** **

**UNITEDSTATES**

**SECURITIESAND 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, 2004**                                              |
|       |   |                                                                                                |
|       |   | **OR**                                                                                              |
|       |   |                                                                                                |
| **o**      |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**Commissionfile 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 10, 2004, the number of shares of Common Stock outstandingwas 2,738,990.

 

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**Ebix,Inc. and Subsidiaries**

 

FORM 10-Q

 

FOR THE QUARTER ENDED MARCH 31, 2004

 

INDEX

 

 
| Part I — FINANCIAL INFORMATION |                                                                                                                  |
|-------------------------------------|-----------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                  |
|                                | Item 1.  Consolidated  Financial Statements                                                                      |   |
|                                |                                                                                                                  |
|                                | Condensed Consolidated Balance Sheets at  March 31, 2004 (unaudited) and December 31, 2003                  | 3 |
|                                |                                                                                                                  |
|                                | Condensed Consolidated Statements of  Operations for the Three Months ended March 31, 2004 and 2003  (unaudited) | 4 |
|                                |                                                                                                                  |
|                                | Condensed Consolidated Statements of Cash  Flows for the Three Months ended March 31, 2004 and 2003  (unaudited) | 5 |
|                                |                                                                                                                  |
|                                | Notes to Condensed Consolidated Financial  Statements (unaudited)                                                     | 6 |
|                                |                                                                                                                  |
|                                | Item 2.   Management’s Discussion and Analysis of Financial Condition and  Results of Operations            | 11 |
|                                |                                                                                                                  |
|                                | Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                             | 20 |
|                                |                                                                                                                  |
|                                | Item  4.  Controls and Procedures                                                                                | 20 |
|                                |                                                                                                                  |
| PART II — OTHER INFORMATION    |                                                                                                                  |
|                                |                                                                                                                  |
|                                | Item 2.   Changes in Securities, Use of Proceeds and Issuer Purchases of Equity  Securities                      | 21 |
|                                |                                                                                                                  |
|                                | Item 5.   Other Information                                                                                      | 21 |
|                                |                                                                                                                  |
|                                | Item 6.   Exhibits and Reports on Form 8-K                                                                       | 21 |
|                                |                                                                                                                  |
| SIGNATURES                          | 22                                                                                                                    |

 

2

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**Ebix,Inc. and Subsidiaries**

**CondensedConsolidated Balance Sheets**

(In thousands, except for share and per shareamounts)

 
|                                                                                                                                                               |   | **March 31,  2004** |   | **December 31,  2003** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                                                                                                                                               |   | **(Unaudited****)**      |   |                        |   |
| **ASSETS**                                                                                                                                                         |   |                     |   |                        |   |
| **Current assets:**                                                                                                                                                |   |                     |   |                        |   |
| Cash and cash equivalents                                                                                                                                          |   | $                        | 5,961  |                        | $      | 7,915 |   |
| Accounts receivable, less allowance of $260  and $356                                                                                                              |   | 3,534                    |   | 1,787                       |   |
| Other current assets                                                                                                                                               |   | 485                      |   | 364                         |   |
| **Total current assets**                                                                                                                                           |   | 9,980                    |   | 10,066                      |   |
| Property and equipment, net                                                                                                                                        |   | 1,469                    |   | 1,353                       |   |
| Capitalized software, net                                                                                                                                          |   | 82                       |   | 109                         |   |
| Intangible assets, net                                                                                                                                             |   | 3,450                    |   | —                      |   |
| Goodwill                                                                                                                                                           |   | 6,055                    |   | 123                         |   |
| Other assets                                                                                                                                                       |   | 371                      |   | 320                         |   |
| **Total assets**                                                                                                                                                   |   | $                        | 21,407 |                        | $      | 11,971 |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                     |   |                     |   |                        |   |
| **Current liabilities:**                                                                                                                                           |   |                     |   |                        |   |
| Accounts payable and accrued expenses                                                                                                                              |   | $                        | 1,934  |                        | $      | 1,778 |   |
| Accrued payroll and related benefits                                                                                                                               |   | 1,292                    |   | 1,287                       |   |
| Current portion of long term debt                                                                                                                                  |   | 500                      |   | —                      |   |
| Current portion of capital lease  obligations                                                                                                                      |   | 43                       |   | 73                          |   |
| Deferred revenue                                                                                                                                                   |   | 2,689                    |   | 2,141                       |   |
| **Total current liabilities**                                                                                                                                      |   | 6,458                    |   | 5,279                       |   |
| Long term debt, less current portion                                                                                                                               |   | 1,726                    |   | —                      |   |
| Redeemable common stock (200,000 and 0  shares issued and outstanding at March 31, 2004 and December 31,  2003, respectively) stated at redemption price |   | 2,700                    |   | —                      |   |
|                                                                                                                                                               |   |                     |   |                        |   |
| **Stockholders’  equity:**                                                                                                                                    |   |                     |   |                        |   |
| Convertible Series D Preferred stock, $.10  par value, 2,000,000 shares authorized, no shares issued and outstanding                                               |   | —                   |   | —                      |   |
| Common stock, $.10 par value, 40,000,000 shares  authorized, 2,738,990 and 2,316,767 shares issued and outstanding,  respectively                                  |   | 274                      |   | 232                         |   |
| Additional paid-in capital                                                                                                                                         |   | 91,951                   |   | 88,706                      |   |
| Deferred compensation                                                                                                                                              |   | (406                     | )      | (436                        | )      |
| Accumulated deficit                                                                                                                                                |   | (81,805                  | )      | (82,251                     | )      |
| Accumulated other comprehensive income                                                                                                                             |   | 509                      |   | 441                         |   |
| **Total stockholders’  equity**                                                                                                                               |   | 10,523                   |   | 6,692                       |   |
| **Total liabilities  and stockholders’ equity**                                                                                                               |   | $                        | 21,407 |                        | $      | 11,971 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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**Ebix,Inc. and Subsidiaries**

**CondensedConsolidated Statements of Operations**

(In thousands, except per share data)

(Unaudited)

 
|                                        |   | **Three  Months Ended March 31,** |   |
|---------------------------------------------|--------|----------------------------------------|--------|
|                                        |   | **2004**                               |   | **2003** |   |
|                                        |   |                                   |   |   |   |
| **Revenue:**                                |   |                                   |   |   |   |
| Software                                    |   | $                                      | 227    |   | $ | 210 |   |
| Services and other                          |   | 3,707                                  |   | 3,402 |   |
| **Total revenue**                           |   | 3,934                                  |   | 3,612 |   |
| **Operating expenses:**                     |   |                                   |   |   |   |
| Services and other costs                    |   | 1,163                                  |   | 1,005 |   |
| Product development                         |   | 560                                    |   | 360 |   |
| Sales and marketing                         |   | 273                                    |   | 461 |   |
| General and administrative                  |   | 1,387                                  |   | 1,164 |   |
| **Total operating expenses**                |   | 3,383                                  |   | 2,990 |   |
| **Operating income**                        |   | 551                                    |   | 622 |   |
| Interest income                             |   | 27                                     |   | 15 |   |
| Interest expense                            |   | (2                                     | )      | (5 | ) |
| Foreign exchange gain (loss)                |   | 10                                     |   | (49 | ) |
| **Income before income taxes**              |   | 586                                    |   | 583 |   |
| Income tax expense                          |   | (140                                   | )      | (67 | ) |
| **Net income**                              |   | $                                      | 446    |   | $ | 516 |   |
|                                        |   |                                   |   |   |   |
| **Basic earnings per common share**         |   | $                                      | 0.17   |   | $ | 0.23 |   |
|                                        |   |                                   |   |   |   |
| **Diluted earnings per common share**       |   | $                                      | 0.15   |   | $ | 0.23 |   |
|                                        |   |                                   |   |   |   |
| Basic weighted average shares outstanding   |   | 2,586                                  |   | 2,291 |   |
|                                        |   |                                   |   |   |   |
| Diluted weighted average shares outstanding |   | 2,917                                  |   | 2,291 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

4

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**Ebix,Inc. and Subsidiaries**

**CondensedConsolidated Statements of Cash Flows**

(In thousands)

(Unaudited)

 
|                                                                                                                                                                                                                                                    |   | **Three  Months Ended March 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                                                                                                                                                                                                    |   | **2004**                               |   | **2003** |   |
|                                                                                                                                                                                                                                                    |   |                                   |   |   |   |
| **Cash flows from  operating activities:**                                                                                                                                                                                                              |   |                                   |   |   |   |
| Net income                                                                                                                                                                                                                                              |   | $                                      | 446    |   | $ | 516 |   |
| **Adjustments to  reconcile net income to net****cash  (used in) provided by operating activities:**                                                                                                                                                    |   |                                   |   |   |   |
| Depreciation and amortization                                                                                                                                                                                                                           |   | 201                                    |   | 97 |   |
| Stock-based compensation                                                                                                                                                                                                                                |   | 40                                     |   | 6 |   |
| Provision for doubtful accounts                                                                                                                                                                                                                         |   | 23                                     |   | 35 |   |
| **Changes in assets  and liabilities, net of effect of acquisition:**                                                                                                                                                                                   |   |                                   |   |   |   |
| Accounts receivable                                                                                                                                                                                                                                     |   | (1,035                                 | )      | (495 | ) |
| Other assets                                                                                                                                                                                                                                            |   | (72                                    | )      | 126 |   |
| Accounts payable and accrued expenses                                                                                                                                                                                                                   |   | 72                                     |   | 111 |   |
| Accrued payroll and related benefits                                                                                                                                                                                                                    |   | (205                                   | )      | 38 |   |
| Deferred revenue                                                                                                                                                                                                                                        |   | 298                                    |   | 459 |   |
| Net cash (used in) provided by operating activities                                                                                                                                                                                                     |   | (232                                   | )      | 893 |   |
| **Cash flows from  investing activities:**                                                                                                                                                                                                              |   |                                   |   |   |   |
| Acquisition of LifeLink, net of cash  acquired                                                                                                                                                                                                          |   | (4,634                                 | )      | — |   |
| Capital expenditures                                                                                                                                                                                                                                    |   | (103                                   | )      | (120 | ) |
| Net cash used in investing activities                                                                                                                                                                                                                   |   | (4,737                                 | )      | (120 | ) |
| **Cash flows from  financing activities:**                                                                                                                                                                                                              |   |                                   |   |   |   |
| Proceeds from the issuance of common stock,  net of issuance costs                                                                                                                                                                                      |   | 2,977                                  |   | — |   |
| Principal payments under capital lease  obligations                                                                                                                                                                                                     |   | (30                                    | )      | (27 | ) |
| Net cash provided by (used in) financing activities                                                                                                                                                                                                     |   | 2,947                                  |   | (27 | ) |
| Effect of foreign exchange rates on cash                                                                                                                                                                                                                |   | 68                                     |   | (36 | ) |
| Net change in cash and cash equivalents                                                                                                                                                                                                                 |   | (1,954                                 | )      | 710 |   |
| Cash and cash equivalents at the beginning of the period                                                                                                                                                                                                |   | 7,915                                  |   | 4,993 |   |
| Cash and cash equivalents at the end of the period                                                                                                                                                                                                      |   | $                                      | 5,961  |   | $ | 5,703 |   |
|                                                                                                                                                                                                                                                    |   |                                   |   |   |   |
| **Supplemental  disclosures of cash flow information:**                                                                                                                                                                                                 |   |                                   |   |   |   |
| Interest paid                                                                                                                                                                                                                                           |   | $                                      | 2      |   | $ | 5 |   |
| Income taxes paid                                                                                                                                                                                                                                       |   | $                                      | 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 condensed consolidated financial statements are unaudited, include theaccounts of Ebix, Inc. and its wholly-owned subsidiaries (Ebix or “theCompany”), and reflect all adjustments (consisting only of normal recurringadjustments) which are, in the opinion of management, necessary for a fairpresentation of the results of the interim periods.

 

On February 23, 2004, the Company acquired LifeLink Corporation(“LifeLink”). 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 $10,226,000 (see note 7). The acquisition wasaccounted for as a purchase business combination.

 

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, 2003.

 

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 significantaccounting policies—**

 

**Revenue Recognition**—We apply the provisions of Statement ofPosition (“SOP”) 97-2, “Software Revenue Recognition,” as amended by Statementof Position 98-9, “Modification of SOP 97-2, Software Revenue Recognition, WithRespect to Certain Transactions,” to all transactions involving the sale ofsoftware.

 

In May 2003, the FASB finalized the terms of Emerging Issues Task Force(EITF) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables, whichprovides criteria governing how to identify whether goods or services that areto be delivered separately in a bundled sales arrangement should be accountedfor separately.  Deliverables areaccounted for separately if they meet all of the following: a) the delivereditems have stand-alone value to the customer; b) the fair value of anyundelivered items can be reliably determined; and c) if the delivery of theundelivered items is probable and substantially controlled by the seller.  In situations where the deliverables fall withinthe higher- level literature as defined by EITF 00-21 the Company applies theguidance in that higher- level literature. Deliverables that do not meet these criteria are combined with one ormore other deliverables.  The Companyadopted EITF Issue No. 00-21 as of July 1, 2003 and now assesses all revenuearrangements against the criteria set forth in EITF Issue No. 00-21.

 

The Company recognizes revenue for licensefees from its software products upon delivery, provided that the fee is fixedand determinable, acceptance has occurred, collectibility is reasonably assuredand persuasive evidence of an arrangement exists.  Revenue from third party software is derived from the licensingof third party software products in connection with sales of the Company’ssoftware licenses, and is recognized upon delivery together with the Company’slicense revenue.

 

Training, data conversion, installation, andconsulting services are recognized as revenue when the services are performedand collectibility is reasonably assured. Revenue for maintenance and support service is recognized ratably overthe term of the support agreement.

 

For arrangements containing multipleelements, revenue is recognized on delivered elements when vendor-specificobjective evidence (VSOE) of fair value has been established on the undeliveredelements, applying the residual method of SOP 98-9.  Fair value is determined for each undelivered element based onthe price charged for the sale of each element separately.  In contracts that contain first yearmaintenance bundled with software fees, unbundling of maintenance is based onthe price charged for renewal maintenance. Revenue for maintenance and supportservice is recognized ratably over the term of the support agreement.

 

For certain contracts where services aredeemed essential to the functionality of the software and the software has notbeen accepted by the customer, the software and related service revenue havebeen deferred until acceptance has taken place.  In

 

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addition, all costs incurred in connectionwith these contracts have been expensed, as the Company has been unable toestimate the total costs to achieve customer acceptance.

 

Revenues related to hosting arrangements,including EbixASP, are recognized ratably over the term of the agreement,including monthly fees as well as any initial registration fees and relatedcustom programming in accordance with Staff Accounting Bulletin (“SAB”) 104“Revenue Recognition”.  Ebix.mall transactionfees are recognized as revenue as the transactions occur and revenue isearned.  Revenue is only recognized whencollectiblity is reasonably assured.

 

Deferred revenue includes maintenance andsupport payments that have been received or billings recorded prior toperformance, amounts received under multi-element arrangements in which VSOE ofundelivered elements does not exist, and initial registration fees and relatedservice fees under hosting agreements. Revenue is recognized when VSOE of the undelivered elements isestablished, the elements are delivered, or the obligation to deliver theelements is extinguished.

 

Software arrangements involving significantcustomization, modification or production of the software are accounted for inaccordance with SOP 81-1, “Accounting for Performance on Construction-Type andCertain Production-Type Contracts,” using the percentage-of-completionmethod.  The Company recognizes revenueusing actual hours worked as a percentage of total expected hours required bythe arrangement, provided that the fee is fixed and determinable and collectionof the receivable is considered probable.

 

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

 

**Stock Options -**AtMarch 31, 2004, the Company had three stock-based employee compensationplans. The Company accounts for stock options issued to employees in accordancewith Accounting Principles Board (“APB”) Opinion No. 25, “Accounting forStock Issued to Employees.” The Company has adopted the disclosure onlyprovisions of Statement of Financial Accounting Standards (“SFAS”)No. 123, “Accounting for Stock-Based Compensation,” for options issued toemployees, as well as the requirements of SFAS No. 148, “Accounting for StockBased Compensation — Transition and Disclosure.” Under APB Opinion No. 25,compensation expense is recorded based on the difference, if any, on themeasurement date, between the estimated fair value of the Company’s stock andthe exercise price of options to purchase that stock. Any resultingcompensation expense is amortized on a straight-line basis over the vestingperiod of the options.

 

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,  2004** |    | **March 31,  2003** |   |
|                                                                                                                                          |   |                     |    |   |   |
| Net income, as reported                                                                                                                       |   | $                        | 446,000 |   | $ | 516,000 |   |
| Add: Stock-based employee compensation  expense included in reported net income, net of related tax effects                                   |   | 5,000                    |    | — |   |
| Deduct: Total stock-based employee  compensation expense determined under fair-value based method for all awards,  net of related tax effects |   | (394,000                 | )       | (228,000 | ) |
| Pro forma net income                                                                                                                          |   | $                        | 57,000  |   | $ | 288,000 |   |
|                                                                                                                                          |   |                     |    |   |   |
| Basic earnings per share, as reported                                                                                                         |   | $                        | 0.17    |   | $ | 0.23 |   |
| Diluted earnings per share, as reported                                                                                                       |   | $                        | 0.15    |   | $ | 0.23 |   |
| Basic earnings per share, pro forma                                                                                                           |   | $                        | 0.02    |   | $ | 0.13 |   |
| Diluted earnings per share, pro forma                                                                                                         |   | $                        | 0.02    |   | $ | 0.13 |   |

 

**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

 

7

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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 2004, the Company did not grant any stockoptions.

 

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 which options to purchase 34,500 shares were outstanding atMarch 31, 2004.  These options weregranted at prices determined by the Board of Directors (at no less than 100percent of the market price on the date of grant).  The options have a four-year vesting period and must be exercisedwithin ten years of the date of the grant. These non-employee options werevalued using the fair value method as prescribed by SFAS No. 123 using thefollowing assumptions: volatility of 88%, risk free interest rate of 3.76% anda 10-year term. Options issued prior to 2001 are performance-based awards, withno service commitment and subject to vesting only if the Company’s stock pricereaches a certain level. Options issued in 2001 vest over four years, but vestingaccelerates if a performance target is achieved.  At March 31, 2004, non-employee options to purchase 7,461shares were vested. The Company recognized compensation expense ofapproximately $34,000 and $6,000 related to these options during the three-monthperiods ended March 31, 2004 and March 31, 2003, respectively.

 

During 2003, the Company granted in-the-money options with a four yearvesting period to purchase 25,000 shares of the Company’s common stock to anemployee who is the brother of the Chief Executive Officer, in connection withhis joining the Company.  This grant wasnot subject to any of the Company’s stock option plans.  The Company recognized compensation expenseof approximately $6,000 related to these options during the three-month periodended 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 endedMarch 31, 2004 and March 31, 2003 was 2,586,000 and 2,291,000,respectively. Diluted EPS is calculated as if the Company had additional commonstock outstanding from the beginning of the year or the date of grant for allcommon stock equivalents, net of assumed repurchased shares using the treasurystock method.  Diluted EPS recognizesthe dilutive effect of common stock equivalents and is equal to net incomedivided by the sum of the weighted average number of shares outstanding andcommon stock equivalents. For the three months ended March 31, 2004 andMarch 31, 2003, the Company’s common stock equivalents consisted of stockoptions.  For the three months endedMarch 31, 2004, the effect of this calculation resulted in an increase inthe weighted average number of shares outstanding of 331,000. At March 31,2004, the fully diluted weighted average number of shares outstanding was2,917,000.  For the three months endedMarch 31, 2003, there was no effect on the weighted average number ofshares outstanding.  At March 31,2004, there were 328,000 shares potentially issuable with respect to stockoptions, which could dilute EPS in the future which were excluded from thediluted EPS calculation because their effect was antidilutive. At March 31,2003, there were 600,000 shares potentially issuable with respect to stockoptions, which could dilute EPS in the future which were excluded from thediluted EPS calculation because their effect was antidilutive.

 

Note 4.  COMPREHENSIVE INCOME

 
|                                                                       |   | **Three  Months Ended March 31,** |    |
|----------------------------------------------------------------------------|--------|----------------------------------------|---------|
|                                                                       |   | **2004**                               |    | **2003** |   |
|                                                                       |   |                                   |    |   |   |
| Net income                                                                 |   | $                                      | 446,000 |   | $ | 516,000 |   |
| Other comprehensive income – foreign  currency translation adjustment |   | 68,000                                 |    | (36,000 | ) |
| Comprehensive income                                                       |   | $                                      | 514,000 |   | $ | 480,000 |   |

 

Note 5.  RELATED PARTY TRANSACTIONS

 

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, 2004 was 930,163, representing an equity ownership ofapproximately 34 percent.  AtMarch 31, 2004 BRiT owned approximately 45% of CF Epic Insurance andGeneral Fund, which owned approximately 8% of our common stock.

 

8

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The Company has entered into various software and service agreementswith BRiT. 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, 2004 were $1,218,000. During thefirst quarter of 2003, approximately $805,000 was recognized as revenue fromBRiT and its affiliates. Total accounts receivable from BRiT and its affiliatesat March 31, 2003 were $852,000.

 

Note 6. SALE OF UNREGISTERED COMMON STOCK

 

On January 16, 2004 the Company sold222,223 shares of its unregistered common stock to CF Epic Insurance andGeneral Fund, an investment fund located in London of which BriT, at March 31,2004, owned approximately 45% of the equity interests, for a total price of$3,000,010, or $13.50 per share.

 

Note 7.  ACQUISITION OF LIFELINK

 

On February 23, 2004, the Company acquired LifeLink Corporation(“LifeLink”), and the operations of LifeLink have been included in theCompany’s financial statements since that date. Under terms of the agreement,the Company acquired all of the outstanding capital stock of LifeLink from itsshareholders in exchange for an aggregate purchase price of $10,226,000,payable as follows: $5,000,000 paid in cash at closing, $2,500,000 non-interestbearing note payable in cash in annual installments of $500,000 over five years(present value computed as $2,226,000), and $3,000,000 payable in 200,000shares of the common stock of the Company issued at the time of closing.  The Company also incurred approximately$71,000 of transaction costs in conjunction with the LifeLink acquisition.  In connection with the 200,000 shares ofcommon stock issued subject to Rule 144, the former shareholder received fromEbix the option to sell his stock back to Ebix subject to specified time framesand prices.  In accordance withFinancial Accounting Standards Board (“FASB”) Statement 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity” and EITF Issue No. 00-19, “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, theCompany has classified $2,700,000 of the value of the common stock issued as aliability, “redeemable common stock,” in the condensed consolidated balancesheet due to existence of the holder’s put option. At any time during the onemonth period commencing on the date which is eighteen months afterFebruary 23, 2004 and ending nineteen months after February 23, 2004,the holder of the redeemable common stock has a one-time right to require theCompany to purchase all of the holder’s 200,000 shares originally issued at aprice of $2,700,000 minus the aggregate purchase price received by the holderfrom any sales of these shares of common stock prior to the exercise of the putoption. As of March 31, 2004, the holder has not sold any shares of commonstock received from this transaction.

 

The following table summarizes the estimated fair value of the LifeLinkassets acquired and liabilities assumed at the date of acquisition. Theseamounts are based upon the preliminary purchase price allocation which issubject to modification upon further analysis by the Company.

 
|                      |   | **February 23,  2004** |       |
|---------------------------|--------|-----------------------------|------------|
|                      |   |                        |       |
| Current assets            |   | $                           | 1,199,000  |   |
| Property and equipment    |   | 119,000                     |       |
| Intangible assets         |   | 3,518,000                   |       |
| Goodwill                  |   | 5,932,000                   |       |
| Total assets acquired     |   | 10,768,000                  |       |
| Current liabilities       |   | 471,000                     |       |
| Total liabilities assumed |   | 471,000                     |       |
| Net assets acquired       |   | $                           | 10,297,000 |   |

 

Of the $3,518,000 of intangible assets acquired, $977,000 was assignedto developed 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 $68,000 of amortization expense related tothese intangible assets for the period ended March 31, 2004.

 

9

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**Estimated Amortization Expenses:**

 
| For the year ended  December 31, 2004 |   | $ | 491,000 |   |
|--------------------------------------------|--------|---|---------|--------|
| For the year ended December 31, 2005  |   | $ | 575,000 |   |
| For the year ended December 31, 2006  |   | $ | 575,000 |   |
| For the year ended December 31, 2007  |   | $ | 575,000 |   |
| For the year ended December 31, 2008  |   | $ | 575,000 |   |

 

The following unaudited pro forma financial information for the threemonths ended March 31, 2004 and March 31, 2003 presents theconsolidated operations of the Company as if the acquisition had been made onJanuary 1, 2003, after giving effect to certain adjustments for the proforma acquisition as of the acquisition date. 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**                                |      | **2003** |   |
|                      |   |                                    |      |   |   |
| Revenue                   |   | $                                       | 4,855,000 |   | $ | 4,945,000 |   |
| Net income                |   | 406,000                                 |      | 433,000 |   |
|                      |   |                                    |      |   |   |
| Basic earnings per share  |   | $                                       | 0.16      |   | $ | 0.19 |   |
| Diuted earnings per share |   | $                                       | 0.14      |   | $ | 0.19 |   |

 

**Note 8—Line of Credit:**

 

The existing revolving line of credit with LaSalle National BankAssociation was increased to $5,000,000 during February 2004 and theagreement was amended in April 2004. There were no borrowings on this line as of March 31, 2004.  The 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 willexpire on October 31, 2005.

 

10

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Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL 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, 2003.

 

**Overview**

 

The Company’s future focus will be on developing consistent andrecurring revenue sources with a concentration in (1) software development forinsurance carriers, agents and brokers, (2) expansion of connectivity betweenconsumers, agents, carriers and third party providers,  (3) business process outsourcing services,which include software development, call center and back office, either offsite or at company facilities, and (4) worldwide sales and support of theagency management systems.

 

Support revenue from legacy products is expected to decline in thefuture as current customers switch to other more technologically advancedsystems (including Ebix ASP). The Company’s focus for the future will beexpanding revenues in the international market, software development forcarriers, agents and brokers and business process outsourcing services.

 

**Critical AccountingPolicies**

 

The Company’s  “criticalaccounting policies” are those that require application of management’s mostdifficult, subjective or complex judgements, often as a result of the need tomake estimates about matters that are inherently uncertain and may change infuture periods. The Company has identified the following as its criticalaccounting policies: revenue recognition, estimating the allowance for doubtfulaccounts receivable and accounting for income taxes. For a discussion of thesepolicies, see “Management’s Discussion and Analysis of Financial Condition andResults of Operations – Critical Accounting Policies” in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2003.

 

**Results of Operations**

 

**Three-Month PeriodEnded March 31, 2004 Compared to the Three-Month Period EndedMarch 31, 2003**

 

**Total Revenue**- The Company’s revenue has been derived from the licensing and sale ofproprietary software and third party software (“Software”) and fromprofessional services and support services (“Services”). Services includeconsulting, implementation, training and project management provided to theCompany’s customers with installed systems and those in the process ofinstalling systems. Also included in Services are fees for software licensemaintenance, LifeLink service revenue (for the period February 23, 2004 toMarch 31, 2004), initial registration and ongoing monthly subscriptionfees for the EbixASP product and transaction fees generated from the Ebix.mallwebsite, as well as software development and call center revenue. Total revenuefor the quarter ended March 31, 2004 increased $322,000, or 8.9%, to $3,934,000from $3,612,000 for the comparable quarter of the prior year.

 

**Software Revenue**- Software revenue is comprised of revenue from the sale of Ebix (formerly“cd”) products, current legacy products, and other third party software.  Total software revenue for the first quarterof 2004 increased $17,000 or 8.1%, from $210,000 for the comparable quarter ofthe prior year. As the Company has changed its focus to e-commerce products andservices, the Company expects future revenue to be comprised primarily ofservices revenue.

 

**Services Revenue**— Total services revenue for the first quarter of 2004 increased $305,000, or9.0%, from $3,402,000 for the comparable quarter of the prior year.  This increase was due to LifeLink revenue ofapproximately $518,000 and an increase in international service revenue of$323,000 partially offset by a decrease in support revenue associated withlegacy products of $269,000, a decrease in INS-Site revenue of  $110,000 and a decrease in consultingrevenue of $157,000.

 

During the first quarter of 2004 and 2003, approximately $953,000 and$805,000, respectively, was recognized as services revenue from BRiT InsuranceHoldings PLC (“BRiT”) and its affiliates. BRiT owned approximately 34% of the Company’s common stock as of May 10,2004.  In addition, the Company has beeninformed that BRiT owned approximately 70% of the

 

11

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equity interests CF Epic Insurance and General Fund, which at May 10,2004 owned approximately 8% of our outstanding common stock.

 

**Services and othercosts**- Cost of servicesrevenue includes costs associated with support, call center, consulting,implementation and training services. Total services and other costs for the quarter increased $158,000 or15.7%, from $1,005,000 for the comparable quarter of the prior year.  This increase was due to an increase inservices revenue and an increase in payroll expenses related to the acquisitionof LifeLink.

 

**Product DevelopmentExpenses**- Total productdevelopment expenses for the first quarter of 2004 increased $200,000, or55.6%, from $360,000 for the comparable quarter of the prior year. Thisincrease was due to an increase in payroll expenses related to the acquisitionof LifeLink and an increase in headcount in India.

 

**Sales and MarketingExpenses**- Total sales andmarketing expenses for the first quarter of 2004 decreased $188,000, or 40.8%,from $461,000 for the comparable quarter of the prior year.  This decrease was attributable to a decreasein payroll expenses and reduced spending on website related marketing andpublic relation expenses. During the first quarter of 2004 the Companyreorganized the sales and marketing department to better utilize existingexpertise; the Company has not yet realized the positive results of thisreorganization.

 

**General andAdministrative Expenses** —Total general andadministrative expenses for the quarter increased $223,000, or 19.2%, from$1,164,000 for the comparable quarter of the prior year.  This increase was due to an increase ininternational expenses and a charge for amortization of intangibles related tothe LifeLink acquisition.

 

# **Income tax expense**— The effective tax rate for the first quarterof 2004 is higher than the rate for the comparable quarter of the prior year dueto a different income mix among the various tax jurisdictions in which theCompany does business.

# ** **

**Liquidity and CapitalResources**

 

The Company had cash and cash equivalents of $5,961,000 atMarch 31, 2004, compared to $7,915,000 at December 31, 2003.

 

During the three months ended March 31, 2004, the Companyexperienced negative operating cash flow of $232,000 as compared to $893,000 ofpositive operating cash flow for the three months ended March 31, 2003.This decrease in cash flow from operations in the three months endedMarch 31, 2004 resulted primarily from an increase in accounts receivableof $1,035,000 and an increase in accrued payroll and related benefits of$205,000, partially offset by net income for the quarter of $710,000 adjusted fornon-cash items and an increase in deferred revenue of $298,000.

 

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 Corp. Inc. (“LifeLink”).  Cash provided by financing activities of$2,947,000 resulted from the Company’s sale of common stock during the quarter.

 

During early 2004 the Company sold 222,223 shares of its previouslyunissued common stock to CF Epic Insurance and General Fund, an investment fundlocated in London of which BriT currently owns approximately 70% of the equityinterests, for gross proceeds of $3,000,010, or $13.50 per share. OnFebruary 23, 2004 the Company acquired LifeLink Corp Inc. (“LifeLink”). Underterms of the agreement, the Company acquired all of the outstanding capitalstock of LifeLink from its shareholders in exchange for an aggregate purchaseprice of $10,226,000 payable as follows: $5,000,000 paid in cash at closing,$2,226,000 payable in cash over a deferred period of five years, and $3,000,000payable in 200,000 shares of the common stock of the Company issued at the timeof closing. See note 7 to the condensed consolidated financial statementsincluded in this Form 10-Q.

 

The existing revolving line of credit with LaSalle National BankAssociation was increased to $5,000,000 during February 2004 and theagreement was amended in April 2004. There were no borrowings on this line as of May 14, 2004.  The 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 willexpire on October 31, 2005.

 

The Company believes that future revenue growth will come frominternational subsidiaries, LifeLink, development services, call centerservices and business process outsourcing services. The Company believes itscash balances and funds provided by operations will be sufficient to meet all ofits anticipated cash requirements for the foreseeable future.

 

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# **The following summarizes the Company’s contractual obligations atMarch 31, 2004, and the effect such obligations are expected to have onthe Company’s liquidity 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) |   | $                          | 5,200  |   | $ | 500 |   | $ | 4,200 |   | $ | 500 |   | $ | — |   |
| Operating Leases Obligations   |   | 1,945                      |   | 488 |   | 860 |   | 597 |   | — |   |
| Capital Leases Obligations     |   | 43                         |   | 43 |   | — |   | — |   | — |   |
| Total                          |   | $                          | 7,188  |   | $ | 1,031 |   | $ | 5,060 |   | $ | 1,097 |   | $ | — |   |

 

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(1)   $2,700,000 is contingent uponexercise of the holder’s put option to require the Company to purchase theholder’s redeemable common stock.  Seenote 7 to the condensed consolidated financial statements included in this Form10-Q.

 

**Safe Harbor forForward-Looking Statements under the Securities Litigation Reform Act of 1995**- This Quarterly Report on Form 10-Q contains various forward-lookingstatements and information that are based on management’s beliefs, as well asassumptions made by, and information currently available to management,including statements regarding future economic performance and financialcondition, liquidity and capital resources, acceptance of the Company’sproducts by the market and management’s plans and objectives. The Company hastried to identify such forward looking statements by use of words such as“expects,” “intends,” “anticipates,” “plans,” “believes, “will,” “should,” and similar expressions, but these wordsare not the exclusive means of identifying such statements. The forward lookingstatements included in this Quarterly Report are subject to various risks,uncertainties and other factors which could cause actual results to varymaterially from those expressed in, or implied by, the forward lookingstatements.  Such risks, uncertaintiesand other factors include those discussed in “Risk Factors” below. Except asexpressly required by the federal securities laws, the Company undertakes noobligation to update any such factors or to publicly announce the results ofany of the forward-looking statements contained herein to reflect changedcircumstances 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 Our Business and Our Industry***

 

**You may have difficulty evaluating our business because of our limitedhistory of Internet, call center and other business 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 begin any call center or otherbusiness process outsourcing operations or begin generating revenues from theseoperations until the first quarter of 2003. Accordingly, there is a limited history of these operations on which youcan evaluate our company and prospects. We cannot be certain that our Internet, call center and other businessprocess outsourcing strategies will be successful, because these strategies arenew.  Our early-stage Internet, callcenter and other business process outsourcing operations will be particularlysusceptible to the risks and uncertainties described in these risk factors andlikely to incur the expenses associated with addressing them.  Our prospects must be considered in light ofthe risks, uncertainties, expenses and difficulties frequently encountered bycompanies in a transitional stage of development, particularly companies in newand rapidly evolving markets, such as electronic commerce, and using new andunproven business models.

 

**Because the support revenue that we have traditionally relied upon hasbeen steadily declining, it is important that new sources of revenue continueto 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 beattributed to the fact that many of our support clients are not renewing theirsupport agreements with us, in many cases because they are no longer using ourlegacy 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 the clients who use our support serviceshave reduced the level of support that we provide them, which in turn reducesour support revenue.  This downwardtrend in our support revenue makes us particularly dependent upon our othersources of revenue.

 

**Two customers currently provide a significant percentage of our totalrevenue.**

** **

Revenues from one customer, BRiT Insurance Holdings PLC, which at May10, 2004 owned approximately 34.0% of our common stock, representedapproximately 18% of our total revenue in 2003 and 15% of our total revenue in2002. The Company has been informed that BRiT owned approximately 70% of CFEpic Insurance and General Fund, which at May 10, 2004 owned approximately 8%of our common stock. If revenues from this customer were to discontinue, ouroperating results could be materially adversely affected.

 

Revenues from another international customer, a New York Stock Exchangelisted multi-national insurance company, represented approximately 11% of ourtotal revenue in 2003.  If revenues fromthis customer were to discontinue, our operating results could be materiallyadversely affected.

 

**Adverse insurance industry economics could adversely affect ourrevenues.**

** **

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

 

**Our operating results may fluctuate dramatically.**

** **

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.  Youshould not rely on our results of operations during any particular quarter asan indication of our results for a full year or any other quarter.  Factors that may affect our quarterlyresults include:

 

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•                                          Changes in insurance agents’and carriers’ consumer acceptance of Internet commerce;

 

•                                          Loss of a significantinsurance agent, carrier or broker relationship or the merger of any of ourparticipating insurance carriers with one another; and

 

•                                          Technical difficulties forour internet focused services that hamper an agent’s ability to run its agencysystem hosted by us.

 

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 to adjust spending quicklyenough to offset any unexpected revenue shortfall.

 

**We could be subject to civil fines and penalties as a result of theSEC’s investigation of our financial reporting.**

** **

On August 11, 2000, we were advised that the SEC had issued aformal Order of Investigation and subpoenaed documents relating to ourfinancial reporting since April 1, 1997, including, in particular, revenuerecognition, software development cost capitalization, royalty costs andclassification of cash receipts.  Wehave submitted documents to the SEC upon the SEC’s request as part of theinvestigation.  It is possible that theSEC could impose civil fines and penalties against us.  An adverse finding against us by the SECcould negatively impact our stock price. In addition, we may continue to incur expenses associated withresponding to this investigation, regardless of its outcome, and this investigationmay divert the efforts and attention of our management team from normalbusiness operations.

 

**We cannot predict our future capital needs and we may not be able tosecure 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 makeacquisitions.  Any required additionalfinancing may not be available on terms favorable to us, or at all.  If adequate funds are not available onacceptable terms, we may be unable to meet our business or strategic objectivesor compete effectively.  If additionalfunds are raised by our issuing equity securities, stockholders may experiencedilution of their ownership interests, and the newly issued securities may haverights superior to those of our common stock. If additional funds are raised by our issuing debt, we may be subject tolimitations on our activities.

 

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

** **

We recently acquired LifeLink and may in the future acquire or makeinvestments in complementary businesses, technologies, services or products ifappropriate opportunities arise.  Theprocess of integrating LifeLink or any other acquired business, technology,service or product into our business and operations may result in unforeseenoperating difficulties and expenditures. Integration of an acquired company also may consume much of ourmanagement’s time and attention that could otherwise be available for ongoingdevelopment of our business.  Moreover,the anticipated benefits of the LifeLink acquisition or any other acquisitionmay not be realized.  Furthermore, wemay be unable to identify, negotiate or finance future acquisitionssuccessfully.  Future acquisitions couldresult in potentially dilutive issuances of equity securities or the incurrenceof debt, contingent liabilities or amortization expenses related to intangibleassets.

 

**We may not be able to continue to develop new products to effectivelyadjust 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.

 

Our segment in the marketplaces in which we operate is characterizedby:

 

•                                          rapidly changing technology;

 

•                                          evolving industry standards;

 

•                                          frequent new product andservice introductions;

 

•                                          shifting distributionchannels; and

 

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•                                          changing customer demands.

 

Our future success will depend on our ability to adapt to this rapidlyevolving marketplace.  We could incursubstantial costs if we need to modify our services or infrastructure in orderto adapt to changes affecting our market, and we may be unable to adapt tothese changes.

 

**The markets for our products are highly competitive and are likely tobecome more competitive, and our competitors may be able to respond morequickly to new or emerging technology and changes in customer requirements.**

 

We operate in highly competitive markets.  In particular, the online insurance distribution market, like thebroader electronic commerce market, is rapidly evolving and highlycompetitive.  Our software business alsoexperiences some competition from certain large hardware suppliers that sellsystems and systems’ components to independent agencies and from small,independent or freelance developers and suppliers of software, who sometimeswork in concert with hardware vendors to supply systems to independentagencies.  Our Internet business mayalso face indirect competition from insurance carriers that have subsidiarieswhich 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 face increasing competition as theonline financial services industry develops and evolves.  Our current and future competitors may beable to:

 

•                                          undertake more extensivemarketing campaigns for their brands and services;

 

•                                          devote more resources towebsite and systems development;

 

•                                          adopt more aggressivepricing policies; and

 

•                                          make more attractive offersto potential employees, online companies and third-party service providers.

 

**If we are unable to protect our intellectual property, our reputationand competitiveness in the marketplace may be materially damaged.**

 

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

 

**If weinfringe on the proprietary rights of others, we may be at a competitivedisadvantage, and any related litigation could 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 us to costly litigation and divert theattention of key personnel.  To theextent that we violate a patent or other intellectual property right of a thirdparty, we may be prevented from operating our business as planned, and we maybe required to pay damages, to obtain a license, if available, to use the rightor to use a non-infringing method, if possible, to accomplish our objectives.

 

**We depend on the continued services of our senior management and ourability 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 services of any of our executive officers or other keyemployees could harm our business.  Wehave no long-term employment agreements with any of our key personnel, nor dowe maintain key man life insurance policies on any of our key employees.

 

Our future success depends on our continuing to attract, retain andmotivate highly skilled employees.  Ifwe are not able to attract and retain new personnel,****our business will be harmed. Competition for personnel in our industry is intense.  We may be unable to retain our key employeesor attract, assimilate or retain other highly qualified employees in thefuture.

 

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**Our international operations are subject to a number of risks thatcould affect our income and growth.**

 

We market our software internationally and plan to expand our Internetservices to locations outside of the United States.  In addition, commencing in 2002, we began development activities,call center services and other operations in India.  Our international operations may not produce enough revenue tojustify our investments in establishing them and are subject to other inherentrisks, including:

 

•                  the impact of recessions in foreign economieson the level of consumers’ insurance shopping and purchasing behavior;

 

•                  greater difficulty incollecting accounts receivable;

 

•                  difficulties and costs ofstaffing and managing foreign operations;

 

•                  reduced protection forintellectual property rights in some countries;

 

•                  seasonal reductions inbusiness activity during the summer months in Europe and other parts of theworld;

 

•                  burdensome regulatoryrequirements, other trade barriers and differing business practices;

 

•                  fluctuations in exchangerates;

 

•                  potentially adverse taxconsequences; and

 

•                  political and economicinstability.

 

Furthermore, our entry into additionalinternational markets requires significant management attention and financialresources, which could lessen our ability to manage our existing businesseffectively.

 

**Laws and regulations that govern the insurance industry could expose usor the agents, brokers and carriers who participate in our online marketplaceto legal penalties.**

** **

We perform functions for licensed insurance agents, brokers andcarriers and are, therefore, required to comply with a complex set of rules andregulations that often vary from state to state.  These rules and regulations can be difficult to comply with and areambiguous and open to interpretation. If we fail to properly interpret and/or comply with these rules andregulations, we, the insurance agents, brokers or carriers doing business withus, our officers, or agents with whom we contract could be subject to varioussanctions, including censure, fines, cease-and-desist orders, loss of licenseor other penalties. This risk, as well as other laws and regulations affectingour business and changes in the regulatory climate or the enforcement orinterpretation of existing law, could expose us to additional costs, includingindemnification of participating insurance agents, brokers or carriers fortheir costs, and could require changes to our business or otherwise harm ourbusiness.  Furthermore, because the applicationof online commerce to the consumer insurance market is relatively new, theimpact of current or future regulations on our business is difficult toanticipate.  To the extent that thereare changes in the rules and regulations regarding the manner in whichinsurance is sold, our business could be adversely affected.

 

**Our call center business could be adversely affected by equipment orsystem interruptions at one or more of our call centers.**

 

Our call center business is dependent upon our ability to protect ourcall centers, including the computer and telecommunications equipment andsoftware systems at those centers, against damage from fire, power loss,telecommunications interruption or failure, natural disaster and other similarevents. In the event we experience a temporary or permanent interruption at oneor more of our call centers, through casualty, operating malfunction orotherwise, our business could be materially adversely affected.

 

**Governmental regulation of the telemarketing industry may increase ourcosts and restrict the operation and growth of our call center business.**

 

The telemarketing industry and, therefore, our call center business aresubject to an increasing amount of governmental regulation.  In particular, telemarketers are now barredfrom contacting persons who have registered their phone numbers on the NationalDo Not Call Registry maintained by the Federal Trade Commission.  We could be subject to a variety ofenforcement or private actions for our failure or the failure of our clients tocomply with these regulations.

 

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Furthermore, our costs may increase as aresult of having to comply with these regulations, and these regulations maylimit our call center activities or reduce the demand for our call centerservices.

 

**The outsourcing of business processes to foreign countries may beperceived negatively, which may reduce the demand for our services and lead togovernmental regulation of these activities.**

 

We enable companies to outsource certain business processes, includingsoftware development activities and call center services, to our operations inIndia.  There have been someincreasingly negative perceptions of the outsourcing of such processes from theU.S. to India, which may reduce the demand for these services and may lead togovernmental regulation affecting such activities.

 

***Risks Related to Our Conduct ofBusiness on The Internet***

 

**Any disruption of our Internet connections could affect the success ofour 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.  Continued growth in Internet usage couldcause a decrease in the quality of Internet connection service.  Websites have experienced serviceinterruptions as a result of outages and other delays occurring throughout theInternet network infrastructure.  Inaddition, there have been several incidents in which individuals haveintentionally caused service disruptions of major e-commerce websites.  If these outages, delays or servicedisruptions frequently occur in the future, usage of our website could growmore slowly than anticipated or decline, and we may lose revenues andcustomers.

 

If the computer hardware operations that host our website were toexperience a system failure, the performance of our website would beharmed.  These systems are alsovulnerable to damage from fire, floods, earthquakes, acts of terrorism, powerloss, telecommunications failures, break-ins and similar events.  Our property and business interruptioninsurance coverage may not be adequate to compensate us for all losses that mayoccur.  In addition, our users depend onInternet service providers, online service providers and other websiteoperators for access to our website. Each of these providers has experienced significant outages in the past,and could experience outages, delays and other difficulties due to systemfailures unrelated to our systems.

 

**Concernsregarding security of transactions or the transmission of confidentialinformation over the Internet or security problems we experience may prevent usfrom expanding our business or subject us to 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 measures that we may take, ourinfrastructure will be potentially vulnerable to physical or electronicbreak-ins, computer viruses or similar problems.  If a person circumvents our security measures, that person couldmisappropriate proprietary information or disrupt or damage our operations.  Security breaches that result in access toconfidential information could damage our reputation and subject us to a riskof loss or liability.  We may berequired to make significant expenditures to protect against or remedy securitybreaches.  Additionally, if we areunable to adequately address our customers’ concerns about security, we mayhave difficulty selling our goods and services.

 

**Uncertainty in the marketplace regarding the use of Internet users’personal information, or proposed legislation limiting such use, could reducedemand for our services and result in increased expenses.**

** **

Concern among consumers and legislators regarding the use of personalinformation gathered from Internet users could create uncertainty in themarketplace.  This could reduce demandfor our services, increase the cost of doing business as a result of litigationcosts or increased service delivery costs, 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.  Many state insurance codes limit thecollection and use of personal information by insurance agencies, brokers andcarriers or insurance service organizations. Moreover, the Federal Trade Commission has settled a proceeding againstone online 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 Internet could place financialburdens 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 and regulations may cover issuessuch as the collection and use of data from website visitors, including theplacing of small information files, or “cookies,” on a user’s hard drive togather information, and

 

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related privacy issues; pricing; taxation;telecommunications over the Internet; content; copyrights; distribution; domainname piracy; and quality of products and services.  The enactment of any additional laws or regulations, includinginternational laws and regulations, could impede the growth of our revenue fromour Internet operations and place additional financial burdens on our business.

 

***Risks Related To Our Common Stock***

 

**The price of our common stock may be extremely volatile.**

** **

In some future periods, our results ofoperations may be below the expectations of public market investors, whichcould negatively affect the market 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 marketprice of our common stock could fluctuate widely due to variations in ourperformance and operating results or because of any of the following factorswhich are, in large part, beyond our control:

 

•                                          announcements of newservices, products, technological innovations, acquisitions or strategicrelationships by us or our competitors;

 

•                                          trends or conditions in theinsurance, software, business process outsourcing and Internet markets;

 

•                                          changes in market valuationsof our competitors; and

 

•                                          general political, economicand market conditions.

 

In addition, the market prices of securitiesof technology companies, including our own, have been volatile and haveexperienced fluctuations that have often been unrelated or disproportionate tooperating performance.  As a result, youmay not be able to sell shares of our common stock at or above the price atwhich you purchase them.  In the past,following periods of volatility in the market price of a company’s securities, securitiesclass action litigation has often been instituted against that company.  If any securities litigation is initiatedagainst us, we could incur substantial costs and our management’s attention andresources could be diverted from our business.

 

**Thesignificant concentration of ownership of our common stock will limit yourability to influence corporate actions.**

 

The concentration of ownership of our commonstock may have the effect of delaying, preventing or deterring a change incontrol of our company, could deprive our stockholders of an opportunity toreceive a premium for their common stock as part of a sale of our company, andmay affect the market price of our common stock.  At May 10, 2004, BRiT Insurance Holdings plc beneficially ownedapproximately 34.0% of our outstanding common stock and, together with ourexecutive officers and directors, beneficially owned approximately 48% of ouroutstanding common stock.  In addition,the Company has been informed that BriT owns approximately 70% of the equityinterests of CF Epic Insurance and General Fund, which at May 10, 2004,beneficially owned approximately 8% of our outstanding common stock.  As a result, those stockholders, if they acttogether, are able to control all matters requiring stockholder approval,including the election of all directors and approval of significant corporatetransactions and amendments to 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.

 

**We may issue equity securities in the future whose terms and rights aresuperior to those of our common stock.**

 

Our certificate of incorporation authorizes the issuance of up to2,000,000 shares of preferred stock.  Noshares of preferred stock are currently outstanding.  However, shares of preferred stock may be issued by our board ofdirectors from time to time in one or more series for the consideration, andwith the rights and preferences, as our board of directors decides. Any sharesof preferred stock that we may issue in the future could be given voting andconversion rights that could dilute the voting power and equity of holders ofshares of our common stock and have preferences over the common stock withrespect to dividends and in liquidation.

 

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**Provisions in our charter and Delaware law may discourage takeoverattempts which could preclude our stockholders from receiving a change ofcontrol premium.**

** **

Our certificate of incorporation could make it more difficult for athird party to acquire control of us, because it gives our Board of Directorsthe ability to issue shares of preferred stock with rights as they deemappropriate without stockholder approval. In addition, Delaware law contains an anti-takeover provision that couldhave the effect of delaying or preventing a change in control that stockholdersmay consider favorable.  This provisionprohibits us from engaging in a business combination with any significantstockholder for a period of three years from the date the person became asignificant stockholder unless specific conditions are met.

 

Item 3.             QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

 

The majority of our operations are based in the U.S. and, accordingly,the majority of our transactions are denominated in U.S. dollars.  However, we have foreign-based operationswhere transactions are denominated in foreign currencies and are subject tomarket risk with respect to fluctuations in the relative value ofcurrencies.  Currently, we haveoperations in Australia, Canada, India, New Zealand and Singapore and conducttransactions in the local currencies of each location.  There can be no assurance that fluctuationsin the value of foreign currencies will not have a material adverse effect onour business, operating results, revenues or financial condition.  To date, the impact of fluctuations in thesecurrencies have resulted in net transaction gains of $10,000 for the threemonths ended March 31, 2004 and losses of $49,000 for the three monthsended March 31, 2003.  Weconsidered the historical trends in currency exchange rate and determined thatit was reasonably possible that adverse changes in exchange rates of 20% forall currencies could be experienced in the near term.  Such adverse changes would have resulted in an adverse impact onincome before taxes of approximately $100,000 and $140,000 for the three monthsended March 31, 2004 and March 31, 2003, respectively.

 

There have been no material changes in the Company’s interest rate riskduring the three months ended March 31, 2004.  For additional information on interest rate risk, refer to the“Quantitative Disclosures About Market Risk” section of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2003.

 

Item 4.             CONTROLS AND PROCEDURES

 

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 theCompany’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that, as of March 31, 2004, theCompany’s disclosure controls and procedures were effective to providereasonable assurance that the information required to be disclosed by theCompany in the reports filed or submitted under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms.

 

Any control system, no matter how well designed and operated, canprovide only reasonable (not absolute) assurance that its objectives will bemet.  Furthermore, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, have beendetected.

 

There have been changes to the Company’s internal control overfinancial reporting during the quarter ended March 31, 2004 in connectionwith the acquisition of LifeLink Corporation and the concurrent assumption ofall LifeLink accounting functions in the Company’s Schaumburg office. TheCompany does not believe that this change has materially affected, or is reasonablylikely to materially affect the Company’s internal control over financialreporting.

 

In connection with the audit of our consolidated financial statementsfor the year ended December 31, 2003, KPMG LLP (“KPMG”) advised ourmanagement and audit committee of reportable conditions related to our internalcontrols.  KPMG recommended that we makecertain operational improvements.  Therecommendations related to improving our internal controls and we have takenaction during 2004 to address KPMG’s recommendations, by reorganizing ourfinance department to better utilize resources.

 

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Part II —OTHER INFORMATION

 

Item 2.  CHANGES IN SECURITIES USE OF PROCEEDSAND ISSUER PURCHASES OF EQUITY SECURITIES

 

On January 16, 2004, the Company sold an aggregate of 222,223shares of its common stock to CF Epic Insurance and General Fund (“CF Epic”),an investment fund located in London, England, for cash in the amount of$3,000,010.50.  The Company sold thesesecurities in a transaction exempt from registration under the Securities Actof 1933 (the “Act”) in reliance upon Section 4(2) of the Act andRegulation D thereunder, as on a transaction not involving a publicoffering.  CF Epic represented inwriting to the Company that it is an “accredited investor” as defined in Rule501(a) of Regulation D under the Act. The Company did not pay any underwriting commissions or discounts orplacement fees in connection with this transaction.

 

On February 23, 2004, the Company issued 200,000 shares of itscommon stock to the shareholder of LifeLink Corporation (“LifeLink”) inconnection with the Company’s acquisition of all the capital stock of LifeLink.The Company sold these securities in a transaction exempt from registration underthe Securities Act of 1933 (the “Act”) in reliance upon Section 4(2) ofthe Act and Regulation D thereunder, as on a transaction not involving a publicoffering.  LifeLink represented inwriting to the Company that it is an “accredited investor” as defined in Rule501(a) of Regulation D under the Act. The Company did not pay any underwriting commissions or discounts orplacement fees in connection with this transaction.

 

Item 5.  OTHER INFORMATION

 

On April 30, 2004, William Baumel, who was chairman of the AuditCommittee of the Company’s Board of Directors, resigned from the Company’sBoard of Directors effective immediately.

 

Item 6.             EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                          Exhibits

 
| 2.1    | Stock Purchase Agreement, dated February 23, 2004, by and among  Ebix, Inc. and the shareholders of LifeLink Corporation (incorporated by  reference to Exhibit 2.1 to the Company’s Current Report of Form 8-K dated  February 23, 2004 (the “February 2004 8-K”) and incorporated herein  by reference). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                     |
| 2.2    | Secured Promissory Note, dated February 23, 2004, issued by the  Company (incorporated herein by reference to Exhibit 2.2 of the  February 2004 8-K and incorporated herein by reference).                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                     |
| 10.1   | Amended and Restated Revolving Line of Credit from LaSalle Bank,  National Association, Amended and Restated Loan and Security Agreement and  Pledge Agreement dated April 21, 2004.                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                     |
| 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).                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                     |
| (b)    | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                      |

 

The Company filed a current report on Form 8-K (pursuant to Items 2 and7 thereof) on February 23, 2004 to report the Company’s acquisition ofLifeLink.

 

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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 17, 2004 | 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**                                                                                                                                                                                                                                                                                                                          |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1             |   | Stock Purchase Agreement, dated February 23, 2004, by and among  Ebix, Inc. and the shareholders of LifeLink Corporation (incorporated by  reference to Exhibit 2.1 to the Company’s Current Report of Form 8-K dated  February 23, 2004 (the “February 2004 8-K”) and incorporated herein  by reference). |
|            |   |                                                                                                                                                                                                                                                                                                                                     |
| 2.2             |   | Secured Promissory Note, dated February 23, 2004, issued by the  Company (incorporated herein by reference to Exhibit 2.2 of the  February 2004 8-K and incorporated herein by reference).                                                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.1*           |   | Amended and Restated Revolving Line of Credit from LaSalle Bank,  National Association, Amended and Restated Loan and Security Agreement and  Pledge Agreement dated April 21, 2004.                                                                                                                                                |
|            |   |                                                                                                                                                                                                                                                                                                                                     |
| 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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