**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 June 30, 2005** |
| ** **                                             |
| **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) hasbeen subject to such filing requirements for the past 90 days.  Yes ýNo o

 

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

 

As of August 5, 2005, the number ofshares of Common Stock outstanding was 2,734,136.

 

 

----

 

FORM 10-Q

 

FOR THE QUARTER ENDED JUNE 30,2005

 

INDEX

 
| Part I — FINANCIAL INFORMATION |                                                                                                                    |
|------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                                    |
|                                     | Item 1. Consolidated Financial Statements                                                                               |   |
|                                     |                                                                                                                    |   |
|                                     | Condensed Consolidated Balance Sheets at June 30,  2005 (unaudited) and December 31, 2004                     | 3 |
|                                     |                                                                                                                    |   |
|                                     | Condensed Consolidated Statements of Income  for the Three and Six Months ended June 30, 2005 and 2004 (unaudited) | 4 |
|                                     |                                                                                                                    |   |
|                                     | Condensed Consolidated Statements of Cash  Flows for the Six Months ended June 30, 2005 and 2004 (unaudited)       | 5 |
|                                     |                                                                                                                    |   |
|                                     | Notes to Condensed Consolidated Financial  Statements (unaudited)                                                       | 6 |
|                                     |                                                                                                                    |   |
|                                     | Item 2. Management’s Discussion and Analysis of Financial Condition  and Results of Operations                     | 13 |
|                                     |                                                                                                                    |   |
|                                     | Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                      | 22 |
|                                     |                                                                                                                    |   |
|                                     | Item 4. Controls and Procedures                                                                                         | 22 |
|                                     |                                                                                                                    |   |
| PART II  — OTHER INFORMATION   | 23                                                                                                                      |
|                                     |                                                                                                                    |   |
|                                     | Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                     | 23 |
|                                     |                                                                                                                    |   |
|                                     | Item 6.  Exhibits                                                                                                       | 23 |
|                                     |                                                                                                                    |   |
| SIGNATURES                               | 24                                                                                                                      |

 

2

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**Ebix, Inc.and Subsidiaries**

**Condensed Consolidated Balance Sheets**

(In thousands, except for shareand per share amounts)

 
| ** **                                                                                                                                                              | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                              | ** ** | **(Unaudited****)**     | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                              |       |                    |       |                        |       |
| **Current assets:**                                                                                                                                                     |       |                    |       |                        |       |
| Cash and  cash equivalents                                                                                                                                              |       | $                       | 4,915      |                        | $          | 5,843 |   |
| Restricted  cash                                                                                                                                                        |       | 3,000                   |       | 3,000                       |       |
| Accounts  receivable, less allowance of $4 and $13, respectively                                                                                                        |       | 3,687                   |       | 3,256                       |       |
| Other  current assets                                                                                                                                                   |       | 568                     |       | 587                         |       |
| **Total current  assets**                                                                                                                                               |       | 12,170                  |       | 12,686                      |       |
| Property and  equipment, net                                                                                                                                            |       | 1,559                   |       | 1,450                       |       |
| Goodwill                                                                                                                                                                |       | 12,474                  |       | 12,669                      |       |
| Intangibles,  net                                                                                                                                                       |       | 3,782                   |       | 4,234                       |       |
| Other assets                                                                                                                                                            |       | 321                     |       | 296                         |       |
| **Total assets**                                                                                                                                                        |       | $                       | 30,306     |                        | $          | 31,335 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                           |       |                    |       |                        |       |
| **Current liabilities:**                                                                                                                                                |       |                    |       |                        |       |
| Line of credit                                                                                                                                                          |       | $                       | 3,409      |                        | $          | 3,500 |   |
| Accounts  payable and accrued expenses                                                                                                                                  |       |                    | 1,935      |                        |       | 1,781 |   |
| Accrued  payroll and related benefits                                                                                                                                   |       | 1,215                   |       | 1,522                       |       |
| Current  portion of long term debt                                                                                                                                      |       | 995                     |       | 977                         |       |
| Deferred  revenue                                                                                                                                                       |       | 3,392                   |       | 2,989                       |       |
| **Total current  liabilities**                                                                                                                                          |       | 10,946                  |       | 10,769                      |       |
| Long term  debt, less current portion                                                                                                                                   |       | 2,312                   |       | 2,796                       |       |
| Redeemable  common stock (157,728 and 357,728 shares issued and outstanding at June 30,  2005 and December 31, 2004, respectively) stated at redemption price |       | 1,525                   |       | 4,262                       |       |
|                                                                                                                                                                    |       |                    |       |                        |       |
| **Stockholders’ equity:**                                                                                                                                          |       |                    |       |                        |       |
| Convertible Series D  Preferred stock, $.10 par value, 500,000 shares authorized, no shares issued  and outstanding                                                |       | —                  |       | —                      |       |
| Common  stock, $.10 par value, 10,000,000 shares authorized, 2,733,686 and 2,911,154  shares issued and outstanding, respectively                                       |       | 273                     |       | 291                         |       |
| Additional  paid-in capital                                                                                                                                             |       | 92,763                  |       | 92,717                      |       |
| Deferred  compensation                                                                                                                                                  |       | (314                    | )          | (376                        | )          |
| Accumulated  deficit                                                                                                                                                    |       | (77,859                 | )          | (80,011                     | )          |
| Accumulated  other comprehensive income                                                                                                                                 |       | 660                     |       | 887                         |       |
| **Total stockholders’ equity**                                                                                                                                     |       | 15,523                  |       | 13,508                      |       |
| **Total liabilities and stockholders’ equity**                                                                                                                     |       | $                       | 30,306     |                        | $          | 31,335 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

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**Ebix, Inc.and Subsidiaries**

**Condensed Consolidated Statements of Income**

(In thousands, except per sharedata)

(Unaudited)

 
| ** **                                                                                                                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                  |       |                                 |       |                               |       |   |   |   |   |
| **Revenue:**                                                                                                                          |       |                                 |       |                               |       |   |   |   |   |
| Software                                                                                                                              |       | $                                    | 408        |                               | $          | 333 |   | $ | 610 |   | $ | 560 |   |
| Services and  other (Including revenues from related parties of $879, $724, $1,757 and  $1,676, respectively – See Note 6.) |       | 5,726                                |       | 4,343                              |       | 11,428 |   | 8,050 |   |
| Total revenue                                                                                                                         |       | 6,134                                |       | 4,676                              |       | 12,038 |   | 8,610 |   |
| **Operating  expenses:**                                                                                                              |       |                                 |       |                               |       |   |   |   |   |
| Services and  other costs                                                                                                             |       | 1,503                                |       | 1,299                              |       | 2,909 |   | 2,462 |   |
| Product  development                                                                                                                  |       | 773                                  |       | 861                                |       | 1,567 |   | 1,421 |   |
| Sales and  marketing                                                                                                                  |       | 522                                  |       | 423                                |       | 1,000 |   | 696 |   |
| General and  administrative                                                                                                           |       | 1,826                                |       | 1,081                              |       | 3,515 |   | 2,267 |   |
| Amortization and depreciation                                                                                                         |       | 319                                  |       | 271                                |       | 648 |   | 472 |   |
| **Total operating expenses**                                                                                                          |       | 4,943                                |       | 3,935                              |       | 9,639 |   | 7,318 |   |
| **Operating income**                                                                                                                  |       | 1,191                                |       | 741                                |       | 2,399 |   | 1,292 |   |
| Interest  income                                                                                                                      |       | 83                                   |       | 15                                 |       | 165 |   | 42 |   |
| Interest  expense                                                                                                                     |       | (113                                 | )          | (1                                 | )          | (215 | ) | (3 | ) |
| Foreign  exchange gain (loss)                                                                                                         |       | 84                                   |       | (2                                 | )          | 75 |   | 8 |   |
| Income  before income taxes                                                                                                           |       | 1,245                                |       | 753                                |       | 2,424 |   | 1,339 |   |
| Income tax  expense                                                                                                                   |       | (161                                 | )          | (43                                | )          | (272 | ) | (183 | ) |
|                                                                                                                                  |       |                                 |       |                               |       |   |   |   |   |
| **Net  income**                                                                                                                       |       | $                                    | 1,084      |                               | $          | 710 |   | $ | 2,152 |   | $ | 1,156 |   |
|                                                                                                                                  |       |                                 |       |                               |       |   |   |   |   |
| **Basic  earnings per common share**                                                                                                  |       | $                                    | 0.39       |                               | $          | 0.26 |   | $ | 0.76 |   | $ | 0.43 |   |
|                                                                                                                                  |       |                                 |       |                               |       |   |   |   |   |
| **Diluted  earnings per common share**                                                                                                |       | $                                    | 0.35       |                               | $          | 0.23 |   | $ | 0.69 |   | $ | 0.39 |   |
|                                                                                                                                  |       |                                 |       |                               |       |   |   |   |   |
| Basic  weighted average shares outstanding                                                                                            |       | 2,778                                |       | 2,739                              |       | 2,845 |   | 2,662 |   |
|                                                                                                                                  |       |                                 |       |                               |       |   |   |   |   |
| Diluted weighted  average shares outstanding                                                                                          |       | 3,057                                |       | 3,066                              |       | 3,141 |   | 2,992 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

4

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**Ebix, Inc.and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows**

(In thousands)

(Unaudited)

 
| ** **                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                               |       |   |   |
| **Cash  flows from operating activities:**                                                                                                                                                                                                                                                                                                                                     |       |                               |       |   |   |
| Net income                                                                                                                                                                                                                                                                                                                                                                     |       | $                                  | 2,152      |   | $ | 1,156 |   |
| **Adjustments  to reconcile net income to net**** cash provided by operating  activities:**                                                                                                                                                                                                                                                                               |       |                               |       |   |   |
| Depreciation  and amortization                                                                                                                                                                                                                                                                                                                                                 |       | 648                                |       | 487 |   |
| Stock-based  compensation                                                                                                                                                                                                                                                                                                                                                      |       | (17                                | )     | 47 |   |
| Restricted  stock compensation                                                                                                                                                                                                                                                                                                                                                 |       | 48                                 |       | — |   |
| Provision  for doubtful accounts                                                                                                                                                                                                                                                                                                                                               |       | 4                                  |       | 60 |   |
| **Changes  in assets and liabilities, net of effect of acquisition:**                                                                                                                                                                                                                                                                                                          |       |                               |       |   |   |
| Accounts  receivable                                                                                                                                                                                                                                                                                                                                                           |       | (431                               | )          | (683 |  )) |
| Other assets                                                                                                                                                                                                                                                                                                                                                                   |       | (7                                 | )          | (290 | ) |
| Accounts  payable and accrued expenses                                                                                                                                                                                                                                                                                                                                         |       | 154                                |       | (115 | ) |
| Accrued  payroll and related benefits                                                                                                                                                                                                                                                                                                                                          |       | (307                               | )          | (921 | ) |
| Deferred  revenue                                                                                                                                                                                                                                                                                                                                                              |       | 403                                |       | 452 |   |
| Net cash provided by operating activities                                                                                                                                                                                                                                                                                                                                      |       | 2,647                              |       | 193 |   |
| **Cash  flows from investing activities:**                                                                                                                                                                                                                                                                                                                                     |       |                               |       |   |   |
| Acquisition  of LifeLink, net of cash acquired                                                                                                                                                                                                                                                                                                                                 |       | —                             |       | (4,763 | ) |
| Capital  expenditures                                                                                                                                                                                                                                                                                                                                                          |       | (330                               | )          | (122 | ) |
| Net cash used in investing activities                                                                                                                                                                                                                                                                                                                                          |       | (330                               | )          | (4,885 | ) |
| **Cash  flows from financing activities:**                                                                                                                                                                                                                                                                                                                                     |       |                               |       |   |   |
| Proceeds  from borrowings related to line of credit                                                                                                                                                                                                                                                                                                                            |       | —                             |       | 3,500 |   |
| Payments on  line of credit                                                                                                                                                                                                                                                                                                                                                    |       | (91                                | )          | — |   |
| Repurchase  of stock guarantee                                                                                                                                                                                                                                                                                                                                                 |       | (2,700                             | )          | — |   |
| Restricted  cash                                                                                                                                                                                                                                                                                                                                                               |       | —                             |       | (3,000 | ) |
| Proceeds  from the exercise of stock options                                                                                                                                                                                                                                                                                                                                   |       | 57                                 |       | — |   |
| Proceeds  from the issuance of common stock, net of issuance costs                                                                                                                                                                                                                                                                                                             |       | —                             |       | 2,977 |   |
| Payments of  long term debt                                                                                                                                                                                                                                                                                                                                                    |       | (500                               | )          | (62 | ) |
| Net cash (used in) provided by financing  activities                                                                                                                                                                                                                                                                                                                           |       | (3,234                             | )          | 3,415 |   |
| Effect of  foreign exchange rates on cash                                                                                                                                                                                                                                                                                                                                      |       | (11                                | )          | 27 |   |
| Net change in cash and cash equivalents                                                                                                                                                                                                                                                                                                                                        |       | (928                               | )     | (1,250 | ) |
| Cash and cash equivalents at the beginning  of the period                                                                                                                                                                                                                                                                                                                      |       | 5,843                              |       | 7,915 |   |
| Cash and cash equivalents at the end of the  period                                                                                                                                                                                                                                                                                                                            |       | $                                  | 4,915      |   | $ | 6,665 |   |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                               |       |   |   |
| **Supplemental  disclosures of cash flow information:**                                                                                                                                                                                                                                                                                                                        |       |                               |       |   |   |
| Interest  paid                                                                                                                                                                                                                                                                                                                                                                 |       | $                                  | 99         |   | $ | 3 |   |
| Income taxes  paid                                                                                                                                                                                                                                                                                                                                                             |       | $                                  | 183        |   | $ | 185 |   |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                               |       |   |   |
| **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. |       |                               |       |   |   |

 

See accompanying notes to condensed consolidated financial statements.

 

5

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Ebix, Inc. andSubsidiaries

NOTES TO CONDENSED 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 (the “Company”),and reflect all adjustments (consisting only of normal recurring adjustments)which are, in the opinion of management, necessary for a fair presentation ofthe results of the interim periods.

 

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

 

The results of operations for the three and six months ended June 30,2005 are not necessarily indicative of results to be expected for the entirecurrent year.

 

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

 

**Summary of significant accounting policies—**

 

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

 

In May 2003, the Financial Accounting Standards Board (“FASB”)finalized the terms of Emerging Issues Task Force Issue No. 00-21, “RevenueArrangements with Multiple Deliverables” (EITF 00-21), whichprovides criteria governing how to identify whether goods or services that areto be delivered separately in a bundled sales arrangement should be accountedfor separately. Deliverables are accounted for separately if they meet all ofthe following: a) the delivered items have stand-alone value to thecustomer; b) the fair value of any undelivered items can be reliablydetermined; and c) if the arrangement includes a general right of return,delivery of the undelivered items is probable and substantially controlled bythe seller. The Company adopted EITF 00-21 on July 1, 2003 for allnew revenue arrangements executed subsequent to June 30, 2003 (orsignificant modification to arrangements existing prior to July 1, 2003).The Company’s current policy is to analyze all new revenue arrangements.

 

To the extent arrangements contain multiple deliverables, the Companyperforms an analysis of the nature of the deliverables to determine to whatextent the deliverables of the arrangement are governed by any higher levelliterature (as defined in EITF 00-21). EITF 00-21 recognizesarrangements that qualify for treatment under SOP 97-2 and certainarrangements that qualify for contract accounting (i.e. SOP 81-1) asfalling under the definition of “higher level literature.”  The Company applies the provisions of SOP 97-2,as amended by Statement of Position 98-9, “Modifications of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions,” to allarrangements which include software deliverables that are considered more thaninconsequential to the other elements in the arrangements. For 2004, all of theCompany’s contracts with multiple deliverables have fallen under higher levelaccounting literature under the provisions of SOP 97-2 and/or SOP 81-1.

 

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

 

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

 

For arrangements containing multiple elements, revenue is recognized ondelivered elements when vendor-specific objective evidence (“VSOE”) of fairvalue has been established on the undelivered elements, applying the residualmethod of SOP 98-9. Fair value is determined for each undelivered elementbased on the price charged for the sale of each element separately. Incontracts that contain first year maintenance bundled with software fees,unbundling of maintenance is based on the price charged for renewalmaintenance. Revenue for maintenance and support service is recognized ratablyover the term of the support agreement.

 

Revenues related to hosting arrangements, including monthly fees aswell as any initial registration fees and related custom programming, arerecognized ratably over the term of the agreement in accordance with StaffAccounting Bulletin (“SAB”) No. 104

 

6

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“Revenue Recognition.” Transaction fees are recognized as revenue asthe transactions occur and revenue is earned. Revenue is only recognized whencollectiblity is probable.

 

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

 

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

 

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

 

**Stock Options -**At June 30,2005, the Company had two stock-based employee compensation plans. The Companyaccounts for stock options issued to employees in accordance with AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees.” The Company has adopted the disclosure only provisions of Statementof Financial Accounting Standards (“SFAS”) No. 123, “Accounting forStock-Based Compensation,” and SFAS No. 148, “Accounting for Stock BasedCompensation — Transition and Disclosure – an Amendment to FASB Statement No. 123,”for options and warrants issued to employees. Under APB Opinion No. 25,compensation expense is recorded based on the difference, if any, on themeasurement date, between the estimated fair value of the Company’s stock andthe exercise price of options to purchase that stock. Any resultingcompensation expense is amortized on a straight-line basis over the vestingperiod of the options.

 

The Company applies APB Opinion No. 25 and related interpretationsin accounting 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** | ** ** | **Six Months Ended**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                                                    | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
|                                                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Net income,  as reported                                                                                                                      |       | $                      | 1,084,000  |                   | $          | 710,000 |   | $ | 2,152,000 |   | $ | 1,156,000 |   |
| Add:  Stock-based employee compensation expense included in reported net income,  net of related tax effects                                  |       | 5,000                  |       | 5,000                  |       | 9,000 |   | 9,000 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair-value  based method for all awards, net of related tax effects |       | (80,000                | )          | (474,000               | )          | (554,000 | ) | (847,000 | ) |
| Pro forma  net income                                                                                                                         |       | $                      | 1,009,000  |                   | $          | 241,000 |   | $ | 1,607,000 |   | $ | 318,000 |   |
|                                                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Basic  earnings per share, as reported                                                                                                        |       | $                      | 0.39       |                   | $          | 0.26 |   | $ | 0.76 |   | $ | 0.43 |   |
| Diluted  earnings per share, as reported                                                                                                      |       | $                      | 0.35       |                   | $          | 0.23 |   | $ | 0.69 |   | $ | 0.39 |   |
| Basic  earnings per share, pro forma                                                                                                          |       | $                      | 0.36       |                   | $          | 0.09 |   | $ | 0.56 |   | $ | 0.12 |   |
| Diluted  earnings per share, pro forma                                                                                                        |       | $                      | 0.33       |                   | $          | 0.08 |   | $ | 0.51 |   | $ | 0.11 |   |

 

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

 

7

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

 

Note 2.  STOCK OPTIONS

 

During the first six months of 2005, the Company did not grant anystock options to employees; however, options to purchase a total of 10,575shares of the Company’s common stock were issued to non-employee directorssubsequent to the Company’s annual meeting of stockholders held on January 14,2005. These options were granted at an exercise price per share equal to thefair market value of a share of common stock on the date of the grant. Theseoptions become exercisable on the last day of each of the four calendarquarters, beginning with the first calendar quarter ending on or after the dateof the grant, and have a term of ten years beginning on the date of grant.

 

The Company has granted stock options outside the Company’s stockoption plans to non-employee consultants to purchase up to an aggregate of57,000 shares of the Company’s common stock, of which options to purchase31,375 shares were outstanding at June 30, 2005.  These options were granted at pricesdetermined by the Board of Directors (at no less than 100 percent of the marketprice on the date of grant).  The optionshave a four-year vesting period and must be exercised within ten years of thedate of the grant. These non-employee options were valued using the fair valuemethod as prescribed by SFAS No. 123 using the following assumptions:volatility of 51%, risk free interest rate of 4% and a 10-year term.Options issued prior to 2001 are performance-based awards, with no servicecommitment and subject to vesting only if the Company’s stock price reaches acertain level. Options issued in 2001 become exercisable over four years, butexercisability accelerates if a performance target is achieved.  At June 30, 2005, non-employee optionsto purchase 6,484 shares were exercisable. The Company recognized compensation expense of approximately $11,000related to these options during the three-month period ended June 30,2005.  The Company recognized a credit tocompensation expense of approximately $27,000 related to these options duringthe six-month period ended June 30, 2005. The Company recognizedcompensation expense of approximately $1,000 and $35,000 related to theseoptions during the three-month and six month periods ended June 30, 2004,respectively.

 

On August 11, 2003, the Company granted 25,000 options to purchasethe Company’s common stock to an employee who is the brother of the Company’sChief Executive Officer, in connection with his joining the Company as anemployee.  The option grantee was anemployee when he received the grant.  The options become exercisable over four years from the date of grant,expire ten years from the date of grant, and were issued with an exercise pricebelow the fair market value of the stock on the date of grant.  This grant was not subject to any of theCompany’s stock option plans.  The totalintrinsic value associated with the granting of these options was $96,250,which will be recognized ratably as compensation expense over the four-year vestingperiod in accordance with APB Opinion No. 25. The Company recognizedcompensation expense of approximately $6,000 and $12,000 related to theseoptions during each of the three-month periods and six-month periods ended June 30,2005 and June 30, 2004, respectively.

 

Note 3. RESTRICTED STOCK

 

On June 1, 2005, the CompensationCommittee of the Board of Directors of the Company gave final approval toawards of 9,758 shares of restricted stock to Robin Raina, the Company’sChairman, Chief Executive Officer and President, and 4,382 shares of restrictedstock to Richard J. Baum, the Company’s Executive Vice President, ChiefFinancial Officer and Secretary, under the Company’s 1996 Incentive Plan.  The awards were made pursuant to a 2004incentive compensation program (the “2004 Program”) approved by the Company’sBoard of Directors on December 4, 2004 (as described in a Form 8-Kfiled by the Company on December 9, 2004) and were subject to adetermination by the Compensation Committee and the Board, afterthe Company’s release of its 2004 operating results, that such operatingresults were substantially consistent with the operating results of the Companyfor the first nine months of 2004, as they compared to those for the sameperiod of the prior year (excluding executive incentive compensation).  The Compensation Committee and the Board madesuch determination in April 2005, at which time the grants of therestricted stock (along with 2004 cash bonus compensation) were approved,subject to the Compensation Committee’s approval of certain terms of therestricted stock awards and of the forms of restricted stock agreements torepresent such awards.

 

On June 1, 2005, the CompensationCommittee approved such terms and forms of restricted stock agreements, and theshares of restricted stock were issued to each of Messrs. Raina and Baumon such date.  In accordance with the2004 Program, the number of shares of restricted stock issued to each of Messrs. Rainaand Baum represents 10% of the aggregate of the total salary and cash bonuscompensation earned by him for 2004 (such aggregate compensation being$1,012,848 in the case of Mr. Raina and $454,889 in the case of Mr. Baum),divided by the market price of the Company’s stock on April 11, 2005, thedate the Board approved the restricted stock grants.  The Company recognized compensation expenseof approximately $48,000 related to these shares during the three and six monthperiods ended June 30, 2005.

 

8

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Pursuant to the restricted stock agreements,the restricted stock vests in three equal annual installments.  The restricted stock also vests with respectto any unvested shares upon the applicable officer’s death, Disability (asdefined) or Retirement (as defined), the Company’s termination of the officerother than for Cause (as defined) or a Change in Control (as defined) of theCompany. If the officer terminates his employment other than due to death,Disability or Retirement or the Company terminates the officer’s employment forCause, any unvested shares held by the officer will be forfeited.

 

Note 4.  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 six monthsended June 30, 2005 was 2,777,970 and 2,844,829, respectively. Theweighted average number of shares outstanding for the three and six monthsended June 30, 2004 was 2,738,990 and 2,662,443, respectively. Diluted EPSis calculated as if the Company had additional common stock outstanding fromthe beginning of the year or the date of grant for all common stockequivalents, net of assumed repurchased shares using the treasury stockmethod.  Diluted EPS recognizes thedilutive effect of common stock equivalents and is equal to net income dividedby the sum of the weighted average number of shares outstanding and commonstock equivalents. For the three and six months ended June 30, 2005 and June 30,2004, the Company’s common stock equivalents consisted of stock options.  For the three and six months ended June 30,2005, the effect of this calculation resulted in an increase in the weightedaverage number of shares outstanding of 279,483 and 295,770, respectively. At June 30,2005, the fully diluted weighted average number of shares outstanding for thethree and six months ended was 3,057,453 and 3,140,599, respectively.  For the three and six months ended June 30,2004, the effect of this calculation resulted in an increase in the weightedaverage number of shares outstanding of 327,364 and 329,384, respectively. At June 30,2004, the fully diluted weighted average number of shares outstanding for thethree and six months ended was 3,066,364 and 2,991,817, respectively.   At June 30, 2005, there were 392,722shares potentially issuable with respect to stock options, which could diluteEPS in the future but which were excluded from the diluted EPS calculationbecause their effect was antidilutive. At June 30, 2004, there were390,986 shares potentially issuable with respect to stock options, which coulddilute EPS in the future but which were excluded from the diluted EPScalculation because their effect was antidilutive.

 

Note 5.  COMPREHENSIVE INCOME

 
| ** **                                                                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Net income                                                                           |       | $                                    | 1,084,000  |                               | $          | 710,000 |   | $ | 2,152,000 |   | $ | 1,156,000 |   |
| Other  comprehensive (expense) income – foreign currency translation adjustment |       | (97,000                              | )          | (41,000                            | )          | (11,000 | )  | 27,000 |   |
| Comprehensive  income                                                                |       | $                                    | 987,000    |                               | $          | 669,000 |   | $ | 2,141,000 |   | $ | 1,183,000 |   |
|                                                                                      |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |

 

Note 6.  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 shares held by BRiTat June 30, 2005 was 930,163, representing an equity ownership ofapproximately 34%.  At June 30,2005, BRiT also owned approximately 70% of CF Epic Insurance and General Fund,which owned approximately 8% of the Company’s common stock.

 

The Company has entered into various software and service agreementswith BRiT.  During the three and sixmonths ended June 30, 2005, approximately $879,000 and $1,757,000,respectively, was recognized as revenue from BRiT and its affiliates. Duringthe three and six months ended June 30, 2004, approximately $724,000 and$1,677,000, respectively, was recognized as revenue from BRiT and itsaffiliates. Total accounts receivable from BRiT and its affiliates at June 30,2005 and December 31, 2004 were $426,000 and $718,000, respectively.

 

During the three and six months ended June 30, 2005, approximately$652,000 and $1,278,000, respectively, was recognized as revenue from anothersignificant customer, AON.  During thethree and six months ended June 30, 2004, approximately $512,000 and$1,068,000, respectively, was recognized as revenue from AON. Total accountsreceivable from AON at June 30, 2005 and December 31, 2004 were$236,000 and $186,000, respectively.

 

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:

 

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$5,000,000 paid in cash at closing, $2,500,000 in a non-interestbearing note payable in cash in annual installments of $500,000 over five years(present value computed as $2,226,000), and $3,000,000 payable in 200,000shares of the common stock of the Company issued at the time of closing to oneof the LifeLink shareholders, who received the right to sell such shares (the “LifeLinkRedeemable Shares”) back to the Company as described below. The Company alsocapitalized approximately $128,000 of transaction costs in conjunction with theLifeLink acquisition.

 

At any time during the one-month period commencing on August 23,2005, the holder of the LifeLink Redeemable Shares had a one-time right torequire the Company to purchase all of the LifeLink Redeemable Shares,originally valued at $15.00 per share in the acquisition of LifeLink, for adiscounted price of $13.50 per share minus the aggregate purchase pricereceived by the holder from any sales of these shares of common stock prior tothe exercise of such right. The Company classified $2,700,000 of the value ofthe common stock issued as temporary equity, “redeemable common stock,” in theconsolidated balance sheet due to the existence of the holder’s embedded putoption.  The Company and LifeLink’sformer shareholder agreed to accelerate the exercisability of the put optionand on April 28, 2005, the Company repurchased the LifeLink RedeemableShares at a price of $13.50 per share.

 

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

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

 

Ofthe $3,518,000 of intangible assets acquired, $977,000 was assigned todeveloped technology with a remaining estimated useful life of five years,$299,000 was assigned to trademarks with a remaining estimated useful life offive years and $2,242,000 was assigned to customer relationships with aremaining estimated useful life of seven years. The Company recorded $144,000and $288,000 of amortization expense related to these intangibles for the threeand six months ended June 30, 2005, respectively, and $135,000 and$203,000 of amortization expense related to these intangibles for the three andsix months ended June 30, 2004, respectively.

 

(inthousands)

 

***EstimatedAmortization Expenses:***

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

 

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

 

# **Note 8.ACQUISITION OF HEART**

#  

On July 1, 2004, Ebix Australia Pty Ltd, which is a wholly-ownedsubsidiary of the Company, acquired certain of the operating assets of HeartConsulting Services Pty Ltd (“Heart”), and the operations of Heart have beenincluded in the Company’s financial statements since that date. Under terms ofthe agreement, the Company acquired the operating assets of Heart in exchangefor an aggregate purchase price of $7,116,000 payable as follows: $3,619,000paid in cash at closing (subsequent to closing, the former owner of Heart paidthe Company $467,000 for deferred revenue and a vacation accrual settlement), $1,399,000payable 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 (present value computed as$1,293,000), and $2,098,000 payable in 157,728 shares of the common stock ofthe Company issued at the time of closing. The Company also capitalizedapproximately $241,000 of transaction costs in conjunction with the Heartacquisition. In connection with the 157,728 shares of common stock issued, theowners of Heart

 

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received from the Company the option to sell their stock back to theCompany subject to specified time frames and prices as discussed below.

 

The Company classified $1,525,000 of the value of the common stockissued as temporary equity, “redeemable common stock,” in the condensedconsolidated balance sheet due to the existence of the holder’s embedded putoption. At any time during the one month period commencing January 3, 2006and ending February 3, 2006, the holder of the redeemable common stock hasa one-time right to require the Company to purchase all of the holder’s 157,728shares at a price of AU$2,000,000 minus the aggregate purchase price receivedby the holder from any sales of these shares of common stock prior to theexercise of the put option. As of June 30, 2005, the holder had not soldany of the shares of the Company’s common stock received in this transaction.

 

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

 

(in thousands)

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

 

Of the $1,229,000 of intangible assets acquired, $630,000 was assignedto customer relationships with a remaining useful life of four years, $410,000was assigned to developed technology and $189,000 was assigned to trademarkswith remaining estimated useful lives of five years. The Company recorded$62,000 and $139,000 of amortization expense related to these intangible assetsfor the three- and six-month period ended June 30, 2005.  There was no amortization expense related tothese intangibles for the three or six months ended June 30, 2004 as theacquisition was consummated in July 2004.

 

(in thousands)

 

***EstimatedAmortization Expenses:***

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

 

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

 

**Note9. PRO FORMA FINANCIALS**

** **

The following unaudited pro forma financial information for the threeand six months ended June 30, 2004 presents the consolidated operations ofthe Company as if the LifeLink and Heart acquisitions had been made on January 1,2004, after giving effect to certain adjustments for the pro forma acquisitionas of the acquisition date. The Company made adjustments primarily for theamortization of intangible assets and interest expense related to theacquisitions. The unaudited pro forma financial information is provided forinformational purposes only and does not project the Company’s results of operationsfor any future period:

 
| ** **                  | **Three Months  Ended  June 30, 2004** | ** ** | **Six Months  Ended  June 30, 2004** | ** ** |
|-----------------------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** **                                  | ** ** | ** **                                | ** ** |
| Revenue                     | $                                           | 5,267,000  |                                      | $          | 10,714,000 |   |
| Net income                  | $                                           | 775,000    |                                      | $          | 1,326,000 |   |
| Basic  earnings per share   | $                                           | 0.27       |                                      | $          | 0.46 |   |
| Diluted  earnings per share | $                                           | 0.24       |                                      | $          | 0.41 |   |

 

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Note 10. LINE OF CREDIT AND OTHERCOMMITMENTS

 

Bank Line of Credit

 

In October 2002, the Company obtained from LaSalle Bank NationalAssociation a $1,000,000 revolving line of credit, secured by a perfected firstsecurity interest in substantially all of the Company’s assets. The line ofcredit was increased to $5,000,000 during February 2004.  On February 23, 2005, the Companyentered into an amendment to the credit agreement amending certain financialcovenants.  Major features of the line,as amended, include an interest rate equal to the prime rate, security at 60%of the amount of the line in a restricted interest-bearing account and timelyfinancial reporting requirements. The line of credit will expire on October 31,2005. As of June 30, 2005, total borrowings on this line were $3,409,000,of which $3,000,000 was classified as restricted cash because it was restrictedfrom use in accordance with the line of credit agreement. The agreement providesthat the line is secured by substantially all of the Company’s assets. TheCompany was in compliance with all debt covenants at June 30, 2005.

 

Letters of Credit

 

Under terms of the agreement with Heart Consulting Services Pty Ltd.(see note 8), $1,399,000 is payable by the Company under stand-by letters ofcredit issued by the Company’s lender on the Company’s line of credit in threeequal annual installments on each of the first, second and third anniversariesof the closing of the Heart asset acquisition (present value computed as$1,293,000). The three letters of credit expire on July 31, 2005, July 31,2006 and July 31, 2007, respectively. On July 1, 2005 the Company paid the first installment of $508,000.

 

Self Insurance

 

The Company is currently self-insured for its health insurance and hasa stop loss policy that limits the individual liability to $75,000 per personand the aggregate liability to 125% of the expected claims based upon thenumber of participants and historical claims. As of June 30, 2005, the maximum aggregate liability calculated was$790,000 for the annual contract period.

 

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Item 2.    MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

**Overview**

 

The Company’s product and service strategy focuses on the followingareas:

 

•                  providingsoftware development services to insurance carriers, brokers and agents;

•                  worldwidesale, customization, development, implementation and support of its insurancecarrier system product, BRICS;

•                  worldwidesales and support of agency management systems, including EbixASP and eglobal;

•                  expansionof connectivity between consumers, agents, carriers and third party providersthrough Ebix.com, LifeLink, INS-Site and Exchange; and

•                  businessprocess outsourcing services, which include call center and back office, eitheroff site or at the Company’s facilities.

 

Software delivered online through application service provider (“ASP”)models and connectivity products are recorded as services by the Company. TheCompany anticipates that future revenue will be provided principally bydevelopment services, the sale and licensing of BRICS, internationaloperations, LifeLink, call center services and support.

 

On February 23, 2004, the Company acquired LifeLink Corporation(which is referred to in this 10-Q as “LifeLink” but was renamed toEbixLife on May 2, 2005), and the operations of LifeLink have beenincluded in the Company’s financial statements since that date. On July 1,2004, Ebix Australia Pty Ltd (VIC), which is a wholly-owned subsidiary of theCompany, acquired certain operating assets of Heart Consulting Services Pty Ltd(“Heart”), and the operations of Heart have been included in the Company’sfinancial statements since that date. Accordingly, the first quarter of 2005reflects the Company’s ownership of LifeLink and Heart for the entire quarteras opposed to the first quarter of 2004, which reflects the Company’s ownershipof LifeLink for only part of the quarter and no ownership of Heart.

 

**Critical Accounting Policies**

 

The Company’s “critical accounting policies” are those that requireapplication of management’s most difficult, subjective or complex 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-Kfor the year ended December 31, 2004.

 

**Results of Operations**

 

**Three-Month Period Ended June 30, 2005Compared to the Three-Month Period Ended June 30, 2004**

 

**Total Revenue** - TheCompany’s revenue has been derived from the licensing and sale of proprietarysoftware and third party software and from professional services and supportservices.  Total revenue for the quarter endedJune 30, 2005 increased $1,458,000, or 31.2%, to $6,134,000 from$4,676,000 for the comparable quarter of the prior year.

 

**Software Revenue** -Software revenue is comprised of revenue from the sale of Ebix products(formerly referred to as “cd products”), current legacy products, and otherthird party software.  Total softwarerevenue for the second quarter of 2005 increased $75,000, or 22.5%, to $408,000from $333,000 for the comparable quarter of the prior year.  This increase was due to the BRICS softwaresale of $208,000 partially offset by a decrease in international softwarelicense revenue of $133,000 in the second quarter of 2005 compared to thesecond quarter of 2004.

 

**Services Revenue** —Services revenue includes revenue derived from 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 revenue are fees for software license maintenance, LifeLinkservices (February 23, 2004 to June 30, 2004 for the year to dateperiod ended June 30, 2004, the entire quarter ended June 30, 2004and the entire three and six month periods ended June 30, 2005), Heartservices (for the quarter and year to date ended June 30, 2005 only asHeart was acquired in July 2004), initial registration and ongoing monthlysubscription fees for the EbixASP product, and transaction fees generated fromthe Ebix.mall website, as well as software development and call center revenue.

 

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Total services revenue for the second quarter of 2005 increased$1,383,000, or 31.8%, to $5,726,000 from $4,343,000 for the comparable quarterof the prior year.  This increase wasprimarily due to the inclusion of Heart revenue of $1,154,000, an increase inconsulting service revenue of $286,000, an increase in LifeLink revenue of$146,000, an increase in international service revenue of $74,000 and anincrease in hosting revenue of $8,000, partially offset by a decrease insupport revenue associated with legacy products of $199,000, a decrease inEbixASP revenue of $36,000, a decrease in INS-Site revenue of $20,000, adecrease in Ebix.mall revenue of $19,000 and a decrease in call center revenueof $11,000.

 

During the second quarter of 2005 and 2004, approximately $879,000 and$724,000, respectively, was recognized as services revenue from BRiT InsuranceHoldings PLC (“BRiT”) and its affiliates. The amounts represented 14% and 16%, respectively, of the Company’stotal revenues for the second quarter of 2005 and 2004, respectively, and theincrease in such revenues of $155,000 represented 11% of the total increase inthe Company’s revenues for the three month period ended June 30, 2005compared to the same period of 2004.**Increasesin revenues from BriT Holdings PLC and its affiliates during each of theperiods presented were a result of BRiT Insurance Holdings PLC and itsaffiliates adding additional development projects and expanding the scope ofthe current projects*.* BRiT ownedapproximately 34% of the Company’s common stock as of June 30, 2005.  In addition, the Company has been informedthat as of June 30, 2005, BRiT owned approximately 70% of the equityinterests of CF Epic Insurance and General Fund, which at June 30, 2005owned approximately 8% of the Company’s outstanding common stock. For both ofthe three-month periods ended June 30, 2005 and June 30, 2004, 11% ofthe Company’s total revenues were from AON. Neither BRiT and its affiliates nor AON have long-term agreements withthe Company that provide certainty that such revenues will be recurring.

 

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

 
| ** **              | ** ** | **Support  Revenue** | ** ** | **Total  Revenue** | ** ** |
|-------------------------|------------|----------------------|------------|--------------------|------------|
|                    |       |                 |       |               |       |
| Second  quarter of 2005 |       | $                    | 669,000    |               | $          | 6,134,000 |   |
| Second  quarter of 2004 |       | $                    | 868,000    |               | $          | 4,676,000 |   |

 

Support revenue decreased $199,000, or 23%, and as a percentage oftotal revenue to 11% from 19%, in the second quarter of 2005 compared to thesecond quarter of 2004.

 

Based on historical data, the Company expects that legacy supportrevenue will continue to decrease by approximately 20% each year on a decliningbalance.  The Company expects the legacysupport revenue will continue as long as it is economically feasible for 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, the Company plans to discontinuesupporting the legacy products. The Company cannot predict when this willoccur.

 

The Company expects that future servicesrevenue will be derived from this support, the sale of BRICS, as well asEbixASP registration and monthly fees, LifeLink Services, Heart Services,software development and call center and, to a much lesser extent, alltransaction revenues from Ebix.mall, EbixExchange (INS-Site), conversion andtraining.

 

**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 $204,000, or 15.7%, to $1,503,000 from $1,299,000 for thecomparable quarter of the prior year. This increase was due to an increase in payroll expenses related to theacquisition of Heart of $157,000, an increase in international services andother costs of $61,000, an increase in support fees of $31,000 and an increasedue to the reclassification of capitalized software amortization of $25,000,partially offset by a decrease in non-Heart payroll of $40,000 and a decreasein facility costs (which are allocated to each department based on headcount)allocated to services and other costs of $30,000.

 

**Product Development Expenses**-Total product development expenses for the second quarter of 2005 decreased$88,000, or 10.2%, to $773,000 from $861,000 for the comparable quarter of theprior year. This decrease was due to a decrease in payroll expenses of $82,000partially offset by an increase in headcount in India, resulting in an increasein payroll expense of $8,000.  In addition,facility costs decreased $14,000 as a result of an increase in headcount.

 

**Sales and Marketing Expenses**-Total sales and marketing expenses for the second quarter of 2005 increased$99,000, or 23.4%, to $522,000 from $423,000 for the comparable quarter of theprior year.  This increase wasattributable to an increase in marketing spending of $78,000 and an increase intravel expenses of $21,000 related to various tradeshows during the quarter.

 

**General and Administrative Expenses**—Total general and administrative expenses for the quarter increased $745,000,or 68.9%, to $1,826,000 from $1,081,000 for the comparable quarter of the prioryear.  This increase was due to anincrease in accrued bonus of $272,000 primarily as a result of one quarter ofthe 2005 supplemental bonus****beingaccrued compared to no such accrual in 2004, operating expenses related toHeart of $132,000, an increase in insurance expense of $70,000, an increase innon-LifeLink or Heart payroll of $54,000, restricted stock expense of $48,000,an increase in vacation accrual of $38,000, an increase in director fees of

 

14

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$32,000, an increase in charitable contributions of $23,000, anincrease in LifeLink payroll of $15,000 and a decrease in the amount offacility costs allocated to other departments of $61,000.

 

**Amortization and Depreciation Expenses**– Total amortization and depreciation expenses for the quarter increased$48,000, or 17.7%, to $319,000 from $271,000 for the comparable quarter of theprior year.  This increase was due to theaddition of Heart intangible assets in July 2004.   Total Heart intangible amortization for thequarter was $62,000 compared to no such amortization in the comparable quarterof the prior year, as Heart was acquired in July 2004.  Total LifeLink intangible amortizationincreased $9,000 for the quarter to $144,000 from $135,000 in the comparablequarter of the prior year.  In addition,depreciation expense increased $4,000 as a result of an increase in assetsacquired as part of the LifeLink acquisition and amortization of capitalizedsoftware decreased $27,000 for the quarter as capitalized software was fullyamortized.

 

# **Income Tax Expense**— The effective tax rate for the second quarterof 2005 of 13% was higher than the rate for the comparable quarter of the prioryear of 6 % due to a different income mix among the various tax jurisdictionsin which the Company does business.

#  

**Six-Month Period Ended June 30, 2005Compared to the Six-Month Period Ended June 30, 2004**

 

**Total Revenue** -Total revenue for the six-month period ended June 30, 2005 increased$3,428,000, or 39.8%, to $12,038,000 from $8,610,000 for the comparable periodof the prior year.

 

**Software Revenue** -Total software revenue for the six-month period ended June 30, 2005increased $50,000, or 8.9%, to $610,000 from $560,000 for the comparable periodof the prior year. This increase was due to the BRICS software sale of $208,000partially offset by a decrease in international software license revenue of $158,000in the six-month period ended June 30, 2005 compared to the six-monthperiod ended June 30, 2004.

 

**Services Revenue** —Total services revenue for the six-month period ended June 30, 2005increased $3,378,000, or 42.0%, to $11,428,000 from $8,050,000 for thecomparable period of the prior year. This increase was due to the inclusion of Heart revenue of $2,036,000,an increase in consulting service revenue of $402,000, an increase in LifeLinkrevenue of $1,238,000, an increase in international service revenue of $54,000,an increase in call center revenue of $34,000, an increase in Ebix.mall revenueof $31,000 and an increase in hosting revenue of $4,000, partially offset by adecrease in support revenue associated with legacy products of $284,000, adecrease in EbixASP revenue of $105,000 and a decrease in INS-Site revenue of$32,000.

 

During the six-month periods ended June 30, 2005 and 2004,approximately $1,757,000 and $1,677,000, respectively, was recognized asservices revenue from BRiT and its affiliates. The amounts represented 15% and 19% of the Company’s total revenues forthe six- month periods ended June 30, 2005 and 2004, respectively, and theincrease in such revenues of $80,000 represented 2.3% of the total increase inthe Company’s revenues for the six month period ended June 30, 2005compared to the same period of 2004. For the six-month periods ended June 30,2005 and June 30, 2004, 11% and 12% of the Company’s total revenues werefrom AON.  Neither BRiT and itsaffiliates nor AON have long-term agreements with the Company that providecertainty that such revenues will be recurring.

 

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

 
| ** **                           | ** ** | **Support  Revenue** | ** ** | **Total  Revenue** | ** ** |
|--------------------------------------|------------|----------------------|------------|--------------------|------------|
|                                 |       |                 |       |               |       |
| Six months  ended June 30, 2005 |       | $                    | 1,454,000  |               | $          | 12,038,000 |   |
| Six months  ended June 30, 2004 |       | $                    | 1,738,000  |               | $          | 8,610,000 |   |

 

Support revenue decreased $284,000, or 16%, and as a percentage oftotal revenue to 12% from 20%, for the six-month period ended June 30,2005 compared to the same period in 2004.

 

**Services and other costs**-Total services and other costs for the six-month period ended June 30,2005 increased $447,000, or 18.2%, to $2,909,000 from $2,462,000 for thecomparable period of the prior year. This increase was due to an increase in payroll expenses related to theacquisition of Heart of $270,000, an increase in international services andother costs of $105,000, increase in facility costs (which are allocated toeach department based on headcount) allocated to services and other costs of$40,000, an increase in non-Heart payroll of $22,000 and an increase in supportfees of $10,000.

 

**Product Development Expenses**-**Total product development expenses forthe six-month period ended June 30, 2005 increased $146,000, or 10.3%, to$1,567,000 from $1,421,000 for the comparable period of the prior year. Thisincrease was due to an increase in payroll expenses related to the acquisitionof LifeLink of $122,000, an increase in headcount in India resulting in anincrease in payroll expense of $19,000 and an increase in facility costs of$40,000 as a result of increases in headcount. These increases were partiallyoffset by a decrease in non-LifeLink domestic payroll expenses of $35,000.

 

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**Sales and Marketing Expenses**-Total sales and marketing expenses for the six-month period ended June 30,2005 increased $304,000, or 43.7%, to $1,000,000 from $696,000 for thecomparable period of the prior year. This increase was attributable to an increase in payroll expensesrelated to LifeLink of $85,000, an increase in non-LifeLink domestic payroll of$30,000, an increase in****marketingspending of $65,000 and travel expenses of $48,000 related to varioustradeshows during the period, an increase in facilities allocation of $34,000,an increase in international marketing expenses of $31,000 and an increase inoffice supplies of $11,000.

 

**General and Administrative Expenses**—Total general and administrative expenses for the six-month period ended June 30,2005 increased $1,248,000, or 55.1%, to $3,515,000 from $2,267,000 for thecomparable period of the prior year. This increase was due to an increase in accrued bonus of $406,000primarily as a result of two quarters of the 2005 supplemental bonus beingaccrued compared to no such accrual in 2004, operating expenses related toHeart of $240,000, an increase in insurance expense of $207,000, an increase ininternational operating expenses of $105,000, an increase in audit and legalexpenses of $96,000, an increase in non-LifeLink or Heart payroll of $21,000,restricted stock expense of $48,000, an increase in vacation accrual of$50,000, an increase in director fees of $50,000, an increase in public relationexpenses of $42,000, an increase in office expense and rent of $55,000, anincrease in charitable contributions of $33,000 and an increase in LifeLinkpayroll of $14,000, partially offset by an increase in the amount of facilitycosts allocated to other departments of $119,000.

 

**Amortization and Depreciation Expenses**– Total amortization and depreciation expenses for the six-month period ended June 30,2005 increased $176,000, or 37.3%, to $648,000 from $472,000 for the comparablequarter of the prior year.  This increasewas due to the addition of LifeLink intangible assets in February 2004 andHeart intangible assets in July 2004.  Total Heart intangible amortization for the period was $139,000 comparedto no such amortization in the comparable period of the prior year, as Heartwas acquired in July 2004.  TotalLifeLink intangible amortization increased $84,000 for the period to $287,000from $203,000 in the comparable period of the prior year.  This increase reflects a partial period ofamortization in 2004, as LifeLink was acquired February 23, 2004, comparedto a full period of amortization in 2005. In addition, depreciation expense increased $7,000 as a result of anincrease in assets acquired as part of the LifeLink acquisition, andamortization of capitalized software decreased $54,000 for the period ascapitalized software was fully amortized.

 

# **Income Tax Expense**— The effective tax rate for thesix-month period ended June 30,2005 of 11% was lower than the rate for the comparable period of the prior yearof 14% due to a different income mix among the various tax jurisdictions inwhich the Company does business.

#  

**Liquidity and Capital Resources**

 

The Company had cash and cash equivalents of $4,915,000 and restrictedcash of $3,000,000 at June 30, 2005, compared to cash and cash equivalentsof $5,843,000 and restricted cash of $3,000,000 at December 31, 2004.

 

During the six months ended June 30, 2005, the Company generatedoperating cash flow of $2,647,000 as compared to $193,000 of operating cashflow for the six months ended June 30, 2004. This increase resultedprimarily from $2,152,000 of net income, an increase in deferred revenue of$403,000 primarily related to the acquisition of LifeLink and Heart, $648,000in amortization and depreciation and an increase in accounts payable andaccrued expenses of $154,000, partially offset by a decrease in accountsreceivable of $431,000 and a decrease in accrued payroll and related benefitsof $307,000.  These balance sheetfluctuations are normal consequences of timing differences between accruals andtheir cash settlement.

 

Cash used in investing activities of $330,000 in the six months ended June 30,2005 primarily represented capital expenditures primarily related to therelocation of the Sydney, Australia office. Cash used in financing activities of $3,234,000 resulted from theCompany’s repurchase of a redeemable stock guarantee of $2,700,000, the paymentof a long-term debt obligation of $500,000 and payments on the line of creditof $91,000 partially offset by the proceeds from the exercise of stock optionsof $57,000.

 

In October 2002, the Company obtained from LaSalle Bank NationalAssociation a $1,000,000 revolving line of credit, secured by a perfected firstsecurity interest in substantially all of the Company’s assets. The line ofcredit was increased to $5,000,000 during February 2004.  On February 23, 2005, the Companyentered into an amendment to the credit agreement amending certain financialcovenants.  Major features of the line,as amended, include an interest rate equal to the prime rate, security at 60%of the amount of the line in a restricted interest-bearing account and timelyfinancial reporting requirements. The line of credit will expire on October 31,2005. As of June 30, 2005, total borrowings on this line were $3,409,000,of which $3,000,000 was classified as restricted cash because it was restrictedfrom use in accordance with the line of credit agreement. The agreementprovides that the line is secured by substantially all of the Company’s assets.The Company was in compliance with all debt covenants at June 30, 2005.

 

On February 23, 2004, the Company acquired LifeLink, and theoperations of LifeLink have been included in the Company’s financial statementssince that date. Under terms of the agreement, the Company acquired all of theoutstanding capital stock of LifeLink from its shareholders in exchange for anaggregate purchase price of $10,354,000, payable as follows: $5,000,000 paid incash at closing, $2,500,000 in a non-interest bearing note payable in cash inannual installments of $500,000 over five years (present value computed as$2,226,000), and $3,000,000 payable in 200,000 shares of the common stock ofthe Company issued at the time of closing. On

 

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February 23, 2005, the Company paid the first installment of$500,000 in accordance with the note agreement. On April 28, 2005, theCompany repurchased the 200,000 shares issued in the acquisition at a price of$13.50 per share.  See note 7 to thecondensed consolidated financial statements included in this Form 10-Qfor a discussion of the redeemable common stock.

 

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

 

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 have sufficient cash from operations to satisfyits contractual obligations for at least the next several years.

 

# **The following summarizes the Company’s contractual obligations at June 30,2005, and the effect such obligations are expected to have on the Company’sliquidity and cash in future periods (in thousands):**

 
| ** **                      | ** ** | **Payment Due by Period** | ** ** |
|---------------------------------|------------|---------------------------|------------|
| ** **                      | ** ** | **Total**                 | ** ** | **Less Than 1  Year** | ** ** | **1 – 3 Years** | ** ** | **3- 5 Years** | ** ** | **More Than 5  Years** | ** ** |
| ** **                      | ** ** | **(in thousands)**        | ** ** |
|                            |       |                      |       |   |   |   |   |   |   |   |   |
| Contractual  Obligations:       |       |                      |       |   |   |   |   |   |   |   |   |
| Long-Term  Debt Obligations (1) |       | $                         | 8,424      |   | $ | 5,991 |   | $ | 2,433 |   | $ | — |   | $ | — |   |
| Operating  Leases Obligations   |       | 2,470                     |       | 741 |   | 1,368 |   | 361 |   | — |   |
| Capital  Leases Obligations     |       | —                    |       | — |   | — |   | — |   | — |   |
| Total                           |       | $                         | 10,894     |   | $ | 6,732 |   | $ | 3,801 |   | $ | 361 |   | $ | — |   |

 

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(1)     $1,525,000 is contingent uponexercise of the holder’s put option to require the Company to purchase theholder’s redeemable common stock in connection with the Heart acquisition. Seenote 8 to the condensed consolidated financial 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-lookingstatements and information that are based on management’s beliefs, as well asassumptions made by, and information currently available to management,including statements regarding future economic performance and financialcondition, liquidity and capital resources, acceptance of the Company’sproducts by the market and management’s plans and objectives. The Company hastried to identify such forward looking statements by use of words such as “expects,”“intends,” “anticipates,” “plans,”  “believes,“will,” “should,” and similar expressions, but these words are not theexclusive means of identifying such statements. The forward looking statementsincluded in this Quarterly Report are subject to various risks, uncertaintiesand other factors which could cause actual results to vary materially fromthose expressed in, or implied by, the forward looking statements.  Such risks, uncertainties and other factorsinclude those discussed in “Risk Factors” below. Except as expressly requiredby the federal securities laws, the Company undertakes no obligation to updateany such factors or to publicly announce the results of any of theforward-looking statements contained herein to reflect changed circumstances orfuture events or developments or for any other 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 materiallyand adversely affect our business, financial condition, operating results, cashflows and prospects and/or the market price of our common stock.  In this section, the words “we,” “us,” “our”and “ours” refer to the Company.

 

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

 

**You may have difficulty evaluating ourbusiness because of our limited history of Internet, call center and other businessprocess 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 notbegin any call center or other business process outsourcing operations or begingenerating revenues from these operations until the first quarter of 2003.Accordingly, there is a limited history of these operations on which you canevaluate our company and prospects. We cannot be certain that our Internet,call center and other business process outsourcing strategies will besuccessful, because these strategies are new. Our early-stage Internet, callcenter and other business process outsourcing operations will be particularlysusceptible to the risks and uncertainties described in these risk factors andmore likely to incur the expenses associated with addressing them. Ourprospects must be considered in light of the risks, uncertainties, expenses anddifficulties frequently encountered by companies in a transitional stage ofdevelopment, particularly companies in new and rapidly evolving markets, suchas electronic commerce, and using new and unproven business models.

 

**Because the support revenue that we have traditionallyrelied upon has been steadily declining, it is important that new sources ofrevenue continue to be developed.**

 

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

 

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

 

Revenues from one customer, BRiT Insurance Holdings PLC and itsaffiliates, which at June 30, 2005 owned approximately 34.0% of our commonstock and approximately 70% of CF Epic Insurance and General Fund, which atthat date owned approximately 8% of our common stock, represented approximately15% and 20% of our total revenue for the six-month periods ended June 30,2005 and 2004, respectively. If revenues from this customer were todiscontinue, our operating results would likely be adversely affected.

 

Revenues from another customer, AON, represented approximately 11% and12% of our total revenue for the six-month periods ended June 30, 2005 and2004, respectively. If revenues from this customer were to discontinue, ouroperating results would likely be adversely affected.

 

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

 

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

 

**Our operating results may fluctuatedramatically**.

 

Our quarterly operating results may fluctuate significantly in thefuture due to a variety of factors that could affect our revenues or ourexpenses in any particular quarter. You should not rely on our results ofoperations during any particular quarter as an indication of our results for afull year or any other quarter. Factors that may affect our quarterly resultsmay include the loss of a significant insurance agent, carrier or brokerrelationship or the merger of any of our participating insurance carriers withone another. Our operating expenses are based in part on our expectations ofour future revenues and are relatively fixed in the short term. We may beunable to adjust spending quickly enough to offset any unexpected revenueshortfall.

 

**We cannot predict our future capital needswith certainty and we may not be able to secure additional financing when weneed it.**

 

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

 

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

 

In 2004 we acquired LifeLink and certain assets of Heart and may in thefuture acquire or make investments in complementary businesses, technologies,services or products if appropriate opportunities arise. The process ofintegrating LifeLink, Heart or any

 

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other acquired business, technology, service or product into ourbusiness and operations may result in unforeseen operating difficulties andexpenditures. Integration of an acquired company also may consume much of ourmanagement’s time and attention that could otherwise be available for ongoingdevelopment of our business. Moreover, the anticipated benefits of the LifeLinkand Heart acquisitions or any other acquisition may not be realized.Furthermore, we may be unable to identify, negotiate or finance futureacquisitions successfully. Future acquisitions could result in potentiallydilutive issuances of equity securities or the incurrence of debt, contingentliabilities or amortization expenses related to intangible assets.

 

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

 

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

 

The marketplaces in which we operate are characterized by:

 

•                                          rapidlychanging technology;

•                                          evolvingindustry standards;

•                                          frequentnew product and service introductions;

•                                          shiftingdistribution channels; and

•                                          changingcustomer demands.

 

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

 

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

 

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

 

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

 

•                                          undertakemore extensive marketing campaigns for their brands and services;

•                                          devotemore resources to website and systems development;

•                                          adoptmore aggressive pricing policies; and

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We market our software internationally and plan to expand our Internetservices to locations outside of the United States. In 2004, we acquiredcertain assets from Heart Consulting Services Pty. Ltd. in Australia. Inaddition, commencing in 2002, we began development activities, call centerservices and other operations in India. Our international operations may notproduce enough revenue to justify our investments in establishing them and aresubject to other inherent risks, including:

 

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

•                                          greaterdifficulty in collecting accounts receivable;

•                                          difficultiesand costs of staffing and managing foreign operations;

•                                          reducedprotection for intellectual property rights in some countries;

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

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

•                                          fluctuationsin exchange rates;

•                                          potentiallyadverse tax consequences; and

•              politicaland economic instability.

 

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

 

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

 

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

 

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

 

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

 

If the computer hardware operations that host our website were toexperience a system failure, the performance of our website would be harmed.These systems are also vulnerable to damage from fire, floods, earthquakes,acts of terrorism, power loss, telecommunications failures, break-ins andsimilar events. Our property and business interruption insurance coverage maynot be adequate to compensate us for all losses that may occur. In addition,our users depend on Internet service providers, online service providers andother website operators for access to our website. Each of these providers hasexperienced significant outages in the past, and could experience outages,delays and other difficulties due to system failures unrelated to our systems.

 

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

 

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

 

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

 

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

 

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

 

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

 

***Risks Related To OurCommon Stock***

 

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

 

In some future periods, our results of operations may be below theexpectations of public market investors, which could negatively affect themarket price of our common stock. Furthermore, the stock market in general hasexperienced extreme price and volume fluctuations in recent years. We believethat, in the future, the market price of our common stock could fluctuatewidely due to variations in our performance and operating results or because ofany 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;

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

•                                          changesin market valuations of our competitors; and

•                                          generalpolitical, economic and market conditions.

 

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

 

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

 

The concentration of ownership of our common stock may have the effectof delaying, preventing or deterring a change in control of our company, coulddeprive our stockholders of an opportunity to receive a premium for theircommon stock as part of a sale of our company, and may affect the market priceof our common stock. At June 30, 2005, BRiT Insurance Holdings PLCbeneficially owned approximately 34.0% of our outstanding common stock and,together with our executive officers and directors, beneficially ownedapproximately 53.7% of our outstanding common stock. In addition, at June 30,2005, CF Epic Insurance and General Fund, of which BriT owns approximately 70%of the equity interests, beneficially owned 8% of our outstanding common stock.As a result, those stockholders, if they act together, are able to control allmatters requiring stockholder approval, including the election of all directorsand approval of significant corporate transactions and amendments to ourcertificate of incorporation. These stockholders may use

 

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their ownership position to approve or take actions that are adverse toyour interests or prevent the taking of actions that are consistent with yourinterests.

 

Item 3.    QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

 

The majority of the Company’s operations are based in the U.S. and,accordingly, the majority of our transactions are denominated in U.S.dollars.  However, the Company hasforeign-based operations where transactions are denominated in foreigncurrencies and are subject to market risk with respect to fluctuations in therelative value of currencies.  Currently,the Company and its subsidiaries have operations in Australia, Canada, India,New Zealand and Singapore and conduct transactions in the local currencies ofeach location.  There can be no assurancethat fluctuations in the value of foreign currencies will not have a materialadverse effect on the Company’s business, operating results, revenues orfinancial condition. The impact of fluctuations in these currencies resulted innet transaction gains of $84,000 for the three months ended June 30, 2005and net transaction losses of $2,000 for the three months ended June 30,2004. The impact of fluctuations in these currencies resulted in nettransaction gains for the six months ended June 30, 2005 and June 30,2004 of $75,000 and $8,000, respectively. The Company considered the historical trends in currency exchange rateand determined 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 $167,000 and $89,000for the three months ended June 30, 2005 and June 30, 2004,respectively. Such adverse changes would have resulted in an adverse impact onincome before taxes of approximately $295,000 and $133,000 for the six monthsended June 30, 2005 and June 30, 2004, respectively.

 

There have been no material changes in the Company’s interest rate riskduring the three and six months ended June 30, 2005.  For additional information on interest raterisk, refer to the “Quantitative Disclosures About Market Risk” section ofthe Company’s Annual Report on Form 10-K for the year ended December 31,2004.

 

Item 4.    CONTROLS AND PROCEDURES

 

During the 2004 year-end audit, the Company’s independent registeredpublic accounting firm, BDO Seidman, LLP (“BDO”) identified certain significantdeficiencies relating to the Company’s internal control over financialreporting. A significant deficiency is a control deficiency, or combination ofcontrol deficiencies, that adversely affects the Company’s ability to initiate,authorize, record, process or report external financial data reliably inaccordance with generally accepted accounting principles such that there ismore than a remote likelihood that a misstatement of the Company’s annual orinterim financial statements that is more than inconsequential will not beprevented or detected. BDO’s determination that there were significantdeficiencies took into consideration audit differences, both requiredadjustments to the Company’s financial statements and unrecorded adjustments,as well as underlying causes for such adjustments, and observations of theCompany’s processes, but did not arise from any particular transaction orevent. The details of the significant deficiencies relate to the lack ofaccounting knowledge and leadership at foreign locations, inadequatedocumentation of certain accounting transactions, insufficient analysis andreview of domestic account reconciliations, lack of documentation ofdevelopment costs and related agreements, and lack of documentation to supportthe Company’s income tax provisions and related accounts**.**On July 4, 2005 the Company hired aninternational controller to supervise the international locations.  ** **The Company is continuing to takesteps necessary to address the other significant deficiencies.

 

There was no change in the Company’s internal control over financialreporting during the quarter ended June 30, 2005 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

The Company carried out an evaluation, under the supervision and withthe participation of the Company’s management, including its Chief ExecutiveOfficer and Chief Financial Officer, of the design and operation of the Company’sdisclosure controls and procedures, which are designed to provide reasonableassurance that the information required to be disclosed by the Company in thereports that it files with or submits to the Securities and Exchange Commissionis (1) recorded, processed, summarized and reported within the timeperiods specified in the rules and forms of the Securities and ExchangeCommission and (2) accumulated and communicated to the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure. Based on this evaluation, the Company’s Chief Executive Officer andthe Company’s Chief Financial Officer concluded that, as of June 30, 2005,the Company’s disclosure controls and procedures were effective to provide suchreasonable assurance.

 

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Part II — OTHER INFORMATION

 

**Item 2.****Unregistered Sales of Equity Securities and Use ofProceeds**

 

The following table providesinformation regarding the Company’s repurchases of shares of its common stockduring the three months ended June 30, 2005.

 
| **Period**     | ** ** | **Shares  Purchased** | ** ** | **Average  Price  Paid  Per  Share** | ** ** | **Shares  Purchased  as Part  of Publicly  Announced  Programs** | ** ** | **Maximum  Shares that  May  Yet be  Purchased  Under  Publicly  Announced  Program** | ** ** |
|----------------|------------|-----------------------|------------|--------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| April (1) |       | 200,000               |       | $                                    | 13.50      |                                                             | —     |                                                                                  | —     |   |
| May            |       | —                |       | —                               |       | —                                                           |       | —                                                                                |       |
| June           |       | —                |       | —                               |       | —                                                           |       | —                                                                                |       |
|                |            |                       |            |                                      |            |                                                                  |            |                                                                                       |            |  |

 

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(1) See Note 7 to the financial statements included in thisQuarterly Report.

 

Item 6.    EXHIBITS

 

The following exhibits are filed with thisreport:

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                   |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                        |
| 2.1              |       | Stock Purchase Agreement dated February 23,  2004 by and among the Company and the shareholders of LifeLink Corporation  (incorporated by reference to Exhibit 2.1 to the Company’s Current  Report of Form 8-K dated February 23, 2004 (the “February 2004  8-K”)) and incorporated herein by reference. |
|             |       |                                                                                                                                                                                                                                                                                                                                              |
| 2.2              |       | Secured Promissory Note, dated February 23,  2004, issued by the Company (incorporated by reference to Exhibit 2.2 of  the February 2004 8-K) and incorporated herein by reference.                                                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                                                                                              |
| 2.3              |       | Purchase Agreement, dated June 28,  2004, by and between Heart Consulting Pty Ltd. And Ebix Australia Pty Ltd.  (incorporated by reference to Exhibit 2.1 to the Company’s Current  Report of Form 8-K dated July 14, 2004 (the “July 14,  2004 8-K”)) and incorporated herein by reference.              |
|             |       |                                                                                                                                                                                                                                                                                                                                              |
| 2.4              |       | Agreement, dated July 1, 2004, by and  between Heart Consulting Pty Ltd. and Ebix, Inc. (incorporated by  reference to Exhibit 2.2 to the Company’s Current Report of Form 8-K  dated July 14, 2004 (the “July 14, 2004 8-K”)) and  incorporated herein by reference.                                |
|             |       |                                                                                                                                                                                                                                                                                                                                              |
| 3.1              |       | Certificate of Incorporation of the  Company, as amended (including Certificates of Designations) (incorporated by  reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the  year ended December 31, 2002) and incorporated herein by reference.                                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                                              |
| 3.2              |       | Bylaws of the Company (filed as Exhibit 3.2  to the Company’s Annual Report on Form 10-K for the fiscal year  ended December 31, 2000) and incorporated herein by reference.                                                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                                              |
| 31.1             |       | Certification of Chief Executive Officer  Pursuant to Rule 13a-14(a) (Section 302 of the  Sarbanes-Oxley Act of 2002).                                                                                                                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                              |
| 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: August 12, 2005 | By              |   |
|                       |            | /s/ RICHARD J. BAUM |
|                       |            | Richard J. Baum |
|                       |            | Executive Vice President — Finance &  Administration, Chief  Financial Officer (principal financial and accounting officer),  and Secretary |

 

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