UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-22081

EPIQ SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Missouri

48-1056429

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

501 Kansas Avenue, Kansas City, Kansas		66105-1300
(Address of principal executive offices)		(Zip Code)

913-621-9500

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at April 18, 2014
Common Stock, $0.01 par value per share		35,683,748 shares

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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 March 31,
	2014			2013
REVENUE:
Operating revenue	$	116,220		$	102,908
Reimbursable expenses	7,051			20,682
Total Revenue	123,271			123,590

OPERATING EXPENSE:
Direct cost of operating revenue (exclusive of depreciation and amortization shown separately below)	57,635			52,496
Reimbursed direct costs	6,803			19,542
Selling, general and administrative expense	44,176			32,424
Depreciation and software and leasehold amortization	8,700			6,999
Amortization of identifiable intangible assets	3,120			4,966
Fair value adjustment to contingent consideration	1,142			—
Other operating expense	69			47
Total Operating Expense	121,645			116,474

INCOME FROM OPERATIONS	1,626			7,116

INTEREST EXPENSE (INCOME):
Interest expense	4,877			1,839
Interest income	(4		)	(4		)
Net Interest Expense	4,873			1,835

INCOME (LOSS) BEFORE INCOME TAXES	(3,247		)	5,281

PROVISION FOR (BENEFIT FROM) INCOME TAXES	(949		)	1,344

NET INCOME (LOSS)	$	(2,298	)	$	3,937

NET INCOME (LOSS) PER SHARE INFORMATION:
Basic	$	(0.07	)	$	0.11
Diluted	$	(0.07	)	$	0.11
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	34,862			35,600
Diluted	34,862			36,547

Cash dividends declared per common share	$	0.09		$	0.09

See accompanying Notes to Condensed Consolidated Financial Statements.

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EPIQ SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)

	March 31, 2014			December 31, 2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	19,193		$	40,336
Trade accounts receivable, less allowance for doubtful accounts of $4,512 and $4,379, respectively	141,884			145,134
Prepaid expenses	12,451			10,617
Other current assets	4,622			3,882
Total Current Assets	178,150			199,969

LONG-TERM ASSETS:
Property and equipment, net	73,893			72,118
Internally developed software costs, net	15,470			16,201
Goodwill	404,344			404,302
Other intangibles, net of accumulated amortization of $112,052 and $108,933, respectively	37,998			41,117
Other long-term assets	13,732			14,074
Total Long-term Assets	545,437			547,812
Total Assets	$	723,587		$	747,781

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations	$	10,599		$	13,349
Accounts payable	21,918			30,419
Accrued compensation	8,972			17,932
Customer deposits	2,573			2,717
Deferred revenue	1,966			4,020
Dividends payable	3,214			3,142
Other accrued liabilities	6,879			6,985
Total Current Liabilities	56,121			78,564

LONG-TERM LIABILITIES:
Deferred income taxes	32,893			35,558
Other long-term liabilities	9,180			8,537
Long-term obligations, excluding current maturities	298,628			299,108
Total Long-term Liabilities	340,701			343,203

COMMITMENTS AND CONTINGENCIES
EQUITY:
Preferred stock - $1 par value; 2,000,000 shares authorized; none issued and outstanding	—			—
Common stock - $0.01 par value; 100,000,000 shares authorized; Issued and outstanding at March 31, 2014 — 40,955,651 and 35,705,913 shares, respectively Issued and outstanding at December 31, 2013 — 40,298,852 and 34,991,629 shares, respectively	410			403
Additional paid-in capital	297,022			291,414
Accumulated other comprehensive loss	(272		)	(541		)
Retained earnings	97,233			102,754
Treasury stock, at cost — 5,249,738 and 5,307,223 shares, respectively	(67,628		)	(68,016		)
Total Equity	326,765			326,014
Total Liabilities and Equity	$	723,587		$	747,781

See accompanying Notes to Condensed Consolidated Financial Statements.

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EPIQ SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

	Three Months Ended March 31,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(2,298	)	$	3,937
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and software and leasehold amortization	8,700			6,999
Amortization of intangible assets	3,120			4,966
Share-based compensation expense	3,539			1,539
Fair value adjustment to contingent consideration	1,142
Provision for doubtful accounts	348			682
Loan fee amortization	1,117			179
Deferred income tax (benefit) expense	(452		)	352
Other, net	(6		)	32
Changes in operating assets and liabilities:
Trade accounts receivable	3,093			(15,058		)
Prepaid expenses and other assets	(1,811		)	(778		)
Accounts payable and other liabilities	(11,223		)	6,354
Customer deposits	(144		)	(13,212		)
Deferred revenue	(2,057		)	(133		)
Income taxes	(3,823		)	(950		)
Excess tax benefit related to share-based compensation	(197		)	(141		)
Other	121			(113		)
Net cash used in operating activities	(831		)	(5,345		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(9,464		)	(3,694		)
Internally developed software costs	(1,437		)	(1,530		)
Proceeds from sale of assets	4			—
Other investing activities, net	—			10
Net cash used in investing activities	(10,897		)	(5,214		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolver borrowings	—			34,000
Payments to reduce revolver borrowings	—			(19,000		)
Debt issuance costs	(837		)	—
Payments under long-term obligations	(2,133		)	(424		)
Payment of deferred acquisition consideration	(3,457		)	—
Excess tax benefit related to share-based compensation	197			141
Common stock repurchases (Note 8)	(3,214		)	(2,181		)
Cash dividends paid (Note 8)	(3,152		)	(3,233		)
Proceeds from exercise of stock options	3,146			498
Net cash provided by (used in) financing activities	(9,450		)	9,801

Effect of exchange rate changes on cash	35			(283		)

NET DECREASE IN CASH AND CASH EQUIVALENTS	(21,143		)	(1,041		)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	40,336			3,808
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	19,193		$	2,767

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EPIQ SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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. 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, 2013, filed with the Securities and Exchange Commission (“SEC”) on February 26, 2014.

The results of operations for any quarter or a partial fiscal year period are not necessarily indicative of the results to be expected for other periods or the entire year.

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of Epiq and our wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

Nature of Operations

We provide integrated technology solutions for the legal profession. Our solutions are designed to streamline the administration of bankruptcy, litigation, investigations, financial transactions and regulatory compliance matters. We offer innovative managed technology solutions for eDiscovery, document review, legal notification, claims administration and controlled disbursement of funds. Our clients include leading law firms, corporate legal departments, bankruptcy trustees, government agencies, mortgage processors, and financial institutions.

Revenue Recognition

We have agreements with clients pursuant to which we deliver various services. Following is a description of significant sources of revenue:

· Fees contingent upon the month-to-month delivery of services defined by client contracts, such as claims processing, claims reconciliation, professional services, call center support, disbursement services, project management, collection and forensic services, consulting services, document review services and conversion of data into an organized, searchable electronic database. The amount we earn varies based primarily on the size and complexity of the engagement, the number of hours of professional services provided and the number of documents or volume of data processed or reviewed.

· Data hosting fees and volume-based fees.

· Deposit-based and service fees. Deposit-based fees are earned based on a percentage of Chapter 7 assets placed on deposit with designated financial institutions by our trustee clients to whom we provide, at no charge, software licenses, limited hardware and hardware maintenance, and postcontract customer support services. The fees earned based on assets placed on deposit by our trustee clients may vary based on fluctuations in short-term interest rates and changes in service fees assessed on such deposits.

· Legal noticing services to parties of interest in bankruptcy, class action and other administrative matters including direct notification and media campaign and advertising management in which we coordinate notification, primarily through print media outlets to potential parties of interest for a particular client engagement.

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

· Reimbursed expenses, primarily related to postage on mailing services and other pass-through expenses.

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Non-Software Arrangements

Certain of our services are billed based on unit prices and volumes for which we have identified each deliverable service element. Based on our evaluation of each element, we have determined that each element delivered has standalone value to our customers because we or other vendors sell such services separately from any other services and deliverables. For certain of these services we have obtained objective and reliable evidence of the fair value of each element based either on the price we charge when we sell an element on a standalone basis or on third-party evidence of fair value of such similar services. For elements where evidence cannot be established, the best estimate of sales price has been used. Our arrangements do not include general rights of return. Accordingly, each of the service elements in our multiple element case and document management arrangements qualifies as a separate unit of accounting. We allocate revenue to the various units of accounting in our arrangements based on the fair value or best estimated selling price of each unit of accounting, which is generally consistent with the stated prices in our arrangements. In instances when revenue recognition is deferred, we utilize the relative selling price method to calculate the revenue recognized for each period. As we have evidence of an arrangement, revenue for each separate unit of accounting is recognized each period. Revenue is recognized as the services are rendered, our fee becomes fixed and determinable, and collectability is reasonably assured. Payments received in advance of satisfaction of the related revenue recognition criteria are recognized as a customer deposit until all revenue recognition criteria have been satisfied.

Software Arrangements

For our Chapter 7 bankruptcy trustee arrangements, we provide our trustee clients with a software license, hardware lease, hardware maintenance, and postcontract customer support services, all at no charge to the trustee. The trustees place their liquidated estate deposits with a financial institution with which we have an arrangement. We earn contingent monthly fees from the financial institutions based on the average dollar amount of deposits held by the trustees with that financial institution related to the software license, hardware lease, hardware maintenance, and postcontract customer support services provided to our trustee clients. The monthly deposit fees have two components consisting of an interest-based component and a non-interest based service fee. Since we have not established vendor specific objective evidence of the fair value of the software license, we do not recognize any revenue on delivery of the software. The software element is deferred and included with the remaining undelivered elements, which are postcontract customer support services. Revenue related to postcontract customer support is entirely contingent on the placement of liquidated estate deposits by the trustee with the financial institution. Accordingly, we recognize this contingent usage based revenue as the fee becomes fixed or determinable at the time actual usage occurs and collectability is probable. This occurs monthly as a result of the computation, billing and collection of monthly deposit fees contractually agreed to. At that time, we have also satisfied the other revenue recognition criteria since we have persuasive evidence that an arrangement exists, services have been rendered, the price is fixed and determinable, and collectability is reasonably assured.

We also provide our trustee clients with certain hardware, such as desktop computers, monitors, and printers as well as hardware maintenance. We retain ownership of all hardware provided and we account for this hardware as a lease. As the hardware maintenance arrangement is an executory contract similar to an operating lease, we use guidance related to contingent rentals in operating lease arrangements for hardware maintenance as well as for the hardware lease. Since the payments under all of our arrangements are contingent upon the level of trustee deposits and the delivery of upgrades and other services, and there remain important uncertainties regarding the amount of unreimbursable costs yet to be incurred by us, we account for the hardware lease as an operating lease. Therefore, all lease payments, based on the estimated fair value of hardware provided, were accounted for as contingent rentals, which requires that we recognize rental income when the changes in the factor on which the contingent lease payment is based actually occur. This occurs at the end of each period as we achieve our target when deposits are held at the financial institution as, at that time, evidence of an arrangement exists, delivery has occurred, the amount has become fixed and determinable, and collection is reasonably assured.

Reimbursements

We have revenue related to reimbursed expenses, primarily postage. Reimbursed postage and other reimbursable direct costs are recorded gross in the Condensed Consolidated Statements of Income as “Reimbursable expenses” and “Reimbursed direct costs”, in the revenue and operating expenses sections, respectively.

Goodwill

Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed. We assess goodwill for impairment on an annual basis at a reporting unit level and have identified our operating segments (Technology and Bankruptcy and Settlement Administration) as our reporting units for purposes of testing for goodwill impairment.

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Goodwill is assessed between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, a change in strategic direction, legal factors, operating performance indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit, or future economic factors such as unfavorable changes in our stock price and market capitalization or unfavorable changes in the estimated future discounted cash flows of our reporting units. Our annual test is performed as of July 31 each year, and there have been no events since our last annual test to indicate that it is more likely than not that the recorded goodwill balance had become impaired. As of July 31, 2013, 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. Our consolidated goodwill totaled $404.3 million as of March 31, 2014.

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We considered both a market approach and an income approach in order to develop an estimate of the fair value of each reporting unit for purposes of our annual impairment test. When available, and as appropriate, we used market multiples derived from a set of competitors or companies with comparable market characteristics to establish fair values for a particular reporting unit (market approach). We also estimated fair value using discounted projected cash flow analysis (income approach). Potential impairment is indicated when the carrying value of a reporting unit, including goodwill, exceeds its estimated fair value. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. In addition, financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital, which is used to determine our discount rate, and through our stock price, which is used to determine our market capitalization. We may be required to recognize impairment of goodwill based on future economic factors such as unfavorable changes in our stock price and market capitalization or unfavorable changes in the estimated future discounted cash flows of our reporting units.

If we determine that the estimated fair value of any reporting unit is less than the reporting unit’s carrying value, then we proceed to the second step of the goodwill impairment analysis to measure the potential impairment charge. An impairment loss is recognized for any excess of the carrying value of the reporting unit’s goodwill over the implied fair value. If goodwill on our Condensed Consolidated Balance Sheet or Consolidated Balance Sheet becomes impaired during a future period, the resulting impairment charge could have a material impact on our results of operations and financial condition.

Income Taxes

Our effective tax rate for the three months ended March 31, 2014 was 29.2% compared to 25.9% for the comparable prior year period. The reduced 2013 rate reflected a discrete benefit related to the enactment of the 2012 American Taxpayer Relief Act which extended the federal research credit for both 2013 and 2012. We recognized approximately $0.4 million of tax benefit relating to the 2012 credits and a portion of our 2013 tax credits during the first quarter of 2013. While legislation has been introduced to retroactively reinstate the credit to the beginning of 2014, the federal research credit has not yet been extended past 2013 and our 2014 effective tax rate does not reflect any research credit benefit. Our effective tax rate is lower than the U.S. statutory rate because we earned income in international jurisdictions with lower tax rates and our income from these jurisdictions increased during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.

On March 31, 2014, New York State passed comprehensive corporate income tax reform with most changes effective for years 2015 and beyond. We have substantial business presence within the state, but we do not expect the new law to have a material impact on our overall expected future tax expense. Because a change in tax law is accounted for in the period of enactment, our results for the three months ended March 31, 2014 reflect the impact of this state law change, however, the impact was not material.

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NOTE 2: GOODWILL AND INTANGIBLE ASSETS

The change in the carrying amount of goodwill for the three months ended March 31, 2014 was as follows:

	Technology Segment		Bankruptcy and Settlement Administration Segment		Total
	(in thousands)
Balance as of December 31, 2013	$	189,339	$	214,963	$	404,302
Foreign currency translation	42		—		42
Balance as of March 31, 2014	$	189,381	$	214,963	$	404,344

Identifiable intangible assets as of March 31, 2014 and December 31, 2013 consisted of the following:

	March 31, 2014				December 31, 2013
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
	(in thousands)
Amortizing intangible assets:
Customer relationships	$	124,512	$	92,899	$	124,512	$	90,274
Trade names	6,591		2,686		6,591		2,481
Non-compete agreements	18,947		16,467		18,947		16,178
Total	$	150,050	$	112,052	$	150,050	$	108,933

Customer relationships, trade names, and non-compete agreements carry a weighted average life of approximately seven years, nine years, and five years, respectively.

Amortization expense related to identifiable intangible assets was $3.1 million and $5.0 million for the three months ended March 31, 2014 and 2013, respectively. The following table outlines the estimated future amortization expense related to intangible assets at March 31, 2014:

(in thousands)
Year Ending December 31,
2014 (from April 1, 2014 to December 31, 2014)	$	9,449
2015	9,893
2016	6,232
2017	5,390
2018	3,434
2019 and thereafter	3,600
Total	$	37,998

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NOTE 3: LONG-TERM OBLIGATIONS

The following is a summary of long-term debt and other long-term obligations outstanding (in thousands):

	Final Maturity Date	Weighted- Average Interest Rate		March 31, 2014			December 31, 2013
				(in thousands)
Senior secured term loan	August 2020	4.25	%	$	298,500		$	299,250
Senior revolving loan	August 2018	—		—			—
Capital leases	April 2017	4.0	%	6,535			6,548
Note payable	October 2014	2.1	%	3,067			4,079
Acquisition-related liabilities	April 2014	—		1,125			2,580
Total long-term obligations, including current portion				309,227			312,457
Current maturities of long-term obligations
Senior secured term loan				(3,000		)	(3,000		)
Capital leases				(3,407		)	(3,690		)
Notes payable				(3,067		)	(4,079		)
Acquisition-related liabilities				(1,125		)	(2,580		)
Total current maturities of long-term obligations				(10,599		)	(13,349		)
Total long-term obligations				$	298,628		$	299,108

2013 Secured Credit Agreement

On August 27, 2013, we entered into a $400 million senior secured credit facility consisting of a $100 million senior revolving loan commitment, maturing in August 2018, and a $300 million senior secured term loan, maturing in August 2020 (the “Credit Agreement”).

During the term of the Credit Agreement, we have the right, subject to compliance with the covenants specified in the Credit Agreement, to increase the amounts available under the Credit Agreement up to a maximum of $600 million in one or more tranches including increasing the total capacity under the senior revolving loan commitment from its original $100 million up to a maximum of $200 million. The Credit Agreement is secured by liens on our real property and a significant portion of our personal property.

On March 26, 2014, we entered into the First Amendment to the Credit Agreement (“First Amendment”) which amends our two senior secured term loan interest rate options and reduces the term loan interest rate by a total of 50 basis points as described below.

Prior to the First Amendment, the senior secured term loan bore interest as follows: (1) 2.75% plus prime rate subject to a 2% floor; or (2) 3.75% plus one, two, three or six month LIBOR rate subject to a 1% LIBOR floor. Effective with the date of the First Amendment, the senior secured loan bears interest as follows: (1) 2.50% plus prime rate subject to a 1.75% floor; or (2) 3.50% plus one, two, three or six month LIBOR rate subject to a 0.75% LIBOR floor. As of March 31, 2014, all outstanding borrowings under the term loan were based on LIBOR subject to a 0.75% LIBOR floor and the applicable margin was 3.50% for an aggregate floating rate of 4.25%.

Borrowings under the senior revolving loan bear interest at various rates based on our total net leverage ratio with two rate options as follows: (1) for base rate advances, borrowings bear interest at prime rate plus 200 to 300 basis points; and (2) for LIBOR rate advances, borrowings bear interest at LIBOR rate plus 300 to 400 basis points. As of March 31, 2014, there were no borrowings outstanding under the senior revolving loan and outstanding letters of credit were $1.0 million.

In 2013, we entered into a two-year 3% interest rate cap agreement for a notional amount of $150.0 million equal to the portion of the senior secured term loan being hedged. The interest rate cap agreement settles monthly and expires on August 31, 2015. It bears a strike rate of 3% with an underlying equal to one month USD LIBOR, which is consistent with the variable rate on the Company’s senior secured term loan. As of March 31, 2014, the hedge was determined to be highly effective and is expected to continue to be highly effective in mitigating the risk of increases in the Company’s expected interest expense payments related to its senior secured term loan consistent with LIBOR rising above 3%.

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All changes in the fair value of the interest rate cap were included in accumulated other comprehensive income and represented a de minimis amount as of March 31, 2014. The hedge was determined to be perfectly effective during the period from inception of the cash flow hedge through March 31, 2014 with no ineffectiveness recognized in earnings. The fair value of the interest rate cap as of March 31, 2014 and December 31, 2013 was $9,000 and $27,000, respectively, and was included in “Other noncurrent assets” on the Condensed Consolidated Balance Sheets. We did not utilize any derivative instruments during the period ended March 31, 2013.

In April 2014 we entered into a forward interest rate swap through August 27, 2020 for approximately $73.7 million equal to the portion of the outstanding amortized principal amount of the senior secured term loan being hedged as of the effective date of the forward interest rate swap. The term of the forward interest rate swap is from August 31, 2015 through August 27, 2020. Under the swap we will pay a fixed amount of interest of 2.81% on the notional amount and the swap counterparty will pay a floating amount of interest based on LIBOR with a one-month designated maturity subject to a floor of 0.75% which is consistent with the company’s obligation under the term loan. This cash flow hedge is expected to be highly effective at inception and will be subject to fair value accounting.

We manage exposure to counter-party credit risk related to our derivative positions by entering into contracts with various major financial institutions that can be expected to fully perform under the terms of such instruments. We do not anticipate non-performance by any of the counter—parties. Our exposure to credit risk in the event of non-performance by any of the counter-parties is limited to

those assets that have been recorded, but have not yet been received in cash.

The term loan facility under our Credit Agreement requires scheduled quarterly principal payments of $750,000, and a final installment equal to the remaining principal balance in August 2020. In addition, the Credit Agreement contains certain annual mandatory pre-payment terms based on a percentage of excess cash flow, commencing with measurement for the fiscal year ending December 31, 2014, and initial payment, if any, in fiscal year 2015. Excess cash flow, as defined in the Credit Agreement includes Consolidated EBITDA adjusted for capital expenditures, interest paid, income taxes paid, principal payments, certain acquisition-related obligations and working capital changes. Such annual mandatory prepayments are only required when the net leverage ratio exceeds 2.75 to 1.00.

The Credit Agreement contains a financial covenant related to a net leverage ratio (as defined in the Credit Agreement) which is not permitted to exceed 4.50 to 1.00 as well as other customary covenants related to limitations on (i) creating liens, debt, guarantees or other contingent obligations, (ii) engaging in mergers, acquisitions and consolidations, (iii) paying dividends or other distributions to, and redeeming and repurchasing securities from, equity holders, (iv) prepaying, redeeming or repurchasing subordinated or junior debt, and (v) engaging in certain transactions with affiliates, in each case, subject to customary exceptions. Under our Credit Agreement, our ability to pay dividends and repurchase securities from equity holders is limited by a requirement that such payments are not to exceed, in the aggregate, 50% of net income, as adjusted, on a cumulative basis for all quarterly periods from the closing date and ending prior to the date of payment or repurchase. Adjustments to Consolidated Net Income, as defined in the Credit Agreement include, among other items, the exclusion of extraordinary items, cumulative effect of a change in accounting principle, intangible asset amortization and impairment charges, non-cash compensation expense, cumulative effect of foreign currency translations, and gains or losses from discontinued operations. As of March 31, 2014, we were in compliance with all covenants.

The remaining annual maturities under the senior secured term loan, due August 2020, for the next five fiscal years and thereafter are:

(in thousands)
Year Ending December 31,
2014 (April 1 - December 31)	$	2,250
2015	3,000
2016	3,000
2017	3,000
2018 and Thereafter	287,250
Total	$	298,500

Capital Leases

We lease certain equipment under capital leases that generally require monthly payments with final maturity dates during various periods through 2017. As of March 31, 2014, our capital lease obligations had a weighted-average interest rate of approximately 4.0%.

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Note Payable

During 2011 we entered into a note payable related to a software license agreement that bears interest of approximately 2.1% and is payable quarterly through the fourth quarter of 2014.

Acquisition-related Liabilities

Amounts recorded in connection with acquisition-related liabilities as of March 31, 2014 and December 31, 2013 are as follows:

	March 31, 2014		December 31, 2013
	(in thousands)
De Novo contingent consideration
Current portion	$	1,125	$	2,580
Total De Novo contingent consideration	$	1,125	$	2,580

Jupiter eSources LLC

The undiscounted amount of all potential future payments that could be required under the Jupiter eSources LLC (“Jupiter eSources”) contingent consideration is between $0 and $10.0 million over the remaining measurement period through December 2014. Based on our assessments of projected revenue over the remainder of the measurement period, we determined that it is not likely that any contingent consideration for Jupiter eSources will be realized and as such there was no liability recorded related to this contingent consideration as of March 31, 2014 or December 31, 2013.

De Novo Legal LLC

In December 2011, the Company acquired De Novo Legal LLC and its affiliated companies (“De Novo Legal”). In connection with the acquisition, certain contingent consideration was payable to the De Novo sellers relative to the January 1, 2013 to December 31, 2013 measurement period (the “Earn-out period”). Therefore, in the first quarter of 2014, we provided an earn-out statement and paid the sellers $3.5 million as a result of the Company’s calculation of the performance measure for the earn-out period. The sellers disputed the Company’s calculation of the earn-out amount and alleged that the performance measure was higher, thereby triggering the next tier of contingent consideration. The Company and the sellers participated in the agreed dispute resolution process as specified under the acquisition agreement and in April 2014 agreed to settle this matter for a cash payment to the sellers of $1.5 million which was paid to the sellers in April 2014. As a result, we recorded a total adjustment of $1.5 million to the contingent consideration obligation as of March 31, 2014 of which $1.1 million is included in “Current maturities of long-term obligations” related to non-employee sellers and $0.4 million is included in “Other accrued expense” related to sellers who are Epiq employees, on the accompanying Condensed Consolidated Balance Sheets as of March 31, 2014. There are no further payments remaining under the contingent consideration obligation with respect to De Novo Legal.

NOTE 4: NET INCOME PER SHARE

Basic net income per share is computed on the basis of weighted average outstanding common shares. We have determined that certain nonvested share awards (also referred to as restricted stock awards) issued by the Company are participating securities because they have non-forfeitable rights to dividends. Accordingly, basic net income per share is calculated under the two-class method calculation.

Diluted net income per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect, if any, of outstanding stock options. The numerator of the diluted net income per share calculation is decreased by the allocation of net income and dividends declared to nonvested shares, if the impact is dilutive.

In determining diluted earnings per share, we use the more dilutive earnings per share result between the two-class method calculation and the treasury stock method calculation applied to our outstanding nonvested share awards.

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The computation of basic and diluted net income per share for the three months ended March 31, 2014 and 2013 is as follows:

	Three Months Ended March 31, 2014							Three Months Ended March 31, 2013
	Net Loss (Numerator)			Weighted Average Common Shares Outstanding (Denominator)	Per Share Amount			Net Income (Numerator)			Weighted Average Common Shares Outstanding (Denominator)	Per Share Amount
	(in thousands, except per share data)

Net income (loss)	$	(2,298	)					$	3,937
Less: amounts allocated to nonvested shares	—							(39		)

Basic net income (loss) available to common stockholders	(2,298		)	34,862	$	(0.07	)	3,898			35,600	$	0.11

Effect of dilutive securities:
Stock options	—			—				—			947
Add back: amounts allocated to nonvested shares	—			—				39			—
Less: amounts re-allocated to nonvested shares	—			—				(39		)	—
Diluted net income (loss) available to common stockholders	$	(2,298	)	34,862	$	(0.07	)	$	3,898		36,547	$	0.11

Due to the net loss incurred for the three months ended March 31, 2014, approximately 553,000 shares related to outstanding options or nonvested shares were not included in the diluted earnings per share calculation because they would be anti-dilutive. For the three months ended March 31, 2013, weighted-average outstanding stock options totaling approximately 2.6 million were anti-dilutive and therefore not included in the computation of diluted net income per share.

NOTE 5: SHARE-BASED COMPENSATION

The fair value of the share-based awards is measured at grant date and the resulting compensation expense is recognized on a straight-line basis over the requisite service period. The following table presents share-based compensation expense, which is a non-cash charge, included in the below noted captions within the Condensed Consolidated Statements of Income:

	Three Months Ended March 31,
	2014			2013

Direct cost of services	$	19		$	19
Selling, general and administrative	3,520			1,520
Share-based compensation expense	3,539			1,539
Income tax benefit	(1,541		)	(654		)
Total share-based compensation expense, net of tax	$	1,998		$	885

We grant stock options, stock appreciation rights, and restricted stock awards under our 2004 Equity Incentive Plan, as amended (the “2004 Plan”), which allows for the issuance of up to 7,500,000 shares. We settle stock option exercises and the vesting of restricted stock awards with newly issued authorized shares or the reissuance of treasury stock. Awards granted under the 2004 Plan that expire, terminate or are forfeited are then available for reissuance as future awards. At March 31, 2014, there were approximately 659,000 shares available for future grants under the 2004 Plan, not considering the estimated number of shares reserved for the executive performance-based annual incentive compensation award as discussed below.

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During the three months ended March 31, 2014, we granted 756,799 restricted stock awards at a weighted-average grant date price of $14.94 per share of which 450,000 shares granted will vest upon certification by the compensation committee of the Company’s board of directors (the “Board”) of the achievement of certain company financial performance criteria for the calendar year ending December 31, 2014 (the “2014 Performance-Based Share Award). During the three months ended March 31, 2014, 100,000 shares of the 2014 Performance-Based Share Awards were forfeited by a former executive in conjunction with that individual’s resignation from the Company. The Company did not recognize any expense during the quarter for these forfeited awards. As of March 31, 2014, we have assessed the likelihood that the performance condition related to the remaining 350,000 shares of the 2014 Performance-Based Share Award will be met and accordingly have recorded the related expense based on the estimated outcome.

Also granted during the first quarter of 2014 were 62,069 shares which vested in April 2014 upon the achievement of financial performance criteria. An additional 219,730 shares were granted related to 2013 financial performance criteria, which vested upon issuance and the related expense was recognized in the Consolidated Statements of Income for the year ended December 31, 2013. The remaining 25,000 restricted stock awards will vest one year from the grant date.

Included in share-based compensation expense for the three months ended March 31, 2014 is $0.6 million of expense recognized with respect to executive performance-based annual incentive compensation awards which, based on our March 31, 2014 share price is equal to approximately 171,000 shares for the annual award. The accrual is recorded in “Accrued compensation” on the accompanying Condensed Consolidated Balance Sheets as of March 31, 2014. As of March 31, 2014, we have assessed the likelihood that the performance condition related to this award will be met and have accrued the related expense based on the estimated outcome.

No options were granted during the three months ended March 31, 2014. As of March 31, 2014 there was $6.6 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 approximately 19 months.

NOTE 6: SEGMENT REPORTING

We report our financial performance based on the following two reportable segments: the Technology segment and the Bankruptcy and Settlement Administration segment.

Our Technology segment provides eDiscovery managed services and technology solutions comprised of consulting, collections and forensics, processing, search and review, and document review to companies and law firms. Produced documents are made available primarily through a hosted environment utilizing our proprietary software DocuMatrix®, and third-party software which allows for efficient attorney review and data requests. Our Bankruptcy and Settlement Administration segment provides managed services and technology solutions that address the needs of our customers with respect to litigation, claims and project administration, compliance matters, controlled disbursements, corporate restructuring, bankruptcy and class action proceedings.

The segment performance measure is based on earnings before interest, taxes, depreciation and amortization, other operating expense, and share-based compensation expense. In management’s evaluation of performance, certain costs, such as compensation for administrative staff and executive management, are not allocated by segment and, accordingly, the following reporting segment results do not include such unallocated costs.

Assets reported within a segment are those assets that can be identified to a segment and primarily consist of trade receivables, property, equipment and leasehold improvements, software, identifiable intangible assets and goodwill. Cash, certain tax-related assets, and certain prepaid assets and other assets are not allocated to our segments. Although we can and do identify long-lived assets such as property, equipment and leasehold improvements, software, and identifiable intangible assets to reporting segments, we do not allocate the related depreciation and amortization to the segment as management evaluates segment performance exclusive of these non-cash charges.

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Following is a summary of segment information for the three months ended March 31, 2014.

	Three Months Ended March 31, 2014
	Technology		Bankruptcy and Settlement Administration		Eliminations			Total
	(in thousands)
Revenues:
Operating revenues	$	81,169	$	35,051	$	—		$	116,220
Intersegment revenues	180		—		(180		)	—

Operating revenues including intersegment revenue	81,349		35,051		(180		)	116,220
Reimbursable expenses	1,107		5,944		—			7,051
Total revenues	82,456		40,995		(180		)	123,271

Direct costs, selling, general and administrative costs	60,158		29,044		(180		)	89,022
Segment performance measure	$	22,298	$	11,951	$	—		$	34,249

Following is a summary of segment information for the three months ended March 31, 2013.

	Three Months Ended March 31, 2013
	Technology		Bankruptcy and Settlement Administration		Eliminations			Total
	(in thousands)
Revenues:
Operating revenues	$	54,787	$	48,121	$	—		$	102,908
Intersegment revenues	5		—		(5		)	—

Operating revenues including intersegment revenue	54,792		48,121		(5		)	102,908
Reimbursable expenses	287		20,395		—			20,682
Total revenues	55,079		68,516		(5		)	123,590

Direct costs, selling, general and administrative costs	38,687		53,917		(5		)	92,599
Segment performance measure	$	16,392	$	14,599	$	—		$	30,991

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Following is a reconciliation of our segment performance measure to income (loss) before income taxes.

	Three Months Ended March 31,
	2014			2013
	(in thousands)
Segment performance measure	$	34,249		$	30,991
Unallocated corporate expenses	(16,053		)	(10,324		)
Share-based compensation expense	(3,539		)	(1,539		)
Depreciation and software and leasehold amortization	(8,700		)	(6,999		)
Amortization of intangible assets	(3,120		)	(4,966		)
Fair value adjustment to contingent consideration	(1,142		)	—
Other operating expense	(69		)	(47		)
Income from operations	1,626			7,116
Interest expense, net	(4,873		)	(1,835		)
Income (loss) before income taxes	$	(3,247	)	$	5,281

Following are total assets by segment.

	March 31, 2014		December 31, 2013
	(in thousands)
Assets
Technology	$	372,423	$	369,135
Bankruptcy and Settlement Administration	273,499		281,073
Unallocated corporate	77,665		97,573
Total consolidated assets	$	723,587	$	747,781

NOTE 7: FAIR VALUE MEASUREMENTS

Accounting standards establish a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are listed below.

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than those included in Level 1, such as quoted market prices for similar assets and liabilities in active markets or quoted prices for identical assets in inactive markets.

Level 3 — Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing an asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The carrying value and estimated fair value of our cash equivalents, which consist of short-term money market funds, are classified as Level 1. There have been no transfers between Level 1 and Level 2 during the three months ended March 31, 2014. In connection with the acquisitions of De Novo and Jupiter eSources, we established liabilities related to potential contingent consideration that were considered to be Level 3 liabilities. These liabilities were valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value.

For fair value measurements categorized within Level 3 of the fair value hierarchy, our accounting and finance management, who report to executive management, determine our valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of our accounting and finance management and are approved by the principal financial officer. Fair value calculations are generally prepared with the assistance of third-party valuation experts who rely on discussions with management in addition to the use

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of management’s assumptions and estimates as they relate to the assets or liabilities in Level 3. Such assumptions and estimates include such inputs as estimates of future cash flows, projected profit and loss information, discount rates, and assumptions as they relate to future pertinent events. Through regular interaction with the third-party valuation experts, finance and accounting management determine that the valuation techniques used and inputs and outputs of the models reflect the requirements of accounting standards as they relate to fair value measurements. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate. As of March 31, 2014 our assets or liabilities that were measured and recorded at fair value on a recurring basis are as follows:

			Estimated Fair Value Measurements
Items Measured at Fair Value on a Recurring	Carrying		Quoted Prices in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs
Basis	Value		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
March 31, 2014:
Assets:
Interest rate cap	$	9	$	—	$	9	$	—

December 31, 2013:
Assets:
Interest rate cap	$	27	$	—	$	27	$	—

Fair Value of Financial Assets and Liabilities

As of March 31, 2014 and December 31, 2013, the carrying value of our trade accounts receivable, accounts payable, certain other liabilities, deferred acquisition price liabilities and capital leases approximated fair value. The amounts outstanding under our Credit Agreement as of March 31, 2014 and December 31, 2013 approximated fair value due to the borrowing rates currently available to us for debt with similar terms and are classified as Level 2. The fair value of the amount outstanding under our Credit Agreement as of December 31, 2013 of $299.3 million was previously disclosed as $302.3 million.

The estimated fair value of the Company’s interest rate cap was determined via the Black-Scholes option pricing model which utilizes certain observable inputs including the forward and spot curves for the underlying 1 month LIBOR and the estimated volatility for the 1 month LIBOR over the remaining term of the interest rate cap agreement. Based on these characteristics the interest rate cap is classified as a level 2. The fair value of the interest rate cap is subject to material change based upon changes in the forward curve for 1 month LIBOR and the volatility thereof.

NOTE 8: EQUITY

Share Repurchases

On November 6, 2013, our Board approved and authorized the repurchase, on or prior to December 31, 2015, of our outstanding shares of common stock up to an aggregate of $35.0 million (the “2014 Share Repurchase Program”) There were no repurchases of shares under the 2014 Share Repurchase Program during the three months ended March 31, 2014 and no repurchases during the three months ended March 31, 2013 under our prior share repurchase program which expired on December 31, 2013.

We also have a policy that requires shares to be repurchased by us to satisfy employee tax withholding obligations upon the vesting of restricted stock awards or the exercise of stock options. During the three months ended March 31, 2014 and 2013, we repurchased 222,235 shares and 175,295 shares, respectively, for approximately $3.2 million and $2.2 million, respectively, to satisfy employee tax withholding obligations upon the vesting of restricted stock awards.

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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 SEC and in press releases and other public statements by our officers throughout the year, Epiq Systems, Inc. makes or will make statements that plan for or anticipate the future. These forward-looking statements include, but are not limited to any projection or expectation of earnings, revenue or other financial items; the plans, strategies and objectives of management for future operations; factors that may affect our operating results; new products or services; the demand for our products and services; our ability to consummate acquisitions and successfully integrate them into our operations; future capital expenditures; effects of current or future economic conditions or performance; industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These forward-looking statements are based on our current expectations. In this Quarterly Report on Form 10-Q, we make statements that plan for or anticipate the future. Many of these statements are found in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this report.

Forward-looking statements may be identified by words or phrases such as “believe,” “expect,” “anticipate,” “should,” “planned,” “may,” “estimated,” “goal,” “objective,” “seeks,” and “potential” and variations of these words and similar expressions or negatives of these words. Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a “safe harbor” for forward-looking statements. Because forward-looking statements involve future risks and uncertainties, listed below are a variety of factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. These factors include (1) any material changes in our total number of client engagements and the volume associated with each engagement, (2) any material changes in our clients’ deposit portfolio or the services required or selected by our clients in engagements, (3) material changes in the number of bankruptcy filings, class action filings or mass tort actions each year, or changes in government legislation or court rules affecting these filings, (4) overall strength and stability of general economic conditions, both in the United States and in the global markets, (5) failure to keep pace with technological changes and significant changes in the competitive environment, (6) risks associated with the handling of confidential data and compliance with information privacy laws, (7) changes in or the effects of pricing structures and arrangements, (8) risks associated with the integration of acquisitions into our existing business operations, (9) risks associated with indebtedness, (10) risks associated with foreign currency fluctuations, (11) risks associated with developing and providing software and internet-based technology solutions to our clients, (12) risks associated with cyber-attacks, interruptions or delays in services at data centers, (13) risks of errors or failures of software or services, (14) risks associated with our international operations, (15) risks of litigation against us or failure to protect our intellectual property, (16) any material non-cash write-downs based on impairment of our goodwill, and (17) other risks detailed from time to time in our SEC filings, including our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. In addition, there may be other factors not included in our SEC filings that may cause actual results to differ materially from any forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements contained herein to reflect future events or developments, except as required by law.

This discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Overview

Epiq is a leading global provider of integrated technology solutions for the legal profession. We combine proprietary software, deep subject matter expertise, highly responsive customer service delivery and a global infrastructure to assist our customers with the technology requirements for their most important and complex matters. We offer these capabilities across a variety of practice areas including bankruptcy, litigation, class action, antitrust, investigations and regulatory compliance.

Our two reportable segments are our Technology segment and our Bankruptcy and Settlement Administration segment.

Our Technology segment (“Technology”) provides eDiscovery managed services and technology solutions comprised of consulting, collections and forensics, processing, search and review, production of documents and document review services to companies and law firms.

Our Bankruptcy and Settlement Administration segment (“Bankruptcy and Settlement Administration”) provides managed services and technology solutions that address the needs of our customers with respect to litigation, claims and project administration, compliance matters, controlled disbursements, corporate restructuring, bankruptcy and class action proceedings.

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Investing in proprietary software development maximizes our competitiveness in the marketplace and distinguishes us from our competitors. Beyond our proprietary software we also incorporate various licensed third-party software products in our solution set allowing us to expand our solutions.

Because we deliver most of our software in a hosted environment and because of the high volume of client data that we manage, network infrastructure is an essential component of our technology strategy. A single large client engagement may entail over 100 million documents or 100 terabytes of information and may include complex structured data (i.e., databases) and unstructured data (e.g., email archives). We operate eDiscovery data centers in the United States, Canada, United Kingdom, Hong Kong, Shanghai and Japan that provide reliable, secure access to our software environments and to customer databases. Information security is of paramount importance in any managed technology business, and Epiq incorporates best practices designed to protect sensitive customer data.

Our software and IT capabilities include significant in-house fulfillment capabilities. Our office locations in New York, Kansas City and Portland have internal abilities for high-speed printing and mailing, call center operations, and disbursement and tax records preparation. The combination of software, IT and fulfillment resources enables Epiq to act as a single-source solution for even the largest, most complex matters in the markets where we compete.

We work in niche, specialty areas which require deep subject matter expertise — such as litigation, bankruptcy, M&A, mass tort, investigations and class action —which have distinctive practices and requirements. Technology alone is insufficient to bring about a successful outcome on a sophisticated client matter; it is often the application of the technology and the expertise of our staff that create the most value for our client. We have a worldwide team of executives, client services specialists and technical consultants on whom clients rely for expert advice — whether delivered at the client’s site or from one of our office locations. Our team includes former practicing litigators, bankruptcy attorneys, plaintiff’s counsel, defense counsel, eDiscovery counsel and other professionals who are leaders in their areas of expertise. While we do not offer clients legal advice (because we are not a law firm), we draw heavily from our subject matter expertise in the legal profession to assist clients in achieving the best outcome on each project on which we are retained.

Our clients include top tier law firms, the in-house legal departments of major corporations, trustees, specialty fiduciaries and other professionals. Among corporate clients, we have substantial relationships with large, multinational companies in a variety of industries, including financial services, pharmaceuticals, insurance, technology and others. Among law firms, we work extensively with Am Law 100 firms in the U.S., Magic Circle firms in the U.K. and leading boutique or specialty law firms in all geographies. The global nature of our business continues to grow. With full-service offices (i.e., locations having a data center, on-site technical staff, on-site project management capabilities and local consulting capacities) around the world, Epiq offers a geographic reach to support client relationships wherever we are needed.

Our financial results are primarily driven by the following facts, among others:

· the number, size and complexity of customer engagements attained;

· the number of documents or volume of data we processed, hosted or reviewed;

· the number of hours professional services are provided;

· the deposit-based fees we earn are dependent upon the balance of assets placed with our designated financial institutions by bankruptcy trustees; and

· the geographic locations of our clients or locations where services are rendered.

Our financial results for first quarter 2014 reflect the impact of strategic investments directed at the global expansion of the eDiscovery franchise as well as a continued higher mix of eDiscovery document review services compared to the prior year period which have a lower margin than the company’s overall margin which impacted income from operations.

During 2013 and the first three months of 2014, we are continuing to expand our eDiscovery services internationally. We added eDiscovery offices and data centers in Tokyo, Shanghai and Toronto in 2013. Document review services and international growth were the primary contributors to Technology segment operating revenue growth in the first quarter of 2014 as compared to the same period in 2013, with growth occurring in both electronically stored information (“ESI”) and document review services. Global ESI solutions continued as the primary service offering, representing approximately 55% of the total 2014 first quarter Technology segment operating revenue, while global document review services increased during the year to now represent approximately 45% of the total 2014 first quarter Technology segment operating revenue.

Lower bankruptcy filings due to the current cyclical downturn in bankruptcy cases, in general, and lower trustee deposit balances specifically related to our Chapter 7 services, resulted in decreases in operating revenues related to our bankruptcy service

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offerings. Our bankruptcy services continue to maintain market leadership during this period of declining bankruptcy filings. We expect the current cyclical downturn in bankruptcy filings to continue throughout 2014.

Operating revenues related to our settlement administration services for the quarter ended March 31, 2014 decreased as compared to the prior year period due to activity related to a large private anti-trust settlement administration engagement in the prior year period.

Results of Operations for the Three Months Ended March 31, 2014 Compared with the Three Months Ended March 31, 2013

The discussion that follows provides information which we believe is relevant to an understanding of our consolidated results of operations. Also see our discussion of segment results in the “Results of Operations by Segment” section below.

Consolidated Results

	Three Months Ended March 31,						$ Change Increase /
Amounts in thousands	2014			2013			(Decrease)			% Change
Operating revenue	$	116,220		$	102,908		$	13,312		13	%
Reimbursable expenses	7,051			20,682			(13,631		)	-66	%
Total Revenue	123,271			123,590			(319		)	0	%

Direct cost of operating revenue (exclusive of depreciation and amortization shown separately below)	57,635			52,496			5,139			10	%
Reimbursed direct costs	6,803			19,542			(12,739		)	-65	%
Selling, general and administrative	44,176			32,424			11,752			36	%
Depreciation and software and leasehold amortization	8,700			6,999			1,701			24	%
Amortization of identifiable intangible assets	3,120			4,966			(1,846		)	-37	%
Fair value adjustment to contingent consideration	1,142			—			1,142			n/m
Other operating expense	69			47			22			47	%
Total Operating Expense	121,645			116,474			5,171			4	%

Income From Operations	1,626			7,116			(5,490		)	-77	%

Interest Expense (Income)
Interest expense	4,877			1,839			3,038			165	%
Interest income	(4		)	(4		)	—			n/m
Net Interest Expense	4,873			1,835			3,038			166	%

Income (Loss) Before Income Taxes	(3,247		)	5,281			(8,528		)	-161	%

Provision (Benefit) for Income Taxes	(949		)	1,344			(2,293		)	-171	%

Net Income (Loss)	$	(2,298	)	$	3,937		$	(6,235	)	-158	%

n/m — not meaningful

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Revenue

The increase in operating revenue for the three months ended March 31, 2014 as compared to the same period in the prior year was driven by a $26.4 million increase in the Technology segment, offset by a $13.1 million decrease in operating revenues for the Bankruptcy and Settlement Administration segment.

Total revenue includes reimbursed expenses, such as postage related to notification services. We reflect these reimbursed expenses as a separate line item on our accompanying Condensed Consolidated Statements of Income. Although reimbursable expenses may fluctuate significantly from quarter to quarter, these fluctuations have a minimal effect on our quarter to quarter income from operations as we realize little or no margin from this revenue.

Operating Expense

The $5.1 million increase in direct cost of operating revenue, exclusive of depreciation and amortization, was primarily the result of the increase in and the mix of operating revenue and includes a $15.5 million increase in direct compensation-related costs primarily in support of the continued revenue growth in our Technology segment. This increase was partially offset by an $8.8 million decrease in costs for legal notification and advertising services as compared to the three months ended March 31, 2013, which included costs related to a large private anti-trust settlement engagement.

The decline in reimbursed direct costs for the three months ended March 31, 2014 as compared to the same period of 2013 corresponds to the decline in revenue from reimbursed expenses.

Selling, general and administrative expenses increased $11.8 million and included an increase of $6.1 million in compensation-related expense which includes $2.6 million in post-employment benefits related to an executive resignation agreement and a $2.0 million increase in share-based compensation expense. The increase in selling, general and administrative expenses also includes an increase of $1.5 million in outside professional services, an increase of $2.1 million in office-related expenses such as lease expense, maintenance, utilities and supplies and an increase of $0.7 million in travel related expense.

Depreciation and software and leasehold amortization costs increased $1.7 million as a result of increased depreciation on equipment and software related to segment investments.

Amortization of intangible assets decreased $1.8 million related to certain of our intangible assets being amortized on an accelerated amortization method which are at lower amortization stages of the estimated useful lives of the intangible assets.

Operating expenses for the three months ended March 31, 2014, included a fair value adjustment to contingent consideration of $1.1 million related to our acquisition of De Novo in 2011. No fair value adjustment to contingent consideration is included in operating expenses for the three months ended March 31, 2013. See Note 3 to the Condensed Consolidated Financial Statements for further discussion of the contingent consideration.

Interest Expense, Net

The increase in net interest expense was primarily due an increased principal amount of debt outstanding during the first quarter 2014 as compared to the prior year period and also due to the higher rate of interest for our term loan under the Credit Agreement as compared to the interest rate under the prior credit agreement. Interest expense for the three months ended March 31, 2014 also includes $0.8 million related to fees incurred in conjunction with the amendment to our Credit Agreement. See Note 3 to the Condensed Consolidated Financial Statements for further discussion of the Credit Agreement.

Income Taxes

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these jurisdictions increased during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.

Results of Operations by Segment

The following segment discussion is presented on a basis consistent with our segment disclosure contained in Note 6 of our Notes to Condensed Consolidated Financial Statements. The table below presents operating revenue, direct and administrative costs (including reimbursed costs) and segment performance measure for each of our reportable segments and a reconciliation of the segment performance measure to consolidated income before income taxes.

	Three Months Ended March 31,						$ Change Increase /			%
Amounts in thousands	2014			2013			(Decrease)			Change
Operating revenue
Technology	$	81,169		$	54,787		$	26,382		48	%
Bankruptcy and Settlement Administration	35,051			48,121			(13,070		)	-27	%
Total operating revenue	$	116,220		$	102,908		$	13,312		13	%

Reimbursable expenses
Technology	$	1,107		$	287		$	820		286	%
Bankruptcy and Settlement Administration	5,944			20,395			(14,451		)	-71	%
Total reimbursable expenses	$	7,051		$	20,682		$	(13,631	)	-66	%

Direct costs, selling, general and administrative costs
Technology	$	60,158		$	38,687		$	21,471		55	%
Bankruptcy and Settlement Administration	29,044			53,917			(24,873		)	-46	%
Intercompany eliminations	(180		)	(5		)	(175		)	n/m
Total direct costs, selling, general and administrative costs	$	89,022		$	92,599		$	(3,577	)	-4	%

Segment performance measure
Technology	$	22,298		$	16,392		$	5,906		36	%
Bankruptcy and Settlement Administration	11,951			14,599			(2,648		)	-18	%
Total segment performance measure	$	34,249		$	30,991		$	3,258		11	%

Segment performance measure	$	34,249		$	30,991		$	3,258		11	%
Unallocated corporate expenses	(16,053		)	(10,324		)	(5,729		)	55	%
Share-based compensation expense	(3,539		)	(1,539		)	(2,000		)	130	%
Depreciation and software and leasehold amortization	(8,700		)	(6,999		)	(1,701		)	24	%
Amortization of intangible assets	(3,120		)	(4,966		)	1,846			-37	%
Fair value adjustment to contingent consideration	(1,142		)	—			(1,142		)	n/m
Other operating expense	(69		)	(47		)	(22		)	47	%
Income from operations	1,626			7,116			(5,490		)	-77	%
Interest expense, net	(4,873		)	(1,835		)	(3,038		)	166	%
Income (loss) before income taxes	$	(3,247	)	$	5,281		$	(8,528	)	-161	%

n/m — not meaningful

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Technology Segment

Operating revenue increased $26.4 million during the three months ended March 31, 2014 as compared to the prior year period primarily as a result of an increase in eDiscovery engagements as compared to the first quarter of 2013, and was solely related to organic growth. We expect to continue to grow our global leadership position throughout the remainder of 2014. Our eDiscovery businesses in Europe and Asia showed continued combined growth with a 40% increase in operating revenue over the prior year first quarter.

Direct, selling, general and administrative costs increased primarily in support of revenue growth and included a $15.0 million increase in direct compensation-related expenses primarily in support of our eDiscovery document review services, a $2.2 million increase in information technology-related costs, a $0.9 million increase in other production costs and a $1.5 million increase in office related expenses related to the expansion of our document review centers capacity.

The Technology segment’s financial results for the three months ended March 31, 2014 reflect the impact of strategic investments primarily in support of global expansion and revenue growth of the eDiscovery franchise as well as a higher mix of eDiscovery document review services compared to the prior year which have lower operating margins than the Company’s overall margin.

Bankruptcy and Settlement Administration Segment

Operating revenue decreased $13.1 million as compared to the prior year, primarily due to a large private anti-trust engagement in the prior year period which was principally completed in the first quarter of 2013 that increased legal notification and advertising services for that period. Also impacting the first quarter of 2014 was the continued current cyclical downturn in bankruptcy filings. We expect the current cyclical downturn in bankruptcy filings to continue through the remainder of 2014. Settlement administration continues to be dependent on the timing and size of contracts awarded.

Direct, selling, general and administrative costs decreased $24.9 million primarily related to a $11.0 million decrease in direct cost of services and a $13.4 million decrease in reimbursed direct costs both which are related to the large private anti-trust engagement which was active during the first quarter of 2013.

Liquidity and Capital Resources

Cash flows from operating activities

During the three months ended March 31, 2014, our operating activities used net cash of $0.8 million. Included in net cash used by operating activities was a net loss of $2.3 million which included $17.5 million of non-cash expenses for a total contribution to cash flows of $15.2 million related to net income adjusted to exclude non-cash expenses. Cash used by operating activities also included a $16.0 million net use of cash resulting from changes in operating assets and liabilities, primarily from an $11.2 million decrease in accounts payable and other liabilities, a decrease in income taxes payable of $3.8 million and an increase of $1.8 million in prepaid expenses and other assets. These uses of cash were partially offset by a $3.1 million decrease in trade accounts receivable. Trade accounts receivable will fluctuate from period to period depending on the period to period change in revenue and the timing of revenue and collections. Accounts payable will fluctuate from period to period depending on the timing of purchases and payments.

During the three months ended March 31, 2013, our operating activities used net cash of $5.3 million. Included in net cash used by operating activities was net income of $3.9 million including non-cash expenses of $14.8 million, for a total contribution to cash flows of $18.7 million related to net income adjusted to exclude non-cash expenses. Cash used by operating activities also included a $24.0 million net use of cash resulting from changes in operating assets and liabilities, primarily from a $15.1 million increase in trade accounts receivable due to revenue growth and also included the use of cash for customer deposits primarily related to the fourth quarter 2012 receipt of a $14.3 million customer deposit for a large settlement administration engagement and the first quarter 2013 expenditures for that matter. These uses of cash were offset by a $6.4 million increase in accounts payable and other liabilities.

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Cash flows from investing activities

During the three months ended March 31, 2014 and 2013, we used cash of $9.5 million and $3.7 million, respectively, for the purchase of property and equipment, including computer hardware and purchased software licenses primarily for our Technology segment and purchased computer hardware primarily for our network infrastructure. Also included in this amount for the three months ended March 31, 2013 was approximately $1.5 million related to the expansion of our Kansas City corporate headquarters which was substantially completed in the third quarter of 2013. Software development is essential to our continued growth, and, during the three months ended March 31, 2014 and 2013, we used cash of $1.4 million and $1.5 million, respectively, to fund internal costs related to the development of software.

Cash flows from financing activities

During the three months ended March 31, 2014, we repaid $0.8 million under the Credit Agreement along with $1.3 million of principal payments related to other debt. During the three months ended March 31, 2014 we paid $3.5 million of deferred acquisition consideration related to the December 28, 2011 acquisition of De Novo Legal LLC. In addition, we paid $3.2 million in dividends and used $3.2 million to repurchase shares required to be repurchased by the company to satisfy employee tax withholding obligations upon the vesting of restricted stock awards and the net share settlement of certain stock options exercises. Cash proceeds from the exercise of stock options were $3.1 million. See Notes 3 and 8 of our Notes to Condensed Consolidated Financial Statements for further information.

During the three months ended March 31, 2013, we borrowed $34.0 million and repaid $19.0 million under our senior revolving loan as part of our former credit facility for a net increase of $15.0 million, along with $0.4 million of principal payments related to other debt. In addition, we paid $3.2 million in dividends and used $2.2 million to repurchase shares required to be repurchased by the company to satisfy employee tax withholding obligations upon the vesting of restricted stock awards and the net share settlement of certain stock options exercises.

We believe that funds generated from working capital, plus our existing cash balances and amounts available under our senior Credit Agreement, 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 obligations, capital leases, dividend payments, common stock repurchases, interest payments due on our outstanding borrowings, and other contractual obligations.

Foreign Cash

As of March 31, 2014 and December 31, 2013, our foreign subsidiaries had $7.0 million and $9.0 million, respectively, in cash located in financial institutions located outside of the United States. We consider the earnings of our non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs. Should we decide to repatriate the foreign earnings, we would have to adjust the income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States.

Off-balance Sheet Arrangements

We do not utilize off-balance sheet arrangements in our operations; however, we enter into operating leases in the ordinary course of business. Our operating lease obligations are disclosed below under “Contractual Obligations”.

Contractual Obligations

There have been no significant developments outside the ordinary course of business with respect to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC on February 26, 2014 (the “2013 Form 10-K”).

Critical Accounting Policies

In our 2013 Form 10-K, 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. There have been no updates to the critical accounting policies contained in our 2013 Form 10-K.

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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 Credit Agreement, fluctuations in short-term interest rates on a portion of our bankruptcy trustee revenue and foreign exchange rates giving rise to translation.

Interest Rate Risk

The senior secured term loan under our Credit Agreement bears interest as follows: (1) 2.50% plus prime rate subject to a 1.75% floor; or (2) 3.50% plus one, two, three or six month LIBOR rate subject to a 0.75% LIBOR floor. As of March 31, 2014, all outstanding borrowings under the term loan were based on LIBOR subject to a 0.75% LIBOR floor and the applicable margin was 3.50%.

In 2013 we entered into a two-year 3% interest rate cap agreement for a notional amount of $150.0 million, equal to the portion of the senior secured term loan being hedged. As of March 31, 2014, the hedge was determined to be highly effective and is expected to continue to be highly effective in mitigating the risks of rising interest rates.

In April 2014 we entered into a forward interest rate swap through August 27, 2020 for approximately $73.7 million equal to the portion of the outstanding amortized principal amount of the senior secured term loan being hedged as of the effective date of the forward swap. The term of the forward interest rate swap is from August 31, 2015 through August 27, 2020. Under the swap we will pay a fixed amount of interest of 2.81% on the notional amount and the swap counterparty will pay a floating amount of interest based on LIBOR with a one-month designated maturity subject to a floor of 0.75% which is consistent with the company’s obligation under the term loan. This cash flow hedge is expected to be highly effective at inception and will be subject to fair value accounting.

We earn deposit-based and service fees in our Chapter 7 bankruptcy business. Deposit-based fees are earned on a percentage of Chapter 7 assets placed on deposit with a designated financial institution by our trustee clients. The fees we earn are based on assets placed on deposit by our trustee clients and may vary based on fluctuations in short-term interest rates. Based on sensitivity analysis we performed for the three months ended March 31, 2014, a hypothetical 1% movement in interest rates would not have had a material effect on our consolidated financial position, results from operations or cash flows.

Foreign Currency Risk

We have operations outside of the United States, therefore, a portion of our revenues and expenses are incurred in a currency other than United States Dollars. We do not utilize hedge instruments to manage the exposures associated with fluctuating currency exchange rates. Our operating results are exposed to changes in exchange rates between the United States Dollar and the functional currency of the countries where we have operations. When the United States Dollar weakens against foreign currencies, the United States Dollar value of revenues and expenses denominated in foreign currencies increases. When the United States Dollar strengthens, the opposite situation occurs.

We performed a sensitivity analysis assuming a hypothetical 1% increase in foreign exchange rates applied to our 2014 results of operations for the three months ended March 31, 2014 and the analysis indicated that such a movement would not have had a material effect on our total revenues, operating income or net income.

Item 4. Controls and Procedures

(a) Controls and Procedures

An evaluation was carried out by our Chief Executive Officer (the “CEO”) and our Senior Vice President of Finance (the “PFO” who took over the role of principal financial officer following the resignation of our Chief Financial Officer during the first quarter of 2014) of the effectiveness of the design and operations of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) or 15d-15(e). Based on this evaluation, our management, including the CEO and PFO, 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.

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(b) Change in Internal Controls over Financial Reporting

There have been no changes in our internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) or 15d-15(f), during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION.

Item 1. Legal Proceedings

We are at times involved in litigation and other legal claims in the ordinary course of business. When appropriate in management’s estimation, we may record reserves in our financial statements for pending litigation and other claims. Although it is not possible to predict with certainty the outcome of litigation, we do not believe that any of the current pending legal proceedings to which we are a party will have a material impact on our results of operations or financial condition.

Item 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, 2013 that was filed with the SEC on February 26, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On November 6, 2013, our Board approved and authorized the repurchase, on or prior to December 31, 2015, of our outstanding shares of common stock up to an aggregate of $35.0 million (the “2014 Share Repurchase Program”). The 2014 Share Repurchase Program became effective on January 1, 2014. There were no repurchases of shares under the 2014 Share Repurchase Program during the three months ended March 31, 2014.

We also have a policy that requires shares to be repurchased by us to satisfy employee tax withholding obligations upon the vesting of restricted stock awards or the exercise of stock options. During the three months ended March 31, 2014, we repurchased 222,235 shares for approximately $3.2 million to satisfy employee tax withholding obligations upon the vesting of restricted stock awards.

The following table presents the total number of shares repurchased during each month of the quarter ended March 31, 2014, and the average price paid per share, and the approximate dollar value of shares that may yet be repurchased under the 2014 Program.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased to Satisfy Employee Tax Withholding Obligations	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs

January 1 — January 31	74,981	$	15.02	74,981	—	$	35,000,000
February 1 — February 28	147,254	$	14.18	147,254	—	$	35,000,000
March 1 — March 31	—	—		—	—	$	35,000,000
Total Activity for the Quarter Ended March 31, 2014	222,235	$	14.46	222,235	—

	Three Months Ended March 31,
	2014		2013

Cash paid for:
Interest	$	3,669	$	1,627
Income taxes, net	3,322		1,924
Non-cash investing and financing transactions:
Property, equipment, and leasehold improvements accrued in accounts payable and other long-term liabilities	6,805		6,949
Dividends declared but not yet paid	3,214		3,251
Capitalized lease obligations incurred	413		306

		Epiq Systems, Inc.

Date:	April 29, 2014	/s/ Tom W. Olofson
		Tom W. Olofson
		Chairman of the Board
		Chief Executive Officer


Date:	April 29, 2014	/s/ Paul F. Liljegren
		Paul F. Liljegren
		Senior Vice President, Finance
		Principal Financial Officer

		Page

	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Statements of Income — Three Months Ended March 31, 2014 and 2013 (Unaudited)	2

	Condensed Consolidated Statements of Comprehensive Income — Three Months Ended March 31, 2014 and 2013 (Unaudited)	3

	Condensed Consolidated Balance Sheets — March 31, 2014 and December 31, 2013 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2014 and 2013 (Unaudited)	5

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27

Item 4.	Controls and Procedures	27

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 6.	Exhibits	29

Signatures		30