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EBIX INC - 10-Q/A - : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) As used herein, the terms "Ebix," "the Company," "we," "our" and "us" refer to
Ebix, Inc., a Delaware corporation, and its consolidated subsidiaries as a
combined entity, except where it is clear that the terms mean only Ebix, Inc.
Safe Harbor for Forward-Looking Statements-This Form 10-Q and certain
information incorporated herein by reference contains forward-looking statements
and information within the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and
Section 21E of the Securities Exchange Act of 1934. This information includes
assumptions made by, and information currently available to management,
including statements regarding future economic performance and financial
condition, liquidity and capital resources, acceptance of the Company's products
by the market, and management's plans and objectives. In addition, certain
statements included in this and our future filings with the Securities and
Exchange Commission ("SEC"), in press releases, and in oral and written
statements made by us or with our approval, which are not statements of
historical fact, are forward-looking statements. Words such as "may," "could,"
"should," "would," "believe," "expect," "anticipate," "estimate," "intend,"
"seeks," "plan," "project," "continue," "predict," "will," "should," and other
words or expressions of similar meaning are intended by the Company to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. These forward-looking statements are found at various
places throughout this report and in the documents incorporated herein by
reference. These statements are based on our current expectations about future
events or results and information that is currently available to us, involve
assumptions, risks, and uncertainties, and speak only as of the date on which
such statements are made.
Our actual results may differ materially from those expressed or implied in
these forward-looking statements. Factors that may cause such a difference,
include, but are not limited to those discussed and identified in Part I,
Item 1A, "Risk Factors" in our 2011 Form 10-K which is incorporated by reference
herein, as well as: the willingness of independent insurance agencies to
outsource their computer and other processing needs to third parties; pricing
and other competitive pressures and the company's ability to gain or maintain
share of sales as a result of actions by competitors and others; changes in
estimates in critical accounting judgments; changes in or failure to comply with
laws and regulations, including accounting standards, taxation requirements
(including tax rate changes, new tax laws and revised tax interpretations) in
domestic or foreign jurisdictions; exchange rate fluctuations and other risks
associated with investments and operations in foreign countries (particularly in
Australia, Singapore, Brazil, and India wherein we have significant operations);
equity markets, including market disruptions and significant interest rate
fluctuations, which may impede our access to, or increase the cost of, external
financing; and international conflict, including terrorist acts. Except as
expressly required by the federal securities laws, the Company undertakes no
obligation to update any such factors, or to publicly announce the results of,
or changes to any of the forward-looking statements contained herein to reflect
future events, developments, changed circumstances, or for any other reason.
The important risk factors that could cause actual results to differ materially
from those in our specific forward-looking statements included in this Form 10-Q
include, but are not limited to, the following:
• Regarding Note 4 of the Notes to the Condensed Consolidated Financial
Statements, and our future liquidity needs discussed under "Liquidity and
Financial Condition," as pertaining to our ability to generate cash from
operating activities and any declines in our credit ratings or financial
condition which could restrict our access to the capital markets or
materially increase our financing costs;
• With respect to Note 5 of the Notes to the Condensed Consolidated
Financial Statements, "Commitments and Contingencies", and "Contractual
Obligations and Commercial Commitments" in MD&A, as regarding changes in
the market value of our assets or the ultimate actual cost of our
commitments and contingencies;
• With respect Note 3 of the Condensed Notes to the Condensed Consolidated
Financial Statements as pertaining to the business acquisitions we have
made and our ability to efficiently and effectively integrate acquired
business operations, and our ability to accurately estimate the fair value
of tangible and intangible assets; and,
• With respect this Management Discussion & Analysis of Financial Condition and Results of Operation and the analysis of the three revenue trends
including the actual realized level of demand for our products during the
immediately foreseeable future.
Readers should carefully review the disclosures and the risk factors described
in this and other documents we file from time to time with the SEC, including
future reports on Forms 10-Q and 8-K, and any amendments thereto. You may obtain
our SEC filings at our website, www.ebix.com under the "Investor Information"
section, or over the Internet at the SEC's web site, www.sec.gov.
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The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto included in
Part 1. Item 1 of this Quarterly Report, and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2011.
Company Overview
Ebix, Inc. is a leading international supplier of software and e-commerce
solutions to the insurance and financial industries. Ebix provides a variety of
application software products for the insurance and financial industries ranging
from data exchanges, carrier systems, and agency systems, to custom software
development for all entities involved in insurance and financial services. Our
goal is to be the leading powerhouse of backend insurance transactions in the
world. The Company's vision is to focus on the convergence of technology
platforms for all insurance channels, processes and entities in a manner such
that data can seamlessly flow once a data entry has been made. Our customers
include many of the top insurance and financial sector companies in the world.
The insurance and financial service industries continue to undergo significant
consolidation as driven by the need for, and benefits from, economies of scale
and scope in providing insurance and financial services in a competitive
environment. The insurance markets have particularly experienced a steady
increase in the desire to reduce paper-based processes and improve efficiency at
the back-end side and consumer end side. Such consolidation has involved both
insurance carriers and insurance brokers and is directly impacting the manner in
which insurance products are distributed. Management believes the insurance
industry will continue to experience significant change and increased
efficiencies through online exchanges, as the transition from paper-based
processes are increasingly becoming the norm across world insurance markets.
Changes in the insurance industry are likely to create new opportunities for the
Company.
Ebix strives to work collaboratively with clients to develop innovative
technology strategies and solutions that address their specific business
challenges. Ebix combines the newest technologies with its capabilities in
consulting, systems design and integration, information technology, business
process outsourcing, applications software, and Web and application hosting to
meet the individual needs of insurance and financial service organizations. We
continue to expand both through business acquisitions and organically.
Offices and Geographic Information
The Company has its worldwide headquarters in Atlanta, Georgia with its
international operations being managed from its Singapore offices, and it also
has domestic operations throughout the United States including California,
Florida, Pennsylvania, Utah, Virginia, Texas, Ohio, and Connecticut; and
international operations in Australia, Brazil, China, Japan, New Zealand, the
United Kingdom, Canada and India. In these offices, Ebix employs insurance and
technology professionals who provide products, services, support and consultancy
to thousands of customers across six continents. The Company's product
development unit in India has been awarded Level 5 status of the Carnegie Mellon
Software Engineering Institute's Capability Maturity Model Integrated
(CMMI), ISO 9001:2000 certification, and ISO 2700 security certification.
Results of Operations - Three Months Ended March 31, 2012 and 2011
Operating Revenue
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 business process outsourcing services, and fees for software
development projects including associated fees for consulting, implementation,
training, and project management provided to customers with installed systems.
Ebix's revenue streams come from four product channels. Presented in the table
below is the breakout of our revenues for each of those product channels for the
three months ended March 31, 2012 and 2011.
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Three Months Ended
March 31,
(dollar amounts in thousands) 2012 2011
Exchanges $ 34,646 $ 31,065
Broker Systems 4,754 3,842
Business Process Outsourcing ("BPO") 3,571 3,619
Carrier Systems 856 1,524
Totals $ 43,827 $ 40,050
During the three months ended March 31, 2012 our total operating revenues
increased $3.8 million or 9%, to $43.8 million as compared to $40.1 million
during the same period in 2011. This increase is the result of growth in our
Exchange channel and recent business acquisitions. $4.2 million of operating
revenues pertaining to our acquisition of ADAM in 2011 were recognized since its
acquisition on February 7, 2011were included in the Company's revenues reported
in its condensed and consolidated statement of income for the three months ended
March 31, 2011. Correspondingly included in the Company's revenues as reported
in its condensed and consolidated statement of income for the three months ended
March 31, 2012 is $6.2 million of ADAM's operating revenue. The Company
continues to effectively leverage product cross-selling opportunities across all
channels, as facilitated by our business acquisitions. With respect to the
acquisition of ADAM completed in February 2011presented on a pro forma basis, as
disclosed in the table in Note 3 "Business Combinations" to the enclosed
consolidated financial statements, combined revenues increased 2.8% for the
three months ending March 31, 2012 versus the three months ended March 31, 2011,
whereas there was a 9.4% increase in reported revenues for the same comparative
periods. The 2.8% increase in pro forma revenues is primarily associated with a
2.0% decrease in first quarter 2012 versus 2011 revenues pertaining to the
businesses acquired during these periods (i.e. ADAM and HealthConnect), offset
by a 4.8% increase in revenues associated with Ebix's legacy operations
preceding these business acquisitions. The cause for the difference between the
9.4% increase in reported revenue for the three months ended March 31, 2012
versus the three months ending March 31, 2011, as compared to the 2.8% increase
in pro forma revenue for the three months ending March 31, 2012 versus the three
months ending March 31, 2011 is due to the effect of combining the revenues
derived from those businesses acquired during these periods with the Company's
pre-existing operations. Also partially effecting reported revenues was the
impact from fluctuations in the exchange rates of the foreign currencies in the
countries in which we conduct operations. During the three months ended
March 31, 2012 and 2011 the change in foreign currency exchange rates increased
reported consolidated operating revenues by $332 thousand and $1.1 million,
respectfully.
Cost of Services Provided
Costs of services provided, which includes costs associated with maintenance,
support, call center, consulting, implementation and training services,
increased $1.7 million or 24%, from $7.3 million in the first quarter of 2011 to
$9.0 million in the first quarter of 2012. This increase is primarily due to
additional customer support costs, personnel expenses, and facilities related
costs in support of increased revenue streams associated with business
acquisitions completed during 2011, and in support of the growth in our Exchange
channel.
Product Development expenses
The Company's product development efforts are focused on the development of new
operating technologies and services for use by insurance carriers, brokers and
agents, and the development of new data exchanges for use in both the domestic
and international insurance and financial services industries. Product
development expenses decreased $0.3 million or 8% from $4.6 million during the
first quarter of 2011 to $4.3 million during the first quarter of 2012. This
modest decrease is primarily due to less spending on product development
personnel in support of the Carrier Systems and BPO channels.
Sales and Marketing Expenses
Sales and marketing expenses increased $1.0 million or 34%, from $2.9 million in
the first quarter of 2011 to $3.8 million in the first quarter of 2012. This
increase is primarily attributable to personnel and facility costs associated
with additional sales personnel in support of our Exchange channels.
General and Administrative Expenses
General and administrative expenses ("G&A") decreased by 1.3 million or 17% from
$7.8 million in the first quarter of 2011 to $6.4 million in the first quarter
of 2012. Included in this quarter's G&A costs is the net benefit in the
approximate amount of $971 thousand related to a termination fee received by the
Company in connection with a failed business acquisition (net of significant
directly related internal operating costs incurred by the Company and a portion
of the fee that had to be paid to our investment banker). Partially offsetting
the net benefit from the acquisition termination fee was a $255 thousand bad
debt expense charge necessary to adequately increase the Company's allowance for
doubtful accounts receivable.
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Amortization and Depreciation Expenses
Amortization and depreciation expenses increased $64 thousand or 3%, from $1.88
million in the first quarter of 2011 to $1.94 million in the first quarter of
2012. This increase is primarily due to $71 thousand of depreciation expenses in
connection with equipment costs associated with the expansion of our data
exchange networks and facilities.
Income Taxes
The Company recognized income tax expense of $2.3 million for the three months
ended March 31, 2012. The Company's interim period income tax provisions are
based on an 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 calculated estimated annual
effective tax rate used by the Company to determine the interim income tax
provision for the first quarter of 2012 was 12.52% as compared to 9.38% for the
same period in 2011. The effective rate increased primarily due to increased
taxable income from jurisdictions with higher tax rates.
Dividends, Liquidity and Capital Resources
The Company's ability to generate significant cash flows from its ongoing
operating activities is one of our fundamental financial strengths. Our
principal sources of liquidity are the cash flows provided by the Company's
operating activities, our commercial banking credit facility, and cash and cash
equivalents on hand. Due to the effect of temporary or timing differences
resulting from the differing treatment of items for tax and accounting purposes
(including the treatment of net operating loss carryforwards and minimum
alternative tax obligations in the U.S. and India), future income tax expense is
expected to exceed cash outlays for income taxes. We intend to utilize cash
flows generated by our operations, in combination with our bank credit facility,
and the possible issuance of additional equity or debt securities, to fund
capital expenditures and organic growth initiatives, to make strategic business
acquisitions in the insurance and financial services sector, and to repurchase
shares of our common stock as market conditions warrant.
We intend to utilize cash flows generated by our ongoing operating activities,
in combination with our commercial lending facility, and the possible issuance
of additional equity or debt securities to fund capital expenditures and organic
growth initiatives, to make strategic business acquisitions, to retire
outstanding indebtedness, and to possibly repurchase shares of our common stock
as market and operating conditions warrant.
In the 4th quarter of 2011 the Company paid its first quarterly dividend in the
amount of $0.04 per common share, paying $1.5 million in the aggregate in
regards to this dividend issuance. This same quarterly dividend per share was
paid in February 2012. The dividend rate was increased to $0.05 effective with
dividend payment to be made in May 2012. The Company intends to use a portion of
its operating cash flows to continue issuing dividends to its shareholders in
the foreseeable future, while remaining dedicated to using most of its cash to
generate improvement in future earnings by funding organic growth initiatives
and accretive business acquisitions.
We believe that anticipated cash flows provided by our operating activities,
together with current cash and cash equivalent balances and access to our credit
facilities and the capital markets, if required and available, will be
sufficient to meet our projected cash requirements for the next twelve months,
and the foreseeable future thereafter, although any projections of future cash
needs, cash flows, and the condition of the capital markets in general, as to
the availability of debt and equity financing, are subject to substantial
uncertainty. In the event additional liquidity needs arise, we may raise funds
from a combination of sources, including the potential issuance of debt or
equity securities. However, there are no assurances that such financing
facilities or the equity capital markets will be available in amounts or on
terms acceptable to us, if at all.
We continue to strategically evaluate our ability to sell additional equity or
debt securities, to expand existing or obtain new credit facilities from lenders
in order to strengthen our financial position. We regularly evaluate our
liquidity requirements, including the need for additional debt or equity
offerings, when considering potential business acquisitions, development of new
products or services, or repurchases of our common stock.
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Our cash and cash equivalents were $37.1 million and $23.7 million at March 31,
2012 and December 31, 2011, respectively. As of March 31, 2012, the Company held
an additional amount of $730 thousand in fixed bank deposits of more than 90
days, which is not included in the reported cash and cash equivalents amount of
$37.1 million. Our cash and cash equivalents balance has increased by $13.4
million since year end 2011, as a direct result of cash generated by our ongoing
operating activities. The Company holds material cash and cash equivalent
balances overseas in foreign jurisdictions. The free flow of cash from certain
countries where we hold such balances may be subject to repatriation tax effects
and other restrictions. Furthermore, the repatriation of earnings from some of
our foreign subsidiaries would result in the application of withholding taxes at
source as well as a tax at the U.S. parent level upon receipt of the
repatriation amounts. The approximate cash, cash equivalents, and short-term
investments balances held in our domestic U.S. operations and each of our
foreign subsidiaries as of May 7, 2012 is presented in table below (figures
denominated in thousands):
United Latin New
States Canada America Australia Singapore Zealand India Sweden Total
Cash and ST investments
$ 7,489 $ 979 $ 1,508 $ 3,123 $ 871 $ 467 $ 15,875 $ 16 $ 30,328
Our current ratio increased to 1.55 at March 31, 2012 as compared to 1.28 at
December 31, 2011 and our working capital position improved to $26.4
million million at March 31, 2012 as compared to $14.0 million at the end of the
2011. The increase in our short-term liquidity position is primarily the result
of the additional available cash balances and the reduction in trade payables
and accrued liabilities. We believe that our ability to generate sustainable and
robust cash flows from operations will enable the Company to continue to fund
its current liabilities from current assets including available cash balances
for the foreseeable future.
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 first quarter of 2012 the
Company did not execute any material business acquisitions.
Operating Activities
Net cash provided by our operating activities was $13.8 million for the three
month period ended March 31, 2012. The primary components of the cash provided
by operations during this three month interim period consisted of net income of
$15.7 million, net of $661 thousand of non-cash unrealized foreign currency
exchange losses, $1.9 million of depreciation and amortization, $(5.1) million
of working capital requirements primarily associated with reductions to trade
payables and accrued liabilities, and $548 thousand of non-cash share-based
compensation.
During the three months ended March 31, 2011 the Company generated $10.3 million
of net cash flow from operating activities. The primary components of the cash
provided by operations during this three-month interim period consisted of net
income of $15.2 million, net of $(1.7) million of net non-cash gains recognized
on derivative instruments and foreign currency exchange, $1.9 million of
depreciation and amortization, $(5.6) million of working capital requirements
primarily associated with payments of trade payables and accrued liabilities,
and increased outstanding trade receivables, and $556 thousand of non-cash
compensation.
Investing Activities
Net cash provided from investing activities during the three months ended
March 31, 2012 totaled $306 thousand which primarily consisted of $979 thousand
from maturities of marketable securities (specifically bank certificates of
deposit), net of purchases, less $673 thousand used for capital expenditures
pertaining to the enhancement of our technology platforms and the purchases of
operating equipment to support our expanding operations.
Net cash provided from investing activities during the three months ended
March 31, 2011 totaled $5.6 million and was primarily related to the $3.5
million of net cash obtained from the acquisition of ADAM in February 2011 (net
of $944 thousand used to settle outstanding ADAM stock options). Also $524
thousand was used for capital expenditures and $2.6 million was provided from
the net maturities of marketable securities (specifically bank certificates of
deposit).
Financing Activities
During the three months ended March 31, 2012 net cash used in financing
activities was $1.5 million. This net financing cash outflow primarily consisted
of the $1.46 million used to remit the dividend paid to common stock holders in
February.
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During the three months ended March 31, 2011 net cash used in financing
activities was $3.9 million. During that interim period the Company remitted
$1.3 million to make principal repayments on existing term loan obligations (net
of proceeds received), $2.4 million was used to complete open market repurchases
of our common stock, and $258 thousand was used to service then existing debt
and capital lease obligations.
Commercial Bank Financing Facility
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 Citi Bank, N.A. as administrative agent and Citibank, N.A.,
Wells Fargo Capital Finance, LLC, and RBS Citizens, N.A. as joint lenders. The
financing is 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 commencing 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. This new $100
million credit facility with Citibank, N.A., as administrative agent, replaces
the former $55 million facility that the Company had in place with Bank of
America, N.A. The initial interest rate applicable to the Secured Syndicated
Credit Facility is LIBOR plus 1.50% or currently 1.74%. 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%.
On April 26, 2012, Ebix fully paid all of its obligations and related fees then
outstanding to Bank of America N.A. ("BOA") and as pertaining to the Credit
Agreement dated February 12, 2010 (as amended). The aggregate amount of the
payment was $45.14 million and was funded from a portion of the proceeds of the
Citi Bank led Secured Syndicated Credit Facility discussed immediately above.
Upon the effective date this payoff, BOA's commitment to extend further credit
to the Company terminated.
Previously on April 20, 2011 the Company entered into a seventh amendment to a
credit agreement (the "Seventh Amendment") with Bank of America, N.A. ("BOA"),
as administrative agent, which materially amended the initial credit agreement
dated February 12, 2010. The Seventh Amendment increased the existing revolving
credit facility from $25 million to $35 million with its term ending on
April 20, 2014, and the $10 million secured term loan was increased to $20
million and amortizes over a three year period with quarterly principal and
interest payments that commenced on June 30, 2011. The entire credit facility
had a variable interest rate currently set at LIBOR plus 1.50%. The revolving
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 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, and the consummation of new business
acquisitions. The Company currently is in compliance with all such financial and
restrictive covenants, and there have been no violations thereof or in the event
of noncompliance, appropriate waivers having been obtained.
At March 31, 2012, the outstanding balance on the revolving line of credit was
$31.8 million and the facility carried an interest rate of 1.75%. This balance
is included in the long-term liabilities section of the Condensed Consolidated
Balance Sheets. During the three month period ending March 31, 2012, both the
average and maximum outstanding balances on the revolving line of credit was
$31.8 million.
At March 31, 2012, the outstanding balance on the term loan was $15 million of
which $8.3 million is due within the next twelve months. This term loan also
carried an interest rate of 1.75%. During the three months ended March 31, 2012,
no payments were made against the 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.
Convertible Debt
On August 25, 2009, the Company entered into a Convertible Note Purchase
Agreement with the Rennes Foundation in an original amount of $5.0 million,
which amount is convertible into shares of common stock at a conversion price of
$16.66 per share (the "Note"). The Note had a 0.0% stated interest rate and no
warrants were issued. The Note was payable in full at its maturity date of
August 25, 2011. The Company applied imputed interest on these convertible notes
using an interest rate of 1.75% and discounted their carrying value accordingly.
With respect to this convertible note, and in accordance with the terms of the
notes, as understood between the Company and the holder, upon a conversion
election by the holder the Company had to satisfy the related original principal
balance in cash and could have satisfied the conversion spread (that being the
excess of the conversion value over the related original principal component) in
either cash or stock at option of the Company. On April 18, 2011, the Rennes
Foundation elected to fully convert the Note. The Company settled this
conversion election by paying $5.0 million in cash with respect to the principal
component, and paying $1.8 million in cash with respect to the conversion
spread. The Company also recognized a pre-tax gain in the amount of $108
thousand with respect the settlement of this convertible debt.
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As of March 31, 2012 and December 31, 2011 the Company has no remaining
convertible debt obligations.
Off-Balance Sheet Arrangements
We do not engage in off -balance sheet financing arrangements.
Contractual Obligations and Commercial Commitments
The following table summarizes our significant contractual purchase obligations
and other long-term commercial commitments as of March 31, 2012. The table
excludes obligations or commitments that are contingent based on events or
factors uncertain at this time.
Payment Due by Period
Less Than More than
Total 1 Year 1-3 Years 3-5 Years 5 years
(in thousands)
Revolving line of credit $ 31,750 $ - $ 31,750 $ - $ -
Long-term debt $ 18,000 $ 8,934 $ 9,066 $ - $ -
Operating leases $ 15,910 $ 4,256 $ 5,868 $ 2,867 $ 2,919
Capital leases $ 825 $ 363 $ 462 $ - $ -
Total $ 66,485 $ 13,553 $ 47,146 $ 2,867 $ 2,919
Recent Accounting Pronouncements
For information about new accounting pronouncements and the potential impact on
our Consolidated Financial Statements, see Note 1 of the condensed notes to the
condensed consolidated financial statements in this Form 10-Q and Note 1 of the
notes to consolidated financial statements in our 2011 Form 10-K.
Application of Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP"), as promulgated in the United States, requires
our management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, revenues and expenses and related disclosures
of contingent assets and liabilities in our Condensed Consolidated Financial
Statements and accompanying notes. We believe the most complex and sensitive
judgments, because of their significance to the Condensed Consolidated Financial
Statements, result primarily from the need to make estimates and assumptions
about the effects of matters that are inherently uncertain. The following
accounting policies involve the use of "critical accounting estimates" because
they are particularly dependent on estimates and assumptions made by management
about matters that are uncertain at the time the accounting estimates are made.
In addition, while we have used our best estimates based on facts and
circumstances available to us at the time, different estimates reasonably could
have been used in the current period, or changes in the accounting estimates
that we used are reasonably likely to occur from period to period which may have
a material impact on our financial condition and results of operations. For
additional information about these policies, see Note 1 of the Condensed Notes
to the Condensed Consolidated Financial Statements in this Form 10-Q. Although
we believe that our estimates, assumptions and judgments are reasonable, they
are limited based upon information presently available. Actual results may
differ significantly from these estimates under different assumptions, judgments
or conditions.
Revenue Recognition
The Company derives its revenues from professional and support services, which
include: (a) subscription and transaction fees related to services delivered
over our exchanges or on an application service provider ("ASP") basis;
(b) subscription and transaction fees related to services delivered over our
exchanges or on an application service provider ("ASP") basis;
(c) implementation, training, and project management provided to customers with
installed systems; (d) revenue generated from software development projects and
associated fees for consulting; and, (e) the licensing of proprietary and
third-party software. Sales and value-added taxes are not included in revenues,
but rather are recorded as a liability until the taxes assessed are remitted to
the respective taxing authorities.
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In accordance with Financial Accounting Standard Board ("FASB") and Securities
and Exchange Commission Staff Accounting (the "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, if contractually required,
and (d) collectability of the arrangement fee is probable. The Company generally
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.
Allowance for Doubtful Accounts Receivable
Management specifically analyzes accounts receivable and historical bad debts,
write-offs, customer concentrations, customer credit-worthiness, current
economic trends and changes in our customer payment terms when evaluating the
adequacy of the allowance for doubtful accounts.
Valuation of Goodwill
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 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 their 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 we 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. During the year ended December 31, 2011 we had no
impairment of our reporting unit goodwill balances.
Income Taxes
Deferred income taxes are recorded to reflect the estimated future tax effects
of differences between 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.
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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.
Foreign Currency Matters
Our reporting currency is the U.S. dollar. The functional currency of the
Company's foreign subsidiaries is the local currency of the country in which the
subsidiary operates. The assets and liabilities of foreign subsidiaries are
translated into U.S. Dollars at the rates of exchange at the balance sheet
dates. Income and expense accounts are translated at the average exchange rates
in effect during the period. Gains and losses resulting from translation
adjustments are included as a component of other comprehensive income in the
accompanying consolidated financial statements. Foreign exchange transaction
gains and losses that are derived from transactions denominated in other than
the subsidiary's' functional currency is included in the determination of net
income.
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