ACQUISITIONS

6 Months Ended

Jun. 30, 2012

ACQUISITIONS

ACQUISITIONS

NOTE 11:   ACQUISITIONS

Encore Discovery Solutions

On April 4, 2011, we completed the acquisition 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 eDiscovery 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 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 purchase price	$	104,327

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 $0.5 million and $3.7 million for the three and six months ended June 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	$	20,044
Non-current assets	2,669
Current liabilities	(6,646		)
Non-current liabilities	(15,115		)
Intangible assets	32,578
Software	2,498
Goodwill	68,299
Net assets acquired	$	104,327

Included in the total liabilities assumed is a net deferred tax liability balance of $16.0 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 results of an independent valuation, we 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 Encore transaction was structured as a stock purchase and therefore, the goodwill and acquired intangible assets are not amortizable for tax purposes.

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.

De Novo Legal LLC

On December 28, 2011, we completed the acquisition of De Novo for approximately $86.6 million and $5.0 million is being held by us as security for potential indemnification claims.  De Novo has document review centers in key strategic locations in the United States and is among the largest providers of managed review and staffing services and also offers clients eDiscovery processing and hosted review.  This transaction augments our capacity for eDiscovery and document review services and broadens our eDiscovery customer base.  The transaction was funded from our credit facility.

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

	(in thousands)
Cash paid at closing	$	67,866
Fair value of deferred cash consideration at closing	4,417
Fair value of contingent consideration at closing	16,226
Working capital adjustment	(1,861		)
Total purchase price	$	86,648

In connection with this acquisition $5.0 million of the purchase price is being held by us and deferred for 18 months following the closing date of the acquisition as security for potential claims for indemnification.  During the first quarter 2012, we adjusted the purchase price to reflect a reduction to this deferred cash consideration related to an uncollected account receivable indemnified by the sellers.  This holdback has been discounted using a discount rate of 11%.  At June 30, 2012, $4.5 million was recorded in “Current maturities of long-term obligations” and at December 31, 2011 $4.9 million was recorded in “Long-term obligations” on the Condensed Consolidated Balance Sheets related to this holdback.  Also during the first quarter of 2012, we finalized the calculation of the working capital adjustment to the purchase price as reflected in the table above.

In connection with an earn-out related to substantial future revenue growth, we have recorded a liability related to potential contingent consideration. The undiscounted amount of all potential future payments under the earn-out opportunity is between $0 and $29.1 million over a two-year measurement period following the acquisition date. Approximately one-quarter of the De Novo earn-out opportunity is also contingent upon certain of the sellers remaining employees of Epiq.  If those sellers do not remain employees of Epiq, the portion of the earn-out to which they were entitled is forfeited by them and will not be allocated to the remaining sellers.  During the second quarter of 2012, the employment of a De Novo employee entitled to a portion of the earn-out ended.  According to the purchase agreement with De Novo, a portion of the earn-out subject to continued employment for this employee was forfeited in its entirety.

The portion of the contingent consideration that is not tied to employment was considered to be part of the total consideration transferred for the purchase of De Novo and has been measured and recognized at fair value.  As of June 30, 2012, $5.9 million is included in “Current maturities of long-term obligations “and $5.6 million is included in “Long-term Obligations” on the Condensed Consolidated Balance Sheet.  As of December 31, 2011, $ 16.2 million was included in “Long-term Obligations” on the Condensed Consolidated Balance Sheet.

The portion of the contingent consideration that is tied to employment is being accounted for as compensation expense when incurred.  As of June 30, 2012, $1.3 million of the estimate of future potential payouts has been accrued of which $0.9 million is included in “Other accrued liabilities” and $0.4 million is included in “Other long-term liabilities” on the Condensed Consolidated Balance Sheet.  As of December 31, 2011, no amounts related to the acquisition-related compensation had been accrued for the period December 28, 2011 through December 31, 2011 as they were immaterial.  Compensation expense related to this portion of the estimate of the earn-out is reflected in “General and administrative expense” on the Condensed Consolidated Statements of Income and included a credit of $0.4 million and expense of $1.3 million for the three and six months ended June 30, 2012, respectively.

The fair value of potential contingent consideration was determined using a present value calculation of the potential payouts based on projected revenue.  Subsequent fair value changes, measured quarterly, up to the end of the final measurement period will be recognized in earnings.  Based on the analysis performed as of June 30, 2012, determined through an analysis of the current projected revenue measure related to this potential contingent consideration, and including the impact of the forfeiture discussed above, a decrease in fair value of $5.5 million was recorded related to the acquisition-related obligation for the earn-out and this adjustment is included in “Fair value adjustment to contingent consideration” in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012.  Also, in conjunction with the quarterly fair value assessment of the compensation-related contingent consideration, approximately $1.7 million of previously accrued compensation expense was reversed during the quarter ended June 30, 2012 which is included in “General and administrative” expense on the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012, respectively.

The change in fair value of the De Novo earn-out also includes $0.4 million and $0.8 million of change in fair value accretion expense, which is included in “Interest expense” in the Condensed Consolidated Statement of Income for the three and six months ended June 30, 2012, respectively.

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	$	11,214
Non-current assets	2,738
Current liabilities	(2,361		)
Non-current liabilities	(500		)
Intangible assets	34,629
Goodwill	40,928
Net assets acquired	$	86,648

Based on the results of an independent valuation, we initially allocated approximately $34.4 million of the purchase price to acquired intangible assets. During the first quarter of 2012, based on new information obtained since December 31, 2011, related to the results of an independent valuation of the fair value of property, plant and equipment acquired in connection with the De Novo acquisition, we adjusted the preliminary purchase price allocation to reflect a $1.5 million reduction in property, plant and equipment along with a corresponding increase of $1.3 million to goodwill and a $0.2 million increase to the customer relationship intangible asset.

The following table summarizes the major classes of acquired intangible assets, as well as the respective weighted-average amortization periods:

	Amount (in thousands)		Weighted Average Amortization Period (Years)
Identifiable Intangible Assets
Trade name	$	850	5.0
Non-compete agreement	2,900		5.0
Customer relationships	30,879		8.0
Total identifiable intangible assets	$	34,629

The excess of purchase consideration over net assets assumed was recorded as goodwill, which represents the strategic value assigned to De Novo, including the expected benefits from the synergies resulting from the transaction, as well as the knowledge and experience of the workforce in place.  The goodwill and intangible assets related to this acquisition are deductible for tax purposes.

The Condensed Consolidated Financial Statements include the operating results of De Novo from the date of acquisition.

Pro Forma Financial Information

The following unaudited condensed pro forma financial information presents consolidated results of operations as if the De Novo and Encore acquisitions had taken place on January 1, 2010 (in thousands).  These amounts were prepared in accordance with the acquisition method of accounting under existing standards and are not necessarily indicative of the results of operations that would have occurred if our acquisitions of De Novo and Encore had been completed on January 1, 2010, nor are they indicative of our future operating results. These unaudited pro forma amounts include an adjustment to reclassify acquisition expenses related to Encore and De Novo to 2010 whereas they were actually incurred throughout 2011.

	Three Months Ended June 30, 2011		Six Months Ended June 30, 2011
Total revenue	$	88,352	$	173,189
Operating revenue	83,089		162,517
Net income	7,050		15,103