UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No.1
to
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2004 |
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OR |
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o |
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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 its charter)
DELAWARE |
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77-0021975 |
(State or other jurisdiction of
incorporation or |
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(I.R.S. Employer Identification No.) |
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1900 E. GOLF ROAD |
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60173 |
(Address of principal executive offices) |
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(Zip Code) |
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Registrants telephone number, including area code: 847-789-3047 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of August 9, 2004, the number of shares of Common Stock outstanding was 2,896,718.
EXPLANATORY NOTE
In connection with a review by the Securities and Exchange Commission (the SEC) of the Companys Registration Statement on Form S-3 (File No. 333-112616), the SEC has reviewed the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (the Form 10-Q) and other reports filed by the Company with the SEC. The SECs review of the Form 10-Q has focused primarily on financial-related disclosure. This Amendment No. 1 to the Form 10-Q (this 10-Q/A) has been filed in connection with the Companys response to comments on the Form 10-Q and other filings raised by the SEC during its review process.
Please note that the information contained in this 10-Q/A has not been updated to reflect events or developments occurring after August 16, 2004, the date the Form 10-Q was originally filed with the SEC and, accordingly, such information continues to speak as of such earlier date.
Ebix, Inc. and Subsidiaries
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2004
INDEX
2
Ebix, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except for share and per share amounts)
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June 30, |
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December 31, |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
6,665 |
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$ |
7,915 |
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Restricted cash |
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3,000 |
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Accounts receivable, less allowance of $290 and $356, respectively |
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3,145 |
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1,787 |
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Other current assets |
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663 |
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364 |
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Total current assets |
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13,473 |
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10,066 |
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Property and equipment, net |
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1,364 |
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1,353 |
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Capitalized software, net |
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55 |
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109 |
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Goodwill |
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6,112 |
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123 |
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Intangibles, net |
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3,315 |
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Other assets |
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411 |
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320 |
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Total assets |
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$ |
24,730 |
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$ |
11,971 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
1,675 |
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$ |
1,778 |
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Accrued payroll and related benefits |
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576 |
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1,287 |
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Current portion of long term debt |
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500 |
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Current portion of capital lease obligations |
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11 |
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73 |
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Deferred revenue |
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2,843 |
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2,141 |
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Total current liabilities |
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5,605 |
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5,279 |
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Long term debt, less current portion |
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1,726 |
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Line of credit |
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3,500 |
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Redeemable common stock (200,000 and 0 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively) stated at redemption price |
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2,700 |
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Stockholders equity: |
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Convertible Series D Preferred stock, $.10 par value, 2,000,000 shares authorized, no shares issued and outstanding |
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Common stock, $.10 par value, 40,000,000 shares authorized, 2,738,990 and 2,316,767 shares issued and outstanding, respectively |
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274 |
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232 |
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Additional paid-in capital |
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91,945 |
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88,706 |
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Deferred compensation |
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(393 |
) |
(436 |
) |
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Accumulated deficit |
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(81,095 |
) |
(82,251 |
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Accumulated other comprehensive income |
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468 |
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441 |
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Total stockholders equity |
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11,199 |
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6,692 |
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Total liabilities and stockholders equity |
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$ |
24,730 |
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$ |
11,971 |
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See accompanying notes to condensed consolidated financial statements.
3
Ebix, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2004 |
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2003 |
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2004 |
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2003 |
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Revenue: |
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Software |
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$ |
333 |
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$ |
558 |
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$ |
560 |
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$ |
768 |
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Services and other (Including revenues from related parties of $724, $179, $1,677 and $984, respectively See Note 5.) |
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4,343 |
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2,737 |
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8,050 |
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6,139 |
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Total revenue |
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4,676 |
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3,295 |
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8,610 |
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6,907 |
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Operating expenses: |
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Services and other costs |
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1,354 |
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773 |
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2,517 |
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1,778 |
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Product development |
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861 |
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430 |
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1,421 |
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790 |
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Sales and marketing |
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423 |
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499 |
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696 |
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960 |
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General and administrative |
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1,297 |
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1,375 |
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2,684 |
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2,539 |
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Total operating expenses |
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3,935 |
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3,077 |
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7,318 |
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6,067 |
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Operating income |
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741 |
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218 |
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1,292 |
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840 |
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Interest income |
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15 |
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20 |
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42 |
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35 |
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Interest expense |
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(1 |
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(5 |
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(3 |
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(10 |
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Foreign exchange gain (loss) |
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(2 |
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(8 |
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8 |
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(57 |
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Income before income taxes |
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753 |
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225 |
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1,339 |
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808 |
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Income tax expense |
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(43 |
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(136 |
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(183 |
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(202 |
) |
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Net income |
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$ |
710 |
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$ |
89 |
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$ |
1,156 |
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$ |
606 |
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Basic earnings per common share |
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$ |
0.26 |
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$ |
0.04 |
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$ |
0.43 |
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$ |
0.26 |
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Diluted earnings per common share |
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$ |
0.23 |
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$ |
0.04 |
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$ |
0.39 |
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$ |
0.26 |
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Basic weighted average shares outstanding |
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2,739 |
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2,291 |
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2,662 |
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2,291 |
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Diluted weighted average shares outstanding |
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3,066 |
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2,298 |
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2,992 |
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2,293 |
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See accompanying notes to condensed consolidated financial statements.
4
Ebix, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Six Months Ended June 30, |
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2004 |
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2003 |
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Cash flows from operating activities: |
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Net income |
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$ |
1,156 |
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$ |
606 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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487 |
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202 |
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Stock-based compensation |
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47 |
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23 |
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Provision for doubtful accounts |
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60 |
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40 |
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Changes in assets and liabilities, net of effect of acquisition: |
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Accounts receivable |
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(683 |
) |
808 |
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Other assets |
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(290 |
) |
(280 |
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Accounts payable and accrued expenses |
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(115 |
) |
341 |
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Accrued payroll and related benefits |
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(921 |
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196 |
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Deferred revenue |
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452 |
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365 |
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Net cash provided by operating activities |
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193 |
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2,301 |
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Cash flows from investing activities: |
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Acquisition of LifeLink, net of cash acquired |
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(4,763 |
) |
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Capital expenditures |
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(122 |
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(388 |
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Net cash used in investing activities |
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(4,885 |
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(388 |
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Cash flows from financing activities: |
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Proceeds from borrowings related to line of credit |
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3,500 |
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Restricted cash |
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(3,000 |
) |
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Proceeds from the issuance of common stock, net of issuance costs |
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2,977 |
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Principal payments under capital lease obligations |
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(62 |
) |
(55 |
) |
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Net cash provided by (used in) financing activities |
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3,415 |
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(55 |
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Effect of foreign exchange rates on cash |
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27 |
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(72 |
) |
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Net change in cash and cash equivalents |
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(1,250 |
) |
1,786 |
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Cash and cash equivalents at the beginning of the period |
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7,915 |
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4,993 |
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Cash and cash equivalents at the end of the period |
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$ |
6,665 |
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$ |
6,779 |
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Supplemental disclosures of cash flow information: |
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Interest paid |
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$ |
3 |
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$ |
10 |
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Income taxes paid |
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$ |
185 |
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$ |
154 |
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Supplemental schedule of noncash investing activities: |
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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. |
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See accompanying notes to condensed consolidated financial statements.
5
Ebix, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation These condensed consolidated financial statements are unaudited, include the accounts of Ebix, Inc. and its wholly-owned subsidiaries (Ebix or the Company), and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results of the interim periods.
On February 23, 2004, the Company acquired LifeLink Corporation (LifeLink). Under terms of the agreement, the Company acquired all of the outstanding capital stock of LifeLink from its shareholders in exchange for an aggregate purchase price of $10,354,000 (see note 7). The acquisition was accounted for as a purchase business combination.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, and accompanying notes thereto, included in the Companys Annual Report on Form 10-K for the year ended December 31, 2003.
The results of operations for the current interim periods are not necessarily indicative of results to be expected for the entire current year.
Summary of significant accounting policies
Revenue Recognition The Company applies the provisions of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, to all transactions involving the sale of software.
6
In May 2003, the Financial Accounting Standards Board (FASB) finalized the terms of Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, (EITF 00-21), which provides criteria governing how to identify whether goods or services that are to be delivered separately in a bundled sales arrangement should be accounted for separately. Deliverables are accounted for separately if they meet all of the following: a) the delivered items have stand-alone value to the customer; b) the fair value of any undelivered items can be reliably determined; and c) if the arrangement includes a general right of return, delivery of the undelivered items is probable and substantially controlled by the seller. The Company adopted EITF 00-21 on July 1, 2003 for all new revenue arrangements executed subsequent to June 30, 2003 (or significant modification to arrangements existing prior to July 1, 2003). The Companys current policy is to analyze all new revenue arrangements.
To the extent arrangements contain multiple deliverables, the Company performs an analysis of the nature of the deliverables to determine to what extent the deliverables of the arrangement are governed by any higher level literature (as defined in EITF 00-21). EITF 00-21 recognizes arrangements that qualify for treatment under SOP 97-2 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 of SOP 97-2, as amended by Statement of Position 98-9, Modifications of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, to all arrangements which include software deliverables that are considered more than inconsequential to the other elements in the arrangements. For 2003, all of the Companys contracts with multiple deliverables have fallen under higher level accounting literature under the provisions of SOP 97-2 and/or SOP 81-1.
Although the Company has not been impacted in the current year by the adoption of EITF 00-21, it is possible that EITF 00-21 may affect future periods given the additional revenue streams the Company has initiated, as well as through the acquisition activities of the Company.
The Company recognizes revenue for license fees from its software products upon delivery, provided that the fee is fixed and determinable, acceptance has occurred, collectibility is probable and persuasive evidence of an arrangement exists. Revenue from third party software is derived from the licensing of third party software products in connection with sales of the Companys software licenses, and is generally recognized upon delivery together with the Companys license revenue. Training, data conversion, installation, and consulting services are generally recognized as revenue when the services are performed and collectibility is probable. Revenue for maintenance and support service is recognized ratably over the term of the support agreement.
For arrangements containing multiple elements, revenue is recognized on delivered elements when vendor-specific objective evidence (VSOE) of fair value has been established on the undelivered elements, applying the residual method of SOP 98-9. Fair value is determined for each undelivered element based on the price charged for the sale of each element separately. In contracts that contain first year maintenance bundled with software fees, unbundling of maintenance is based on the price charged for renewal maintenance. Revenue for maintenance and support service is recognized ratably over the term of the support agreement.
For certain contracts where services are deemed essential to the functionality of the software and the software has not been accepted by the customer, the software and related service revenue have been deferred until acceptance has taken place. In addition, all costs incurred in connection with these contracts have been expensed, as the Company has been unable to estimate the total costs to achieve customer acceptance.
Revenues related to EbixASP and other hosting arrangements, including monthly fees as well as any initial registration fees and related custom programming, are recognized ratably over the term of the agreement in accordance with Staff Accounting Bulletin (SAB) No. 104 Revenue Recognition. Ebix.mall transaction fees are recognized as revenue as the transactions occur and revenue is earned. Revenue is only recognized when collectiblity is probable.
Deferred revenue includes maintenance and support payments that have been received or billings recorded prior to performance and in certain cases, cash collections, amounts received under multi-element arrangements in which VSOE of undelivered elements does not exist; and initial registration fees and related service fees under hosting agreements. Revenue is recognized when VSOE of the undelivered elements is established, the elements are delivered, or the obligation to deliver the elements is extinguished.
Software arrangements involving significant customization, modification or production are accounted for in accordance with American Institute of Certified Public Accountants Statement of Position 81-1, Accounting for Performance on Construction-Type and Certain Production-Type Contracts, using the percentage-of-completion method. The Company recognizes revenue using actual hours worked as a percentage of total expected hours required by the arrangement, provided that the fee is fixed and determinable, there is evidence of an arrangement and recovery of any related recorded asset is considered probable.
For business process outsourcing agreements, which include call center services, services are primarily performed on a time and material basis. Revenue is recognized when the service is performed.
Stock Options - At June 30, 2004, the Company had three stock-based employee compensation plans. The Company accounts for stock options issued to employees in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, for options issued to employees, as well as the requirements of SFAS No. 148, Accounting for Stock Based Compensation Transition and Disclosure. Under APB Opinion No. 25, compensation expense is recorded based on the difference, if any, on the measurement date, between the estimated fair value of the Companys stock and the exercise price of options to purchase that stock. Any resulting compensation expense is amortized on a straight-line basis over the vesting period of the options.
7
The Company applies APB Opinion No. 25 and related interpretations in accounting for its employee stock-based compensation plans. Had compensation cost for these stock-based compensation plans been determined based on the fair-value method prescribed by SFAS No. 123, using the Black-Scholes option-pricing model, the Companys net earnings and net earnings per share would have been the pro forma amounts indicated below:
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Three Months Ended |
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Six Months Ended |
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June 30, 2004 |
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June 30, 2003 |
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June 30, 2004 |
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June 30, 2003 |
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Net income, as reported |
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$ |
710,000 |
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$ |
89,000 |
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$ |
1,156,000 |
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$ |
606,000 |
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Add: Stock-based employee compensation expense included in reported net income, net of related tax effects |
|
5,000 |
|
|
|
9,000 |
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Deduct: Total stock-based employee compensation expense determined under fair-value based method for all awards, net of related tax effects |
|
(247,000 |
) |
(172,000 |
) |
(641,000 |
) |
(345,000 |
) |
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Pro forma net income (loss) |
|
$ |
468,000 |
|
$ |
(83,000 |
) |
$ |
524,000 |
|
$ |
261,000 |
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|
|
|
|
|
|
|
|
|
|
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Basic earnings per share, as reported |
|
$ |
0.26 |
|
$ |
0.04 |
|
$ |
0.43 |
|
$ |
0.26 |
|
Diluted earnings per share, as reported |
|
$ |
0.23 |
|
$ |
0.04 |
|
$ |
0.39 |
|
$ |
0.26 |
|
Basic earnings (loss) per share, pro forma |
|
$ |
0.17 |
|
$ |
(0.04 |
) |
$ |
0.20 |
|
$ |
0.11 |
|
Diluted earnings (loss) per share, pro forma |
|
$ |
0.15 |
|
$ |
(0.04 |
) |
$ |
0.18 |
|
$ |
0.11 |
|
Non-employee Stock CompensationThe Company accounts for stock-based compensation issued to non-employees in accordance with SFAS No. 123 and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in conjunction with Selling Goods or Services. SFAS No. 123 establishes a fair value-based method of accounting for stock-based compensation plans. Under the fair-value based method, compensation cost is measured at the grant date based on the value of the award, which is calculated using an option pricing model, and is recognized over the service period, which is usually the vesting period.
Note 2. STOCK OPTIONS
During the first quarter of 2004, the Company did not grant any stock options. During the second quarter of 2004, the Company granted options to purchase 61,500 shares of common stock to employees and a director of the Company. These options were granted at prices equal to 100 percent of the market price on the date of grant. The options have a four-year vesting period and must be exercised within ten years of the date of the grant. For the options granted to employees, vesting accelerates if a net income performance target is achieved.
The Company has granted stock options outside the Companys stock option plans to non-employee consultants to purchase up to an aggregate of 57,000 shares, of which options to purchase 34,500 shares were outstanding at June 30, 2004. These options were granted at prices equal to 100 percent of the market price on the date of grant. The options have a four-year vesting period and must be exercised within ten years of the date of the grant. These non-employee options were valued using the fair value method as prescribed by SFAS No. 123. Options issued prior to 2001 are performance-based awards, with no service commitment and subject to vesting only if the Companys stock price reaches a certain level. Options issued in 2001 vest over four years, but vesting accelerates if a performance target is achieved. At June 30, 2004, non-employee options to purchase 8,125 shares were vested. The Company recognized compensation expense of approximately $1,000 and $17,000 related to these options during the three-month periods ended June 30, 2004 and June 30, 2003, respectively. The Company recognized compensation expense of approximately $35,000 and $23,000 related to these options during the six-month periods ended June 30, 2004 and June 30, 2003, respectively.
On August 11, 2003, the Company granted options to purchase the Companys common stock to an employee who is the brother of the Chief Executive Officer, in connection with his joining the Company as an employee. The option grantee was an employee when he received the grant. The options vest over four years from the date of grant, expire ten years from the date of grant, and were issued with an exercise price below the fair market value of the stock on the date of grant. This grant was not subject to any of the Companys stock option plans. The total intrinsic value associated with the granting of options was $96,250, which is being recognized ratably as compensation expense over the four- year vesting period in accordance with APB Opinion No. 25. The Company recognized compensation expense of approximately $6,000 and $12,000, respectively, related to these options during the three and six months period ended June 30, 2004.
8
Note 3. EARNINGS PER SHARE
Basic earnings per share (EPS) is equal to net income divided by the weighted average number of shares of common stock outstanding for the period. The weighted average number of shares outstanding for the three and six months-ended June 30, 2004 was 2,739,000 and 2,662,000, respectively. The weighted average number of shares outstanding for both the three and six months-ended June 30, 2003 was 2,291,000. Diluted EPS is calculated as if the Company had additional common stock outstanding from the beginning of the year or the date of grant for all common stock equivalents, net of assumed repurchased shares using the treasury stock method. Diluted EPS recognizes the dilutive effect of common stock equivalents and is equal to net income divided by the sum of the weighted average number of shares outstanding and common stock equivalents. For the three and six months ended June 30, 2004 and June 30, 2003, the Companys common stock equivalents consisted of stock options. For the three and six months ended June 30, 2004, the effect of this calculation resulted in an increase in the weighted average number of shares outstanding of 327,000 and 329,000, respectively. For the three and six months ended June 30, 2004, the fully diluted weighted average number of shares outstanding was 3,066,000 and 2,992,000, respectively. For the three and six months ended June 30, 2003, the effect of this calculation resulted in an increase in the weighted average number of shares outstanding of 7,000 and 2,000, respectively. For the three and six months ended June 30, 2003, the fully diluted weighted average number of shares outstanding was 2,298,000 and 2,293,000, respectively. At June 30, 2004, there were 391,000 shares potentially issuable with respect to stock options, which could dilute EPS in the future but which were excluded from the diluted EPS calculation because their effect was antidilutive.
Note 4. COMPREHENSIVE INCOME
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
710,000 |
|
$ |
89,000 |
|
$ |
1,156,000 |
|
$ |
606,000 |
|
Other comprehensive (expense) income foreign currency translation adjustment |
|
(41,000 |
) |
(36,000 |
) |
27,000 |
|
(72,000 |
) |
||||
Comprehensive income |
|
$ |
669,000 |
|
$ |
53,000 |
|
$ |
1,183,000 |
|
$ |
534,000 |
|
Note 5. RELATED PARTY AND SIGNIFICANT CUSTOMER TRANSACTIONS
In 2001, the Company issued 868,000 shares of its common stock to BRiT Insurance Holdings PLC (BRiT) for $7,000,000. The total number of shares held by BRiT at June 30, 2004 was 930,163, representing an equity ownership of approximately 34%. At June 30, 2004, BRiT owned approximately 70% of CF Epic Insurance and General Fund, which owned approximately 8% of our common stock.
The Company has entered into various software and service agreements with BRiT. During the second quarter of 2004 and 2003, approximately $724,000 and $179,000, respectively, was recognized as services revenue from BRiT and its affiliates. During the first quarter of 2004 and 2003, approximately $953,000 and $805,000, respectively, was recognized as services revenue from BRiT and its affiliates. Total accounts receivable from BRiT and its affiliates at June 30, 2004 were $708,000. Total accounts receivable from BRiT and its affiliates at December 31, 2003 were $369,000.
During the second quarter of 2004 and 2003, approximately $512,000 and $355,000, respectively was recognized from another significant customer, AON. During the first quarter of 2004 and 2003 approximately $557,000 and $441,000 respectively, was recognized from AON. Total accounts receivable from AON at June 30, 2004 were $480,000. Total accounts receivable from AON at December 31, 2003 were $192,000.
Note 6. SALE OF UNREGISTERED COMMON STOCK
On January 16, 2004 the Company sold 222,223 shares of its unregistered common stock to CF Epic Insurance and General Fund (CF Epic), an investment fund located in London, BRiT owned approximately 70% of the equity interests of CF Epic at June 30, 2004, for a total price of $3,000,010, or $13.50 per share.
9
Note 7. ACQUISITION OF LIFELINK
On February 23, 2004, the Company acquired LifeLink Corporation (LifeLink), and the operations of LifeLink have been included in the Companys financial statements since that date. Under terms of the agreement, the Company acquired all of the outstanding capital stock of LifeLink 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, $2,500,000 in a non-interest bearing note payable in cash in annual installments of $500,000 over five years (present value computed as $2,226,000), and $3,000,000 payable in 200,000 shares of the common stock of the Company issued at the time of closing. The Company also capitalized approximately $128,000 of transaction costs in conjunction with the LifeLink acquisition. In connection with the 200,000 shares of common stock issued subject to Rule 144, the former shareholder received from Ebix the option to sell his stock back to Ebix subject to specified time frames and prices. In accordance with Financial
The Company has classified $2,700,000 of the value of the common stock issued as a liability, redeemable common stock, in the condensed consolidated balance sheet due to the existence of the holders embedded put option. At any time during the 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 the redeemable common stock has a one-time right to require the Company to purchase all of the holders 200,000 shares originally issued at a price of $2,700,000 minus the aggregate purchase price received by the holder from any sales of these shares of common stock prior to the exercise of the put option. As of June 30, 2004, the holder had not sold any shares of common stock received from this transaction.
The following table summarizes the estimated fair value of the LifeLink assets acquired and liabilities assumed at the date of acquisition.
Current assets |
|
$ |
1,199,000 |
|
Property and equipment |
|
119,000 |
|
|
Intangible assets |
|
3,518,000 |
|
|
Goodwill |
|
5,989,000 |
|
|
Total assets acquired |
|
10,825,000 |
|
|
Current liabilities |
|
471,000 |
|
|
Total liabilities assumed |
|
471,000 |
|
|
Net assets acquired |
|
$ |
10,354,000 |
|
Of the $3,518,000 of intangible assets acquired, $977,000 was assigned to developed technology with a remaining estimated useful life of five years, $299,000 was assigned to trademarks with a remaining estimated useful life of five years and $2,242,000 was assigned to customer relationships with a remaining estimated useful life of seven years. The Company recorded $135,000 and $203,000 of amortization expense related to these intangible assets for the three and six-month periods ended June 30, 2004, respectively.
Estimated Amortization Expenses:
For the year ended December 31, 2004 |
|
$ |
491,000 |
|
For the year ended December 31, 2005 |
|
$ |
575,000 |
|
For the year ended December 31, 2006 |
|
$ |
575,000 |
|
For the year ended December 31, 2007 |
|
$ |
575,000 |
|
For the year ended December 31, 2008 |
|
$ |
575,000 |
|
10
The following unaudited pro forma financial information for the three months ended June 30, 2003 and six months ended June 30, 2004 and June 30, 2003 presents the consolidated operations of the Company as if the acquisition had been made on January 1, 2003, after giving effect to certain adjustments for the pro forma acquisition as of the acquisition date. The unaudited pro forma financial information is provided for informational purposes only and does not project the Companys results of operations for any future period:
|
|
Three Months |
|
|
|
|||||
Ended June 30, |
Six Months Ended June 30, |
|||||||||
2003 |
2004 |
|
2003 |
|||||||
|
|
|
|
|
|
|
|
|||
Revenue |
|
$ |
4,628,000 |
|
$ |
9,531,000 |
|
$ |
9,573,000 |
|
Net income |
|
6,000 |
|
1,116,000 |
|
439,000 |
|
|||
|
|
|
|
|
|
|
|
|||
Basic earnings per share |
|
$ |
0.01 |
|
$ |
0.42 |
|
$ |
0.18 |
|
Diluted earnings per share |
|
$ |
0.01 |
|
$ |
0.37 |
|
$ |
0.18 |
|
Note 8Line of Credit:
The existing revolving line of credit with LaSalle National Bank Association was increased to $5,000,000 during February 2004 and the agreement was amended in April 2004. Major features of the line, as amended, include an interest rate stated at prime, security at 60% of the amount of the line in a restricted interest bearing account and timely financial reporting requirements. The line of credit will expire on October 31, 2005. As of June 30, 2004 total borrowings on this line were $3,500,000 of which $3,000,000 is restricted from use in accordance with the line of credit agreement. The agreement provides that the line is secured by substantially all of the Companys assets. The Company is subject to certain other financial covenants and was in compliance with them as of June 30, 2004.
Note 9Subsequent Event:
On July 1, 2004, Ebix Australia Pty Ltd. (Ebix Australia), a subsidiary of Ebix, Inc., acquired the operating assets of Heart Consulting Pty Ltd. located in Melbourne, Australia (Heart) pursuant to a purchase agreement dated June 28, 2004, by and between Ebix Australia and Heart.
Pursuant to the purchase agreement, Ebix Australia acquired the operating assets of Heart 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 Companys lender on the Companys 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 Shares). The Shares are subject to a repurchase commitment by Ebix pursuant to which Heart may require Ebix to repurchase the Shares at any time during January 2006 for an aggregate purchase price of A$2,000,000 ($1,399,000 USD) minus any proceeds received by Heart from earlier sales of any portion of the Shares.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part 1, Item 1, of this Quarterly Report, and the audited consolidated financial statements and notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2003. See Safe Harbor for Forward-Looking Statements under the Securities Litigation Reform Act of 1995 below.
11
Overview
The Companys future focus will continue to be will be on developing consistent and recurring revenue sources with a concentration in (1) software development for insurance carriers, agents and brokers, (2) expansion of connectivity between consumers, agents, carriers and third party providers, (3) business process outsourcing services, which include software development, call center and back office, either off site or at company facilities, and (4) worldwide sales and support of the agency management systems. This development of recurring revenue sources will be accomplished through the previously mentioned four initiatives in addition to identifying and negotiating for strategic synergistic acquisition targets such as the recently completed acquisitions of LifeLink and Heart.
Support revenue from legacy products is expected to decline in the future as current customers switch to other technologically advanced systems (including Ebix ASP) see discussion below.
Critical Accounting Policies
The Companys critical accounting policies are those that require application of managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain and may change in future periods. The Company has identified the following as its critical accounting policies: revenue recognition, estimating the allowance for doubtful accounts receivable and accounting for income taxes. For a discussion of these policies, see Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies in the Companys Annual Report on Form 10-K for the year ended December 31, 2003.
Results of Operations
Three-Month Period Ended June 30, 2004 Compared to the Three-Month Period Ended June 30, 2003
Total Revenue - The Companys revenue has been derived from the licensing and sale of proprietary software and third party software (Software) and from professional services and support services (Services). Services include consulting, implementation, training and project management provided to the Companys customers with installed systems and those in the process of installing systems. Also included in Services are fees for software license maintenance, LifeLink services, initial registration and ongoing monthly subscription fees for the EbixASP product and transaction fees generated from the Ebix.mall website, as well as software development and call center revenue. Total revenue for the quarter ended June 30, 2004 increased $1,381,000, or 41.9%, to $4,676,000 from $3,295,000 for the comparable quarter of the prior year.
Software Revenue - Software revenue is comprised of revenue from the sale of Ebix (formerly cd) products, current legacy products, and other third party software. Total software revenue for the second quarter of 2004 decreased $225,000, or 40.3%, to $333,000 from $558,000 for the comparable quarter of the prior year. This decrease was due to a decrease in international software license revenue of 83% in second quarter 2004 compared to the second quarter 2003.
Services Revenue Total services revenue for the second quarter of 2004 increased $1,606,000, or 58.7%, to $4,343,000 from $2,737,000 for the comparable quarter of the prior year. This increase was due to LifeLink revenue of approximately $1,395,000, an increase in consulting service of $621,000, an increase in Ebix.mall transaction fees of $33,000 and an increase in international service revenue of $10,000 partially offset by a decrease in support revenue associated with legacy products of $263,000, a decrease in call center revenue of $82,000, a decrease in INS-Site revenue of $74,000 and a decrease in EbixASP revenue of $34,000.
During the second quarter of 2004 and 2003, approximately $724,000 and $179,000, respectively was recognized as services revenue from BRiT Insurance Holdings PLC (BRiT) and its affiliates. The amounts represented 16% and 5%, respectively, of the Companys total revenues for the second quarter of 2004 and 2003, respectively, and the increase in such revenues of $545,000, represented 39% of the total increase in the Companys revenues for the three month period ended June 30, 2004 compared to the same period of 2003. Increases in revenues from BriT Holdings PLC and its affiliates during each of the periods presented were a result of BRiT Insurance Holdings PLC and its affiliates adding additional development projects and expanding the scope of the current projects. BRiT owned approximately 34% of the Companys common stock as of June 30, 2004. In addition, the Company has been informed that as of June 30, 2004, BRiT owned approximately 70% of the equity interests of CF Epic Insurance and General Fund, which at June 30, 2004 owned approximately 8% of the Companys outstanding common stock.
12
Support revenue associated with the Companys legacy products is decreasing due to a trend of declining renewals for these older product offerings.
|
|
Support |
|
Total |
|
||
|
|
|
|
|
|
||
Second quarter of 2004 |
|
$ |
868,000 |
|
$ |
4,676,000 |
|
Second quarter of 2003 |
|
$ |
1,129,000 |
|
$ |
3,295,000 |
|
Support revenue decreased $261,000, or 23%, and as a percentage of total revenue to 19% from 34%, in the second quarter of 2004 compared to the second quarter of 2003.
Based on historical data, the Company expects that legacy support revenue will continue to decrease by approximately 20% each year on a declining balance. The Company expects the legacy support revenue will continue as long as it is economically feasible for the Company 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 for the activity to be profitable and if not, we plan to discontinue supporting the legacy products. We cannot predict when this will occur.
The Company expects that future services revenue will be derived from this support, as well as EbixASP registration and monthly fees, software development and call center and, to a much lesser extent all transaction revenues 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 the quarter increased $581,000, or 75.2%, to $1,354,000 from $773,000 for the comparable quarter of the prior year. This increase was primarily due to the deferral of costs of $314,000 during the second quarter of 2003 related to a project that was not complete until the third quarter of 2003. This increase was also due to an increase in payroll expenses related to the acquisition of LifeLink of $190,000, an increase in facility costs (which are allocated to each department based on headcount) allocated to services and other costs as a result of the increase in headcount related to the acquisition of LifeLink of $69,000, and an increase in support fees of $40,000, partially offset by a decrease in international services and other costs of $32,000.
Product Development Expenses - Total product development expenses for the second quarter of 2004, increased $431,000, or 100.2%, to $861,000 from $430,000 for the comparable quarter of the prior year. This increase was due to an increase in payroll expenses related to the acquisition of LifeLink of $273,000, annual salary increases of $77,000 and an increase in headcount in India, resulting in an increase in payroll expense of $20,000. In addition, facility costs increased $61,000 as a result of an increase in headcount.
Sales and Marketing Expenses - Total sales and marketing expenses for the second quarter of 2004 decreased $76,000, or 15.2%, to $423,000 from $499,000 for the comparable quarter of the prior year. This decrease was attributable to reduced marketing spending of $55,000 and a decrease in facility costs of $21,000 as a result of the lower headcount.
General and Administrative Expenses Total general and administrative expenses for the quarter decreased $78,000, or 5.7%, to $1,297,000 from $1,375,000 for the comparable quarter of the prior year. This decrease was due to an increase in the amount of facility costs allocated to other departments of $59,000, a decrease in office expense of $122,000 related to telephone expenses, and a decrease in audit and legal expenses of $32,000, partially offset by a charge for amortization of intangibles related to the LifeLink acquisition of $135,000.
Six-Month Period Ended June 30, 2004 Compared to the Six-Month Period Ended June 30, 2003
Total Revenue - Total revenue for the six-month period ended June 30, 2004 increased $1,703,000, or 24.7%, to $8,610,000 from $6,907,000 for the comparable period of the prior year.
Software Revenue - Total software revenue for the six-month period ended June 30, 2004 decreased $208,000, or 27.1%, to $560,000 from $768,000 for the comparable period of the prior year. This decrease was due to a decrease in international software license revenue of 37% in the six-month period ended June 30, 2004 compared to the six-month period ended June 30, 2003.
Services Revenue Total services revenue for the six-month period ended June 30, 2004 increased $1,911,000, or 31.1%, to $8,050,000 from $6,139,000 for the comparable period of the prior year. This increase was due to LifeLink revenue of approximately $1,913,000, an increase in consulting services of $944,000, an increase in international service revenue of $333,000, and an increase in Ebix.mall transaction revenue of $44,000, partially offset by a decrease in support revenue associated with legacy products of $531,000, a decrease in EbixASP revenue of $311,000, a decrease in call center revenue of $297,000 and a decrease in INS-Site revenue of $184,000.
13
During the six-month periods ended June 30, 2004 and 2003, approximately $1,677,000 and $984,000, respectively, was recognized as services revenue from BRiT and its affiliates. The amounts represented 20% and 14% of the Companys total revenues for the six- month periods ended June 30, 2004 and 2003, respectively, and the increase in such revenues of $693,000 represented 41% of the total increase in the Companys revenues for the six month period ended June 30, 2004 compared to the same period of 2003.
Support revenue associated with the Companys legacy products is decreasing as discussed above due to a trend of declining renewals for these older product offerings.
|
|
Support |
|
Total |
|
||
|
|
|
|
|
|
||
Six months ended June 30, 2004 |
|
$ |
1,738,000 |
|
$ |
8,610,000 |
|
Six months ended June 30, 2003 |
|
$ |
2,269,000 |
|
$ |
6,907,000 |
|
Support revenue decreased $531,000, or 23%, and as a percentage of total revenue to 20% from 33%, for the six-month period ended June 30, 2004 compared to the same period in 2003.
Services and other costs - Total services and other costs for the six-month period ended June 30, 2004 increased $739,000, or 41.6%, to $2,517,000 from $1,778,000 for the comparable period of the prior year. This increase was due to the deferral of costs of $314,000 during the second quarter of 2003 related to a project that was not complete until the third quarter of 2003. In addition this increase was due to an increase in payroll expenses related to the acquisition of LifeLink of $304,000, an increase in facility costs (which are allocated to each department based on headcount) allocated to services and other costs of $34,000 as a result of the increase in headcount related to the acquisition of LifeLink, an increase in international services and other costs of $46,000 and an increase in support fees of $41,000.
Product Development Expenses - Total product development expenses for the six-month period ended June 30, 2004 increased $631,000, or 79.9%, to $1,421,000 from $790,000 for the comparable period of the prior year. This increase was due to an increase in payroll expenses related to the acquisition of LifeLink of $411,000, annual salary increases of $107,000 and an increase in headcount in India resulting in an increase in payroll expense of $57,000. In addition, facility costs increased $56,000 as a result of increases in headcount.
Sales and Marketing Expenses - Total sales and marketing expenses for the six-month period ended June 30, 2004 decreased $264,000, or 27.5%, to $696,000 from $960,000 for the comparable period of the prior year. This decrease was attributable to a decrease in payroll and related expenses of $134,000 and a decrease in facility costs of $86,000 as a result of the decreases in headcount, and reduced marketing spending of $72,000, partially offset by an increase in sales and marketing expenses in India of $28,000.
General and Administrative Expenses Total general and administrative expenses for the six-month period ended June 30, 2004 increased $145,000, or 5.7%, to $2,684,000 from $2,539,000 for the comparable quarter of the prior year. This increase was due to an increase in international expenses of $220,000, a charge for amortization of intangibles related to the LifeLink acquisition of $203,000 and an increase in consulting expenses of $4,000, partially offset by a decrease in office expense of $175,000 and a decrease in payroll and benefits of $107,000.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $9,665,000 (including restricted cash of $3,000,000 in accordance with the line of credit agreement) at June 30, 2004, compared to $7,915,000 at December 31, 2003. Total cash and cash equivalents (including restricted cash of $3,000,000 in accordance with the line of credit agreement) at August 13, 2004 was $6,626,000.
During 2004, the Company generated operating cash flows of $193,000, due primarily to $1,156,000 in net income (an increase of $550,000 from the prior year), partially offset by an increase in accounts receivable and a decrease in accrued payroll and related benefits. The decrease in accrued payroll and related benefits is related to bonuses, which were accrued in 2003 and paid in the second quarter of 2004. The accounts receivable increase is primarily due to BRiT and its affiliates, which had $708,000 of accounts receivable outstanding at June 30, 2004. These balance sheet fluctuations are normal consequences of timing differences between accruals and their cash settlement.
For the six-month period ended June 30, 2004, 20% and 12% of the Companys total revenues were from two customers BRiT (including its affiliates) and AON, respectively. Neither BRiT and its affiliates nor AON have long-term agreements with the Company that provide certainty that such revenues will be recurring.
14
Cash used in investing activities of $4,885,000 in the six months ended June 30, 2004 represented expenditures made primarily as a result of the Companys acquisition of LifeLink. Cash provided by financing activities of $6,415,000 resulted primarily from the Companys sale of common stock during the first quarter of 2003 of $2,977,000 and borrowings of $3,500,000 on the Companys existing line of credit during the second quarter of 2004.
During early 2004 the Company sold 222,223 shares of its previously unissued common stock to CF Epic Insurance and General Fund, an investment fund located in London of which BRiT owned approximately 70% of the equity interests as of June 30, 2004, for gross proceeds of $3,000,010, or $13.50 per share.
On February 23, 2004 the Company acquired LifeLink. Under terms of the agreement, the Company acquired all of the outstanding capital stock of LifeLink 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, $2,500,000 in a non-interest bearing note payable in cash annual installments of $500,000 over five years (present value computed at $2,226,000), and $3,000,000 payable in 200,000 shares of the common stock of the Company issued at the time of closing. The Company also capitalized approximately $128,000 of transaction costs with the LifeLink acquisition. See note 7 to the condensed consolidated financial statements included in this Form 10-Q for a discussion of a repurchase obligation with respect to the shares of common stock.
On July 1, 2004, Ebix Australia Pty Ltd. (Ebix Australia), a subsidiary of Ebix, Inc., acquired the operating assets of Heart Consulting Pty Ltd. located in Melbourne, Australia (Heart) pursuant to a purchase agreement dated June 28, 2004, by and between Ebix Australia and Heart. Pursuant to the purchase agreement, Ebix Australia acquired the operating assets of Heart 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 Companys lender on the Companys 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. See note 9 to the condensed consolidated financial statements included in this Form 10-Q for a discussion of a repurchase obligation with respect to the shares of common stock.
The existing revolving line of credit with LaSalle National Bank Association was increased to $5,000,000 during February 2004 and the agreement was amended in April 2004. There was $3,500,000 of borrowings on this line as of June 30, 2004. Major features of the line, as amended, include an interest rate stated at prime, security at 60% of the amount of the line in a restricted interest bearing account and timely financial reporting requirements. The line of credit is scheduled to expire on October 31, 2005.
|
|
Payment Due by Period |
|
|||||||||||||
|
|
Total |
|
Less Than 1 |
|
1 - 3 Years |
|
3- 5 Years |
|
More Than 5 |
|
|||||
|
|
(in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Contractual Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Long-Term Debt Obligations (1)(2) |
|
$ |
8,700 |
|
$ |
500 |
|
$ |
7,700 |
|
$ |
500 |
|
$ |
|
|
Operating Leases Obligations |
|
1,819 |
|
474 |
|
804 |
|
461 |
|
80 |
|
|||||
Capital Leases Obligations |
|
11 |
|
11 |
|
|
|
|
|
|
|
|||||
Total |
|
$ |
10,530 |
|
$ |
985 |
|
$ |
8,504 |
|
$ |
961 |
|
$ |
80 |
|
(1) $2,700,000 is contingent upon exercise of the holders put option to require the Company to purchase the holders redeemable common stock in connection with the LifeLink acquisition. See note 7 to the condensed consolidated financial statements included in this Form 10-Q.
(2) Does not reflect obligations with respect to the Heart acquisition.
15
Safe Harbor for Forward-Looking Statements under the Securities Litigation Reform Act of 1995 - This Quarterly Report on Form 10-Q contains various forward-looking statements and information that are based on managements beliefs, as well as assumptions made by, and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, acceptance of the Companys products by the market and managements plans and objectives. The Company has tried to identify such forward looking statements by use of words such as expects, intends, anticipates, plans, believes, will, should, and similar expressions, but these words are not the exclusive means of identifying such statements. The forward looking statements included in this Quarterly Report are subject to various risks, uncertainties and other factors which could cause actual results to vary materially from those expressed in, or implied by, the forward looking statements. Such risks, uncertainties and other factors include those discussed in Risk Factors below. Except as expressly required by the federal securities laws, the Company undertakes no obligation to update any such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect changed circumstances or future events or developments or for any other reason.
Risk Factors
You should carefully consider the risks, uncertainties and other factors described below, along with all of the other information included in this quarterly report on Form 10-Q, because they could materially and adversely affect our business, financial condition, operating results, cash flows and prospects and/or the market price of our common stock. This risk factors section is written in response to the Securities and Exchange Commissions plain English guidelines. In this section, the words we, us, our and ours refer to the Company and not any other person.
Risks Related To Our Business and Our Industry
You may have difficulty evaluating our business because of our limited history of Internet, call center and other business process outsourcing.
Although our predecessor began operations in 1976, we did not begin any Internet operations until September 1999 and did not begin generating revenues from these operations until the fourth quarter of 2000. We did not begin any call center or other business process outsourcing operations or begin generating revenues from these operations until the first quarter of 2003. Accordingly, there is a limited history of these operations on which you can evaluate our company and its prospects. We cannot be certain that our Internet, call center and other business process outsourcing strategies will be successful, because these strategies are new. Our early-stage Internet, call center and other business process outsourcing operations will be particularly susceptible to the risks and uncertainties described in these risk factors and likely to incur the expenses associated with addressing them. Our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in a transitional stage of development, particularly companies in new and rapidly evolving markets and using new and unproven business models.
Because the support revenue that we have traditionally relied upon has been steadily declining, it is important that new sources of revenue continue to be developed.
Based on historical data, the Company expects that legacy support revenue will continue to decrease by approximately 20% each year on a declining balance. This decline can be attributed to the fact that many of our support clients are not renewing their support agreements with us, in many cases because they are no longer using our legacy software. Even if they are continuing to use our legacy software, our support clients may choose not to renew their support agreements if their legacy software products no longer require support or they use third party support. In addition, some of the clients who use our support services have reduced the level of support that we provide them, which in turn reduces our support revenue. This downward trend in our support revenue makes us particularly dependent upon our other sources of revenue.
Two customers currently provide a significant percentage of our total revenue.
Revenues from one customer, BRiT Insurance Holdings PLC and its affiliates, which at June 30, 2004 owned approximately 34% of our common stock and approximately 70% of CF Epic Insurance and General Fund, which at that date owned approximately 8% of our common stock, represented approximately 23% of our total revenue in 2003 and 17% of our total revenue in 2002. The revenues from BRiT Insurance Holdings PLC and its affiliates represented approximately 20% and 14% of the Companys total revenues for the six-month periods ended June 30, 2004 and 2003, respectively. If revenues from this customer were to discontinue, our operating results could be adversely affected.
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Revenues from another international customer, AON represented approximately 11% of our total revenue in 2003. The revenues from AON represented approximately 12% of the Companys total revenues for both the six-month periods ended June 30, 2004 and 2003. If revenues from this customer were to discontinue, our operating results could be materially adversely affected.
Adverse insurance industry economics could adversely affect our revenues.
We are dependent on the insurance industry, which may be adversely affected by current economic and world conditions.
Our operating results may fluctuate dramatically.
Our quarterly operating results may fluctuate significantly in the future due to a variety of factors that could affect our revenues or our expenses in any particular quarter. You should not rely on our results of operations during any particular quarter as an indication of our results for a full year or any other quarter. Factors that may affect our quarterly results include:
Changes in insurance agents and carriers consumer acceptance of Internet commerce;
Loss of a significant insurance agent, carrier or broker relationship or the merger of any of our participating insurance carriers with one another; and
Technical difficulties for our internet focused services that hamper an agents ability to run its agency system hosted by us.
Our operating expenses are based in part on our expectations of our future revenues and are relatively fixed in the short term. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall.
We could be subject to civil fines and penalties as a result of the SECs investigation of our financial reporting.
On August 11, 2000, we were advised that the SEC had issued a formal Order of Investigation and subpoenaed documents relating to our financial reporting since April 1, 1997, including, in particular, revenue recognition, software development cost capitalization, royalty costs and classification of cash receipts. We submitted documents to the SEC upon the SECs request as part of the investigation. It is possible that the SEC could impose civil fines and penalties against us. An adverse finding against us by the SEC could negatively impact our stock price. In addition, we may continue to incur expenses associated with responding to this investigation, regardless of its outcome, and this investigation may divert the efforts and attention of our management team from normal business operations.
We cannot predict our future capital needs and we may not be able to secure additional financing when we need it.
We may need to raise additional funds in the future in order to fund more aggressive brand promotion or more rapid expansion, to develop new or enhanced services, to respond to competitive pressures, to make future acquisitions, to satisfy future obligations with respect to the LifeLink and Heart acquisitions or to pay down other indebtedness. Any required additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available on acceptable terms, we may be unable to meet our business or strategic objectives or compete effectively. If additional funds are raised by our issuing equity securities, stockholders may experience dilution of their ownership interests, and the newly issued securities may have rights superior to those of our common stock. If additional funds are raised by our issuing debt, we may be subject to limitations on our activities.
Any acquisitions that we undertake could be difficult to integrate, disrupt our business, dilute stockholder value and harm our operating results.
We recently acquired LifeLink and Heart and may in the future acquire or make investments in complementary businesses, technologies, services or products if appropriate opportunities arise. The process of integrating LifeLink and Heart or any other acquired business, technology, service or product into our business and operations may result in unforeseen operating difficulties and expenditures. Integration of an acquired company also may consume much of our managements time and attention that could otherwise be available for ongoing development of our business. Moreover, the anticipated benefits of the LifeLink 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 in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or amortization expenses related to intangible assets.
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We may not be able to continue to develop new products to effectively adjust for rapid technological changes.
To be successful, we must adapt to rapidly changing technological and market needs, by continually enhancing our website and introducing new products and services to address our users changing demands.
Our segment in the marketplaces in which we operate is characterized by:
rapidly changing technology;
evolving industry standards;
frequent new product and service introductions;
shifting distribution channels; and
changing customer demands.
Our future success will depend on our ability to adapt to this rapidly evolving marketplace. We could incur substantial costs if we need to modify our services or infrastructure in order to adapt to changes affecting our market, and we may be unable to adapt to these changes.
The markets for our products are highly competitive and are likely to become more competitive, and our competitors may be able to respond more quickly to new or emerging technology and changes in customer requirements.
We operate in highly competitive markets. In particular the electronic commerce market is rapidly evolving and highly competitive. Our software business also experiences some competition from certain large hardware suppliers that sell systems and systems components to independent agencies and from small, independent or freelance developers and suppliers of software, who sometimes work in concert with hardware vendors to supply systems to independent agencies. Our Internet business may also face indirect competition from insurance carriers that have subsidiaries which perform in-house agency and brokerage functions.
Some of our current competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. In addition, we believe we will face increasing competition as the online financial services industry develops and evolves. Our current and future competitors may be able to:
undertake more extensive marketing campaigns for their brands and services;
devote more resources to website and systems development;
adopt more aggressive pricing policies; and
make more attractive offers to potential employees, online companies and third-party service providers.
If we are unable to protect our intellectual property, our reputation and competitiveness in the marketplace may be materially damaged.
We regard our intellectual property in general and our software in particular as critical to our success. It may be possible for third parties to copy aspects of our products or, without authorization, to obtain and use information that we regard as trade secrets. Existing copyright law affords only limited practical protection, and our software is unpatented.
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If we infringe on the proprietary rights of others, we may be at a competitive disadvantage, and any related litigation could be time consuming and costly.
Third parties may claim that we have violated their intellectual property rights. Any of these claims, with or without merit, could subject us to costly litigation and divert the attention of key personnel. To the extent that we violate a patent or other intellectual property right of a third party, we may be prevented from operating our business as planned, and we may be required to pay damages, to obtain a license, if available, to use the right or to use a non-infringing method, if possible, to accomplish our objectives.
We depend on the continued services of our senior management and our ability to attract and retain other key personnel.
Our future success is substantially dependent on the continued services and continuing contributions of our senior management and other key personnel, particularly Robin Raina, our President and Chief Executive Officer, and Richard J. Baum, our Executive Vice President Finance & Administration, Chief Financial Officer and Secretary. The loss of the services of any of our executive officers or other key employees could harm our business. We have no long-term employment agreements with any of our key personnel, nor do we maintain key man life insurance policies on any of our key employees.
Our future success depends on our continuing to attract, retain and motivate highly skilled employees. If we are not able to attract and retain new personnel, our business will be harmed. Competition for personnel in our industry is intense. We may be unable to retain our key employees or attract, assimilate or retain other highly qualified employees in the future.
Our international operations are subject to a number of risks that could affect our income and growth.
We market our software internationally and plan to expand our Internet services to locations outside of the United States. In addition, we have development activities, call center services and other operations in India, and Heart Consulting operates principally in Australia. Our international operations may not produce enough revenue to justify our investments in establishing them and are subject to other inherent risks, including:
the impact of recessions in foreign economies on the level of consumers insurance shopping and purchasing behavior;
greater difficulty in collecting accounts receivable;
difficulties and costs of staffing and managing foreign operations;
reduced protection for intellectual property rights in some countries;
seasonal reductions in business activity during the summer months in Europe and other parts of the world;
burdensome regulatory requirements, other trade 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 requires significant management attention and financial resources, which could lessen our ability to manage our existing business effectively.
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Laws and regulations that govern the insurance industry could expose us or the agents, brokers and carriers who participate in our online marketplace to legal penalties.
We perform functions for licensed insurance agents, brokers and carriers and are, therefore, required to comply with a complex set of rules and regulations that often vary from state to state. These rules and regulations can be difficult to comply with and are ambiguous and open to interpretation. If we fail to properly interpret and/or comply with these rules and regulations, we, the insurance agents, brokers or carriers doing business with us, our officers, or agents with whom we contract could be subject to various sanctions, including censure, fines, cease-and-desist orders, loss of license or other penalties. This risk, as well as other laws and regulations affecting our business and changes in the regulatory climate or the enforcement or interpretation of existing law, could expose us to additional costs, including indemnification of participating insurance agents, brokers or carriers for their costs, and could require changes to our business or otherwise harm our business. Furthermore, because the application of online commerce to the consumer insurance market is relatively new, the impact of current or future regulations on our business is difficult to anticipate. To the extent that there are changes in the rules and regulations regarding the manner in which insurance is sold, our business could be adversely affected.
Our call center business could be adversely affected by equipment or system interruptions at one or more of our call centers.
Our call center business is dependent upon our ability to protect our call centers, including the computer and telecommunications equipment and software systems at those centers, against damage from fire, power loss, telecommunications interruption or failure, natural disaster and other similar events. In the event we experience a temporary or permanent interruption at one or more of our call centers, through casualty, operating malfunction or otherwise, our business could be materially adversely affected.
Governmental regulation of the telemarketing industry may increase our costs and restrict the operation and growth of our call center business.
The telemarketing industry and, therefore, our call center business are subject to an increasing amount of governmental regulation. In particular, telemarketers are now barred from contacting persons who have registered their phone numbers on the National Do Not Call Registry maintained by the Federal Trade Commission. We could be subject to a variety of enforcement or private actions for our failure or the failure of our clients to comply with these regulations.
Furthermore, our costs may increase as a result of having to comply with these regulations, and these regulations may limit our call center activities or reduce the demand for our call center services.
The outsourcing of business processes to foreign countries may be perceived negatively, which may reduce the demand for our services and lead to governmental regulation of these activities.
We enable companies to outsource certain business processes, including software development activities and call center services, to our operations in India. There have been some increasingly negative perceptions of the outsourcing of such processes from the U.S. to India, which may reduce the demand for these services and may lead to governmental regulation affecting such activities.
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Risks Related to Our Conduct of Business on The Internet
Any disruption of our Internet connections could affect the success of our Internet based products.
Any system failure, including network, software or hardware failure, that causes an interruption in our network or a decrease in responsiveness of our website could result in reduced user traffic and reduced revenue. Continued growth in Internet usage could cause a decrease in the quality of Internet connection service. Websites have experienced service interruptions as a result of outages and other delays occurring throughout the Internet network infrastructure. In addition, there have been several incidents in which individuals have intentionally caused service disruptions of major e-commerce websites. If these outages, delays or service disruptions frequently occur in the future, usage of our website could grow more slowly than anticipated or decline, and we may lose revenues and customers.
If the computer hardware operations that host our website were to experience a system failure, the performance of our website would be harmed. These systems are also vulnerable to damage from fire, floods, earthquakes, acts of terrorism, power loss, telecommunications failures, break-ins and similar events. Our property and business interruption insurance coverage may not be adequate to compensate us for all losses that may occur. In addition, our users depend on Internet service providers, online service providers and other website operators for access to our website. Each of these providers has experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems.
Concerns regarding security of transactions or the transmission of confidential information over the Internet or security problems we experience may prevent us from expanding our business or subject us to legal exposure.
If we do not offer sufficient security features in our online product and service offerings, our products and services may not gain market acceptance, and we could be exposed to legal liability. Despite the measures that we may take, our infrastructure will be potentially vulnerable to physical or electronic break-ins, computer viruses or similar problems. If a person circumvents our security measures, that person could misappropriate proprietary information or disrupt or damage our operations. Security breaches that result in access to confidential information could damage our reputation and subject us to a risk of loss or liability. We may be required to make significant expenditures to protect against or remedy security breaches. Additionally, if we are unable to adequately address our customers concerns about security, we may have difficulty selling our goods and services.
Uncertainty in the marketplace regarding the use of Internet users personal information, or proposed legislation limiting such use, could reduce demand for our services and result in increased expenses.
Concern among consumers and legislators regarding the use of personal information gathered 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 or increased service delivery costs, or otherwise harm our business. Legislation has been proposed that would limit the users of personally identifiable information of Internet users gathered online or require online services to establish privacy policies. Many state insurance codes limit the collection and use of personal information by insurance agencies, brokers and carriers or insurance service organizations. Moreover, the Federal Trade Commission has settled a proceeding against one online service that agreed in the settlement to limit the manner in which personal information could be collected from users and provided to third parties.
Future government regulation of the Internet could place financial burdens on our businesses.
Because of the Internets popularity and increasing use, new laws and regulations directed specifically at e-commerce may be adopted. These laws and regulations may cover issues such as the collection and use of data from website visitors, including the placing of small information files, or cookies, on a users hard drive to gather information, and related privacy issues; pricing; taxation; telecommunications over the Internet; content; copyrights; distribution; domain name piracy; and quality of products and services. The enactment of any additional laws or regulations, including international laws and regulations, could impede the growth of our revenue from our Internet operations and place additional financial burdens on our business.
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Risks Related To Our Common Stock
The price of our common stock may be extremely volatile.
In some future periods, our results of operations may be below the expectations of public market investors, which could negatively affect the market price of our common stock. Furthermore, the stock market in general has experienced extreme price and volume fluctuations in recent years. We believe that, in the future, the market price of our common stock could fluctuate widely due to variations in our performance and operating results or because of any of the following factors, which are, in large part, beyond our control:
announcements of new services, products, technological innovations, acquisitions or strategic relationships by us or our competitors;
trends or conditions in the insurance, software, business process outsourcing and Internet markets;
changes in market valuations of our competitors; and
general political, economic and market conditions.
In addition, the market prices of securities of technology companies, including our own, have been volatile and have experienced fluctuations that have often been unrelated or disproportionate to operating performance. As a result, you may not be able to sell shares of our common stock at or above the price at which you purchase them. In the past, following periods of volatility in the market price of a companys securities, securities class action litigation has often been instituted against that company. If any securities litigation is initiated against us, we could incur substantial costs and our managements attention and resources could be diverted from our business.
The significant concentration of ownership of our common stock will limit your ability to influence corporate actions.
The concentration of ownership of our common stock may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company, and may affect the market price of our common stock. At June 30, 2004, BRiT Insurance Holdings plc beneficially owned approximately 34% of our outstanding common stock and, together with our executive officers and directors, beneficially owned approximately 48% of our outstanding common stock. In addition, the Company has been informed that BriT owns approximately 70% of the equity interests of CF Epic Insurance and General Fund, which at June 30, 2004, beneficially owned approximately 8% of our outstanding common stock. As a result, those stockholders, if they act together, are able to control all matters requiring stockholder approval, including the election of all directors and approval of significant corporate transactions and
amendments to our certificate of incorporation. These stockholders may use their ownership position to approve or take actions that are adverse to your interests or prevent the taking of actions that are consistent with your interests.
Item 3. QUANTITATIVE AND QUALITATIVE 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 operations where transactions are denominated in foreign currencies and are subject to market 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 local currencies of each location. There can be no assurance that fluctuations in the value of foreign currencies will not have a material adverse effect on our business, operating results, revenues or financial condition. The fluctuations in these currencies resulted in net transaction losses of $2,000 and $8,000 for the three months ended June 30, 2004 and 2003, respectively. For the six months ended June 30, 2004, the fluctuations in these currencies resulted in a net transaction gain of $8,000. For the six months ended June 30, 2003, the fluctuations in these currencies resulted in a net transaction loss of $57,000. We considered the historical trends in currency exchange rate and determined that it was reasonably possible that adverse changes in exchange rates of 20% for all currencies could be experienced in the near term. Such adverse changes would have resulted in an adverse impact on income before taxes of approximately $145,000 and $137,000 for the three months ended June 30, 2004 and June 30, 2003, respectively. Such adverse changes would have resulted in an adverse impact on income before taxes of approximately $242,000 and $199,000 for the six months ended June 30, 2004 and June 30, 2003, respectively.
There have been no material changes in the Companys interest rate risk during the three and six months ended June 30, 2004. While the Company has interest rate risk related to the line of credit, the exposure is mitigated by the interest income on the restricted balance of $3,000,000. For additional information on interest rate risk, refer to the Quantitative Disclosures About Market Risk section of the Companys Annual Report on Form 10-K for the year ended December 31, 2003.
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Item 4. CONTROLS AND PROCEDURES
In connection with its 2003 year-end audit, the Companys independent certified public accountants at that time, KPMG LLP (KPMG), identified details of reportable conditions relating to the Companys internal control over financial reporting. According to KPMG, the communication of the reportable conditions was based on their professional judgment, taking into consideration audit differences that required adjustment to the Companys financial statements, as well as the underling causes for such adjustments, and KPMGs observations about the Companys internal control processes, but did not arise from any particular transaction or event. On March 25, 2004, KPMG presented to the audit committee the details of the reportable conditions noted during the 2003 audit, which included (1) delegation of authority and what KPMG considered to be inadequate reviews by a person other than the preparer of accounting information, (2) the lack of a formalized contract review process to ensure proper revenue recognition, (3) the lack of a complete understanding of the Companys income tax provision and related accounts, (4) inadequate documentation for certain unusual transactions (including the basis for the Companys 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 KPMGs identified issues, in the first quarter of 2004 (prior to the quarter covered by this report), the Company changed its reporting structure within the financial accounting group and redistributed responsibilities among the financial accounting group to create improved checks and balances. The reorganization included appointment of a senior member of the group as corporate controller to whom all the other members report. Further, (a) the responsibility for a formalized contract review process to ensure proper revenue recognition was re-assigned to a financial department director; (b) the Company established a process for the quarterly review of the provision for income taxes by the Chief Financial Officer and corporate controller; (c) the Chief Financial Officer and corporate controller undertook responsibility for the analysis and documentation of any unusual transactions.
In addition, in order to address further the deficiencies described above and to improve the Companys internal control over financial reporting for future periods, the Company plans to:
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Perform a review of internal control over financial reporting in connection with satisfying the requirements Section 404 of the Sarbanes-Oxley Act and regulations promulgated thereunder, with the assistance of an outside consulting firm to be retained by the Company; |
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Perform more detailed quarterly reconciliations and analyses of the Companys revenue accounts; |
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Continue to enhance staffing to provide sufficient resources to accomplish the foregoing objectives, including through the addition of a senior financial accountant in Australia. |
The enhancements to internal control over financial reporting made in the first six months of 2004 constitute, and the planned further improvements will constitute, significant changes in internal control over financial reporting. There was not, however, any change in the Companys internal control over financial reporting during the quarter ended June 30, 2004 that has materially effected, or is reasonably likely to effect, the Companys internal control over financial reporting. The Company continues to evaluate the effectiveness of its internal control over financial reporting, along with its disclosure controls and procedures, on an ongoing basis and will take further action as appropriate.
The Company carried out an evaluation, under the supervision and with the participation of the Companys management, including its Chief Executive Officer and Chief Financial Officer, of the design and operation of the Companys disclosure controls and procedures, which are designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files with or submits to the Securities and Exchange Commission is (1) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and (2) accumulated and communicated to the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, the Companys Chief Executive Officer and the Companys Chief Financial Officer concluded that, as of June 30, 2004, the Companys disclosure controls and procedures were effective to provide such reasonable assurance. They reached this conclusion based in large part on their assessment of (i) the financial expertise of the members of the internal accounting staff, (ii) the regular communications among such persons (serving as a de facto disclosure committee), and between them and the rest of the relatively small organization, with respect to all material developments in the Companys business, and (iii) the review of the Companys financial and other disclosure by the Companys management, its audit committee, its independent public accountants and its outside legal counsel, as well as (iv) the enhancements made to the Companys internal control over financial reporting in the first six months of 2004.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002). |
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Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002). |
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Certification of Chief Executive Officer Pursuant to Section 906 of the Sabanes-Oxley Act of 2002 (furnished herewith). |
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Certification of Chief Financial Officer Pursuant to Section 906 of the Sabanes-Oxley Act of 2002 (furnished herewith). |
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Reports on Form 8-K |
The Company furnished a current report on Form 8-K (pursuant to Item 12 thereof) on May 17, 2004 to report the Companys announcement of its results of operations and financial position as of, and for the three-month period ended March 31, 2004.
The Company filed a Form 8-K/A (pursuant to Items 2 and 7 thereof) on May 7, 2004, amending a current report on Form 8-K it filed on February 23, 2004, to provide the following financial statements and pro forma financial statements in connection with the Companys acquisition of LifeLink:
Financial Statements of LifeLink Corporation for the years ended December 31, 2003 and 2002.
Ebix, Inc. and Subsidiaries Unaudited Pro Forma Condensed Combining Balance Sheet at December 31, 2003.
Ebix, Inc. and Subsidiaries Unaudited Pro Forma Condensed Statements of Income For the Year Ending December 31, 2003.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf by the undersigned thereunto duly authorized.
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Ebix, Inc. |
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Date: May 20, 2005 |
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/s/ RICHARD J. BAUM |
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Richard J. Baum |
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Executive Vice President Finance & Administration, Chief |
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