UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-22081
EPIQ SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Missouri |
|
48-1056429 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
501 Kansas Avenue, Kansas City, Kansas |
|
66105-1300 |
(Address of principal executive offices) |
|
(Zip Code) |
913-621-9500
(Registrants 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 issuers classes of common stock, as of the latest practicable date.
Class |
|
Outstanding at July 18, 2014 |
Common Stock, $0.01 par value per share |
|
35,999,992 shares |
Explanatory Note:
The purpose of this Amendment No. 1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, of Epiq Systems, Inc. that was filed with the Securities and Exchange Commission on August 1, 2014 (the Form 10-Q) is to provide certain exhibits under Item 6, which were inadvertently omitted from the original filing.
Except as set forth above, no other changes have been made to the Form 10-Q. This Amendment No. 1 speaks as of the original filing date of the Form 10-Q and does not modify or update any disclosures in the Form 10-Q and does not reflect events that may have occurred subsequent to the original filing date.
FORM 10-Q
QUARTER ENDED JUNE 30, 2014
CONTENTS
PART I - FINANCIAL INFORMATION
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
REVENUE: |
|
|
|
|
|
|
|
|
| ||||
Operating revenue |
|
$ |
115,451 |
|
$ |
104,976 |
|
$ |
231,671 |
|
$ |
207,884 |
|
Reimbursable expenses |
|
9,605 |
|
8,396 |
|
16,656 |
|
29,078 |
| ||||
Total Revenue |
|
125,056 |
|
113,372 |
|
248,327 |
|
236,962 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
OPERATING EXPENSE: |
|
|
|
|
|
|
|
|
| ||||
Direct cost of operating revenue (exclusive of depreciation and amortization shown separately below) |
|
57,533 |
|
49,528 |
|
115,168 |
|
102,024 |
| ||||
Reimbursed direct costs |
|
9,434 |
|
8,072 |
|
16,237 |
|
27,614 |
| ||||
Selling, general and administrative expense |
|
46,374 |
|
36,931 |
|
90,538 |
|
69,337 |
| ||||
Depreciation and software and leasehold amortization |
|
9,255 |
|
7,391 |
|
17,955 |
|
14,390 |
| ||||
Amortization of identifiable intangible assets |
|
3,166 |
|
4,736 |
|
6,286 |
|
9,702 |
| ||||
Fair value adjustment to contingent consideration |
|
|
|
|
|
1,142 |
|
|
| ||||
Loss on disposition of property and equipment |
|
339 |
|
4 |
|
351 |
|
22 |
| ||||
Other operating expense |
|
157 |
|
49 |
|
226 |
|
96 |
| ||||
Total Operating Expense |
|
126,258 |
|
106,711 |
|
247,903 |
|
223,185 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
INCOME (LOSS) FROM OPERATIONS |
|
(1,202 |
) |
6,661 |
|
424 |
|
13,777 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
INTEREST EXPENSE (INCOME): |
|
|
|
|
|
|
|
|
| ||||
Interest expense |
|
3,852 |
|
2,004 |
|
8,729 |
|
3,843 |
| ||||
Interest income |
|
(9 |
) |
(8 |
) |
(13 |
) |
(12 |
) | ||||
Net Interest Expense |
|
3,843 |
|
1,996 |
|
8,716 |
|
3,831 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
INCOME (LOSS) BEFORE INCOME TAXES |
|
(5,045 |
) |
4,665 |
|
(8,292 |
) |
9,946 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
PROVISION FOR (BENEFIT FROM) INCOME TAXES |
|
(1,626 |
) |
1,823 |
|
(2,575 |
) |
3,167 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
NET INCOME (LOSS) |
|
$ |
(3,419 |
) |
$ |
2,842 |
|
$ |
(5,717 |
) |
$ |
6,779 |
|
|
|
|
|
|
|
|
|
|
| ||||
NET INCOME (LOSS) PER SHARE INFORMATION: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
(0.10 |
) |
$ |
0.08 |
|
$ |
(0.16 |
) |
$ |
0.18 |
|
Diluted |
|
$ |
(0.10 |
) |
$ |
0.08 |
|
$ |
(0.16 |
) |
$ |
0.18 |
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
35,365 |
|
35,933 |
|
35,115 |
|
35,765 |
| ||||
Diluted |
|
35,365 |
|
36,859 |
|
35,115 |
|
36,702 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash dividends declared per common share |
|
$ |
0.09 |
|
$ |
0.09 |
|
$ |
0.18 |
|
$ |
0.18 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
NET INCOME (LOSS) |
|
$ |
(3,419 |
) |
$ |
2,842 |
|
$ |
(5,717 |
) |
$ |
6,779 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustment |
|
768 |
|
(32 |
) |
1,055 |
|
(1,025 |
) | ||||
Unrealized losses on derivatives, net of tax benefit of $603, $0, $603, and $0, respectively) |
|
(792 |
) |
|
|
(810 |
) |
|
| ||||
COMPREHENSIVE INCOME (LOSS) |
|
$ |
(3,443 |
) |
$ |
2,810 |
|
$ |
(5,472 |
) |
$ |
5,754 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
|
|
June 30, 2014 |
|
December 31, 2013 |
| ||
ASSETS |
|
|
|
|
| ||
CURRENT ASSETS: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
24,990 |
|
$ |
40,336 |
|
Trade accounts receivable, less allowance for doubtful accounts of |
|
138,117 |
|
145,134 |
| ||
Prepaid expenses |
|
11,065 |
|
10,617 |
| ||
Deferred taxes |
|
8,155 |
|
3,824 |
| ||
Other current assets |
|
365 |
|
58 |
| ||
Total Current Assets |
|
182,692 |
|
199,969 |
| ||
|
|
|
|
|
| ||
LONG-TERM ASSETS: |
|
|
|
|
| ||
Property and equipment, net |
|
72,225 |
|
72,118 |
| ||
Internally developed software costs, net |
|
14,938 |
|
16,201 |
| ||
Goodwill |
|
404,611 |
|
404,302 |
| ||
Other intangibles, net of accumulated amortization of $115,219 and $108,933, respectively |
|
35,973 |
|
41,117 |
| ||
Other long-term assets |
|
13,347 |
|
14,074 |
| ||
Total Long-term Assets |
|
541,094 |
|
547,812 |
| ||
Total Assets |
|
$ |
723,786 |
|
$ |
747,781 |
|
|
|
|
|
|
| ||
LIABILITIES AND EQUITY |
|
|
|
|
| ||
CURRENT LIABILITIES: |
|
|
|
|
| ||
Current maturities of long-term obligations |
|
$ |
8,133 |
|
$ |
13,349 |
|
Accounts payable |
|
17,619 |
|
30,419 |
| ||
Accrued compensation |
|
16,954 |
|
17,932 |
| ||
Customer deposits |
|
3,609 |
|
2,717 |
| ||
Deferred revenue |
|
1,351 |
|
4,020 |
| ||
Dividends payable |
|
3,239 |
|
3,142 |
| ||
Other accrued liabilities |
|
7,952 |
|
6,985 |
| ||
Total Current Liabilities |
|
58,857 |
|
78,564 |
| ||
|
|
|
|
|
| ||
LONG-TERM LIABILITIES: |
|
|
|
|
| ||
Deferred income taxes |
|
32,328 |
|
35,558 |
| ||
Other long-term liabilities |
|
10,809 |
|
8,537 |
| ||
Long-term obligations, excluding current maturities |
|
298,869 |
|
299,108 |
| ||
Total Long-term Liabilities |
|
342,006 |
|
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 June 30, 2014 40,830,651 and 35,899,726 shares, respectively |
|
|
|
|
| ||
Issued and outstanding at December 31, 2013 40,298,852 and 34,991,629 shares, respectively |
|
408 |
|
403 |
| ||
Additional paid-in capital |
|
295,756 |
|
291,414 |
| ||
Accumulated other comprehensive loss |
|
(296 |
) |
(541 |
) | ||
Retained earnings |
|
90,607 |
|
102,754 |
| ||
Treasury stock, at cost 4,930,925 and 5,307,223 shares, respectively |
|
(63,552 |
) |
(68,016 |
) | ||
Total Equity |
|
322,923 |
|
326,014 |
| ||
Total Liabilities and Equity |
|
$ |
723,786 |
|
$ |
747,781 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
|
|
Six Months Ended June 30, |
| ||||
|
|
2014 |
|
2013 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
| ||
Net income (loss) |
|
$ |
(5,717 |
) |
$ |
6,779 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
| ||
Depreciation and software and leasehold amortization |
|
17,955 |
|
14,390 |
| ||
Amortization of intangible assets |
|
6,286 |
|
9,702 |
| ||
Share-based compensation expense |
|
4,276 |
|
4,364 |
| ||
Fair value adjustment to contingent consideration |
|
1,142 |
|
|
| ||
Provision for doubtful accounts |
|
845 |
|
1,104 |
| ||
Loan fee amortization |
|
1,462 |
|
358 |
| ||
Deferred income tax (benefit) expense |
|
(2,331 |
) |
(75 |
) | ||
Other, net |
|
397 |
|
(30 |
) | ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Trade accounts receivable |
|
6,907 |
|
(45,175 |
) | ||
Prepaid expenses and other assets |
|
(1,825 |
) |
430 |
| ||
Accounts payable and other liabilities |
|
(2,365 |
) |
5,667 |
| ||
Customer deposits |
|
892 |
|
(13,076 |
) | ||
Deferred revenue |
|
(2,691 |
) |
1,234 |
| ||
Income taxes |
|
(6,388 |
) |
(947 |
) | ||
Excess tax benefit related to share-based compensation |
|
(176 |
) |
(178 |
) | ||
Other |
|
101 |
|
84 |
| ||
Net cash provided by (used in) operating activities |
|
18,770 |
|
(15,369 |
) | ||
|
|
|
|
|
| ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
| ||
Purchase of property and equipment |
|
(19,417 |
) |
(12,158 |
) | ||
Internally developed software costs |
|
(3,114 |
) |
(3,248 |
) | ||
Proceeds from sale of assets |
|
209 |
|
|
| ||
Cash paid for business acquisition |
|
(302 |
) |
|
| ||
Other investing activities, net |
|
|
|
4 |
| ||
Net cash used in investing activities |
|
(22,624 |
) |
(15,402 |
) | ||
|
|
|
|
|
| ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
| ||
Proceeds from revolver borrowings |
|
|
|
72,000 |
| ||
Payments to reduce revolver borrowings |
|
|
|
(33,000 |
) | ||
Debt issuance costs |
|
(837 |
) |
|
| ||
Payments under long-term obligations |
|
(4,285 |
) |
(1,830 |
) | ||
Payment of deferred acquisition consideration |
|
(4,957 |
) |
|
| ||
Excess tax benefit related to share-based compensation |
|
176 |
|
178 |
| ||
Common stock repurchases (Note 9) |
|
(3,627 |
) |
(3,508 |
) | ||
Cash dividends paid (Note 9) |
|
(6,334 |
) |
(6,499 |
) | ||
Proceeds from exercise of stock options |
|
6,802 |
|
895 |
| ||
Net cash provided by (used in) financing activities |
|
(13,062 |
) |
28,236 |
| ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash |
|
1,570 |
|
339 |
| ||
|
|
|
|
|
| ||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
(15,346 |
) |
(2,196 |
) | ||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
|
40,336 |
|
3,808 |
| ||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
24,990 |
|
$ |
1,612 |
|
EPIQ SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Supplemental cash flow information is as follows:
|
|
Six Months Ended |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Cash paid for: |
|
|
|
|
| ||
Interest |
|
$ |
7,047 |
|
$ |
3,583 |
|
Income taxes, net |
|
6,088 |
|
4,180 |
| ||
Non-cash investing and financing transactions: |
|
|
|
|
| ||
Property, equipment, and leasehold improvements accrued in accounts payable and other long-term liabilities |
|
2,750 |
|
8,521 |
| ||
Dividends declared but not yet paid |
|
3,239 |
|
3,263 |
| ||
Obligations incurred in purchase transaction |
|
976 |
|
|
| ||
Capitalized lease obligations incurred |
|
431 |
|
306 |
| ||
See accompanying Notes to Condensed Consolidated Financial Statements.
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, consisting of normal and recurring 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.
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. 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.
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 $404.6 million as of June 30, 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 units 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 units 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.
Recently Issued Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board (the FASB) issued new guidance related to share-based payment awards with performance targets attainable after the requisite service period. The new guidance clarifies that companies should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, no compensation expense should be recorded related to an award for which the transfer to the employee is contingent on the attainment of a performance target until it becomes probable that the performance target will be met. The new guidance does not require any new or additional disclosures. This guidance will be effective for us beginning January 1, 2016. We do not expect this new guidance to have a material effect on our consolidated financial position, results of operations or cash flows.
In May 2014, the FASB and the International Accounting Standards Board issued their final standard on revenue from contracts with customers. This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most of the current revenue recognition guidance. The new guidance requires that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract with a customer, (2) identify the performance obligations under the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations under the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance also provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. This new revenue guidance will be effective for us beginning in the first quarter of fiscal 2017 and early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach (cumulative effect adjustment in period of adoption) to adopt the new guidance. We are currently assessing the impact of this new revenue guidance on our consolidated financial position, results of operations and cash flows.
NOTE 2: GOODWILL AND INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the six months ended June 30, 2014 was as follows:
|
|
Technology |
|
Bankruptcy |
|
Total |
| |||
|
|
(in thousands) |
| |||||||
Balance as of December 31, 2013 |
|
$ |
189,339 |
|
$ |
214,963 |
|
$ |
404,302 |
|
Acquisition |
|
|
|
153 |
|
153 |
| |||
Foreign currency translation |
|
156 |
|
|
|
156 |
| |||
Balance as of June 30, 2014 |
|
$ |
189,495 |
|
$ |
215,116 |
|
$ |
404,611 |
|
The increase in goodwill in 2014 resulted from the April 2014 acquisition of Minus 10 Software, LLC (Minus 10). See Note 6 of our Notes to Condensed Consolidated Financial Statements for further detail.
Identifiable intangible assets as of June 30, 2014 and December 31, 2013 consisted of the following:
|
|
June 30, 2014 |
|
December 31, 2013 |
| ||||||||
|
|
Gross Carrying |
|
Accumulated |
|
Gross Carrying |
|
Accumulated |
| ||||
|
|
(in thousands) |
| ||||||||||
Amortizing intangible assets: |
|
|
|
|
|
|
|
|
| ||||
Customer relationships |
|
$ |
124,512 |
|
$ |
95,538 |
|
$ |
124,512 |
|
$ |
90,274 |
|
Trade names |
|
6,591 |
|
2,893 |
|
6,591 |
|
2,481 |
| ||||
Technology |
|
1,142 |
|
29 |
|
|
|
|
| ||||
Non-compete agreements |
|
18,947 |
|
16,759 |
|
18,947 |
|
16,178 |
| ||||
Total |
|
$ |
151,192 |
|
$ |
115,219 |
|
$ |
150,050 |
|
$ |
108,933 |
|
During the second quarter of 2014 we recorded technology related intangible assets in connection with acquisition of Minus 10. See Note 6 of our Notes to Condensed Consolidated Financial Statements for further detail. Customer relationships, trade names, acquired technology and non-compete agreements carry a weighted average life of approximately seven years, nine years, ten years and five years, respectively.
Amortization expense related to identifiable intangible assets was $3.2 million and $4.7 million for the three months ended June 30, 2014 and 2013, respectively and $6.3 million and $9.7 million for the six months ended June 30, 2014 and 2013, respectively. The following table outlines the estimated future amortization expense related to intangible assets at June 30, 2014:
(in thousands) |
|
|
| |
Year Ending December 31, |
|
|
| |
2014 (from July 1, 2014 to December 31, 2014) |
|
$ |
6,369 |
|
2015 |
|
10,007 |
| |
2016 |
|
6,346 |
| |
2017 |
|
5,504 |
| |
2018 |
|
3,548 |
| |
2019 and thereafter |
|
4,199 |
| |
Total |
|
$ |
35,973 |
|
NOTE 3: LONG-TERM OBLIGATIONS
The following is a summary of long-term debt and other long-term obligations outstanding (in thousands):
|
|
Final |
|
Weighted- |
|
June 30, |
|
December 31, |
| ||
|
|
|
|
|
|
(in thousands) |
| ||||
Senior secured term loan |
|
August 2020 |
|
4.25 |
% |
$ |
297,750 |
|
$ |
299,250 |
|
Senior revolving loan |
|
August 2018 |
|
|
|
|
|
|
| ||
Capital leases |
|
April 2017 |
|
4.0 |
% |
6,167 |
|
6,548 |
| ||
Note payable |
|
October 2014 |
|
2.1 |
% |
2,049 |
|
4,079 |
| ||
Acquisition-related liabilities |
|
May 2021 |
|
N/A |
|
1,036 |
|
2,580 |
| ||
Total long-term obligations, including current portion |
|
|
|
|
|
307,002 |
|
312,457 |
| ||
Current maturities of long-term obligations |
|
|
|
|
|
|
|
|
| ||
Senior secured term loan |
|
|
|
|
|
(3,000 |
) |
(3,000 |
) | ||
Capital leases |
|
|
|
|
|
(3,084 |
) |
(3,690 |
) | ||
Notes payable |
|
|
|
|
|
(2,049 |
) |
(4,079 |
) | ||
Acquisition-related liabilities |
|
|
|
|
|
|
|
(2,580 |
) | ||
Total current maturities of long-term obligations |
|
|
|
|
|
(8,133 |
) |
(13,349 |
) | ||
Total long-term obligations |
|
|
|
|
|
$ |
298,869 |
|
$ |
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 reduced our two senior secured term loan interest rate options and reduced the LIBOR floor resulting in a total interest rate reduction 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 June 30, 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 June 30, 2014, there were no borrowings outstanding under the senior revolving loan and outstanding letters of credit were $1.0 million.
In April 2014 we entered into a forward interest rate swap through August 27, 2020 with a notional amount of 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 companys obligation under the term loan. The interest rate swap contains a floor
of 0.75% to ensure that the one-month LIBOR received on each settlement of the interest rate swap cannot go below 0.75%.
The objective of entering into this interest rate swap is to eliminate the variability of the cash flows in interest payments related to the portion of the debt being hedged. The interest rate swap qualifies as a cash flow hedge and, as such, is being accounted for at estimated fair value with changes in estimated fair value being deferred in accumulated other comprehensive income until such time as the hedged transaction is recognized in earnings. This cash flow hedge is expected to be highly effective and any ineffectiveness will be immediately recognized in earnings.
The changes in fair value of the interest rate swap for the three months ended June 30, 2014 was a decrease of $0.7 million and was included in accumulated other comprehensive income. As the derivative will not begin settling until August 2015, there were no cash settlements during the three months ended June 30, 2014 and the Company does not expect any amounts to be reclassified from accumulated other comprehensive income to earnings within the next twelve months. The hedge was determined to be highly effective during the period from inception of the cash flow hedge through June 30, 2014 with any ineffectiveness considered as de minimis. The fair value of the interest rate swap as of June 30, 2014 was a liability of $1.4 million and was included in Other long-term liabilities on the Condensed Consolidated Balance Sheets. We did not utilize any derivative instruments during the period ended June 30, 2013.
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 Companys senior secured term loan. As the strike rate of 3% was greater than the underlying, the one-month LIBOR, the caplets for the three and six months ended June 30, 2014, expired with a $0 value. As of June 30, 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 Companys expected interest expense payments related to its senior secured term loan consistent with LIBOR rising above 3%.
All changes in the estimated fair value of the interest rate cap were included in accumulated other comprehensive income and represented a de minimis amount as of June 30, 2014. The hedge was determined to be perfectly effective during the period from inception of the cash flow hedge through June 30, 2014 with no ineffectiveness recognized in earnings. The fair value of the interest rate cap as of June 30, 2014 and December 31, 2013 was $1,000 and $27,000, respectively, and was included in Other noncurrent assets on the Condensed Consolidated Balance Sheets.
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 June 30, 2014, we were in compliance with all financial 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 (July 1 December 31) |
|
$ |
1,500 |
|
2015 |
|
3,000 |
| |
2016 |
|
3,000 |
| |
2017 |
|
3,000 |
| |
2018 and Thereafter |
|
287,250 |
| |
Total |
|
$ |
297,750 |
|
Capital Leases
We lease certain equipment under capital leases that generally require monthly payments with final maturity dates during various periods through 2018. As of June 30, 2014, our capital lease obligations had a weighted-average interest rate of approximately 4.0 %.
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 June 30, 2014 and December 31, 2013 are as follows:
|
|
June 30, |
|
December 31, |
| ||
|
|
(in thousands) |
| ||||
Minus 10 deferred acquisition price |
|
|
|
|
| ||
Long-term portion |
|
$ |
43 |
|
$ |
|
|
|
|
|
|
|
| ||
Minus 10 contingent consideration |
|
|
|
|
| ||
Long-term portion |
|
$ |
993 |
|
$ |
|
|
|
|
|
|
|
| ||
De Novo contingent consideration |
|
|
|
|
| ||
Current portion |
|
|
|
2,580 |
| ||
Total acquisition-related liabilities |
|
$ |
1,036 |
|
$ |
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 June 30, 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 Companys calculation of the performance measure for the earn-out period. The sellers disputed the Companys 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 Fair value adjustment to contingent consideration and $0.4 million is included in Selling, general and administrative expense in the Condensed Consolidated Statements of Income for the six months ended June 30, 2014. There are no further payments remaining under the contingent consideration obligation with respect to De Novo Legal.
Minus 10
In connection with the April 2014 acquisition of Minus 10 we withheld approximately $43,000 of the purchase price as security for potential indemnification claims payable approximately 14 months following the closing date of the acquisition. Also, in connection with the acquisition of Minus 10, we incurred an obligation to pay certain contingent consideration which may be payable to the sellers based on future levels of qualifying profit and other measures as defined in the purchase agreement. This contingent consideration opportunity for the sellers would be payable, if earned, over seven discrete measurement periods through December 31, 2020. The Minus 10 contingent consideration obligation has been measured and recognized at a fair value of approximately $1.0 million as of June 30, 2014 which is included in Long-term obligations on the Condensed Consolidated Balance Sheets. A discount rate of 25.0% was applied to the contingent consideration liability which is reflective of the inherent risk attributable to this new product line given its status as an early-stage venture. Subsequent fair value changes, measured quarterly, up to the ultimate amount paid, will be recognized in earnings. See Note 6 of our Notes to Condensed Consolidated Financial Statements for further discussion of the Minus 10 acquisition.
NOTE 4: NET INCOME PER SHARE
Basic net income per share is computed on the basis of weighted average outstanding common shares.
On June 11, 2014, our shareholders approved the Amended and Restated 2004 Equity Incentive Plan (the Current Plan), which was effective January 1, 2014. One of the amendments included in the Current Plan is to specify that dividends are no longer payable on nonvested share awards during the vesting period. Such dividends declared during the vesting period will be accrued and are payable only if and when the nonvested share awards vest. As a result of this amendment, nonvested share awards (also referred to as restricted stock awards) issued by the Company are no longer considered to be participating securities because they do not have non-forfeitable rights to dividends. Accordingly, basic and diluted net income per share are calculated using the treasury stock method which does not require the allocation of net income to nonvested shares.
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. For the three and six months ended June 30, 2014, we did not include the effect of stock options and non-vested shares in the calculation of diluted loss per share because the effect would have been anti-dilutive due to the net loss reported for these periods. For the three and six months ended June 30, 2014, approximately 0.4 million shares and 0.5 million shares, respectively, related to outstanding options or nonvested shares that otherwise would have been included in the diluted earnings per share calculation were not included because they would have been anti-dilutive due to the net loss for the periods. For the three and six months ended June 30, 2014, weighted-average outstanding stock options totaling approximately 2.3 million and 2.0 million shares, respectively, were anti-dilutive due to price and were therefore not included in the computation of diluted earnings per share. For the three and six months ended June 30, 2013, weighted-average outstanding stock options totaling approximately 2.4 million and 2.5 million were anti-dilutive and therefore not included in the computation of diluted net income per share.
The computation of basic and diluted net income per share for the three and six months ended June 30, 2013 is as follows:
|
|
Three Months Ended June 30, 2013 |
|
Six Months Ended June 30, 2013 |
| ||||||||||||
|
|
Net Loss |
|
Weighted |
|
Per Share |
|
Net Income |
|
Weighted |
|
Per Share |
| ||||
|
|
(in thousands, except per share data) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
$ |
2,842 |
|
|
|
|
|
$ |
6,779 |
|
|
|
|
| ||
Less: amounts allocated to nonvested shares |
|
(28 |
) |
|
|
|
|
(67 |
) |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic net income available to common stockholders |
|
2,814 |
|
35,933 |
|
$ |
0.08 |
|
6,712 |
|
35,765 |
|
$ |
0.18 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Stock options |
|
|
|
926 |
|
|
|
|
|
937 |
|
|
| ||||
Add back: amounts allocated to nonvested shares |
|
28 |
|
|
|
|
|
67 |
|
|
|
|
| ||||
Less: amounts re-allocated to nonvested shares |
|
(28 |
) |
|
|
|
|
(67 |
) |
|
|
|
| ||||
Diluted net income available to common stockholders |
|
$ |
2,814 |
|
36,859 |
|
$ |
0.08 |
|
$ |
6,712 |
|
36,702 |
|
$ |
0.18 |
|
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 |
|
Six Months Ended |
| ||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Direct cost of services |
|
$ |
28 |
|
$ |
601 |
|
$ |
47 |
|
$ |
620 |
|
Selling, general and administrative |
|
709 |
|
2,224 |
|
4,229 |
|
3,744 |
| ||||
Share-based compensation expense |
|
737 |
|
2,825 |
|
4,276 |
|
4,364 |
| ||||
Income tax benefit |
|
(321 |
) |
(1,229 |
) |
(1,860 |
) |
(1,651 |
) | ||||
Total share-based compensation expense, net of tax |
|
$ |
416 |
|
$ |
1,596 |
|
$ |
2,416 |
|
$ |
2,713 |
|
We grant stock options, stock appreciation rights, and restricted stock awards under our 2004 Equity Incentive Plan, as amended and restated (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 June 30, 2014, there were approximately 972,000 shares available for future grants under the 2004 Plan, not considering the estimated number of shares reserved for the executive and other performance-based annual incentive compensation award as discussed below.
During the six months ended June 30, 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 Companys 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 six months ended June 30, 2014, 225,000 shares of the 2014 Performance-Based Share Awards were forfeited by two former executives in
conjunction with their resignation from the Company in March 2014 and June 2014, respectively. The Company did not recognize any expense during the six months ended June 30, 2014 for these forfeited awards. As of June 30, 2014, we have assessed the likelihood that the performance condition related to the remaining 225,000 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 six months 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 for executive performance-based annual incentive compensation awards, 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 and six months ended June 30, 2014 is $0.3 million and $0.9 million, respectively, of expense recognized with respect to executive and other performance-based annual incentive compensation awards which, based on our June 30, 2014 share price is equal to approximately 122,000 shares for the annual awards. The accrual is recorded in Accrued compensation on the accompanying Condensed Consolidated Balance Sheets as of June 30, 2014. As of June 30, 2014, we have assessed the likelihood that the performance conditions related to these awards will be met and have accrued the related expense based on the estimated outcome.
During the six months ended June 30, 2014 we granted 77,500 stock options with weighted-average exercise price of $13.39 per share which vest over five years.
The fair value of each stock option grant was estimated at the date of grant using a Black-Scholes option pricing model. The following table presents the weighted-average assumptions used and the weighted-average fair value per option granted.
|
|
Six months ended |
| |
|
|
2014 |
| |
Expected life of stock option (years) |
|
7.0 |
| |
Expected volatility |
|
33 |
% | |
Risk-free interest rate |
|
2.2 |
% | |
Dividend yield |
|
2.6 |
% | |
Weighted-average grant-date fair value |
|
$ |
3.67 |
|
Expected forfeiture rate |
|
6.0 |
% | |
As of June 30, 2014 there was $4.2 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested share-based awards, which will be recognized over a weighted-average period of approximately 1.9 years.
NOTE 6: ACQUISITIONS
Minus 10 Software, LLC (Minus 10)
On April 1, 2014, we completed the acquisition of Minus 10, a company that develops and maintains software products and provides related services to its customers with respect to web-enabled bankruptcy preparation and case management and will expand our Chapter 11 restructuring service offerings. Minus 10 will be included in our Bankruptcy and Settlement Administration segment.
The purchase price of Minus 10 was comprised of the following:
|
|
(in thousands) |
| |
Cash paid at closing |
|
$ |
302 |
|
Net working capital liability |
|
17 |
| |
Deferred cash consideration |
|
43 |
| |
Fair value of contingent consideration |
|
933 |
| |
Total purchase price |
|
$ |
1,295 |
|
The cash consideration paid at closing was funded from our cash balances.
As a result of an earn-out opportunity the sellers of Minus 10 have the opportunity to receive contingent consideration based on a percentage of future qualifying profit and other measures, as defined in the purchase agreement. This contingent
consideration opportunity for the sellers would be payable, if earned, over seven discrete measurement periods beginning with April 1, 2014 through December 31, 2014 and each annual period ending December 31, 2015 through December 31, 2020.
The fair value of the contingent consideration was determined by a present value calculation of the potential payouts based on financial projections over the earn-out period. Subsequent changes in fair value, which will be measured quarterly, will be recognized in earnings. We recognized fair value of approximately $1.0 million of the contingent consideration in Long-term obligations on the Consolidated Balance Sheet at June 30, 2014.
Transaction related costs, which were expensed during the period in which they were incurred, were not material related to this acquisition.
Total purchase consideration has been allocated to the identifiable intangible assets based on their respective fair values on the acquisition date. The purchase price allocations are summarized in the following table:
|
|
(in thousands) |
| |
Intangible assets: |
|
|
| |
Acquired technology |
|
$ |
1,142 |
|
Goodwill |
|
153 |
| |
Net assets acquired |
|
$ |
1,295 |
|
We allocated approximately $1.1 million of the purchase price to acquired technology which is included in Intangible assets on the Condensed Consolidated Balance Sheets as of June 30, 2014. This intangible asset will be amortized on a straight-line basis over an amortization period of 10 years. The entire balances of goodwill and acquired technology related to this acquisition are amortizable for tax purposes.
For the quarter ended June 30, 2014, our consolidated results of operations, since our acquisition of Minus 10 on April 1, 2014, included de minimis results of operations and operating revenue related to the Minus 10 legal entity. These amounts are not necessarily reflective of the actual impact of the Minus 10 acquisition due to post-acquisition integration with our legal entities.
NOTE 7: 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 managements evaluation of performance, certain costs, such as compensation for administrative staff and executive management, are not allocated by segment and, accordingly, the following reporting segment results do not include such unallocated costs.
Assets reported within a segment are those assets that can be identified to a segment and primarily consist of trade receivables, property, equipment and leasehold improvements, software, identifiable intangible assets and goodwill. Cash, certain tax-related assets, and certain prepaid assets and other assets are not allocated to our segments. Although we can and do identify long-lived assets such as property, equipment and leasehold improvements, software, and identifiable intangible assets to reporting segments, we do not allocate the related depreciation and amortization to the segment as management evaluates segment performance exclusive of these non-cash charges.
Following is a summary of segment information for the three months ended June 30, 2014.
|
|
Three Months Ended June 30, 2014 |
| ||||||||||
|
|
Technology |
|
Bankruptcy |
|
Eliminations |
|
Total |
| ||||
|
|
(in thousands) |
| ||||||||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Operating revenues |
|
$ |
78,523 |
|
$ |
36,928 |
|
$ |
|
|
$ |
115,451 |
|
Intersegment revenues |
|
258 |
|
|
|
(258 |
) |
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating revenues including intersegment revenue |
|
78,781 |
|
36,928 |
|
(258 |
) |
115,451 |
| ||||
Reimbursable expenses |
|
850 |
|
8,755 |
|
|
|
9,605 |
| ||||
Total revenues |
|
79,631 |
|
45,683 |
|
(258 |
) |
125,056 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Direct costs, selling, general and administrative costs |
|
59,094 |
|
31,780 |
|
(258 |
) |
90,616 |
| ||||
Segment performance measure |
|
$ |
20,537 |
|
$ |
13,903 |
|
$ |
|
|
$ |
34,440 |
|
|
|
|
|
|
|
|
|
|
| ||||
Segment performance measure as a percentage of segment operating revenue |
|
26.2 |
% |
37.6 |
% |
|
|
29.8 |
% |
Following is a summary of segment information for the three months ended June 30, 2013.
|
|
Three Months Ended June 30, 2013 |
| ||||||||||
|
|
Technology |
|
Bankruptcy |
|
Eliminations |
|
Total |
| ||||
|
|
(in thousands) |
| ||||||||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Operating revenues |
|
$ |
70,126 |
|
$ |
34,850 |
|
$ |
|
|
$ |
104,976 |
|
Intersegment revenues |
|
78 |
|
|
|
(78 |
) |
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating revenues including intersegment revenue |
|
70,204 |
|
34,850 |
|
(78 |
) |
104,976 |
| ||||
Reimbursable expenses |
|
535 |
|
7,861 |
|
|
|
8,396 |
| ||||
Total revenues |
|
70,739 |
|
42,711 |
|
(78 |
) |
113,372 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Direct costs, selling, general and administrative costs |
|
48,979 |
|
31,788 |
|
(78 |
) |
80,689 |
| ||||
Segment performance measure |
|
$ |
21,760 |
|
$ |
10,923 |
|
$ |
|
|
$ |
32,683 |
|
|
|
|
|
|
|
|
|
|
| ||||
Segment performance measure as a percentage of segment operating revenue |
|
31.0 |
% |
31.3 |
% |
|
|
31.1 |
% |
Following is a reconciliation of our segment performance measure to income (loss) before income taxes.
|
|
Three Months Ended June 30, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(in thousands) |
| ||||
Segment performance measure |
|
$ |
34,440 |
|
$ |
32,683 |
|
Unallocated corporate expenses |
|
(21,988 |
) |
(11,017 |
) | ||
Share-based compensation expense |
|
(737 |
) |
(2,825 |
) | ||
Depreciation and software and leasehold amortization |
|
(9,255 |
) |
(7,391 |
) | ||
Amortization of intangible assets |
|
(3,166 |
) |
(4,736 |
) | ||
Loss on disposition of property and equipment |
|
(339 |
) |
(4 |
) | ||
Other operating expense |
|
(157 |
) |
(49 |
) | ||
Income (loss) from operations |
|
(1,202 |
) |
6,661 |
| ||
Interest expense, net |
|
(3,843 |
) |
(1,996 |
) | ||
Income (loss) before income taxes |
|
$ |
(5,045 |
) |
$ |
4,665 |
|
Following is a summary of segment information for the six months ended June 30, 2014.
|
|
Six Months Ended June 30, 2014 |
| ||||||||||
|
|
Technology |
|
Bankruptcy |
|
Eliminations |
|
Total |
| ||||
|
|
(in thousands) |
| ||||||||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Operating revenues |
|
$ |
159,692 |
|
$ |
71,979 |
|
$ |
|
|
$ |
231,671 |
|
Intersegment revenues |
|
438 |
|
|
|
(438 |
) |
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating revenues including intersegment revenue |
|
160,130 |
|
71,979 |
|
(438 |
) |
231,671 |
| ||||
Reimbursable expenses |
|
1,957 |
|
14,699 |
|
|
|
16,656 |
| ||||
Total revenues |
|
162,087 |
|
86,678 |
|
(438 |
) |
248,327 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Direct costs, selling, general and administrative costs |
|
119,252 |
|
60,824 |
|
(438 |
) |
179,638 |
| ||||
Segment performance measure |
|
$ |
42,835 |
|
$ |
25,854 |
|
$ |
|
|
$ |
68,689 |
|
|
|
|
|
|
|
|
|
|
| ||||
Segment performance measure as a percentage of segment operating revenue |
|
26.8 |
% |
35.9 |
% |
|
|
29.6 |
% |
Following is a summary of segment information for the six months ended June 30, 2013.
|
|
Six Months Ended June 30, 2013 |
| ||||||||||
|
|
Technology |
|
Bankruptcy |
|
Eliminations |
|
Total |
| ||||
|
|
(in thousands) |
| ||||||||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Operating revenues |
|
$ |
124,913 |
|
$ |
82,971 |
|
$ |
|
|
$ |
207,884 |
|
Intersegment revenues |
|
83 |
|
|
|
(83 |
) |
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating revenues including intersegment revenue |
|
124,996 |
|
82,971 |
|
(83 |
) |
207,884 |
| ||||
Reimbursable expenses |
|
822 |
|
28,256 |
|
|
|
29,078 |
| ||||
Total revenues |
|
125,818 |
|
111,227 |
|
(83 |
) |
236,962 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Direct costs, selling, general and administrative costs |
|
87,666 |
|
85,705 |
|
(83 |
) |
173,288 |
| ||||
Segment performance measure |
|
$ |
38,152 |
|
$ |
25,522 |
|
$ |
|
|
$ |
63,674 |
|
|
|
|
|
|
|
|
|
|
| ||||
Segment performance measure as a percentage of segment operating revenue |
|
30.5 |
% |
30.8 |
% |
|
|
30.6 |
% |
Following is a reconciliation of our segment performance measure to income (loss) before income taxes.
|
|
Six Months Ended June 30, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(in thousands) |
| ||||
Segment performance measure |
|
$ |
68,689 |
|
$ |
63,674 |
|
Unallocated corporate expenses |
|
(38,029 |
) |
(21,323 |
) | ||
Share-based compensation expense |
|
(4,276 |
) |
(4,364 |
) | ||
Depreciation and software and leasehold amortization |
|
(17,955 |
) |
(14,390 |
) | ||
Amortization of intangible assets |
|
(6,286 |
) |
(9,702 |
) | ||
Fair value adjustment to contingent consideration |
|
(1,142 |
) |
|
| ||
Loss on disposition of property and equipment |
|
(351 |
) |
(22 |
) | ||
Other operating expense |
|
(226 |
) |
(96 |
) | ||
Income from operations |
|
424 |
|
13,777 |
| ||
Interest expense, net |
|
(8,716 |
) |
(3,831 |
) | ||
Income (loss) before income taxes |
|
$ |
(8,292 |
) |
$ |
9,946 |
|
Following are total assets by segment.
|
|
June 30, |
|
December 31, |
| ||
|
|
(in thousands) |
| ||||
Assets |
|
|
|
|
| ||
Technology |
|
$ |
355,786 |
|
$ |
369,135 |
|
Bankruptcy and Settlement Administration |
|
288,441 |
|
281,073 |
| ||
Unallocated corporate |
|
79,559 |
|
97,573 |
| ||
Total consolidated assets |
|
$ |
723,786 |
|
$ |
747,781 |
|
NOTE 8: 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 six months ended June 30, 2014. In connection with the acquisition of Minus 10 we established a liability related to potential contingent consideration that is considered to be a Level 3 liability. This liability was valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value. Such unobservable inputs include financial forecasts prepared by management which include estimates of future cash flows, projected profit and loss information, and discount rates.
The fair values of our derivative financial instruments have been categorized as Level 2 due to the fact that the forward and spot curves for one-month LIBOR, an active market, are observable for the full term of the respective derivative contracts. The fair value of the interest rate swap was estimated using the income model and market based models. The fair value of the interest rate cap agreement was estimated using the Black option pricing model.
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 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 of managements 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 June 30, 2014 our assets or liabilities that were measured and recorded at estimated fair value on a recurring basis are as follows:
|
|
|
|
Estimated Fair Value Measurements |
| ||||||||
Items Measured at Fair Value on a Recurring |
|
Carrying |
|
Quoted Prices |
|
Significant |
|
Significant |
| ||||
Basis |
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
|
|
(in thousands) |
| ||||||||||
June 30, 2014: |
|
|
|
|
|
|
|
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Interest rate cap |
|
$ |
1 |
|
|
|
$ |
1 |
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Interest rate swap |
|
$ |
1,387 |
|
|
|
$ |
1,387 |
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||||
Acquisition-related liability |
|
$ |
992 |
|
|
|
|
|
$ |
992 |
| ||
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2013: |
|
|
|
|
|
|
|
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Interest rate cap |
|
$ |
27 |
|
$ |
|
|
$ |
27 |
|
$ |
|
|
Fair Value of Financial Assets and Liabilities
As of June 30, 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 June 30, 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 values of the Companys option based derivative instruments as described in Note 3 to the Condensed Consolidated Financial Statements were determined via the Black 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 terms of the agreements. The estimated fair value of the Companys interest rate swap, a derivative financial instrument, was determined via the income and market approaches utilizing certain observable inputs including the forward and spot curves for the underlying 1 month LIBOR over the remaining term of the agreement. Based on these characteristics these derivative instruments are classified as level 2. The fair values of the derivative instruments are subject to material changes based upon changes in the forward curve for 1 month LIBOR and the volatility thereof.
The following table represents the change in the acquisition-related contingent consideration obligation during the three months ended June 30, 2014 (there was no activity in Level 3 during the three months ended March 31, 2014):
|
|
Fair Value |
| |
|
|
(in thousands) |
| |
|
|
|
| |
Beginning balance March 31, 2014 |
|
$ |
|
|
Increase in fair value related to Minus 10 acquisition |
|
933 |
| |
Increase in fair value related to accretion of obligation |
|
59 |
| |
Ending balance June 30, 2014 |
|
$ |
992 |
|
The carrying value of the Minus 10 contingent consideration was based on managements estimate of projected profit and loss over the measurement period and an applied discount rate of 25% which is reflective of the inherent risk attributable to this new product line given its status as an early-stage venture. Subsequent fair value changes, measured quarterly, up to the ultimate amount paid, will be recognized in earnings. For the three and six months ended June 30, 2014, accreted interest expense was $0.1 million which is included in Interest expense on the Condensed Consolidated Income Statements.
NOTE 9: 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 six months ended June 30, 2014 and no repurchases during the six months ended June 30, 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 June 30, 2014 and 2013, we repurchased 29,440 shares and 96,534 shares, respectively, for approximately $0.4 million and $1.3 million, respectively, to satisfy such employee tax withholding obligations. During the six months ended June 30, 2014 and 2013, we repurchased 251,675 shares and 271,829 shares, respectively, for approximately $3.6 million and $3.5 million, respectively, to satisfy employee tax withholding obligations as described above.
Dividends
On June 11, 2014, our Board declared a cash dividend of $0.09 per outstanding share of common stock, which will be paid on September 9, 2014 to shareholders of record as of the close of business on August 1, 2014. On March 6, 2014, our Board declared a cash dividend of $0.09 per outstanding share of common stock which was paid on June 3, 2014 to shareholders of record as of May 1, 2014. Dividends payable were approximately $3.2 million and $3.1 million at June 30, 2014 and December 31, 2013, respectively.
NOTE 10: LEGAL PROCEEDINGS
We are at times involved in litigation and other legal claims in the ordinary course of business. When appropriate in managements estimation, we may record reserves in our financial statements for pending litigation and other claims. 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, financial condition or cash flows.
Item 2. Managements 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 Managements 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) failure to keep pace with technological changes and significant changes in the competitive environment, (2) risks associated with cyber-attacks, interruptions or delays in services at data centers, (3) risks of errors or failures of software or services, (4) any material changes in our total number of client engagements and the volume associated with each engagement, (5) any material changes in our clients deposit portfolio or the services required or selected by our clients in engagements, (6) changes in or the effects of pricing structures and arrangements, (7) risks associated with the handling of confidential data and compliance with information privacy laws, (8) risks associated with developing and providing software and internet-based technology solutions to our clients, (9) ability to attract, develop and retain executives and other qualified employees, (10) risks associated with the integration of acquisitions into our existing business operations, (11) risks associated with our international operations, (12) risks associated with foreign currency fluctuations, (13) risks of litigation against us or failure to protect our intellectual property, (14) 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, (15) any material non-cash write-downs based on impairment of our goodwill, (16) risks associated with indebtedness and interest rate fluctuations, (17) overall strength and stability of general economic conditions, both in the United States and in the global markets, and (18) 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.
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 clients site or from one of our office locations. Our team includes former practicing litigators, bankruptcy attorneys, plaintiffs 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 the second quarter of 2014 reflect the continued 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 companys overall margin which impacted income from operations.
During 2013 and the first half of 2014, we continued 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 half 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 second quarter year-to-date Technology segment operating revenue as compared to 61% for the same period in 2013, while global document review services increased during the year to now represent approximately 45% of the total 2014 second quarter year-to-date Technology segment operating revenue as compared to 39% for the same period in 2013.
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
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 June 30, 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 June 30, 2014 Compared with the Three Months Ended June 30, 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
Amounts in thousands
|
|
Three Months Ended June 30, |
|
$ Change |
|
|
| |||||
|
|
2014 |
|
2013 |
|
(Decrease) |
|
% Change |
| |||
Operating revenue |
|
$ |
115,451 |
|
$ |
104,976 |
|
$ |
10,475 |
|
10 |
% |
Reimbursable expenses |
|
9,605 |
|
8,396 |
|
1,209 |
|
14 |
% | |||
Total Revenue |
|
125,056 |
|
113,372 |
|
11,684 |
|
10 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
Direct cost of operating revenue (exclusive of depreciation and amortization shown separately below) |
|
57,533 |
|
49,528 |
|
8,005 |
|
16 |
% | |||
Reimbursed direct costs |
|
9,434 |
|
8,072 |
|
1,362 |
|
17 |
% | |||
Selling, general and administrative expense |
|
46,374 |
|
36,931 |
|
9,443 |
|
26 |
% | |||
Depreciation and software and leasehold amortization |
|
9,255 |
|
7,391 |
|
1,864 |
|
25 |
% | |||
Amortization of identifiable intangible assets |
|
3,166 |
|
4,736 |
|
(1,570 |
) |
-33 |
% | |||
Loss on disposition of property and equipment |
|
339 |
|
4 |
|
335 |
|
n/m |
| |||
Other operating expense |
|
157 |
|
49 |
|
108 |
|
n/m |
| |||
Total Operating Expense |
|
126,258 |
|
106,711 |
|
19,547 |
|
18 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
Income (Loss) From Operations |
|
(1,202 |
) |
6,661 |
|
(7,863 |
) |
n/m |
| |||
|
|
|
|
|
|
|
|
|
| |||
Interest Expense (Income) |
|
|
|
|
|
|
|
|
| |||
Interest expense |
|
3,852 |
|
2,004 |
|
1,848 |
|
92 |
% | |||
Interest income |
|
(9 |
) |
(8 |
) |
(1 |
) |
13 |
% | |||
Net Interest Expense |
|
3,843 |
|
1,996 |
|
1,847 |
|
93 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
Income (Loss) Before Income Taxes |
|
(5,045 |
) |
4,665 |
|
(9,710 |
) |
n/m |
| |||
|
|
|
|
|
|
|
|
|
| |||
Provision (Benefit) for Income Taxes |
|
(1,626 |
) |
1,823 |
|
(3,449 |
) |
n/m |
| |||
|
|
|
|
|
|
|
|
|
| |||
Net Income (Loss) |
|
$ |
(3,419 |
) |
$ |
2,842 |
|
$ |
(6,261 |
) |
n/m |
|
n/m not meaningful
Revenue
The increase in operating revenue for the three months ended June 30, 2014 as compared to the same period in the prior year was driven by an $8.4 million increase in the Technology segment and a $2.1 million increase 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 $8.0 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 $10.1 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 a $1.0 million decrease in costs for legal notification and advertising services as compared to the three months ended June 30, 2013.
The increase in reimbursed direct costs for the three months ended June 30, 2014 as compared to the same period of 2013 corresponds to the increase in revenue from reimbursed expenses.
Selling, general and administrative expenses increased $9.4 million and included an increase of $7.6 million in compensation-related expense which is primarily related to $7.7 million in post-employment benefits related to an executive resignation agreement in addition to $1.0 million of severance benefits. These increases were offset by a $2.1 million decrease in share-based compensation expense as compared to the prior year second quarter. The increase in selling, general and administrative expenses also includes an increase of $1.0 million in outside professional services and an increase of $1.1 million in office-related expenses such as lease expense, maintenance, utilities and supplies related to the expansion of our document review centers capacity.
Depreciation and software and leasehold amortization costs increased $1.9 million as a result of increased depreciation on equipment and software related to segment investments.
Amortization of intangible assets decreased $1.6 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.
Interest Expense, Net
The increase in net interest expense was primarily due to an increased principal amount of debt outstanding during the second quarter of 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.
Income Taxes
Our effective tax rate for the three months ended June 30, 2014 was 32.2% compared to 39.1% for the comparable prior year period. The lower 2014 rate is attributable to a greater proportion of income being earned in lower tax jurisdictions compared to the prior year period.
Results of Operations by Segment
The following segment discussion is presented on a basis consistent with our segment disclosure contained in Note 7 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.
Amounts in thousands
|
|
Three Months Ended June 30, |
|
$ |
|
|
| |||||
|
|
2014 |
|
2013 |
|
(Decrease) |
|
% Change |
| |||
Operating revenue |
|
|
|
|
|
|
|
|
| |||
Technology |
|
$ |
78,523 |
|
$ |
70,126 |
|
$ |
8,397 |
|
12 |
% |
Bankruptcy and Settlement Administration |
|
36,928 |
|
34,850 |
|
2,078 |
|
6 |
% | |||
Total operating revenue |
|
$ |
115,451 |
|
$ |
104,976 |
|
$ |
10,475 |
|
10 |
% |
|
|
|
|
|
|
|
|
|
| |||
Reimbursable expenses |
|
|
|
|
|
|
|
|
| |||
Technology |
|
$ |
850 |
|
$ |
535 |
|
$ |
315 |
|
59 |
% |
Bankruptcy and Settlement Administration |
|
8,755 |
|
7,861 |
|
894 |
|
11 |
% | |||
Total reimbursable expenses |
|
$ |
9,605 |
|
$ |
8,396 |
|
$ |
1,209 |
|
14 |
% |
|
|
|
|
|
|
|
|
|
| |||
Direct costs, selling, general and administrative costs |
|
|
|
|
|
|
|
|
| |||
Technology |
|
$ |
59,094 |
|
$ |
48,979 |
|
$ |
10,115 |
|
21 |
% |
Bankruptcy and Settlement Administration |
|
31,780 |
|
31,788 |
|
(8 |
) |
|
| |||
Intercompany eliminations |
|
(258 |
) |
(78 |
) |
(180 |
) |
n/m |
| |||
Total direct costs, selling, general and administrative costs |
|
$ |
90,616 |
|
$ |
80,689 |
|
$ |
9,927 |
|
12 |
% |
|
|
|
|
|
|
|
|
|
| |||
Segment performance measure |
|
|
|
|
|
|
|
|
| |||
Technology |
|
$ |
20,537 |
|
$ |
21,760 |
|
$ |
(1,223 |
) |
-6 |
% |
Bankruptcy and Settlement Administration |
|
13,903 |
|
10,923 |
|
2,980 |
|
27 |
% | |||
Total segment performance measure |
|
$ |
34,440 |
|
$ |
32,683 |
|
$ |
1,757 |
|
5 |
% |
|
|
|
|
|
|
|
|
|
| |||
Segment performance measure |
|
$ |
34,440 |
|
$ |
32,683 |
|
$ |
1,757 |
|
5 |
% |
Unallocated corporate expenses |
|
(21,988 |
) |
(11,017 |
) |
(10,971 |
) |
100 |
% | |||
Share-based compensation expense |
|
(737 |
) |
(2,825 |
) |
2,088 |
|
-74 |
% | |||
Depreciation and software and leasehold amortization |
|
(9,255 |
) |
(7,391 |
) |
(1,864 |
) |
25 |
% | |||
Amortization of intangible assets |
|
(3,166 |
) |
(4,736 |
) |
1,570 |
|
-33 |
% | |||
Loss on disposition of property and equipment |
|
(339 |
) |
(4 |
) |
(335 |
) |
n/m |
| |||
Other operating expense |
|
(157 |
) |
(49 |
) |
(108 |
) |
n/m |
| |||
Income from operations |
|
(1,202 |
) |
6,661 |
|
(7,863 |
) |
-118 |
% | |||
Interest expense, net |
|
(3,843 |
) |
(1,996 |
) |
(1,847 |
) |
93 |
% | |||
Income (loss) before income taxes |
|
$ |
(5,045 |
) |
$ |
4,665 |
|
$ |
(9,710 |
) |
-208 |
% |
n/m not meaningful
Technology Segment
Operating revenue increased $8.4 million during the three months ended June 30, 2014 as compared to the prior year period primarily as a result of an increase in eDiscovery engagements as compared to the second quarter of 2013, and increased 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 19% increase in operating revenue over the prior year second quarter.
Direct, selling, general and administrative costs increased $10.1 million as compared to the second quarter of 2013 primarily in support of revenue growth. This increase included a $7.5 million increase in compensation related costs which included
$0.8 million of severance benefits and an increase of $5.9 million as compared to the second quarter of 2013 related to compensation paid to project-based attorneys for document review services. This direct cost of services varies directly with the amount of document review services revenue. Information technology-related costs increased $1.7 million which is partially related to the recent data center consolidation.
The Technology segments financial results for the three months ended June 30, 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 Companys overall margin.
Bankruptcy and Settlement Administration Segment
Operating revenue increased $2.1 million as compared to the prior year. Continuing to impact this segments results of operation is 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 were consistent with the prior year second quarter. Compensation related expenses increased by $0.9 million and this increase was offset by a decrease of $1.1 million in production costs.
Results of Operations for the Six Months Ended June 30, 2014 Compared with the Six Months Ended June 30, 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
Amounts in thousands
|
|
Six Months Ended June 30, |
|
$ Change |
|
|
| |||||
|
|
2014 |
|
2013 |
|
(Decrease) |
|
% Change |
| |||
Operating revenue |
|
$ |
231,671 |
|
$ |
207,884 |
|
$ |
23,787 |
|
11 |
% |
Reimbursable expenses |
|
16,656 |
|
29,078 |
|
(12,422 |
) |
-43 |
% | |||
Total Revenue |
|
248,327 |
|
236,962 |
|
11,365 |
|
5 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
Direct cost of operating revenue (exclusive of depreciation and amortization shown separately below) |
|
115,168 |
|
102,024 |
|
13,144 |
|
13 |
% | |||
Reimbursed direct costs |
|
16,237 |
|
27,614 |
|
(11,377 |
) |
-41 |
% | |||
Selling, general and administrative expense |
|
90,538 |
|
69,337 |
|
21,201 |
|
31 |
% | |||
Depreciation and software and leasehold amortization |
|
17,955 |
|
14,390 |
|
3,565 |
|
25 |
% | |||
Amortization of identifiable intangible assets |
|
6,286 |
|
9,702 |
|
(3,416 |
) |
-35 |
% | |||
Fair value adjustment to contingent consideration |
|
1,142 |
|
|
|
1,142 |
|
n/m |
| |||
Loss on disposition of property and equipment |
|
351 |
|
22 |
|
329 |
|
n/m |
| |||
Other operating expense |
|
226 |
|
96 |
|
130 |
|
n/m |
| |||
Total Operating Expense |
|
247,903 |
|
223,185 |
|
24,718 |
|
11 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
Income From Operations |
|
424 |
|
13,777 |
|
(13,353 |
) |
-97 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
Interest Expense (Income) |
|
|
|
|
|
|
|
|
| |||
Interest expense |
|
8,729 |
|
3,843 |
|
4,886 |
|
127 |
% | |||
Interest income |
|
(13 |
) |
(12 |
) |
(1 |
) |
8 |
% | |||
Net Interest Expense |
|
8,716 |
|
3,831 |
|
4,885 |
|
128 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
Income (Loss) Before Income Taxes |
|
(8,292 |
) |
9,946 |
|
(18,238 |
) |
n/m |
| |||
|
|
|
|
|
|
|
|
|
| |||
Provision (Benefit) for Income Taxes |
|
(2,575 |
) |
3,167 |
|
(5,742 |
) |
n/m |
| |||
|
|
|
|
|
|
|
|
|
| |||
Net Income (Loss) |
|
$ |
(5,717 |
) |
$ |
6,779 |
|
$ |
(12,496 |
) |
n/m |
|
n/m not meaningful
Revenue
The increase in operating revenue for the six months ended June 30, 2014 as compared to the same period in the prior year was driven by a $34.8 million increase in the Technology segment, offset by an $11.0 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 $13.1 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 $25.6 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 a $9.8 million decrease in costs for legal notification and advertising services and a $1.6 million decrease in other production costs as compared to the six months ended June 30, 2013, which included costs related to a large private anti-trust settlement engagement.
The decline in reimbursed direct costs for the six months ended June 30, 2014 as compared to the same period of 2013 corresponds to the decline in revenue from reimbursed expenses.
Selling, general and administrative expenses increased $21.2 million and included an increase of $13.1 million in compensation-related expense which includes $10.3 million in post-employment benefits related to executive resignation agreements. The increase in selling, general and administrative expenses also includes an increase of $2.4 million in outside professional services and an increase of $3.0 million in office-related expenses such as lease expense, maintenance, utilities and supplies primarily related to the expansion of our document review centers capacity.
Depreciation and software and leasehold amortization costs increased $3.6 million as a result of increased depreciation on equipment and software related to segment investments.
Amortization of intangible assets decreased $3.4 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 six months ended June 30, 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 six months ended June 30, 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 to an increased principal amount of debt outstanding during the first half of 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 six months ended June 30, 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
Our effective tax rate for the six months ended June 30, 2014 was 31.1% and was 31.8% for the comparable prior year period. Our 2014 effective tax rate is lower than the U.S. statutory rate because we earned a greater proportion of income in international jurisdictions compared to in the U.S. The reduced 2013 rate reflected a discrete benefit related to the extension of the federal research credit through tax year 2013. 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 six months of 2013.
Results of Operations by Segment
The following segment discussion is presented on a basis consistent with our segment disclosure contained in Note 7 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.
Amounts in thousands
|
|
Six Months Ended June 30, |
|
$ |
|
|
| |||||
|
|
2014 |
|
2013 |
|
(Decrease) |
|
% Change |
| |||
Operating revenue |
|
|
|
|
|
|
|
|
| |||
Technology |
|
$ |
159,692 |
|
$ |
124,913 |
|
$ |
34,779 |
|
28 |
% |
Bankruptcy and Settlement Administration |
|
71,979 |
|
82,971 |
|
(10,992 |
) |
-13 |
% | |||
Total operating revenue |
|
$ |
231,671 |
|
$ |
207,884 |
|
$ |
23,787 |
|
11 |
% |
|
|
|
|
|
|
|
|
|
| |||
Reimbursable expenses |
|
|
|
|
|
|
|
|
| |||
Technology |
|
$ |
1,957 |
|
$ |
822 |
|
$ |
1,135 |
|
138 |
% |
Bankruptcy and Settlement Administration |
|
14,699 |
|
28,256 |
|
(13,557 |
) |
-48 |
% | |||
Total reimbursable expenses |
|
$ |
16,656 |
|
$ |
29,078 |
|
$ |
(12,422 |
) |
-43 |
% |
|
|
|
|
|
|
|
|
|
| |||
Direct costs, selling, general and administrative costs |
|
|
|
|
|
|
|
|
| |||
Technology |
|
$ |
119,252 |
|
$ |
87,666 |
|
$ |
31,586 |
|
36 |
% |
Bankruptcy and Settlement Administration |
|
60,824 |
|
85,705 |
|
(24,881 |
) |
-29 |
% | |||
Intercompany eliminations |
|
(438 |
) |
(83 |
) |
(355 |
) |
n/m |
| |||
Total direct costs, selling, general and administrative costs |
|
$ |
179,638 |
|
$ |
173,288 |
|
$ |
6,350 |
|
4 |
% |
|
|
|
|
|
|
|
|
|
| |||
Segment performance measure |
|
|
|
|
|
|
|
|
| |||
Technology |
|
$ |
42,835 |
|
$ |
38,152 |
|
$ |
4,683 |
|
12 |
% |
Bankruptcy and Settlement Administration |
|
25,854 |
|
25,522 |
|
332 |
|
1 |
% | |||
Total segment performance measure |
|
$ |
68,689 |
|
$ |
63,674 |
|
$ |
5,015 |
|
8 |
% |
|
|
|
|
|
|
|
|
|
| |||
Segment performance measure |
|
$ |
68,689 |
|
$ |
63,674 |
|
$ |
5,015 |
|
8 |
% |
Unallocated corporate expenses |
|
(38,029 |
) |
(21,323 |
) |
(16,706 |
) |
78 |
% | |||
Share-based compensation expense |
|
(4,276 |
) |
(4,364 |
) |
88 |
|
-2 |
% | |||
Depreciation and software and leasehold amortization |
|
(17,955 |
) |
(14,390 |
) |
(3,565 |
) |
25 |
% | |||
Amortization of intangible assets |
|
(6,286 |
) |
(9,702 |
) |
3,416 |
|
-35 |
% | |||
Fair value adjustment to contingent consideration |
|
(1,142 |
) |
|
|
(1,142 |
) |
n/m |
| |||
Loss on disposition of property and equipment |
|
(351 |
) |
(22 |
) |
(329 |
) |
n/m |
| |||
Other operating expense |
|
(226 |
) |
(96 |
) |
(130 |
) |
n/m |
| |||
Income from operations |
|
424 |
|
13,777 |
|
(13,353 |
) |
-97 |
% | |||
Interest expense, net |
|
(8,716 |
) |
(3,831 |
) |
(4,885 |
) |
128 |
% | |||
Income (loss) before income taxes |
|
$ |
(8,292 |
) |
$ |
9,946 |
|
$ |
(18,238 |
) |
n/m |
|
n/m not meaningful
Technology Segment
Operating revenue increased $34.8 million during the six months ended June 30, 2014 as compared to the prior year period primarily as a result of an increase in eDiscovery engagements as compared to the same period in 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 28% increase in year-to-date operating revenue over the prior year second quarter.
Direct, selling, general and administrative costs increased $31.6 million primarily in support of revenue growth and included a $22.5 million increase in compensation related expenses. The increase in compensation related expenses includes an increase of $19.8 million related to compensation paid to project-based attorneys for document review services for the six months ended June 30, 2014 as compared to the same period in 2013. This direct cost of services varies directly with the amount of document review services revenue. The change in direct, selling, general and administrative costs also includes a $2.9 million increase in information technology-related costs, a $2.2 million increase in office-related expenses such as lease expense, maintenance, utilities and supplies primarily related to the expansion of our document review centers capacity and a $2.0 million increase in other production related costs.
The Technology segments financial results for the six months ended June 30, 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 Companys overall margin.
Bankruptcy and Settlement Administration Segment
Operating revenue decreased $11.0 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 six months 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 $27.1 million decrease in direct cost of services which is related to the large private anti-trust engagement which was active during the first quarter of 2013. This decrease was partially offset by a $1.4 million increase in compensation related expenses.
Liquidity and Capital Resources
Cash flows from operating activities
During the six months ended June 30, 2014, our operating activities provided net cash of $18.8 million. Included in net cash used by operating activities was a net loss of $5.7 million which included $30.0 million of non-cash expenses for a total contribution to cash flows of $24.3 million related to net income adjusted to exclude non-cash expenses. Cash used by operating activities also included a $5.5 million net use of cash resulting from changes in operating assets and liabilities, primarily from a $2.4 million decrease in accounts payable and other liabilities, a decrease in income taxes payable of $6.4 million and an increase of $1.8 million in prepaid expenses and other assets. These uses of cash were partially offset by a $6.9 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 six months ended June 30, 2013, our operating activities used net cash of $15.4 million. Included in net cash used by operating activities was net income of $6.8 million including non-cash expenses of $29.8 million, for a total contribution to cash flows of $36.6 million related to net income adjusted to exclude non-cash expenses. Cash used by operating activities also included a $52.0 million net use of cash resulting from changes in operating assets and liabilities, primarily from a $45.2 million increase in trade accounts receivable related to several large active matters in the first half of 2013. Cash used by operating activities also included a decrease in 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 $4.3 million increase in accounts payable and other liabilities.
Cash flows from investing activities
During the six months ended June 30, 2014 and 2013, we used cash of $19.4 million and $12.2 million, respectively, for the purchase of property and equipment, including computer hardware and purchased software licenses primarily for our Technology segment and computer hardware primarily for our network infrastructure. Also included in this amount for the six months ended June 30, 2013 was approximately $5.1 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 six months ended June 30, 2014 and 2013, we used cash of $3.1 million and $3.2 million, respectively, to fund internal costs related to the development of software.
Cash flows from financing activities
During the six months ended June 30, 2014, we repaid $1.5 million under the Credit Agreement along with $2.8 million of principal payments related to other debt. During the six months ended June 30, 2014 we also paid $5.0 million of deferred acquisition consideration related to the December 28, 2011 acquisition of De Novo Legal LLC, $6.3 million in dividends and we used $3.6 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 option exercises. Cash proceeds from the exercise of stock options were $6.8 million. See Notes 3 and 9 of our Notes to Condensed Consolidated Financial Statements for further information.
During the six months ended June 30, 2013, we borrowed $72.0 million and repaid $33.0 million under our senior revolving loan as part of our former credit facility for a net increase of $39.0 million, along with $1.8 million of principal payments related to other debt. In addition, we paid $6.5 million in dividends and used $3.5 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 option exercises.
We believe that funds generated from operations, plus our existing cash balances and amounts available under our 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 June 30, 2014 and December 31, 2013, our foreign subsidiaries had $4.6 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.
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 the prime rate subject to a 1.75% floor; or (2) 3.50% plus one, two, three or six month LIBOR subject to a 0.75% LIBOR floor. As of June 30, 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 June 30, 2014, the notional amount of the interest rate cap was approximately $148.9 million and 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 with a notional amount of 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 the date of which the Companys interest rate cap agreement expires, 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 companys obligation under the term loan. These cash flow hedges were determined to be highly effective at inception and are expected to be highly effective in mitigating the risks of rising interest rates in the future. See Note 3 to the Condensed Consolidated Financial Statements for further detail.
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 and six months ended June 30, 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 and six months ended June 30, 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 Chief Financial Officer (CFO) of the effectiveness of the design and operations of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) or 15d-15(e). Based on this evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Change in Internal Controls over Financial Reporting
There have been no changes in our internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) or 15d-15(f), during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are at times involved in litigation and other legal claims in the ordinary course of business. When appropriate in managements estimation, we may record reserves in our financial statements for pending litigation and other claims. We do not believe that any of the current pending legal proceedings to which we are a party will have a material impact on our results of operations or financial condition.
There have been no material changes in our Risk Factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 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 six months ended June 30, 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 June 30, 2014, we repurchased 29,440 shares for approximately $0.4 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 June 30, 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 |
|
Average Price |
|
Total Number of |
|
Total Number of |
|
Maximum Number |
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
April 1 April 30 |
|
29,440 |
|
$ |
14.01 |
|
29,440 |
|
|
|
$ |
35,000,000 |
|
May 1 May 31 |
|
|
|
|
|
|
|
|
|
$ |
35,000,000 |
| |
June 1 June 30 |
|
|
|
|
|
|
|
|
|
$ |
35,000,000 |
| |
Total Activity for the Quarter Ended June 30, 2014 |
|
29,440 |
|
$ |
14.01 |
|
29,440 |
|
|
|
|
|
10.1 Executive Resignation Agreement and General Release of Claims dated March 14, 2014, among Epiq Systems, Inc. and Elizabeth M. Braham. Incorporated by reference and previously filed as Exhibit 10.1 to the Registrants quarterly report on Form 10-Q/A with the Securities and Exchange Commission on June 13, 2014.
10.2 Executive Consulting Advisory Agreement, dated March 14, 2014, among Epiq Systems, Inc. and Elizabeth M. Braham. Incorporated by reference and previously filed as Exhibit 10.2 to the Registrants quarterly report on Form 10-Q/A with the Securities and Exchange Commission on June 13, 2014.
10.3 First Amendment, dated March 26, 2014, to the Credit Agreement dated as of August 27, 2013 among Epiq Systems, Inc. and the domestic subsidiaries named therein as guarantors, a syndicate of banks and institutional investors as lenders, KeyBank National Association as the LC issuer, swing line lender, administrative agent. Incorporated by reference and previously filed as Exhibit 10.1 to the Registrants current report on Form 8-K filed with the Securities and Exchange Commission on March 27, 2014.
10.4 2004 Equity Incentive Plan, as approved on June 11, 2014, and as amended and restated effective January 1, 2014. Incorporated by reference and previously filed as Exhibit 10.1 to the Registrants current report on Form 8-K with the Securities and Exchange Commission on June 12, 2014.
10.5 Executive Resignation Agreement and General Release of Claims dated June 6, 2014, among Epiq Systems, Inc. and Christopher E. Olofson and is filed herewith.
10.6 Executive Consulting Advisory Agreement, dated June 6, 2014, among Epiq Systems, Inc. and Christopher E. Olofson and is filed herewith.
10.7 Karin-Joyce Tjon Employment Offer letter dated June 17, 2014 among Epiq Systems, Inc. and Karin-Joyce Tjon. Incorporated by reference and previously filed as Exhibit 10.1 to the Registrants current report on Form 8-K with the Securities and Exchange Commission on June 20, 2014.
10.8 Executive Employment Agreement dated June 17, 2014 among Epiq Systems, Inc. and Karin-Joyce Tjon Sien Fat. Incorporated by reference and previously filed as Exhibit 10.2 to the Registrants current report on Form 8-K with the Securities and Exchange Commission on June 20, 2014.
31.1 Certifications of Chief Executive Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of Chief Financial Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language). : (i) Condensed Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2013, (ii) Condensed Consolidated Statements of Comprehensive Income for the
three and six months ended June 30, 2014 and 2013, (iii) Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013, and (v) and (vi) Notes to Condensed Consolidated Financial Statements.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
Epiq Systems, Inc. |
|
|
|
Date: August 15, 2014 |
|
/s/ Tom W. Olofson |
|
|
Tom W. Olofson |
|
|
Chairman of the Board |
|
|
Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
Date: August 15, 2014 |
|
/s/ Karin-Joyce Tjon Sien Fat |
|
|
Karin-Joyce Tjon Sien Fat |
|
|
Executive Vice President and Chief Financial Officer |
|
|
(Principal Financial Officer) |
EXHIBIT 10.5
EXECUTIVE RESIGNATION AGREEMENT
AND GENERAL RELEASE OF CLAIMS
THIS EXECUTIVE RESIGNATION AGREEMENT AND GENERAL RELEASE OF CLAIMS (this Agreement), is made and entered into by and between Christopher E. Olofson (Executive) and Epiq Systems, Inc., a Missouri corporation (Epiq), each a (Party) and collectively, (the Parties).
1. Executive shall resign his employment with Epiq and each of its affiliates and subsidiaries (collectively, Epiq Systems) (including any and all positions that Executive holds as a Director / Board Member of any Epiq subsidiary) effective as of 5:00 p.m. Central Standard Time on June 30, 2014 (the Resignation Date), and in connection with such resignation, the parties are entering into this Agreement to provide for among other things a general release of claims in exchange for the consideration set forth herein. If Executive is re-elected to Epiqs Board of Directors, he is not resigning from that position as part of this Agreement. Epiq has paid and/or will pay Executives base salary and accrued vacation, if any, earned through the Resignation Date (less required payroll deductions and withholdings). As of the Resignation Date, and except as expressly provided in the Executive Consulting Advisory Agreement between Executive and Epiq, to be effective July 1, 2014 (subject to this Agreement being effective) (the Advisory Agreement), it is agreed that Executive will be relieved of all duties associated with Executives employment (including without limitation as set forth above), and that Executive will not, and has no actual or apparent authority to, take any actions or incur any liability on behalf of Epiq Systems. Executive agrees that for the time period that begins on the Resignation Date and continues through the six month anniversary of the Resignation Date, Executive shall promptly provide Epiq written notification regarding any new employment (including with respect to any consulting arrangement, except as between Executive and Epiq) accepted by Executive including the name and principal address of the new company and the job title of Executives new employment (or consulting arrangement, as applicable) with such company or person. Notwithstanding anything in this Agreement to the contrary, from the Effective Date through the six month anniversary of the Resignation Date, Executive hereby grants consent to Epiq to notify any new employer of Executive or other person regarding Executives non-compete and/or non-solicitation obligations under this Agreement.
2. Executive acknowledges and agrees that on and after the Effective Date of this Agreement, Executive shall continue to comply with and be bound by all obligations set forth in Exhibit A hereto, which shall control over any directly conflicting provisions in any employment-related agreement between Executive and Epiq (the Post-Termination Obligations).
3. In consideration for the mutual promises contained herein, subject to this Agreement becoming effective as set forth in Section 13 below, Epiq will provide Executive with the following lump sum payments and benefits (collectively, the Special Consideration):
(a) four severance payments of One Million, Nine Hundred Forty-Five Thousand Dollars and Zero Cents ($1,945,000.00)(less withholding for federal tax, state tax, and other standard deductions) each; such payments will be made via electronic transfer to Executive on each of: (i) on the later of (x) July 1, 2014 or (y) five (5) business days following the Effective Date (as defined below); (ii) no later than January 2, 2015; (iii) no later than July 3,
2015; and (iv) no later than January 5, 2016 in connection with the execution by Executive and delivery to Epiq of the release certificate annexed hereto as Exhibit B (the Additional Release); provided that Epiq delivers the Additional Release to Executive and Executive signs the Additional Release on or after December 15, 2015 and not later than the close of business on December 21, 2015 and promptly delivers such signed Additional Release to Epiq; and (b) with respect to that certain automobile lease (the Lease) for the company car (VIN #WBAFR9C58CC271464) (the Automobile) wherein Epiq is the lessee and the Automobile was a perquisite provided to Executive during the term of Executives employment, Epiq shall: (x) provide Executive with exclusive use of the Automobile after the Resignation Date and through termination of the Lease and continue to maintain and timely pay all required payments under the Lease through the termination of the Lease including but not limited to lease, tax, title, and insurance, such insurance to be consistent with coverage currently in place, (y) cause updated evidence of insurance cards to be timely provided to Executive during the Lease term, and (z) upon the conclusion of the Lease (or earlier in Epiqs discretion pursuant to the Lease), buy out the Lease and purchase the Automobile including to pay any applicable taxes and other fees and cause the ownership of the Automobile including the certificate of title to be transferred to Executive, provided that upon and following such transfer of ownership Epiq shall not have any further liability for or obligation pertaining to the Automobile including but not limited to sales, tax, title and/or insurance.
The Special Consideration will not be paid, granted and performed until on and after the Effective Date. The Parties understand and agree that in the event of a Change in Control (as defined in the Epiq 2004 Equity Incentive Plan), the timing of the payments of any as yet unpaid installments of the Special Consideration set forth above shall accelerate in full such that any remaining unpaid installments of the Special Consideration shall be paid to Executive on the later of five (5) business days after the closing of such Change in Control, or five (5) business days following the Effective Date of the Additional Release annexed hereto as Exhibit B.
The Special Consideration will not be considered compensation for purposes of any employee benefit plan, program, policy or arrangement maintained or hereafter established by Epiq Systems. Executive acknowledges that the Special Consideration represents consideration for signing and abiding by this Agreement, including the Release (as defined below), and continued compliance with the Post-Termination Obligations, and is not salary, wages or benefits to which Executive was otherwise entitled. Epiq and Executive agree that Epiq will have paid Executive all salary, benefits, perquisites, and compensation of any nature, due and owing in accordance with the payroll schedule in existence as of the Resignation Date. No additional salary, benefits, perquisites, or compensation of any nature are payable unless specifically provided for herein.
In addition, Epiq agrees to pay Executive for all of Executives accrued but unused vacation pay (accrued through the Resignation Date), if any. Executive further specifically acknowledges and agrees that the Agreement does not provide for, and that Executive is ineligible for continued participation in any 401(k) retirement savings or disability insurance plan following the Resignation Date.
Executive acknowledges and agrees that any unvested stock options Executive had or may have been entitled to have as of the Resignation Date will not be accelerated or vested and will be automatically terminated and forfeited as of the Resignation Date.
Executives rights with respect to any equity awards (such as stock options or grants of restricted stock) shall be determined in accordance with the terms of such equity awards and the applicable equity award plans and/or agreements, which are not modified in any way by this Agreement; provided that Executive acknowledges and agrees that the one hundred twenty-five thousand (125,000) restricted shares of common stock of Epiq awarded to Executive on or about January 28, 2014, by the Compensation Committee of the Board of Directors of Epiq, pursuant to the Epiq 2004 Equity Incentive Plan, as amended (the 2004 Plan), the vesting of which was contingent upon among other things the achievement by Epiq of certain performance-based objectives for fiscal year 2014 (the Award), has been forfeited pursuant to the Plan as of the Resignation Date, and in connection therewith, that certain Restricted Stock Award Agreement between Executive and Epiq, which was entered into in connection with such Award, is void and of no effect. Executive understands and acknowledges that Executive shall not be entitled to any payments or benefits (including, but not limited to, any bonus or other compensation for Epiqs 2014 fiscal year) from Epiq other than those expressly set forth in this Section 3.
4. Executive acknowledges and agrees that Executive will not be eligible after the Resignation Date for any other compensation, bonus, insurance coverage (other than that for which the Executive may be eligible for under COBRA), pay, or benefits (cash or non-cash) from Epiq. Executive understands that Executive shall not accrue vacation, sick or personal days after the Resignation Date. Executive waives and forever discharges the Released Parties (as defined below) from any liability for any payment or benefits of any kind which might otherwise be payable as a result of Executives employment with Epiq or termination therefrom (other than any obligations of Epiq under the Advisory Agreement, the Indemnification Agreement, the Articles of Incorporation or the Bylaws, as defined below), it being the intention of the parties to convert and merge all such claims and rights into this Agreement.
4.5. Following the Resignation Date, and subject to Executives personal and professional obligations and upon reasonable notice and at reasonable times, Executive agrees to reasonably assist Epiq Systems and its attorneys in any litigation or arbitration related to Epiq Systems (or any of its) businesses in which Executive is named as a party or of which Executive has unique specific and relevant knowledge, documents or expertise. Executive acknowledges and agrees that such reasonable assistance may include, but will not be limited to, providing background information regarding any matter on which Executive previously worked, aiding in the drafting of declarations, executing declarations or similar documents, testifying or otherwise appearing at investigation interviews, depositions, arbitrations or court hearings and preparation for the above-described or similar activities. Executives reasonable assistance will be provided at reasonable times and scheduled in such a manner as to accommodate Executives personal and professional commitments. Executive understands and agrees that for so long as he is receiving payments of the Special Consideration, Executive will receive no additional compensation for Executives reasonable assistance beyond the Special Consideration, except that Epiq agrees to reimburse Executive for any reasonable costs and expenses that are incurred by Executive in providing such assistance, including but not limited to airfare, meals, and accommodations. Following January 1, 2016, to the extent that Epiq Systems requires Executives assistance pursuant to this Section 4.5, in addition to
reimbursement for any reasonable costs and expenses as described above, Epiq will also pay Executive on an hourly consulting basis at a rate of pay to be mutually agreed to by the Parties. If Executive is contacted by a third party in regard to any dispute, potential dispute, litigation or potential litigation adverse to Epiq, Executive will first contact the chief legal officer of the Epiq Legal Department (the Epiq CLO) before further communicating with such person or persons, and will allow legal counsel of Epiqs choosing without expense to Executive to participate in any such communication. For the duration of Executives employment and continuing after the Resignation Date, Executive promises not to encourage, counsel or assist (directly or indirectly) any current or former employee, or third-party in the preparation, prosecution or defense of any civil dispute, difference, grievance, claim, charge or complaint adverse to Epiq Systems unless compelled to do so by valid legal process. If Executive receives notice that Executive is required to provide testimony or confidential information in any context about Epiq Systems to any third party, Executive agrees to inform the Epiq CLO. Executive, thereafter, agrees to reasonably cooperate with Epiq Systems and its attorneys in responding to (if necessary) such legal process. In that regard, Executive agrees not to testify or provide any information in circumstances described in this paragraph unless: (a) Epiq first provides its written consent to Executive to provide testimony; or (b) after Executive informs the Epiq CLO that he has been served with a subpoena or court order that may require him to testify about matters subject to this paragraph, Epiq has informed Executive in writing that it has fully and within all legally available timeframes exhausted its efforts to challenge any request, subpoena or court order requiring Executives testimony. If Executive is required to provide testimony in any such context, Executive is, of course, expected to testify truthfully. If, at any time after the Resignation Date, Executive is required to give testimony in any legal proceeding adverse to Epiq Systems, or regarding Executives employment with Epiq, Epiq agrees to provide without expense to the Executive, and Executive agrees to retain, Epiqs outside counsel engaged in connection with the matter; provided, however, should there be an actual or potential legal conflict of interest preventing such outside counsel from representing both Epiq (and any of its affiliates) and Executive, then Epiq shall provide Executive substitute counsel of Executives choosing and which is reasonably agreed upon by Epiq, without expense to Executive.
Executive will continue to be indemnified for Executives actions and omissions taken while employed by Epiq and under that certain Indemnification Agreement effective as of July 29, 2009, between Epiq and Executive (the Indemnification Agreement) and to the same extent as other then-current officers of Epiq under the Epiq Amended and Restated Articles of Incorporation and Bylaws, each as amended through the date hereof and then in effect (respectively, the Articles of Incorporation and Bylaws), and Executive will continue to be covered by the Epiq directors and officers liability insurance policy as in effect from time to time for Executives actions and omissions taken while employed by Epiq to the same extent as other then-current directors and officers of Epiq, each subject to the requirements of applicable law. Further, the Released Parties (defined below), fully release and forever discharge Executive from any and all claims that they have or may claim to have as of the date this Agreement is executed related to Executives actions or omissions as an employee, officer or director of Epiq to the extent such claims are fully covered by applicable insurance. The Released Parties represent that as of the date of this Agreement, they are not aware of any Claims (defined below) of potential liability against Executive arising out of Executives employment with Epiq.
5. In consideration for the Special Consideration described in Section 3 above, Executive on behalf of Executive and all of Executives heirs and/or personal representatives hereby releases and forever discharges Epiq Systems and each of their respective successors, assigns, and all of their respective current or former: employees, officers, directors, members, owners, shareholders, insurers, re-insurers, investors, attorneys, agents, representatives, and employee benefit programs, and the trustees, administrators and insurers of such programs (sometimes referred to herein as the Released Parties), of and from any and all claims for relief of any kind, whether known or unknown, including any act, omission, claim, demand, judgment, loss, damage, counterclaim, liability, obligation, complaint, charge, suit, action or cause of action of any kind or nature whatsoever (collectively, Claims) which Executive may have had, or may now have, relating to matters occurring on or before the date hereof, except those Claims (i) arising out of the performance of this Agreement; (ii) relating to Executives rights to indemnification under the Indemnification Agreement, the Articles of Incorporation and/or the Bylaws; and (iii) Executives rights under employee benefit plans of Epiq Systems. Any claims Executive may have or claim to have in his capacity as a shareholder of Epiq Systems which arise as of the date this Agreement is executed, are also hereby expressly waived; however Executive is not waiving any prospective claims of shareholder rights. Without limiting in any way the generality of the foregoing general release, Executive specifically releases the Released Parties from any Claims which may have existed or which may now exist from the beginning of time to the date of this Agreement, including, without limitation: any claims Executive may have arising from or relating to Executives position as a member of the Board of Directors of Epiq (excluding all rights to indemnification and insurance coverage as specified in Section 4.5 above), a shareholder of Epiq, and his employment with or termination from employment with Epiq, including but not limited to breach of contract, wrongful termination, constructive discharge, harassment, discrimination, retaliation, fraud, defamation, and infliction of emotional distress; a release of any rights or claims Executive may have under Title VII of the Civil Rights Act of 1964, as amended, and the Civil Rights Act of 1991 (which prohibit discrimination in employment based upon race, color, sex, religion and national origin); the Age Discrimination in Employment Act of 1967, as amended (which prohibits age discrimination in employment); the Older Workers Benefit Protection Act (which prohibits age discrimination in employment); the Americans with Disabilities Act of 1990, as amended, and the Rehabilitation Act of 1973 (which prohibit discrimination based upon disability); the Family and Medical Leave Act of 1993 (which prohibits discrimination based on requesting or taking a family or medical leave); Section 1981 of the Civil Rights Act of 1866 (which prohibits discrimination based upon race); Section 1985(3) of the Civil Rights Act of 1871 (which prohibits conspiracies to discriminate); the Employee Retirement Income Security Act of 1974, as amended (which prohibits discrimination with regard to benefits); Section 4980B of the Internal Revenue Code of 1986, as amended (except as expressly set forth in herein); the National Labor Relations Act, as amended; the Occupational Safety and Health Act of 1970, as amended; the Sarbanes-Oxley Act of 2002, as amended; the Fair Labor Standards Act, as amended; the Equal Pay Act of 1963, as amended; New York, California, Florida, Illinois, Kansas and Missouri state, city, or local statutes or common law, as amended; and any other federal, state, city or local (or other) laws of any kind or nature. This includes a release by Executive of any claims for wrongful discharge, constructive discharge, harassment, discrimination, retaliation, whistleblowing, breach of contract, failure to receive proper notices as a Board of Directors member, torts or any other claims in any way related to Executives employment with, resignation from, or termination from employment with Epiq. Executive further releases any and all claims of whatever nature or source whether known or unknown which arise either partially or entirely from any other action or inaction by any Released Party up to the execution date of this Agreement (such releases
provided for in this Agreement by Executive for the benefit of the Released Parties collectively being the Release). Nothing in this Release or this Agreement shall constitute a release of any Claim that Executive may hereafter have (i) arising out of the performance of this Agreement; (ii) relating to Executives rights under employee benefit plans of Epiq Systems; or (iii) relating to Executives rights to indemnification under the Indemnification Agreement, the Articles and/or the Bylaws.
6. Executive warrants, with the understanding that such warranty is material to this transaction, that Executive has not asserted, and no person or entity has asserted on Executives behalf, any claim, demand, cause of action or lawsuit arising out of or related in any way to the Executives employment with, resignation from, or termination from Epiq or regarding any of the Released Parties herein. Executive specifically agrees that Executive will not in the future file any complaint, charge or lawsuit including to seek private remedies based on actions or omissions that are the subject of the Release, with any court or any other tribunal; nor will Executive file or assert any claim, complaint or charge seeking individual relief with any local, state or federal governmental agency. Nothing in this Section 6 shall limit the right of Executive to pursue any Claim against Epiq (i) arising out of the performance of this Agreement; (ii) relating to Executives rights under employee benefit plans of Epiq Systems; or (iii) relating to Executives rights to indemnification under the Indemnification Agreement, the Articles and/or the Bylaws.
7. Executive agrees that if the Executive does file any complaint, charge or lawsuit in violation of Section 6 above, then Epiq and/or any of the Released Parties, as applicable, shall be entitled to recover from Executive the entire monetary value as of the Effective Date of the Special Consideration described in Section 3 above, as well as its/their costs and expenses incurred in defense of such complaint, charge or lawsuit, including reasonable attorneys fees (except as provided in Section 8 below). Nothing in this section prohibits Executive from participating in and cooperating with any investigation by a governmental agency.
8. Notwithstanding anything herein to the contrary, the parties acknowledge and agree that although Executive has specifically agreed to release any claim of age discrimination under the ADEA pursuant to Section 5 above, the remedies described in Section 7 above shall not apply to any complaint, charge or lawsuit under the ADEA challenging the validity of Executives agreement to release any ADEA claim. Accordingly, if Executive breaches this Agreement by filing and/or asserting a complaint, charge or lawsuit against Epiq and/or any of the Released Parties under the ADEA, or if Executive files a lawsuit or complaint to challenge the validity of Executives release of any ADEA claim, then Epiq and/or the Released Parties, as applicable, will not be entitled to recover from Executive any amount of the Special Consideration, nor any of its/their costs, expenses or attorneys fees incurred in defense of such action, except as may be specifically authorized under federal law; provided, however, that the release set forth herein may be pleaded as a full and complete defense to any such action, suit, administrative claim or other proceeding which may be instituted, prosecuted or attempted in breach of this Agreement.
9. Executive covenants and agrees, with the understanding that such covenant is material to this Agreement, not to: (i) publicize or disclose in any way any terms of this Agreement, except to Executives spouse or partner, attorneys and/or financial or tax advisors (provided such financial and/or tax advisors agree to keep such information confidential), and as may be required by law; or (ii) make any disparaging or derogatory statements to anyone regarding any Released Party or regarding any of Epiq Systems products and/or services unless such statements are made truthfully and only in response to a subpoena or other legal process. It is expressly understood these covenants
do not apply to any communications made (i) only directly to a family member of Executive, or his spouse or partner; or (ii) to Epiq Board Members in Executives capacity as a member of the Board of Directors and in furtherance of Executives fiduciary duties; or (iii) that are consistent with the talking points developed per Section 9.5 below. Epiq, on behalf of Epiq Systems and its respective directors, officers and employees, covenants and agrees, with the understanding that such covenant is material to this Agreement, not to (i) publicize or disclose in any way the terms of this Agreement, except to its employees with a business need to know, attorneys, financial and/or tax advisors (including its external auditor) with a business need to know, until Epiq is required to disclose, and discloses, this Agreement and the Advisory Agreement and/or the material terms of such agreements in connection with legal or regulatory requirements; and (ii) make any disparaging, derogatory, or otherwise unfavorable statements to any third party regarding Executive unless such statements are made truthfully and only in response to a subpoena or other legal process.
9.5 Executive agrees to direct all requests for references or inquiries regarding Executives employment with Epiq to Epiqs President and Chief Operating Officer, who will provide a positive reference that is consistent with publicly filed documents and highlights Executives contributions to the Company during his years of service. Executive and Epiq agree to work cooperatively to prepare a list of questions and mutually agreeable talking points related to any inquiries regarding Executives employment at and departure from Epiq and agree that any communications made consistent with such talking points shall not be a breach of this Agreement. Nothing in this section shall prevent either Party from referring to Epiqs publicly filed documents related to Executives employment and the conclusion of that employment, including but not limited to any related SEC filings or Company press releases. A copy of Epiqs press release is annexed hereto as Exhibit C.
10. Executive warrants and agrees that he will make available for pick up, delete and or destroy all Epiq property and information as soon as reasonably practicable. This includes, but it not limited to any and all hard copies, any and all electronic copies, and all Confidential Information (as defined in Exhibit A) in Executives possession, custody or control on the Effective Date. Promptly following the execution of this Agreement, Executive will provide an inventory list to Epiqs CLO of all equipment located in his Chicago home or to which he has immediate access to facilitate a discussion regarding making available for pick up by an Epiq representative of all Epiq Systems property, or wiping of all related electronic resources. If Executive inadvertently does not return, delete and/or destroy Epiq Systems documents or property that should have been returned, deleted and/or destroyed earlier, then Executive will promptly make available for pick up by an Epiq representative, delete and/or destroy any such items upon discovering them. Notwithstanding the foregoing, Executive shall be allowed to retain such Confidential Information as mutually agreed to by the Parties solely as it pertains to his duties and responsibilities as a member of Epiqs Board of Directors or in order to fulfill his duties and responsibilities under the Advisory Agreement. Executive agrees that if he is reelected at the next annual shareholder meeting, he will not receive any compensation for his services as a member of the Epiq Board of Directors.
11. Executive also agrees to provide Epiq, on or before the Resignation Date: (a) all passwords or other codes of which he is aware are necessary for Epiq to gain access to any and all software or data maintained or stored in Epiq-owned information technology assets; (b) all keys and key fobs to any Epiq office or facility including any leased corporate apartment; and (c) employee identification cards used for any Epiq Systems office. Notwithstanding the foregoing, Executive
shall be provided certain computer equipment as reasonably necessary pertaining to his duties and responsibilities as a member of Epiqs Board of Directors or in order to fulfill his duties and responsibilities under the Advisory Agreement.
12. The Releases may be pleaded as a full and complete defense to any Claim or other proceeding that may be instituted, prosecuted, alleged or attempted in breach of this Agreement.
13. Besides the provisions contained herein, and by execution of this document, Executive expressly waives any and all rights to claims arising under the Age Discrimination in Employment Act of 1967 (the ADEA), as amended, and the Older Workers Benefit Protection Act (the OWBPA) that may exist as of the date this Agreement is executed and:
(a) Executive acknowledges that Executives waiver of rights or claims arising under the ADEA is in writing, written in a manner calculated to be understood, and is understood by Executive;
(b) Executive expressly understands this waiver refers to rights or claims arising under the ADEA;
(c) Executive expressly understands that by execution of this document, Executive does not waive any ADEA rights or claims that may arise after the date this Agreement is executed;
(d) Executive acknowledges that the waiver of Executives rights of claims arising under the ADEA is in exchange for the consideration outlined above;
(e) Executive has been advised and encouraged in writing (via this Agreement) to consult with an attorney prior to signing this Agreement;
(f) Executive has been given twenty-one (21) days after receipt of this Agreement (Waiting Period) in which to consider it (after which time this Agreement, if not accepted by execution by the Executive, shall be null and void), although Executive is free to sign the Agreement before then, but further acknowledges that by electing to execute this Agreement prior to the expiration of the Waiting Period, Executive has waived Executives right to consider this Agreement for the entire Waiting Period;
(g) Executive understands that this Agreement, including the Release, shall not become effective and enforceable until the eighth day following execution of the Agreement (such date upon which this Agreement becomes effective being the Effective Date), and that at any time prior to such day Executive may revoke this Agreement.
14. Executive agrees that no promise or agreement not herein expressed has been made by Epiq or any Released Party; that this Agreement is not executed in reliance upon any statement or representation made by Epiq or any Released Party; that the mutual promises contained in this Agreement are the sole and only consideration for this Agreement and are accepted in full compromise and settlement and in satisfaction of any and every such Claim; that this Agreement is not to be construed as an admission of liability by Executive, Epiq or any Released Party, all liability being expressly denied by such parties; and that the terms and conditions hereof are contractual and not mere recitals.
15. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS. THE PARTIES AGREE THAT ANY DISPUTES ARISING OUT OF OR RELATED TO THIS AGREEMENT SHALL BE SETTLED BY MEDIATION AND/OR ARBITRATION TO BE HELD IN ACCORDANCE WITH THE EMPLOYMENT DISPUTE RESOLUTION RULES THEN IN EFFECT OF THE AMERICAN ARBITRATION ASSOCIATION (AAA). THE MEDIATION AND/OR ARBITRATION SHALL BE CONDUCTED IN THE CHICAGO AREA. UPON RECEIVING A DEMAND FOR MEDIATION OR ARBITRATION (OR BOTH), THE PARTIES WILL ATTEMPT TO MUTUALLY AGREE TO THE SELECTED MEDIATOR OR ARBITRATOR. MEDIATION WILL ONLY OCCUR IF BOTH PARTIES AGREE TO PARTICIPATE. IF THE PARTIES CANNOT MUTUALLY AGREE ON AN ARBITRATOR WITHIN THIRTY (30) DAYS, AAA WILL PROVIDE THE PARTIES WITH A LIST OF POTENTIAL ARBITRATORS. THE PARTIES WILL ALTERNATELY STRIKE NAMES FROM THE LIST, WITH EPIQ GOING FIRST, UNTIL ONLY ONE NAME RERMAINS. THE PARTIES AGREE THAT, BY ENTERING INTO THIS AGREEMENT, THE PARTIES ARE WAIVING A RIGHT TO TRIAL BY JURY. THE ARBITRATOR MAY GRANT INJUNCTIONS OR OTHER RELIEF IN SUCH DISPUTE. THE DECISION OF THE ARBITRATOR SHALL BE FINAL, CONCLUSIVE AND BINDING ON THE PARTIES TO THE ARBITRATION. JUDGMENT MAY BE ENTERED ON THE ARBITRATORS DECISION IN ANY COURT OF COMPETENT JURISDICTION. EPIQ WILL PAY: (1) AAAS FILING AND OTHER ADMINISTRATIVE FEES (LESS $100); (2) THE ARBITRATORS FEE AND REASONABLE TRAVEL EXPENSES; AND (3) THE COST OF RENTING AN ARBITRATION HEARING ROOM. EXECUTIVE WILL PAY $100 TOWARD SUCH FILING AND ADMINISTRATIVE COSTS TO EPIQ (UPON REQUEST BY EXECUTIVE, THE ARBITRATOR MAY DETERMINE THAT THE FEE SHOULD BE REFUNDED TO EXECUTIVE). EACH PARTY SHALL PAY ITS OR HIS OR HER OWN EXPERTS AND/OR ATTORNEYS FEES, UNLESS THE ARBITRATOR AWARDS REASONABLE EXPERTS AND/OR ATTORNEYS FEES AS A PREVAILING PARTY UNDER APPLICABLE LAW. EACH PARTYS PROMISE TO RESOLVE CLAIMS BY ARBITRATION IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT, RATHER THAN THROUGH THE COURTS, IS CONSIDERATION FOR OTHER PARTYS LIKE PROMISE. IN THE EVENT IT BECOMES NECESSARY FOR ANY AGGRIEVED PARTY (INCLUDING ANY RELEASED PARTY) TO BRING LEGAL ACTION AGAINST THE OTHER PARTY TO ENFORCE THE TERMS OF THIS AGREEMENT, WHETHER FOR INJUNCTIVE RELIEF OR DAMAGES, THE PARTIES AGREE THAT THE PREVAILING PARTY IN SUCH ACTION (IN WHOLE OR IN PART) SHALL BE ENTITLED TO RECOVER ITS COSTS AND EXPENSES INCURRED IN SUCH ACTION, INCLUDING REASONABLE ATTORNEYS FEES AND EXPENSES FROM THE NON-PREVAILING PARTY (EXCEPT AS PROVIDED IN SECTION 8 ABOVE).
16. Executive shall be solely responsible for payment of any and all applicable income, employment, excise or other taxes related to payments under this Agreement; provided, however, that Epiq shall be responsible for paying any employer-taxes related to payments under this Agreement. Epiq may withhold from any amounts payable under this Agreement such taxes as shall be required to be withheld pursuant to any applicable federal, state or local law or regulation. Executive represents and warrants to Epiq that Executive has had the opportunity to obtain Executives own legal and tax counsel in connection with the negotiation and drafting of this Agreement and that Executive has not relied upon Epiq, its officers, directors, employees, agents,
including its counsel, for legal or tax advice. To the extent applicable, this Agreement is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended, and it shall be interpreted in a manner that complies with such section to the fullest extent possible. Epiq and Executive agree that Epiq shall, with Executives written consent, which shall not be unreasonably withheld, have the power to adjust the timing or other details relating to the payments described in this Agreement if Epiq determines that such adjustments are necessary in order to comply with or become exempt from the requirements of Section 409A.
17. The majority of the independent directors (as defined by applicable NASDAQ rules) of Epiqs Board of Directors shall pre-approve the filing and commencement of any lawsuit, complaint or similar action against Executive by Epiq Systems (on behalf of itself or any Released Party) arising out of or related to this Agreement.
18. The provisions of this Agreement are severable, and if any provision, section or paragraph or part of any provision, section or paragraph contained herein is found to be unenforceable or inoperable, then the other provisions, sections or paragraphs, or the remainder of the particular provision, section or paragraph, whichever applies, shall remain fully valid and enforceable.
19. This Agreement, including the Exhibits, contain the entire agreement between Executive and Epiq concerning the foregoing matters and no change, modification or waiver of any provision hereof will be valid unless in writing and signed by all of the parties to be bound.
20. This Agreement may be executed in separate counterparts, each of which is deemed to be the original and all of which taken together constitute one and the same Agreement.
21. EXECUTIVE EXPRESSLY UNDERSTANDS AND AGREES THAT THE CONSIDERATION SPECIFICALLY STATED HEREIN IS THE SOLE CONSIDERATION FOR THIS AGREEMENT AND ACKNOWLEDGES THAT EXECUTIVE HAS READ THIS AGREEMENT AND UNDERSTANDS ALL OF ITS TERMS. EXECUTIVE EXECUTES THIS AGREEMENT VOLUNTARILY WITH THE FULL KNOWLEDGE OF ITS SIGNIFICANCE AND INTENDS TO BE LEGALLY BOUND HEREBY. FURTHERMORE, IT IS AGREED THAT EXECUTIVE SHALL HAVE THE RIGHT TO REVOKE ASSENT TO THIS AGREEMENT BY WRITTEN NOTICE TO EPIQ TO THE UNDERSIGNED, WITHIN THE SEVEN (7)-DAY PERIOD FOLLOWING EXECUTIVES EXECUTION OF THIS AGREEMENT, AND THAT THIS AGREEMENT SHALL NOT BECOME EFFECTIVE OR ENFORCEABLE UNTIL SUCH SEVEN (7)-DAY PERIOD HAS EXPIRED.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the date indicated under their respective signatures below.
EPIQ SYSTEMS, INC. |
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EXECUTIVE | ||
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Signed: |
/s/ Brad D. Scott |
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Signed: |
/s/ Christopher Olofson |
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Name: |
Brad D. Scott |
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Date: June 6, 2014 | |
Title: |
President and COO |
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Date: June 6, 2014 |
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EXHIBIT A
POST-TERMINATION OBLIGATIONS
1. Definitions.
Confidential Information shall mean and include any and all confidential and/or proprietary information of Epiq Systems and/or its customers and suppliers, including but not limited to information relating to the following: proprietary information; technical data, inventions, trade secrets, intellectual property, know-how, software, developments, processes, formulas, technology, designs, drawings, engineering, hardware configuration; business matters, business strategies, affairs, finances, sales, financial condition, operations; marketing, product information, research, product plans, products, services, customer lists, customers, markets; former, current, or prospective clients, vendors or employees; and other information in any form of a similar nature not available to the public.
2. Confidential Information. Executive acknowledges that while employed by Epiq, Executive had access to, acquired and/or assisted in the development of Confidential Information. Executive agrees not to use or disclose, and confirms Executives continuing obligation not to use or disclose, directly or indirectly, any Confidential Information at any time without the prior written authorization of the Epiq Chairman and/or Chief Executive Officer or the Board of Directors, or until the information otherwise becomes public knowledge without violation of this Agreement by Executive. Nothing in this Agreement shall supersede nor relieve Executive of confidentiality and/or nondisclosure obligations stemming from any prior confidentiality agreement with Epiq, at common law or pursuant to the attorney-client privilege. Executive further agrees to arrange for pick up, delete and/or destroy any and all hard copies, and delete and/or destroy any and all electronic copies of all Epiq Systems confidential documents relating to Epiq Systems business that Executive received while in Epiqs employ, including email; to identify all other Epiq Systems property Executive has in Executives possession, custody and/or control promptly; and to arrange for pick up such other property as requested by Epiq. If Executive discovers that Executive inadvertently did not return, delete and/or destroy Epiq Systems documents or property that should have been returned, deleted and/or destroyed earlier, Executive will promptly arrange for pick up, delete and/or destroy any such items upon discovering it. Executive agrees to the reasonableness of the restraint imposed under this paragraph.
3. Non-solicitation/Competition. Executive agrees that for the time period that begins on the Resignation Date and continues through the six (6) month anniversary of the Resignation Date, Executive will not, directly or indirectly: (i) compete against Epiq Systems or engage in employment with or provide independent contractor or consulting services for any person, corporation, firm or other entity which directly competes with Epiq Systems within its territories as of the Resignation Date; (ii) either on Executives own behalf or on behalf of any person or entity other than Epiq Systems, hire or attempt to hire, solicit, induce, recruit or encourage any other employees, contractors or suppliers of Epiq Systems to terminate their relationship with Epiq Systems in order to work for any person,
corporation, firm, company or business entity other than Epiq Systems; or (iii) either on behalf of Executive or for any other person, corporation, firm, company or other business entity, do any of the following acts: (a) solicit, serve or cater to any of Epiq Systems customers whom Executive solicited, served or catered to on behalf of Epiq Systems or with whom Executive became acquainted during the course of Executives employment with Epiq for the purpose of engaging in competition against the businesses of Epiq Systems within its territories as of the Resignation Date; (b) divert or attempt to divert any of Epiq Systems customers or any of the business or patronage of such customers; or (c) call upon, influence or attempt to influence any of Epiq Systems customers to transfer their business or patronage from Epiq Systems to Executive or to any other person, corporation, firm, company or business entity engaged in a directly competitive business within its territories as of the Resignation Date. Executive agrees to the reasonableness of the restraint imposed under this paragraph.
EXHIBIT B
ADDITIONAL RELEASE
CERTIFICATE
I, Christopher E. Olofson (Executive), in consideration for the mutual promises made in that certain Executive Resignation Agreement and General Release of Claims, dated , between Executive and Epiq Systems, Inc., a Missouri corporation (Agreement), hereby state that, as of the date of Executives signature on this Certificate, and as evidenced thereby, the following paragraphs 1 through 8 are true and correct, and Executive is in agreement with this Certificate.
1. Capitalized terms used but not defined in this Certificate have the meanings set forth in the Agreement.
2. Executive has signed this Certificate on or after December 15, 2015 and not later than the close of business on December 21, 2015. Executive has promptly delivered this signed Certificate to Epiq.
3. From the Effective Date of the Agreement through and including the date Executive has signed and delivered this Certificate below, Executive on behalf of Executive and all of Executives heirs and/or personal representatives hereby release and forever discharge the Released Parties of and from any and all Claims which Executive may have had, or may now have, relating to matters occurring on or before the date hereof, except those Claims (i) arising out of the performance of the Agreement; (ii) relating to Executives right to indemnification under the Indemnification Agreement; (iii) Executives rights under employee benefit plans of Epiq Systems. Without limiting in any way the generality of the foregoing general release, Executive specifically releases the Released Parties from any Claims which may have existed or which may now exist from the beginning of time to the date of this Agreement, including, without limitation: any claims Executive may have arising from or relating to Executives position as a member of the Board of Directors or Epiq (excluding all rights to indemnification and insurance coverage as specified in Section 4.5 above), a shareholder of Epiq, and his employment with or termination (including any constructive discharge) from employment with Epiq, including but not limited to breach of contract, wrongful termination, constructive discharge, harassment, discrimination, retaliation, fraud, defamation, and infliction of emotional distress; a release of any rights or claims Executive may have under Title VII of the Civil Rights Act of 1964, as amended, and the Civil Rights Act of 1991 (which prohibit discrimination in employment based upon race, color, sex, religion and national origin); the Age Discrimination in Employment Act of 1967, as amended (which prohibits age discrimination in employment); the Older Workers Benefit Protection Act (which prohibits age discrimination in employment); the Americans with Disabilities Act of 1990, as amended, and the Rehabilitation Act of 1973 (which prohibit discrimination based upon disability); the Family and Medical Leave Act of 1993 (which prohibits discrimination based on requesting or taking a family or medical leave); Section 1981 of the Civil Rights Act of 1866 (which prohibits discrimination based upon race); Section 1985(3) of the Civil Rights Act of 1871 (which prohibits conspiracies to discriminate); the Employee Retirement Income Security Act of 1974, as amended (which prohibits discrimination with regard to benefits); Section 4980B of the Internal Revenue Code of 1986, as amended (except as expressly set forth in herein); the National Labor Relations Act, as amended; the Occupational Safety and Health Act of 1970, as amended; the Sarbanes-Oxley Act of 2002, as amended; the Fair Labor Standards Act, as amended; the Equal Pay
Act of 1963, as amended; New York, California, Florida, Illinois, Kansas and Missouri state, city, or local statutes or common law, as amended; and any other federal, state, city or local (or other) laws of any kind or nature. This includes a release by Executive of any claims for wrongful discharge, constructive discharge, harassment, discrimination, retaliation, whistleblowing, failure to receive timely notices as a member of the Board of Directors, breach of contract, torts or any other claims in any way related to Executives employment with, resignation from, or termination from employment with Epiq. Executive further releases any and all claims of whatever nature or source whether known or unknown which arise either partially or entirely from any other action or inaction by any Released Party. Nothing in this Release or this Agreement shall constitute a release of any Claim that Executive may have or may hereafter have (i) arising out of the performance of this Agreement; (ii) relating to Executives rights under employee benefit plans of Epiq Systems; or (iii) relating to Executives rights to indemnification under the Indemnification Agreement, the Articles or the Bylaws. Further, any claims Executive may have or claim to have in his capacity as a shareholder of Epiq Systems which arise as of the date this Certificate is executed, are also hereby expressly waived; however, Executive is not waiving any prospective claims of shareholder rights.
3.5 Further, the Released Parties fully release and forever discharge Executive from any and all claims that they have or may claim to have as of the date this Certificate is executed related to Executives actions or omissions as an employee, officer or director of Epiq to the extent such claims are fully covered by applicable insurance. The Released Parties represent that as of the date of this Agreement, they are not aware of any Claims (defined below) of potential liability against Executive arising out of Executives employment with Epiq.
4. Save as permitted by Section 8 of the Agreement and this Certificate, Executive warrants, with the understanding that such warranty is material to this transaction, that Executive has not asserted, and no person or entity has asserted on Executives behalf, any claim, demand, cause of action or lawsuit arising out of or related in any way to the Executives employment with, resignation from, or termination from Epiq or regarding any of the Released Parties herein. Executive specifically agrees that Executive will not in the future file any complaint, charge or lawsuit including to seek private remedies based on actions or omissions released herein against any Released Party, with any court or any other tribunal; nor will Executive file or assert any claim, complaint or charge seeking individual relief with any local, state or federal governmental agency.
5. Executive warrants that the Post-Termination Obligations remain in full force and effect, and nothing in the Agreement or this Certificate relieves Executive of complying with the Post-Termination Obligations.
6. Executive warrants and agrees that Epiq has paid Executive all salary, benefits, and compensation of any nature, due and owing in accordance with the payroll schedule in existence as of the Resignation Date.
7. Executive acknowledges and agrees that:
(a) Executives waiver of rights or claims arising under the ADEA is in writing, written in a manner calculated to be understood, and is understood by Executive;
(b) Executive expressly understands that this waiver refers to rights or claims arising under the ADEA;
(c) Executive expressly understands that by execution of this Certificate, Executive does not waive any ADEA rights or claims that may arise after the date this Certificate is executed by Executive;
(d) Executive acknowledges that the waiver of Executives rights or claims arising under the ADEA is in exchange for the consideration outlined in the Agreement;
(e) Executive has been advised and encouraged in writing (via this Certificate) to consult with an attorney prior to signing this Certificate;
(f) Executive was provided a copy of this Certificate as Exhibit B to the Agreement and, as such, has been given more than twenty-one (21) days to consider this Certificate;
(g) Executive understands that this Certificate, including the Release, shall not become effective and enforceable until the eighth day following execution of this Certificate (Revocation Period), and that at any time prior to such day Executive may revoke this Certificate; and
(f) Nothing in this Certificate is intended to supersede the parties respective rights and obligations contained in the Agreement, and that the Agreement shall survive and remain in full force and effect following Executives execution of this Certificate.
8. Notwithstanding anything herein to the contrary, the parties acknowledge and agree that although Executive has specifically agreed to release any claim of age discrimination under the ADEA pursuant to Section 3 above, the remedies described in Section 4 above shall not apply to any complaint, charge or lawsuit under the ADEA challenging the validity of Executives agreement to release any ADEA claim. Accordingly, if Executive breaches this Agreement by filing and/or asserting a complaint, charge or lawsuit against Epiq and/or any of the Released Parties under the ADEA, or if Executive files a lawsuit or complaint to challenge the validity of Executives release of any ADEA claim, then Epiq and/or the Released Parties, as applicable, will not be entitled to recover from Executive any amount of the Special Consideration, nor any of its/their costs, expenses or attorneys fees incurred in defense of such action, except as may be specifically authorized under federal law; provided, however, that the release set forth herein may be pleaded as a full and complete defense to any such action, suit, administrative claim or other proceeding which may be instituted, prosecuted or attempted in breach of this Agreement.
THIS CERTIFICATE has been agreed to as of the date below by the Executive.
SIGNED BY THE EXECUTIVE:
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Christopher E. Olofson |
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EXHIBIT C
DRAFT PRESS RELEASE
Epiq Systems Announces Christopher E. Olofson Will Resign as an Executive Officer and Continue as a Board Member and Senior Advisor to the Company
Kansas City, KS ( , 2014) Epiq Systems, Inc. (NASDAQ: EPIQ), a leading provider of managed technology for the global legal profession, today announced the resignation of Christopher E. Olofson as an executive officer of the company, effective June 30, 2014. Mr. Olofson will continue to serve as a member of the Board of Directors and provide six months of consulting services as a senior advisor.
Mr. Olofson joined Epiq in 1988. During his career, he has served the company in a variety of executive positions, including president and chief operating officer.
Tom W. Olofson, chairman and chief executive officer said, Chriss vision and long commitment have been integral to the companys growth, and we look forward to his continued service as a senior advisor and member of our Board of Directors. Chris has made many significant contributions to the company over the years. His leadership has been instrumental in building our top-ranked global eDiscovery, bankruptcy and settlements businesses, and his contributions to our business strategy, operations practices, technology and culture will benefit Epiq for years to come. All of our associates have enjoyed working with Chris, and everyone wishes him the very best.
EXHIBIT 10.6
EXECUTIVE CONSULTING ADVISORY AGREEMENT
This EXECUTIVE CONSULTING ADVISORY AGREEMENT and the Exhibit attached hereto (the Agreement), made and effective as of July 1, 2014 (the Effective Date), set forth the terms and conditions relating to the consulting services to be provided by Christopher E. Olofson (Advisor) to Epiq Systems, Inc. (Company). This Agreement supersedes all prior or contemporaneous understandings, agreements, discussions or negotiations, whether written or oral, concerning the subject matter of this Agreement. However, this Agreement and the compensation provided herein are expressly conditioned upon the execution, effectiveness, and full compliance by Advisor and Company with the Executive Resignation Agreement and General Release of Claims with the Company (the Resignation and Release Agreement).
In consideration for the parties mutual promises contained in this Agreement, the parties hereby agree to the following:
1) SERVICES. Advisor agrees to provide the services described in Exhibit A attached hereto and incorporated herein (Services) to Company.
2) TERM AND TERMINATION. The term of this Agreement shall commence as of the Effective Date and shall continue in full force and effect until the sooner of: (i) December 31, 2014; (ii) termination by either party for Cause (as defined below); or as otherwise set forth in Exhibit A. Cause shall mean the following: (i) for purposes of the Companys termination of this Agreement, Cause shall mean Advisors failure to perform the Services within a commercially reasonable timeframe following any request for Services; and (ii) for the purposes of the Advisors termination of this Agreement, Cause shall mean Companys failure to provide the Fees provided in Exhibit A. Notice of termination for Cause by either party to this Agreement shall be provided pursuant to Section 12, provided that such termination notice shall provide at least fifteen (15) days from receipt of the notice for the allegedly breaching party to cure the purported breach (if curable), otherwise termination shall be effective at the end of such fifteen (15) day period.
3) COMPENSATION. The amounts set forth in Exhibit A (Fees) shall constitute compensation in full for the Services. Company will pay the Fees to Advisor in accordance with the terms specified in Exhibit A.
4) INDEPENDENT CONTRACTOR. As a material condition of this Agreement, at all times during the term hereof and throughout the course of performing Services hereunder, Advisor shall be an independent contractor with respect to Company and not an employee, partner or in joint venture with Company. Advisor will not be eligible for any of Companys employee benefits, nor will Company: (i) make deductions from Advisors fees for FICA; (ii) make state or federal unemployment insurance contributions on behalf of Advisor; (iii) withhold state or federal income tax from payments to Advisor; (iv) make disability insurance contributions on behalf of Advisor; (v) obtain workers compensation insurance on behalf of Advisor; or (vi) provide health insurance for Advisor. Company shall neither have nor exercise control, direction or supervision over the professional judgment, manner, location or methods by which Advisor performs the Services; provided, however, that the Services shall be provided in a manner consistent with the provisions of this Agreement, and at no time less than commercially reasonable. All Services will be provided by telephone, express mail, email and other electronic means and shall not require Advisors physical presence in the Companys executive offices or at any other Company location.
In addition, Advisor acknowledges and agrees that Advisor is obligated to report as income all compensation received by Advisor pursuant to this Agreement, and, to the extent permitted by applicable law, Advisor agrees to indemnify Company and hold it harmless to the extent of any employment tax liabilities
incurred by Company which are attributable to Advisor, except to the extent caused by Company.
Except as provided in Section 14, Advisor is free to accept employment and perform services for other businesses or persons during Advisors engagement by the Company subject to the terms and conditions of the Resignation and Release Agreement.
If Company provides to Advisor in the performance of his duties under this Agreement any document containing Confidential Information (as that term is used in the Resignation and Release Agreement), Advisor shall promptly, upon the expiration of the term of this Agreement, return all hard copies of such document and delete and/or destroy all electronic copies of such document, and shall not retain any copies. In the event that Advisor subsequently discovers that he inadvertently retained any such document following the term of this Agreement, Advisor shall promptly comply with the procedures for the return, deletion, or and/or destruction of such documents as provided by the Resignation and Release Agreement.
5) ADVISORS REPRESENTATIONS AND COVENANTS. Advisor represents and warrants that Advisors retention as an Advisor by Company hereunder and Advisors performance of all the terms of this Agreement does not and will not breach any agreement with any third party, including, but not limited to, an agreement on behalf of Advisor not to disclose or use any confidential or proprietary information acquired by Advisor from third parties prior to Advisors retention as an Advisor by Company. Advisor agrees that Advisor has not entered into, and will not enter into, any agreement, either written or oral, in conflict with this Agreement.
As material consideration for this Agreement, Advisor represents and warrants that Advisor shall not provide, make available or disclose to Company, or use in the performance of the Services to Company hereunder, any confidential, proprietary or trade secret information of any third party which is not generally available to the public, unless Advisor has obtained written authorization for its possession, use and/or disclosure.
6) ARBITRATION. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS. THE PARTIES AGREE THAT ANY DISPUTES ARISING OUT OF OR RELATED TO THIS AGREEMENT SHALL BE SETTLED BY MEDIATION AND/OR ARBITRATION TO BE HELD IN ACCORDANCE WITH THE EMPLOYMENT DISPUTE RESOLUTION RULES THEN IN EFFECT OF THE AMERICAN ARBITRATION ASSOCIATION (AAA). THE MEDIATION AND/OR ARBITRATION SHALL BE HELD IN THE CHICAGO AREA. UPON RECEIVING A DEMAND FOR MEDIATION OR ARBITRATION (OR BOTH), THE PARTIES WILL ATTEMPT TO MUTUALLY AGREE TO THE SELECTED MEDIATOR OR ARBITRATOR. MEDIATION WILL ONLY OCCUR IF BOTH PARTIES AGREE TO PARTICIPATE. IF THE PARTIES CANNOT MUTUALLY AGREE ON AN ARBITRATOR WITHIN THIRTY (30) DAYS, AAA WILL PROVIDE THE PARTIES WITH A LIST OF POTENTIAL ARBITRATORS. THE PARTIES WILL ALTERNATELY STRIKE NAMES FROM THE LIST, WITH EPIQ GOING FIRST, UNTIL ONLY ONE NAME RERMAINS. THE PARTIES AGREE THAT BY ENTERING INTO THIS AGREEMENT, THAT THE PARTIES ARE WAIVING A RIGHT TO TRIAL BY JURY. THE ARBITRATOR MAY GRANT INJUNCTIONS OR OTHER RELIEF IN SUCH DISPUTE. THE DECISION OF THE ARBITRATOR SHALL BE FINAL, CONCLUSIVE AND BINDING ON THE PARTIES TO THE ARBITRATION. JUDGMENT MAY BE ENTERED ON THE ARBITRATORS DECISION IN ANY COURT OF COMPETENT JURISDICTION. EPIQ WILL PAY: (1) AAAS FILING AND OTHER ADMINISTRATIVE FEES (LESS $100); (2) THE ARBITRATORS FEE AND REASONABLE TRAVEL EXPENSES; AND (3) THE COST OF RENTING AN ARBITRATION HEARING ROOM. ADVISOR WILL PAY $100 TOWARD SUCH FILING AND ADMINISTRATIVE COSTS TO EPIQ (UPON REQUEST BY ADVISOR, THE ARBITRATOR MAY DETERMINE THAT THE FEE SHOULD BE REFUNDED TO ADVISOR). EACH PARTY SHALL PAY ITS OR HIS OWN EXPERTS AND/OR ATTORNEYS FEES, UNLESS THE ARBITRATOR AWARDS REASONABLE EXPERTS AND/OR ATTORNEYS FEES AS A PREVAILING PARTY UNDER APPLICABLE LAW. EACH PARTYS PROMISE TO RESOLVE CLAIMS BY ARBITRATION IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT,
RATHER THAN THROUGH THE COURTS, IS CONSIDERATION FOR OTHER PARTYS LIKE PROMISE. IN THE EVENT IT BECOMES NECESSARY FOR ANY AGGRIEVED PARTY TO BRING LEGAL ACTION AGAINST THE OTHER PARTY TO ENFORCE THE TERMS OF THIS AGREEMENT, WHETHER FOR INJUNCTIVE RELIEF OR DAMAGES, THE PARTIES AGREE THAT THE PREVAILING PARTY IN SUCH ACTION (IN WHOLE OR IN PART) SHALL BE ENTITLED TO RECOVER ITS COSTS AND EXPENSES INCURRED IN SUCH ACTION, INCLUDING REASONABLE ATTORNEYS FEES AND EXPENSES FROM THE NON-PREVAILING PARTY. THE PARTIES ACKNOWLEDGE AND AGREE THAT NOTHING IN THIS AGREEMENT TO ARBITRATE CLAIMS ARISING UNDER THIS AGREEMENT SHALL BE CONSTRUED AS THE PARTIES AGREEMENT TO ARBITRATE CLAIMS ARISING UNDER THE RESIGNATION AND RELEASE AGREEMENT.
7) ASSIGNMENT. Advisor may not assign this Agreement. Advisor agrees that this Agreement shall be binding upon Advisor, and shall inure to the benefit of Company, its successors and assigns.
8) AMENDMENT, WAIVER. This Agreement may be amended, modified, superseded, canceled, renewed, or extended, and the terms hereof may be waived, only by a written instrument executed by each party, or in the case of a waiver, by the party waiving compliance. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by any party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement.
9) NO STRICT CONSTRUCTION. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any party.
10) VALIDITY. If any provision of this Agreement, or part thereof, shall be declared invalid, illegal or unenforceable, such provision or part thereof shall be severed and all remaining provisions shall continue in full force and effect.
11) APPLICABLE LAW. Advisor agrees to comply with all applicable governmental laws, ordinances, rules and regulations (Laws) applicable to Advisors Services under this Agreement and the performance thereof.
12) NOTICES. All notices or other communications hereunder shall be in writing and shall be (a) delivered personally, or (b) delivered by a reputable overnight courier to the following:
To Company:
Epiq Systems, Inc.
Legal Department
501 Kansas Avenue
Kansas City, KS 66105
To Advisor:
Christopher E. Olofson
161 East Chicago Ave.
Unit 58 K3
Chicago, IL 60611
13) EXECUTION. If this Agreement as written is satisfactory to Advisor, it is requested that Advisor execute and return the original to Epiq Systems, Inc., Legal Department, 501 Kansas Avenue, Kansas City, KS 66105, Attn: General Counsel. A PDF email copy should also be sent immediately following execution. This Agreement shall not be effective unless and until it is duly executed by an authorized representative of Company. This Agreement and the compensation provided herein are expressly conditioned upon the parties execution and full compliance with (and effectiveness of) the Resignation and Release Agreement. Following execution by Company, a copy will be returned to Advisor for Advisors files.
14) GENERAL. Advisor is a former executive officer of the Company and has entered into the Resignation and Release Agreement. Advisor hereby acknowledges and agrees that the Post-Termination Obligations as defined and contained in the Resignation and Release Agreement are in full force and effect and that nothing in this Agreement modifies, amends or supersedes such Post-Termination Obligations. A failure to execute the Resignation and Release Agreement by Advisor and Company will immediately render this Agreement void. A breach of the Resignation and Release Agreement by Company will constitute Companys breach of this Agreement,
relieve Advisor from any obligation to perform any responsibilities otherwise required by this Agreement, and will automatically terminate this Agreement. A breach of the Resignation and Release Agreement by Advisor will constitute Advisors breach of this Agreement, relieve Company from any obligation to perform any responsibilities otherwise required by this Agreement and will automatically terminate this Agreement.
I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THE FOREGOING AGREEMENT IN ITS ENTIRETY, AND HAVE BEEN ADVISED BY THIS AGREEMENT TO RECEIVE INDEPENDENT LEGAL ADVICE. I AM SATISFIED THAT I UNDERSTAND IT COMPLETELY, AND I AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS. I EXPRESSLY ACKNOWLEDGE THAT THE FOREGOING AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.
ACKNOWLEDGED AND AGREED: |
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ADVISOR |
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Signature: |
/s/ Christopher Olofson |
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Print: |
C. Olofson |
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Date: June 6, 2014 |
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EPIQ SYSTEMS, INC. |
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Signature: |
/s/ Brad D. Scott |
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Brad D. Scott |
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Title: |
President and Chief Operating Officer |
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Date: June 6, 2014 |
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EXHIBIT A
Description of Work and Fees for Services
1) The Services to be performed by Advisor are: Advisory services to the executive committee of the Company at the request and direction of the Companys President and Chief Operating Officer, including on those Company (and any of its subsidiaries) matters Advisor had knowledge of or involvement with, both generally and specifically, through Advisors prior employment with the Company. Advisory Services generally not to exceed forty (40) hours per month. Advisor shall provide such advisory services to the Companys President and Chief Operating Officer within a commercially reasonable time following each such request. Advisor will not be involved in the day-to-day financial or operating activities of the Company. All Services will be provided by telephone, express mail, email and other electronic means and shall not require Advisors physical presence in the Companys executive offices or at any other Company location.
2) Fees for Services: Subject to Section 3 below, the fees for the Services set forth in paragraph 1 above shall be $100,000 per month, payable monthly on or about the last business day of the month.
3) Other.
(a) If this Agreement is terminated by Advisor for Cause or by the Company without Cause before December 31, 2014, then this Agreement and Advisors Services to the Company under this Agreement shall immediately terminate and, provided Advisor is not in breach of this Agreement, the Company agrees that all Fees Advisor would have otherwise received through successful completion of the term of this Agreement shall be accelerated and immediately payable within thirty (30) calendar days following such termination.
(b) If this Agreement is terminated by Advisor without Cause or by the Company for Cause before December 31, 2014, then this Agreement and Advisors Services to the Company under this Agreement shall immediately terminate, and Advisor shall only be entitled to the Fees through such date of termination (which may be pro-rata during any calendar month), which shall be payable within thirty (30) calendar days following such termination.
(c) In the event this Agreement is breached: (i) by Company because Company has breached the Resignation and Release Agreement, then this Agreement shall be automatically terminated and Advisor shall be paid Fees through such termination date; or (ii) by Advisor because Advisor has breached the Resignation and Release Agreement, then this Agreement shall be automatically terminated and Advisor shall be paid Fees through such termination date.
Exhibit 31.1
CERTIFICATIONS
I, Tom W. Olofson, certify that:
1. I have reviewed this Form 10-Q/A of Epiq Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 15, 2014 |
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/s/ Tom W. Olofson |
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Tom W. Olofson |
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Chairman of the Board |
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Chief Executive Officer |
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(Principal Executive Officer) |
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Exhibit 31.2
CERTIFICATIONS
I, Karin-Joyce Tjon Sien Fat, certify that:
1. I have reviewed this Form 10-Q/A of Epiq Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 15, 2014 |
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/s/ Karin-Joyce Tjon Sien Fat |
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Karin-Joyce Tjon Sien Fat |
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Executive Vice President and Chief Financial Officer |
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(Principal Financial Officer) |
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Exhibit 32.1
CERTIFICATIONS OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350.
I, Tom W. Olofson, Chief Executive Officer of Epiq Systems, Inc. (the Company), hereby certify pursuant to Section 1350, of chapter 63 of title 18, United States Code, and Section 906 of the Sarbanes Oxley Act of 2002, that, to the best of my knowledge, (1) the Form 10-Q/A of the Company to which this Exhibit is attached (the Report) fully complies with the requirements of section 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Tom W. Olofson |
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Tom W. Olofson |
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Dated: August 15, 2014 |
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Karin-Joyce Tjon Sien Fat, Executive Vice President and Chief Financial Officer of Epiq Systems, Inc. (the Company), hereby certify pursuant to Section 1350, of chapter 63 of title 18, United States Code, and Section 906 of the Sarbanes Oxley Act of 2002, that, to the best of my knowledge, (1) the Form 10-Q/A of the Company to which this Exhibit is attached (the Report) fully complies with the requirements of section 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Karin-Joyce Tjon Sien Fat |
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Karin-Joyce Tjon Sien Fat |
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Dated: August 15, 2014 |
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FAIR VALUE MEASUREMENTS (Details 2) (Credit Agreement, USD $)
In Millions, unless otherwise specified |
Dec. 31, 2013
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Previously disclosed
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Fair value of Financial Assets and Liabilities | |
Amount outstanding under credit facility, which approximated fair value | $ 302.3 |
Revised disclosure
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Fair value of Financial Assets and Liabilities | |
Amount outstanding under credit facility, which approximated fair value | $ 299.3 |
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