company's common stock for accounting purposes on the date
these stock options were granted. In connection with the acquisition of Arbor in
September 2000, the Company recorded deferred stock-based compensation of $5.2
million. This amount represents the difference between the exercise price and
the deemed fair value of the Company's common stock for accounting purposes on
the date all outstanding unvested options and restricted stock of Arbor were
converted to Company options and restricted stock. The deferred stock-based
compensation is included as a component of stockholders' equity and is being
amortized over the vesting period of the options. Approximately $630,000 and
$508,000 of amortization expense was recognized in the three months ended June
30, 2001 and 2000, respectively. For the six-month periods ending June 30, 2001
and 2000, approximately $1.3 million and $1.1 million of amortization expense
was recognized, respectively.
6. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Standards No. 141, Business Combinations, and No. 142, Goodwill and
Other Intangible Assets, effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to result in an increase
in net income of $20.8 million and $14.2 million for 2002 and 2003,
respectively. During 2002, the Company will perform the first of the required
impairment tests of goodwill and indefinite lived intangible assets as of
January 1, 2002 and has not yet determined what the effect of these tests will
be on the earnings and financial position of the Company.
-6-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Except for historical information, this document contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements involve risks and uncertainties,
including, among other things, statements regarding our revenue mix, anticipated
costs and expenses, service development, relationships with strategic partners
and pending acquisitions. These forward-looking statements include declarations
regarding our belief or current expectations of management, such as statements
indicating that "we expect," "we anticipate," "we intend," "we believe," and
similar language. We caution that any forward-looking statement made by us in
this Quarterly Report on Form 10-Q or in other announcements made by us are
further qualified by important factors that could cause actual results to differ
materially from those projected in the forward-looking statements, including
without limitation the risks discussed in our Annual Report on Form 10-K filed
on March 23, 2001.
The following discussion and analysis of the financial condition and
results of operations of eBenX should be read in conjunction with the
consolidated financial statements and related notes for the year ended December
31, 2000, and included in our Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
Overview
We provide specialized technology-based solutions to employers, brokers and
other employee benefit advisors, and health plans and other carriers for the
purchase, administration, and payment of group health and welfare benefits. We
apply the Internet and other technology to simplify and automate the complex,
ongoing and multiple transactions associated with the exchange of data and
dollars between parties in the health and welfare benefits supply chain.
In September 2000, we acquired Arbor Administrative Services, Inc., which
merged into our wholly owned subsidiary, Arbor Associates, Inc. (Arbor). Arbor
is a Web-based benefits administrator that offers a Web/IVR benefits platform,
and provides full service benefit administration for mid-sized employers. Arbor
distributes its services primarily through brokers and other employee benefits
advisors.
Revenue is derived primarily from providing ongoing annual enrollment and
health and welfare eligibility administration and premium billing and payment
exchange services. Administrative or exchange services revenue typically is
priced on a per employee per month basis with adjustments made to accommodate
the number of health plans and other carriers required by the customer. In many
cases, we allow fixed and variable fee structures to permit volume-adjusted
pricing. We recognize revenue for administrative services as the services are
performed. Revenue also is recorded for implementation fees associated with our
administrative services. These fees are recognized as revenue over the life of
the contract. We also receive fees for providing enrollment services. These fees
are recognized over the enrollment period as services are provided. In addition,
we earn revenue from health and welfare benefits procurement consulting fees as
services are performed. We typically enter into multi-year contracts with our
large employer customers. Customers may purchase some or all of our services,
and the customer relationship may evolve from utilizing procurement services to
utilizing implementation and enrollment services and per employee-based
administrative services.
The establishment of new customer relationships involves lengthy and
extensive sales and implementation processes. The large employer sales process
typically takes four to six months, and the implementation process takes an
additional two to four months. The establishment of new mid-market customer
relationships is coordinated through the broker or employee benefit advisor that
typically has an existing relationship with the employer. The implementation
process for mid-market customers typically takes one 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 administrative 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.
-7-
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 increase our sales and marketing expenses over the next several years,
including expanding efforts to sell directly to health plans and other carriers.
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 as a majority of our in-house development efforts related to
determining specific software requirements and evaluating alternatives related
to specific performance criteria for our products. 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 net losses. As of June 30, 2001, we
had an accumulated deficit of $43.3 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,
the development and maintenance of our customer and carrier interfaces, and the
amortization of stock-based compensation, goodwill and other intangibles.
Although we have experienced significant revenue growth in recent periods, our
operating results for future periods are subject to numerous uncertainties. In
view of the rapidly evolving nature of our business and our limited operating
history, we believe that period-to-period comparisons of our operating results
are not necessarily meaningful and should not be relied upon as an indication of
future performance.
Results of Operations
The following table sets forth for the periods indicated selected statement
of operations data expressed as a percentage of net revenues.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2001 2000 2001 2000
------ ----- ----- -----
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of services 85.0 75.4 87.9 76.0
------ ----- ----- -----
Gross profit 15.0 24.6 12.1 24.0
Operating expenses:
Selling, general and administrative 48.1 45.5 50.6 44.4
Research and development 28.0 28.5 29.0 28.5
Amortization of stock-based compensation 8.0 8.0 8.9 9.5
Amortization of goodwill and other intangibles 72.2 -- 74.7 --
------ ----- ----- -----
Total operating expenses 156.3 82.0 163.2 82.4
------ ----- ----- -----
Loss from operations (141.3) (57.4) (151.1) (58.4)
Interest income and other, net 13.5 27.8 15.5 27.7
------ ----- ----- -----
Net loss (127.8%) (29.6%) (135.6%) (30.7%)
====== ===== ===== =====
-8-
In addition to our operating results, we also track and provide enrollment
statistics. Enrollment is defined as the number of employees to which we
currently provide administration services. Enrollment commitments include
employees currently in enrollment, new customer employee commitments that will
be implemented in the foreseeable future, and exclude employee commitments which
will be terminated in the future. The following table sets forth our enrollment
statistics for the periods indicated.
June 30,
----------------------
2001 2000
------- -------
Enrollment 814,000 585,000
Enrollment commitments 36,000 140,000
Comparison of the three months ended June 30, 2001 and 2000
Net revenue. Net revenue for the three months ended June 30, 2001 increased
to $7.8 million from $6.4 million for the same period in 2000, representing an
increase of $1.4 million, or 22.4%. This increase was due primarily to revenue
earned in 2001 from our subsidiary, Arbor Associates, Inc. (Arbor), in addition
to revenue earned through new sales of our administrative services.
Cost of services. Cost of services for the three months ended June 30, 2001
increased to $6.7 million, from $4.8 million for the same period in 2000,
representing an increase of $1.8 million, or 37.9%. Cost of services, as a
percentage of net revenues, increased to 85.0% for the three months ended June
30, 2001 from 75.4% for the same period in 2000. Primary reasons for this
increase include: additional cost of service expense from Arbor, which generally
experiences lower margins during the first half of a calendar year and higher
margins in the last half of a calendar year; Arbor integration costs; higher
rent costs, equipment lease costs, and depreciation related to our new Minnesota
production site; higher rent costs related to new company headquarters; and
severance costs related to a workforce reduction in February, 2001. We
anticipate that margins will continue to be impacted by most of these factors
over the near future.
Selling, general and administrative. Selling, general and administrative
expenses increased to $3.8 million for the three months ended June 30, 2001,
from $2.9 million for the same period in 2000. The $858,000 increase, or 29.5%,
was due to additional expense from Arbor, severance costs resulting from a
workforce reduction in February 2001, and increased rent and depreciation
related to new company headquarters. Selling, general and administrative
expenses, as a percentage of net revenues, increased to 48.1% for the three
months ended June 30, 2001, from 45.5% for the same period in 2000. We
anticipate that sales and marketing expenses will increase in future periods as
we continue to expand our sales and marketing efforts.
Research and development. Research and development expenses for the three
months ended June 30, 2001 increased to $2.2 million, from $1.8 million for the
same period in 2000, representing an increase of $369,000, or 20.2%. This
increase is primarily due to research and development expenses incurred during
the quarter by Arbor. Research and development expenses, as a percentage of net
revenues, decreased to 28.0% for the three months ended June 30, 2001, from
28.5% for the same period in 2000. We anticipate that we will continue to devote
substantial resources to our research and development efforts and related
expenses will increase for the foreseeable future.
Amortization of stock-based compensation. In connection with the granting
of stock options to employees prior to our initial public offering, we recorded
deferred stock-based compensation in 1999, with an additional amount recorded in
2000 related to our acquisition of Arbor. We recorded $630,000 in amortization
expense related to the deferred stock-based compensation for the three months
ended June 30, 2001, an increase of 24.0% from the $508,000 recorded for the
same period in 2000. This increase was due primarily to the assumption of
outstanding restricted stock, options, and warrants of Arbor. The amortization
of deferred stock-based compensation will result in an additional $4.5 million
of charges to operations through 2004.
Amortization of goodwill and other intangibles. Related to our acquisition
of Arbor, goodwill and other intangibles of $67.9 million was recorded. Goodwill
and other intangibles will be amortized over 36 months. We recorded $5.7 million
in amortization expense related to these assets in the three months ended June
30, 2001.
-9-
Interest income and other, net. Net interest income includes income earned
from our invested cash and short-term securities and income earned from
facilitating our customers' payments to their health plans. Net interest income
decreased to $1.1 million for the three months ended June 30, 2001, from $1.8
million for the same period in 2000. The decrease in interest income between
periods is primarily a result of a decrease in our short-term investment
portfolio as a result of the acquisition of Arbor and operating losses.
Income taxes. As of December 31, 2000, we had unused federal and state
research and development tax credit carryforwards of approximately $250,000
which begin to expire in 2009. In addition, we had unused federal net operating
loss carryforwards at December 31, 2000 of approximately $11.4 million which
begin to expire in 2009. The utilization of these carryforwards is dependent
upon our ability to generate sufficient taxable income during carryforward
periods.
Comparison of the six months ended June 30, 2001 and 2000
Net revenue. Net revenue for the six months ended June 30, 2001 increased
to $15.1 million from $12.0 million for the same period in 2000, representing an
increase of $3.1 million, or 26.5%. This increase was due primarily to revenue
earned in 2001 from Arbor in addition to revenue earned through new sales of our
administrative services.
Cost of services. Cost of services for the six months ended June 30, 2001
increased to $13.3 million, from $9.1 million for the same period in 2000,
representing an increase of $4.2 million, or 46.3%. Cost of services, as a
percentage of net revenues, increased to 87.9% for the six months ended June 30,
2001 from 76.0% for the same period in 2000. Primary reasons for this increase
include: additional cost of service expense from Arbor, which generally
experiences lower margins during the first half of a calendar year and higher
margins in the last half of a calendar year; costs related to integrating Arbor
operations and systems; higher rent costs, equipment lease costs, and
depreciation related to our new Minnesota production site; higher rent costs
related to new company headquarters; and severance costs related to a workforce
reduction in February, 2001. We anticipate that margins will continue to be
impacted by most of these factors over the near future.
Selling, general and administrative. Selling, general and administrative
expenses increased to $7.7 million for the six months ended June 30, 2001, from
$5.3 million for the same period in 2000. The $2.4 million increase, or 44.3%,
primarily was due to additional expense from Arbor, severance costs resulting
from a workforce reduction in February 2001, and increased rent and depreciation
related to new company headquarters. Selling, general and administrative
expenses, as a percentage of net revenues, increased to 50.6% for the six months
ended June 30, 2001, from 44.4% for the same period in 2000. We anticipate that
sales and marketing expenses will increase in future periods as we continue to
expand our sales and marketing efforts.
Research and development. Research and development expenses for the six
months ended June 30, 2001 increased to $4.4 million, from $3.4 million for the
same period in 2000, representing an increase of $1.0 million, or 28.9%. This
increase is primarily due to research and development expenses incurred during
the quarter by Arbor. Research and development expenses, as a percentage of net
revenues, increased to 29.0% for the six months ended June 30, 2001, from 28.5%
for the same period in 2000. We anticipate that we will continue to devote
substantial resources to our research and development efforts and related
expenses will increase for the foreseeable future.
Amortization of stock-based compensation. In connection with the granting
of stock options to employees prior to our initial public offering, we recorded
deferred stock-based compensation in 1999, with an additional amount recorded in
2000 related to our acquisition of Arbor. We recorded $1.3 million in
amortization expense related to the deferred stock-based compensation for the
six months ended June 30, 2001, an increase of 17.7% from the $1.1 million
recorded for the same period in 2000. This increase was due primarily to the
assumption of outstanding restricted stock, options, and warrants of Arbor. The
amortization of deferred stock-based compensation will result in an additional
$4.5 million of charges to operations through 2004.
Amortization of goodwill and other intangibles. Related to our acquisition
of Arbor, goodwill and other intangibles of $67.9 million was recorded. Goodwill
and other intangibles will be amortized over 36 months. We recorded $11.3
million in amortization expense related to these assets in the six months ended
June 30, 2001.
Interest income and other, net. Net interest income includes income earned
from our invested cash and short-term securities and income earned from
facilitating our customers' payments to their health plans. Net interest income
decreased to $2.3 million for the six months ended June 30, 2001, from $3.3
million for the same period in 2000. The 29.1% decrease
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in interest income between periods is primarily a result of a decrease in our
short-term investment portfolio due to the acquisition of Arbor and operating
losses.
Liquidity and Capital Resources
Our initial public offering on December 10, 1999 generated gross proceeds
of $100 million in cash. The January 2000 exercise of the underwriter's
over-allotment option to purchase 750,000 shares at $20.00 per share generated
additional gross proceeds of $15 million in cash. After underwriting discounts
and commissions and other costs, the net proceeds from the offering totaled
$105.5 million. Approximately $20.4 million of these proceeds were used in
connection with our acquisition of Arbor in September 2000. We intend to use the
remaining proceeds from the offering for general corporate purposes, including
working capital, sales and marketing expenditures, development of new products
and services, and investment in technology infrastructure. In addition, a
portion of the net proceeds may be used for other acquisitions of businesses,
products and technologies that are complementary to ours. Pending use of the net
proceeds for the above purposes, we 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 June 30, 2001, we had $70.6 million in short-term investments and
cash and cash equivalents. Short-term investments consisted primarily of
commercial paper and corporate and government bonds. Cash equivalents consisted
primarily of money market funds.
Our operating activities used cash of $4.8 million and $2.9 million in the
six months ended June 30, 2001 and 2000, respectively. The use of cash in
operations in 2001 was due primarily to funding our net loss, offset by a
decrease in other current assets and noncash charges for depreciation and
amortization. The use of cash in operations in 2000 was due primarily to funding
our net loss, an increase in other current assets and a decrease in accounts
payable, partially offset by an increase in accrued expenses and noncash charges
for depreciation, amortization and the loss on the sale of property and
equipment.
Our investing activities provided cash of $4.3 million and used cash of
$108.6 million in the six months ended June 30, 2001 and 2000, respectively. In
2001, our investing activities generated $228.9 million in cash through sales of
investments, but used $222.4 million for purchases of investments and $2.2
million for additions to equipment. In 2000, our investing activities generated
$329.7 million in cash from sales of investments, but used $432.1 million for
purchases of investments and $6.2 million for additions to equipment.
Our financing activities provided cash of $113,000 and $13.7 million in the
six months ended June 30, 2001 and 2000, respectively. In 2001, cash flows from
financing activities consisted of proceeds from the exercise of stock options
and warrants. In 2000, proceeds from the issuance of common stock generated
$13.0 million in cash, comprised of net proceeds of $14 million from the
underwriter's exercise of the over-allotment option to purchase 750,000 shares
of common stock, offset by additional payments of expenses related to our
initial public offering. Stock issued under the exercise of options and warrants
generated net cash of $758,000 in 2000.
Our equipment additions consist primarily of computer hardware and
software, office furniture and equipment and leasehold improvements. 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 fund these additions through working
capital or operating leases.
We believe that the net proceeds from the sale of the common stock in our
public offering and cash from operations will be sufficient to meet our working
capital and operating resource expenditure requirements for the foreseeable
future. However, to the extent that cash is used to fund acquisitions or
investments in complementary businesses, technologies or service lines, we may
find it necessary to obtain additional equity or debt financing.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
Our exposure to market risk for changes in interest rates relate primarily
to our short-term investments. We do not use derivative financial instruments.
The primary objective of our investment activities is to preserve principal
while maximizing yields without significantly increasing risk. Due to the nature
of our investments, we believe that there is no material risk exposure. All
investments are held at market value, with unrealized gains and losses included
in other comprehensive income.
The table below represents principal (or notional) amounts and related
weighted-average interest rates by year of maturity for the Company's
investments at June 30, 2001 (in thousands):
2001 2002 2003 Total
------- ------- ------ -------
Cash equivalents $ 388 $ - $ - $ 388
Average interest rate 3.2% - - 3.2%
Short-term investments $56,942 $10,456 $2,778 $70,176
Average interest rate 4.0% 4.6% 4.7% 4.1%
Exchange Rate and Commodity Price Sensitivity
We do not conduct business outside of the United States and do not invest
in foreign instruments or commodities and, therefore, have no direct exposure
related to either foreign currency exchange rate fluctuation or commodity price
fluctuation.
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PART II
Item 1. Legal Proceedings
The Company is not involved in any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None.
Use of Proceeds from Initial Public Offering
On December 15, 1999, we closed our initial public offering of 5,000,000
shares of common stock. 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. 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 effective date of which was December 9, 1999. With the
over-allotment option, the aggregate initial public offering proceeds totaled
$115 million. After deducting underwriting discounts and commissions and other
offering expenses of $9.5 million, we received net proceeds of approximately
$105.5 million from the offering.
We have used the net offering proceeds for the following purposes in the
approximate amounts set forth below (in millions):
Short-term investments $ 62.7
Acquisition of Arbor 20.4
Purchase of furniture and equipment 9.1
Working capital 13.3
------
Total $105.5
In connection with our acquisition of Arbor, the eBenX President of
Mid-Market, formerly President of Arbor, received approximately $11.4 million in
his capacity as the majority shareholder of Arbor. Otherwise, none of the net
proceeds were paid, directly or indirectly to (i) officers or directors of eBenX
or its affiliates, (ii) persons owning 10% or more of our equity securities or
(iii) affiliates.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders in Minneapolis,
Minnesota on May 24, 2001. Of the 19,730,803 shares outstanding as of the record
date, 13,088,386 shares were present or represented by proxy at the meeting. The
following action was voted upon:
A proposal to elect the following directors to serve for a term ending
upon the 2004 Annual Meeting of Stockholders or until their successors
are elected and qualified:
Director Votes For Votes Withheld
------------------ ---------- --------------
Paul V. Barber 13,085,829 2,557
James P. Bradley 13,085,629 2,757
Daniel M. Cain 13,085,829 2,557
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Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are submitted herewith:
3.1 Fifth Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of Registrant's Registration
Statement on Form S-1, Registration Number 333- 87985).
3.2 Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 of Registrant's Registration Statement on Form S-1,
Registration Number 333-87985).
4.1 Form of Certificate of Common Stock of the Company (incorporated by
reference to Exhibit 4.1 of Registrant's Registration Statement on
Form S-1, Registration Number 333-87985).
10.1 1993 Stock Option Plan (incorporated by reference to Exhibit 4.4 of
Registrant's Registration Statement on Form S-8, Registration Number
333-94081).
10.2 1999 Stock Incentive Plan (incorporated by reference to Exhibit 4.5 of
Registrant's Registration Statement on Form S-8, Registration Number
333-94081).
10.3 1999 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 4.6 of Registrant's Registration Statement on Form S-8,
Registration Number 333-94081).
10.4 eBenX, Inc./Arbor Administrative Services, Inc. 2000 Equity
Compensation Plan (incorporated by reference to Exhibit 10.4 of
Registrant's Form 10-K, filed March 23, 2001).
10.5 Amended 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).
10.6 Amended 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).
10.7 Amended 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).
10.8 Employment Agreement by and between the Company and Thomas E. Kelly,
dated as of February 23, 2001.
10.9 Separation Agreement and Release by and between the Company and
Michael C. Bingham, dated as of March 5, 2001.
10.10 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).
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10.11 Registration Rights Agreement, dated September 6, 2000 (relating to
the registration rights of the previous shareholders of Arbor
Administrative Services, Inc.) (incorporated by reference to Exhibit
10.15 of Registrant's Form 10-K, filed March 23, 2001).
(b) Reports on Form 8-K
On May, 16, 2001 the Company filed a Current Report on Form 8-K in
compliance with Regulation FD reporting that it had been informed that
an institutional investor intended to distribute an aggregate of
531,267 of the Company's common stock to its 60 limited partners on
or about May 14, 2001.
On June 19, 2001 the Company filed a Current Report on Form 8-K
reporting that Dr. Elain C. Enthoven, Ph.D. was elected to its Board
of Directors to replace outgoing board member John M. Nehra, who had
served on the Company's Board of Directors since 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EBENX, INC.
Date: August 14, 2001 By /s/ Thomas E. Kelly
--------------------------------------
Thomas E. Kelly
Chief Financial Officer and Secretary
(principal financial officer)
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