**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q/A**

**Amendment No.1**

** **

**to**

 

| **ý**                                             | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**        |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                   |
| **For the quarterly period ended June 30,  2004** |
| ** **                                             |
| **OR**                                                 |
|                                                   |
| **o**                                                  | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Commission file number 0-15946**

 

**Ebix, Inc.**

(Exact name of registrant as specified in itscharter)

 

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ýNo o

 

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

 

As of August 9, 2004, the number of shares of Common Stockoutstanding was 2,896,718.

 

 

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**EXPLANATORY NOTE**

 

**In connection with a review by the Securitiesand Exchange Commission (the “SEC”) of the Company’s Registration Statement on Form S-3(File No. 333-112616), the SEC has reviewed the Company’s QuarterlyReport on Form 10-Q for the quarter ended June 30, 2004 (the “Form 10-Q”)and other reports filed by the Company with the SEC. The SEC’s review of the Form 10-Qhas focused primarily on financial-related disclosure. This Amendment No. 1to the Form 10-Q (this “10-Q/A”) has been filed in connectionwith the Company’s response to comments on the Form 10-Q and otherfilings raised by the SEC during its review process.**

 

**Please note that the information contained inthis 10-Q/A has not been updated to reflect events or developmentsoccurring after August 16, 2004, the date the Form 10-Q wasoriginally filed with the SEC and, accordingly, such information continues tospeak as of such earlier date.**

 

**Ebix, Inc. and Subsidiaries**

 

FORM 10-Q

 

FOR THE QUARTER ENDED JUNE 30, 2004

 

INDEX

 
| Part I — FINANCIAL INFORMATION |                                                                                                                    |
|------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                                    |   |
|                                     | Item 1.  Consolidated Financial  Statements                                                                        |   |
|                                     |                                                                                                                    |   |
|                                     | Condensed Consolidated Balance Sheets at June 30,  2004 (unaudited) and December 31, 2003                     | 3 |
|                                     |                                                                                                                    |   |
|                                     | Condensed Consolidated Statements of Income  for the Three and Six Months ended June 30, 2004 and 2003 (unaudited) | 4 |
|                                     |                                                                                                                    |   |
|                                     | Condensed Consolidated Statements of Cash  Flows for the Six Months ended June 30, 2004 and 2003 (unaudited)       | 5 |
|                                     |                                                                                                                    |   |
|                                     | Notes to Condensed Consolidated Financial  Statements (unaudited)                                                       | 6 |
|                                     |                                                                                                                    |   |
|                                     | Item 2.   Management’s Discussion and Analysis of Financial Condition and  Results of Operations              | 11 |
|                                     |                                                                                                                    |   |
|                                     | Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                               | 22 |
|                                     |                                                                                                                    |   |
|                                     | Item 4.   Controls and Procedures                                                                                  | 23 |
|                                     |                                                                                                                    |   |
| PART II — OTHER INFORMATION    | 23                                                                                                                      |
|                                     |                                                                                                                    |   |
|                                     | Item 6.   Exhibits and Reports on Form 8-K                                                                    | 23 |
|                                     |                                                                                                                    |   |
| SIGNATURES                               | 24                                                                                                                      |

 

2

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**Ebix, Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

(In thousands, except for share and per shareamounts)

 
| ** **                                                                                                                                                        | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                        | ** ** | **(Unaudited****)**     | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                        |       |                    |       |                        |       |
| **Current assets:**                                                                                                                                               |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                         |       | $                       | 6,665      |                        | $          | 7,915 |   |
| Restricted cash                                                                                                                                                   |       | 3,000                   |       | —                      |       |
| Accounts receivable, less allowance of $290  and $356, respectively                                                                                               |       | 3,145                   |       | 1,787                       |       |
| Other current assets                                                                                                                                              |       | 663                     |       | 364                         |       |
| **Total current assets**                                                                                                                                          |       | 13,473                  |       | 10,066                      |       |
| Property and equipment, net                                                                                                                                       |       | 1,364                   |       | 1,353                       |       |
| Capitalized software, net                                                                                                                                         |       | 55                      |       | 109                         |       |
| Goodwill                                                                                                                                                          |       | 6,112                   |       | 123                         |       |
| Intangibles, net                                                                                                                                                  |       | 3,315                   |       | —                      |       |
| Other assets                                                                                                                                                      |       | 411                     |       | 320                         |       |
| **Total assets**                                                                                                                                                  |       | $                       | 24,730     |                        | $          | 11,971 |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                    |       |                    |       |                        |       |
| **Current  liabilities:**                                                                                                                                         |       |                    |       |                        |       |
| Accounts payable and accrued expenses                                                                                                                             |       | $                       | 1,675      |                        | $          | 1,778 |   |
| Accrued payroll and related benefits                                                                                                                              |       | 576                     |       | 1,287                       |       |
| Current portion of long term debt                                                                                                                                 |       | 500                     |       | —                      |       |
| Current portion of capital lease  obligations                                                                                                                     |       | 11                      |       | 73                          |       |
| Deferred revenue                                                                                                                                                  |       | 2,843                   |       | 2,141                       |       |
| **Total current liabilities**                                                                                                                                     |       | 5,605                   |       | 5,279                       |       |
| Long term debt, less current portion                                                                                                                              |       | 1,726                   |       | —                      |       |
| Line of credit                                                                                                                                                    |       | 3,500                   |       | —                      |       |
| Redeemable common stock (200,000 and 0  shares issued and outstanding at June 30, 2004 and December 31,  2003, respectively) stated at redemption price |       | 2,700                   |       | —                      |       |
|                                                                                                                                                              |       |                    |       |                        |       |
| **Stockholders’  equity:**                                                                                                                                   |       |                    |       |                        |       |
| Convertible Series D Preferred stock,  $.10 par value, 2,000,000 shares authorized, no shares issued and outstanding                                         |       | —                  |       | —                      |       |
| Common stock, $.10 par value, 40,000,000 shares  authorized, 2,738,990 and 2,316,767 shares issued and outstanding,  respectively                                 |       | 274                     |       | 232                         |       |
| Additional paid-in capital                                                                                                                                        |       | 91,945                  |       | 88,706                      |       |
| Deferred compensation                                                                                                                                             |       | (393                    | )          | (436                        | )          |
| Accumulated deficit                                                                                                                                               |       | (81,095                 | )          | (82,251                     | )          |
| Accumulated other comprehensive income                                                                                                                            |       | 468                     |       | 441                         |       |
| **Total stockholders’  equity**                                                                                                                              |       | 11,199                  |       | 6,692                       |       |
| **Total liabilities and  stockholders’ equity**                                                                                                              |       | $                       | 24,730     |                        | $          | 11,971 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

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**Ebix, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Income**

(In thousands, except per share data)

(Unaudited)

 
| ** **                                                                                                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                               |       |                                 |       |                               |       |   |   |   |   |
| **Revenue:**                                                                                                                       |       |                                 |       |                               |       |   |   |   |   |
| Software                                                                                                                           |       | $                                    | 333        |                               | $          | 558 |   | $ | 560 |   | $ | 768 |   |
| Services and other (Including revenues from  related parties of $724, $179, $1,677 and $984, respectively – See Note 5.) |       | 4,343                                |       | 2,737                              |       | 8,050 |   | 6,139 |   |
| Total revenue                                                                                                                      |       | 4,676                                |       | 3,295                              |       | 8,610 |   | 6,907 |   |
| **Operating  expenses:**                                                                                                           |       |                                 |       |                               |       |   |   |   |   |
| Services and other costs                                                                                                           |       | 1,354                                |       | 773                                |       | 2,517 |   | 1,778 |   |
| Product development                                                                                                                |       | 861                                  |       | 430                                |       | 1,421 |   | 790 |   |
| Sales and marketing                                                                                                                |       | 423                                  |       | 499                                |       | 696 |   | 960 |   |
| General and administrative                                                                                                         |       | 1,297                                |       | 1,375                              |       | 2,684 |   | 2,539 |   |
| **Total operating expenses**                                                                                                       |       | 3,935                                |       | 3,077                              |       | 7,318 |   | 6,067 |   |
| **Operating income**                                                                                                               |       | 741                                  |       | 218                                |       | 1,292 |   | 840 |   |
| Interest income                                                                                                                    |       | 15                                   |       | 20                                 |       | 42 |   | 35 |   |
| Interest expense                                                                                                                   |       | (1                                   | )          | (5                                 | )          | (3 | ) | (10 | ) |
| Foreign exchange gain (loss)                                                                                                       |       | (2                                   | )          | (8                                 | )          | 8 |   | (57 | ) |
| Income before income taxes                                                                                                         |       | 753                                  |       | 225                                |       | 1,339 |   | 808 |   |
| Income tax expense                                                                                                                 |       | (43                                  | )          | (136                               | )          | (183 | ) | (202 | ) |
|                                                                                                                               |       |                                 |       |                               |       |   |   |   |   |
| **Net  income**                                                                                                                    |       | $                                    | 710        |                               | $          | 89 |   | $ | 1,156 |   | $ | 606 |   |
| ** **                                                                                                                         |       |                                 |       |                               |       |   |   |   |   |
| **Basic  earnings per common share**                                                                                               |       | $                                    | 0.26       |                               | $          | 0.04 |   | $ | 0.43 |   | $ | 0.26 |   |
| ** **                                                                                                                         |       |                                 |       |                               |       |   |   |   |   |
| **Diluted  earnings per common share**                                                                                             |       | $                                    | 0.23       |                               | $          | 0.04 |   | $ | 0.39 |   | $ | 0.26 |   |
|                                                                                                                               |       |                                 |       |                               |       |   |   |   |   |
| Basic weighted average shares outstanding                                                                                          |       | 2,739                                |       | 2,291                              |       | 2,662 |   | 2,291 |   |
|                                                                                                                               |       |                                 |       |                               |       |   |   |   |   |
| Diluted weighted average shares outstanding                                                                                        |       | 3,066                                |       | 2,298                              |       | 2,992 |   | 2,293 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

4

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**Ebix, Inc. and Subsidiaries**

**Condensed Consolidated Statements of CashFlows**

(In thousands)

(Unaudited)

 
| ** **                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **2004**                           | ** ** | **2003** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                         |       |                               |       |   |   |
| **Cash  flows from operating activities:**                                                                                                                                                                                                                                                                                                                                   |       |                               |       |   |   |
| Net income                                                                                                                                                                                                                                                                                                                                                                   |       | $                                  | 1,156      |   | $ | 606 |   |
| **Adjustments  to reconcile net income to net**** cash provided by operating  activities:**                                                                                                                                                                                                                                                                             |       |                               |       |   |   |
| Depreciation and amortization                                                                                                                                                                                                                                                                                                                                                |       | 487                                |       | 202 |   |
| Stock-based compensation                                                                                                                                                                                                                                                                                                                                                     |       | 47                                 |       | 23 |   |
| Provision for doubtful accounts                                                                                                                                                                                                                                                                                                                                              |       | 60                                 |       | 40 |   |
| **Changes  in assets and liabilities, net of effect of acquisition:**                                                                                                                                                                                                                                                                                                        |       |                               |       |   |   |
| Accounts receivable                                                                                                                                                                                                                                                                                                                                                          |       | (683                               | )          | 808 |   |
| Other assets                                                                                                                                                                                                                                                                                                                                                                 |       | (290                               | )          | (280 | ) |
| Accounts payable and accrued expenses                                                                                                                                                                                                                                                                                                                                        |       | (115                               | )          | 341 |   |
| Accrued payroll and related benefits                                                                                                                                                                                                                                                                                                                                         |       | (921                               | )          | 196 |   |
| Deferred revenue                                                                                                                                                                                                                                                                                                                                                             |       | 452                                |       | 365 |   |
| Net cash provided by operating activities                                                                                                                                                                                                                                                                                                                                    |       | 193                                |       | 2,301 |   |
| **Cash  flows from investing activities:**                                                                                                                                                                                                                                                                                                                                   |       |                               |       |   |   |
| Acquisition of LifeLink, net of cash  acquired                                                                                                                                                                                                                                                                                                                               |       | (4,763                             | )          | — |   |
| Capital expenditures                                                                                                                                                                                                                                                                                                                                                         |       | (122                               | )          | (388 | ) |
| Net cash used in investing activities                                                                                                                                                                                                                                                                                                                                        |       | (4,885                             | )          | (388 | ) |
| **Cash  flows from financing activities:**                                                                                                                                                                                                                                                                                                                                   |       |                               |       |   |   |
| Proceeds from borrowings related to line of  credit                                                                                                                                                                                                                                                                                                                          |       | 3,500                              |       | — |   |
| Restricted cash                                                                                                                                                                                                                                                                                                                                                              |       | (3,000                             | )          | — |   |
| Proceeds from the issuance of common stock,  net of issuance costs                                                                                                                                                                                                                                                                                                           |       | 2,977                              |       | — |   |
| Principal payments under capital lease  obligations                                                                                                                                                                                                                                                                                                                          |       | (62                                | )          | (55 | ) |
| Net cash provided by (used in) financing activities                                                                                                                                                                                                                                                                                                                          |       | 3,415                              |       | (55 | ) |
| Effect of foreign exchange rates on cash                                                                                                                                                                                                                                                                                                                                     |       | 27                                 |       | (72 | ) |
| Net change in cash and cash equivalents                                                                                                                                                                                                                                                                                                                                      |       | (1,250                             | )     | 1,786 |   |
| Cash and cash equivalents at the beginning of the period                                                                                                                                                                                                                                                                                                                     |       | 7,915                              |       | 4,993 |   |
| Cash and cash equivalents at the end of the period                                                                                                                                                                                                                                                                                                                           |       | $                                  | 6,665      |   | $ | 6,779 |   |
|                                                                                                                                                                                                                                                                                                                                                                         |       |                               |       |   |   |
| **Supplemental  disclosures of cash flow information:**                                                                                                                                                                                                                                                                                                                      |       |                               |       |   |   |
| Interest paid                                                                                                                                                                                                                                                                                                                                                                |       | $                                  | 3          |   | $ | 10 |   |
| Income taxes paid                                                                                                                                                                                                                                                                                                                                                            |       | $                                  | 185        |   | $ | 154 |   |
|                                                                                                                                                                                                                                                                                                                                                                         |       |                               |       |   |   |
| **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. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

(UNAUDITED)

 

Note 1.  BASIS OF PRESENTATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

On February 23, 2004, the Company acquired LifeLink Corporation (“LifeLink”).Under terms of the agreement, the Company acquired all of the outstandingcapital stock of LifeLink from its shareholders in exchange for an aggregatepurchase price of $10,354,000 (see note 7). The acquisition was accounted foras a purchase business combination.

 

These condensed consolidated financial statements should be read inconjunction with the consolidated financial statements, and accompanying notesthereto, included in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2003.

 

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

 

**Summary of significant accounting policies—**

 

**Revenue Recognition**—The Company applies the provisions ofStatement of Position (“SOP”) 97-2, “Software Revenue Recognition,” asamended by Statement of Position 98-9, “Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions,” to alltransactions involving the sale of software.

 

6

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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 appliesthe provisions of SOP 97-2, as amended by Statement of Position 98-9,“Modifications of SOP 97-2, Software Revenue Recognition, With Respect toCertain Transactions,” to all arrangements which include software deliverablesthat are considered more than inconsequential to the other elements in thearrangements. For 2003, all of the Company’s contracts with multipledeliverables have fallen under higher level accounting literature under theprovisions 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 through 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.

 

For certain contracts where services are deemed essential to thefunctionality of the software and the software has not been accepted by thecustomer, the software and related service revenue have been deferred untilacceptance has taken place. In addition, all costs incurred in connection withthese contracts have been expensed, as the Company has been unable to estimatethe total costs to achieve customer acceptance.

 

Revenues related to EbixASP and other hosting arrangements, includingmonthly fees as well as any initial registration fees and related customprogramming, are recognized ratably over the term of the agreement inaccordance with Staff Accounting Bulletin (“SAB”) No. 104 “RevenueRecognition”. Ebix.mall transaction fees are recognized as revenue as thetransactions 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 material basis.Revenue is recognized when the service is performed.

 

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

 

7

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The Company applies APB Opinion No. 25 and related 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, 2004** | ** ** | **June 30, 2003** | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
|                                                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Net income, as reported                                                                                                                       |       | $                      | 710,000    |                   | $          | 89,000 |   | $ | 1,156,000 |   | $ | 606,000 |   |
| Add: Stock-based employee compensation  expense included in reported net income, net of related tax effects                                   |       | 5,000                  |       | —                 |       | 9,000 |   | — |   |
| Deduct: Total stock-based employee  compensation expense determined under fair-value based method for all awards,  net of related tax effects |       | (247,000               | )          | (172,000               | )          | (641,000 | ) | (345,000 | ) |
| Pro forma net income (loss)                                                                                                                   |       | $                      | 468,000    |                   | $          | (83,000 | ) | $ | 524,000 |   | $ | 261,000 |   |
|                                                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Basic earnings per share, as reported                                                                                                         |       | $                      | 0.26       |                   | $          | 0.04 |   | $ | 0.43 |   | $ | 0.26 |   |
| Diluted earnings per share, as reported                                                                                                       |       | $                      | 0.23       |                   | $          | 0.04 |   | $ | 0.39 |   | $ | 0.26 |   |
| Basic earnings (loss) per share, pro forma                                                                                                    |       | $                      | 0.17       |                   | $          | (0.04 | ) | $ | 0.20 |   | $ | 0.11 |   |
| Diluted earnings (loss) per share, pro  forma                                                                                                 |       | $                      | 0.15       |                   | $          | (0.04 | ) | $ | 0.18 |   | $ | 0.11 |   |

 

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

 

Note 2.  STOCK OPTIONS

 

During the first quarter of 2004, the Company did not grant any stockoptions.  During the second quarter of2004, the Company granted options to purchase 61,500 shares of common stock toemployees and a director of the Company. These options were granted at prices equal to 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.  For the optionsgranted to employees, vesting accelerates if a net income performance target isachieved.

 

The Company has granted stock options outside the Company’s stockoption plans to non-employee consultants to purchase up to an aggregate of57,000 shares, of which options to purchase 34,500 shares were outstanding at June 30,2004.  These options were granted atprices equal to 100 percent of the market price on the date of grant.  The options have a four-year vesting periodand must be exercised within ten years of the date of the grant. Thesenon-employee options were valued using the fair value method as prescribed bySFAS No. 123. Options issued prior to 2001 are performance-based awards,with no service commitment and subject to vesting only if the Company’s stockprice reaches a certain level. Options issued in 2001 vest over four years, butvesting accelerates if a performance target is achieved.  At June 30, 2004, non-employee optionsto purchase 8,125 shares were vested. The Company recognized compensationexpense of approximately $1,000 and $17,000 related to these options during thethree-month periods ended June 30, 2004 and June 30, 2003,respectively. The Company recognized compensation expense of approximately$35,000 and $23,000 related to these options during the six-month periods endedJune 30, 2004 and June 30, 2003, respectively.

 

On August 11, 2003, the Company granted options to purchase theCompany’s common stock to an employee who is the brother of the Chief ExecutiveOfficer, in connection with his joining the Company as an employee.  The option grantee was an employee when hereceived the grant.  The options vest over four years from the dateof grant, expire ten years from the date of grant, and were issued with anexercise price below the fair market value of the stock on the date ofgrant.  This grant was not subject to anyof the Company’s stock option plans.  Thetotal intrinsic value associated with the granting of options was  $96,250, which is being recognized ratably ascompensation expense over the four- year vesting period in accordance with APBOpinion No. 25.  The Company recognized compensation expense ofapproximately $6,000 and $12,000, respectively, related to these options duringthe three and six months period ended June 30, 2004.

 

8

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Note 3.  EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) is equal to net income divided by theweighted average number of shares of common stock outstanding for the period.The weighted average number of shares outstanding for the three and sixmonths-ended June 30, 2004 was 2,739,000 and 2,662,000, respectively. Theweighted average number of shares outstanding for both the three and sixmonths-ended June 30, 2003 was 2,291,000. Diluted EPS is calculated as ifthe Company had additional common stock outstanding from the beginning of theyear or the date of grant for all common stock equivalents, net of assumedrepurchased shares using the treasury stock method.  Diluted EPS recognizes the dilutive effect ofcommon stock equivalents and is equal to net income divided by the sum of theweighted average number of shares outstanding and common stock equivalents. Forthe three and six months ended June 30, 2004 and June 30, 2003, theCompany’s common stock equivalents consisted of stock options.  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 327,000 and 329,000, respectively.  For the three and six months ended June 30,2004, the fully diluted weighted average number of shares outstanding was3,066,000 and 2,992,000, respectively. For the three and six months ended June 30, 2003, the effect ofthis calculation resulted in an increase in the weighted average number ofshares outstanding of 7,000 and 2,000, respectively. For the three and sixmonths ended June 30, 2003, the fully diluted weighted average number ofshares outstanding was 2,298,000 and 2,293,000, respectively. At June 30,2004, there were 391,000 shares potentially issuable with respect to stockoptions, which could dilute EPS in the future but which were excluded from thediluted EPS calculation because their effect was antidilutive.

 

Note 4.  COMPREHENSIVE INCOME

 
| ** **                                                                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Net income                                                                           |       | $                                    | 710,000    |                               | $          | 89,000 |   | $ | 1,156,000 |   | $ | 606,000 |   |
| Other comprehensive (expense) income –  foreign currency translation adjustment |       | (41,000                              | )          | (36,000                            | )          | 27,000 |   | (72,000 | ) |
| Comprehensive income                                                                 |       | $                                    | 669,000    |                               | $          | 53,000 |   | $ | 1,183,000 |   | $ | 534,000 |   |

 

Note 5.  RELATED PARTY ANDSIGNIFICANT CUSTOMER TRANSACTIONS

 

In 2001, the Company issued 868,000 shares of its common stock to BRiTInsurance Holdings PLC (“BRiT”) for $7,000,000. The total number of shares heldby BRiT at June 30, 2004 was 930,163, representing an equity ownership ofapproximately 34%.  At June 30,2004, BRiT owned approximately 70% of CF Epic Insurance and General Fund, whichowned approximately 8% of our common stock.

 

The Company has entered into various software and service agreementswith BRiT. During the second quarter of 2004 and 2003, approximately $724,000and $179,000, respectively, was recognized as services revenue from BRiT andits affiliates. During the first quarter of 2004 and 2003, approximately$953,000 and $805,000, respectively, was recognized as services revenue fromBRiT and its affiliates. Total accounts receivable from BRiT and its affiliatesat June 30, 2004 were $708,000. Total accounts receivable from BRiT andits affiliates at December 31, 2003 were $369,000.

 

During the second quarter of 2004 and 2003, approximately $512,000 and$355,000, respectively was recognized from another significant customer,AON.  During the first quarter of 2004and 2003 approximately $557,000 and $441,000 respectively, was recognized fromAON.  Total accounts receivable from AONat June 30, 2004 were $480,000. Total accounts receivable from AON at December 31, 2003 were$192,000.

 

Note 6. SALE OF UNREGISTERED COMMON STOCK

 

On January 16, 2004 the Company sold222,223 shares of its unregistered common stock to CF Epic Insurance andGeneral Fund (“CF Epic”), an investment fund located in London, BRiT ownedapproximately 70% of the equity interests of CF Epic at June 30, 2004, fora total price of $3,000,010, or $13.50 per share.

 

9

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Note 7.  ACQUISITION OF LIFELINK

 

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

 

The Company has classified $2,700,000 of the value of the common stockissued as a liability, “redeemable common stock,” in the condensed consolidatedbalance sheet due to the existence of the holder’s embedded put option. At anytime during the one month period commencing on the date which is 18 monthsafter February 23, 2004 and ending 19 months after February 23, 2004,the holder of the redeemable common stock has a one-time right to require theCompany to purchase all of the holder’s 200,000 shares originally issued at aprice of $2,700,000 minus the aggregate purchase price received by the holderfrom any sales of these shares of common stock prior to the exercise of the putoption. As of June 30, 2004, the holder had not sold any shares of commonstock received from this transaction.

 

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

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

 

Of the $3,518,000 of intangible assets acquired, $977,000 was assignedto developed technology with a remaining estimated useful life of five years,$299,000 was assigned to trademarks with a remaining estimated useful life offive years and $2,242,000 was assigned to customer relationships with aremaining estimated useful life of seven years. The Company recorded $135,000 and $203,000 of amortization expense related to these intangible assets forthe three and six-month periods ended June 30, 2004, respectively.

 

**Estimated Amortization Expenses:**

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

 

10

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The following unaudited pro forma financial information for the threemonths ended June 30, 2003 and six months ended June 30, 2004 and June 30,2003 presents the consolidated operations of the Company as if the acquisitionhad been made on January 1, 2003, after giving effect to certainadjustments for the pro forma acquisition as of the acquisition date.  The unaudited pro forma financial informationis provided for informational purposes only and does not project the Company’sresults of operations for any future period:

 
| ** **                 | ** **                         | **Three Months** | ** ** | ** ** | ** ** |
|----------------------------|------------------------------------|------------------|------------|------------|------------|
| **Ended June 30,**    | **Six Months Ended June 30,** |
| **2003**                   | **2004**                           | ** **       | **2003**   |
|                       |                               |             |       |       |       |   |   |
| Revenue                    |                               | $                | 4,628,000  |       | $          | 9,531,000 |   | $ | 9,573,000 |   |
| Net income                 |                               | 6,000            |       | 1,116,000  |       | 439,000 |   |
|                       |                               |             |       |       |       |   |   |
| Basic earnings per share   |                               | $                | 0.01       |       | $          | 0.42 |   | $ | 0.18 |   |
| Diluted earnings per share |                               | $                | 0.01       |       | $          | 0.37 |   | $ | 0.18 |   |

 

**Note 8—Line of Credit:**

 

The existing revolving line of credit with LaSalle National BankAssociation was increased to $5,000,000 during February 2004 and theagreement was amended in April 2004. Major features of the line, as amended, include an interest rate statedat prime, security at 60% of the amount of the line in a restricted interestbearing account and timely financial reporting requirements.  The line of credit will expire on October 31,2005.  As of June 30, 2004 totalborrowings on this line were $3,500,000 of which $3,000,000 is restricted fromuse in accordance with the line of credit agreement.  The agreement provides that the line issecured by substantially all of the Company’s assets.  The Company is subject to certain otherfinancial covenants and was in compliance with them as of June 30, 2004.

 

**Note 9—Subsequent Event:**

 

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

 

Pursuant to the purchase agreement, Ebix Australia acquired theoperating assets of Heart in exchange for an aggregate purchase price (inAustralian dollars) of A$10,175,000 ($7,116,000 USD based on the exchange rateas published by the Reserve Bank of Australia on July 1, 2004 of A$0.6994per United States Dollar (“USD”)) payable as follows: A$5,175,000 ($3,619,000USD) in cash at closing, A$2,000,000 ($1,399,000 USD) payable under stand-byletters of credit issued by the Company’s lender on the Company’s line ofcredit in three equal annual installments on each of the first, second andthird anniversaries of the closing (the “Deferred Payments”), and A$3,000,000($2,098,000 USD) payable in 157,728 shares of common stock of Ebix issued atthe closing (the “Shares”).  The Sharesare subject to a repurchase commitment by Ebix pursuant to which Heart mayrequire Ebix to repurchase the Shares at any time during January 2006 foran aggregate purchase price of A$2,000,000 ($1,399,000 USD) minus any proceedsreceived by Heart from earlier sales of any portion of the Shares.

 

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

 

The following information should be read in conjunction with theunaudited condensed consolidated financial statements and the notes theretoincluded in Part 1, Item 1, of this Quarterly Report, and the auditedconsolidated financial statements and notes thereto and Management’s Discussionand Analysis of Financial Condition and Results of Operations contained in theCompany’s Annual Report on Form 10-K for the year ended December 31,2003.  See “Safe Harbor for Forward-LookingStatements under the Securities Litigation Reform Act of 1995” below.

 

11

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**Overview**

 

The Company’s future focus will continue to be will be on developingconsistent and recurring revenue sources with a concentration in (1) softwaredevelopment for insurance carriers, agents and brokers, (2) expansion ofconnectivity between consumers, agents, carriers and third partyproviders,  (3) business processoutsourcing services, which include software development, call center and backoffice, either off site or at company facilities, and (4) worldwide salesand support of the agency management systems. This development of recurring revenue sources will be accomplishedthrough the previously mentioned four initiatives in addition to identifyingand negotiating for strategic synergistic acquisition targets such as therecently completed acquisitions of LifeLink and Heart.

 

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

 

**Critical Accounting Policies**

 

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

 

**Results of Operations**

 

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

 

**Total Revenue** - The Company’s revenue has beenderived from the licensing and sale of proprietary software and third partysoftware (“Software”) and from professional services and support services (“Services”).Services include consulting, implementation, training and project managementprovided to the Company’s customers with installed systems and those in theprocess of installing systems. Also included in Services are fees for softwarelicense maintenance, LifeLink services, initial registration and ongoingmonthly subscription fees for the EbixASP product and transaction feesgenerated from the Ebix.mall website, as well as software development and callcenter revenue. Total revenue for the quarter ended June 30, 2004increased $1,381,000, or 41.9%, to $4,676,000 from $3,295,000 for thecomparable quarter of the prior year.

 

**Software Revenue** - Software revenue iscomprised of revenue from the sale of Ebix (formerly “cd”) products, currentlegacy products, and other third party software.  Total software revenue for the second quarterof 2004 decreased $225,000, or 40.3%, to $333,000 from $558,000 for thecomparable quarter of the prior year. This decrease was due to a decrease in international software licenserevenue of 83% in second quarter 2004 compared to the second quarter 2003.

 

**Services Revenue** — Total services revenue forthe second quarter of 2004 increased $1,606,000, or 58.7%, to $4,343,000 from$2,737,000 for the comparable quarter of the prior year.  This increase was due to LifeLink revenue ofapproximately $1,395,000, an increase in consulting service of $621,000, anincrease in Ebix.mall transaction fees of $33,000 and an increase ininternational service revenue of $10,000 partially offset by a decrease insupport revenue associated with legacy products of $263,000, a decrease in callcenter revenue of $82,000, a decrease in INS-Site revenue of  $74,000 and a decrease in EbixASP revenue of$34,000.

 

During the second quarter of 2004 and 2003, approximately $724,000 and$179,000, respectively was recognized as services revenue from BRiT InsuranceHoldings PLC (“BRiT”) and its affiliates. The amounts represented 16% and 5%, respectively, of the Company’s totalrevenues for the second quarter of 2004 and 2003, respectively, and theincrease in such revenues of $545,000, represented 39% of the total increase inthe Company’s revenues for the three month period ended June 30, 2004compared to the same period of 2003.**Increasesin revenues from BriT Holdings PLC and its affiliates during each of theperiods presented were a result of BRiT Insurance Holdings PLC and its affiliatesadding additional development projects and expanding the scope of the currentprojects*.* BRiT ownedapproximately 34% of the Company’s common stock as of June 30, 2004.  In addition, the Company has been informedthat as of June 30, 2004, BRiT owned approximately 70% of the equityinterests of CF Epic Insurance and General Fund, which at June 30, 2004owned approximately 8% of the Company’s outstanding common stock.

 

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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 2004 |       | $                    | 868,000    |               | $          | 4,676,000 |   |
| Second quarter of 2003 |       | $                    | 1,129,000  |               | $          | 3,295,000 |   |

 

Support revenue decreased $261,000, or 23%, and as a percentage oftotal revenue to 19% from 34%, in the second quarter of 2004 compared to thesecond quarter of 2003.

 

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

 

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

 

**Services and other costs**-Cost of services includes costs associated with support, call center,consulting, implementation and training services.  Total services and other costs for thequarter increased $581,000, or 75.2%, to $1,354,000 from $773,000 for thecomparable quarter of the prior year. This increase was primarily due to the deferral of costs of $314,000during the second quarter of 2003 related to a project that was not completeuntil the third quarter of 2003.  Thisincrease was also due to an increase in payroll expenses related to theacquisition of LifeLink of $190,000, an increase in facility costs (which areallocated to each department based on headcount) allocated to services andother costs as a result of the increase in headcount related to the acquisitionof LifeLink of $69,000, and an increase in support fees of $40,000, partiallyoffset by a decrease in international services and other costs of $32,000.

 

**Product Development Expenses**-* *Totalproduct development expenses for the second quarter of 2004, increased$431,000, or 100.2%, to $861,000 from $430,000 for the comparable quarter ofthe prior year. This increase was due to an increase in payroll expensesrelated to the acquisition of LifeLink of $273,000, annual salary increases of$77,000 and an increase in headcount in India, resulting in an increase inpayroll expense of $20,000.  In addition,facility costs increased $61,000 as a result of an increase in headcount.

 

**Sales and Marketing Expenses**-Total sales and marketing expenses for the second quarter of 2004 decreased$76,000, or 15.2%, to $423,000 from $499,000 for the comparable quarter of theprior year.  This decrease wasattributable to reduced marketing spending of $55,000 and a decrease infacility costs of $21,000 as a result of the lower headcount.

 

**General and Administrative Expenses** —Totalgeneral and administrative expenses for the quarter decreased $78,000, or 5.7%,to $1,297,000 from $1,375,000 for the comparable quarter of the prioryear.  This decrease was due to anincrease in the amount of facility costs allocated to other departments of$59,000, a decrease in office expense of $122,000 related to telephoneexpenses, and a decrease in audit and legal expenses of $32,000, partiallyoffset by a charge for amortization of intangibles related to the LifeLinkacquisition of $135,000.

 

**Six-Month Period Ended June 30, 2004 Compared to the Six-MonthPeriod Ended June 30, 2003**

 

**Total Revenue** - Total revenue for thesix-month period ended June 30, 2004 increased $1,703,000, or 24.7%, to$8,610,000 from $6,907,000 for the comparable period of the prior year.

 

**Software Revenue** - Total software revenue forthe six-month period ended June 30, 2004 decreased $208,000, or 27.1%, to$560,000 from $768,000 for the comparable period of the prior year. Thisdecrease was due to a decrease in international software license revenue of 37%in the six-month period ended June 30, 2004 compared to the six-monthperiod ended June 30, 2003.

 

**Services Revenue** — Total services revenue forthe six-month period ended June 30, 2004 increased $1,911,000, or 31.1%,to $8,050,000 from $6,139,000 for the comparable period of the prior year.  This increase was due to LifeLink revenue ofapproximately $1,913,000, an increase in consulting services of $944,000, anincrease in international service revenue of $333,000, and an increase inEbix.mall transaction revenue of $44,000, partially offset by a decrease insupport revenue associated with legacy products of $531,000, a decrease inEbixASP revenue of $311,000, a decrease in call center revenue of $297,000 anda decrease in INS-Site revenue of $184,000. 

 

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During the six-month periods ended June 30, 2004 and 2003,approximately $1,677,000 and $984,000, respectively, was recognized as servicesrevenue from BRiT and its affiliates. The amounts represented 20% and 14% of the Company’s total revenues forthe six- month periods ended June 30, 2004 and 2003, respectively, and theincrease in such revenues of $693,000 represented 41% of the total increase inthe Company’s revenues for the six month period ended June 30, 2004compared to the same period of 2003.

 

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

 
| ** **                          | ** ** | **Support  Revenue** | ** ** | **Total  Revenue** | ** ** |
|-------------------------------------|------------|----------------------|------------|--------------------|------------|
|                                |       |                 |       |               |       |
| Six months ended June 30, 2004 |       | $                    | 1,738,000  |               | $          | 8,610,000 |   |
| Six months ended June 30, 2003 |       | $                    | 2,269,000  |               | $          | 6,907,000 |   |

 

Support revenue decreased $531,000, or 23%, and as a percentage oftotal revenue to 20% from 33%, for the six-month period ended June 30,2004 compared to the same period in 2003.

 

**Services and other costs**-Total services and other costs for the six-month period ended June 30,2004 increased $739,000, or 41.6%, to $2,517,000 from $1,778,000 for thecomparable period of the prior year. This increase was due to the deferral of costs of $314,000 during thesecond quarter of 2003 related to a project that was not complete until thethird quarter of 2003.  In addition thisincrease was due to an increase in payroll expenses related to the acquisitionof LifeLink of $304,000, an increase in facility costs (which are allocated toeach department based on headcount) allocated to services and other costs of$34,000 as a result of the increase in headcount related to the acquisition ofLifeLink, an increase in international services and other costs of $46,000 andan increase in support fees of $41,000.

 

**Product Development Expenses**-* *Totalproduct development expenses for the six-month period ended June 30, 2004increased $631,000, or 79.9%, to $1,421,000 from $790,000 for the comparableperiod of the prior year. This increase was due to an increase in payrollexpenses related to the acquisition of LifeLink of $411,000, annual salaryincreases of $107,000 and an increase in headcount in India resulting in anincrease in payroll expense of $57,000. In addition, facility costs increased$56,000 as a result of increases in headcount.

 

**Sales and Marketing Expenses**-Total sales and marketing expenses for the six-month period ended June 30,2004 decreased $264,000, or 27.5%, to $696,000 from $960,000 for the comparableperiod of the prior year.  This decreasewas attributable to a decrease in payroll and related expenses of $134,000 anda decrease in facility costs of $86,000 as a result of the decreases inheadcount, and reduced marketing spending of $72,000, partially offset by anincrease in sales and marketing expenses in India of $28,000.

 

**General and Administrative Expenses** —Totalgeneral and administrative expenses for the six-month period ended June 30,2004 increased $145,000, or 5.7%, to $2,684,000 from $2,539,000 for thecomparable quarter of the prior year. This increase was due to an increase in international expenses of$220,000, a charge for amortization of intangibles related to the LifeLinkacquisition of $203,000 and an increase in consulting expenses of $4,000,partially offset by a decrease in office expense of $175,000 and a decrease inpayroll and benefits of $107,000.

 

**Liquidity and Capital Resources**

 

The Company had cash and cash equivalents of $9,665,000 (including restrictedcash of $3,000,000 in accordance with the line of credit agreement) at June 30,2004, compared to $7,915,000 at December 31, 2003.  Total cash and cash equivalents (includingrestricted cash of $3,000,000 in accordance with the line of credit agreement)at August 13, 2004 was $6,626,000.

 

During 2004, the Company generated operating cash flows of $193,000,due primarily to $1,156,000 in net income (an increase of $550,000 from theprior year), partially offset by an increase in accounts receivable and adecrease in accrued payroll and related benefits.  The decrease in accrued payroll and relatedbenefits is related to bonuses, which were accrued in 2003 and paid in thesecond quarter of 2004.  The accountsreceivable increase is primarily due to BRiT and its affiliates, which had$708,000 of accounts receivable outstanding at June 30, 2004. Thesebalance sheet fluctuations are normal consequences of timing differencesbetween accruals and their cash settlement.

 

For the six-month period ended June 30, 2004, 20% and 12% of theCompany’s total revenues were from two customers – BRiT (including itsaffiliates) and AON, respectively. Neither BRiT and its affiliates nor AON have long-term agreements withthe Company that provide certainty that such revenues will be recurring.

 

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Cash used in investing activities of $4,885,000 in the six months endedJune 30, 2004 represented expenditures made primarily as a result of theCompany’s acquisition of LifeLink.  Cashprovided by financing activities of $6,415,000 resulted primarily from theCompany’s sale of common stock during the first quarter of 2003 of $2,977,000and borrowings of $3,500,000 on the Company’s existing line of credit duringthe second quarter of 2004.

 

During early 2004 the Company sold 222,223 shares of its previouslyunissued common stock to CF Epic Insurance and General Fund, an investment fundlocated in London of which BRiT owned approximately 70% of the equity interestsas of June 30, 2004, for gross proceeds of $3,000,010, or $13.50 pershare. 

 

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

 

On July 1, 2004, Ebix Australia Pty Ltd. (“Ebix Australia”), asubsidiary of Ebix, Inc., acquired the operating assets of HeartConsulting Pty Ltd. located in Melbourne, Australia (“Heart”) pursuant to apurchase agreement dated June 28, 2004, by and between Ebix Australia andHeart.  Pursuant to the purchaseagreement, Ebix Australia acquired the operating assets of Heart in exchangefor an aggregate purchase price (in Australian dollars) of A$10,175,000($7,116,000 USD) (based on the exchange rate as published by the Reserve Bankof Australia on July 1, 2004 of A$0.6994 per United States Dollar (“USD”))payable as follows: A$5,175,000 ($3,619,000 USD) in cash at closing,A$2,000,000 ($1,399,000 USD) payable under stand-by letters of credit issued bythe Company’s lender on the Company’s line of credit in three equal annualinstallments on each of the first, second and third anniversaries of theclosing (the “Deferred Payments”), and A$3,000,000 ($2,098,000 USD) payable in157,728 shares of common stock of Ebix issued at the closing.  See note 9 to the condensed consolidatedfinancial statements included in this Form 10-Q for a discussion ofa repurchase obligation with respect to the shares of common stock.

 

The existing revolving line of credit with LaSalle National BankAssociation was increased to $5,000,000 during February 2004 and theagreement was amended in April 2004. There was $3,500,000 of borrowings on this line as of June 30,2004.  Major features of the line, asamended, include an interest rate stated at prime, security at 60% of theamount of the line in a restricted interest bearing account and timelyfinancial reporting requirements.  Theline of credit is scheduled to expire on October 31, 2005.

 

# *** ***In planning for itscapital needs, the Company takes into account its sources of cash, whichinclude operating cash flow, cash balances and funds from credit facilities,and anticipated future cash needs, which include working capital requirementsfor operations, capital expenditures, and expenditures for businessacquisitions.  Based on these considerations, the Company believes it willhave sufficient cash for operations and to satisfy its contractual obligationsfor at least the next several years.

#  

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

#  

| ** **                        | ** ** | **Payment Due by Period** | ** ** |
|-----------------------------------|------------|---------------------------|------------|
| ** **                        | ** ** | **Total**                 | ** ** | **Less Than 1  Year** | ** ** | **1 - 3 Years** | ** ** | **3- 5 Years** | ** ** | **More Than 5  Years** | ** ** |
| ** **                        | ** ** | **(in thousands)**        | ** ** |
|                              |       |                      |       |   |   |   |   |   |   |   |   |
| Contractual Obligations:          |       |                      |       |   |   |   |   |   |   |   |   |
| Long-Term Debt Obligations (1)(2) |       | $                         | 8,700      |   | $ | 500 |   | $ | 7,700 |   | $ | 500 |   | $ | — |   |
| Operating Leases Obligations      |       | 1,819                     |       | 474 |   | 804 |   | 461 |   | 80 |   |
| Capital Leases Obligations        |       | 11                        |       | 11 |   | — |   | — |   | — |   |
| Total                             |       | $                         | 10,530     |   | $ | 985 |   | $ | 8,504 |   | $ | 961 |   | $ | 80 |   |

 

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(1)          $2,700,000 is contingent upon exercise of theholder’s put option to require the Company to purchase the holder’s redeemablecommon stock in connection with the LifeLink acquisition.  See note 7 to the condensed consolidatedfinancial statements included in this Form 10-Q.

(2)          Does not reflect obligations with respect tothe Heart acquisition.

 

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

 

**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.  This risk factors section is written inresponse to the Securities and Exchange Commission’s “plain English”guidelines.  In this section, the words “we,”“us,” “our” and “ours” refer to the Company and not any other person.

 

***Risks Related To Our Business and Our Industry***

 

**You may have difficulty evaluating our business because of our limitedhistory of Internet, call center and other business process outsourcing.**

 

Although our predecessor began operations in 1976, we did not begin anyInternet operations until September 1999 and did not begin generatingrevenues from these operations until the fourth quarter of 2000.  We did not begin any call center or otherbusiness process outsourcing operations or begin generating revenues from theseoperations until the first quarter of 2003. Accordingly, there is a limited history of these operations on which youcan evaluate our company and its prospects. We cannot be certain that our Internet, call center and other businessprocess outsourcing strategies will be successful, because these strategies arenew.  Our early-stage Internet, callcenter and other business process outsourcing operations will be particularlysusceptible to the risks and uncertainties described in these risk factors andlikely to incur the expenses associated with addressing them.  Our prospects must be considered in light ofthe risks, uncertainties, expenses and difficulties frequently encountered bycompanies in a transitional stage of development, particularly companies in newand rapidly evolving markets and using new and unproven business models.

 

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

** **

Based on historical data, the Company expects that legacy supportrevenue will continue to decrease by approximately 20% each year on a decliningbalance.  This decline can be attributedto the fact that many of our support clients are not renewing their supportagreements with us, in many cases because they are no longer using our legacysoftware.  Even if they are continuing touse our legacy software, our support clients may choose not to renew theirsupport agreements if their legacy software products no longer require supportor they use third party support.  Inaddition, some of the clients who use our support services have reduced thelevel of support that we provide them, which in turn reduces our supportrevenue.  This downward trend in oursupport revenue makes us particularly dependent upon our other sources ofrevenue.

 

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

 

Revenues from one customer, BRiT Insurance Holdings PLC and itsaffiliates, which at June 30, 2004 owned approximately 34% of our commonstock and approximately 70% of CF Epic Insurance and General Fund, which atthat date owned approximately 8% of our common stock, represented approximately23% of our total revenue in 2003 and 17% of our total revenue in 2002. Therevenues from BRiT Insurance Holdings PLC and its affiliates representedapproximately 20% and 14% of the Company’s total revenues for the six-monthperiods ended June 30, 2004 and 2003, respectively. If revenues from thiscustomer were to discontinue, our operating results could be adverselyaffected.

 

16

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Revenues from another international customer, AON representedapproximately 11% of our total revenue in 2003. The revenues from AON represented approximately 12% of the Company’stotal revenues for both the six-month periods ended June 30, 2004 and2003. If revenues from this customer were to discontinue, our operating resultscould be materially adversely affected.

 

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

 

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

 

**Our operating results may fluctuate dramatically.**

** **

Our quarterly operating results may fluctuate significantly in thefuture due to a variety of factors that could affect our revenues or ourexpenses in any particular quarter.  Youshould not rely on our results of operations during any particular quarter asan indication of our results for a full year or any other quarter.  Factors that may affect our quarterly resultsinclude:

 

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

 

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

 

•                                          Technicaldifficulties for our internet focused services that hamper an agent’s abilityto run its agency system hosted by us.

 

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

 

**We could be subject to civil fines and penalties as a result of the SEC’sinvestigation of our financial reporting.**

** **

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

 

**We cannot predict our future capital needs and we may not be able tosecure additional financing when we need it.**

** **

We may need to raise additional funds in the future in order to fundmore aggressive brand promotion or more rapid expansion, to develop new orenhanced services, to respond to competitive pressures, to make futureacquisitions, to satisfy future obligations with respect to the LifeLink andHeart acquisitions or to pay down other indebtedness.  Any required additional financing may not beavailable on terms favorable to us, or at all. If adequate funds are not available on acceptable terms, we may be unableto meet our business or strategic objectives or compete effectively.  If additional funds are raised by our issuingequity securities, stockholders may experience dilution of their ownershipinterests, and the newly issued securities may have rights superior to those ofour common stock.  If additional fundsare raised by our issuing debt, we may be subject to limitations on ouractivities.

 

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

** **

We recently acquired LifeLink and Heart and may in the future acquireor make investments in complementary businesses, technologies, services orproducts if appropriate opportunities arise. The process of integrating LifeLink and Heart or any other acquiredbusiness, technology, service or product into our business and operations mayresult in unforeseen operating difficulties and expenditures.  Integration of an acquired company also mayconsume much of our management’s time and attention that could otherwise beavailable for ongoing development of our business.  Moreover, the anticipated benefits of theLifeLink and Heart acquisitions or any other acquisition may not be realized.  Furthermore, we may be unable to identify,negotiate or finance future acquisitions successfully.  Future acquisitions could result inpotentially dilutive issuances of equity securities or the incurrence of debt,contingent liabilities or amortization expenses related to intangible assets.

 

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**We may not be able to continue to develop new products to effectivelyadjust for rapid technological changes.**

** **

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

 

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

 

•                                          rapidly changing technology;

 

•                                          evolving industry standards;

 

•                                          frequent new product andservice introductions;

 

•                                          shifting distributionchannels; and

 

•                                          changing customer demands.

 

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

 

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

** **

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

 

Some of our current competitors have longer operating histories, largercustomer bases, greater brand recognition and significantly greater financial,marketing and other resources than we do. In addition, we believe we will face increasing competition as theonline financial services industry develops and evolves.  Our current and future competitors may beable to:

 

•                                          undertake more extensivemarketing campaigns for their brands and services;

 

•                                          devote more resources towebsite and systems development;

 

•                                          adopt more aggressivepricing policies; and

 

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

 

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

** **

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

 

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**If weinfringe on the proprietary rights of others, we may be at a competitivedisadvantage, and any related litigation could be time consuming and costly.**

 

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

 

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

** **

Our future success is substantially dependent on the continued servicesand continuing contributions of our senior management and other key personnel,particularly Robin Raina, our President and Chief Executive Officer, andRichard J. Baum, our Executive Vice President – Finance &Administration, Chief Financial Officer and Secretary.  The loss of the services of any of ourexecutive officers or other key employees could harm our business.  We have no long-term employment agreementswith any of our key personnel, nor do we maintain key man life insurancepolicies on any of our key employees.

 

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

 

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

** **

We market our software internationally and plan to expand our Internetservices to locations outside of the United States.  In addition, we have development activities,call center services and other operations in India, and Heart Consultingoperates principally in Australia.  Ourinternational operations may not produce enough revenue to justify ourinvestments in establishing them and are subject to other inherent risks,including:

 

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

 

•                  greater difficulty incollecting accounts receivable;

 

•                  difficulties and costs ofstaffing and managing foreign operations;

 

•                  reduced protection forintellectual property rights in some countries;

 

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

 

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

 

•                  fluctuations in exchangerates;

 

•                  potentially adverse taxconsequences; and

 

•                  political and economicinstability.

 

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

 

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

 

We perform functions for licensed insurance agents, brokers andcarriers and are, therefore, required to comply with a complex set of rules andregulations that often vary from state to state.  These rules and regulations can bedifficult to comply with and are ambiguous and open to interpretation.  If we fail to properly interpret and/orcomply with these rules and regulations, we, the insurance agents, brokersor carriers doing business with us, our officers, or agents with whom wecontract could be subject to various sanctions, including censure, fines,cease-and-desist orders, loss of license or other penalties. This risk, as wellas other laws and regulations affecting our business and changes in theregulatory climate or the enforcement or interpretation of existing law, couldexpose us to additional costs, including indemnification of participatinginsurance agents, brokers or carriers for their costs, and could requirechanges to our business or otherwise harm our business.  Furthermore, because the application ofonline commerce to the consumer insurance market is relatively new, the impactof current or future regulations on our business is difficult toanticipate.  To the extent that there arechanges in the rules and regulations regarding the manner in whichinsurance is sold, our business could be adversely affected.

 

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

** **

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

 

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

** **

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

 

Furthermore, our costs may increase as a result of having to complywith these regulations, and these regulations may limit our call centeractivities or reduce the demand for our call center services.

 

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

** **

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

 

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

 

**Any disruption of our Internet connections could affect the success ofour Internet based products.**

** **

Any system failure, including network, software or hardware failure,that causes an interruption in our network or a decrease in responsiveness ofour website could result in reduced user traffic and reduced revenue.  Continued growth in Internet usage couldcause a decrease in the quality of Internet connection service.  Websites have experienced serviceinterruptions as a result of outages and other delays occurring throughout theInternet network infrastructure.  Inaddition, there have been several incidents in which individuals haveintentionally caused service disruptions of major e-commerce websites.  If these outages, delays or servicedisruptions frequently occur in the future, usage of our website could growmore slowly than anticipated or decline, and we may lose revenues andcustomers.

 

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

 

**Concernsregarding security of transactions or the transmission of confidentialinformation over the Internet or security problems we experience may prevent usfrom expanding our business or subject us to legal exposure.**

 

If we do not offer sufficient security features in our online productand service offerings, our products and services may not gain marketacceptance, and we could be exposed to legal liability.  Despite the measures that we may take, ourinfrastructure will be potentially vulnerable to physical or electronicbreak-ins, computer viruses or similar problems.  If a person circumvents our securitymeasures, that person could misappropriate proprietary information or disruptor damage our operations.  Securitybreaches that result in access to confidential information could damage ourreputation and subject us to a risk of loss or liability.  We may be required to make significantexpenditures to protect against or remedy security breaches.  Additionally, if we are unable to adequatelyaddress our customers’ concerns about security, we may have difficulty sellingour goods and services.

 

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

** **

Concern among consumers and legislators regarding the use of personalinformation gathered from Internet users could create uncertainty in themarketplace.  This could reduce demandfor our services, increase the cost of doing business as a result of litigationcosts or increased service delivery costs, or otherwise harm our business.  Legislation has been proposed that wouldlimit the users of personally identifiable information of Internet usersgathered online or require online services to establish privacy policies.  Many state insurance codes limit thecollection and use of personal information by insurance agencies, brokers andcarriers or insurance service organizations. Moreover, the Federal Trade Commission has settled a proceeding againstone online service that agreed in the settlement to limit the manner in whichpersonal information could be collected from users and provided to thirdparties.

 

**Future government regulation of the Internet could place financialburdens on our businesses.**

** **

Because of the Internet’s popularity and increasing use, new laws andregulations directed specifically at e-commerce may be adopted.  These laws and regulations may cover issuessuch as the collection and use of data from website visitors, including theplacing of small information files, or “cookies,” on a user’s hard drive togather information, and related privacy issues; pricing; taxation;telecommunications over the Internet; content; copyrights; distribution; domainname piracy; and quality of products and services.  The enactment of any additional laws orregulations, including international laws and regulations, could impede thegrowth of our revenue from our Internet operations and place additionalfinancial burdens on our business.

 

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

 

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

** **

In some future periods, our results ofoperations may be below the expectations of public market investors, whichcould negatively affect the market price of our common stock.  Furthermore, the stock market in general hasexperienced extreme price and volume fluctuations in recent years.  We believe that, in the future, the marketprice of our common stock could fluctuate widely due to variations in ourperformance and operating results or because of any of the following factors,which are, in large part, beyond our control:

 

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

 

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

 

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

 

**•**                                          generalpolitical, economic and market conditions.

 

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

 

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

 

The concentration of ownership of our commonstock may have the effect of delaying, preventing or deterring a change incontrol of our company, could deprive our stockholders of an opportunity toreceive a premium for their common stock as part of a sale of our company, andmay affect the market price of our common stock.  At June 30, 2004, BRiT InsuranceHoldings plc beneficially owned approximately 34% of our outstanding commonstock and, together with our executive officers and directors, beneficiallyowned approximately 48% of our outstanding common stock.  In addition, the Company has been informedthat BriT owns approximately 70% of the equity interests of CF Epic Insuranceand General Fund, which at June 30, 2004, beneficially owned approximately8% of our outstanding common stock.  As aresult, 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 our certificate of incorporation.  These stockholders may use their ownershipposition to approve or take actions that are adverse to your interests orprevent the taking of actions that are consistent with your interests.

 

Item 3.             QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The majority of our operations are based in the U.S. and, accordingly,the majority of our transactions are denominated in U.S. dollars.  However, we have foreign-based operationswhere transactions are denominated in foreign currencies and are subject tomarket risk with respect to fluctuations in the relative value of currencies.  Currently, we have operations in Australia,Canada, India, New Zealand and Singapore and conduct transactions in the localcurrencies of each location.  There canbe no assurance that fluctuations in the value of foreign currencies will nothave a material adverse effect on our business, operating results, revenues orfinancial condition.  The fluctuations inthese currencies resulted in net transaction losses of  $2,000 and $8,000 for the three months ended June 30,2004 and 2003, respectively.  For the sixmonths ended June 30, 2004, the fluctuations in these currencies resultedin a net transaction gain of $8,000.  Forthe six months ended June 30, 2003, the fluctuations in these currenciesresulted in a net transaction loss of $57,000. We considered the historicaltrends in currency exchange rate and determined that it was reasonably possiblethat adverse changes in exchange rates of 20% for all currencies could beexperienced in the near term.  Suchadverse changes would have resulted in an adverse impact on income before taxesof approximately $145,000 and $137,000 for the three months ended June 30,2004 and June 30, 2003, respectively. Such adverse changes would haveresulted in an adverse impact on income before taxes of approximately $242,000and $199,000 for the six months ended June 30, 2004 and June 30,2003, respectively.

 

There have been no material changes in the Company’s interest rate riskduring the three and six months ended June 30, 2004. While the Company hasinterest rate risk related to the line of credit, the exposure is mitigated bythe interest income on the restricted balance of $3,000,000.  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 31,2003.

 

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Item 4.    CONTROLS AND PROCEDURES

 

In connectionwith its 2003 year-end audit, the Company’s independent certified publicaccountants at that time, KPMG LLP (“KPMG”), identified details of reportableconditions relating to the Company’s internal control over financialreporting.  According to KPMG, the communication of the reportableconditions was based on their professional judgment, taking into considerationaudit differences that required adjustment to the Company’s financialstatements, as well as the underling causes for such adjustments, and KPMG’sobservations about the Company’s internal control processes, but did not arisefrom any particular transaction or event. On March 25, 2004, KPMG presented to the audit committee thedetails of the reportable conditions noted during the 2003 audit, whichincluded (1) delegation of authority and what KPMG considered to beinadequate reviews by a person other than the preparer of accountinginformation, (2) the lack of a formalized contract review process toensure proper revenue recognition, (3) the lack of a completeunderstanding of the Company’s income tax provision and related accounts, (4) inadequatedocumentation for certain unusual transactions (including the basis for theCompany’s accounting conclusions), and (5) internal control matters(documented and testable control environment) under the Sarbanes-Oxley Act, Section 404(together with applicable regulations,”SOX 404”).

 

In response toKPMG’s identified issues, in the first quarter of 2004 (prior to the quartercovered by this report), the Company changed its reporting structure within thefinancial accounting group and redistributed responsibilities among thefinancial accounting group to create improved checks and balances.  The reorganization included appointment of asenior member of the group as corporate controller to whom all the othermembers report.  Further, (a) theresponsibility for a formalized contract review process to ensure proper revenuerecognition was re-assigned to a financial department director; (b) theCompany established a process for the quarterly review of the provision forincome taxes by the Chief Financial Officer and corporate controller; (c) theChief Financial Officer and corporate controller undertook responsibility forthe analysis and documentation of any unusual transactions.

 

In addition, inorder to address further the deficiencies described above and to improve theCompany’s internal control over financial reporting for future periods, theCompany plans to:

 
| 1.     |   | Perform  a review of internal control over financial reporting in connection with  satisfying the requirements Section 404 of the Sarbanes-Oxley Act and  regulations promulgated thereunder, with the assistance of an outside  consulting firm to be retained by the Company; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                 |
| 2.     |   | Perform  more detailed quarterly reconciliations and analyses of the Company’s revenue  accounts;                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                 |
| 3.     |   | Continue  to enhance staffing to provide sufficient resources to accomplish the  foregoing objectives, including through the addition of a senior financial  accountant in Australia.                                                                                                |

 

Theenhancements to internal control over financial reporting made in the first sixmonths of 2004 constitute, and the**planned further improvements will constitute, significant changes ininternal control over financial reporting. There was not, however, any changein the Company’s internal control over financial reporting during the quarterended June 30, 2004 that has materially effected, or is reasonably likely toeffect, the Company’s internal control over financial reporting.  The Company continues to evaluate theeffectiveness of its internal control over financial reporting, along with itsdisclosure controls and procedures, on an ongoing basis and will take furtheraction as appropriate.

 

The Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingits Chief Executive Officer and Chief Financial Officer, of the design andoperation of the Company’s disclosure controls and procedures, which aredesigned to provide reasonable assurance that the information required to bedisclosed by the Company in the reports that it files with or submits to theSecurities 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’s  management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. Based on this evaluation, the Company’s Chief Executive Officer and theCompany’s Chief Financial Officer concluded that, as of June 30, 2004, the Company’sdisclosure controls and procedures were effective to provide such reasonableassurance. They reached this conclusion based in large part on their assessmentof (i) the financial expertise of the members of the internal accountingstaff, (ii) the regular communications among such persons  (serving as a de facto disclosure committee),and between them and the rest of the relatively small organization, withrespect to all material developments in the Company’s business, and (iii) thereview of the Company’s financial and other disclosure by the Company’smanagement, its audit committee, its independent public accountants and itsoutside legal counsel, as well as (iv) the enhancements made to theCompany’s internal control over financial reporting in the first six months of2004.

 

Part II —OTHER INFORMATION

 

Item 6.             EXHIBITS AND REPORTSON FORM 8-K

 

(a)                          Exhibits

 

 
| 31.1   | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (Section 302  of the Sarbanes-Oxley Act of 2002). |
|--------|--------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                 |
| 31.2   | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (Section 302  of the Sarbanes-Oxley Act of 2002). |
|   |                                                                                                                                 |
| 32.1   | Certification of Chief Executive Officer Pursuant to Section 906  of the Sabanes-Oxley Act of 2002 (furnished herewith).        |
|   |                                                                                                                                 |
| 32.2   | Certification of Chief Financial Officer Pursuant to Section 906  of the Sabanes-Oxley Act of 2002 (furnished herewith).        |
|   |                                                                                                                                 |
| (b)    | Reports on Form 8-K                                                                                                             |

 

The Company furnished a current report on Form 8-K (pursuantto Item 12 thereof) on May 17, 2004 to report the Company’s announcementof its results of operations and financial position as of, and for thethree-month period ended March 31, 2004.

 

The Company filed a Form 8-K/A (pursuant to Items 2 and 7thereof) on May 7, 2004, amending a current report on Form 8-Kit filed on February 23, 2004, to provide the following financialstatements and pro forma financial statements in connection with the Company’sacquisition of LifeLink:

 

Financial Statements of LifeLink Corporation for the years ended December 31,2003 and 2002.

Ebix, Inc. and Subsidiaries Unaudited Pro Forma CondensedCombining Balance Sheet at December 31, 2003.

Ebix, Inc. and Subsidiaries Unaudited Pro Forma CondensedStatements of Income For the Year Ending December 31, 2003.

 

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SIGNATURES

 

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

 

 
|                    | Ebix, Inc. |
|-------------------------|-----------------|
|                    |            |
|                    |            |
| Date: May 20, 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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