**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q/A**

**Amendment No. 1**

 

**to**

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

 

**Commission file number 0-15946**

 

**Ebix, Inc.**

(Exact name of registrant as specified in itscharter)

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes 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 November 11, 2004, the number of shares of Common Stockoutstanding was 2,904,674.

 

 

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**EXPLANATORY NOTE**

 

**In connection with a review by the Securitiesand Exchange Commission (the "SEC") of the Company's RegistrationStatement on Form S-3 (File No. 333-112616), the SEC has reviewed theCompany's Quarterly Report on Form 10-Q for the quarter ended September30, 2004 (the "Form 10-Q") and other reports filed by theCompany with the SEC. The SEC's review of the Form 10-Q has focusedprimarily on financial-related disclosure. This Amendment No. 1 to theForm 10-Q (this "10-Q/A") has been filed in connection with theCompany's response to comments on the Form 10-Q and other filings raisedby the SEC during its review process.**

 

**Please note that the information contained inthis 10-Q/A has not been updated to reflect events or developments occurringafter November 15, 2004, the date the Form 10-Q was originally filed withthe SEC and, accordingly, such information continues to speak as of suchearlier date.**

 

**Ebix, Inc. and Subsidiaries**

 

FORM 10-Q

 

FOR THE QUARTER ENDED SEPTEMBER 30, 2004

 

INDEX

 
| Part I — FINANCIAL INFORMATION                                                                                       |   |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                           |   |   |
| Item 1. Consolidated Financial Statements                                                                                      |   |   |
|                                                                                                                           |   |   |
| Condensed Consolidated Balance Sheets at September 30,  2004 (unaudited) and December 31, 2003                       |   | 3      |
|                                                                                                                           |   |   |
| Condensed Consolidated Statements of Income  for the Three and Nine Months ended September 30, 2004 and 2003  (unaudited) |   | 4      |
|                                                                                                                           |   |   |
| Condensed Consolidated Statements of Cash Flows  for the Nine Months ended September 30, 2004 and 2003 (unaudited)        |   | 5      |
|                                                                                                                           |   |   |
| Notes to Condensed Consolidated Financial  Statements (unaudited)                                                              |   | 6      |
|                                                                                                                           |   |   |
| Item 2. Management’s Discussion and Analysis  of Financial Condition and Results of Operations                            |   | 12     |
|                                                                                                                           |   |   |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                                            |   | 23     |
|                                                                                                                           |   |   |
| Item 4. Controls and Procedures                                                                                                |   | 23     |
|                                                                                                                           |   |   |
| Item 5. Other Information                                                                                                      |   |   |
|                                                                                                                           |   |   |
| PART II — OTHER INFORMATION                                                                                          |   | 24     |
|                                                                                                                           |   |   |
| Item 2. Unregistered Sales of Equity  Securities and Use of Proceeds                                                           |   | 24     |
|                                                                                                                           |   |   |
| Item 6. Exhibits and Reports on Form 8-K                                                                                  |   | 24     |
|                                                                                                                           |   |   |
| SIGNATURES                                                                                                                     |   | 25     |

 

2

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**Ebix, Inc.and SubsidiariesCondensed ConsolidatedBalance Sheets**(In thousands, except for share and per share amounts)

 
| ** **                                                                                                                                                             | ** ** | **September 30, 2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                             | ** ** | **(Unaudited****)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                             |       |                        |       |                        |       |
| **Current  assets:**                                                                                                                                                   |       |                        |       |                        |       |
| Cash and cash equivalents                                                                                                                                              |       | $                           | 4,556      |                        | $          | 7,915 |   |
| Accounts receivable, less allowance of $342  and $356, respectively                                                                                                    |       | 3,027                       |       | 1,787                       |       |
| Other current assets                                                                                                                                                   |       | 878                         |       | 364                         |       |
| **Total current assets**                                                                                                                                               |       | 8,461                       |       | 10,066                      |       |
| Restricted cash                                                                                                                                                        |       | 3,000                       |       | —                      |       |
| Property and equipment, net                                                                                                                                            |       | 1,359                       |       | 1,353                       |       |
| Capitalized software, net                                                                                                                                              |       | 27                          |       | 109                         |       |
| Goodwill                                                                                                                                                               |       | 12,836                      |       | 123                         |       |
| Intangibles, net                                                                                                                                                       |       | 3,574                       |       | —                      |       |
| Other assets                                                                                                                                                           |       | 411                         |       | 320                         |       |
| **Total  assets**                                                                                                                                                      |       | $                           | 29,668     |                        | $          | 11,971 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                         |       |                        |       |                        |       |
| **Current  liabilities:**                                                                                                                                              |       |                        |       |                        |       |
| Accounts payable and accrued expenses                                                                                                                                  |       | $                           | 1,620      |                        | $          | 1,778 |   |
| Accrued payroll and related benefits                                                                                                                                   |       | 650                         |       | 1,287                       |       |
| Current portion of long term debt                                                                                                                                      |       | 925                         |       | —                      |       |
| Current portion of capital lease  obligations                                                                                                                          |       | —                      |       | 73                          |       |
| Deferred revenue                                                                                                                                                       |       | 3,158                       |       | 2,141                       |       |
| **Total current liabilities**                                                                                                                                          |       | 6,353                       |       | 5,279                       |       |
| Long term debt, less current portion                                                                                                                                   |       | 2,693                       |       | —                      |       |
| Line of credit                                                                                                                                                         |       | 3,500                       |       | —                      |       |
| Redeemable common stock (357,728 and 0  shares issued and outstanding at September 30, 2004 and December 31,  2003, respectively) stated at redemption price |       | 4,135                       |       | —                      |       |
|                                                                                                                                                                   |       |                        |       |                        |       |
| **Stockholders’  equity:**                                                                                                                                        |       |                        |       |                        |       |
| Convertible Series D Preferred stock,  $.10 par value, 2,000,000 shares authorized, no shares issued and outstanding                                              |       | —                      |       | —                      |       |
| Common stock, $.10 par value, 40,000,000 shares  authorized, 2,904,674 and 2,316,767 shares issued and outstanding,  respectively                                      |       | 290                         |       | 232                         |       |
| Additional paid-in capital                                                                                                                                             |       | 92,669                      |       | 88,706                      |       |
| Deferred compensation                                                                                                                                                  |       | (383                        | )          | (436                        | )          |
| Accumulated deficit                                                                                                                                                    |       | (80,114                     | )          | (82,251                     | )          |
| Accumulated other comprehensive income                                                                                                                                 |       | 525                         |       | 441                         |       |
| **Total  stockholders’ equity**                                                                                                                                   |       | 12,987                      |       | 6,692                       |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                   |       | $                           | 29,668     |                        | $          | 11,971 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

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**Ebix, Inc.and SubsidiariesCondensed ConsolidatedStatements of Income**

(In thousands, except per share data)(Unaudited)

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

 

See accompanying notes to condensed consolidated financial statements.

 

4

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**Ebix, Inc.and SubsidiariesCondensed ConsolidatedStatements of Cash Flows**

(In thousands)(Unaudited)

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **2004**                                 | ** ** | **2003** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                     |       |   |   |
| **Cash  flows from operating activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                     |       |   |   |
| Net income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | $                                        | 2,137      |   | $ | 1,181 |   |
| **Adjustments  to reconcile net income to net**** cash provided by operating  activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                     |       |   |   |
| Depreciation and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | 814                                      |       | 315 |   |
| Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 53                                       |       | 27 |   |
| Provision for doubtful accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | 123                                      |       | 7 |   |
| **Changes  in assets and liabilities, net of effect of acquisitions:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                                     |       |   |   |
| Accounts receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | (628                                     | )          | 914 |   |
| Other assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | (505                                     | )          | (133 | ) |
| Accounts payable and accrued expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | (210                                     | )          | 213 |   |
| Accrued payroll and related benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | (847                                     | )          | 520 |   |
| Deferred revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 340                                      |       | (330 | ) |
| Net cash provided by operating activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 1,277                                    |       | 2,714 |   |
| **Cash  flows from investing activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                     |       |   |   |
| Acquisition of LifeLink, net of cash  acquired                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | (4,763                                   | )          | — |   |
| Acquisition of Heart, net of cash acquired                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | (3,152                                   | )          |   |   |
| Capital expenditures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | (170                                     | )          | (454 | ) |
| Net cash used in investing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | (8,085                                   | )          | (454 | ) |
| **Cash  flows from financing activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                     |       |   |   |
| Proceeds from borrowings related to line of  credit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 3,500                                    |       | — |   |
| Restricted cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | (3,000                                   | )          | — |   |
| Proceeds from the issuance of common stock,  net of issuance costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 2,977                                    |       | — |   |
| Proceeds from the from exercise of common  stock options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 45                                       |       | — |   |
| Principal payments under capital lease  obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | (73                                      | )          | (84 | ) |
| Net cash provided by (used in) financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 3,449                                    |       | (84 | ) |
| Effect of foreign exchange rates on cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | —                                   |       | 1 |   |
| Net change in cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | (3,359                                   | )          | 2,177 |   |
| Cash and cash equivalents at the beginning of the period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 7,915                                    |       | 4,993 |   |
| Cash and cash equivalents at the end of the period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | $                                        | 4,556      |   | $ | 7,170 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                     |       |   |   |
| **Supplemental  disclosures of cash flow information:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                                     |       |   |   |
| Interest paid                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | $                                        | 43         |   | $ | 14 |   |
| Income taxes paid                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | $                                        | 342        |   | $ | 40 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                     |       |   |   |
| **Supplemental  schedule of noncash investing activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                     |       |   |   |
| During the first quarter of 2004, the  Company purchased all of the capital stock of LifeLink Corporation for  consideration which included 200,000 shares of common stock valued at $3,000,000,  cash of $5,000,000, and a note payable of $2,226,000. The Company also  capitalized approximately $128,000 of transaction costs in conjunction with  the acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                                     |       |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                     |       |   |   |
| During the third quarter of 2004, Ebix  Australia acquired the operating assets of Heart Consulting PTY Ltd. in  exchange for an aggregate purchase price (in Australian dollars) of  A$10,175,000 ($7,116,000 USD) (based on the exchange rate as published by the  Reserve Bank of Australia on July 1, 2004 of A$0.6994 per United States  Dollar (“USD”)) payable as follows: A$5,175,000 ($3,619,000 USD) in cash at  closing, A$2,000,000 ($1,399,000 USD) payable under stand-by letters of  credit issued by the Company’s lender on the Company’s line of credit in  three equal annual installments on each of the first, second and third  anniversaries of the closing (the “Deferred Payments”), and A$3,000,000  ($2,098,000 USD) payable in 157,728 shares of common stock of Ebix issued at  the closing. The Company also capitalized approximately $106,000 of transaction  costs in conjunction with the acquisition. |       |                                     |       |   |   |

 

See accompanying notes to condensed consolidated financial statements.

 

5

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Ebix, Inc.and SubsidiariesNOTES TO CONDENSEDCONSOLIDATED 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 July 1, 2004, Ebix Australia Pty Ltd. (“Ebix Australia”), asubsidiary of Ebix, Inc., acquired certain of the operating assets ofHeart Consulting Pty Ltd. located in Melbourne, Australia (“Heart”) pursuant toa purchase agreement dated June 28, 2004, by and between Ebix Australia andHeart (see note 8).

 

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

 

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

 

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

 

**Summary of significant accounting policies—**

 

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

 

In May 2003, the Financial Accounting Standards Board (“FASB”)finalized the terms of Emerging Issues Task ForceIssue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” (“EITF 00-21”),which provides criteria governing how to identify whether goods or servicesthat are to be delivered separately in a bundled sales arrangement should beaccounted for separately. Deliverables are accounted for separately if theymeet all of the following: a) the delivered items have stand-alone valueto the customer; b) the fair value of any undelivered items can bereliably determined; and c) if the arrangement includes a general right ofreturn, delivery of the undelivered items is probable and substantiallycontrolled by the seller. The Company adopted EITF 00-21 on July 1, 2003for all new revenue arrangements executed subsequent to June 30, 2003 (orsignificant modification to arrangements existing prior to July 1,2003).  The Company’s current policy isto analyze all new revenue arrangements.

 

To the extent arrangements contain multiple deliverables, the Companyperforms an analysis of the nature of the deliverables to determine to whatextent the deliverables of the arrangement are governed by any higher levelliterature (as defined in EITF 00-21). EITF 00-21 recognizes arrangements that qualify for treatment under SOP97-2 and certain arrangements that qualify for contract accounting (i.e. SOP 81-1)as falling under the definition of “higher level literature”.  The Company applies the provisions ofSOP 97-2, as amended by Statement of Position 98-9, to all arrangements whichinclude software deliverables that are considered more than inconsequential tothe other elements in the arrangements. For 2004, all of the Company’s contracts with multiple deliverables havefallen under higher level accounting literature under the provisions of SOP 97-2and/or SOP 81-1.

 

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

 

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

 

6

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

7

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

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

 

**Non-employee Stock Compensation**—TheCompany accounts for stock-based compensation issued to non-employees inaccordance with SFAS No. 123 and EITF Issue No. 96-18, “Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or in conjunction with Selling Goods or Services.” SFAS No. 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. During the third quarter of 2004, theCompany granted options to purchase 4,500 shares of common stock to directorsof the Company.  These options weregranted at prices equal to 100 percent of the market price on the date ofgrant.  The options have a four-yearvesting period and must be exercised within ten years of the date of thegrant.  For the options granted toemployees, vesting accelerates if a net income performance target is achieved.

 

The Company has granted stock options outside the Company’s stockoption plans to non-employee consultants to purchase up to an aggregate of57,000 shares, of which options to purchase 34,500 shares were outstanding at September 30,2004.  These options were granted atprices equal to 100 percent of the market price on the date of grant.  The options have a four-year vesting periodand must be exercised within ten years of the date of the grant. Thesenon-employee options were valued using the fair value method as prescribed bySFAS No. 123. Options issued prior to 2001 are performance-based awards,with no service commitment and subject to vesting only if the Company’s stockprice reaches a certain level. Options issued in 2001 vest over four years, butvesting accelerates if a performance target is achieved.  At September 30, 2004, non-employeeoptions to purchase 8,320 shares were vested. The Company recognizedcompensation expense of approximately $1,000 related to these options duringthe three-month periods ended September 30, 2004.  The Company recognized a credit tocompensation expense of approximately $1,000 related to these options duringthe three-month period ended September 30, 2003.  The Company recognized compensation expenseof approximately $36,000 and $23,000 related to these options during thenine-month periods ended September 30, 2004 and September 30, 2003,respectively.

 

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

 

8

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Note 3.  EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) is equal to net income divided by theweighted average number of shares of common stock outstanding for the period.The weighted average number of shares outstanding for the three and ninemonths-ended September 30, 2004 were 2,900,000 and 2,742,000,respectively. The weighted average number of shares outstanding for both thethree and nine months-ended September 30, 2003 were 2,291,000. Diluted EPSis calculated as if the Company had additional common stock outstanding fromthe beginning of the year or the date of grant for all common stockequivalents, net of assumed repurchased shares using the treasury stockmethod.  Diluted EPS recognizes thedilutive effect of common stock equivalents and is equal to net income dividedby the sum of the weighted average number of shares outstanding and commonstock equivalents. For the three and nine months ended September 30, 2004and September 30, 2003, the Company’s common stock equivalents consistedof stock options.  For the three and ninemonths ended September 30, 2004, the effect of this calculation resultedin an increase in the weighted average number of shares outstanding of 308,000and 322,000, respectively.  For the threeand nine months ended September 30, 2004, the fully diluted weightedaverage number of shares outstanding was 3,208,000 and 3,064,000,respectively.  For the three and ninemonths ended September 30, 2003, the effect of this calculation resultedin an increase in the weighted average number of shares outstanding of 60,000and 13,000, respectively. For the three and nine months ended September 30,2003, the fully diluted weighted average number of shares outstanding was2,351,000 and 2,304,000, respectively. At September 30, 2004, there were393,000 shares potentially issuable with respect to stock options, which coulddilute EPS in the future but which were excluded from the diluted EPScalculation because their effect was antidilutive.

 

Note 4.  COMPREHENSIVE INCOME

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

 

Note 5.  RELATED PARTY ANDSIGNIFICANT CUSTOMER TRANSACTIONS

 

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

 

The Companyhas entered into various software and service agreements with BRiT. During thethird quarter of 2004 and 2003, approximately $1,004,000 and $1,502,000,respectively, was recognized as services revenue from BRiT and itsaffiliates.  During the nine months endedSeptember 30, 2004 and 2003, approximately $2,681,000 and $2,486,000,respectively, was recognized as services revenue from BRiT and itsaffiliates.  Total accounts receivablefrom BRiT and its affiliates at September 30, 2004 and December 31,2003 were $547,000 and $369,000, respectively.

 

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

 

Note 6.  SALE OF UNREGISTEREDCOMMON STOCK

 

On January 16, 2004 the Company sold 222,223 shares of itsunregistered common stock to CF Epic Insurance and General Fund (“CF Epic”), aninvestment fund located in London, BRiT owned approximately 70% of the equityinterests of CF Epic at September 30, 2004, for a total price of$3,000,010, or $13.50 per share.

 

9

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Note7.  ACQUISITION OF LIFELINK

 

On February 23,2004, the Company acquired LifeLink Corporation (“LifeLink”), and theoperations of LifeLink have been included in the Company’s financial statementssince that date. Under terms of the agreement, the Company acquired all of theoutstanding capital stock of LifeLink from its shareholders in exchange for anaggregate purchase price of $10,354,000, payable as follows: $5,000,000 paid incash at closing, $2,500,000 in a non-interest bearing note payable in cash inannual installments of $500,000 over five years (present value computed as$2,226,000), and $3,000,000 payable in 200,000 shares of the common stock ofthe Company issued at the time of closing. The Company also capitalized approximately $128,000 of transaction costsin conjunction with the LifeLink acquisition. In connection with the 200,000shares of common stock issued subject to Rule 144, the former shareholderreceived from Ebix the option to sell his stock back to Ebix subject tospecified time frames and prices.

 

The Companyhas classified $2,700,000 of the value of the common stock issued as temporaryequity, “redeemable common stock,” in the condensed consolidated balance sheetdue to the existence of the holder’s embedded put option. At any time duringthe one month period commencing on the date which is 18 months after February 23,2004 and ending 19 months after February 23, 2004, the holder of theredeemable common stock has a one-time right to require the Company to purchaseall of the holder’s 200,000 shares originally issued at a price of $2,700,000minus the aggregate purchase price received by the holder from any sales ofthese shares of common stock prior to the exercise of the put option. As of September 30,2004, the holder had not sold any shares of common stock received from thistransaction.

 

The followingtable summarizes the estimated fair value of the LifeLink assets acquired andliabilities assumed at the date of acquisition.

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

 

Of the $3,518,000 of intangible assets acquired, $977,000 was assignedto developed technology with a remaining estimated useful life of five years,$299,000 was assigned to trademarks with a remaining estimated useful life offive years and $2,242,000 was assigned to customer relationships with aremaining estimated useful life of seven years. The Company recorded $144,000 and $347,000 of amortization expenserelated to these intangible assets for the three and nine-month periods ended September 30,2004, respectively.

 

**Estimated Amortization Expenses:**

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

 

10

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Note 8**–**ACQUISITIONOF HEART

 

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

 

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

 

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

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

 

Of the $450,000 of intangible assets acquired the entire amount wasassigned to information technology with a remaining estimated useful life oftwo years.  The Company recorded $58,000of amortization expense related to these intangible assets for the three and nine-monthperiods ended September 30, 2004, respectively.

 

**Estimated Amortization Expenses:**

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

 

Note 9. - PRO FORMA FINANCIALS

 

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

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

 

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Note 10—LINE OF CREDIT:

 

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

 

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

 

The following information should be read in conjunction with 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 on developing consistentand 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) businessprocess outsourcing services, which include software development, call centerand back office, either off site or at company facilities, and (4) worldwidesales and support of the agency management systems.  This development of recurring revenue sourceswill be accomplished through the previously mentioned four initiatives inaddition to identifying and negotiating for strategic synergistic acquisitiontargets such as the recently completed acquisitions of LifeLink and Heart.

 

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

 

**Critical Accounting Policies**

 

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

 

**Results of Operations**

 

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

 

**Total Revenue** - The Company’s revenue has beenderived from the licensing and sale of proprietary software and third partysoftware (“Software”) and from professional services and support services (“Services”).Services include consulting, implementation, training and project managementprovided to the Company’s customers with installed systems and those in theprocess of installing systems. Also included in Services are fees for softwarelicense maintenance, LifeLink services, Heart services, initial registrationand ongoing monthly subscription fees for the EbixASP product and transactionfees generated from the Ebix.mall website, as well as software development andcall center revenue. Total revenue for the quarter ended September 30,2004 increased $1,488,000, or 35.7%, to $5,656,000 from $4,168,000 for thecomparable quarter of the prior year.

 

**Software Revenue** - Software revenue iscomprised of revenue from the sale of Ebix (formerly “cd”) products, currentlegacy products, and other third party software.  Total software revenue for the third quarterof 2004 decreased $199,000, or 53.4%, to $174,000 from $373,000 for thecomparable quarter of the prior year. This decrease was due to a decrease in international software licenserevenue of 52% in third quarter 2004 compared to the third quarter 2003 due tothe timing of revenues from international customers.

 

12

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**Services Revenue** — Total services revenue forthe third quarter of 2004 increased $1,687,000, or 44.5%, to $5,482,000 from$3,795,000 for the comparable quarter of the prior year.  This increase was due to LifeLink revenue ofapproximately $1,286,000, Heart revenue of approximately $925,000, an increasein consulting service revenue of $397,000 and an increase in Ebix.malltransaction fees of $64,000 partially offset by a decrease in support revenueassociated with legacy products of $153,000, a decrease in call center revenueof $205,000, a decrease in INS-Site revenue of $71,000 and a decrease inEbixASP revenue of $556,000.

 

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

 

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

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

 

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

 

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

 

The Company expects that future 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 $220,000, or 17.9%, to $1,450,000 from $1,230,000 for thecomparable quarter of the prior year. This increase was due to an increase in payroll expenses related to theacquisitions of LifeLink of $120,000 and Heart of $115,000, an increase infacility costs (which are allocated to each department based on headcount)allocated to services and other costs as a result of the increase in headcountrelated to the acquisition of LifeLink of $17,000, an increase in internationalservice costs of $178,000 and an increase in support fees of $142,000,partially offset by a decrease in costs incurred in the third quarter of 2003of $314,000 related to a project that costs were deferred during the secondquarter of 2003 and realized in third quarter 2003 and a decrease in non-LifeLinkand Heart payroll of $38,000.

 

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

 

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

 

**General and Administrative Expenses** —Totalgeneral and administrative expenses for the quarter increased $534,000, or36.6%, to $1,994,000 from $1,460,000 for the comparable quarter of the prioryear.  This increase was due to anincrease in audit and legal expenses of $144,000, bad debt expense of $101,000,employee benefits of $89,000 and charge for amortization of intangibles relatedto the LifeLink acquisition of $144,000 and Heart acquisition of $56,000.

 

**Interest Expense —**Total interest expense forthe quarter increased $101,000 to $105,000 from $4,000 for the comparablequarter of the prior year.  This increasewas due to $52,000 of imputed interest related to the LifeLink note payable,$40,000 of interest related to the line of credit and $13,000 of imputedinterest related to the Heart note payable partially offset by a decrease ininternational interest expense of $4,000.

 

**Income tax benefit (expense) –** Total income taxbenefit increased $164,000 to $61,000 of benefit from expense of $103,000 fromthe comparable quarter of the prior year. This increase in benefit was due to a change in the effective tax rateon a consolidated basis primarily as a result of the impact of the LifeLink andHeart acquisitions.

 

13

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

 

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

 

**Software Revenue** - Total software revenue forthe nine-month period ended September 30, 2004 decreased $407,000, or35.7%, to $734,000 from $1,141,000 for the comparable period of the prior year.This decrease was due to a decrease in international software license revenueof 46% in the nine-month period ended September 30, 2004 compared to thenine-month period ended September 30, 2003 due to the timing of revenuesfrom international customers.

 

**Services Revenue** — Total services revenue forthe nine-month period ended September 30, 2004 increased $3,598,000, or36.2%, to $13,532,000 from $9,934,000 for the comparable period of the prioryear.  This increase was due to LifeLinkrevenue of approximately $3,198,000, Heart revenue of $925,000, an increase inconsulting services of $1,042,000, and an increase in Ebix.mall transactionrevenue of $108,000, partially offset by a decrease in support revenueassociated with legacy products of $683,000, a decrease in EbixASP revenue of$235,000, a decrease in call center revenue of $502,000 and a decrease inINS-Site revenue of $255,000.

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

**Interest Expense —**Total interest expense forthe period increased $94,000 to $108,000 from $14,000 for the comparable periodof the prior year.  This increase was dueto $52,000 of imputed interest related to the LifeLink notes payable, $40,000of interest related to the line of credit and $13,000 of imputed interestrelated to the Heart note payable partially offset by a decrease ininternational interest expense of $11,000.

 

**Income tax benefit (expense) –** Total incometax expense decreased $183,000 to $122,000 from $305,000 from the comparableperiod of the prior year.  This decreasewas due to a change in the effective tax rate on a consolidated basis primarilyas a result of the impact of the LifeLink and Heart acquisitions.

 

14

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**Liquidity and Capital Resources**

 

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

 

During the first nine months of 2004, the Company generated operatingcash flows of $1,277,000, due primarily to $2,137,000 in net income, partiallyoffset by an increase in accounts receivable and a decrease in accrued payrolland related benefits.  The decrease inaccrued payroll and related benefits is related to bonuses, which were accruedin 2003 and paid in the second quarter of 2004. The accounts receivable increase is primarily due to BRiT and itsaffiliates, which had $547,000 of accounts receivable outstanding at September 30,2004. These balance sheet fluctuations are normal consequences of timingdifferences between accruals and their cash settlement.

 

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

 

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

 

During early 2004 the Company sold 222,223 shares of its previouslyunissued common stock to CF Epic Insurance and General Fund, an investment fundlocated in London of which BRiT owned approximately 70% of the equity interestsas of September 30, 2004, for gross proceeds of $3,000,010, or $13.50 pershare. On February 23, 2004 the Company acquired LifeLink. Under terms ofthe agreement, the Company acquired all of the outstanding capital stock ofLifeLink from its shareholders in exchange for an aggregate purchase price of$10,354,000 payable as follows: $5,000,000 paid in cash at closing, $2,500,000in a non-interest bearing note payable in cash annual installments of $500,000over five years (present value computed at $2,226,000), and $3,000,000 payablein 200,000 shares of the common stock of the Company issued at the time ofclosing. The Company also capitalized approximately $128,000 of transactioncosts with the LifeLink acquisition.  Seenote 7 to the condensed consolidated financial statements included in this Form 10-Qfor a discussion of a repurchase obligation with respect to the shares ofcommon stock.

 

On July 1, 2004, Ebix Australia Pty Ltd. (“Ebix Australia”), asubsidiary of Ebix, Inc., acquired the operating assets of HeartConsulting Pty Ltd. located in Melbourne, Australia (“Heart”) pursuant to apurchase agreement dated June 28, 2004, by and between Ebix Australia andHeart.  Pursuant to the purchaseagreement, Ebix Australia acquired the operating assets of Heart in exchangefor an aggregate purchase price (in Australian dollars) of A$10,175,000($7,116,000 USD) (based on the exchange rate as published by the Reserve Bank ofAustralia on July 1, 2004 of A$0.6994 per United States Dollar (“USD”))payable as follows: A$5,175,000 ($3,619,000 USD) in cash at closing,A$2,000,000 ($1,399,000 USD) payable under stand-by letters of credit issued bythe Company’s lender on the Company’s line of credit in three equal annualinstallments on each of the first, second and third anniversaries of theclosing (the “Deferred Payments”), and A$3,000,000 ($2,098,000 USD) payable in157,728 shares of common stock of Ebix issued at the closing.  See note 8 to the condensed consolidatedfinancial statements included in this Form 10-Q for a discussion of arepurchase obligation with respect to the shares of common stock.  The letters of credit were issued on July 1,2004 and therefore are not affected by exchange rate fluctuations.

 

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

 

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

 

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# **The following summarizes the Company’scontractual obligations at September 30, 2004, and the effect suchobligations are expected to have on the Company’s liquidity and cash in futureperiods (in thousands):**

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

 

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

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

 

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

 

**Risk Factors**

 

Youshould carefully consider the risks, uncertainties and other factors describedbelow, along with all of the other information included in this quarterlyreport on Form 10-Q, because they could materially and adversely affectour business, financial condition, operating results, cash flows and prospectsand/or the market price of our common stock. This risk factors section is written in response to the Securitiesand Exchange Commission’s “plain English” guidelines.  In this section, the words “we,” “us,” “our”and “ours” refer to the Company and not any other person.

 

***Risks Related To Our Business andOur Industry***

 

**Youmay have difficulty evaluating our business because of our limited history ofInternet, call center and other business process outsourcing.**

** **

Althoughour predecessor began operations in 1976, we did not begin any Internetoperations until September 1999 and did not begin generating revenues fromthese 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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**Becausethe support revenue that we have traditionally relied upon has been steadilydeclining, it is important that new sources of revenue continue to bedeveloped.**

 

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

 

**Twocustomers currently provide a significant percentage of our total revenue.**

** **

Revenuesfrom one customer, BRiT Insurance Holdings PLC and its affiliates, which at September 30,2004 owned approximately 32% of our common stock and approximately 70% of CFEpic Insurance and General Fund, which at that date owned approximately 8% ofour common stock, represented approximately 23% of our total revenue in 2003and 17% of our total revenue in 2002. The revenues from BRiT Insurance HoldingsPLC and its affiliates represented approximately 19% and 22% of the Company’stotal revenues for the nine-month periods ended September 30, 2004 and2003, respectively. If revenues from this customer were to discontinue, ouroperating results could be adversely affected.

 

Revenuesfrom another international customer, AON represented approximately 11% of ourtotal revenue in 2003.  The revenues fromAON represented approximately 10% of the Company’s total revenues for both thenine-month periods ended September 30, 2004 and 2003. If revenues fromthis customer were to discontinue, our operating results could be materiallyadversely affected.

 

**Adverseinsurance industry economics could adversely affect our revenues.**

** **

Weare dependent on the insurance industry, which may be adversely affected bycurrent economic and world conditions.

 

**Ouroperating results may fluctuate dramatically.**

** **

Ourquarterly operating results may fluctuate significantly in the future due to avariety of factors that could affect our revenues or our expenses in anyparticular quarter.  You should not relyon our results of operations during any particular quarter as an indication ofour 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.

 

Ouroperating expenses are based in part on our expectations of our future revenuesand are relatively fixed in the short term. We may be unable to adjust spending quickly enough to offset anyunexpected revenue shortfall.

 

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

** **

OnAugust 11, 2000, we were advised that the SEC had issued a formal Order ofInvestigation and subpoenaed documents relating to our financial reportingsince April 1, 1997, including, in particular, revenue recognition,software development cost capitalization, royalty costs and classification ofcash receipts.  We submitted documents tothe SEC upon the SEC’s request as part of the investigation.  It is possible that the SEC could imposecivil fines and penalties against us.  Anadverse finding against us by the SEC could negatively impact our stockprice.  In addition, we may continue toincur expenses associated with responding to this investigation, regardless ofits outcome, and this investigation may divert the efforts and attention of ourmanagement team from normal business operations.

 

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**Wecannot predict our future capital needs and we may not be able to secureadditional financing when we need it.**

** **

Wemay need to raise additional funds in the future in order to fund moreaggressive brand promotion or more rapid expansion, to develop new or enhancedservices, to respond to competitive pressures, to make future acquisitions, tosatisfy future obligations with respect to the LifeLink and Heart acquisitionsor to pay down other indebtedness.  Anyrequired additional financing may not be available on terms favorable to us, orat all.  If adequate funds are notavailable on acceptable terms, we may be unable to meet our business orstrategic objectives or compete effectively. If additional funds are raised by our issuing equity securities,stockholders may experience dilution of their ownership interests, and thenewly issued securities may have rights superior to those of our commonstock.  If additional funds are raised byour issuing debt, we may be subject to limitations on our activities.

 

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

** **

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

 

**Wemay not be able to continue to develop new products to effectively adjust forrapid technological changes.**

** **

Tobe successful, we must adapt to rapidly changing technological and marketneeds, by continually enhancing our website and introducing new products andservices to address our users’ changing demands.

 

Oursegment in the marketplaces in which we operate is characterized by:

 

•                                          rapidly changing technology;

 

•                                          evolving industry standards;

 

•                                          frequent new product andservice introductions;

 

•                                          shifting distributionchannels; and

 

•                                          changing customer demands.

 

Ourfuture success will depend on our ability to adapt to this rapidly evolvingmarketplace.  We could incur substantialcosts if we need to modify our services or infrastructure in order to adapt tochanges affecting our market, and we may be unable to adapt to these changes.

 

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**Themarkets for our products are highly competitive and are likely to become morecompetitive, and our competitors may be able to respond more quickly to new oremerging technology and changes in customer requirements.**

** **

Weoperate in highly competitive markets. In particular the electronic commerce market is rapidly evolving andhighly competitive.  Our software businessalso experiences some competition from certain large hardware suppliers thatsell systems and systems’ components to independent agencies and from small,independent or freelance developers and suppliers of software, who sometimeswork in concert with hardware vendors to supply systems to independentagencies.  Our Internet business may alsoface indirect competition from insurance carriers that have subsidiaries whichperform in-house agency and brokerage functions.

 

Someof our current competitors have longer operating histories, larger customerbases, greater brand recognition and significantly greater financial, marketingand other resources than we do.  Inaddition, we believe we will face increasing competition as the onlinefinancial services industry develops and evolves.  Our current and future competitors may beable to:

 

•                                          undertake more extensivemarketing campaigns for their brands and services;

 

•                                          devote more resources towebsite and systems development;

 

•                                          adopt more aggressivepricing policies; and

 

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

 

**Ifwe are unable to protect our intellectual property, our reputation andcompetitiveness in the marketplace may be materially damaged.**

** **

Weregard our intellectual property in general and our software in particular ascritical to our success.  It may bepossible for third parties to copy aspects of our products or, withoutauthorization, to obtain and use information that we regard as tradesecrets.  Existing copyright law affordsonly limited practical protection, and our software is unpatented.

 

**If we infringe on theproprietary rights of others, we may be at a competitive disadvantage, and anyrelated litigation could be time consuming and costly.**

 

Thirdparties may claim that we have violated their intellectual propertyrights.  Any of these claims, with orwithout merit, could subject us to costly litigation and divert the attentionof key personnel.  To the extent that weviolate a patent or other intellectual property right of a third party, we maybe prevented from operating our business as planned, and we may be required topay damages, to obtain a license, if available, to use the right or to use anon-infringing method, if possible, to accomplish our objectives.

 

**Wedepend on the continued services of our senior management and our ability toattract and retain other key personnel.**

** **

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

 

Ourfuture success depends on our continuing to attract, retain and motivate highlyskilled employees.  If we are not able toattract and retain new personnel,****ourbusiness will be harmed.  Competition forpersonnel in our industry is intense.  Wemay be unable to retain our key employees or attract, assimilate or retainother highly qualified employees in the future.

 

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**Ourinternational operations are subject to a number of risks that could affect ourincome and growth.**

** **

Wemarket our software internationally and plan to expand our Internet services tolocations outside of the United States. In addition, we have development activities, call center services andother operations in India, and Heart Consulting operates principally inAustralia.  Our international operationsmay not produce enough revenue to justify our investments in establishing themand are subject to other inherent risks, including:

 

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

 

•                  greater difficulty in collecting accountsreceivable;

 

•                  difficulties and costs of staffing andmanaging foreign operations;

 

•                  reduced protection for intellectual propertyrights 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 additional international markets requiressignificant management attention and financial resources, which could lessenour ability to manage our existing business effectively.

 

**Lawsand regulations that govern the insurance industry could expose us or theagents, brokers and carriers who participate in our online marketplace to legalpenalties.**

** **

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

 

**Ourcall center business could be adversely affected by equipment or systeminterruptions at one or more of our call centers.**

** **

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

 

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**Governmentalregulation of the telemarketing industry may increase our costs and restrictthe operation and growth of our call center business.**

** **

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

 

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

 

**Theoutsourcing of business processes to foreign countries may be perceivednegatively, which may reduce the demand for our services and lead togovernmental regulation of these activities.**

** **

Weenable companies to outsource certain business processes, including softwaredevelopment 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 of Business onThe Internet***

 

**Anydisruption of our Internet connections could affect the success of our Internetbased products.**

** **

Anysystem failure, including network, software or hardware failure, that causes aninterruption in our network or a decrease in responsiveness of our websitecould 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.

 

Ifthe computer hardware operations that host our website were to experience asystem failure, the performance of our website would be harmed.  These systems are also vulnerable to damagefrom fire, floods, earthquakes, acts of terrorism, power loss,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.

 

**Concerns regarding securityof transactions or the transmission of confidential information over theInternet or security problems we experience may prevent us from expanding ourbusiness or subject us to legal exposure.**

 

Ifwe do not offer sufficient security features in our online product and serviceofferings, our products and services may not gain market acceptance, and wecould be exposed to legal liability. Despite the measures that we may take, our infrastructure will be potentiallyvulnerable to physical or electronic break-ins, computer viruses or similarproblems.  If a person circumvents oursecurity measures, that person could misappropriate proprietary information ordisrupt or damage our operations. Security breaches that result in access to confidential informationcould damage our reputation and subject us to a risk of loss or liability.  We may be required to make significantexpenditures to protect against or remedy security breaches.  Additionally, if we are unable to adequatelyaddress our customers’ concerns about security, we may have difficulty sellingour goods and services.

 

**Uncertaintyin the marketplace regarding the use of Internet users’ personal information,or proposed legislation limiting such use, could reduce demand for our servicesand result in increased expenses.**

** **

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

 

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**Futuregovernment regulation of the Internet could place financial burdens on ourbusinesses.**

** **

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

 

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

 

**Theprice of our common stock may be extremely volatile.**

** **

In some future periods, our results of operations may be below theexpectations of public market investors, which could negatively affect themarket price of our common stock. Furthermore, the stock market in general has experienced extreme priceand volume fluctuations in recent years. We believe that, in the future, the market price of our common stockcould fluctuate widely due to variations in our performance and operatingresults or because of any of the following factors, which are, in large part,beyond our control:

 

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

 

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

 

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

 

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

 

In addition, the market prices of securities of technology companies,including our own, have been volatile and have experienced fluctuations thathave often been unrelated or disproportionate to operating performance.  As a result, you may not be able to sellshares of our common stock at or above the price at which you purchasethem.  In the past, following periods ofvolatility in the market price of a company’s securities, securities classaction litigation has often been instituted against that company.  If any securities litigation is initiatedagainst us, we could incur substantial costs and our management’s attention andresources could be diverted from our business.

 

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

 

The concentration of ownership of our common stock may have the effectof delaying, preventing or deterring a change in control of our company, coulddeprive our stockholders of an opportunity to receive a premium for theircommon stock as part of a sale of our company, and may affect the market priceof our common stock.  At September 30,2004, BRiT Insurance Holdings plc beneficially owned approximately 32% of ouroutstanding common stock and, together with our executive officers anddirectors, beneficially owned approximately 48% of our outstanding commonstock.  In addition, the Company has beeninformed that BriT owns approximately 70% of the equity interests of CF Epic Insuranceand General Fund, which at September 30, 2004, beneficially ownedapproximately 8% of our outstanding common stock.  As a result, those stockholders, if they acttogether, are able to control all matters requiring stockholder approval,including the election of all directors and approval of significant corporatetransactions and

amendmentsto our certificate of incorporation. These stockholders may use their ownership position to approve or takeactions that are adverse to your interests or prevent the taking of actionsthat are consistent with your interests.

 

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Item 3.             QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The majority of our operations are based in the U.S. and, accordingly,the majority of our transactions are denominated in U.S. dollars.  However, we have foreign-based operationswhere transactions are denominated in foreign currencies and are subject tomarket risk with respect to fluctuations in the relative value of currencies.  Currently, we have operations in Australia,Canada, India, New Zealand and Singapore and conduct transactions in the localcurrencies of each location.  There canbe no assurance that fluctuations in the value of foreign currencies will nothave a material adverse effect on our business, operating results, revenues orfinancial condition.  The fluctuations inthese currencies resulted in a net transaction loss of $3,000 and a nettransaction gain of $1,000 for the three months ended September 30, 2004and 2003, respectively.  For the ninemonths ended September 30, 2004, the fluctuations in these currenciesresulted in a net transaction gain of $5,000. For the nine months ended September 30, 2003, the fluctuations inthese currencies resulted in a net transaction loss of $56,000. We consideredthe historical trends in currency exchange rate and determined that it wasreasonably possible that adverse changes in exchange rates of 20% for allcurrencies could be experienced in the near term.  Such adverse changes would have resulted inan adverse impact on income before taxes of approximately $160,000 and $101,000for the three months ended September 30, 2004 and September 30, 2003,respectively. Such adverse changes would have resulted in an adverse impact onincome before taxes of approximately $402,000 and $300,000 for the nine monthsended September 30, 2004 and September 30, 2003, respectively.

 

There have been no material changes in the Company’s interest rate riskduring the three and nine months ended September 30, 2004. While the Companyhas interest rate risk related to the line of credit, the exposure is mitigatedby the 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.             CONTROLS AND PROCEDURES

 

In connection with its 2003 year-end audit, the Company’s independentcertified public accountants at that time, KPMG LLP (“KPMG”), identifieddetails of reportable conditions relating to the Company’s internal controlover financial reporting.  According to KPMG, the communication of thereportable conditions was based on their professional judgment, taking intoconsideration audit differences that required adjustment to the Company’sfinancial statements, as well as the underling causes for such adjustments, andKPMG’s observations about the Company’s internal control processes, but did notarise from any particular transaction or event. On March 25, 2004, KPMG presented to the audit committee thedetails of the reportable conditions noted during the 2003 audit, whichincluded (1) delegation of authority and what KPMG considered to beinadequate reviews by a person other than the preparer of accountinginformation, (2) the lack of a formalized contract review process toensure proper revenue recognition, (3) the lack of a completeunderstanding of the Company’s income tax provision and related accounts, (4) inadequatedocumentation for certain unusual transactions (including the basis for theCompany’s accounting conclusions), and (5) internal control matters(documented and testable control environment) under the Sarbanes-Oxley Act, Section 404(together with applicable regulations,”SOX 404”).

 

In response to KPMG’s identified issues, in the first quarter of 2004(prior to the quarter covered by this report), the Company changed itsreporting structure within the financial accounting group and redistributedresponsibilities among the financial accounting group to create improved checksand balances.  The reorganizationincluded appointment of a senior member of the group as corporate controller towhom all the other members report. Further, (a) the responsibility for a formalized contract reviewprocess to ensure proper revenue recognition was re-assigned to a financialdepartment director; (b) the Company established a process for thequarterly review of the provision for income taxes by the Chief FinancialOfficer and corporate controller; (c) the Chief Financial Officer andcorporate controller undertook responsibility for the analysis anddocumentation of any unusual transactions. During the third quarter of 2004, the Company hired an additional seniorstaff professional for the financial accounting group, whose duties include SOX404 documentation of internal control matters. His hiring strengthened theoverall capabilities of the accounting group****andallowed the further reallocation of responsibilities, enabling the corporatecontroller to devote additional time to focus on the Company’s consolidated taxprovision and accounting for income taxes.

 

In addition, in order toaddress further the deficiencies described above and to improve the Company’sinternal control over financial reporting for future periods, the Company plansto:

 

1.               Perform a review of internal control overfinancial reporting in connection with satisfying the requirements Section 404of the Sarbanes-Oxley Act and regulations promulgated thereunder, with theassistance of an outside consulting firm to be retained by the Company; 

 

2.               Perform more detailed quarterlyreconciliations and analyses of the Company’s revenue accounts; 

 

3.               Continue to enhance staffing to providesufficient resources to accomplish the foregoing objectives, including throughthe addition of a senior financial accountant in Australia. 

 

The enhancements to internalcontrol over financial reporting made in the first nine months of 2004constitute, and the planned further improvements will constitute, significantchanges in internal control over financial reporting.  In particular, thehiring of a senior staff professional for the financial accounting group, andthe related further reallocation of responsibilities within that group,constituted a change in the Company’s internal control over financial reportingduring the quarter ended September 30, 2004 that has materially affectedthe Company’s internal control over financial reporting.  The Company continues to evaluate theeffectiveness of its internal control over financial reporting, along with itsdisclosure controls and procedures, on an ongoing basis and will take furtheraction as appropriate.

 

The Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,of the design and operation of the Company’s disclosure controls andprocedures, which are designed to provide reasonable assurance that theinformation required to be disclosed by the Company in the reports that itfiles with or submits to the Securities and Exchange Commission is (1) recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSecurities and Exchange Commission and (2) accumulated and communicated to theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.  Based on this evaluation, the Company’s ChiefExecutive Officer and the Company’s Chief Financial Officer concluded that, asof September 30, 2004, the Company’s disclosure controls and procedureswere effective to provide such reasonable assurance.  They reached this conclusion based in largepart on their assessment of (i) the financial expertise of the members ofthe internal accounting staff, (ii) the regular communications among suchpersons (serving as a de facto disclosure committee), and between them and therest of the relatively small organization, with respect to all materialdevelopments in the Company’s business, and (iii) the review of theCompany’s financial and other disclosure by the Company’s management, its auditcommittee, its independent public accountants and its outside legal counsel, aswell as (iv) the enhancements made to the Company’s internal control overfinancial reporting in the first nine months of 2004.

 

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Part II —OTHER INFORMATION

 

Item2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS

 

On July 1, 2004, theCompany issued 157,728 shares of its common stock (the “Securities”) to HeartConsulting Services Pty Ltd (“Heart”), located in Melbourne, Australia, inconnection with the acquisition of substantially all of the operating assets ofHeart by a wholly-owned subsidiary of the Company, Ebix Australia Pty Ltd. (“EbixAustralia”).  The Company sold theSecurities in a transaction exempt from registration under the Securities Actof 1933, as amended (the “Act”), in reliance upon Regulation S promulgatedthereunder, as a transaction not involving an offer or sale within the UnitedStates.  Heart represented in writing tothe Company and Ebix Australia that it (i) is not a “U.S. Person” as suchterm is defined in Rule 902 of Regulation S under the Act, (ii) isnot purchasing the Securities for the account or benefit of any U.S. Person, (iii) agreedto resell the Securities only in accordance with the provisions of RegulationS, pursuant to registration under the Act or pursuant to an available exemptionfrom registration, and (iv) agreed not to engage in hedging transactionswith regard to the Securities unless in compliance with the Act.  Neither the Company nor Ebix Australia paidany underwriting commissions or discounts or placement fees in connection withthis transaction.

 

Item 6.             EXHIBITS AND REPORTSON FORM 8-K

 

(a)                          Exhibits

 

31.1                   Certification of Chief ExecutiveOfficer Pursuant to Rule 13a-14(a) (Section 302 of theSarbanes-Oxley Act of 2002).

 

31.2                   Certification of Chief FinancialOfficer Pursuant to Rule 13a-14(a) (Section 302 of theSarbanes-Oxley Act of 2002).

 

32.1                   Certification of Chief ExecutiveOfficer Pursuant to Section 906 of the Sabanes-Oxley Act of 2002(furnished herewith).

 

32.2                   Certification of Chief FinancialOfficer Pursuant to Section 906 of the Sabanes-Oxley Act of 2002(furnished herewith).

 

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SIGNATURES

 

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

 
|               |   | Ebix, Inc. |
|--------------------|--------|-----------------|
|               |   |            |
|               |   |            |
| Date: May 20, 2005 |   | By              |   |
|               |   |            | /s/ RICHARD J. BAUM |
|               |   |            | Richard J. Baum |
|               |   |            | Executive Vice President — Finance & Administration, Chief  Financial Officer (principal financial and accounting officer),  and Secretary |

 

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