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TMCNet:  EBIX INC - 10-Q - : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[November 09, 2012]

EBIX INC - 10-Q - : 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, 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 to 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; • With respect this Management Discussion & Analysis of Financial Condition and Results of Operation and the analysis of the three and nine month 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 website, www.sec.gov.

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 22-------------------------------------------------------------------------------- Table of Contents 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 industry. Ebix provides a variety of application software products for the insurance industry ranging from carrier systems, agency systems and data exchanges to custom software development for all entities involved in insurance and financial services. Our goal is to be the leading powerhouse of back-end 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 industry has undergone significant consolidation over the past several years driven by the need for, and benefits from, economies of scale and scope in providing insurance 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 both 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 specific business challenges.

Ebix combines the newest technologies with its capabilities in consulting, systems design and integration, IT and business process outsourcing, applications software, and Web and application hosting to meet the individual needs of insurance and financial service organizations. We intend to expand both organically and through strategic business acquisitions.

Offices and Geographic Information The Company has its worldwide headquarters in Atlanta, Georgia with its international operations being managed from its Singapore offices. The Company has operations across the United States with offices in Walnut Creek, San Diego, Pasadena, Fresno, Santa Barbara and Hemet, California; Miami, Florida; Pittsburgh, Pennsylvania; Park City, Utah; Herndon and Lynchburg, Virginia; Dallas and Houston, Texas; Norwalk, Connecticut; and Columbus, Ohio, as well as an additional operating facility in Atlanta, Georgia. The Company also has offices in Australia, Brazil, China, Japan, New Zealand, 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 September 30, 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 and nine months ended September 30, 2012 and 2011, respectively.

23-------------------------------------------------------------------------------- Table of Contents Three Months Ended Nine Months Ended September 30, September 30, (dollar amounts in thousands) 2012 2011 2012 2011 Exchanges $ 43,592 $ 33,021 $ 116,420 $ 96,308 Broker Systems 4,537 4,731 13,713 13,397Business Process Outsourcing ("BPO") 4,252 3,576 11,713 10,948 Carrier Systems 1,423 1,274 3,501 4,266 Totals $ 53,804 $ 42,602 $ 145,347 $ 124,919 During the three months ended September 30, 2012 our total operating revenues increased $11.2 million or 26%, to $53.8 million as compared to $42.6 million during the third quarter of 2011. This increase is the result of growth in our Exchange channel and recent business acquisitions. $6.3 million of operating revenue pertaining to ADAM, acquired on February 7, 2011, were included in the Company's revenues reported in its condensed and consolidated statement of income for the three months ended September 30, 2011. Correspondingly included in the Company's revenues as reported in its condensed and consolidated statement of income for the three months ended September 30, 2012 is $5.7 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 business acquisitions completed during fiscal year 2011 through the third fiscal quarter of 2012 on a pro forma basis, as disclosed in the table in Note 3 "Business Combinations" to the condensed consolidated financial statements, combined revenues increased 3.5% for the three month period ending September 30, 2012 as compared to the same three month in 2011, whereas there was a 26.3% increase in reported revenues for the same comparative periods. The 3.5% increase in pro forma revenue is associated with a 4.9% increase in the revenues for three month period ending September 30, 2012 versus 2011 pertaining to the businesses acquired within these periods (i.e. ADAM, HealthConnect, BSI, Taimma, PlanetSoft, Fintechnix, and TriSystems) which includes increases in revenues for these businesses that was generated since Ebix acquired them as facilitated by product cross selling initiatives with the Company's pre-existing divisions and customer base, partially offset by a 1.4% decrease in revenues associated with Ebix's legacy operations preceding these business acquisitions. The cause for the difference between the 26.3% increase in reported revenue for the three month period ending September 30, 2012 as compared to the same period in 2011, versus the 3.5% increase in pro forma revenue for the three month ending September 30, 2012 as compared to the same period in 2011 is due to the effect of combining the additional revenue 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 September 30, 2012 and 2011 the change in foreign currency exchange rates (decreased)/increased reported consolidated operating revenues by approximately $(0.7) million and $1.5 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 $790 thousand or 9%, from $8.7 million in the third quarter of 2011 to $9.5 million in the third quarter of 2012. This increase is due to additional personnel costs and professional service expenses in support of expanded revenue streams associated with recent business acquisitions completed during 2012 and 2011.

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 service industries. Product development expenses increased $2.1 million or 43% from $5.0 million during the third quarter of 2011 to $7.1 million during the third quarter of 2012. This increase is attributable to additional personnel and staffing costs associated with increased software and system development activities in our India operating unit in support of our Exchange channel and recent business acquisitions.

Sales and Marketing Expenses Sales and marketing expenses increased $906 thousand or 26%, from $3.4 million in the third quarter of 2011 to $4.3 million in the third quarter of 2012. This increase is attributable to personnel and staffing costs associated with additional sales personnel added in support of our Exchange channel.

General and Administrative Expenses General and administrative expenses increased by $3.9 million or 67% from $5.8 million in the third quarter of 2011 to $9.7 24-------------------------------------------------------------------------------- Table of Contents million in the third quarter of 2012. This increase is partially due to the fact that in Q3 of 2011 the Company recognized a $1.2 million net reduction to previously recorded contingency based earn-out accruals pertaining to business acquisitions made during 2009 and 2010. Also contributing to the increase of general and administrative expenses were $1.4 million of additional personnel related costs associated with recent business acquisitions made over the last twelve months, $0.3 million increase in legal fees, and a $0.3 million increase in insurance costs.

Amortization and Depreciation Expenses Amortization and depreciation expenses increased $720 thousand or 41%, from $1.7 million in the third quarter of 2011 to $2.5 million in the third quarter of 2012. This increase due to $545 thousand of additional amortization costs associated with the customer relationship and developed technology intangible assets that were acquired in connection with recent business combinations completed over the last twelve months, and $204 thousand of additional depreciation expense associated with capital expenditures made to expand our operations and facilities.

Interest Expense Interest expense increased $222 thousand or 102%, from $218 thousand in the third quarter of 2011 to $440 thousand in the third quarter of 2012. Interest expense increased due to the fact that the outstanding balance on the Company's revolving credit facility increased from $10.2 million at September 30, 2011 to $37.8 million at September 30, 2012.

Other Non-Operating Income Other non-operating income for the three months ended September 30, 2012 in the amount of $414 thousand pertains to the gain recognized in regards to the decrease in the fair value of the put option that was issued to the former stockholders of PlanetSoft, acquired by Ebix in June 2012, who received shares of Ebix common stock as part of the acquisition consideration paid by the Company.

Income Taxes The Company recognized income tax expense of $2.2 million for the three months ended September 30, 2012, as compared to $1.1 million for third quarter of 2011.

Comparatively the income tax expense increased from a year earlier due to an increase in the effective tax rate, the provision recorded this quarter to increase our reserves for unrecognized tax benefits, and the fact that during the third quarter of 2011 the Company recorded a tax benefit in the amount of $403 thousand as a result of recognizing enhanced research and development tax deductions applicable to our Singapore operations retroactive back to the year 2010. The Company's effective tax rate used in the determination of its interim period tax provision for the quarter was 10.35% as compared to the 8.94% effective tax rate for the same period a year earlier. The effective rate increased due to a greater proportion of our taxable income being generated from jurisdictions with higher tax rates. The Company's interim period income tax provisions are based on our estimate of the effective income tax rate for the full current year, after eliminating discrete items uniquely related to the respective interim reporting period. During the third quarter the Company recognized a discrete income tax expense in the amount of $634 thousand with respect to an increase to our liability reserves for unrecognized tax benefits.

Results of Operations - Nine Months Ended September 30, 2012 and 2011 Operating Revenue During the nine months ended September 30, 2012 our total operating revenues increased $20.4 million or 16%, to $145.3 million as compared to $124.9 million during the same period in 2011. This increase is the result of growth in our Exchange channel primarily due to recent business acquisitions. $16.9 million of operating revenue pertaining to ADAM, acquired on February 7, 2011, were included in the Company's revenues reported in its condensed and consolidated statement of income for the nine months ended September 30, 2011.

Correspondingly included in the Company's revenues as reported in its condensed and consolidated statement of income for the nine months ended September 30, 2012 is $18.0 million of ADAM's operating revenue. With respect to the business acquisitions completed during fiscal year 2011 through the third fiscal quarter of 2012 on a pro forma basis, as disclosed in the table in Note 3 "Business Combinations" to the condensed consolidated financial statements, combined revenues increased 1.3% for the nine month period through the third fiscal quarter of 2012 as compared to the nine month period through the third fiscal quarter of 2011, whereas there was a 16.4% increase in reported revenues for the same comparative periods. The 1.3% increase in pro forma revenue is associated with a 2.4% increase in the revenues for nine month period through the third quarter 2012 versus 2011 pertaining to the businesses acquired during these periods (i.e. ADAM, HealthConnect, BSI, Taimma, PlanetSoft, Fintechnix, and TriSystems) which includes increases in revenues for these businesses that was generated since Ebix acquired them as facilitated by product cross selling initiatives with the Company's pre-existing divisions and customer base, partially offset by a 1.1% decrease in revenues associated with Ebix's legacy operations preceding 25-------------------------------------------------------------------------------- Table of Contents these business acquisitions. The cause for the difference between the 16.4% increase in reported revenue for the nine month period through the third quarter 2012 revenue as compared to the same period in 2011, versus the 1.3% increase in pro forma revenue for the nine month period through the third quarter of 2012 as compared to the same period in 2011 is due to the effect of combining the additional revenue 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 nine months ended September 30, 2012 and 2011 the change in foreign currency exchange rates (decreased)/increased reported consolidated operating revenues by approximately $(1.3) million and $4.3 million, respectfully.

Costs of Services Provided Costs of services provided, increased $2.8 million or 11% during the nine months ended September 30, 2012 to $27.7 million as compared to $24.9 million incurred during the same period in 2011. This increase is due to additional personnel costs and professional services expenses in support of our increased revenue streams from the growth in our Exchange channel and from recent business acquisitions completed during last twelve months.

Product Development Expenses Product development expenses increased $2.8 million or 19% during the nine months ended September 30, 2012 to $17.2 million as compared to $14.4 million of costs incurred during the same period in 2011. This increase is attributable to additional personnel and staffing costs associated with increased software and system development activities in our India operating unit in support of our Exchange channel and recent business acquisitions.

Sales and Marketing Expenses Sales and marketing expenses increased $2.9 million or 30% during the nine months ended September 30, 2012 to $12.5 million as compared to $9.6 million recognized during the same period in 2011. This increase is attributable to additional personnel, advertising, and trade show costs in support of our Exchange channel and recent business acquisitions.

General and Administrative Expenses General and administrative ("G&A") expenses increased $6.5 million or 35% for the nine months ended September 30, 2012 to $24.7 million from $18.2 million for same period in 2011. Included in G&A costs for the current nine month interim period 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 directly related internal operating costs incurred by the Company and a portion of the fee that had to be paid to our investment banker).

Offsetting this benefit is a $3.2 million adverse year over year variance caused by the fact that in second and third quarters of 2011 the Company recognized a reduction to previously recorded contingency based earn-out accruals pertaining to business acquisitions made during 2010/2009, and $2.8 million of additional personnel related costs associated with recent business acquisitions made over the last nine months.

Amortization and Depreciation Expenses Amortization and depreciation expenses increased by $954 thousand or 17% during the nine months ended September 30, 2012 to $6.6 million as compared to $5.6 million recorded during the same period in 2011. This increase is due to $672 thousand of additional amortization costs associated with the customer relationship and developed technology intangible assets that were acquired in connection with recent business combinations completed over the last twelve months, and $282 thousand of additional depreciation expense associated with capital expenditures made to expand our operations and facilities.

Interest Expense Interest expense increased $413 thousand or 70%, from $592 thousand during the nine months ended September 30, 2011 to $1.0 million for the nine months ended September 30, 2012. Interest expense increased due to the fact that the average outstanding balance on the Company's revolving credit facility increased from $19.5 million for the prior year nine-month period in 2011 as compared to the $30.6 million for the current nine month period in 2012.

Other Non-Operating Income Other non-operating income for the nine months ended September 30, 2012 in the amount of $676 thousand pertains to the cumulative gain recognized in regards to the decrease in the fair value of the put option that was issued to the former stockholders 26-------------------------------------------------------------------------------- Table of Contents of PlanetSoft, acquired by Ebix in June 2012, whom received shares of Ebix common stock as part of the acquisition consideration paid by the Company.

Income Taxes The Company recognized income tax expense in the amount of $6.7 million for the nine months ended September 30, 2012 as compared to a net tax benefit in the amount of $168 thousand recognized for the nine months ending September 30, 2011. Compared to the same nine month period from a year earlier income tax expense increased due to an increase in the effective tax rate, the provisions recorded this year to increase our reserves for unrecognized tax benefits, the fact that in the third quarter of 2011 the Company recognized a net tax benefit in the amount of $4.6 million in connection with the release of the remaining valuation allowances that had been held against deferred tax assets associated with tax net operating losses carry forwards obtained from prior business acquisition, and during the third quarter of 2011 the Company recorded a tax benefit in the amount of $403 thousand as a result of recognizing enhanced research and development tax deductions applicable to our Singapore operations retroactive back to the year 2010. The Company's effective tax rate used in the determination of the interim period tax provision for the nine months ending September 30, 2012 was 10.35% as compared to the 8.94% effective tax rate for the same period a year earlier. The effective rate increased due to a greater proportion of our taxable income being generated from jurisdictions with higher tax rates. The Company's interim period income tax provisions are based on our estimate of the effective income tax rate for the full current year, after eliminating discrete items uniquely related to the respective interim reporting period. During the nine months ended September 30, 2012 the Company recognized total discrete income tax expense in the amount of $1.2 million with respect to an increase in our liability reserves for unrecognized tax benefits.

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 cash outlays for income taxes are expected to exceed income tax expense. 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.

In the 4th quarter of 2011 the Company paid its first quarterly dividend in the amount of $0.04 per common share. This same quarterly dividend per share was paid again in February 2012. The dividend rate was increased to $0.05 effective with the dividend payment made in May 2012, and the same dividend payment was made in August 2012 and will again be made in November 2012. On November 7, 2012 Ebix's Board of Directors increased the regular quarterly dividend by 50% to 7.5 cents per outstanding share of the Company's common stock to be paid in February 2013 and is expected to continue on a quarterly basis thereafter. The Company intends to use a portion of its operating cash flows to continue issuing similar quarterly 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, access to our credit facilities, and access to 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.

We continue to strategically evaluate our ability to issue 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 and repurchases of our common stock.

Our cash and cash equivalents were $29.5 million and $23.7 million at September 30, 2012 and December 31, 2011, respectively. Our cash and cash equivalents balance has increased by $5.8 million since year end 2011, as a result of both cash generated by our ongoing operating activities and funds provided by our new financing facility with Citi Bank. 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 27-------------------------------------------------------------------------------- Table of Contents the U.S. parent level upon receipt of the repatriated 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 November 5, 2012 is presented in the table below (figures denominated in thousands): United States Canada Latin America Australia Singapore New Zealand India Europe Sweden Total Cash and ST investments $ 14,009 $ 2,609 $ 1,603 $ 6,673 $ 1,579 $ 1,655 $ 1,316 $ 1,936 $ 15 $ 31,395 Our current ratio decreased modestly to 1.26 at September 30, 2012 from 1.28 at December 31, 2011 although our working capital position increased to $15.8 million at September 30, 2012 from $14.0 million at the end of the 2011. The Company's accounts receivable DSO stood at 61 days at September 30, 2012 and reflects a continuing favorable trend being down 3 days from December 31, 2011 and 6 days from the third quarter of 2011. We continue to 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 nine months ended September 30, 2012 the Company executed and completed five business acquisitions including PlanetSoft, Inc. which is discussed further below; the other acquisitions were not material individually or in the aggregate.

A significant component of the purchase price consideration for many of the Company's business acquisitions is a potential future cash earnout based on reaching certain specified future revenue targets. The Company recognizes these potential obligations as contingent liabilities. These contingent consideration liabilities are recorded at fair value on the acquisition date and are re-measured quarterly based on the then assessed fair value and adjusted if necessary. As of September 30, 2012, the total of these contingent liabilities was $30.0 million, of which $23.7 million is reported in long-term liabilities, and $6.2 million is included current liabilities in the Company's Condensed Consolidated Balance Sheet. As of December 31, 2011 the total of these contingent liabilities was $7.6 million which were included accounts payable and accrued liabilities in the Company's Consolidated Balance Sheet.

Operating Activities Net cash provided by our operating activities was $54.0 million for the nine months ended September 30, 2012. The primary components of the cash provided by operations during this nine months interim period consisted of net income of $51.8 million, net of $(280) thousand of net non-cash gains recognized on derivative instruments and foreign currency exchange, $6.6 million of depreciation and amortization, $(5.7) million of working capital requirements primarily associated with increased accounts outstanding trade accounts receivable and reductions to trade payables and accrued liabilities, and $1.6 million of non-cash share-based compensation.

Net cash provided by our operating activities was $22.1 million for the three-month period ended September 30, 2011. The primary components of the cash provided by operations during that nine month period consisted of net income of $54.0 million, net of $(2.2) million of net non-cash gains recognized on derivative instruments and foreign currency exchange, $5.6 million of depreciation and amortization, $(7.2) million of working capital requirements primarily associated with reductions to trade payables and accrued liabilities, and increased receivables from customers, and $1.7 million of non-cash share-based compensation.

Investing Activities Net cash used for investing activities during the nine months ended September 30, 2012 was $58.9 million, of which $54.1 million in the aggregate was used to complete business acquisitions closed during the year, $2.0 million was used for the investment in CurePet, $1.5 million was used in payment of an earnout obligation in connection with our 2010 acquisition of MCN in Brazil, $1.5 million was used for capital expenditures pertaining to the enhancement of our technology platforms and the purchases of operating equipment to support our expanding operations. Partially offsetting these investment cash outflows was $146 thousand of net cash in-flow from maturities of marketable securities (specifically bank certificates of deposit), net of purchases.

Net cash provided from investing activities during the nine months ended September 30, 2011 totaled $5.7 million which 28-------------------------------------------------------------------------------- Table of Contents consisted of $4.6 million from maturities of marketable securities (specifically bank certificates of deposit), net of purchases, and $3.5 million of net cash obtained in connection with the acquisition of ADAM in February 2011. Partially offsetting these investing cash inflows were $1.9 million used for capital expenditures and $577 thousand used to settle earn out obligations in connection with a prior business acquisition.

Financing Activities During the nine months ended September 30, 2012 net cash provided by financing activities was $13.7 million which consisted of $27.9 million provided from the Company's term loan with Citibank (net of the repayment of the remaining balance from the then pre-existing term loan with BOA), $6.1 million provided from our commercial bank revolving credit facility with Citibank (net of repayments), and $739 thousand of proceeds from the exercise of common stock options. Partially offsetting these aggregate cash proceeds was $15.2 million used to repurchase shares of our common stock, $5.2 million used to pay quarterly dividends to our common stockholders, and $829 thousand used to make principal payments on long-term debt and capital lease obligations.

During the nine months ended September 30, 2011 net cash used in financing activities was $66.8 million. This net financing cash outflow consisted of $56.5 million used to complete open market repurchases of our common stock, $14.8 million was used to reduce the balance of our commercial bank revolving credit facility, $4.7 million used to make scheduled principal payments on our term loan facility, $6.8 million used to fully settle convertible debt obligations, and $253 thousand was used towards principal repayments on existing capital lease obligations, all being partially offset by $16.3 million of proceeds from our expanded commercial banking financing facility, net of repayments.

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 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. This new $100 million credit facility with Citibank, N.A., as administrative agent, replaced the former $55 million facility that the Company had in place with Bank of America, N.A. The 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%. The credit facility is and will be 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.

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 related Credit Agreement dated February 12, 2010 (as amended). The aggregate amount of the payment was $45.1 million and was funded from a portion of the proceeds of the Citibank 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.

At September 30, 2012, the outstanding balance on the Company's revolving line of credit with Citibank was $37.8 million and the facility carried an interest rate of 1.74%. This balance is included in the long-term liabilities section of the Condensed Consolidated Balance Sheets. Regarding the Company's revolving line of credit during the nine months ended September 30, 2012, the average outstanding balance was $30.6 million and the maximum outstanding balance was $37.8 million.

At September 30, 2012, the outstanding balance on the Company's term loan with Citibank was $42.9 million of which $11.0 million is due within the next twelve months. This term loan also carried an interest rate of 1.74%. During the nine months ended September 30, 2012, $2.1 million of scheduled payments were against the existing term loan with Citibank, and $1.7 million of scheduled payments were made against the term loan previously with BOA. 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.

29-------------------------------------------------------------------------------- Table of Contents 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 September 30, 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 $ 37,840 $ - $ 37,840 $ - $ - Long-term debt $ 45,338 $ 11,600 $ 33,738 $ - $ - Operating leases $ 16,105 $ 5,045 $ 6,007 $ 3,071 $ 1,982 Capital leases $ 640 $ 333 $ 307 $ - $ - Total $ 99,923 $ 16,978 $ 77,892 $ 3,071 $ 1,982 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, and 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 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.

In accordance with 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.

30-------------------------------------------------------------------------------- Table of Contents 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 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 the 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, 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.

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 31-------------------------------------------------------------------------------- Table of Contents to meet before being recognized in the financial statements.

Foreign Currency Matters Historically the functional currency for the Company's foreign subsidiaries in India and Singapore had been the Indian rupee and Singapore dollar respectively.

As a result of the Company's rapid growth, including its recent acquisition of PlanetSoft, and the expansion of its intellectual property research and development activities in its Singapore subsidiary, and its product development activities and information technology enabled services for the insurance industry provided by its India subsidiary in support of Ebix's operating divisions across the world (both of which are transacted in U.S. dollars), management undertook a reconsideration of functional currency designations for these two foreign subsidiaries in India and Singapore, and concluded that effective July 1, 2012 the functional currency for these entities should be changed to the U.S. dollar. Management believes that the acquisition of PlanetSoft in combination with the other four business acquisitions completed during the current year and the cumulative effect of business acquisitions made over the last few years which in turn has necessitated the rapid growth of the Company's operations in India and Singapore, were indicative of a significant change in the economic facts and circumstances that justified the reconsideration and ultimate change in the functional currency. Had the change in the functional currency designation for our India and Singapore subsidiaries not been made, the Company would have incurred and recognized approximately $1.25 million of foreign currency exchange losses for the three months ended September 30, 2012. Furthermore, a portion of the monetary assets and liabilities for these two foreign subsidiaries that are denominated in foreign currencies are re-measured into U.S. dollars at the exchange rates in effect at each reporting date. These corresponding re-measurement gains and losses are included as a component of foreign currency exchange gains and losses in the accompanying Condensed Consolidated Statements of Income and amounted to a $422 thousand loss for the three months ended September 30, 2012.

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 other comprehensive income in the accompanying Condensed Consolidated Balance Sheets. 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.

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