10-Q

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 September 30, 2011

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	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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 October 21, 2011
Common Stock, $0.01 par value per share	35,712,695 shares

EPIQ SYSTEMS, INC.

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2011

CONTENTS

			Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Statements of Income — Three and nine months ended September 30, 2011 and 2010 (Unaudited)		2
	Condensed Consolidated Balance Sheets — September 30, 2011 and December 31, 2010 (Unaudited)		3
	Condensed Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income — Nine months ended September 30, 2011 and 2010 (Unaudited)		4
	Condensed Consolidated Statements of Cash Flows — Nine months ended September 30, 2011 and 2010 (Unaudited)		5
	Notes to Condensed Consolidated Financial Statements (Unaudited)		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		38
Item 4.	Controls and Procedures		38
PART II - OTHER INFORMATION
Item 1.		Legal Proceedings	40
Item 1A.		Risk Factors	40
Item 6.		Exhibits	41
Signatures			42

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

EPIQ SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
REVENUE:
Case management services	$	56,385		$	36,626		$	156,588		$	110,674
Case management bundled products and services	4,224			4,847			13,083			14,433
Document management services	9,143			10,526			22,985			32,042
Operating revenue before reimbursed direct costs	69,752			51,999			192,656			157,149
Operating revenue from reimbursed direct costs	6,359			6,288			17,031			22,442
Total Revenue	76,111			58,287			209,687			179,591
OPERATING EXPENSE:
Direct cost of services (exclusive of depreciation and amortization shown separately below)	23,888			16,455			64,526			48,207
Direct cost of bundled products and services (exclusive of depreciation and amortization shown separately below)	778			831			2,391			2,669
Reimbursed direct costs	6,289			6,126			16,778			21,959
General and administrative	26,395			20,068			72,763			64,181
Depreciation and software and leasehold amortization	5,795			4,911			16,808			15,358
Amortization of identifiable intangible assets	6,146			1,697			16,107			5,213
Other operating (income) expense	(1,621		)	281			(486		)	350
Total Operating Expense	67,670			50,369			188,887			157,937
INCOME FROM OPERATIONS	8,441			7,918			20,800			21,654
INTEREST EXPENSE (INCOME):
Interest expense	1,555			408			4,122			1,132
Interest income	(96		)	(7		)	(112		)	(29		)
Net Interest Expense	1,459			401			4,010			1,103
INCOME BEFORE INCOME TAXES	6,982			7,517			16,790			20,551
PROVISION FOR INCOME TAXES	2,696			2,979			6,649			9,763
NET INCOME	$	4,286		$	4,538		$	10,141		$	10,788
NET INCOME PER SHARE INFORMATION:
Basic	$	0.12		$	0.12		$	0.29		$	0.29
Diluted	$	0.12		$	0.12		$	0.28		$	0.28
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	35,268			37,063			35,145			36,646
Diluted	36,629			38,185			36,550			40,315
Cash dividends declared per common share	$	0.05		$	0.035		$	0.155		$	0.070

See accompanying Notes to Condensed Consolidated Financial Statements.

2

EPIQ SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)

	September 30, 2011			December 31, 2010
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	4,680		$	5,439
Trade accounts receivable, less allowance for doubtful accounts of $4,844 and $3,778, respectively	83,918			59,940
Prepaid expenses	5,730			5,581
Other current assets	7,665			5,637
Total Current Assets	$	101,993		$	76,597
LONG-TERM ASSETS:
Property and equipment, net	40,747			41,258
Internally developed software costs, net	21,881			19,659
Goodwill	363,908			294,789
Other intangibles, net of accumulated amortization of $74,458 and $58,339, respectively	60,180			43,580
Other	5,351			2,335
Total Long-term Assets, net	492,067			401,621
Total Assets	$	594,060		$	478,218
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	11,693		$	13,227
Accrued compensation	5,544			8,891
Deposits	2,121			2,553
Deferred revenue	3,256			1,422
Other accrued liabilities	7,342			4,611
Current maturities of long-term obligations	10,838			2,945
Total Current Liabilities	40,794			33,649
LONG-TERM LIABILITIES:
Deferred income taxes	42,343			24,159
Other long-term liabilities	4,878			5,027
Long-term obligations (excluding current maturities)	175,338			86,860
Total Long-term Liabilities	222,559			116,046
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock - $1 par value; 2,000,000 shares authorized; none issued and outstanding, respectively	—			—
Common stock - $0.01 par value; 100,000,000 shares authorized; issued and outstanding — 39,493,852 and 39,063,327 shares, respectively	395			391
Additional paid-in capital	285,356			281,119
Accumulated other comprehensive loss	(1,883		)	(1,971		)
Retained earnings	95,697			91,069
Treasury stock, at cost — 3,787,452 and 3,295,492 shares	(48,858		)	(42,085		)
Total Stockholders’ Equity	330,707			328,523
Total Liabilities and Stockholders’ Equity	$	594,060		$	478,218

See accompanying Notes to Condensed Consolidated Financial Statements.

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EPIQ SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

	Common Stock	Treasury Stock		Common Stock		Additional Paid-In Capital			AOCI (1)			Retained Earnings			Treasury Stock			Total
Balance at December 31, 2010	39,063	(3,295	)	$	391	$	281,119		$	(1,971	)	$	91,069		$	(42,085	)	$	328,523
Comprehensive income:
Net income	—	—		—		—			—			10,141			—			10,141
Foreign currency translation adjustment	—	—		—		—			88			—			—			88
Total comprehensive income	—	—		—		—			88			10,141			—			10,229
Tax benefit from share-based compensation	—	—		—		312			—			—			—			312
Common stock issued under share-based compensation plans	431	319		4		(1,664		)	—			—			4,085			2,425
Common stock repurchased under share-based compensation plans	—	(66	)	—		—			—			—			(900		)	(900		)
Share repurchases (Note 9)	—	(745	)	—		—			—						(9,958		)	(9,958		)
Dividends declared (Note 9)	—	—		—		—			—			(5,513		)	—			(5,513		)
Share-based compensation	—	—		—		5,589			—						—			5,589
Balance at September 30, 2011	39,494	(3,787	)	$	395	$	285,356		$	(1,883	)	$	95,697		$	(48,858	)	$	330,707

(1)AOCI — Accumulated Other Comprehensive Income (Loss)

	Common Stock	Treasury Stock		Common Stock		Additional Paid-In Capital			AOCI (1)			Retained Earnings			Treasury Stock			Total
Balance at December 31, 2009	36,238	(56	)	$	362	$	248,937		$	(1,815	)	$	79,772		$	(858	)	$	326,398
Comprehensive income:
Net income	—	—		—		—			—			10,788			—			10,788
Foreign currency translation adjustment	—	—		—		—			147			—			—			147
Total comprehensive income	—	—		—		—			147			10,788			—			10,935
Tax deficiency from share-based compensation	—	—		—		(335		)	—			—			—			(335		)
Common stock issued under share-based compensation plans	497	89		5		(259		)	—			—			1,275			1,021
Common stock repurchased under share-based compensation plans		(76	)												(948		)	(948		)
Share repurchases (Note 9)	—	(2,329	)	—		—						—			(29,924		)	(29,924		)
Dividends declared (Note 9)	—	—		—		—			—			(2,632		)	—			(2,632		)
Conversion of convertible notes	2,328	—		24		27,144						—						27,168
Share-based compensation	—	—		—		5,992			—			—			—			5,992
Balance at September 30, 2010	39,063	(2,372	)	$	391	$	281,479		$	(1,668	)	$	87,928		$	(30,455	)	$	337,675

(1)AOCI — Accumulated Other Comprehensive Loss

See accompanying Notes to Condensed Consolidated Financial Statements.

4

EPIQ SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

	Nine months ended September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	10,141		$	10,788
Adjustments to reconcile net income to net cash provided by operating activities:
Expense for deferred income taxes	910			295
Depreciation and software and leasehold amortization	16,808			15,358
Amortization of identifiable intangible assets	16,107			5,213
Change in valuation of contingent consideration	(4,466		)	—
Benefit related to embedded option	—			(738		)
Share-based compensation expense	5,589			5,992
Provision for bad debts	2,045			1,612
Other, net	977			191
Excess tax benefit related to share-based compensation	(111		)	(18		)
Changes in operating assets and liabilities, net of effects from business acquisitions:
Trade accounts receivable	(14,187		)	(13,955		)
Prepaid expenses and other assets	310			1,023
Accounts payable and other liabilities	(8,789		)	(7,299		)
Deferred revenue	1,823			827
Other	(18		)	(111		)
Net cash provided by operating activities	27,139			19,178
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(10,732		)	(8,993		)
Internally developed software costs	(4,836		)	(6,464		)
Cash paid for business acquisition, net of cash acquired	(99,330		)	—
Other investing activities, net	106			8
Net cash used in investing activities	(114,792		)	(15,449		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolver	148,000			15,000
Payments on revolver	(45,000		)	—
Payments under long-term obligations	(2,621		)	(27,222		)
Excess tax benefit related to share-based compensation	111			18
Common stock repurchases (Note 9)	(10,858		)	(30,872		)
Cash dividends paid (Note 9)	(3,728		)	(1,348		)
Debt issuance costs	(1,940		)	(1,460		)
Proceeds from issuance of common stock under share-based compensation plans	2,425			1,021
Net cash provided by (used in) financing activities	86,389			(44,863		)
Effect of exchange rate changes on cash	505			(6		)
DECREASE IN CASH AND CASH EQUIVALENTS	(759		)	(41,140		)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	5,439			48,986
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	4,680		$	7,846

See accompanying Notes to Condensed Consolidated Financial Statements.

5

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. 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, 2010, filed with the Securities and Exchange Commission on February 25, 2011.

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 its 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, financial transactions and regulatory compliance matters.  We offer innovative technology solutions for e-discovery, document review, legal notification, claims administration and controlled disbursement of funds.  Our clients include law firms, corporate legal departments, bankruptcy trustees, government agencies and other professional advisors who require innovative technology, responsive service and deep subject-matter expertise.

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 case management services defined by client contracts, such as claims processing, claims reconciliation, professional services, call center support, disbursement services, project management, collections and forensic 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.

·Hosting fees based on the amount of data stored.

·Deposit-based fees, earned primarily based on a percentage of Chapter 7 total liquidated 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 post-contract customer support services. The fees we earn are based on total liquidated assets placed on deposit by our trustee clients and may vary based on fluctuations in short-term interest rates.

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·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.

·Reimbursement for costs incurred, primarily related to postage on mailing services.

·Monitoring and noticing fees earned based on monthly or on-demand requests for information provided through our AACER® software product.

Non-Software Arrangements

Services related to E-discovery, bankruptcy and settlement administration are billed based on volume. For these contractual arrangements, 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.  We have also obtained objective and reliable evidence of the value of each element based either on the price we charge when we sell an element on a standalone basis, based on third-party evidence of fair value of such similar services, or an estimated selling price.  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 of each unit of accounting, which is generally consistent with the stated prices in our arrangements. 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 post-contract 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 dollar level of average monthly deposits held by the trustees with that financial institution related to the software license, hardware lease, hardware maintenance, and post-contract customer support services. Since we have not established vendor specific objective evidence (“VSOE”) 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 post-contract customer support services.  This revenue, when recognized, is included as a component of “Case management services” revenue.  Revenue related to post-contract 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 applicable 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, printers and 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 and nine months ended September 30, 2011 and 2010, is included in the Condensed Consolidated Statements of Income as a component of “Case management services” revenue.

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Reimbursements

We have revenue related to the reimbursement of certain costs, primarily postage. Reimbursed postage and other reimbursable direct costs are recorded gross in the Condensed Consolidated Statements of Income as “Operating revenue from reimbursed direct costs” and as “Reimbursed direct costs,” respectively.

Goodwill

Goodwill consists of the excess of the 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 we have identified our operating segments (E-discovery, bankruptcy and settlement administration) as our reporting units for purposes of testing for goodwill impairment as of July 31, 2011. At the time of the prior year’s goodwill impairment testing, we had identified four reporting units (bankruptcy trustee management, corporate restructuring, E-discovery and settlement administration).  We believe that the aggregation of the bankruptcy trustee management and corporate restructuring reporting units is appropriate based on changes in our business and related to the October 1, 2010 acquisition of Jupiter eSources, which have resulted in these two reporting units meeting the aggregation criteria set forth in applicable authoritative accounting guidance. 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 was more likely than not that the recorded goodwill balance had become impaired.

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 evaluating the market approach, we determined that directly comparable publicly-traded companies did not exist, primarily due to the unique business model characteristics and projected growth of each reporting unit. Instead, we utilized a discounted projected future cash flow analysis (income approach) to determine the fair value of each reporting unit. 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, used to determine our discount rate, and through our stock price, 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 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 the impact that future economic impacts will have on our reporting units, there can be no assurances that our estimates and assumptions regarding the duration of the economic recession, or the period or strength of recovery, made for purposes of our annual goodwill impairment test, will prove to be accurate predictions of the future. If our 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.

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Our recognized goodwill totaled $363.9 million as of September 30, 2011.  As of July 31, 2011, 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.

As described in Note 11 of the Notes to Condensed Consolidated Financial Statements, in connection with the acquisition of Jupiter eSources LLC (“Jupiter eSources”) on October 1, 2010, we recognized $30.7 million of goodwill, which is allocated to the bankruptcy segment, and in connection with the acquisition of Encore Discovery Solutions on April 4, 2011, we recognized $69.1 million of goodwill, which is allocated to the E-discovery segment.

Recently Issued and Adopted Accounting Pronouncements

In September 2011 the Financial Accounting Standards Board (“FASB”) issued guidance which amends the existing standards related to annual and interim goodwill impairment tests.  Current guidance requires companies to test goodwill for impairment, at least annually, using a two-step process. The updated guidance provides companies with the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this option, companies are no longer required to calculate the fair value of a reporting unit unless they determine, based on that qualitative assessment, that it is more likely than not that the reporting unit’s fair value is less than its carrying amount. The new guidance includes examples of the types of events and circumstances to consider in conducting the qualitative assessment.   The amendments will be effective for us beginning with our annual goodwill impairment test in 2012.  We do not expect this new guidance to have a material effect on our consolidated financial position, results of operations or cash flows.

In June 2011 the FASB issued a new standard related to comprehensive income.  This new standard requires companies to present comprehensive income in a single statement below net income or in a separate statement of comprehensive income immediately following the income statement.  In both options, companies must present the components of net income, total net income, the components of other comprehensive income, total other comprehensive income and total comprehensive income.  This new standard does not change which items are reported in other comprehensive income or the requirement to report reclassifications of items from other comprehensive income to net income.  The new standard eliminates the option to present comprehensive income on the statement of changes in shareholders’ equity.  This requirement will become effective for us beginning with the Form 10-Q filing for the quarter ending March 31, 2012 and will require retrospective application for all periods presented.  We do not expect this new guidance to have a material effect on our consolidated financial position, results of operations or cash flows.

In December 2010 the FASB issued new guidance to address differences in the ways entities have interpreted requirements for disclosures about pro forma revenue and earnings in a business combination.  This guidance states that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior year annual reporting period only.  This guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective for us for any business combinations whose acquisition date is after January 1, 2011 and the guidance impacts disclosures only.  See Note 11 of the Notes to Condensed Consolidated Financial Statements for the required disclosures with respect to our recent acquisitions.

In December 2010 the FASB issued new standards that amend the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. We adopted this guidance as of the beginning of fiscal year 2011. The adoption of this standard did not have an impact on our Condensed Consolidated Financial Statements as we do not have any reporting units with zero or negative carrying amounts as of our last impairment test.

In January 2010 the FASB issued updated guidance that requires entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, the update requires entities to present separately information about purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). The disclosures related to Level 1 and Level 2 fair value measurements were effective for us in 2010. The update required new disclosures only, and had no impact on our consolidated financial position, results of operations, or cash flows as we have not had any transfers out of Level 1. The disclosures related to Level 3 fair value measurements were effective for us in 2011. This update required new disclosures only, and had no impact on our consolidated financial position, results of operations or cash flows.

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In October 2009 the FASB issued new standards for revenue recognition with multiple deliverables. These new standards require entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. These new standards were effective for us beginning in the first quarter of fiscal year 2011.  The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements.

In October 2009 the FASB issued new standards for the accounting for certain revenue arrangements that include software elements. These new standards amend the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products.  These new standards were effective for us beginning in the first quarter of fiscal year 2011. The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements as our software arrangements are not tangible products with software components.

NOTE 2:   GOODWILL AND INTANGIBLE ASSETS

The change in the carrying amount of goodwill for the first nine months of 2011 was as follows (in thousands):

	E-discovery		Bankruptcy		Settlement Administration		Total
	(in thousands)
Balance as of December 31, 2010	$	79,826	$	182,116	$	32,847	$	294,789
Acquisition	69,076		—		—		69,076
Foreign currency translation	43		—		—		43
Balance as of September 30, 2011	$	148,945	$	182,116	$	32,847	$	363,908

Amortizing identifiable intangible assets as of September 30, 2011 and December 31, 2010 consisted of the following (in thousands):

	September 30, 2011				December 31, 2010
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
	(in thousands)
Amortizing intangible assets:
Customer relationships	$	93,633	$	46,297	$	63,902	$	32,007
Trade names	2,362		905		745		745
Non-compete agreements	32,209		27,256		30,838		25,587
Non-amortizing intangible assets:
Trade names	6,434		—		6,434		—
	$	134,638	$	74,458	$	101,919	$	58,339

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Customer relationships, non-compete agreements and trade names carry a weighted average remaining life of seven years, six years and five years, respectively. Aggregate amortization expense related to identifiable intangible assets was $6.1 million and $1.7 million for the three months ended September 30, 2011 and 2010, respectively, and $16.1 million and $5.2 million for the nine months ended September 30, 2011 and 2010, respectively.  The following table outlines the estimated future amortization expense related to intangible assets held at September 30, 2011:

(in thousands) Year Ending December 31,
2011 (excluding the nine months ended September 30, 2011)	$	5,123
2012	18,047
2013	12,126
2014	7,074
2015	5,500
2016	2,706

NOTE 3:   LONG-TERM OBLIGATIONS

Following is a summary of long-term obligations outstanding (in thousands):

	September 30, 2011			December 31, 2010
	(in thousands)
Senior revolving loan	$	170,000		$	67,000
Capital leases	5,182			7,055
Acquisition-related liabilities	10,994			15,750
Total long-term obligations, including current portion	186,176			89,805
Current maturities of long-term obligations	(10,838		)	(2,945		)
Long-term obligations	$	175,338		$	86,860

Credit Facilities

On April 25, 2011, we entered into an amended senior credit facility, with KeyBank National Association as administrative agent, and a syndicate of banks as lenders.  The amendment to the credit facility, which continues to provide for a senior revolving loan, increased the aggregate amount of funds available from $140.0 million to $325.0 million, and extended the maturity date from June 2014 to December 2015. During the term of the credit facility, we have the right, subject to compliance with the covenants as set forth in the credit facility agreement, to increase the borrowings to a maximum of $375.0 million, an increase from the $200.0 million maximum in our previous facility.  The credit facility is secured by liens on our land and buildings and substantially all of our personal property.

Borrowings under the senior revolving loan 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; (2) for LIBOR rate advances, borrowings bear interest at LIBOR rate plus 175 to 275 basis points. At September 30, 2011, borrowings of $170.0 million under this facility had a weighted average interest rate of 2.79%. The average amount of borrowings under this facility in the third quarter of 2011 was $176.3 million, at a weighted average interest rate of 2.42%.  The maximum month-end amount outstanding during the third quarter of 2011 was $180.0 million. At September 30, 2011, the amount available for borrowings under the credit facility was reduced by the $170.0 million outstanding and $1.1 million in outstanding letters of credit.

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).  As stated per the credit facility, as of September 30, 2011, the leverage ratio was not to exceed 3.00 to 1.00 and the fixed charge coverage ratio could not be less than 1.25 to 1.00.  As of September 30, 2011 and December 31, 2010, we were in compliance with all financial covenants.

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, with a limit of $15.0 million, and subordinated debt, with a limit of $100 million of aggregate subordinated debt.

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Generally, 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 bank permission.

Contingent Convertible Subordinated Notes

On or about June 11, 2010, prior to the maturity date, $27.2 million of contingent convertible subordinated notes (“convertible notes”) were converted into 2.3 million shares of common stock at a conversion price of $11.67. On June 15, 2010, the convertible notes matured, resulting in a cash payment of $22.8 million, plus accrued interest. The original $50.0 million of convertible notes were issued in June 2004 with a fixed 4% per annum interest rate and an original maturity of June 15, 2007.  The holders of the convertible notes had the right to extend the maturity date by up to three years.  In April 2007, the holders exercised this right and the maturity date of the convertible notes was extended to June 15, 2010.

The right to extend the maturity of the convertible notes was accounted for as an embedded option subject to bifurcation.  The embedded option was initially valued at $1.2 million and the convertible notes balance was reduced by the same amount.  In April 2007 the holders of the convertible notes exercised their right to extend and we performed a final valuation to estimate the fair value of the embedded option as of the approximate date of the extension.  The estimated fair value of the embedded option at that date, included as a component of the convertible notes, was approximately $4.8 million. The $4.8 million estimated fair value of the embedded option was fully amortized as a credit to “Interest expense” on the Condensed Consolidated Statements of Income over the period to the extended maturity, which was June 15, 2010.

Upon conversion of $27.2 million of the notes, we recognized a nominal gain related to the remaining unamortized embedded option value associated with the converted notes in the year ended December 31, 2010.  The above changes related to the carrying value of the convertible notes, the estimated fair value of the embedded option, the amortization of the fair value of the embedded option, and recognition of nominal gain upon conversion did not affect our cash flow.

Capital Leases

We lease certain property and software under capital leases that expire during various years through 2014.

Acquisition-related Liabilities

We have made acquisitions for which a portion of the purchase price has been deferred.  These deferred payments, which are either non-interest bearing or have a below market interest rate, have been discounted using an appropriate imputed interest rate.

In the fourth quarter of 2010, in connection with the acquisition of Jupiter eSources, we incurred a liability related to contingent consideration for an earn-out opportunity based on future revenue growth. The potential undiscounted amount of all future payments that we could be required to make under the earn-out opportunity is between $0 and $20.0 million over a four year period. We estimated the fair value of the contingent consideration using probability assessments of projected revenue over the earn-out period, and applied an appropriate discount rate based upon the weighted average cost of capital.  This fair value is based on significant inputs not observable in the market. We have recognized the fair value of $2.7 million and $7.2 million of the contingent consideration in “Long-term obligations” on the Condensed Consolidated Balance Sheet at September 30, 2011, and December 31, 2010, respectively. Subsequent fair value changes, measured quarterly, up to the ultimate amount paid, will be recognized in earnings.  During the three and nine-month periods ended September 30, 2011, we recognized a decrease in the fair value of $1.7 million and $4.5 million, respectively, reflected in “Other operating expense” on the Condensed Consolidated Statements of Income.

In addition to the earn-out opportunity, in connection with the acquisition of Jupiter eSources, we withheld a portion of the purchase price for any claims for indemnification and purchase price adjustments.  This holdback has been discounted using an appropriate imputed interest rate and $8.3 million and $8.1 million are recorded in “Current maturities of long-term obligations” and “Long-term obligations” on the Condensed Consolidated Balance Sheet at September 30, 2011 and December 31, 2010, respectively.

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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 and convertible debt (if applicable), if dilutive. The numerator of the diluted net income per share calculation is increased by the amount of interest expense, net of tax, related to outstanding convertible debt (if applicable), and the allocation of net income and dividends declared to nonvested shares, if the net impact is dilutive.

We have determined that certain nonvested share awards (also referred to as restricted stock awards) issued by us 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 as it relates to participating securities. For the three and nine months ended September 30, 2011, the treasury stock method was more dilutive, and for the three and nine months ended September 30, 2010, the two-class method calculation was more dilutive.

The computation of basic and diluted net income per share for the three and nine months ended September 30, 2011 is as follows (in thousands, except per share data):

	Three Months Ended September 30, 2011					Nine Months Ended September 30, 2011
	Net Income (Numerator)		Weighted Average Common Shares Outstanding (Denominator)	Per Share Amount		Net Income (Numerator)			Weighted Average Common Shares Outstanding (Denominator)	Per Share Amount
Net income	$	4,286				$	10,141
Less: net income allocated to nonvested shares (1)	—					(5		)
Basic net income available to common stockholders	4,286		35,268	$	0.12	10,136			35,145	$	0.29
Effect of dilutive securities:
Stock options	—		1,361			—			1,364
Nonvested shares	—		—			5			41
Diluted net income available to common stockholders	$	4,286	36,629	$	0.12	$	10,141		36,550	$	0.28

(1)   Amounts allocated to holders of nonvested shares are calculated based upon a weighted average percentage of nonvested shares that are participating securities in relation to total shares outstanding.

The computation of basic and diluted net income per share for the three and nine months ended September 30, 2010 is as follows (in thousands, except per share data):

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	Three Months Ended September 30, 2010						Nine Months Ended September 30, 2010
	Net Income (Numerator)			Weighted Average Common Shares Outstanding (Denominator)	Per Share Amount		Net Income (Numerator)			Weighted Average Common Shares Outstanding (Denominator)	Per Share Amount
Net income	$	4,538					$	10,788
Less: amounts allocated to nonvested shares (1)	(12		)				(34		)
Basic net income available to common stockholders	4,526			37,063	$	0.12	10,754			36,646	$	0.29
Effect of dilutive securities:
Stock options	—			1,122			—			1,080
Convertible debt	—			—			537			2,589
Add-back: amounts allocated to nonvested shares(1)	12			—			34			—
Less: amounts re-allocated to nonvested shares	(12		)	—			(34		)	—
Diluted net income available to common stockholders	$	4,526		38,185	$	0.12	$	11,291		40,315	$	0.28

(1)Amounts allocated to holders of nonvested shares are calculated based upon a weighted average percentage of nonvested shares that are participating securities in relation to total shares outstanding.

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NOTE 5:   SHARE-BASED COMPENSATION

Share-based compensation is measured at grant date, based on the fair value of the award, and is recognized on a straight-line basis over the requisite service period.  The following table presents total share-based compensation expense included in the Condensed Consolidated Statements of Income (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Direct cost of services	$	103		$	101		$	229		$	266
General and administrative	1,969			2,064			5,360			5,726
Pre-tax share-based compensation expense	2,072			2,165			5,589			5,992
Income tax benefit	(897		)	(694		)	(2,420		)	(1,781		)
Total share-based compensation expense, net of tax	$	1,175		$	1,471		$	3,169		$	4,211

The 2004 Equity Incentive Plan, as amended (the “2004 Plan”), limits the combined grant of options to acquire shares of common stock, stock appreciation rights, and restricted stock awards under the 2004 Plan to 7,500,000 shares.  Any grant under the 2004 Plan that expires or terminates unexercised, becomes unexercisable, or is forfeited will generally be available for future grants. At September 30, 2011, there were approximately 637,000 shares of common stock available for future equity-related grants under the 2004 Plan.

During the nine months ended September 30, 2011, we granted 430,000 nonvested share awards at a weighted-average grant date price of $13.39 per share.  These awards vest 12 months after the date of grant upon achievement of a performance condition for the calendar year ending December 31, 2011. As of September 30, 2011, we have assessed the likelihood that the performance condition will be met and have recorded the related expense based on the estimated outcome. We also granted 557,500 stock options with a weighted-average exercise price of $14.60 per share, which vest over periods ranging from five to seven years.

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.

	Nine months ended September 30,
	2011			2010
Expected life of stock option (years)	6.6			6.5
Expected volatility	30		%	37		%
Risk-free interest rate	2.5		%	2.7		%
Dividend yield	1.1		%	0.63		%
Weighted average grant-date fair value	$	4.49		$	4.68

As of September 30, 2011, there was $7.0 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 2.7 years.

NOTE 6:   SEGMENT REPORTING

We have three reporting segments: E-discovery, bankruptcy and settlement administration.  Our E-discovery business provides collections and forensics, processing, search and review, and document review services to companies and the litigation departments of law firms.  Produced documents are made available primarily through a hosted environment, and our DocuMatrix™ software allows for efficient attorney review and data requests.  Our bankruptcy business provides solutions that address the needs of trustees to administer bankruptcy proceedings and of debtor corporations that file a plan of reorganization.  Our settlement administration business provides managed services including legal notification, claims administration, project administration and controlled disbursement.

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

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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, 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 September 30, 2011. The intersegment revenues in the three months ended September 30, 2011, related primarily to call center and printing services performed by the settlement administration segment for the bankruptcy segment.

	Three Months Ended September 30, 2011
	E-discovery		Bankruptcy		Settlement Administration		Eliminations			Total
	(in thousands)
Revenue:
Operating revenue before reimbursed direct costs	$	36,626	$	23,842	$	9,284	$	—		$	69,752
Intersegment revenue	25		—		564		(589		)	—
Operating revenue before reimbursed direct costs	36,651		23,842		9,848		(589		)	69,752
Operating revenue from reimbursed direct costs	193		2,447		3,719		—			6,359
Total revenue	36,844		26,289		13,567		(589		)	76,111
Direct costs, general and administrative costs	22,043		14,665		11,630		(589		)	47,749
Segment performance measure	$	14,801	$	11,624	$	1,937	$	—		$	28,362

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Following is a summary of segment information for the three months ended September 30, 2010. The intersegment revenues in the three months ended September 30, 2010 related primarily to call center and printing services performed by the settlement administration segment for the bankruptcy segment.

	Three Months Ended September 30, 2010
	E-discovery		Bankruptcy		Settlement Administration		Eliminations			Total
	(in thousands)
Revenue:
Operating revenue before reimbursed direct costs	$	19,957	$	21,993	$	10,049	$	—		$	51,999
Intersegment revenue	11		1		433		(445		)	—
Operating revenue before reimbursed direct costs	19,968		21,994		10,482		(445		)	51,999
Operating revenue from reimbursed direct costs	132		2,076		4,080		—			6,288
Total revenue	20,100		24,070		14,562		(445		)	58,287
Direct costs, general and administrative costs	10,734		11,447		13,077		(445		)	34,813
Segment performance measure	$	9,366	$	12,623	$	1,485	$	—		$	23,474

Following is a reconciliation of our segment performance measure to income before income taxes:

	Three Months Ended September 30,
	2011			2010
	(in thousands)
Segment performance measure	$	28,362		$	23,474
Corporate and unallocated expenses	(7,529		)	(6,502		)
Share-based compensation expense	(2,072		)	(2,165		)
Depreciation and software and leasehold amortization	(5,795		)	(4,911		)
Amortization of identifiable intangible assets	(6,146		)	(1,697		)
Other operating expense	1,621			(281		)
Interest expense, net	(1,459		)	(401		)
Income before income taxes	$	6,982		$	7,517

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Following is a summary of segment information for the nine months ended September 30, 2011. The intersegment revenues in the nine months ended September 30, 2011, related primarily to call center and printing services performed by the settlement administration segment for the bankruptcy segment.

	Nine Months Ended September 30, 2011
	E-discovery		Bankruptcy		Settlement Administration		Eliminations			Total
	(in thousands)
Revenue:
Operating revenue before reimbursed direct costs	$	96,314	$	68,148	$	28,194	$	—		$	192,656
Intersegment revenue	33		—		1,470		(1,503		)	—
Operating revenue before reimbursed direct costs	96,347		68,148		29,664		(1,503		)	192,656
Operating revenue from reimbursed direct costs	404		4,601		12,026		—			17,031
Total revenue	96,751		72,749		41,690		(1,503		)	209,687
Direct costs, general and administrative costs	55,823		37,200		37,545		(1,503		)	129,065
Segment performance measure	$	40,928	$	35,549	$	4,145	$	—		$	80,622

Following is a summary of segment information for the nine months ended September 30, 2010. The intersegment revenues in the nine months ended September 30, 2010, related primarily to call center and printing services performed by the settlement administration segment for the bankruptcy segment.

	Nine Months Ended September 30, 2010
	E-Discovery		Bankruptcy		Settlement Administration		Eliminations			Total
	(in thousands)
Revenue:
Operating revenue before reimbursed direct costs	$	56,539	$	70,988	$	29,622	$	—		$	157,149
Intersegment revenue	41		1		1,302		(1,344		)	—
Operating revenue before reimbursed direct costs	56,580		70,989		30,924		(1,344		)	157,149
Operating revenue from reimbursed direct costs	227		7,076		15,139		—			22,442
Total revenue	56,807		78,065		46,063		(1,344		)	179,591
Direct costs, general and administrative costs	31,834		38,548		40,864		(1,344		)	109,902
Segment performance measure	$	24,973	$	39,517	$	5,199	$	—		$	69,689

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Following is a reconciliation of our segment performance measure to income before income taxes:

	Nine Months Ended September 30,
	2011			2010
	(in thousands)
Segment performance measure	$	80,622		$	69,689
Corporate and unallocated expenses	(21,804		)	(21,122		)
Share-based compensation expense	(5,589		)	(5,992		)
Depreciation and software and leasehold amortization	(16,808		)	(15,358		)
Amortization of identifiable intangible assets	(16,107		)	(5,213		)
Other operating expense	486			(350		)
Interest expense, net	(4,010		)	(1,103		)
Income before income taxes	$	16,790		$	20,551

Following are total assets by segment:

	September 30,  2011		December 31, 2010
	(in thousands)
Assets
E-discovery	$	254,897	$	145,246
Bankruptcy	247,687		260,458
Settlement Administration	54,561		53,830
Corporate and unallocated	36,915		18,684
Total consolidated assets	$	594,060	$	478,218

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.  Our Level 3 liability is valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the contingent consideration.

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As of September 30, 2011 and December 31, 2010, our assets and liabilities that are measured and recorded at fair value on a recurring basis were as follows (in thousands):

	Estimated Fair Value Measurements
Items Measured at Fair Value on a	Carrying		Quoted Prices in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs
Recurring Basis	Value		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
September 30, 2011:
Assets:
Money market funds	$	34	$	34	$	—	$	—
Liabilities:
Contingent consideration (1)	$	2,700	$	—	$	—	$	2,700
December 31, 2010:
Assets:
Money market funds	$	54	$	54	$	—	$	—
Liabilities:
Contingent consideration (1)	$	7,166	$	—	$	—	$	7,166

(1)The contingent consideration represents the estimated fair value of the additional potential earn-out opportunity payable in connection with our acquisition of Jupiter eSources that is contingent upon future revenue growth. We estimated the fair value using projected revenue over the earn-out period, and applied a discount rate to the projected earn-out payments that approximated the weighted average cost of capital.

	Fair Value Measurements UsingSignificant Unobservable Inputs(Level 3)(in thousands)
	Contingent Consideration
Beginning balance December 31, 2010	$	7,166
Decrease in fair value	4,466
Ending balance September 30, 2011	$	2,700

The amount of total gains for the three month and nine month periods ended September 30, 2011, attributable to the change in contingent consideration as of September 30, 2011, is $1.7 million and $4.5 million, respectively, and are reflected in “Other operating expense” on the Condensed Consolidated Statements of Income.

As of September 30, 2011 and December 31, 2010, 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 at September 30, 2011 and December 31, 2010 was $170.0 million and $67.0 million, respectively, which approximated fair value due to the borrowing rates currently available to us for debt with similar terms.

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NOTE 8:    SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information is as follows (in thousands):

	Nine Months Ended September 30,
	2011		2010
Cash paid for:
Interest	$	3,628	$	2,073
Income taxes paid, net	3,359		18,093
Non-cash investing and financing transactions:
Property, equipment, and leasehold improvements accrued in accounts payable	1,267		1,167
Conversion of convertible notes into common stock	—		27,168
Capitalized lease obligations incurred	196		3,827
Dividends declared but not yet paid	1,785		1,284
Obligations incurred in acquisition	844		—

NOTE 9:                STOCKHOLDERS’ EQUITY

Share Repurchase

On October 26, 2010, we announced that our board of directors authorized $35.0 million for share repurchases (the “Share Repurchase Program”). Repurchases may be made pursuant to the Share Repurchase Program from time to time at prevailing market prices in the open market or in privately negotiated purchases, or both. We may utilize one or more plans with our brokers or banks for pre-authorized purchases within defined limits pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, to effect all or a portion of the repurchases. During the nine months ended September 30, 2011, we purchased 745,414 shares of common stock for approximately $10.0 million, at a weighted average cost of approximately $13.37 per share.  During the year ended December 31, 2010, we purchased 3.4 million shares of common stock for $43.2 million, at a weighted average cost of approximately $12.80 per share.

We also have a policy that requires shares to be repurchased by us to satisfy tax withholding obligations upon the vesting of restricted stock awards.

Dividend

On January 17, 2011, our board of directors declared a cash dividend of $0.035 per outstanding share of common stock, which was paid on February 17, 2011, to shareholders of record on January 27, 2011.  On February 23, 2011, our board of directors declared a cash dividend of $0.035 per outstanding share of common stock, which was paid on May 19, 2011, to shareholders of record on April 28, 2011.  On June 7, 2011, our board of directors declared a cash dividend of $0.035 per outstanding share of common stock, payable on August 18, 2011, to shareholders of record as of the close of business on July 28, 2011.  On September 15, 2011, our board of directors declared a cash dividend of $0.05 per outstanding share of common stock, payable on November 17, 2011, to shareholders of record as of the close of business on October 27, 2011.  Dividends payable of approximately $1.8 million is included as a component of “Other accrued liabilities” in the Condensed Consolidated Balance Sheets at September 30, 2011.

NOTE 10:              LEGAL PROCEEDINGS

Purported Software License Complaint

On or about June 24, 2011, Epiq eDiscovery Solutions, Inc., an indirect, wholly owned subsidiary of Epiq Systems, Inc. (“EDS”), filed a lawsuit against Sybase, Inc. (“Sybase”) and Does 1 to 50, et al. in the Superior Court of the State of California, Alameda County (the “Superior Court”), alleging breach of contract and requesting a declaratory judgment against Sybase.  EDS’s complaint against Sybase relates to a dispute that has arisen under a software license agreement between EDS and Sybase (the “Agreement”) and encompasses a request by EDS for the Superior Court to issue an order:  (a) declaring that EDS currently owes Sybase nothing under the Agreement, and (b) requiring Sybase to provide EDS with certain license keys

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to software licenses that EDS purchased from Sybase under the Agreement.  On or about July 29, 2011, Sybase filed an answer to the complaint and a cross-complaint against EDS and Does 51-60 relating to that same dispute and Agreement, alleging that, among other things, EDS owes Sybase additional amounts under the Agreement totaling at least $7.0 million, plus interest and costs of suit.

We believe that Sybase’s cross-complaint has no merit and we and EDS will defend against Sybase’s cross-complaint vigorously.  No amounts have been recorded in the accompanying Condensed Consolidated Financial Statements associated with this matter. EDS filed the lawsuit in order to protect and defend its rights and to demonstrate that, at all relevant times, EDS acted in good faith and in accordance with the terms of the Agreement.

Purported Derivative Shareholder Complaint

On July 29, 2008, the Alaska Electrical Pension Fund filed a putative shareholder derivative action on behalf of Epiq Systems, Inc. in the U.S. District Court for the District of Kansas (the “Court”) (Civil Action No. 08-CV-2344 CM/JPO), alleging, among other things, improper conduct by each of our current directors and certain current and former executive officers and directors regarding stock option grants. We have stated consistently that the claims made in the action are meritless.

Also as previously reported, on April 27, 2010, on the determination of our board of directors, we entered into a Stipulation of Settlement (the “Settlement Agreement”) with the plaintiff and defendants relating to the settlement of this litigation and mutual release of claims, and we and our insurance carrier agreed to pay plaintiff’s counsel’s fees and expenses, which totaled $3.5 million. On June 22, 2010, the Court entered an order which, among other things, preliminarily approved the Settlement Agreement and scheduled a final hearing.  On August 25, 2010, the Court entered a final order, dated August 24, 2010, finally approving the Settlement and dismissing with prejudice the lawsuit and all claims contained therein (the “Final Order”). During the third quarter of 2010, the settlement amount, which had been fully accrued for in prior periods, was paid by us and our insurance company. On or about September 24, 2010, the Final Order became final and non-appealable because no appeal was filed prior to such date.

NOTE 11:   ACQUISITIONS

Jupiter eSources LLC

On October 1, 2010, we completed the acquisition of one hundred percent of Jupiter eSources, which includes the proprietary software product, AACER® (Automated Access to Court Electronic Records), that assists creditors, including banks, mortgage processors, and their administrative services professionals to streamline processing of their portfolios of loans in bankruptcy cases. The AACER® product electronically monitors developments in all U.S. 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 the AACER® solution, clients achieve greater accuracy in faster timeframes, with a significant cost savings compared to manual attorney review of each case in the portfolio.

The purchase price of Jupiter eSources was comprised of the following:

	(in thousands)
Cash paid at closing	$	51,600
Fair value of holdback	8,090
Working capital adjustment	539
Fair value of contingent consideration	7,166
Total purchase price	$	67,395

In connection with this acquisition, we withheld a portion of the purchase price for any claims for indemnification and purchase price adjustments.  This holdback has been discounted using an appropriate imputed interest rate.  At September 30, 2011, $8.3 million was recorded in “Current maturities of long-term obligations” on the Condensed Consolidated Balance Sheet and at December 31, 2010, $8.1 million was recorded in “Long-term obligations”, related to this holdback.

As a result of an earn-out opportunity based on future revenue growth that is part of this acquisition, we also have contingent consideration. The potential undiscounted amount of all future payments that we could be required to make under the earn-out opportunity is between $0 and $20.0 million over a four year period.  We have recognized the fair value of $2.7 million and

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$7.2 million of the contingent consideration in “Long-term obligations” on the Condensed Consolidated Balance Sheet at September 30, 2011 and December 31, 2010, respectively. The fair value of the contingent consideration was determined by a present value calculation of the potential payouts based on projected revenue. Subsequent changes in fair value, which are measured quarterly, up to the ultimate amount paid, will be recognized in earnings.  For the three and nine-month periods ended September 30, 2011, we recognized a decrease in the fair value of $1.7 million and $4.5 million, respectively, reflected in “Other operating expense” in the Condensed Consolidated Statements of Income.

The transaction was funded from our credit facility. Transaction related costs, which were expensed during the period in which they were incurred, are reflected in “Other operating expense” in the Condensed Consolidated Statements of Income, and totaled $0.1 million for the nine months ended September 30, 2011, for this acquisition.

Total purchase consideration has been allocated to the tangible and identifiable intangible assets and to liabilities assumed based on their respective fair values on the acquisition date. The purchase price allocations are summarized in the following table:

	(in thousands)
Tangible assets and liabilities
Current assets, including cash acquired	$	1,733
Non-current assets	37
Current liabilities	(1,191		)
Intangible assets	33,258
Software	2,880
Goodwill	30,678
Net assets acquired	$	67,395

Based on the results of an independent valuation, we allocated approximately $33.3 million of the purchase price to acquired intangible assets, and $2.9 million of the purchase price to software. The following table summarizes the major classes of acquired intangible assets and software, as well as the respective weighted-average amortization periods:

Identifiable Intangible Assets	Amount (in thousands)		Weighted Average Amortization Period (Years)
Trade name	$	6,434	Indefinite
Non-compete agreements	2,955		5.0
Customer relationships	23,869		5.0
Total identifiable intangible assets	$	33,258

Software	Amount (in thousands)		Weighted Average Amortization Period (Years)
AACER® software application	$	2,880	5.0

The excess of purchase consideration over net assets assumed was recorded as goodwill, which represents the strategic value we placed on the AACER® product.  We have allocated goodwill of $30.7 million related to this acquisition to our bankruptcy segment, which is deductible for tax purposes. The Condensed Consolidated Financial Statements include the operating results of Jupiter eSources from the date of acquisition.

Encore Discovery Solutions

On April 4, 2011, we completed the acquisition of one hundred percent of Encore Discovery Solutions (“Encore”) for approximately $104.3 million, $10.0 million of which was placed in escrow as security for potential indemnification claims. 

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Encore provides products and services for electronic evidence processing, document review platforms, and professional services for project management, data collection and forensic consulting. With this transaction, we further strengthen our worldwide e-discovery franchise providing corporate legal departments and law firms with a broad range of capabilities to manage electronic information for discovery, investigations, compliance and related legal matters.  The transaction was funded from our credit facility.

The total preliminary purchase price transferred to effect the acquisition was as follows (in thousands):

	(in thousands)
Cash paid at closing	$	103,385
Other consideration	844
Working capital adjustment	98
Total preliminary purchase price	$	104,327

The transaction was funded from our credit facility. Transaction related costs, which were expensed during the period in which they were incurred, are reflected in “Other operating expense” in the Condensed Consolidated Statements of Income, and totaled $3.9 million for the nine months ended September 30, 2011, for this acquisition.

Total purchase consideration has been allocated to the tangible and identifiable intangible assets and to liabilities assumed based on their respective fair values on the acquisition date.  The measurement period for purchase price allocations ends as soon as information on the facts and circumstances becomes available, but does not exceed 12 months. If new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized for assets acquired and liabilities assumed, we will retrospectively adjust the amounts recognized as of the acquisition date.  The preliminary purchase price allocations are summarized in the following table:

	(in thousands)
Tangible assets and liabilities
Current assets, including cash acquired	$	19,239
Non-current assets	2,669
Current liabilities	(6,646		)
Non-current liabilities	(15,087		)
Intangible assets	32,578
Software	2,498
Goodwill	69,076
Net assets acquired	$	104,327

Included in the total liabilities assumed is a preliminary net deferred tax liability balance of $16.4 million, primarily comprised of the difference between the assigned values of the intangible assets acquired and the tax basis of those assets.

Based on the preliminary results of an independent valuation, we have allocated approximately $32.6 million of the purchase price to acquired intangible assets, and $2.5 million of the purchase price to software. The following table summarizes the major classes of acquired intangible assets and software, as well as the respective weighted-average amortization periods:

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	Amount (in thousands)		Weighted Average Amortization Period (Years)
Identifiable Intangible Assets
Trade name	$	1,617	5.0
Non-compete agreement	1,362		2.0
Customer relationships	29,599		7.0
Total identifiable intangible assets	$	32,578
Software internally developed	$	2,498	5.0

The amounts shown above may change in the near term as management continues to assess the fair value of acquired assets and liabilities.  We are also continuing to gather information necessary to evaluate the income tax implications on the opening balance sheet.  The income tax related accounts and goodwill may be affected once this evaluation is complete.  The Encore transaction was structured as a stock purchase and therefore, the goodwill and acquired intangible assets are not amortizable for tax purposes.

During the third quarter of 2011, we continued evaluating the income tax implications of the Encore acquisition.  As a result of that evaluation we retrospectively decreased the net deferred tax liability as of April 4, 2011, by approximately $1.4 million.  This reduction was attributable to new information gathered during the measurement period and our assessment of income tax filing requirements in state and local jurisdictions where Encore has significant operations.  This opening balance sheet adjustment resulted in a corresponding reduction in goodwill and had no impact on the accompanying Condensed Consolidated Statements of Income.

The excess of purchase consideration over net assets assumed was recorded as goodwill, which represents the strategic value assigned to Encore, including the expected benefits from the synergies resulting from the transaction, as well as the knowledge and experience of the workforce in place.

Pro forma financial information

The following unaudited condensed pro forma financial information presents the results of operations as if the Encore and Jupiter eSources acquisitions had taken place on January 1, 2010 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Revenue	$	76,111	$	73,034	$	221,211	$	219,816
Net income	4,327		5,752		11,259		9,385

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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 Securities and Exchange Commission (the “SEC”) and in press releases and other public statements by our officers throughout the year, we make 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) significant changes in the competitive environment, (6) risks associated with 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 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, and (16) 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 integrated 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 e-discovery, document review, legal notification, claims administration and controlled disbursement of funds.  Our clients include law firms, corporate legal departments, bankruptcy trustees, government agencies and other professional advisors who require innovative technology, responsive service and deep subject-matter expertise.

We have three reporting segments: E-discovery, bankruptcy and settlement administration.

E-discovery

Our E-discovery segment provides collections and forensics, processing, search and review, and document review services to companies and the litigation departments of law firms.  We process data which analyzes, filters, deduplicates and produces documents for review.  Produced documents are made available primarily through a hosted environment, and our proprietary software, DocuMatrix™ and third party software which allows for efficient attorney review and data requests. Our customers

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are typically corporations that use our products and services cooperatively with their legal counsel to manage the e-discovery process for litigation and regulatory matters.

The substantial amount of electronic documents and other data used by businesses has changed the dynamics of how attorneys support discovery in complex litigation matters. Due to the complexity of cases, the volume of data that are maintained electronically, and the volume of documents that are produced in all types of litigation, 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 E-discovery business.

·Consulting, forensics and collection service fees based on the number of hours 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.

·Hosting fees based on the amount of data stored.

·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 U.S., Europe and Asia.  In 2009, we expanded our offerings to include data forensics and collections services, as well as document review services and we also launched IQ Review™, a revolutionary combination of new intelligent technology and expert services which incorporates new prioritization technology into DocuMatrix™, our flagship document management platform.

On April 4, 2011, we completed the acquisition of Encore Discovery Solutions (“Encore”) for $104.3 million cash, $10.0 million of which was placed in escrow as security for potential indemnification claims. Encore provides market-proven products and services for electronic evidence processing, document review platforms, and professional services for project management, data collection and forensic consulting. With this transaction, we further strengthen our worldwide e-discovery franchise providing corporate legal departments and law firms with a broad range of capabilities to manage electronic information for litigation, investigations, compliance and related legal matters.

Bankruptcy

Bankruptcy is an integral part of the United States’ economy.  As reported by the Administrative Office of the U.S. Courts for the twelve-month period ended June 30, 2011 and 2010, there were approximately 1.53 million and 1.57 million new bankruptcy filings, respectively. Bankruptcy filings for the twelve-month period ended June 30, 2011, decreased 3% versus the twelve-month period ended June 30, 2010.  During this period, Chapter 7 filings decreased 4%, Chapter 11 filings fell 11%, and Chapter 13 filings increased 2%.

Our bankruptcy business 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 June 30, 2011, accounted for approximately 71% 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 June 30, 2011, accounted for approximately 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 June 30, 2011, accounted for approximately 28% of all bankruptcy filings.  In a Chapter

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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.

The application of Chapter 7 bankruptcy regulations has the practical effect of discouraging trustee customers from incurring direct administrative costs for computer system expenses.  As a result, 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.

Chapter 11 bankruptcy engagements are generally long-term, multi-year assignments that provide revenue visibility into future periods. For the Chapter 7 trustee services component of the bankruptcy segment, the deposit portfolio exceeded $2.0 billion during the three months ended September 30, 2011, while pricing continued at floor pricing levels under our agreements due to the low short-term interest rate environment.

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 U.S. 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.

On October 1, 2010, we completed the acquisition of Jupiter eSources. The purchase price was comprised of $60.0 million of cash, $8.4 million of which was withheld for any claims for indemnification, and purchase price adjustments. In addition, there is contingent consideration related to an earn-out opportunity based on future revenue growth. The potential undiscounted amount of all future payments that we could be required to make under the earn-out opportunity is between $0 and $20.0 million over a four year period. The transaction was funded from our credit facility. See Note 11 of the Notes to Condensed Consolidated Financial Statements for further detail.

Through this purchase, we acquired a proprietary software product, AACER® (Automated Access to Court Electronic Records), that assists creditors including banks, mortgage processors, and their administrative services professionals to streamline processing of their portfolios of loans in bankruptcy cases. The AACER® product electronically monitors developments in all U.S. 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 the AACER® solution, clients achieve greater accuracy in faster timeframes, with a significant cost savings compared to manual attorney review of each case in the portfolio.

Following is a description of the significant sources of revenue in our bankruptcy business.

·Data hosting fees and volume-based fees.

·Case management professional service fees and other support service fees related to the administration of cases, including data conversion, claims processing, claims reconciliation, professional services and disbursement services.

·Deposit-based fees, earned primarily on a percentage of Chapter 7 total liquidated 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 post-contract customer support services.  The fees we earn based on total liquidated assets placed on deposit by our trustee clients may vary based on fluctuations in short-term interest rates.

·Legal noticing services to parties of interest in bankruptcy 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.

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·Reimbursement for costs incurred, primarily related to postage on mailing services.

·Monitoring and noticing fees earned based on monthly or on-demand requests for information provided through our AACER® software product.

Settlement Administration

Our settlement administration segment provides managed services, including legal notification, claims administration, project administration and controlled disbursement.

The customers of our settlement administration segment are companies that require the administration of a settlement, resolution of a class action matter, or administration of a project. We sell our services directly to these customers and other interested parties, including legal counsel, which often provide access to these customers.

Following is a description of the significant sources of revenue in our settlement administration business.

·Fees contingent upon the month-to-month delivery of case management services such as 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.

·Legal noticing services to parties of interest in class action matters; including 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.

·Reimbursement for costs incurred related to postage on mailing services.

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. Class action and mass tort 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.

Results of Operations for the Three Months Ended September 30, 2011 Compared with the Three Months Ended September 30, 2010

Consolidated Results

Revenue

Total revenue was $76.1 million for the three months ended September 30, 2011, an increase of $17.8 million, or 31%, as compared to the prior year. A portion of our total revenue consists of reimbursement for direct costs we incur, such as postage related to document management services.  We reflect the operating revenue from these reimbursed direct costs as a separate line item on our accompanying Condensed Consolidated Statements of Income.  Revenue originating from reimbursed direct costs was $6.4 million, an increase of $0.1 million, or 1%, from the prior year. Although operating revenue from reimbursed direct costs may fluctuate significantly from quarter to quarter, these fluctuations have a minimal effect on our income from operations as we realize little or no margin from this revenue.

Operating revenue exclusive of revenue originating from reimbursed direct costs was $69.8 million in the three months ended September 30, 2011, an increase of $17.8 million, or 34%, as compared to the prior year.   This increase was driven by a $16.7 million increase in the E-discovery segment, resulting from organic growth as well as the Encore acquisition in April 2011, and a $1.8 million increase in the bankruptcy segment which was partially offset by a $0.7 million decrease in the settlement administration segment. Changes by segment are discussed below.

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Operating Expense

The direct cost of services, exclusive of depreciation and amortization, was $23.9 million for the three months ended September 30, 2011, an increase of $7.4 million, or 45%, as compared to the prior year. This increase was primarily the result of a $5.3 million increase in compensation related expense, primarily related to the Encore acquisition, and a $1.8 million increase in third-party production costs and outside services, partially offset by a $0.7 million decrease in legal advertising costs.  Changes by segment are discussed below.

The direct cost of bundled products and services, exclusive of depreciation and amortization, was $0.8 million, which is consistent with the same period in the prior year. Changes by segment are discussed below.

Reimbursed direct costs increased $0.2 million, or 3%, to $6.3 million for the three months ended September 30, 2011, compared to the prior year.  This increase corresponds to the increase in operating revenue from reimbursed direct costs.  Changes by segment are discussed below.

General and administrative costs increased $6.3 million, or 32%, to $26.4 million for the three months ended September 30, 2011. This increase was due primarily to a $4.5 million increase in compensation related expense, a $0.2 million increase in lease expense, a $0.2 million increase in maintenance expenses, a $0.2 million increase in professional services, and a $0.4 million increase in travel related costs, partially offset by a $0.1 million decrease in share-based compensation expense. Changes by segment are discussed below.

Depreciation and software and leasehold amortization costs increased $0.9 million, or 18%, to $5.8 million for the three months ended September 30, 2011.

Amortization of identifiable intangible assets for the three months ended September 30, 2011, was $6.1 million, an increase of $4.4 million compared to the prior year. This increase was due to the current year amortization of intangible assets resulting from the acquisition of Jupiter eSources in the fourth quarter of 2010 and Encore in the second quarter of 2011.

Other operating expenses decreased $1.9 million for the three months ended September 30, 2011, compared to the prior year.  This decrease was primarily due to the recognition of income of $1.7 million for the fair value adjustment to the contingent consideration related to the Jupiter eSources acquisition.

Interest Expense, Net

We recognized interest expense of $1.6 million for the three months ended September 30, 2011, an increase of $1.2 million, compared to the prior year.  This increase was due to interest expense resulting from increased borrowings on our senior revolving loan to fund the Jupiter eSources and Encore acquisitions and our stock repurchase plan.

Income Taxes

Our effective tax rate for the three months ended September 30, 2011, was 38.6%, compared to 39.6% in the prior year. The lower tax rate is primarily related to reducing the use of non-deductible equity incentive compensation in 2011, the renewal of the federal research credit in December 2010, a greater proportion of income being generated in lower state tax jurisdictions, an increase in the domestic manufacturer’s deduction, and a reduction in 2011 interest expense on prior year uncertain tax positions due to settling the New York State income tax audit in 2010.

During September 2011 lapses in the statute of limitations for our 2007 federal tax return resulted in recognizing $0.2 million of unrecognized tax benefits, all of which reduced income tax expense. As of September 30, 2011, our 2008 — 2010 federal, state and foreign tax returns are subject to examination. In addition, the 2007 statute of limitations remains open in certain state and foreign jurisdictions, the 2006 federal and certain states’ statutes  are still open with respect to acquired net operating losses,  and the New York State statute is open only with respect to our 2005 outstanding investment tax credit refund claim. As of September 30, 2011, it is reasonably possible that approximately $0.5 million of unrecognized tax benefits will be recognized in the following twelve months due to the closing of 2007 and 2008 years for federal and state jurisdictions of which $0.4 million would affect our effective tax rate.  In addition, it is reasonably possible that we will recognize $0.5 million of tax benefits in the following twelve months relating to the New York investment tax credit, of which $0.3 million would affect our effective tax rate.

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Net Income

Our net income was $4.3 million for the three months ended September 30, 2011, compared to $4.5 million for the prior year, a decrease of $0.2 million, or 6%. The decrease from the prior year was primarily driven by increased acquisition related expense related to the Encore acquisition, amortization of intangibles which resulted from the acquisitions of Jupiter eSources and Encore, and interest expense, partially offset by growth in our E-discovery segment and the fair value adjustment to the contingent consideration for the Jupiter eSources acquisition.

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.

E-discovery Segment

E-discovery operating revenue before reimbursed direct costs for the three months ended September 30, 2011, was $36.6 million, an increase of $16.7 million, or 84%, compared to the prior year.  Operating revenue growth as compared to the prior year period resulted from the impact of the Encore acquisition as well as organic growth.

E-discovery direct and administrative costs, including reimbursed direct costs, were $22.0 million for the three months ended September 30, 2011, an increase of $11.3 million compared to the prior year, of which $8.6 million was attributed to the acquisition of Encore with the remaining $2.7 million increase to support the organic growth of the business.

Bankruptcy Segment

Bankruptcy operating revenue before reimbursed direct costs for the three months ended September 30, 2011, was $23.8 million, an increase of $1.8 million, or 8%, compared to the prior year. This increase was primarily attributable to an increase in revenue related to our AACER® product, partially offset by a lower level of new Chapter 11 filings.

Bankruptcy direct and administrative costs, including reimbursed direct costs, increased $3.3 million, or 28%, to $14.7 million for the three months ended September 30, 2011, compared to the prior year. The change in these costs was the result of an increase in direct costs primarily related to the Jupiter eSources acquisition, a $0.4 million increase in reimbursed direct costs, a $0.3 million increase in outside services, and a $0.7 million increase in legal advertising expense.

Settlement Administration Segment

Settlement administration operating revenue before reimbursed direct costs was $9.3 million in the three months ended September 30, 2011, a decrease of $0.7 million, or 8%, compared to the prior year, primarily due to lower printing and claims administration services and due to revenue in the prior year period related to a large customer advertising campaign.

Settlement administration direct and administrative costs, including reimbursed direct costs, for the three months ended September 30, 2011, were $11.6 million, a decrease of $1.5 million, or 11%, compared to the prior year, primarily due to a decrease in legal advertising noticing costs.

Results of Operations for the Nine Months Ended September 30, 2011 Compared with the Nine Months Ended September 30, 2010

Consolidated Results

Revenue

Total revenue was $209.7 million for the nine months ended September 30, 2011, an increase of $30.1 million, or 17%, as compared to the prior year. A portion of our total revenue consists of reimbursement for direct costs we incur, such as postage related to document management services.  We reflect the operating revenue from these reimbursed direct costs as a separate line item in our accompanying Condensed Consolidated Statements of Income.  Revenue originating from reimbursed direct costs was $17.0 million, a decrease of $5.4 million, or 24%, from the prior year. Although operating revenue from reimbursed

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direct costs may fluctuate significantly from quarter to quarter, these fluctuations have a minimal effect on our income from operations as we realize little or no margin from this revenue.

Operating revenue exclusive of revenue originating from reimbursed direct costs was $192.7 million in the nine months ended September 30, 2011, an increase of $35.6 million, or 23%, as compared to the prior year. This increase was driven by a $39.8 million increase in the E-discovery segment, partially offset by a $2.8 million decrease in the bankruptcy segment and a $1.4 million decrease in the settlement administration segment. Changes by segment are discussed below.

Operating Expense

The direct cost of services, exclusive of depreciation and amortization was $64.5 million for the nine months ended September 30, 2011, an increase of $16.3 million, or 34%, as compared to the prior year. This increase was primarily the result of an $11.0 million increase in compensation related expense, primarily related to the Encore acquisition and a $4.2 million increase in production supplies and services, partially offset by a $0.4 million decrease in legal advertising costs. Changes by segment are discussed below.

The direct cost of bundled products and services, exclusive of depreciation and amortization, was $2.4 million, a decrease of $0.3 million, or 11%, as compared to the prior year. Changes by segment are discussed below.

Reimbursed direct costs decreased $5.2 million, or 24%, to $16.8 million for the nine months ended September 30, 2011, compared to the prior year.  This decrease corresponds to the decrease in operating revenue from reimbursed direct costs.  Changes by segment are discussed below.

General and administrative costs increased $8.6 million, or 13%, to $72.8 million for the nine months ended September 30, 2011. This increase was primarily due to a $1.7 million increase in professional services, a $4.8 million increase in compensation-related expense, increases in lease expense of $0.7 million and maintenance expense of $0.7 million, and a $1.1 million increase in travel related costs, offset by a $0.4 million decrease in share-based compensation and a $1.6 million decrease related to a provision for litigation in the prior year.  Changes by segment are discussed below.

Depreciation and software and leasehold amortization costs for the nine months ended September 30, 2011, increased $1.4 million, or 9%, to $16.8 million compared with the prior year.

Amortization of identifiable intangible assets for the nine months ended September 30, 2011, was $16.1 million, an increase of $10.9 million, or 209%, compared to the prior year. This increase was due to the current year amortization of intangible assets resulting from the acquisition of Jupiter eSources in the fourth quarter of 2010 and Encore in April 2011.

Other operating expenses decreased $0.8 million for the nine months ended September 30, 2011, compared to the prior year.  This decrease was primarily due to the recognition of income of $4.5 million for the fair value adjustment to the contingent consideration for the Jupiter eSources acquisition, partially offset by a $4.0 million increase in acquisition-related expenses which were primarily associated with the Encore purchase.

Interest Expense, Net

We recognized interest expense of approximately $4.1 million for nine months ended September 30, 2011, an increase of $3.0 million compared to the prior year.  This increase was due to interest expense resulting from increased borrowings on our senior revolving loan to fund the Jupiter eSources and Encore acquisitions and our stock repurchase plan.

Income Taxes

Our effective tax rate for the nine months ended September 30, 2011, was 39.6%, compared to 47.5% in the prior year.  This decrease is primarily related to a decrease in our projected estimated annual effective tax rate of approximately 3% related to reducing the use of non-deductible equity incentive compensation in 2011 and an additional decrease of approximately 3% attributable to the renewal of the federal research credit in December 2010.  Additional reductions in the comparative rates are related to a greater proportion of income being generated in lower state tax jurisdictions, an increase in the domestic production activities deduction, and a reduction in 2011 interest expense on prior year uncertain tax positions due to settling the New York State income tax audit in 2010.  We have increasing operations in the United Kingdom and acquisitions have resulted in state and local jurisdictions with lower tax rates compared to our historical operations that have significant activity in New York and New York City.

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We have increased our unrecognized tax benefits relating to the Encore acquisition by $1.3 million.  If recognized, the entire $1.3 million would affect our effective tax rate.  In addition, we acquired federal and certain state net operating losses originating in 2006.  Although the statute of limitations generally lapses after three years from filing the return, these net operating losses could still be adjusted if examined by federal or state income tax auditors.

During September 2011, lapses in the statute of limitations for our 2007 federal tax return resulted in recognizing $0.2 million of unrecognized tax benefits, all of which reduced tax expense. As of September 30, 2011, our 2008 — 2010 federal, state and foreign tax returns are subject to examination. In addition, the 2007 statute of limitations remains open in certain state and foreign jurisdictions, the 2006 federal and certain states’ statures are still open with respect to acquired net operating losses and the New York State statute is open only with respect to our 2005 outstanding investment tax credit refund claim. As of September 30, 2011, it is reasonably possible that approximately $0.5 million of unrecognized tax benefits will be recognized in the following twelve months due to the closing of 2007 and 2008 years for federal and state jurisdictions of which $0.4 million would affect our effective tax rate.  In addition, it is reasonably possible that we will recognize $0.5 million of tax benefits in the following twelve months relating to the New York investment tax credit of which $0.3 million would affect our effective tax rate.

Net Income

Our net income was $10.1 million for the nine months ended September 30, 2011, compared to $10.8 million for the prior year, a decrease of $0.7 million, or 6%. The decrease from the prior year was primarily driven by increased acquisition related expense, amortization of intangibles which resulted from the acquisitions of Jupiter eSources and Encore, and interest expense, partially offset by growth in our E-discovery segment and the fair value adjustment to the contingent consideration for the Jupiter eSources acquisition.

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.

E-discovery Segment

E-discovery operating revenue before reimbursed direct costs for the nine months ended September 30, 2011, was $96.3 million, an increase of $39.8 million, or 70%, compared to the prior year.  Operating revenue growth as compared to the prior year period resulted from the impact of the Encore acquisition along with organic growth.

E-discovery direct and administrative costs, including reimbursed direct costs, were $55.8 million for the nine months ended September 30, 2011, an increase of $24.0 million, or 75%, compared to the prior year.  For this period $17.2 million of the increase was attributed to the acquisition of Encore with the remaining $6.8 million increase to support the organic growth of the business.

Bankruptcy Segment

Bankruptcy operating revenue before reimbursed direct costs for the nine months ended September 30, 2011, was $68.1 million, a decrease of $2.8 million, or 4%, compared to the prior year. This decrease was primarily attributable to a lower level of new Chapter 11 filings, and not as many cases in the early stages of bankruptcy; partially offset by an increase in revenue related to AACER®.

Bankruptcy direct and administrative costs, including reimbursed direct costs, decreased $1.3 million, or 3%, to $37.2 million for the nine months ended September 30, 2011, compared to the prior year. The change in these costs was the result of a $2.4 million decrease in reimbursed direct costs, a $0.9 million decrease in outside services, a $2.0 million decrease in compensation related expense, partially offset by an increase in direct costs related to the Jupiter eSources acquisition.

Settlement Administration Segment

Settlement administration operating revenue before reimbursed direct costs was $28.2 million in the nine months ended September 30, 2011, a decrease of $1.4 million, or 5%, compared to the prior year, primarily due to lower printing and claims administration services.

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Settlement administration direct and administrative costs, including reimbursed direct costs, for the nine months ended September 30, 2011, were $37.5 million, a decrease of $3.3 million, or 8%, compared to the prior year.  The change in these costs was the result of $3.0 million decrease in reimbursed direct costs, and a $0.7 million decrease in legal advertising noticing costs, partially offset by a $0.2 million increase in outside services.

Liquidity and Capital Resources

Cash flows from operating activities

During the nine months ended September 30, 2011, our operating activities provided net cash of $27.1 million. Contributing to net cash provided by operating activities were net income of $10.1 million and non-cash expenses, such as depreciation and amortization and share-based compensation expense, of $37.9 million. These items were partially offset by a $20.9 million net use of cash resulting from changes in operating assets and liabilities, net of the effects from business acquisitions. The most significant changes in operating assets and liabilities were an $8.8 million decrease in accounts payable and other liabilities, and a $14.2 million increase in trade accounts receivable.  Trade accounts receivable will fluctuate from period to period depending on the timing of sales and collections. Accounts payable and other liabilities will fluctuate from period to period depending on timing of purchases and payments.

Cash flows from investing activities

During the nine months ended September 30, 2011, we completed the acquisition of Encore with a cash purchase price of $99.3 million funded from our senior revolving loan.  In addition, we used cash of $10.7 million for the purchase of property and equipment, including computer hardware and purchased software licenses primarily for our E-discovery business and purchased computer hardware primarily for our corporate network infrastructure and bankruptcy business. Enhancements to our existing software and the development of new software is essential to our continued growth, and, during the nine months ended September 30, 2011, we used cash of $4.8 million to fund internal costs related to the development of software for which technological feasibility had been established. We believe that cash generated from operations will be adequate to fund our anticipated property, equipment, and software spending over the next year.

Cash flows from financing activities

During the nine months ended September 30, 2011, we borrowed $148.0 million under our senior revolving loan primarily to fund the acquisition of Encore in April 2011.  During the nine months ended September 30, 2011, proceeds from our senior revolving loan were also used to fund purchases of property and equipment and internal costs of software development, totaling $15.6 million (as discussed above), as well as to fund common stock repurchases of $10.9 million (as discussed below) and cash dividend payments of $3.7 million.   During the nine months ended September 30, 2011, we also used cash of $45.0 million for payments on our senior revolving loan, $2.6 million for the payment of long-term obligations, including capital lease payments and $1.9 million for debt issuance costs.  These uses of cash were partially offset by net proceeds from stock issued in connection with the exercise of employee stock options of $2.4 million.

Recent financing activities

Revolving Credit Agreement:  On April 25, 2011, we entered into an amended senior credit facility, with KeyBank National Association as administrative agent, and a syndicate of banks as lenders.  The amendment to the credit facility, which continues to provide for a senior revolving loan, increased the aggregate amount of funds available from $140.0 million to $325.0 million, and extended the maturity date from June 2014 to December 2015. During the term of the credit facility, we have the right, subject to compliance with the covenants as set forth in the credit facility agreement, to increase the borrowings to a maximum of $375.0 million, an increase from the $200.0 million maximum in our previous facility.  The credit facility is secured by liens on our land and buildings and substantially all of our personal property.  See Note 3 of the Notes to Condensed Consolidated Financial Statements for further detail.

Borrowings under the senior revolving loan 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; (2) for LIBOR rate advances, borrowings bear interest at LIBOR rate plus 175 to 275 basis points. At September 30, 2011, borrowings of $170.0 million under this facility had a weighted average interest rate of 2.79%. The average amount of borrowings under this facility in the third quarter of 2011 was $176.3 million, at a weighted average interest rate of 2.42%. 

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The maximum month-end amount outstanding during the third quarter of 2011 was $180.0 million. At September 30, 2011, the amount available for borrowings under the credit facility was reduced by the $170.0 million outstanding and $1.1 million in outstanding letters of credit.

The financial covenants contained in the credit facility include a total debt leverage ratio and a fixed charges coverage ratio (all as defined in our credit facility agreement).  As of September 30, 2011, the financial covenants were a leverage ratio not to exceed 3.00 to 1.00, and a fixed charge coverage ratio of not less than 1.25 to 1.00.  As of September 30, 2011 and December 31, 2010, we were in compliance with all financial covenants.

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, with a limit of $15.0 million, and subordinated debt, with a limit of $100.0 million of aggregate subordinated debt.  Generally, 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 bank permission.

On April 4, 2011, we completed the acquisition of Encore for $99.3 million cash, which was funded from our credit facility.  See Note 11 of the Notes to Condensed Consolidated Financial Statements for further detail.

Share Repurchase Program:  On October 26, 2010, we announced that our board of directors authorized $35.0 million for share repurchases (the “Share Repurchase Program”). Repurchases may be made pursuant to the Share Repurchase Program from time to time at prevailing market prices in the open market or in privately negotiated purchases, or both. We may utilize one or more plans with our brokers or banks for pre-authorized purchases within defined limits pursuant to Rule 10b5-1 under the Exchange Act to effect all or a portion of the repurchases. During the nine months ended September 30, 2011, we purchased 745,414 shares of common stock for approximately $10.0 million, at an average cost of $13.37 per share.  During the three months ended September 30, 2011, we did not repurchase any shares of common stock.

We also have a policy that requires shares to be repurchased by us to satisfy tax withholding obligations upon the vesting of restricted stock awards.

Dividend:  On January 17, 2011, our board of directors declared a cash dividend of $0.035 per outstanding share of common stock, which was paid on February 17, 2011, to shareholders of record on January 27, 2011.  On February 23, 2011, our board of directors declared a cash dividend of $0.035 per outstanding share of common stock, payable on May 19, 2011, to shareholders of record at the close of business on April 28, 2011.  On June 7, 2011, our board of directors declared a cash dividend of $0.035 per outstanding share of common stock, payable on August 18, 2011, to shareholders of record as of the close of business on July 28, 2011.  On September 15, 2011, our board of directors declared a cash dividend of $0.05 per outstanding share of common stock, payable on November 17, 2011, to shareholders of record as of the close of business on October 27, 2011.  Dividends payable of approximately $1.8 million is included as a component of “Other accrued liabilities” on the Condensed Consolidated Balance Sheets at September 30, 2011.

We believe that funds generated from operations, plus our existing cash resources 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, interest payments due on our outstanding borrowings, and other contractual obligations.

In addition, we believe we could fund any future acquisitions, dividend payments, or common stock repurchases with our internally available cash, cash generated from operations, our existing available debt capacity, or from the issuance of additional securities.

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Foreign Cash

As of September 30, 2011, our foreign subsidiaries had $2.9 million in cash located in financial institutions outside of the United States.  A majority of this cash represents undistributed earnings of our foreign subsidiaries, a significant portion of which are indefinitely reinvested.  In the event of a distribution to the U.S., those earnings could be subject to U.S. federal and state income taxes, net of foreign tax credits.

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, 2010, except for the additional borrowings under the senior revolving loan as a result of the Encore acquisition.  See Note 3 of the Notes to Condensed Consolidated Financial Statements for further information.

Critical Accounting Policies

In our Annual Report on Form 10-K for the year ended December 31, 2010, that was filed with the SEC on February 25, 2011, 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 discussion of the goodwill impairment test 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, 2010.

We assess goodwill for impairment on an annual basis at a reporting unit level and we have identified our operating segments (E-discovery, Bankruptcy and Settlement Administration) as our reporting units for purposes of testing for goodwill impairment as of July 31, 2011. At the time of the prior year’s goodwill impairment testing, we had identified four reporting units (bankruptcy trustee management, corporate restructuring, E-discovery and settlement administration).  We believe that the aggregation of the bankruptcy trustee management and corporate restructuring reporting units is appropriate based on changes in our business and related to the Jupiter eSources acquisition, which have resulted in these two reporting units meeting the aggregation criteria set forth in applicable authoritative accounting guidance.

Recently Issued and Adopted Accounting Pronouncements

In September 2011 the Financial Accounting Standards Board (“FASB”) issued guidance which amends the existing standards related to annual and interim goodwill impairment tests.  Current guidance requires companies to test goodwill for impairment, at least annually, using a two-step process. The updated guidance provides companies with the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this option, companies are no longer required to calculate the fair value of a reporting unit unless they determine, based on that qualitative assessment, that it is more likely than not that the reporting unit’s fair value is less than its carrying amount. The new guidance includes examples of the types of events and circumstances to consider in conducting the qualitative assessment.  The amendments will be effective for us beginning with our annual goodwill impairment test in 2012.  We do not expect this new guidance to have a material effect on our consolidated financial position, results of operations or cash flows.

In June 2011 the FASB issued a new standard related to comprehensive income.  This new standard requires companies to present comprehensive income in a single statement below net income or in a separate statement of comprehensive income immediately following the income statement.  In both options, companies must present the components of net income, total net income, the components of other comprehensive income, total other comprehensive income and total comprehensive income.  This new standard does not change which items are reported in other comprehensive income or the requirement to report reclassifications of items from other comprehensive income to net income.  The new standard eliminates the option to present comprehensive income on the statement of shareholders’ equity.  This requirement will become effective for us beginning with the Form 10-Q filing for the quarter ending March 31, 2012, and will require retrospective application for all periods presented.  We do not expect this new guidance to have a material effect on our consolidated financial position, results of operations or cash flows.

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In December 2010 the FASB issued new guidance to address differences in the ways entities have interpreted requirements for disclosures about pro forma revenue and earnings in a business combination.  This guidance states that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior year annual reporting period only.  This guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective for us for any business combinations whose acquisition date is after January 1, 2011, and the guidance impacts disclosures only.  See Note 11 of the Notes to Condensed Consolidated Financial Statements for the required disclosures with respect to our recent acquisitions.

In December 2010 the FASB issued new standards that amend the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. We adopted this guidance as of the beginning of fiscal year 2011. The adoption of this standard did not have an impact on our consolidated financial statements as we do not have any reporting units with zero or negative carrying amounts as of our last impairment test.

In January 2010 the FASB issued updated guidance that requires entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, the update requires entities to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). The disclosures related to Level 1 and Level 2 fair value measurements were effective for us in 2010. The update required new disclosures only, and had no impact on our consolidated financial position, results of operations, or cash flows as we have not had any transfers out of Level 1. The disclosures related to Level 3 fair value measurements were effective for us in 2011. This update also only requires new disclosures, and will have no impact on our consolidated financial position, results of operations or cash flows.

In October 2009 the FASB issued new standards for revenue recognition with multiple deliverables. These new standards require entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. These new standards were effective for us beginning in the first quarter of fiscal year 2011.  The adoption of this standard did not have a material impact on our consolidated financial statements.

In October 2009 the FASB issued new standards for the accounting for certain revenue arrangements that include software elements. These new standards amend the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products.  These new standards were effective for us beginning in the first quarter of fiscal year 2011.  The adoption of this standard did not have a material impact on our consolidated financial statements as our software arrangements are not tangible products with software components.

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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 September 30, 2011, we had borrowed $170.0 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 September 30, 2011, the analysis indicated that such a movement would not have a material effect on our consolidated financial position, results of operations or cash flows.

In our Chapter 7 bankruptcy business we earn deposit-based fees.  These fees are earned primarily on a percentage of Chapter 7 total liquidated assets placed on deposit with a designated financial institution by our trustee clients.  The fees we earn based on total liquidated assets placed on deposit by our trustee clients may vary based on fluctuations in short-term interest rates.  Based on sensitivity analysis we performed for the nine months ended September 30, 2011, a 1% movement in interest rates would not have 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, and therefore, a portion of our revenues and expenses are incurred in a currency other than U.S. 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 U.S. dollar and the functional currency of the countries where we have operations. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues and expenses denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs.

We performed a sensitivity analysis for the nine months ended September 30, 2011, assuming a 1% movement in foreign currency rates applied to the total revenue outside the United States.  As of September 30, 2011, the analysis indicated that such a movement would not have a material effect on our consolidated financial position, results of operations or cash flows.

Item 4.           Controls and Procedures

An evaluation was carried out by our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operations of our disclosure controls and procedures as defined in Exchange Act Rule 13a-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.

During the second quarter of 2011 we initiated a company-wide implementation of SAP, which provides certain enhancements, efficiencies, and increased security features to the financial reporting process and surrounding internal controls.  As of the end of the third quarter, a number of our business units were using the new system, with remaining business units planned to move to SAP over the next year.  We reviewed affected internal controls as part of this implementation, and made changes where appropriate.  There have been no other changes in our internal control over financial reporting during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Other than the changes mentioned above, there have been no changes in our internal control over financial reporting during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION.

Item 1.           Legal Proceedings

Purported Software License Complaint

On or about June 24, 2011, Epiq eDiscovery Solutions, Inc., an indirect, wholly owned subsidiary of Epiq Systems, Inc. (“EDS”), filed a lawsuit against Sybase, Inc. (“Sybase”) and Does 1 to 50, et al. in the Superior Court of the State of California, Alameda County (the “Superior Court”), alleging breach of contract and requesting a declaratory judgment against Sybase.  EDS’s complaint against Sybase relates to a dispute that has arisen under a software license agreement between EDS and Sybase (the “Agreement”) and encompasses a request by EDS for the Superior Court to issue an order:  (a) declaring that EDS currently owes Sybase nothing under the Agreement, and (b) requiring Sybase to provide EDS with certain license keys to software licenses that EDS purchased from Sybase under the Agreement.  On or about July 29, 2011, Sybase filed an answer to the complaint and a cross-complaint against EDS and Does 51-60 relating to that same dispute and Agreement, alleging that, among other things, EDS owes Sybase additional amounts under the Agreement totaling at least $7.0 million, plus interest and costs of suit.

We believe that Sybase’s cross-complaint has no merit and we and EDS will defend against Sybase’s cross-complaint vigorously.  No amounts have been recorded as a loss contingency as of September 30, 2011, in the accompanying Condensed Consolidated Financial Statements associated with this matter. EDS filed the lawsuit in order to protect and defend its rights and to demonstrate that, at all relevant times, EDS acted in good faith and in accordance with the terms of the Agreement.

Purported Derivative Shareholder Complaint

On July 29, 2008, the Alaska Electrical Pension Fund filed a putative shareholder derivative action on behalf of Epiq Systems, Inc. in the U.S. District Court for the District of Kansas (the “Court”) (Civil Action No. 08-CV-2344 CM/JPO), alleging, among other things, improper conduct by each of our current directors and certain current and former executive officers and directors regarding stock option grants. We have stated consistently that the claims made in the action are meritless.

Also as previously reported, on April 27, 2010, on the determination of our board of directors, we entered into a Stipulation of Settlement (the “Settlement Agreement”) with the plaintiff and defendants relating to the settlement of this litigation and mutual release of claims, and we and our insurance carrier agreed to pay plaintiff’s counsel’s fees and expenses, which totaled $3.5 million. On June 22, 2010, the Court entered an order which, among other things, preliminarily approved the Settlement Agreement and scheduled a final hearing.  On August 25, 2010, the Court entered a final order, dated August 24, 2010, finally approving the Settlement and dismissing with prejudice the lawsuit and all claims contained therein (the “Final Order”). During the third quarter of 2010 the settlement amount, which had been fully accrued for in prior periods, was paid by us and our insurance company. On or about September 24, 2010, the Final Order became final and non-appealable because no appeal was filed prior to such date.

Item 1A.        Risk Factors

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, 2010, that was filed with the SEC on February 25, 2011.

40

Item 6.           Exhibits

12.1Computation of ratio of earnings to fixed charges.

31.1Certifications 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.

31.2Certifications 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.

32.1Certifications 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.

41

SIGNATURES

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:	October 31, 2011	/s/ Tom W. Olofson
		Tom W. Olofson
		Chairman of the Board
		Chief Executive Officer
		Director
		(Principal Executive Officer)
Date:	October 31, 2011	/s/ Elizabeth M. Braham
		Elizabeth M. Braham
		Executive Vice President, Chief Financial Officer
		(Principal Financial & Accounting Officer)

42

EX-12.1

Exhibit 12.1

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

EPIQ SYSTEMS, INC.

(In Thousands, except for Ratio)

			Year Ended December 31,
	Nine Months Ended September 30, 2011		2010		2009		2008		2007		2006
Earnings
Net income	$	10,141	$	13,929	$	14,595	$	13,836	$	6,929	$	35,131
Income tax expense	6,649		12,641		12,266		10,507		4,066		22,834
Fixed charges	6,985		5,335		4,023		3,505		13,882		15,349
Earnings available for fixed charges	23,775		31,905		30,884		27,848		24,877		73,314
Fixed Charges
Interest expense *	3,660		1,537		1,160		1,331		10,980		12,023
Amortization of deferred loan charges	462		393		314		426		993		1,445
Estimated interest expense in leases	2,863		3,405		2,549		1,748		1,909		1,881
Total fixed charges	$	6,985	$	5,335	$	4,023	$	3,505	$	13,882	$	15,349
Ratio of Earnings to Fixed Charges	3.4		6.0		7.7		7.9		1.8		4.8

* Interest included in fixed charges includes only interest on third party indebtedness and, accordingly, we have excluded accrued interest expense related to uncertain tax positions.

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Tom W. Olofson, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Epiq Systems, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:       October 31, 2011

/s/ Tom W. Olofson

Tom W. Olofson

Chairman of the Board

Chief Executive Officer

(Principal Executive Officer)

1

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Elizabeth M. Braham, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Epiq Systems, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:     October 31, 2011

/s/ Elizabeth M. Braham

Elizabeth M. Braham

Executive Vice President, Chief Financial Officer

(Principal Financial Officer)

1

EX-32.1

Exhibit 32.1

CERTIFICATIONS OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350.

I, Tom W. Olofson, Chief Executive Officer of Epiq Systems, Inc. (the “Company”), hereby certify pursuant to Section 1350, of chapter 63 of title 18, United States Code, and Section 906 of the Sarbanes — Oxley Act of 2002, that, to the best of my knowledge, (1) the quarterly report on Form 10-Q of the Company to which this Exhibit is attached (the “Report”) fully complies with the requirements of section 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Tom W. Olofson

Tom W. Olofson

Dated:    October 31, 2011

I, Elizabeth M. Braham, Chief Financial Officer of Epiq Systems, Inc. (the “Company”), hereby certify pursuant to Section 1350, of chapter 63 of title 18, United States Code, and Section 906 of the Sarbanes — Oxley Act of 2002, that, to the best of my knowledge, (1) the quarterly report on Form 10-Q of the Company to which this Exhibit is attached (the “Report”) fully complies with the requirements of section 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Elizabeth M. Braham

Elizabeth M. Braham

Dated:    October 31, 2011

1

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Share data	Sep. 30, 2011	Dec. 31, 2010
CONDENSED CONSOLIDATED BALANCE SHEETS
Trade accounts receivable, allowance for doubtful accounts (in dollars)	$ 4,844	$ 3,778
Other intangibles, accumulated amortization (in dollars)	$ 74,458	$ 58,339
Preferred stock, par value (in dollars per share)	$ 1	$ 1
Preferred stock, shares authorized	2,000,000	2,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	39,493,852	39,063,327
Common stock, shares outstanding	39,493,852	39,063,327
Treasury stock, shares	3,787,452	3,295,492

XML

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (USD $) In Thousands	Total	Common Stock	Additional Paid-In Capital	Accumulated Other Comprehensive Income (Loss)	Retained Earnings	Treasury Stock	Comprehensive Income
Balance at Dec. 31, 2009	$ 326,398	$ 362	$ 248,937	$ (1,815)	$ 79,772	$ (858)
Balance (in shares) at Dec. 31, 2009		36,238				(56)
Comprehensive income:
Net income	10,788				10,788		10,788
Foreign currency translation adjustment	147			147			147
Total comprehensive income	10,935			147	10,788		10,935
Tax benefit (deficiency) from share-based compensation	(335)		(335)
Common stock issued under share-based compensation plans	1,021	5	(259)			1,275
Common stock issued under share-based compensation plans (in shares)		497				89
Common stock repurchased under share-based compensation plans	(948)					(948)
Common stock repurchased under share-based compensation plans (in shares)						(76)
Share repurchases (Note 9)	(29,924)					(29,924)
Share repurchases (Note 9) (in shares)						(2,329)
Dividends declared (Note 9)	(2,632)				(2,632)
Conversion of convertible notes	27,168	24	27,144
Conversion of convertible notes (in shares)		2,328
Share-based compensation	5,992		5,992
Balance at Sep. 30, 2010	337,675	391	281,479	(1,668)	87,928	(30,455)
Balance (in shares) at Sep. 30, 2010		39,063				(2,372)
Balance at Dec. 31, 2010	328,523	391	281,119	(1,971)	91,069	(42,085)
Balance (in shares) at Dec. 31, 2010		39,063				(3,295)
Comprehensive income:
Net income	10,141				10,141		10,141
Foreign currency translation adjustment	88			88			88
Total comprehensive income	10,229			88	10,141		10,229
Tax benefit (deficiency) from share-based compensation	312		312
Common stock issued under share-based compensation plans	2,425	4	(1,664)			4,085
Common stock issued under share-based compensation plans (in shares)		431				319
Common stock repurchased under share-based compensation plans	(900)					(900)
Common stock repurchased under share-based compensation plans (in shares)						(66)
Share repurchases (Note 9)	(9,958)					(9,958)
Share repurchases (Note 9) (in shares)						(745)
Dividends declared (Note 9)	(5,513)				(5,513)
Share-based compensation	5,589		5,589
Balance at Sep. 30, 2011	$ 330,707	$ 395	$ 285,356	$ (1,883)	$ 95,697	$ (48,858)
Balance (in shares) at Sep. 30, 2011		39,494				(3,787)

XML

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (USD $) In Thousands, except Per Share data	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
REVENUE:
Case management services	$ 56,385	$ 36,626	$ 156,588	$ 110,674
Case management bundled products and services	4,224	4,847	13,083	14,433
Document management services	9,143	10,526	22,985	32,042
Operating revenue before reimbursed direct costs	69,752	51,999	192,656	157,149
Operating revenue from reimbursed direct costs	6,359	6,288	17,031	22,442
Total Revenue	76,111	58,287	209,687	179,591
OPERATING EXPENSE:
Direct cost of services (exclusive of depreciation and amortization shown separately below)	23,888	16,455	64,526	48,207
Direct cost of bundled products and services (exclusive of depreciation and amortization shown separately below)	778	831	2,391	2,669
Reimbursed direct costs	6,289	6,126	16,778	21,959
General and administrative	26,395	20,068	72,763	64,181
Depreciation and software and leasehold amortization	5,795	4,911	16,808	15,358
Amortization of identifiable intangible assets	6,146	1,697	16,107	5,213
Other operating (income) expense	(1,621)	281	(486)	350
Total Operating Expense	67,670	50,369	188,887	157,937
INCOME FROM OPERATIONS	8,441	7,918	20,800	21,654
INTEREST EXPENSE (INCOME):
Interest expense	1,555	408	4,122	1,132
Interest income	(96)	(7)	(112)	(29)
Net Interest Expense	1,459	401	4,010	1,103
INCOME BEFORE INCOME TAXES	6,982	7,517	16,790	20,551
PROVISION FOR INCOME TAXES	2,696	2,979	6,649	9,763
NET INCOME	$ 4,286	$ 4,538	$ 10,141	$ 10,788
NET INCOME PER SHARE INFORMATION:
Basic (in dollars per share)	$ 0.12	$ 0.12	$ 0.29	$ 0.29
Diluted (in dollars per share)	$ 0.12	$ 0.12	$ 0.28	$ 0.28
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic (in shares)	35,268	37,063	35,145	36,646
Diluted (in shares)	36,629	38,185	36,550	40,315
Cash dividends declared per common share (in dollars per share)	$ 0.050	$ 0.035	$ 0.155	$ 0.070

XML

FAIR VALUES OF ASSETS AND LIABILITIES

9 Months Ended

Sep. 30, 2011

FAIR VALUES OF ASSETS AND LIABILITIES

FAIR VALUES OF ASSETS AND LIABILITIES

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.  Our Level 3 liability is valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the contingent consideration.

As of September 30, 2011 and December 31, 2010, our assets and liabilities that are measured and recorded at fair value on a recurring basis were as follows (in thousands):

	Estimated Fair Value Measurements
Items Measured at Fair Value on a	Carrying		Quoted Prices in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs
Recurring Basis	Value		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
September 30, 2011:
Assets:
Money market funds	$	34	$	34	$	—	$	—
Liabilities:
Contingent consideration (1)	$	2,700	$	—	$	—	$	2,700
December 31, 2010:
Assets:
Money market funds	$	54	$	54	$	—	$	—
Liabilities:
Contingent consideration (1)	$	7,166	$	—	$	—	$	7,166

(1)The contingent consideration represents the estimated fair value of the additional potential earn-out opportunity payable in connection with our acquisition of Jupiter eSources that is contingent upon future revenue growth. We estimated the fair value using projected revenue over the earn-out period, and applied a discount rate to the projected earn-out payments that approximated the weighted average cost of capital.

	Fair Value Measurements UsingSignificant Unobservable Inputs(Level 3)(in thousands)
	Contingent Consideration
Beginning balance December 31, 2010	$	7,166
Decrease in fair value	4,466
Ending balance September 30, 2011	$	2,700

The amount of total gains for the three month and nine month periods ended September 30, 2011, attributable to the change in contingent consideration as of September 30, 2011, is $1.7 million and $4.5 million, respectively, and are reflected in “Other operating expense” on the Condensed Consolidated Statements of Income.

As of September 30, 2011 and December 31, 2010, 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 at September 30, 2011 and December 31, 2010 was $170.0 million and $67.0 million, respectively, which approximated fair value due to the borrowing rates currently available to us for debt with similar terms.

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2011	Oct. 21, 2011
Document and Entity Information
Entity Registrant Name	EPIQ SYSTEMS INC
Entity Central Index Key	0001027207
Document Type	10-Q
Document Period End Date	Sep. 30, 2011
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		35,712,695
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3

XML

LONG-TERM OBLIGATIONS

9 Months Ended

Sep. 30, 2011

LONG-TERM OBLIGATIONS

LONG-TERM OBLIGATIONS

NOTE 3:   LONG-TERM OBLIGATIONS

Following is a summary of long-term obligations outstanding (in thousands):

	September 30, 2011			December 31, 2010
	(in thousands)
Senior revolving loan	$	170,000		$	67,000
Capital leases	5,182			7,055
Acquisition-related liabilities	10,994			15,750
Total long-term obligations, including current portion	186,176			89,805
Current maturities of long-term obligations	(10,838		)	(2,945		)
Long-term obligations	$	175,338		$	86,860

Credit Facilities

On April 25, 2011, we entered into an amended senior credit facility, with KeyBank National Association as administrative agent, and a syndicate of banks as lenders.  The amendment to the credit facility, which continues to provide for a senior revolving loan, increased the aggregate amount of funds available from $140.0 million to $325.0 million, and extended the maturity date from June 2014 to December 2015. During the term of the credit facility, we have the right, subject to compliance with the covenants as set forth in the credit facility agreement, to increase the borrowings to a maximum of $375.0 million, an increase from the $200.0 million maximum in our previous facility.  The credit facility is secured by liens on our land and buildings and substantially all of our personal property.

Borrowings under the senior revolving loan 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; (2) for LIBOR rate advances, borrowings bear interest at LIBOR rate plus 175 to 275 basis points. At September 30, 2011, borrowings of $170.0 million under this facility had a weighted average interest rate of 2.79%. The average amount of borrowings under this facility in the third quarter of 2011 was $176.3 million, at a weighted average interest rate of 2.42%.  The maximum month-end amount outstanding during the third quarter of 2011 was $180.0 million. At September 30, 2011, the amount available for borrowings under the credit facility was reduced by the $170.0 million outstanding and $1.1 million in outstanding letters of credit.

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).  As stated per the credit facility, as of September 30, 2011, the leverage ratio was not to exceed 3.00 to 1.00 and the fixed charge coverage ratio could not be less than 1.25 to 1.00.  As of September 30, 2011 and December 31, 2010, we were in compliance with all financial covenants.

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, with a limit of $15.0 million, and subordinated debt, with a limit of $100 million of aggregate subordinated debt.

Generally, 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 bank permission.

Contingent Convertible Subordinated Notes

On or about June 11, 2010, prior to the maturity date, $27.2 million of contingent convertible subordinated notes (“convertible notes”) were converted into 2.3 million shares of common stock at a conversion price of $11.67. On June 15, 2010, the convertible notes matured, resulting in a cash payment of $22.8 million, plus accrued interest. The original $50.0 million of convertible notes were issued in June 2004 with a fixed 4% per annum interest rate and an original maturity of June 15, 2007.  The holders of the convertible notes had the right to extend the maturity date by up to three years.  In April 2007, the holders exercised this right and the maturity date of the convertible notes was extended to June 15, 2010.

The right to extend the maturity of the convertible notes was accounted for as an embedded option subject to bifurcation.  The embedded option was initially valued at $1.2 million and the convertible notes balance was reduced by the same amount.  In April 2007 the holders of the convertible notes exercised their right to extend and we performed a final valuation to estimate the fair value of the embedded option as of the approximate date of the extension.  The estimated fair value of the embedded option at that date, included as a component of the convertible notes, was approximately $4.8 million. The $4.8 million estimated fair value of the embedded option was fully amortized as a credit to “Interest expense” on the Condensed Consolidated Statements of Income over the period to the extended maturity, which was June 15, 2010.

Upon conversion of $27.2 million of the notes, we recognized a nominal gain related to the remaining unamortized embedded option value associated with the converted notes in the year ended December 31, 2010.  The above changes related to the carrying value of the convertible notes, the estimated fair value of the embedded option, the amortization of the fair value of the embedded option, and recognition of nominal gain upon conversion did not affect our cash flow.

Capital Leases

We lease certain property and software under capital leases that expire during various years through 2014.

Acquisition-related Liabilities

We have made acquisitions for which a portion of the purchase price has been deferred.  These deferred payments, which are either non-interest bearing or have a below market interest rate, have been discounted using an appropriate imputed interest rate.

In the fourth quarter of 2010, in connection with the acquisition of Jupiter eSources, we incurred a liability related to contingent consideration for an earn-out opportunity based on future revenue growth. The potential undiscounted amount of all future payments that we could be required to make under the earn-out opportunity is between $0 and $20.0 million over a four year period. We estimated the fair value of the contingent consideration using probability assessments of projected revenue over the earn-out period, and applied an appropriate discount rate based upon the weighted average cost of capital.  This fair value is based on significant inputs not observable in the market. We have recognized the fair value of $2.7 million and $7.2 million of the contingent consideration in “Long-term obligations” on the Condensed Consolidated Balance Sheet at September 30, 2011, and December 31, 2010, respectively. Subsequent fair value changes, measured quarterly, up to the ultimate amount paid, will be recognized in earnings.  During the three and nine-month periods ended September 30, 2011, we recognized a decrease in the fair value of $1.7 million and $4.5 million, respectively, reflected in “Other operating expense” on the Condensed Consolidated Statements of Income.

In addition to the earn-out opportunity, in connection with the acquisition of Jupiter eSources, we withheld a portion of the purchase price for any claims for indemnification and purchase price adjustments.  This holdback has been discounted using an appropriate imputed interest rate and $8.3 million and $8.1 million are recorded in “Current maturities of long-term obligations” and “Long-term obligations” on the Condensed Consolidated Balance Sheet at September 30, 2011 and December 31, 2010, respectively.

XML

STOCKHOLDERS' EQUITY

9 Months Ended

Sep. 30, 2011

STOCKHOLDERS' EQUITY

STOCKHOLDERS' EQUITY

NOTE 9:                STOCKHOLDERS’ EQUITY

Share Repurchase

On October 26, 2010, we announced that our board of directors authorized $35.0 million for share repurchases (the “Share Repurchase Program”). Repurchases may be made pursuant to the Share Repurchase Program from time to time at prevailing market prices in the open market or in privately negotiated purchases, or both. We may utilize one or more plans with our brokers or banks for pre-authorized purchases within defined limits pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, to effect all or a portion of the repurchases. During the nine months ended September 30, 2011, we purchased 745,414 shares of common stock for approximately $10.0 million, at a weighted average cost of approximately $13.37 per share.  During the year ended December 31, 2010, we purchased 3.4 million shares of common stock for $43.2 million, at a weighted average cost of approximately $12.80 per share.

We also have a policy that requires shares to be repurchased by us to satisfy tax withholding obligations upon the vesting of restricted stock awards.

Dividend

On January 17, 2011, our board of directors declared a cash dividend of $0.035 per outstanding share of common stock, which was paid on February 17, 2011, to shareholders of record on January 27, 2011.  On February 23, 2011, our board of directors declared a cash dividend of $0.035 per outstanding share of common stock, which was paid on May 19, 2011, to shareholders of record on April 28, 2011.  On June 7, 2011, our board of directors declared a cash dividend of $0.035 per outstanding share of common stock, payable on August 18, 2011, to shareholders of record as of the close of business on July 28, 2011.  On September 15, 2011, our board of directors declared a cash dividend of $0.05 per outstanding share of common stock, payable on November 17, 2011, to shareholders of record as of the close of business on October 27, 2011.  Dividends payable of approximately $1.8 million is included as a component of “Other accrued liabilities” in the Condensed Consolidated Balance Sheets at September 30, 2011.

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LEGAL PROCEEDINGS

9 Months Ended

Sep. 30, 2011

LEGAL PROCEEDINGS

LEGAL PROCEEDINGS

NOTE 10:              LEGAL PROCEEDINGS

Purported Software License Complaint

On or about June 24, 2011, Epiq eDiscovery Solutions, Inc., an indirect, wholly owned subsidiary of Epiq Systems, Inc. (“EDS”), filed a lawsuit against Sybase, Inc. (“Sybase”) and Does 1 to 50, et al. in the Superior Court of the State of California, Alameda County (the “Superior Court”), alleging breach of contract and requesting a declaratory judgment against Sybase.  EDS’s complaint against Sybase relates to a dispute that has arisen under a software license agreement between EDS and Sybase (the “Agreement”) and encompasses a request by EDS for the Superior Court to issue an order:  (a) declaring that EDS currently owes Sybase nothing under the Agreement, and (b) requiring Sybase to provide EDS with certain license keys to software licenses that EDS purchased from Sybase under the Agreement.  On or about July 29, 2011, Sybase filed an answer to the complaint and a cross-complaint against EDS and Does 51-60 relating to that same dispute and Agreement, alleging that, among other things, EDS owes Sybase additional amounts under the Agreement totaling at least $7.0 million, plus interest and costs of suit.

We believe that Sybase’s cross-complaint has no merit and we and EDS will defend against Sybase’s cross-complaint vigorously.  No amounts have been recorded in the accompanying Condensed Consolidated Financial Statements associated with this matter. EDS filed the lawsuit in order to protect and defend its rights and to demonstrate that, at all relevant times, EDS acted in good faith and in accordance with the terms of the Agreement.

Purported Derivative Shareholder Complaint

On July 29, 2008, the Alaska Electrical Pension Fund filed a putative shareholder derivative action on behalf of Epiq Systems, Inc. in the U.S. District Court for the District of Kansas (the “Court”) (Civil Action No. 08-CV-2344 CM/JPO), alleging, among other things, improper conduct by each of our current directors and certain current and former executive officers and directors regarding stock option grants. We have stated consistently that the claims made in the action are meritless.

Also as previously reported, on April 27, 2010, on the determination of our board of directors, we entered into a Stipulation of Settlement (the “Settlement Agreement”) with the plaintiff and defendants relating to the settlement of this litigation and mutual release of claims, and we and our insurance carrier agreed to pay plaintiff’s counsel’s fees and expenses, which totaled $3.5 million. On June 22, 2010, the Court entered an order which, among other things, preliminarily approved the Settlement Agreement and scheduled a final hearing.  On August 25, 2010, the Court entered a final order, dated August 24, 2010, finally approving the Settlement and dismissing with prejudice the lawsuit and all claims contained therein (the “Final Order”). During the third quarter of 2010, the settlement amount, which had been fully accrued for in prior periods, was paid by us and our insurance company. On or about September 24, 2010, the Final Order became final and non-appealable because no appeal was filed prior to such date.

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SUPPLEMENTAL CASH FLOW INFORMATION

9 Months Ended

Sep. 30, 2011

SUPPLEMENTAL CASH FLOW INFORMATION

SUPPLEMENTAL CASH FLOW INFORMATION

NOTE 8:    SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information is as follows (in thousands):

	Nine Months Ended September 30,
	2011		2010
Cash paid for:
Interest	$	3,628	$	2,073
Income taxes paid, net	3,359		18,093
Non-cash investing and financing transactions:
Property, equipment, and leasehold improvements accrued in accounts payable	1,267		1,167
Conversion of convertible notes into common stock	—		27,168
Capitalized lease obligations incurred	196		3,827
Dividends declared but not yet paid	1,785		1,284
Obligations incurred in acquisition	844		—

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS

9 Months Ended

Sep. 30, 2011

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS

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. 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, 2010, filed with the Securities and Exchange Commission on February 25, 2011.

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 its 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, financial transactions and regulatory compliance matters.  We offer innovative technology solutions for e-discovery, document review, legal notification, claims administration and controlled disbursement of funds.  Our clients include law firms, corporate legal departments, bankruptcy trustees, government agencies and other professional advisors who require innovative technology, responsive service and deep subject-matter expertise.

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 case management services defined by client contracts, such as claims processing, claims reconciliation, professional services, call center support, disbursement services, project management, collections and forensic 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.

· Hosting fees based on the amount of data stored.

· Deposit-based fees, earned primarily based on a percentage of Chapter 7 total liquidated 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 post-contract customer support services. The fees we earn are based on total liquidated assets placed on deposit by our trustee clients and may vary based on fluctuations in short-term interest rates.

· 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.

· Reimbursement for costs incurred, primarily related to postage on mailing services.

· Monitoring and noticing fees earned based on monthly or on-demand requests for information provided through our AACER® software product.

Non-Software Arrangements

Services related to E-discovery, bankruptcy and settlement administration are billed based on volume. For these contractual arrangements, 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.  We have also obtained objective and reliable evidence of the value of each element based either on the price we charge when we sell an element on a standalone basis, based on third-party evidence of fair value of such similar services, or an estimated selling price.  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 of each unit of accounting, which is generally consistent with the stated prices in our arrangements. 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 post-contract 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 dollar level of average monthly deposits held by the trustees with that financial institution related to the software license, hardware lease, hardware maintenance, and post-contract customer support services. Since we have not established vendor specific objective evidence (“VSOE”) 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 post-contract customer support services.  This revenue, when recognized, is included as a component of “Case management services” revenue.  Revenue related to post-contract 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 applicable 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, printers and 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 and nine months ended September 30, 2011 and 2010, is included in the Condensed Consolidated Statements of Income as a component of “Case management services” revenue.

Reimbursements

We have revenue related to the reimbursement of certain costs, primarily postage. Reimbursed postage and other reimbursable direct costs are recorded gross in the Condensed Consolidated Statements of Income as “Operating revenue from reimbursed direct costs” and as “Reimbursed direct costs,” respectively.

Goodwill

Goodwill consists of the excess of the 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 we have identified our operating segments (E-discovery, bankruptcy and settlement administration) as our reporting units for purposes of testing for goodwill impairment as of July 31, 2011. At the time of the prior year’s goodwill impairment testing, we had identified four reporting units (bankruptcy trustee management, corporate restructuring, E-discovery and settlement administration).  We believe that the aggregation of the bankruptcy trustee management and corporate restructuring reporting units is appropriate based on changes in our business and related to the October 1, 2010 acquisition of Jupiter eSources, which have resulted in these two reporting units meeting the aggregation criteria set forth in applicable authoritative accounting guidance. 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 was more likely than not that the recorded goodwill balance had become impaired.

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 evaluating the market approach, we determined that directly comparable publicly-traded companies did not exist, primarily due to the unique business model characteristics and projected growth of each reporting unit. Instead, we utilized a discounted projected future cash flow analysis (income approach) to determine the fair value of each reporting unit. 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, used to determine our discount rate, and through our stock price, 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 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 the impact that future economic impacts will have on our reporting units, there can be no assurances that our estimates and assumptions regarding the duration of the economic recession, or the period or strength of recovery, made for purposes of our annual goodwill impairment test, will prove to be accurate predictions of the future. If our 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.

Our recognized goodwill totaled $363.9 million as of September 30, 2011.  As of July 31, 2011, 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.

As described in Note 11 of the Notes to Condensed Consolidated Financial Statements, in connection with the acquisition of Jupiter eSources LLC (“Jupiter eSources”) on October 1, 2010, we recognized $30.7 million of goodwill, which is allocated to the bankruptcy segment, and in connection with the acquisition of Encore Discovery Solutions on April 4, 2011, we recognized $69.1 million of goodwill, which is allocated to the E-discovery segment.

Recently Issued and Adopted Accounting Pronouncements

In September 2011 the Financial Accounting Standards Board (“FASB”) issued guidance which amends the existing standards related to annual and interim goodwill impairment tests.  Current guidance requires companies to test goodwill for impairment, at least annually, using a two-step process. The updated guidance provides companies with the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this option, companies are no longer required to calculate the fair value of a reporting unit unless they determine, based on that qualitative assessment, that it is more likely than not that the reporting unit’s fair value is less than its carrying amount. The new guidance includes examples of the types of events and circumstances to consider in conducting the qualitative assessment.   The amendments will be effective for us beginning with our annual goodwill impairment test in 2012.  We do not expect this new guidance to have a material effect on our consolidated financial position, results of operations or cash flows.

In June 2011 the FASB issued a new standard related to comprehensive income.  This new standard requires companies to present comprehensive income in a single statement below net income or in a separate statement of comprehensive income immediately following the income statement.  In both options, companies must present the components of net income, total net income, the components of other comprehensive income, total other comprehensive income and total comprehensive income.  This new standard does not change which items are reported in other comprehensive income or the requirement to report reclassifications of items from other comprehensive income to net income.  The new standard eliminates the option to present comprehensive income on the statement of changes in shareholders’ equity.  This requirement will become effective for us beginning with the Form 10-Q filing for the quarter ending March 31, 2012 and will require retrospective application for all periods presented.  We do not expect this new guidance to have a material effect on our consolidated financial position, results of operations or cash flows.

In December 2010 the FASB issued new guidance to address differences in the ways entities have interpreted requirements for disclosures about pro forma revenue and earnings in a business combination.  This guidance states that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior year annual reporting period only.  This guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective for us for any business combinations whose acquisition date is after January 1, 2011 and the guidance impacts disclosures only.  See Note 11 of the Notes to Condensed Consolidated Financial Statements for the required disclosures with respect to our recent acquisitions.

In December 2010 the FASB issued new standards that amend the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. We adopted this guidance as of the beginning of fiscal year 2011. The adoption of this standard did not have an impact on our Condensed Consolidated Financial Statements as we do not have any reporting units with zero or negative carrying amounts as of our last impairment test.

In January 2010 the FASB issued updated guidance that requires entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, the update requires entities to present separately information about purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). The disclosures related to Level 1 and Level 2 fair value measurements were effective for us in 2010. The update required new disclosures only, and had no impact on our consolidated financial position, results of operations, or cash flows as we have not had any transfers out of Level 1. The disclosures related to Level 3 fair value measurements were effective for us in 2011. This update required new disclosures only, and had no impact on our consolidated financial position, results of operations or cash flows.

In October 2009 the FASB issued new standards for revenue recognition with multiple deliverables. These new standards require entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. These new standards were effective for us beginning in the first quarter of fiscal year 2011.  The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements.

In October 2009 the FASB issued new standards for the accounting for certain revenue arrangements that include software elements. These new standards amend the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products.  These new standards were effective for us beginning in the first quarter of fiscal year 2011. The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements as our software arrangements are not tangible products with software components.

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NET INCOME PER SHARE

9 Months Ended

Sep. 30, 2011

NET INCOME PER SHARE

NET INCOME PER SHARE

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 and convertible debt (if applicable), if dilutive. The numerator of the diluted net income per share calculation is increased by the amount of interest expense, net of tax, related to outstanding convertible debt (if applicable), and the allocation of net income and dividends declared to nonvested shares, if the net impact is dilutive.

We have determined that certain nonvested share awards (also referred to as restricted stock awards) issued by us 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 as it relates to participating securities. For the three and nine months ended September 30, 2011, the treasury stock method was more dilutive, and for the three and nine months ended September 30, 2010, the two-class method calculation was more dilutive.

The computation of basic and diluted net income per share for the three and nine months ended September 30, 2011 is as follows (in thousands, except per share data):

	Three Months Ended September 30, 2011					Nine Months Ended September 30, 2011
	Net Income (Numerator)		Weighted Average Common Shares Outstanding (Denominator)	Per Share Amount		Net Income (Numerator)			Weighted Average Common Shares Outstanding (Denominator)	Per Share Amount
Net income	$	4,286				$	10,141
Less: net income allocated to nonvested shares (1)	—					(5		)
Basic net income available to common stockholders	4,286		35,268	$	0.12	10,136			35,145	$	0.29
Effect of dilutive securities:
Stock options	—		1,361			—			1,364
Nonvested shares	—		—			5			41
Diluted net income available to common stockholders	$	4,286	36,629	$	0.12	$	10,141		36,550	$	0.28

(1)   Amounts allocated to holders of nonvested shares are calculated based upon a weighted average percentage of nonvested shares that are participating securities in relation to total shares outstanding.

The computation of basic and diluted net income per share for the three and nine months ended September 30, 2010 is as follows (in thousands, except per share data):

	Three Months Ended September 30, 2010						Nine Months Ended September 30, 2010
	Net Income (Numerator)			Weighted Average Common Shares Outstanding (Denominator)	Per Share Amount		Net Income (Numerator)			Weighted Average Common Shares Outstanding (Denominator)	Per Share Amount
Net income	$	4,538					$	10,788
Less: amounts allocated to nonvested shares (1)	(12		)				(34		)
Basic net income available to common stockholders	4,526			37,063	$	0.12	10,754			36,646	$	0.29
Effect of dilutive securities:
Stock options	—			1,122			—			1,080
Convertible debt	—			—			537			2,589
Add-back: amounts allocated to nonvested shares(1)	12			—			34			—
Less: amounts re-allocated to nonvested shares	(12		)	—			(34		)	—
Diluted net income available to common stockholders	$	4,526		38,185	$	0.12	$	11,291		40,315	$	0.28

(1)Amounts allocated to holders of nonvested shares are calculated based upon a weighted average percentage of nonvested shares that are participating securities in relation to total shares outstanding.

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SHARE-BASED COMPENSATION

9 Months Ended

Sep. 30, 2011

SHARE-BASED COMPENSATION

SHARE-BASED COMPENSATION

NOTE 5:   SHARE-BASED COMPENSATION

Share-based compensation is measured at grant date, based on the fair value of the award, and is recognized on a straight-line basis over the requisite service period.  The following table presents total share-based compensation expense included in the Condensed Consolidated Statements of Income (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Direct cost of services	$	103		$	101		$	229		$	266
General and administrative	1,969			2,064			5,360			5,726
Pre-tax share-based compensation expense	2,072			2,165			5,589			5,992
Income tax benefit	(897		)	(694		)	(2,420		)	(1,781		)
Total share-based compensation expense, net of tax	$	1,175		$	1,471		$	3,169		$	4,211

The 2004 Equity Incentive Plan, as amended (the “2004 Plan”), limits the combined grant of options to acquire shares of common stock, stock appreciation rights, and restricted stock awards under the 2004 Plan to 7,500,000 shares.  Any grant under the 2004 Plan that expires or terminates unexercised, becomes unexercisable, or is forfeited will generally be available for future grants. At September 30, 2011, there were approximately 637,000 shares of common stock available for future equity-related grants under the 2004 Plan.

During the nine months ended September 30, 2011, we granted 430,000 nonvested share awards at a weighted-average grant date price of $13.39 per share.  These awards vest 12 months after the date of grant upon achievement of a performance condition for the calendar year ending December 31, 2011. As of September 30, 2011, we have assessed the likelihood that the performance condition will be met and have recorded the related expense based on the estimated outcome. We also granted 557,500 stock options with a weighted-average exercise price of $14.60 per share, which vest over periods ranging from five to seven years.

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.

	Nine months ended September 30,
	2011			2010
Expected life of stock option (years)	6.6			6.5
Expected volatility	30		%	37		%
Risk-free interest rate	2.5		%	2.7		%
Dividend yield	1.1		%	0.63		%
Weighted average grant-date fair value	$	4.49		$	4.68

As of September 30, 2011, there was $7.0 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 2.7 years.

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SEGMENT REPORTING

9 Months Ended

Sep. 30, 2011

SEGMENT REPORTING

SEGMENT REPORTING

NOTE 6:   SEGMENT REPORTING

We have three reporting segments: E-discovery, bankruptcy and settlement administration.  Our E-discovery business provides collections and forensics, processing, search and review, and document review services to companies and the litigation departments of law firms.  Produced documents are made available primarily through a hosted environment, and our DocuMatrix™ software allows for efficient attorney review and data requests.  Our bankruptcy business provides solutions that address the needs of trustees to administer bankruptcy proceedings and of debtor corporations that file a plan of reorganization.  Our settlement administration business provides managed services including legal notification, claims administration, project administration and controlled disbursement.

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, 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 September 30, 2011. The intersegment revenues in the three months ended September 30, 2011, related primarily to call center and printing services performed by the settlement administration segment for the bankruptcy segment.

	Three Months Ended September 30, 2011
	E-discovery		Bankruptcy		Settlement Administration		Eliminations			Total
	(in thousands)
Revenue:
Operating revenue before reimbursed direct costs	$	36,626	$	23,842	$	9,284	$	—		$	69,752
Intersegment revenue	25		—		564		(589		)	—
Operating revenue before reimbursed direct costs	36,651		23,842		9,848		(589		)	69,752
Operating revenue from reimbursed direct costs	193		2,447		3,719		—			6,359
Total revenue	36,844		26,289		13,567		(589		)	76,111
Direct costs, general and administrative costs	22,043		14,665		11,630		(589		)	47,749
Segment performance measure	$	14,801	$	11,624	$	1,937	$	—		$	28,362

Following is a summary of segment information for the three months ended September 30, 2010. The intersegment revenues in the three months ended September 30, 2010 related primarily to call center and printing services performed by the settlement administration segment for the bankruptcy segment.

	Three Months Ended September 30, 2010
	E-discovery		Bankruptcy		Settlement Administration		Eliminations			Total
	(in thousands)
Revenue:
Operating revenue before reimbursed direct costs	$	19,957	$	21,993	$	10,049	$	—		$	51,999
Intersegment revenue	11		1		433		(445		)	—
Operating revenue before reimbursed direct costs	19,968		21,994		10,482		(445		)	51,999
Operating revenue from reimbursed direct costs	132		2,076		4,080		—			6,288
Total revenue	20,100		24,070		14,562		(445		)	58,287
Direct costs, general and administrative costs	10,734		11,447		13,077		(445		)	34,813
Segment performance measure	$	9,366	$	12,623	$	1,485	$	—		$	23,474

Following is a reconciliation of our segment performance measure to income before income taxes:

	Three Months Ended September 30,
	2011			2010
	(in thousands)
Segment performance measure	$	28,362		$	23,474
Corporate and unallocated expenses	(7,529		)	(6,502		)
Share-based compensation expense	(2,072		)	(2,165		)
Depreciation and software and leasehold amortization	(5,795		)	(4,911		)
Amortization of identifiable intangible assets	(6,146		)	(1,697		)
Other operating expense	1,621			(281		)
Interest expense, net	(1,459		)	(401		)
Income before income taxes	$	6,982		$	7,517

Following is a summary of segment information for the nine months ended September 30, 2011. The intersegment revenues in the nine months ended September 30, 2011, related primarily to call center and printing services performed by the settlement administration segment for the bankruptcy segment.

	Nine Months Ended September 30, 2011
	E-discovery		Bankruptcy		Settlement Administration		Eliminations			Total
	(in thousands)
Revenue:
Operating revenue before reimbursed direct costs	$	96,314	$	68,148	$	28,194	$	—		$	192,656
Intersegment revenue	33		—		1,470		(1,503		)	—
Operating revenue before reimbursed direct costs	96,347		68,148		29,664		(1,503		)	192,656
Operating revenue from reimbursed direct costs	404		4,601		12,026		—			17,031
Total revenue	96,751		72,749		41,690		(1,503		)	209,687
Direct costs, general and administrative costs	55,823		37,200		37,545		(1,503		)	129,065
Segment performance measure	$	40,928	$	35,549	$	4,145	$	—		$	80,622

Following is a summary of segment information for the nine months ended September 30, 2010. The intersegment revenues in the nine months ended September 30, 2010, related primarily to call center and printing services performed by the settlement administration segment for the bankruptcy segment.

	Nine Months Ended September 30, 2010
	E-Discovery		Bankruptcy		Settlement Administration		Eliminations			Total
	(in thousands)
Revenue:
Operating revenue before reimbursed direct costs	$	56,539	$	70,988	$	29,622	$	—		$	157,149
Intersegment revenue	41		1		1,302		(1,344		)	—
Operating revenue before reimbursed direct costs	56,580		70,989		30,924		(1,344		)	157,149
Operating revenue from reimbursed direct costs	227		7,076		15,139		—			22,442
Total revenue	56,807		78,065		46,063		(1,344		)	179,591
Direct costs, general and administrative costs	31,834		38,548		40,864		(1,344		)	109,902
Segment performance measure	$	24,973	$	39,517	$	5,199	$	—		$	69,689

Following is a reconciliation of our segment performance measure to income before income taxes:

	Nine Months Ended September 30,
	2011			2010
	(in thousands)
Segment performance measure	$	80,622		$	69,689
Corporate and unallocated expenses	(21,804		)	(21,122		)
Share-based compensation expense	(5,589		)	(5,992		)
Depreciation and software and leasehold amortization	(16,808		)	(15,358		)
Amortization of identifiable intangible assets	(16,107		)	(5,213		)
Other operating expense	486			(350		)
Interest expense, net	(4,010		)	(1,103		)
Income before income taxes	$	16,790		$	20,551

Following are total assets by segment:

	September 30,  2011		December 31, 2010
	(in thousands)
Assets
E-discovery	$	254,897	$	145,246
Bankruptcy	247,687		260,458
Settlement Administration	54,561		53,830
Corporate and unallocated	36,915		18,684
Total consolidated assets	$	594,060	$	478,218

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 10,141	$ 10,788
Adjustments to reconcile net income to net cash provided by operating activities:
Expense for deferred income taxes	910	295
Depreciation and software and leasehold amortization	16,808	15,358
Amortization of identifiable intangible assets	16,107	5,213
Change in valuation of contingent consideration	(4,466)
Benefit related to embedded option		(738)
Share-based compensation expense	5,589	5,992
Provision for bad debts	2,045	1,612
Other, net	977	191
Excess tax benefit related to share-based compensation	(111)	(18)
Changes in operating assets and liabilities, net of effects from business acquisitions:
Trade accounts receivable	(14,187)	(13,955)
Prepaid expenses and other assets	310	1,023
Accounts payable and other liabilities	(8,789)	(7,299)
Deferred revenue	1,823	827
Other	(18)	(111)
Net cash provided by operating activities	27,139	19,178
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(10,732)	(8,993)
Internally developed software costs	(4,836)	(6,464)
Cash paid for business acquisition, net of cash acquired	(99,330)
Other investing activities, net	106	8
Net cash used in investing activities	(114,792)	(15,449)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolver	148,000	15,000
Payments on revolver	(45,000)
Payments under long-term obligations	(2,621)	(27,222)
Excess tax benefit related to share-based compensation	111	18
Common stock repurchases (Note 9)	(10,858)	(30,872)
Cash dividends paid (Note 9)	(3,728)	(1,348)
Debt issuance costs	(1,940)	(1,460)
Proceeds from issuance of common stock under share-based compensation plans	2,425	1,021
Net cash provided by (used in) financing activities	86,389	(44,863)
Effect of exchange rate changes on cash	505	(6)
DECREASE IN CASH AND CASH EQUIVALENTS	(759)	(41,140)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	5,439	48,986
CASH AND CASH EQUIVALENTS, END OF PERIOD	$ 4,680	$ 7,846

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GOODWILL AND INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2011

GOODWILL AND INTANGIBLE ASSETS

GOODWILL AND INTANGIBLE ASSETS

NOTE 2:   GOODWILL AND INTANGIBLE ASSETS

The change in the carrying amount of goodwill for the first nine months of 2011 was as follows (in thousands):

	E-discovery		Bankruptcy		Settlement Administration		Total
	(in thousands)
Balance as of December 31, 2010	$	79,826	$	182,116	$	32,847	$	294,789
Acquisition	69,076		—		—		69,076
Foreign currency translation	43		—		—		43
Balance as of September 30, 2011	$	148,945	$	182,116	$	32,847	$	363,908

Amortizing identifiable intangible assets as of September 30, 2011 and December 31, 2010 consisted of the following (in thousands):

	September 30, 2011				December 31, 2010
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
	(in thousands)
Amortizing intangible assets:
Customer relationships	$	93,633	$	46,297	$	63,902	$	32,007
Trade names	2,362		905		745		745
Non-compete agreements	32,209		27,256		30,838		25,587
Non-amortizing intangible assets:
Trade names	6,434		—		6,434		—
	$	134,638	$	74,458	$	101,919	$	58,339

Customer relationships, non-compete agreements and trade names carry a weighted average remaining life of seven years, six years and five years, respectively. Aggregate amortization expense related to identifiable intangible assets was $6.1 million and $1.7 million for the three months ended September 30, 2011 and 2010, respectively, and $16.1 million and $5.2 million for the nine months ended September 30, 2011 and 2010, respectively.  The following table outlines the estimated future amortization expense related to intangible assets held at September 30, 2011:

(in thousands) Year Ending December 31,
2011 (excluding the nine months ended September 30, 2011)	$	5,123
2012	18,047
2013	12,126
2014	7,074
2015	5,500
2016	2,706

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ACQUISITIONS

9 Months Ended

Sep. 30, 2011

ACQUISITIONS

ACQUISITIONS

NOTE 11:   ACQUISITIONS

Jupiter eSources LLC

On October 1, 2010, we completed the acquisition of one hundred percent of Jupiter eSources, which includes the proprietary software product, AACER® (Automated Access to Court Electronic Records), that assists creditors, including banks, mortgage processors, and their administrative services professionals to streamline processing of their portfolios of loans in bankruptcy cases. The AACER® product electronically monitors developments in all U.S. 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 the AACER® solution, clients achieve greater accuracy in faster timeframes, with a significant cost savings compared to manual attorney review of each case in the portfolio.

The purchase price of Jupiter eSources was comprised of the following:

	(in thousands)
Cash paid at closing	$	51,600
Fair value of holdback	8,090
Working capital adjustment	539
Fair value of contingent consideration	7,166
Total purchase price	$	67,395

In connection with this acquisition, we withheld a portion of the purchase price for any claims for indemnification and purchase price adjustments.  This holdback has been discounted using an appropriate imputed interest rate.  At September 30, 2011, $8.3 million was recorded in “Current maturities of long-term obligations” on the Condensed Consolidated Balance Sheet and at December 31, 2010, $8.1 million was recorded in “Long-term obligations”, related to this holdback.

As a result of an earn-out opportunity based on future revenue growth that is part of this acquisition, we also have contingent consideration. The potential undiscounted amount of all future payments that we could be required to make under the earn-out opportunity is between $0 and $20.0 million over a four year period.  We have recognized the fair value of $2.7 million and $7.2 million of the contingent consideration in “Long-term obligations” on the Condensed Consolidated Balance Sheet at September 30, 2011 and December 31, 2010, respectively. The fair value of the contingent consideration was determined by a present value calculation of the potential payouts based on projected revenue. Subsequent changes in fair value, which are measured quarterly, up to the ultimate amount paid, will be recognized in earnings.  For the three and nine-month periods ended September 30, 2011, we recognized a decrease in the fair value of $1.7 million and $4.5 million, respectively, reflected in “Other operating expense” in the Condensed Consolidated Statements of Income.

The transaction was funded from our credit facility. Transaction related costs, which were expensed during the period in which they were incurred, are reflected in “Other operating expense” in the Condensed Consolidated Statements of Income, and totaled $0.1 million for the nine months ended September 30, 2011, for this acquisition.

Total purchase consideration has been allocated to the tangible and identifiable intangible assets and to liabilities assumed based on their respective fair values on the acquisition date. The purchase price allocations are summarized in the following table:

	(in thousands)
Tangible assets and liabilities
Current assets, including cash acquired	$	1,733
Non-current assets	37
Current liabilities	(1,191		)
Intangible assets	33,258
Software	2,880
Goodwill	30,678
Net assets acquired	$	67,395

Based on the results of an independent valuation, we allocated approximately $33.3 million of the purchase price to acquired intangible assets, and $2.9 million of the purchase price to software. The following table summarizes the major classes of acquired intangible assets and software, as well as the respective weighted-average amortization periods:

Identifiable Intangible Assets	Amount (in thousands)		Weighted Average Amortization Period (Years)
Trade name	$	6,434	Indefinite
Non-compete agreements	2,955		5.0
Customer relationships	23,869		5.0
Total identifiable intangible assets	$	33,258

Software	Amount (in thousands)		Weighted Average Amortization Period (Years)
AACER® software application	$	2,880	5.0

The excess of purchase consideration over net assets assumed was recorded as goodwill, which represents the strategic value we placed on the AACER® product.  We have allocated goodwill of $30.7 million related to this acquisition to our bankruptcy segment, which is deductible for tax purposes. The Condensed Consolidated Financial Statements include the operating results of Jupiter eSources from the date of acquisition.

Encore Discovery Solutions

On April 4, 2011, we completed the acquisition of one hundred percent of Encore Discovery Solutions (“Encore”) for approximately $104.3 million, $10.0 million of which was placed in escrow as security for potential indemnification claims. 

Encore provides products and services for electronic evidence processing, document review platforms, and professional services for project management, data collection and forensic consulting. With this transaction, we further strengthen our worldwide e-discovery franchise providing corporate legal departments and law firms with a broad range of capabilities to manage electronic information for discovery, investigations, compliance and related legal matters.  The transaction was funded from our credit facility.

The total preliminary purchase price transferred to effect the acquisition was as follows (in thousands):

	(in thousands)
Cash paid at closing	$	103,385
Other consideration	844
Working capital adjustment	98
Total preliminary purchase price	$	104,327

The transaction was funded from our credit facility. Transaction related costs, which were expensed during the period in which they were incurred, are reflected in “Other operating expense” in the Condensed Consolidated Statements of Income, and totaled $3.9 million for the nine months ended September 30, 2011, for this acquisition.

Total purchase consideration has been allocated to the tangible and identifiable intangible assets and to liabilities assumed based on their respective fair values on the acquisition date.  The measurement period for purchase price allocations ends as soon as information on the facts and circumstances becomes available, but does not exceed 12 months. If new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized for assets acquired and liabilities assumed, we will retrospectively adjust the amounts recognized as of the acquisition date.  The preliminary purchase price allocations are summarized in the following table:

	(in thousands)
Tangible assets and liabilities
Current assets, including cash acquired	$	19,239
Non-current assets	2,669
Current liabilities	(6,646		)
Non-current liabilities	(15,087		)
Intangible assets	32,578
Software	2,498
Goodwill	69,076
Net assets acquired	$	104,327

Included in the total liabilities assumed is a preliminary net deferred tax liability balance of $16.4 million, primarily comprised of the difference between the assigned values of the intangible assets acquired and the tax basis of those assets.

Based on the preliminary results of an independent valuation, we have allocated approximately $32.6 million of the purchase price to acquired intangible assets, and $2.5 million of the purchase price to software. The following table summarizes the major classes of acquired intangible assets and software, as well as the respective weighted-average amortization periods:

	Amount (in thousands)		Weighted Average Amortization Period (Years)
Identifiable Intangible Assets
Trade name	$	1,617	5.0
Non-compete agreement	1,362		2.0
Customer relationships	29,599		7.0
Total identifiable intangible assets	$	32,578
Software internally developed	$	2,498	5.0

The amounts shown above may change in the near term as management continues to assess the fair value of acquired assets and liabilities.  We are also continuing to gather information necessary to evaluate the income tax implications on the opening balance sheet.  The income tax related accounts and goodwill may be affected once this evaluation is complete.  The Encore transaction was structured as a stock purchase and therefore, the goodwill and acquired intangible assets are not amortizable for tax purposes.

During the third quarter of 2011, we continued evaluating the income tax implications of the Encore acquisition.  As a result of that evaluation we retrospectively decreased the net deferred tax liability as of April 4, 2011, by approximately $1.4 million.  This reduction was attributable to new information gathered during the measurement period and our assessment of income tax filing requirements in state and local jurisdictions where Encore has significant operations.  This opening balance sheet adjustment resulted in a corresponding reduction in goodwill and had no impact on the accompanying Condensed Consolidated Statements of Income.

The excess of purchase consideration over net assets assumed was recorded as goodwill, which represents the strategic value assigned to Encore, including the expected benefits from the synergies resulting from the transaction, as well as the knowledge and experience of the workforce in place.

Pro forma financial information

The following unaudited condensed pro forma financial information presents the results of operations as if the Encore and Jupiter eSources acquisitions had taken place on January 1, 2010 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Revenue	$	76,111	$	73,034	$	221,211	$	219,816
Net income	4,327		5,752		11,259		9,385

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands	Sep. 30, 2011	Dec. 31, 2010
CURRENT ASSETS:
Cash and cash equivalents	$ 4,680	$ 5,439
Trade accounts receivable, less allowance for doubtful accounts of $4,844 and $3,778, respectively	83,918	59,940
Prepaid expenses	5,730	5,581
Other current assets	7,665	5,637
Total Current Assets	101,993	76,597
LONG-TERM ASSETS:
Property and equipment, net	40,747	41,258
Internally developed software costs, net	21,881	19,659
Goodwill	363,908	294,789
Other intangibles, net of accumulated amortization of $74,458 and $58,339, respectively	60,180	43,580
Other	5,351	2,335
Total Long-term Assets, net	492,067	401,621
Total Assets	594,060	478,218
CURRENT LIABILITIES:
Accounts payable	11,693	13,227
Accrued compensation	5,544	8,891
Deposits	2,121	2,553
Deferred revenue	3,256	1,422
Other accrued liabilities	7,342	4,611
Current maturities of long-term obligations	10,838	2,945
Total Current Liabilities	40,794	33,649
LONG-TERM LIABILITIES:
Deferred income taxes	42,343	24,159
Other long-term liabilities	4,878	5,027
Long-term obligations (excluding current maturities)	175,338	86,860
Total Long-term Liabilities	222,559	116,046
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $1 par value; 2,000,000 shares authorized; none issued and outstanding, respectively
Common stock - $0.01 par value; 100,000,000 shares authorized; issued and outstanding - 39,493,852 and 39,063,327 shares, respectively	395	391
Additional paid-in capital	285,356	281,119
Accumulated other comprehensive loss	(1,883)	(1,971)
Retained earnings	95,697	91,069
Treasury stock, at cost - 3,787,452 and 3,295,492 shares	(48,858)	(42,085)
Total Stockholders' Equity	330,707	328,523
Total Liabilities and Stockholders' Equity	$ 594,060	$ 478,218