Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-15946
Ebix, Inc.
(Exact name of registrant as specified in its charter)
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DELAWARE
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77-0021975 |
(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.) |
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5 CONCOURSE PARKWAY, SUITE 3200 |
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ATLANTA, GEORGIA
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30328 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: 678-281-2020
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o 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.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of August 7, 2009, the number of shares of Common Stock outstanding was 10,336,236.
Ebix, Inc. and Subsidiaries
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2009
INDEX
PART I FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
Ebix, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Operating Revenue |
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$ |
22,421 |
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$ |
17,803 |
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$ |
43,089 |
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$ |
34,442 |
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Operating expenses: |
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Cost of services provided |
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4,532 |
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3,225 |
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8,833 |
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6,161 |
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Product development |
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2,753 |
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2,162 |
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5,258 |
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4,240 |
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Sales and marketing |
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1,121 |
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818 |
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2,255 |
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1,665 |
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General and administrative |
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3,925 |
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3,856 |
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7,553 |
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7,672 |
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Amortization and depreciation |
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830 |
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837 |
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1,573 |
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1,656 |
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Total operating expenses |
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13,161 |
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10,898 |
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25,472 |
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21,394 |
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Operating income |
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9,260 |
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6,905 |
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17,617 |
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13,048 |
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Interest income |
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39 |
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140 |
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91 |
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262 |
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Interest expense |
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(273 |
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(394 |
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(557 |
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(736 |
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Foreign exchange gain (loss) |
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346 |
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100 |
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752 |
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159 |
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Income before income taxes |
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9,372 |
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6,751 |
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17,903 |
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12,733 |
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Income tax (expense)/benefit |
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(416 |
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(415 |
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(612 |
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(727 |
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Net income |
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$ |
8,956 |
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$ |
6,336 |
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$ |
17,291 |
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$ |
12,006 |
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Basic earnings per common share |
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$ |
0.88 |
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$ |
0.65 |
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$ |
1.72 |
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$ |
1.21 |
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Diluted earnings per common share |
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$ |
0.73 |
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$ |
0.54 |
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$ |
1.42 |
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$ |
1.00 |
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Basic weighted average shares outstanding |
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10,186 |
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9,688 |
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10,057 |
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9,954 |
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Diluted weighted average shares outstanding |
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12,487 |
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11,977 |
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12,427 |
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12,220 |
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See accompanying notes to consolidated financial statements.
2
Ebix, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
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June 30, |
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December 31, |
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2009 |
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2008 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
11,876 |
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$ |
9,475 |
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Short-term investments |
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3,154 |
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1,536 |
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Accounts receivable, less allowance of $548 and $453, respectively |
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16,394 |
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13,562 |
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Other current assets |
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1,558 |
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951 |
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Total current assets |
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32,982 |
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25,524 |
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Property and equipment, net |
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4,668 |
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3,774 |
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Goodwill |
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102,251 |
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88,488 |
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Indefinite-lived intangibles |
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13,637 |
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11,589 |
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Other intangible assets, net |
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11,014 |
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10,235 |
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Other assets |
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636 |
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1,557 |
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Total assets |
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$ |
165,188 |
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$ |
141,167 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
3,766 |
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$ |
8,245 |
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Accrued payroll and related benefits |
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2,353 |
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2,709 |
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Short term debt |
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24,945 |
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24,945 |
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Current portion of convertible debt |
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5,306 |
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11,518 |
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Current portion of long term debt and capital lease obligations |
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212 |
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912 |
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Deferred revenue |
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7,671 |
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5,383 |
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Other current liabilities |
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212 |
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142 |
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Total current liabilities |
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44,465 |
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53,854 |
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Convertible debt |
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15,000 |
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15,000 |
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Long term debt and capital lease obligation, less current portion |
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419 |
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290 |
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Other liabilities |
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2,708 |
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941 |
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Deferred revenue |
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96 |
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330 |
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Deferred rent |
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730 |
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610 |
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Total liabilities |
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63,418 |
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71,025 |
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Commitments and Contingencies, Note 9 |
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Stockholders equity: |
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Convertible Series D Preferred stock, $.10 par value, 500,000
shares authorized, no shares issued and outstanding |
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Common stock, $.10 par value, 20,000,000 shares authorized,
10,331,872 issued and 10,318,369 outstanding at June 30, 2009 and
10,006,455 issued and 9,946,710 outstanding at December 31, 2008 |
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1,032 |
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981 |
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Additional paid-in capital |
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118,282 |
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111,641 |
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Treasury stock (13,503 and 59,745 shares repurchased as of June
30, 2009 and December 31, 2008 respectively) |
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(76 |
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(1,178 |
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Accumulated deficit |
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(12,908 |
) |
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(30,199 |
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Accumulated other comprehensive income |
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(4,560 |
) |
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(11,103 |
) |
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Total stockholders equity |
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101,770 |
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70,142 |
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Total liabilities and stockholders equity |
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$ |
165,188 |
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$ |
141,167 |
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See accompanying notes to consolidated financial statements.
3
Ebix, Inc. and Subsidiaries
Consolidated Statement of Stockholders Equity and Comprehensive Income
(unaudited)
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Accumulated |
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Common Stock |
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Other |
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Treasury |
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Additional |
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Comprehensive |
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Stock |
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Treasury |
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Paid-in |
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Deferred |
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Accumulated |
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(Loss) |
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Comprehensive |
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Shares |
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Amount |
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Shares |
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Stock |
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Capital |
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Compensation |
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Deficit |
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Income |
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Total |
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Income |
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(In thousands, except share amounts) |
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Balance, December 31, 2008 |
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10,006,455 |
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$ |
981 |
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(59,745 |
) |
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$ |
(1,178 |
) |
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$ |
111,641 |
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$ |
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$ |
(30,199 |
) |
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$ |
(11,103 |
) |
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$ |
70,142 |
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Net income |
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17,291 |
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17,291 |
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$ |
17,291 |
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Cumulative translation
adjustment |
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6,543 |
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6,543 |
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$ |
6,543 |
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Comprehensive income |
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$ |
23,834 |
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Conversion of principal and
interest on convertible
promissory notes |
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294,340 |
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30 |
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6,234 |
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6,264 |
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Repurchase of common
stock |
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(16,224 |
) |
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(2 |
) |
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(10,650 |
) |
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(205 |
) |
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(298 |
) |
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(505 |
) |
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Exercise of stock options |
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82,846 |
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8 |
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1,414 |
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1,422 |
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Vesting of restricted stock |
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21,347 |
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15 |
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(15 |
) |
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Retirement
of treasury stock |
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(56,892 |
) |
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56,892 |
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1,307 |
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(1,307 |
) |
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Deferred compensation and
amortization related to
options |
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|
613 |
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|
613 |
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|
Balance, June 30, 2009 |
|
|
10,331,872 |
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|
1,032 |
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|
(13,503 |
) |
|
$ |
(76 |
) |
|
$ |
118,282 |
|
|
$ |
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|
$ |
(12,908 |
) |
|
$ |
(4,560 |
) |
|
$ |
101,770 |
|
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|
See accompanying notes to consolidated financial statements.
4
Ebix, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Six Months Ended June 30, |
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2009 |
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|
2008 |
|
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Cash flows from operating activities: |
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Net income |
|
$ |
17,291 |
|
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$ |
12,006 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
|
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1,573 |
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1,651 |
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Stock-based compensation |
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100 |
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|
64 |
|
Restricted stock compensation |
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513 |
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|
254 |
|
Unrealized foreign exchange gain on forward contracts |
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(144 |
) |
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Provision for doubtful accounts |
|
|
90 |
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|
179 |
|
Changes in operating assets and liabilities: |
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|
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Accounts receivable |
|
|
(2,617 |
) |
|
|
(2,738 |
) |
Other assets |
|
|
(387 |
) |
|
|
44 |
|
Accounts payable and accrued expenses |
|
|
(483 |
) |
|
|
(1,282 |
) |
Accrued payroll and related benefits |
|
|
(532 |
) |
|
|
216 |
|
Deferred revenue |
|
|
1,092 |
|
|
|
(368 |
) |
Deferred taxes |
|
|
(1,125 |
) |
|
|
653 |
|
Deferred rent and other liabilities |
|
|
178 |
|
|
|
(20 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
15,549 |
|
|
|
10,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Investment in Telstra eBusiness Services, net of cash acquired |
|
|
|
|
|
|
(42,968 |
) |
Investment in Periculum, net of cash acquired |
|
|
(200 |
) |
|
|
(1,067 |
) |
Investment in ConfirmNet, net of cash acquired |
|
|
(3,094 |
) |
|
|
|
|
Investment in IDS, net of cash acquired |
|
|
(1,000 |
) |
|
|
|
|
Investment in Acclamation, net of cash acquired |
|
|
(85 |
) |
|
|
|
|
Investment in Facts, net of cash acquired |
|
|
(5,704 |
) |
|
|
|
|
(Purchase) Maturities of marketable securities, net |
|
|
(1,618 |
) |
|
|
(655 |
) |
Capital expenditures |
|
|
(1,200 |
) |
|
|
(382 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(12,901 |
) |
|
|
(45,072 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from (payments on) line of credit |
|
|
|
|
|
|
9,295 |
|
Proceeds from the issuance of common stock, net of issuance costs |
|
|
|
|
|
|
12,518 |
|
Proceeds from the exercise of the stock options |
|
|
1,422 |
|
|
|
514 |
|
Repurchase of Common Stock |
|
|
(505 |
) |
|
|
(24,000 |
) |
Payments on capital lease obligations |
|
|
(78 |
) |
|
|
(2 |
) |
Principal payments of debt obligations |
|
|
(742 |
) |
|
|
(490 |
) |
|
|
|
|
|
|
|
Net cash provided/(used) in financing activities |
|
|
97 |
|
|
|
(2,165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rates on cash |
|
|
(344 |
) |
|
|
(1,469 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
2,401 |
|
|
|
(38,047 |
) |
Cash and cash equivalents at the beginning of the period |
|
|
9,475 |
|
|
|
48,437 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period |
|
$ |
11,876 |
|
|
$ |
10,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
429 |
|
|
$ |
459 |
|
Income taxes paid |
|
$ |
2,873 |
|
|
$ |
560 |
|
Supplemental
Disclosure of noncash financing activities
During the six months ended June 30, 2009 the holder of the convertible notes, Whitebox VSC, Ltd.
(Whitebox) converted $6.3 million of principal and accrued interest into 294,340 shares of the
Companys common stock.
During the six months ended June 30, 2009, the company has entered into a twelve month currency
forward contract with an aggregate notional amount of $8 million to sell United States Dollars and buy
Indian Rupees and the Company recognized an unrealized gain of
$144 thousand on marking the contracts to
their fair market value at June 30, 2009.
See accompanying notes to consolidated financial statements.
5
Ebix, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
Note 1: Description of Business and Summary of Significant Accounting Policies
Description of BusinessEbix, Inc. and subsidiaries (Ebix or the Company)
provides a series of on -demand software products and e-commerce services for the insurance
industry ranging from carrier systems, agency systems and exchanges to custom software development
for carriers, brokers, and agents involved in the insurance and financial industries. The Company
has its headquarters in Atlanta, Georgia and also operates in five other countries including
Australia, New Zealand, Singapore, UK and India. International revenue accounted for 25.4% and
41.2% of the Companys total revenue for the six months ended June 30, 2009 and 2008 respectively.
The Companys revenues are derived from four product/service groups. The Companys revenue in
local currency terms for each of the four groups grew in the second quarter of 2009 and the
six-month period ending June 30, 2009 as compared to the same period in 2008. The strengthening of
the U.S. $ year over year, resulted in the broker division revenue (primarily coming from
international divisions) for 2009 decreasing significantly in US$ terms. Presented in the table
below is the breakout of our revenue streams for each of those product/service groups for the three
and six months ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(dollar amounts in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Carrier Systems |
|
$ |
2,701 |
|
|
$ |
2,843 |
|
|
$ |
5,527 |
|
|
$ |
5,133 |
|
Exchanges |
|
|
13,162 |
|
|
|
9,380 |
|
|
|
25,195 |
|
|
|
18,731 |
|
BPO |
|
|
3,714 |
|
|
|
1,817 |
|
|
|
7,075 |
|
|
|
3,514 |
|
Broker Systems |
|
|
2,844 |
|
|
|
3,763 |
|
|
|
5,292 |
|
|
|
7,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
22,421 |
|
|
$ |
17,803 |
|
|
$ |
43,089 |
|
|
$ |
34,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Significant Accounting Policies
Basis of PresentationThe accompanying consolidated financial statements have been prepared
in accordance with U.S. generally accepted accounting principles, and the effect of inter-company
balances and transactions has been eliminated. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the consolidated financial position of the Company and
its consolidated results of operations and cash flows. These interim financial statements should be
read in conjunction with the financial statements and accompanying notes included in the Companys
Annual Report on Form 10-K for the year ended December 31,2008.
ReclassificationBeginning in 2008 and for all subsequent periods reported, the Company has
reclassified and separately presented in the accompanying consolidated balance sheets and
statements of cash flows its investments in and cash flows associated with short-term investments
in certificates of deposit placed with its commercial bank in India. These certificates of deposit
have maturities in ranging from 12 to 120 months. The aggregate amount of these short-term
investments was $3.2 million and $1.5 million at June 30, 2009 and December 31, 2008, respectively,
and the net cash inflows (outflows) arising from these investments was ($1.6) million and ($655)
thousand for the six months ended June 30 2009 and 2008, respectively.
Short-term InvestmentsThe Companys short-term investments consist of certificates of
deposits with established commercial banking institutions with readily determinable fair values.
These certificates of deposit have maturities periods ranging from 12 to 120 months, with a
weighted average maturity period of approximately 12 months at June 30, 2009. Ebix accounts for
investments that are reasonably expected to be realized in cash, sold or consumed during the year
as short-term investments that are available-for-sale. The carrying amount of investments in
marketable securities approximates fair value at June 30, 2009 and December 31, 2008. The carrying
value of our short-term investments was $3.2 million and $1.5 million at June 30, 2009 and December
31, 2008, respectively.
Fair Value of Financial InstrumentsThe Company believes the carrying amount of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses, accrued payroll and related
benefits, and our
line of credit is a reasonable estimate of their fair value due to the short maturity of these
items and/or their fluctuating interest rates.
6
Ebix, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
Revenue Recognition and Deferred RevenueThe Company derives its revenues from professional
and support services, which includes revenue generated from software development projects and
associated fees for consulting, implementation, training, and project management provided to
customers with installed systems, subscription and transaction fees related to services delivered
over our exchanges or on an application service provider (ASP) basis, fees for hosting software,
fees for software license maintenance and registration, business process outsourcing revenue, and
the licensing of proprietary and third-party software. Sales and value-added taxes are not included
in revenues, but rather are recorded as a liability until the taxes assessed are remitted to the
respective taxing authorities.
The Company considers revenue earned and realizable when: (a) persuasive evidence of the sales
arrangement exists, provided that the arrangement fee is fixed or determinable, (b) delivery or
performance has occurred, (c) customer acceptance has been received, if contractually required, and
(d) collectability of the arrangement fee is probable. The Company uses signed contractual
agreements as persuasive evidence of a sales arrangement. Revenue is recorded net of sales tax, as
these taxes are recognized as a liability upon billing.
We apply the provisions of Statement of Position 97-2, Software Revenue Recognition (SOP
97-2), as amended by Statement of Position 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions, (SOP 98-9) to all transactions involving the
license of software where the software deliverables are considered more than inconsequential to the
other elements in the arrangement. For contracts that contain multiple deliverables, we analyze the
revenue arrangements in accordance with Emerging Issues Task Force Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables (EITF 00-21), which provides criteria governing how to
determine whether goods or services that are delivered separately in a bundled sales arrangement
should be considered as separate units of accounting for the purpose of revenue recognition.
Deliverables are accounted for separately if they meet all of the following criteria: a) the
delivered items has value to the customer on a stand-alone basis; b) there is objective and
reliable evidence of the fair value of the undelivered items; and c) if the arrangement includes a
general right of return relative to the delivered items, the delivery or performance of the
undelivered items is probable and substantially controlled by the seller. 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. In regards to
arrangements containing multiple performance elements, revenue recognition on delivered elements is
predicated upon the establishment of vendor-specific objective evidence (VSOE) of the fair value
for the undelivered elements and applying the residual method of SOP 98-9 if necessary. Fair value
is determined for each undelivered element based on the price the Company charges when the item is
sold separately.
Data exchange processing and ASP transaction services fee revenue is recognized as the
transactions occur and generally billed in arrears. Service fees for hosting arrangements are
recognized over the requisite service period.
Software development arrangements involving significant customization, modification or
production are accounted for in accordance with Statement of Position 81-1, Accounting for
Performance on Construction-Type and Certain Production-Type Contracts, (SOP 81-1) using the
percentage-of-completion method. The Company recognizes revenue using periodic reported actual
hours worked as a percentage of total expected hours required to complete the project arrangement
and applies the percentage to the total arrangement fee.
The Company begins to recognize revenue from license fees for its software products upon
delivery and the customers acceptance of the software implementation and customizations if
applicable. Revenue from third party software is derived from the licensing of third party software
products in connection with sales of the Companys software licenses and is recognized upon
delivery together with the Companys licensed software products. Training, data conversion,
installation, and consulting services fees are recognized as revenue when the services are
performed. Revenue for maintenance and support services is recognized ratably over the term of the
support agreement.
7
Ebix, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
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.
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 derived from
initial setup or registration fees are recognized ratably over the term of the agreement in
accordance with SEC Staff Accounting Bulletin (SAB) 104, Revenue Recognition.
Deferred revenue includes maintenance and support payments or billings that have been received
or recorded prior to performance and, in certain cases, cash collections; initial setup or
registration fees under hosting agreements; and amounts received under multi-element arrangements
in which the VSOE for the undelivered elements does not exist. In these instances revenue is
recognized when the VSOE for the undelivered elements is established or when all contractual
elements have been completed and delivered.
Allowance
for Doubtful Accounts ReceivableAccounts receivable is stated at invoice billed
amounts net of the estimated allowance for doubtful accounts receivable. Management specifically
analyzes accounts receivable and historical bad debts, write-offs, 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. Bad debt expense was $90 thousand
and $90 thousand for the three and six months ended June 30, 2009, respectively, and $150 thousand
and $180 thousand for the three and six months ended June 30 2008, respectively. Accounts
receivable are written off against the allowance account when the Company has exhausted all
reasonable collection efforts. No accounts were written off as uncollectible during the six months
ending June 30, 2009 and 2008 respectively.
Goodwill and Other Indefinite-Lived Intangible AssetsGoodwill represents the cost in excess
of the fair value of the net assets of acquired businesses. In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, or SFAS 142, goodwill is not amortized. We are required to
test goodwill for impairment at the reporting unit level on an annual basis or on an interim basis
if an event occurs or circumstances change that would reduce the fair value of a reporting unit
below its carrying value. We perform our annual goodwill impairment test as of September 30 each
year. In analyzing goodwill for potential impairment, we use projections of future discounted
cash flows from our reporting units to determine whether the reporting units estimated fair value
exceeds its carrying value. Our estimates of fair value for each reporting unit are corroborated by
market multiple comparables. If the fair value of a reporting unit exceeds its carrying value, then
no further testing is required. However, if a reporting units fair value were to be less than its
carrying value, we would then determine the amount of the impairment charge, if any, which would be
the amount that the carrying value of the reporting units goodwill exceeded its implied value. The
Company performed the annual impairment assessment, as required by SFAS No. 142 as of September 30,
2008 and it was determined that the recorded goodwill was not impaired. No impairment of goodwill
was indicated based on the updated analysis.
During the six months ended June 30, 2009 the Company recorded $8.7 million of additional
goodwill in connection with the previous acquisitions of Telstra, Acclamation, Periculum, and
ConfirmNet, and its most recent acquisition of Facts Services, Inc (Facts) which was effective on
May 1, 2009.
Changes in the carrying amount of goodwill for the six months ended June 30, 2009 are as
follows:
|
|
|
|
|
|
|
(In thousands) |
|
Beginning Balance at December 31,2008 |
|
$ |
88,488 |
|
Additions |
|
|
8,668 |
|
Foreign currency translation adjustments |
|
|
5,095 |
|
|
|
|
|
Ending Balance at June 30, 2009 |
|
$ |
102,251 |
|
|
|
|
|
8
Ebix, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
The Companys indefinite-lived asset is associated with the estimated fair value of the
contractual/territorial relationships existing with the property and casualty insurance carriers in
Australia. These contractual/territorial rights are perpetual in nature and, therefore, the useful
lives are considered indefinite. Indefinite-lived intangible assets are not amortized, but rather
are tested for impairment annually. In accordance with SFAS 142, we are required to test
indefinite-lived intangible assets for impairment annually or whenever events and circumstances
indicate that there may be an impairment of the asset value. Our annual impairment test date is
September 30. We perform the impairment test for our indefinite-lived intangible assets by
comparing the assets fair value to its carrying value. We estimate the fair value based on
projected discounted future cash flows. An impairment charge is recognized if the assets estimated
fair value is less than its carrying value. In connection with the acquisition of Telstra an
indefinite-lived asset in the amount of $14.7 million was recorded as of January 2, 2008.
Finite-lived Intangible AssetsPurchased intangible assets represent the estimated acquisition
date fair value of customer relationships, developed technology, and trademarks acquired through
synergistic combination of the business that we acquire in the U.S. and foreign countries in which
operate. We amortize these intangible assets on a straight-line basis over their estimated useful
lives, as follows:
|
|
|
|
|
|
|
Life |
|
Category |
|
(yrs) |
|
Customer relationships |
|
|
4-20 |
|
Developed technology |
|
|
3-7 |
|
Trademarks |
|
|
5-10 |
|
9
Ebix, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
The carrying value of intangible assets at June 30, 2009 and December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Intangible assets: |
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
13,032 |
|
|
$ |
11,373 |
|
Developed technology |
|
|
5,051 |
|
|
|
4,762 |
|
Trademarks |
|
|
687 |
|
|
|
656 |
|
Backlog |
|
|
140 |
|
|
|
140 |
|
|
|
|
|
|
|
|
Total intangibles |
|
|
18,910 |
|
|
|
16,931 |
|
Accumulated amortization |
|
|
(7,896 |
) |
|
|
(6,696 |
) |
|
|
|
|
|
|
|
Intangibles, net |
|
$ |
11,014 |
|
|
$ |
10,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangibles: |
|
|
|
|
|
|
|
|
Customer/territorial relationships |
|
$ |
13,637 |
|
|
$ |
11,589 |
|
Amortization
expense recognized in connection with acquired intangible assets was
$482 thousand and $594 thousand respectively for the three
months ended June 30, 2009 and 2008, and $951 thousand and
$1.2 million respectively for the six months ended
June 30, 2009 and 2008.
Income TaxesThe Company follows the asset and liability method of accounting for income taxes
pursuant to Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS 109).
Deferred income taxes are recorded to reflect the tax consequences on future years of differences
between the tax basis of assets and liabilities, and operating loss and tax credit carry forwards
and their financial reporting amounts in each period using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. In assessing the realizability of the 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. A
valuation allowance is recorded for the portion of the deferred tax assets that are not expected to
be realized based on the levels of historical taxable income and projections for future taxable
income over the periods in which the temporary differences will be deductible.
Effective January of 2007 the Company adopted the Financial Accounting Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes by prescribing the minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements.
Foreign Currency TranslationThe functional currency of the Companys foreign subsidiaries is
the local currency of the country in which the subsidiary operates. The assets and liabilities of
foreign subsidiaries are translated into U.S. Dollars at the rates of exchange at the balance sheet
dates. Income and expense accounts are translated at the average exchange rates in effect during
the period. Gains and losses resulting from translation adjustments are included as a component of
other comprehensive income in the accompanying consolidated financial statements. Foreign exchange
transaction gains and losses that are derived from transactions denominated in other than the
subsidiarys functional currency are included in the determination of net income.
Recent Accounting Pronouncements In December 2007, the FASB issued SFAS No. 141R, Business
Combinations (SFAS 141R). SFAS 141R replaces SFAS No. 141, Business Combinations, and improves
the relevance, representational faithfulness, and comparability of the information that a reporting
entity provides in its financial reports about a business combination and its effects. SFAS 141R is
effective for fiscal years beginning after December 15, 2008. The Company adopted SFAS 141R during
the first quarter of 2009 and applied this accounting standard to the recording of its acquisition
of Facts which was completed as of May 1, 2009.
10
Ebix, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
Fair Value Measurement (SFAS 157), SFAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB
Statement No. 157 which delayed the implementation of the provisions of FAS No. 157 with regard to
non-financial assets and liabilities that are not carried at fair value on a recurring basis
in financial statements. In April 2009, FASB issued FSP SFAS No. 157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly. FSP SFAS No. 157-4 provides guidelines for
making fair value measurements more consistent with the principles presented in SFAS No. 157, Fair
Value Measurements. This FSP relates to determining fair values when there is no active market or
where the price inputs being used represent distressed sales. It reaffirms what SFAS No. 157 states
regarding the objective of fair value measurementto reflect how much an asset would be sold for in
an orderly transaction (as opposed to a distressed or forced transaction) at the date of the
financial statements under current market conditions. Specifically, it reaffirms the need to use
judgment to ascertain if a formerly active market has become inactive and in determining fair
values when markets have become inactive. The FSP is effective for the Companys annual reporting
for the fiscal year 2009. The Company has adopted SFAS 157, FSP FAS 157-2, and FSP SFAS No.
157-4, and the adoption of these standards did not have material impact on the our consolidated
financial position and results of operations.
In April 2009, FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, which amends SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of financial instruments in interim
as well as annual financial statements. This standard is effective for periods ending after June
15, 2009. Accordingly, the Company adopted the provisions of FSP FAS 107-1 and APB 28-1 on June 30,
2009. The adoption of this guidance did not have a material impact on our consolidated financial
position, results of operations or cash flows. However, the provisions of FSP FAS 107-1 and APB
28-1 did result in additional disclosures with respect to the fair value of the Companys financial
instruments. See Note 14, Financial Instruments, for these additional disclosures.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No.
165), which provides guidance to establish general standards of accounting for, and disclosures
of, events that occur after the balance sheet date but before financial statements are issued or
are available to be issued. SFAS 165 is effective for interim or fiscal periods ending after June
15, 2009. Accordingly, the Company adopted the provisions of SFAS No. 165 on June 30, 2009. The
adoption of this guidance did not have a material impact on our consolidated financial position,
results of operations or cash flows. The provisions of SFAS No. 165 result in additional
disclosures with respect to subsequent events.
Note 2: Earnings per Share
The basic and diluted earnings per share (EPS), and the basic and diluted weighted average
shares outstanding for all periods presented on the consolidated statements of income have been
adjusted to reflect the retroactive effect of the Companys 3-for-1 stock split dated October 9,
2008 (see Note 3 for further explanation). Basic EPS is equal to net income divided by the
weighted average number of shares of common stock outstanding for the period. Diluted EPS takes
into consideration common stock equivalents which for the Company consist of stock options,
restricted stock, and convertible debt. With respect to stock options, diluted EPS is calculated as
if the Company had additional common stock outstanding from the beginning of the year or the date
of grant or issuance, net of assumed repurchased shares using the treasury stock method. With
respect to convertible debt, diluted EPS is calculated as if the debt instrument had been converted
at the beginning of the reporting period or the date of issuance, whichever is later. Diluted EPS
is equal to net income plus interest expense on convertible debt, divided by the combined sum of
the weighted average number of shares outstanding and common stock equivalents. At June 30, 2009
and 2008 there were 361,872 and 361,392, respectively, shares potentially issuable with respect to
stock options which could dilute EPS in the future but which was excluded from the diluted EPS
calculation because presently their effect is anti-dilutive.
To calculate diluted earnings per share, interest expense related to convertible debt of $135
thousand and $125 thousand for the three months ended June, 2009 and 2008, and $298 thousand and
$250 thousand for the six months ended June, 2009 and 2008, respectively was added back to net
income.
11
Ebix, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Basic Weighted Average Shares Outstanding |
|
|
10,186,485 |
|
|
|
9,688,320 |
|
|
Incremental Shares |
|
|
2,300,976 |
|
|
|
2,288,994 |
|
|
|
|
|
|
|
|
Diluted Shares Outstanding |
|
|
12,487,461 |
|
|
|
11,977,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Basic Weighted Average Shares Outstanding |
|
|
10,057,457 |
|
|
|
9,953,556 |
|
|
Incremental Shares |
|
|
2,369,769 |
|
|
|
2,266,755 |
|
|
|
|
|
|
|
|
Diluted Shares Outstanding |
|
|
12,427,226 |
|
|
|
12,220,311 |
|
|
|
|
|
|
|
|
Note 3: Stock Split
On July 29, 2008 the Board of Directors approved and declared a 3-for-1 stock split on shares
of its common stock (the Stock Split) effective October 9, 2008 (the Split Date) outstanding as
of the close of business on September 29, 2008. As a result of the Stock Split, every share of the
Companys common stock was converted into three shares of the common stock. Each stockholders
percentage ownership in the Company and proportional voting power remained unchanged after the
Stock Split. Furthermore, as a result of the Stock Split approximately 6.5 million additional
shares of common stock were issued and the Companys issued and outstanding common stock was
increased to approximately 9.8 million shares. Shares reserved for issuance under the Companys
1996 Stock Option Plan, the 1998 Director Option Plan, the 2006 Incentive Compensation Program, and
for the Companys 2.5% convertible promissory notes were similarly adjusted. Information presented
in these consolidated financial statements, the accompanying notes, and the MD&A have been adjusted
for all periods presented to reflect the retroactive effect of the stock split.
Note 4: Business Acquisitions
The Companys business acquisitions are accounted for under the purchase method of accounting
in accordance with SFAS No. 141, Business Combinations, as amended by SFAS No. 141R, Business
Combinations issued in December 2007 and which is effective for acquisitions completed after
December 15, 2008. Accordingly, the consideration paid by the Company for the businesses it
purchases is allocated to the assets and liabilities acquired based upon their estimated fair
values as of the date of the acquisition. The excess of the purchase price over the estimated fair
values of assets acquired and liabilities assumed is recorded as goodwill. Certain acquisitions
included contingent consideration in the form of earn-out provisions which are recorded as a
component of goodwill at its estimated fair value.
2009 Acquisition
Facts Services, Inc. Effective May 1, 2009, Ebix, Inc. acquired Facts, a leading provider of
fully automated software solutions for healthcare payers specializing in claims processing,
employee benefits, and managed care. Facts products are available in either an ASP or self-hosted
model. The Company paid the Facts shareholders $6.5 million for all of Facts stock. The Company
is combining Facts operations with its Pittsburgh health services division operating under the
name of EbixHealth, which included operating results of Facts starting in the second quarter of
2009. Ebix financed this acquisition with internal resources using available cash reserves. The
purchase price allocation for the Facts acquisition is not complete because the Company is in the
process of developing a valuation of the respective acquired identifiable intangible and tangible
assets. The Company has tentatively recognized $5.9 million of goodwill and $595 thousand of
intangible assets in connection with the acquisition of Facts. The recognized goodwill pertains to
the value of the expected synergies to be derived from combining the operations of Facts with Ebix,
and the value of the acquired workforce.
12
Ebix, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
2008 Acquisitions
ConfirmNet CorporationEffective November 1, 2008 Ebix acquired ConfirmNet Corporation
(ConfirmNet) a provider of insurance certificate creation and tracking services. The Company paid
ConfirmNet shareholders $7.36 million for all of ConfirmNets stock, and ConfirmNet shareholders
earned an additional $3.1 million in additional consideration which was paid during the first
quarter of 2009 and retain the right to earn up to an additional $3.0 million, which is currently
considered contingent, at the one year anniversary date of the acquisition if certain revenue
targets of the ConfirmNet division of Ebix are met. The results of operation for ConfirmNet, which
is a component of our BPO channel, are included in the Companys reported net income since the
fourth quarter of 2008. Ebix financed this acquisition using available cash balances.
Acclamation Systems, Inc.Effective August 1, 2008 Ebix acquired Acclamation Systems, Inc
(Acclamation) a developer of supplier software and e-commerce solutions to the health insurance
industry. The Company acquired all of the stock of Acclamation for a payment of $22 million in cash
and additional future payments of up to $3.0 million, which is currently considered contingent,
over a two year period subsequent to the effective date of the acquisition if certain customer
revenue targets for Ebixs Health Benefits division are achieved. The Company also incurred
approximately $85 thousand of costs primarily consisting of legal, accounting, due diligence, and
filing fees directly related to the closing of the acquisition. Ebix financed this acquisition with
a combination of $15 million of proceeds from the issuance of convertible debt and $7 million of
available cash reserves. The operating results of Acclamation, which is a component of our Exchange
channel, have been included in the Companys reported net income beginning in the third quarter of
2008.
Periculum Services GroupEffective April 28, 2008 Ebix acquired Periculum Services Group
(Periculum) a provider of certificate of insurance tracking services. The Company acquired all of
the stock of Periculum for a payment of $1.1 million and additional consideration of $200 thousand
which was paid in April 2009. Ebix financed this acquisition using available cash. The operating
results of Periculum, which is a component of our BPO channel, have been included in the Companys
reported net income beginning in the second quarter of 2008.
Telstra eBusiness ServicesEffective January 2, 2008 Ebix acquired Telstra eBusiness Services
(Telstra) an insurance exchange located in Melbourne, Australia. The Company purchased all of the
stock of Telstra for a payment of Australian $50.0 million (US $43.9 million). Telstra was a wholly
owned subsidiary of Telstra Services Solutions Holding Limited. The Company also incurred
approximately $368 thousand of expenses primarily consisting of legal, accounting, due diligence,
and filing fees directly related to the closing of the acquisition. Ebix financed this acquisition
with a combination of $1.6 million of available cash reserves, $16.5 million from the Companys
line of credit, $20.0 million of convertible debt, and $5.7 million from sales of the Companys
common stock. The operating results of Telstra have been included in the Companys reported net
income since the first quarter of 2008. The acquisition also gave rise to the elimination of
certain personnel of Telstra and as a result and in accordance with the FASBs Emerging Issues Task
Force Issue No. 95-3 Recognition of Liabilities in Connection with a Purchase Business
Combination, the Company recognized a liability of $198 thousand related to this elimination of
personnel that was undertaken as part of the final integration plan that was implemented
immediately after the closing of the acquisition. The Company completed its purchase price
allocation and the valuation of the respective acquired intangible assets with the assistance of
independent third party valuation experts. As a result, the Company recognized an indefinite-life
intangible and associated estimated fair value with respect to the contractual/territorial
relationships existing with the property and casualty insurance carriers in Australia. These
contractual/territorial rights are perpetual in nature and, therefore, the useful lives are
considered indefinite. Indefinite-lived intangible assets are not amortized, but rather are tested
for impairment annually. In summary the Company recorded an indefinite-life intangible asset with
respect to the insurance carriers in the amount of $14.9 million, definite lived intangible assets
with respect to acquired customer relationships in the amount of $2.6 million (with an estimated
useful life of 20 years), and acquired developed technology in the amount of $523 thousand (with an
estimated useful life of 3 years).
13
Ebix, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
The following table summarizes the estimated fair value of the net assets acquired and the
liabilities assumed at the acquisition dates for those business combinations completed during 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
Current assets |
|
$ |
9,146 |
|
|
$ |
7,638 |
|
Property and equipment |
|
|
817 |
|
|
|
817 |
|
Intangible assets |
|
|
7,183 |
|
|
|
5,809 |
|
Indefinite-lived intangibles |
|
|
14,862 |
|
|
|
14,748 |
|
Goodwill |
|
|
66,988 |
|
|
|
58,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
98,996 |
|
|
|
87,334 |
|
Less: liabilities assumed |
|
|
(17,438 |
) |
|
|
(12,558 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
81,558 |
|
|
$ |
74,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the separately identified intangible assets acquired as a
result of the acquisitions that occurred during 2009 and 2008 as of the acquisition date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
Intangible asset category |
|
Fair Value |
|
|
Useful Life |
|
|
|
(in thousands) |
|
|
(in years) |
|
Customer relationships |
|
$ |
6,102 |
|
|
|
14.5 |
|
Developed technology |
|
|
1,081 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
Total acquired intangible assets |
|
$ |
7,183 |
|
|
$ |
12.9 |
|
|
|
|
|
|
|
|
Note 5: Pro Forma Financial Information
The following pro forma financial information for the six months ended June 30, 2009 and 2008
presents the consolidated operations of the Company as if the Facts
acquisition described above in Note
4 had been made on January 1, 2008, after giving effect to certain adjustments for the pro forma
effects of the acquisition as of the acquisition dates. The Company made adjustments primarily for
the amortization of intangible assets and the recognition of income tax expense using local
effective tax rates. This unaudited pro forma financial information is provided for informational
purposes only and does not project the Companys results of operations for any future period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
Six Months Ended June 30, 2008 |
|
|
|
As Reported |
|
|
Pro Forma |
|
|
As Reported |
|
|
Pro Forma |
|
Revenue |
|
$ |
43,089 |
|
|
$ |
44,708 |
|
|
$ |
34,442 |
|
|
$ |
36,769 |
|
Net income |
|
$ |
17,291 |
|
|
$ |
17,443 |
|
|
$ |
12,006 |
|
|
$ |
11,923 |
|
Basic earnings per share |
|
$ |
1.72 |
|
|
$ |
1.73 |
|
|
$ |
1.21 |
|
|
$ |
1.20 |
|
Diluted earnings per share |
|
$ |
1.42 |
|
|
$ |
1.43 |
|
|
$ |
1.00 |
|
|
$ |
1.00 |
|
Note 6: Short-term Debt
The Companys short term debt consists of a $25.0 million revolving line of credit facility
with Bank of America Corporation. The line provides for a variable interest rate at Libor plus
1.3%, is secured by a first security interest in substantially all of the Companys assets, and
expires on August 31, 2009. The underlying loan and security agreement contains certain financial
covenants related to profitability, current assets, and debt coverage to which the Company is in
compliance. There have been no cited events of default.
14
Ebix, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
There were no repayments or borrowings on the line of credit during the six months ended June
30, 2009. As of June 30, 2009 the outstanding balance on the line was $24.9 million and the
facility carried an interest rate of 1.62%.
During the year ending December 31, 2008 the Company borrowed $9.3 million from the revolving
line of credit facility, and at year end 2008 the balance on the credit facility was $24.9 million.
Note 7: Long-term Debt:
Long-term debt is in connection with the acquisition of EbixLife (formerly known as LifeLink) in
February 2004 the purchase consideration of which included a $2.5 million non-interest bearing note
payable. The note was payable in annual installments of $500 thousand over five years. The Company
imputed interest on this debt at the rate of 4%. The final installment payment was made in February
2009.
Note 8: Convertible Debt
The Company accounts for its convertible debt in accordance with APB Opinion 14, Accounting
for Convertible Debt and Debt Issued with Stock Purchase Warrants.
On July 11, 2008, the Company entered into a Secured Convertible Note Purchase Agreement with
Whitebox in the original principal amount of $15.0 million, which amount is convertible into shares
of Common Stock at a Conversion Price of $28.00 per share, subject to certain adjustments as set
forth in the note. The note bears an interest rate of 2.5% per annum which is payable on an annual
basis on July 11 of each year, each date of conversion (as to the principal amount being
converted), and the maturity date. No warrants were issued with this convertible note. The note is
payable in full at its maturity date of July 11, 2010. The proceeds of this note were used by the
Company to partially finance the acquisition of Acclamation. The Note is convertible, in whole or
in part, into shares of Common Stock at the option of Whitebox, at any time and from time to time
(subject to certain conversion limitations set forth in the Note), at the Conversion Price. The
Company has the option to cause a mandatory conversion and the subsequent surrender of the Note at
a Conversion Price of $28.00 per share, if the average price of the Companys Common Stock on the
trading market exceeds $56.00 for any consecutive 30 trading days.
On December 18, 2007, the Company entered into a Secured Convertible Note Purchase Agreement with
Whitebox in the original principal amount of $20.0 million, which amount is convertible into shares
of Common Stock at a Conversion Price of $21.28 per share, subject to certain adjustments as set
forth in the note. The note bears an interest rate of 2.5% per annum, payable on an annual basis on
December 18th of each year, each date of conversion (as to the principal amount being converted)
and the maturity date. No warrants were issued with this convertible note. The proceeds of this
note were used by the Company to partially finance the acquisition of Telstra. The Note is
convertible, in whole or in part, into shares of Common Stock at the option of Whitebox, at any
time and from time to time (subject to certain conversion limitations set forth in the Note), at
the Conversion Price. The Company has the option to cause a mandatory conversion and the subsequent
surrender of the Note at a Conversion Price of $21.28 per share, if the average price of the
Companys Common Stock on the trading market exceeds $42.67 for any consecutive 30 trading days.
Pursuant to the share purchase agreements, Ebix was obligated to file with the SEC this
registration statement for the underlying shares of our common stock and use our reasonable best
efforts to cause the SEC to declare the registration statement effective. This registration
statement, number 333-150371, became effective on February 18, 2009. Through June 30, 2009 Whitebox
converted $14.9 million of principal and accrued interest into 700,237 shares of the Companys
common stock.
15
Ebix, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
Note 9: Commitments and Contingencies
Lease CommitmentsThe Company leases office space under non-cancelable operating leases with
expiration dates ranging through 2015, with various renewal options. Capital leases range from
three to five years and are primarily for computer equipment. There were multiple assets under
various individual capital leases at June 30, 2009 and 2008. Rental expense for office facilities
and certain equipment subject to operating leases for the six
months ended June 30, 2009 and 2008 was $1.1 million and $1.2 million, respectively. Sublease
income was $69 thousand and $37 thousand, respectively for the six months ended June 30, 2009 and
2008.
ContingenciesThe Company is not involved in any significant legal action or claim, that in
the opinion of management can have a material adverse effect on the Companys consolidated
financial position, results of operations or liquidity.
Self InsuranceFor most of the Companys U.S. employees the Company is currently self-insured for
its health insurance and has a stop loss policy that limits the individual liability to $100
thousand per person and the aggregate liability to 125% of the expected claims based upon the
number of participants and historical claims. As of June 30, 2009, the amount accrued on the
Companys consolidated balance sheet for the self-insured component of the Companys employee
health insurance was $103 thousand. The maximum potential estimated cumulative liability for the
annual contract period, which ends in September 2009, is $1.2 million.
Note 10: Income Taxes
Effective Tax RateOur effective tax rate reflects the tax benefits from having
significant operations outside the United States, which are taxed at rates lower than the U.S.
statutory rate of 35%. The effective income tax for the six months ended June 30, 2009 rate
was 4.81%, as compared to 5.70% for the same period in 2008. The effective tax rate for 2009 has
decreased due to the change in the mix of taxable income amongst the various domestic and foreign
countries, including certain low tax rate foreign jurisdictions, in which the Company conducts
operations. The Companys interim period income tax provisions are based on our current estimate
of the effective income tax rates applicable to the related annual twelve month period, after
considering discrete items unique to the respective interim reporting period.
In the United States the Companys effective federal income tax rate is reduced because
of the use of available net operating loss (NOL) carry-forwards used to partially offset taxable
income. At June 30, 2009, the Company has remaining available domestic net operating loss (NOL)
carry-forwards of approximately $34 million (net of
approximately $8.8 million utilized to reduce
the taxable income for the six months ending June 30, 2009), which are available to offset future
federal and certain state income taxes. A portion of these NOLs will expire during each of the
years 2009 through 2020. A full valuation allowance currently exists against the Companys
accumulated domestic net operating loss carryforwards because of uncertainty as to the expectation
of future taxable income in the United States and the pending execution of available tax planning
strategies. Changes in the valuation allowance could have a material impact on the Companys future
effective tax rate.
Currently, the Companys local taxable income in India, other than passive interest and
rental income, is subject to a tax holiday. The tax holiday is scheduled to expire in 2011. The
Companys operations in India are also subject to the 11.33% Minimum Alternative Tax (MAT). For
the three month and six periods ended June 30, 2009 the Companys MAT liability was $343 thousand
and $739 thousand respectively. The tax paid under the MAT provisions is carried forward for a
period of seven years to be used as an offset against future tax liabilities computed under the
regular corporate income tax provisions, for which the current income tax rate is 33.99%.
Accordingly, the Companys consolidated balance sheet at June 30, 2009 includes a long-term
deferred tax asset in the amount of $2.1 million.
16
Ebix, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
FIN 48 Accounting for Uncertainty in Income TaxesThe Company adopted the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007 FIN 48. As
of June 30, 2009 the Companys consolidated balance sheet includes a liability of $763 thousand for
unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows:
|
|
|
|
|
|
|
(in thousands) |
|
Balance at January 1, 2009 |
|
$ |
914 |
|
|
|
|
|
|
Additions for tax positions related to current year |
|
|
98 |
|
Additions for tax positions of prior years |
|
|
|
|
Reductions for tax position of prior years |
|
|
(249 |
) |
|
|
|
|
Balance at June 30, 2009 |
|
$ |
763 |
|
|
|
|
|
It is expected that the amount of unrecognized tax benefits may change in the next twelve
months; however, we presently do not expect the change to have a significant impact on our
consolidated statement of income or consolidated balance sheet. At this time, an estimate of the
range of the reasonably possible outcomes cannot be made.
Note 11: Financial Instruments
SFAS No. 157, Fair Value Measurements (SFAS 157), as amended by FASB Staff Position
FAS 157-2, Effective Date of FASB Statement No. 157, defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market
participants at the measurement date. SFAS 157 establishes a three-level fair value hierarchy that
prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the
use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs
used to measure fair value are as follows:
|
|
|
Level 1 |
Quoted prices in active markets for identical assets or liabilities. |
|
|
|
Level 2 |
Observable inputs other than quoted prices included in Level 1, such as
quoted prices for similar assets and liabilities in active markets; or quoted prices
for identical or similar assets and liabilities in markets that are not active. |
|
|
|
Level 3 |
Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities. This includes
certain pricing models, discounted cash flow methodologies and similar techniques that
use significant unobservable inputs. |
The
Company has classified its financial instruments, being the foreign
exchange forward contracts discussed in Note 12, which are measured at fair value on a recurring basis, into the most
appropriate level within the fair value hierarchy based on the inputs used to determine the fair
value at the measurement date in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2009 |
|
|
|
|
|
|
|
Fair Value Measurement at reporting date using |
|
|
|
|
|
|
|
Quoted price in |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
active markets for |
|
|
Significant other |
|
|
unobservable |
|
|
|
|
|
|
|
identical assets |
|
|
observable inputs |
|
|
inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency forward contract |
|
$ |
142 |
|
|
$ |
|
|
|
$ |
142 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency forward contract |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
17
Ebix, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (unaudited)
Note 12: Derivative Instruments
The Company uses derivative instruments that are not designated as hedges under SFAS No. 133,
to hedge the fluctuations in foreign exchange rates for recognized balance sheet items such as
intercompany receivables. During the three months ended June 30,
2009 the Company entered into a series of twelve month foreign
currency forward contracts maturing June 10, 2010 and totaling $8.0 million. The intended
purpose of these hedging instruments is to offset the income statement impact of recorded
foreign exchange transaction gains and losses resulting from U.S. dollar denominated invoices
issued by our Indian subsidiary whose functional currency is the Indian rupee. The changes in the
fair value of these derivatives is recorded in foreign exchange gains (losses), in the consolidated
statements of income and were $144 thousand for the three and six months ended June 30, 2009.
The following table presents the aggregate notional principal amounts of the outstanding
derivative financial instruments together with the related balance sheet exposure:
|
|
|
|
|
|
|
|
|
As at June 30, 2009 |
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
Notional principal |
|
|
exposure asset |
|
|
|
amount (Note a) |
|
|
(liability) (Note b) |
|
Foreign exchange forward contracts
denominated in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Dollars (sell) Indian
Rupee (buy) |
|
$ |
8,000 |
|
|
$ |
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
142 |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Notional amounts are key elements of derivative financial instrument agreements, but
do not represent the amount exchanged by counterparties and do not measure the Companys exposure
to credit or market risks, or derivative financial instruments agreements. |
|
(b) |
|
Balance sheet exposure is denominated in U.S. Dollars and denotes the mark-to-market
impact of the derivative financial instruments on the reporting date. |
The fair value of the derivative instruments and their location on the financial
statements of the Company is summarized in the table below:
|
|
|
|
|
|
|
Non-designated |
|
|
|
As at June 30, |
|
|
|
2009 |
|
Assets |
|
|
|
|
Other current assets |
|
$ |
142 |
|
Other assets |
|
$ |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
Other current liabilities |
|
$ |
|
|
Other liabilities |
|
$ |
|
|
Note 13: Sales of Unregistered Common Stock
Note 10 to the Companys consolidated financial statements for the years ended December 31,
2008, 2007, and 2006 included in our 2008 Annual Report on Form 10-K and incorporated herein by
reference, includes details regarding the sales of unregistered shares of the Companys common
stock occurring during those years. The shares sold in December 2007 and April 2008 were registered
in a S-1 registration statement number 333-150371 that was filed with the SEC and declared
effective on February 18, 2009. During the six months ended June 30, 2009 there were no
registered or unregistered sales of the Companys common stock.
18
Ebix, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
Note 14: Repurchase of Common Stock from Brit:
On April 16, 2008, the Company entered into a Stock Purchase Agreement with Brit Insurance Holdings
PLC (Brit) for the repurchase of 1,200,000 shares of the companys common stock held by Brit, and
consummated the transaction on April 17, 2008. The price was $20.00 per share, for an aggregate
purchase price of $24.0 million. As of August 5, 2009, Brit holds 339,789 shares of our common
stock, representing approximately 3.33% of our outstanding stock. The Company financed this share
repurchase using a combination of the proceeds of its April 2008 sales of common stock ($11.0
million), cash on hand ($8.0 million) and additional borrowings under its line of credit ($5.0
million).
Note 15: Geographic Information
The Company operates in one reportable segment whose performance and results are regularly
reviewed by the Companys chief decision maker as to performance and allocation of resources. In
accordance with SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information
the following enterprise wide information is provided. This information relates to the geographic
locations in which the Company conducts business operations.
Six Months ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
America |
|
|
Australia |
|
|
New Zealand |
|
|
India |
|
|
Singapore |
|
|
Total |
|
Revenue |
|
$ |
32,160 |
|
|
$ |
9,525 |
|
|
$ |
573 |
|
|
$ |
|
|
|
$ |
831 |
|
|
$ |
43,089 |
|
Fixed assets |
|
$ |
2,588 |
|
|
$ |
439 |
|
|
$ |
34 |
|
|
$ |
1,566 |
|
|
$ |
41 |
|
|
$ |
4,668 |
|
Goodwill |
|
$ |
66,311 |
|
|
$ |
35,940 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
102,251 |
|
Other intangible assets |
|
$ |
8,550 |
|
|
$ |
16,101 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
24,651 |
|
Headcount |
|
|
312 |
|
|
|
66 |
|
|
|
8 |
|
|
|
290 |
|
|
|
6 |
|
|
|
682 |
|
Six Months ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
America |
|
|
Australia |
|
|
New Zealand |
|
|
India |
|
|
Singapore |
|
|
Total |
|
Revenue |
|
$ |
20,247 |
|
|
$ |
12,699 |
|
|
$ |
505 |
|
|
$ |
36 |
|
|
$ |
955 |
|
|
$ |
34,442 |
|
Fixed assets |
|
$ |
2,111 |
|
|
$ |
429 |
|
|
$ |
33 |
|
|
$ |
816 |
|
|
$ |
38 |
|
|
$ |
3,427 |
|
Goodwill |
|
$ |
29,983 |
|
|
$ |
54,748 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
84,731 |
|
Other intangible assets |
|
$ |
6,362 |
|
|
$ |
3,626 |
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
9,988 |
|
Headcount |
|
|
235 |
|
|
|
67 |
|
|
|
9 |
|
|
|
162 |
|
|
|
6 |
|
|
|
479 |
|
The results of operations for Australia, New Zealand and Singapore were adversely
affected in 2009 because of the significant strengthening of the U.S. $ as compared to the foreign
currencies for the countries in which we conduct international operations. In particular during the
six-month period ending June 30, 2009 the average exchange rates for Australia, New Zealand, and
Singapore weakened by 22.9%, 26.6%, and 7.0% respectively.
Note 16: Subsequent Events thru August 6, 2009
Conversion
of a Portion of Outstanding DebtDuring July 2009 Whitebox in
connection with the $15 million Secured Convertible Promissory Note dated July 11, 2008, converted
$500 thousand of principal into 17,867 shares of the Ebix common stock.
19
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Safe Harbor for Forward-Looking Statements under the Securities Litigation Reform Act of
1995This Quarterly Report on Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be
identified by words such as may, could, should, would, believe, expect, anticipate,
estimate, intend, seek, plan, project, continue, predict or words of similar meaning
and include, but are not limited to, statements regarding the outlook for our future business and
financial performance. Forward-looking statements are based on managements current expectations
and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances
that are difficult to predict. Actual outcomes and results may differ materially due to global
political, economic, business, competitive, market, regulatory and other factors, including the
items identified in Part I, Item 1A, Risk Factors in our 2007 Form 10-K which is incorporated by
reference herein. We undertake no obligation to publicly update any forward-looking statement,
whether as a result of new information, future developments or otherwise.
The important factors that could cause actual results to differ materially from those in our
specific forward-looking statements included in this Form 10-Q include, but are not limited to, the
following:
|
|
|
Regarding Notes 6, and 8 of the Notes to Consolidated Financial Statements, and
our future liquidity needs discussed under Liquidity and Financial Condition, our
ability to generate cash from operating activities and any declines in our credit
ratings or financial condition which could restrict our access to the capital markets or
materially increase our financing costs; |
|
|
|
With respect to Note 9 of the Condensed Notes to Consolidated Financial
Statements, Commitments and Contingencies, and Contractual Obligations and Commercial
Commitments in MD&A, changes in the market value of our assets or the actual cost of
our commitments or contingencies; |
|
|
|
Regarding Note 4 of the Condensed Notes to Consolidated Financial Statements
related to acquired intangible assets and our ability to accurately estimate the fair
value of such assets; and, |
|
|
|
With respect this Management Discussion & Analysis of Financial Condition and
Results of Operation and in particular the analysis of the six month revenue trend, and
the actual level of demand for our services during the immediately foreseeable future. |
The following information should be read in conjunction with the unaudited consolidated
financial statements and the notes thereto included in Part 1 Item 1 of this Quarterly Report, and
the audited consolidated financial statements and notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations contained in the Companys Annual Report
on Form 10-K for the year ended December 31, 2008.
Company Overview
Ebix, Inc. is a leading international supplier of on-demand software and e-commerce solutions
to the insurance industry. Ebix provides a series of application software products for the
insurance industry ranging from carrier systems, agency systems and exchanges to custom software
development for all entities involved in the insurance and financial industries. Our goal is to be
the leading powerhouse of backend insurance transactions in the world. The Companys technology
vision is to focus on convergence of all insurance channels, processes and entities in a manner
such that data can seamlessly flow once a data entry has been made. Our customers include many of
the top insurance and financial sector companies in the world.
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. The insurance markets have also seen a steady increase in the desire to
reduce paper based processes and improve efficiency both at the back-end side and also at the
consumer end side. Such consolidation has involved both insurance carriers and insurance brokers
and is directly impacting the manner in which insurance products are distributed. Management
believes the world-wide insurance industry will continue to experience significant change
and the need for increased efficiencies through online exchanges and streamlined processes.
The changes in the insurance industry are likely to create new opportunities for the Company.
20
Ebix strives to work collaboratively with clients to develop innovative technology strategies
and solutions that address specific business challenges. Ebix combines the newest technologies with
its capabilities in consulting, systems design and integration, IT and business process
outsourcing, applications software, and Web and application hosting to meet the individual needs of
organizations. Over 70% of our operating revenues are of a recurring nature.
|
|
Recently, we have continued to expand both organically and through a series of acquisitions
including: |
Facts Services, Inc.Effective May 1, 2009, Ebix, Inc. acquired Facts, a leading provider of
fully automated software solutions for healthcare payers specializing in claims processing,
employee benefits, and managed care. Facts products are available in either an ASP or self-hosted
model. The Company paid the Facts shareholders $6.5 million for all of Facts outstanding stock.
The Company is combining Facts operations with its Pittsburgh health services division operating
under the name of EbixHealth, which will include operating results of Facts starting in the second
quarter of 2009. Ebix financed this acquisition with internal resources using available cash
reserves.
ConfirmNet CorporationEffective November 1, 2008 Ebix acquired ConfirmNet Corporation
(ConfirmNet) a provider of insurance certificate creation and tracking services. The Company paid
ConfirmNet shareholders $7.4 million for all of ConfirmNets stock, and ConfirmNet shareholders
earned an additional $3.1 million in additional which was paid in the first quarter of 2009 and
retain the right to earn up to an additional $3.0 million at the one year anniversary date of the
acquisition if certain revenue targets of the ConfirmNet division of Ebix are met. The results of
operation for ConfirmNet, which is a component of our BPO channel, are included in the Companys
reported net income starting in the fourth quarter of 2008. Ebix financed this acquisition using
available cash balances.
Acclamation Systems, Inc.Effective August 1, 2008 Ebix acquired Acclamation Systems, Inc
(Acclamation) a developer of supplier software and e-commerce solutions to the health insurance
industry. The Company acquired all of the stock of Acclamation for a payment of $22 million in cash
and additional future payments of up to $3 million over a two year period subsequent to the
effective date of the acquisition if certain customer revenue targets for Ebixs Health Benefits
division are achieved. Ebix financed this acquisition with a combination of the proceeds from the
issuance of convertible debt and available cash reserves. The operating results of Acclamation,
which is a component of our Exchange channel, have been included in the Companys reported net
income beginning in the third quarter of 2008.
Periculum Services GroupEffective April 28, 2008 Ebix acquired Periculum Services Group
(Periculum) a provider of certificate of insurance tracking services. The Company acquired all of
the stock of Periculum for a payment of $1.1 million and additional future payments of up to $200
thousand at the one year anniversary date of the acquisition if certain customer retention and
revenue targets for Periculum are achieved. Ebix financed this acquisition using available cash.
The purchase price allocation for this business combination is not complete because the Company is
in the process of developing a valuation of the respective identifiable intangible and tangible
assets. The operating results of Periculum, which is a component of our BPO channel, have been
included in the Companys reported net income beginning in the second quarter of 2008.
Telstra eBusiness ServicesEffective January 2, 2008 Ebix acquired Telstra eBusiness Services
(Telstra) an insurance exchange located in Melbourne, Australia. The Company purchased all of the
stock of Telstra for a payment of Australian $50.0 million (US $43.9 million). Telstra was a wholly
owned subsidiary of Telstra Services Solutions Holding Limited. Ebix financed this acquisition with
a combination of $1.6 million of available cash reserves, $16.5 million from the Companys line of
credit, $20.0 million of convertible debt, and $5.7 million from sales of the Companys common
stock. The operating results of Telstra have been included in the Companys reported net income
since the first quarter of 2008.
21
Offices and Geographic Information
The Company has its headquarters in Atlanta, Georgia, and it also has domestic operations in
Walnut Creek and Hemet, California; Coral Gables, Florida; Pittsburgh, Pennsylvania; Park City,
Utah; Herndon, Virginia; and Dallas, Texas. The Company also has offices in Australia, New Zealand,
Singapore, United Kingdom and India. In these offices, Ebix employs insurance and technology
professionals who provide products, services, support and consultancy to approximately 3,000
customers across six continents. The Companys product development unit in India has been awarded
Level 5 status of the Carnegie Mellon Software Engineering Institutes Capability Maturity Model
Integrated (CMMI) and ISO 9001:2000 certification. Information on the geographic dispersion of the
Companys revenues, assets, and employees is provided in Note 7 to the consolidated financial
statements, included Part 1 in this Form 10-Q.
Key Performance Indicators
Management focuses on a variety of key indicators to monitor operating and financial
performance. These performance indicators include measurements of revenue growth, operating income,
operating margin, income from continuing operations, diluted earnings per share, and cash provided
by operating activities. We monitor these indicators, in conjunction with our corporate governance
practices, to ensure that business vitality is maintained and effective control is exercised.
The key performance indicators and their results for the three and six months ended June 30,
2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(dollar amounts in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenue |
|
$ |
22,421 |
|
|
$ |
17,803 |
|
|
$ |
43,089 |
|
|
$ |
34,442 |
|
Revenue growth (yr over yr) |
|
|
25.9 |
% |
|
|
81.4 |
% |
|
|
25.1 |
% |
|
|
82.9 |
% |
Operating income |
|
$ |
9,260 |
|
|
$ |
6,905 |
|
|
$ |
17,617 |
|
|
$ |
13,048 |
|
Operating margin |
|
|
41.3 |
% |
|
|
38.8 |
% |
|
|
40.9 |
% |
|
|
37.9 |
% |
Net income |
|
$ |
8,956 |
|
|
$ |
6,336 |
|
|
$ |
17,291 |
|
|
$ |
12,006 |
|
Diluted earnings per share |
|
$ |
0.73 |
|
|
$ |
0.54 |
|
|
$ |
1.42 |
|
|
$ |
1.00 |
|
Cash provided by operating activities |
|
$ |
7,733 |
|
|
$ |
7,043 |
|
|
$ |
15,549 |
|
|
$ |
10,659 |
|
Results of OperationsThree Month Periods Ended June 30, 2009 and 2008
Operating Revenue
The Company generates its revenues from professional and support services, which includes
revenues from software development projects and associated fees for consulting, implementation,
training, and project management provided to customers with installed systems, subscription and
transaction fees related to services delivered over our exchanges or on an ASP basis, fees for
hosting software, fees for software license maintenance and registration, business process
outsourcing revenue, and the licensing of proprietary and third-party software.
Our revenues are principally derived from four product/service groups. Presented in the table
below is the breakout of our revenue streams for each of those product/service groups for the three
and six months ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(dollar amounts in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Carrier Systems |
|
$ |
2,701 |
|
|
$ |
2,843 |
|
|
$ |
5,527 |
|
|
$ |
5,133 |
|
Exchanges |
|
|
13,162 |
|
|
|
9,380 |
|
|
|
25,195 |
|
|
|
18,731 |
|
BPO |
|
|
3,714 |
|
|
|
1,817 |
|
|
|
7,075 |
|
|
|
3,514 |
|
Broker Systems |
|
|
2,844 |
|
|
|
3,763 |
|
|
|
5,292 |
|
|
|
7,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
22,421 |
|
|
$ |
17,803 |
|
|
$ |
43,089 |
|
|
$ |
34,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
During the three months ended June 30, 2009 our operating revenue increased $4.6 million or
25.9%, to $22.4 million in the second quarter of 2009 compared to $17.8 million during the second
quarter of 2008. Although, the significant year over year strengthening of the US dollar, resulted in the exchange and broker
division revenues (primarily coming from our international operations) for second quarter of 2009
decreasing by $1.1 million in U.S.$ terms. In particular our reported revenues from our
international operations in Australia, New Zealand, and Singapore for the second quarter of 2009
were adversely affected because of the strengthening US dollar. Specifically during the
three-month period ending June 30, 2009 the average exchange rates for Australia, New Zealand, and
Singapore weakened by 19.5%, 22.3%, and 7.3% respectively.
Cost of Services Provided
Costs of services provided, which includes costs associated with support, call center,
consulting, implementation and training services, increased $1.3 million or 40.6%, from $3.2
million in the second quarter of 2008 to $4.5 million in the second quarter of 2009. This increase
is attributable to additional personnel and facility costs primarily associated with our
acquisitions of Periculum, ConfirmNet and Acclamation. During the quarter we were able to achieve
a $219 thousand of cost reductions, as compared to the same quarter of the prior year, as a result
of off shoring certain functions to our operating facilities in India.
Product Development Expenses
The Companys product development efforts are focused on the development new technologies for
insurance carriers, brokers and agents, and the development of new exchanges for international and
domestic markets. Product development expenses increased $591 thousand or 27.3%, from $2.2 million
during the second quarter of 2008 to $2.8 million during the second quarter of 2009. This increase
is primarily due to costs associated with new product development activities in support of our
recent acquisitions within our exchange division.
Sales and Marketing Expenses
Sales and marketing expenses increased $303 thousand or 37.0%, from $818 thousand in the
second quarter of 2008 to $1.1 million in the second quarter of 2009. This increase is primarily
attributable additional personnel and commission related costs in our BPO and exchange divisions.
General and Administrative Expenses
General and administrative costs slightly increased by $69 thousand or 1.8%, from $3.86
million during the second quarter of 2008 to $3.93 million during the second quarter of 2009.
During the quarter $542 thousand of additional personnel and compensation related costs were
largely offset by $458 thousand of reduced facility and travel expenses.
Amortization and Depreciation Expenses
Amortization and depreciation expenses of $830 thousand remained steady during the second
quarter of 2009 as compared to the $837 thousand reported for the second quarter of 2008.
Increased depreciation expense of $103 thousand related to additional capital equipment
expenditures were offset by a $110 thousand reduction in amortization expense related to the to the
completion of the amortization of the customer relationships intangible asset acquired with
purchase acquisition of Heart Consulting Pty Ltd. (Heart) (acquired in July 2004), and the
reclassification of a portion of the purchase price of Telstra (acquired in January 2008)
associated with the existing contractual/territorial relationships with the property and casualty
insurance carriers in Australia to an indefinite life intangible asset which reduced amortization
expense by $42 thousand.
Income Taxes
The income tax provision for the three months ended June 30, 2009 is $416 thousand which is
flat as compared to the compared to the $415 thousand recognized in the same period in 2008. The
Companys interim period income tax provisions are based on our estimate of the effective income
tax rates applicable to related annual twelve month period, after considering discrete items
uniquely related to the current interim reporting period. The effective tax rate utilized in the
second quarter of 2009 was 4.46% which is down from the 6.1% for the same period in 2008 due to
the change in the mix of taxable income amongst the various domestic and foreign countries,
including certain low tax rate foreign jurisdictions, in which the Company conducts operations.
23
Results of OperationsSix-Month Periods Ended June 30, 2009 and 2008
Operating Revenue
During the six months ended June 30, 2009 our operating revenue increased $8.6 million or
25.1%, to $43.1 million in 2009 compared to $34.8 million during the same period in 2008.
Although, the significant year over year strengthening of the US dollar, resulted in the exchange
and broker division revenues (primarily coming from our international operations) for the six
months ended June 30, 2009 decreasing by $3.3 million in US$ terms. In particular our reported
revenues from our international operations in Australia, New Zealand, and Singapore for the first
half of 2009 were adversely affected because of the strengthening US dollar. Specifically during
the six-month period ending June 30, 2009 the average exchange rates for Australia, New Zealand,
and Singapore weakened by 22.9%, 26.6%, and 7.0% respectively.
Cost of Services Provided
Costs of services provided, increased $2.7 million or 43.4% during the six months ended June
30, 2009 to $8.8 million in 2009 as compared to $6.2 million incurred during the same period in
2008. This increase is principally attributable to additional personnel and facility costs
associated with our recent acquisitions of Periculum, ConfirmNet, and Acclamation.
Product Development Expenses
Product development expenses increased $1.0 million or 23.8% during the six months ended June
30, 2009 to $5.3 million in comparison to $4.2 million of costs incurred during the same period in
2008. This increase is primarily due to costs associated with new product development activities
in support new product offerings of the exchange division.
Sales and Marketing Expenses
Sales and marketing expenses increased $0.6 million or 35.4% during the six months ended June
30, 2009 to $2.3 million as compared to $1.7 million recognized during the same period in 2008.
This increase is primarily attributable additional personnel and commission related costs in our
BPO and exchange divisions.
General and Administrative Expenses
General and administrative costs of $7.55 million for the six months ended June 30, 2009
remained relatively steady as compared to the $7.67 million reported for the same period in 2008.
During the current year-to-date period additional personnel related and compensation costs
amounting to $760 thousand were largely offset by $859 thousand in reduced facility costs.
Amortization and Depreciation Expenses
Amortization and depreciation expenses decreased slightly by $83 thousand during the six
months ended June 30, 2009 to $1.6 million as compared to $1.7 million recorded during the same
period in 2008. We incurred increased depreciation expense of $141 thousand related to additional
capital equipment expenditures and additional amortization expenses amounting to $172 thousand
related to intangible assets associated with the April 2008 acquisition of Periculum, August 2008
acquisition of Acclamation, November 2008 acquisition of ConfirmNet, and the May 2009 acquisition
of Facts. Primarily offsetting these expense increases were a $142 thousand reduction in
amortization expense related to the to the completion of the amortization of the customer
relationships intangible
asset acquired with purchase acquisition of Heart (acquired in July 2004), and the
reclassification of a portion of the purchase price of Telstra (acquired in January 2008)
associated with the existing contractual/territorial relationships with the property and casualty
insurance carriers in Australia to an indefinite life intangible asset which reduced amortization
expense by $164 thousand.
24
Income Taxes
The income tax provision for the six months ended June 30, 2009 was $612 thousand which
represents a $115 thousand or16% decrease compared to the $727 thousand recognized during the same
period of 2008. The Companys cumulative interim period income tax provisions are based on the
estimated effective income tax rates applicable the entire annual reporting, after considering
discrete items unique to the interim periods being reported. The effective tax rate for the interim
six month period thru June 30 was 4.81% which is down from the
5.70% for the same period in 2008 due
to the change in the mix of taxable income amongst the various domestic and foreign countries,
including certain low tax rate foreign jurisdictions, in which the Company conducts operations.
Reported income tax expense for the six months ended June 30, 2009 are also lower due to a $249
reduction in the provision for uncertain tax positions.
Liquidity and Capital Resources
Our ability to generate significant cash flows from operating activities is one of our
fundamental financial strengths. Our principal sources of liquidity are the cash flows provided by
our operating activities, our revolving credit facility, and cash and cash equivalents on hand. Due
to the effect of temporary or timing differences resulting from the differing treatment of items
for tax and accounting purposes and minimum alternative tax obligations in India, future cash
outlays for income taxes are expected to substantially exceed current income tax expense but will
not adversely impact the Companys liquidity position. We intend to utilize cash flows generated by
our ongoing operating activities, in combination with renewing our revolving credit facility and
the possible issuance of additional equity securities to fund capital expenditures and organic
growth initiatives, to make acquisitions, and to retire outstanding indebtedness.
We believe that anticipated cash flows provided by our operating activities, together with
current cash and cash equivalent balances and access to our credit facilities and the capital
markets, if required and available, will be sufficient to meet our projected cash requirements for
the next twelve months, and the foreseeable future thereafter, although any projections of future
cash needs, cash flows, and the condition of the capital markets in general, as to the availability
of debt and equity financing, are subject to substantial uncertainty. In the event additional
liquidity needs arise, we may raise funds from a combination of sources, including the potential
issuance of debt or equity securities. Our revolving line of credit, which has a current balance of
$24.9 million, will mature in August 2009, and the $20 million December 18, 2007 convertible note
with Whitebox which has current balance of $5.3 million, will mature in December 2009. As to the
to our revolving line of credit, during the third and fourth quarters
of 2009 we expect to do either of the following: (a)
secure a short-term extension under reasonable terms acceptable to the Company; (b) renew the
existing facility with Bank of America Corporation at favorable market terms; (c) execute an
agreement for new revolving credit facility with a major commercial bank at acceptable market
terms; and/or (d) raise equity capital in order to fully pay the balance on the existing line of
credit. In light of the current market value of the Companys common stock we anticipate that
Whitebox will convert the remaining principal balance on the December 18, 2007 convertible note and
a significant portion of the $15 million July 11, 2008 Whitebox convertible note into shares of our
common stock over the forthcoming months.
Our cash and cash equivalents were $11.9 million and $9.5 million at June 30, 2009 and
December 31, 2008, respectively. Our cash and cash equivalents balance increased during the quarter
primarily as a result of the cash generated from our operating activities.
25
Operating Activities
For the six months ended June 30, 2009, the Company generated $15.5 million of net cash flow
from operating activities which is $4.8 million or 45.8% greater than the $10.7 million generated
during the six months ended June 30, 2008. The primary components of the cash provided by
operations for the quarter consisted of net income of
$17.3 million, net of $1.6 million of depreciation and amortization, $(3.8) million of working
capital requirements, and $0.6 million of non-cash compensation.
The $10.7 million of net cash flows generated by our operating activities during the six
months ended June 30, 2008 principally consisted of net income of $12.0 million, net of $(3.3)
million of working capital requirements, $1.7 million of depreciation and amortization, and $319
thousand of non-cash compensation.
Investing Activities
Net cash used for investing activities during the six months ended June 30, 2009 totaled $12.9
million, of which $6.5 million was used for the acquisition of Facts (effective May 1, 2009), $1.0
million was used to fulfill an earn-out payment obligation to the former shareholders of IDS (a
November 2007 business acquisition), $3.1 million was used to fulfill earn-out payment obligations
to the former shareholders of ConfirmNet (a November 2008 business acquisition), $1.2 million was
used for capital expenditures and purchases of operating equipment pertaining to the enhancement of
our technology platforms, and $1.6 million was used for investments in marketable securities
(specifically bank certificates of deposit).
Net cash used for investing activities totaled $44.4 million for the six months ended June 30,
2008, of which $43.0 million was used for the January 2008 acquisition of Telstra (net of $1.3
million of cash acquired), $382 thousand was used for operating equipment and capital expenditures
in support of our technology platforms.
Financing Activities
During the six months ended June 30, 2009 the net cash provided from financing activities was
$110 thousand. This financing inflow was comprised of $507 thousand used to complete open market
repurchases of our common stock and $805 thousand used to service existing long-term debt and
capital lease obligations. Partially offsetting these uses of cash for financing related purposes
was $1.4 million provided from the exercise of stock options.
Net cash used for financing activities for the six months ended June 30, 2008 totaled $2.2
million. This net cash outflow was primarily comprised of $9.3 million provided from our revolving
line of credit facility and $12.5 million generated from the sale of common stock, offset by $24.0
million used to repurchase of our common stock from an affiliate.
Revolving Credit Facility
The Company has a $25 million revolving line of credit facility with Bank of America
Corporation that matures on August 31, 2009. The interest rate on the credit facility is Libor plus
1.30%. At June 30, 2009 the balance on the line of credit was $24.9 million with an effective
interest rate was 1.62%, thereby leaving $100 thousand available under the facility. The underlying
loan and security agreement contains certain financial covenants related to profitability, current
assets, and debt coverage to which the Company is in compliance. There have been no cited events of
default.
Off-Balance Sheet Arrangements
The Company does not and has not engaged in off-balance sheet financing arrangements.
26
Contractual Obligations and Commercial Commitments
The following table summarizes our significant contractual purchase obligations and other
long-term commercial commitments as of June 30, 2009. The table excludes obligations or commitments
that are contingent based on events or factors uncertain at this time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period |
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 Year |
|
|
1 - 3 Years |
|
|
3 - 5 Years |
|
|
5 years |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
24,945 |
|
|
$ |
24,945 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Convertible debt |
|
|
20,306 |
|
|
|
5,306 |
|
|
|
15,000 |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
6,221 |
|
|
|
1,897 |
|
|
|
2,611 |
|
|
|
1,566 |
|
|
|
147 |
|
Capital leases |
|
|
631 |
|
|
|
212 |
|
|
|
276 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
52,103 |
|
|
$ |
32,360 |
|
|
$ |
17,887 |
|
|
$ |
1,709 |
|
|
$ |
147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
For information about new accounting pronouncements and the potential impact on our
Consolidated Financial Statements, see Note 1 of the Notes to Consolidated Financial Statements in
this Form 10-Q and Note 1 of the Notes to Consolidated Financial Statements in our 2008 Form 10-K.
Application of Critical Accounting Policies
The preparation of our Consolidated Financial Statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We
believe the most complex and sensitive judgments, because of their significance to the Consolidated
Financial Statements, result primarily from the need to make estimates and assumptions about the
effects of matters that are inherently uncertain. The Summary of Significant Accounting Policies
sections of Note 1 to this Form 10-Q and the Consolidated Financial Statements, in our 2008 Form
10-K describe the pertinent accounting estimates and policies used in preparation of the
Consolidated Financial Statements. Actual results in these areas could differ materially from our
estimates. We have considered how the acquisition of Telstra and Acclamation has affected our
critical accounting policies and concluded that it has not had a significant impact on our critical
accounting policies.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (SAB) 104
Revenue Recognition and therefore we consider revenue earned and realizable when (a) persuasive
evidence of the sales arrangement exists, provided that the arrangement fee is fixed or
determinable, (b) delivery or performance has occurred, (c) customer acceptance has been received,
if contractually required, and, (d) collectability of the arrangement fee is probable. The Company
typically uses signed contractual agreements as persuasive evidence of a sales arrangement. Sales
and value-added taxes are not included in revenues, but rather are recorded as a liability until
the taxes assessed are remitted to the respective taxing authorities.
We apply the provisions of Statement of Position 97-2, Software Revenue Recognition (SOP
97-2), as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions to all transactions involving the license of software where the
software deliverables are considered more than inconsequential to the other elements in the
arrangement. For contracts that contain multiple deliverables, we analyze the revenue arrangements
in accordance with Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21), individual contractual deliverables are accounted for separately if (a)
the delivered items has value to the customer on a stand-alone basis;(b) there is vendor-specific
objective and reliable evidence (VSOE) of the fair value of the undelivered items; and, (c) if
the arrangement includes a general right of return relative to the delivered items, the delivery or
performance of the undelivered items
is probable and substantially in our control. Software development arrangements involving
significant customization, modification or production are accounted for in accordance with
Statement of Position 81-1, Accounting for Performance on Construction-Type and Certain
Production-Type Contracts, (SOP 81-1) using the percentage-of-completion method. The Company
recognizes revenue using periodic reported actual hours worked as a percentage of total expected
hours required to complete the project arrangement and applies the percentage to the total
arrangement fee.
27
The Company begins to recognize revenue from license fees for its application software
products upon delivery and the customers acceptance of the software implementation and
customizations if applicable. Revenue from third party software is derived from the licensing of
third party software products in connection with sales of the Companys software licenses and is
recognized upon delivery together with the Companys licensed software products. Training, data
conversion, installation, and consulting services fees are recognized as revenue when the services
are performed. Revenue for maintenance and support services is recognized ratably over the term of
the support agreement. Revenues derived from initial setup or registration fees are recognized
ratably over the term of the agreement in accordance with SAB 104. ASP transaction services fee
revenue is recognized as the transactions occur and generally billed in arrears. Service fees for
hosting arrangements are recognized over the requisite service period.
Deferred revenue includes maintenance and support payments or billings that have been received
or recorded prior to performance and, in certain cases, cash collections; initial setup or
registration fees under hosting agreements; software license fees received in advance of delivery,
acceptance, and/or completion of the earnings process; and amounts received under multi-element
arrangements in which the VSOE for the undelivered elements does not exist. In these instances
revenue is recognized when the VSOE for the undelivered elements is established or when all
contractual elements have been completed and delivered.
Allowance for Doubtful Accounts Receivable
Management specifically analyzes accounts receivable and historical bad debts, write-offs,
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.
Valuation of Goodwill
The Company applies the provisions of Financial Accounting Statement No. 142 Goodwill and
Other Intangible Assets (SFAS 142) which addresses how goodwill and other acquired intangible
assets should be accounted for in financial statements. In this regard we test these intangible
assets for impairment annually or more frequently if indicators of potential impairment are
present. These events or circumstances would include a significant change in the business climate,
legal factors, operating performance indicators, competition, sale or disposition of a significant
portion of the business or other factors. The testing involves comparing the reporting unit and
asset carrying values to their respective fair values; we determine fair value by using the present
value of future estimated net cash flows.
In analyzing goodwill for potential impairment, we use projections of future discounted cash
flows to determine each reporting units fair value. These projections of cash flows are based on
our views of growth rates, anticipated future economic conditions and the appropriate discount
rates relative to risk and estimates of residual values. We believe that our estimates are
consistent with assumptions that marketplace participants would use in their estimates of fair
value. Our estimates of fair value for each reporting unit are corroborated by market multiple
comparables. The use of different estimates or assumptions within our projected discounted cash
flows (e.g., growth rates, future economic conditions, discount rates and estimates of terminal
values) when determining the fair value of our reporting units could result in different values and
may result in a goodwill impairment charge. During the twelve months ended December 31, 2008, 2007
and 2006, we had no impairment of our reporting unit goodwill balances. For additional information
concerning our recorded goodwill balances, see Note 1 of the Condensed Notes to Consolidated
Financial Statements in this Form 10-Q and Note 1 to Consolidated Financial Statements for the year
ended December 31, 2008 in our 2008 annual report on Form 10-K.
28
Income Taxes
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes
(SFAS 109). As part of the process of preparing our Consolidated Financial Statements, we estimate
our income taxes in each of the jurisdictions in which we operate. This process involves us
estimating our current tax exposure together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included in our Consolidated Balance Sheets. We then assess
the likelihood that our net deferred tax assets will be recovered from future taxable income in the
years in which those temporary differences are expected to be recovered or settled, and, to the
extent we believe that recovery is not likely, we must establish a valuation allowance. The Company
has not provided deferred U.S. taxes on its unremitted foreign earnings because it considers them
to be permanently re-invested.
We currently maintain a full valuation allowance against the deferred tax asset associated
with the Companys accumulated domestic net operating loss carryforwards because management
believes it is more likely than not that this deferred tax asset may not be realizable due to
uncertainties as to the generation of future taxable income in the United States and the lack of
available tax-planning strategies.
Effective January of 2007 the Company adopted the Financial Accounting Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes by prescribing the minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements.
Foreign Currency Translation
Our reporting currency is the U.S. dollar. The functional currency of the Companys foreign
subsidiaries is generally the local currency of the country in which the subsidiary operates. The
assets and liabilities of foreign subsidiaries are translated into U.S. Dollars at the rates of
exchange at the balance sheet dates. Income and expense accounts are translated at the average
exchange rates in effect during the period. Gains and losses resulting from translation adjustments
are included as a component of other comprehensive income in the accompanying consolidated
financial statements. Foreign exchange transaction gains and losses that are derived from
transactions denominated in other than the subsidiarys functional currency are included in the
determination of net income.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to certain market risks, including foreign currency exchange rates and
interest rates. The Companys exposure to foreign currency exchange rates risk is related to our
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. The majority of
the Companys operations are based in the U.S. and, accordingly, the majority of our transactions
are denominated in U.S. dollars, however, the Company also has significant operations in Australia,
New Zealand, Singapore, and India, and we 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 Companys business, operating results, revenues or financial
condition. Net changes in the cumulative foreign currency translation account, which is a component
comprehensive income with stockholders equity, were unrealized gains (losses) of $7.7 million and
$6.5 million respectfully during the three and six months ended June 30, 2009, and $1.7 million and
$3.6 million respectfully for the three and six months ended June 30, 2008. The Company considered
the historical trends in currency exchange rate and determined that it was reasonably possible that
adverse changes in our respective foreign currency exchange rates of 20% could be experienced in
the near term. Such an adverse change in currency exchange rates would have resulted in reduction
to pre-tax income of approximately $728 thousand and $1.4 million for the three and six months
ended June 30, 2009, respectively and approximately $1.9 million and $2.3 million for the three and
six months ended June 30, 2008, respectively.
29
During the quarter ended June 30, 2009, we entered into a series of one-year forward foreign
exchange contracts to hedge the intercompany receivables originated by our Indian subsidiary that
are denominated in United States dollars. These U.S dollars / Indian rupee hedges are intended to
partially offset the impact of movement of exchange rates on future operating costs, and to reduce
the risk that our earnings and cash flows will be adversely affected by
changes in foreign currency exchange rates. As of June 30, 2009, the notional value of these
contracts which are scheduled to mature in eleven months is $8 million. Changes in the fair value
of these derivative instruments are recognized in our consolidated income statement. We use these
instruments as economic hedges, intended to mitigate the effects of changes in foreign exchange
rates, and not for speculative purposes. These derivative instruments do not subject us to material
balance sheet risk due to exchange rate movements because gains and losses on these derivatives are
intended to offset gains and losses on the intercompany receivables being hedged. For the six
months ended June 30, 2009, we recognized an unrealized gain of $144 thousand included in Foreign
exchange gain (loss) in the consolidated statements of income. Based upon a sensitivity analysis
performed against our forward foreign exchange contracts at June 30, 2009, which measures the
hypothetical change in the fair value of the contracts resulting from 20% shift in the value of
exchange rates of the Indian rupee relative to the U.S. dollar, a 20% appreciation in the U.S.
dollar against the Indian rupee (and a corresponding increase in the value of the hedged assets)
would lead to a decrease in the fair value of our forward foreign exchange contracts by $1.3
million. Conversely, a 20% depreciation in the U.S. dollar against the Indian rupee would lead to
an increase in the fair value of our forward foreign exchange contracts by $1.9 million. We
regularly review our hedging strategies and may in the future, as a part of this review, determine
the need to change our hedging activities.
The Companys exposure to interest rate risk relates to its interest expense on outstanding
debt obligations and to its interest income on existing cash balances. As of June 30, 2009 the
Company had $45.2 million of outstanding debt obligations which consisted of a $24.9 million
balance on our revolving line of credit, and $5.3 million and $15.0 million respectively on the
remaining balances on the December 17, 2007 and July 1, 2008 convertible promissory notes with
Whitebox. The interest rate on Whitebox convertible notes is fixed at 2.5% therefore these
instruments present no risk as to exposures to financial market fluctuations. The Companys
revolving line of credit bears interest at the rate of LIBOR + 1.3%, and interest rate stood at
1.62% at June 30, 2009. The Company is exposed to market risk in regards to the line of credit as
to the potential increase to interest expense arising from adverse changes in interest rates. This
interest rate risk is estimated as the potential decrease in earnings resulting from a hypothetical
30% increase in the LIBOR rate. Such an adverse change in the LIBOR rate would have resulted in a
reduction to pre-tax income of approximately $7 thousand and $16 thousand for the six months ending
June 30, 2009 and 2008 respectively. The Companys average cash balances during the six months of
2009 was $10.8 million and its existing cash balances as of June 30, 2009 was $11.9 million. The
Company is exposed to market risk in relation to these cash balances in regards to the potential
loss of interest income arising from adverse changes in interest rates. This interest rate risk is
estimated as the potential decrease in earnings resulting from a hypothetical 20% decrease in
interest rates earned on deposited funds. Such an adverse change in these interest rates would have
resulted in a reduction to pre-tax income of approximately $18 thousand and $14 thousand for the
six months ending June 30, 2009 and 2008, respectively.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and ProceduresAs required by Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, an evaluation was carried out under the supervision and
with the participation of our management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures
as of June 30, 2009. Based upon this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of June 30, 2009, our disclosure controls and procedures were
effective to provide reasonable assurance that information required to be disclosed in the reports
that we file or submit under the Securities Exchange Act of 1934 is accurately and properly
recorded, processed, summarized and reported within the time periods specified in the applicable
rules and forms and that it is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
Internal Control over Financial ReportingThere were no changes in our internal control over
financial reporting during the six months ended June 30, 2009, that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
30
Part II OTHER INFORMATION
Item 1A. RISK FACTORS
We believe there have been no material changes from the risk factors previously disclosed in
our Annual Report on Form 10-K for the year ended December 31, 2008. You should carefully consider,
in addition to the other information set forth in this report, the risk factors discussed in our
Annual Report, which could materially affect our business, financial condition, or future results.
Such risk factors are expressly incorporated herein by reference. The risks described in our Annual
Report are not the only risks facing our Company. In addition to risks and uncertainties inherent
in forward looking statements contained in this Report on Form 10-Q, additional risks and
uncertainties not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition, and/or operating results.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
The following table contains information with respect to purchases of our common stock made by
or on behalf of Ebix during the six months ended June 30, 2009, as part of our publicly-announced
plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number (or |
|
|
|
Total Number of Shares |
|
|
|
|
|
|
Approximate Dollar Value) of |
|
|
|
Purchased as Part of |
|
|
|
|
|
|
Shares that May Yet Be |
|
|
|
Publicly-Announced |
|
|
Average Price Paid |
|
|
Purchased Under the Plans or |
|
Period |
|
Plans or Programs |
|
|
Per Share (1) |
|
|
Programs (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
70,245 |
|
|
$ |
20.43 |
|
|
$ |
3,565,000 |
|
January 1, 2009 to
March 31, 2009 |
|
|
26,874 |
|
|
$ |
18.82 |
|
|
$ |
3,059,000 |
|
April 1, 2009 to June
30, 2009 |
|
|
|
|
|
$ |
|
|
|
$ |
3,059,000 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
97,119 |
|
|
$ |
19.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average price paid per share for shares purchased as part of our publicly-announced plan
(includes brokerage commissions). |
|
(2) |
|
On March 21, 2008, the Companys board of directors ratified, and we publicly announced, an
increase in the Companys ability to repurchase shares of our outstanding common stock from an
amount of $1.0 million to $5.0 million in shares. The opening balance stated here reflects the
previous repurchase of 70,245 shares. |
Item 6. EXHIBITS
The exhibits filed herewith or incorporated by reference herein are listed on the Exhibit
Index attached hereto.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
Ebix, Inc.
|
|
Date: August 7, 2009 |
By: |
/s/ Robin Raina
|
|
|
|
Robin Raina |
|
|
|
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
Date: August 7, 2009 |
By: |
/s/ Robert F. Kerris
|
|
|
|
Robert F. Kerris |
|
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
32
EXHIBIT INDEX
|
|
|
|
|
EXHIBIT |
|
|
NO. |
|
DESCRIPTION |
|
|
|
|
|
|
2.1 |
|
|
Share Sale Agreement by and among Ebix, Inc., Ebix Australia
(vic) Pty Ltd, and Telstra Services Solutions Holdings Limited
dated December 22, 2007 (incorporated by reference to Exhibit
2.1 to the Companys Current Report on Form 8-K filed on March
18, 2008 and incorporated herein by reference). |
|
|
|
|
|
|
2.2 |
|
|
Stock Purchase Agreement by and amongst Ebix, Acclamation
Systems, Inc., and Joseph Ott, as Seller dated July 31, 2008
(incorporated by reference to Exhibit 2.1 to the Companys
Current Report on Form 8-K filed August 5, 2008 and
incorporated herein by reference). |
|
|
|
|
|
|
2.3 |
|
|
Agreement and Plan of Merger by and among Ebix, Inc.,
ConfirmNet Corporation, Ebix Software India Private Limited,
ConfirmNet Acquisition Sub, Inc and Craig A. Irving, as
shareholders Representation dated November 1, 2008
(incorporated by reference to Exhibit 2.1 to the Companys
Current Report on Form 8-K filed November 11, 2008 and
incorporated herein by reference). |
|
|
|
|
|
|
3.1 |
|
|
Certificates of Incorporation of the Company, as amended
(including Certificates of Designations) (incorporated by
reference to Exhibit 3.1 to the Companys Quarterly Report on
Form 10-Q for the period ended March 31, 2005 and incorporated
herein by reference). |
|
|
|
|
|
|
3.2 |
|
|
Bylaws of the Company (filed as Exhibit 3.2 to the Companys
Annual Report on Form 10-K for the fiscal year ended December
31, 2000 and incorporated herein by reference). |
|
|
|
|
|
|
10.29 |
|
|
Share Purchase Agreement made and entered into as of April 2,
2008 by and among Ebix, Inc and Rennes Foundation
(incorporated by reference to Exhibit 10.29 to the Companys
Current Report on Form 8-K filed on April 14, 2008 and
incorporated herein by reference). |
|
|
|
|
|
|
10.30 |
|
|
Share Purchase Agreement made and entered into as of April 7,
2008 by and among Ebix, Inc and Ashford Capital Management,
Inc. (incorporated by reference to Exhibit 10.30 to the
Companys Current Report on Form 8-K filed on April 14, 2008
and incorporated herein by reference). |
|
|
|
|
|
|
10.31 |
|
|
Stock Re-Purchase Agreement made and entered into as of April
16, 2008 by and among Ebix, Inc and Brit Insurance, Holdings,
Inc. (incorporated by reference to Exhibit 10.31 to the
Companys Current Report on Form 8-K filed April 17, 2008 and
incorporated herein by reference). |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer Pursuant to 13a-14(a)
(Section 302 of the Sarbanes-Oxley Act of 2002). |
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer Pursuant to 13a-14(a)
(Section 302 of the Sarbanes-Oxley Act of 2002). |
|
|
|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
33