**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **ý**                                        | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**         |
|---------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|
|                                              |
| **For the quarterly period ended June 30,  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 all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý No o

 

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

 

As of August 9, 2004, the number of shares of Common Stock outstandingwas 2,896,718.

 

 

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

 

2

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**Ebix, Inc. and Subsidiaries**

**CondensedConsolidated Balance Sheets**

(In thousands, except for share and per shareamounts)

 
| ** **                                                                                                                                                   | ** ** | **June 30,  2004**  | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **(Unaudited****)** | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                   |       |                |       |                        |       |
| **Current assets:**                                                                                                                                          |       |                |       |                        |       |
| Cash and cash equivalents (restricted cash  of $3,000 and $0, respectively, in accordance with the line of credit  agreement)                                |       | $                   | 9,665      |                        | $          | 7,915 |   |
| 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**

**CondensedConsolidated 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**

**CondensedConsolidated Statements of Cash Flows**

(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                         |       | — |   |
| 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                                                                                                                                                                                                                                                                                                                         |       | 6,415                         |       | (55 | ) |
| Effect of foreign exchange rates on cash                                                                                                                                                                                                                                                                                                                                     |       | 27                            |       | (72 | ) |
| Net change in  cash and cash equivalents                                                                                                                                                                                                                                                                                                                                     |       | 1,750                         |       | 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                                                                                                                                                                                                                                                                                                                          |       | $                             | 9,665      |   | $ | 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 TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1.  BASIS OF PRESENTATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

On February 23, 2004, the Company acquired LifeLink Corporation(“LifeLink”). Under terms of the agreement, the Company acquired all of theoutstanding capital stock of LifeLink from its shareholders in exchange for anaggregate purchase price of $10,354,000 (see note 7). The acquisition wasaccounted for as a purchase business combination.

 

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

 

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

 

**Summary of significant accounting policies—**

 

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

 

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

 

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

 

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

 

For arrangements containing multipleelements, revenue is recognized on delivered elements when vendor-specificobjective evidence (VSOE) of fair value has been established on the undeliveredelements, applying the residual method of SOP 98-9.  Fair value is determined for each undeliveredelement based on the price charged for the sale of each elementseparately.  In contracts that containfirst year maintenance bundled with software fees, unbundling of maintenance isbased on the price charged for renewal maintenance. Revenue for maintenance andsupport service is recognized ratably over the term of the support agreement.

 

6

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For certain contracts where services aredeemed essential to the functionality of the software and the software has notbeen accepted by the customer, the software and related service revenue havebeen deferred until acceptance has taken place. In addition all costs incurred in connection with these contracts havebeen expensed, as the Company has been unable to estimate the total costs toachieve customer acceptance.

 

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

 

LifeLink revenues are derivedfrom software license fees, maintenance fees and software set-up fees.  License fees and maintenance are included ina single monthly fee, which is recognized over the life of the contract,typically one year.  No revenue isrecognized until software set up is complete and end users are actually usingthe software.  Set-up service fees areseparately stated in contracts and generally do not vary among customers.  License and maintenance fees are based on aprice list with discounts based on number of users.  These fees have an established VSOE.  Any additional fees are attributable to theservices.  Contract accounting is notused for services.  Customers do not haveright of return.  A customer candiscontinue using the software, but receives no refund of the monthly fees.

 

Deferredrevenue includes maintenance and support payments that have been received orbillings recorded prior to performance, amounts received under multi-elementarrangements in which VSOE of undelivered elements does not exist, and initialregistration fees and related service fees under hosting agreements.  Revenue is recognized when VSOE of theundelivered elements is established, the elements are delivered, or theobligation to deliver the elements is extinguished.

 

Software arrangements involving significantcustomization, modification or production of the software are accounted for inaccordance with SOP 81-1, “Accounting for Performance on Construction-Type andCertain Production-Type Contracts,” using the percentage-of-completion method.  The Company recognizes revenue using actualhours worked as a percentage of total expected hours required by thearrangement, provided that the fee is fixed and determinable and collection ofthe receivable is considered probable. The Company currently has no suchagreements in effect.

 

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

 

**Stock Options -**At June 30, 2004, the Companyhad three stock-based employee compensation plans. The Company accounts forstock 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 interpretations inaccounting for its employee stock-based compensation plans. Had compensationcost for these stock-based compensation plans been determined based on thefair-value method prescribed by SFAS No. 123, using the Black-Scholesoption-pricing model, the Company’s net earnings and net earnings per sharewould have been the pro forma amounts indicated below:

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended** | ** ** | **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 atJune 30, 2004.  These options weregranted at prices equal to 100 percent of the market price on the date ofgrant.  The options have a four-yearvesting period and must be exercised within ten years of the date of the grant.These non-employee options were valued using the fair value method asprescribed by SFAS No. 123. Options issued prior to 2001 are performance-basedawards, with no service commitment and subject to vesting only if the Company’sstock price reaches a certain level. Options issued in 2001 vest over fouryears, but vesting accelerates if a performance target is achieved.  At June 30, 2004, non-employee options topurchase 8,125 shares were vested. The Company recognized compensation expenseof 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 Companygranted options to purchase the Company’s common stock to an employee who isthe brother of the Chief Executive Officer, in connection with his joining theCompany as an employee.  The optiongrantee was an employee when he received the grant.  The options vestover four years from the date of grant, expire ten years from the date ofgrant, and were issued with an exercise price below the fair market value ofthe stock on the date of grant.  Thisgrant was not subject to any of the Company’s stock option plans.  The total intrinsic value associated with thegranting of options was  $96,250, whichis being recognized ratably as compensation expense over the four- year vestingperiod in accordance with APB Opinion No. 25.  The Company recognizedcompensation expense of approximately $6,000 and $12,000, respectively, relatedto these options during the 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 the weightedaverage number of shares of common stock outstanding for the period. Theweighted 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 if theCompany had additional common stock outstanding from the beginning of the yearor 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, the Company’scommon 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 of thiscalculation resulted in an increase in the weighted average number of sharesoutstanding of 7,000 and 2,000, respectively. For the three and six monthsended June 30, 2003, the fully diluted weighted average number of sharesoutstanding was 2,298,000 and 2,293,000, respectively. At June 30, 2004, therewere 391,000 shares potentially issuable with respect to stock options, whichcould dilute EPS in the future but which were excluded from the diluted EPScalculation 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, BRiTowned approximately 70% of CF Epic Insurance and General Fund, which ownedapproximately 8% of our common stock.

 

The Companyhas entered into various software and service agreements with BRiT. During thesecond quarter of 2004 and 2003, approximately $724,000 and $179,000,respectively, was recognized as services revenue from BRiT and its affiliates.During the first quarter of 2004 and 2003, approximately $953,000 and $805,000,respectively, was recognized as services revenue from BRiT and its affiliates.Total accounts receivable from BRiT and its affiliates at June 30, 2004 were$708,000. Total accounts receivable from BRiT and its affiliates at December31, 2003 were $369,000.

 

During thesecond quarter of 2004 and 2003, approximately $512,000 and $355,000,respectively was recognized from another significant customer, AON.  During the first quarter of 2004 and 2003approximately $557,000 and $441,000 respectively, was recognized from AON.  Total accounts receivable from AON at June30, 2004 were $480,000.  Total accountsreceivable 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, for atotal price of $3,000,010, or $13.50 per share.

 

Note 7.  ACQUISITION OF LIFELINK

 

On February 23, 2004, the Company acquired LifeLink Corporation(“LifeLink”), and the operations of LifeLink have been included in theCompany’s financial statements since that date. Under terms of the agreement,the Company acquired all of the outstanding capital stock of LifeLink from itsshareholders in exchange for an aggregate purchase price of $10,354,000,payable as follows: $5,000,000 paid in cash at closing, $2,500,000 in anon-interest bearing note payable in cash in annual installments of $500,000over five years (present value computed as $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 capitalizedapproximately $128,000 of transaction costs in conjunction with the LifeLinkacquisition. In connection with the 200,000 shares of common stock issuedsubject to Rule 144, the former shareholder received from Ebix the option tosell his stock back to Ebix subject to specified time frames and prices.  In accordance with Financial

 

9

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Accounting Standards Board (“FASB”) Statement 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity” and EITF Issue No. 00-19, “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” theCompany has classified $2,700,000 of the value of the common stock issued as aliability, “redeemable common stock,” in the condensed consolidated balancesheet due to the existence of the holder’s put option. At any time during theone month period commencing on the date which is 18 months afterFebruary 23, 2004 and ending 19 months after February 23, 2004, theholder 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 summarizesthe estimated fair value of the LifeLink assets acquired and liabilitiesassumed 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 |   |

 

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, 2003** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------|------------|--------------------------------------|------------|-------------------------------|------------|
| ** **                 | ** ** | ** **                           | **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 the agreementwas amended in April 2004.  Majorfeatures of the line, as amended, include an interest rate stated at prime,security at 60% of the amount of the line in a restricted interest bearingaccount 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.

 

10

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**Note 9—Subsequent Event:**

 

On July 1, 2004, Ebix Australia Pty Ltd. (“Ebix Australia”), asubsidiary of Ebix, Inc., acquired the operating assets of Heart Consulting PtyLtd. located in Melbourne, Australia (“Heart”) pursuant to a purchase agreementdated June 28, 2004, by and between Ebix Australia and Heart.

 

Pursuant to the purchase agreement, 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$0.6994 perUnited 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 lettersof credit issued by the Company’s lender on the Company’s line of credit inthree equal annual installments on each of the first, second and thirdanniversaries 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 for anaggregate 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 DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

**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 party providers,  (3) business process outsourcing services,which include software development, call center and back office, either offsite or at company facilities, and (4) worldwide sales and support of theagency management systems.  Thisdevelopment of recurring revenue sources will be accomplished through thepreviously mentioned four initiatives in addition to identifying andnegotiating for strategic synergistic acquisition targets such as the recentlycompleted acquisitions of LifeLink and Heart.

 

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

 

**Critical Accounting Policies**

 

The Company’s  “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 projectmanagement provided to the Company’s customers with installed systems and thosein the process of installing systems. Also included in Services are fees forsoftware license 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, 2004 increased$1,381,000, or 41.9%, to $4,676,000 from $3,295,000 for the comparable quarterof 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

 

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$333,000 from $558,000 for the comparable quarter of the prioryear.  This decrease was due to adecrease in international software license revenue of 83% in second quarter2004 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 of2004 and 2003, approximately $724,000 and $179,000, respectively was recognizedas services revenue from BRiT Insurance Holdings PLC (“BRiT”) and itsaffiliates.  The amounts represented 16%and 5%, respectively, of the Company’s total revenues for the second quarter of2004 and 2003, respectively, and the increase in such revenues of $545,000,represented 39% of the total increase in the Company’s revenues for the threemonth period ended June 30, 2004 compared to the same period of 2003. BRiTowned approximately 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 equity interestsof CF Epic Insurance and General Fund, which at June 30, 2004 ownedapproximately 8% of the Company’s outstanding common stock.

 

Support revenue associated withthe Company’s legacy products is decreasing due to a trend of decliningrenewals for these older product offerings.

 
| ** **             | ** ** | **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 23.1%, and as a percentage of total revenue to 19% from 34%, inthe second quarter of 2004 compared to the second quarter of 2003.

 

Based on historical data, theCompany expects that legacy support revenue will continue to decrease byapproximately 20% each year on a declining balance.  The Company expects the legacy supportrevenue will continue as long as it is economically feasible for the Company tomaintain 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 reviewedto determined if costs can be further reduced for the activity to be profitableand if not, we plan to discontinue supporting the legacy products. We cannotpredict when this will occur.

 

The Company expects that future services revenue will be derived fromthis support, as well as EbixASP registration and monthly fees, softwaredevelopment and call center and, to a much lesser extent all transactionrevenues from Ebix.mall, EbixExchange (INS-Site), conversion and training.

 

**Services and other costs**-Cost of services 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**-Total product 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, annual salary increases and an increasein headcount in India totaling $370,000. In addition, facility costs increased $61,000 as a result of an increasein 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

 

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decrease in audit and legal expenses of $32,000, partially offset by acharge for amortization of intangibles related to the LifeLink acquisition of$135,000.

 

**Six-Month Period Ended June 30, 2004 Compared to the Six-Month PeriodEnded 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-month periodended June 30, 2003.

 

**Services Revenue** — Total services revenue forthe six-month period ended June 30, 2004 increased $1,911,000, or 31.1%, to $8,050,000from $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.

 

During the six-month periodsended June 30, 2004 and 2003, approximately $1,677,000 and $984,000,respectively, was recognized as services revenue from BRiT and itsaffiliates.  The amounts represented 20%and 14% of the Company’s total revenues for the six- month periods ended June30, 2004 and 2003, respectively, and the increase in such revenues of $693,000represented 41% of the total increase in the Company’s revenues for the sixmonth period ended June 30, 2004 compared to the same period of 2003.

 

Support revenue associated withthe Company’s legacy products is decreasing as discussed above due to a trendof declining renewals for these older 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 23.4%, and as a percentage of total revenue to 20% from 33%, forthe six-month period ended June 30, 2004 compared to the same period in 2003.

 

**Servicesand other costs**-Total services and other costs for the six-month period ended June 30, 2004increased $739,000, or 41.6%, to $2,517,000 from $1,778,000 for the comparableperiod of the prior year.  This increasewas due to the deferral of costs of $314,000 during the second quarter of 2003related to a project that was not complete until the third quarter of2003.  In addition this increase was dueto an increase in payroll expenses related to the acquisition of LifeLink of$304,000, an increase in facility costs (which are allocated to each departmentbased on headcount) allocated to services and other costs of $34,000 as aresult of the increase in headcount related to the acquisition of LifeLink, anincrease in international services and other costs of $46,000 and an increasein support fees of $41,000.

 

**Product Development Expenses**-Total product 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, annual salary increases and anincrease in headcount in India totaling $576,000. In addition, facility costs increased $55,000 as a result ofincreases in headcount.

 

**Sales andMarketing Expenses**-Total sales and marketing expenses for the six-month period ended June 30, 2004decreased $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.

 

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

 

During 2004, the Companygenerated operating cash flows of $193,000, due primarily to $1,156,000 in netincome (an increase of $550,000 from the prior year), partially offset by anincrease in accounts receivable and a decrease in accrued payroll and relatedbenefits.  The decrease in accruedpayroll and related benefits is related to bonuses, which were accrued in 2003and paid in the second quarter of 2004. The accounts receivable increase is primarily due to BRiT and itsaffiliates, which had $708,000 of accounts receivable outstanding at June 30,2004. These balance sheet fluctuations are normal consequences of timingdifferences between accruals and their cash settlement.

 

For the six-month period endedJune 30, 2004, 20% and 12% of the Company’s total revenues were from twocustomers – BRiT (including its affiliates) and AON, respectively.  Neither BRiT and its affiliates nor AON havelong-term agreements with the Company that provide certainty that such revenueswill be recurring.

 

Cash used in investingactivities of $4,885,000 in the six months ended June 30, 2004 representedexpenditures made primarily as a result of the Company’s acquisition ofLifeLink.  Cash provided by financingactivities of $6,415,000 resulted primarily from the Company’s sale of commonstock during the first quarter of 2003 of $2,977,000 and borrowings of$3,500,000 on the Company’s existing line of credit during the second quarterof 2004.

 

During early 2004 the Companysold 222,223 shares of its previously unissued common stock to CF EpicInsurance and General Fund, an investment fund located in London of which BRiTowned approximately 70% of the equity interests as of June 30, 2004, for grossproceeds of $3,000,010, or $13.50 per share. On February 23, 2004 theCompany acquired LifeLink. 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 annual installments of $500,000 over five years (present valuecomputed at $2,226,000), and $3,000,000 payable in 200,000 shares of the commonstock of the Company issued at the time of closing. The Company alsocapitalized approximately $128,000 of transaction costs with the LifeLinkacquisition.  See note 7 to the condensedconsolidated financial statements included in this Form 10-Q for a discussionof a repurchase obligation with respect to the shares of common stock.

 

On July 1, 2004, Ebix Australia Pty Ltd. (“Ebix Australia”), asubsidiary of Ebix, Inc., acquired the operating assets of Heart Consulting PtyLtd. located in Melbourne, Australia (“Heart”) pursuant to a purchase agreementdated June 28, 2004, by and between Ebix Australia and Heart.  Pursuant to the purchase agreement, EbixAustralia acquired the operating assets of Heart in exchange for an aggregatepurchase price (in Australian dollars) of A$10,175,000 ($7,116,000 USD) (basedon the exchange rate as published by the Reserve Bank of Australia on July 1,2004 of A$0.6994 per United States Dollar (“USD”)) payable as follows:A$5,175,000 ($3,619,000 USD) in cash at closing, A$2,000,000 ($1,399,000 USD)payable under stand-by letters of credit issued by the Company’s lender on theCompany’s line of credit in three equal annual installments on each of thefirst, second and third anniversaries of the closing (the “Deferred Payments”),and A$3,000,000 ($2,098,000 USD) payable in 157,728 shares of common stock ofEbix issued at the closing.  See note 9to the condensed consolidated financial statements included in this Form 10-Qfor a discussion of a repurchase obligation with respect to the shares ofcommon stock.

 

The existing revolving line ofcredit with LaSalle National Bank Association was increased to $5,000,000during February 2004 and the agreement was amended inApril 2004.  There was $3,500,000 ofborrowings on this line as of June 30, 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 is scheduled to expire onOctober 31, 2005.

 

In planning for its capitalneeds the Company takes into account its sources of cash, which includeoperating cash flow, cash balances, funds from credit facilities and funds fromother capital market transactions, and anticipated future cash needs, includingworking capital requirements for operations, capital expenditures, andexpenditures for business acquisitions. Based on these considerations, the Company believes it will have sufficientcash for operations and to satisfy its other contractual obligations for atleast the next several years, although there can be no assurance to thateffect.  See “Risk Factors - We cannotpredict our future capital needs and we may not be able to secure additionalfinancing when we need it.”

 

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# **The following summarizes the Company’scontractual obligations at June 30, 2004, and the effect such obligationsare expected to have on the Company’s liquidity and cash in future periods (inthousands):**

#  

| ** **                        | ** ** | **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)   $2,700,000is contingent upon exercise of the holder’s put option to require the Companyto purchase the holder’s redeemable common stock in connection with theLifeLink acquisition.  See note 7 to thecondensed consolidated financial statements included in this Form 10-Q.

(2)   Doesnot reflect obligations with respect to the Heart acquisition.

 

**Safe Harbor for Forward-Looking Statements under the SecuritiesLitigation Reform Act of 1995** - This Quarterly Reporton Form 10-Q contains various forward-looking statements and information thatare based on management’s beliefs, as well as assumptions made by, andinformation currently available to management, including statements regardingfuture economic performance and financial condition, liquidity and capitalresources, acceptance of the Company’s products by the market and management’splans and objectives. The Company has tried to identify such forward lookingstatements by use of words such as “expects,” “intends,” “anticipates,”“plans,”  “believes, “will,” “should,”and similar expressions, but these words are not the exclusive means ofidentifying such statements. The forward looking statements included in thisQuarterly Report are subject to various risks, uncertainties and other factorswhich could cause actual results to vary materially from those expressed in, orimplied by, the forward looking statements. Such risks, uncertainties and other factors include those discussed in“Risk Factors” below. Except as expressly required by the federal securitieslaws, the Company undertakes no obligation to update any such factors or to publiclyannounce the results of any of the forward-looking statements contained hereinto reflect changed circumstances or future events or developments or for anyother reason.

 

**Risk Factors**

 

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

 

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

 

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

** **

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

 

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

 

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

 

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

** **

Revenuesfrom one customer, BRiT Insurance Holdings PLC and its affiliates, which atJune 30, 2004 owned approximately 34% of our common stock and approximately 70%of CF Epic Insurance and General Fund, which at that date owned approximately8% of our common stock, represented approximately 23% of our total revenue in2003 and 17% of our total revenue in 2002. The revenues from BRiT InsuranceHoldings PLC and its affiliates represented approximately 20% and 14% of theCompany’s total revenues for the six-month periods ended June 30, 2004 and 2003,respectively. If revenues from this customer were to discontinue, our operatingresults could be adversely affected.

 

Revenuesfrom another international customer, AON represented approximately 11% of ourtotal revenue in 2003.  The revenues fromAON represented approximately 12% of the Company’s total revenues for both thesix-month periods ended June 30, 2004 and 2003. If revenues from this customerwere to discontinue, our operating results could be materially adverselyaffected.

 

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

** **

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

 

**Our operating results may fluctuate dramatically.**

** **

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

 

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

 

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

 

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

 

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

 

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

** **

On August 11, 2000, we were advised that the SEC had issued aformal Order of Investigation and subpoenaed documents relating to ourfinancial reporting since April 1, 1997, including, in particular, revenuerecognition, software development cost capitalization, royalty costs andclassification of cash receipts.  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 beunable to 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 our

 

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activities.

 

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

 

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

 

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

** **

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

 

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

 

•              rapidly changing technology;

 

•              evolving industry standards;

 

•              frequent new product and service introductions;

 

•              shifting distribution channels; 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 extensive marketing campaigns for theirbrands and services;

 

•              devote more resources to website and systemsdevelopment;

 

•              adopt more aggressive pricing policies; and

 

•              make more attractive offers to potential employees, onlinecompanies 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 in particularas critical to our success.  It may bepossible for

 

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third parties to copy aspects of our productsor, without authorization, to obtain and use information that we regard astrade secrets.  Existing copyright lawaffords only limited practical protection, and our software is unpatented.

 

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

 

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

 

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

** **

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

 

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

 

**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 economies on the level ofconsumers’ insurance shopping and purchasing behavior;

 

•      greater difficulty in collecting accountsreceivable;

 

•      difficulties and costs of staffing andmanaging foreign operations;

 

•      reduced protection for intellectualproperty rights in some countries;

 

•      seasonal reductions in business activityduring the summer months in Europe and other parts of the world;

 

•      burdensome regulatory requirements, othertrade barriers and differing business practices;

 

•      fluctuations in exchange rates;

 

•      potentially adverse tax consequences; and

 

•      political and economic instability.

 

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

 

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

** **

We perform functions forlicensed insurance agents, brokers and carriers and are, therefore, required tocomply with a complex set of rules and regulations that often vary from stateto state.  These rules and regulationscan be difficult to comply with and are ambiguous and open tointerpretation.  If we fail to properlyinterpret and/or comply with these rules and regulations, we, the insuranceagents, brokers or carriers doing business with us, our officers, or agentswith whom we contract could be subject to various sanctions,

 

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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 which insurance issold, 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 callcenter business is dependent upon our ability to protect our call centers,including the computer and telecommunications equipment and software systems atthose centers, against damage from fire, power loss, telecommunicationsinterruption or failure, natural disaster and other similar events. In theevent we experience a temporary or permanent interruption at one or more of ourcall centers, through casualty, operating malfunction or otherwise, ourbusiness 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.**

** **

Thetelemarketing industry and, therefore, our call center business are subject toan 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 comply with these regulations,and these regulations may limit our call center activities or reduce the demandfor 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.

 

***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 confidential informationover the Internet or security problems we experience may prevent us fromexpanding 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

 

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inaccess to confidential information could damage our reputation and subject usto a risk of loss or liability.  We maybe required to make significant expenditures to protect against or remedysecurity breaches.  Additionally, if weare unable to adequately address our customers’ concerns about security, we mayhave difficulty selling our goods and services.

 

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

 

Concern among consumers and legislators regarding the use of personalinformation gathered from Internet users could create uncertainty in themarketplace.  This could reduce demandfor our services, increase the cost of doing business as a result of litigationcosts or increased service delivery costs, or otherwise harm our business.  Legislation has been proposed that wouldlimit the users of personally identifiable information of Internet users gatheredonline 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 additional financialburdens on our business.

 

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

 

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

** **

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

 

**•**              announcements of new services,products, technological innovations, acquisitions or strategic relationships byus or our competitors;

 

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

 

**•**              changes in market valuations ofour competitors; and

 

**•**              general political, economic andmarket 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 at whichyou 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 Insurance Holdings plcbeneficially owned approximately 34% of our outstanding common stock and,together with our executive officers and directors, beneficially ownedapproximately 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 approximately 8%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

 

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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 AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

 

The majority of our operations are based in the U.S. and, accordingly,the majority of our transactions are denominated in U.S. dollars.  However, we have foreign-based operations wheretransactions are denominated in foreign currencies and are subject to marketrisk 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 endedJune 30, 2004 and 2003, respectively. For the six months ended June 30, 2004, the fluctuations in thesecurrencies resulted in a net transaction gain of $8,000.  For the six months ended June 30, 2003, thefluctuations in these currencies resulted in a net transaction loss of $57,000.We considered the historical trends in currency exchange rate and determinedthat it was reasonably possible that adverse changes in exchange rates of 20%for all currencies could be experienced in the near term.  Such adverse changes would have resulted inan adverse impact on income before taxes of approximately $145,000 and $137,000for the three months ended June 30, 2004 and June 30, 2003, respectively. Suchadverse changes would have resulted in an adverse impact on income before taxesof approximately $242,000 and $199,000 for the six months ended June 30, 2004and 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.

 

Item 4.    CONTROLSAND PROCEDURES

 

The Company carried out an evaluation, under the supervision and withthe participation of the Company’s management, including its Chief ExecutiveOfficer and Chief Financial Officer, of the design and operation of theCompany’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that, as of June 30, 2004, the Company’sdisclosure controls and procedures were effective to provide reasonableassurance that the information required to be disclosed by the Company in thereports filed or submitted under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.

 

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

 

In connection with the audit of our consolidated financial statementsfor the year ended December 31, 2003, KPMG LLP (“KPMG”) advised theCompany’s management and audit committee of reportable conditions related to itsinternal controls.  KPMG presented to theaudit committee details of the reportable conditions noted during the 2003audit which included delegation of authority, formalized contract reviewprocess to ensure proper revenue recognition, accounting for income taxes,analysis/documentation for unusual transactions, and SOX 404 internal controlmatters (documented and testable control environment).

 

In response to KPMG’s identified issues, in the first quarter of 2004, theCompany changed its reporting structure within the financial accounting groupand will redistribute responsibilities among the financial accounting group tocreate improved checks and balances.  Theresponsibility for a formalized contract review process to ensure properrevenue recognition will be re-assigned to a financial departmentdirector.  The ongoing quarterly reviewof the provision for income taxes will be performed by the CFO, corporatecontroller and a newly hired senior financial accounting member located inAustralia. The foregoing individuals will also be responsible for the analysisand documentation of any unusual transactions. The Company has hired anadditional senior staff professional for the financial accounting group whoseduties will include SOX 404 documentation of internal control matters.

 

There were no changes to the Company’s internal control over financialreporting during the quarter ended June 30, 2004 that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

Part II — OTHER INFORMATION

 

Item 6.    EXHIBITS AND REPORTS ON 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                                                                                                           |

 

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The Company furnished a currentreport on Form 8-K (pursuant to Item 12 thereof) on May 17, 2004 to report the Company’sannouncement of its results of operations and financial position as of, and forthe three-month period ended March 31, 2004.

 

The Company filed a Form 8-K/A(pursuant to Items 2 and 7 thereof) on May 7, 2004, amending a current reporton Form 8-K it 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 endedDecember 31, 2003 and 2002.

Ebix, Inc. and Subsidiaries Unaudited Pro Forma Condensed CombiningBalance Sheet at December 31, 2003.

Ebix, Inc. and Subsidiaries Unaudited Pro Forma Condensed Statements ofIncome 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 report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                  | Ebix, Inc. |
|-----------------------|------------|
|                  |       |
|                  |       |
| Date: August 16, 2004 | By         |   |
|                  |       | /s/ RICHARD J. BAUM |
|                  |       | Richard J. Baum |
|                  |       | Executive Vice President — Finance & Administration, Chief   Financial Officer (principal financial and accounting officer),  and Secretary |

 

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