UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
|
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2016
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 001-36633
EPIQ SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Missouri |
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48-1056429 |
(State or other jurisdiction of |
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(I.R.S. Employer |
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501 Kansas Avenue, Kansas City, Kansas |
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66105-1300 |
(Address of principal executive offices) |
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(Zip Code) |
913-621-9500
(Registrants telephone number, including area code)
No Changes
(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 |
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Accelerated filer x |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
There were 37,921,079 shares of common stock, $0.01 par value, outstanding at April 22, 2016.
CONTENTS
PART I FINANCIAL INFORMATION
EPIQ SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share and per share amounts)
|
|
March 31, |
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December 31, |
| ||
|
|
|
|
|
| ||
ASSETS |
|
|
|
|
| ||
Current Assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
20,223 |
|
$ |
27,620 |
|
Trade accounts receivable, net |
|
163,464 |
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140,597 |
| ||
Prepaid expenses |
|
18,322 |
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20,206 |
| ||
Income taxes receivable |
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8,272 |
|
8,421 |
| ||
Other current assets |
|
656 |
|
199 |
| ||
Total current assets |
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210,937 |
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197,043 |
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Long-term Assets: |
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|
|
|
| ||
Property and equipment, net |
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72,846 |
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77,715 |
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Internally developed software, net |
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16,429 |
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15,971 |
| ||
Goodwill |
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477,319 |
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477,479 |
| ||
Other intangible assets, net |
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41,169 |
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44,943 |
| ||
Other long-term assets |
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10,724 |
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10,746 |
| ||
Total long-term assets |
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618,487 |
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626,854 |
| ||
Total Assets |
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$ |
829,424 |
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$ |
823,897 |
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LIABILITIES AND EQUITY |
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|
|
|
| ||
Current Liabilities: |
|
|
|
|
| ||
Accounts payable |
|
$ |
26,373 |
|
$ |
28,704 |
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Current maturities of long-term obligations |
|
11,944 |
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12,213 |
| ||
Accrued compensation |
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11,217 |
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23,977 |
| ||
Client deposits |
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3,111 |
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3,593 |
| ||
Deferred revenue |
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4,924 |
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3,669 |
| ||
Dividends payable |
|
3,624 |
|
3,599 |
| ||
Other accrued expenses |
|
12,051 |
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9,144 |
| ||
Total current liabilities |
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73,244 |
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84,899 |
| ||
Long-term Liabilities: |
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|
|
|
| ||
Deferred income taxes |
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45,550 |
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47,036 |
| ||
Other long-term liabilities |
|
13,792 |
|
12,476 |
| ||
Long-term obligations |
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387,578 |
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371,365 |
| ||
Total long-term liabilities |
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446,920 |
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430,877 |
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Commitments and contingencies |
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|
|
|
| ||
Equity: |
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|
|
|
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Preferred stock$1 par value; 2,000,000 shares authorized; none issued and outstanding |
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|
|
|
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Common stock$0.01 par value; authorized 100,000,000 shares; issued and outstanding March 31, 2016 40,835,651 and 37,932,692 shares, respectively; issued and outstanding December 31, 2015 40,835,651 and 37,534,447 shares, respectively |
|
408 |
|
408 |
| ||
Additional paid-in capital |
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296,861 |
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296,324 |
| ||
Accumulated other comprehensive loss |
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(9,308 |
) |
(7,949 |
) | ||
Retained earnings |
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59,519 |
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62,991 |
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Treasury stock, at cost 2,902,959 shares and 3,301,204 shares, respectively |
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(38,220 |
) |
(43,653 |
) | ||
Total equity |
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309,260 |
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308,121 |
| ||
Total Liabilities and Equity |
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$ |
829,424 |
|
$ |
823,897 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
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Three Months Ended |
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2016 |
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2015 |
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Revenue: |
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Operating revenue |
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$ |
131,528 |
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$ |
107,755 |
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Reimbursable expenses |
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15,003 |
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11,273 |
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Total revenue |
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146,531 |
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119,028 |
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|
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Operating Expense: |
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|
|
|
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Direct cost of operating revenue (exclusive of depreciation and amortization shown separately below) |
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65,153 |
|
51,029 |
| ||
Reimbursable expenses |
|
14,908 |
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10,504 |
| ||
Selling, general and administrative expense |
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47,742 |
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39,064 |
| ||
Depreciation and software and leasehold amortization |
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9,534 |
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8,765 |
| ||
Amortization of identifiable intangible assets |
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3,774 |
|
2,685 |
| ||
Other operating expense |
|
53 |
|
137 |
| ||
Total operating expense |
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141,164 |
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112,184 |
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Operating income |
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5,367 |
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6,844 |
| ||
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|
|
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|
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Interest expense (income): |
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|
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Interest expense |
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5,408 |
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4,229 |
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Interest income |
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(33 |
) |
(4 |
) | ||
Net interest expense |
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5,375 |
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4,225 |
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Income (loss) before income taxes |
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(8 |
) |
2,619 |
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Income tax expense |
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57 |
|
886 |
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Net income (loss) |
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$ |
(65 |
) |
$ |
1,733 |
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Net income (loss) per common share: |
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Basic |
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$ |
|
|
$ |
0.05 |
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Diluted |
|
$ |
|
|
$ |
0.05 |
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Weighted average common shares outstanding: |
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|
|
|
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Basic |
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37,068 |
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36,281 |
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Diluted |
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37,068 |
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36,914 |
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Cash dividends declared per share of common stock |
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$ |
0.09 |
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$ |
0.09 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(In thousands)
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Three Months Ended |
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2016 |
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2015 |
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Net income (loss) |
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$ |
(65 |
) |
$ |
1,733 |
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Other comprehensive income (loss): |
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|
|
|
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Foreign currency translation adjustment, net of $0 tax in all periods |
|
(356 |
) |
(2,335 |
) | ||
Unrealized losses on derivatives, net of tax benefit of $0 and $439, respectively |
|
(1,003 |
) |
(696 |
) | ||
Comprehensive loss |
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$ |
(1,424 |
) |
$ |
(1,298 |
) |
See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
(In thousands)
|
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Common |
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Treasury |
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Common |
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Additional |
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AOCL(1) |
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Retained |
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Treasury |
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Total |
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Balance at December 31, 2015 |
|
40,836 |
|
(3,301 |
) |
$ |
408 |
|
$ |
296,324 |
|
$ |
(7,949 |
) |
$ |
62,991 |
|
$ |
(43,653 |
) |
$ |
308,121 |
|
Net loss |
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|
|
|
|
|
|
|
|
|
|
(65 |
) |
|
|
(65 |
) | ||||||
Other comprehensive loss |
|
|
|
|
|
|
|
|
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(1,359 |
) |
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|
|
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(1,359 |
) | ||||||
Restricted common stock issued under share-based compensation plans |
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|
|
740 |
|
|
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(818 |
) |
|
|
|
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9,768 |
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8,950 |
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Stock option exercises |
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|
|
6 |
|
|
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(64 |
) |
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|
|
|
81 |
|
17 |
| ||||||
Common stock repurchased under share-based compensation plans |
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|
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(348 |
) |
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|
|
|
|
|
|
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(4,416 |
) |
(4,416 |
) | ||||||
Dividends declared ($0.09 per share) |
|
|
|
|
|
|
|
|
|
|
|
(3,407 |
) |
|
|
(3,407 |
) | ||||||
Share-based compensation expense |
|
|
|
|
|
|
|
1,419 |
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|
|
|
|
|
|
1,419 |
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Balance at March 31, 2016 |
|
40,836 |
|
(2,903 |
) |
$ |
408 |
|
$ |
296,861 |
|
$ |
(9,308 |
) |
$ |
59,519 |
|
$ |
(38,220 |
) |
$ |
309,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Balance at December 31, 2014 |
|
40,836 |
|
(4,155 |
) |
$ |
408 |
|
$ |
294,054 |
|
$ |
(4,362 |
) |
$ |
88,391 |
|
$ |
(53,554 |
) |
$ |
324,937 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
1,733 |
|
|
|
1,733 |
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Other comprehensive loss |
|
|
|
|
|
|
|
|
|
(3,031 |
) |
|
|
|
|
(3,031 |
) | ||||||
Tax benefit from share-based compensation |
|
|
|
|
|
|
|
325 |
|
|
|
|
|
|
|
325 |
| ||||||
Restricted common stock issued under share-based compensation plans |
|
|
|
685 |
|
|
|
(3,497 |
) |
|
|
|
|
8,878 |
|
5,381 |
| ||||||
Stock option exercises |
|
|
|
37 |
|
|
|
(8 |
) |
|
|
|
|
483 |
|
475 |
| ||||||
Common stock repurchased under share-based compensation plans |
|
|
|
(220 |
) |
|
|
|
|
|
|
|
|
(4,017 |
) |
(4,017 |
) | ||||||
Dividends declared ($0.09 per share) |
|
|
|
|
|
|
|
|
|
|
|
(3,351 |
) |
|
|
(3,351 |
) | ||||||
Share-based compensation expense |
|
|
|
|
|
|
|
1,555 |
|
|
|
|
|
|
|
1,555 |
| ||||||
Balance at March 31, 2015 |
|
40,836 |
|
(3,653 |
) |
$ |
408 |
|
$ |
292,429 |
|
$ |
(7,393 |
) |
$ |
86,773 |
|
$ |
(48,210 |
) |
$ |
324,007 |
|
(1) AOCLAccumulated Other Comprehensive Loss
See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
|
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Three Months Ended |
| ||||
|
|
2016 |
|
2015 |
| ||
|
|
|
|
|
| ||
Net cash provided by (used in) operating activities |
|
$ |
(10,341 |
) |
$ |
3,824 |
|
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Purchase of property and equipment |
|
(3,020 |
) |
(6,482 |
) | ||
Internally developed software costs |
|
(2,322 |
) |
(2,136 |
) | ||
Cash proceeds from sale of assets |
|
458 |
|
1 |
| ||
Net cash used in investing activities |
|
(4,884 |
) |
(8,617 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Proceeds from revolver borrowings |
|
29,000 |
|
|
| ||
Repayment of revolver borrowings |
|
(10,000 |
) |
|
| ||
Repayment of long-term debt and other long-term obligations |
|
(3,347 |
) |
(2,496 |
) | ||
Debt issuance costs |
|
|
|
(612 |
) | ||
Payment of acquisition-related liabilities |
|
|
|
(18 |
) | ||
Excess tax benefit related to share-based compensation |
|
91 |
|
31 |
| ||
Common stock repurchases |
|
(4,416 |
) |
(4,017 |
) | ||
Cash dividends paid |
|
(3,382 |
) |
(3,340 |
) | ||
Proceeds from exercise of stock options |
|
17 |
|
475 |
| ||
Net cash provided by (used in) financing activities |
|
7,963 |
|
(9,977 |
) | ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash |
|
(135 |
) |
(1,148 |
) | ||
|
|
|
|
|
| ||
Net decrease in cash and cash equivalents |
|
(7,397 |
) |
(15,918 |
) | ||
Cash and cash equivalents at beginning of period |
|
27,620 |
|
54,226 |
| ||
Cash and cash equivalents at end of period |
|
$ |
20,223 |
|
$ |
38,308 |
|
|
|
|
|
|
| ||
Supplemental disclosure of cash flow information: |
|
|
|
|
| ||
Cash paid for interest |
|
$ |
5,026 |
|
$ |
3,506 |
|
Cash paid (recovered) for income taxes, net |
|
603 |
|
(2,324 |
) | ||
Non-cash investing and financing transactions: |
|
|
|
|
| ||
Property, equipment, and leasehold improvements accrued in accounts payable |
|
$ |
4,078 |
|
$ |
2,695 |
|
Dividends declared |
|
3,407 |
|
3,351 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
EPIQ SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: ACCOUNTING POLICIES, INTERIM FINANCIAL STATEMENTS AND BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements of Epiq Systems, Inc. and Subsidiaries (Epiq, we, our, us or the Company) included herein have been prepared by Epiq, without audit, in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules. We believe that the disclosures are adequate to enable a reasonable understanding of the information presented. The Condensed Consolidated Financial Statements included in this Form 10-Q should be read in conjunction with the consolidated financial statements and the related notes, as well as Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, for the year ended December 31, 2015, as amended (2015 Form 10-K) and Managements Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q.
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the periods reported. Actual results may differ from those estimates.
In the opinion of the management of Epiq, the unaudited Condensed Consolidated Financial Statements contain all adjustments necessary for a fair presentation of the results for interim periods. All adjustments made were of a normal and recurring nature.
The results of operations for the three months ended March 31, 2016, are not necessarily indicative of the results expected for other interim periods or for the full year ending December 31, 2016.
Recently Issued Accounting Standards
In March 2016, the Financial Accounting Standards Board (the FASB) issued accounting standard update (ASU) No. 2016-09, CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Under the new guidance, entities will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (APIC). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. In addition, the guidance eliminates the requirement that excess tax benefits be realized (i.e., through a reduction in income taxes payable) before companies can recognize them. Under todays guidance, entities cannot recognize excess tax benefits when an option is exercised or a share vests if the related tax deduction increases a net operating loss carryforward rather than reduces income taxes payable. This guidance also simplifies several other aspects of the accounting for employee share-based payments, including forfeitures, statutory tax withholdings requirements and classification in the statement of cash flow. The guidance is effective for Epiq beginning in the first quarter of fiscal 2017. Early adoption is permitted, but all of the guidance must be adopted in the same period. In addition, if early adoption is elected in an interim period, any adjustment shall be reflected as of the beginning of the annual period that includes that interim period. We do not expect the adoption of this new guidance to have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This new lease guidance requires that an entity should recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term. Leases would be classified as either Type A leases (generally todays capital leases) or Type B leases (generally todays operating leases). For certain leases of assets other than property (for example, equipment, aircraft, cars, trucks), a lessee would classify the lease as a Type A lease and would do the following: (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments and (2) recognize the unwinding of the discount on the lease liability as interest separately from the amortization of the right-of-use asset. For certain leases of property (that is, land and/or a building or part of a building), a lessee would classify the lease as a Type B lease and would do the following: (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments and (2) recognize a single lease cost, combining the unwinding of the discount on the lease liability with the amortization of the right-of-use asset, on a straight-line basis. This guidance also provides accounting updates with respect to lessor accounting under a lease arrangement. Historically, we have not engaged in the business of leasing assets to third parties. This new lease guidance is effective for Epiq beginning in the first quarter of fiscal 2019. 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. Early adoption is permitted for all entities. We are currently assessing the full impact of this new guidance on our consolidated financial position, results of operations and cash flows, however, due to the magnitude of our operating leases and related rent expense, we expect the adoption of this accounting guidance to have a material effect on our consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, CompensationStock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The new guidance clarifies that a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition. As a result, compensation cost would be recognized over the required service period, if it is probable that the performance condition will be achieved. The new guidance does not require any new or additional disclosures. This guidance was effective for us beginning January 1, 2016 and its adoption did not have a material impact on our Condensed Consolidated Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. This new revenue guidance 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 was going to be effective for Epiq beginning in the first quarter of fiscal 2017. In August 2015, the FASB deferred the effective date by one year. Early adoption as of the original effective date will be 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 and will adopt this new guidance effective January 1, 2018.
NOTE 2: ACQUISITIONS
On April 30, 2015, we completed the acquisition of Iris Data Services, Inc. (Iris).The aggregate purchase consideration was $133.8 million, consisting of $124.7 million in cash consideration and $9.1 million of assumed capital lease obligations of the seller. The cash consideration was funded with existing cash and borrowings under our Credit Agreement (defined in Note 3 to this Condensed Consolidated Financial Statements). Approximately $13.0 million of the cash consideration was placed in escrow for fifteen months after the closing as security for potential future indemnification claims.
Effective January 2016, we completed the integration of Iris into our legacy eDiscovery business within our Technology Segment, and as a result, the determination of Iriss post-acquisition revenues and operating results for 2016 on a stand-alone basis are impracticable, given the integration of accounting records, including cost centers, customer contracts, the realignment of key personnel and the sharing of property and equipment assets.
During the fourth quarter of 2015, we finalized the purchase price allocation related to the Iris acquisition, and as a result, no allocation adjustments were recorded during the three months ended March 31, 2016. See Note 13 to the Consolidated Financial Statements included in our 2015 Form 10-K for additional information.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. The purchase consideration was allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the date of acquisition. This allocation resulted in goodwill of $73.7 million, all of which was assigned to Epiqs Technology segment.
(in thousands) |
|
Purchase Price |
| |
Cash and cash equivalents |
|
$ |
197 |
|
Accounts receivable |
|
15,208 |
| |
Other current assets |
|
1,551 |
| |
Deferred income tax assets |
|
8,484 |
| |
Property and equipment |
|
10,642 |
| |
Other long-term assets |
|
246 |
| |
Intangible assets |
|
34,694 |
| |
Goodwill |
|
73,676 |
| |
Total assets acquired |
|
144,698 |
| |
|
|
|
| |
Accounts payable |
|
4,407 |
| |
Accrued liabilities |
|
4,837 |
| |
Deferred revenue |
|
1,689 |
| |
Deferred income tax liabilities |
|
|
| |
Capital lease obligations |
|
9,061 |
| |
Total liabilities assumed |
|
19,994 |
| |
|
|
|
| |
Net assets acquired |
|
$ |
124,704 |
|
The fair values of intangible assets acquired were estimated utilizing a discounted cash flow approach, with the assistance of an independent appraisal firm. The intangible assets acquired as part of the Iris acquisition are being amortized over their expected estimated economic benefit period. The fair values consist of the following:
(in thousands) |
|
Fair Value |
|
Useful Life |
| |
Customer relationships |
|
$ |
15,400 |
|
8 years |
|
Technology |
|
8,400 |
|
3 years |
| |
Trade name |
|
7,000 |
|
10 years |
| |
Non-compete agreements |
|
3,894 |
|
2 5 years |
| |
Total |
|
$ |
34,694 |
|
|
|
Pro Forma Results of Operations
The following table presents the unaudited pro forma combined results of operations of Epiq and Iris for the three months ended March 31, 2015, after giving effect to certain pro forma adjustments including: (i) amortization of acquired intangible assets, (ii) the impact of acquisition-related expenses, and (iii) interest expense adjustment for historical long-term debt of Iris that was repaid and interest expense on additional borrowings by Epiq to fund the acquisition. The operating results of Iris were included in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 for the full period.
(in thousands) |
|
Three Months Ended |
| |
Total revenues |
|
$ |
131,914 |
|
Net income (loss) |
|
309 |
| |
The unaudited pro forma financial information presented above assumes that the Iris acquisition occurred on January 1, 2014 and is not necessarily indicative of the actual results that would have occurred had those transactions been completed on that date. Furthermore, it does not reflect the impacts of any potential operating efficiencies, savings from expected synergies, or costs to integrate the operations. The unaudited pro forma financial information presented above is not necessarily indicative of future results.
NOTE 3: LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following (in thousands):
|
|
As of March 31, 2016 |
|
As of December 31, 2015 |
| ||||||||
|
|
Principal |
|
Unamortized |
|
Principal |
|
Unamortized |
| ||||
Senior secured term loan due 2020, variable interest rate |
|
$ |
366,301 |
|
$ |
(4,988 |
) |
$ |
367,213 |
|
$ |
(5,264 |
) |
Senior secured revolving loan due 2018, variable interest rate |
|
19,000 |
|
|
(1) |
|
|
|
(1) | ||||
Capital leases, due various dates from 2016 to 2021 |
|
12,073 |
|
|
|
13,326 |
|
|
| ||||
Notes payable, due 2017, 2.20% interest rate |
|
7,136 |
|
|
|
8,303 |
|
|
| ||||
Total obligations |
|
404,510 |
|
(4,988 |
) |
388,842 |
|
(5,264 |
) | ||||
Less: Obligations due within one year |
|
11,944 |
|
|
|
12,213 |
|
|
| ||||
Long-term obligations |
|
$ |
392,566 |
|
$ |
(4,988 |
) |
$ |
376,629 |
|
$ |
(5,264 |
) |
(1) As of March 31, 2016 and December 31, 2015, we had $1.0 million and $1.1 million, respectively, of unamortized debt issuance costs related to the $100 million senior secured revolving loan commitment that was included in Other long-term assets, net in the Condensed Consolidated Balance Sheets.
Credit Agreement
As of March 31, 2016, we have a $475 million senior secured credit facility consisting of a $100 million senior secured revolving loan commitment, maturing in August 2018, and a $375 million amortizing senior secured term loan, maturing in August 2020 (the Credit Agreement).
As of March 31, 2016:
· Borrowings outstanding under the senior secured term loan were subject to an interest rate based on the 0.75% LIBOR floor plus an applicable margin of 3.75% for an aggregate interest rate floor of 4.50%.
· Borrowings outstanding under the senior secured revolving loan had a weighted average interest rate of 6.1%.
· We had $0.8 million in letters of credit outstanding that reduce the borrowing capacity under the senior secured revolving loan.
· We were in compliance with all financial covenants.
Capital Leases
We lease certain property and equipment under capital leases that generally require monthly payments with final maturity dates during various periods through 2021. As of March 31, 2016 our capital leases had a weighted-average interest rate of approximately 4.6%.
Notes Payable
In November 2014 we entered into a note payable related to a software license and maintenance agreement that bears interest of approximately 2.20% and is payable quarterly through September 2017.
NOTE 4: EQUITY
Share Repurchases
We have a policy that requires us to repurchase shares of our common stock to satisfy employee tax withholding obligations upon the vesting of restricted stock awards or the exercise of stock options and, at the participants election, shares of common stock surrendered to us for satisfaction of the exercise price of stock options.
During the three months ended March 31, 2016 and 2015, we repurchased 347,908 shares of common stock for $4.4 million and 219,737 shares of common stock for $4.0 million, respectively. Additionally, during the three months ended March 31, 2016 and 2015, shares of common stock surrendered to us to satisfy the exercise price of stock options were 40,308 and 1,889, respectively.
Dividends
On February 25, 2016, the board of directors (the Board) of Epiq declared a cash dividend of $0.09 per outstanding share of common stock payable to shareholders of record as of the close of business on April 4, 2016 and on May 2, 2016, we paid an aggregate $3.4 million to holders of our common stock on account of such dividends.
On April 28, 2016, the Board declared a cash dividend of $0.09 per outstanding share of common stock payable on July 5, 2016 to shareholders of record as of the close of business on May 23, 2016.
The aggregate amount of the dividends declared during the three months ended March 31, 2016 and 2015 was $3.4 million in each period, or $0.09 per share of common stock. During the three months ended March 31, 2016 and 2015, we paid cash dividends of $3.4 million and $3.3 million, respectively
Accumulated Other Comprehensive Loss
The following table summarizes the components of Accumulated other comprehensive loss (in thousands):
|
|
Three Months Ended |
| ||||
|
|
2016 |
|
2015 |
| ||
Foreign currency translation adjustments |
|
|
|
|
| ||
Balance at beginning of period |
|
$ |
(5,161 |
) |
$ |
(2,952 |
) |
Other comprehensive loss, net of tax |
|
(356 |
) |
(2,335 |
) | ||
Balance at end of period |
|
$ |
(5,517 |
) |
$ |
(5,287 |
) |
|
|
|
|
|
| ||
Unrealized loss on cash flow hedges |
|
|
|
|
| ||
Balance at beginning of period |
|
$ |
(2,788 |
) |
$ |
(1,410 |
) |
Other comprehensive loss, net of tax |
|
(1,003 |
) |
(696 |
) | ||
Balance at end of period |
|
$ |
(3,791 |
) |
$ |
(2,106 |
) |
There were no reclassifications of amounts from Accumulated other comprehensive loss into the Condensed Consolidated Statements of Operations during the three months ended March 31, 2016 and 2015.
NOTE 5: EARNINGS PER SHARE
Basic earnings per common share is computed on the basis of weighted-average outstanding shares of common stock. Diluted earnings per common share is computed on the basis of basic weighted-average outstanding common shares adjusted for the dilutive effect, if any, of dilutive securities which included outstanding stock options and nonvested restricted stock awards.
The following table summarizes basic and diluted earnings per share (in thousands, except per share amounts).
|
|
Three Months Ended |
| ||||
|
|
2016 |
|
2015 |
| ||
Net income (loss) |
|
$ |
(65 |
) |
$ |
1,733 |
|
|
|
|
|
|
| ||
Weighted-average common shares outstanding: |
|
|
|
|
| ||
Basic common shares |
|
37,068 |
|
36,281 |
| ||
Effect of dilutive securities |
|
|
|
633 |
| ||
Diluted common shares |
|
37,068 |
|
36,914 |
| ||
Net income (loss) per common share: |
|
|
|
|
| ||
Basic net income (loss) per common share |
|
$ |
|
|
$ |
0.05 |
|
Diluted net income (loss) per common share |
|
$ |
|
|
$ |
0.05 |
|
|
|
|
|
|
| ||
Potentially dilutive shares excluded from the calculation: |
|
|
|
|
| ||
Stock options and nonvested shares excluded as their inclusion would be anti-dilutive |
|
2,453 |
|
137 |
|
NOTE 6: FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The following table provides the financial assets and liabilities carried at fair value, in thousands, measured on a recurring basis as of March 31, 2016 and December 31, 2015 using the fair value hierarchy prescribed by U.S. GAAP. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs. Level 3 includes fair values estimated using significant non-observable inputs. An assets or liabilitys classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
|
|
|
|
Fair Value Measurements |
| ||||||||
|
|
Carrying |
|
Quoted |
|
Significant |
|
Significant |
| ||||
|
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
March 31, 2016: |
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Interest rate swap |
|
$ |
4,859 |
|
$ |
|
|
$ |
4,859 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2015: |
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Interest rate swap |
|
$ |
3,856 |
|
$ |
|
|
$ |
3,856 |
|
$ |
|
|
Interest rate swap
The fair value of our interest rate swap 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 the interest rate swap is classified as Level 2. The fair value of the interest rate swap is subject to material changes based upon changes in the forward curve for 1 month LIBOR and the volatility thereof.
Other Fair Value Disclosures
The carrying amounts of cash and cash equivalents, short-term investments, receivables, accounts payable and accrued expenses approximate their fair values because of the relatively short-term maturities of these financial instruments. As of March 31, 2016 and December 31, 2015, the amounts outstanding under both our credit facility and notes payable approximated fair value due to the borrowing rates currently available to us for debt with similar terms and are classified as Level 2.
NOTE 7: INCOME TAXES
The locations where we generate pretax income (or loss) have a significant effect on our consolidated effective tax rate. We estimate that our pretax income incurred in the United States will be subject to a combined statutory federal and state tax rate of approximate 41%, while our pretax income (or loss) incurred in foreign income tax jurisdictions will be subject to a combined statutory tax rate of approximately 21%, primarily driven by our expected pretax income in Europe.
We calculate our provision for income taxes during the interim periods by applying an estimate of the effective tax rate for the full fiscal year to consolidated ordinary pretax income (or loss) for the reporting period. We are also required to record the tax impact of certain discrete items, unusual or infrequently occurring items including changes in judgment about valuation allowances, and the effects of changes in tax laws or income tax rates, in the interim period in which they occur. In addition, material jurisdictions with a projected loss for the year where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion combined with the tax impact of recording certain discrete items could result in a higher or lower effective tax rate during a particular interim period than the estimated annual effective tax rate anticipated for the year.
As of March 31, 2016 and December 31, 2015, we have recorded a valuation allowance against net deferred tax assets recognized in the United States, including net operating loss carryforwards. Our Condensed Consolidated Balance Sheet includes a deferred tax liability that relates to certain indefinite-lived intangibles which we are amortizing for tax purposes. Since the reversal of this deferred tax liability is not determinable, our 34.6% estimated annual effective tax rate includes approximately $4.5 million tax expense related to this amortization.
NOTE 8: SHARE-BASED COMPENSATION
Share-based Compensation Expense
The following table presents total share-based compensation expense (in thousands):
|
|
Three Months Ended |
| ||||
|
|
2016 |
|
2015 |
| ||
Direct cost of services |
|
$ |
118 |
|
$ |
89 |
|
Selling, general and administrative expense |
|
2,398 |
|
1,532 |
| ||
Total share-based compensation expense |
|
$ |
2,516 |
|
$ |
1,621 |
|
Nonvested Restricted Stock Awards
A summary of nonvested restricted stock activity is presented in the table below (shares in thousands):
|
|
Shares |
|
Weighted |
| |
Nonvested at December 31, 2015 |
|
709 |
|
$ |
17.00 |
|
Granted |
|
757 |
|
12.56 |
| |
Vested |
|
(913 |
) |
13.65 |
| |
Forfeited/Canceled |
|
(18 |
) |
16.48 |
| |
Nonvested at March 31, 2016 |
|
535 |
|
16.46 |
| |
The fair value of nonvested restricted stock awards is based on the closing market price of our common stock on the date of grant. Nonvested restricted stock entitles the holder to shares of unrestricted common stock upon vesting.
As of March 31, 2016, total unrecognized compensation expense related to unvested restricted stock awards was $6.6 million and will be recognized over a weighted-average period of approximately 1.7 years.
Performance-based Restricted Stock Awards
In March 2016, we granted 20,000 shares of performance-based restricted stock to a senior management employee (2016 Management Performance RSA). The 2016 Management Performance RSA is earned based upon the achievement of certain segment level financial performance criteria for the calendar year ending December 31, 2016.
In February 2015, we granted an aggregate of 320,000 shares of performance-based restricted stock awards to executive officers of Epiq (the 2015 Executive Officer Performance RSAs). The 2015 Executive Officer Performance RSAs were earned based upon the achievement of certain financial performance criteria of Epiq for the year ended December 31, 2015 and required certification by the compensation committee of the Board (the Compensation Committee). On January 28, 2016, the Compensation Committee certified that the performance conditions with respect to all of the 2015 Executive Officer Performance RSAs were achieved, and according to the terms of the underlying award agreements, awards representing 140,000 shares of common stock vested on February 22, 2016. The remaining 180,000 of 2015 Executive Officer Performance RSAs are scheduled to vest, subject to continuing employment, in two equal installments in February 2017 and 2018.
In January 2015, we granted 20,000 shares of performance-based restricted stock to a senior management employee (2015 Management Performance RSA). The 2015 Management Performance RSA was earned based upon the achievement of certain segment-level financial performance criteria for the year ended December 31, 2015. In February 2016, one of the performance conditions related to the 2015 Management Performance RSA was certified to be achieved, and restricted stock equal to 10,000 shares of common stock vested. The remaining 10,000 shares were forfeited.
Contingent Restricted Stock Awards
On January 28, 2016, the Compensation Committee approved the grants of service-based and performance-based restricted stock to directors and executive officers (the Contingent Equity Awards) of Epiq. These awards are contingent upon the approval by our shareholders of an amendment and restatement of the Epiq Systems, Inc. 2004 Equity Incentive Plan (the 2004 Plan), which would increase the number of shares of common stock available for awards, and that we are planning to submit for approval at the annual meeting of shareholders for 2016. If shareholder approval is not obtained, the Contingent Equity Awards will automatically convert to cash awards, which will be equal to the number of shares that ultimately vest, depending on level of achievement of certain financial measures, multiplied by the closing stock price of Epiq common stock (as published by NASDAQ Global Markets) on the vest date. As of March 31, 2016, the estimated cash value of the Contingent Equity Awards was $7.4 million. For the three months ended March 31, 2016, we recognized $0.7 million of expense related to the Contingent Equity Awards that is included in Selling, general and administrative expense in the Condensed Consolidated Statements of Operations. The expense related to the Contingent Equity Awards is recognized as a cash expense, and therefore is not included in Share-based Compensation Expense.
Annual Incentive Awards
During the three months ended March 31, 2016, we granted an aggregate of 717,461 shares of restricted stock to executive officers and employees of Epiq that immediately vested in connection with the payment of 2015 annual incentive compensation. In addition, we plan to pay a portion of the 2016 annual incentive awards to executive officers and employees of Epiq in the form of fully vested common stock (the 2016 Annual Incentive Awards). Our ability to pay the 2016 Annual Incentive Awards in common stock is contingent upon the approval by our shareholders of the proposed amendment and restatement of the 2004 Plan as described above. If shareholder approval is not obtained, the 2016 Annual Incentive Awards will be paid in cash. For the three months ended March 31, 2016, we have recognized $2.2 million of expense related to the 2016 Annual Incentive Awards. Prior to obtaining shareholder approval as described above, the expense related to the 2016 Annual Incentive Awards is recognized as a cash expense, and therefore is not included in Share-based Compensation Expense.
Stock Options
Stock option activity during the three months ended March 31, 2016 was immaterial to the Condensed Consolidated Financial Statements. As of March 31, 2016, unrecognized compensation cost related to unvested stock options was $1.7 million, which will be recognized over a weighted-average period of approximately 2.4 years.
Equity Award Plans
As of March 31, 2016, there were 175,495 and 200,000 remaining shares available for issuance under the 2004 Plan and Epiq Systems, Inc. 2015 Inducement Award Plan, respectively.
NOTE 9: 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 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 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, class action, mass tort proceedings, federal regulatory actions and data breach responses.
The segment performance measure is based on earnings before interest, taxes, depreciation and amortization, certain nonrecurring operating expenses, share-based compensation expense and contingent equity award expense (as described in Note 8 to the Condensed Consolidated Financial Statements). In managements evaluation of segment performance, certain costs, such as executive management, administrative staff, and other enterprise level expenses including certain information technology, data security and marketing expenses 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 and equipment, 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 and equipment, 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 (in thousands):
|
|
Three Months Ended March 31, 2016 |
| ||||||||||
|
|
Technology |
|
Bankruptcy |
|
Eliminations |
|
Total |
| ||||
Operating revenue |
|
$ |
93,257 |
|
$ |
38,271 |
|
$ |
|
|
$ |
131,528 |
|
Intersegment revenue |
|
269 |
|
|
|
(269 |
) |
|
| ||||
Operating revenues including intersegment revenue |
|
93,526 |
|
38,271 |
|
(269 |
) |
131,528 |
| ||||
Reimbursable expenses |
|
562 |
|
14,441 |
|
|
|
15,003 |
| ||||
Total revenue |
|
94,088 |
|
52,712 |
|
(269 |
) |
146,531 |
| ||||
Direct costs, reimbursable expenses, selling, general and administrative expenses |
|
68,271 |
|
40,974 |
|
(269 |
) |
108,976 |
| ||||
Segment performance measure |
|
$ |
25,817 |
|
$ |
11,738 |
|
$ |
|
|
$ |
37,555 |
|
As a percentage of segment operating revenue |
|
28 |
% |
31 |
% |
|
|
29 |
% |
|
|
Three Months Ended March 31, 2015 |
| ||||||||||
|
|
Technology |
|
Bankruptcy |
|
Eliminations |
|
Total |
| ||||
Operating revenue |
|
$ |
70,023 |
|
$ |
37,732 |
|
$ |
|
|
$ |
107,755 |
|
Intersegment revenue |
|
939 |
|
|
|
(939 |
) |
|
| ||||
Operating revenues including intersegment revenue |
|
70,962 |
|
37,732 |
|
(939 |
) |
107,755 |
| ||||
Reimbursable expenses |
|
313 |
|
10,960 |
|
|
|
11,273 |
| ||||
Total revenue |
|
71,275 |
|
48,692 |
|
(939 |
) |
119,028 |
| ||||
Direct costs, reimbursable expenses, selling, general and administrative expenses |
|
53,066 |
|
35,988 |
|
(939 |
) |
88,115 |
| ||||
Segment performance measure |
|
$ |
18,209 |
|
$ |
12,704 |
|
$ |
|
|
$ |
30,913 |
|
As a percentage of segment operating revenue |
|
26 |
% |
34 |
% |
|
|
29 |
% |
Following is a reconciliation of the segment performance measure to consolidated income (loss) before income taxes (in thousands):
|
|
Three Months Ended March 31, |
| ||||
|
|
2016 |
|
2015 |
| ||
Segment performance measure |
|
$ |
37,555 |
|
$ |
30,913 |
|
Unallocated expenses |
|
(16,311 |
) |
(10,861 |
) | ||
Share-based compensation expense |
|
(2,516 |
) |
(1,621 |
) | ||
Depreciation and software and leasehold amortization |
|
(9,534 |
) |
(8,765 |
) | ||
Amortization of identifiable intangible assets |
|
(3,774 |
) |
(2,685 |
) | ||
Other operating expense |
|
(53 |
) |
(137 |
) | ||
Operating income |
|
5,367 |
|
6,844 |
| ||
Interest expense, net |
|
(5,375 |
) |
(4,225 |
) | ||
Income (loss) before income taxes |
|
$ |
(8 |
) |
$ |
2,619 |
|
Following are capital expenditures (including software development costs) by segment (in thousands):
|
|
Three Months Ended March 31, |
| ||||
|
|
2016 |
|
2015 |
| ||
Capital Expenditures |
|
|
|
|
| ||
Technology |
|
$ |
1,644 |
|
$ |
2,252 |
|
Bankruptcy and Settlement Administration |
|
389 |
|
436 |
| ||
Unallocated and corporate |
|
3,309 |
|
5,930 |
| ||
Total capital expenditures |
|
$ |
5,342 |
|
$ |
8,618 |
|
Following are assets by segment (in thousands):
|
|
As of |
|
As of |
| ||
Total Assets |
|
|
|
|
| ||
Technology |
|
$ |
473,200 |
|
$ |
465,736 |
|
Bankruptcy and Settlement Administration |
|
279,601 |
|
276,097 |
| ||
Unallocated and corporate |
|
76,623 |
|
82,064 |
| ||
Total assets |
|
$ |
829,424 |
|
$ |
823,897 |
|
Following is total revenue, determined by the location providing the services, by geographical area (in thousands):
|
|
Three Months Ended March 31, |
| ||||
|
|
2016 |
|
2015 |
| ||
Total Revenue |
|
|
|
|
| ||
United States |
|
$ |
123,084 |
|
$ |
101,668 |
|
United Kingdom |
|
13,650 |
|
13,690 |
| ||
Other countries |
|
9,797 |
|
3,670 |
| ||
Total revenue |
|
$ |
146,531 |
|
$ |
119,028 |
|
Following are long-lived assets, excluding intangible assets, by geographical area (in thousands):
|
|
As of |
|
As of |
| ||
Long-lived assets |
|
|
|
|
| ||
United States |
|
$ |
80,049 |
|
$ |
84,137 |
|
Other countries |
|
9,226 |
|
9,549 |
| ||
Total long-lived assets |
|
$ |
89,275 |
|
$ |
93,686 |
|
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. Although it is not possible to predict with certainty the outcome of litigation, we do not believe that any of the current pending legal proceedings to which we are a party will have a material impact on our results of operations, financial condition or cash flows.
Villere Litigation
On December 11, 2015, St. Denis J. Villere & Company, L.L.C. (Villere) and George Young (the Plaintiffs) filed a petition, which was later amended, in the Circuit Court of Jackson County, Missouri (the Court) against Epiq and eight of our directors (the Director Defendants). The petition, as amended, concerns Villeres December 7, 2015 purported nomination of six directors, which Epiq rejected, because, among other things, the company argues that Villere was prohibited from nominating directors under the terms of a Director Appointment Agreement, dated November 1, 2014, among Villere, Epiq and the Villere Designee (as defined therein) and that such nomination failed to comply with our amended and restated bylaws (the Bylaws). The Plaintiffs petition, as amended, includes claims for, among other things: (1) injunctive relief, (2) a declaratory judgement that the purported nomination was proper so that Villere can then submit such nominations for a vote at the companys annual meeting of shareholders in 2016 (the 2016 Annual Meeting); (3) a declaratory judgment that Epiqs Bylaws are either facially invalid or invalid as applied to Villere; and (4) breach of fiduciary duty against the Director Defendants. In its amended petition, Villere abandoned its claim for any monetary damages associated with its breach of fiduciary duty claim. Epiq filed counterclaims on January 13, 2016, against the Plaintiffs, and later amended such counterclaims to include certain clients of Villere (the Villere Clients) on whose behalf Villere is purportedly operating. Villere has filed a motion to dismiss such counterclaims against the Villere Clients. After a hearing on April 4, 2016, the Court issued a judgment (the Judgment) finding that the Director Appointment Agreement had been terminated by Villere and that Villere could nominate its slate of directors to the companys Board at its 2016 Annual Meeting. The Court did not rule on certain of Plaintiffs claims relative to the alleged breach of fiduciary duties or the validity of Epiqs Bylaws. The parties have each submitted motions to amend the Judgment. Epiqs motion to amend is principally to certify the Judgment as final so that Epiq may file an appeal thereof. On April 22, 2016, the Court ruled in favor of Epiq on its motion to amend and denied Plaintiffs motion to amend (the Amended Judgment). No hearing has yet been scheduled by the Court relative to Epiqs counterclaims. Both Plaintiffs and Epiq have filed separate notices of appeal of the Amended Judgment with the Missouri Court of Appeals for the Western District. On April 26, 2016, the Plaintiffs filed an application with the Court requesting reimbursement of approximately $2.8 million in attorneys fees and other related expenses (the Fee Application). Epiq intends to contest the Fee Application vigorously as we believe the Fee Application is legally without merit. At this time, we cannot reasonably predict the outcome of the Fee Application, and as a result, we have not accrued a liability in the Condensed Consolidated Financial Statements as of March 31, 2016.
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The discussion below, as well as other portions of this Form 10-Q, contains statements that relate to future events and expectations and, as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words or phrases such as believe, expect, anticipate, should, planned, projected, forecasted, may, estimated, goal, objective, seeks, and potential, and variations of these words and similar expressions or negatives of these words. 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; effects of current or future economic conditions or performance; industry trends; expectations regarding the current review process of strategic and financial alternatives; and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in our 2015 Form 10-K, and those described from time to time in our future reports filed with the Securities and Exchange Commission.
Executive Summary
Epiq is a leading provider of professional services and integrated technology for the legal profession. We combine expert professional services, proprietary and select third-party software, and a global infrastructure to serve our clients as a strategic partner. Our innovative solutions and professional services are designed for a variety of client legal matters, including litigation, investigations, financial transactions and regulatory compliance as well as the administration of corporate restructuring and bankruptcies, class action and mass tort proceedings, federal regulatory actions and data breach responses.
Our two reportable segments are Technology and Bankruptcy and Settlement Administration.
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. On April 30, 2015, we completed the acquisition of Iris, a leading provider of managed services for the legal profession including electronic discovery and document review. Iris supports Epiqs strategic plan to offer managed services solutions to its existing global client base within the Technology segment. Effective with and subsequent to the acquisition date, the operating results of Iris are included within the Technology segment. Effective January 2016, we completed the integration of Iris into our legacy eDiscovery business, and as a result, the determination of Iriss post-acquisition revenues and operating results for 2016 on a stand-alone basis are impracticable, given the integration of accounting records, including cost centers, certain client and vendor contracts, the realignment of key personnel and the sharing of property and equipment assets.
Bankruptcy and Settlement Administration provides managed services and technology solutions that address the needs of our clients with respect to litigation, claims and project administration, compliance matters, controlled disbursements, corporate restructuring, bankruptcy, class action, mass tort proceedings, federal regulatory actions and data breach responses.
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.
Network infrastructure is an essential component of our technology strategy because most of our software is utilized by our clients within a hosted environment and we manage a high volume of client data. A single large client engagement may entail over 100 million documents or 100 terabytes of information and may include complex structured data such as databases and unstructured data such as email archives. We operate eDiscovery data centers in the United States, Canada, China, Hong Kong, Japan, Germany and the United Kingdom. Our data centers provide reliable, secure access to our software environments and to client databases. Information security is of paramount importance in any managed technology business, and Epiq incorporates best practices designed to protect sensitive client 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-volume data intake, high-speed printing and mailing, call center operations, cash 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 expertisesuch as litigation, investigations, bankruptcy, mergers and acquisitions, mass tort, data breach, settlements and class actionwhich have distinctive practices and requirements. Technology alone is insufficient to bring about a successful outcome on a sophisticated client matter; it is the application of the technology combined with the expertise of our staff that creates superior value for our client. We have a worldwide team of executives, client services specialists and technical consultants on whom clients rely for expert advicewhether delivered at the clients site or from one of our global office locations.
Our clients include top-tier law firms, in-house legal departments of major corporations, bankruptcy trustees, government agencies, mortgage processors, and financial institutions. Among law firms, we work extensively with Am Law 100 firms in the United States, Magic Circle firms in the United Kingdom, and leading regional, boutique and specialty law firms. Among corporate clients, we have substantial relationships with Fortune 500® and other large, multinational companies in a variety of industries, including financial services, pharmaceuticals, insurance, technology, retailers and others.
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 Epiq does not engage in the practice of law and thus does not offer legal advice, we draw heavily from our subject-matter expertise in the legal profession to assist clients to achieve the best outcome possible on each and every project.
Our financial results are primarily driven by the following facts, among others:
· the number, size, complexity and duration of client engagements attained;
· the prices we are able to negotiate with our clients, the prices we are able to negotiate with our vendors and the results of our cost management efforts; and
· the geographic locations of our clients or locations where services are rendered.
Strategic and Financial Review
On September 18, 2014, the Company and its Board announced the commencement of a process to explore a full range of strategic and financial alternatives, which may include among other things, acquisitions, divestitures, or a going-private or recapitalization transaction, in order to determine a course of action that is in the best interest of all shareholders. There can be no assurance that the strategic review will result in the consummation of a transaction. We incurred $2.3 million and $1.0 million of strategic and financial review expenses during the three months ended March 31, 2016 and 2015, respectively.
Results of Operations for the Three Months Ended March 31, 2016 Compared with the Three Months Ended March 31, 2015
The following provides information relevant to understanding our consolidated results of operations. Also see our discussion of segment results in the Results of Operations by Segment section below.
Consolidated Results of Operations
|
|
Three Months Ended March 31, |
| |||||||||
Amounts in thousands |
|
2016 |
|
2015 |
|
$ Change |
|
% Change |
| |||
Operating revenue |
|
$ |
131,528 |
|
$ |
107,755 |
|
$ |
23,773 |
|
22 |
% |
Reimbursable expenses |
|
15,003 |
|
11,273 |
|
3,730 |
|
33 |
% | |||
Total revenue |
|
146,531 |
|
119,028 |
|
27,503 |
|
23 |
% | |||
Direct costs of operating revenue (exclusive of depreciation and amortization shown separately below) |
|
65,153 |
|
51,029 |
|
14,124 |
|
28 |
% | |||
Reimbursable expenses |
|
14,908 |
|
10,504 |
|
4,404 |
|
42 |
% | |||
Selling, general and administrative expense |
|
47,742 |
|
39,064 |
|
8,678 |
|
22 |
% | |||
Depreciation and software and leasehold amortization |
|
9,534 |
|
8,765 |
|
769 |
|
9 |
% | |||
Amortization of identifiable intangible assets |
|
3,774 |
|
2,685 |
|
1,089 |
|
41 |
% | |||
Other operating expense |
|
53 |
|
137 |
|
(84 |
) |
(61 |
)% | |||
Total operating expense |
|
141,164 |
|
112,184 |
|
28,980 |
|
26 |
% | |||
Operating income |
|
5,367 |
|
6,844 |
|
(1,477 |
) |
(22 |
)% | |||
Interest expense (income) |
|
|
|
|
|
|
|
|
| |||
Interest expense |
|
5,408 |
|
4,229 |
|
1,179 |
|
28 |
% | |||
Interest income |
|
(33 |
) |
(4 |
) |
(29 |
) |
(725 |
)% | |||
Net interest expense |
|
5,375 |
|
4,225 |
|
1,150 |
|
27 |
% | |||
Income (loss) before income taxes |
|
(8 |
) |
2,619 |
|
(2,627 |
) |
(100 |
)% | |||
Income tax expense |
|
57 |
|
886 |
|
(829 |
) |
(94 |
)% | |||
Net income (loss) |
|
$ |
(65 |
) |
$ |
1,733 |
|
$ |
(1,798 |
) |
(104 |
)% |
Consolidated Revenue
Operating revenue increased $23.7 million, or 22%, to $131.5 million during the three months ended March 31, 2016 from $107.8 million during the three months ended March 31, 2015. This change is composed of an increase of $23.2 million in the Technology segment and an increase of $0.5 million in the Bankruptcy and Settlement Administration segment. Refer to the subsequent Results of Operations by Segment for additional information.
Our total revenue includes reimbursable expenses, such as postage related to notification services. Although reimbursable expenses may fluctuate significantly from period to period, these fluctuations have a minimal effect on our operating income as we realize little or no margin from this revenue.
Consolidated Operating Expense
Direct cost of operating revenue (exclusive of depreciation and amortization expense), increased $14.2 million, or 28%, to $65.2 million during the three months ended March 31, 2016 from $51.0 million during the three months ended March 31, 2015. This was primarily due to an increase of $6.8 million in compensation costs, including an increase of $4.3 million related to project-based attorneys in our Technology segment who perform document review services, an increase of $3.8 million in production costs primarily related to software licenses and data center costs in our Technology segment and an increase of $3.0 million in direct costs primarily related to legal notification, legal claims advertising expenses and other production costs in our Bankruptcy and Settlement Administration Segment.
Reimbursable expenses increased $4.4 million, or 42%, during the three months ended March 31, 2016 to $14.9 million from $10.5 million during the three months ended March 31, 2015. This corresponds to the increase in reimbursable expenses revenue and is primarily due to higher postage volumes.
Selling, general and administrative expense increased $8.6 million, or 22%, to $47.7 million during the three months ended March 31, 2016 from $39.1 million during the three months ended March 31, 2015. This was primarily due to an increase of $5.0 million in salaries and benefits, an increase of $1.6 million in sales commission expense, an increase of $1.3 million in expenses related to the strategic and financial review process, an increase of $0.6 million in adverting expense and an increase of $0.4 million in travel and entertainment expense. Other selling, general and administrative expenses increased by $0.6 million. These increases were offset by a decrease of $0.9 million in postemployment benefits primarily related to employee severance charges.
Depreciation and software and leasehold amortization increased $0.7 million, or 8%, to $9.5 million during the three months ended March 31, 2016 from $8.8 million during the three months ended March 31, 2015. This increase was primarily related to the property and equipment acquired in connection with the Iris acquisition.
Amortization of identifiable intangible assets increased $1.1 million, or 41%, to $3.8 million during the three months ended March 31, 2016 from $2.7 million during the three months ended March 31, 2015. This increase was primarily related to amortization of intangible assets acquired in connection with Iris.
Consolidated Interest Expense
Interest expense increased $1.2 million, or 29%, to $5.4 million for the three months ended March 31, 2016, from $4.2 million for the three months ended March 31, 2015. The increase was primarily due to higher principal amount of debt outstanding during the three months ended March 31, 2016 compared to the same period of 2015 to fund the acquisition of Iris.
Consolidated Income Taxes
Our effective tax rate is impacted by the jurisdictions where our pretax income (or loss) is generated and the level of pretax income (or loss) generated during the interim period compared to the fiscal year forecast. As our consolidated pretax income (or loss) approaches breakeven, our consolidated effective tax rate becomes noncustomary.
For the three months ended March 31, 2016, we recognized income tax expense of $0.1 million compared to $0.9 million for the three months ended March 31, 2015. This decrease in income tax expense was primarily the result of a decrease in consolidated pretax income, the impact of changes in mix of pretax income and losses in the jurisdictions where we operate. For the three months ended March 31, 2016 and March 31, 2015, we incurred a U.S. pretax loss of $6.9 million and $2.2 million, respectively. For the three months ended March 31, 2016 and March 31, 2015, our European operations incurred pretax income of $6.6 million and $4.7 million, respectively. Also contributing to the noncustomary consolidated effective tax rate for the three months ended March 31, 2016 was the recognition of interest expense related to uncertain tax positions as discrete income tax expense.
Results of Operations by Segment
The following segment discussion is presented on a basis consistent with our segment disclosure contained in Note 9 to the Condensed Consolidated Financial Statements. The table below presents revenues, direct costs, selling, general and administrative expenses (including reimbursable expenses), segment performance measure for each of our reportable segments and a reconciliation of the segment performance measure to our consolidated income (loss) before income taxes.
|
|
Three Months Ended |
|
|
|
|
| |||||
Amounts in thousands |
|
2016 |
|
2015 |
|
$ Change |
|
% Change |
| |||
Operating revenue |
|
|
|
|
|
|
|
|
| |||
Technology |
|
$ |
93,257 |
|
$ |
70,023 |
|
$ |
23,234 |
|
33 |
% |
Bankruptcy and Settlement Administration |
|
38,271 |
|
37,732 |
|
539 |
|
1 |
% | |||
Total operating revenue |
|
$ |
131,528 |
|
$ |
107,755 |
|
$ |
23,773 |
|
22 |
% |
Reimbursable expenses |
|
|
|
|
|
|
|
|
| |||
Technology |
|
$ |
562 |
|
$ |
313 |
|
$ |
249 |
|
80 |
% |
Bankruptcy and Settlement Administration |
|
14,441 |
|
10,960 |
|
3,481 |
|
32 |
% | |||
Total reimbursable expenses |
|
$ |
15,003 |
|
$ |
11,273 |
|
$ |
3,730 |
|
33 |
% |
Total revenue |
|
|
|
|
|
|
|
|
| |||
Technology |
|
$ |
93,819 |
|
$ |
70,336 |
|
$ |
23,483 |
|
33 |
% |
Bankruptcy and Settlement Administration |
|
52,712 |
|
48,692 |
|
4,020 |
|
8 |
% | |||
Total revenue |
|
$ |
146,531 |
|
$ |
119,028 |
|
$ |
27,503 |
|
23 |
% |
Direct costs, reimbursable expenses, selling, general and administrative expenses |
|
|
|
|
|
|
|
|
| |||
Technology |
|
$ |
68,271 |
|
$ |
53,066 |
|
$ |
15,205 |
|
29 |
% |
Bankruptcy and Settlement Administration |
|
40,974 |
|
35,988 |
|
4,986 |
|
14 |
% | |||
Intercompany eliminations |
|
(269 |
) |
(939 |
) |
670 |
|
71 |
% | |||
Total direct costs, reimbursable expenses, selling, general and administrative expenses |
|
$ |
108,976 |
|
$ |
88,115 |
|
$ |
20,861 |
|
24 |
% |
Segment performance measure |
|
|
|
|
|
|
|
|
| |||
Technology |
|
$ |
25,817 |
|
$ |
18,209 |
|
$ |
7,608 |
|
42 |
% |
Bankruptcy and Settlement Administration |
|
11,738 |
|
12,704 |
|
(966 |
) |
(8 |
)% | |||
Total segment performance measure |
|
$ |
37,555 |
|
$ |
30,913 |
|
$ |
6,642 |
|
21 |
% |
|
|
|
|
|
|
|
|
|
| |||
Segment performance measure as a percentage of segment operating revenue |
|
|
|
|
|
|
|
|
| |||
Technology |
|
28 |
% |
26 |
% |
|
|
2 |
% | |||
Bankruptcy and Settlement Administration |
|
31 |
% |
34 |
% |
|
|
(3 |
)% | |||
Total |
|
29 |
% |
29 |
% |
|
|
|
% |
|
|
Three Months Ended |
|
|
|
|
| |||||
Amounts in thousands |
|
2016 |
|
2015 |
|
$ Change |
|
% Change |
| |||
Reconciliation of segment performance measure to consolidated income (loss) before income taxes |
|
|
|
|
|
|
|
|
| |||
Segment performance measure |
|
$ |
37,555 |
|
$ |
30,913 |
|
$ |
6,642 |
|
21 |
% |
Unallocated expenses |
|
(16,311 |
) |
(10,861 |
) |
(5,450 |
) |
(50 |
)% | |||
Share-based compensation expense |
|
(2,516 |
) |
(1,621 |
) |
(895 |
) |
(55 |
)% | |||
Depreciation and software and leasehold amortization |
|
(9,534 |
) |
(8,765 |
) |
(769 |
) |
(9 |
)% | |||
Amortization of identifiable intangible assets |
|
(3,774 |
) |
(2,685 |
) |
(1,089 |
) |
(41 |
)% | |||
Other operating expense |
|
(53 |
) |
(137 |
) |
84 |
|
61 |
% | |||
Operating income |
|
5,367 |
|
6,844 |
|
(1,477 |
) |
(22 |
)% | |||
Interest expense, net |
|
(5,375 |
) |
(4,225 |
) |
(1,150 |
) |
(27 |
)% | |||
Income (loss) before income taxes |
|
$ |
(8 |
) |
$ |
2,619 |
|
$ |
(2,627 |
) |
(100 |
)% |
Technology Segment
Operating revenue increased $23.3 million, or 33%, to $93.3 million during the three months ended March 31, 2016 from $70.0 million during the three months ended March 31, 2015. This increase was primarily due to an increase of $9.4 million in revenue from electronically stored information (ESI) services in North America primarily as the result of the impact of the acquisition of Iris in April 2015, an increase of $8.2 million in North America document review revenue as the result of an increase in billable hours and an increase of $5.7 million in Europe and Asia eDiscovery revenue as the result of growth in both document review and ESI service revenues.
Revenue from reimbursable expenses increased to $0.6 million for the three months ended March 31, 2016 from $0.3 million during the three months ended March 31, 2015, primarily due to an increase in reimbursable third party production costs.
Direct costs, reimbursable expenses and selling, general and administrative expenses increased $15.2 million, or 29%, to $68.3 million during the three months ended March 31, 2016 from $53.1 million during the three months ended March 31, 2015. This was primarily due to an increase of $7.8 million in employee salaries and benefits, including $4.3 million related to project-based attorneys associated with the increase in document review revenue, an increase of $1.5 million in sales commission expense, an increase in production costs of $3.8 million primarily related to third party software and data center expenses, an increase of $0.9 million in reimbursable direct costs, an increase of $0.6 million in travel and entertainment expense and an increase of $0.3 million in advertising expense. Other miscellaneous selling, general and administrative expenses increased by $0.3 million.
Bankruptcy and Settlement Administration Segment
Operating revenue increased $0.6 million, or 2%, to $38.3 million during the three months ended March 31, 2016 from $37.7 million during the three months ended March 31, 2015. This increase was due to an increase of $5.2 million in revenue from our settlement administration business, primarily related to data breach response services, partially offset by a decrease of $4.7 million in revenue from bankruptcy related services caused by lower levels of active matters in our corporate restructuring service line, including the substantial completion of a claims administration engagement during the fourth quarter of 2015 and a decrease in revenue from our AACER bankruptcy services.
Revenue from reimbursable expenses increased $3.4 million, or 31%, to $14.4 million during the three months ended March 31, 2016 from $11.0 million during the three months ended March 31, 2015, primarily due to an increase in reimbursable postage costs.
Direct costs, reimbursable expenses and selling, general and administrative expenses increased $5.0 million, or 14%, to $41.0 million during the three months ended March 31, 2016 from $36.0 million during the three months ended March 31, 2015. This was primarily due to an increase of $2.3 million in legal notifications, legal claims advertising costs and other miscellaneous production costs and an increase of $3.5 million in reimbursed expenses, primarily consisting of postage costs for legal notifications and legal claims advertising services. These increases were offset by a $0.4 million decrease in lease expense and $0.4 million decrease in other general and administrative related expenses.
Liquidity and Capital Resources
Overview
We had $20.2 million in cash and cash equivalents as of March 31, 2016, of which $13.2 million was held by our foreign subsidiaries at financial institutions outside of the United States. We consider the earnings of our foreign 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. In the event that we decide to repatriate foreign earnings, we would have to adjust the income tax provision in the period when we determine that the earnings will no longer be indefinitely invested outside the United States.
We have historically funded our global operations primarily through cash flows from operations and borrowings under our credit facility. Furthermore, we have historically used cash flows from operations and borrowings under our credit facility to fund our proprietary software product development, fund our capital expenditures, repurchase shares of our common stock, pay dividends and acquire businesses. We have also used cash flows from operations to pay interest and principal payments under our debt agreements.
We believe that our cash balances and other current assets, together with our expected future cash flows provided by operating activities and, as necessary, by utilization of our existing committed and available borrowing capacity under our credit facility, will be sufficient to meet our expected operating and debt service requirements for at least the next 12 months. As we expect to generate positive free cash flow for fiscal year 2016 and beyond, we expect to continue to repay or be able to refinance the amounts outstanding under our credit facility as or before they become due and payable.
Operating Activities
Our operating activities used cash of $10.3 million during the three months ended March 31, 2016. Included in cash used in operating activities was a net loss of $0.1 million which included $16.0 million of non-cash expenses for net contribution to cash flows of $15.9 million related to net income adjusted to exclude non-cash expenses. Cash used in operating activities also included a $26.3 million decrease in cash resulting from net changes in operating assets and liabilities, primarily from a $23.8 million increase in accounts receivables due to an increase of days-sales-outstanding and a decrease of $5.6 million in accounts payable and other liabilities. Other operating assets and liabilities increased operating cash flows $3.1 million. Trade accounts receivable fluctuates from period to period depending on the period to period change in revenue and the timing of revenue and collections. Accounts payable fluctuates from period to period depending on the timing of purchases and payments.
Our operating activities provided net cash of $3.8 million during the three months ended March 31, 2015. Included in net cash provided by operating activities was net income of $1.7 million which included $14.1 million of non-cash expenses for net contribution to cash flows of $15.8 million related to net income adjusted to exclude non-cash expenses. Cash provided by operating activities also included a $12.0 million decrease in cash resulting from net changes in operating assets and liabilities, primarily from a $13.3 million increase in accounts receivables due to an increase of days-sales-outstanding together with an increase in sequential quarterly revenue as compared to the prior quarter, a decrease of $5.1 million in accounts payable and other liabilities offset by a decrease of $3.9 million in income taxes receivable due primarily from collection of a $2.3 million net tax refunds. Other operating assets and liabilities increased operating cash flows $2.5 million.
Investing Activities
We used cash of $4.9 million and $8.6 million in our investing activities during the three months ended March 31, 2016 and 2015, respectively. We funded purchases of property and equipment, including computer hardware and purchased software of $3.0 million and $6.5 million during the three months ended March 31, 2016 and 2015, respectively. Software development is essential to support certain of our service offerings, and we used cash of $2.3 million and $2.1 million during the three months ended March 31, 2016 and 2015, respectively to fund internal costs related to the development of software. Proceeds from the sale of property and equipment were $0.5 million during the three months ended March 31, 2016.
Financing Activities
During the three months ended March 31, 2016, we had net borrowings of $19.0 million under our senior secured revolving loan, which was primarily used to fund working capital requirements and repaid $0.9 million of principal amounts outstanding under our senior secured term loan. We paid $2.4 million of principal amounts related to other long-term debt obligations, including $1.2 million related to a note payable and $1.2 million related to capital lease obligations. We paid $3.4 million in dividends and used $4.4 million to repurchase shares of common stock to satisfy employee tax withholding obligations upon the vesting of restricted stock awards.
During the three months ended March 31, 2015, we paid $2.5 million of principal amounts related to our debt, including $1.3 million related to our credit facility, $1.1 million related to a note payable and $0.1 million related to capital lease obligations. We paid $0.6 million of debt issuance cost in conjunction with the second amendment to our Credit Agreement. We paid $3.3 million in dividends and used $4.0 million to repurchase shares of common stock to satisfy employee tax withholding obligations upon the vesting of restricted stock awards and certain stock option exercises. Cash proceeds from the exercise of stock options were $0.5 million.
Credit Agreement
As of March 31, 2016, we have a $475 million senior secured credit facility, consisting of a $100 million senior secured revolving loan, maturing in August 2018, and a $375 million amortizing senior secured term loan, maturing in August 2020. The credit facility is secured by liens on our real property and a significant portion of our personal property. Subject to securing additional commitments from financial institutions and compliance with the covenants specified in the Credit Agreement, our Credit Agreement also provides a remaining $125 million uncommitted accordion for access to incremental capital (the Accordion). The Accordion provides for increasing the senior secured term loan up to $500 million and/or increasing the total capacity under the senior secured revolving loan commitment up to a maximum of $200 million with the aggregate total increase in the term loan and revolving loans not to exceed $200 million and the aggregate total not to exceed $600 million.
In addition, the Credit Agreement requires certain annual mandatory prepayments based on a percentage of excess cash flow when the net leverage ratio exceeds 2.75 to 1.00. Excess cash flow, as defined in the Credit Agreement, consists of Consolidated EBITDA (as defined in the Credit Agreement) adjusted for capital expenditures, changes in working capital, interest paid, income taxes paid, principal payments, dividends and certain acquisition-related obligations. Any prepayments reduce proportionately borrowings outstanding under the senior secured term loan and senior secured revolving loan.
The Credit Agreement contains a net leverage ratio (as defined in the Credit Agreement) covenant 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) prepaying, redeeming or repurchasing subordinated or junior debt, and (iv) engaging in certain transactions with affiliates, in each case, subject to customary exceptions.
Under our Credit Agreement, our ability to declare and 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 of the credit facility 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, specified severance costs, 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. Further, we are not allowed to declare and pay dividends and repurchase securities from equity holders if our net leverage ratio on a pro forma basis would exceed 4.25 to 1.0 or if our pro forma unused capacity on the senior secured revolving loan would be less than $25 million. The amounts outstanding under the credit facility may be accelerated upon the occurrence of an event of default under the Credit Agreement.
As of March 31, 2016:
· Our borrowings outstanding under the senior secured term loan and senior secured revolving loan were $366.3 million and $19.0 million, respectively.
· We had $0.8 million in letters of credit outstanding that reduce the borrowing capacity under the senior secured revolving loan.
· Borrowings outstanding under the senior secured term loan were subject to an interest rate based on the 0.75% LIBOR floor plus an applicable margin of 3.75% for an aggregate interest rate floor of 4.50%.
· Borrowings outstanding under the senior secured revolving loan had a weighted average interest rate of 6.1%.
· We were in compliance with all financial covenants.
Business Acquisition
On April 30, 2015, we completed the acquisition of all of the capital stock of Iris pursuant to the Purchase Agreement dated April 7, 2015. Under the terms of the Purchase Agreement, the aggregate purchase consideration was $133.8 million, consisting of $124.7 million in cash consideration and $9.1 million of assumed capital lease obligations of the seller. The cash consideration was funded with existing cash and borrowings under our Credit Agreement. Approximately $13.0 million of the cash consideration was placed in escrow for fifteen months after the closing as security for potential future indemnification claims.
Dividends
On February 25, 2016, the Board of Epiq declared a cash dividend of $0.09 per outstanding share of common stock payable to shareholders of record as of the close of business on April 4, 2016 and on May 2, 2016, we paid an aggregate $3.4 million to holders of our common stock on account of such dividends.
On April 28, 2016, the Board declared a cash dividend of $0.09 per outstanding share of common stock payable on July 5, 2016 to shareholders of record as of the close of business on May 23, 2016.
The aggregate amount of the dividends declared during the three months ended March 31, 2016 and 2015 was $3.4 million in each period, or $0.09 per share of common stock. During the three months ended March 31, 2016 and 2015, we paid cash dividends of $3.4 million and $3.3 million, respectively.
Critical Accounting Policies and Estimates
We disclose critical accounting policies and estimates that require management to use significant judgment or that require significant estimates in our 2015 Form 10-K. Management regularly reviews the selection and application of our critical accounting policies. There have been no material updates to the critical accounting policies and estimates contained in our 2015 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 facility, 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
Credit Facility
The senior secured term loan under our credit facility bears interest as follows: (1) 2.75% plus prime rate subject to a 1.75% floor; or (2) 3.75% plus one, two, three or six month LIBOR rate subject to a 0.75% LIBOR floor for an aggregate floating rate floor of 4.50%. As of March 31, 2016, all outstanding borrowings under the term loan were based on LIBOR subject to an aggregate floating rate of 4.50%.
The senior secured revolving loan under our credit facility bears interest as follows: (1) for base rate advances, borrowings bear interest at prime rate plus 225 to 325 basis points; and (2) for LIBOR advances, borrowings bear interest at LIBOR plus 325 to 425 basis points. As of March 31, 2016, the weighted-average interest rate for borrowings outstanding under the senior secured revolving was 6.1%.
Based on borrowings outstanding as of March 31, 2016, a hypothetical 100 basis point increase in the prime or LIBOR rates would have increased our annual interest expense by approximately $3.2 million.
Interest Rate Cash Flow Hedge
In April 2014, we entered into a forward interest rate swap effective from August 31, 2015 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. 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 our 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 will not be less than our LIBOR floor obligation to lenders of 0.75%. As of March 31, 2016, the notional amount outstanding under the interest rate swap was $73.1 million.
The objective of entering into this interest rate swap was 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 loss until such time as the hedged transaction is recognized in earnings. As of March 31, 2016, 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. The fair value of the interest rate swap at March 31, 2016 was a liability of $4.9 million.
Chapter 7 Deposit-based fees
We earn interest rate-based and service fees from our Chapter 7 bankruptcy services. Interest rate-based and service fees are earned on a percentage of Chapter 7 assets placed on deposit with a designated financial institution by our trustee clients. The interest rate-based fees we earn may vary based on fluctuations in short-term interest rates. As of March 31, 2016, our trustee clients had $1.3 billion of assets placed on deposit with designated financial institutions.
Based on a sensitivity analysis we performed for the three months ended March 31, 2016, a hypothetical 100 basis points movement in short-term interest rates would not have had a material effect on our consolidated balance sheets, results from operations or cash flows.
Foreign Currency Risk
We have operations outside of the United States, and therefore, a portion of our net assets, revenues and expenses are in functional currencies other than United States dollars. We do not utilize hedge instruments to manage the exposures associated with fluctuating foreign currency exchange rates, and as a result, we are exposed to changes in currency exchange rates between the United States dollar and the functional currency of the foreign countries where we have operations. Our most significant exposure to foreign currency exchange risk relates to the British Pound. When the United States dollar weakens against foreign currencies, the dollar value of our net assets, 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 10% strengthening or weakening in the United States dollar relative to foreign currency exchange rates applied to the historical financial statements of our foreign subsidiaries for the three months ended March 31, 2016, which indicated that such a movement would have changed our consolidated net assets and operating income by approximately $5.8 million and $0.7 million, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have each reviewed and evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that our current disclosure controls and procedures are effective as of the end of the period for which this Quarterly Report on Form 10-Q is filed. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and include controls and procedures designed to ensure that information required to be disclosed in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15-(f) under the Exchange Act. Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2105 based on the criteria set forth in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). As permitted by the guidelines established by the SEC, managements assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the operations of Iris, which was acquired on April 30, 2015 and are included in the 2015 consolidated financial statements. While not included in the internal controls assessment as of December 31, 2015, management continues to implement its standard control framework within the Iris business operations.
We have extended our oversight and monitoring processes that support our internal control over financial reporting to include Iris operations. Even though management was not required to perform an evaluation of Iris internal control over financial reporting, through our monitoring of such controls during the three months ended March 31, 2016, we became aware of a material weakness relating to appropriate controls over the Iris revenue-related processes, including contract management and billing processes, which were not operating effectively to prevent or detect potential material errors within revenue resulting from Iris operations. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrants annual or interim financial statements will not be prevented or detected on a timely basis.
Significant integration of internal controls over financial reporting for Iris operations is complete at this time. Management continues to implement specific enhancements to controls within the Iris revenue process to mitigate the material weakness discussed above.
Changes in Internal Control Over Financial Reporting
Except as previously disclosed, there have been no other changes in the Companys internal control over financial reporting during the three months ended March 31, 2016, that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
For information related to our legal proceedings, see Note 10, Legal Proceedings under Part I, Item 1 of this quarterly report on Form 10-Q.
There have been no material changes in our Risk Factors from those disclosed in our 2015 Form 10-K that was filed with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We have a policy that requires us to purchase shares of our common stock to satisfy employee tax withholding obligations upon the vesting of restricted stock awards or the exercise of stock options and, at the participants election, shares of common stock surrendered to the Company for satisfaction of the exercise price of stock options under the 2004 Plan and the Epiq Systems, Inc. 2015 Inducement Award Plan. During the three months ended March 31, 2016, we purchased shares of our common stock as follows.
Period |
|
Total |
|
Average |
|
Total $ Amount of |
|
Maximum |
| |
January 1 January 31 |
|
108,792 |
|
$ |
11.75 |
|
|
|
|
|
February 1 February 29 |
|
67,772 |
|
12.93 |
|
|
|
|
| |
March 1 March 31 |
|
211,652 |
|
13.39 |
|
|
|
|
| |
Total |
|
388,216 |
|
12.85 |
|
|
|
|
| |
(1) Represents shares of common stock surrendered to us by participants under the 2004 Plan to satisfy employee tax withholding obligations upon the vesting of restricted stock awards and the exercise price of stock options.
(2) The price paid per share was based on the closing trading price of our common stock on the date on which we purchased shares from the participant under the 2004 Plan.
(3) As of March 31, 2016, there were no share repurchase programs authorized by the Board.
10.1 |
* |
|
Executive Employment Agreement, dated January 1, 2016 among Epiq Systems, Inc. and Jayne L. Rothman. |
|
|
|
|
10.2 |
|
|
Executive Management Qualified Executive Performance Plan, as amended and restated on January 28, 2016. 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 February 1, 2016. |
|
|
|
|
10.3 |
|
|
Executive Management Strategic Executive Incentive Plan, as amended and restated on January 28, 2016. Incorporated by reference and previously filed as Exhibit 10.2 to the Registrants current report on Form 8-K filed with the Securities and Exchange Commission on February 1, 2016. |
|
|
|
|
31.1 |
* |
|
Certification of the Chief Executive Officer of Epiq Systems, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
31.2 |
* |
|
Certification of the Chief Financial Officer of Epiq Systems, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
32.1 |
** |
|
Certification of the Chief Executive Officer and Chief Financial Officer of Epiq Systems, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
101 |
* |
|
The following unaudited financial information from Epiq Systems, Inc.s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL (Extensible Business Reporting Language) includes: (i) Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015, (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2016 and 2015, (iv) Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2016 and 2015, (v) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015, and (vi) the Notes to Condensed Consolidated Financial Statements. |
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* |
|
Filed herewith. |
|
|
|
|
|
** |
|
Furnished herewith. |
|
|
|
|
|
|
|
Management contract or compensatory plan or arrangement. |
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: May 3, 2016 |
/s/ Tom W. Olofson |
|
Tom W. Olofson |
|
Chairman of the Board |
|
Chief Executive Officer |
|
(Principal Executive Officer) |
|
|
|
|
Date: May 3, 2016 |
/s/ Karin-Joyce Tjon Sien Fat |
|
Karin-Joyce Tjon Sien Fat |
|
Executive Vice President and Chief Financial Officer |
|
(Principal Financial Officer) |
Exhibit 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (Agreement) is effective as of January 1, 2016 (the Effective Date), and is made by and between Epiq Systems, Inc., a Missouri corporation (the Company), and Jayne L. Rothman, an individual (Executive).
WHEREAS, the Executive joined the Company on July 11, 2005, and since such date has served the Company in a variety of senior corporate officer positions;
WHEREAS, the Executive is currently the Senior Vice President, General Counsel and Secretary of the Company, and is the chief legal officer responsible for, among other things, all legal affairs of the Company and its subsidiaries; and
WHEREAS, the Company and Executive desire to enter into this Agreement providing for, among other things, Executives continuing employment by the Company on the terms and conditions provided herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:
1. Definitions. Capitalized terms used but not defined in this Agreement shall have the meanings ascribed to such terms in the Plan (as defined below). For purposes of this Agreement:
(a) Accrued Obligations shall mean: (i) (A) any unpaid Base Salary through the End Date; (B) reimbursement for any unreimbursed reasonable and appropriate business expenses incurred through the End Date; and (C) any accrued but unused vacation time, as of the End Date, in accordance with Company policy, in each case, payable within sixty (60) days following the End Date (or as otherwise required by applicable law); and (ii) all other accrued and vested payments, benefits and fringe benefits to which the Executive shall be entitled up to and including the End Date in accordance with the applicable compensation arrangement or benefit plan or program of the Company.
(b) Affiliates shall mean with respect to an entity, any entity that Controls, is Controlled by, or is under common Control with, that entity, and shall include Subsidiaries.
(c) Awards shall have the meaning as set forth in the Plan.
(d) Base Salary shall mean the Executives annual base compensation rate for services paid by the Company to the Executive at the time immediately prior to the End Date, as reflected in the Companys payroll records. Base Salary shall not include commissions, bonuses, overtime pay, incentive compensation, benefits paid under any qualified plan, any group medical, dental or other welfare benefit plan, non-cash compensation, or any other additional compensation, but shall include amounts reduced pursuant to the Executives salary reduction agreement under Section 125, 132(f)(4) or 401(k) of the Internal Revenue Code, if any, or a nonqualified elective deferred compensation arrangement, if any, to the extent that in each such case the reduction is to base salary.
(e) Board shall mean the Board of Directors of the Company.
(f) Bonus shall mean the greater of: (i) the cash value of the most recent annual bonus actually earned (whether payable or paid in cash, stock or a combination of both) by the Executive pursuant to a Bonus Arrangement; or (ii) for the Companys fiscal year 2016, Three Hundred Thousand Dollars and Zero Cents ($300,000.00).
(g) Bonus Arrangement shall mean the Executives bonus, as provided under the Companys annual cash incentive compensation plan or program, any applicable employment agreement between the Executive and the Company or as otherwise determined by the Board or the Compensation Committee.
(h) Cause shall mean with respect to Executive one or more of the following: (i) Executive being charged with a felony under the laws of the United States or any state thereof, or any act of fraud or dishonesty; (ii) commission of an act or omission that subjects Executive to being enjoined, suspended, barred or otherwise disciplined for violation of any laws, regulations and rules applicable to Executive, the Company, or any if its Affiliates; (iii) the commission by Executive of any act or omission that constitutes misconduct and is injurious to the Company or any of its Affiliates; (iv) Executives conduct causing Company or any of its Affiliates public disgrace or disrepute or substantial economic harm; (v) Executives failure or refusal to perform any lawful duty under this Agreement or as reasonably directed by the CEO, which failure is not cured, if curable, within five (5) business days after delivery of notice thereof to Executive; (vi) any act or omission aiding or abetting a competitor, supplier or customer of the Company or any of its Affiliates to the disadvantage or detriment of the Company or any of its Affiliates; (vii) commission by Executive of any willful act taken by Executive in bad faith against the interests of the Company or any of its Affiliates; (viii) gross negligence or willful misconduct with respect to the Company or any of its Affiliates; or (ix) any material breach of this Agreement which, if curable, is not cured within ten (10) business days after delivery of written notice thereof to Executive. The cure period may be extended for such reasonable time as is necessary to affect a cure as long as the Executive in the sole discretion of the CEO begins to take reasonable steps to cure the event within the first five (5) days after delivery of written notice to Executive; provided that following a Change in Control, Cause shall mean only a termination for the Executive being charged with a felony under the laws of the United States of any state thereof, or any act of fraud or dishonesty. Cause also includes any of the above grounds for dismissal regardless of whether the Company or any of its Affiliates learns of it before or after terminating Executives employment.
(i) Change in Control shall have the meaning as set forth in the Plan.
(j) Code Section 280G shall mean Internal Revenue Code Section 280G and the treasury regulations and other official guidance promulgated thereunder from time to time.
(k) Code Section 409A shall mean Internal Revenue Code Section 409A and the treasury regulations and other official guidance promulgated thereunder from time to time.
(l) Code Section 4999 shall mean Internal Revenue Code Section 4999 and the treasury regulations and other official guidance promulgated thereunder from time to time.
(m) Company Property shall mean all Company property and equipment assigned and provided to Executive by the Company to help Executive carry out Executives Company responsibilities including but not limited to keys, credit cards, access cards, Confidential Information, laptops, computer related and other office equipment, mobile telephone, and other computer or communication devices.
(n) Confidential Information shall mean and includes any and all confidential and/or proprietary information of the Company, its Affiliates and their respective 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; provided that Confidential Information does not include any of the foregoing information or items that are publicly known and generally available through no wrongful act of Executive or of others who were under confidentiality obligations as to the item(s) or information involved.
(o) Control (including with correlative meanings, the terms Controlling, Controlled by and under common Control with) shall mean the possession directly or indirectly of the power to direct or cause the direction of the management and policies of an entity, whether through the ownership of voting securities, by trust, management agreement, contract or otherwise.
(p) Disability shall mean a physical or mental illness, injury, or condition that: (i) prevents, or is likely to prevent, as certified by a physician, Executive from performing one or more of the essential functions of Executives position, for at least 120 consecutive calendar days or for at least 150 calendar days, whether or not consecutive, in any 365 calendar day period; and (ii) which cannot be accommodated with a reasonable accommodation, without undue hardship on the Company, as specified in the Americans with Disabilities Act.
(q) Disputes (and each, a Dispute) shall mean any and all disputes, controversies or claims that arise out of or in connection with, or relate in any manner to, the rights and liabilities of the parties hereunder or any provision of this Agreement or the interpretation, enforceability, performance, breach, termination or validity hereof relating to the resolution of disputes and questions including without limitation concerning arbitrability or any claim under any state or federal law, regulation or statute or common law theory governing or relating to the employment relationship (except claims for workers compensation or unemployment benefits).
(r) Employment Period shall mean the period of time from and including the Effective Date through and including the End Date.
(s) End Date shall mean the last day of employment of the Executive by the Company.
(t) Executive Management Committee shall mean the executive management of the Company (e.g., the Chief Executive Officer (CEO), President, Chief Operating Officer, Chief Financial Officer, and other C-level executive management of the Company approved by the CEO).
(u) Good Reason shall mean if Executive resigns from employment with the Company as a result of one or more of the following reasons: (i) a material reduction in Executives responsibilities, duties or authority, without Executives express prior authorization which shall not be unreasonably withheld, delayed or conditioned; (ii) any failure by the Company to provide, or a material reduction in, any compensation or benefits, including any perquisites, to which Executive is entitled as of the Effective Date (including with respect to Executives travel in the conduct of business) and/or that are agreed to be provided under this Agreement; (iii) any requirement that Executives principal office be based more distant than fifty (50) miles from Kansas City, Kansas; (iv) any material breach by the Company of this Agreement; or (v) the failure of the Company to obtain an assumption in writing of its obligation to perform this Agreement by any successor to all or substantially all of the assets of the Company within forty-five (45) days after a Change of Control; provided that written notice of Executives resignation for Good Reason must be delivered to the Company within fifteen (15) days after the occurrence of any such event in order for Executives resignation with Good Reason to be effective hereunder; and provided further that, in order for Executives resignation for Good Reason to be effective hereunder, the Company must not have cured such event (if curable) within thirty (30) days after receiving written notice thereof, or if the event cannot be reasonably cured within such thirty (30) days, the cure period shall be extended for such reasonable time as is necessary to effect a cure as long as the Company begins to take reasonable steps to cure the event within the first thirty (30) days.
(v) Plan shall mean that certain Epiq Systems, Inc. Amended and Restated 2004 Equity Incentive Plan, effective January 1, 2014.
(w) Prior Inventions shall mean all inventions, original works of authorship, developments, improvements, and trade secrets that were made by Executive prior to Executives employment with the Company, as set forth on Exhibit A to this Agreement.
(x) Release shall mean the Companys executive separation (or similar) and general release agreement providing for among other things the release of all Claims (as defined therein) Executive may have against the Company and its Affiliates and other Released Parties (as defined therein).
(y) Restricted Period shall mean the eighteen (18) month period following the End Date; provided that if Executive is terminated by the Company following a Change in Control, then the Restricted Period shall mean the twenty-four (24) month period following the End Date.
(z) Separation Consideration shall mean:
(i) a cash amount equal to the sum of the Bonus and eighteen (18) months of Base Salary; and
(ii) regular monthly payments (payable 1 month in arrears) equal to the difference between (A) the Executives monthly premium rate for health insurance for Executive and Executives dependents under the Companys relevant health insurance plans (e.g., medical, dental, and vision) in effect on the End Date, and (B) the monthly premium paid by Executive for substantially similar health insurance coverage for Executive and Executives dependents (whether through the Consolidated Omnibus Budget Reconciliation Act (COBRA) or otherwise) after the End Date, until the earlier of (Y) eighteen (18) months from the End Date, or (Z) Executives employment by a person, company, or other entity that offers health insurance;
provided that, following a Change in Control, the Separation Consideration shall mean:
(i) a cash amount equal to two times the sum of the Bonus and Base Salary;
(ii) regular monthly payments (payable 1 month in arrears) equal to the difference between (A) the Executives monthly premium rate for health insurance for Executive and Executives dependents (as applicable) under the Companys relevant health insurance plans (e.g., medical, dental, and vision) in effect on the End Date, and (B) the monthly premium paid by Executive for substantially similar health insurance coverage for Executive and Executives dependents (whether through the Consolidated Omnibus Budget Reconciliation Act (COBRA) or otherwise) after the End Date, until the earlier of (Y) twenty-four (24) months from the End Date, or (Z) Executives employment by a person, company, or other entity that offers health insurance;
(iii) a payment equivalent to, or at the discretion of Executive, the continuation of, twenty-four months of other benefits to which Executive was entitled as of the End Date; and
(iv) a cash amount of Twenty-Five Thousand Dollars and Zero Cents ($25,000.00), which represents an amount to assist Executive with executive outplacement services.
Notwithstanding the foregoing, the Separation Consideration shall be payable within sixty (60) days following the End Date (or as otherwise required by applicable law or as expressly set forth above relating to regular monthly payments or other consideration), provided that Executive shall not be entitled to receive the Separation Consideration unless and until: (x) Executive has executed and delivered the Release to the Company; (y) the Release has become fully effective in all respects; and (z) Executive reaffirms and does not breach the post-termination obligations contained in this Agreement and has not breached the provisions of the Release or breached the provisions of Sections 7, 8 or 10 hereof.
(aa) Subsidiaries shall mean any corporation or other entity of which the securities or other ownership interests having the voting power to elect a majority of the board of directors or other governing body are, at the time of determination, owned by a parent company, directly or indirectly.
(bb) Taxes shall mean any and all federal, state, local or foreign withholding taxes, excise taxes, or employment taxes or any other taxes applicable to this Agreement.
(cc) Work Product shall mean all discoveries, concepts, ideas, inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports, patents, trademarks and copyrights, copyrightable work and mask work (whether or not including any confidential information) and all registrations or applications related thereto, all other proprietary information and all similar or related information (whether or not patentable or capable of being registered under applicable trademark or copyright law) which relate to the Companys and any of its Affiliates actual or anticipated business, research and development or existing or future products or services and which are conceived, developed or made by Executive or other employees, officers, directors or agents of the Company and any of its Affiliates (whether alone or jointly with others) while employed by the Company and its Affiliates (or any of their predecessors or successors), whether before or after the Effective Date.
2. Employment. The Company shall continue to employ Executive, and Executive hereby accepts such continued employment with the Company, upon the terms and conditions set forth in this Agreement.
Although Executives principal location for employment shall be Kansas City, Kansas, Executive agrees that Executive will travel as business conditions warrant and as reasonably requested.
3. Term.
(a) Executives employment with Company shall continue during the Employment Period until (i) either Executive or Company terminates Executives employment with Company, or (ii) Executives Disability or death.
(b) Executive can terminate the Employment Period at any time with or without Good Reason, by providing sixty (60) days written notice to the Company. However, Company reserves the right either to accelerate Executives intended End Date to an earlier actual date or to allow Executives intended End Date to stand. Company can terminate Executives employment at any time with or without Cause, subject to the Companys potential obligations to Executive in Section 6 hereof. Except as otherwise provided herein, any termination of Executives employment by the Company, shall be effective on the date specified in a written notice from the Company to Executive. Termination of Executives employment with Company will be effective immediately upon the Disability or death of Executive.
(c) Unless otherwise requested by the Company, upon any termination of the Executives employment with the Company (without regard to which party initiated such termination or if termination was with or without Cause or Good Reason), the Executive shall (i) promptly resign from any position as an officer, director or fiduciary of any Company-related entity that the Executive may hold as of the End Date, and (ii) immediately return to the Company all Company Property issued to Executive during the Employment Period.
(d) For clarification purposes, the post-termination obligations of this Agreement, including but not limited to Sections 7, 8 and 10 hereof, shall remain in effect following any termination of the Employment Period, without regard to which party initiated such termination or if termination was with or without Cause or Good Reason.
4. Position and Duties.
(a) During the Employment Period, Executive shall serve as Senior Vice President, General Counsel and Secretary of the Company, and shall have the normal duties, responsibilities, functions and authority of such positions as assigned from time to time by the CEO, the President and Chief Operating Officer, or the Board. Executive hereby accepts such continued employment and agrees to devote Executives full employment energies, interest, abilities and time to the performance of Executives duties to the Company or any of its Affiliates as assigned by the Company. Executive shall promptly and faithfully comply with all the rules and regulations of applicable governmental regulatory agencies and with the reasonable instructions, directions, requests, rules and regulations of the Company in connection with the performance of Executives duties.
(b) Executive agrees that, during the Employment Period, Executives services shall be exclusive to the Company and therefore Executive will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which the Company and its Affiliates are involved or become involved during the Employment Period, nor will Executive engage in any other activities that conflict with Executives obligations to the Company and its Affiliates. Executive agrees to the Conflict of Interest Guidelines set forth on Exhibit B to this Agreement. Notwithstanding the foregoing, Executive may perform such other work, whether for consideration or as a volunteer, only if and to the extent that such other work does not interfere with Executives duties to the Company. Executive shall not make any investment of money or time in any business that is or may be competitive or which is being formed or organized to be competitive with or similar to or adverse to any of the Companys or any of its Affiliates businesses, services, or product(s), whether such business is conducted by a proprietorship, partnership, corporation or other entity or venture. However, nothing herein shall prohibit Executive from being a passive owner of not more than 4.9% of the outstanding stock of any class of a corporation which is publicly traded, so long as Executive has no active participation in the business of such corporation.
5. Compensation and Benefits.
(a) As of the Effective Date, Executives Base Salary shall be payable by the Company in regular installments in accordance with the Companys general payroll practices (as such practices may be in effect from time to time).
(b) During the Employment Period, Executive shall be entitled to participate in all of the employee benefit programs of the Company for which Executive is generally eligible, as such programs may be modified, replaced or eliminated from time to time. Any payment that Executive is required to make pursuant to such employee benefit programs may be adjusted or implemented from time to time consistent with changes affecting the participants generally in such programs.
(c) During the Employment Period, Executive shall be entitled to up to four (4) weeks of paid vacation per calendar year, which amount shall be pro-rated for any partial calendar year of employment during the Employment Period; provided, however, that Executive shall schedule such vacation time with the CEO and the Executive Management Committee in a manner consistent with the business needs of the Company and its Affiliates. Executives unused vacation time shall not be carried forward to any subsequent calendar year, and no compensation shall be payable in lieu thereof.
(d) During the Employment Period, the Company shall reimburse Executive for all reasonable and appropriate expenses actually incurred by Executive in the course of performing Executives duties and responsibilities under this Agreement, consistent with the Companys policies in effect from time to time with respect to such expenses, upon presentation of expense statements, vouchers or other supporting information as may be required under such policies in effect from time to time.
(e) All amounts payable to Executive as compensation hereunder (including Section 6 hereof) shall be subject to all required and customary withholding by the Company.
(f) The Awards, including the vesting of Awards, shall be governed by the Plan except as expressly set forth in this Agreement.
6. Termination of Employment.
(a) Termination without Cause or for Good Reason - If the Executives employment with the Company is terminated by the Company without Cause or by the Executive for Good Reason, then Executive shall be entitled to receive: (i) the Accrued Obligations; and (ii) the Separation Consideration.
(b) Termination for Cause or without Good Reason - If the Executives employment with the Company is terminated by the Company for Cause or by the Executive without Good Reason, then Executive shall only be entitled to receive the Accrued Obligations.
(c) Termination due to Disability If the Executives employment with the Company is terminated due to the Executives Disability, then within sixty (60) days from the End Date (or as otherwise required by law), the Executive shall be entitled to receive: (i) the Accrued Obligations; (ii) the right to elect continuation of coverage of insurance benefits to the extent allowed by law; and (iii) a cash amount equal to twelve (12) months Base Salary.
(d) Termination due to Death If the Executives employment with the Company is terminated due to the Executives death, then within sixty (60) days from the End Date (or as otherwise required by law), the Executives estate and Executives beneficiaries, as the case may be, shall be entitled to receive: (i) the Accrued Obligations; (ii) the right to elect continuation of coverage of insurance benefits to the extent allowed by law; and
(iii) any other survivor benefits that may become due pursuant to any employee benefit plan or program of the Company.
(e) Payments, other consideration and benefits provided in this Section 6 shall be in lieu of any termination or severance payments, other consideration or benefits for which the Executive may be eligible under any of the plans, policies or programs of the Company, and shall be reduced (offset) by any statutory entitlements of the Executive (including notice of termination, termination pay and/or severance pay, but excluding statutory unemployment benefits), and any payment related to an actual or potential liability under the Worker Adjustment and Retraining Notification Act of 1988 or similar state, local or foreign law.
(f) All payments, other consideration, and benefits provided under this Section 6 shall be subject to all applicable Taxes and all required and customary withholding by the Company.
7. Confidential Information. Executive acknowledges and agrees that Confidential Information concerning the business or affairs of the Company and any of its Affiliates (which will include certain third party confidential information entrusted to the Company and its Affiliates) will be obtained by, created by, or disclosed or made available to Executive while Executive is employed by the Company. Executive agrees that Confidential Information (other than certain third party information owned by such third parties) is the property of the Company and/or its Affiliates, as the case may be. Executive agrees that at all times during the Employment Period and thereafter, Executive shall not use (even for Executives own purposes) or disclose any Confidential Information to any person or entity without written authorization from the Board, except for the direct benefit of the Company and its Affiliates during the Employment Period and strictly on a need-to-know basis with persons and/or entities that have executed confidentiality agreements with the Company and its Affiliates. Executive shall deliver to the Company on the End Date, or at any other time as the Company may request, any Company Property and all memoranda, notes, plans, documents, electronically stored and hard copy information, information technology assets and devices, records, reports, computer files, disks and tapes, printouts and software and other documents and data (and copies thereof) embodying or relating to Confidential Information, Work Product or the business of the Company or any of its Affiliates that Executive may then possess or have under Executives custody or control.
8. Intellectual Property, Inventions and Patents. Executive acknowledges that Work Product belongs to the Company or any of its Affiliates, as applicable. Executive shall promptly disclose Work Product to the Company (including as appropriate the CEO and members of the Executive Management Committee) and, at the Companys expense, perform all actions reasonably requested by the CEO or the Board (whether during or after the Employment Period) to establish and confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments). Executive acknowledges that all Work Product shall be deemed to constitute works made for hire under the U.S. Copyright Act of 1976, as amended. To the extent that any material produced under this Agreement may not be considered works made for hire, or to the extent that this Section 8 is declared invalid either in substance or purpose, in whole or in part, Executive hereby agrees to irrevocably transfer, grant, convey, assign, and relinquish exclusively to the Company (including any of its Affiliates, in the Companys sole discretion) any and all of Executives right, title, and interest, including ownership of copyright, patent and/or trademark rights, to any material conceived, developed, or made by Executive under this Agreement without the necessity of further consideration.
9. Inventions Retained and Licensed. Executive acknowledges that Exhibit A accurately specifies a list of Prior Inventions which belong to Executive, which relate to the Companys proposed business, products or research and development, and which are not assigned to the Company hereunder; or, if no such list is attached, Executive represents that there are no such Prior Inventions. If during the course of Executives employment with the Company, Executive incorporated or incorporates into a Company product, service, process or machine a Prior Invention owned by Executive or in which Executive had or has an interest, the Company is hereby granted and had and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license to make, have made, modify, use, sublicense and sell such Prior Invention as part of or in connection with such product, service, process or machine.
10. Restrictive Covenants.
(a) Non-Compete. Executive acknowledges and agrees that, during the course of Executives employment with the Company (including its Affiliates), Executive shall become familiar with the Companys and its Affiliates trade secrets and with other Confidential Information, and that Executives services shall be of special, unique and extraordinary value to the Company and its Affiliates. Therefore, in consideration of the Companys agreement to employ Executive and the compensation to be paid to Executive hereunder and in connection with such employment, Executive agrees that, from the Effective Date until the end of the Restricted Period, Executive shall not directly or indirectly compete with the Company or any of its Affiliates or own any interest in, manage, control, participate in, consult with, render services for, be employed in an executive, managerial or administrative capacity by any person, corporation, firm or other entity, or in any manner engage in any business that provides any product(s) or service(s) that compete with any product(s) or service(s) offered or provided by the Company or any of its Affiliates within any of their territories. With respect to this non-compete provision, nothing herein shall prohibit Executive from being a passive owner of not more than 4.9% of the outstanding stock of any class of a corporation which is publicly traded, so long as Executive has no active participation in the business of such corporation.
(b) Non-Solicit. From the Effective Date until the end of the Restricted Period, Executive shall not directly or indirectly either on Executives own behalf or on behalf of any person or entity that is not the Company or any of its Affiliates: (i) hire, solicit, induce, recruit, or encourage (which includes any attempts to take such actions) (x) any employee or officer and/or agent of the Company or any of its Affiliates to terminate their employment, agency or other agreement with, or leave the employ of, the Company or any of its Affiliates in order to work for any person, corporation, firm, company or business entity other than the Company or any of its Affiliates, or (y) any former employee, officer or agent of the Company or any of its Affiliates to violate any post-termination obligations contained in their agreements with the Company or any of its Affiliates, as the case may be; or (ii) in any way interfere with the relationship between the Company or any of its Affiliates and any employee or agent thereof; or (iii) induce, encourage or attempt to induce or encourage any customer, referral source, supplier, licensee, licensor, franchisee or other business relation of the Company or any of its Affiliates to cease doing business with the Company or such Affiliate, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation and the Company or any of its Affiliates.
(c) Executive agrees that the restrictive periods set forth in this Section 10 shall not expire, and shall be tolled, during any period in which the Executive is in violation of any obligation contained in this Section 10, and all restrictions shall automatically be extended by the period the Executive was in violation of any such restrictions.
(d) Executive further agrees that the provisions of and restraints set forth in this Section 10 are reasonable and necessary to protect the Company and its Affiliates respective, legitimate business interests. For clarification purposes, all post-termination obligations of this Agreement shall remain in effect following the End Date. For further clarification purposes, no act may be taken by the Executive after the End Date on behalf of the Company or any of its Affiliates except as may be expressly set forth in a written agreement by and between the Executive and the Company and/or any of its Affiliates. In the event that Executive leaves the employ of the Company, and upon obtaining new employment, Executive shall promptly provide written notice to the Company regarding the identity of Executives new employer and hereby grants consent to the Company to notify Executives new employer about Executives rights and obligations under this Agreement.
11. Code Section 280G.
(a) Notwithstanding any other provision of this Agreement or any other plan, arrangement or agreement to the contrary, if any of the payments, other consideration or benefits provided or to be provided by the Company or its Affiliates to the Executive or for the Executives benefit pursuant to the terms of this Agreement or otherwise (Covered Payments) constitute parachute payments (Parachute Payments) within the meaning of Code Section 280G and would, but for this Section 11 be subject to the excise tax imposed under Code Section 4999 (or any successor provision thereto) or any similar tax imposed by state or local law or any interest or penalties with respect to such taxes (collectively, the Excise Tax), then the Covered Payments shall be either: (i) reduced to the minimum extent necessary to ensure that no portion of the Covered Payments is subject to the Excise Tax (that
amount, the Reduced Amount); or (ii) payable in full if the Executives receipt on an after-tax basis of the full amount of payments, other consideration and benefits (after taking into account the applicable federal, state, local and foreign income, employment and excise taxes (including the Excise Tax)) would result in the Executive receiving an amount greater than the Reduced Amount. Any such reduction made pursuant to (i) above shall be made by the Company in its sole discretion consistent with the requirements of Code Section 409A.
(b) Notwithstanding the prior Section, in the event that any Covered Payments constitute Parachute Payments that are subject to the Excise Tax, and such amounts become payable prior to June 30, 2017, then the Company shall pay to the Executive an additional gross-up payment (the Gross-Up Payment) in an amount such that after payment by the Executive of the Excise Tax and all other income, employment, excise and other taxes that are imposed on the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the sum of (A) the Excise Tax imposed upon the Covered Payments and (B) the product of any deductions disallowed because of the inclusion of the Gross-up Payment in the Executives adjusted gross income and the applicable marginal rate of federal income taxation for the calendar year in which the Executives Gross-Up Payment is to be made.
12. Code Section 409A Compliance.
(a) The intent of the parties is that payments and benefits under this Agreement comply with Code Section 409A, and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance therewith. To the extent that any provision hereof is modified in order to comply with Code Section 409A, such modification shall be made in good faith and shall, to the maximum extent reasonably possible, maintain the original intent and economic benefit to the Executive and the Company of the applicable provision without violating the provisions of Code Section 409A. In no event whatsoever shall the Company be liable for any additional tax, interest or penalty that may be imposed on the Executive by Code Section 409A or damages for failing to comply with Code Section 409A.
(b) To the extent required for purposes of Code Section 409A, if applicable, a termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amount, other consideration or benefit upon or following a termination of employment unless such termination is also a separation from service within the meaning of Code Section 409A and, for purposes of any such provision of this Agreement, references to a termination, termination of employment or like terms shall mean separation from service.
(c) Notwithstanding anything to the contrary in this Agreement, if the Executive is deemed on the End Date to be a specified employee within the meaning of that term under Code Section 409A(a)(2)(B), then with regard to any payment, other consideration or the provision of any benefit that is considered nonqualified deferred compensation under Code Section 409A payable on account of a separation from service, such payment, other consideration or benefit shall not be made or provided until the date which is the earlier of: (i) the expiration of the six (6)-month period measured from the date of such separation from service of the Executive; or (ii) the date of the Executives death, to the extent required under Code Section 409A. Upon the expiration of the foregoing delay period, all payments, other consideration and benefits delayed pursuant to this Section 12 (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to the Executive in a lump sum, and all remaining payments, other consideration and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.
(d) To the extent that reimbursements or other in-kind benefits under this Agreement constitute nonqualified deferred compensation for purposes of Code Section 409A: (i) all expenses or other reimbursements hereunder shall be made on or prior to the last day of the taxable year following the taxable year in which such expenses were incurred by the Executive; (ii) any right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit; and (iii) no such reimbursement, expenses eligible for reimbursement, or in-kind benefits provided in any taxable year shall in any way affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year. For purposes of Code Section 409A, the Executives right to receive installment payments pursuant to this Agreement shall be treated as a right to receive a series of separate and distinct payments. Whenever a payment under this Agreement specifies a payment period with reference to a
number of days, the actual date of payment within the specified period shall be within the sole discretion of the Company.
13. Enforcement. If, at the time of enforcement of Sections 7, 8 or 10 of this Agreement, a court or appropriate tribunal holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or geographical area and that the court or appropriate tribunal shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. Because Executives services are unique and because Executive has access to Confidential Information including Work Product, the parties hereto agree that the Company would suffer irreparable harm from a breach of Sections 7, 8 or 10 by Executive and that money damages would not be an adequate remedy for any such breach of this Agreement. Therefore, in the event of a breach or threatened breach of this Agreement, the Company and any of its Affiliates (including any of their respective successors or assigns), in addition to other rights and remedies existing in their favor, shall be entitled to specific performance and/or injunctive or other equitable relief from a court or other tribunal of competent jurisdiction in order to enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security). Executive acknowledges and agrees: (i) that the provisions and restrictions contained in Sections 6, 7, 8, 9 and 10 are reasonable; (ii) that Executive has reviewed the provisions of this Agreement with Executives legal counsel; and (iii) that Executive is freely entering into this Agreement.
14. Executives Representations. Executive hereby represents and warrants to the Company that: (i) the execution, delivery and performance of this Agreement by Executive do not and shall not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which Executive is bound; (ii) Executive is not a party to or bound by any employment agreement, non-compete or non-solicitation agreement or confidentiality agreement with any other person or entity; and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms. Executive hereby acknowledges and represents that Executive has consulted with independent legal counsel regarding Executives rights and obligations under this Agreement and that Executive fully understands the terms and conditions contained herein.
15. Survival. Sections 5(e) through 28, inclusive, shall survive and continue in full force in accordance with their terms notwithstanding the End Date.
16. Notices. Any notice or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given (i) when personally delivered, (ii) upon delivery by a reputable overnight express courier (charges prepaid), or (iii) five days following mailing by certified or registered mail, postage prepaid and return receipt requested. Unless another address is specified in writing, notices and communications to Executive and the Company shall be sent to the addresses indicated below:
Notices to Executive:
Jayne L. Rothman
c/o Epiq Systems
501 Kansas Avenue
Kansas City, KS 66105
Notices to the Company:
Epiq Systems, Inc.
Attention: Chief Executive Officer
501 Kansas Avenue
Kansas City, KS 66105
Any party hereto, may, by written notice to the other, change its address for receipt of notices hereunder.
17. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.
18. Complete Agreement. This Agreement and those documents expressly referred to herein embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way, including but not limited to that certain Employment, Confidential Information, Invention Assignment and Arbitration Agreement between Company and Executive dated July 12, 2005.
19. 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.
20. Counterparts/Electronic Delivery. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. This Agreement, to the extent signed and delivered by electronic means, shall be treated in all manner and respects as an original agreement and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person.
21. Successors and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, the Company and their respective heirs, successors and assigns, except that Executive may not assign Executives rights or delegate Executives duties or obligations hereunder without the prior written consent of the Company.
22. Choice of Law. All issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the State of Missouri, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Missouri or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Missouri. Executive expressly consents to the personal jurisdiction of the state and federal courts located in Kansas City, Kansas including for any lawsuit filed there against Executive by the Company arising from or related to this Agreement (subject to Section 26 below).
23. Amendment and Waiver. The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and Executive effectuated in a written amendment to this Agreement that has been signed by both of the parties, and no course of conduct or course of dealing or failure or delay by any party hereto in enforcing or exercising any of the provisions of this Agreement (including, without limitation, the Companys right to terminate the Employment Period for Cause) shall affect the validity, binding effect or enforceability of this Agreement or be deemed to be an implied waiver of any provision of this Agreement.
24. Insurance. The Company may in its sole discretion apply for and procure in its own name and for its own benefit life and/or disability insurance on Executive in any amount or amounts considered advisable. Executive agrees to cooperate in any medical or other examination, supply any information and execute and deliver any applications or other instruments in writing as may be reasonably necessary to obtain and constitute such insurance.
25. Indemnification and Reimbursement of Payments on Behalf of Executive. The Company and its Affiliates shall be entitled to deduct or withhold from any amounts owing from the Company or any of its Affiliates to Executive any Taxes imposed with respect to Executives compensation or other payments from the Company or any of its Affiliates or Executives ownership interest in the Company (including, without limitation, wages, bonuses, dividends, the receipt or exercise of equity options and/or the receipt or vesting of restricted equity). In the event the Company or any of its Affiliates does not make such deductions or withholdings, Executive shall
indemnify the Company and its Affiliates for any amounts paid or payable by the Company with respect to any such Taxes owed by Executive.
26. Dispute Resolution.
(a) Except as otherwise expressly provided in this Agreement, the parties agree that the arbitration procedure set forth below shall be the sole and exclusive method for resolving and remedying any Dispute; provided that nothing in this Section 26 shall prohibit a party hereto from instituting litigation to enforce any Final Determination (as defined below) or to seek injunctive relief. The parties hereby acknowledge and agree that, except as otherwise provided in this Section 26 or in the Employment Arbitration Rules and Mediation Procedures (the Rules) promulgated by the American Arbitration Association (the Arbitration Service) as in effect from time to time, the arbitration procedures and any Final Determination hereunder shall be governed by, and shall be enforced pursuant to, the Federal Arbitration Act, 9 U.S.C. §1 et. seq., as may be amended or superseded. THE COMPANY AND EXECUTIVE AGREE THAT, BY ENTERING INTO THIS AGREEMENT, THE COMPANY AND EXECUTIVE ARE WAIVING THE RIGHT TO TRIAL BY JURY. THE COMPANY AND EXECUTIVE FURTHER AGREE THAT THE COMPANY AND EXECUTIVE SHALL BRING CLAIMS AGAINST THE OTHER ONLY IN THEIR RESPECTIVE INDIVIDUAL CAPACITIES, AND NOT AS A PLAINTIFF OR CLASS MEMBER IN ANY PURPORTED CLASS OR REPRESENTATIVE PROCEEDING. FURTHER, UNLESS BOTH THE COMPANY AND EXECUTIVE AGREE OTHERWISE, THE ARBITRATOR MAY NOT CONSOLIDATE THE CLAIMS OF MORE THAN ONE PERSON, AND MAY NOT OTHERWISE PRESIDE OVER ANY FORM OF A REPRESENTATIVE OR CLASS PROCEEDING. EXECUTIVE UNDERSTANDS THAT EACH PARTYS PROMISE TO RESOLVE CLAIMS BY ARBITRATION IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT, RATHER THAN THROUGH THE COURTS, IS CONSIDERATION FOR THE OTHER PARTYS LIKE PROMISE. EXECUTIVE FURTHER UNDERSTANDS THAT EXECUTIVE IS OFFERED CONTINUING EMPLOYMENT IN CONSIDERATION OF AMONG OTHER THINGS EXECUTIVES PROMISE TO ARBITRATE CLAIMS. THE PARTIES AGREE THAT ANY CLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE BARRED UNLESS COMMENCED WITHIN ONE YEAR AFTER THE EVENT GIVING RISE TO THE CLAIM.
(b) Except as provided elsewhere herein, in the event that any party asserts that there exists a Dispute, such party shall deliver a written notice to each other party involved therein specifying the nature of the asserted Dispute and requesting a meeting to attempt to resolve the same. If no such resolution is reached within ten (10) business days after the delivery of such notice, the party delivering such notice of Dispute (the Disputing Person) may thereafter request that both parties submit the Dispute to mediation, and if both parties agree to do so, then the Dispute will be submitted to mediation. If mediation fails, or if either party refuses to submit the Dispute to mediation, then the Disputing Person may commence arbitration hereunder by delivering to each other party involved therein a demand for arbitration (a Demand for Arbitration). Such Demand for Arbitration shall be promptly submitted to the Arbitration Service to commence the arbitration with the Arbitration Service. The Company and Executive shall mutually agree upon one arbitrator (the Arbitrator) to resolve any Dispute pursuant to the procedures set forth in this Section 26 and the Rules. The Arbitrator shall permit and facilitate such discovery as the parties shall reasonably request. If the Company and Executive cannot mutually agree on the Arbitrator within fifteen (15) business days following receipt of the list of arbitrators from the Arbitration Service, then the Arbitration Service shall appoint an arbitrator no later than twenty-five (25) business days following the parties receipt of such list.
(c) Except as otherwise provided by applicable law, the Company will pay the costs of the Arbitration Service and the Arbitrator; provided that at the conclusion of the arbitration, the Arbitrator shall award costs and expenses (including the costs of the arbitration previously advanced and the reasonable fees and expenses of attorneys, accountants and other experts) and reasonable interest to the prevailing party.
(d) The arbitration shall be conducted in Kansas City under the Rules as in effect from time to time. The parties shall use their reasonable best efforts to cause the Arbitrator to conduct the arbitration so that a final result, determination, finding, judgment and/or award (the Final Determination) is made or rendered as soon as practicable, but in no event later than ninety (90) business days after the delivery of the Demand for Arbitration nor later than thirty (30) days following completion of the arbitration. Notwithstanding any Missouri
law to the contrary, the Final Determination shall be final and binding on all parties and there shall be no appeal from or reexamination of the Final Determination, except for fraud, perjury, evident partiality or misconduct by the Arbitrator prejudicing the rights of any party and to correct manifest clerical errors.
(e) Notwithstanding anything to the contrary, nothing in this Section 26 shall be construed to impair the right of any person or entity to seek injunctive or other equitable relief in any court of competent jurisdiction.
27. Executives Cooperation. During the Employment Period and thereafter, Executive shall cooperate with the Company and any of its Affiliates in any investigation, subpoena, any administrative, regulatory, settlement, arbitration, litigation, mediation, or judicial proceeding or any dispute with a third party as reasonably requested by the Company or any of its Affiliates, including without limitation that Executive will be available to the Company or any of its Affiliates upon reasonable notice for interviews and factual investigations, appearing at the Companys or any of its Affiliates request to give testimony without requiring service of a subpoena or other legal process, volunteering to the Company or any of its Affiliates all pertinent information and turning over to the Company or any of its Affiliates all relevant documents which are or may come into Executives possession, custody or control all at times and on schedules that are reasonably consistent with Executives other activities and commitments. In the event the Company or any of its Affiliates requires Executives cooperation in accordance with this Section 27, (i) the Company or any of its Affiliate(s), as appropriate, shall reimburse Executive solely for reasonable travel expenses (including lodging and meals) upon submission of receipts; and (ii) if Executive is no longer employed by the Company, then the Company or any of its Affiliates, as appropriate, shall pay Executive a per diem consulting charge of $1,000.00, and the Company or any of its Affiliates, as appropriate, may, in its sole discretion, appoint and pay the reasonable fees and expenses of attorneys, accountants and other professionals retained with respect to such matter or matters.
28. Legal Review. Executive agrees that Executive has been given a reasonable opportunity to review this Agreement with counsel of Executives choosing.
IN WITNESS WHEREOF, the parties hereto have executed this Executive Employment Agreement effective as of the Effective Date.
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EPIQ SYSTEMS, INC. | |
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By: |
/s/ Tom W. Olofson |
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Name: |
Tom W. Olofson |
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Its: |
CEO |
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Date: |
1-1-16 |
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/s/ Jayne Rothman | |
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Jayne L. Rothman | |
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Date: |
1-1-16 |
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EXHIBIT A
Prior Inventions
None
EXHIBIT B
Conflict of Interest Guidelines
It is the policy of Epiq Systems, Inc. and its subsidiaries and affiliates (collectively, Epiq) to conduct all affairs in strict compliance with the letter and spirit of the law and to adhere to the highest principles of business ethics. Accordingly, all officers, employees and independent contractors must avoid activities which are in conflict, or give the appearance of being in conflict, with these principles and with the interests of Epiq. The following are potentially compromising situations which must be avoided. Any exceptions must be reported to, and written approval for continuation must be obtained from, the Chief Executive Officer of Epiq Systems, Inc.
1. Revealing confidential information to outsiders or misusing confidential information. Unauthorized divulging of information is a violation of this policy whether or not for personal gain and whether or not harm to the Company is intended.
2. Accepting or offering substantial gifts, excessive entertainment, favors or payments which may be deemed to constitute undue influence or otherwise be improper or embarrassing to Epiq.
3. Participating in civic or professional organizations that might involve divulging confidential information of Epiq.
4. Initiating or approving personnel actions affecting reward or punishment of employees or applicants where there is a family relationship or is or appears to be a personal or social involvement.
5. Initiating or approving any form of personal or social harassment of employees.
6. Investing or holding outside directorship in suppliers, customers, or competing companies, including financial speculations, where such investment or directorship might influence in any manner a decision or course of action of Epiq.
7. Borrowing from or lending to employees, customers or suppliers.
8. Acquiring real estate of interest to Epiq.
9. Improperly using or disclosing to Epiq any proprietary information or trade secrets of any former or concurrent employer or other person or entity with whom obligations of confidentiality exist.
10. Unlawfully discussing prices, costs, customers, sales or markets with competing companies or their employees.
11. Making any unlawful agreement with distributors with respect to prices.
12. Improperly using or authorizing the use of any inventions which are the subject of patent claims of any other person or entity.
13. Engaging in any conduct which is not in the best interests of Epiq.
Each officer, employee and independent contractor must take every necessary action to ensure compliance with these guidelines and to bring problem areas to the attention of higher management for review. Violations of this conflict of interest policy may result in disciplinary action up to and including immediate discharge.
Exhibit 31.1
CERTIFICATIONS
I, Tom W. Olofson, certify that:
1. I have reviewed this report on Form 10-Q of Epiq Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The 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: May 3, 2016
/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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Exhibit 31.2
CERTIFICATIONS
I, Karin-Joyce Tjon Sien Fat, certify that:
1. I have reviewed this report on Form 10-Q of Epiq Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The 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: May 3, 2016
/s/ KARIN-JOYCE TJON SIEN FAT |
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Karin-Joyce Tjon Sien Fat |
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Executive Vice President, Chief 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 of the United States Code, and Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, (1) the quarterly report on Form 10-Q of the Company to which this Exhibit is attached (the Report) fully complies with the requirements of section 13(a) or 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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Date: May 3, 2016 |
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I, Karin-Joyce Tjon Sien Fat, Chief Financial Officer of Epiq Systems, Inc. (the Company), hereby certify pursuant to Section 1350 of chapter 63 of title 18 of the United States Code, and Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, (1) the quarterly report on Form 10-Q of the Company to which this Exhibit is attached (the Report) fully complies with the requirements of section 13(a) or 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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Date: May 3, 2016 |
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Document and Entity Information - shares |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Apr. 22, 2016 |
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Document and Entity Information | ||
Entity Registrant Name | EPIQ SYSTEMS INC | |
Entity Central Index Key | 0001027207 | |
Document Type | 10-Q | |
Document Period End Date | Mar. 31, 2016 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --12-31 | |
Entity Current Reporting Status | Yes | |
Entity Filer Category | Accelerated Filer | |
Entity Common Stock, Shares Outstanding | 37,921,079 | |
Document Fiscal Year Focus | 2016 | |
Document Fiscal Period Focus | Q1 |
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Parenthetical) - $ / shares |
Mar. 31, 2016 |
Dec. 31, 2015 |
---|---|---|
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) | ||
Preferred stock, par value (in dollars per share) | $ 1 | $ 1 |
Preferred stock, shares authorized | 2,000,000 | 2,000,000 |
Preferred stock, shares issued | 0 | 0 |
Preferred stock, shares outstanding | 0 | 0 |
Common stock, par value (in dollars per share) | $ 0.01 | $ 0.01 |
Common stock, shares authorized | 100,000,000 | 100,000,000 |
Common stock, shares issued | 40,835,651 | 40,835,651 |
Common stock, shares outstanding | 37,932,692 | 37,534,447 |
Treasury stock, shares | 2,902,959 | 3,301,204 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED) | ||
Net income (loss) | $ (65) | $ 1,733 |
Other comprehensive income (loss): | ||
Foreign currency translation adjustment, net of $0 tax in all periods | (356) | (2,335) |
Unrealized losses on derivatives, net of tax benefit of $0 and $439, respectively | (1,003) | (696) |
Comprehensive loss | $ (1,424) | $ (1,298) |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED) (Parenthetical) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED) | ||
Foreign currency translation adjustment, net of tax | $ 0 | $ 0 |
Unrealized losses on interest rate cash flow hedges, tax benefit | $ 0 | $ (439) |
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED) (Parenthetical) - $ / shares |
3 Months Ended | |||
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Apr. 28, 2016 |
Feb. 25, 2016 |
Mar. 31, 2016 |
Mar. 31, 2015 |
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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED) | ||||
Common Stock, Dividends, Per Share, Declared | $ 0.09 | $ 0.09 | $ 0.09 | $ 0.09 |
ACCOUNTING POLICIES, INTERIM FINANCIAL STATEMENTS AND BASIS OF PRESENTATION |
3 Months Ended |
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Mar. 31, 2016 | |
ACCOUNTING POLICIES, INTERIM FINANCIAL STATEMENTS AND BASIS OF PRESENTATION | |
ACCOUNTING POLICIES, INTERIM FINANCIAL STATEMENTS AND BASIS OF PRESENTATION |
NOTE 1: ACCOUNTING POLICIES, INTERIM FINANCIAL STATEMENTS AND BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements of Epiq Systems, Inc. and Subsidiaries (“Epiq,” “we,” “our,” “us” or the “Company”) included herein have been prepared by Epiq, without audit, in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules. We believe that the disclosures are adequate to enable a reasonable understanding of the information presented. The Condensed Consolidated Financial Statements included in this Form 10-Q should be read in conjunction with the consolidated financial statements and the related notes, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, for the year ended December 31, 2015, as amended (“2015 Form 10-K”) and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q.
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the periods reported. Actual results may differ from those estimates.
In the opinion of the management of Epiq, the unaudited Condensed Consolidated Financial Statements contain all adjustments necessary for a fair presentation of the results for interim periods. All adjustments made were of a normal and recurring nature.
The results of operations for the three months ended March 31, 2016, are not necessarily indicative of the results expected for other interim periods or for the full year ending December 31, 2016.
Recently Issued Accounting Standards
In March 2016, the Financial Accounting Standards Board (the “FASB”) issued accounting standard update (“ASU”) No. 2016-09, Compensation—Stock Compensation (Topic 718): “Improvements to Employee Share-Based Payment Accounting”. Under the new guidance, entities will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. In addition, the guidance eliminates the requirement that excess tax benefits be realized (i.e., through a reduction in income taxes payable) before companies can recognize them. Under today’s guidance, entities cannot recognize excess tax benefits when an option is exercised or a share vests if the related tax deduction increases a net operating loss carryforward rather than reduces income taxes payable. This guidance also simplifies several other aspects of the accounting for employee share-based payments, including forfeitures, statutory tax withholdings requirements and classification in the statement of cash flow. The guidance is effective for Epiq beginning in the first quarter of fiscal 2017. Early adoption is permitted, but all of the guidance must be adopted in the same period. In addition, if early adoption is elected in an interim period, any adjustment shall be reflected as of the beginning of the annual period that includes that interim period. We do not expect the adoption of this new guidance to have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This new lease guidance requires that an entity should recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term. Leases would be classified as either Type A leases (generally today’s capital leases) or Type B leases (generally today’s operating leases). For certain leases of assets other than property (for example, equipment, aircraft, cars, trucks), a lessee would classify the lease as a Type A lease and would do the following: (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments and (2) recognize the unwinding of the discount on the lease liability as interest separately from the amortization of the right-of-use asset. For certain leases of property (that is, land and/or a building or part of a building), a lessee would classify the lease as a Type B lease and would do the following: (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments and (2) recognize a single lease cost, combining the unwinding of the discount on the lease liability with the amortization of the right-of-use asset, on a straight-line basis. This guidance also provides accounting updates with respect to lessor accounting under a lease arrangement. Historically, we have not engaged in the business of leasing assets to third parties. This new lease guidance is effective for Epiq beginning in the first quarter of fiscal 2019. 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. Early adoption is permitted for all entities. We are currently assessing the full impact of this new guidance on our consolidated financial position, results of operations and cash flows, however, due to the magnitude of our operating leases and related rent expense, we expect the adoption of this accounting guidance to have a material effect on our consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The new guidance clarifies that a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition. As a result, compensation cost would be recognized over the required service period, if it is probable that the performance condition will be achieved. The new guidance does not require any new or additional disclosures. This guidance was effective for us beginning January 1, 2016 and its adoption did not have a material impact on our Condensed Consolidated Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. This new revenue guidance 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 was going to be effective for Epiq beginning in the first quarter of fiscal 2017. In August 2015, the FASB deferred the effective date by one year. Early adoption as of the original effective date will be 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 and will adopt this new guidance effective January 1, 2018.
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ACQUISITIONS |
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ACQUISITIONS |
NOTE 2: ACQUISITIONS
On April 30, 2015, we completed the acquisition of Iris Data Services, Inc. (“Iris”).The aggregate purchase consideration was $133.8 million, consisting of $124.7 million in cash consideration and $9.1 million of assumed capital lease obligations of the seller. The cash consideration was funded with existing cash and borrowings under our Credit Agreement (defined in Note 3 to this Condensed Consolidated Financial Statements). Approximately $13.0 million of the cash consideration was placed in escrow for fifteen months after the closing as security for potential future indemnification claims.
Effective January 2016, we completed the integration of Iris into our legacy eDiscovery business within our Technology Segment, and as a result, the determination of Iris’s post-acquisition revenues and operating results for 2016 on a stand-alone basis are impracticable, given the integration of accounting records, including cost centers, customer contracts, the realignment of key personnel and the sharing of property and equipment assets.
During the fourth quarter of 2015, we finalized the purchase price allocation related to the Iris acquisition, and as a result, no allocation adjustments were recorded during the three months ended March 31, 2016. See Note 13 to the Consolidated Financial Statements included in our 2015 Form 10-K for additional information.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. The purchase consideration was allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the date of acquisition. This allocation resulted in goodwill of $73.7 million, all of which was assigned to Epiq’s Technology segment.
The fair values of intangible assets acquired were estimated utilizing a discounted cash flow approach, with the assistance of an independent appraisal firm. The intangible assets acquired as part of the Iris acquisition are being amortized over their expected estimated economic benefit period. The fair values consist of the following:
Pro Forma Results of Operations
The following table presents the unaudited pro forma combined results of operations of Epiq and Iris for the three months ended March 31, 2015, after giving effect to certain pro forma adjustments including: (i) amortization of acquired intangible assets, (ii) the impact of acquisition-related expenses, and (iii) interest expense adjustment for historical long-term debt of Iris that was repaid and interest expense on additional borrowings by Epiq to fund the acquisition. The operating results of Iris were included in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 for the full period.
The unaudited pro forma financial information presented above assumes that the Iris acquisition occurred on January 1, 2014 and is not necessarily indicative of the actual results that would have occurred had those transactions been completed on that date. Furthermore, it does not reflect the impacts of any potential operating efficiencies, savings from expected synergies, or costs to integrate the operations. The unaudited pro forma financial information presented above is not necessarily indicative of future results.
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LONG-TERM OBLIGATIONS |
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LONG-TERM OBLIGATIONS |
NOTE 3: LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following (in thousands):
Credit Agreement
As of March 31, 2016, we have a $475 million senior secured credit facility consisting of a $100 million senior secured revolving loan commitment, maturing in August 2018, and a $375 million amortizing senior secured term loan, maturing in August 2020 (the “Credit Agreement”).
As of March 31, 2016:
Capital Leases
We lease certain property and equipment under capital leases that generally require monthly payments with final maturity dates during various periods through 2021. As of March 31, 2016 our capital leases had a weighted-average interest rate of approximately 4.6%.
Notes Payable
In November 2014 we entered into a note payable related to a software license and maintenance agreement that bears interest of approximately 2.20% and is payable quarterly through September 2017.
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EQUITY |
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EQUITY |
NOTE 4: EQUITY
Share Repurchases
We have a policy that requires us to repurchase shares of our common stock to satisfy employee tax withholding obligations upon the vesting of restricted stock awards or the exercise of stock options and, at the participant’s election, shares of common stock surrendered to us for satisfaction of the exercise price of stock options.
During the three months ended March 31, 2016 and 2015, we repurchased 347,908 shares of common stock for $4.4 million and 219,737 shares of common stock for $4.0 million, respectively. Additionally, during the three months ended March 31, 2016 and 2015, shares of common stock surrendered to us to satisfy the exercise price of stock options were 40,308 and 1,889, respectively.
Dividends
On February 25, 2016, the board of directors (the “Board”) of Epiq declared a cash dividend of $0.09 per outstanding share of common stock payable to shareholders of record as of the close of business on April 4, 2016 and on May 2, 2016, we paid an aggregate $3.4 million to holders of our common stock on account of such dividends.
On April 28, 2016, the Board declared a cash dividend of $0.09 per outstanding share of common stock payable on July 5, 2016 to shareholders of record as of the close of business on May 23, 2016.
The aggregate amount of the dividends declared during the three months ended March 31, 2016 and 2015 was $3.4 million in each period, or $0.09 per share of common stock. During the three months ended March 31, 2016 and 2015, we paid cash dividends of $3.4 million and $3.3 million, respectively
Accumulated Other Comprehensive Loss
The following table summarizes the components of Accumulated other comprehensive loss (in thousands):
There were no reclassifications of amounts from Accumulated other comprehensive loss into the Condensed Consolidated Statements of Operations during the three months ended March 31, 2016 and 2015.
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EARNINGS PER SHARE |
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EARNINGS PER SHARE |
NOTE 5: EARNINGS PER SHARE
Basic earnings per common share is computed on the basis of weighted-average outstanding shares of common stock. Diluted earnings per common share is computed on the basis of basic weighted-average outstanding common shares adjusted for the dilutive effect, if any, of dilutive securities which included outstanding stock options and nonvested restricted stock awards.
The following table summarizes basic and diluted earnings per share (in thousands, except per share amounts).
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FAIR VALUE MEASUREMENTS |
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NOTE 6: FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The following table provides the financial assets and liabilities carried at fair value, in thousands, measured on a recurring basis as of March 31, 2016 and December 31, 2015 using the fair value hierarchy prescribed by U.S. GAAP. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs. Level 3 includes fair values estimated using significant non-observable inputs. An asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Interest rate swap
The fair value of our interest rate swap 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 the interest rate swap is classified as Level 2. The fair value of the interest rate swap is subject to material changes based upon changes in the forward curve for 1 month LIBOR and the volatility thereof.
Other Fair Value Disclosures
The carrying amounts of cash and cash equivalents, short-term investments, receivables, accounts payable and accrued expenses approximate their fair values because of the relatively short-term maturities of these financial instruments. As of March 31, 2016 and December 31, 2015, the amounts outstanding under both our credit facility and notes payable approximated fair value due to the borrowing rates currently available to us for debt with similar terms and are classified as Level 2.
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INCOME TAXES |
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INCOME TAXES |
NOTE 7: INCOME TAXES
The locations where we generate pretax income (or loss) have a significant effect on our consolidated effective tax rate. We estimate that our pretax income incurred in the United States will be subject to a combined statutory federal and state tax rate of approximate 41%, while our pretax income (or loss) incurred in foreign income tax jurisdictions will be subject to a combined statutory tax rate of approximately 21%, primarily driven by our expected pretax income in Europe.
We calculate our provision for income taxes during the interim periods by applying an estimate of the effective tax rate for the full fiscal year to consolidated ordinary pretax income (or loss) for the reporting period. We are also required to record the tax impact of certain discrete items, unusual or infrequently occurring items including changes in judgment about valuation allowances, and the effects of changes in tax laws or income tax rates, in the interim period in which they occur. In addition, material jurisdictions with a projected loss for the year where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion combined with the tax impact of recording certain discrete items could result in a higher or lower effective tax rate during a particular interim period than the estimated annual effective tax rate anticipated for the year.
As of March 31, 2016 and December 31, 2015, we have recorded a valuation allowance against net deferred tax assets recognized in the United States, including net operating loss carryforwards. Our Condensed Consolidated Balance Sheet includes a deferred tax liability that relates to certain indefinite-lived intangibles which we are amortizing for tax purposes. Since the reversal of this deferred tax liability is not determinable, our 34.6% estimated annual effective tax rate includes approximately $4.5 million tax expense related to this amortization.
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SHARE-BASED COMPENSATION |
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SHARE-BASED COMPENSATION |
NOTE 8: SHARE-BASED COMPENSATION
Share-based Compensation Expense
The following table presents total share-based compensation expense (in thousands):
Nonvested Restricted Stock Awards
A summary of nonvested restricted stock activity is presented in the table below (shares in thousands):
The fair value of nonvested restricted stock awards is based on the closing market price of our common stock on the date of grant. Nonvested restricted stock entitles the holder to shares of unrestricted common stock upon vesting.
As of March 31, 2016, total unrecognized compensation expense related to unvested restricted stock awards was $6.6 million and will be recognized over a weighted-average period of approximately 1.7 years.
Performance-based Restricted Stock Awards
In March 2016, we granted 20,000 shares of performance-based restricted stock to a senior management employee (“2016 Management Performance RSA”). The 2016 Management Performance RSA is earned based upon the achievement of certain segment level financial performance criteria for the calendar year ending December 31, 2016.
In February 2015, we granted an aggregate of 320,000 shares of performance-based restricted stock awards to executive officers of Epiq (the “2015 Executive Officer Performance RSAs”). The 2015 Executive Officer Performance RSAs were earned based upon the achievement of certain financial performance criteria of Epiq for the year ended December 31, 2015 and required certification by the compensation committee of the Board (the “Compensation Committee”). On January 28, 2016, the Compensation Committee certified that the performance conditions with respect to all of the 2015 Executive Officer Performance RSAs were achieved, and according to the terms of the underlying award agreements, awards representing 140,000 shares of common stock vested on February 22, 2016. The remaining 180,000 of 2015 Executive Officer Performance RSAs are scheduled to vest, subject to continuing employment, in two equal installments in February 2017 and 2018.
In January 2015, we granted 20,000 shares of performance-based restricted stock to a senior management employee (“2015 Management Performance RSA”). The 2015 Management Performance RSA was earned based upon the achievement of certain segment-level financial performance criteria for the year ended December 31, 2015. In February 2016, one of the performance conditions related to the 2015 Management Performance RSA was certified to be achieved, and restricted stock equal to 10,000 shares of common stock vested. The remaining 10,000 shares were forfeited.
Contingent Restricted Stock Awards
On January 28, 2016, the Compensation Committee approved the grants of service-based and performance-based restricted stock to directors and executive officers (the “Contingent Equity Awards”) of Epiq. These awards are contingent upon the approval by our shareholders of an amendment and restatement of the Epiq Systems, Inc. 2004 Equity Incentive Plan (the “2004 Plan”), which would increase the number of shares of common stock available for awards, and that we are planning to submit for approval at the annual meeting of shareholders for 2016. If shareholder approval is not obtained, the Contingent Equity Awards will automatically convert to cash awards, which will be equal to the number of shares that ultimately vest, depending on level of achievement of certain financial measures, multiplied by the closing stock price of Epiq common stock (as published by NASDAQ Global Markets) on the vest date. As of March 31, 2016, the estimated cash value of the Contingent Equity Awards was $7.4 million. For the three months ended March 31, 2016, we recognized $0.7 million of expense related to the Contingent Equity Awards that is included in “Selling, general and administrative expense” in the Condensed Consolidated Statements of Operations. The expense related to the Contingent Equity Awards is recognized as a cash expense, and therefore is not included in “Share-based Compensation Expense”.
Annual Incentive Awards
During the three months ended March 31, 2016, we granted an aggregate of 717,461 shares of restricted stock to executive officers and employees of Epiq that immediately vested in connection with the payment of 2015 annual incentive compensation. In addition, we plan to pay a portion of the 2016 annual incentive awards to executive officers and employees of Epiq in the form of fully vested common stock (the “2016 Annual Incentive Awards”). Our ability to pay the 2016 Annual Incentive Awards in common stock is contingent upon the approval by our shareholders of the proposed amendment and restatement of the 2004 Plan as described above. If shareholder approval is not obtained, the 2016 Annual Incentive Awards will be paid in cash. For the three months ended March 31, 2016, we have recognized $2.2 million of expense related to the 2016 Annual Incentive Awards. Prior to obtaining shareholder approval as described above, the expense related to the 2016 Annual Incentive Awards is recognized as a cash expense, and therefore is not included in “Share-based Compensation Expense”.
Stock Options
Stock option activity during the three months ended March 31, 2016 was immaterial to the Condensed Consolidated Financial Statements. As of March 31, 2016, unrecognized compensation cost related to unvested stock options was $1.7 million, which will be recognized over a weighted-average period of approximately 2.4 years.
Equity Award Plans
As of March 31, 2016, there were 175,495 and 200,000 remaining shares available for issuance under the 2004 Plan and Epiq Systems, Inc. 2015 Inducement Award Plan, respectively.
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SEGMENT REPORTING |
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SEGMENT REPORTING |
NOTE 9: 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 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 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, class action, mass tort proceedings, federal regulatory actions and data breach responses.
The segment performance measure is based on earnings before interest, taxes, depreciation and amortization, certain nonrecurring operating expenses, share-based compensation expense and contingent equity award expense (as described in Note 8 to the Condensed Consolidated Financial Statements). In management’s evaluation of segment performance, certain costs, such as executive management, administrative staff, and other enterprise level expenses including certain information technology, data security and marketing expenses 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 and equipment, 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 and equipment, 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 (in thousands):
Following is a reconciliation of the segment performance measure to consolidated income (loss) before income taxes (in thousands):
Following are capital expenditures (including software development costs) by segment (in thousands):
Following are assets by segment (in thousands):
Following is total revenue, determined by the location providing the services, by geographical area (in thousands):
Following are long-lived assets, excluding intangible assets, by geographical area (in thousands):
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LEGAL PROCEEDINGS |
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LEGAL PROCEEDINGS |
NOTE 10: LEGAL PROCEEDINGS
We are at times involved in litigation and other legal claims in the ordinary course of business. When appropriate in management’s estimation, we may record reserves in our financial statements for pending litigation and other claims. Although it is not possible to predict with certainty the outcome of litigation, we do not believe that any of the current pending legal proceedings to which we are a party will have a material impact on our results of operations, financial condition or cash flows.
Villere Litigation
On December 11, 2015, St. Denis J. Villere & Company, L.L.C. (“Villere”) and George Young (the “Plaintiffs”) filed a petition, which was later amended, in the Circuit Court of Jackson County, Missouri (the “Court”) against Epiq and eight of our directors (the “Director Defendants”). The petition, as amended, concerns Villere’s December 7, 2015 purported nomination of six directors, which Epiq rejected, because, among other things, the company argues that Villere was prohibited from nominating directors under the terms of a Director Appointment Agreement, dated November 1, 2014, among Villere, Epiq and the Villere Designee (as defined therein) and that such nomination failed to comply with our amended and restated bylaws (the “Bylaws”). The Plaintiffs’ petition, as amended, includes claims for, among other things: (1) injunctive relief, (2) a declaratory judgement that the purported nomination was proper so that Villere can then submit such nominations for a vote at the company’s annual meeting of shareholders in 2016 (the “2016 Annual Meeting”); (3) a declaratory judgment that Epiq’s Bylaws are either facially invalid or invalid as applied to Villere; and (4) breach of fiduciary duty against the Director Defendants. In its amended petition, Villere abandoned its claim for any monetary damages associated with its breach of fiduciary duty claim. Epiq filed counterclaims on January 13, 2016, against the Plaintiffs, and later amended such counterclaims to include certain clients of Villere (the “Villere Clients”) on whose behalf Villere is purportedly operating. Villere has filed a motion to dismiss such counterclaims against the Villere Clients. After a hearing on April 4, 2016, the Court issued a judgment (the “Judgment”) finding that the Director Appointment Agreement had been terminated by Villere and that Villere could nominate its slate of directors to the company’s Board at its 2016 Annual Meeting. The Court did not rule on certain of Plaintiffs’ claims relative to the alleged breach of fiduciary duties or the validity of Epiq’s Bylaws. The parties have each submitted motions to amend the Judgment. Epiq’s motion to amend is principally to certify the Judgment as final so that Epiq may file an appeal thereof. On April 22, 2016, the Court ruled in favor of Epiq on its motion to amend and denied Plaintiffs’ motion to amend (the “Amended Judgment”). No hearing has yet been scheduled by the Court relative to Epiq’s counterclaims. Both Plaintiffs and Epiq have filed separate notices of appeal of the Amended Judgment with the Missouri Court of Appeals for the Western District. On April 26, 2016, the Plaintiffs filed an application with the Court requesting reimbursement of approximately $2.8 million in attorneys’ fees and other related expenses (the “Fee Application”). Epiq intends to contest the Fee Application vigorously as we believe the Fee Application is legally without merit. At this time, we cannot reasonably predict the outcome of the Fee Application, and as a result, we have not accrued a liability in the Condensed Consolidated Financial Statements as of March 31, 2016.
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ACCOUNTING POLICIES, INTERIM FINANCIAL STATEMENTS AND BASIS OF PRESENTATION (Policies) |
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Recently Issued Accounting Standards |
Recently Issued Accounting Standards
In March 2016, the Financial Accounting Standards Board (the “FASB”) issued accounting standard update (“ASU”) No. 2016-09, Compensation—Stock Compensation (Topic 718): “Improvements to Employee Share-Based Payment Accounting”. Under the new guidance, entities will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. In addition, the guidance eliminates the requirement that excess tax benefits be realized (i.e., through a reduction in income taxes payable) before companies can recognize them. Under today’s guidance, entities cannot recognize excess tax benefits when an option is exercised or a share vests if the related tax deduction increases a net operating loss carryforward rather than reduces income taxes payable. This guidance also simplifies several other aspects of the accounting for employee share-based payments, including forfeitures, statutory tax withholdings requirements and classification in the statement of cash flow. The guidance is effective for Epiq beginning in the first quarter of fiscal 2017. Early adoption is permitted, but all of the guidance must be adopted in the same period. In addition, if early adoption is elected in an interim period, any adjustment shall be reflected as of the beginning of the annual period that includes that interim period. We do not expect the adoption of this new guidance to have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This new lease guidance requires that an entity should recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term. Leases would be classified as either Type A leases (generally today’s capital leases) or Type B leases (generally today’s operating leases). For certain leases of assets other than property (for example, equipment, aircraft, cars, trucks), a lessee would classify the lease as a Type A lease and would do the following: (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments and (2) recognize the unwinding of the discount on the lease liability as interest separately from the amortization of the right-of-use asset. For certain leases of property (that is, land and/or a building or part of a building), a lessee would classify the lease as a Type B lease and would do the following: (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments and (2) recognize a single lease cost, combining the unwinding of the discount on the lease liability with the amortization of the right-of-use asset, on a straight-line basis. This guidance also provides accounting updates with respect to lessor accounting under a lease arrangement. Historically, we have not engaged in the business of leasing assets to third parties. This new lease guidance is effective for Epiq beginning in the first quarter of fiscal 2019. 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. Early adoption is permitted for all entities. We are currently assessing the full impact of this new guidance on our consolidated financial position, results of operations and cash flows, however, due to the magnitude of our operating leases and related rent expense, we expect the adoption of this accounting guidance to have a material effect on our consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The new guidance clarifies that a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition. As a result, compensation cost would be recognized over the required service period, if it is probable that the performance condition will be achieved. The new guidance does not require any new or additional disclosures. This guidance was effective for us beginning January 1, 2016 and its adoption did not have a material impact on our Condensed Consolidated Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. This new revenue guidance 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 was going to be effective for Epiq beginning in the first quarter of fiscal 2017. In August 2015, the FASB deferred the effective date by one year. Early adoption as of the original effective date will be 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 and will adopt this new guidance effective January 1, 2018.
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ACQUISITIONS (Tables) - Iris Data Services Inc |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Acquisitions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of the purchase price of acquisition and the preliminary estimated fair values of the assets acquired and liabilities assumed |
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Schedule of fair value of intangible assets acquired |
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Schedule of unaudited pro forma combined result of operations |
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LONG-TERM OBLIGATIONS (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
LONG-TERM OBLIGATIONS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of long-term obligations |
Long-term obligations consisted of the following (in thousands):
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EQUITY (Tables) |
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EQUITY | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Accumulated other comprehensive loss |
The following table summarizes the components of Accumulated other comprehensive loss (in thousands):
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EARNINGS PER SHARE (Tables) |
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EARNINGS PER SHARE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of basic and diluted earnings per share |
The following table summarizes basic and diluted earnings per share (in thousands, except per share amounts).
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FAIR VALUE MEASUREMENTS (Tables) |
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FAIR VALUE MEASUREMENTS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of financial assets and liabilities measured and recorded at fair value on a recurring basis |
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SHARE-BASED COMPENSATION (Tables) |
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SHARE-BASED COMPENSATION. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of share-based compensation expense |
The following table presents total share-based compensation expense (in thousands):
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Summary of non-vested restricted stock activity |
A summary of nonvested restricted stock activity is presented in the table below (shares in thousands):
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SEGMENT REPORTING (Tables) |
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SEGMENT REPORTING | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of segment information |
Following is a summary of segment information (in thousands):
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Schedule of reconciliation of segment performance measure to consolidated income (loss) before income taxes |
Following is a reconciliation of the segment performance measure to consolidated income (loss) before income taxes (in thousands):
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Schedule of capital expenditures (including software development costs) by segment |
Following are capital expenditures (including software development costs) by segment (in thousands):
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Schedule of total assets by segment |
Following are assets by segment (in thousands):
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Schedule of total revenue, determined by the location providing the services, by geographical area |
Following is total revenue, determined by the location providing the services, by geographical area (in thousands):
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Schedule of long-lived assets, excluding intangible assets, by geographical area |
Following are long-lived assets, excluding intangible assets, by geographical area (in thousands):
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EQUITY - Share Repurchases (Details) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | ||||
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May. 02, 2016 |
Apr. 28, 2016 |
Feb. 25, 2016 |
Mar. 31, 2016 |
Mar. 31, 2015 |
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Dividend | |||||
Cash dividends declared per share of common stock | $ 0.09 | $ 0.09 | $ 0.09 | $ 0.09 | |
Aggregate amount of dividends declared | $ 3,407 | $ 3,351 | |||
Cash dividends paid | $ 3,400 | 3,382 | 3,340 | ||
Repurchase Shares Satisfy Employee Tax Withholding Obligations | |||||
Share Repurchases | |||||
Share repurchases | $ 4,400 | $ 4,000 | |||
Share repurchases (in shares) | 347,908 | 219,737 | |||
Additional shares of common stock surrendered under stock repurchase program | 40,308 | 1,889 |
EQUITY - Accumulated Other Comprehensive Loss (Details) - USD ($) |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
|
Accumulated Other Comprehensive Income (Loss), Net of Tax | ||
Balance beginning of the period | $ (7,949,000) | |
Other comprehensive loss, net of tax | (1,359,000) | $ (3,031,000) |
Reclassification adjustments, net of tax | 0 | 0 |
Balance end of the period | (9,308,000) | |
Foreign currency translation adjustments | ||
Accumulated Other Comprehensive Income (Loss), Net of Tax | ||
Balance beginning of the period | (5,161,000) | (2,952,000) |
Other comprehensive loss, net of tax | (356,000) | (2,335,000) |
Balance end of the period | (5,517,000) | (5,287,000) |
Unrealized loss on cash flow hedges | ||
Accumulated Other Comprehensive Income (Loss), Net of Tax | ||
Balance beginning of the period | (2,788,000) | (1,410,000) |
Other comprehensive loss, net of tax | (1,003,000) | (696,000) |
Balance end of the period | $ (3,791,000) | $ (2,106,000) |
EARNINGS PER SHARE (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
|
EARNINGS PER SHARE | ||
Net income (loss) | $ (65) | $ 1,733 |
Weighted average common shares outstanding | ||
Basic common shares (in shares) | 37,068 | 36,281 |
Effect of dilutive securities (in shares) | 633 | |
Diluted common shares (in shares) | 37,068 | 36,914 |
Net income (loss) per common share: | ||
Basic net income (loss) per common share | $ 0.00 | $ 0.05 |
Diluted net income (loss) per common share | $ 0.00 | $ 0.05 |
Potentially dilutive shares excluded from the calculation: | ||
Stock options and nonvested shares excluded as their inclusion would be anti-dilutive | 2,453 | 137 |
FAIR VALUE MEASUREMENTS (Details) - Interest rate swap - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Dec. 31, 2015 |
|
Assets and liabilities measured and recorded at fair value on a recurring basis | ||
Variable rate basis | 1 month LIBOR | |
Recurring Basis | Carrying Value | ||
Assets and liabilities measured and recorded at fair value on a recurring basis | ||
Interest rate swap | $ 4,859 | $ 3,856 |
Recurring Basis | Significant Other Observable Inputs (Level 2) | Fair Value | ||
Assets and liabilities measured and recorded at fair value on a recurring basis | ||
Interest rate swap | $ 4,859 | $ 3,856 |
SHARE-BASED COMPENSATION - Expense (Details) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
|
SHARE-BASED COMPENSATION | ||
Total share-based compensation expense | $ 2,516 | $ 1,621 |
Direct cost of services | ||
SHARE-BASED COMPENSATION | ||
Total share-based compensation expense | 118 | 89 |
Selling, general and administrative expense | ||
SHARE-BASED COMPENSATION | ||
Total share-based compensation expense | $ 2,398 | $ 1,532 |
SEGMENT REPORTING - Segment Performance (Details) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
|
Reconciliation of a segment performance measure to consolidated income (loss) before income taxes | ||
Segment performance measure | $ 37,555 | $ 30,913 |
Unallocated expenses | (16,311) | (10,861) |
Share-based compensation expense | (2,516) | (1,621) |
Depreciation and software and leasehold amortization | (9,534) | (8,765) |
Amortization of identifiable intangible assets | (3,774) | (2,685) |
Other operating expense | (53) | (137) |
Operating income | 5,367 | 6,844 |
Interest expense, net | (5,375) | (4,225) |
Income (loss) before income taxes | $ (8) | $ 2,619 |
SEGMENT REPORTING - Capital Expenditures (Details) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
|
Capital Expenditures | ||
Total capital expenditures | $ 5,342 | $ 8,618 |
Technology | ||
Capital Expenditures | ||
Total capital expenditures | 1,644 | 2,252 |
Bankruptcy and Settlement Administration | ||
Capital Expenditures | ||
Total capital expenditures | 389 | 436 |
Unallocated and corporate | ||
Capital Expenditures | ||
Total capital expenditures | $ 3,309 | $ 5,930 |
SEGMENT REPORTING - Total Assets (Details) - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
---|---|---|
Assets | ||
Total assets | $ 829,424 | $ 823,897 |
Unallocated and corporate | ||
Assets | ||
Total assets | 76,623 | 82,064 |
Technology | ||
Assets | ||
Total assets | 473,200 | 465,736 |
Bankruptcy and Settlement Administration | ||
Assets | ||
Total assets | $ 279,601 | $ 276,097 |
SEGMENT REPORTING - Revenue and Long-Lived Assets (Details) - USD ($) $ in Thousands |
3 Months Ended | ||
---|---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
Dec. 31, 2015 |
|
Revenue and long-lived assets excluding intangible assets, by geographical area | |||
Revenue | $ 146,531 | $ 119,028 | |
Long-lived assets | 89,275 | $ 93,686 | |
United States | |||
Revenue and long-lived assets excluding intangible assets, by geographical area | |||
Revenue | 123,084 | 101,668 | |
Long-lived assets | 80,049 | 84,137 | |
United Kingdom | |||
Revenue and long-lived assets excluding intangible assets, by geographical area | |||
Revenue | 13,650 | 13,690 | |
Other countries | |||
Revenue and long-lived assets excluding intangible assets, by geographical area | |||
Revenue | 9,797 | $ 3,670 | |
Long-lived assets | $ 9,226 | $ 9,549 |
LEGAL PROCEEDINGS (Details) $ in Millions |
Apr. 26, 2016
USD ($)
|
---|---|
Villere Litigation | |
Amount of reimbursement the Plaintiff is requesting in a filed Fee Application | $ 2.8 |
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