**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                                                  | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**         |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|
|                                                        |
| **For the  quarterly period ended September 30, 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 asspecified in its charter)

 
| **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 reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  Yes ý No o

 

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

 

As of November 11, 2004, the number ofshares of Common Stock outstanding was 2,904,674.

 

 

----

 

**Ebix, Inc.and Subsidiaries**

 

FORM 10-Q

 

FOR THE QUARTER ENDED SEPTEMBER 30,2004

 

INDEX

 
| Part I — FINANCIAL INFORMATION |                                                                                                                           |
|-------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                           |   |
|                                | Item 1.   Consolidated Financial Statements                                                                               |   |
|                                |                                                                                                                           |   |
|                                | Condensed Consolidated Balance Sheets at September 30,  2004 (unaudited) and December 31, 2003                       |   |
|                                |                                                                                                                           |   |
|                                | Condensed Consolidated Statements of Income  for the Three and Nine Months ended September 30, 2004 and 2003  (unaudited) |   |
|                                |                                                                                                                           |   |
|                                | Condensed Consolidated Statements of Cash  Flows for the Nine Months ended September 30, 2004 and 2003 (unaudited)        |   |
|                                |                                                                                                                           |   |
|                                | Notes to Condensed Consolidated Financial  Statements (unaudited)                                                              |   |
|                                |                                                                                                                           |   |
|                                | Item 2.   Management’s Discussion and Analysis of Financial Condition and  Results of Operations                     |   |
|                                |                                                                                                                           |   |
|                                | Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                      |   |
|                                |                                                                                                                           |   |
|                                | Item 4.   Controls and Procedures                                                                                         |   |
|                                |                                                                                                                           |   |
|                                | Item 5. Other Information                                                                                                      |   |
|                                |                                                                                                                           |   |
| PART II — OTHER INFORMATION    |                                                                                                                           |
|                                |                                                                                                                           |
|                                | Item 2. Unregistered Sales of Equity  Securities and Use of Proceeds                                                           |   |
|                                |                                                                                                                           |   |
|                                | Item 6.   Exhibits and Reports on Form 8-K                                                                                |   |
|                                |                                                                                                                           |   |
| SIGNATURES                          |                                                                                                                           |

 

2

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**Ebix, Inc.and Subsidiaries**

**CondensedConsolidated Balance Sheets**

(In thousands, except for shareand per share amounts)

 
| ** **                                                                                                                                                             | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                             | ** ** | **(Unaudited****)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                             |       |                         |       |                        |       |
| **Current  assets:**                                                                                                                                                   |       |                         |       |                        |       |
| Cash and  cash equivalents                                                                                                                                             |       | $                            | 4,556      |                        | $          | 7,915 |   |
| Accounts  receivable, less allowance of $342 and $356, respectively                                                                                                    |       | 3,027                        |       | 1,787                       |       |
| Other  current assets                                                                                                                                                  |       | 878                          |       | 364                         |       |
| **Total current assets**                                                                                                                                               |       | 8,461                        |       | 10,066                      |       |
| Restricted  cash                                                                                                                                                       |       | 3,000                        |       | —                      |       |
| Property and  equipment, net                                                                                                                                           |       | 1,359                        |       | 1,353                       |       |
| Capitalized  software, net                                                                                                                                             |       | 27                           |       | 109                         |       |
| Goodwill                                                                                                                                                               |       | 12,836                       |       | 123                         |       |
| Intangibles,  net                                                                                                                                                      |       | 3,574                        |       | —                      |       |
| Other assets                                                                                                                                                           |       | 411                          |       | 320                         |       |
| **Total  assets**                                                                                                                                                      |       | $                            | 29,668     |                        | $          | 11,971 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                         |       |                         |       |                        |       |
| **Current  liabilities:**                                                                                                                                              |       |                         |       |                        |       |
| Accounts  payable and accrued expenses                                                                                                                                 |       | $                            | 1,620      |                        | $          | 1,778 |   |
| Accrued  payroll and related benefits                                                                                                                                  |       | 650                          |       | 1,287                       |       |
| Current  portion of long term debt                                                                                                                                     |       | 925                          |       | —                      |       |
| Current  portion of capital lease obligations                                                                                                                          |       | —                       |       | 73                          |       |
| Deferred  revenue                                                                                                                                                      |       | 3,158                        |       | 2,141                       |       |
| **Total current liabilities**                                                                                                                                          |       | 6,353                        |       | 5,279                       |       |
| Long term  debt, less current portion                                                                                                                                  |       | 2,693                        |       | —                      |       |
| Line of  credit                                                                                                                                                        |       | 3,500                        |       | —                      |       |
| Redeemable  common stock (357,728 and 0 shares issued and outstanding at September 30,  2004 and December 31, 2003, respectively) stated at redemption price |       | 4,135                        |       | —                      |       |
|                                                                                                                                                                   |       |                         |       |                        |       |
| **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, 2,904,674 and 2,316,767  shares issued and outstanding, respectively                                      |       | 290                          |       | 232                         |       |
| Additional  paid-in capital                                                                                                                                            |       | 92,669                       |       | 88,706                      |       |
| Deferred  compensation                                                                                                                                                 |       | (383                         | )          | (436                        | )          |
| Accumulated  deficit                                                                                                                                                   |       | (80,114                      | )          | (82,251                     | )          |
| Accumulated  other comprehensive income                                                                                                                                |       | 525                          |       | 441                         |       |
| **Total  stockholders’ equity**                                                                                                                                   |       | 12,987                       |       | 6,692                       |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                   |       | $                            | 29,668     |                        | $          | 11,971 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

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**Ebix, Inc.and Subsidiaries**

**CondensedConsolidated Statements of Income**

(In thousands, except per sharedata)

(Unaudited)

 
| ** **                                                                                                                           | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2004**                                  | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                                 |       |                                      |       |                                     |       |   |   |   |   |
| **Revenue:**                                                                                                                         |       |                                      |       |                                     |       |   |   |   |   |
| Software                                                                                                                             |       | $                                         | 174        |                                     | $          | 373 |   | $ | 734 |   | $ | 1,141 |   |
| Services and  other (Including revenues from related parties of $1,004, $1,502, $2,681 and  $2,486, respectively – See Note 5.) |       | 5,482                                     |       | 3,795                                    |       | 13,532 |   | 9,934 |   |
| Total revenue                                                                                                                        |       | 5,656                                     |       | 4,168                                    |       | 14,266 |   | 11,075 |   |
| **Operating  expenses:**                                                                                                             |       |                                      |       |                                     |       |   |   |   |   |
| Services and  other costs                                                                                                            |       | 1,450                                     |       | 1,230                                    |       | 3,967 |   | 3,008 |   |
| Product  development                                                                                                                 |       | 781                                       |       | 408                                      |       | 2,202 |   | 1,198 |   |
| Sales and  marketing                                                                                                                 |       | 431                                       |       | 411                                      |       | 1,127 |   | 1,371 |   |
| General and  administrative                                                                                                          |       | 1,994                                     |       | 1,460                                    |       | 4,678 |   | 3,999 |   |
| **Total operating expenses**                                                                                                         |       | 4,656                                     |       | 3,509                                    |       | 11,974 |   | 9,576 |   |
| **Operating income**                                                                                                                 |       | 1,000                                     |       | 659                                      |       | 2,292 |   | 1,499 |   |
| Interest  income                                                                                                                     |       | 28                                        |       | 22                                       |       | 70 |   | 57 |   |
| Interest  expense                                                                                                                    |       | (105                                      | )          | (4                                       | )          | (108 | ) | (14 | ) |
| Foreign  exchange gain (loss)                                                                                                        |       | (3                                        | )          | 1                                        |       | 5 |   | (56 | ) |
| Income  before income taxes                                                                                                          |       | 920                                       |       | 678                                      |       | 2,259 |   | 1,486 |   |
| Income tax  benefit (expense)                                                                                                        |       | 61                                        |       | (103                                     | )          | (122 | ) | (305 | ) |
|                                                                                                                                 |       |                                      |       |                                     |       |   |   |   |   |
| **Net  income**                                                                                                                      |       | $                                         | 981        |                                     | $          | 575 |   | $ | 2,137 |   | $ | 1,181 |   |
|                                                                                                                                 |       |                                      |       |                                     |       |   |   |   |   |
| **Basic earnings  per common share**                                                                                                 |       | $                                         | 0.34       |                                     | $          | 0.25 |   | $ | 0.78 |   | $ | 0.52 |   |
|                                                                                                                                 |       |                                      |       |                                     |       |   |   |   |   |
| **Diluted  earnings per common share**                                                                                               |       | $                                         | 0.31       |                                     | $          | 0.24 |   | $ | 0.70 |   | $ | 0.51 |   |
|                                                                                                                                 |       |                                      |       |                                     |       |   |   |   |   |
| Basic  weighted average shares outstanding                                                                                           |       | 2,900                                     |       | 2,291                                    |       | 2,742 |   | 2,291 |   |
|                                                                                                                                 |       |                                      |       |                                     |       |   |   |   |   |
| Diluted  weighted average shares outstanding                                                                                         |       | 3,208                                     |       | 2,351                                    |       | 3,064 |   | 2,304 |   |

 

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)

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **2004**                                 | ** ** | **2003** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                     |       |   |   |
| **Cash  flows from operating activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                     |       |   |   |
| Net income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | $                                        | 2,137      |   | $ | 1,181 |   |
| **Adjustments  to reconcile net income to net**** cash provided by operating  activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                     |       |   |   |
| Depreciation  and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 814                                      |       | 315 |   |
| Stock-based  compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 53                                       |       | 27 |   |
| Provision  for doubtful accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 123                                      |       | 7 |   |
| **Changes  in assets and liabilities, net of effect of acquisitions:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                                     |       |   |   |
| Accounts  receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | (628                                     | )          | 914 |   |
| Other assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | (505                                     | )          | (133 | ) |
| Accounts  payable and accrued expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | (210                                     | )          | 213 |   |
| Accrued  payroll and related benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | (847                                     | )          | 520 |   |
| Deferred  revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 340                                      |       | (330 | ) |
| Net cash provided by operating activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 1,277                                    |       | 2,714 |   |
| **Cash  flows from investing activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                     |       |   |   |
| Acquisition  of LifeLink, net of cash acquired                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | (4,763                                   | )          | — |   |
| Acquisition  of Heart, net of cash acquired                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | (3,152                                   | )          |   |   |
| Capital  expenditures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | (170                                     | )          | (454 | ) |
| Net cash used in investing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | (8,085                                   | )          | (454 | ) |
| **Cash  flows from financing activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                     |       |   |   |
| Proceeds  from borrowings related to line of credit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 3,500                                    |       | — |   |
| Restricted  cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | (3,000                                   | )          | — |   |
| Proceeds  from the issuance of common stock, net of issuance costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 2,977                                    |       | — |   |
| Proceeds  from the from exercise of common stock options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 45                                       |       | — |   |
| Principal  payments under capital lease obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | (73                                      | )          | (84 | ) |
| Net cash provided by (used in) financing  activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 3,449                                    |       | (84 | ) |
| Effect of  foreign exchange rates on cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | —                                   |       | 1 |   |
| Net change in cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | (3,359                                   | )          | 2,177 |   |
| Cash and cash equivalents at the beginning  of the period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 7,915                                    |       | 4,993 |   |
| Cash and cash equivalents at the end of the  period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | $                                        | 4,556      |   | $ | 7,170 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                     |       |   |   |
| **Supplemental  disclosures of cash flow information:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                                     |       |   |   |
| Interest  paid                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | $                                        | 43         |   | $ | 14 |   |
| Income taxes  paid                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | $                                        | 342        |   | $ | 40 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                     |       |   |   |
| **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. The Company also capitalized approximately $128,000 of  transaction costs in conjunction with the acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                                     |       |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                     |       |   |   |
| During the  third quarter of 2004, Ebix Australia acquired the operating assets of Heart  Consulting PTY Ltd. in exchange for an aggregate purchase price (in  Australian dollars) of A$10,175,000 ($7,116,000 USD) (based on the exchange  rate as published by the Reserve Bank of Australia on July 1, 2004 of  A$0.6994 per United States Dollar (“USD”)) payable as follows: A$5,175,000  ($3,619,000 USD) in cash at closing, A$2,000,000 ($1,399,000 USD) payable  under stand-by letters of credit issued by the Company’s lender on the  Company’s line of credit in three equal annual installments on each of the  first, second and third anniversaries of the closing (the “Deferred Payments”),  and A$3,000,000 ($2,098,000 USD) payable in 157,728 shares of common stock of  Ebix issued at the closing. The Company also capitalized approximately $106,000  of transaction costs in conjunction with the acquisition. |       |                                     |       |   |   |

 

See accompanying notes to condensed consolidated financial statements.

 

5

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Ebix, Inc. and Subsidiaries

NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 July 1, 2004, Ebix Australia Pty Ltd. (“Ebix Australia”), asubsidiary of Ebix, Inc., acquired certain of the operating assets of HeartConsulting Pty Ltd. located in Melbourne, Australia (“Heart”) pursuant to apurchase agreement dated June 28, 2004, by and between Ebix Australia andHeart (see note 8).

 

On February 23, 2004, the Company acquired LifeLink Corporation (“LifeLink”).Under terms of the agreement, the Company acquired all of the outstandingcapital stock of LifeLink from its shareholders in exchange for an aggregatepurchase price of $10,354,000 (see note 7). The acquisition was accounted foras 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 periods are notnecessarily indicative of results to be expected for the entire current year.

 

**Summary of significant accounting policies—**

 

**Revenue Recognition**—The Company applies the provisions ofStatement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amendedby Statement of Position 98-9, “Modification of SOP 97-2, Software RevenueRecognition, With Respect to Certain Transactions,” to all transactionsinvolving the sale of software.

 

InMay 2003, the Financial Accounting Standards Board (“FASB”) finalized theterms of Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangementswith Multiple Deliverables,” (“EITF 00-21”), which provides criteria governinghow to identify whether goods or services that are to be delivered separatelyin a bundled sales arrangement should be accounted for separately. Deliverablesare accounted for separately if they meet all of the following: a) thedelivered items have stand-alone value to the customer; b) the fair valueof any undelivered items can be reliably determined; and c) if thearrangement includes a general right of return, delivery of the undelivereditems is probable and substantially controlled by the seller. The Companyadopted EITF 00-21 on July 1, 2003 for all new revenue arrangementsexecuted subsequent to June 30, 2003 (or significant modification toarrangements existing prior to July 1, 2003).  The Company’s current policy is to analyzeall new revenue arrangements.

 

To the extent arrangements contain multipledeliverables, the Company performs an analysis of the nature of thedeliverables to determine to what extent the deliverables of the arrangementare governed by any higher level literature (as defined in EITF 00-21).  EITF 00-21 recognizes arrangements thatqualify for treatment under SOP 97-2 and certain arrangements that qualify forcontract accounting (i.e. SOP 81-1) as falling under the definition of “higherlevel literature”.  The Company appliesthe provisions of SOP 97-2, as amended by Statement of Position 98-9, to allarrangements which include software deliverables that are considered more thaninconsequential to the other elements in the arrangements.  For 2004, all of the Company’s contracts withmultiple deliverables have fallen under higher level accounting literatureunder the provisions of SOP 97-2 and/or SOP 81-1.

 

Although theCompany has not been impacted in the current year by the adoption of EITF00-21, it is possible that EITF 00-21 may affect future periods given theadditional revenue streams the Company has initiated, as well as through theacquisition activities of the Company.

 

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 derivedfrom the licensing of third party software products in connection with sales ofthe Company’s software licenses and is recognized upon delivery together withthe Company’s license revenue.

 

6

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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 undeliveredelement based on the price charged for the sale of each elementseparately.  In contracts that containfirst year maintenance bundled with software fees, unbundling of maintenance isbased on the price charged for renewal maintenance. Revenue for maintenance andsupport service 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 addition, all costs incurred in connection with these contracts havebeen expensed, as the Company has been unable to estimate the total costs toachieve customer acceptance.

 

Revenues (including monthly fees as well asany initial registration fees and related custom programming) related tohosting arrangements, including EbixASP, are recognized ratably over the termof the agreement, in accordance with Staff Accounting Bulletin (“SAB”) 104, “RevenueRecognition.”  Ebix.mall transaction feesare recognized as revenue as the transactions occur and revenue is earned.  Revenue is only recognized when collectiblityis reasonably assured.

 

LifeLink revenues are derived from software license fees, maintenancefees and software set-up fees.  Licensefees and maintenance are included in a single monthly fee, which is recognizedover the life of the contract, typically one year.  No revenue is recognized until software setup is complete and end users are actually using the software. Set up feerevenue is recognized over the life of the contract.

 

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. The Company currently has no suchagreements in effect.

 

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

 

**Stock Options -**At September 30,2004, the Company had three stock-based employee compensation plans. TheCompany accounts for stock options issued to employees in accordance withAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees.” The Company has adopted the disclosure only provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 123, “Accountingfor Stock-Based Compensation,” for options issued to employees, as well as therequirements of SFAS No. 148, “Accounting for Stock Based Compensation —Transition and Disclosure.” Under APB Opinion No. 25, compensation expenseis recorded based on the difference, if any, on the measurement date, betweenthe estimated fair value of the Company’s stock and the exercise price ofoptions to purchase that stock. Any resulting compensation expense is amortizedon a straight-line basis over the vesting period of the options.

 

7

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

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended**       | ** ** | **Nine Months Ended**        | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** |
|                                                                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Net income,  as reported                                                                                                                      |       | $                            | 981,000    |                         | $          | 575,000 |   | $ | 2,137,000 |   | $ | 1,181,000 |   |
| Add:  Stock-based employee compensation expense included in reported net income,  net of related tax effects                                  |       | 5,000                        |       | 3,000                        |       | 14,000 |   | 3,000 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair-value  based method for all awards, net of related tax effects |       | (247,000                     | )          | (171,000                     | )          | (888,000 | ) | (516,000 | ) |
| Pro forma  net income                                                                                                                         |       | $                            | 739,000    |                         | $          | 407,000 |   | $ | 1,263,000 |   | $ | 668,000 |   |
|                                                                                                                                          |       |                         |       |                         |       |   |   |   |   |
| Basic  earnings per share, as reported                                                                                                        |       | $                            | 0.34       |                         | $          | 0.25 |   | $ | 0.78 |   | $ | 0.52 |   |
| Diluted  earnings per share, as reported                                                                                                      |       | $                            | 0.31       |                         | $          | 0.24 |   | $ | 0.70 |   | $ | 0.51 |   |
| Basic  earnings per share, pro forma                                                                                                          |       | $                            | 0.25       |                         | $          | 0.18 |   | $ | 0.46 |   | $ | 0.29 |   |
| Diluted  earnings per share, pro forma                                                                                                        |       | $                            | 0.23       |                         | $          | 0.17 |   | $ | 0.41 |   | $ | 0.29 |   |

 

**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. 123 establishesa fair value-based method of accounting for stock-based compensation plans.Under the fair-value based method, compensation cost is measured at the grantdate based on the value of the award, which is calculated using an optionpricing model, and is recognized over the service period, which is usually thevesting period.

 

Note 2.  STOCK OPTIONS

 

During the first quarter of 2004, the Company did not grant any stockoptions.  During the second quarter of2004, the Company granted options to purchase 61,500 shares of common stock toemployees and a director of the Company. During the third quarter of 2004, theCompany granted options to purchase 4,500 shares of common stock to directorsof the Company.  These options weregranted at prices equal to 100 percent of the market price on the date ofgrant.  The options have a four-yearvesting period and must be exercised within ten years of the date of thegrant.  For the options granted toemployees, vesting accelerates if a net income performance target is achieved.

 

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 at September 30,2004.  These options were granted atprices equal to 100 percent of the market price on the date of grant.  The options have a four-year vesting periodand must be exercised within ten years of the date of the grant. Thesenon-employee options were valued using the fair value method as prescribed bySFAS No. 123. 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, butvesting accelerates if a performance target is achieved.  At September 30, 2004, non-employeeoptions to purchase 8,320 shares were vested. The Company recognizedcompensation expense of approximately $1,000 related to these options duringthe three-month periods ended September 30, 2004.  The Company recognized a credit tocompensation expense of approximately $1,000 related to these options duringthe three-month period ended September 30, 2003.  The Company recognized compensation expenseof approximately $36,000 and $23,000 related to these options during thenine-month periods ended September 30, 2004 and September 30, 2003,respectively.

 

On August 11, 2003, the Company granted options to purchase theCompany’s common stock to an employee who is the brother of the Chief ExecutiveOfficer, in connection with his joining the Company as an employee.  The option grantee was an employee when hereceived the grant.  The options vest over four years from the dateof grant, expire ten years from the date of grant, and were issued with anexercise price below the fair market value of the stock on the date ofgrant.  This grant was not subject to anyof the Company’s stock option plans.  Thetotal intrinsic value associated with the granting of options was $96,250,which is being recognized ratably as compensation expense over the four- yearvesting period in accordance with APB Opinion No. 25.  The Companyrecognized compensation expense of approximately $6,000 and $18,000,respectively, related to these options during the three and nine months periodended September 30, 2004.

 

8

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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 and ninemonths-ended September 30, 2004 were 2,900,000 and 2,742,000,respectively. The weighted average number of shares outstanding for both the threeand nine months-ended September 30, 2003 were 2,291,000. Diluted EPS iscalculated as if the Company had additional common stock outstanding from thebeginning of the year or the date of grant for all common stock equivalents,net of assumed repurchased shares using the treasury stock method.  Diluted EPS recognizes the dilutive effect ofcommon stock equivalents and is equal to net income divided by the sum of theweighted average number of shares outstanding and common stock equivalents. Forthe three and nine months ended September 30, 2004 and September 30,2003, the Company’s common stock equivalents consisted of stock options.  For the three and nine months ended September 30,2004, the effect of this calculation resulted in an increase in the weightedaverage number of shares outstanding of 308,000 and 322,000, respectively.  For the three and nine months ended September 30,2004, the fully diluted weighted average number of shares outstanding was3,208,000 and 3,064,000, respectively. For the three and nine months ended September 30, 2003, the effectof this calculation resulted in an increase in the weighted average number ofshares outstanding of 60,000 and 13,000, respectively. For the three and ninemonths ended September 30, 2003, the fully diluted weighted average numberof shares outstanding was 2,351,000 and 2,304,000, respectively. At September 30,2004, there were 393,000 shares potentially issuable with respect to stockoptions, which could dilute EPS in the future but which were excluded from thediluted EPS calculation because their effect was antidilutive.

 

Note 4.  COMPREHENSIVE INCOME

 
| ** **                                                                 | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                 | ** ** | **2004**                                  | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                       |       |                                      |       |                                     |       |   |   |   |   |
| Net income                                                                 |       | $                                         | 981,000    |                                     | $          | 575,000 |   | $ | 2,137,000 |   | $ | 1,181,000 |   |
| Other  comprehensive income – foreign currency translation adjustment |       | 57,000                                    |       | 73,000                                   |       | 84,000 |   | 1,000 |   |
| Comprehensive  income                                                      |       | $                                         | 1,038,000  |                                     | $          | 648,000 |   | $ | 2,221,000 |   | $ | 1,182,000 |   |

 

Note 5.  RELATED PARTY ANDSIGNIFICANT CUSTOMER TRANSACTIONS

 

In 2001, the Company issued 868,000 shares of its common stock to BRiTInsurance Holdings PLC (“BRiT”) for $7,000,000. The total number of shares heldby BRiT at September 30, 2004 was 930,163, representing an equityownership of approximately 32%.  At September 30,2004, BRiT owned approximately 70% of CF Epic Insurance and General Fund, whichowned approximately 8% of our common stock.

 

The Company has entered into various software and service agreementswith BRiT. During the third quarter of 2004 and 2003, approximately $1,004,000and $1,502,000, respectively, was recognized as services revenue from BRiT andits affiliates.  During the nine monthsended September 30, 2004 and 2003, approximately $2,681,000 and $2,486,000,respectively, was recognized as services revenue from BRiT and itsaffiliates.  Total accounts receivablefrom BRiT and its affiliates at September 30, 2004 and December 31, 2003were $547,000 and $369,000, respectively.

 

During the third quarter of 2004 and 2003, approximately $326,000 and$478,000, respectively was recognized from another significant customer, AON.  During the nine months ended September 30,2004 and 2003, approximately $1,395,000 and $1,274,000, respectively, wasrecognized as service revenue from AON.  Total accounts receivable from AON at September 30,2004 and December 31, 2003 were $353,000 and $192,000, respectively.

 

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 (“CF Epic”), an investment fund located in London, BRiT ownedapproximately 70% of the equity interests of CF Epic at September 30,2004, for a total price of $3,000,010, or $13.50 per share.

 

9

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Note 7.  ACQUISITION OF LIFELINK

 

On February 23, 2004, the Company acquired LifeLink Corporation (“LifeLink”),and the operations of LifeLink have been included in the Company’s financialstatements since that date. Under terms of the agreement, the Company acquiredall of the outstanding capital stock of LifeLink from its shareholders inexchange for an aggregate purchase price of $10,354,000, payable as follows:$5,000,000 paid in cash at closing, $2,500,000 in a non-interest bearing notepayable in cash in annual installments of $500,000 over five years (presentvalue computed as $2,226,000), and $3,000,000 payable in 200,000 shares of thecommon stock of the Company issued at the time of closing.  The Company also capitalized approximately$128,000 of transaction costs in conjunction with the LifeLink acquisition. Inconnection with the 200,000 shares of common stock issued subject to Rule 144,the former shareholder received from Ebix the option to sell his stock back toEbix subject to specified time frames and prices.

 

The Company has classified $2,700,000 of the value of the common stockissued as temporary equity, “redeemable common stock,” in the condensedconsolidated balance sheet due to the existence of the holder’s embedded putoption. At any time during the one month period commencing on the date which is18 months after February 23, 2004 and ending 19 months after February 23,2004, the holder of the redeemable common stock has a one-time right to requirethe Company to purchase all of the holder’s 200,000 shares originally issued ata price 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 September 30, 2004, the holder had not sold any shares ofcommon stock received from this transaction.

 

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

 
| Current assets             |   | $          | 1,199,000  |   |
|----------------------------|--------|------------|------------|--------|
| Property and  equipment    |   | 119,000    |       |
| Intangible  assets         |   | 3,518,000  |       |
| Goodwill                   |   | 5,989,000  |       |
| Total assets  acquired     |   | 10,825,000 |       |
| Current  liabilities       |   | 471,000    |       |
| Total  liabilities assumed |   | 471,000    |       |
| Net assets  acquired       |   | $          | 10,354,000 |   |

 

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 $144,000 and $347,000 of amortization expense related to these intangible assets for thethree and nine-month periods ended September 30, 2004, respectively.

 

**Estimated Amortization Expenses:**

 
| For the year ending December 31,  2004 |   | $ | 491,000 |   |
|---------------------------------------------|--------|---|---------|--------|
| For the year  ending December 31, 2005 |   | $ | 575,000 |   |
| For the year  ending December 31, 2006 |   | $ | 575,000 |   |
| For the year  ending December 31, 2007 |   | $ | 575,000 |   |
| For the year  ending December 31, 2008 |   | $ | 575,000 |   |
| Thereafter                                  |   | $ | 727,000 |   |

 

10

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Note 8**–**ACQUISITIONOF HEART

 

On July 1, 2004, Ebix Australia Pty Ltd, which is a wholly-ownedsubsidiary of the Company, acquired certain of the operating assets of HeartConsulting Services Pty Ltd (“Heart”), and the operations of Heart have beenincluded in the Company’s financial statements since that date. Under terms ofthe agreement, the Company acquired the operating assets of Heart in exchangefor an aggregate purchase price of $7,116,000 payable as follows: $3,619,000paid in cash at closing (subsequent to closing the former owner paid $467,000for deferred revenue and vacation accrual settlement), $1,399,000 payable understand-by letters of credit issued by the Company’s lender on the Company’s lineof credit in three equal annual installments on each of the first, second andthird anniversaries of the closing (present value computed as $1,293,000), and$2,098,000 payable in 157,728 shares of the common stock of the Company issuedat the time of closing.  The Company alsocapitalized approximately $106,000 of transaction costs in conjunction with theHeart acquisition. In connection with the 157,728 shares of common stock issuedsubject to Rule 144, the former owners received from Ebix the option to sellhis stock back to Ebix subject to specified time frames and prices.

 

The Company has classified $1,399,000 of the value of the common stockissued as temporary equity, “redeemable common stock,” in the condensedconsolidated balance sheet due to the existence of the holder’s embedded putoption. At any time during the one month period commencing January 3, 2006and ending February 3, 2006, the holder of the redeemable common stock hasa one-time right to require the Company to purchase all of the holder’s 157,728shares originally issued at a price of $1,399,000 minus the aggregate purchaseprice received by the holder from any sales of these shares of common stockprior to the exercise of the put option. As of September 30, 2004, theholder had not sold any shares of common stock received from this transaction.

 

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

 
| Current assets             |   | $         | 467,000   |   |
|----------------------------|--------|-----------|-----------|--------|
| Property and  equipment    |   | 43,000    |      |
| Intangible  assets         |   | 450,000   |      |
| Goodwill                   |   | 6,724,000 |      |
| Total assets  acquired     |   | 7,684,000 |      |
| Current  liabilities       |   | 467,000   |      |
| Total  liabilities assumed |   | 467,000   |      |
| Net assets  acquired       |   | $         | 7,217,000 |   |

 

Of the $450,000 of intangibleassets acquired the entire amount was assigned to information technology with aremaining estimated useful life of two years. The Company recorded $58,000 of amortization expense related to theseintangible assets for the three and nine-month periods ended September 30,2004, respectively.

 

**Estimated Amortization Expenses:**

 
| For the year ended December 31,  2004 |   | $ | 112,500 |   |
|--------------------------------------------|--------|---|---------|--------|
| For the year  ended December 31, 2005 |   | $ | 225,000 |   |
| For the year  ended December 31, 2006 |   | $ | 112,500 |   |

 

Note 9. - PRO FORMA FINANCIALS

 

The following unaudited pro forma financial information for the threemonths ended September 30, 2003 and nine months ended September 30,2004 and September 30, 2003 presents the consolidated operations of theCompany as if the LifeLink and Heart acquisitions had been made on January 1,2003, after giving effect to certain adjustments for the pro forma acquisitionas of the acquisition date.  Theunaudited pro forma financial information is provided for informational purposesonly and does not project the Company’s results of operations for any futureperiod:

 
|                        |   | **Three Months  Ended September** |      | **Nine Months Ended  September 30,** |       |
|-----------------------------|--------|-----------------------------------|-----------|-------------------------------------------|------------|
|                        |   | **30, 2003**                      |      | **2004**                                  | ** ** | **2003** |   |
|                        |   |                              |      |                                      |       |   |   |
| Revenue                     |   | $                                 | 6,092,000 |                                      | $          | 16,370,000 |   | $ | 16,848,000 |   |
| Net income                  |   | 616,000                           |      | 2,364,000                                 |       | 1,302,000 |   |
|                        |   |                              |      |                                      |       |   |   |
| Basic  earnings per share   |   | $                                 | 0.23      |                                      | $          | 0.82 |   | $ | 0.49 |   |
| Diluted  earnings per share |   | $                                 | 0.23      |                                      | $          | 0.74 |   | $ | 0.49 |   |

 

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Note 10—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. Major features of the line, as amended, include an interest rate statedat prime, security at 60% of the amount of the line in a restricted interestbearing account and timely financial reporting requirements.  The line of credit will expire on October 31,2005.  As of September 30, 2004total borrowings on this line were $3,500,000 of which $3,000,000 is restrictedfrom use in accordance with the line of credit agreement.  The agreement provides that the line issecured by substantially all of the Company’s assets.  The Company is subject to certain otherfinancial covenants and was in compliance with them, or has received a waiverfrom the lender for non-compliance, as of September 30, 2004.

 

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

 

The following information should be read in conjunction with the unauditedcondensed consolidated financial statements and the notes thereto included inPart 1, Item 1, of this Quarterly Report, and the audited consolidatedfinancial statements and notes thereto and Management’s Discussion and Analysisof Financial Condition and Results of Operations contained in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2003.  See “Safe Harbor for Forward-LookingStatements under the Securities Litigation Reform Act of 1995” below.

 

**Overview**

 

The Company’s future focus will continue to be on developing consistentand recurring revenue sources with a concentration in (1) software developmentfor insurance carriers, agents and brokers, (2) expansion of connectivitybetween consumers, 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.  Thisdevelopment of recurring revenue sources will be accomplished through thepreviously mentioned four initiatives in addition to identifying andnegotiating for strategic synergistic acquisition targets such as the recentlycompleted acquisitions of LifeLink and Heart.

 

Support revenue from legacy products is expected to decline in thefuture as current customers switch to other technologically advanced systems(including Ebix ASP) see discussion below.

 

**Critical Accounting Policies**

 

The Company’s “critical accounting policies” are those that requireapplication of management’s most difficult, subjective or complex judgments,often as a result of the need to make estimates about matters that areinherently uncertain and may change in future periods. The Company hasidentified the following as its critical accounting policies: revenuerecognition, estimating the allowance for doubtful accounts receivable andaccounting for income taxes. For a discussion of these policies, see “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Critical Accounting Policies” in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2003.

 

**Results of Operations**

 

**Three-Month Period Ended September 30,2004 Compared to the Three-Month Period Ended September 30, 2003**

 

**Total Revenue** - TheCompany’s revenue has been derived from the licensing and sale of proprietarysoftware and third party software (“Software”) and from professional servicesand support services (“Services”). Services include consulting, implementation,training and project management provided to the Company’s customers withinstalled systems and those in the process of installing systems. Also includedin Services are fees for software license maintenance, LifeLink services, Heartservices, initial registration and ongoing monthly subscription fees for theEbixASP product and transaction fees generated from the Ebix.mall website, aswell as software development and call center revenue. Total revenue for thequarter ended September 30, 2004 increased $1,488,000, or 35.7%, to$5,656,000 from $4,168,000 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 third quarterof 2004 decreased $199,000, or 53.4%, to $174,000 from $373,000 for thecomparable quarter of the prior year. This decrease was due to a decrease in international software licenserevenue of 52% in third quarter 2004 compared to the third quarter 2003 due tothe timing of revenues from international customers.

 

12

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**Services Revenue** —Total services revenue for the third quarter of 2004 increased $1,687,000, or44.5%, to $5,482,000 from $3,795,000 for the comparable quarter of the prioryear.  This increase was due to LifeLinkrevenue of approximately $1,286,000, Heart revenue of approximately $925,000,an increase in consulting service revenue of $397,000 and an increase inEbix.mall transaction fees of $64,000 partially offset by a decrease in supportrevenue associated with legacy products of $153,000, a decrease in call centerrevenue of $205,000, a decrease in INS-Site revenue of $71,000 and a decreasein EbixASP revenue of $556,000.

 

During the third quarter of 2004 and 2003, approximately $1,004,000 and$1,502,000, respectively was recognized as services revenue from BRiT InsuranceHoldings PLC (“BRiT”) and its affiliates. The amounts represented 18% and 36%, respectively, of the Company’stotal revenues for the third quarter of 2004 and 2003, respectively. Revenuesfrom BRiT Holdings PLC and its affiliates decreased in the third quarter of2004 compared to the third quarter of 2003 as a result of the timing of thedevelopment projects of BRiT and its affiliates.  BRiT owned approximately 32% of the Company’scommon stock as of September 30, 2004. In addition, the Company has been informed that as of September 30,2004, BRiT owned approximately 70% of the equity interests of CF Epic Insuranceand General Fund, which at September 30, 2004 owned approximately 8% ofthe Company’s outstanding common stock.

 

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

 
| ** **             | ** ** | **Support  Revenue** | ** ** | **Total  Revenue** | ** ** |
|------------------------|------------|----------------------|------------|--------------------|------------|
|                   |       |                 |       |               |       |
| Third  quarter of 2004 |       | $                    | 821,000    |               | $          | 5,656,000 |   |
| Third  quarter of 2003 |       | $                    | 973,000    |               | $          | 4,168,000 |   |

 

Support revenue decreased $152,000, or 16%, and as a percentage oftotal revenue to 15% from 23%, in the third quarter of 2004 compared to thethird quarter of 2003.

 

Based on historical data, the Company expects that legacy supportrevenue will continue to decrease by approximately 20% each year on a decliningbalance.  The Company expects the legacysupport revenue will continue as long as it is economically feasible for theCompany to maintain and support the legacy products.  As revenue from the legacy support decreases,costs will be reduced. When income from legacy support falls below break even,operations will be reviewed to determined if costs can be further reduced forthe activity to be profitable and if not, we plan to discontinue supporting thelegacy products. We cannot predict when this will occur.

 

The Company expects that future servicesrevenue will be derived from this support, as well as EbixASP registration andmonthly fees, software development and call center and, to a much lesser extentall transaction revenues from Ebix.mall, EbixExchange (INS-Site), conversionand training.

 

**Services and other costs**-Cost of services includes costs associated with support, call center,consulting, implementation and training services.  Total services and other costs for thequarter increased $220,000, or 17.9%, to $1,450,000 from $1,230,000 for thecomparable quarter of the prior year. This increase was due to an increase in payroll expenses related to theacquisitions of LifeLink of $120,000 and Heart of $115,000, an increase infacility costs (which are allocated to each department based on headcount)allocated to services and other costs as a result of the increase in headcountrelated to the acquisition of LifeLink of $17,000, an increase in internationalservice costs of $178,000 and an increase in support fees of $142,000,partially offset by a decrease in costs incurred in the third quarter of 2003of $314,000 related to a project that costs were deferred during the secondquarter of 2003 and realized in third quarter 2003 and a decrease innon-LifeLink and Heart payroll of $38,000.

 

**Product Development Expenses**-Total product development expenses for the third quarter of 2004, increased$373,000, or 91.4%, to $781,000 from $408,000 for the comparable quarter of theprior year. This increase was primarily due to an increase in payroll expensesrelated to the acquisition of LifeLink of $290,000 and annual salary increasesof $46,000.  In addition, facility costsincreased $37,000 as a result of an increase in headcount.

 

**Sales and Marketing Expenses**-Total sales and marketing expenses for the third quarter of 2004 increased$20,000, or 4.9%, to $431,000 from $411,000 for the comparable quarter of theprior year.  This increase wasattributable to an increase in payroll expenses related to the acquisition onLifeLink of $83,000, an increase in travel and entertainment of $11,000, andincrease in international expenses of $6,000 and an increase in office expensesof $3,000 partially offset by a decrease in non-LifeLink related payrollexpense of $44,000, reduced marketing spending of $25,000 and a decrease infacility costs of $14,000.

 

**General and Administrative Expenses**—Total general and administrative expenses for the quarter increased $534,000,or 36.6%, to $1,994,000 from $1,460,000 for the comparable quarter of the prioryear.  This increase was due to anincrease in audit and legal expenses of $144,000, bad debt expense of $101,000,employee benefits of $89,000 and charge for amortization of intangibles relatedto the LifeLink acquisition of $144,000 and Heart acquisition of $56,000.

 

**Interest Expense —**Totalinterest expense for the quarter increased $101,000 to $105,000 from $4,000 forthe comparable quarter of the prior year. This increase was due to $52,000 of imputed interest related to theLifeLink note payable, $40,000 of interest related to the line of credit and$13,000 of imputed interest related to the Heart note payable partially offsetby a decrease in international interest expense of $4,000.

 

**Income tax benefit (expense) –**Total income tax benefit increased $164,000 to $61,000 of benefit from expenseof $103,000 from the comparable quarter of the prior year.  This increase in benefit was due to a changein the effective tax rate on a consolidated basis primarily as a result of theimpact of the LifeLink and Heart acquisitions.

 

13

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**Nine-Month Period Ended September 30,2004 Compared to the Nine-Month Period Ended September 30, 2003**

 

**Total Revenue** -Total revenue for the nine-month period ended September 30, 2004 increased$3,191,000, or 28.8%, to $14,266,000 from $11,075,000 for the comparable periodof the prior year.

 

**Software Revenue** -Total software revenue for the nine-month period ended September 30, 2004decreased $407,000, or 35.7%, to $734,000 from $1,141,000 for the comparableperiod of the prior year. This decrease was due to a decrease in internationalsoftware license revenue of 46% in the nine-month period ended September 30,2004 compared to the nine-month period ended September 30, 2003 due to thetiming of revenues from international customers.

 

**Services Revenue** —Total services revenue for the nine-month period ended September 30, 2004increased $3,598,000, or 36.2%, to $13,532,000 from $9,934,000 for thecomparable period of the prior year. This increase was due to LifeLink revenue of approximately $3,198,000,Heart revenue of $925,000, an increase in consulting services of $1,042,000,and an increase in Ebix.mall transaction revenue of $108,000, partially offsetby a decrease in support revenue associated with legacy products of $683,000, adecrease in EbixASP revenue of $235,000, a decrease in call center revenue of$502,000 and a decrease in INS-Site revenue of $255,000.

 

During the nine-month periods ended September 30, 2004 and 2003,approximately $2,681,000 and $2,486,000, respectively, was recognized asservices revenue from BRiT and its affiliates. The amounts represented 19% and 22% of the Company’s total revenues forthe nine- month periods ended September 30, 2004 and 2003, respectively,and the increase in such revenues of $195,000 represented 16% of the totalincrease in the Company’s revenues for the nine month period ended September 30,2004 compared to the same period of 2003.

 

Support revenue associated with the Company’s legacy products isdecreasing as discussed above due to a trend of declining renewals for theseolder product offerings.

 
| ** **                                 | ** ** | **Support  Revenue** | ** ** | **Total  Revenue** | ** ** |
|--------------------------------------------|------------|----------------------|------------|--------------------|------------|
|                                       |       |                 |       |               |       |
| Nine months  ended September 30, 2004 |       | $                    | 2,560,000  |               | $          | 14,266,000 |   |
| Nine months  ended September 30, 2003 |       | $                    | 3,243,000  |               | $          | 11,075,000 |   |

 

Support revenue decreased $683,000, or 21%, and as a percentage oftotal revenue to 18% from 29%, for the nine-month period ended September 30,2004 compared to the same period in 2003.

 

**Services and other costs**-Total services and other costs for the nine-month period ended September 30,2004 increased $959,000, or 31.9%, to $3,967,000 from $3,008,000 for thecomparable period of the prior year. This increase was due to an increase in payroll expenses related to theacquisition of LifeLink of $367,000, annual salary increases of $20,000, anincrease in facility costs (which are allocated to each department based onheadcount) allocated to services and other costs of $51,000 as a result of theincrease in headcount related to the acquisition of LifeLink, an increase ininternational services and other costs of $333,000 and an increase in supportfees of $173,000 and an increase in office supplies of $15,000.

 

**Product Development Expenses**-Total product development expenses for the nine-month period ended September 30,2004 increased $1,004,000, or 83.8%, to $2,202,000 from $1,198,000 for thecomparable period of the prior year. This increase was due to an increase inpayroll expenses related to the acquisition of LifeLink of $736,000, annualsalary increases of $118,000, an increase in headcount in India of $61,000 andincreased facility costs of $89,000 as a result of increases in headcount.

 

**Sales and Marketing Expenses**-Total sales and marketing expenses for the nine-month period ended September 30,2004 decreased $244,000, or 17.8%, to $1,127,000 from $1,371,000 for thecomparable period of the prior year. This decrease was attributable to a decrease in payroll and relatedexpenses of $88,000 and a decrease in facility costs of $100,000 as a result ofthe decreases in headcount, and reduced marketing spending of $88,000,partially offset by an increase in international sales and marketing expensesin of $32,000.

 

**General and Administrative Expenses**—Total general and administrative expenses for the nine-month period ended September 30,2004 increased $679,000, or 17.0%, to $4,678,000 from $3,999,000 for thecomparable period of the prior year. This increase was due to an increase in international expenses of$244,000, Heart expenses of $201,000, an increase in employee benefits of$89,000 and a charge for amortization of intangibles related to the LifeLinkacquisition of $347,000 and the Heart acquisition of $56,000, partially offset bya decrease in office expense of $126,000 and a decrease in payroll and benefitsof $132,000.

 

**Interest Expense —**Totalinterest expense for the period increased $94,000 to $108,000 from $14,000 forthe comparable period of the prior year. This increase was due to $52,000 of imputed interest related to theLifeLink notes payable, $40,000 of interest related to the line of credit and$13,000 of imputed interest related to the Heart note payable partially offsetby a decrease in international interest expense of $11,000.

 

**Income tax benefit (expense) –**Total income tax expense decreased $183,000 to $122,000 from $305,000 from thecomparable period of the prior year. This decrease was due to a change in the effective tax rate on aconsolidated basis primarily as a result of the impact of the LifeLink andHeart acquisitions.

 

14

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**Liquidity and Capital Resources**

 

As of September 30, 2004 the Company had cash and cash equivalentsof $4,556,000 net of $3,000,000 in restricted cash. Total cash and cashequivalents at November 11, 2004 including restricted cash of $3,000,000was $8,025,000.

 

During the first nine months of 2004, the Company generated operatingcash flows of $1,277,000, due primarily to $2,137,000 in net income, partiallyoffset by an increase in accounts receivable and a decrease in accrued payrolland related benefits.  The decrease inaccrued payroll and related benefits is related to bonuses, which were accrued in2003 and paid in the second quarter of 2004. The accounts receivable increase is primarily due to BRiT and itsaffiliates, which had $547,000 of accounts receivable outstanding at September 30,2004. These balance sheet fluctuations are normal consequences of timingdifferences between accruals and their cash settlement.

 

For the nine-month period ended September 30, 2004, 19% and 10% ofthe Company’s total revenues were from two customers – BRiT (including itsaffiliates) and AON, respectively. Neither BRiT and its affiliates nor AON have long-term agreements withthe Company that provide certainty that such revenues will be recurring.

 

Cash used in investing activities of $8,085,000 in the nine monthsended September 30, 2004 represented expenditures made primarily as aresult of the Company’s acquisitions of LifeLink and Heart.  Cash provided by financing activities of$3,449,000 resulted primarily from the Company’s sale of common stock duringthe first quarter of 2004 of $2,977,000 and borrowings of $3,500,000 on theCompany’s existing line of credit during the second quarter of 2004 partiallyoffset by the restricted cash required for the line of credit of $3,000,000.

 

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 owned approximately 70% of the equity interestsas of September 30, 2004, for gross proceeds of $3,000,010, or $13.50 pershare. On February 23, 2004 the Company acquired LifeLink. Under terms ofthe agreement, the Company acquired all of the outstanding capital stock ofLifeLink from its shareholders in exchange for an aggregate purchase price of$10,354,000 payable as follows: $5,000,000 paid in cash at closing, $2,500,000in a non-interest bearing note payable in cash annual installments of $500,000over five years (present value computed at $2,226,000), and $3,000,000 payablein 200,000 shares of the common stock of the Company issued at the time ofclosing. The Company also capitalized approximately $128,000 of transactioncosts with the LifeLink acquisition.  Seenote 7 to the condensed consolidated financial statements included in this Form10-Q for a discussion of a repurchase obligation with respect to the shares ofcommon stock.

 

On July 1, 2004, Ebix Australia Pty Ltd. (“Ebix Australia”), asubsidiary of Ebix, Inc., acquired the operating assets of Heart Consulting PtyLtd. located in Melbourne, Australia (“Heart”) pursuant to a purchase agreementdated June 28, 2004, by and between Ebix Australia and Heart.  Pursuant to the purchase agreement, EbixAustralia acquired the operating assets of Heart in exchange for an aggregatepurchase price (in Australian dollars) of A$10,175,000 ($7,116,000 USD) (basedon the exchange rate as published by the Reserve Bank of Australia on July 1,2004 of A$0.6994 per United States Dollar (“USD”)) payable as follows:A$5,175,000 ($3,619,000 USD) in cash at closing, A$2,000,000 ($1,399,000 USD)payable under stand-by letters of credit issued by the Company’s lender on theCompany’s line of credit in three equal annual installments on each of thefirst, second and third anniversaries of the closing (the “Deferred Payments”),and A$3,000,000 ($2,098,000 USD) payable in 157,728 shares of common stock ofEbix issued at the closing.  See note 8to the condensed consolidated financial statements included in this Form 10-Qfor a discussion of a repurchase obligation with respect to the shares ofcommon stock.  The letters of credit wereissued on July 1, 2004 and therefore are not affected by exchange ratefluctuations.

 

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 was $3,500,000 of borrowings on this line as of September 30,2004.  Major features of the line, asamended, include an interest rate stated at prime, security at 60% of theamount of the line in a restricted interest bearing account and timelyfinancial reporting requirements.  Theline of credit is scheduled to expire on October 31, 2005.

 

In planning for its capital needs, the Company takes into account itssources of cash, which include operating cash flow, cash balances and fundsfrom credit facilities, and anticipated future cash needs, which includeworking capital requirements for operations, capital expenditures, andexpenditures for business acquisitions. Based on these considerations, the Company believes it will havesufficient cash for operations and to satisfy its other contractual obligationsfor at least the next several years.

 

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# **The following summarizes the Company’s contractual obligations at September 30,2004, and the effect such obligations are expected to have on the Company’sliquidity and cash in future periods (in thousands):**

#  

| ** **                         | ** ** | **Payment Due by Period** | ** ** |
|------------------------------------|------------|---------------------------|------------|
| ** **                         | ** ** | **Total**                 | ** ** | **Less Than 1  Year** | ** ** | **1 - 3 Years** | ** ** | **3 - 5 Years** | ** ** | **More Than 5  Years** | ** ** |
| ** **                         | ** ** | **(in thousands)**        | ** ** |
|                               |       |                      |       |   |   |   |   |   |   |   |   |
| Contractual  Obligations:          |       |                      |       |   |   |   |   |   |   |   |   |
| Long-Term  Debt Obligations (1)(2) |       | $                         | 11,498     |   | $ | 3,666 |   | $ | 7,332 |   | $ | 500 |   | $ | — |   |
| Operating  Leases Obligations      |       | 2,705                     |       | 664 |   | 1,315 |   | 567 |   | 159 |   |
| Capital  Leases Obligations        |       | —                    |       | — |   | — |   | — |   | — |   |
| Total                              |       | $                         | 14,203     |   | $ | 4,330 |   | $ | 8,647 |   | $ | 1,067 |   | $ | 159 |   |

 

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(1)          $2,700,000 is contingentupon exercise of the holder’s put option to require the Company to purchase theholder’s redeemable common stock in connection with the LifeLinkacquisition.  See note 7 to the condensedconsolidated financial statements included in this Form 10-Q.

(2)          $1,399,000 is contingentupon exercise of the holder’s put option to require the Company to purchase theholder’s redeemable common stock in connection with the Heart acquisition.  See note 8 to the condensed consolidatedfinancial statements included in this Form 10-Q.

 

**Safe Harbor for Forward-Looking Statementsunder the Securities Litigation Reform Act of 1995** -This Quarterly Report on Form 10-Q contains various forward-looking statementsand information that are based on management’s beliefs, as well as assumptionsmade by, and information currently available to management, includingstatements regarding future economic performance and financial condition,liquidity and capital resources, acceptance of the Company’s products by themarket and management’s plans and objectives. The Company has tried to identifysuch forward looking statements by use of words such as “expects,” “intends,” “anticipates,”“plans,”  “believes, “will,” “should,”and similar expressions, but these words are not the exclusive means ofidentifying such statements. The forward looking statements included in thisQuarterly Report are subject to various risks, uncertainties and other factorswhich could cause actual results to vary materially from those expressed in, orimplied by, the forward looking statements. Such risks, uncertainties and other factors include those discussed in “RiskFactors” below. Except as expressly required by the federal securities laws,the Company undertakes no obligation to update any such factors or to publiclyannounce the results of any of the forward-looking statements contained hereinto reflect changed circumstances or future events or developments or for anyother reason.

 

**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 and prospectsand/or the market price of our common stock. This risk factors section is written in response to the Securitiesand 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 its 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 and using new and unproven business models.

 

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**Because the support revenue that we have traditionally relied upon hasbeen steadily declining, it is important that new sources of revenue continueto be developed.**

** **

Based on historical data, the Company expectsthat legacy support revenue will continue to decrease by approximately 20% eachyear on a declining balance.  Thisdecline can be attributed to the fact that many of our support clients are notrenewing their support agreements with us, in many cases because they are nolonger using our legacy software.  Evenif they are continuing to use our legacy software, our support clients maychoose not to renew their support agreements if their legacy software productsno longer require support or they use third party support.  In addition, some of the clients who use oursupport services have reduced the level of support that we provide them, whichin turn reduces our support revenue. This downward trend in our support revenue makes us particularlydependent upon our other sources of revenue.

 

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

** **

Revenues from one customer, BRiT Insurance Holdings PLC and itsaffiliates, which at September 30, 2004 owned approximately 32% of ourcommon stock and approximately 70% of CF Epic Insurance and General Fund, whichat that date owned approximately 8% of our common stock, representedapproximately 23% of our total revenue in 2003 and 17% of our total revenue in2002. The revenues from BRiT Insurance Holdings PLC and its affiliatesrepresented approximately 19% and 22% of the Company’s total revenues for thenine-month periods ended September 30, 2004 and 2003, respectively. Ifrevenues from this customer were to discontinue, our operating results could beadversely affected.

 

Revenues from another international customer, AON representedapproximately 11% of our total revenue in 2003. The revenues from AON represented approximately 10% of the Company’stotal revenues for both the nine-month periods ended September 30, 2004and 2003. If revenues from this customer were to discontinue, our operatingresults could be materially adversely 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 quarterly resultsinclude:

 

•                                          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 the SEC’sinvestigation 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.  Wesubmitted 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 thisinvestigation may divert the efforts and attention of our management team fromnormal business operations.

 

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**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, to make futureacquisitions, to satisfy future obligations with respect to the LifeLink andHeart acquisitions or to pay down other indebtedness.  Any required additional financing may not beavailable on terms favorable to us, or at all. If adequate funds are not available on acceptable terms, we may beunable to meet our business or strategic objectives or competeeffectively.  If additional funds areraised by our issuing equity securities, stockholders may experience dilutionof their ownership interests, and the newly issued securities may have rightssuperior 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 Heart and may in the future acquireor make investments in complementary businesses, technologies, services orproducts if appropriate opportunities arise. The process of integrating LifeLink and Heart or any other acquiredbusiness, technology, service or product into our business and operations mayresult in unforeseen operating difficulties and expenditures.  Integration of an acquired company also mayconsume much of our management’s time and attention that could otherwise beavailable for ongoing development of our business.  Moreover, the anticipated benefits of theLifeLink and Heart acquisitions or any other acquisition may not be realized.  Furthermore, we may be unable to identify,negotiate or finance future acquisitions successfully.  Future acquisitions could result inpotentially dilutive issuances of equity securities or the incurrence of debt,contingent liabilities or amortization expenses related to intangible assets.

 

**We may not be able to continue to develop 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

 

•                                          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.

 

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**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 electronic commerce marketis rapidly evolving and highly competitive. Our software business also experiences some competition from certainlarge hardware suppliers that sell systems and systems’ components toindependent agencies and from small, independent or freelance developers andsuppliers of software, who sometimes work in concert with hardware vendors tosupply systems to independent agencies. Our Internet business may also face indirect competition from insurancecarriers that have subsidiaries which perform in-house agency and brokeragefunctions.

 

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.  If weare 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, we have development activities,call center services and other operations in India, and Heart Consultingoperates principally in Australia.  Ourinternational operations may not produce enough revenue to justify ourinvestments in establishing them and are subject to other inherent risks,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 difficultto comply with and are ambiguous and open to interpretation.  If we fail to properly interpret and/orcomply with these rules and regulations, we, the insurance agents, brokers orcarriers doing business with us, our officers, or agents with whom we contractcould be subject to various sanctions, including censure, fines, cease-and-desistorders, loss of license or other penalties. This risk, as well as other lawsand regulations affecting our business and changes in the regulatory climate orthe enforcement or interpretation of existing law, could expose us toadditional costs, including indemnification of participating insurance agents,brokers or carriers for their costs, and could require changes to our businessor otherwise harm our business. Furthermore, because the application of online commerce to the consumerinsurance market is relatively new, the impact of current or future regulationson our business is difficult to anticipate. To the extent that there are changes in the rules and regulationsregarding the manner in which insurance is sold, our business could beadversely 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 uponour ability to protect our call centers, including the computer and telecommunicationsequipment and software systems at those centers, against damage from fire,power loss, telecommunications interruption or failure, natural disaster andother similar events. In the event we experience a temporary or permanentinterruption at one or more of our call centers, through casualty, operatingmalfunction or otherwise, our business could be materially adversely affected.

 

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**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 are subject to an increasing amount of governmentalregulation.  In particular, telemarketersare now barred from contacting persons who have registered their phone numberson the National Do Not Call Registry maintained by the Federal TradeCommission.  We could be subject to avariety of enforcement or private actions for our failure or the failure of ourclients to comply with these regulations.

 

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 some increasinglynegative perceptions of the outsourcing of such processes from the U.S. toIndia, 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.  In addition,there have been several incidents in which individuals have intentionallycaused 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 system failuresunrelated 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 securitymeasures, that person could misappropriate proprietary information or disruptor damage our operations.  Securitybreaches that result in access to confidential information could damage ourreputation and subject us to a risk of loss or liability.  We may be required to make significantexpenditures to protect against or remedy security breaches.  Additionally, if we are unable to adequatelyaddress our customers’ concerns about security, we may have difficulty sellingour 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.

 

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**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 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 orregulations, including international laws and regulations, could impede thegrowth of our revenue from our Internet operations and place additionalfinancial 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 factors,which are, in large part, beyond our control:

 

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

 

**•**                                          trends orconditions in the insurance, software, business process outsourcing andInternet markets;

 

**•**                                          changes inmarket valuations of our competitors; and

 

**•**                                          generalpolitical, economic and 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,securities class action litigation has often been instituted against thatcompany.  If any securities litigation isinitiated against us, we could incur substantial costs and our management’sattention and resources 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 to receivea premium for their common stock as part of a sale of our company, and mayaffect the market price of our common stock. At September 30, 2004, BRiT Insurance Holdings plc beneficiallyowned approximately 32% 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 September 30,2004, 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.

 

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Item 3.             QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The majority of our operations are based inthe U.S. and, accordingly, the majority of our transactions are denominated inU.S. dollars.  However, we haveforeign-based operations where transactions are denominated in foreigncurrencies and are subject to market risk with respect to fluctuations in therelative value of currencies.  Currently,we have operations in Australia, Canada, India, New Zealand and Singapore andconduct transactions 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.  The fluctuations in these currencies resultedin a net transaction loss of $3,000 and a net transaction gain of $1,000 forthe three months ended September 30, 2004 and 2003, respectively.  For the nine months ended September 30,2004, the fluctuations in these currencies resulted in a net transaction gainof $5,000.  For the nine months ended September 30,2003, the fluctuations in these currencies resulted in a net transaction lossof $56,000. We considered the historical trends in currency exchange rate anddetermined that it was reasonably possible that adverse changes in exchangerates of 20% for all currencies could be experienced in the near term.  Such adverse changes would have resulted inan adverse impact on income before taxes of approximately $160,000 and $101,000for the three months ended September 30, 2004 and September 30, 2003,respectively. Such adverse changes would have resulted in an adverse impact onincome before taxes of approximately $402,000 and $300,000 for the nine monthsended September 30, 2004 and September 30, 2003, respectively.

 

There have been no material changes in theCompany’s interest rate risk during the three and nine months ended September 30,2004. While the Company has interest rate risk related to the line of credit,the exposure is mitigated by the interest income on the restricted balance of$3,000,000.  For additional informationon interest rate risk, refer to the “Quantitative Disclosures About Market Risk”section of the Company’s Annual Report on Form 10-K for the year ended December 31,2003.

 

Item 4.             CONTROLS AND PROCEDURES 

 

As of end of the fiscal quarter endedSeptember 30, 2004, the Company’s Chief Executive Officer and Chief Financial Officercarried out an evaluation, with the participation of other members of theCompany’s management as they deemed appropriate, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934). Based on their evaluation of these disclosure controlsand procedures, the Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures were effectivein all material respects in ensuring that material information required to bedisclosed in the periodic reports the Company files with the Securities andExchange Commission is recorded, processed, summarized and reported in a timelymanner.

 

Any control system, no matter how welldesigned and operated, can provide only reasonable (not absolute) assurancethat its objectives will be met.  Furthermore, no evaluation of controlscan provide absolute assurance that all control issues and instances of fraud,if any, have been detected.

 

In connection with its 2003 year-end audit,our independent certified public accountant at that time, KPMG LLP (“KPMG”) identifieddetails of reportable conditions relating to our internal controls andprocedures.  KPMG presented to the auditcommittee details of the reportable conditions noted during the 2003 auditwhich included delegation of authority, formalized contract review process toensure proper revenue recognition, accounting for income taxes,analysis/documentation for unusual transactions, and SOX 404 internal controlmatters (documented and testable control environment).  While we are in the process of implementing amore effective system of controls and procedures we have instituted certaininterim controls, procedures and other changes to ensure that informationrequired to be disclosed in this Quarterly Report on Form 10-Q has beenrecorded, processed, summarized and reported accurately.

 

In response to KPMG’s identified issues, inthe first quarter of 2004, the Company changed its reporting structure withinthe financial accounting group and is redistributing responsibilities among thefinancial accounting group to create improved checks and balances.  The responsibility for a formalized contractreview process to ensure proper revenue recognition will be re-assigned to afinancial department director.  Theongoing quarterly review of the provision for income taxes will be performed bythe Chief Financial Officer, corporate controller and a newly hired seniorfinancial accounting member located in Australia. The foregoing individualswill also be responsible for the analysis and documentation of any unusualtransactions. The Company has hired an additional senior staff professional forthe financial accounting group whose duties will include SOX 404 documentationof internal control matters.

 

Based in part on the steps listed above, ourChief Executive Officer and our Chief Financial Officer have concluded that ourdisclosure controls and procedures are effective to ensure that the informationthat we are required to disclose in reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedaccurately within the time periods specified in Securities and ExchangeCommission rules and forms.

 

In addition, in order to address further thedeficiencies described above and to improve our internal disclosure and controlprocedures for future periods, we will:

 
| 1.     | Perform a review of internal controls and  procedures in connection with Section 404 of Sarbanes Oxley legislative  requirements; |
|--------|-----------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                              |
| 2.     | Perform more detailed quarterly  reconciliations and analyses of the Company’s revenue accounts;                             |
|   |                                                                                                                              |
| 3.     | Continue to enhance staffing to provide  sufficient resources to accomplish the foregoing objectives.                             |

 

These steps will constitute significantchanges in internal controls.  We willcontinue to evaluate the effectiveness of our disclosure controls and internalcontrols and procedures on an ongoing basis, and will take further action asappropriate.  Other than as discussedabove, no significant changes were made in the Company’s internal controls orin other factors that could significantly affect these controls during thethird quarter of 2004.

 

 

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Part II —OTHER INFORMATION

 

Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS

 

OnJuly 1, 2004, the Company issued 157,728 shares of its common stock (the “Securities”)to Heart Consulting Services Pty Ltd (“Heart”), located in Melbourne,Australia, in connection with the acquisition of substantially all of theoperating assets of Heart by a wholly-owned subsidiary of the Company, EbixAustralia Pty Ltd. (“Ebix Australia”). The Company sold the Securities in a transaction exempt fromregistration under the Securities Act of 1933, as amended (the “Act”), inreliance upon Regulation S promulgated thereunder, as a transaction notinvolving an offer or sale within the United States.  Heart represented in writing to the Companyand Ebix Australia that it (i) is not a “U.S. Person” as such term is definedin Rule 902 of Regulation S under the Act, (ii) is not purchasing theSecurities for the account or benefit of any U.S. Person, (iii) agreed to resellthe Securities only in accordance with the provisions of Regulation S, pursuantto registration under the Act or pursuant to an available exemption fromregistration, and (iv) agreed not to engage in hedging transactions with regardto the Securities unless in compliance with the Act.  Neither the Company nor Ebix Australia paidany underwriting commissions or discounts or placement fees in connection withthis transaction.

 

Item 6.             EXHIBITS AND REPORTSON FORM 8-K

 

(a)                          Exhibits

 
| 31.1   | Certification of Chief Executive Officer  Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of  2002).    |   |
|--------|--------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                           |   |
| 31.2   | Certification of Chief Financial Officer  Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of  2002).    |   |
|   |                                                                                                                           |   |
| 32.1   | Certification of Chief Executive Officer  Pursuant to Section 906 of the Sabanes-Oxley Act of 2002 (furnished  herewith). |   |
|   |                                                                                                                           |   |
| 32.2   | Certification of Chief Financial Officer  Pursuant to Section 906 of the Sabanes-Oxley Act of 2002 (furnished  herewith). |   |
|   |                                                                                                                           |   |

 

 

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SIGNATURES

 

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

 

 
|                         | Ebix, Inc. |
|------------------------------|------------|
|                         |       |
|                         |       |
| Date: November 15, 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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