Notes to Condensed Consolidated Financial Statements
Note 1: Description of Business and Summary of Significant Accounting Policies
Description of Business—
Ebix, Inc. and subsidiaries (“Ebix” or the “Company”) is an international supplier of on-demand software and e-commerce solutions to the insurance industry. Ebix provides various application software products for the insurance industry ranging from data exchanges, carrier systems, and agency systems, to custom software development for business entities across the insurance industry. The Company's products feature fully customizable and scalable on-demand software applications designed to streamline the way insurance professionals manage distribution, marketing, sales, customer service, and accounting activities. The Company has its headquarters in Atlanta, Georgia and also conducts operating activities in Australia, Canada, China, India, New Zealand, Singapore, United Kingdom and Brazil. International revenue accounted for
32.7%
and
31.5%
of the Company’s total revenue for the
six months
ended
June 30, 2014
and
2013
, respectively.
The Company’s revenues are 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, 2014
and
2013
.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(dollar amounts in thousands)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Exchanges
|
|
$
|
41,350
|
|
|
$
|
40,501
|
|
|
$
|
83,455
|
|
|
$
|
82,187
|
|
Broker Systems
|
|
4,865
|
|
|
4,766
|
|
|
9,351
|
|
|
9,488
|
|
Risk Compliance Solutions (“RCS”), fka Business Process Outsourcing (“BPO”)
|
|
3,652
|
|
|
4,013
|
|
|
7,077
|
|
|
8,177
|
|
Carrier Systems
|
|
1,609
|
|
|
1,724
|
|
|
2,997
|
|
|
3,718
|
|
Totals
|
|
$
|
51,476
|
|
|
$
|
51,004
|
|
|
$
|
102,880
|
|
|
$
|
103,570
|
|
Summary of Significant Accounting Policies
Basis of Presentation—
The accompanying unaudited condensed consolidated financial statements and these notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") with the effect of inter-company balances and transactions eliminated. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP and SEC rules have been condensed or omitted as permitted by and pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements contain adjustments (consisting only of normal recurring items) necessary to fairly present the consolidated financial position of the Company and its consolidated results of operations and cash flows. Operating results for the
six months
ended
June 30, 2014
and
2013
are not necessarily indicative of the results that may be expected for the full year. The condensed consolidated
December 31, 2013
balance sheet included in this interim period filing has been derived from the audited financial statements at that date but does not necessarily include all of the information and related notes required by GAAP for complete financial statements. These condensed interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2013
.
Reclassification—
The change in reserve for potential uncertain income tax return positions had been previously netted against the provision for deferred taxes line in the consolidated statements of cash flows, it is now shown separately. Also, beginning in 2014 the Company has applied the new provisions under FAS update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists and as more fully described in Note 6 "Income Taxes". A portion of potential uncertain income tax return positions previously reported in "Other Liabilities" on the condensed consolidated balance sheets are now netted against the "Deferred tax asset, net" line in the long term asset section of the condensed consolidated balance sheets.
Fair Value of Financial Instrument—
The Company follows the relevant GAAP guidance concerning fair value measurements which provides a consistent framework to define, measure, and disclose the fair value of assets and liabilities in financial statements. Fair value is defined 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. This guidance establishes a three-level hierarchy priority for disclosure of assets and liabilities recorded at fair value. The ordering of priority
reflects the degree to which objective data from external active markets are available to measure fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable.
|
|
•
|
Level 1 Inputs
- Unadjusted quoted prices available in active markets for identical investments to the reporting entity at the measurement date
|
|
|
•
|
Level 2 Inputs
- Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
|
|
|
•
|
Level 3 Inputs
- Unobservable inputs, which are used to the extent that observable inputs are not available, and used in situations where there is little or no market activity for the asset or liability and wherein the reporting entity makes estimates and assumptions related to the pricing of the asset or liability including assumptions regarding risk.
|
A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
As of
June 30, 2014
the Company had the following financial instruments to which it had to consider fair values and had to make fair assessments:
|
|
•
|
Common share-based put option for which the fair value was measured as a Level 2 instrument.
|
|
|
•
|
Short-term investments for which the fair values are measured as a Level 1 instrument.
|
|
|
•
|
Contingent accrued earn-out business acquisition consideration liabilities for which fair values are measured as Level 3 instruments. These contingent consideration liabilities were recorded at fair value on the acquisition date and are remeasured quarterly based on the then assessed fair value and adjusted if necessary. The increases or decreases in the fair value of contingent consideration payable can result from changes in anticipated revenue levels and changes in assumed discount periods and rates. As the fair value measure is based on significant inputs that are not observable in the market, they are categorized as Level 3.
|
Other financial instruments not measured at fair value on the Company's unaudited consolidated balance sheet at
June 30, 2014
but which require disclosure of their fair values include: cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, accrued payroll and related benefits, capital lease obligations, and debt under the revolving line of credit and term loans with Citibank. The estimated fair value of such instruments at
June 30, 2014
and
December 31, 2013
, approximates their carrying value as reported on the unaudited Condensed Consolidated Balance Sheet.
Additional information regarding the Company's assets and liabilities that are measured at fair value on a recurring basis is presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values at Reporting Date Using*
|
Descriptions
|
|
Balance, June 30, 2014
|
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
|
|
(In thousands)
|
Assets
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
Commercial bank certificates of deposits
|
|
$
|
1,427
|
|
$
|
1,427
|
|
$
|
—
|
|
$
|
—
|
|
Total assets measured at fair value
|
|
$
|
1,427
|
|
$
|
1,427
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
Common share-based put option (a)
|
|
$
|
530
|
|
$
|
—
|
|
$
|
530
|
|
$
|
—
|
|
Contingent accrued earn-out acquisition consideration (b)
|
|
17,209
|
|
—
|
|
—
|
|
17,209
|
|
Total liabilities measured at fair value
|
|
$
|
17,739
|
|
$
|
—
|
|
$
|
530
|
|
$
|
17,209
|
|
|
|
|
|
|
|
(a) In connection with the acquisition of PlanetSoft effective June 1, 2012, Ebix issued a put option to the PlanetSoft's three shareholders. The put option, which expired in July 9, 2014, is exercisable during the thirty-day period immediately following the two-year anniversary date of the closing of the business acquisition, which if exercised would enable them to sell the underlying 296,560 shares of Ebix common stock they received as part of the purchase consideration, back to the Company at a price of $16.86 per share. The inputs used in the valuation of the put option include term, stock price volatility, current stock price, exercise price, and the risk free rate of return. During the months of July and August 2014 the former shareholders of PlanetSoft elected to exercise their put option rights with respect to the remaining 209,656 shares of Ebix common stock they still held. Accordingly the shareholders put those shares back to the Company at $16.86 per share plus interest at the rate of 20% as per the PlanetSoft acquisition agreement. The total consideration to be paid by the Company in connection with the exercise of these put options will be $3.6 million.
|
(b) The income valuation approach is applied and the valuation inputs include the contingent payment arrangement terms, projected cash flows, rate of return, and probability assessments.
|
* During the three months ended June 30, 2014 there were no transfers between fair value Levels 1, 2 or 3.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values at Reporting Date Using*
|
Descriptions
|
|
Balance, December 31, 2013
|
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
|
|
(In thousands)
|
Assets
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
Commercial bank certificates of deposits
|
|
$
|
801
|
|
801
|
|
$
|
—
|
|
$
|
—
|
|
Total assets measured at fair value
|
|
$
|
801
|
|
$
|
801
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
Common share-based put option (a)
|
|
$
|
845
|
|
$
|
—
|
|
845
|
|
$
|
—
|
|
Contingent accrued earn-out acquisition consideration (b)
|
|
14,420
|
|
—
|
|
—
|
|
14,420
|
|
Total liabilities measured at fair value
|
|
$
|
15,265
|
|
$
|
—
|
|
$
|
845
|
|
$
|
14,420
|
|
|
|
|
|
|
|
(a) In connection with the acquisition of PlanetSoft effective June 1, 2012, Ebix issued a put option to the PlanetSoft's three shareholders. sition of PlanetSoft effective June 1, 2012, Ebix issued a put option to the PlanetSoft's three shareholders. The put option, which expired in July 9, 2014, is exercisable during the thirty-day period immediately following the two-year anniversary date of the closing of the business acquisition, which if exercised would enable them to sell the underlying 296,560 shares of Ebix common stock they received as part of the purchase consideration, back to the Company at a price of $16.86 per share. The inputs used in the valuation of the put option include term, stock price volatility, current stock price, exercise price, and the risk free rate of return. During the months of July and August 2014 the former shareholders of PlanetSoft elected to exercise their put option rights with respect to the remaining 209,656 shares of Ebix common stock they still held. Accordingly the shareholders put those shares back to the Company at $16.86 per share plus interest at the rate of 20% as per the PlanetSoft acquisition agreement. The total consideration to be paid by the Company in connection with the exercise of these put options will be $3.6 million.
|
(b) The income valuation approach is applied and the valuation inputs include the contingent payment arrangement terms, projected cash flows, rate of return, and probability assessments.
|
* During the twelve months ended December 31, 2013 there were no transfers between fair value Levels 1, 2 or 3.
|
For the Company's assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the following table provides a reconciliation of the beginning and ending balances for each category therein, and gains or losses recognized during the
six months
ended
June 30, 2014
and during the year ended
December 31, 2013
:
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
Contingent Liability for Accrued Earn-out Acquisition Consideration
|
|
Balance, June 30, 2014
|
Balance, December 31, 2013
|
|
|
(in thousands)
|
|
|
|
|
Beginning balance
|
|
$
|
14,420
|
|
$
|
17,495
|
|
|
|
|
|
Total remeasurement adjustments:
|
|
|
|
(Gains) or losses included in earnings **
|
|
(1,762
|
)
|
(10,253
|
)
|
Foreign currency translation adjustments ***
|
|
360
|
|
730
|
|
|
|
|
|
Acquisitions and settlements
|
|
|
|
Business acquisitions
|
|
6,441
|
|
9,425
|
|
Settlement payments
|
|
(2,250
|
)
|
(2,977
|
)
|
|
|
|
|
Ending balance
|
|
$
|
17,209
|
|
$
|
14,420
|
|
|
|
|
|
The amount of total (gains) or losses for the period included in earnings or changes to net assets, attributable to changes in unrealized (gains) or losses relating to assets or liabilities still held at period-end.
|
|
$
|
(770
|
)
|
$
|
(9,954
|
)
|
|
|
|
|
** recorded as an adjustment to reported general and administrative expenses
|
|
*** recorded as a component of other comprehensive income within stockholders' equity
|
|
Quantitative Information about Level 3 Fair Value Measurements
The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration liabilities designated as Level 3 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Fair Value at June 30, 2014
|
|
Valuation Technique
|
|
Significant Unobservable
Input
|
Contingent acquisition consideration:
(TriSystems, Qatarlyst, CurePet, and HealthCare Magic acquisitions)
|
|
$17,209
|
|
Discounted cash flow
|
|
Projected revenue and probability of achievement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Fair Value at December 31, 2013
|
|
Valuation Technique
|
|
Significant Unobservable
Input
|
Contingent acquisition consideration:
(Taimma, Planetsoft, TriSystems, and Qatarlyst acquisitions)
|
|
$14,420
|
|
Discounted cash flow
|
|
Projected revenue and probability of achievement
|
Sensitivity to Changes in Significant Unobservable Inputs
As presented in the table above, the significant unobservable inputs used in the fair value measurement of contingent consideration related to business acquisitions are projected revenue forecasts as developed by the relevant members of Company's management team and the probability of achievement of those revenue forecasts. The discount rate used in these calculations is
1.75%
. Significant increases (decreases) in these unobservable inputs in isolation would result in a significantly higher (lower) fair value measurement.
Revenue Recognition—
The Company derives its revenues primarily from subscription and transaction fees pertaining to services delivered over our exchanges or from our ASP platforms, fees for risk compliance solution services, and fees for software development projects including associated fees for consulting, implementation, training, and project management provided to customers with installed systems and applications. 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.
In accordance with Financial Accounting Standard Board (“FASB”) and SEC accounting guidance on revenue recognition, 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 or is assured, 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. We apply the provisions of the relevant generally accepted accounting principles related 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 the relevant technical accounting guidance, 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. Generally these types of arrangements include deliverables pertaining to software licenses, system set-up, and professional services associated with product customization or modification. Delivery of the various contractual elements typically occurs over periods of less than
eighteen months
. These arrangements generally do not have refund provisions or have very limited refund terms.
Software development arrangements involving significant customization, modification or production are accounted for in accordance with the appropriate technical accounting guidance issued by FASB 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.
Accounts Receivable and the Allowance for Doubtful Accounts Receivable—
Reported accounts receivable include
$32.3 million
of trade receivables stated at invoice billed amounts net of the estimated allowance for doubtful accounts receivable in the amount of
$1.45 million
, and
$9.6 million
of unbilled receivables. The unbilled receivables pertain to certain projects for which the timing of billing is tied to contractual milestones. The Company adheres to such contractually stated performance milestones and accordingly issues invoices to customers as per contract billing schedules. Approximately
$8.0 million
of deferred revenue is included in billed accounts receivable at
June 30, 2014
. The Company recognized and recorded bad debt expense in the amount of
$395 thousand
and
$748 thousand
for the
three and six
-month periods ended
June 30, 2014
and
$527 thousand
for both the
three and six
-month periods ended
June 30, 2013
, respectively. Accounts receivable are written off against the allowance account when the Company has exhausted all reasonable collection efforts.
Goodwill and Other Indefinite-Lived Intangible Assets—
Goodwill represents the cost in excess of the fair value of the net assets of acquired businesses. Indefinite-lived intangible assets represent the fair value of certain acquired contractual customer relationships for which future cash flows are expected to continue indefinitely. In accordance with the relevant FASB accounting guidance, goodwill and indefinite-lived intangible assets are not amortized but are tested 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 likely have reduced the fair value of a reporting unit below its carrying value. Potential impairment indicators include a significant change in the business climate, legal factors, operating performance indicators, competition, and the sale or disposition of a significant portion of the business. The impairment evaluation process involves an assessment of certain qualitative factors to determine whether the existence of events or circumstances would indicate that it is more likely than not that the fair value of any of our reporting units was less than its carrying amount. If after assessing the totality of events or circumstances, we were to determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would not perform the two-step quantitative impairment testing described further below.
The aforementioned two-step quantitative testing process involves comparing the reporting unit carrying values to their respective fair values; we determine fair value of our reporting units by applying the discounted cash flow method using the
present value of future estimated net cash flows. If the fair value of a reporting unit exceeds its carrying value, then no further testing is required. However, if a reporting unit's 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 unit's goodwill exceeded its implied value. Projections of cash flows are based on our views of growth rates, operating costs, 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. The use of different estimates or assumptions for 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. We perform our annual goodwill impairment evaluation and testing as of September 30th of each year. This evaluation is done during the fourth quarter each year. During the year ended
December 31, 2013
we had no impairment of our reporting unit goodwill balances.
Changes in the carrying amount of goodwill for the
six months
ended
June 30, 2014
and the year ended
December 31, 2013
are reflected in the following table. Goodwill increased during this period due to the
two
business acquisitions that were made in January and May, and as more fully described in Note 3 "Business Combinations".
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
(In thousands)
|
Beginning Balance
|
$
|
337,068
|
|
|
$
|
326,748
|
|
Additions
|
14,353
|
|
|
11,136
|
|
Foreign currency translation adjustments
|
1,412
|
|
|
(816
|
)
|
Ending Balance
|
$
|
352,833
|
|
|
$
|
337,068
|
|
Finite-lived Intangible Assets—
Purchased intangible assets represent the estimated acquisition date fair value of customer relationships, developed technology, trademarks and non-compete agreements obtained in connection with the businesses we acquire. We amortize these intangible assets on a straight-line basis over their estimated useful lives, as follows:
|
|
|
|
Category
|
|
Life (yrs)
|
Customer relationships
|
|
7-20
|
Developed technology
|
|
3–12
|
Trademarks
|
|
3–15
|
Non-compete agreements
|
|
5
|
Database
|
|
10
|
The carrying value of finite-lived and indefinite-lived intangible assets at
June 30, 2014
and
December 31, 2013
are as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
|
(In thousands)
|
Finite-lived intangible assets:
|
|
|
|
Customer relationships
|
$
|
63,654
|
|
|
$
|
62,408
|
|
Developed technology
|
15,161
|
|
|
14,630
|
|
Trademarks
|
2,796
|
|
|
2,646
|
|
Non-compete agreements
|
764
|
|
|
538
|
|
Backlog
|
140
|
|
|
140
|
|
Database
|
212
|
|
|
212
|
|
Total intangibles
|
82,727
|
|
|
80,574
|
|
Accumulated amortization
|
(33,636
|
)
|
|
(29,840
|
)
|
Finite-lived intangibles, net
|
$
|
49,091
|
|
|
$
|
50,734
|
|
|
|
|
|
Indefinite-lived intangibles:
|
|
|
|
Customer/territorial relationships
|
$
|
30,887
|
|
|
$
|
30,887
|
|
Amortization expense recognized in connection with acquired intangible assets was
$1.8 million
and
$3.7 million
for the
three and six
months ended
June 30, 2014
and
$1.8 million
and
$3.5 million
for the
three and six
months ended
June 30, 2013
, respectively.
Foreign Currency Translation—
The functional currency for the Company's foreign subsidiaries in India and Singapore is the U.S. dollar because the intellectual property research and development activities provided by its Singapore subsidiary, and the product development and information technology enabled services activities for the insurance industry provided by its India subsidiary, both in support of Ebix's operating divisions across the world, are transacted in U.S. dollars.
The functional currency of the Company's other foreign subsidiaries is the local currency of the country in which the subsidiary operates. The assets and liabilities of these 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 accumulated other comprehensive income in the accompanying consolidated balance sheets, and are included in the condensed consolidated statements of comprehensive income. Foreign exchange transaction gains and losses that are derived from transactions denominated in a currency other than the subsidiary's functional currency are included in the determination of net income.
Income Taxes—
Deferred income taxes are recorded to reflect the estimated future tax effects of differences between the financial statement and tax basis of assets, liabilities, operating losses, and tax credit carry forwards using the tax rates expected to be in effect when the temporary differences reverse. Valuation allowances, if any, are recorded to reduce deferred tax assets to the amount management considers more likely than not to be realized. Such valuation allowances are 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.
The Company also applies FASB accounting guidance on accounting for uncertainty in income taxes positions. This guidance 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. In this regard we recognize the tax benefit from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
Recent Relevant Accounting Pronouncements—
The following is a brief discussion of recently released accounting pronouncements that are pertinent to the Company's business:
In May 2014 the FASB issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers"
.
ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other
standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU.
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.
An entity should apply the amendments in this ASU using one of the following two methods:
1. Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients:
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•
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For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.
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•
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For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods.
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•
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For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue.
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2. Retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. If an entity elects this transition method it also should provide the additional disclosures in reporting periods that include the date of initial application of:
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•
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The amount by which each financial statement line item is affected in the current reporting period by the application of this ASU as compared to the guidance that was in effect before the change.
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•
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An explanation of the reasons for significant changes.
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The Company will adopt this new accounting standard effective January 1, 2017 and it has not presently determined the impact that the adoption of ASU No. 2014-09 will have on its income statement, balance sheet, or statement of cash flows. Furthermore, the Company has not yet determined the method of retrospective adoption it will use as described in paragraphs 1 and 2 immediately above.
In July 2013, the FASB issued Accounting Standards Update No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists". This accounting standard states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This accounting standards update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The accounting standards update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. This pronouncement should be applied prospectively to all unrecognized tax benefits that exist at the
effective date. Retrospective application is permitted. The Company adopted this new standard during the interim three-month reporting period ending March 31, 2014, and it materially effected how unrecognized tax benefits were accounted for and presented in the Company's balance sheet.
In February 2013 The FASB has issued Accounting Standards Update (ASU) No. 2013-02, "Comprehensive Income Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income", to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses may later reclassified out of accumulated other comprehensive income into net income. The amendments in this ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. The new amendments will require an organization to:
•
Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.
•
Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account instead of directly to income or expense.
The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual).
The amendments were effective for reporting periods beginning after December 15, 2012 for public companies Early adoption was permitted. The Company adopted this new standard in 2013 and it did not have effect on its financial statements.
Note 2: Earnings per Share
A reconciliation between basic and diluted earnings per share is as follows (in thousands, except per share data):
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2014
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|
2013
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2014
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2013
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(In thousands, except per share data)
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Net income for basic and diluted earnings per share
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$
|
13,579
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|
|
$
|
13,542
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|
|
$
|
28,996
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|
|
$
|
30,886
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Basic Weighted Average Shares Outstanding
|
38,427
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|
|
37,210
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|
|
38,373
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|
|
37,189
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Dilutive effect of stock options and restricted stock awards
|
220
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|
|
1,579
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|
|
251
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|
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1,595
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Diluted weighted average shares outstanding
|
38,647
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|
|
38,789
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38,624
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|
38,784
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Basic earnings per common share
|
$
|
0.35
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|
$
|
0.36
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|
|
$
|
0.76
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|
|
$
|
0.83
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Diluted earnings per common share
|
$
|
0.35
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|
$
|
0.35
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|
|
$
|
0.75
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$
|
0.80
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Note 3: Business Combinations
The Company executes accretive business acquisitions in combination with organic growth initiatives as part of its comprehensive business growth and expansion strategy. The Company looks to acquire businesses that are complementary to Ebix's existing products and services.
During the
six
months ended
June 30, 2014
the Company completed
two
business acquisitions. The first being CurePet, Inc. ("CurePet") effective January 27, 2014. Previously Ebix had a minority investment in CurePet, which is more fully described in Note 9. Ebix acquired the entire business of CurePet in an asset purchase agreement with total purchase consideration being
$6.35 million
which includes a possible future one time contingent earnout payment of up to
$5.0 million
based on earned revenues over the subsequent
thirty-six
month period following the effective date of the acquisition. This contingent earnout liability is currently estimated to have a fair value of
$1.6 million
. The valuation and purchase price allocation for the CurePet acquisition remains preliminary and will be finalized prior to December 31, 2014.
The other business acquisition completed during the
six
months ended
June 30, 2014
was HealthCare Magic Private Limited ("HealthCare Magic") which was acquired on May 21, 2014. HealthCare Magic is a medical advisory service with an online network of approximately
15,000
General Physicians and Surgeons spread across
50
specialties including alternative medicine. The Company acquired HealthCare Magic for aggregate cash consideration in the amount of
$6.0 million
plus a possible future one time contingent earnout payment of up to
$12.36 million
based on earned revenues over the subsequent
twenty-four
month period following the effective date of the acquisition. This contingent earnout liability is currently estimated to have a fair value of
$4.83 million
. The Company funded the HealthCare Magic acquisition from available cash reserves on hand. The valuation and purchase price allocation for the HealthCare Magic acquisition is considered preliminary and will be finalized during the third quarter.
A significant component of the purchase price consideration for many of the Company's business acquisitions is a potential subsequent cash earnout payment based on reaching certain specified future revenue targets. The Company recognizes these potential obligations as contingent liabilities and are reported accordingly on its Condensed Consolidated Balance Sheets. As discussed in more detail in Note 1, these contingent consideration liabilities are recorded at fair value on the acquisition date and are remeasured quarterly based on the then assessed fair value and adjusted if necessary. During the three months ended
June 30, 2014
and
2013
these aggregate contingent accrued earn-out business acquisition consideration liabilities, were reduced by
$0
and
$5.8 million
, respectively, and during the the
six
months ended
June 30, 2014
and
2013
these contingent liabilities were reduced by
$1.8 million
and
$6.1 million
, respectively, due to remeasurements as based on the then assessed fair value and changes in anticipated future revenue levels. These reductions to the contingent accrued earn-out liabilities resulted in corresponding reduction to general and administrative expenses as reported on the Condensed Consolidated Statements of Income. As of
June 30, 2014
, the total of these contingent liabilities was
$17.21 million
, of which
$17.07 million
is reported in long-term liabilities, and
$137 thousand
is included in current liabilities in the Company's Condensed Consolidated Balance Sheet. As of
December 31, 2013
the
total of these contingent liabilities was
$14.42 million
, of which
$10.28 million
is reported in long-term liabilities, and
$4.14 million
is included in current liabilities in the Company's Condensed Consolidated Balance Sheet.
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. Recognized goodwill pertains to the value of the expected synergies to be derived from combining the operations of the businesses we acquire including the value of the acquired workforce.
The aggregated unaudited pro forma financial information pertaining to all of the Company's acquisitions made during the
six months
ended
June 30, 2013
and
June 30, 2014
, which includes the acquisitions of Qatarlyst, CurePet, and HealthCare Magic as presented in the table below is provided for informational purposes only and does not project the Company's expected results of operations for any future period. No effect has been given in this pro forma information for future synergistic benefits that may still be realized as a result of combining these companies or costs that may yet be incurred in integrating their operations. The 2014 and 2013 pro forma financial information below assumes that all such business acquisitions were made on January 1, 2013, whereas the Company's reported financial statements for the
three and six
months ended
June 30, 2014
only include the operating results from the businesses since the effective date that they were acquired by Ebix.
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Three Months Ended June 30, 2014
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Three Months Ended June 30, 2013
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Six Months Ending June 30, 2014
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Six Months Ending June 30, 2013
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As Reported
|
Pro Forma
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As Reported
|
Pro Forma
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As Reported
|
Pro Forma
|
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As Reported
|
Pro Forma
|
|
(unaudited)
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(unaudited)
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(unaudited)
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(unaudited)
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(In thousands, except per share data)
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Revenue
|
$
|
51,476
|
|
$
|
51,610
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|
|
$
|
51,004
|
|
$
|
50,855
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|
|
$
|
102,880
|
|
$
|
103,419
|
|
|
$
|
103,570
|
|
$
|
104,300
|
|
Net Income
|
$
|
13,579
|
|
$
|
13,553
|
|
|
$
|
13,542
|
|
$
|
12,986
|
|
|
$
|
28,996
|
|
$
|
28,960
|
|
|
$
|
30,886
|
|
$
|
28,468
|
|
Basic EPS
|
$
|
0.35
|
|
$
|
0.35
|
|
|
$
|
0.36
|
|
$
|
0.35
|
|
|
$
|
0.76
|
|
$
|
0.75
|
|
|
$
|
0.83
|
|
$
|
0.77
|
|
Diluted EPS
|
$
|
0.35
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
$
|
0.33
|
|
|
$
|
0.75
|
|
$
|
0.75
|
|
|
$
|
0.80
|
|
$
|
0.73
|
|
In the above table, the unaudited pro forma revenue for the three months ended
June 30, 2014
increased by
$0.8 million
from the unaudited pro forma revenue during the same period in
2013
of
$50.9 million
to
$51.6 million
, representing a
1.5%
increase.
The pro forma revenue increase was primarily due to growth of our Exchange channel revenues which grew in spite of exchange rate changes which resulted in a decrease of
$0.5 million
.
Correspondingly, the reported revenue for the three months ended
June 30, 2014
increased by
$0.5 million
or
0.9%
from the reported revenue during the same period in
2013
. The unaudited pro forma revenue for the
six
months ended
June 30, 2014
decreased by
$0.9 million
from the unaudited pro forma revenue during the same period in
2013
of
$104.3 million
to
$103.4 million
, representing a
0.8%
decrease. The pro forma revenue decrease was primarily due to exchange rate changes which resulted in a decrease of
$2.3 million
. Correspondingly, the reported revenue for the
six
months ended
June 30, 2014
decreased by
$0.7 million
or
0.7%
from the reported revenue during the same period in
2013
.
Note 4: Debt with Commercial Bank
On May 19, 2014, Ebix, Inc. (the “Company”) and certain of its subsidiaries entered into a Third Amendment (the “Third Amendment”) to the Credit Agreement, dated April 26, 2012 (as previously amended), among the Company, Wells Fargo Capital Finance, LLC, as a lender, RBS Citizens, N.A. as a lender, and Citibank, N.A., ("CitiBank") as Administrative Agent and as a lender (the “Credit Agreement”). The Third Amendment amends the Company’s obligations with respect to certain covenants under the Credit Agreement, to provide flexibility to the Company to make certain specified business acquisitions, while allowing the Company to make early payments towards reduction of its bank debt. Furthermore, the Third Amendment amends the Credit Agreement by reducing the revolving commitments of the lenders to
$7.84 million
as of May 19, 2014, for which the Company made a principal payment in the amount of
$15.0 million
, and to
zero
as of September 30, 2014. Additionally, the Company will make, in addition to the scheduled principal payments otherwise required, a prepayment of principal on the term loans under the Credit Agreement in the aggregate principal amount of
$5.0 million
on December 31, 2014.
On April 26, 2012, Ebix entered into a credit agreement providing for a
$100 million
secured syndicated credit facility (the “Secured Syndicated Credit Facility”) with Citibank as administrative agent and Citibank, Wells Fargo Capital Finance, LLC,
and RBS Citizens, N.A. as joint lenders. The financing was comprised of a
four
-year,
$45 million
secured revolving credit facility, a
$45 million
secured term loan which amortizes over a
four
year period with quarterly principal and interest payments that commenced on June 30, 2012 and a final payment of all remaining outstanding principal and accrued interest due on April 26, 2016, and an accordion feature that provides for the expansion of the credit facility by an additional
$10 million
. The interest rate applicable to the Secured Syndicated Credit Facility is
LIBOR
plus
1.50%
or currently
1.65%
. Under the Secured Syndicated Credit Facility the maximum interest rate that could be charged depending upon the Company's leverage ratio is
LIBOR
plus
2.00%
. The credit facility is used by the Company to fund working capital requirements primarily in support of current operations, organic growth, and accretive business acquisitions. The Company incurred
$744 thousand
of origination costs in connection with this new credit facility, and is amortizing these costs into interest expense over the
four
-year life of the credit agreement. As of
June 30, 2014
the Company's consolidated balance sheet includes
$341 thousand
of remaining deferred financing costs. The underlying financing agreement contains financial covenants regarding the Company's annualized EBITDA, fixed charge coverage ratio, and leverage ratio, as well as certain restrictive covenants pertaining to such matters as the incurrence of new debt, the aggregate amount of repurchases of the Company's equity shares, dividend payments, and the consummation of new business acquisitions. The Company currently is in compliance with all such financial and restrictive covenants.
At
June 30, 2014
, the outstanding balance on the revolving line of credit was
$7.84 million
and the facility carried an interest rate of
1.65%
. During the
six months
ended
June 30, 2014
,
$15.0 million
payments were made against the revolving line of credit. This balance is included in the current liabilities section of the Condensed Consolidated Balance Sheets. During the
six months
period ended
June 30, 2014
, the average and maximum outstanding balances on the revolving line of credit were
$19.4 million
and
$22.8 million
, respectively.
At
June 30, 2014
, the outstanding balance on the term loan was
$27.13 million
of which
$18.75 million
is due within the next
twelve
months. This term loan also carried an interest rate of
1.65%
. During the
six months
ended
June 30, 2014
,
$4.8 million
of scheduled payments were made against the existing term loan. The current and long-term portions of the term loan are included in the respective current and long-term sections of the Condensed Consolidated Balance Sheets, the amounts of which were
$18.75 million
and
$8.38 million
respectively at
June 30, 2014
.
Note 5: Commitments and Contingencies
Contingencies
-Between July 14, 2011 and July 21, 2011, securities class action complaints were filed against the Company and certain of its officers in the United States District Court for the Southern District of New York and in the United States District Court for the Northern District of Georgia. The complaints assert claims against (i) the Company and the Company's CEO and CFO for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder and (ii) the Company's CEO and CFO as alleged controlling persons. The complaints generally allege false statements in earnings reports, SEC filings, press releases, and other public statements that allegedly caused the Company's stock to trade at artificially inflated prices. Plaintiffs seek an unspecified amount of damages. The New York action has been transferred to Georgia and has been consolidated with the Georgia action, now styled In re: Ebix, Inc. Securities Litigation, Civil Action No. 1:11-CV-02400-RWS (N.D. Ga.). The parties have reached a mutually acceptable agreement to resolve this action for a cash payment of
$6.5 million
to be funded by both the Company and its insurance carrier. As previously disclosed, the Company recorded a contingent liability and recognized a charge against earnings in the amount of
$4.23 million
(
$2.63 million
net of the associated tax benefit) as part of this settlement. Following a final fairness hearing on June 5, 2014, the Court entered the Final Order and Judgment Approving the Class Action Settlement and Plan of Allocation and Certifying the Settlement Class on June 11, 2014, and the Final Order and Judgment Awarding Attorneys’ Fees, an Incentive Award, and Reimbursement of Expenses on June 13, 2014. The time for appeal has passed and no appeals were filed. This matter is now concluded.
In connection with this shareholder class action suit, there have been three derivative complaints brought by certain shareholders on behalf of the Company, which name certain of the Company's officers and its entire board of directors as Defendants. The first such derivative action was brought by an alleged shareholder named Paul Nauman styled Nauman v. Raina, et al., Civil Action File No. 2011-cv-205276 (Superior Court of Fulton County, Georgia), filed September 1, 2011. The second such derivative action was brought by an alleged shareholder named Gilbert Spagnola styled Spagnola v. Bhalla, et al., Civil Action No. 1:13-CV-00062-RWS (N.D. Ga.), filed January 7, 2013. The third such derivative action was brought by an alleged shareholder named Hotel Trades Council and Hotel Association of New York City, Inc. Pension Fund styled Hotel Trades Council and Hotel Association of New York City, Inc. Pension Fund v. Raina, et al., Civil Action No. 1:13-CV-00246-RWS (N.D. Ga.), filed January 23, 2013. These derivative actions are based on substantially the same factual allegations in the shareholder class action suit, but also variously claim breach of fiduciary duties, abuse of control, gross mismanagement, the wasting of corporate assets, negligence, unjust enrichment by the Company's directors, and violation of Section 14 of the Exchange Act. The Nauman case was stayed pending the completion of expert discovery in the shareholder class action suit. On April 12, 2013, the Court entered an Order consolidating the Spagnola and Hotel derivative cases under the style In re Ebix, Inc. Derivative Litigation, File No. 1:13-CV-00062- RWS
(N.D. Ga.), appointing Hotel Trades Council and Hotel Association of New York City, Inc. Pension Fund as Lead Derivative Plaintiff, and appointing the law firm Cohen Milstein Sellers & Toll PLLC as Lead Derivative Counsel and The Law Offices of David A. Bain LLC as Liaison Counsel. Lead Derivative Plaintiff filed its Consolidated Shareholder Derivative and Class Action Complaint on May 20, 2013. Thereafter, the Court entered a Consent Order on June 4, 2013, setting a schedule for Lead Derivative Plaintiff to amend its Complaint in light of the anticipated preliminary proxy related to a proposed transaction announced on May 1, 2013 with affiliates of Goldman Sachs & Co. The parties in both the derivative actions are conferring regarding future case scheduling. The Company denies any liability and intends to defend the derivative actions vigorously.
On December 3, 2012, the Company received a subpoena and letter from the Securities and Exchange Commission (“SEC”) dated November 30, 2012, stating that the SEC is conducting a formal, non-public investigation styled In the Matter of Ebix, Inc. (A-3318) and seeking documents primarily related to the issues raised in the In re: Ebix, Inc. Securities Litigation. On April 16, 2013, the Company received a second subpoena from the SEC seeking additional documents. The Company has cooperated with the SEC to provide the requested documents.
On June 6, 2013, the Company was notified that the U.S. Attorney for the Northern District of Georgia had opened an investigation into allegations of intentional misconduct that had been brought to its attention from the pending shareholder class action lawsuit against the Company's directors and officers, the media and other sources. The Company is cooperating with the U.S. Attorney's office.
Following our announcement on May 1, 2013 of the Company's execution of a merger agreement with affiliates of Goldman Sachs & Co., twelve putative class action complaints challenging the proposed merger were filed in the Delaware Court of Chancery. These complaints name as Defendants some combination of the Company, its directors, Goldman Sachs & Co. and affiliated entities. On June 10, 2013, the twelve complaints were consolidated by the Delaware Court of Chancery, now captioned In re Ebix, Inc. Stockholder Litigation, CA No. 8526-VCN. On June 19, 2013, the Company announced that the merger agreement had been terminated pursuant to a Termination and Settlement Agreement. After Defendants moved to dismiss the consolidated proceeding, Lead Plaintiffs amended their operative complaint to drop their claims against Goldman Sachs & Co. and focus their allegations on an Acquisition Bonus Agreement (“ABA”) between the Company and Robin Raina. On September 26, 2013, Defendants moved to dismiss the Amended Consolidated Complaint. On July 24, 2014, the Court issued its Memorandum Opinion. The only surviving counts are as follows: (i) Counts II and IV, but only to the extent the Plaintiffs seek non-monetary relief for alleged material misstatements related to the ABA base price in the 2010 Proxy Statement; (ii) Count II, but only to the extent it challenges the continued existence of the ABA as an alleged unreasonable anti-takeover device; and, (iii) Count V, but only to the extent that it relates to the compensation the Board received under the Company’s 2010 Stock Incentive Plan.The Company denies any liability and intends to defend the action vigorously.
The Company has been sued by Microsoft for alleged copyright infringement, breach of contract, and unjust enrichment. Microsoft Corporation and Microsoft Licensing GP v. Ebix, Inc., Case No. 1:13-CV-01655-CAP (N.D.Ga), filed May 15, 2013. The Company filed a Motion to Dismiss on July 10, 2013. In response, Microsoft filed an Amended Complaint. The Company filed a Motion to Dismiss the Amended Complaint on August 29, 2013. On February 14, 2014, the Court denied the Company’s Motion to Dismiss. The Company cooperated with Microsoft in an audit of all of the Company's Microsoft licenses. The current deadline to respond to the Amended Complaint is September 8, 2014. The Company denies any liability and intends to defend the action vigorously.
The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate likely disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
Lease Commitments—
The Company leases office space under non-cancelable operating leases with expiration dates ranging through 2019, 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, 2014
and
2013
. Rental expense for office facilities and certain equipment subject to operating leases for the
six months
ended
June 30, 2014
and
2013
was
$3.3 million
and
$3.3 million
, respectively.
Self Insurance—
For most of the Company’s U.S. employees the Company is self-insured for its health insurance program and has a stop loss policy that limits the individual liability to
$120 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, 2014
, the amount accrued on the Company’s Condensed Consolidated Balance Sheet for the self-insured component of the Company’s employee health insurance was
$302 thousand
. The maximum potential estimated cumulative liability for the annual contract period, which ends in September 2014, is
$2.9 million
.
Note 6: Income Taxes
The Company's consolidated world-wide effective tax rate reflects the tax benefits of conducting operating activities in certain foreign jurisdictions where earnings are taxed at rates lower than U.S. statutory rates and where certain components of the Company's income are exempt from taxation. Furthermore, the Company's world-wide product development operations and intellectual property ownership have been centralized into our India and Singapore subsidiaries. Our operations in India benefit from a tax holiday which will affect are various operating facilities. The tax holiday expired for one of our facilities in April of 2014, and will expire for our other facilities in the years 2015 through 2018. As such a significant component of the income generated by our India operations, other than passive interest income, is not taxed. After the expiration of the full tax holiday all of the income generated by our India operations will be taxed at
50%
of the normal
33.99%
corporate tax rate for a period of
five
years. The Company also has a relatively low income tax rate in Singapore wherein our operations are taxed at a
10%
marginal tax rate as a result of concessions granted by the local Singapore Economic Development Board for the benefit of in-country intellectual property owners. The concessionary
10%
income tax rate will expire after 2015, at which time our Singapore operations will be subject to the prevailing corporate tax rate in Singapore, which is currently
17%
, unless the Company reaches a subsequent agreement to extend the incentive period and the then applicable concessionary rate or possibly secure a lower concessionary tax rate.
The Company recognized total income tax expense in the amount of
$7.54 million
for the
six months
ended
June 30, 2014
. The Company's interim period income tax provisions are based on a calculated estimate of the effective income tax rate expected to be applicable to the corresponding annual period, after eliminating discrete items unique to the respective interim period being reported. The Company's interim period tax provision, exclusive of discrete items, for this six month period during 2014 was an expense of
$3.96 million
which is reflective of a
10.87%
effective tax rate, as compared to the
8.77%
for the same period during 2013. The effective rate increased primarily due to increased taxable income from jurisdictions with higher tax rates. The discrete items recognized during the
six months
ended
June 30, 2014
were
$3.87 million
of tax expense recorded to increase the reserve for potential uncertain tax positions, partially offset by a
$0.29
million benefit associated with the utilization of net operating loss carryforwards from our operations in the United Kingdom.
At
June 30, 2014
, the Company had remaining available domestic net operating loss (“NOL”) carry-forwards of approximately
$44.5 million
which are available to offset future federal and certain state income taxes. The Company reviews its NOL positions to validate that all NOL carry-forwards will be utilized before they begin to expire in 2020.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With the exception of NOL carry-forwards, the Company is no longer subject to U.S. federal or state tax examinations by tax authorities for years before 2007 due to the expiration of the statute of limitations. There is an open federal income tax audit for taxable years 2008 through 2011. In connection with this open audit, the Company has and continues to respond to information requests from the IRS, but there has been no identification of potential deficiencies or assessments to date. Regarding our foreign operations as of December 31, 2013, the tax years that remain open and possibly subject to examination by the tax authorities in those jurisdictions are Australia (2006 to 2013), Singapore and Brazil (2007 to 2013), New Zealand (2008 to 2013), India (2010 to 2013) and Great Britain (2012 and 2013).
Accounting for Uncertainty in Income Taxes—
The Company has applied the FASB’s accounting guidance on accounting for uncertain income tax positions. As of
June 30, 2014
the Company’s Condensed Consolidated Balance Sheet includes a liability of
$16.61 million
for unrecognized tax benefits which is included in other long term liabilities before applying the offset provision required by the application of Notice 2013-11. During the
six months
ended
June 30, 2014
there were
$3.87 million
of additions to this liability reserve. A reconciliation of the beginning and ending amounts of the Company’s liability reserves for unrecognized tax benefits is as follows:
`
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
(in thousands)
|
Beginning Balance
|
$
|
12,742
|
|
|
$
|
5,925
|
|
Additions for tax positions related to current year
|
263
|
|
|
6,546
|
|
Additions for tax positions of prior years
|
3,603
|
|
|
271
|
|
Reductions for tax position of prior years
|
—
|
|
|
—
|
|
Ending Balance
|
$
|
16,608
|
|
|
$
|
12,742
|
|
The Company recognizes interest accrued and penalties related to unrecognized tax benefits as part of income tax expense. As of
June 30, 2014
and
December 31, 2013
approximately
$2.36 million
and
$1.05 million
, respectively, of estimated interest
and penalties is also included in other long term liabilities in the accompanying Condensed Consolidated Balance Sheet, and is part of the balance of the liability for unrecognized tax benefits in the above table.
The Company has applied the new provisions under FAS update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists. Under these provisions, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward in most cases. This provision has been applied and
$5.93 million
and
$8.42 million
of unrecognized tax benefits have been applied against NOL carryforward amounts as of
June 30, 2014
and
December 31, 2013
, respectively.
Note 7: Derivative Instruments
In connection with the acquisition of PlanetSoft effective June 1, 2012, Ebix issued a put option to PlanetSoft's three shareholders. The put option, which expired on July 9, 2014, was exercisable during the
thirty
-day period immediately following the
two
-year anniversary date of the business acquisition, which if exercised would enable them to sell the underlying
296,560
shares of Ebix common stock they received as part of the purchase consideration, back to the Company at a price of
$16.86
per share, which represents the per-share value established on the effective date of the closing of Ebix's acquisition of PlanetSoft. In accordance with the relevant authoritative accounting literature a portion of the total purchase consideration was allocated to this put liability based on its initial fair value, which was determined to be
$1.4 million
using a Black-Scholes model. The inputs used in the valuation of the put option include term, stock price volatility, current stock price, exercise price, and the risk free rate of return. At
June 30, 2014
the fair value of the put option liability was re-measured and was determined to have decreased
$315 thousand
during the
six months
period then ended with this amount reflected as a gain and reported as a non-operating income in the accompanying Condensed Consolidated Statement of Income. As of
June 30, 2014
, the aggregate fair value of this derivative instrument, which is included in the current liabilities section on the Condensed Consolidated Balance Sheet, was
$530 thousand
. The Company has classified the put option, for which the fair value is re-measured on a recurring basis at each reporting date, as a Level 2 instrument (i.e. wherein fair value is partially determined and based on observable inputs other than quoted market prices), which we believe is the most appropriate level within the fair value hierarchy based on the inputs used to determine its fair value at the measurement date. As discussed in Note 12 "Subsequent Events", during the mont
hs of July and August 2014 the former shareholders of PlanetSoft elected to exercise their put option rights with respect to the remaining
209,656
shares of Ebix common stock they still held. Accordingly the shareholders put those shares back to the Company at
$16.86
per share plus interest at the rate of
20%
as per the PlanetSoft acquisition agreement. The total consideration to be paid by the Company in connection with the exercise of these put options will be
$3.6 million
.
Note 8: Geographic Information
The Company operates with
one
reportable segment whose results are regularly reviewed by the Company's chief operating decision maker as to performance and allocation of resources. External customer revenues in the tables below are attributed to a particular country based on whether the customer had a direct contract with the Company which was executed in that particular country for the sale of the Company's products/services with an Ebix subsidiary located in that country.
The following enterprise wide information relates to the Company's geographic locations (all amounts in thousands):
As of and for the
Six Months Ended
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
Latin America
|
|
Australia
|
|
Singapore
|
|
New Zealand
|
|
India
|
|
Europe
|
|
Total
|
External Revenues
|
$
|
69,260
|
|
|
$
|
2,743
|
|
|
$
|
2,981
|
|
|
$
|
19,310
|
|
|
$
|
2,260
|
|
|
$
|
1,353
|
|
|
$
|
549
|
|
|
$
|
4,424
|
|
|
$
|
102,880
|
|
Long-lived assets
|
$
|
314,673
|
|
|
$
|
8,670
|
|
|
$
|
11,503
|
|
|
$
|
750
|
|
|
$
|
68,402
|
|
|
$
|
94
|
|
|
$
|
37,449
|
|
|
$
|
28,816
|
|
|
$
|
470,357
|
|
As of and for the
Six Months Ended
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
Latin America
|
|
Australia
|
|
Singapore
|
|
New Zealand
|
|
India
|
|
Europe
|
|
Total
|
External Revenues
|
$
|
70,898
|
|
|
$
|
3,381
|
|
|
$
|
2,786
|
|
|
$
|
19,840
|
|
|
$
|
1,383
|
|
|
$
|
1,161
|
|
|
$
|
371
|
|
|
$
|
3,750
|
|
|
$
|
103,570
|
|
Long-lived assets
|
$
|
320,353
|
|
|
$
|
9,103
|
|
|
$
|
11,535
|
|
|
$
|
1,007
|
|
|
$
|
69,580
|
|
|
$
|
209
|
|
|
$
|
19,388
|
|
|
$
|
25,020
|
|
|
$
|
456,195
|
|
Note 9: Minority Business Investment
In 2012, Ebix acquired a minority
19.8%
interest in CurePet for cash consideration in the amount of
$2.0 million
. CurePet is a developmental-stage enterprise that has completed an insurance exchange that connects pet owners, referring veterinarians, animal hospitals, academic institutes, and suppliers of medical and general pet supplies, while providing a wide variety of services related to pet insurance to each constituent including practice management, electronic medical records, and billing.
CurePet had previously been a customer of Ebix
; during
six months
ended
June 30, 2013
the Company recognized
$1.2 million
from CurePet, and as of
December 31, 2013
there were
$1.4 million
of outstanding receivable balances due from CurePet in the Company's reported trade accounts receivable. Ebix also had a revenue share arrangement with CurePet pertaining to certain customer revenues recognized by CurePet, and the Company had the option of forgoing said revenue share arrangement in exchange for an additional
20.0%
equity interest. The Company had been accounting for its minority investment in CurePet using the cost method. Based on this independent evaluation it was concluded that the fair value of this minority business investment was greater than the Company's carrying value of the investment, and therefore the investment was not impaired as of
December 31, 2013
. Also as disclosed in Note 3 "Business Combinations," effective January 27, 2014 Ebix acquired the entire business of CurePet in an asset purchase agreement with the total purchase consideration being in the amount of
$6.35 million
of which includes a possible contingent earnout payment of up to
$5.0 million
based on earned revenues over the subsequent thirty-six month period following the date of the acquisition. This contingent earnout liability is currently estimated to have a fair value of
$1.6 million
.
During the
six months
ended
June 30, 2014
the CurePet business generated
$325 thousand
of revenue which is included in the Company’s consolidated revenues reported for the same period.
Note 10: Temporary Equity
The
$5.0 million
of temporary equity reported on the Company's condensed consolidated balance sheet as of
June 30, 2014
and
December 31, 2013
is in connection with the June 2012 acquisition of PlanetSoft. As part of the consideration paid for PlanetSoft in accordance with terms of the merger agreement the former PlanetSoft shareholders received
296,560
shares of Ebix common stock valued at
$16.86
per share or
$5.0 million
in the aggregate. In regard to these shares of Ebix common stock, and as discussed in Note 7 "Derivative Instruments," the Company issued a put option to PlanetSoft's
three
shareholders. The put option, which expired on July 9, 2014, was exercisable during the
thirty
-day period immediately following the
two
-year anniversary date of the business acquisition, and which if exercised would enable them to sell the underlying
296,560
shares of Ebix common stock they received as part of the purchase consideration, back to the Company at a price of
$16.86
per share, which represents the per-share value established on the effective date of the closing of Ebix's acquisition of PlanetSoft. Accordingly and in compliance with Accounting Standards Codification ("ASC") 480 "Accounting for Redeemable Equity Instruments," given that the common stock is redeemable for cash at the option of the holders and not within control of the Company, it is presented outside of the stockholders equity section of the Condensed Consolidated Balance Sheet, and is shown as a separate line referred to as "temporary equity" appearing after liabilities, and before the stockholder's equity section, and will remain so until July 2014 when either the put option is exercised or lapsed. As discussed in Note 12 "Subsequent Events" in July and August 2014 the former shareholders of PlanetSoft elected to exercise their put option rights with respect to the remaining
209,656
shares of Ebix common stock they still held. Accordingly the shareholders have since put those shares back to the Company at
$16.86
per share plus interest at the rate of
20%
for the period after the exercise until the cash consideration is paid by the Company, as per the PlanetSoft acquisition agreement. The total consideration to be paid by the Company in connection with the exercise of these put options will be
$3.6 million
.
Note 11: Other Liabilities
Other liabilities at
June 30, 2014
and
December 31, 2013
consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
(In thousands)
|
Reserve for potential uncertain income tax return positions
|
$
|
16,608
|
|
|
$
|
12,742
|
|
Unfavorable lease liability, long term portion
|
344
|
|
|
394
|
|
Portion of an unrecognized tax benefit netted against deferred tax asset for a net operating loss carryforward
|
(5,926
|
)
|
|
(8,422
|
)
|
Other
|
5
|
|
|
5
|
|
Total
|
$
|
11,031
|
|
|
$
|
4,719
|
|
Note 12: Subsequent Events
Entry into a Material Definitive Agreement, Creation of a Direct Financial Obligation
On August 5, 2014, Ebix entered into a credit agreement providing for a
$150 million
secured syndicated credit facility (the “Regions Secured Syndicated Credit Facility”) with Regions Financial Corporation ("Regions") as administrative agent and Regions with MUFG Union Bank N.A., and Silicon Valley Bank as joint lenders. The financing is comprised of a
five
-year,
$150 million
secured revolving credit facility, with an option to expand to
$200 million
upon request and with additional lender commitments. This new
$150 million
credit facility with Regions, as administrative agent, replaces the former syndicated
$100 million
facility that the Company had in place with Citi Bank, N.A. which was paid in full upon the undertaking of this new loan facility with Regions. The initial interest rate applicable to the Secured Syndicated Credit Facility is LIBOR plus
1.75%
or currently
1.90%
. Under the Regions Secured Syndicated Credit Facility the maximum interest rate that could be charged depending upon the Company's leverage ratio is LIBOR plus
2.25%
.
Put Option Exercise
During July and August 2014 the former shareholders of PlanetSoft elected to exercise their put option rights, which expired on July 9, 2014, with respect to the remaining
209,656
shares of Ebix common stock they still held as part of the purchase consideration conveyed by Ebix when it acquired PlanetSoft in June 2012. Accordingly the shareholders have since put those shares back to the Company at
$16.86
per share plus interest at the rate of
20%
for the period after the exercise until the cash consideration is paid by the Company, as per the PlanetSoft acquisition agreement. The total consideration to be paid by the Company in connection with the exercise of these put options will be
$3.6 million
.
Repurchases of Common Stock
On August 8, 2014 the Company purchased
30,600
shares of its outstanding common stock for aggregate consideration in the amount of
$403 thousand
and at an average rate of
$13.18
per share. All share repurchases were done in accordance with Rule 10b-18 of the Securities Act of 1934 as to the timing, pricing, and volume of such transactions, and were completed using available cash resources and cash generated from the Company's operating activities.