UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-22081
EPIQ SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Missouri |
| 48-1056429 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
501 Kansas Avenue, Kansas City, Kansas |
| 66105-1300 |
(Address of principal executive offices) |
| (Zip Code) |
913-621-9500
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
| Accelerated filer x |
|
|
|
Non-accelerated filer o (Do not check if a smaller reporting company) |
| Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class |
| Outstanding at April 11, 2013 |
Common Stock, $0.01 par value per share |
| 36,260,693 shares |
EPIQ SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2013
PART I - FINANCIAL INFORMATION
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
|
| Three Months Ended |
| ||||
|
| 2013 |
| 2012 |
| ||
REVENUE: |
|
|
|
|
| ||
Operating revenue |
| $ | 102,908 |
| $ | 82,827 |
|
Reimbursable expenses |
| 20,682 |
| 5,645 |
| ||
Total Revenue |
| 123,590 |
| 88,472 |
| ||
|
|
|
|
|
| ||
OPERATING EXPENSE: |
|
|
|
|
| ||
Direct cost of operating revenue (exclusive of depreciation and amortization shown separately below) |
| 52,496 |
| 32,076 |
| ||
Reimbursed direct costs |
| 19,542 |
| 5,568 |
| ||
Selling, general and administrative expense |
| 32,424 |
| 32,032 |
| ||
Depreciation and software and leasehold amortization |
| 6,999 |
| 6,728 |
| ||
Amortization of identifiable intangible assets |
| 4,966 |
| 6,769 |
| ||
Other operating expense (income) |
| 47 |
| (171 | ) | ||
Total Operating Expense |
| 116,474 |
| 83,002 |
| ||
|
|
|
|
|
| ||
INCOME FROM OPERATIONS |
| 7,116 |
| 5,470 |
| ||
|
|
|
|
|
| ||
INTEREST EXPENSE (INCOME): |
|
|
|
|
| ||
Interest expense |
| 1,839 |
| 2,726 |
| ||
Interest income |
| (4 | ) | (6 | ) | ||
Net Interest Expense |
| 1,835 |
| 2,720 |
| ||
|
|
|
|
|
| ||
INCOME BEFORE INCOME TAXES |
| 5,281 |
| 2,750 |
| ||
|
|
|
|
|
| ||
PROVISION FOR INCOME TAXES |
| 1,344 |
| 711 |
| ||
|
|
|
|
|
| ||
NET INCOME |
| $ | 3,937 |
| $ | 2,039 |
|
|
|
|
|
|
| ||
NET INCOME PER SHARE INFORMATION: |
|
|
|
|
| ||
Basic |
| $ | 0.11 |
| $ | 0.06 |
|
Diluted |
| $ | 0.11 |
| $ | 0.06 |
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
|
|
|
|
| ||
Basic |
| 35,600 |
| 35,478 |
| ||
Diluted |
| 36,547 |
| 36,447 |
| ||
|
|
|
|
|
| ||
Cash dividends declared per common share |
| $ | 0.09 |
| $ | 0.05 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
|
| Three Months Ended |
| ||||
|
| 2013 |
| 2012 |
| ||
Net income |
| $ | 3,937 |
| $ | 2,039 |
|
Other comprehensive income: |
|
|
|
|
| ||
Foreign currency translation adjustment, net of tax |
| (993 | ) | 437 |
| ||
Comprehensive income |
| $ | 2,944 |
| $ | 2,476 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
|
| March 31, 2013 |
| December 31, 2012 |
| ||
|
|
|
|
|
| ||
ASSETS |
|
|
|
|
| ||
CURRENT ASSETS: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 2,767 |
| $ | 3,808 |
|
Trade accounts receivable, less allowance for doubtful accounts of $5,473 and $4,825, respectively |
| 117,282 |
| 103,415 |
| ||
Prepaid expenses |
| 10,970 |
| 9,967 |
| ||
Other current assets |
| 3,042 |
| 3,414 |
| ||
Total Current Assets |
| 134,061 |
| 120,604 |
| ||
|
|
|
|
|
| ||
LONG-TERM ASSETS: |
|
|
|
|
| ||
Property and equipment, net |
| 47,492 |
| 44,552 |
| ||
Internally developed software costs, net |
| 18,241 |
| 18,905 |
| ||
Goodwill |
| 403,942 |
| 404,211 |
| ||
Other intangibles, net of accumulated amortization of $95,064 and $90,099, respectively |
| 54,986 |
| 59,951 |
| ||
Other |
| 6,007 |
| 6,493 |
| ||
Total Long-term Assets, net |
| 530,668 |
| 534,112 |
| ||
Total Assets |
| $ | 664,729 |
| $ | 654,716 |
|
|
|
|
|
|
| ||
LIABILITIES AND EQUITY |
|
|
|
|
| ||
CURRENT LIABILITIES: |
|
|
|
|
| ||
Current maturities of long-term obligations |
| $ | 9,142 |
| $ | 9,151 |
|
Accounts payable |
| 24,233 |
| 17,351 |
| ||
Accrued compensation |
| 7,325 |
| 5,086 |
| ||
Customer deposits |
| 2,882 |
| 16,094 |
| ||
Deferred revenue |
| 2,998 |
| 3,131 |
| ||
Dividends payable |
| 3,251 |
| 3,231 |
| ||
Other accrued liabilities |
| 8,000 |
| 6,905 |
| ||
Total Current Liabilities |
| 57,831 |
| 60,949 |
| ||
|
|
|
|
|
| ||
LONG-TERM LIABILITIES: |
|
|
|
|
| ||
Deferred income taxes |
| 40,020 |
| 41,409 |
| ||
Other long-term liabilities |
| 5,628 |
| 5,700 |
| ||
Long-term obligations, excluding current maturities |
| 218,194 |
| 203,288 |
| ||
Total Long-term Liabilities |
| 263,842 |
| 250,397 |
| ||
|
|
|
|
|
| ||
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
| ||
EQUITY: |
|
|
|
|
| ||
Preferred stock - $1 par value; 2,000,000 shares authorized; none issued and outstanding |
|
|
| — |
| ||
Common stock - $0.01 par value; 100,000,000 shares authorized; |
| 403 |
| 399 |
| ||
Additional paid-in capital |
| 292,579 |
| 291,065 |
| ||
Accumulated other comprehensive loss |
| (2,425 | ) | (1,432 | ) | ||
Retained earnings |
| 105,131 |
| 104,445 |
| ||
Treasury stock, at cost — 4,125,277 and 4,001,343 shares |
| (52,632 | ) | (51,107 | ) | ||
Total Equity |
| 343,056 |
| 343,370 |
| ||
Total Liabilities and Equity |
| $ | 664,729 |
| $ | 654,716 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
|
| Three Months Ended March 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
| ||
Net income |
| $ | 3,937 |
| $ | 2,039 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and software and leasehold amortization |
| 6,999 |
| 6,728 |
| ||
Amortization of intangible assets |
| 4,966 |
| 6,769 |
| ||
Share-based compensation expense |
| 1,539 |
| 1,854 |
| ||
Provision for doubtful accounts |
| 682 |
| 497 |
| ||
Accretion of discount |
| 28 |
| 721 |
| ||
Deferred income tax expense |
| 352 |
| 858 |
| ||
Other, net |
| 183 |
| 145 |
| ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Trade accounts receivable |
| (15,058 | ) | (5,147 | ) | ||
Prepaid expenses and other assets |
| (778 | ) | 1,205 |
| ||
Accounts payable and other liabilities |
| 5,404 |
| (2,779 | ) | ||
Customer deposits |
| (13,212 | ) | 1,796 |
| ||
Excess tax benefit related to share-based compensation |
| (141 | ) | — |
| ||
Other |
| (246 | ) | 410 |
| ||
Net cash (used in) provided by operating activities |
| (5,345 | ) | 15,096 |
| ||
|
|
|
|
|
| ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
| ||
Purchase of property and equipment |
| (3,694 | ) | (2,639 | ) | ||
Internally developed software costs |
| (1,530 | ) | (1,644 | ) | ||
Other investing activities, net |
| 10 |
| 51 |
| ||
Net cash used in investing activities |
| (5,214 | ) | (4,232 | ) | ||
|
|
|
|
|
| ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
| ||
Proceeds from revolver borrowings |
| 34,000 |
| 16,000 |
| ||
Payments to reduce revolver borrowings |
| (19,000 | ) | (18,000 | ) | ||
Payments under long-term obligations |
| (424 | ) | (1,517 | ) | ||
Excess tax benefit related to share-based compensation |
| 141 |
|
|
| ||
Common stock repurchases (Note 9) |
| (2,181 | ) | (1,868 | ) | ||
Cash dividends paid (Note 9) |
| (3,233 | ) | (1,787 | ) | ||
Proceeds from issuance of common stock under share-based compensation plans |
| 498 |
| 40 |
| ||
Net cash provided by (used in) financing activities |
| 9,801 |
| (7,132 | ) | ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash |
| (283 | ) | 104 |
| ||
|
|
|
|
|
| ||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
| (1,041 | ) | 3,836 |
| ||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
| 3,808 |
| 2,838 |
| ||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
| $ | 2,767 |
| $ | 6,674 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and with the rules and regulations for reporting on Form 10-Q for interim financial statements. Accordingly, the financial statements do not include certain disclosures required for comprehensive annual financial statements.
The unaudited financial information reflects all adjustments, which are, in the opinion of management, necessary to present fairly our results of operations, financial position, and cash flows for the periods presented. The adjustments consist primarily of normal recurring adjustments. Prior year amounts have been reclassified to conform to the current year presentation. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related Notes included in the Epiq Systems, Inc. (“Epiq,” “we,” “us,” or “our”) Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission (“SEC”) on March 5, 2013.
In preparing these financial statements, we have evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.
The results of operations for any quarter or a partial fiscal year period are not necessarily indicative of the results to be expected for other periods or the entire year.
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of Epiq and our wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Nature of Operations
We are a provider of integrated technology solutions for the legal profession. Our solutions streamline the administration of bankruptcy, litigation, investigations, financial transactions and regulatory compliance matters. We offer innovative managed technology solutions for eDiscovery, document review, legal notification, claims administration and controlled disbursement of funds. Our clients include leading law firms, corporate legal departments, bankruptcy trustees, government agencies, mortgage processors, and financial institutions.
Revenue Recognition
We have agreements with clients pursuant to which we deliver various services each month.
Following is a description of significant sources of revenue:
· Fees contingent upon the month-to-month delivery of services defined by client contracts, such as claims processing, claims reconciliation, professional services, call center support, disbursement services, project management, collection and forensic services, consulting services, document review services and conversion of data into an organized, searchable electronic database. The amount we earn varies based primarily on the size and complexity of the engagement, the number of hours services are provided and the number of documents or amount of data reviewed.
· Hosting fees based on the amount of data stored.
· Deposit-based and service fees. Deposit-based fees are earned based on a percentage of Chapter 7 assets placed on deposit with a designated financial institution by our trustee clients, to whom we provide, at no charge, software licenses, limited hardware and hardware maintenance, and postcontract customer support services. The fees we earn are based on assets placed on deposit by our trustee clients and may vary based on fluctuations in short-term interest rates and changes in service fees.
· Legal noticing services to parties of interest in bankruptcy and class action matters, including direct notification, media campaign, and advertising management in which we coordinate notification through various media outlets, such as print, radio and television, to potential parties of interest for a particular client engagement.
· Monitoring and noticing fees earned based on monthly or on-demand requests for information provided through our AACER® software product.
· Reimbursed expenses, primarily related to postage on mailing services.
Non-Software Arrangements
Certain of our services are billed based on unit prices and volumes for which we have identified each deliverable service element. Based on our evaluation of each element, we have determined that each element delivered has standalone value to our customers because we or other vendors sell such services separately from any other services/deliverables. For certain of these services we have obtained objective and reliable evidence of the fair value of each element based either on the price we charge when we sell an element on a standalone basis or on third-party evidence of fair value of such similar services. For elements where evidence cannot be established the best estimate of sales price has been used. Lastly, our arrangements do not include general rights of return. Accordingly, each of the service elements in our multiple element case and document management arrangements qualifies as a separate unit of accounting. We allocate revenue to the various units of accounting in our arrangements based on the fair value or best estimated selling price of each unit of accounting, which is generally consistent with the stated prices in our arrangements. In instances when revenue has been required to be deferred, we utilize the relative selling price method to calculate the revenue recognized. As we have evidence of an arrangement, revenue for each separate unit of accounting is recognized each period. Revenue is recognized as the services are rendered, our fee becomes fixed and determinable, and collectability is reasonably assured. Payments received in advance of satisfaction of the related revenue recognition criteria are recognized as a customer deposit until all revenue recognition criteria have been satisfied.
Software Arrangements
For our Chapter 7 bankruptcy trustee arrangements, we provide our trustee clients with a software license, hardware lease, hardware maintenance, and postcontract customer support services, all at no charge to the trustee. The trustees place their liquidated estate deposits with a financial institution with which we have an arrangement. We earn contingent monthly fees from the financial institutions based on the average dollar amount of deposits held by the trustees with that financial institution related to the software license, hardware lease, hardware maintenance, and postcontract customer support services provided to our trustee clients. The monthly fees have two components consisting of an interest-based component and a non-interest based service fee. Since we have not established vendor specific objective evidence of the fair value of the software license, we do not recognize any revenue on delivery of the software. The software element is deferred and included with the remaining undelivered elements, which are postcontract customer support services. Revenue related to postcontract customer support is entirely contingent on the placement of liquidated estate deposits by the trustee with the financial institution. Accordingly, we recognize this contingent usage based revenue as the fee becomes fixed or determinable at the time actual usage occurs and collectability is probable. This occurs monthly as a result of the computation, billing and collection of monthly deposit fees contractually agreed to. At that time, we have also satisfied the other revenue recognition criteria since we have persuasive evidence that an arrangement exists, services have been rendered, the price is fixed and determinable, and collectability is reasonably assured.
We also provide our trustee clients with certain hardware, such as desktop computers, monitors, and printers as well as hardware maintenance. We retain ownership of all hardware provided and we account for this hardware as a lease. As the hardware maintenance arrangement is an executory contract similar to an operating lease, we use guidance related to contingent rentals in operating lease arrangements for hardware maintenance as well as for the hardware lease. Since the payments under all of our arrangements are contingent upon the level of trustee deposits and the delivery of upgrades and other services, and there remain important uncertainties regarding the amount of unreimbursable costs yet to be incurred by us, we account for the hardware lease as an operating lease. Therefore, all lease payments, based on the estimated fair value of hardware provided, were accounted for as contingent rentals; which requires that we recognize rental income when the changes in the factor on which the contingent lease payment is based actually occur. This occurs at the end of each period as we achieve our target when deposits are held at the financial institution as, at that time, evidence of an arrangement exists, delivery has occurred, the amount has become fixed and determinable, and collection is reasonably assured.
This revenue, which was less than ten percent of our total revenue for the three months ended March 31, 2013 and 2012, is included in the Condensed Consolidated Statements of Income as a component of “Operating revenue”.
Reimbursements
We have revenue related to reimbursed expenses, primarily postage. Reimbursed postage and other reimbursable direct costs are recorded gross in the Condensed Consolidated Statements of Income as “Reimbursable expenses” and as “Reimbursed direct costs”, in the revenue and operating expenses sections, respectively.
Goodwill
Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed. We assess goodwill for impairment on an annual basis at a reporting unit level and have identified our operating segments (Technology and Bankruptcy and Settlement Administration) as our reporting units for purposes of testing for goodwill impairment. In the first quarter of 2013, we reorganized our internal financial reporting structure. Under the new structure, we began reporting our financial performance based on the following two reportable segments: the Technology segment and the Bankruptcy and Settlement Administration segment. The composition of the segment previously called eDiscovery remains unchanged and is now referred to as the Technology segment (“Technology”). The former Bankruptcy segment and Settlement Administration segment were combined and are now reported as the Bankruptcy and Settlement Administration segment (“Bankruptcy and Settlement Administration”). At the time of the prior year’s goodwill impairment testing, we had identified our three operating segments as our reporting units (eDiscovery, Bankruptcy, and Settlement Administration). Based on the change in our operating segments, we have evaluated our goodwill balance and have determined that there is no impairment of goodwill as a result of this change.
Goodwill is assessed between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, a change in strategic direction, legal factors, operating performance indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit, or future economic factors such as unfavorable changes in our stock price and market capitalization or unfavorable changes in the estimated future discounted cash flows of our reporting units. Our annual test is performed as of July 31 each year, and there have been no events since our last annual test to indicate that it is more likely than not that the recorded goodwill balance had become impaired. Our consolidated goodwill totaled $403.9 million as of March 31, 2013. As of July 31, 2012, which is the date of our most recent impairment test, the fair value of each of our reporting units was in excess of the carrying value of the reporting unit.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We considered both a market approach and an income approach in order to develop an estimate of the fair value of each reporting unit for purposes of our annual impairment test. When available, and as appropriate, we used market multiples derived from a set of competitors or companies with comparable market characteristics to establish fair values for a particular reporting unit (market approach). We also estimated fair value using discounted projected cash flow analysis (income approach). Potential impairment is indicated when the carrying value of a reporting unit, including goodwill, exceeds its estimated fair value. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. In addition, financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital, which is used to determine our discount rate, and through our stock price, which is used to determine our market capitalization. We may be required to recognize impairment of goodwill based on future economic factors such as unfavorable changes in our stock price and market capitalization or unfavorable changes in the estimated future discounted cash flows of our reporting units.
If we determine that the estimated fair value of any reporting unit is less than the reporting unit’s carrying value, then we proceed to the second step of the goodwill impairment analysis to measure the potential impairment charge. An impairment loss is recognized for any excess of the carrying value of the reporting unit’s goodwill over the implied fair value. If goodwill on our Condensed Consolidated Balance Sheet or Consolidated Balance Sheet becomes impaired during a future period, the resulting impairment charge could have a material impact on our results of operations and financial condition.
Due to the current economic environment and the uncertainties regarding potential future economic impacts on our reporting units, there can be no assurances that the estimates and assumptions made for purposes of our \annual goodwill impairment test, will prove to be accurate predictions of the future. If assumptions regarding forecasted revenues or margins of certain of our reporting units are not achieved, we may be required to record goodwill impairment losses in future periods. It is not
possible at this time to determine if any such future impairment loss would occur, and if it does occur, whether such charge would be material.
NOTE 2: GOODWILL AND INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the three months ended March 31, 2013 was as follows:
|
| Technology |
| Bankruptcy |
| Total |
| |||
|
|
|
|
|
|
|
| |||
Balance as of December 31, 2012 |
| $ | 189,248 |
| $ | 214,963 |
| $ | 404,211 |
|
Foreign currency translation |
| (269 | ) | — |
| (269 | ) | |||
Balance as of March 31, 2013 |
| $ | 188,979 |
| $ | 214,963 |
| $ | 403,942 |
|
Identifiable intangible assets as of March 31, 2013 and December 31, 2012 consisted of the following:
|
| March 31, 2013 |
| December 31, 2012 |
| ||||||||
|
| Gross Carrying |
| Accumulated |
| Gross Carrying |
| Accumulated |
| ||||
|
| (in thousands) |
| ||||||||||
Amortizing intangible assets: |
|
|
|
|
|
|
|
|
| ||||
Customer relationships |
| $ | 124,512 |
| $ | 77,920 |
| $ | 124,512 |
| $ | 73,713 |
|
Trade names |
| 6,591 |
| 1,854 |
| 6,591 |
| 1,650 |
| ||||
Non-compete agreements |
| 18,947 |
| 15,290 |
| 18,947 |
| 14,736 |
| ||||
Total |
| $ | 150,050 |
| $ | 95,064 |
| $ | 150,050 |
| $ | 90,099 |
|
Customer relationships, non-compete agreements and trade names carry a weighted average life of seven years, five years and eight years, respectively.
Amortization expense related to identifiable intangible assets was $5.0 million and $6.8 million for the three months ended March 31, 2013 and 2012, respectively. The following table outlines the estimated future amortization expense related to intangible assets at March 31, 2013:
(in thousands)
Year Ending December 31, |
|
|
| |
2013(from April 1, 2013 to December 31, 2013) |
| $ | 13,868 |
|
2014 |
| 12,569 |
| |
2015 |
| 9,893 |
| |
2016 |
| 6,232 |
| |
2017 |
| 5,390 |
| |
2018 and thereafter |
| 7,034 |
| |
Total |
| $ | 54,986 |
|
NOTE 3: LONG-TERM OBLIGATIONS
The following is a summary of long-term obligations outstanding (in thousands):
|
| Final |
| Weighted- |
| March 31, |
| December 31, |
| ||
|
|
|
|
|
| (in thousands) |
| ||||
Senior revolving loan |
| December 2015 |
| 3.1 | % | $ | 214,000 |
| $ | 199,000 |
|
Capital leases |
| April 2017 |
| 6.2 | % | 2,722 |
| 2,860 |
| ||
Note payable |
| September 2014 |
| 2.2 | % | 7,080 |
| 7,080 |
| ||
Acquisition-related liabilities |
| December 2013 |
| 3.5 | % | 3,534 |
| 3,499 |
| ||
Total long-term obligations, including current portion |
|
|
|
|
| 227,336 |
| 212,439 |
| ||
Current maturities of long-term obligations |
|
|
|
|
|
|
|
|
| ||
Capital leases |
|
|
|
|
| (1,596 | ) | (1,640 | ) | ||
Notes payable |
|
|
|
|
| (4,012 | ) | (4,012 | ) | ||
Acquisition-related liabilities |
|
|
|
|
| (3,534 | ) | (3,499 | ) | ||
Total current maturities of long-term obligations |
|
|
|
|
| (9,142 | ) | (9,151 | ) | ||
Total Long-term obligations |
|
|
|
|
| $ | 218,194 |
| $ | 203,288 |
|
Credit Facilities
We have a $325.0 million revolving loan senior credit facility with a maturity date of December 2015. We have the right, subject to compliance with the covenants as set forth in the credit facility agreement, to increase the facility up to a maximum of $375.0 million. The credit facility is secured by liens on our land and buildings and substantially all of our personal property.
Borrowings under the senior credit facility bear interest at various rates based on our leverage ratio with two rate options at the discretion of management as follows: (1) for base rate advances, borrowings bear interest at prime rate plus 75 to 175 basis points; and (2) for LIBOR rate advances, borrowings bear interest at LIBOR rate plus 175 to 275 basis points. At March 31, 2013, borrowings of $214.0 million under this facility had a weighted average interest rate of 3.1%. The average amount of borrowings under this facility during the first quarter of 2013 was $199.7 million, at a weighted average interest rate of 3.1%. The maximum amount outstanding during the first quarter of 2013 was $214.0 million.
The financial covenants contained in the credit facility include a total debt leverage ratio and a fixed charge coverage ratio (all as defined in our credit facility agreement). The leverage ratio is not permitted to exceed 3.00 to 1.00 and the fixed charge coverage ratio is not permitted to be less than 1.25 to 1.00. As of March 31, 2013, we were in compliance with all financial covenants and the amount available for additional borrowings under the credit facility under the most restrictive financial covenant was approximately $43.9 million.
Other restrictive covenants contained in our credit facility include limitations on incurring additional indebtedness and completing acquisitions. We generally cannot incur indebtedness outside the credit facility, with the exception of capital leases, up to $15.0 million, and subordinated debt, up to $100 million. In addition, for acquisitions we must be able to demonstrate that, on a pro forma basis, we would be in compliance with our covenants during the four quarters prior to the acquisition, and bank permission must be obtained for acquisitions in which cash consideration exceeds $125.0 million or total consideration exceeds $175.0 million. The total consideration for all acquisitions consummated during the term of our credit facility may not exceed $300.0 million in the aggregate without lender permission.
Capital Leases
We lease certain equipment under capital leases that generally require monthly payments with final maturity dates during various periods through 2017. As of March 31, 2013, our capital leases had a weighted-average interest rate of approximately 6.2%.
Note Payable
During 2011 we entered into a note payable related to a software license agreement that bears interest of approximately 2.2% and is payable quarterly through September 2014.
Acquisition-related Liabilities
Amounts recorded in connection with acquisition-related liabilities as of March 31, 2013 and December 31, 2012 are as follows:
|
| March 31, |
| December 31, |
| ||
|
| (in thousands) |
| ||||
De Novo deferred acquisition price |
|
|
|
|
| ||
Current portion |
| $ | 3,534 |
| $ | 3,499 |
|
Total De Novo deferred acquisition price |
| $ | 3,534 |
| $ | 3,499 |
|
De Novo Legal LLC
In connection with the acquisition of De Novo Legal LLC (“De Novo”) on December 28, 2011, a portion of the purchase price is being held by us and deferred until June 2013 for potential indemnification claims. This amount has been discounted using an appropriate imputed interest rate.
NOTE 4: NET INCOME PER SHARE
Basic net income per share is computed on the basis of weighted average outstanding common shares. Diluted net income per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options, if dilutive. The numerator of the diluted net income per share calculation is increased by the allocation of net income and dividends declared to nonvested shares, if the impact is dilutive.
We have determined that certain nonvested share awards (also referred to as restricted stock awards) issued by the company are participating securities because they have non-forfeitable rights to dividends. Accordingly, basic net income per share is calculated under the two-class method calculation. In determining the number of diluted shares outstanding, we are required to disclose the more dilutive earnings per share result between the treasury stock method calculation and the two-class method calculation.
The computation of basic and diluted net income per share for the three months ended March 31, 2013 and 2012 is as follows:
|
| Three Months Ended March 31, 2013 |
| Three Months Ended March 31, 2012 |
| ||||||||||||
|
| Net Income |
| Weighted |
| Per Share |
| Net Income |
| Weighted |
| Per Share |
| ||||
|
| (in thousands, except per share data) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 3,937 |
|
|
|
|
| $ | 2,039 |
|
|
|
|
| ||
Less: amounts allocated to nonvested shares |
| (39 | ) |
|
|
|
| (6 | ) |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic net income available to common stockholders |
| 3,898 |
| 35,600 |
| $ | 0.11 |
| 2,033 |
| 35,478 |
| $ | 0.06 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Stock options |
|
|
| 947 |
|
|
| — |
| 969 |
|
|
| ||||
Add back: amounts allocated to nonvested shares |
| 39 |
|
|
|
|
| 6 |
| — |
|
|
| ||||
Less: amounts re-allocated to nonvested shares |
| (39 | ) |
|
|
|
| (6 | ) | — |
|
|
| ||||
Diluted net income available to common stockholders |
| $ | 3,898 |
| 36,547 |
| $ | 0.11 |
| $ | 2,033 |
| 36,447 |
| $ | 0.06 |
|
For the three months ended March 31, 2013 and 2012, weighted-average outstanding stock options totaling approximately 2.6 million and 3.2 million, respectively, were anti-dilutive and therefore not included in the computation of diluted net income per share.
NOTE 5: SHARE-BASED COMPENSATION
The fair value of the share-based awards is measured at grant date and the resulting compensation expense is recognized on a straight-line basis over the requisite service period. The following table presents share-based compensation expense, which is a non-cash charge, included in the below noted captions within the Condensed Consolidated Statements of Income:
|
| Three Months Ended |
| ||||
|
| 2013 |
| 2012 |
| ||
|
|
|
|
|
| ||
Direct cost of services |
| $ | 19 |
| $ | 89 |
|
Selling, general and administrative |
| 1,520 |
| 1,765 |
| ||
Share-based compensation expense |
| 1,539 |
| 1,854 |
| ||
Income tax benefit |
| (654 | ) | (809 | ) | ||
Total share-based compensation expense, net of tax |
| $ | 885 |
| $ | 1,045 |
|
The 2004 Equity Incentive Plan, as amended (the “2004 Plan”), limits the grant of options to acquire shares of common stock, stock appreciation rights, and restricted stock awards under the 2004 Plan to an aggregate of 7,500,000 shares. Any grant under the 2004 Plan that expires or terminates unexercised, becomes unexercisable, or is forfeited will be available for future grants. At March 31, 2013, there were approximately 231,000 shares of common stock available for future equity-related grants under the 2004 Plan.
During the three months ended March 31, 2013, we granted 375,000 nonvested share awards at a weighted-average grant date price of $12.44 per share of which 330,000 shares vest upon certification by the compensation committee of the company’s board of directors of achievement of certain financial performance criteria for the calendar year ending December 31, 2013
and 20,000 shares vested upon issuance. The remainder of the nonvested share awards vests one year after the grant date. As of March 31, 2013 we have assessed the likelihood that the performance condition will be met and have recorded the related expense based on the estimated outcome.
We settle stock option exercises and nonvested share awards with newly issued common shares or treasury stock.
The fair value of each stock option grant was estimated at the date of grant using a Black-Scholes option pricing model. The following table presents the weighted-average assumptions used and the weighted-average fair value per option granted for the three months ended March 31, 2012. There were no options granted during the three months ended March 31, 2013.
|
| Three Months |
| |
Expected life of stock option (years) |
| 6.6 |
| |
Expected volatility |
| 38 | % | |
Risk-free interest rate |
| 1.2 | % | |
Dividend yield |
| 1.5 | % | |
Weighted average grant-date fair value |
| $ | 3.97 |
|
As of March 31, 2013 there was $6.7 million of unrecognized compensation cost, net of estimated forfeitures, related to nonvested share-based awards, which will be recognized over a weighted-average period of two years.
NOTE 6: SEGMENT REPORTING
In the first quarter of 2013, we reorganized our internal financial reporting structure. Under the new structure, we began reporting our financial performance based on the following two reportable segments: the Technology segment and the Bankruptcy and Settlement Administration segment. The composition of the segment previously called eDiscovery remains unchanged and is now referred to as the Technology segment. The former Bankruptcy segment and Settlement Administration segment were combined and will now be reported as the Bankruptcy and Settlement Administration segment. Although our consolidated results of operation, financial position and cash flows were not impacted we have updated the segment disclosures for prior periods to reflect our new internal reporting structure.
Our Technology segment provides eDiscovery managed services and technology solutions comprised of consulting, collections and forensics, processing, search and review, and document review to companies and law firms. Produced documents are made available primarily through a hosted environment utilizing our proprietary software DocuMatrix™, and third-party software which allows for efficient attorney review and data requests Our Bankruptcy and Settlement Administration segment provides managed services and technology solutions that address the needs of our customers with respect to litigation, claims and project administration, compliance matters, controlled disbursements corporate restructuring bankruptcy and class action proceedings.
The segment performance measure is based on earnings before interest, taxes, depreciation and amortization, other operating expense, and share-based compensation expense. In management’s evaluation of performance, certain costs, such as compensation for administrative staff and executive management, are not allocated by segment and, accordingly, the following reporting segment results do not include such unallocated costs.
Assets reported within a segment are those assets that can be identified to a segment and primarily consist of trade receivables, property, equipment and leasehold improvements, software, identifiable intangible assets and goodwill. Cash, certain tax-related assets, and certain prepaid assets and other assets are not allocated to our segments. Although we can and do identify long-lived assets such as property, equipment and leasehold improvements, software, and identifiable intangible assets to reporting segments, we do not allocate the related depreciation and amortization to the segment as management evaluates segment performance exclusive of these non-cash charges.
Following is a summary of segment information for the three months ended March 31, 2013.
|
| Three Months Ended March 31, 2013 |
| ||||||||||
|
| Technology |
| Bankruptcy |
| Eliminations |
| Total |
| ||||
|
| (in thousands) |
| ||||||||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Operating revenues |
| $ | 54,787 |
| $ | 48,121 |
| $ | — |
| $ | 102,908 |
|
Intersegment revenues |
| 5 |
| — |
| (5 | ) | — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating revenues including intersegment revenue |
| 54,792 |
| 48,121 |
| (5 | ) | 102,908 |
| ||||
Reimbursable expenses |
| 287 |
| 20,395 |
| — |
| 20,682 |
| ||||
Total revenues |
| 55,079 |
| 68,516 |
| (5 | ) | 123,590 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Direct costs, selling, general and administrative costs |
| 38,687 |
| 53,917 |
| (5 | ) | 92,599 |
| ||||
Segment performance measure |
| $ | 16,392 |
| $ | 14,599 |
| $ | — |
| $ | 30,991 |
|
Following is a summary of segment information for the three months ended March 31, 2012.
|
| Three Months Ended March 31, 2012 |
| ||||||||||
|
| Technology |
| Bankruptcy |
| Eliminations |
| Total |
| ||||
|
| (in thousands) |
| ||||||||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Operating revenues |
| $ | 48,848 |
| $ | 33,979 |
| $ | — |
| $ | 82,827 |
|
Intersegment revenues |
| 48 |
| — |
| (48 | ) | — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating revenues including intersegment revenue |
| 48,896 |
| 33,979 |
| (48 | ) | 82,827 |
| ||||
Reimbursable expenses |
| 456 |
| 5,189 |
| — |
| 5,645 |
| ||||
Total revenues |
| 49,352 |
| 39,168 |
| (48 | ) | 88,472 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Direct costs, selling, general and administrative costs |
| 31,759 |
| 24,949 |
| (48 | ) | 56,660 |
| ||||
Segment performance measure |
| $ | 17,593 |
| $ | 14,219 |
| $ | — |
| $ | 31,812 |
|
Following is a reconciliation of our segment performance measure to income before income taxes.
|
| Three Months Ended March 31, |
| ||||
|
| 2013 |
| 2012 |
| ||
|
| (in thousands) |
| ||||
Segment performance measure |
| $ | 30,991 |
| $ | 31,812 |
|
Unallocated corporate expenses |
| (10,324 | ) | (11,162 | ) | ||
Share-based compensation expense |
| (1,539 | ) | (1,854 | ) | ||
Depreciation and software and leasehold amortization |
| (6,999 | ) | (6,728 | ) | ||
Amortization of intangible assets |
| (4,966 | ) | (6,769 | ) | ||
Other operating expense (income) |
| (47 | ) | 171 |
| ||
Income from operations |
| 7,116 |
| 5,470 |
| ||
Interest expense, net |
| (1,835 | ) | (2,720 | ) | ||
Income before income taxes |
| $ | 5,281 |
| $ | 2,750 |
|
Following are total assets by segment.
|
| March 31, |
| December 31, |
| ||
|
| (in thousands) |
| ||||
Assets |
|
|
|
|
| ||
Technology |
| $ | 337,908 |
| $ | 335,051 |
|
Bankruptcy and Settlement Administration |
| 289,184 |
| 296,811 |
| ||
Unallocated corporate |
| 37,637 |
| 22,854 |
| ||
Total consolidated assets |
| $ | 664,729 |
| $ | 654,716 |
|
NOTE 7: FAIR VALUES OF ASSETS AND LIABILITIES
Accounting standards establish a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are listed below.
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than those included in Level 1, such as quoted market prices for similar assets and liabilities in active markets or quoted prices for identical assets in inactive markets.
Level 3 — Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing an asset or liability.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying value and estimated fair value of our cash equivalents, which consist of short-term money market funds, are classified as Level 1. There have been no transfers between Level 1 and Level 2 during the three months ended March 31, 2013. In connection with the acquisitions of De Novo and Jupiter eSources we established liabilities related to potential contingent consideration that are considered to be Level 3 liabilities. These liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value. As of March 31, 2013 and December 31, 2012 the value of these liabilities was $0.
For fair value measurements categorized within Level 3 of the fair value hierarchy, our accounting and finance management, who report to the chief financial officer, determine our valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of our accounting and finance management and are approved by the chief financial officer. Fair value calculations are generally prepared by third-party valuation experts who rely on discussions with management in addition to the use of management’s assumptions and estimates as they related to the assets or liabilities in Level 3. Such assumptions and
estimates include such inputs as estimates of future cash flows, projected profit and loss information, discount rates, and assumptions as they relate to future pertinent events. Through regular interaction with the third-party valuation experts, finance and accounting management determine that the valuation techniques used and inputs and outputs of the models reflect the requirements of accounting standards as they relate to fair value measurements. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
As of March 31, 2013 and December 31, 2012, the carrying value of our trade accounts receivable, accounts payable, certain other liabilities, deferred acquisition price payments and capital leases approximated fair value. The amount outstanding under our credit facility was $214.0 million and $199.0 million at March 31, 2013 and December 31, 2012, respectively, which approximated fair value due to the borrowing rates currently available to us for debt with similar terms and is classified as Level 2. As of March 31, 2013 there were no other assets or liabilities that are measured and recorded at fair value on a recurring basis.
NOTE 8: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows (in thousands):
|
| Three Months Ended |
| ||||
|
| 2013 |
| 2012 |
| ||
|
|
|
|
|
| ||
Cash paid for: |
|
|
|
|
| ||
Interest |
| $ | 1,627 |
| $ | 1,691 |
|
Income taxes, net |
| 1,924 |
| 1,158 |
| ||
Non-cash investing and financing transactions: |
|
|
|
|
| ||
Property, equipment, and leasehold improvements accrued in accounts payable and other long-term liabilities |
| 6,949 |
| 913 |
| ||
Capitalized lease obligations incurred |
| 306 |
| — |
| ||
Dividends declared but not yet paid |
| 3,251 |
| 1,803 |
| ||
NOTE 9: EQUITY
Share Repurchases
On June 1, 2012, our board of directors (the “Board”) authorized the repurchase, through December 31, 2013, of up to an aggregate of $35.0 million of our outstanding shares of common stock (the “2012 Program”). There were no repurchases of shares under the 2012 Program during the three months ended March 31, 2013 or 2012.
We also have a policy that requires shares to be repurchased by us to satisfy employee tax withholding obligations upon the vesting of restricted stock awards or the exercise of stock options. During the three months ended March 31, 2013, we repurchased 175,295 shares for approximately $2.2 million to satisfy employee tax withholding obligations upon the vesting of restricted stock awards and the net share settlement of certain stock option exercises. During the three months ended March 31, 2012, we repurchased 154,768 shares for approximately $1.9 million to satisfy employee tax withholding obligations upon the vesting of restricted stock awards.
Dividends
On February 28, 2013, the Board declared a cash dividend of $0.09 per outstanding share of common stock, which is payable on June 3, 2013 to shareholders of record as of the close of business on May 1, 2013.
Dividends payable were approximately $3.3 million and $3.2 million at March 31, 2013 and December 31, 2012, respectively.
NOTE 10: LEGAL PROCEEDINGS
We are at times involved in litigation and other legal claims in the ordinary course of business. When appropriate in management’s estimation, we may record reserves in our financial statements for pending litigation and other claims. Although it is not possible to predict with certainty the outcome of litigation, we do not believe that any of the current pending legal proceedings to which we are a party will have a material impact on our results of operations or financial condition.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
In this report, in other filings with the SEC and in press releases and other public statements by our officers throughout the year, Epiq Systems, Inc. makes or will make statements that plan for or anticipate the future. These forward-looking statements include, but are not limited to any projection or expectation of earnings, revenue or other financial items; the plans, strategies and objectives of management for future operations; factors that may affect our operating results; new products or services; the demand for our products and services; our ability to consummate acquisitions and successfully integrate them into our operations; future capital expenditures; effects of current or future economic conditions or performance; industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These forward-looking statements are based on our current expectations. In this Quarterly Report on Form 10-Q, we make statements that plan for or anticipate the future. Many of these statements are found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this report.
Forward-looking statements may be identified by words or phrases such as “believe,” “expect,” “anticipate,” “should,” “planned,” “may,” “estimated,” “goal,” “objective” “seeks,” and “potential” and variations of these words and similar expressions or negatives of these words. Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a “safe harbor” for forward-looking statements. Because forward-looking statements involve future risks and uncertainties, listed below are a variety of factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. These factors include (1) any material changes in our total number of client engagements and the volume associated with each engagement, (2) any material changes in our clients’ deposit portfolio or the services required or selected by our clients in engagements, (3) material changes in the number of bankruptcy filings, class action filings or mass tort actions each year, or changes in government legislation or court rules affecting these filings, (4) overall strength and stability of general economic conditions, both in the United States and in the global markets, (5) failure to keep pare with technological changes and significant changes in the competitive environment, (6) risks associated with the handling of confidential data and compliance with information privacy laws, (7) changes in or the effects of pricing structures and arrangements, (8) risks associated with the integration of acquisitions into our existing business operations, (9) risks associated with indebtedness, (10) risks associated with foreign currency fluctuations, (11) risks associated with developing and providing software and internet-based technology solutions to our clients, (12) risks associated with cyber attacks, interruptions or delays in services at data centers, (13) risks of errors or failures of software or services, (14) risks associated with our international operations, (15) risks of litigation against us, or failure to protect our intellectual property, (16) any material non-cash write-downs based on impairment of our goodwill, and (17) other risks detailed from time to time in our SEC filings, including our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. In addition, there may be other factors not included in our SEC filings that may cause actual results to differ materially from any forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements contained herein to reflect future events or developments, except as required by law.
This discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Overview
We are a provider of managed technology solutions for the legal profession. Our solutions streamline the administration of bankruptcy, litigation, financial transactions and regulatory compliance matters. We offer innovative technology solutions for eDiscovery, document review, legal notification, claims administration and controlled disbursement of funds. Our clients include leading law firms, corporate legal departments, bankruptcy trustees, government agencies, mortgage processors, and financial institutions.
In the first quarter of 2013, we reorganized our internal financial reporting structure. Under the new structure, we began reporting our financial performance based on the following two reportable segments: the Technology segment and the Bankruptcy and Settlement Administration segment. The composition of the segment previously called eDiscovery remains unchanged and is now referred to as the Technology segment. The former Bankruptcy segment and Settlement Administration segment were combined and are now reported as the Bankruptcy and Settlement Administration segment. Although our consolidated results of operation, financial position and cash flows will not be impacted we have updated the segment disclosures for prior periods to reflect our new internal reporting structure.
Technology
Our Technology segment provides eDiscovery managed services and technology solutions comprised of consulting, collections and forensics, processing, search and review, production of documents and document review services to companies and the litigation departments of law firms. Our eDataMatrix® and third-party software analyzes, filters, deduplicates and produces documents for review. Documents are made available primarily through a hosted environment, and our DocuMatrix™ and third-party software allows for efficient attorney review and data requests. Our customers are typically large corporations that use our products and services cooperatively with their legal counsel to manage the eDiscovery process for litigation, investigations, anti-trust filings and regulatory matters and data requests.
The substantial amount of electronic documents and other data used by businesses has changed the dynamics of how attorneys support discovery in complex litigation, investigations and data requests. Due to the complexity of matters, the volume of data that are maintained electronically, and the volume of documents that are produced, law firms have become increasingly reliant on electronic evidence management systems to organize and manage the litigation discovery process.
Following is a description of the significant sources of revenue in our Technology segment.
· Consulting, forensics, collection and project management service fees based on the number of hours that services are provided.
· Fees related to the conversion of data into an organized, searchable electronic database. The amount earned varies primarily on the number of documents or volume of data processed.
· Hosting fees based on the amount of data stored.
· Production of documents based on the number of documents
· Document review fees based on the number of hours spent reviewing documents, the number of pages reviewed, or the amount of data reviewed.
Our primary offices are in New York, Phoenix, London and Hong Kong and we operate data centers in the United States, Europe and Asia.
Bankruptcy and Settlement Administration
Our Bankruptcy and Settlement Administration segment provides managed services and technology solutions that address the needs of our customers with respect to litigation, claims and project administration, compliance matters, controlled disbursements corporate restructuring bankruptcy and class action proceedings.
Bankruptcy is an integral part of the United States’ economy. As of the most recently reported data by the Administrative Office of the U.S. Courts for the twelve-month period ended December 31, 2012 and 2011, there were approximately 1.22 million and 1.41 million new bankruptcy filings, respectively. Bankruptcy filings for the twelve-month period ended December 31, 2012 decreased 13% versus the twelve-month period ended December 31, 2011. During this period, Chapter 7 filings decreased 15%, Chapter 11 filings fell 10%, and Chapter 13 filings decreased 10%.
This segment provides solutions that address the needs of Chapter 7, Chapter 11, and Chapter 13 bankruptcy trustees to administer bankruptcy proceedings and of debtor corporations that file a plan of reorganization.
· Chapter 7 is a liquidation bankruptcy for individuals or businesses that, as measured by the number of new cases filed in the twelve-month period ended December 31, 2012, accounted for approximately 69% of all bankruptcy filings. In a Chapter 7 case, the debtor’s assets are liquidated and the resulting cash proceeds are used by the Chapter 7 bankruptcy trustee to pay creditors. Chapter 7 cases typically last several years.
· Chapter 11 is a reorganization model of bankruptcy for corporations that, as measured by the number of new cases filed in the twelve-month period ended December 31, 2012, accounted for less than 1% of all bankruptcy filings. Chapter 11 generally allows a company, often referred to as the debtor-in-possession, to continue operating under a plan of reorganization to restructure its business and to modify payment terms of both secured and unsecured obligations. Chapter 11 cases generally last several years.
· Chapter 13 is a reorganization model of bankruptcy for individuals that, as measured by the number of new cases filed in the twelve-month period ended December 31, 2012, accounted for approximately 30% of all bankruptcy filings. In a Chapter 13 case, debtors make periodic cash payments into a reorganization plan and a Chapter 13 bankruptcy trustee
uses these cash payments to make monthly distributions to creditors. Chapter 13 cases typically last between three and five years.
Chapter 11 bankruptcy engagements are generally long-term, multi-year assignments that provide revenue visibility into future periods. Our trustee services deposit portfolio averaged approximately $1.7 billion during the three months ended March 31, 2013, while pricing continued at floor pricing levels under our agreements due to the low short-term interest rate environment.
We provide our Chapter 7 products and services to our trustee customers at no direct charge, and they maintain deposit accounts for bankruptcy cases under their administration at a designated banking institution. We have arrangements with various banks under which we provide the bankruptcy trustee case management software and related services, and the bank provides the bankruptcy trustee with deposit-related banking services.
The key participants in a bankruptcy proceeding include the debtor-in-possession, the debtor’s legal counsel, the creditors, the creditors’ legal counsel, and the bankruptcy judge. Chapter 7 and Chapter 13 cases also include a professional bankruptcy trustee, who is responsible for administering the bankruptcy case. The end-user customers of our Chapter 7, Chapter 11, and Chapter 13 bankruptcy businesses are debtor corporations that file a plan of reorganization and professional bankruptcy trustees. The Executive Office for United States Trustees, a division of the United States Department of Justice, appoints all bankruptcy trustees. A United States Trustee is appointed in most federal court districts and generally has responsibility for overseeing the integrity of the bankruptcy system. The bankruptcy trustee’s primary responsibilities include liquidating the debtor’s assets or collecting funds from the debtor, distributing the collected funds to creditors pursuant to the orders of the bankruptcy court and preparing regular status reports for the Executive Office for United States Trustees and for the bankruptcy court. Trustees manage an entire caseload of bankruptcy cases simultaneously.
Our proprietary software product, AACER® (Automated Access to Court Electronic Records) (“AACER®”), assists creditors including banks, mortgage processors, and their administrative services professionals to streamline processing of their portfolios of loans in bankruptcy cases. AACER® electronically monitors developments in all United States bankruptcy courts and applies sophisticated algorithms to classify docket filings automatically in each case to facilitate the management of large bankruptcy claims operations. By implementing AACER®, clients achieve greater accuracy in faster timeframes, with a significant cost savings compared to manual attorney review of each case in the portfolio. Banking PortalTM, a centralized hub for processing online banking transactions across Epiq’s family of Chapter 7 products, facilitates the rapid on boarding of new banks and provides ebanking capabilities.
Class action refers to litigation in which class representatives bring a lawsuit against a defendant company or other persons on behalf of a large group of similarly affected persons. Mass tort refers to class action cases that are particularly large or prominent. Class action and mass tort litigation is often complex and the cases, including administration of any settlement, may last several years. Key participants in this marketplace include law firms that specialize in representing class action and mass tort plaintiffs and other law firms that specialize in representing defendants.
Following is a description of the significant sources of revenue in our Bankruptcy and Settlement Administration segment.
· Data hosting fees and volume-based fees.
· Professional service fees and other support service fees contingent upon the month-to-month delivery of services such as data conversion, claims processing, claims reconciliation, project management, professional services, call center support, website development and administration, and controlled disbursements. The amount we earn varies primarily on the size and complexity of the engagement.
· Deposit-based and service fees. Deposit-based fees are earned on a percentage of Chapter 7 assets placed on deposit with a designated financial institution by our trustee clients, to whom we provide, at no charge, software licenses, limited hardware and hardware maintenance, and postcontract customer support services. The fees we earn based on assets placed on deposit by our trustee clients may vary based on fluctuations in short-term interest rates and changes in service fees.
· Legal noticing services to parties of interest in bankruptcy, class action, and other administrative matters, including direct notification and media campaign and advertising management in which we coordinate notification, primarily through print media outlets, to potential parties of interest for a particular client engagement.
· Monitoring and noticing fees earned based on monthly or on-demand requests for information provided through AACER®.
· Reimbursement for costs incurred, primarily related to postage on mailing services.
Results of Operations for the Three Months Ended March 31, 2013 Compared with the Three Months Ended March 31, 2012
The discussion that follows provides information which we believe is relevant to an understanding of our consolidated results of operations. Also see discussion of segment results in Results of Operations by Segment section below.
Consolidated Results
|
| Three Months Ended March |
| $ Change |
|
|
| |||||
Amounts in thousands |
| 2013 |
| 2012 |
| (Decrease) |
| % Change |
| |||
Operating revenue |
| $ | 102,908 |
| $ | 82,827 |
| $ | 20,081 |
| 24 | % |
Reimbursable expenses |
| 20,682 |
| 5,645 |
| 15,037 |
| 266 | % | |||
Total Revenue |
| 123,590 |
| 88,472 |
| 35,118 |
| 40 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Direct cost of operating revenue (exclusive of depreciation and amortization shown separately below) |
| 52,496 |
| 32,076 |
| 20,420 |
| 64 | % | |||
Reimbursed direct costs |
| 19,542 |
| 5,568 |
| 13,974 |
| 251 | % | |||
Selling, general and administrative |
| 32,424 |
| 32,032 |
| 392 |
| 1 | % | |||
Depreciation and software and leasehold amortization |
| 6,999 |
| 6,728 |
| 271 |
| 4 | % | |||
Amortization of identifiable intangible assets |
| 4,966 |
| 6,769 |
| (1,803 | ) | -27 | % | |||
Other operating expense (income) |
| 47 |
| (171 | ) | 218 |
| N/M | ||||
Total Operating Expense |
| 116,474 |
| 83,002 |
| 33,472 |
| 40 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Income From Operations |
| 7,116 |
| 5,470 |
| 1,646 |
| 30 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Interest Expense (Income) |
|
|
|
|
|
|
|
|
| |||
Interest expense |
| 1,839 |
| 2,726 |
| (887 | ) | -33 | % | |||
Interest income |
| (4 | ) | (6 | ) | 2 |
| N/M | ||||
Net Interest Expense |
| 1,835 |
| 2,720 |
| (885 | ) | -33 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Income Before Income Taxes |
| 5,281 |
| 2,750 |
| 2,531 |
| 92 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Provision for Income Taxes |
| 1,344 |
| 711 |
| 633 |
| 89 | % | |||
|
|
|
|
|
|
|
|
|
| |||
Net Income |
| $ | 3,937 |
| $ | 2,039 |
| $ | 1,898 |
| 93 | % |
N/M — not meaningful
Revenue
The increase in operating revenue for the three months ended March 31, 2013 as compared to the same period in the prior year was driven by a $5.9 million increase in the Technology segment and a $14.1 million increase in the Bankruptcy and Settlement Administration segment.
Total revenue includes reimbursed expenses, such as postage related to notification services. We reflect these reimbursed expenses as a separate line item on our accompanying Condensed Consolidated Statements of Income. Although reimbursable expenses may fluctuate significantly from quarter to quarter, these fluctuations have a minimal effect on our quarter to quarter income from operations as we realize little or no margin from this revenue.
Operating Expense
The increase in direct cost of operating revenue, exclusive of depreciation and amortization, was primarily the result of the increase in and mix of operating revenue and includes a $5.6 million increase in compensation related expense, a $7.5 million increase related to costs for legal notification and advertising services, and a $6.4 million increase in other production costs.
The increase in reimbursed direct costs for the three months ended March 31, 2013 as compared to the same period of 2012 corresponds to the increase in revenue from reimbursed expenses.
Selling, general and administrative expenses and depreciation and software and leasehold amortization expense were comparable to the prior period notwithstanding the increase in revenue.
Interest Expense, Net
The decrease in net interest expense was primarily due to a $0.6 million decrease in accreted interest expense related to acquisition-related liabilities for the three months ended March 31, 2013 as compared to the same period in the prior year.
Income Taxes
Our effective tax rate for the three months ended March 31, 2013 was 25.5% compared to 25.9% in the prior year. The 2013 reduction from statutory rates is primarily due to the enactment of the 2012 American Taxpayer Relief Act which extended the federal research credit for both 2012 and 2013. We have recognized approximately $0.4 million of tax benefit relating to the 2012 credits and a portion of our 2013 tax credits during this quarter. The 2012 reduction from statutory rates resulted from a tax benefit related to settling our New York investment tax credit claim, as previously reported.
We have been informed that our income tax returns for the years ended December 31, 2009, 2010 and 2011will be audited by the State of New York beginning in the third quarter of this year. The outcome of the tax exam cannot be predicted with certainty but we do not expect any adjustments to be material. If any issues are resolved in a manner not consistent with our expectations, we could be required to adjust our provision for income tax in the period such resolution occurs.
Results of Operations by Segment
The following segment discussion is presented on a basis consistent with our segment disclosure contained in Note 6 of our Notes to Condensed Consolidated Financial Statements. The table below presents operating revenue, direct and administrative costs (including reimbursed costs) and segment performance measure for each of our reportable segments and a reconciliation of the segment performance measure to consolidated income before income taxes.
|
| Three Months Ended March 31, |
| $ Change |
| % |
| |||||
Amounts in thousands |
| 2013 |
| 2012 |
| (Decrease) |
| Change |
| |||
Operating revenue |
|
|
|
|
|
|
|
|
| |||
Technology |
| $ | 54,787 |
| $ | 48,848 |
| $ | 5,939 |
| 12 | % |
Bankruptcy and Settlement Administration |
| 48,121 |
| 33,979 |
| 14,142 |
| 42 | % | |||
Total operating revenue |
| $ | 102,908 |
| $ | 82,827 |
| $ | 20,081 |
| 24 | % |
|
|
|
|
|
|
|
|
|
| |||
Reimbursable expenses |
|
|
|
|
|
|
|
|
| |||
Technology |
| $ | 287 |
| $ | 456 |
| $ | (169 | ) | -37 | % |
Bankruptcy and Settlement Administration |
| 20,395 |
| 5,189 |
| 15,206 |
| 293 | % | |||
Total reimbursable expenses |
| $ | 20,682 |
| $ | 5,645 |
| $ | 15,037 |
| 266 | % |
|
|
|
|
|
|
|
|
|
| |||
Direct costs, selling, general and administrative costs |
|
|
|
|
|
|
|
|
| |||
Technology |
| $ | 38,687 |
| $ | 31,759 |
| $ | 6,928 |
| 22 | % |
Bankruptcy and Settlement Administration |
| 53,917 |
| 24,949 |
| 28,968 |
| 116 | % | |||
Intercompany eliminations |
| (5 | ) | (48 | ) | 43 |
| -90 | % | |||
Total direct costs, selling, general and administrative costs |
| $ | 92,599 |
| $ | 56,660 |
| $ | 35,939 |
| 63 | % |
|
|
|
|
|
|
|
|
|
| |||
Segment performance measure |
|
|
|
|
|
|
|
|
| |||
Technology |
| $ | 16,392 |
| $ | 17,593 |
| $ | (1,201 | ) | -7 | % |
Bankruptcy and Settlement Administration |
| 14,599 |
| 14,219 |
| 380 |
| 3 | % | |||
Total segment performance measure |
| $ | 30,991 |
| $ | 31,812 |
| $ | (821 | ) | -3 | % |
|
|
|
|
|
|
|
|
|
| |||
Segment performance measure |
| $ | 30,991 |
| $ | 31,812 |
|
|
|
|
| |
Unallocated corporate expenses |
| (10,324 | ) | (11,162 | ) |
|
|
|
| |||
Share-based compensation expense |
| (1,539 | ) | (1,854 | ) |
|
|
|
| |||
Depreciation and software and leasehold amortization |
| (6,999 | ) | (6,728 | ) |
|
|
|
| |||
Amortization of intangible assets |
| (4,966 | ) | (6,769 | ) |
|
|
|
| |||
Other operating expense (income) |
| (47 | ) | 171 |
|
|
|
|
| |||
Income from operations |
| 7,116 |
| 5,470 |
|
|
|
|
| |||
Interest expense, net |
| (1,835 | ) | (2,720 | ) |
|
|
|
| |||
Income before income taxes |
| $ | 5,281 |
| $ | 2,750 |
|
|
|
|
|
Technology Segment
Operating revenue increased $5.9 million compared to the prior year period primarily as a result of an increase in document review engagements as compared to the first quarter of 2012.
Direct, selling, general and administrative costs increased primarily in support of revenue growth and related to a $4.3 million increase in compensation related expenses, a $1.0 million increase in outside service providers and a $1.1 million increase in technology-related costs, offset by a $0.9 million decrease in maintenance and repairs expense.
Bankruptcy and Settlement Administration Segment
Operating revenue increased $14.1 million as compared to the prior year, primarily due to a large active private anti-trust settlement engagement, which was principally complete in the first quarter of 2013, that increased legal notification and advertising services as compared to the prior year. This increase was partially offset by decreases in revenues resulting from the current cyclical downturn in bankruptcy filings.
Direct, selling, general and administrative costs increased primarily related to an increase in legal advertising costs of $7.5 million, an increase of $14.2 million in reimbursed direct costs, a $1.3 million increase in compensation expense, and an increase of $2.1 million in outside services, which were primarily related to the large active private anti-trust settlement engagement.
Liquidity and Capital Resources
Cash flows from operating activities
During the three months ended March 31, 2013, our operating activities used net cash of $5.3 million. Included in net cash used by operating activities was net income of $3.9 million, including $14.8 million of non-cash expenses, for a total of $18.7 million. Cash used by operating activities also included a $24.0 million net use of cash resulting from changes in operating assets and liabilities, primarily from a $15.1 million increase in trade accounts receivable due to revenue growth and a $13.2 million decrease in customer deposits, offset by a $5.4 million increase in accounts payable and other liabilities. Trade accounts receivable will fluctuate from period to period depending on the timing of sales and collections. Accounts payable will fluctuate from period to period depending on the timing of purchases and payments.
During the three months ended March 31, 2012, our operating activities provided net cash of $15.1 million. Contributing to net cash provided by operating activities were net income of $2.0 million and non-cash expenses, such as depreciation and amortization and share-based compensation expense, of $16.9 million, for a total of $18.9 million. These items were partially offset by a $4.5 million net use of cash resulting from changes in operating assets and liabilities, resulting primarily from a $5.1 million increase in accounts receivable, due to revenue growth, a $1.2 million decrease in prepaid expenses and other assets, and a $1.0 million reduction in accounts payable and other liabilities.
Cash flows from investing activities
During the three months ended March 31, 2013 and 2012, we used cash of $3.7 million and $2.6 million, respectively, for the purchase of property and equipment, including computer hardware and purchased software licenses primarily for our Technology segment and purchased computer hardware primarily for our network infrastructure. Also included in this amount for the three months ended March 31, 2013 was approximately $1.5 million related to the expansion of our Kansas City corporate headquarters. Software development is essential to our continued growth and during the three months ended March 31, 2013 and 2012, we used cash of $1.5 million and $1.6 million, respectively, to fund internal costs related to the development of software. We believe that cash generated from operations plus our existing cash balances and amounts available under our credit facility will be adequate to fund our anticipated property, equipment, and software spending over the next year.
Cash flows from financing activities
During the three months ended March 31, 2013, we borrowed $34.0 million and repaid $19.0 million under our senior revolving loan for a net increase of $15.0 million along with $0.4 million of principal payments related to other debt. In addition, we paid $3.2 million in dividends and used $2.2 million to repurchase shares required to be repurchased by the company to satisfy employee tax withholding obligations upon the vesting of restricted stock awards and the net share settlement of certain stock options exercises. See Notes 3 and 9 to our Condensed Consolidated Financial Statements for further information.
During the three months ended March 31, 2012, we borrowed $16.0 million and repaid $18.0 million under our senior revolving loan for a net reduction of $2.0 million along with $1.5 million of principal payments related to other debt. In addition, we paid $1.8 million in dividends and used $1.9 million to repurchase shares required to satisfy employee tax withholding obligations upon the vesting of restricted stock awards.
We believe that funds generated from operations, plus our existing cash balances and amounts available under our credit facility, will be sufficient to meet our currently anticipated working capital requirements, internal software development expenditures, property, equipment and third party software expenditures, deferred acquisition price agreements, capital leases, dividend payments, common stock repurchases, interest payments due on our outstanding borrowings, and other contractual obligations.
Foreign Cash
As of March 31, 2013 and December 31, 2012, our foreign subsidiaries had $3.7 million and $3.0 million, respectively, in cash located in financial institutions located outside of the United States. We consider the earnings of our non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs. Should we decide to repatriate the foreign earnings, we would have to adjust the income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States.
Off-balance Sheet Arrangements
We generally do not utilize off-balance sheet arrangements in our operations; however, we enter into operating leases in the normal course of business. Our operating lease obligations are disclosed below under “Contractual Obligations”.
Contractual Obligations
There have been no significant developments with respect to our contractual obligations since December 31, 2012.
Critical Accounting Policies
In our Annual Report on Form 10-K for the year ended December 31, 2012 that was filed with the SEC on March 5, 2013, we disclose accounting policies, referred to as critical accounting policies, that require management to use significant judgment or that require significant estimates. Management regularly reviews the selection and application of our critical accounting policies. Other than the updates described below there have been no updates to the critical accounting policies contained in our Annual Report on Form 10-K for the year ended December 31, 2012.
Goodwill
We assess goodwill for impairment on an annual basis at a reporting unit level and have identified our operating segments (Technology segment and Bankruptcy and Settlement Administration segment) as our reporting units for purposes of testing for goodwill impairment. In the first quarter of 2013, we reorganized our internal financial reporting structure. Under the new structure, we began reporting our financial performance based on the following two reportable segments: the Technology segment and the Bankruptcy and Settlement Administration segment. The composition of the segment previously called eDiscovery remains unchanged and is now referred to as the Technology segment. The former Bankruptcy segment and segment Settlement Administration segment were combined and are now reported as the Bankruptcy and Settlement Administration segment.
At the time of the prior year’s goodwill impairment testing, we had identified our three operating segments as our reporting units (eDiscovery, Bankruptcy, and Settlement Administration). Based on the change in our operating segments we have evaluated our goodwill balances and have determined that there is no impairment of goodwill as a result of this change.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks to which we are exposed include interest rates under our senior revolving credit facility, foreign exchange rates giving rise to translation, and fluctuations in short-term interest rates on a portion of our bankruptcy trustee revenue.
Interest Rate Risk
Interest on our senior revolving credit facility is generally based on a spread, not to exceed 275 basis points over the LIBOR rate. As of March 31, 2013, we had borrowed $214.0 million under the senior revolving loan.
We performed a sensitivity analysis assuming a hypothetical 100 basis point movement in interest rates applied to the average daily borrowings of the senior revolving loan. As of March 31, 2013, the analysis indicated that such a movement would have increased our interest expense by approximately $0.5 million for the three months ended March 31, 2013.
We earn deposit-based and service fees in our Chapter 7 bankruptcy business. Deposit-based fees are earned on a percentage of Chapter 7 assets placed on deposit with a designated financial institution by our trustee clients. The fees we earn are based on assets placed on deposit by our trustee clients may vary based on fluctuations in short-term interest rates. Based on a sensitivity analysis we performed for the three months ended March 31, 2013, a hypothetical 1% movement in interest rates would not have had a material effect on our consolidated financial position, results from operations or cash flows.
We currently do not hold any interest rate floor options or other derivatives.
Foreign Currency Risk
We have operations outside of the United States, therefore, a portion of our revenues and expenses are incurred in a currency other than United States Dollars. We do not utilize hedge instruments to manage the exposures associated with fluctuating currency exchange rates. Our operating results are exposed to changes in exchange rates between the United States Dollar and the functional currency of the countries where we have operations. When the United States Dollar weakens against foreign currencies, the United States Dollar value of revenues and expenses denominated in foreign currencies increases. When the United States Dollar strengthens, the opposite situation occurs.
We performed a sensitivity analysis assuming a hypothetical 1% increase in foreign exchange rates applied to our 2013 results of operations. For the three months ended March 31, 2013, the analysis indicated that such a movement would not have had a material effect on our total revenues, operating income or net income.
Item 4. Controls and Procedures
(a) Controls and Procedures
An evaluation was carried out by Epiq Systems, Inc.’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”)of the effectiveness of the design and operations of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) or 15d-15(e). Based on this evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Change in Internal Controls over Financial Reporting
There have been no changes in our internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) or 15d-15(f), during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are at times involved in litigation and other legal claims in the ordinary course of business. When appropriate in management’s estimation, we may record reserves in our financial statements for pending litigation and other claims. Although it is not possible to predict with certainty the outcome of litigation, we do not believe that any of the current pending legal proceedings to which we are a party will have a material impact on our results of operations or financial condition.
There have been no material changes in our Risk Factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012 that was filed with the SEC on March 5, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On June 1, 2012, our board of directors (the “Board”) authorized the repurchase, through December 31, 2013, of up to an aggregate of $35.0 million of our outstanding shares of common stock (the “2012 Program”). There were no repurchases of shares under the 2012 Program during the three months ended March 31, 2013 or 2012.
We also have a policy that requires shares to be repurchased by us to satisfy employee tax withholding obligations upon the vesting of restricted stock awards or the exercise of their stock options. During the three months ended March 31, 2013, we repurchased 175,295 shares for approximately $2.2 million to satisfy employee tax withholding obligations upon the vesting of restricted stock awards and the net share settlement of certain stock option exercises. During the three months ended March 31, 2012, we repurchased 154,768 shares for approximately $1.9 million to satisfy employee tax withholding obligations upon the vesting of restricted stock awards.
The following table presents the total number of shares repurchased during each month of the quarter ended March 31, 2013, the average price paid per share (including brokerage commissions paid by the Company), the number of shares that were repurchased as part of the 2012 Program, and the approximate dollar value of shares that may yet be repurchased under the 2012 Program.
Period |
| Total Number of |
| Average Price Paid per |
| Total Number of |
| Maximum Number (or |
|
|
|
|
|
|
|
|
|
|
|
January 1 — January 31 |
| — |
| $ — |
| — |
| $ 31,700,000 |
|
February 1 — February 28 |
| 174,697 |
| 12.44 |
| — |
| 31,700,000 |
|
March 1 — March 31 |
| 598 |
| 13.18 |
| — |
| 31,700,000 |
|
Total Activity for the Quarter Ended March 31, 2013 |
| 175,295 |
| $ 12.44 |
| — |
| $ 31,700,000 |
|
12.1 Computation of ratio of earnings to fixed charges.
31.1 Certifications of Chief Executive Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of Chief Financial Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350.
101.INS† XBRL Instance Document.
101.SCH† XBRL Taxonomy Extension Schema Document.
101.CAL† XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF† XBRL Taxonomy Definition Linkbase Document.
101.LAB† XBRL Taxonomy Extension Label Linkbase Document.
101.PRE† XBRL Taxonomy Extension Presentation Linkbase Document.
† Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is otherwise not subject to liability under these sections.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| Epiq Systems, Inc. |
|
|
|
Date: | April 30, 2013 | /s/ Tom W. Olofson |
| Tom W. Olofson | |
| Chairman of the Board | |
| Chief Executive Officer | |
| Director | |
| (Principal Executive Officer) |
Date: | April 30, 2013 | /s/ Elizabeth M. Braham |
| Elizabeth M. Braham | |
| Executive Vice President Operations, Chief Financial Officer | |
| (Principal Financial & Accounting Officer) |