| EBIX INC Item 1A RISK FACTORS You should carefully consider the risks, uncertainties and other factors described below, along with all of the other information included in this annual report on Form 10-K, because they could materially and adversely affect our business, financial condition, operating results and prospects and/or the market price of our common stock |
| This risk factors section is written in response to the Securities and Exchange Commission’s “plain English” guidelines |
| Risks Related To Our Business and Our Industry You may have difficulty evaluating our business because of our limited history of Internet, call center and other business process outsourcing |
| Although our predecessor began operations in 1976, we did not begin any Internet operations until September 1999 and did not begin generating revenues from these operations until the fourth quarter of 2000 |
| We did not begin any call center or other business process outsourcing operations or begin generating revenues from these operations until the first quarter of 2003 |
| Accordingly, there is a limited history of these operations on which you can evaluate our company and prospects |
| We cannot be certain that our Internet, call center and other business process outsourcing strategies will be successful, because these strategies are new |
| Our early-stage Internet, call center and other business process outsourcing operations will be particularly susceptible to the risks and uncertainties described in these risk factors and more likely to incur the expenses associated with addressing them |
| Our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in a transitional stage of development, particularly companies in new and rapidly evolving markets, such as electronic commerce, and using new and unproven business models |
| Because the support revenue that we have traditionally relied upon has been steadily declining, it is important that new sources of revenue continue to be developed |
| Our revenue from the support services we offer in connection with our legacy software products has been decreasing significantly over the course of the past few years |
| This decline can be attributed to the fact that many of our support clients are not renewing their support agreements with us, in many cases 7 ______________________________________________________________________ because they are no longer using our legacy software |
| Even if they are continuing to use our legacy software, our support clients may choose not to renew their support agreements if their legacy software products no longer require support or they use third party support |
| In addition, some of the clients who use our support services have reduced the level of support that we provide them, which in turn reduces our support revenue |
| This downward trend in our support revenue makes us particularly dependent upon our other sources of revenue |
| Two customers currently provide a significant percentage of our total revenue |
| Revenues from one customer, Brit Insurance Holdings PLC and its affiliates, which at March 16, 2006 owned approximately 34dtta0prca of our common stock and approximately 78prca of CF Epic Insurance and General Fund, which at that date owned approximately 8dtta1prca of our common stock, represented approximately 16prca (dlra3cmam762cmam000) of our total revenue in 2005 and 18prca (dlra3cmam551cmam000) of our total revenue in 2004 |
| If revenues from this customer were to discontinue, our operating results could be adversely affected |
| Revenues from another customer, AON, represented approximately 7prca (dlra1cmam594cmam000) and 9prca (dlra1cmam856cmam000) of our total revenue in 2005 and 2004, respectively |
| If revenues from this customer were to discontinue, our operating results could be adversely affected |
| Adverse insurance industry economics could adversely affect our revenues |
| We are dependent on the insurance industry, which may be adversely affected by current economic and world political conditions |
| Our operating results may fluctuate dramatically |
| Our quarterly operating results may fluctuate significantly in the future due to a variety of factors that could affect our revenues or our expenses in any particular quarter |
| You should not rely on our results of operations during any particular quarter as an indication of our results for a full year or any other quarter |
| Factors that may affect our quarterly results may include the loss of a significant insurance agent, carrier or broker relationship or the merger of any of our participating insurance carriers with one another |
| Our operating expenses are based in part on our expectations of our future revenues and are relatively fixed in the short term |
| We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall |
| We cannot predict our future capital needs and we may not be able to secure additional financing when we need it |
| We may need to raise additional funds in the future in order to fund more aggressive brand promotion or more rapid expansion, to develop new or enhanced services, to respond to competitive pressures or to make acquisitions |
| Any required additional financing may not be available on terms favorable to us, or at all |
| If adequate funds are not available on acceptable terms, we may be unable to meet our business or strategic objectives or compete effectively |
| If additional funds are raised by our issuing equity securities, stockholders may experience dilution of their ownership interests, and the newly issued securities may have rights superior to those of our common stock |
| If additional funds are raised by our issuing debt, we may be subject to limitations on our activities |
| Any acquisitions that we undertake could be difficult to integrate, disrupt our business, dilute stockholder value and harm our operating results |
| In the event we complete one or more acquisitions, we may be subject to a variety of risks, including risks associated with an ability to integrate acquired assets or operations into our existing operations, higher costs or unexpected difficulties or problems with acquired assets or entities, outdated or 8 ______________________________________________________________________ incompatible technologies, labor difficulties or an inability to realize anticipated synergies and efficiencies, whether within anticipated timeframes or at all, one or more of which risks, if realized, could have an adverse impact on our operations |
| We may not be able to continue to develop new products to effectively adjust for rapid technological changes |
| To be successful, we must adapt to rapidly changing technological and market needs, by continually enhancing our website and introducing new products and services to address our users’ changing demands |
| The marketplaces in which we operate are characterized by: · rapidly changing technology; · evolving industry standards; · frequent new product and service introductions; · shifting distribution channels; and · changing customer demands |
| Our future success will depend on our ability to adapt to this rapidly evolving marketplace |
| We could incur substantial costs if we need to modify our services or infrastructure in order to adapt to changes affecting our market, and we may be unable to adapt to these changes |
| The markets for our products are highly competitive and are likely to become more competitive, and our competitors may be able to respond more quickly to new or emerging technology and changes in customer requirements |
| We operate in highly competitive markets |
| In particular, the online insurance distribution market, like the broader electronic commerce market, is rapidly evolving and highly competitive |
| Our software business also experiences some competition from certain large hardware suppliers that sell systems and systems’ components to independent agencies and from small, independent or freelance developers and suppliers of software, who sometimes work in concert with hardware vendors to supply systems to independent agencies |
| Our Internet business may also face indirect competition from insurance carriers that have subsidiaries which perform in-house agency and brokerage functions |
| Some of our current competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do |
| In addition, we believe we will face increasing competition as the online financial services industry develops and evolves |
| Our current and future competitors may be able to: · undertake more extensive marketing campaigns for their brands and services; · devote more resources to website and systems development; · adopt more aggressive pricing policies; and · make more attractive offers to potential employees, online companies and third-party service providers |
| If we are unable to protect our intellectual property, our reputation and competitiveness in the marketplace may be materially damaged |
| We regard our intellectual property in general and our software in particular as critical to our success |
| It may be possible for third parties to copy aspects of our products or, without authorization, to obtain and 9 ______________________________________________________________________ use information that we regard as trade secrets |
| Existing copyright law affords only limited practical protection, and our software is unpatented |
| If we infringe on the proprietary rights of others, we may be at a competitive disadvantage, and any related litigation could be time consuming and costly |
| Third parties may claim that we have violated their intellectual property rights |
| Any of these claims, with or without merit, could subject us to costly litigation and divert the attention of key personnel |
| To the extent that we violate a patent or other intellectual property right of a third party, we may be prevented from operating our business as planned, and we may be required to pay damages, to obtain a license, if available, to use the right or to use a non-infringing method, if possible, to accomplish our objectives |
| We depend on the continued services of our senior management and our ability to attract and retain other key personnel |
| Our future success is substantially dependent on the continued services and continuing contributions of our senior management and other key personnel, particularly Robin Raina, our President and Chief Executive Officer |
| The loss of the services of any of our executive officers or other key employees could harm our business |
| We have no long-term employment agreements with any of our key personnel, nor do we maintain key man life insurance policies on any of our key employees |
| Our future success depends on our continuing to attract, retain and motivate highly skilled employees |
| Competition for personnel in our industry is intense |
| We may be unable to retain our key employees or attract, assimilate or retain other highly qualified employees in the future |
| Our international operations are subject to a number of risks that could affect our income and growth |
| We market our software internationally and plan to expand our Internet services to locations outside of the United States |
| In 2004, we acquired certain assets from Heart Consulting Services Pty |
| In addition, commencing in 2002, we began development activities, call center services and other operations in India |
| Our international operations may not produce enough revenue to justify our investments in establishing them and are subject to other inherent risks, including: · the impact of recessions in foreign economies on the level of consumers’ insurance shopping and purchasing behavior; · greater difficulty in collecting accounts receivable; · difficulties and costs of staffing and managing foreign operations; · reduced protection for intellectual property rights in some countries; · seasonal reductions in business activity during the summer months in Europe and other parts of the world; · burdensome regulatory requirements, other trade barriers and differing business practices; · fluctuations in exchange rates; · potentially adverse tax consequences; and · political and economic instability |
| Furthermore, our entry into additional international markets requires significant management attention and financial resources, which could lessen our ability to manage our existing business effectively |
| 10 ______________________________________________________________________ Laws and regulations that govern the insurance industry could expose us or the agents, brokers and carriers who participate in our online marketplace to legal penalties |
| We perform functions for licensed insurance agents, brokers and carriers and are, therefore, required to comply with a complex set of rules and regulations that often vary from state to state |
| These rules and regulations can be difficult to comply with and are ambiguous and open to interpretation |
| If we fail to properly interpret and/or comply with these rules and regulations, we, the insurance agents, brokers or carriers doing business with us, our officers, or agents with whom we contract could be subject to various sanctions, including censure, fines, cease-and-desist orders, loss of license or other penalties |
| This risk, as well as other laws and regulations affecting our business and changes in the regulatory climate or the enforcement or interpretation of existing law, could expose us to additional costs, including indemnification of participating insurance agents, brokers or carriers for their costs, and could require changes to our business or otherwise harm our business |
| Furthermore, because the application of online commerce to the consumer insurance market is relatively new, the impact of current or future regulations on our business is difficult to anticipate |
| To the extent that there are changes in the rules and regulations regarding the manner in which insurance is sold, our business could be adversely affected |
| Governmental regulation of the telemarketing industry may increase our costs and restrict the operation and growth of our call center business |
| The telemarketing industry and, therefore, our call center business are subject to an increasing amount of governmental regulation |
| In particular, telemarketers are now barred from contacting persons who have registered their phone numbers on the National Do Not Call Registry maintained by the Federal Trade Commission |
| We could be subject to a variety of enforcement or private actions for our failure or the failure of our clients to comply with these regulations |
| Furthermore, our costs may increase as a result of having to comply with these regulations, and these regulations may limit our call center activities or reduce the demand for our call center services |
| Risks Related to Our Conduct of Business on The Internet Any disruption of our Internet connections could affect the success of our Internet based products |
| Any system failure, including network, software or hardware failure, that causes an interruption in our network or a decrease in responsiveness of our website could result in reduced user traffic and reduced revenue |
| Continued growth in Internet usage could cause a decrease in the quality of Internet connection service |
| Websites have experienced service interruptions as a result of outages and other delays occurring throughout the Internet network infrastructure |
| In addition, there have been several incidents in which individuals have intentionally caused service disruptions of major e-commerce websites |
| If these outages, delays or service disruptions frequently occur in the future, usage of our website could grow more slowly than anticipated or decline, and we may lose revenues and customers |
| If the computer hardware operations that host our website were to experience a system failure, the performance of our website would be harmed |
| These systems are also vulnerable to damage from fire, floods, earthquakes, acts of terrorism, power loss, telecommunications failures, break-ins and similar events |
| Our property and business interruption insurance coverage may not be adequate to compensate us for all losses that may occur |
| In addition, our users depend on Internet service providers, online service providers and other website operators for access to our website |
| Each of these providers has experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems |
| 11 ______________________________________________________________________ Concerns regarding security of transactions or the transmission of confidential information over the Internet or security problems we experience may prevent us from expanding our business or subject us to legal exposure |
| If we do not offer sufficient security features in our online product and service offerings, our products and services may not gain market acceptance, and we could be exposed to legal liability |
| Despite the measures that we may take, our infrastructure will be potentially vulnerable to physical or electronic break-ins, computer viruses or similar problems |
| If a person circumvents our security measures, that person could misappropriate proprietary information or disrupt or damage our operations |
| Security breaches that result in access to confidential information could damage our reputation and subject us to a risk of loss or liability |
| We may be required to make significant expenditures to protect against or remedy security breaches |
| Additionally, if we are unable to adequately address our customers’ concerns about security, we may have difficulty selling our goods and services |
| Uncertainty in the marketplace regarding the use of Internet users’ personal information, or proposed legislation limiting such use, could reduce demand for our services and result in increased expenses |
| Concern among consumers and legislators regarding the use of personal information gathered from Internet users could create uncertainty in the marketplace |
| This could reduce demand for our services, increase the cost of doing business as a result of litigation costs or increased service delivery costs, or otherwise harm our business |
| Legislation has been proposed that would limit the users of personally identifiable information of Internet users gathered online or require online services to establish privacy policies |
| Many state insurance codes limit the collection and use of personal information by insurance agencies, brokers and carriers or insurance service organizations |
| Moreover, the Federal Trade Commission has settled a proceeding against one online service that agreed in the settlement to limit the manner in which personal information could be collected from users and provided to third parties |
| Future government regulation of the Internet could place financial burdens on our businesses |
| Because of the Internet’s popularity and increasing use, new laws and regulations directed specifically at e-commerce may be adopted |
| These laws and regulations may cover issues such as the collection and use of data from website visitors, including the placing of small information files, or “cookies,” on a user’s hard drive to gather information, and related privacy issues; pricing; taxation; telecommunications over the Internet; content; copyrights; distribution; domain name piracy; and quality of products and services |
| The enactment of any additional laws or regulations, including international laws and regulations, could impede the growth of our revenue from our Internet operations and place additional financial burdens on our business |
| Risks Related To Our Common Stock The price of our common stock may be extremely volatile |
| In some future periods, our results of operations may be below the expectations of public market investors, which could negatively affect the market price of our common stock |
| Furthermore, the stock market in general has experienced extreme price and volume fluctuations in recent years |
| We believe that, in the future, the market price of our common stock could fluctuate widely due to variations in our performance and operating results or because of any of the following factors which are, in large part, beyond our control: · announcements of new services, products, technological innovations, acquisitions or strategic relationships by us or our competitors; 12 ______________________________________________________________________ · trends or conditions in the insurance, software, business process outsourcing and Internet markets; · changes in market valuations of our competitors; and · general political, economic and market conditions |
| In addition, the market prices of securities of technology companies, including our own, have been volatile and have experienced fluctuations that have often been unrelated or disproportionate to operating performance |
| In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company |
| If any securities litigation is initiated against us, we could incur substantial costs and our management’s attention and resources could be diverted from our business |
| The significant concentration of ownership of our common stock will limit your ability to influence corporate actions |
| The concentration of ownership of our common stock may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company, and may affect the market price of our common stock |
| At March 16, 2006, Brit Insurance Holdings PLC beneficially owned approximately 34dtta0prca of our outstanding common stock and, together with our executive officers and directors, beneficially owned approximately 54dtta4prca of our outstanding common stock |
| In addition, at March 16, 2006, CF Epic Insurance and General Fund, of which Brit owns approximately 78prca of the equity interests, beneficially owned 8dtta1prca of our outstanding common stock |
| As a result, those stockholders, if they act together, are able to control all matters requiring stockholder approval, including the election of all directors and approval of significant corporate transactions and amendments to our certificate of incorporation |
| These stockholders may use their ownership position to approve or take actions that are adverse to your interests or prevent the taking of actions that are consistent with your interests |