EBIX INC - Annual Report: 2005 (Form 10-K)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

to

OR

Commission file number 0-15946

EBIX, INC.
(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (847) 789-3047

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class

Common Stock, par value $0.10 per share

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  o    No  x

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  o    No  x

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  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     Accelerated filer  o    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o    No  x

As of March 16, 2006, the number of shares of Common Stock outstanding was 2,752,752. As of June 30, 2005 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of Common Stock held by nonaffiliates, based upon the last sale price of the shares as reported on the NASDAQ SmallCap Market on such date, was approximately $12,956,914 (for this purpose, the Company has assumed that directors, executive officers and holders of more than 10% of the Company’s common stock are affiliates).

EBIX, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

 

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Safe Harbor for Forward-Looking Statements under the Private Securities Litigation Reform Act of 1995—This Annual Report on Form 10-K contains various forward-looking statements and information that are based on management’s 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 Company’s products by the market and management’s 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 Annual 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 the extent to which the Company’s new products and services can be successfully developed and marketed, the integration and other risks associated with recent and future acquisitions, the willingness of independent insurance agencies to outsource their computer and other processing needs to third parties, the Company’s ability to continue to develop new products to effectively address market needs in an industry characterized by rapid technological change, the Company’s dependence on the insurance industry (and in particular independent agents), the highly competitive and rapidly changing automation systems market, the Company’s ability to effectively protect its applications software and other proprietary information, the Company’s ability to attract and retain quality management, and software, technical sales and other personnel, the potential negative impact on the Company’s outsourcing business in India from adverse publicity and possible governmental regulation, the risks of disruption of the Company’s Internet connections or internal service problems, the possibly adverse effects of a substantial increase in volume of traffic on the Company’s website, mainframe and other servers, possible security breaches on the Company’s website and the possible effects of insurance regulation on the Company’s business. Certain of these, as well as other, risks, uncertainties and other factors, are described in more detail in this Annual Report on Form 10-K, included under “Item 1. Business—Risk Factors.” 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 , or changes to, any of, or change, the forward-looking statements contained herein to reflect future events or developments or changed circumstances or for any other reason.

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PART I

Item 1.                        BUSINESS

Ebix, Inc. (the “Company”), which changed its name from ebix.com, Inc. on December 30, 2003, was founded in 1976 as Delphi Systems, Inc., a California corporation. In this report, Ebix, Inc. is referred to as the “Company,” while Ebix.com (Ebix.com is a registered trademark of Ebix, Inc.) refers to the Company’s website.

The Company is an international provider of software and Internet-based solutions for the insurance industry. International revenue accounted for 37%, 33% and 31% of total revenue in 2005, 2004 and 2003, respectively. Historically and during 2005, the Company’s revenue has been derived primarily from professional and support services (95% of revenue in 2005) and from the licensing and sale of software comprised of proprietary software and third-party software (5% of revenue in 2005). Professional services and support include software development projects, transaction based fees, fees for software license maintenance, initial registration and ongoing monthly subscription fees from the EbixASP product and business process outsourcing revenue. Also included in professional services and support are fees for consulting, implementation, training, and project management provided to the Company’s customers with installed systems and those in the process of installing systems.

On February 23, 2004 the Company acquired LifeLink Corporation (“LifeLink”) located in Park City, Utah. LifeLink markets a number of software products that provide sales illustrations and quote comparison services to insurance carriers and wholesalers operating in the life insurance and long-term care markets. The Company acquired all of the outstanding stock of LifeLink from its shareholders in exchange for an aggregate purchase price of $10,354,000, payable in cash and stock. See note 13 to the consolidated financial statements included in this Form 10-K. The acquisition of LifeLink has provided the Company with an entrée to the life insurance segment of the insurance market from both the agent/broker and carrier perspective. On May 2, 2005, the LifeLink name was changed to EbixLife Inc. (“EbixLife”).

On July 1, 2004, Ebix Australia Pty Ltd (VIC), which is a wholly-owned subsidiary of the Company, acquired certain operating assets of Heart Consulting Services Pty Ltd (“Heart”). Heart was a broker systems vendor in Australia that provided end-to-end ASP broker systems to more than 650 brokers in Australia. Under terms of the agreement, the Company acquired the operating assets of Heart in exchange for an aggregate purchase price of $7,116,000 payable in cash, letters of credit and stock. See note 14 to the consolidated financial statements included in this Form 10-K. The acquisition of Heart provided us with a significant share of the smaller broker market in Australia, substantially raising our overall insurance broker market share in Australia. Prior to the acquisition of certain assets of Heart, the Company had a large share of the mid-sized broker market in Australia.

Information on the Company’s revenues, net income and fixed assets in different geographic areas is furnished in note 12 to the consolidated financial statements, included elsewhere in this Form 10-K.

Industry overview—The insurance industry has undergone significant consolidation over the past several years driven by the need for, and benefits from, economies of scale and scope in providing insurance in a competitive environment. Consolidation has involved both insurance carriers and insurance brokers and is directly impacting the manner in which insurance products are distributed. Management believes the insurance industry will continue to experience significant changes in the next several years to meet the changing distribution model. Changes in the insurance industry may create both opportunities and challenges for the Company.

Business and Growth Strategy—The Company intends to grow its business in the future both organically and through additional synergistic acquisitions. Over the past year the Company has emphasized its software development business along with identifying synergistic acquisitions, while

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decreasing its emphasis on businesses having more intense competition such as business process outsourcing and call center.

Products and Services—The Company’s product and service strategy focuses on the following five areas: (1) providing software development services to insurance carriers, brokers and agents; (2) worldwide sale, customization, development, implementation and support of its insurance carrier system product, named Business Reinsurance and Insurance Company System (“BRICS”); (3) worldwide sales and support of agency management systems including EbixASP and eGlobal; (4) expansion of connectivity between consumers, agents, carriers, and third party providers through its exchange family of products worldwide namely, EbixLife and EbixExchange; and (5) business process outsourcing services, which include call center and back office, either off site or at the Company’s facilities. Software delivered online through application service provider (“ASP”) models and connectivity products are recorded as services by the Company. The Company anticipates that future revenue will be provided principally by development services, system sales, the sale and licensing of BRICS, international operations, EbixLife, EbixExchange, call center services and support.

The Company provides development consulting to brokers, carriers and agents. Some of the Company’s recent projects for clients include: development of a reinsurance exchange for a European company; design and development of a carrier system over the web for a large European company; design and development of a carrier system for a U.S. company; and development of an online application, underwriting, policy issuance, and claims system for an insurance carrier; development of bank assurance system for an international broker/banker; and development and deployment of new exchange functionality in Australia, etc. In addition, the Company has developed call center and business process outsource operations for large brokers, insurance companies and retail brokers.

EbixLife markets a number of software products that provide sales illustrations and quote comparison services to insurance carriers and wholesalers operating in the life insurance, annuity and long-term care markets. The assets of EbixLife acquired by the Company were utilized by EbixLife in connection with the life insurance sales software applications business, and the Company intends to continue such use of these assets into the foreseeable future.

In 2001, the Company began marketing the EbixASP product to beta customers, and it became available to the general public in 2002. EbixASP is a web-enabled system for insurance agencies to manage their businesses. EbixASP is sold both as a hosted and a self-hosted product. Revenues generated from the sale of EbixASP hosted by the Company are recorded in services revenue, while revenues generated from the sale of self-hosted EbixASP are recorded in software revenue. The Company-hosted product generates revenues through initial registration and ongoing monthly subscription fees based on the number of personnel accessing the software. As a result of the Company’s acquisition of certain assets of Heart in July 2004, the Company focuses on providing ASP based broker systems to small and midsize brokers in the Australian market.

Ebix.mall generates revenues through transaction fees billed to insurance agencies and carriers who use the Ebix.com website.

The product “BRICS” refers to custom software development of systems for insurance carriers on a contractual basis. These systems are unique for each customer and are client hosted.

EbixExchange is an Internet based service developed by the Company to facilitate connectivity for upload, download, and data exchange between carriers, agents and third party providers and is part of the total revenue generation from the other product offerings, which feature EbixExchange as part of their technology. The service was completed in late 2002 and is currently being used for the download function in EbixASP and the rating functionality in the Company’s business to consumer exchange, Ebix.mall. In May 2001, the Company purchased the INS-Site product line. The INS-Site product line could be

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characterized as an earlier model of EbixExchange, facilitating carrier-to-agent workflow such as download of policy information, upload of new business or policy change requests, as well as agent inquiry of key policy information such as status, billing and claims. INS-Site generates revenue through hosting and service fees.

The Company also continues to provide its agency management software product line, which is comprised of “eGlobal”, a modular agency management solution providing flexibility and the ability to handle unstructured data and complex risk, and “Ebix.one”, a structured system utilizing many features of the Company’s previous products. The Company also continues to support but no longer sells six “legacy” products: INfinity, INSIGHT, PC-ELITE, Insurnet, SMART, and Vista. The legacy products provide basic functions such as policy administration, claims handling, accounting, and financial reporting. The Company expects to maintain and support the legacy products as long as it believes there is adequate economic and strategic justification. The Company will continue to encourage customers utilizing legacy products to migrate to newer products.

The software products offered by the Company range in price from $85 per month per seat to $2,700 per license, depending on whether the customers are obtaining the products through a service hosted by the Company or hosting the products themselves, and the total contract value for certain multiple-site global brokers can be over $1,000,000. For the years ended December 31, 2005 and December 31, 2004, Brit Insurance Holdings PLC (“Brit”) and its affiliates, accounted for approximately 16% and 18%, respectively, of consolidated revenue. See note 2 to the consolidated financial statements included in this Form 10-K. In addition to Brit and its affiliates, one customer, AON, accounted for approximately 11% of consolidated revenue for the year ended December 31, 2003. AON accounted for less than 10% of the consolidated revenue for the years ended December 31, 2005 and December 31, 2004.

System Design and Architecture—The Company’s new product offerings utilize the latest Internet based architecture. “eGlobal” is a client/server based system, which runs on an Oracle relational database software technology. “Ebix.one” is operational on Pervasive database software.

EbixASP is an e-commerce enabled agency management system that can be hosted on an ASP basis by the Company or licensed to a customer to self-host. The product is hosted by the Company at a fully managed hosting facility, Sungard eSourcing (“Sungard”), using a MS-SQL server, Microsoft ASP on multiple servers in a load balanced environment with redundancy in terms of back ups and downtime. All agencies using EbixASP need only one software product, Microsoft Internet Explorer, as the back end software is hosted at Sungard.

BRICS is a Microsoft dot net based system that can be hosted on an ASP basis by the Company or licensed to the customer on a self-hosted basis.

EbixExchange operates on Microsoft dot net technology.

INS-Site is one of the products offered by Ebix under the EbixExchange family of products. This product allows insurance data to be downloaded from and into multiple insurance company systems automatically. This product is hosted by the Company.

EbixLife’s WinFlex is a life insurance sales presentation system. The product is hosted by the Company at a fully managed hosting facility, Consonus, using a MS-SQL server, Microsoft ASP on multiple servers in a load balanced environment with redundancy in terms of back ups and downtime.

Backlog—There was no significant backlog as of December 31, 2005 or December 31, 2004.

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Product Development—At December 31, 2005, the Company employed 95 (72 international and 23 domestic) full-time employees engaged in product development activities. These activities include research and development of software enhancements such as adding functionality, improving usefulness, increasing responsiveness, adapting to newer software and hardware technologies and developing and maintaining the website. Development of custom software enhancements for customers can be used in system development for other customers.

The Company’s development focus is in four areas: (i) continued enhancement of EbixASP and eGlobal, (ii) developing technology for insurance carriers, brokers and agents, including, in some cases, hosting the systems developed, (iii) continued enhancement of EbixExchange, and (iv) continued maintenance of the Ebix.com website.

Product development expenditures were $3,258,000, $3,016,000 and $1,552,000 in 2005, 2004 and 2003, respectively. Increases in product development are a result of the acquisition of EbixLife in 2004 and an increase in developers internationally. Product development expenditures related to general product development and specific projects for clients.

Competition—Management believes its principal competition varies by each area of focus.

In the area of connectivity, the Company competes with a large carrier owned network that provides transaction connections to agents and carriers, and in-house systems developed by carriers. In addition, the Company competes, to a much lesser extent, with operators of several smaller websites that enter and leave the market on a regular basis.

Key competitive features in the area of connectivity include: (1) ability to complete end-to-end conversion of data between systems and from input to policy issuance, (2) offerings and services for both personal and commercial lines, (3) affording insurance customers a marketplace in which insurance can be priced on an objective, competitive basis, and (4) ability to complete transactions online for insurance customers, agents, and carriers. Management believes that, overall, with respect to Ebix.com, INS-Site, and EbixExchange, the Company competes favorably with respect to these factors.

In the area of agency management systems, while the Company believes that EbixASP provides a strategic advantage for the Company, two companies provide client/server software which are in competition with those historically offered by the Company. These companies are larger than the Company and may have greater resources. Additionally, certain large hardware suppliers sell systems and system components to independent agencies. The Company also experiences competition to a much lesser extent from small, independent or freelance developers and suppliers of software who sometimes work in concert with hardware providers to supply systems to independent agencies.

The Company believes that some insurance carriers continue to operate subsidiaries that actively compete with the Company to provide agency systems to their in-house agency or brokerage efforts. These carriers generally have much greater financial resources than the Company and have in the past subsidized the automation of independent agencies through various incentives offered to promote the sale of the carrier’s insurance products.

In the area of insurance company systems, the Company competes with established venders like Computer Science Corporation (CSC), Rebus and PMSC. Management believes that its focus and current technology will differentiate it from the competition.

In the area of consulting, the Company competes with hardware, development, and software providers and in-house information technology departments in carriers and targeted clients. These companies and carriers generally have much greater financial resources than the Company. The Company also experiences, to a much lesser extent, competition from small, independent or freelance developers and

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suppliers of software who sometimes work in concert with hardware providers to supply consulting and development.

Key competitive factors for the Company’s software, services and consulting are product technology, features and functions, ease of use, price, project management, service, reputation, reliability, effects of insurance regulation, insurance knowledge, technology expertise, and quality of customer support and training. Management believes that, overall, the Company competes favorably with respect to these factors.

Proprietary Rights—The Company regards its software as proprietary and attempts to protect it with copyrights, trade secret laws and restrictions on disclosure and transferring title. Despite these precautions, it may be possible for third parties to copy aspects of the Company’s products or, without authorization, to obtain and use information which the Company regards as trade secrets. Existing copyright law affords only limited practical protection and the Company’s software is unpatented.

Employees—At December 31, 2005, the Company had 229 employees, including 16 in sales and marketing, 95 in product development, 71 in customer service and operations, 19 in call center and 28 in general management, administration and finance. None of the Company’s employees are presently covered by a collective bargaining agreement. Management believes that its relations with its employees are good.

Item 1A.                RISK FACTORS

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

Risks Related To Our Business and Our Industry

You may have difficulty evaluating our business because of our 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 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 more 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, such as electronic commerce, 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.

Our revenue from the support services we offer in connection with our legacy software products has been decreasing significantly over the course of the past few years. 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

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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 March 16, 2006 owned approximately 34.0% of our common stock and approximately 78% of CF Epic Insurance and General Fund, which at that date owned approximately 8.1% of our common stock, represented approximately 16% ($3,762,000) of our total revenue in 2005 and 18% ($3,551,000) of our total revenue in 2004. If revenues from this customer were to discontinue, our operating results could be adversely affected.

Revenues from another customer, AON, represented approximately 7% ($1,594,000) and 9% ($1,856,000) of our total revenue in 2005 and 2004, respectively. If revenues from this customer were to discontinue, our operating results could be 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 political 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 may include the loss of a significant insurance agent, carrier or broker relationship or the merger of any of our participating insurance carriers with one another.

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 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 or to make acquisitions. 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.

In the event we complete one or more acquisitions, we may be subject to a variety of risks, including risks associated with an ability to integrate acquired assets or operations into our existing operations, higher costs or unexpected difficulties or problems with acquired assets or entities, outdated or

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incompatible technologies, labor difficulties or an inability to realize anticipated synergies and efficiencies, whether within anticipated timeframes or at all, one or more of which risks, if realized, could have an adverse impact on our operations.

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.

The marketplaces in which we operate are 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 online insurance distribution market, like the broader 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

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use information that we regard as trade secrets. Existing copyright law affords only limited practical protection, and our software is unpatented.

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. 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 2004, we acquired certain assets from Heart Consulting Services Pty. Ltd. in Australia. In addition, commencing in 2002, we began development activities, call center services and other operations in India. 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.

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.

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.

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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 Internet’s 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 user’s hard drive to gather information, and related privacy issues; pricing; taxation; telecommunications over the Internet; content; copyrights; distribution; domain name piracy; and quality of products and services. 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.

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;

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·       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 company’s 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 management’s 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 March 16, 2006, Brit Insurance Holdings PLC beneficially owned approximately 34.0% of our outstanding common stock and, together with our executive officers and directors, beneficially owned approximately 54.4% of our outstanding common stock. In addition, at March 16, 2006, CF Epic Insurance and General Fund, of which Brit owns approximately 78% of the equity interests, beneficially owned 8.1% 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 1B.               UNRESOLVED STAFF COMMENTS

Not applicable.

Item 2.                        PROPERTIES

The Company’s corporate headquarters are in Schaumburg (a suburb of Chicago), Illinois, where it leases a 2,900 square foot location. Substantially all corporate finance and administrative functions are located in Schaumburg. The Company and its subsidiaries lease additional office space of approximately 9,800 square feet in Atlanta, Georgia and 5,500 square feet in Park City, Utah. The Company also leases office space in the United States, New Zealand, Australia and Singapore for support and sales offices. The Company owns two facilities in India with total square footage of approximately 29,000 square feet. The Indian facilities provide software development and call center services for customers. Management believes its facilities are adequate for its current needs and that suitable additional or substitute space will be available as needed.

Item 3.                        LEGAL PROCEEDINGS

In the normal course of business, the Company is a party to various legal proceedings. The Company does not expect that any currently pending proceedings will have a material adverse effect on its business, results of operations or financial condition.

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Item 4.                        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Company’s Annual Meeting of Stockholders, held on December 16, 2005, the following members were elected to the Company’s Board of Directors, each by the respective vote indicated to the right of such nominee’s name:

 

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PART II

Item 5.                        MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The principal market for the Company’s common stock is the NASDAQ SmallCap Market. The Company’s common stock trades under the symbol “EBIX.” As of December 31, 2005, there were 90 holders of record of the Company’s common stock.

The following tables set forth the high and low closing bid prices for the Company’s common stock for each calendar quarter in 2005 and 2004.

 

 

As of March 16, 2006, there were 2,752,752 shares of the Company’s common stock outstanding.

Dividends

The Company has not paid any cash dividends on its common stock to date. The Company currently anticipates that it will retain any future earnings for the development and operation of its business. Accordingly, the Company does not anticipate paying cash dividends on its common stock in the foreseeable future.

Recent Sales of Unregistered Securities

The Company did not sell any unregistered securities during 2005, except as previously disclosed in a quarterly report on Form 10-Q.

Recent Purchases of Equity Securities

The Company did not purchase any of its equity securities during the fourth quarter of 2005.

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Item 6.                        SELECTED FINANCIAL DATA

The following data for fiscal years 2005, 2004, and 2003 should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements and the related notes and other financial information included herein.

Consolidated Financial Highlights

 

Item 7.                         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information contained in this section has been derived from our historical financial statements and should be read together with our historical financial statements and related notes included elsewhere in this document. The discussion below contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties including, but not limited to: consumer demand and acceptance of services offered by us, our ability to achieve and maintain acceptable cost levels, fare levels and actions by competitors, regulatory matters, general economic conditions, commodity prices, and changing business strategies. Forward-looking statements are subject to a number of factors that could cause actual results to differ materially from our expressed or implied expectations, including, but not limited to: our performance in future periods, our ability to generate working capital from operations, our ability to take delivery of and to finance aircraft, the adequacy of our insurance coverage, and the results of litigation or investigation. Our forward-looking statements can be identified by the use of terminology such as “anticipates,” “expects,” “intends,” “believes,” “will” or the negative thereof, or variations thereon or comparable terminology. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. For a discussion of risk uncertainties and other factors that could cause actual results to differ materially from those expressed in, or implied by the forward looking statements, see “Item 1. Business—Risk Factors.” See also, “Safe Harbor for forward-looking statements under the Private Securities Litigation Act of 1995.”

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The Company’s product and service strategy focuses on the following five areas: (1) providing software development services to insurance carriers, brokers and agents; (2) worldwide sale, customization, development, implementation and support of its insurance carrier system product BRICS; (3) worldwide sales and support of agency management systems including EbixASP and eGlobal; (4) expansion of connectivity between consumers, agents, carriers, and third party providers through its exchange family of products worldwide namely EbixLife and EbixExchange; and (5) business process outsourcing services, which include call center and back office, either off site or at the Company’s facilities. Software delivered online through ASP models and connectivity products are recorded as services by the Company. The Company anticipates that future revenue will be provided principally by development services, system sales, the sale and licensing of BRICS, international operations, EbixLife, EbixExchange, call center services and support.

The product referred to as “BRICS” pertains to custom software development of systems for insurance carriers on a contractual basis to which the Company plans to ascribe increased focus in the future. These systems are unique for each customer and are client hosted. During 2005, the Company recognized revenue of $888,000 related to BRICS.

During 2004, the Company completed two synergistic acquisitions (EbixLife and Heart) which have added revenue and earnings to the Company’s consolidated results in a proportionate amount (no dilution). On February 23, 2004, the Company acquired LifeLink Corporation (renamed to EbixLife Inc. (“EbixLife”) on May 2, 2005). The operations of EbixLife have been included in the Company’s financial statements since that date. On July 1, 2004, Ebix Australia Pty Ltd (VIC), which is a wholly-owned subsidiary of the Company, acquired certain operating assets of Heart Consulting Services Pty Ltd (“Heart”), and the operations of Heart have been included in the Company’s financial statements since that date. During 2005, the Company recognized revenue of $6,166,000 and $4,084,000 related to EbixLife and Heart, respectively. During 2004, the Company recognized revenue of $4,684,000 and $1,706,000 related to EbixLife and Heart, respectively. The Company intends to seek to increase revenue and income in the future through identification of additional synergistic acquisitions and through increasing emphasis on the sale and licensing of large scale development projects for insurance carriers, brokers and agents, where the margins are the greatest.

During 2005, the Company entered into various software and service agreements with Brit, which beneficially owned approximately 34% of the Company’s outstanding common stock at March 16, 2006 (see Note 2 to the consolidated financial statements included herein). In addition, at March 16, 2006, CF Epic Insurance and General Fund, of which Brit owns approximately 78% of the equity interests, beneficially owned 8.1% of the Company’s outstanding common stock. Approximately $3,762,000 was recognized as revenue during 2005 from Brit and its affiliates, representing approximately 16% of the Company’s total revenue for that year. Total accounts receivable related to Brit and its affiliates at December 31, 2005 were $988,000. The Company expects to continue these types of arrangements with Brit and its affiliates. These agreements relate to the customization of EbixASP for the European markets in addition to hosting, development, and transaction fees.

In 2001, the Company began marketing the EbixASP product and it became available to the general public in 2002. EbixASP is a web-enabled system for insurance agencies to manage their businesses. This product generates revenues through initial registration and ongoing monthly subscription fees based on the number of personnel accessing the software. During 2005, the Company recognized revenue of $561,000 related to EbixASP.

The Company also continues to provide its agency management software product line, comprised of “eGlobal”, a modular agency management solution providing flexibility and the ability to handle unstructured data and complex risk, and “Ebix.one”, a structured system utilizing many features of the Company’s previous products. The Company also continues to support, but no longer sells, six “legacy”

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products: INfinity, INSIGHT, PC-ELITE, Insurnet, SMART, and Vista. The legacy products provide basic functions such as policy administration, claims handling, accounting and financial reporting. The Company expects to maintain and support the legacy products as long as it believes there is adequate economic and strategic justification. The Company will continue to encourage customers utilizing legacy products to migrate to newer products.

Critical Accounting Policies—The Company’s “critical accounting policies” are those that require application of management’s 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. We have identified the following as our critical accounting policies: revenue recognition and estimating the allowance for doubtful accounts receivable and income taxes.

Revenue recognition—We derive our revenue primarily from two sources: (1) product revenue, which includes software licenses and (2) services and support revenue, which includes software license maintenance, software development, training, consulting and hosting revenue. As described below, significant management judgments, estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.

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 criteria: 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  and 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 Company’s 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 2005, all of the Company’s contracts with multiple deliverables fell under higher level accounting literature under the provisions of SOP 97-2 and/or SOP 81-1.

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. Management uses signed contractual agreements as persuasive evidence of an arrangement where fee information is documented. The Company performs credit checks on new customers to verify that collectibility will be probable. Revenue from third party software is derived from the licensing of third party software products in connection with sales of the Company’s software licenses and is generally recognized upon delivery together with the Company’s 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.

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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.

Revenues related to 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”) 104, “Revenue Recognition.” 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 or billings that have been received or 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, evidence of an arrangement exists and the recovery of any related 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.

Allowance for doubtful accounts receivable—The preparation of consolidated financial statements requires our management to make estimates and assumptions that affect the reported amount of assets at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Specifically, our management must make estimates of the collectability of our accounts receivable. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Our accounts receivable balance was $3,502,000, net of an allowance for doubtful accounts of $11,000 as of December 31, 2005.

Income taxes—The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers

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the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Although future taxable income of the Company may be sufficient to utilize a substantial amount of the benefits of the Company’s net operating loss carryforwards and to realize its deferred tax assets, a valuation allowance was recorded to offset the carrying value of the Company’s deferred tax assets, as management concluded that the realization of its deferred tax assets does not meet the “more likely than not” criteria under Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.”

The Company’s estimated effective tax rate for future periods is dependent on the mix of jurisdictions where taxable income is generated. The effective income tax rate for any year or period is not indicative of the future and could fluctuate substantially.

Results of Operations

Ebix, Inc. and Subsidiaries

 

On February 23, 2004, the Company acquired LifeLink Corporation (which was renamed to EbixLife Inc. on May 2, 2005 and is referred to in this 10-K as “EbixLife”), and the operations of EbixLife have been included in the Company’s financial statements since that date. On July 1, 2004, Ebix Australia Pty Ltd (VIC), which is a wholly-owned subsidiary of the Company, acquired certain operating assets of Heart Consulting Services Pty Ltd (“Heart”), and the operations of Heart have been included in the Company’s financial statements since that date. The majority of the Company’s growth since early 2004 has been attributed to these acquisitions.

Total Revenue—The Company’s 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 Company’s customers with installed systems and those in the process of installing systems. Also included in Services are fees for software license maintenance, EbixLife services, Heart 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 is comprised of Software revenue and Services revenue.

·       Total revenue for 2005 increased $4,117,000, or 20.6%, from 2004, see discussion of Software revenue and Services Revenue below.

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·       Total revenue for 2004 increased $5,550,000, or 38.5%, from 2003, see discussion of Software revenue and Services Revenue below.

·       Total Software revenue for 2005 increased $349,000, or 40.2%, from 2004. This increase was primarily due to the BRICS software sales of $380,000 partially offset by a decrease in international software license revenue.

·       Total Software revenue for 2004 decreased $629,000, or 42.0%, from 2003. The Company expects future revenue to be comprised primarily of Services revenue.

·       Total Services revenue for 2005 increased $3,768,000, or 19.7%, from 2004. This increase was due to increases in Heart revenue of approximately $2,378,000, EbixLife revenue of approximately $1,482,000,  consulting revenue of $570,000 and BRICS revenue of $508,000 partially offset by a decrease in support revenue associated with legacy products of $644,000, a decrease in Ebix.mall revenue of $213,000, a decrease in non-Heart international consulting revenue of $127,000, a decrease in Ebix ASP revenue of $71,000, a decrease in INS-Site revenue of $67,000, a decrease in hosting revenue of $29,000 and a decrease in call center revenue of $19,000.

During 2005, 2004, and 2003, approximately $3,762,000, $3,551,000 and $3,245,000, respectively, was recognized as Services revenue from Brit and its affiliates related to call center and development projects. Revenue from Brit and its affiliates represented 16%, 18% and 23% of the Company’s total revenues for 2005, 2004 and 2003, respectively. Brit owned approximately 34% of the Company’s common stock as of March 16, 2006. In addition, as of March 16, 2006, CF Epic Insurance and General Fund, of which Brit owns approximately 78% of the equity interests as of such date, beneficially owned 8.1% of the Company’s outstanding common stock.

Total revenue for 2005 increased $4,117,000 or 20.6% from 2004, while revenue from Brit and its affiliates in 2005 increased $211,000 or 6% from 2004. Total revenue for 2004 increased $5,550,000 or 38.5% from 2003, while revenue from Brit in 2004 increased $306,000 or 9% from 2003. The revenues from Brit and its affiliates relate to projects for call center and software development services. 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.

Total revenue for AON was $1,594,000, $1,856,000 and $1,652,000 during 2005, 2004 and 2003, respectively representing 7% , 9% and 11% of total revenue.  Neither Brit and its affiliates nor AON have long-term agreements with the Company that provide certainty that such revenues will be recurring. AON International continues to acquire licenses for more locations resulting in more reliance on the e-global system.

Support revenue associated with the Company’s legacy products is decreasing due to a trend of declining renewals for these older product offerings.

 

Support revenue decreased $644,000, or 19%, and as a percentage of total revenue to 11% from 17%, in 2005 compared to 2004. Support revenue decreased $800,000, or 19%, and as a percentage of total revenue to 17% from 29%, in 2004 compared to 2003.

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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 determine if costs can be further reduced for the activity to be profitable and, if not, the Company will discontinue supporting the respective legacy product. The Company cannot predict when this will occur.

The Company expects that future Services revenue will be derived from this support, the sale of BRICS, as well as EbixASP registration and monthly fees, EbixLife services, Heart services, software development and call center and to a much lesser extent, all transaction revenues from Ebix.mall, conversion and training.

·       Total Services revenue for 2004 increased $6,179,000, or 47.8%, from 2003. This increase was due to the addition of EbixLife revenue of approximately $4,684,000 and Heart revenue of approximately $1,706,000 and increases in consulting revenue of $1,543,000, Ebix.mall revenue of $187,000 and hosting revenue of $109,000, partially offset by a decrease in support revenue associated with legacy products of $800,000, a decrease in call center revenue of $493,000, a decrease in Ebix ASP revenue of $445,000 and a decrease in INS-Site revenue of $312,000.

Services and other costs—Services and other costs include costs associated with support, call center consulting, implementation and training services.

·       Total services and other costs for 2005 increased $574,000, or 10.7%, from 2004. This increase was due to an increase in EbixLife payroll expenses of $272,000, an increase in Heart payroll expenses of $509,000 (reflecting a full year of expenses for EbixLife and Heart) and an increase in facility costs of $111,000 partially offset by a decrease in expenses for required services to support the Company’s products of $172,000, a decrease in international support costs of $49,000 and a decrease in non-EbixLife payroll of $97,000.

·       Total services and other costs for 2004 increased $1,240,000, or 29.5%, from 2003. This increase was due to an increase in payroll expenses related to the acquisition of EbixLife of $505,000 and Heart of $258,000, an increase in facility costs of $205,000, an increase in expenses for required services to support the Company’s products of $201,000, an increase in international support costs of $39,000 and an increase in non-EbixLife payroll of $32,000.

Product development expenses—

·       Total product development expenses for 2005 increased $242,000, or 8.0%, from 2004. This increase was due to an increase in payroll expenses related to annual salary increases of $82,000 and an increase in India payroll expenses of $70,000. In addition, facility costs increased $102,000 as a result of an increase in headcount. These increases were partially offset by a $12,000 decrease in EbixLife payroll expense related to a decrease in headcount.

·       Total product development expenses for 2004 increased $1,464,000, or 94.3%, from 2003. This increase was due to an increase in payroll expenses related to EbixLife of $1,029,000, annual salary increases of $174,000 and an increase in India payroll expenses of $57,000. In addition, facility costs increased $210,000 as a result of an increase in headcount. These increases were partially offset by a $6,000 decrease in travel and entertainment expenses.

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Sales and marketing expenses—

·       Total sales and marketing expenses for 2005 increased $471,000, or 29.4% from 2004. This increase was due to an increase in payroll expenses related to EbixLife of $106,000, an increase in travel and entertainment of $102,000, an increase in international sales and marketing expenses of $81,000, an increase in facility costs of $70,000, an increase in non-EbixLife payroll expenses of $63,000, an increase in office supply expenses of $26,000, an increase in telephone expenses $12,000 and an increase in trade show expenses of $42,000. These increases were partially offset by a decrease in consulting expenses of $24,000 and other marketing expenses of $7,000.

·       Total sales and marketing expenses for 2004 approximated the total sales and marketing expenses from 2003. The sales and marketing focus has remained constant.

General and administrative expenses—

·       Total general and administrative expenses for 2005 increased $450,000, or 7.0%, from 2004. This increase was due to an increased in health insurance and other  benefits of $290,000, an increase in operating expenses related to international locations of $220,000 and Heart of $246,000, an increase in investor relation expenses and director fees of $143,000, an increase in non-EbixLife payroll of $123,000, an increase in consulting expenses of $85,000, an increase in rent expenses of $27,000, an increase in telephone expenses of $26,000, an increase in office expenses of $20,000, an increase in insurance expenses of $20,000 and an increase in management fees of $18,000 partially offset by an increase in the amount of facility costs allocated to other departments of $283,000, a decrease in audit and legal expenses of $248,000, a decrease in bad debt provision of $99,000, a decrease of $70,000 related to EbixLife payroll, a decrease in travel and entertainment of $38,000 and a decrease in other expenses of $30,000.

·       Total general and administrative expenses for 2004 increased $1,402,000, or 28.5%, from 2003. This increase was due to operating expenses related to Heart of $376,000 an increase in international expenses of $78,000, an increase in payroll expenses related to the acquisition of EbixLife of $296,000, an increase in non-EbixLife payroll of $109,000 an increase in bad debt expense $94,000, an increase in professional fees of $258,000 and an general increase in business operations due to the acquisition of EbixLife and Heart of approximately $191,000.

Amortization and depreciation expenses—

·       Total amortization and depreciation expenses for 2005 increased $136,000, or 11.5% from 2004. This increase was due to the addition of EbixLife intangible assets in February 2004 and Heart intangible assets in July 2004. Total EbixLife intangible amortization for 2005 was $575,000 compared to $491,000 for 2004. This increase reflects a partial year of amortization in 2004, as EbixLife was acquired February 23, 2004, compared to a full year of amortization in 2005. Total Heart intangible amortization for 2005 was $299,000 compared to $154,000 for 2004. This increase reflects a partial year of amortization in 2004, as EbixLife was acquired in July 2004, compared to a full year of amortization in 2005. In addition, depreciation expense increased $16,000 as a result of an increase in assets. These increases were partially offset by a decrease in the amortization of capitalized software of $109,000 for the year as capitalized software was fully amortized.

·       Total amortization and depreciation expenses for 2004 increased $743,000, or 168% from 2003. This increase was due to a charge for amortization of intangibles related to the Lifeline acquisition of $491,000 and Heart acquisition of $154,000 and an increase in depreciation expense of $98,000 primarily related to an increase in assets acquired as a result of the EbixLife acquisition. Future expenses related to the amortization of Heart and EbixLife intangible assets are expected to be $882,000 for the years 2005 through 2007, $795,000 for 2008, $424,000 for 2009 and $367,000 for

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2010. See Notes 13 and 14 to the consolidated financial statements, included elsewhere in this Form 10-K for detail relating to the allocation of value of intangible assets.

Income Taxes—

·       Income tax expense for 2005 increased $151,000, or 105.6% from 2004. This increase was due to an increase in income before taxes and a difference between the effective and statutory rates due to a different income mix among the various tax jurisdictions in which the Company does business. In addition, the Company implemented a new tax structure, which was completed during the third quarter of 2005.

·       Income tax expense for 2004 increased $47,000, or 49.0% from 2003. This increase was due to an increase in income before taxes and a difference between the effective and statutory rates due to a different income mix among the various tax jurisdictions.

Liquidity and Capital Resources

The Company had cash and cash equivalents of $6,733,000 at December 31, 2005. The Company had cash and cash equivalents of $5,843,000 and $3,000,000 of restricted cash at December 31, 2004. The Company’s cash balance at December 31, 2003 was $7,915,000.

During 2005, the Company generated operating cash flow of $5,483,000, compared to operating cash flow of $2,810,000 in 2004, due primarily to $4,322,000 in net income, which included non-cash expense of  $1,321,000 of amortization and depreciation, an increase in accounts payable of $181,000 and an increase in other assets of $122,000 partially offset by an increase in accounts receivable of $255,000 and a decrease in deferred revenue of $195,000. These balance sheet fluctuations are normal consequences of timing differences between accruals and their cash settlement.

During 2004, the Company generated operating cash flow of $2,810,000, compared to operating cash flow of $3,343,000 in 2003, due primarily to $2,240,000 in net income, which included non-cash expense of  $1,185,000 of amortization and depreciation, and an increase in deferred revenue of $170,000, partially offset by an increase in accounts receivable of $841,000, an increase in other assets of $99,000 and a decrease in accounts payable and accrued expenses of $49,000. The accounts receivable increase is primarily due to EbixLife receivables, which were $955,000 at December 31, 2004. These balance sheet fluctuations are normal consequences of timing differences between accruals and their cash settlement.

During 2005, cash used in investing activities of $484,000 represented expenditures made primarily as a result of the Company’s relocation of the Sydney, Australia office. Cash used in financing activities of $4,029,000 in 2005 resulted primarily from the Company’s repurchase of a redeemable stock guarantee for $2,700,000, the payment of a long-term debt obligation of $960,000, payments on the line of credit of $3,500,000 partially offset by the release of restricted cash required for the line of credit of $3,000,000 and proceeds from stock options of $131,000.

During 2004, cash used in investing activities of $8,522,000 (an increase of approximately $7,967,000 over the prior year) represented expenditures made primarily as a result of the Company’s acquisitions of EbixLife and the assets of Heart. Cash provided by financing activities of $3,640,000 in 2004 resulted primarily from the Company’s sale of common stock during the first quarter of 2004 of $2,977,000 and borrowings of $3,500,000 on the Company’s existing line of credit during the second quarter of 2004 partially offset by the restricted cash required for the line of credit of $3,000,000.

In 2005, 16% and 7% of the Company’s total revenues were from two customers—Brit and its affiliates and AON, respectively. Neither Brit nor AON have long-term agreements with the Company that provide certainty that such revenues and related cash flows will be recurring. AON International continues to acquire licenses for more locations resulting in more reliance on the e-global system.

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In October 2002, the Company obtained from LaSalle Bank National Association a $1,000,000 revolving line of credit, secured by a perfected first security interest in substantially all of the Company’s assets. The line of credit was increased to $5,000,000 during February 2004 and expires on October 31, 2006. In November 2005, the line of credit was paid and the total borrowings on this line were zero as of December 31, 2005.

On February 23, 2004, the Company acquired LifeLink Corporation (“LifeLink”), and the operations of LifeLink have been included in the Company’s financial statements since that date. On May 2, 2005, the LifeLink name was changed to EbixLife. 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. See note 13 to the consolidated financial statements included in this Form 10-K for a discussion of the redeemable common stock.

On July 1, 2004, Ebix Australia Pty Ltd, which is a wholly-owned subsidiary of the Company, acquired certain operating assets of Heart Consulting Services Pty Ltd (“Heart”), and the operations of Heart have been included in the Company’s financial statements since that date. Under terms of the agreement, the Company acquired the operating assets of Heart in exchange for an aggregate purchase price of $7,116,000 payable as follows: $3,619,000 paid in cash at closing (subsequent to closing the former owner paid the Company $467,000 for deferred revenue and a vacation accrual settlement), $1,399,000 payable under stand-by letters of credit issued by the Company’s lender on the Company’s line of credit in three equal annual installments on each of the first, second and third anniversaries of the closing (present value computed as $1,293,000), and $2,098,000 payable in 157,728 shares of the common stock of the Company issued at the time of closing. See note 14 to the consolidated financial statements included in this Form 10-K for a discussion of the redeemable common stock.

In planning for its capital needs, the Company takes into account its sources of cash, which include operating cash flow, cash balances and funds from credit facilities, and anticipated future cash needs, which include working capital requirements for operations, capital expenditures, and expenditures for business acquisitions. Based on these considerations, the Company believes it will have sufficient cash for operations and to satisfy its contractual obligations for at least the next several years.

(1)          $1,461,000 (included in the Less Than 1 Year column) is contingent upon exercise of the holder’s put option to require the Company to purchase the holder’s redeemable common stock in connection with the Heart acquisition. See Note 14 to the consolidated financial statements included in this Form 10-K.

(2)          Includes interest of approximately $238,000 at an imputed interest rate of 4% as of the date of acquisition.

Impact of Recently Issued Accounting Standards—In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”), which revises and replaces SFAS No. 123,

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“Accounting for Stock-Based Payment” and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” FAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value based method and the recording of such expense in the Company’s consolidated statements of operations. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. The provisions of FAS 123R were to have been effective for reporting periods beginning after June 15, 2005. At the end of March 2005, the SEC staff released Staff Accounting Bulletin No. 107 (SAB 107), providing guidance for implementing FASB No. 123R. Subsequently, the Commission delayed the implementation dates for FAS 123R to the start of the Company’s fiscal year. As a result, the Company will be required to comply with the provisions of FAS 123R beginning January 1, 2006. The Company is evaluating the requirements of FAS 123R. However, because the Company currently accounts for employee stock option grants in a footnote disclosure as permitted by SFAS No. 123, the adoption of FAS 123R will have an impact on the Company’s consolidated results of operations. In December 2005 the vesting of the 1996 in the money share options was accelerated in order to eliminate future expense related to unvested options. The Company estimates that the impact will be approximately $73,000 of compensation expense for the year ended December 31, 2006, approximately $22,000 of compensation expense for the year ended December 31, 2007 and approximately $13,000 of compensation expense for the year ended December 31, 2008 based on the current information. See Note 1 for an illustration of the historical effects of expensing options.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces APB Opinion No. 20, “Accounting Changes” and  SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS 154 retained accounting guidance related to changes in estimates, changes in a reporting entity and error corrections. However, changes in accounting principles must be accounted for retrospectively by modifying the financial statements of prior periods unless it is impractible to do so. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not believe adoption of SFAS 154 will have a material impact on its financial position, results of operations or cash flows.

Quarterly Financial Information (unaudited):

The following is the unaudited quarterly financial information for 2005 and 2004:

 

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Item 7A.                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to certain market risks, including foreign currency and interest rates. The majority of the Company’s operations are based in the U.S. and, accordingly, the majority of our transactions are denominated in U.S. dollars. However, 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, the Company has 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 the Company’s business, operating results, revenues or financial condition. In 2005, the net change in the cumulative foreign currency translation adjustment account, which is a component of stockholders’ equity, was an unrealized loss of ($510,000). In 2004 and 2003, the net change in the cumulative foreign currency translation adjustment account, which is a component of stockholders’ equity, was an unrealized gain of $446,000 and $100,000, respectively. The Company 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 income taxes of approximately $376,000, $214,000 and $198,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

The Company’s exposure to interest rate risk relates to its debt obligations and to its interest income as it relates to the outstanding cash balances. As of December 31, 2005 the Company had no debt outstanding related to its line of credit and the remaining debt is fixed. While the Company had interest rate risk related to its line of credit at December 31, 2004, the exposure was mitigated by the interest income on the restricted balance of $3,000,000. As of December 31, 2003, the Company had no debt outstanding. The Company’s market risk at December 31, 2005, is the potential loss of interest income arising from adverse changes in interest rates. Interest rate risk is estimated as the potential decrease in pre-tax income resulting from a hypothetical 10% decrease in effective interest rates on the Company’s outstanding cash balance. The Company does not feel such a loss of interest income would be significant to its results of operations.

The Company does not currently use any derivative financial instruments.

ITEM 8.                FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See also the “Quarterly Financial Information” included under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Ebix, Inc.
Schaumburg, Illinois

We have audited the accompanying consolidated balance sheets of Ebix, Inc. (the “Company”) as of December 31, 2005 and 2004 and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the years then ended. We have also audited the 2005 and 2004 schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ebix, Inc. at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the two years then ended, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the 2005 and 2004 schedules present fairly, in all material respects, the information set forth therein.

/s/ BDO SEIDMAN, LLP

Chicago, Illinois
March 10, 2006

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Report of Independent Registered Public Accounting Firm

The Board of Directors
Ebix, Inc.:

We have audited the accompanying consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for the year ended December 31, 2003 of Ebix, Inc. and subsidiaries (the Company). In connection with our audit of the consolidated financial statements, we also have audited the consolidated financial statement schedule listed in Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the Company’s operations and their cash flows for the year ended December 31, 2003, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

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Ebix, Inc. and Subsidiaries

Consolidated Balance Sheets

 

See accompanying notes to consolidated financial statements.

30

Ebix, Inc. and Subsidiaries

Consolidated Statements of Income

 

See accompanying notes to consolidated financial statements.

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Ebix, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity and Comprehensive Income

 

See accompanying notes to consolidated financial statements.