**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                                              | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**         |
|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|
|                                                    |       |                                                                                                |
| **For the quarterly period ended  March 31, 2006** |
|                                                    |       | ** **                                                                                          |
| **OR**                                                  |
|                                                    |       |                                                                                                |
| **o**                                                   | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**Commission file number 0-15946**

 

**Ebix,Inc.**

(Exact name of registrant as specified in itscharter)

 

| **DELAWARE**                                      | ** ** | **77-0021975**                       |
|---------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or |       | (I.R.S. Employer Identification No.) |
| organization)                                     |       |                                 |
|                                              |       |                                 |
| **1900 E. GOLF ROAD**                             | ** ** | ** **                           |
| **SCHAUMBURG, IL**                                | ** ** | **60173**                            |
| (Address of principal executive offices)          |       | (Zip Code)                           |

 

Registrant’s telephone number, including areacode: **847-789-3047**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes  ý    No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large acceleratedfiler     Accelerated filer  o    Non-acceleratedfiler  ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes  o    No  ý

 

As of May 9, 2006, the number of shares of Common Stock outstanding was2,756,703.

 

 

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**Ebix, Inc. and Subsidiaries**

 

FORM 10-Q

 

FOR THE QUARTER ENDED MARCH 31, 2006

 

INDEX

 
| PART I — FINANCIAL INFORMATION |   |                                                                                                |
|-------------------------------------|--------|-----------------------------------------------------------------------------------------------------|
|                                |   |                                                                                                |   |   |
|                                |   | Item 1. Consolidated Financial Statements                                                           |   |   |
|                                |   |                                                                                                |   |   |
|                                |   |                                                                                                | Condensed Consolidated Balance Sheets at March 31, 2006  (unaudited) and December 31, 2005 |   | 3 |
|                                |   |                                                                                                |   |   |   |
|                                |   |                                                                                                | Condensed Consolidated Statements of Income for the Three Months  ended March 31, 2006 and 2005 (unaudited) |   | 4 |
|                                |   |                                                                                                |   |   |   |
|                                |   |                                                                                                | Condensed Consolidated Statements of Cash Flows for the Three Months  ended March 31, 2006 and 2005 (unaudited) |   | 5 |
|                                |   |                                                                                                |   |   |   |
|                                |   |                                                                                                | Notes to Condensed Consolidated Financial Statements (unaudited) |   | 6 |
|                                |   |                                                                                                |   |   |
|                                |   | Item 2. Management’s Discussion and Analysis of Financial Condition  and Results of Operations |   | 14 |
|                                |   |                                                                                                |   |   |
|                                |   | Item 3. Quantitative and Qualitative Disclosures About Market Risk                                  |   | 16 |
|                                |   |                                                                                                |   |   |
|                                |   | Item 4. Controls and Procedures                                                                     |   | 16 |
|                                |   |                                                                                                |   |   |
| PART  II — OTHER INFORMATION   |   | 18                                                                                                  |
|                                |   |                                                                                                |   |   |
|                                |   | Item  1A. Risk Factors                                                                              |   | 18 |
|                                |   |                                                                                                |   |   |
|                                |   | Item 6.  Exhibits                                                                                   |   | 22 |
|                                |   |                                                                                                |   |   |
| SIGNATURES                          |   | 23                                                                                                  |

 

2

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**Ebix, Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

(In thousands, except for share and per shareamounts)

 
| ** **                                                                                                                                                                    | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                    | ** ** | **(Unaudited****)**      | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                    | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **Current  assets:**                                                                                                                                                          |       |                     |       |                        |       |
| Cash and  cash equivalents                                                                                                                                                    |       | $                        | 6,246      |                        | $          | 6,733 |   |
| Accounts  receivable, less allowance of $18 and $11, respectively                                                                                                             |       | 3,885                    |       | 3,502                       |       |
| Other  current assets                                                                                                                                                         |       | 520                      |       | 444                         |       |
| **Total current assets**                                                                                                                                                      |       | 10,651                   |       | 10,679                      |       |
| Property and  equipment, net                                                                                                                                                  |       | 1,408                    |       | 1,488                       |       |
| Goodwill                                                                                                                                                                      |       | 12,047                   |       | 12,204                      |       |
| Intangible  assets, net                                                                                                                                                       |       | 3,058                    |       | 3,293                       |       |
| Other assets                                                                                                                                                                  |       | 285                      |       | 317                         |       |
| **Total assets**                                                                                                                                                              |       | $                        | 27,449     |                        | $          | 27,981 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                |       |                     |       |                        |       |
| **Current  liabilities:**                                                                                                                                                     |       |                     |       |                        |       |
| Accounts  payable and accrued expenses                                                                                                                                        |       | $                        | 1,518      |                        | $          | 1,962 |   |
| Accrued  payroll and related benefits                                                                                                                                         |       | 677                      |       | 1,450                       |       |
| Current  portion of long term debt                                                                                                                                            |       | 966                      |       | 969                         |       |
| Deferred  revenue                                                                                                                                                             |       | 3,017                    |       | 2,794                       |       |
| **Total current liabilities**                                                                                                                                                 |       | 6,178                    |       | 7,175                       |       |
| Long term  debt, less current portion                                                                                                                                         |       | 1,348                    |       | 1,844                       |       |
| Redeemable common stock (0 shares issued  and outstanding at March 31, 2006 and 157,728 outstanding at  December 31, 2005, respectively) stated at redemption price |       | —                   |       | 1,461                       |       |
|                                                                                                                                                                          |       |                     |       |                        |       |
| **Stockholders’  equity:**                                                                                                                                               |       |                     |       |                        |       |
| Convertible Series D Preferred stock, $.10  par value, 500,000 shares authorized, no shares issued and outstanding                                                            |       | —                   |       | —                      |       |
| Common stock, $.10 par value, 10,000,000 shares  authorized, and 2,753,352 and 2,740,516 shares issued and outstanding,  respectively                                         |       | 275                      |       | 274                         |       |
| Additional paid-in capital                                                                                                                                                    |       | 94,040                   |       | 92,539                      |       |
| Accumulated  deficit                                                                                                                                                          |       | (74,554                  | )          | (75,689                     | )          |
| Accumulated  other comprehensive income                                                                                                                                       |       | 162                      |       | 377                         |       |
| **Total  stockholders’ equity**                                                                                                                                          |       | 19,923                   |       | 17,501                      |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                          |       | $                        | 27,449     |                        | $          | 27,981 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

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**Ebix, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Income**

(In thousands, except per share data)

(Unaudited)

 
| ** **                                                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                                                                                | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Revenue:**                                                                                              |       |                                  |       |   |   |
| Software                                                                                                  |       | $                                     | 497        |   | $ | 202 |   |
| Services and other (Including revenues from  related parties of $713 and $878, respectively- See Note 6.) |       | 5,153                                 |       | 5,702 |   |
| **Total revenue**                                                                                         |       | 5,650                                 |       | 5,904 |   |
| **Operating  expenses:**                                                                                  |       |                                  |       |   |   |
| Services and  other costs                                                                                 |       | 1,331                                 |       | 1,406 |   |
| Product  development                                                                                      |       | 869                                   |       | 794 |   |
| Sales and  marketing                                                                                      |       | 590                                   |       | 478 |   |
| General and  administrative                                                                               |       | 1,364                                 |       | 1,689 |   |
| Amortization  and depreciation                                                                            |       | 314                                   |       | 329 |   |
| **Total operating expenses**                                                                              |       | 4,468                                 |       | 4,696 |   |
| **Operating income**                                                                                      |       | 1,182                                 |       | 1,208 |   |
| Interest  income                                                                                          |       | 79                                    |       | 82 |   |
| Interest expense                                                                                          |       | (32                                   | )          | (102 | ) |
| Foreign  exchange gain (loss)                                                                             |       | 42                                    |       | (9 | ) |
| **Income  before income taxes**                                                                           |       | 1,271                                 |       | 1,179 |   |
| Income tax  expense                                                                                       |       | (136                                  | )          | (111 | ) |
| **Net  income**                                                                                           |       | $                                     | 1,135      |   | $ | 1,068 |   |
|                                                                                                      |       |                                  |       |   |   |
| **Basic  earnings per common share**                                                                      |       | $                                     | 0.41       |   | $ | 0.37 |   |
|                                                                                                      |       |                                  |       |   |   |
| **Diluted  earnings per common share**                                                                    |       | $                                     | 0.36       |   | $ | 0.33 |   |
|                                                                                                      |       |                                  |       |   |   |
| Basic  weighted average shares outstanding                                                                |       | 2,748                                 |       | 2,912 |   |
|                                                                                                      |       |                                  |       |   |   |
| Diluted  weighted average shares outstanding                                                              |       | 3,137                                 |       | 3,224 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

4

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**Ebix, Inc. and Subsidiaries**

**Condensed Consolidated Statements of CashFlows**

(In thousands)

(Unaudited)

 
| ** **                                                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                | ** ** | **2006**                              | ** ** | **2005** | ** ** |
|                                                                                                      |       |                                  |       |   |   |
| **Cash  flows from operating activities:**                                                                |       |                                  |       |   |   |
| Net income                                                                                                |       | $                                     | 1,135      |   | $ | 1,068 |   |
| **Adjustments to reconcile net income to net**** cash  provided by (used in) operating activities:** |       |                                  |       |   |   |
| Depreciation  and amortization                                                                            |       | 314                                   |       | 329 |   |
| Stock-based  compensation                                                                                 |       | 21                                    |       | (32 | ) |
| Restricted  stock compensation                                                                            |       | 68                                    |       | — |   |
| Provision  for doubtful accounts                                                                          |       | 7                                     |       | 2 |   |
| **Changes  in assets and liabilities:**                                                                   |       |                                  |       |   |   |
| Accounts  receivable                                                                                      |       | (390                                  | )          | (176 | ) |
| Other assets                                                                                              |       | (44                                   | )          | 3 |   |
| Accounts  payable and accrued expenses                                                                    |       | (444                                  | )          | (58 | ) |
| Accrued  payroll and related benefits                                                                     |       | (773                                  | )          | 141 |   |
| Deferred  revenue                                                                                         |       | 223                                   |       | 501 |   |
| Net cash provided  by operating activities                                                                |       | 117                                   |       | 1,778 |   |
| **Cash  flows from investing activities:**                                                                |       |                                  |       |   |   |
| Capital  expenditures                                                                                     |       | (17                                   | )          | (276 | ) |
| Net cash used in  investing activities                                                                    |       | (17                                   | )          | (276 | ) |
| **Cash  flows from financing activities:**                                                                |       |                                  |       |   |   |
| Proceeds  from the exercise of the stock options                                                          |       | 31                                    |       | 12 |   |
| Principal  payments under debt obligations                                                                |       | (499                                  | )          | (500 | ) |
| Net cash used in  financing activities                                                                    |       | (468                                  | )          | (488 | ) |
| Effect of  foreign exchange rates on cash                                                                 |       | (119                                  | )          | 56 |   |
| Net change in cash  and cash equivalents                                                                  |       | (487                                  | )          | 1,070 |   |
| Cash and cash  equivalents at the beginning of the period                                                 |       | 6,733                                 |       | 5,843 |   |
| Cash and cash  equivalents at the end of the period                                                       |       | $                                     | 6,246      |   | $ | 6,913 |   |
|                                                                                                      |       |                                  |       |   |   |
| **Supplemental  disclosures of cash flow information:**                                                   |       |                                  |       |   |   |
| Interest  paid                                                                                            |       | $                                     | —     |   | $ | 47 |   |
| Income taxes  paid                                                                                        |       | $                                     | 40         |   | $ | 86 |   |
|                                                                                                      |       |                                  |       |   |   |
| **Supplemental  schedule of noncash investing activities:**                                          |       |                                  |       |   |   |

 

See accompanying notes to condensed consolidated financial statements.

 

5

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Ebix, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

(UNAUDITED)

 

Note 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

 

**Basis of presentation** – These condensedconsolidated financial statements are unaudited, include the accounts of Ebix,Inc. and its wholly-owned subsidiaries (Ebix or “the Company”), and reflect alladjustments (consisting only of normal recurring adjustments) which are, in theopinion of management, necessary for a fair presentation of the results of theinterim periods.

 

These condensed consolidated financial statements should be read inconjunction with the consolidated financial statements, and accompanying notesthereto, included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2005.

 

The results of operations for the current interim period are notnecessarily indicative of results to be expected for the entire current year.

 

Certain prior period amounts have been reclassified to conform to thecurrent period presentation.

 

**Summary of significant accounting policies—**

 

**RevenueRecognition**—**We** apply the provisions of Statement of Position (“SOP”) 97-2, “SoftwareRevenue Recognition,” as amended by Statement of Position 98-9, “Modificationof SOP 97-2, Software Revenue Recognition, With Respect to CertainTransactions,” to all transactions involving the sale of software.

** **

In May 2003, theFinancial Accounting Standards Board (“FASB”) finalized the terms of EmergingIssues Task Force Issue No. 00-21, “Revenue Arrangements with MultipleDeliverables” (EITF 00-21), which provides criteria governing how toidentify whether goods or services that are to be delivered separately in abundled sales arrangement should be accounted for separately. Deliverables areaccounted for separately if they meet all of the following: a) thedelivered items have stand-alone value to the customer; b) the fair valueof any undelivered items can be reliably determined; and c) if thearrangement includes a general right of return, delivery of the undelivereditems is probable and substantially controlled by the seller. The Companyadopted EITF 00-21 on July 1, 2003 for all new revenue arrangementsexecuted subsequent to June 30, 2003 (or significant modification toarrangements existing prior to July 1, 2003). The Company’s current policyis to analyze all new revenue arrangements.

 

To the extentarrangements contain multiple deliverables, the Company performs an analysis ofthe nature of the deliverables to determine to what extent the deliverables ofthe arrangement are governed by any higher level literature (as defined in EITF00-21). EITF 00-21 recognizes arrangements that qualify for treatment under SOP97-2 and certain arrangements that qualify for contract accounting (i.e. SOP 81-1)as falling under the definition of “higher level literature”. The Companyapplies the provisions of SOP 97-2, as amended by Statement of Position 98-9, “Modificationsof SOP 97-2, Software Revenue Recognition, With Respect to CertainTransactions,” to all arrangements which include software deliverables that areconsidered more than inconsequential to the other elements in the arrangements.For 2006, all of the Company’s contracts with multiple deliverables have fallenunder higher level accounting literature under the provisions of SOP 97-2and/or SOP 81-1.

 

The Company recognizesrevenue for license fees from its software products upon delivery, providedthat the fee is fixed and determinable, acceptance has occurred, collectibilityis probable and persuasive evidence of an arrangement exists. Revenue fromthird party software is derived from the licensing of third party softwareproducts in connection with sales of the Company’s software licenses, and isgenerally recognized upon delivery together with the Company’s license revenue.Training, data conversion, installation, and consulting services are generallyrecognized as revenue when the services are performed and collectibility isprobable. Revenue for maintenance and support service is recognized ratablyover the term of the support agreement.

 

For arrangementscontaining multiple elements, revenue is recognized on delivered elements whenvendor-specific objective evidence (“VSOE”) of fair value has been establishedon the undelivered elements, applying the residual method of SOP 98-9. Fairvalue is determined for each undelivered element based on the price charged forthe sale of each element separately. In contracts that contain first yearmaintenance bundled with software fees, unbundling of maintenance is based onthe price charged for renewal maintenance. Revenue for maintenance and supportservice is recognized ratably over the term of the support agreement.

 

Revenues related tohosting arrangements, including monthly fees as well as any initial registrationfees and related custom programming, are recognized ratably over the term ofthe agreement in accordance with Staff Accounting Bulletin (“SAB”) No. 104“Revenue Recognition”. Transaction fees are recognized as revenue as thetransactions occur and revenue is earned. Revenue is only recognized whencollectiblity is probable.

 

6

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Deferred revenueincludes maintenance and support payments that have been received or billingsrecorded prior to performance and, in certain cases, cash collections, amountsreceived under multi-element arrangements in which VSOE of undelivered elementsdoes not exist, and initial registration fees and related service fees underhosting agreements. Revenue is recognized when VSOE of the undelivered elementsis established, the elements are delivered, or the obligation to deliver theelements is extinguished.

 

Software arrangementsinvolving significant customization, modification or production are accountedfor in accordance with American Institute of Certified Public AccountantsStatement of Position 81-1, “Accounting for Performance on Construction-Typeand Certain Production-Type Contracts,” using the percentage-of-completionmethod. The Company recognizes revenue using actual hours worked as apercentage of total expected hours required by the arrangement, provided thatthe fee is fixed and determinable, there is evidence of an arrangement andrecovery of any related recorded asset is considered probable.

 

For business processoutsourcing agreements, which include call center services, services areprimarily performed on a time and materials basis. Revenue is recognized whenthe service is performed.

 

**Employee Stock Options****—At** March 31,2006, the Company has two stock-based employee compensation plans. Prior toJanuary 1, 2006, the Company accounted for stock options issued to employees inaccordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees.”The Company had adopted the disclosure only provisions of SFAS No. 123,“Accounting for Stock Based Compensation,” and SFAS No. 148, “Accounting forStock Based Compensation—Transition and Disclosure—an Amendment to FASBStatement No. 123,” for options and warrants issued to employees. Under APBOpinion No. 25, compensation expense is based on the difference, if any, on themeasurement date, between the estimated fair value of the Company’s stock andthe exercise price of options to purchase that stock. Any resultingcompensation expense is amortized on a straight-line basis over the vestingperiod of the options. 

 

In December 2004, theFASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”),which revises and replaces SFAS No. 123, “Accounting for Stock-Based Payment”and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”FAS 123R requires the measurement of all share-based payments to employees,including grants of employee stock options, using a fair-value based method andthe recording of such expense in the Company’s consolidated statements ofoperations. The pro forma disclosures previously permitted under SFAS No. 123will no longer be an alternative to financial statement recognition. Theprovisions of FAS 123R were to have been effective for reporting periods beginningafter June 15, 2005. At the end of March 2005, the SEC staff released StaffAccounting Bulletin No. 107 (SAB 107), providing guidance for implementing FASBNo. 123R. Subsequently, the Commission delayed the implementation dates for FAS123R to the start of the Company’s fiscal year. The Company accounts for stockoptions issued to employees in accordance with Statement of FinancialAccounting Standards No. 123 (revised 2004), “Share Based Payment” (SFAS123(R)), applying the modified prospective method, see Note 3 for additionalinformation.

 

**Non-employee Stock Compensation****—Prior toJanuary 1, 2006 the** Company accounted for stock basedcompensation issued to non-employees in accordance with SFAS No. 123 andEmerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting forEquity Instruments That Are Issued to Other Than Employees for Acquiring, or inconjunction with Selling Goods or Services.” SFAS No. 123 establishes afair value based method of accounting for stock-based compensation plans. Underthe fair value based method, compensation cost is measured at the grant datebased on the value of the award, which is calculated using an option pricingmodel, and is recognized over the service period, which is usually the vestingperiod. Beginning on January 1, 2006, the Company accounts for stock basedcompensation issued to non-employees in accordance with SFAS 123(R), applyingthe modified prospective method, see Note 3 for additional information.

 

Note 2. STOCK OPTIONS

 

During the first quarter of 2006, the Company did not grant any stockoptions to employees; however, options to purchase a total of 1,500 shares ofthe Company’s Common Stock were issued to one non-employee director subsequentto his appointment to the Company’s Board of Directors on January 3, 2006.These options were granted at an exercise price per share of 100% of the fairmarket value of a share of Common Stock on the date of the grant. These optionsbecome exercisable with respect to (a) 500 shares on the day prior to thefirst anniversary of the date of the grant and (b) 125 shares on the lastday of each of the eight calendar quarters commencing on the last day of thecalendar quarter ending on or after the first anniversary of the date of thegrant. Each option has a term of ten years beginning on the date of the grant.

 

The Company has granted stock options outside the Company’s stockoption plans to non-employee consultants to purchase up to an aggregate of57,000 shares of the Company’s common stock, of which options to purchase30,875 shares were outstanding at March 31, 2006. These options weregranted at prices determined by the Board of Directors (at no less than 100percent of the market price on the date of grant). The options have a four-yearvesting period and must be exercised within ten years of the date of the grant.These non-employee options were valued using the fair value method asprescribed by SFAS No. 123 using the following assumptions: volatility of 51%,risk free interest rate of 4.59% and a 10-year term. Options issued prior to2001 are performance-based awards, with no service commitment and subject tovesting only if the Company’s stock price reaches a certain level. Optionsissued in 2001 vest over four years, but vesting accelerates if a performancetarget is achieved. At March 31, 2006, non-employee options to purchase 4,812shares were vested. The Company recognized a credit to compensation expense ofapproximately $38,000 related to these options during the three-month periodended March 31, 2005. There was no compensation expense related to theseoptions during the three-month period ended March 31, 2006 as the options werevested.

 

On August 11, 2003, the Company granted 25,000 options to purchasethe Company’s common stock to an employee who is the brother of the ChiefExecutive Officer, in connection with his joining the Company as an employee. Theoption grantee was an employee when he received the grant. The options vestover four years from the date of grant, expire ten years from the date ofgrant, and were issued with an exercise price below the fair market value ofthe stock on the date of grant. This grant was not subject to any of theCompany’s stock option plans. The total intrinsic value associated with thegranting of these options was $96,250, which will be recognized ratably ascompensation expense over the four-year vesting period in accordance with APBOpinion No. 25. The Company recognized compensation expense of approximately$6,000 related to these options during each of the three-month periods endedMarch 31, 2006 and March 31, 2005.

 

Note 3. STOCK BASED COMPENSATION

 

Effective January 1, 2006, theCompany adopted Statement of Financial Accounting Standards No. 123(revised 2004), “Share Based Payment” (SFAS 123(R)), applying the modifiedprospective method. Prior to the adoption of SFAS 123(R), the Company appliedthe

 

7

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provisions of APB Opinion No.25, “Accounting for Stock Issued to Employees,” in accounting for itsstock-based awards, and accordingly, recognized no compensation cost for itsstock plans other than for its restricted stock awards.** **Under the modified prospectivemethod, SFAS 123(R) applies to new awards and to awards that were outstandingas of December 31, 2005 that are subsequently vested, modified, repurchased orcancelled. Compensation expense recognized during the first quarter of 2006includes the portion vesting during the period for (1) all share-based paymentsgranted prior to, but not yet vested as of December 31, 2005, based on thegrant date fair value estimated in accordance with the original provisions ofStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation” (SFAS 123) and (2) all share-based payments grantedsubsequent to December 31, 2005, based on the grant-date fair value estimatedusing the Black-Scholes option-pricing model. No stock options were granted toemployees during the first quarter of 2006; however, options were granted to aDirector. Stock compensation expense of $16,000 was recognized during the firstquarter of 2006 on existing stock options. As a result of the Company’sdecision to adopt the modified prospective method, prior period results havenot been restated.

 

The following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions ofSFAS 123 for the three months ended March 31, 2005:

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **March 31, 2005**     | ** ** |
|                                                                                                                                          |       |                             |       |
| Net income, as reported                                                                                                                       |       | $                                | 1,068,000  |   |
| Add: Stock-based employee compensation  expense included in reported net income, net of related tax effects                                   |       | 4,560                            |       |
| Deduct: Total stock-based employee  compensation expense determined under fair-value based method for all awards,  net of related tax effects |       | (474,766                         | )          |
| Pro forma net income                                                                                                                          |       | $                                | 597,794    |   |
|                                                                                                                                          |       |                             |       |
| Basic earnings per share, as reported                                                                                                         |       | $                                | 0.37       |   |
| Diluted earnings per share, as reported                                                                                                       |       | $                                | 0.33       |   |
| Basic earnings per share, pro forma                                                                                                           |       | $                                | 0.21       |   |
| Diluted earnings per share, pro forma                                                                                                         |       | $                                | 0.19       |   |

 

Before adoption of SFAS 123(R),pro forma disclosures reflected the fair value of each option grant estimatedon the date of grant using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions for stock options granted during the threemonths ended March 31, 2005:

 
| ** **                               | ** ** | **Three Months  Ended  March 31, 2005** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------|------------|
| Expected volatility                      |       | 97                                                     | %          |
| Expected dividends                       |       | None                                                   |       |
| Weighted average risk-free interest rate |       | 4.36                                                   | %          |
| Expected life of stock options           |       | 10 years                                               |       |

 

A summary of stock based compensation activity within the Company’sstock-based compensation plans for the three months ended March 31, 2006 is asfollows:

 
| ** **                       | ** ** | **Number of Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Term  (Years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------|------------|--------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------|------------|
|                             |       |                           |       |                                           |       |                                                                 |       |                                |       |
| Outstanding at December 31, 2005 |       | 685,912                        |       | $                                              | 11.89      |                                                                 |       |                                |       |   |
| Granted                          |       | 1,500                          |       | 19.65                                          |       |                                                                 |       |                                |       |
| Exercised                        |       | (2,977                         | )          | $                                              | 14.70      |                                                                 |       |                                |       |   |
| Canceled                         |       | —                         |       | $                                              | —     |                                                                 |       |                                |       |   |
| Outstanding at March 31, 2006    |       | 684,435                        |       | $                                              | 11.91      |                                                                 | 6.08       |                                | $          | 5,706,956 |   |
|                             |       |                           |       |                                           |       |                                                                 |       |                                |       |
| Exercisable at March 31, 2006    |       | 645,291                        |       | $                                              | 10.51      |                                                                 | 6.12       |                                | $          | 6,284,037 |   |

 

8

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The aggregate intrinsic value for stock options outstanding andexercisable is defined as the difference between the market value of theCompany’s stock as of the end of the period and the exercise price of the stockoptions. The total intrinsic value of stock options exercised during the firstquarter of 2006 was $30,000. As a result of the stock optionsexercised, the Company recorded additional paid-in-capital of $31,000. Duringthe first quarter of 2006, cash received from stock options exercised was $32,000.The following is a summary of nonvested stock option activity for the threemonths ended March 31, 2006:

 
| ** **                     | ** ** | **Number of Shares** | ** ** | **Weighted Average  Grant-Date Fair  Value** | ** ** |
|--------------------------------|------------|--------------------------------|------------|--------------------------------------------------------|------------|
|                           |       |                           |       |                                                   |       |
| Nonvested at December 31, 2005 |       | 6,623                          |       | $                                                      | 18.26      |   |
| Granted                        |       | 1,500                          |       | 19.65                                                  |       |
| Vested                         |       | (998                           | )          | $                                                      | 16.09      |   |
| Canceled                       |       | —                         |       | —                                                 |       |
| Nonvested at March 31, 2006    |       | 7,125                          |       | $                                                      | 16.51      |   |

 

The Company had 22,644 of stockoptions that were unvested at March 31, 2006 that were expensed in 1999. Inaddition the Company has 9,375 of stock options that were unvested related toRahul Raina; see Note 2 for additional information.

 

At March 31, 2006, there was $118,000of total unrecognized compensation cost related to nonvested stock options.This cost will be recognized over 3.0 years.

 

The Company also grantsrestricted stock to certain employees. On June 1, 2005, the CompensationCommittee of the Board of Directors of the Company gave final approval toawards of 9,758 shares of restricted stock to Robin Raina, the Company’sChairman, Chief Executive Officer and President, and 4,382 shares of restrictedstock to Richard J. Baum, the Company’s Executive Vice President, Chief FinancialOfficer and Secretary, under the Company’s 1996 Incentive Plan. The awards weremade pursuant to a 2004 incentive compensation program (the “2004 Program”)approved by the Company’s Board of Directors on December 4, 2004 (asdescribed in a Form 8-K filed by the Company on December 9, 2004) andwere subject to a determination by the Compensation Committee and the Board,after the Company’s release of its 2004 operating results, that such operatingresults were substantially consistent with the operating results of the Companyfor the first nine months of 2004, as they compared to those for the sameperiod of the prior year (excluding executive incentive compensation). TheCompensation Committee and the Board made such determination in April 2005,at which time the grants of the restricted stock (along with 2004 cash bonuscompensation) were approved, subject to the Compensation Committee’s approvalof certain terms of the restricted stock awards and of the forms of restrictedstock agreements to represent such awards.

 

On June 1, 2005,the Compensation Committee approved such terms and forms of restricted stockagreements, and the shares of restricted stock were issued to each ofMessrs. Raina and Baum on such date. In accordance with the 2004 Program,the number of shares of restricted stock issued to each of Messrs. Rainaand Baum represents 10% of the aggregate of the total salary and cash bonuscompensation earned by him for 2004 (such aggregate compensation being $1,013,000in the case of Mr. Raina and $455,000 in the case of Mr. Baum),divided by the market price of the Company’s stock on April 11, 2005, thedate the Board approved the restricted stock grants. The Company recognizedcompensation expense of approximately $8,000 related to these shares during thequarter ended March 31, 2006. There was no compensation expense related to thisrestricted stock for the quarter ended March 31, 2005.

 

On February 3, 2006, theCompensation Committee of the Board of Directors of the Company gave finalapproval to awards of 8,354 shares of restricted stock to Robin Raina, theCompany’s Chairman, Chief Executive Officer and President, and 2,506 shares ofrestricted stock to Richard J. Baum, the Company’s Executive Vice President,Chief Financial Officer and Secretary, under the Company’s 1996 Incentive Plan.The awards were made pursuant to a 2005 incentive compensation program (the “2005Program”) approved by the Company’s Board of Directors. In accordance with the2005 Program, the number of shares of restricted stock issued to each ofMessrs. Raina and Baum represents 15% of the aggregate of the total salaryand cash bonus compensation earned by him for 2005 (such aggregate compensationbeing $1,100,000 in the case of Mr. Raina and $330,000 in the case ofMr. Baum), divided by the market price of the Company’s stock on February 3,2006, the date the Board approved the restricted stock grants. The Companyrecognized compensation expense of approximately $59,000 related to theseshares for the quarter ended March 31, 2006. There was no compensation expenserelated to this restricted stock for the quarter ended March 31, 2005.

 

Pursuant to therestricted stock agreements, the restricted stock vests in three equal annualinstallments. The restricted stock also vests with respect to any unvestedshares upon the applicable officer’s death, Disability (as defined) orRetirement (as defined), the Company’s termination of the officer other thanfor Cause (as defined) or a Change in Control (as defined) of the Company. If theofficer terminates his employment other than due to death, Disability orRetirement or the Company terminates the officer’s employment for Cause, anyunvested shares held by the officer will be forfeited.

 

9

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Note 4. EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) is equal to net income divided by theweighted average number of shares of common stock outstanding for the period.The weighted average number of shares outstanding for the three months endedMarch 31, 2006 and March 31, 2005 was 2,747,880 and 2,912,432,respectively. Diluted EPS is calculated as if the Company had additional commonstock outstanding from the beginning of the year or the date of grant for allcommon stock equivalents, net of assumed repurchased shares using the treasurystock method. Diluted EPS recognizes the dilutive effect of common stockequivalents and is equal to net income divided by the sum of the weightedaverage number of shares outstanding and common stock equivalents. For thethree months ended March 31, 2006 and March 31, 2005, the Company’scommon stock equivalents consisted of restricted stock and stock options. Forthe three months ended March 31, 2006, the effect of this calculationresulted in an increase in the weighted average number of shares outstanding of388,939. At March 31, 2006, the fully diluted weighted average number ofshares outstanding was 3,136,819. For the three months ended March 31,2005, the effect of this calculation resulted in an increase in the weightedaverage number of shares outstanding of 312,055. At March 31, 2005, thefully diluted weighted average number of shares outstanding was 3,224,487. AtMarch 31, 2006, there were 295,496 shares potentially issuable withrespect to stock options, which could dilute EPS in the future but which wereexcluded from the diluted EPS calculation because their effect wasantidilutive.

 

Note 5. COMPREHENSIVE INCOME

 
| ** **                                                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
|                                                                              |       |                                                 |       |   |   |
| Net income                                                                        |       | $                                                    | 1,135,000  |   | $ | 1,068,000 |   |
| Other comprehensive (loss) income — foreign  currency translation adjustment |       | (215,000                                             | )          | 86,000 |   |
| Comprehensive income                                                              |       | $                                                    | 920,000    |   | $ | 1,154,000 |   |

 

Note 6. RELATED PARTY TRANSACTIONS AND SIGNIFICANT CUSTOMERS

 

In 2001, the Company issued 868,000 shares of its common stock to BritInsurance Holdings PLC (“Brit”), for $7,000,000. The total shares held by Britat March 31, 2006 was 930,163, representing an equity ownership ofapproximately 34%. At March 31, 2006 Brit owned approximately 78% of CF EpicInsurance and General Fund, which owned approximately 8% of the Company’scommon stock.

 

The Company has entered into various software and service agreementswith Brit. During the first quarter of 2006 approximately $713,000 (13%) wasrecognized as revenue from Brit and its affiliates. During the first quarter of2005, approximately $878,000 (15%) was recognized as revenue from Brit and itsaffiliates. Total accounts receivable from Brit and its affiliates atMarch 31, 2006 and December 31, 2005 were $1,067,000 and $988,000,respectively.

 

During the first quarter of 2006 and 2005, approximately $496,000 (9%) and$625,000 (11%), respectively, was recognized as revenue from anothersignificant customer, AON. Total accounts receivable from AON at March 31,2006 and December 31, 2005 were $531,000 and $181,000, respectively.

 

Note 7. ACQUISITION OF LIFELINK

 

On February 23,2004, the Company acquired LifeLink Corporation (“LifeLink”), and theoperations of LifeLink have been included in the Company’s financial statementssince that date. Under terms of the agreement, the Company acquired all of theoutstanding capital stock of LifeLink from its shareholders in exchange for anaggregate purchase price of $10,354,000 payable as follows: $5,000,000 paid incash at closing, $2,500,000 in a non-interest bearing note payable in cash inannual installments of $500,000 over five years (present value computed as$2,226,000), and $3,000,000 payable in 200,000 shares of the common stock ofthe Company issued at the time of closing to one of the LifeLink shareholderswho received the right to sell such shares (the “LifeLink Redeemable Shares”)back to the Company as described below. The Company also capitalizedapproximately $128,000 of transaction costs in conjunction with the LifeLinkacquisition.

 

10

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At any time during theone month period commencing on August 23, 2005, the holder of the LifeLinkRedeemable Shares had a one-time right to require the Company to purchase allof the LifeLink Redeemable Shares, originally valued at $15.00 per share in theacquisition of LifeLink, for a discounted priced of $13.50 per share minus theaggregate purchase price received by the holder from any sales of these sharesof common stock prior to the exercise of the put option. The Company classified$2,700,000 of the value of the common stock issued as temporary equity, “redeemablecommon stock,” in the consolidated balance sheet due to the existence of theholder’s embedded put option. The Company and LifeLink’s former shareholderagreed to accelerate the exercisability of the put option and on April 28,2005, the Company repurchased the LifeLink Redeemable Shares at a price of$13.50 per share. On May 2, 2005, the LifeLink name was changed toEbixLife Inc. The following table summarizes the fair value of the LifeLinkassets acquired and liabilities assumed at the date of acquisition.

 
| Current assets            |   | $          | 1,199,000  |   |
|---------------------------|--------|------------|------------|--------|
| Property and equipment    |   | 119,000    |       |
| Intangible assets         |   | 3,518,000  |       |
| Goodwill                  |   | 5,989,000  |       |
| Total assets acquired     |   | 10,825,000 |       |
| Current liabilities       |   | 471,000    |       |
| Total liabilities assumed |   | 471,000    |       |
| Net assets acquired       |   | $          | 10,354,000 |   |

 

Of the $3,518,000 ofintangible assets acquired, $977,000 was assigned to developed technology witha remaining estimated useful life of five years, $299,000 was assigned totrademarks with a remaining estimated useful life of five years and $2,242,000was assigned to customer relationships with a remaining estimated useful lifeof seven years. The Company recorded $144,000 of amortization expense relatedto these intangible assets for each of the quarters ended March 31, 2006and 2005.

 

***Estimated AmortizationExpenses:***

*** ***
| For the year ending December 31, 2006 |   | $ | 575,000 |   |
|--------------------------------------------|--------|---|---------|--------|
| For the year ending December 31, 2007 |   | $ | 575,000 |   |
| For the year ending December 31, 2008 |   | $ | 575,000 |   |
| For the year ending December 31, 2009 |   | $ | 358,000 |   |
| For the year ending December 31, 2010 |   | $ | 320,000 |   |
| Thereafter                                 |   | $ | 47,000  |   |

 

The acquisition ofEbixLife was consistent with the Company’s overall focus on marketing softwareto insurance agents and brokers. This acquisition increased sales and revenueof the consolidated total while providing significant sales opportunities forthe Company’s other existing services. The Company performed an annualimpairment assessment, as required by SFAS No. 142, “Goodwill and OtherIntangible Assets”, of the EbixLife goodwill and intangible assets as ofSeptember 30, 2005 and it was determined that the assets were notimpaired.

 

# **Note 8.ACQUISITION OF HEART**

# ** **

On July 1, 2004,Ebix Australia Pty Ltd, which is a wholly-owned subsidiary of the Company,acquired certain of the operating assets of Heart Consulting Services Pty Ltd (“Heart”),and the operations of Heart have been included in the Company’s financialstatements since that date. Under terms of the agreement, the Company acquiredthe operating assets of Heart in exchange for an aggregate purchase price of$7,116,000 payable as follows: $3,619,000 paid in cash at closing (subsequentto closing the former owner of Heart paid the Company $467,000 for deferredrevenue and a vacation accrual settlement), $1,399,000 payable under stand-byletters of credit issued by the Company’s lender on the Company’s line ofcredit in three equal annual installments on each of the first, second andthird anniversaries of the closing (present value computed as $1,293,000), and$2,098,000 payable in 157,728 shares of the common stock of the Company issuedat the time of closing. The Company also capitalized approximately $241,000 oftransaction costs in conjunction with the Heart acquisition. In connection withthe 157,728 shares of common stock issued, the owners of Heart received fromEbix the option to sell their stock back to Ebix subject to specified timeframes and prices.

 

In 2005, the Company hadclassified $1,461,000 of the value of the common stock issued as temporaryequity, “redeemable common stock,” in the condensed consolidated balance sheetdue to the existence of the holder’s embedded put option. At any time duringthe one month period commencing January 3, 2006 and endingFebruary 3, 2006, the holder of the redeemable common stock had a one-timeright to require the Company to purchase all of the holder’s 157,728 shares ata price of AU$2,000,000 minus the aggregate purchase price received by theholder from any sales of these shares of common stock prior to the exercise ofthe put option. As of December 31, 2005, the holder had not sold anyshares of common stock received from this transaction. The holder did notexercise

 

11

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the right to require theCompany to purchase all of the holder’s 157,728 shares as of February 3,2006; as such, the redeemable common stock was reclassified in first quarter2006 as it is no longer redeemable.

 

Concurrent with theacquisition, the Company ascribed a preliminary value to each of the assets andliabilities assumed from the acquisition of Heart. Upon final review of theacquisition, the purchase price was reallocated. The following table summarizesthe fair value of the Heart assets acquired and liabilities assumed at the dateof acquisition subsequent to the reallocation.

 
| Current assets            |   | $         | 467,000   |   |
|---------------------------|--------|-----------|-----------|--------|
| Property and equipment    |   | 43,000    |      |
| Intangible assets         |   | 1,229,000 |      |
| Goodwill                  |   | 5,945,000 |      |
| Total assets acquired     |   | 7,684,000 |      |
| Current liabilities       |   | 467,000   |      |
| Total liabilities assumed |   | 467,000   |      |
| Net assets acquired       |   | $         | 7,217,000 |   |

 

Of the $1,229,000 ofintangible assets acquired, $630,000 was assigned to customer relationshipswith a remaining useful life of four years, $410,000 was assigned to developedtechnology and $189,000 was assigned to trademarks with a remaining estimateduseful lives of five years. The Company recorded $73,000 and $74,000 ofamortization expense related to these intangible assets for the quarters ended March 31,2006 and 2005.

 

*Estimated Amortization Expenses:*

* *
| For the year ended December 31, 2006 |   | $ | 300,000 |   |
|-------------------------------------------|--------|---|---------|--------|
| For the year ended December 31, 2007 |   | $ | 300,000 |   |
| For the year ended December 31, 2008 |   | $ | 215,000 |   |
| For the year ended December 31, 2009 |   | $ | 65,000  |   |
| For the year ended December 31, 2010 |   | $ | —  |   |

 

The acquisition of Heartwas consistent with the Company’s overall focus on marketing software toinsurance agents and brokers. This acquisition increased sales and revenue ofthe consolidated total while providing significant sales opportunities for theCompany’s other existing services. The Company performed an annual impairmentassessment, as required by SFAS No. 142, “Goodwill and Other IntangibleAssets”, of the Heart goodwill and intangible assets as of September 30,2005 and it was determined that the assets were not impaired.

 

Note 9**-**LINE OF CREDIT AND OTHER COMMITMENTS

 

Bank Line of Credit

 

In October 2002,the Company obtained from LaSalle Bank National Association a $1,000,000revolving line of credit, secured by a perfected first security interest insubstantially all of the Company’s assets. The line of credit was increased to$5,000,000 during February 2004. On February 23, 2005, the Companyentered into an amendment to the credit agreement amending certain financialcovenants. Major features of the line, as amended, include an interest rateequal to the prime rate, security at 60% of the amount of the line in arestricted interest-bearing account and timely financial reportingrequirements.

 

In October 2005,the Company entered into an amendment to the credit agreement, which deletedthe security at 60% of the amount of the line in a restricted interest-bearingaccount and extended the expiration date to October 31, 2006.

 

In November 2005,the line of credit was paid and the total borrowings on this line were zero asof March 31, 2006.

 

Letters of Credit

 

Under terms of theagreement with Heart Consulting Services Pty Ltd. (see note 8), $1,399,000 ispayable by the Company under stand-by letters of credit issued by the Company’slender on the Company’s line of credit in three equal annual installments oneach of the first, second and third anniversaries of the closing of the Heartasset acquisition (present value computed as $1,293,000). The three letters ofcredit expire on July 31, 2005, July 31, 2006 and July 31, 2007,respectively. On July 1, 2005 the Company paid the first installment of$508,000.

 

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Self Insurance:

 

The Company is currentlyself-insured for its health insurance and has a stop loss policy that limitsthe individual liability to $75,000 per person and the aggregate liability to125% of the expected claims based upon the number of participants andhistorical claims. As of March 31, 2006, the maximum aggregate liabilitycalculated was $679,000 for the annual contract period, which ends inSeptember 2006.

 

**Note10—DEBT MATURITIES**

** **
| ** ** | ** ** | **Year Ended December 31,** | ** ** | ** ** | ** ** |
|------------|------------|--------------------------------------------|------------|------------|------------|
| ** ** | ** ** | **2006**                                   | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **Total** | ** ** |
| EbixLife   |       | $                                          | —     |       | $          | 500,000 |   | $ | 462,000 |   | $ | 430,000 |   | $ | 1,392,000 |   |
| Heart      |       | $                                          | 466,000    |       | $          | 456,000 |   | $ | — |   | $ | — |   | $ | 922,000 |   |
|       |       | $                                          | 466,000    |       | $          | 956,000 |   | $ | 462,000 |   | $ | 430,000 |   | $ | 2,314,000 |   |

 

The EbixLife debt is aresult of the EbixLife acquisition on February 23, 2004 and represents a$2,500,000 non-interest bearing note payable. The note is payable in annualinstallments of $500,000 over five years. The Company has imputed interest onthis debt of 4%. The first installment was paid on February 23, 2005 andthe second installment was paid on February 23, 2006.

 

The Heart debt is aresult of the Heart acquisition on July 1, 2004 and represents $1,399,000payable under stand by letters of credit issued by the Company’s lender underthe Company’s line of credit in three equal annual installments on each of thefirst, second and third anniversaries of the closing. The Company has imputedinterest on this debt at 4%. The first installment was paid onJuly 1, 2005.

 

Note 11 – ACQUISITION OFINFINITY ON MAY 9, 2006

 

On May 9, 2006, Ebix, Inc. (“Ebix”) announced theacquisition of substantially all of the operating assets of Infinity SystemsConsulting, Inc. (“Infinity”). This acquisition was post-dated to be effectiveas of May 1, 2006. Ebix acquired these assets for an upfront payment of $2.9million in cash and a potential future payment not exceeding $4.5 million incash if Infinity meets certain future revenue projections as a division ofEbix.

 

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Item 2.             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following information should be read in conjunction with theunaudited condensed consolidated financial statements and the notes theretoincluded in Part 1. Item 1 of this Quarterly Report, and the auditedconsolidated financial statements and notes thereto and Management’s Discussionand Analysis of Financial Condition and Results of Operations contained in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2005.

 

**Overview**

 

The Company’s product and service strategy focuses on the followingfive areas: (1) providing software development services to insurancecarriers, brokers and agents; (2) worldwide sale, customization,development, implementation and support of its insurance carrier systemproduct, named Business Reinsurance and Insurance Company System “BRICS”);(3) worldwide sales and support of agency management systems includingEbixASP and eGlobal; (4) expansion of connectivity between consumers,agents, carriers and third party providers through its exchange family ofproducts worldwide namely, EbixLife and EbixExchange; and (5) businessprocess outsourcing services, which include call center and back office, eitheroff site or at the Company’s facilities. Software delivered online throughapplication service provider (“ASP”) models and connectivity products arerecorded as services by the Company. The Company anticipates that futurerevenue will be provided principally by development services, system sales, thesale and licensing of BRICS, international operations, EbixLife, EbixExchange,call center services and support.

 

As discussed in note 9, on May 9, 2006 the Company, for a cash paymentof $2.9 million of internally generated funds, acquired substantially all ofthe operating assets of Infinity Consulting, Inc. effective May 1, 2006. Thereis a contingent future payment of $4.5 million to be made upon attainingperformance criteria.  This acquisitionis consistent with the Company’s overall focus on providing software solutionsto insurance carriers, agents and brokers. Along with the Company’s other acquisitions over the last two years, theacquisition of Infinity provides the Company with a stronger base of insurancecustomers who are a target for cross marketing of the Company’s other products.

 

**Critical Accounting Policies**

 

The Company’s “critical accounting policies” are those that requireapplication of management’s most difficult, subjective or complex judgements,often as a result of the need to make estimates about matters that areinherently uncertain and may change in future periods. The Company hasidentified the following as its critical accounting policies: revenuerecognition, estimating the allowance for doubtful accounts receivable andaccounting for income taxes. For a discussion of these policies, see “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Critical Accounting Policies” in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2005.

 

**Results of Operations**

 

**Three-Month Period Ended March 31, 2006 Compared to theThree-Month Period Ended March 31, 2005**

 

**Total Revenue** - The Company’s revenue has beenderived from the licensing and sale of proprietary software and third partysoftware (“Software”) and from professional services and support services (“Services”).Services include consulting, implementation, training and project managementprovided to the Company’s customers with installed systems and those in theprocess of installing systems. Also included in Services are fees for softwarelicense maintenance, EbixLife services, Heart services, initial registrationand ongoing monthly subscription fees for the EbixASP product and transactionfees generated from the Ebix.mall website, as well as software development andcall center revenue. Total revenue for the quarter ended March 31, 2006 decreased$254,000, or 4.3%, to $5,650,000 from $5,904,000 for the comparable quarter ofthe prior year.

 

**Software Revenue** - Software revenue iscomprised of revenue from the sale of Ebix (formerly “cd”) products, currentlegacy products, and other third party software. Total software revenue for thefirst quarter of 2006 increased $295,000, or 146.0%, to $497,000 from $202,000for the comparable quarter of the prior year. This increase was primarily dueto the increase in international software revenue of $308,000.

 

**Services Revenue** — Total services revenue forthe first quarter of 2006 decreased $549,000, or 9.6%, from $5,702,000 for thecomparable quarter of the prior year. This decrease was primarily due to adecrease in consulting revenue of $330,000, a decrease in support revenueassociated with legacy products of $195,000, a decrease in EbixMall revenue of$127,000, a decrease in call center revenue of $31,000, a decrease in hostingrevenue of $29,000 partially offset by an increase in international servicerevenue of $135,000 and an increase in EbixLife revenue of $45,000.

 

During the first quarter of 2006 and 2005, approximately $713,000 and $878,000,respectively was recognized as services revenue from Brit Insurance HoldingsPLC (“Brit”) and its affiliates. The amounts represented 13% and 15%, of theCompany’s total revenues for the first quarters of 2006 and 2005, respectively.Brit owned approximately 34% of the Company’s common stock as of March 31,2006. In addition, the Company has been informed that, as of March 31, 2006,Brit owned approximately 78% of the equity interests of CF Epic Insurance andGeneral Fund, which at March 31, 2006 owned approximately 8% of theCompany’s outstanding common stock.**Forthe three-month periods ended March 31, 2006 and March 31, 2005, 9%and 11% of the Company’s total revenues were from AON. Neither Brit and itsaffiliates nor AON have long-term agreements with the Company that providecertainty that such revenues will be recurring.

 

Support revenue associated with the Company’s legacy products isdecreasing due to a trend of declining renewals for these older

 

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product offerings.

 
| ** **             | ** ** | **Support  Revenue** | ** ** | **Total  Revenue** | ** ** |
|------------------------|------------|----------------------|------------|--------------------|------------|
|                   |       |                 |       |               |       |
| First  quarter of 2006 |       | $                    | 590,000    |               | $          | 5,153,000 |   |
| First  quarter of 2005 |       | $                    | 785,000    |               | $          | 5,904,000 |   |

 

Support revenue decreased $195,000, or 25%, and as a percentage oftotal revenue decreased to 11% from 13%, in the first quarter of 2006, comparedto the first quarter of 2005.

 

Based on historical data, the Company expects that legacy supportrevenue will continue to decrease by approximately 20% each year on a decliningbalance. The Company expects the legacy support revenue will continue as longas it is economically feasible for the Company to maintain and support thelegacy products. As revenue from the legacy support decreases, costs will bereduced. When income from legacy support falls below breakeven, operations willbe reviewed to determine if costs can be further reduced for the activity to beprofitable, and if not, the Company plans to discontinue supporting the legacyproducts. The Company cannot predict when this will occur.

 

The Company expects that future Servicesrevenue will be derived from the sale of BRICS as well as EbixASP registrationand monthly fees, EbixLife services, Heart Services, software development and legacysupport and, to a much lesser extent all transaction revenues from Ebix.mall,EbixExchange, conversion and training.

 

**Services and other costs**-Cost of services revenue includes costs associated with support, call center,consulting, implementation and training services. Total services and othercosts for the quarter decreased $75,000, or 5.3%, from $1,406,000 for thecomparable quarter of the prior year. This decrease was due to a decrease inpayroll expenses of $41,000, a decrease in expenses for required services tosupport the Company’s products of $35,000 and a decrease in facility costs of $8,000partially offset by an increase in international support costs of $9,000.

 

**Product Development Expenses**-Total product development expenses for the first quarter of 2006 increased $75,000,or 9.4%, from $794,000 for the comparable quarter of the prior year. Thisincrease was due to an increase in payroll expenses related to an increase inIndia payroll expenses of $27,000 and a decrease in domestic payroll of $7,000.In addition, facility costs increased $55,000 as a result of the increases inheadcount in various locations.

 

**Sales and Marketing Expenses**-Total sales and marketing expenses for the first quarter of 2006 increased $112,000,or 23.4%, from $478,000 for the comparable quarter of the prior year. Thisincrease was attributable to an increase in payroll expenses of $104,000.

 

**General and Administrative Expenses** - Totalgeneral and administrative expenses for the quarter decreased $325,000, or 19.2%,from $1,689,000 for the comparable quarter of the prior year. This decrease wasdue to a decrease in accrued bonus of $250,000, as a result of one quarter ofthe 2005 total bonus being accrued compared to no such accrual in 2006, anincrease in the amount of facility costs allocated to other departments of$220,000, a decrease in audit and legal fees of $165,000, a decrease inconsulting costs of $25,000, a decrease in rent expense of $9,000 and adecrease in insurance expense of $8,000 partially offset by an increase inpayroll expenses of $186,000, an increase in travel and entertainment of$70,000, an increase in international general and administrative expenses of$59,000 and an increase in office expense of $33,000.

 

**Amortization and Depreciation Expenses**– Total amortization and depreciation expenses for the quarter decreased $15,000,or 4.6%, from $329,000 for the comparable quarter of the prior year. Depreciationexpense decreased $15,000 as a result of assets becoming fully depreciatedprior to the first quarter of 2006.

 

# **Income tax expense**— The effective tax rate for the first quarterof 2006 was higher than the rate for the comparable quarter of the prior yeardue to a different income mix among the various tax jurisdictions in which theCompany does business.

# ** **

**Liquidity and Capital Resources**

 

The Company had cash and cash equivalents of $6,246,000 atMarch 31, 2006, compared to cash and cash equivalents of $6,733,000 atDecember 31, 2005.

 

During the three months ended March 31, 2006, the Companygenerated operating cash flow of $117,000 as compared to $1,778,000 ofoperating cash flow for the three months ended March 31, 2005. This decreasein cash flow from operations in the three months ended March 31, 2006resulted primarily from a decrease in payroll and accrued benefits of $773,000due to the payment of 2005 bonuses, a decrease in accounts payable and accruedexpenses of $444,000, an increase in accounts receivable of $390,000, partiallyoffset by $1,135,000 of net income, depreciation and amortization of $314,000,an increase in deferred revenue of $223,000 and

 

15

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restricted stock compensation of $68,000. These balance sheetfluctuations are normal consequences of timing differences between accruals andtheir cash settlement.

 

Cash used in investing activities of $17,000 in the three months endedMarch 31, 2006 represented various capital expenditures. Cash used infinancing activities of $468,000 resulted from the Company’s payment of along-term debt obligation, partially offset by the proceeds from the exerciseof stock options.

 

In the three monthsended March 31, 2006, 13% and 9% of the Company’s total revenues were from twocustomers—Brit and its affiliates and AON, respectively. Neither Brit nor AONhave long-term agreements with the Company that provide certainty that suchrevenues and related cash flows will be recurring. AON International continuesto acquire licenses for more locations resulting in more reliance on the e-Globalsystem.

 

In October 2002,the Company obtained from LaSalle Bank National Association a $1,000,000revolving line of credit, secured by a perfected first security interest insubstantially all of the Company’s assets. The line of credit was increased to$5,000,000 during February 2004 and expires on October 31, 2006. InNovember 2005, the line of credit was paid and the total borrowings onthis line were zero as of March 31, 2006.

 

In planning for itscapital needs, the Company takes into account its sources of cash, whichinclude operating cash flow, cash balances and funds from credit facilities,and anticipated future cash needs, which include working capital requirementsfor operations, capital expenditures, and expenditures for businessacquisitions.  Based on these considerations, the Company believes it willhave sufficient cash from operations to satisfy its contractual obligations forat least the next several years.

 

# **The following summarizes the Company’s contractual obligations atMarch 31, 2006, and the effect such obligations are expected to have onthe Company’s liquidity and cash in future periods (in thousands):**

# ** **

| ** **                      | ** ** | **Payment Due by Period** | ** ** |
|---------------------------------|------------|---------------------------|------------|
| ** **                      | ** ** | **Total**                 | ** ** | **Less Than 1  Year** | ** ** | **1 — 3 Years** | ** ** | **3- 5 Years** | ** ** | **More Than 5  Years** | ** ** |
| ** **                      | ** ** | **(in thousands)**        | ** ** |
|                            |       |                      |       |   |   |   |   |   |   |   |   |
| Contractual  Obligations:       |       |                      |       |   |   |   |   |   |   |   |   |
| Long-Term  Debt Obligations (1) |       | $                         | 2,432      |   | $ | 966 |   | $ | 1,466 |   | $ | — |   | $ | — |   |
| Operating  Leases Obligations   |       | 3,686                     |       | 1,058 |   | 1,546 |   | 729 |   | 353 |   |
| Capital  Leases Obligations     |       | —                    |       | — |   | — |   | — |   | — |   |
| Total                           |       | $                         | 6,118      |   | $ | 2,024 |   | $ | 3,012 |   | $ | 729 |   | $ | 353 |   |

 

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(1)     Includes interest of approximately $166,000at an imputed interest rate of 4% as of the date of acquisition.

 

Item 3.             QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The majority of the Company’s operations are based in the U.S. and, accordingly,the majority of our transactions are denominated in U.S. dollars. However, theCompany has foreign-based operations where transactions are denominated inforeign currencies and are subject to market risk with respect to fluctuationsin the relative value of currencies. Currently, the Company and itssubsidiaries have operations in Australia, Canada, India, New Zealand andSingapore and conduct transactions in the local currencies of each location. Therecan be no assurance that fluctuations in the value of foreign currencies willnot have a material adverse effect on the Company’s business, operatingresults, revenues or financial condition. The impact of fluctuations in thesecurrencies resulted in net transaction gains of $42,000 for the three monthsended March 31, 2006 and losses of $9,000 for the three months endedMarch 31, 2005. The Company considered the historical trends in currencyexchange rate and determined that it was reasonably possible that adversechanges in exchange rates of 20% for all currencies could be experienced in thenear term. Such adverse changes would have resulted in an adverse impact onincome before taxes of approximately $227,000 and $127,000 for the three monthsended March 31, 2006 and March 31, 2005, respectively.

 

There have been no material changes in the Company’s interest rate riskduring the three months ended March 31, 2006. For additional informationon interest rate risk, refer to the “Quantitative Disclosures About Market Risk”section of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005.

 

Item 4.             CONTROLS ANDPROCEDURES –

 

*DisclosureControls and Procedures.*The Company maintains controls andprocedures designed to ensure that it is able to collect the information we arerequired to disclose in the reports we file with the SEC, and to process,summarize and disclose this information within the time periods specified inthe rules of the SEC. Management, with the participation of the ChiefExecutive

 

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Officer and ChiefFinancial Officer, has evaluated our disclosure controls and procedures (assuch term is defined in Rules 13a-15(e) and 15d-15(e) under theSecurities and Exchange Act of 1934 as amended (the “Exchange Act”).

 

Based on suchevaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that, as of the end of such period, the Company’s controls andprocedures are effective to ensure that we are able to collect, process anddisclose the information it is required to disclose in the report we file withthe SEC within the required time periods.

 

*Changesin Internal Control Over Financial Reporting.*There hasbeen no change in our internal control over financial reporting for the threemonths ended March 31, 2006, that has materially affected, or is reasonablylikely to materially affect, internal control over financial reporting.

 

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Part II — OTHER INFORMATION

 

**Safe Harbor for Forward-Looking Statements under the SecuritiesLitigation Reform Act of 1995** – This Quarterly Reporton Form 10-Q contains various forward-looking statements and information thatare based on management’s beliefs, as well as assumptions made by, andinformation currently available to management, including statements regardingfuture economic performance and financial condition, liquidity and capitalresources, acceptance of the Company’s products by the market and management’splans and objectives. The Company has tried to identify such forward lookingstatements by use of words such as “expects,” “intends,” “anticipates,” “plans,”  “believes, “will,” “should,” and similarexpressions, but these words are not the exclusive means of identifying suchstatements. The forward looking statements included in this Quarterly Reportare subject to various risks, uncertainties and other factors which could causeactual results to vary materially from those expressed in, or implied by, theforward looking statements. Such risks, uncertainties and other factors includethose discussed in “Risk Factors” below. Except as expressly required by thefederal securities laws, the Company undertakes no obligation to update anysuch factors or to publicly announce the results of any of the forward-lookingstatements contained herein to reflect changed circumstances or future eventsor developments or for any other reason.

 

Item 1A. RISK FACTORS

 

# **Risk Factors**

# ** **

You should carefully consider the risks, uncertainties and otherfactors described below, along with all of the other information included inthis quarterly report on Form 10-Q, because they could materially and adverselyaffect our business, financial condition, operating results, cash flows andprospects and/or the market price of our common stock. This risk factorssection is written in response to the Securities and Exchange Commission’s“plain English” guidelines. In this section, the words “we,” “us,” “our” and “ours”refer to the Company and not any other person.

 

***RisksRelated To Our Business and Our Industry***

*** ***

**Youmay have difficulty evaluating our business because of our limited history ofInternet, call center and other business process outsourcing.**

** **

Although our predecessorbegan operations in 1976, we did not begin any Internet operations until September 1999and did not begin generating revenues from these operations until the fourthquarter of 2000. We did not begin any call center or other business processoutsourcing operations or begin generating revenues from these operations untilthe first quarter of 2003. Accordingly, there is a limited history of theseoperations on which you can evaluate our company and prospects. We cannot becertain that our Internet, call center and other business process outsourcingstrategies will be successful, because these strategies are new. Our early-stageInternet, call center and other business process outsourcing operations will beparticularly susceptible to the risks and uncertainties described in these riskfactors and more likely to incur the expenses associated with addressing them.Our prospects must be considered in light of the risks, uncertainties, expensesand difficulties frequently encountered by companies in a transitional stage ofdevelopment, particularly companies in new and rapidly evolving markets, suchas electronic commerce, and using new and unproven business models.

 

**Becausethe support revenue that we have traditionally relied upon has been steadilydeclining, it is important that new sources of revenue continue to bedeveloped.**

** **

Our revenue from thesupport services we offer in connection with our legacy software products hasbeen decreasing significantly over the course of the past few years. Thisdecline can be attributed to the fact that many of our support clients are notrenewing their support agreements with us, in many cases because they are nolonger using our legacy software. Even if they are continuing to use our legacysoftware, our support clients may choose not to renew their support agreementsif their legacy software products no longer require support or they use thirdparty support. In addition, some of the clients who use our support serviceshave reduced the level of support that we provide them, which in turn reducesour support revenue. This downward trend in our support revenue makes usparticularly dependent upon our other sources of revenue.

 

**Twocustomers currently provide a significant percentage of our total revenue.**

** **

Revenues from onecustomer, Brit Insurance Holdings PLC and its affiliates, which atMarch 31, 2006 owned approximately 34.0% of our common stock andapproximately 78% of CF Epic Insurance and General Fund, which at that dateowned approximately 8.1% of our common stock, represented approximately 13%($713,000) and 15% ($878,000) of our total revenue for the three-month periodsended March 31, 2006 and March 31, 2005, respectively. If revenues from thiscustomer were to discontinue, our operating results could be adverselyaffected.

 

Revenues from anothercustomer, AON, represented approximately 9% ($496,000) and 11% ($625,000) ofour total revenue for the three-month periods ended March 31, 2006 and March31, 2005, respectively. If revenues from this customer were to discontinue, ouroperating results could be adversely affected.

 

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**Adverseinsurance industry economics could adversely affect our revenues.**

** **

We are dependent on theinsurance industry, which may be adversely affected by current economic andworld political conditions.

 

**Ouroperating results may fluctuate dramatically.**

** **

Our quarterly operatingresults may fluctuate significantly in the future due to a variety of factorsthat could affect our revenues or our expenses in any particular quarter. Youshould not rely on our results of operations during any particular quarter asan indication of our results for a full year or any other quarter. Factors thatmay affect our quarterly results may include the loss of a significantinsurance agent, carrier or broker relationship or the merger of any of ourparticipating insurance carriers with one another.

 

Our operating expensesare based in part on our expectations of our future revenues and are relativelyfixed in the short term. We may be unable to adjust spending quickly enough tooffset any unexpected revenue shortfall.

 

**Wecannot predict our future capital needs and we may not be able to secureadditional financing when we need it.**

** **

We may need to raiseadditional funds in the future in order to fund more aggressive brand promotionor more rapid expansion, to develop new or enhanced services, to respond tocompetitive pressures or to make acquisitions. Any required additionalfinancing may not be available on terms favorable to us, or at all. If adequatefunds are not available on acceptable terms, we may be unable to meet ourbusiness or strategic objectives or compete effectively. If additional fundsare raised by our issuing equity securities, stockholders may experiencedilution of their ownership interests, and the newly issued securities may haverights superior to those of our common stock. If additional funds are raised byour issuing debt, we may be subject to limitations on our activities.

 

**Anyacquisitions that we undertake could be difficult to integrate, disrupt ourbusiness, dilute stockholder value and harm our operating results.**

** **

In the event we completeone or more acquisitions, we may be subject to a variety of risks, includingrisks associated with an ability to integrate acquired assets or operationsinto our existing operations, higher costs or unexpected difficulties orproblems with acquired assets or entities, outdated or incompatibletechnologies, labor difficulties or an inability to realize anticipatedsynergies and efficiencies, whether within anticipated timeframes or at all, oneor more of which risks, if realized, could have an adverse impact on ouroperations.

 

**Wemay not be able to continue to develop new products to effectively adjust forrapid technological changes.**

** **

To be successful, wemust adapt to rapidly changing technological and market needs, by continuallyenhancing our website and introducing new products and services to address ourusers’ changing demands.

 

The marketplaces inwhich we operate are characterized by:

 

•       rapidly changing technology;

 

•       evolving industry standards;

 

•       frequent new product and serviceintroductions;

 

•       shifting distribution channels; and

 

•       changing customer demands.

 

Our future success willdepend on our ability to adapt to this rapidly evolving marketplace. We couldincur substantial costs if we need to modify our services or infrastructure inorder to adapt to changes affecting our market, and we may be unable to adaptto these changes.

 

**Themarkets for our products are highly competitive and are likely to become morecompetitive, and our competitors may be able to respond more quickly to new oremerging technology and changes in customer requirements.**

** **

We operate in highlycompetitive markets. In particular, the online insurance distribution market,like the broader electronic commerce market, is rapidly evolving and highlycompetitive. Our software business also experiences some competition fromcertain large hardware suppliers that sell systems and systems’ components toindependent agencies and from small, independent or freelance developers andsuppliers of software, who sometimes work in concert with hardware vendors tosupply systems to independent agencies. Our Internet business may also faceindirect competition from insurance carriers that have subsidiaries whichperform in-house agency and brokerage functions.

 

Some of our currentcompetitors have longer operating histories, larger customer bases, greaterbrand recognition and significantly greater financial, marketing and otherresources than we do. In addition, we believe we will face increasingcompetition as the online financial services industry develops and evolves. Ourcurrent and future competitors may be able to:

 

•       undertake more extensive marketingcampaigns for their brands and services;

 

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•       devote more resources to website andsystems development;

 

•       adopt more aggressive pricing policies;and

 

•       make more attractive offers to potentialemployees, online companies and third-party service providers.

 

**Ifwe are unable to protect our intellectual property, our reputation andcompetitiveness in the marketplace may be materially damaged.**

** **

We regard ourintellectual property in general and our software in particular as critical toour success. It may be possible for third parties to copy aspects of ourproducts or, without authorization, to obtain and use information that weregard as trade secrets. Existing copyright law affords only limited practicalprotection, and our software is unpatented.

 

**Ifwe infringe on the proprietary rights of others, we may be at a competitivedisadvantage, and any related litigation could be time consuming and costly.**

** **

Third parties may claimthat we have violated their intellectual property rights. Any of these claims,with or without merit, could subject us to costly litigation and divert theattention of key personnel. To the extent that we violate a patent or otherintellectual property right of a third party, we may be prevented fromoperating our business as planned, and we may be required to pay damages, toobtain a license, if available, to use the right or to use a non-infringingmethod, if possible, to accomplish our objectives.

 

**Wedepend on the continued services of our senior management and our ability toattract and retain other key personnel.**

** **

Our future success issubstantially dependent on the continued services and continuing contributionsof our senior management and other key personnel, particularly Robin Raina, ourPresident and Chief Executive Officer. The loss of the services of any of ourexecutive officers or other key employees could harm our business. We have nolong-term employment agreements with any of our key personnel, nor do wemaintain key man life insurance policies on any of our key employees.

 

Our future successdepends on our continuing to attract, retain and motivate highly skilledemployees. If we are not able to attract and retain new personnel, our businesswill be harmed. Competition for personnel in our industry is intense. We may beunable to retain our key employees or attract, assimilate or retain otherhighly qualified employees in the future.

 

**Ourinternational operations are subject to a number of risks that could affect ourincome and growth.**

** **

We market our softwareinternationally and plan to expand our Internet services to locations outsideof the United States. In 2004, we acquired certain assets from Heart ConsultingServices Pty. Ltd. in Australia. In addition, commencing in 2002, we begandevelopment activities, call center services and other operations in India. Ourinternational operations may not produce enough revenue to justify ourinvestments in establishing them and are subject to other inherent risks,including:

 

•       the impact of recessions in foreigneconomies on the level of consumers’ insurance shopping and purchasingbehavior;

 

•       greater difficulty in collecting accountsreceivable;

 

•       difficulties and costs of staffing andmanaging foreign operations;

 

•       reduced protection for intellectualproperty rights in some countries;

 

•       seasonal reductions in business activityduring the summer months in Europe and other parts of the world;

 

•       burdensome regulatory requirements, othertrade barriers and differing business practices;

 

•       fluctuations in exchange rates;

 

•       potentially adverse tax consequences; and

 

•       political and economic instability.

 

Furthermore, our entryinto additional international markets requires significant management attentionand financial resources, which could lessen our ability to manage our existingbusiness effectively.

 

**Lawsand regulations that govern the insurance industry could expose us or theagents, brokers and carriers who participate in our online marketplace to legalpenalties.**

** **

We perform functions forlicensed insurance agents, brokers and carriers and are, therefore, required tocomply with a complex set of rules and regulations that often vary fromstate to state. These rules and regulations can be difficult to complywith and are ambiguous and open to interpretation. If we fail to properly interpretand/or comply with these rules and regulations, we, the insurance agents,brokers or carriers doing business with us, our officers, or agents with whomwe contract could be subject to various sanctions, including censure, fines,cease-and-desist orders, loss of license or other penalties. This risk, as wellas other laws and regulations affecting our business and changes in theregulatory climate or the enforcement or interpretation of existing law, couldexpose us to additional costs, including indemnification of participatinginsurance agents, brokers or carriers for their costs, and could

 

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require changes to ourbusiness or otherwise harm our business. Furthermore, because the applicationof online commerce to the consumer insurance market is relatively new, theimpact of current or future regulations on our business is difficult toanticipate. To the extent that there are changes in the rules andregulations regarding the manner in which insurance is sold, our business couldbe adversely affected.

 

**Governmentalregulation of the telemarketing industry may increase our costs and restrictthe operation and growth of our call center business.**

** **

The telemarketingindustry and, therefore, our call center business are subject to an increasingamount of governmental regulation. In particular, telemarketers are now barredfrom contacting persons who have registered their phone numbers on the NationalDo Not Call Registry maintained by the Federal Trade Commission. We could besubject to a variety of enforcement or private actions for our failure or thefailure of our clients to comply with these regulations. Furthermore, our costsmay increase as a result of having to comply with these regulations, and theseregulations may limit our call center activities or reduce the demand for ourcall center services.

 

***RisksRelated to Our Conduct of Business on The Internet***

*** ***

**Anydisruption of our Internet connections could affect the success of our Internetbased products.**

** **

Any system failure,including network, software or hardware failure, that causes an interruption inour network or a decrease in responsiveness of our website could result inreduced user traffic and reduced revenue. Continued growth in Internet usagecould cause a decrease in the quality of Internet connection service. Websiteshave experienced service interruptions as a result of outages and other delaysoccurring throughout the Internet network infrastructure. In addition, therehave been several incidents in which individuals have intentionally causedservice disruptions of major e-commerce websites. If these outages, delays orservice disruptions frequently occur in the future, usage of our website couldgrow more slowly than anticipated or decline, and we may lose revenues andcustomers.

 

If the computer hardwareoperations that host our website were to experience a system failure, theperformance of our website would be harmed. These systems are also vulnerableto damage from fire, floods, earthquakes, acts of terrorism, power loss,telecommunications failures, break-ins and similar events. Our property andbusiness interruption insurance coverage may not be adequate to compensate usfor all losses that may occur. In addition, our users depend on Internet serviceproviders, online service providers and other website operators for access toour website. Each of these providers has experienced significant outages in thepast, and could experience outages, delays and other difficulties due to systemfailures unrelated to our systems. Concerns regarding security of transactionsor the transmission of confidential information over the Internet or securityproblems we experience may prevent us from expanding our business or subject usto legal exposure.

 

If we do not offersufficient security features in our online product and service offerings, ourproducts and services may not gain market acceptance, and we could be exposedto legal liability. Despite the measures that we may take, our infrastructurewill be potentially vulnerable to physical or electronic break-ins, computerviruses or similar problems. If a person circumvents our security measures,that person could misappropriate proprietary information or disrupt or damageour operations. Security breaches that result in access to confidentialinformation could damage our reputation and subject us to a risk of loss orliability. We may be required to make significant expenditures to protectagainst or remedy security breaches. Additionally, if we are unable to adequatelyaddress our customers’ concerns about security, we may have difficulty sellingour goods and services.

 

**Uncertaintyin the marketplace regarding the use of Internet users’ personal information,or proposed legislation limiting such use, could reduce demand for our servicesand result in increased expenses.**

** **

Concern among consumersand legislators regarding the use of personal information gathered fromInternet users could create uncertainty in the marketplace. This could reducedemand for our services, increase the cost of doing business as a result oflitigation costs or increased service delivery costs, or otherwise harm ourbusiness. Legislation has been proposed that would limit the users ofpersonally identifiable information of Internet users gathered online orrequire online services to establish privacy policies. Many state insurancecodes limit the collection and use of personal information by insuranceagencies, brokers and carriers or insurance service organizations. Moreover,the Federal Trade Commission has settled a proceeding against one onlineservice that agreed in the settlement to limit the manner in which personalinformation could be collected from users and provided to third parties.

 

**Futuregovernment regulation of the Internet could place financial burdens on ourbusinesses.**

** **

Because of the Internet’spopularity and increasing use, new laws and regulations directed specificallyat e-commerce may be adopted. These laws and regulations may cover issues suchas the collection and use of data from website visitors, including the placingof small information files, or “cookies,” on a user’s hard drive to gatherinformation, and related privacy issues; pricing; taxation; telecommunicationsover the Internet; content; copyrights; distribution; domain name piracy; andquality of products and services. The enactment of any additional laws orregulations, including international laws and regulations, could impede thegrowth of our revenue from our Internet operations and place additional financialburdens on our business.

 

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***RisksRelated To Our Common Stock***

*** ***

**Theprice of our common stock may be extremely volatile.**

** **

In some future periods,our results of operations may be below the expectations of public marketinvestors, which could negatively affect the market price of our common stock.Furthermore, the stock market in general has experienced extreme price andvolume fluctuations in recent years. We believe that, in the future, the marketprice of our common stock could fluctuate widely due to variations in ourperformance and operating results or because of any of the following factorswhich are, in large part, beyond our control:

 

•       announcements of new services, products,technological innovations, acquisitions or strategic relationships by us or ourcompetitors;

 

•       trends or conditions in the insurance,software, business process outsourcing and Internet markets;

 

•       changes in market valuations of ourcompetitors; and

 

•       general political, economic and marketconditions.

 

In addition, the marketprices of securities of technology companies, including our own, have beenvolatile and have experienced fluctuations that have often been unrelated ordisproportionate to operating performance. As a result, you may not be able tosell shares of our common stock at or above the price at which you purchasethem. In the past, following periods of volatility in the market price of acompany’s securities, securities class action litigation has often been institutedagainst that company. If any securities litigation is initiated against us, wecould incur substantial costs and our management’s attention and resourcescould be diverted from our business.

 

**Thesignificant concentration of ownership of our common stock will limit yourability to influence corporate actions.**

** **

The concentration ofownership of our common stock may have the effect of delaying, preventing ordeterring a change in control of our company, could deprive our stockholders ofan opportunity to receive a premium for their common stock as part of a sale ofour company, and may affect the market price of our common stock. AtMarch 31, 2006, Brit Insurance Holdings PLC beneficially ownedapproximately 34.0% of our outstanding common stock and, together with ourexecutive officers and directors, beneficially owned approximately 54.4% of ouroutstanding common stock. In addition, at March 31, 2006, CF EpicInsurance and General Fund, of which Brit owns approximately 78% of the equityinterests, beneficially owned 8.1% of our outstanding common stock. As aresult, those stockholders, if they act together, are able to control allmatters requiring stockholder approval, including the election of all directorsand approval of significant corporate transactions and amendments to ourcertificate of incorporation. These stockholders may use their ownershipposition to approve or take actions that are adverse to your interests orprevent the taking of actions that are consistent with your interests.

 

Item 6.EXHIBITS

 
|   |   |                                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|
| 31.1   |   | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)  (Section 302 of the Sarbanes-Oxley Act of 2002).    |
|   |   |                                                                                                                          |
| 32.2   |   | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)  (Section 302 of the Sarbanes-Oxley Act of 2002).    |
|   |   |                                                                                                                          |
| 32.1   |   | Certification of Chief Executive Officer Pursuant to Section 906  of the Sabanes-Oxley Act of 2002 (furnished herewith). |
|   |   |                                                                                                                          |
| 32.2   |   | Certification of Chief Financial Officer Pursuant to Section 906  of the Sabanes-Oxley Act of 2002 (furnished herewith). |

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|               | Ebix, Inc. |
|--------------------|------------|
|               |       |
|               |       |
| Date: May 15, 2006 | By         |   |
|               |       | /s/ RICHARD J. BAUM |
|               |       | Richard J. Baum |
|               |       | Executive Vice President — Finance & Administration, Chief |
|               |       | Financial Officer (principal financial and accounting officer), |
|               |       | and Secretary |

 

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EXHIBIT INDEX

 
| **EXHIBIT NO.** | ** ** | **DESCRIPTION**                                                                                                       |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                  |
| 31.1*           |       | Certification of Chief Executive Officer Pursuant to 13a-14(a)  (Section 302 of the Sarbanes-Oxley Act of 2002). |
| 31.2*           |       | Certification of Chief Financial Officer Pursuant to 13a-14(a)  (Section 302 of the Sarbanes-Oxley Act of 2002). |
| 32.1*           |       | Certification of Chief Executive Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002              |
| 32.2*           |       | Certification of Chief Financial Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002              |

 

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*                                         Includedas an exhibit to this quarterly report on Form 10-Q.

 

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