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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 SEPTEMBER 30, 2002.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ to
_____________.
Commission file number 0-28365
eBenX, Inc.
(Exact name of registrant
as specified in its charter)
Minnesota 41-1758843
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
605 North Highway 169 Suite LL
Minneapolis, Minnesota 55441
(Address of principal executive offices)
Telephone Number: (763) 614-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of November 1, 2002 there were 20,198,652 shares of the registrant's common
stock outstanding.
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EBENX, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2002
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2002
and December 31, 2001 1
Condensed Consolidated Statements of Operations for the three-
and nine-month periods ended September 30, 2002 and 2001 2
Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 2002 and 2001 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
EBENX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,682 $ 3,324
Short-term investments 35,923 46,211
Accounts receivable, net of allowance of $925 and $957 7,435 7,868
Unbilled revenue 1,904 2,272
Prepaid expenses and other 1,706 1,937
--------- ---------
Total current assets 51,650 61,612
Property and equipment, net 9,818 11,401
Loans receivable from employees 514 540
Note receivable 1,300 800
Equity investment 2,067 --
Deposits 104 113
Goodwill and indefinite lived intangibles, net 13,177 20,334
Contract and customer relationship intangibles, net 6,960 --
--------- ---------
Total assets $ 85,590 $ 94,800
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 393 $ 204
Accrued compensation 2,022 2,297
Accrued expenses 4,251 3,684
Restructuring reserve 2,812 --
Client liability reserve 438 670
Deferred revenue 267 109
--------- ---------
Total current liabilities 10,183 6,964
Shareholders' equity:
Common stock 202 199
Additional paid-in capital 182,511 182,130
Deferred stock-based compensation (1,701) (3,145)
Accumulated other comprehensive income 280 204
Retained deficit (105,885) (91,552)
--------- ---------
Total shareholders' equity 75,407 87,836
--------- ---------
Total liabilities and shareholders'
equity $ 85,590 $ 94,800
========= =========
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 Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net revenue $ 13,812 $ 9,095 $ 37,275 $ 24,239
Cost of services (exclusive of stock-based compensation
expense of $107 and $215 for the three months ended
September 30, 2002 and 2001 and $344 and $705 for the nine
months ended September 30, 2002 and 2001, respectively) 8,868 6,632 28,311 19,937
-------- -------- -------- --------
Gross profit 4,944 2,463 8,964 4,302
Operating expenses:
Selling, general and administrative (exclusive of stock- based
compensation expense of $243 and $318 for the three months
ended September 30, 2002 and 2001 and $747 and $944 for
the nine months ended September 30,
2002 and 2001, respectively) 3,433 4,065 10,803 11,725
Research and development (exclusive of stock-based
compensation expense of $60 and $111 for the three months
ended September 30, 2002 and 2001 and $198 and $337 for the
nine months ended September 30, 2002 and 2001, respectively) 1,818 2,213 5,844 6,612
Amortization of stock-based compensation 410 644 1,289 1,986
Amortization of goodwill and other intangibles 240 5,656 240 16,969
Restructuring charge -- -- 6,223 --
-------- -------- -------- --------
Total operating expenses 5,901 12,578 24,399 37,292
-------- -------- -------- --------
Loss from operations (957) (10,115) (15,435) (32,990)
Interest income and other, net 372 805 1,104 3,151
-------- -------- -------- --------
Net loss $ (585) $ (9,310) $(14,331) $(29,839)
======== ======== ======== ========
Net loss per share:
Basic and diluted $ (0.03) $ (0.47) $ (0.72) $ (1.53)
======== ======== ======== ========
Shares used in calculation of net loss per share:
Basic and diluted 20,119 19,632 19,912 19,485
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
-2-
EBENX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine Months Ended
September 30,
-----------------------
2002 2001
-------- ---------
Operating activities:
Net loss $(14,331) $ (29,839)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 2,073 1,787
Amortization of stock-based compensation,
goodwill and other intangibles 1,529 18,955
Changes in operating assets and liabilities:
Accounts receivable 425 (17)
Other current assets 625 1,007
Accounts payable 189 385
Accrued expenses 1,130 670
Restructuring reserve 2,799 -
Client liability reserve (232) -
Deferred revenue 158 117
Deposits 9 (2)
------- ---------
Net cash used in operating activities (5,626) (6,937)
Investing activities:
Additions to property and equipment (1,304) (2,669)
Purchases of investments (82,671) (311,738)
Sales of investments 93,035 322,923
Advances on notes (500) (500)
Cost of acquisition, net of cash acquired (2,102) -
Advances to employees - (72)
------- ---------
Net cash provided by investing activities 6,458 7,944
Financing activities:
Stock options and warrants exercised 362 138
Proceeds from issuance of common stock, net of costs 164 157
-------- ---------
Net cash provided by financing activities 526 295
Net increase in cash and cash equivalents 1,358 1,302
Cash and cash equivalents at beginning of period 3,324 764
-------- ---------
Cash and cash equivalents at end of period $ 4,682 $ 2,066
======== =========
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, 2001 balance sheet which was extracted from the audited
financial statements of December 31, 2001, have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (all of which are
normal and recurring in nature) that are necessary for a fair presentation of
the interim periods presented. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The results of operations for the three- and nine-month
period ended September 30, 2002 are not necessarily indicative of the results to
be expected for any subsequent quarter or for the entire year ended December 31,
2002. 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, 2001.
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 nine months ended September 30, 2002 consisted of unrealized gains on
available-for-sale securities of $76,000, resulting in a total comprehensive
loss of $14,255,000. The tax effects of these other comprehensive adjustments
were not considered to be material.
-4-
3. Restructuring Charge
In the first quarter of 2002, the Board of Directors approved plans to
undertake restructuring and cost saving actions which included workforce
reductions, vacating leased office space, asset disposals, and other costs
related to re-engineering and restructuring business processes and operations.
The Company completed these actions in the first quarter, and as a result, the
Company recorded a restructuring expense of $6.2 million.
The initial restructuring expenses described above and subsequent
reductions to the related liability accounts included the following:
Employee Contractual
Termination Lease Asset
(in thousands) Benefits Obligations Disposals Other Total
----------- ----------- --------- ----- -------
Initial expense and accrual $1,004 $3,492 $ 813 $ 914 $ 6,223
Cash payments (865) (743) - (990) (2,598)
Non-cash charges - - (813) - (813)
------ ------ ----- ----- -------
Restructuring reserve, September 30, 2002 $ 139 $2,749 $ - $ (76) $ 2,812
====== ====== ===== ===== =======
Employee termination benefits in the first nine months included
expenses related to the reduction of 34 personnel primarily through facility
closures and consolidation of corporate administrative functions.
Contractual lease obligations relate primarily to future contractual
lease costs associated with vacating two floors at the Minneapolis headquarters
location. The Company is actively seeking to sublease this space. The remaining
estimated rent and operating expenses of $2.7 million relates to the contractual
lease that will expire on July 31, 2005.
Asset disposals relate to office equipment to be disposed of and
leasehold improvements written-off. These assets were related to the two closed
floors at the Minneapolis headquarters location.
4. Acquisitions and Investment
On November 5, 2001, the Company completed the acquisition of the
health and welfare assets of Howard Johnson & Company ("Howard Johnson"), a
wholly owned subsidiary of Merrill Lynch & Company, Inc., for a final purchase
price of approximately $12.6 million, including approximately $11.5 million paid
in cash at closing and approximately $1.1 million in assumed obligations to
employees, pursuant to the terms of an Asset Purchase Agreement between Howard
Johnson and the Company dated as of October 19, 2001 (the "Asset Purchase
Agreement"). The purchase price was funded from the Company's existing cash.
In connection with the consummation of this acquisition, the Company
entered into a Shared Services Agreement with Howard Johnson pursuant to which
Howard Johnson will provide agreed upon services to the Company in connection
with the Company's health and welfare business for up to 24 months. The Company
is currently obligated to pay Howard Johnson a monthly fee of $187,500, subject
to reduction as responsibility for providing these services to each client is
transferred to the Company. The Company also entered into a Marketing Agreement
with Howard Johnson pursuant to which Howard Johnson may refer potential and
existing clients seeking health and welfare benefits services to the Company in
exchange for a percentage of revenues from such referrals.
The above acquisition was accounted for using the purchase method of
accounting. An analysis completed by an independent third party during the third
quarter allocated $7.2 million of the total purchase price to customer contracts
and relationships. The remainder of the purchase price was allocated to goodwill
and other indefinite lived intangibles. Customer contracts and relationship
intangibles have an estimated useful life of 8 years and will be amortized over
this useful life using the straight line method, beginning in the third quarter
of 2002.
-5-
The following summary, prepared on an unaudited pro forma basis,
reflects the condensed consolidated results of operations for the three- and
nine-month periods ended September 30, 2002 and 2001, assuming the health and
welfare assets of Howard Johnson had been acquired at the beginning of fiscal
2001:
(in thousands, except per share data) Three months ended Nine months ended
September 30, September 30,
------------------ ---------------------
2002 2001 2002 2001
------- ------- -------- --------
Revenue $13,812 $14,128 $ 37,275 $ 38,252
Loss from operations, excluding amortization
of stock-based compensation, goodwill and other
intangibles and restructuring charge $ (307) $(2,871) $ (7,683) $(12,289)
Net loss $ (585) $(8,470) $(14,331) $(28,405)
Basic and diluted net loss per share $ (0.03) $ (0.43) $ (0.72) $ (1.46)
The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the three- and nine-month
periods ended September 30, 2001. They are not intended to be a projection of
future results and do not reflect any synergies that might be affected from
combined operations.
In February 2002, the Company entered into an agreement with Benu, Inc.
(formerly known as "Emerge HealthCare, Inc."), a privately held Delaware
corporation, to develop and deliver new employee choice and risk-adjusted
pricing health and welfare benefit products. The Company is providing the
technology and services to these new developing products and has licensed its
proprietary platform to Benu, Inc. ("Benu"). Coincident with entering into the
agreement, the Company also participated in the Series B preferred share equity
offering of Benu and purchased shares representing less than 20% of the
outstanding shares of Benu for approximately $2 million. This investment is
carried at cost and recoverability of the carrying amount will be evaluated on a
periodic basis.
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
Administrative Services, Inc. ("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. Amortization expense of approximately $410,000 and $644,000 was
recognized in the three months ended September 30, 2002 and 2001, respectively.
For the nine-month periods ending September 30, 2002 and 2001, approximately
$1.3 million and $2 million of amortization expense was recognized,
respectively.
6. Note Receivable
In conjunction with the formation of a strategic alliance to develop,
promote, distribute and support an integrated Web-based benefits administration
and communications product for mid-sized employers, the Company entered into a
joint development agreement and a related loan agreement on August 31, 2001,
granting a line of credit of $1.5 million to Online Benefits, Inc. ("Online"), a
privately held Delaware corporation. The outstanding principal balance under the
line of credit bears interest at a rate of 8% per annum. Interest is due
annually on the anniversary date of the loan agreement. On August 31, 2004, the
third anniversary date of the loan agreement, payment of the lesser of the
outstanding principal balance under the line of credit or the total gross
revenues received by the strategic alliance through such date is due. If less
than the entire principal balance under the line of credit is paid on August 31,
2004, then the lesser of the remaining principal balance or the total gross
revenues of the strategic alliance for the preceding year is due on the next and
each succeeding anniversary date of the loan agreement. Any remaining
outstanding principal balance under the line of credit is due on
-6-
August 31, 2006. At September 30, 2002, $1.3 million has been loaned to Online
and is outstanding under the line of credit. This amount is recorded as a note
receivable. No additional advances were made under the line of credit during the
third quarter of 2002.
As a condition of the loan agreement, the Company received warrants to
purchase common stock of Online at an exercise price of $1.644 per share. The
warrants entitle the Company to purchase shares equal to 15% of the total
advances on the line of credit, divided by the per share exercise price. The
warrants expire August 31, 2006. Warrants for the purchase of 118,613 shares of
common stock were outstanding at September 30, 2002.
7. Letter of Credit
On August 29, 2001, the Company secured an irrevocable letter of credit
for approximately $1.8 million. The letter was required under the operating
lease of the Company's corporate headquarters, and as such, the lessor is
assigned as the beneficiary of the funds in the event of default on the lease.
The letter of credit expires July 31, 2005, and is collateralized by securities
restricted for that purpose.
8. Recent Accounting Pronouncements
The Company has adopted Statement of Financial Accounting Standards No.
141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets,
issued by the Financial Accounting Standards Board. 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 effect of the change in accounting resulted in an increase to net
income of $1.5 million for the quarter ended September 30, 2002 and $6 million
for the nine months ended September 30, 2002. The Company has performed the
first of the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002 and concluded there was no potential
goodwill impairment for the Company at that date.
The following summary, prepared on an unaudited pro forma basis,
reflects the condensed consolidated results of operations for the three and nine
month periods ended September 30, 2002 and 2001, assuming no amortization of
goodwill and other intangibles in 2001:
(in thousands, except per share data) Three months ended Nine months ended
September 30, September 30,
------------------ ---------------------
2002 2001 2002 2001
------- ------- -------- --------
Reported net loss $ (585) $(9,310) $(14,331) $(29,839)
Add back: Goodwill amortization - 5,656 - 16,969
------- ------- -------- --------
Adjusted net loss $ (585) $(3,654) $(14,331) $(12,870)
======= ======= ======== ========
Net loss per share:
Reported net loss per share $ (0.03) $ (0.47) $ (0.72) $ (1.53)
Goodwill amortization per share - 0.29 - 0.87
------- ------- -------- --------
Adjusted net loss per share $ (0.03) $ (0.18) $ (0.72) $ (0.66)
======= ======= ======== ========
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the
accounting and reporting provision of APB Opinion No. 30, "Reporting the Results
of Operations" for a disposal of a segment of a business. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged.
-7-
9. Subsequent Events
On November 4, 2002 the Company and SHPS, Inc. ("SHPS"), a private
company, announced that they have entered into a definitive agreement to merge
the Company into a wholly-owned subsidiary of SHPS. SHPS offers comprehensive HR
and benefits administration and health management services to help employers,
public sector enterprises, and health plans manage the administrative, clinical
and financial aspects of benefits and health care delivery. The merged company
will operate under the name SHPS and will be headquartered in Louisville,
Kentucky.
In the merger, the Company's shareholders will receive a cash payment
of $4.85 for each share of the Company's common stock owned on the closing date.
The merger is expected to close in the first quarter of 2003, subject to
regulatory and shareholder approval. Details regarding the transaction will be
included in a proxy statement to be filed with the SEC and mailed to all
shareholders prior to a special shareholder's meeting to approve the
transaction.
-8-
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 28, 2002.
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, 2001, and included in our Annual Report on Form 10-K as filed with the
Securities and Exchange Commission. For information regarding the Company's
Critical Accounting Policies, refer to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001.
Overview
We provide specialized technology-based solutions to employers,
brokers, 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 health and
welfare benefits data and dollars.
On November 5, 2001, we acquired the health and welfare assets of
Howard Johnson & Company, a wholly owned subsidiary of Merrill Lynch & Company,
Inc., for a purchase price of $12.6 million, consisting of approximately $11.5
million in cash and the assumption of $1.1 million of liabilities. The
acquisition was accounted for under the purchase method of accounting. Under
this method, the purchase price is allocated to the assets acquired and
liabilities assumed based on their determined fair market values. The assets
acquired primarily consist of customer contracts and arrangements for the
provision of health and welfare benefits administration services. An analysis
completed by an independent third party during the third quarter allocated $7.2
million of the total purchase price to customer contracts and relationships. The
remainder of the purchase price was allocated to goodwill and other indefinite
lived intangibles. Customer contracts and relationship intangibles have an
estimated useful life of 8 years and will be amortized over this useful life
using the straight line method, beginning in the third quarter of 2002.
On November 4, 2002 the Company and SHPS, Inc. ("SHPS"), a private
company, announced that they have entered into a definitive agreement to merge
the Company into a wholly-owned subsidiary of SHPS. SHPS offers comprehensive HR
and benefits administration and health management services to help employers,
public sector enterprises, and health plans manage the administrative, clinical
and financial aspects of benefits and health care delivery. The merged company
will operate under the name SHPS and will be headquartered in Louisville,
Kentucky. In the merger, the Company's shareholders will receive a cash payment
of $4.85 for each share of the Company's common stock owned on the closing date.
The merger is expected to close in the first quarter of 2003, subject to
regulatory and shareholder approval.
Revenue is derived primarily from providing ongoing annual enrollment
and health and welfare eligibility administration and premium billing and
payment exchange services. Administrative 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. We typically
enter into multi-year contracts with our large employer customers and often
provide fixed and variable fee structures to permit volume-adjusted pricing.
Customers may purchase some or all of our services, and the customer
relationship may evolve from utilizing consulting services to utilizing
implementation and enrollment services and per employee-based administrative
services.
Cost of services consists primarily of personnel costs for account
management, operations, production, consulting and information technology costs
for both ongoing consulting and administrative services, as well as for customer
-9-
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 portion of cost of services consists of new customer
implementation expenses.
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.
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. The Company follows AICPA Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", in accounting for internally developed software. To date, we have
not capitalized 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, research and development costs have been expensed as
incurred.
Since our inception, we have incurred losses. As of September 30, 2002,
we had an accumulated deficit of $105.9 million. These losses and this
accumulated deficit have resulted from the significant costs incurred in the
development of our technology platform, the establishment of relationships with
our customers, the development and maintenance of our customer and carrier
interfaces, amortization of stock-based compensation and goodwill and other
intangibles and a $30.4 million impairment charge to the carrying value of
goodwill associated with the September 2000 acquisition of Arbor. Although we
have experienced significant revenue growth in recent periods, our operating
results for future periods are subject to numerous uncertainties and risks
including, but not limited to, those risks and uncertainties discussed in our
Annual Report on Form 10-K filed on March 28, 2002.
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 Nine months ended
September 30, September 30,
-------------------- -------------------
2002 2001 2002 2001
------- -------- ------- --------
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of services 64.2 72.9 76.0 82.3
------- -------- ------- --------
Gross profit 35.8 27.1 24.0 17.7
Operating expenses:
Selling, general and administrative 24.9 44.7 29.0 48.4
Research and development 13.2 24.3 15.7 27.3
Amortization of stock-based compensation 3.0 7.1 3.5 8.2
Amortization of goodwill and other intangibles 1.7 62.2 0.6 70.0
Restructuring charge - - 16.7 -
------- -------- ------- --------
Total operating expenses 42.8 138.3 65.5 153.9
------- -------- ------- --------
Loss from operations (7.0) (111.2) (41.5) (136.2)
Interest income and other, net 2.7 8.9 3.0 13.0
------- -------- ------- --------
Net loss (4.3%) (102.3%) (38.5%) (123.2%)
======= ======== ======= ========
-10-
In addition to our operating results, we also track and provide
enrollment statistics. Enrollment is defined as the number of our customers'
employees or retirees to which we currently provide administration services.
Pending enrollment commitments include new customer employee commitments that
will be implemented in the foreseeable future, and exclude enrolled employees
known to be terminating in the future. The following table sets forth our
enrollment statistics for the periods indicated.
September 30,
-------------------------
2002 2001
--------- -------
Enrollment 965,000 729,000
Net pending enrollment commitments 179,000 171,000
--------- -------
Enrollment plus commitments 1,144,000 900,000
========= =======
Comparison of the three months ended September 30, 2002 and 2001
Net revenue. Net revenue for the three months ended September 30, 2002
increased to $13.8 million from $9.1 million for the same period in 2001,
representing an increase of $4.7 million, or 51.9%. This increase was due
primarily to additional revenue derived from the acquisition of the health and
welfare clients of Howard Johnson in November 2001, and as a result of the new
sales made during calendar year 2001 and 2002. This increase was partially
offset by the discontinuance of services provided to Verizon Communications,
Inc., lower implementation fees, and the termination of certain clients during
2002 and 2001, including several unprofitable clients during 2001.
Cost of services. Cost of services for the three months ended September
30, 2002 increased to $8.9 million, from $6.6 million for the same period in
2001, representing an increase of $2.3 million, or 33.7%. The primary reason for
this increase was additional service expense associated with the acquisition of
the health and welfare clients of Howard Johnson. Cost of services, as a
percentage of net revenues, decreased to 64.2% for the three months ended
September 30, 2002 from 72.9% for the same period in 2001, primarily as a result
of the acquisition of the health and welfare assets of Howard Johnson and
actions taken during first quarter 2002 to become more efficient, consistent
with the Company's plan to improve gross margins.
Selling, general and administrative. Selling, general and
administrative expenses for the three months ended September 30, 2002 decreased
to $3.4 million, from $4.1 million for the same period in 2001, representing a
decrease of $0.7 million, or 15.5%. Selling, general and administrative
expenses, as a percentage of net revenues, decreased to 24.9% for the three
months ended September 30, 2002, from 44.7% for the same period in 2001,
primarily as a result of increased revenues, strengthening bad debt reserves in
2001, and actions taken to hold firm or reduce certain SG&A expenditures from
2001 levels. These actions include the 2002 reductions to corporate headquarters
office space and reductions to the general and administrative workforce.
Management expects to continue to hold firm or reduce SG&A expenditures in the
future. Recently, management took actions to streamline the management
structure, resulting in the elimination of an officer position.
Research and development. Research and development expenses for the
three months ended September 30, 2002 decreased to $1.8 million, from $2.2
million for the same period in 2001, representing a decrease of $0.4 million, or
17.8%. This decrease was primarily due to a decrease in salaries resulting from
workforce reductions and a decrease in contractor expenses. Research and
development expenses, as a percentage of net revenues, decreased to 13.2% for
the three months ended September 30, 2002, from 24.3% for the same period in
2001, primarily as a result of increased revenues, while holding firm or
reducing certain R&D expenditures.
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 $410,000 in
amortization expense related to the deferred stock-based compensation for the
three months ended September 30, 2002, a decrease of 36.3% from the $644,000
recorded for the same period in 2001. This decrease will continue through future
quarters as the calculation of the expense under SFAS 123
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requires heavier weighting of the expense in the early years of the option's
life. Amortization of deferred stock-based compensation will result in an
additional $1.7 million of charges to operations through 2004.
Amortization of goodwill and other intangibles. Under SFAS No. 142,
Goodwill and Other Intangible Assets, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment test. Other intangible assets will be amortized over their useful
lives. The Company performed the first of the required impairment tests of
goodwill and indefinite lived assets as of January 1, 2002 and concluded there
was no potential impairment for the Company at that date.
An analysis of the consideration paid for the acquisition of the health
and welfare assets of Howard Johnson was completed by an independent third party
during the third quarter. The analysis allocated $7.2 million of the total
purchase price to customer contracts and relationships. The remainder of the
purchase price was allocated to goodwill and other indefinite lived intangibles.
Customer contracts and relationship intangibles have an estimated useful life of
8 years and will be amortized over this useful life using the straight line
method. As such, the Company recorded amortization expense of $240,000 for the
three months ended September 30, 2002.
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 $372,000 for the three months ended September 30, 2002, from
$805,000 for the same period in 2001. The $433,000 decrease, or 53.8%, is
primarily a result of the decrease in our short-term investment portfolio from
the acquisition of the health and welfare assets of Howard Johnson, cash used in
operations and for capital expenditures, as well as a decrease in the return on
investment of the securities that are held in our short-term investment
portfolio due to a general decline in interest rates.
Comparison of the nine months ended September 30, 2002 and 2001
Net revenue. Net revenue for the nine months ended September 30, 2002
increased to approximately $37.3 million from $24.2 million for the same period
in 2001, representing an increase of $13.1 million, or 53.8%. This increase was
due primarily to additional revenue derived from the acquisition of the health
and welfare clients of Howard Johnson in November 2001, and as a result of the
new sales made during calendar year 2001 and 2002. This increase was partially
offset by the discontinuance of the majority of services provided to Verizon
Communications, Inc., lower implementation fees, and the termination of certain
clients during 2002 and 2001, including several unprofitable clients during
2001.
Cost of services. Cost of services for the nine months ended September
30, 2002 increased to $28.3 million, from $19.9 million for the same period in
2001, representing an increase of $8.4 million, or 42.0%. The primary reason for
this increase was additional service expense associated with the acquisition of
the health and welfare clients of Howard Johnson. Cost of services, as a
percentage of net revenues, decreased to 76.0% for the nine months ended
September 30, 2002 from 82.3% for the same period in 2001, primarily as a result
of the acquisition of the health and welfare assets of Howard Johnson and
actions taken during first quarter 2002 to become more efficient, consistent
with the Company's plan to improve gross margins.
Selling, general and administrative. Selling, general and
administrative expenses for the nine months ended September 30, 2002 decreased
to $10.8 million from $11.7 million for the same period in 2001, representing a
decrease of $0.9 million, or 7.9%. Selling, general and administrative expenses,
as a percentage of net revenues, decreased to 29.0% for the nine months ended
September 30, 2002, from 48.4% for the same period in 2001, primarily as a
result of increased revenues, strengthening bad debt reserves in 2001, and
actions taken to hold firm or reduce certain SG&A expenditures from 2001 levels.
These actions include first quarter 2002 reductions to corporate headquarters
office space and reductions to the general and administrative workforce which
were partially offset by additional expenses associated with the acquisition of
the health and welfare assets of Howard Johnson. Management expects to continue
to hold firm or reduce SG&A expenditures in the future. Recently, management
took actions to streamline the management structure, resulting in the
elimination of an officer position.
Research and development. Research and development expenses for the
nine months ended September 30, 2002 decreased to $5.8 million, from $6.6
million for the same period in 2001, representing a decrease of $0.8 million, or
11.6%. This decrease was primarily due to a decrease in salaries resulting from
workforce reductions and a decrease in contractor
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expenses. Research and development expenses, as a percentage of net revenues,
decreased to 15.7% for the nine months ended September 30, 2002, from 27.3% for
the same period in 2001, primarily as a result of increased revenues, while
holding firm or reducing certain R&D expenditures.
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
nine months ended September 30, 2002, a decrease of 35.1% from the $2 million
recorded for the same period in 2001. This decrease will continue through future
quarters as the calculation of the expense under SFAS 123 requires heavier
weighting of the expense in the early years of the option's life. Amortization
of deferred stock-based compensation will result in an additional $1.7 million
of charges to operations through 2004.
Restructuring charge. In the first quarter of 2002, the Board of
Directors approved plans to undertake restructuring and cost saving actions
which included workforce reductions, vacating leased office space, asset
disposals, and other costs related to re-engineering and restructuring business
processes and operations. The Company completed these actions in the first
quarter, and as a result, the Company recorded a restructuring expense of $6.2
million.
Amortization of goodwill and other intangibles. Under SFAS No. 142,
Goodwill and Other Intangible Assets, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests. Other intangible assets will be amortized over their useful
lives. The Company performed the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002 and
concluded there was no potential impairment for the Company at that date.
An analysis of the consideration paid for the acquisition of the health
and welfare assets of Howard Johnson was completed by an independent third party
during the third quarter. The analysis allocated $7.2 million of the total
purchase price to customer contracts and relationships. The remainder of the
purchase price was allocated to goodwill and other indefinite lived intangibles.
Customer contracts and relationship intangibles have an estimated useful life of
8 years and will be amortized over this useful life using the straight line
method, beginning in the third quarter of 2002. As such, the Company recorded
amortization expense of $240,000 during the first nine months of 2002. During
the first nine months of 2001, the Company recorded $17 million of amortization
of goodwill and other intangibles.
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 nine months ended September 30, 2002, from
$3.2 million for the same period in 2001. The $2.1 million decrease, or 65.0%,
is primarily a result of the decrease in our short-term investment portfolio
from the acquisition of the health and welfare assets of Howard Johnson, cash
used in operations and for capital expenditures, as well as a decrease in the
return on investment of the securities that are held in our short-term
investment portfolio due to a general decline in interest rates.
Income taxes. As of December 31, 2001, 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, 2001 of approximately $23.1 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 and therefore, are not recognized as an asset on the Company's balance
sheet.
Significant balance sheet changes. Total assets decreased from $94.8
million as of December 31, 2001 to $85.6 million as of September 30, 2002,
primarily as a result of decreases in cash and short-term investments, accounts
receivable, unbilled revenue and property and equipment. An additional advance
under a line of credit and an equity investment in Benu offset these decreases.
The decrease in accounts receivable and unbilled revenue resulted from
collections during the first nine months of 2002 of open enrollment fees, which
were billed or accrued for our mid-market and former Howard Johnson clients
during the fourth quarter of 2001. Property and equipment decreased as a result
of depreciation and assets disposed of or written-off in connection with
restructuring and cost saving actions taken in the first quarter of 2002.
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Total liabilities increased from $7 million as of December 31, 2001 to
$10.2 million as of September 30, 2002, primarily as a result of $2.8 million of
reserves held for restructuring and cost saving actions taken in the first
quarter of 2002 and an increase in general operational accrued expenses.
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.
On November 5, 2001, we acquired the assets of the health and welfare
business unit of Howard Johnson & Company, a wholly owned subsidiary of Merrill
Lynch & Company, Inc., for a final purchase price of approximately $12.6
million, consisting of approximately $11.5 million in cash and the assumption of
approximately $1.1 million in assumed obligations to employees which were
primarily paid in the second quarter of 2002.
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.
As of September 30, 2002, we had $40.6 million in short-term
investments and cash and cash equivalents. Short-term investments plus cash and
cash equivalents decreased by approximately $1.3 million and $8.9 million during
the three months and nine months ended September 30, 2002, respectively. These
reductions were due primarily to the use of cash in operations (including
expenditures related to restructuring) and the investment in Benu. Short-term
investments consisted primarily of commercial paper and corporate and government
bonds. Cash equivalents consisted primarily of money market funds. Cash of $1.8
million has been restricted as collateral for a letter of credit.
Our operating activities, which includes $2.6 million used for 2002
restructuring activities, used cash of $5.6 million in the nine months ended
September 30, 2002 and $6.9 million for the same period in 2001. The use of cash
in operations in 2002 was due primarily to funding our net loss and
restructuring activities, offset by remaining restructuring reserves, noncash
charges for depreciation and amortization of stock-based compensation, goodwill
and other intangibles, a decrease in accounts receivable and unbilled revenue
and an increase in accrued expenses. The use of cash in operations in 2001 was
due primarily to funding our net loss, partially offset by noncash charges for
depreciation and amortization of stock-based compensation, goodwill and other
intangibles.
Our investing activities provided cash of $6.5 million and $7.9 million
in the nine months ended September 30, 2002 and 2001, respectively. In 2002, our
investing activities generated $10.4 million in cash through net sales of
investments, while using $2.1 million for the investment in Benu, $500,000 in
additional advances under the line of credit to Online Benefits, Inc., and $1.3
million for additions to equipment. In 2001, our investing activities provided
cash of $11.2 million through net sales of investments while using $2.7 million
for additions to equipment and $500,000 for the initial advance under the line
of credit.
Our financing activities provided cash of $526,000 and $295,000 in the
nine months ended September 30, 2002 and 2001, respectively. In 2002 and 2001,
cash flows from financing activities consisted of proceeds from the sale of
stock through our employee stock purchase plan and through the exercise of stock
options and warrants.
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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
Our exposure to market risk for changes in interest rates relate
primarily to our short-term investments. We do not use derivative financial
instruments. The primary objective of our investment activities is to preserve
principal while maximizing yields without significantly increasing risk. Due to
the nature of our investments, we believe that there is no material risk
exposure. All investments are held at market value, with unrealized gains and
losses included in other comprehensive income.
The table below represents principal (or notional) amounts and related
weighted-average interest rates by year of maturity for the Company's
investments at September 30, 2002 (in thousands):
2002 2003 2004 2005 Total
------- ------- ------ ------ -------
Cash equivalents $ 4,682 $ - $ - $ - $ 4,682
Average interest rate 1.8% 1.8%
Short-term investments $10,904 $15,561 $6,970 $2,488 $35,923
Average interest rate 2.5% 3.3% 3.2% 3.5% 3.0%
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.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this report, and,
based on their evaluation, our principal executive officer and principal
financial officer have concluded that these controls and procedures are
effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
Disclosure controls and procedures are our internal controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
us in the reports that we file under the Exchange Act is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.
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PART II
Item 1. Legal Proceedings
A class action lawsuit was filed on October 25, 2001 on behalf of
purchasers of the securities of the Company between December 9, 1999 and
December 6, 2000, inclusive. The lawsuit was filed in United States District
Court, Southern District of New York, against the Company, BancBoston Robertson
Stephens, Inc., Warburg Dillon Read LLC, Thomas Weisel Partners LLC, and eBenX
Chairman, Mark W. Tierney, Chief Executive Officer, John J. Davis, and our
former Executive Vice President & General Manager - Corporate Solutions, Scott
P. Halstead. The complaint alleges violations of Sections 11, 12(a)(2) and 15 of
the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. The complaint alleges that the
Company's prospectus, filed in connection with the Company's initial public
offering, was materially false and misleading because it failed to disclose
certain commissions and agreements between the aforementioned parties and
certain investors and customers. The complaint seeks unspecified damages plus
attorneys' fees and rescission. The Company intends to vigorously defend against
this lawsuit.
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.
Through September 30, 2002, we have used the net offering proceeds for
the following purposes in the approximate amounts set forth below (in millions):
Short-term investments $ 30.7
Acquisition of Arbor 20.4
Acquisition of health and welfare assets of Howard Johnson 12.4
Equity investment in Benu, Inc. 2.1
Advances to and Notes receivable from Online Benefits, Inc. 1.3
Purchase of furniture and equipment 12.3
Working capital used in Operations 26.3
------
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 affialiates, (ii) persons owning 10% or more of our equity securities or
(iii) affiliates.
Item 3. Defaults Upon Senior Securities
Not applicable.
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Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On November 4, 2002 the Company and SHPS, Inc. ("SHPS"), a private
company, announced that they have entered into a definitive agreement to merge
the companies. SHPS offers comprehensive HR and benefits administration and
health management services to help employers, public sector enterprises, and
health plans manage the administrative, clinical and financial aspects of
benefits and health care delivery. The merged company will operate under the
name SHPS and will be headquartered in Louisville, Kentucky.
In the merger, the Company's shareholders will receive a cash payment
of $4.85 for each share of the Company's common stock owned on the closing date.
The merger is expected to close in the first quarter of 2003, subject to
regulatory and shareholder approval.
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 Employee Stock Purchase Plan (incorporated by reference
to Exhibit 4.6 of Registrant's Registration Statement on Form
S-8, Registration Number 333-94081).
10.3 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).
10.4 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).
10.5 Amended and Restated 1999 Stock Incentive Plan.
10.6 Separation Agreement and Release by and between the Company
and Scott Halstead, effective October 5, 2002.
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(b) Reports on Form 8-K
On August 14, 2002, the Company filed a Current Report on Form 8-K in
connection with the filing of the Quarterly Report on Form 10-Q of the
Company, which reported that John J. Davis, Chief Executive Officer,
and Randall J. Schmidt, Chief Financial Officer, each filed with the
Securities and Exchange Commission the certification required pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EBENX INC.
Date: November 14, 2002 By /s/ Randall J. Schmidt
-------------------------------------
Randall J. Schmidt
Chief Financial Officer and Secretary
(principal financial officer)
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CERTIFICATIONS
I, John J. Davis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of eBenX, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of the
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 By /s/ John J. Davis
------------------------------------
John J. Davis
Chief Executive Officer
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I, Randall J. Schmidt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of eBenX, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 By /s/ Randall J. Schmidt
----------------------------------
Randall J. Schmidt
Chief Financial Officer
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