**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                                              | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**         |
|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|
|                                                    |       |                                                                                                |
| **For the quarterly period ended March 31,  2005** |
|                                                    |       | ** **                                                                                          |
| **OR**                                                  |
|                                                    |       |                                                                                                |
| **o**                                                   | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**Commission file number 0-15946**

 

**Ebix, Inc.**

(Exact name of registrant as specified in itscharter)

 
| **DELAWARE**                                                               | ** ** | **77-0021975**                       |
|----------------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or  organization)           |       | (I.R.S. Employer Identification No.) |
|                                                                       |       |                                 |
| **1900 E. GOLF ROAD  SCHAUMBURG, IL**                                      | ** ** | **60173**                            |
| (Address of principal executive offices)                                   |       | (Zip Code)                           |
|                                                                       |       |                                 |
| Registrant’s telephone number, including  area code: **847-789-3047** |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  ý

 

As of May 2, 2005, the number of shares of Common Stock outstanding was2,712,491.

 

 

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**Ebix, Inc. and Subsidiaries**

 

FORM 10-Q

 

FOR THE QUARTER ENDED MARCH 31, 2005

 

INDEX

 

 
| PART I — FINANCIAL INFORMATION |                                                                                                                 |
|-------------------------------------|----------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                 |   |
|                                | Item 1. Consolidated Financial Statements                                                                            |   |
|                                |                                                                                                                 |
|                                | Condensed Consolidated Balance Sheets at March 31,  2005 (unaudited) and December 31, 2004                 |   |
|                                |                                                                                                                 |
|                                | Condensed Consolidated Statements of Income  for the Three Months ended March 31, 2005 and 2004 (unaudited)     |   |
|                                |                                                                                                                 |
|                                | Condensed Consolidated Statements of Cash  Flows for the Three Months ended March 31, 2005 and 2004 (unaudited) |   |
|                                |                                                                                                                 |
|                                | Notes to Condensed Consolidated Financial  Statements (unaudited)                                                    |   |
|                                |                                                                                                                 |
|                                | Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations                  |   |
|                                |                                                                                                                 |
|                                | Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                                  |   |
|                                |                                                                                                                 |
|                                | Item 4. Controls and Procedures                                                                                      |   |
|                                |                                                                                                                 |
| PART II — OTHER INFORMATION    |                                                                                                                 |
|                                |                                                                                                                 |
|                                | Item 4. Submission of Matters to a Vote of  Security Holders                                                         |   |
|                                |                                                                                                                 |
|                                | Item 6. Exhibits                                                                                                     |   |
|                                |                                                                                                                 |
| SIGNATURES                          |                                                                                                                 |
|                                     |                                                                                                                      |  |  |

 

2

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**Ebix, Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

(In thousands, except for share and per shareamounts)

 
| ** **                                                                                                                                                   | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **(Unaudited****)**      | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                   |       |                     |       |                        |       |
| **Current  assets:**                                                                                                                                         |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                    |       | $                        | 6,913      |                        | $          | 5,843 |   |
| Restricted cash                                                                                                                                              |       | 3,000                    |       | 3,000                       |       |
| Accounts receivable, less allowance of $11  and $13                                                                                                          |       | 3,430                    |       | 3,256                       |       |
| Other current assets                                                                                                                                         |       | 560                      |       | 587                         |       |
| **Total current assets**                                                                                                                                     |       | 13,903                   |       | 12,686                      |       |
| Property and equipment, net                                                                                                                                  |       | 1,614                    |       | 1,450                       |       |
| Goodwill                                                                                                                                                     |       | 12,540                   |       | 12,669                      |       |
| Intangible assets, net                                                                                                                                       |       | 3,999                    |       | 4,234                       |       |
| Other assets                                                                                                                                                 |       | 321                      |       | 296                         |       |
| **Total  assets**                                                                                                                                            |       | $                        | 32,377     |                        | $          | 31,335 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                               |       |                     |       |                        |       |
| **Current  liabilities:**                                                                                                                                    |       |                     |       |                        |       |
| Line of credit                                                                                                                                               |       | $                        | 3,500      |                        | $          | 3,500 |   |
| Accounts payable and accrued expenses                                                                                                                        |       | 1,723                    |       | 1,781                       |       |
| Accrued payroll and related benefits                                                                                                                         |       | 1,663                    |       | 1,522                       |       |
| Current portion of long term debt                                                                                                                            |       | 986                      |       | 977                         |       |
| Deferred revenue                                                                                                                                             |       | 3,490                    |       | 2,989                       |       |
| **Total current liabilities**                                                                                                                                |       | 11,362                   |       | 10,769                      |       |
| Long term debt, less current portion                                                                                                                         |       | 2,304                    |       | 2,796                       |       |
| Redeemable common stock (357,728 shares  issued and outstanding at March 31, 2005 and December 31, 2004,  respectively) stated at redemption price |       | 4,241                    |       | 4,262                       |       |
|                                                                                                                                                         |       |                     |       |                        |       |
| **Stockholders’  equity:**                                                                                                                              |       |                     |       |                        |       |
| Convertible Series D Preferred stock, $.10  par value, 500,000 shares authorized, no shares issued and outstanding                                           |       | —                   |       | —                      |       |
| Common stock, $.10 par value, 10,000,000 shares  authorized, and 2,912,491 and 2,911,154 shares issued and outstanding,  respectively                        |       | 291                      |       | 291                         |       |
| Additional paid-in capital                                                                                                                                   |       | 92,689                   |       | 92,717                      |       |
| Deferred compensation                                                                                                                                        |       | (368                     | )          | (376                        | )          |
| Accumulated deficit                                                                                                                                          |       | (78,943                  | )          | (80,011                     | )          |
| Accumulated other comprehensive income                                                                                                                       |       | 801                      |       | 887                         |       |
| **Total  stockholders’ equity**                                                                                                                         |       | 14,470                   |       | 13,508                      |       |
| **Total  liabilities and stockholders’ equity**                                                                                                         |       | $                        | 32,377     |                        | $          | 31,335 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

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**Ebix, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Income**

(In thousands, except per share data)

(Unaudited)

 
| ** **                                                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                                                                | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Revenue:**                                                                                              |       |                                  |       |   |   |
| Software                                                                                                  |       | $                                     | 202        |   | $ | 227 |   |
| Services and other (Including revenues from  related parties of $878 and $953, respectively- See Note 5.) |       | 5,702                                 |       | 3,707 |   |
| **Total revenue**                                                                                         |       | 5,904                                 |       | 3,934 |   |
| **Operating  expenses:**                                                                                  |       |                                  |       |   |   |
| Services and other costs                                                                                  |       | 1,406                                 |       | 1,163 |   |
| Product development                                                                                       |       | 794                                   |       | 560 |   |
| Sales and marketing                                                                                       |       | 478                                   |       | 273 |   |
| General and administrative                                                                                |       | 1,689                                 |       | 1,186 |   |
| Amortization and depreciation                                                                             |       | 329                                   |       | 201 |   |
| **Total operating expenses**                                                                              |       | 4,696                                 |       | 3,383 |   |
| **Operating income**                                                                                      |       | 1,208                                 |       | 551 |   |
| Interest income                                                                                           |       | 82                                    |       | 27 |   |
| Interest expense                                                                                          |       | (102                                  | )          | (2 | ) |
| Foreign exchange (loss) gain                                                                              |       | (9                                    | )          | 10 |   |
| **Income  before income taxes**                                                                           |       | 1,179                                 |       | 586 |   |
| Income tax expense                                                                                        |       | (111                                  | )          | (140 | ) |
| **Net  income**                                                                                           |       | $                                     | 1,068      |   | $ | 446 |   |
|                                                                                                      |       |                                  |       |   |   |
| **Basic  earnings per common share**                                                                      |       | $                                     | 0.37       |   | $ | 0.17 |   |
|                                                                                                      |       |                                  |       |   |   |
| **Diluted  earnings per common share**                                                                    |       | $                                     | 0.33       |   | $ | 0.15 |   |
|                                                                                                      |       |                                  |       |   |   |
| Basic weighted average shares outstanding                                                                 |       | 2,912                                 |       | 2,586 |   |
|                                                                                                      |       |                                  |       |   |   |
| Diluted weighted average shares outstanding                                                               |       | 3,224                                 |       | 2,917 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

4

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**Ebix, Inc. and Subsidiaries**

**Condensed Consolidated Statements of CashFlows**

(In thousands)

(Unaudited)

 
| ** **                                                                                                                                                                                                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                                                                                                              | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                                                                                                                                                                                                                    |       |                                  |       |   |   |
| **Cash  flows from operating activities:**                                                                                                                                                                                                              |       |                                  |       |   |   |
| Net income                                                                                                                                                                                                                                              |       | $                                     | 1,068      |   | $ | 446 |   |
| **Adjustments  to reconcile net income to net**** cash provided by (used in)  operating activities:**                                                                                                                                              |       |                                  |       |   |   |
| Depreciation and amortization                                                                                                                                                                                                                           |       | 329                                   |       | 201 |   |
| Stock-based compensation                                                                                                                                                                                                                                |       | (32                                   | )          | 40 |   |
| Provision for doubtful accounts                                                                                                                                                                                                                         |       | 2                                     |       | 23 |   |
| **Changes  in assets and liabilities, net of effect of acquisition:**                                                                                                                                                                                   |       |                                  |       |   |   |
| Accounts receivable                                                                                                                                                                                                                                     |       | (176                                  | )          | (1,035 | ) |
| Other assets                                                                                                                                                                                                                                            |       | 3                                     |       | (72 | ) |
| Accounts payable and accrued expenses                                                                                                                                                                                                                   |       | (58                                   | )          | 72 |   |
| Accrued payroll and related benefits                                                                                                                                                                                                                    |       | 141                                   |       | (205 | ) |
| Deferred revenue                                                                                                                                                                                                                                        |       | 501                                   |       | 298 |   |
| Net cash provided by (used in) operating activities                                                                                                                                                                                                     |       | 1,778                                 |       | (232 | ) |
| **Cash  flows from investing activities:**                                                                                                                                                                                                              |       |                                  |       |   |   |
| Acquisition of LifeLink, net of cash acquired                                                                                                                                                                                                           |       | —                                |       | (4,634 | ) |
| Capital expenditures                                                                                                                                                                                                                                    |       | (276                                  | )          | (103 | ) |
| Net cash used in investing activities                                                                                                                                                                                                                   |       | (276                                  | )          | (4,737 | ) |
| **Cash  flows from financing activities:**                                                                                                                                                                                                              |       |                                  |       |   |   |
| Proceeds from the issuance of common stock,  net of issuance costs                                                                                                                                                                                      |       | —                                |       | 2,977 |   |
| Proceeds from the exercise of the stock  options                                                                                                                                                                                                        |       | 12                                    |       | — |   |
| Principal payments under debt obligations                                                                                                                                                                                                               |       | (500                                  | )          | (30 | ) |
| Net cash (used in) provided by financing activities                                                                                                                                                                                                     |       | (488                                  | )          | 2,947 |   |
| Effect of foreign exchange rates on cash                                                                                                                                                                                                                |       | 56                                    |       | 68 |   |
| Net change in cash and cash equivalents                                                                                                                                                                                                                 |       | 1,070                                 |       | (1,954 | ) |
| Cash and cash equivalents at the beginning of the period                                                                                                                                                                                                |       | 5,843                                 |       | 7,915 |   |
| Cash and cash equivalents at the end of the period                                                                                                                                                                                                      |       | $                                     | 6,913      |   | $ | 5,961 |   |
|                                                                                                                                                                                                                                                    |       |                                  |       |   |   |
| **Supplemental  disclosures of cash flow information:**                                                                                                                                                                                                 |       |                                  |       |   |   |
| Interest paid                                                                                                                                                                                                                                           |       | $                                     | 47         |   | $ | 2 |   |
| Income taxes paid                                                                                                                                                                                                                                       |       | $                                     | 86         |   | $ | 84 |   |
|                                                                                                                                                                                                                                                    |       |                                  |       |   |   |
| **Supplemental  schedule of noncash investing activities:**                                                                                                                                                                                        |       |                                  |       |   |   |
| During the first quarter of 2004, the  Company purchased all of the capital stock of LifeLink Corporation for  consideration which included 200,000 shares of common stock valued at  $3,000,000, cash of $5,000,000, and a note payable of $2,226,000. |       |                                  |       |   |   |

 

See accompanying notes to condensed consolidated financial statements.

 

5

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Ebix, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

(UNAUDITED)

 

Note 1.  BASIS OF PRESENTATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

**Basis of presentation** – These condensedconsolidated financial statements are unaudited, include the accounts of Ebix,Inc. and its wholly-owned subsidiaries (Ebix or “the Company”), and reflect alladjustments (consisting only of normal recurring adjustments) which are, in theopinion of management, necessary for a fair presentation of the results of theinterim periods.

 

These condensed consolidated financial statements should be read inconjunction with the consolidated financial statements, and accompanying notesthereto, included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2004.

 

The results of operations for the current interim period are notnecessarily indicative of results to be expected for the entire current year.

 

Certain prior period amounts have been reclassified to conform to thecurrent period presentation.

 

**Summary of significant accounting policies—**

 

**Revenue Recognition**—

 

We apply the provisions of Statement of Position (“SOP”) 97-2, “SoftwareRevenue Recognition,” as amended by Statement of Position 98-9, “Modificationof SOP 97-2, Software Revenue Recognition, With Respect to CertainTransactions,” to all transactions involving the sale of software.

 

In May 2003, the Financial Accounting Standards Board (“FASB”)finalized the terms of Emerging Issues Task Force Issue No. 00-21, “RevenueArrangements with Multiple Deliverables” (EITF 00-21), which providescriteria governing how to identify whether goods or services that are to bedelivered separately in a bundled sales arrangement should be accounted forseparately. Deliverables are accounted for separately if they meet all of thefollowing: a) the delivered items have stand-alone value to the customer;b) the fair value of any undelivered items can be reliably determined; andc) if the arrangement includes a general right of return, delivery of theundelivered items is probable and substantially controlled by the seller. TheCompany adopted EITF 00-21 on July 1, 2003 for all new revenuearrangements executed subsequent to June 30, 2003 (or significantmodification to arrangements existing prior to July 1, 2003). The Company’scurrent policy is to analyze all new revenue arrangements.

 

To the extent arrangements contain multiple deliverables, the Companyperforms an analysis of the nature of the deliverables to determine to whatextent the deliverables of the arrangement are governed by any higher levelliterature (as defined in EITF 00-21). EITF 00-21 recognizes arrangements thatqualify for treatment under SOP 97-2 and certain arrangements that qualify forcontract accounting (i.e. SOP 81-1) as falling under the definition of “higherlevel literature”. The Company applies the provisions of SOP 97-2, as amendedby Statement of Position 98-9, “Modifications of SOP 97-2, Software RevenueRecognition, With Respect to Certain Transactions,” to all arrangements whichinclude software deliverables that are considered more than inconsequential tothe other elements in the arrangements. For 2004, all of the Company’scontracts with multiple deliverables have fallen under higher level accountingliterature under the provisions of SOP 97-2 and/or SOP 81-1.

 

Although the Company has not been impacted in the current year by theadoption of EITF 00-21, it is possible that EITF 00-21 may affect futureperiods given the additional revenue streams the Company has initiated, as wellas the acquisition activities of the Company.

 

6

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The Company recognizes revenue for license fees from its softwareproducts upon delivery, provided that the fee is fixed and determinable,acceptance has occurred, collectibility is probable and persuasive evidence ofan arrangement exists. Revenue from third party software is derived from thelicensing of third party software products in connection with sales of theCompany’s software licenses, and is generally recognized upon delivery togetherwith the Company’s license revenue. Training, data conversion, installation,and consulting services are generally recognized as revenue when the servicesare performed and collectibility is probable. Revenue for maintenance andsupport service is recognized ratably over the term of the support agreement.

 

For arrangements containing multiple elements, revenue is recognized ondelivered elements when vendor-specific objective evidence (“VSOE”) of fairvalue has been established on the undelivered elements, applying the residualmethod of SOP 98-9. Fair value is determined for each undelivered element basedon the price charged for the sale of each element separately. In contracts thatcontain first year maintenance bundled with software fees, unbundling ofmaintenance is based on the price charged for renewal maintenance. Revenue formaintenance and support service is recognized ratably over the term of thesupport agreement.

 

Revenues related to hosting arrangements, including monthly fees aswell as any initial registration fees and related custom programming, arerecognized ratably over the term of the agreement in accordance with StaffAccounting Bulletin (“SAB”) No. 104 “Revenue Recognition.” Transactionfees are recognized as revenue as the transactions occur and revenue is earned.Revenue is only recognized when collectiblity is probable.

 

Deferred revenue includes maintenance and support payments that havebeen received or billings recorded prior to performance and, in certain cases,cash collections; amounts received under multi-element arrangements in whichVSOE of undelivered elements does not exist and initial registration fees andrelated service fees under hosting agreements. Revenue is recognized when VSOEof the undelivered elements is established, the elements are delivered, or theobligation to deliver the elements is extinguished.

 

Software arrangements involving significant customization, modificationor production are accounted for in accordance with American Institute ofCertified Public Accountants Statement of Position 81-1, “Accounting forPerformance on Construction-Type and Certain Production-Type Contracts,” usingthe percentage-of-completion method. The Company recognizes revenue usingactual hours worked as a percentage of total expected hours required by thearrangement, provided that the fee is fixed and determinable, there is evidenceof an arrangement and recovery of any related recorded asset is consideredprobable.

 

For business process outsourcing agreements, which include call centerservices, services are primarily performed on a time and materials basis.Revenue is recognized when the service is performed.

 

**Stock Options -**At March 31, 2005, theCompany had two stock-based employee compensation plans. The Company accountsfor stock options issued to employees in accordance with Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”The Company has adopted the disclosure only provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 123, “Accounting forStock-Based Compensation,”and SFAS No. 148, “Accounting for Stock BasedCompensation — Transition and Disclosure – an Amendment to FASB Statement No.123,” for options and warrants issued to employees. Under APB OpinionNo. 25, compensation expense is recorded based on the difference, if any,on the measurement date, between the estimated fair value of the Company’sstock and the exercise price of options to purchase that stock. Any resultingcompensation expense is amortized on a straight-line basis over the vestingperiod of the options.

 

7

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The Company applies APB Opinion No. 25 and related interpretations inaccounting for its employee stock-based compensation plans. Had compensationcost for these stock-based compensation plans been determined based on thefair-value method prescribed by SFAS No. 123, using the Black-Scholesoption-pricing model, the Company’s net earnings and net earnings per sharewould have been the pro forma amounts indicated below:

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                    | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
|                                                                                                                                          |       |                    |       |   |   |
| Net income, as reported                                                                                                                       |       | $                       | 1,068,000  |   | $ | 446,000 |   |
| Add: Stock-based employee compensation  expense included in reported net income, net of related tax effects                                   |       | 4,560                   |       | 4,560 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair-value based method for all awards,  net of related tax effects |       | (474,766                | )          | (372,885 | ) |
| Pro forma net income                                                                                                                          |       | $                       | 597,794    |   | $ | 77,675 |   |
|                                                                                                                                          |       |                    |       |   |   |
| Basic earnings per share, as reported                                                                                                         |       | $                       | 0.37       |   | $ | 0.17 |   |
| Diluted earnings per share, as reported                                                                                                       |       | $                       | 0.33       |   | $ | 0.15 |   |
| Basic earnings per share, pro forma                                                                                                           |       | $                       | 0.21       |   | $ | 0.03 |   |
| Diluted earnings per share, pro forma                                                                                                         |       | $                       | 0.19       |   | $ | 0.03 |   |

 

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-BasedPayment” (“FAS 123R”), which revises and replaces SFAS No. 123, “Accountingfor Stock-Based Payment” and supercedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” FAS 123R requires the measurement of allshare-based payments to employees, including grants of employee stock options,using a fair-value based method and the recording of such expense in theCompany’s consolidated statements of operations. The pro-forma disclosurespreviously permitted under SFAS No. 123 will no longer be an alternativeto financial statement recognition. The provisions of FAS 123R were to havebeen effective for reporting periods beginning after June 15, 2005. At theend of March, the SEC staff released Staff Accounting Bulletin No. 107 (SAB107), providing guidance for implementing FASB No. 123R.  Subsequently, the Commission delayed theimplementation dates for FAS123R to the start of the Company’s fiscalyear.  As a result, the Company will berequired to comply with the provisions of FAS123R beginning January 1,2006.The Company is evaluating the requirements of FAS 123R, but because theCompany is accounting for employee stock option grants in a footnote disclosureas permitted by SFAS No. 123, the adoption of FAS 123R will have animpact on the Company’s consolidated results of operations.

 

**Non-employee Stock Compensation**—TheCompany accounts for stock-based compensation issued to non-employees inaccordance with SFAS No. 123 and EITF Issue No. 96-18, “Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or in conjunction with Selling Goods or Services.” SFAS No. 123establishes a fair value-based method of accounting for stock-basedcompensation plans. Under the fair-value based method, compensation cost ismeasured at the grant date based on the value of the award, which is calculatedusing an option pricing model, and is recognized over the service period, whichis usually the vesting period.

 

Note 2.  STOCK OPTIONS

 

During the first quarter of 2005, the Company did not grant any stockoptions to employees; however, options to purchase a total of 10,575 shares ofthe Company’s Common Stock were issued to non-employee directors subsequent tothe Company’s annual meeting of stockholders held on January 14, 2005.These options were granted at an exercise price per share of 100% of the fairmarket value of a share of Common Stock on the date of the grant. These optionsbecome exercisable on the last day of each of the four calendar quarters,beginning with the first calendar quarter ending on or after the date of thegrant, and have a term of ten years beginning on the date of grant.

 

8

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The Company has granted stock options outside the Company’s stockoption plans to non-employee consultants to purchase up to an aggregate of57,000 shares of the Company’s common stock, of which options to purchase34,500 shares were outstanding at March 31, 2005.  These options were granted at pricesdetermined by the Board of Directors (at no less than 100 percent of the marketprice on the date of grant).  The optionshave a four-year vesting period and must be exercised within ten years of thedate of the grant. These non-employee options were valued using the fair valuemethod as prescribed by SFAS No. 123 using the following assumptions:volatility of 51%, risk free interest rate of 4.59% and a 10-year term. Optionsissued prior to 2001 are performance-based awards, with no service commitmentand subject to vesting only if the Company’s stock price reaches a certainlevel. Options issued in 2001 vest over four years, but vesting accelerates ifa performance target is achieved.  At March 31,2005, non-employee options to purchase 8,340 shares were vested. The Companyrecognized a credit to compensation expense of approximately $38,000 related tothese options during the three-month period ended March 31, 2005. TheCompany recognized compensation expense of approximately $34,000 related tothese options during the three-month period ended March 31, 2004.

 

On August 11, 2003, the Company granted 25,000 options to purchasethe Company’s common stock to an employee who is the brother of the ChiefExecutive Officer, in connection with his joining the Company as anemployee.  The option grantee was anemployee when he received the grant.  The options vest over four years from the date of grant, expire ten yearsfrom the date of grant, and were issued with an exercise price below the fairmarket value of the stock on the date of grant. This grant was not subject to any of the Company’s stock optionplans.  The total intrinsic valueassociated with the granting of these options was $96,250, which will berecognized ratably as compensation expense over the four-year vesting period inaccordance with APB Opinion No. 25. The Company recognized compensation expenseof approximately $6,000 related to these options during each of the three-monthperiods ended March 31, 2005 and March 31, 2004 .

 

Note 3.  EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) is equal to net income divided by theweighted average number of shares of common stock outstanding for the period.The weighted average number of shares outstanding for the three months ended March 31,2005 and March 31, 2004 was 2,912,432 and 2,585,876, respectively. DilutedEPS is calculated as if the Company had additional common stock outstandingfrom the beginning of the year or the date of grant for all common stockequivalents, net of assumed repurchased shares using the treasury stockmethod.  Diluted EPS recognizes thedilutive effect of common stock equivalents and is equal to net income dividedby the sum of the weighted average number of shares outstanding and commonstock equivalents. For the three months ended March 31, 2005 and March 31,2004, the Company’s common stock equivalents consisted of stock options.  For the three months ended March 31,2005, the effect of this calculation resulted in an increase in the weightedaverage number of shares outstanding of 312,055. At March 31, 2005, thefully diluted weighted average number of shares outstanding was 3,224,487.  For the three months ended March 31,2004, the effect of this calculation resulted in an increase in the weighted averagenumber of shares outstanding of 331,403. At March 31, 2004, the fullydiluted weighted average number of shares outstanding was 2,917,279.   At March 31, 2005, there were 387,692shares potentially issuable with respect to stock options, which could diluteEPS in the future but which were excluded from the diluted EPS calculationbecause their effect was antidilutive.

 

Note 4.  COMPREHENSIVE INCOME

 
| ** **                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                                       |       |                                  |       |   |   |
| Net income                                                                 |       | $                                     | 1,068,000  |   | $ | 446,000 |   |
| Other comprehensive income – foreign  currency translation adjustment |       | 86,000                                |       | 68,000 |   |
| Comprehensive income                                                       |       | $                                     | 1,154,000  |   | $ | 514,000 |   |

 

9

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Note 5.  RELATED PARTYTRANSACTIONS AND SIGNIFICANT CUSTOMERS

 

In 2001, the Company issued 868,000 shares of its common stock to BRiTInsurance Holdings PLC (“BRiT”), for $7,000,000. The total shares held by BRiTat March 31, 2005 was 930,163, representing an equity ownership ofapproximately 32 percent.  At March 31,2005, BRiT owned approximately 70% of CF Epic Insurance and General Fund, whichowned approximately 8% of the Company’s common stock.

 

The Company has entered into various software and service agreementswith BRiT.  During the first quarter of2005, approximately $878,000 was recognized as revenue from BRiT and itsaffiliates. During the first quarter of 2004, approximately $953,000 wasrecognized as revenue from BRiT and its affiliates. Total accounts receivablefrom BRiT and its affiliates at March 31, 2005 and December 31, 2004were $406,000 and $718,000, respectively.

 

During the first quarter of 2005 and 2004, approximately $625,000 and$678,000, respectively, was recognized as revenue from another significantcustomer, AON.  Total accounts receivablefrom AON at March 31, 2005 and December 31, 2004 were $194,000 and$186,000, respectively.

 

Note 6.  ACQUISITION OF LIFELINK

 

On February 23, 2004, the Company acquired LifeLink Corporation (“LifeLink”),and the operations of LifeLink have been included in the Company’s financialstatements since that date. Under terms of the agreement, the Company acquiredall of the outstanding capital stock of LifeLink from its shareholders inexchange for an aggregate purchase price of $10,354,000 payable as follows:$5,000,000 paid in cash at closing, $2,500,000 in a non-interest bearing notepayable in cash in annual installments of $500,000 over five years (presentvalue computed as $2,226,000), and $3,000,000 payable in 200,000 shares of thecommon stock of the Company issued at the time of closing to one of theLifeLink shareholders. The Company also capitalized approximately $128,000 oftransaction costs in conjunction with the LifeLink acquisition. In connectionwith the 200,000 shares of common stock issued to a former shareholder, thatperson received from Ebix the option to sell his stock back to Ebix subject tospecified time frames and prices as discussed below.

 

The Company classified $2,700,000 of the value of the common stockissued as temporary equity, “redeemable common stock,” in the consolidatedbalance sheet due to the existence of the holder’s embedded put option. At anytime during the one month period commencing on the date which is 18 monthsafter February 23, 2004 and ending 19 months after February 23, 2004,the holder of the redeemable common stock had a one-time right to require theCompany to purchase all of the holder’s 200,000 shares, originally valued at$15.00 per share in the acquisition of LifeLink, for a discounted price of$13.50 per share minus the aggregate purchase price received by the holder fromany sales of these shares of common stock prior to the exercise of the putoption. As of March 31, 2005, the holder had not sold any of the shares ofthe Company’s common stock received in this transaction. On April 28,2005, the Company repurchased at a price of $13.50 per share the 200,000 sharesof its common stock issued to the former LifeLink shareholder.  See note 11 below.

 

The following table summarizes the estimated fair value of the LifeLinkassets acquired and liabilities assumed at the date of acquisition.

 
| (in thousands)            |
|---------------------------|
|                      |
| Current assets            |   | $ | 1,199 |   |
| Property and equipment    |   | 119 |   |
| Intangible assets         |   | 3,518 |   |
| Goodwill                  |   | 5,989 |   |
| Total assets acquired     |   | 10,825 |   |
| Current liabilities       |   | 471 |   |
| Total liabilities assumed |   | 471 |   |
| Net assets acquired       |   | $ | 10,354 |   |

 

10

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Ofthe $3,518,000 of intangible assets acquired, $977,000 was assigned todeveloped technology with a remaining estimated useful life of five years,$299,000 was assigned to trademarks with a remaining estimated useful life offive years and $2,242,000 was assigned to customer relationships with aremaining estimated useful life of seven years. The Company recorded $144,000and $68,000 of amortization related to these intangibles for the periods ended March 31,2005 and March 31, 2004, respectively.

 

(inthousands)

 

***EstimatedAmortization Expenses:***

*** ***
| For the year ending December 31, 2005 |   | $ | 575 |   |
|--------------------------------------------|--------|---|-----|--------|
| For the year ending December 31, 2006 |   | $ | 575 |   |
| For the year ending December 31, 2007 |   | $ | 575 |   |
| For the year ending December 31, 2008 |   | $ | 575 |   |
| For the year ending December 31, 2009 |   | $ | 358 |   |
| Thereafter                                 |   | $ | 367 |   |

 

The acquisition of LifeLink was consistent with the Company’s overallfocus on marketing software to insurance agents and brokers. This acquisitionincreased sales and revenue of the consolidated total while providingsignificant sales opportunities for the Company’s other existing services.

 

# **Note7.—ACQUISITION OF HEART**

#  

On July 1, 2004, Ebix Australia Pty Ltd, which is a wholly-ownedsubsidiary of the Company, acquired certain of the operating assets of HeartConsulting Services Pty Ltd (“Heart”), and the operations of Heart have beenincluded in the Company’s financial statements since that date. Under terms ofthe agreement, the Company acquired the operating assets of Heart in exchangefor an aggregate purchase price of $7,116,000 payable as follows: $3,619,000paid in cash at closing (subsequent to closing, the former owner of Heart paid theCompany $467,000 for deferred revenue and a vacation accrual settlement),$1,399,000 payable under stand-by letters of credit issued by the Company’slender on the Company’s line of credit in three equal annual installments oneach of the first, second and third anniversaries of the closing (present valuecomputed as $1,293,000), and $2,098,000 payable in 157,728 shares of the commonstock of the Company issued at the time of closing. The Company alsocapitalized approximately $241,000 of transaction costs in conjunction with theHeart acquisition. In connection with the 157,728 shares of common stockissued, the owners of Heart received from Ebix the option to sell their stockback to Ebix subject to specified time frames and prices as discussed below.

 

The Company classified $1,541,000 of the value of the common stockissued as temporary equity, “redeemable common stock,” in the condensedconsolidated balance sheet due to the existence of the holder’s embedded putoption. At any time during the one month period commencing January 3, 2006and ending February 3, 2006, the holder of the redeemable common stock hasa one-time right to require the Company to purchase all of the holder’s 157,728shares at a price of $1,399,000 minus the aggregate purchase price received bythe holder from any sales of these shares of common stock prior to the exerciseof the put option. As of March 31, 2005, the holder had not sold any ofthe shares of the Company’s common stock received in this transaction.

 

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Concurrent with the acquisition, the Company ascribed a preliminaryvalue to each of the assets and liabilities assumed from the acquisition ofHeart. Upon final review of the acquisition, the purchase price was reallocated.The following table summarizes the estimated fair value of the Heart assetsacquired and liabilities assumed at the date of acquisition subsequent to thereallocation.

 

(in thousands)

 
| Current assets            |   | $     | 467    |   |
|---------------------------|--------|-------|--------|--------|
| Property and equipment    |   | 43    |   |
| Intangible assets         |   | 1,229 |   |
| Goodwill                  |   | 5,945 |   |
| Total assets acquired     |   | 7,684 |   |
| Current liabilities       |   | 467   |   |
| Total liabilities assumed |   | 467   |   |
| Net assets acquired       |   | $     | 7,217  |   |

 

Of the $1,229,000 of intangible assets acquired, $630,000 was assignedto customer relationships with a remaining useful life of four years, $410,000was assigned to developed technology and $189,000 was assigned to trademarkswith remaining estimated useful lives of five years. The Company recorded$74,000 of amortization expense related to these intangible assets for theperiod ended March 31, 2005.  Therewas no amortization expense related to these intangibles for the period ended March 31,2004 as the acquisition was consummated in July 2004.

 

(in thousands)

 

***EstimatedAmortization Expenses:***

*** ***
| For the year ended December 31, 2005 |   | $ | 307 |   |
|-------------------------------------------|--------|---|-----|--------|
| For the year ended December 31, 2006 |   | $ | 307 |   |
| For the year ended December 31, 2007 |   | $ | 307 |   |
| For the year ended December 31, 2008 |   | $ | 220 |   |
| For the year ended December 31, 2009 |   | $ | 66  |   |

 

The acquisition of Heart was consistent with the Company’s overallfocus on marketing software to insurance agents and brokers. This acquisitionincreased sales and revenue of the consolidated total while providingsignificant sales opportunities for the Company’s other existing services.

 

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**Note8.—PROFORMA FINANCIALS**

** **

The following unaudited pro forma financial information for the threemonths ended March 31, 2004 presents the consolidated operations of theCompany as if the LifeLink and Heart acquisitions had been made on January 1,2004, after giving effect to certain adjustments for the pro forma acquisitionas of the acquisition date. The Company made adjustments primarily for theamortization of intangible assets and interest expense related to theacquisitions. The unaudited pro forma financial information is provided forinformational purposes only and does not project the Company’s results ofoperations for any future period:

 
| ** **                 | ** ** | **Three Months Ended  March 31, 2004** | ** ** |
|----------------------------|------------|---------------------------------------------|------------|
| ** **                 | ** ** | ** **                                  | ** ** |
| Revenue                    |       | $                                           | 5,446,000  |   |
| Net income                 |       | 552,000                                     |       |
| Basic earnings per share   |       | $                                           | 0.19       |   |
| Diluted earnings per share |       | $                                           | 0.17       |   |

 

Note 9.—LINE OF CREDIT

 

Bank Line of Credit

 

In October 2002, the Company entered into a revolving line ofcredit, secured by a perfected first security interest in the Company’s assets,for $1,000,000 with interest payable on outstanding borrowings at the primerate. The existing revolving line of credit with LaSalle Bank NationalAssociation was increased to $5,000,000 during February 2004 and theagreement was amended in April 2004. On February 23, 2005, theCompany entered into a second amendment to the credit agreement, which waseffective as of December 31, 2004 and added a requirement that the Companyinclude in its quarterly deliveries to the bank an income statement of theCompany showing EBITDA (as defined in the agreement) of the Company, eliminateda covenant of the Company to maintain a minimum tangible net worth (as definedin the agreement) and added a covenant that the Company maintain a maximumsenior debt to EBITDA ratio. The Company was in compliance with the amendedmaximum senior debt to EBITDA ratio covenant at December 31, 2004. Thisamendment memorialized an understanding that had been reached with the lenderprior to December 31, 2004. Major features of the line, as amended,include an interest rate stated at prime, security at 60% of the amount of theline in a restricted interest bearing account and timely financial reportingrequirements. The line of credit will expire on October 31, 2005. As of March 31,2005 total borrowings on this line were $3,500,000, of which $3,000,000 wasclassified as restricted cash because it was restricted from use in accordancewith the line of credit agreement. The agreement provides that the line wassecured by substantially all of the Company’s assets.

 

The Company was in compliance with all debt covenants at March 31,2005.

 

 

Letters of Credit

 

Under terms of the agreement with Heart Consulting Services Pty Ltd.(see note 7), $1,399,000 is payable by the Company under stand-by letters ofcredit issued by the Company’s lender on the Company’s line of credit in threeequal annual installments on each of the first, second and third anniversariesof the closing of the Heart asset acquisition (present value computed as$1,293,000). The three letters of credit expire on July 31, 2005, July 31,2006 and July 31, 2007, respectively.

 

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Note 10.—ANNUAL MEETING

 

On January 14, 2005, the stockholders of the Company approved anamendment to the Company’s 1996 Stock Incentive Plan (the “1996 Plan”), whichincreased by 300,000, to 1,137,500, the number of shares of the Company’scommon stock reserved and available for grant under the 1996 Plan and prohibitedthe repricing of options granted under the 1996 Plan.

 

On January 14, 2005, following the approval of the Company’sstockholders, the Company’s Certificate of Incorporation was amended to reducethe number of authorized shares of the Company’s common stock from 40,000,000to 10,000,000 and the number of authorized shares of the Company’s preferredstock from 2,000,000 to 500,000.

 

Note 11. – SUBSEQUENT EVENTS

 

On April 28, 2005 the Company repurchased 200,000 shares of itscommon stock at a price of $13.50 per share. The shares were originally issuedas part of the $10,354,000 in consideration the Company paid in its acquisitionof LifeLink in February 2004 (see note 7). The 200,000 shares were valued at $15.00 per share at the time of thetransaction, or $3.0 million in aggregate, and Ebix provided a “put” optionthat enabled LifeLink’s founder to sell the shares back to Ebix at a 10%discount to the $15.00 issue price.  Theput option was to be effective on August 23, 2005, but Ebix and theshareholder mutually agreed to accelerate the timing of the exercise of the putoption. 

 

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Item 2.             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following information should be read in conjunction with theunaudited condensed consolidated financial statements and the notes theretoincluded in Part 1. Item 1 of this Quarterly Report, and the auditedconsolidated financial statements and notes thereto and Management’s Discussionand Analysis of Financial Condition and Results of Operations contained in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

**Overview**

 

The Company’s product and service strategy focuses on the followingfive areas: (1) providing software development services to insurancecarriers, brokers and agents (2) worldwide sale, customization,development, implementation and support of its insurance carrier systemproduct, BRICS, (3) worldwide sales and support of agency managementsystems, including EbixASP and eglobal, (4) expansion of connectivitybetween consumers, agents, carriers and third party providers through Ebix.com,LifeLink, INS-Site and Exchange, and (5) business process outsourcingservices, which include call center and back office, either off site or at theCompany’s facilities. Software delivered online through application serviceprovider (“ASP”) models and connectivity products are recorded as services bythe Company. The Company anticipates that future revenue will be providedprincipally by development services, the sale and licensing of BRICS,international operations, LifeLink, call center services and support.

 

On February 23, 2004, the Company acquired LifeLink Corporation(which is referred to in this 10-Q as “LifeLink” but was renamed to EbixLife onMay 2, 2005), and the operations of LifeLink have been included in the Company’sfinancial statements since that date. On July 1, 2004, Ebix Australia PtyLtd (VIC), which is a wholly-owned subsidiary of the Company, acquired certainoperating assets of Heart Consulting Services Pty Ltd (“Heart”), and theoperations of Heart have been included in the Company’s financial statementssince that date. Accordingly, the first quarter of 2005 reflects the Company’sownership of LifeLink and Heart for the entire quarter as opposed to the firstquarter of 2004, which reflects the Company’s ownership of LifeLink for onlypart of the quarter and no ownership of Heart.

 

**Critical Accounting Policies**

 

The Company’s “critical accounting policies” are those that requireapplication of management’s most difficult, subjective or complex judgements,often as a result of the need to make estimates about matters that areinherently uncertain and may change in future periods. The Company hasidentified the following as its critical accounting policies: revenuerecognition, estimating the allowance for doubtful accounts receivable andaccounting for income taxes. For a discussion of these policies, see “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Critical Accounting Policies” in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2004.

 

**Results of Operations**

 

**Three-Month Period Ended March 31, 2005 Compared to theThree-Month Period Ended March 31, 2004**

 

**Total Revenue** - The Company’s revenue has beenderived from the licensing and sale of proprietary software and third partysoftware (“Software”) and from professional services and support services (“Services”).Services include consulting, implementation, training and project managementprovided to the Company’s customers with installed systems and those in theprocess of installing systems. Also included in Services are fees for softwarelicense maintenance, LifeLink services (February 23, 2004 to March 31,2004 for the quarter ended March 31, 2004, and the entire quarter ended March 31,2005), Heart services (for the quarter ended March 31, 2005 only, as Heartwas acquired in July 2004), initial registration and ongoing monthlysubscription fees for the EbixASP product and transaction fees generated fromthe Ebix.mall website, as well as software development and call center revenue.Total revenue for the quarter ended March 31, 2005 increased $1,970,000,or 50.1%, to

 

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$5,904,000 from $3,934,000 for the comparable quarter of the prioryear.

 

**Software Revenue** - Software revenue iscomprised of revenue from the sale of Ebix (formerly “cd”) products, currentlegacy products, and other third party software.  Total software revenue for the first quarterof 2005 decreased $25,000, or 11.0%, to $202,000 from $227,000 for thecomparable quarter of the prior year. As the Company has changed its focus toe-commerce products and services, the Company expects future revenue to becomprised primarily of services revenue.

 

**Services Revenue** — Total services revenue forthe first quarter of 2005 increased $1,995,000, or 53.8%, from $3,707,000 forthe comparable quarter of the prior year. This increase was due to the inclusion of a full quarter of LifeLinkrevenue, which resulted in an increase of approximately $1,092,000, theinclusion of Heart service revenue of $882,000, an increase in consultingrevenue of $101,000, an increase in Ebix.mall revenue of $50,000 and anincrease in call center revenue of $45,000, partially offset by a decrease insupport revenue associated with legacy products of $85,000, a decrease inEbixASP revenue of $55,000, a decrease in International service revenue of $20,000,a decrease in INS-Site revenue of $11,000 and a decrease in hosting revenue of$4,000.

 

During the first quarter of 2005 and 2004, approximately $878,000 and$953,000, respectively was recognized as services revenue from BRiT InsuranceHoldings PLC (“BRiT”) and its affiliates. The amounts represented 15% and 24%, of the Company’s total revenues forthe first quarters of 2005 and 2004, respectively. BRiT owned approximately 32%of the Company’s common stock as of March 31, 2005.  In addition, the Company has been informedthat, as of March 31, 2005, BRiT owned approximately 70% of the equityinterests of CF Epic Insurance and General Fund, which at March 31, 2005owned approximately 8% of the Company’s outstanding common stock.**For the three-month periods ended March 31,2005 and March 31, 2004, 11% and 17% of the Company’s total revenues werefrom AON.  Neither BRiT and itsaffiliates nor AON have long-term agreements with the Company that providecertainty that such revenues will be recurring.

 

Support revenue associated with the Company’s legacy products isdecreasing due to a trend of declining renewals for these older productofferings.

 
| ** **            | ** ** | **Support  Revenue** | ** ** | **Total  Revenue** | ** ** |
|-----------------------|------------|----------------------|------------|--------------------|------------|
|                  |       |                 |       |               |       |
| First quarter of 2005 |       | $                    | 785,000    |               | $          | 5,904,000 |   |
| First quarter of 2004 |       | $                    | 870,000    |               | $          | 3,934,000 |   |

 

Support revenue decreased $85,000, or 10%, and as a percentage of totalrevenue decreased to 13% from 22%, in the first quarter of 2005, compared tothe first quarter of 2004.

 

Based on historical data, the Company expects that legacy supportrevenue will continue to decrease by approximately 20% each year on a decliningbalance.  The Company expects the legacysupport revenue will continue as long as it is economically feasible for the Companyto maintain and support the legacy products. As revenue from the legacy support decreases, costs will be reduced.When income from legacy support falls below breakeven, operations will bereviewed to determined if costs can be further reduced for the activity to beprofitable, and if not, the Company plans to discontinue supporting the legacyproducts. The Company cannot predict when this will occur.

 

The Company expects that future Servicesrevenue will be derived from this support, the sale of BRICS as well as EbixASPregistration and monthly fees, LifeLink Services, Heart Services, softwaredevelopment and call center and, to a much lesser extent all transactionrevenues from Ebix.mall, EbixExchange (INS-Site), conversion and training.

 

**Services and other costs**-Cost of services revenue includes costs associated with support, call center,consulting, implementation and training services.  Total services and other costs for thequarter increased $243,000, or 20.9%, from $1,163,000 for the comparablequarter of the prior year.  This increasewas due to an

 

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increase in payroll expenses related to the acquisition of LifeLink of$91,000 and Heart of $123,000, an increase in facility costs of $69,000 and anincrease in international support costs of $35,000, partially offset by adecrease in expenses for required services to support the Company’s products of$49,000 and a decrease in non-LifeLink and Heart related payroll of $26,000.

 

**Product Development Expenses**-Total product development expenses for the first quarter of 2005 increased$234,000, or 41.8%, from $560,000 for the comparable quarter of the prior year.This increase was due to an increase in payroll expenses related to LifeLink of$135,000, an increase in non-LifeLink domestic payroll expenses of $32,000, anincrease in India payroll expenses of $11,000 and an increase in Canadianpayroll expenses of $2,000.  In addition,facility costs increased $54,000 as a result of the increases in headcount invarious locations.

 

**Sales and Marketing Expenses**-Total sales and marketing expenses for the first quarter of 2005 increased$205,000, or 75.1%, from $273,000 for the comparable quarter of the prioryear.  This increase was attributable toan increase in payroll expenses related to LifeLink of $56,000, an increase innon-LifeLink domestic payroll of $62,000, an increase in Heart payroll of$24,000, an increase in facility costs related to the increase in headcount of$37,000, an increase in travel expenses of $21,000, an increase in costs ofoffice supplies of $13,000, and an increase in advertising expenses of $6,000,partially offset by a decrease in international sales and marketing of $8,000and a decrease in consulting expenses of $6,000.

 

**General and Administrative Expenses** —Total generaland administrative expenses for the quarter increased $503,000, or 42.4%, from$1,186,000 for the comparable quarter of the prior year.  This increase was due to an increase inaccrued bonus of $174,000, primarily as a result of one quarter of the 2005supplemental bonus being accrued compared to no such accrual in 2004, operatingexpenses related to Heart of $98,000, an increase in audit and legal fees of$92,000, and an increase in general business operation expenses related toLifeLink and Heart of $139,000.

 

**Amortization and depreciation Expenses**– Total amortization and depreciation expenses for the quarter increased$128,000, or 63.7%, from $201,000 for the comparable quarter of the prioryear.  This increase was due to theaddition of LifeLink intangible assets in February 2004 and Heartintangible assets in July 2004.  Total Heart intangible amortization for the quarter was $74,000 comparedto no such amortization in the comparable quarter of the prior year, as Heartwas acquired in July 2004.  TotalLifeLink intangible amortization increased $77,000 for the quarter to $144,000from $67,000 in the comparable quarter of the prior year.  This increase reflects a partial quarter ofamortization in 2004, as LifeLink was acquired February 23, 2004, comparedto a full quarter of amortization in 2005. In addition, depreciation expense increased $4,000 as a result of anincrease in assets acquired as part of the LifeLink acquisition andamortization of capitalized software decreased $27,000 for the quarter ascapitalized software was fully amortized.

 

# **Income tax expense**— The effective tax rate for the first quarterof 2005 was lower than the rate for the comparable quarter of the prior yeardue to a different income mix among the various tax jurisdictions in which theCompany does business.

#  

**Liquidity and Capital Resources**

 

The Company had cash and cash equivalents of $6,913,000 and restrictedcash of $3,000,000 at March 31, 2005, compared to cash and cashequivalents of $5,843,000 and restricted cash of $3,000,000 at December 31,2004. The Company had cash and cash equivalents of $3,212,000 and restrictedcash of $3,000,000 at April 30, 2005; the decrease in cash from March 31,2005 was primarily due to the stock repurchase for $2,700,000 on April 28,2005 (see note 11) and bonus payouts of $1,200,000 on April 1, 2005.

 

During the three months ended March 31, 2005, the Companygenerated operating cash flow of $1,778,000 as compared to $232,000 of negativeoperating cash flow for the three months ended March 31, 2004. Thisincrease in cash flow from operations in the three months ended March 31,2005 resulted primarily from $1,068,000 of net income, an increase in deferredrevenue of $501,000 primarily related to the acquisition of LifeLink and Heart,$329,000 in amortization and depreciation and in increase in accrued payrolland related benefits of $141,000,

 

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partially offset by a decrease in accounts receivable of $177,000 andan decrease in accounts payable and accrued benefits of $58,000.  These balance sheet fluctuations are normalconsequences of timing differences between accruals and their cash settlement.

 

Cash used in investing activities of $276,000 in the three months endedMarch 31, 2005  primarilyrepresented capital expenditures primarily related to the relocation of theSydney Australia office.  Cash used infinancing activities of $488,000 resulted from the Company’s payment of along-term debt obligation, partially offset by the proceeds from the exerciseof stock options.

 

Cash used in investing activities of $4,737,000 in the three monthsended March 31, 2004 represented expenditures made primarily as a resultof the Company’s acquisition of LifeLink. Cash provided by financing activities of $2,947,000 resulted from theCompany’s sale of common stock during the quarter.

 

In October 2002, the Company entered into a revolving line ofcredit, secured by a perfected first security interest in the Company’s assets,for $1,000,000, with interest payable on outstanding borrowings at the primerate. The existing revolving line of credit with LaSalle Bank NationalAssociation was increased to $5,000,000 during February 2004 and theagreement was amended in April 2004. On February 23, 2005, the Companyentered into a second amendment to the credit agreement, which was effective asof December 31, 2004 and added a requirement that the Company include inits quarterly deliveries to the bank an income statement of the Company showingEBITDA (as defined in the agreement) of the Company, eliminated a covenant ofthe Company to maintain a minimum tangible net worth (as defined in theagreement) and added a covenant that the Company maintain a maximum senior debtto EBITDA ratio. This amendment memorialized an understanding that had beenreached with the lender prior to December 31, 2004. Major features of theline, as amended, include an interest rate stated at prime, security at 60% ofthe amount of the line in a restricted interest bearing account and timelyfinancial reporting requirements. The line of credit will expire on October 31,2005. As of March 31, 2005 total borrowings on this line were $3,500,000,of which $3,000,000 was classified as restricted cash because it was restrictedfrom use in accordance with the line of credit agreement. The agreementprovides that the line is secured by substantially all of the Company’s assets.The Company was in compliance with all debt covenants at March 31, 2005.

 

On February 23, 2004, the Company acquired LifeLink , and theoperations of LifeLink have been included in the Company’s financial statementssince that date. Under terms of the agreement, the Company acquired all of theoutstanding capital stock of LifeLink from its shareholders in exchange for anaggregate purchase price of $10,354,000, payable as follows: $5,000,000 paid incash at closing, $2,500,000 in a non-interest bearing note payable in cash inannual installments of $500,000 over five years (present value computed as$2,226,000), and $3,000,000 payable in 200,000 shares of the common stock ofthe Company issued at the time of closing. On February 23, 2005, theCompany paid the first installment of $500,000 in accordance with the noteagreement. On April 28, 2005 the Company repurchased the 200,000 shares ofits common stock at a price of $13.50 per share. See note 7 and 11 to thecondensed consolidated financial statements included in this Form 10-Q fora discussion of the redeemable common stock.

 

On July 1, 2004, Ebix Australia Pty Ltd (VIC), which is awholly-owned subsidiary of the Company, acquired certain operating assets ofHeart Consulting Services Pty Ltd (“Heart”), and the operations of Heart havebeen included in the Company’s financial statements since that date. Underterms of the agreement, the Company acquired the operating assets of Heart inexchange for an aggregate purchase price of $7,116,000 payable as follows:$3,619,000 paid in cash at closing (subsequent to closing, the former ownerpaid the Company $467,000 for deferred revenue and a vacation accrualsettlement), $1,399,000 payable under stand-by letters of credit issued by theCompany’s lender on the Company’s line of credit in three equal annualinstallments on each of the first, second and third anniversaries of theclosing (present value computed as $1,293,000), and $2,098,000 payable in157,728 shares of the common stock of the Company issued at the time ofclosing. See note 8 to the condensed consolidated financial statements includedin this Form 10-Q for a discussion of the redeemable common stock.

 

In planning for its capital needs, the Company takes into account itssources of cash, which include operating cash flow, cash balances and fundsfrom credit facilities, and anticipated future cash needs, which include

 

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working capital requirements for operations, capital expenditures, andexpenditures for business acquisitions.  Based on these considerations,the Company believes it will have sufficient cash from operations to satisfyits contractual obligations for at least the next several years.

 

# **The following summarizes the Company’s contractual obligations at March 31,2005, and the effect such obligations are expected to have on the Company’sliquidity and cash in future periods (in thousands):**

 
| ** **                         | ** ** | **Payment  Due by Period** | ** ** |
|------------------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Total**                  | ** ** | **Less  Than 1  Year** | ** ** | **1 – 3  Years** | ** ** | **3- 5  Years** | ** ** | **More  Than 5  Years** | ** ** |
| ** **                         | ** ** | **(in  thousands)**        | ** ** |
|                               |       |                       |       |   |   |   |   |   |   |   |   |
| Contractual Obligations:           |       |                       |       |   |   |   |   |   |   |   |   |
| Long-Term Debt Obligations (1) (2) |       | $                          | 11,140     |   | $ | 7,475 |   | $ | 3,665 |   | $ | — |   | $ | — |   |
| Operating Leases Obligations       |       | 2,501                      |       | 780 |   | 1,279 |   | 304 |   | 138 |   |
| Capital Leases Obligations         |       | —                     |       | — |   | — |   | — |   | — |   |
| Total                              |       | $                          | 13,641     |   | $ | 8,255 |   | $ | 4,944 |   | $ | 304 |   | $ | 138 |   |

 

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(1)     $2,700,000was contingent upon exercise of the holder’s put option to require the Companyto purchase the holder’s redeemable common stock. On April 28, 2005 theCompany repurchased 200,000 shares of its common stock at a price of $13.50 pershare. See note 7 and 11 to the condensed consolidated financial statementsincluded in this Form 10-Q.

 

(2)     $1,541,000is contingent upon exercise of the holder’s put option to require the Companyto purchase the holder’s redeemable common stock in connection with the Heartacquisition. See note 8 to the condensed consolidated financial statementsincluded in this Form 10-Q.

 

**Safe Harbor for Forward-Looking Statements under the SecuritiesLitigation Reform Act of 1995** – This Quarterly Reporton Form 10-Q contains various forward-looking statements and information thatare based on management’s beliefs, as well as assumptions made by, andinformation currently available to management, including statements regardingfuture economic performance and financial condition, liquidity and capitalresources, acceptance of the Company’s products by the market and management’splans and objectives. The Company has tried to identify such forward lookingstatements by use of words such as “expects,” “intends,” “anticipates,” “plans,”  “believes, “will,” “should,” and similarexpressions, but these words are not the exclusive means of identifying suchstatements. The forward looking statements included in this Quarterly Reportare subject to various risks, uncertainties and other factors which could causeactual results to vary materially from those expressed in, or implied by, theforward looking statements.  Such risks,uncertainties and other factors include those discussed in “Risk Factors”below. Except as expressly required by the federal securities laws, the Companyundertakes no obligation to update any such factors or to publicly announce theresults of any of the forward-looking statements contained herein to reflectchanged circumstances or future events or developments or for any other reason.

 

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# **Risk Factors**

#  

You should carefully consider the risks, uncertainties and otherfactors described below, along with all of the other information included inthis quarterly report on Form 10-Q, because they could materially and adverselyaffect our business, financial condition, operating results, cash flows andprospects and/or the market price of our common stock.  This risk factors section is written inresponse to the Securities and Exchange Commission’s “plain English”guidelines.  In this section, the words “we,”“us,” “our” and “ours” refer to the Company and not any other person.

 

***Risks Related To OurBusiness and Our Industry***

 

**You may have difficulty evaluating ourbusiness because of our limited history of Internet, call center and otherbusiness process outsourcing.**

 

Although our predecessor began operations in 1976, we did not begin anyInternet operations until September 1999 and did not begin generatingrevenues from these operations until the fourth quarter of 2000. We did not beginany call center or other business process outsourcing operations or begingenerating revenues from these operations until the first quarter of 2003.Accordingly, there is a limited history of these operations on which you canevaluate our company and prospects. We cannot be certain that our Internet,call center and other business process outsourcing strategies will besuccessful, because these strategies are new. Our early-stage Internet, callcenter and other business process outsourcing operations will be particularlysusceptible to the risks and uncertainties described in these risk factors andmore likely to incur the expenses associated with addressing them. Ourprospects must be considered in light of the risks, uncertainties, expenses anddifficulties frequently encountered by companies in a transitional stage ofdevelopment, particularly companies in new and rapidly evolving markets, suchas electronic commerce, and using new and unproven business models.

 

**Because the support revenue that we havetraditionally relied upon has been steadily declining, it is important that newsources of revenue continue to be developed.**

 

Our revenue from the support services we offer in connection with ourlegacy software products has been decreasing significantly over the course ofthe past few years. This decline can be attributed to the fact that many of oursupport clients are not renewing their support agreements with us, in manycases because they are no longer using our legacy software. Even if they arecontinuing to use our legacy software, our support clients may choose not torenew their support agreements if their legacy software products no longerrequire support or they use third party support. In addition, some of theclients who use our support services have reduced the level of support that weprovide them, which in turn reduces our support revenue. This downward trend inour support revenue makes us particularly dependent upon our other sources ofrevenue.

 

**Two customers currently provide a significantpercentage of our total revenue.**

 

Revenues from one customer, BRiT Insurance Holdings PLC and itsaffiliates, which at May 2, 2005 owned approximately 34.0% of our common stockand approximately 70% of CF Epic Insurance and General Fund, which at that dateowned approximately 8.2% of our common stock, represented approximately 15% and24% of our total revenue for the three-month periods ended March 31, 2005and 2004, respectively. If revenues from this customer were to discontinue, ouroperating results could be adversely affected.

 

Revenues from another customer, AON, represented approximately 11% and17% of our total revenue for the three-month periods ended March 31, 2005and 2004. If revenues from this customer were to discontinue, our operatingresults could be adversely affected.

 

**Adverse insurance industry economics couldadversely affect our revenues**.

 

We are dependent on the insurance industry, which may be adverselyaffected by current economic and world political conditions.

 

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**Our operating results may fluctuatedramatically**.

 

Our quarterly operating results may fluctuate significantly in thefuture due to a variety of factors that could affect our revenues or ourexpenses in any particular quarter. You should not rely on our results ofoperations during any particular quarter as an indication of our results for afull year or any other quarter. Factors that may affect our quarterly resultsmay include the loss of a significant insurance agent, carrier or brokerrelationship or the merger of any of our participating insurance carriers withone another.

Our operating expenses are based in part on our expectations of ourfuture revenues and are relatively fixed in the short term. We may be unable toadjust spending quickly enough to offset any unexpected revenue shortfall.

 

**We cannot predict our future capital needsand we may not be able to secure additional financing when we need it.**

 

We may need to raise additional funds in the future in order to fundmore aggressive brand promotion or more rapid expansion, to develop new orenhanced services, to respond to competitive pressures or to make acquisitions.Any required additional financing may not be available on terms favorable tous, or at all. If adequate funds are not available on acceptable terms, we maybe unable to meet our business or strategic objectives or compete effectively.If additional funds are raised by our issuing equity securities, stockholdersmay experience dilution of their ownership interests, and the newly issuedsecurities may have rights superior to those of our common stock. If additionalfunds are raised by our issuing debt, we may be subject to limitations on ouractivities.

 

**Any acquisitions that we undertake could bedifficult to integrate, disrupt our business, dilute stockholder value and harmour operating results**.

 

We recently acquired LifeLink and certain assets of Heart and may inthe future acquire or make investments in complementary businesses,technologies, services or products if appropriate opportunities arise. Theprocess of integrating LifeLink, Heart or any other acquired business,technology, service or product into our business and operations may result inunforeseen operating difficulties and expenditures. Integration of an acquiredcompany also may consume much of our management’s time and attention that couldotherwise be available for ongoing development of our business. Moreover, theanticipated benefits of the LifeLink and Heart acquisitions or any other acquisitionmay not be realized. Furthermore, we may be unable to identify, negotiate orfinance future acquisitions successfully. Future acquisitions could result inpotentially dilutive issuances of equity securities or the incurrence of debt,contingent liabilities or amortization expenses related to intangible assets.

 

**We may not be able to continue to develop newproducts to effectively adjust for rapid technological changes.**

 

To be successful, we must adapt to rapidly changing technological andmarket needs, by continually enhancing our website and introducing new productsand services to address our users’ changing demands.

 

The marketplaces in which we operate are characterized by:

 

•                                          rapidlychanging technology;

•                                          evolvingindustry standards;

•                                          frequentnew product and service introductions;

•                                          shiftingdistribution channels; and

•                                          changingcustomer demands.

 

Our future success will depend on our ability to adapt to this rapidlyevolving marketplace. We could incur substantial costs if we need to modify ourservices or infrastructure in order to adapt to changes affecting our market,and we may be unable to adapt to these changes.

 

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**The markets for our products are highlycompetitive and are likely to become more competitive, and our competitors maybe able to respond more quickly to new or emerging technology and changes incustomer requirements.**

 

We operate in highly competitive markets. In particular, the onlineinsurance distribution market, like the broader electronic commerce market, israpidly evolving and highly competitive. Our software business also experiencessome competition from certain large hardware suppliers that sell systems andsystems’ components to independent agencies and from small, independent orfreelance developers and suppliers of software, who sometimes work in concertwith hardware vendors to supply systems to independent agencies. Our Internetbusiness may also face indirect competition from insurance carriers that havesubsidiaries which perform in-house agency and brokerage functions.

 

Some of our current competitors have longer operating histories, largercustomer bases, greater brand recognition and significantly greater financial,marketing and other resources than we do. In addition, we believe we will faceincreasing competition as the online financial services industry develops andevolves. Our current and future competitors may be able to:

 

•                                          undertakemore extensive marketing campaigns for their brands and services;

•                                          devotemore resources to website and systems development;

•                                          adoptmore aggressive pricing policies; and

•                                          makemore attractive offers to potential employees, online companies and third-partyservice providers.

 

**If we are unable to protect our intellectualproperty, our reputation and competitiveness in the marketplace may bematerially damaged.**

 

We regard our intellectual property in general and our software inparticular as critical to our success. It may be possible for third parties tocopy aspects of our products or, without authorization, to obtain and useinformation that we regard as trade secrets. Existing copyright law affordsonly limited practical protection, and our software is unpatented.

 

**If we infringe on the proprietary rights ofothers, we may be at a competitive disadvantage, and any related litigationcould be time consuming and costly.**

 

Third parties may claim that we have violated their intellectualproperty rights. Any of these claims, with or without merit, could subject usto costly litigation and divert the attention of key personnel. To the extentthat we violate a patent or other intellectual property right of a third party,we may be prevented from operating our business as planned, and we may berequired to pay damages, to obtain a license, if available, to use the right orto use a non-infringing method, if possible, to accomplish our objectives.

 

**We depend on the continued services of oursenior management and our ability to attract and retain other key personnel**.

 

Our future success is substantially dependent on the continued servicesand continuing contributions of our senior management and other key personnel,particularly Robin Raina, our President and Chief Executive Officer, andRichard J. Baum, our Executive Vice President—Finance &Administration, Chief Financial Officer and Secretary. The loss of the servicesof any of our executive officers or other key employees could harm ourbusiness. We have no long-term employment agreements with any of our keypersonnel, nor do we maintain key man life insurance policies on any of our keyemployees.

 

Our future success depends on our continuing to attract, retain andmotivate highly skilled employees. If we are not able to attract and retain newpersonnel, our business will be harmed. Competition for personnel in ourindustry is intense. We may be unable to retain our key employees or attract,assimilate or retain other highly qualified employees in the future.

 

**Our international operations are subject to anumber of risks that could affect our income and growth.**

 

We market our software internationally and plan to expand our Internetservices to locations outside of

 

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the United States. In 2004, we acquired certain assets from Heart ConsultingServices Pty. Ltd. in Australia. In addition, commencing in 2002, we begandevelopment activities, call center services and other operations in India. Ourinternational operations may not produce enough revenue to justify ourinvestments in establishing them and are subject to other inherent risks,including:

 

•                                          theimpact of recessions in foreign economies on the level of consumers’ insuranceshopping and purchasing behavior;

•                                          greaterdifficulty in collecting accounts receivable;

•                                          difficultiesand costs of staffing and managing foreign operations;

•                                          reducedprotection for intellectual property rights in some countries;

•                                          seasonalreductions in business activity during the summer months in Europe and otherparts of the world;

•                                          burdensomeregulatory requirements, other trade barriers and differing business practices;

•                                          fluctuationsin exchange rates;

•                                          potentiallyadverse tax consequences; and

•                                          politicaland economic instability.

 

Furthermore, our entry into additional international markets requiressignificant management attention and financial resources, which could lessenour ability to manage our existing business effectively.

 

**Laws and regulations that govern theinsurance industry could expose us or the agents, brokers and carriers whoparticipate in our online marketplace to legal penalties.**

 

We perform functions for licensed insurance agents, brokers andcarriers and are, therefore, required to comply with a complex set ofrules and regulations that often vary from state to state. These rules andregulations can be difficult to comply with and are ambiguous and open tointerpretation. If we fail to properly interpret and/or comply with theserules and regulations, we, the insurance agents, brokers or carriers doingbusiness with us, our officers, or agents with whom we contract could besubject to various sanctions, including censure, fines, cease-and-desistorders, loss of license or other penalties. This risk, as well as other lawsand regulations affecting our business and changes in the regulatory climate orthe enforcement or interpretation of existing law, could expose us toadditional costs, including indemnification of participating insurance agents,brokers or carriers for their costs, and could require changes to our businessor otherwise harm our business. Furthermore, because the application of onlinecommerce to the consumer insurance market is relatively new, the impact ofcurrent or future regulations on our business is difficult to anticipate. Tothe extent that there are changes in the rules and regulations regardingthe manner in which insurance is sold, our business could be adverselyaffected.

 

***Risks Related to OurConduct of Business on The Internet***

 

**Any disruption of our Internet connectionscould affect the success of our Internet based products**.

 

Any system failure, including network, software or hardware failure,that causes an interruption in our network or a decrease in responsiveness ofour website could result in reduced user traffic and reduced revenue. Continuedgrowth in Internet usage could cause a decrease in the quality of Internetconnection service. Websites have experienced service interruptions as a resultof outages and other delays occurring throughout the Internet networkinfrastructure. In addition, there have been several incidents in whichindividuals have intentionally caused service disruptions of major e-commercewebsites. If these outages, delays or service disruptions frequently occur inthe future, usage of our website could grow more slowly than anticipated ordecline, and we may lose revenues and customers.

 

If the computer hardware operations that host our website were toexperience a system failure, the performance of our website would be harmed.These systems are also vulnerable to damage from fire, floods, earthquakes,acts of terrorism, power loss, telecommunications failures, break-ins andsimilar events. Our property and business interruption insurance coverage maynot be adequate to compensate us for all losses that

 

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may occur. In addition, our users depend on Internet service providers,online service providers and other website operators for access to our website.Each of these providers has experienced significant outages in the past, andcould experience outages, delays and other difficulties due to system failuresunrelated to our systems.

 

**Concerns regarding security of transactionsor the transmission of confidential information over the Internet or securityproblems we experience may prevent us from expanding our business or subject usto legal exposure.**

 

If we do not offer sufficient security features in our online productand service offerings, our products and services may not gain marketacceptance, and we could be exposed to legal liability. Despite the measuresthat we may take, our infrastructure will be potentially vulnerable to physicalor electronic break-ins, computer viruses or similar problems. If a personcircumvents our security measures, that person could misappropriate proprietaryinformation or disrupt or damage our operations. Security breaches that resultin access to confidential information could damage our reputation and subjectus to a risk of loss or liability. We may be required to make significantexpenditures to protect against or remedy security breaches. Additionally, ifwe are unable to adequately address our customers’ concerns about security, wemay have difficulty selling our goods and services.

 

**Uncertainty in the marketplace regarding theuse of Internet users’ personal information, or proposed legislation limitingsuch use, could reduce demand for our services and result in increasedexpenses.**

 

Concern among consumers and legislators regarding the use of personalinformation gathered from Internet users could create uncertainty in themarketplace. This could reduce demand for our services, increase the cost ofdoing business as a result of litigation costs or increased service deliverycosts, or otherwise harm our business. Legislation has been proposed that wouldlimit the users of personally identifiable information of Internet usersgathered online or require online services to establish privacy policies. Manystate insurance codes limit the collection and use of personal information byinsurance agencies, brokers and carriers or insurance service organizations.Moreover, the Federal Trade Commission has settled a proceeding against oneonline service that agreed in the settlement to limit the manner in whichpersonal information could be collected from users and provided to thirdparties.

 

**Future government regulation of the Internetcould place financial burdens on our businesses.**

 

Because of the Internet’s popularity and increasing use, new laws andregulations directed specifically at e-commerce may be adopted. These laws andregulations may cover issues such as the collection and use of data fromwebsite visitors, including the placing of small information files, or “cookies,”on a user’s hard drive to gather information, and related privacy issues; pricing;taxation; telecommunications over the Internet; content; copyrights;distribution; domain name piracy; and quality of products and services. Theenactment of any additional laws or regulations, including international lawsand regulations, could impede the growth of our revenue from our Internetoperations and place additional financial burdens on our business.

 

***Risks Related To OurCommon Stock***

 

**The price of our common stock may beextremely volatile.**

 

In some future periods, our results of operations may be below theexpectations of public market investors, which could negatively affect themarket price of our common stock. Furthermore, the stock market in general hasexperienced extreme price and volume fluctuations in recent years. We believe that,in the future, the market price of our common stock could fluctuate widely dueto variations in our performance and operating results or because of any of thefollowing factors which are, in large part, beyond our control:

 

•                                          announcementsof new services, products, technological innovations, acquisitions or strategicrelationships by us or our competitors;

 

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•                                          trendsor conditions in the insurance, software, business process outsourcing andInternet markets;

•                                          changesin market valuations of our competitors; and

•                                          generalpolitical, economic and market conditions.

 

In addition, the market prices of securities of technology companies,including our own, have been volatile and have experienced fluctuations thathave often been unrelated or disproportionate to operating performance. As aresult, you may not be able to sell shares of our common stock at or above theprice at which you purchase them. In the past, following periods of volatilityin the market price of a company’s securities, securities class actionlitigation has often been instituted against that company. If any securitieslitigation is initiated against us, we could incur substantial costs and ourmanagement’s attention and resources could be diverted from our business.

 

**The significant concentration of ownership ofour common stock will limit your ability to influence corporate actions.**

 

The concentration of ownership of our common stock may have the effectof delaying, preventing or deterring a change in control of our company, coulddeprive our stockholders of an opportunity to receive a premium for theircommon stock as part of a sale of our company, and may affect the market priceof our common stock. At May 2, 2005, BRiT Insurance Holdings PLCbeneficially owned approximately 34.0% of our outstanding common stock and,together with our executive officers and directors, beneficially ownedapproximately 53.4% of our outstanding common stock. In addition, at May 2,2005, CF Epic Insurance and General Fund, of which BriT owns approximately 70%of the equity interests, beneficially owned 8.2% of our outstanding commonstock. As a result, those stockholders, if they act together, are able tocontrol all matters requiring stockholder approval, including the election ofall directors and approval of significant corporate transactions and amendmentsto our certificate of incorporation. These stockholders may use their ownershipposition to approve or take actions that are adverse to your interests orprevent the taking of actions that are consistent with your interests.

 

Item 3.             QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The majority of the Company’s operations are based in the U.S. and,accordingly, the majority of our transactions are denominated in U.S.dollars.  However, the Company hasforeign-based operations where transactions are denominated in foreigncurrencies and are subject to market risk with respect to fluctuations in therelative value of currencies.  Currently,the Company and its subsidiaries have operations in Australia, Canada, India,New Zealand and Singapore and conduct transactions in the local currencies ofeach location.  There can be no assurancethat fluctuations in the value of foreign currencies will not have a materialadverse effect on the Company’s business, operating results, revenues orfinancial condition.  The impact offluctuations in these currencies resulted in net transaction losses for thethree months ended March 31, 2005 and gains of $10,000 for the threemonths ended March 31, 2004.  TheCompany considered the historical trends in currency exchange rate anddetermined that it was reasonably possible that adverse changes in exchangerates of 20% for all currencies could be experienced in the near term.  Such adverse changes would have resulted inan adverse impact on income before taxes of approximately $127,000 and $44,000for the three months ended March 31, 2005 and March 31, 2004,respectively.

 

There have been no material changes in the Company’s interest rate riskduring the three months ended March 31, 2005.  For additional information on interest raterisk, refer to the “Quantitative Disclosures About Market Risk” section ofthe Company’s Annual Report on Form 10-K for the year ended December 31,2004.

 

Item 4.             CONTROLS AND PROCEDURES

 

During the 2004 year-end audit, the Company’s independent registeredpublic accounting firm, BDO Seidman, LLP (“BDO”) identified certain significantdeficiencies relating to the Company’s internal control over financialreporting. A significant deficiency is a control deficiency, or combination ofcontrol deficiencies, that adversely affects the Company’s ability to initiate,authorize, record, process or report external financial data

 

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reliably in accordance with generally accepted accounting principlessuch that there is more than a remote likelihood that a misstatement of theCompany’s annual or interim financial statements that is more thaninconsequential will not be prevented or detected. BDO’s determination thatthere were significant deficiencies took into consideration audit differences,both required adjustments to the Company’s financial statements and unrecordedadjustments, as well as underlying causes for such adjustments, andobservations of the Company’s processes, but did not arise from any particulartransaction or event. The details of the significant deficiencies relates tothe lack of accounting knowledge and leadership at foreign locations, inadequatedocumentation for certain accounting transactions, insufficient analysis andreview of domestic account reconciliations, lack of documentation ofdevelopment costs and related agreements, and lack of documentation to supportthe Company’s income tax provisions and related accounts. The Company isevaluating what steps it needs to take to address these significantdeficiencies.

 

There was no change in the Company’s internal control over financialreporting during the quarter ended March 31, 2005 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

The Company carried out an evaluation, under the supervision and withthe participation of the Company’s management, including its Chief ExecutiveOfficer and Chief Financial Officer, of the design and operation of the Company’sdisclosure controls and procedures, which are designed to provide reasonableassurance that the information required to be disclosed by the Company in thereports that it files with or submits to the Securities and Exchange Commissionis (1) recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the Securities and Exchange Commission and(2) accumulated and communicated to the Company’s management, including theCompany’s Chief Executive Officer and Chief Financial Officer, as appropriate,to allow timely decisions regarding required disclosure. Based on thisevaluation, the Company’s Chief Executive Officer and the Company’s ChiefFinancial Officer concluded that, as of March 31, 2005, the Company’sdisclosure controls and procedures were effective to provide such reasonableassurance.  They reached this conclusionbased in large part on their assessment of (i) the financial expertise ofthe members of the internal accounting staff, (ii) the regularcommunications among such persons (serving as a de facto disclosure committee),and between them and the rest of the relatively small organization, with respectto all material developments in the Company’s business, and (iii) theoverall process of preparation and review of the Company’s financial and otherdisclosures.

 

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Part II — OTHER INFORMATION

 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

At the Company’s Annual Meeting of Stockholders, held on January 14,2005, the following members were elected to the Company’s Board of Directors,each by the respective vote indicated to the right of such nominee’s name:

 
| **Nominee**        | ** ** | **For**   | ** ** | **Authority  Withheld** | ** ** |
|--------------------|------------|-----------|------------|-------------------------|------------|
|               |       |      |       |                    |       |
| Pavan Bhalla       |       | 2,429,611 |       | 17,634                  |       |
| Dennis Drislane    |       | 2,430,036 |       | 17,029                  |       |
| Paul Joseph Hodges |       | 2,429,611 |       | 17,634                  |       |
| Hans Ueli Keller   |       | 2,429,611 |       | 17,634                  |       |
| Kenneth D. Merin   |       | 2,429,611 |       | 17,634                  |       |
| Robin Raina        |       | 2,429,584 |       | 17,661                  |       |
| William G. Rich    |       | 2,384,652 |       | 62,593                  |       |

 

 

Item 6. EXHIBITS

 
| 3.1*   |   | Certificate of Incorporation of the Company, as amended.                                                                                                                                                                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                       |
| 10.1   |   | 1996 Stock Incentive Plan, as amended (incorporated by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 14,  2005 and incorporated herein by reference).                                                     |
|   |   |                                                                                                                                                                                                                                                       |
| 10.2   |   | Second Amendment to Loan and Security Agreement, effective as of December 31,  2004 (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K dated February 23, 2005 and incorporated herein by  reference). |
|   |   |                                                                                                                                                                                                                                                       |
| 31.1   |   | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (Section 302  of the Sarbanes-Oxley Act of 2002).                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                       |
| 32.2   |   | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (Section 302  of the Sarbanes-Oxley Act of 2002).                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                       |
| 32.1   |   | Certification of Chief Executive Officer Pursuant to Section 906  of the Sabanes-Oxley Act of 2002 (furnished herewith).                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                       |
| 32.2   |   | Certification of Chief Financial Officer Pursuant to Section 906  of the Sabanes-Oxley Act of 2002 (furnished herewith).                                                                                                                              |

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|               | Ebix, Inc. |
|--------------------|------------|
|               |       |
|               |       |
| Date: May 12, 2005 | By         |   |
|               |       | /s/ RICHARD J. BAUM |
|               |       | Richard J. Baum |
|               |       | Executive Vice President — Finance & Administration, Chief |
|               |       | Financial Officer (principal financial and accounting officer), |
|               |       | and Secretary |

 

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EXHIBIT INDEX

 
| **EXHIBIT  NO.** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                            |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                       |
| 3**.**1*         |       | Certificate of Incorporation of the Company, as amended.                                                                                                                                                                                                   |
| 10.1             |       | 1996 Stock Incentive Plan, as amended (incorporated by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 14,  2005 and incorporated herein by reference).                                                     |
| 10.2             |       | Second Amendment to Loan and Security Agreement, effective as of December 31,  2004 (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K dated February 23, 2005 and incorporated herein by  reference). |
| 31.1*            |       | Certification of Chief Executive Officer Pursuant to 13a-14(a) (Section 302  of the Sarbanes-Oxley Act of 2002).                                                                                                                                      |
| 31.2*            |       | Certification of Chief Financial Officer Pursuant to 13a-14(a) (Section 302  of the Sarbanes-Oxley Act of 2002).                                                                                                                                      |
| 32.1*            |       | Certification of Chief Executive Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                                                   |
| 32.2*            |       | Certification of Chief Financial Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                                                   |

 

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*                                         Included as anexhibit to this quarterly report on Form 10-Q.

 

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