-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FFcVyL9dsgWApiaLTbpeWkTvghh1zvoHxFKcU0kcuFnlZfoTlR8moe67oefYTUVM nNJDEok5s/rXhhUyez6PPA== 0001157523-07-001787.txt : 20070220 0001157523-07-001787.hdr.sgml : 20070219 20070220160128 ACCESSION NUMBER: 0001157523-07-001787 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20070220 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20070220 DATE AS OF CHANGE: 20070220 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPIQ SYSTEMS INC CENTRAL INDEX KEY: 0001027207 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 481056429 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22081 FILM NUMBER: 07635587 BUSINESS ADDRESS: STREET 1: 501 KANSAS AVENUE CITY: KANSAS CITY STATE: KS ZIP: 66105-1309 BUSINESS PHONE: 9136219500 MAIL ADDRESS: STREET 1: 501 KANSAS AVENUE CITY: KANSAS CITY STATE: MO ZIP: 66105-1309 FORMER COMPANY: FORMER CONFORMED NAME: ELECTRONIC PROCESSING INC DATE OF NAME CHANGE: 19961116 8-K 1 a5338319.txt EPIQ SYSTEMS, INC. 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 February 20, 2007 (February 20, 2007) Date of Report (Date of earliest event reported) EPIQ SYSTEMS, INC. (Exact name of registrant as specified in its charter) Missouri 0-22081 48-1056429 (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification Number) 501 Kansas Avenue Kansas City, Kansas 66105 (Address of principal executive offices) (913) 621-9500 (Registrant's telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): |_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425). |_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12). |_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)). |_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)). ================================================================================ Item 2.02. Results of Operations and Financial Condition. On February 20, 2007, Epiq Systems, Inc. issued a press release announcing its financial results for the fourth quarter and year ended December 31, 2006. A copy of the press release is attached as Exhibit 99.1 to this report and is incorporated herein by reference. The attached press release includes four non-GAAP financial measures that management uses and that the company believes may be useful to investors: o Non-GAAP net income, calculated as net income plus or minus, as applicable, deferred revenue accounted for under Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), plus amortization of acquisition-related intangibles, share-based compensation expense, acquisition-related expense, loan fee amortization and non-cash embedded option charges, all net of tax; o Non-GAAP earnings per share, calculated as non-GAAP income on a fully diluted per share basis; o Non-GAAP adjusted EBITDA, calculated as net income plus or minus, as applicable, deferred revenue accounted for under SOP 97-2, and before acquisition-related expenses, depreciation and amortization expenses, share-based compensation expense, net expenses related to financing (primarily interest expense), and income taxes; and o Non-GAAP operating revenue, calculated as operating revenue before reimbursed direct costs plus or minus, as applicable, deferred revenue accounted for under SOP 97-2. Reconciliations of each of these non-GAAP measures are included in schedules to the press release filed with this report. These non-GAAP financial measures are intended to supplement the accounting principles generally accepted in the United States of America (GAAP) financial information included in the press release by providing management and investors with additional insight regarding results of operations. Management uses non-GAAP net income (i) in its strategic planning for the company and (ii) in evaluating the results of operations of the company. The company's compensation committee has used non-GAAP net income in evaluating the performance of management and in determining executive bonuses. Management believes the non-GAAP net income measure provides management with additional perspective when evaluating the results of operations and may be similarly useful to investors when evaluating financial results of the company for comparable periods for the following reasons: o Certain of the adjusted items can fluctuate significantly from period-to-period due in part to the timing of completion of major acquisitions, the timing of major refinancings (whether or not related to those acquisitions) and similar events. Management believes the adjustments to net income to account for these types of significant corporate arrangements may be useful to investors in comparing the results of operations of the company without the effect of certain aspects of those corporate arrangements; and o Certain of the adjusted items represent significant non-cash charges in computing GAAP net income, which investors may find useful in excluding from operating results to evaluate comparable periods; and o The adjustment for deferred revenue under SOP 97-2 reverses the initial deferral and the subsequent recognition of deferred revenue related to a specific 36 month arrangement spanning October 2003 - September 2006, as more fully described below in the discussion of the use of non-GAAP operating revenue. -1- Management recognizes that its use of non-GAAP net income, as with any non-GAAP financial measure, has various limitations, including the fact that many of the adjusted items may be a normally recurring expense for the company or may involve the actual use of cash. Nonetheless, management believes that this non-GAAP net income measures provide additional insight for investors into the operating results and business trends of the company. A reconciliation of non-GAAP net income to net income is included in the schedules to the press release filed with this report. Management also uses non-GAAP earnings per share, which is calculated as non-GAAP net income on a fully diluted per share basis. Management uses non-GAAP earnings per share for the same reasons that it uses non-GAAP net income and believes that non-GAAP earnings per share may be useful to investors for the same purposes as non-GAAP net income. The compensation committee has used non-GAAP earnings per share in evaluating the performance of management and in determining executive bonuses. A reconciliation of non-GAAP earnings per share to GAAP earnings per share is included in schedules to the press release filed with this report. Management also uses non-GAAP adjusted EBITDA as a non-GAAP performance measure. Management regularly reviews EBITDA as it assesses its current and prospective operating results, including anticipated operating results for acquired businesses. Management uses non-GAAP adjusted EBITDA (i) in its strategic planning for the company and (ii) in evaluating the results of operations of the company. The compensation committee has used non-GAAP adjusted EBITDA in evaluating the performance of management and in determining executive bonuses. Management calculates non-GAAP adjusted EBITDA as net income before interest/financing, taxes, depreciation, amortization, share-based compensation, and acquisition-related expenses, adjusted to include deferred revenue accounted for under SOP 97-2 in the period in which the services were provided and to exclude the revenue in the later period in which it was recognized. Management believes non-GAAP adjusted EBITDA is useful to management and may be useful to investors in evaluating the results of operations when comparing financial results for comparable periods for the following reasons: o Certain of the adjusted items can fluctuate significantly from period-to-period due in part to the timing of completion of major acquisitions, the timing of major refinancings (whether or not related to those acquisitions) and similar events. Management believes the adjustments to net income to account for these types of significant corporate arrangements may be useful to investors in comparing the results of operations of the company without the effect of certain aspects of those corporate arrangements; o Certain of the adjusted items represent non-cash charges to net income, which investors may find useful in excluding from operating results to evaluate comparable periods; and o Management believes the adjustment to include deferred revenue accounted for under SOP 97-2 in the period in which the services were provided and to exclude the revenue in the later period in which it was recognized is useful in computing adjusted EBITDA for the same reasons discussed below relating to the use of non-GAAP operating revenue. Management recognizes that its use of non-GAAP adjusted EBITDA has various limitations, including the fact that the adjusted items may be a normally recurring expense or may involve the actual use of cash. Nonetheless, management believes that this non-GAAP adjusted EBITDA measure provides additional insight for investors into the operating results and business trends of the company. -2- A reconciliation of non-GAAP adjusted EBITDA to net income is included in a schedule to the press release filed with this report. Management uses non-GAAP operating revenue to enhance the comparability of periods affected by the accounting for revenue under SOP 97-2 with respect to a specific 36 month Chapter 7 bankruptcy arrangement spanning October 2003 - September 2006. Throughout the 36 month fixed term of this arrangement the company provided services to clients and received ordinary course cash payments each month. Based on the structure of this arrangement, however, SOP 97-2 required the deferral of substantially all revenue from this arrangement to the final two quarterly periods. An aggregate deferral of $66.1 million of revenue was reported from the fourth quarter of 2003 through the first quarter of 2006, of which $60.1 million was recognized in the second quarter of 2006 and $6.0 million was recognized in the third quarter of 2006. Although revenue from the arrangement was deferred, under GAAP, the related costs were not deferred but rather recognized as incurred. This deferral of revenue, while required by GAAP, makes it difficult for management and investors to assess the comparability of financial results for periods affected by the deferral (and later recognition) of revenue from this arrangement. In the assessment of 2006 financial results by management, the results were adjusted to include deferred revenue accounted for under SOP 97-2 in the period in which the services were provided and to exclude the revenue in the later period in which it was recognized. Similarly, the compensation committee excluded the recognition of previously deferred revenue in 2006 in determining whether management had satisfied financial objectives underlying executive incentive compensation arrangements in place for 2006. Management calculates non-GAAP operating revenue as operating revenue before reimbursed direct costs adjusted to include deferred revenue accounted for under SOP 97-2 in the period in which the services were provided and to exclude the revenue in the later period in which the deferred revenue is recognized. Management believes this reversal more readily allows comparability of quarters affected by the accounting for this specific arrangement to periods preceding and subsequent to that arrangement. Revenue for arrangements in periods prior to October 2003 and for the current arrangement, which began October 1, 2006, is recognized in the period the services are provided. The information in Item 2.02 of this report and in the exhibit attached hereto is not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section or Sections 11 or 12(a)(2) of the Securities Act of 1933, as amended. The information contained in this Item 2.02 and in the accompanying exhibit is not incorporated by reference into any filing with the SEC made by the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing. -3- Item 9.01. Financial Statements and Exhibits. (c) Exhibits. The following exhibit is filed as part of this report: Exhibit No. Description - ----------- ----------- 99.1 Epiq Systems, Inc. Press Release issued February 20, 2007, reporting fourth quarter and year ended December 31, 2006 financial results. -4- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. EPIQ SYSTEMS, INC. Date: February 20, 2007 By: /s/ Tom W. Olofson --------------------------- Name: Tom W. Olofson Title: Chairman of the Board and Chief Executive Officer -5- EX-99.1 2 a5338319ex991.txt EXHIBIT 99.1 Exhibit 99.1 Epiq Systems, Inc. Announces Fourth Quarter and Full Year 2006 Results KANSAS CITY, Kan.--(BUSINESS WIRE)--Feb. 20, 2007--Epiq Systems, Inc. (NASDAQ:EPIQ) announced results of operations for the fourth quarter and full year of 2006 with fourth quarter operating revenue (total revenue less operating revenue from reimbursed direct costs) of $38.7 million compared to $23.5 million for the same period last year and 2006 operating revenue of $199.7 million compared to $82.7 million last year. Operating revenue for the fourth quarter of 2006 does not include recognition of previously deferred revenue, while fourth quarter 2005 operating revenue reflected a deferral of $5.6 million. In 2006, the Company recognized $59.7 million of previously deferred revenue; during 2005, the Company deferred $24.5 million of revenue. Excluding the impacts of deferred revenue for both fiscal years, operating revenue in 2006 increased 31% compared to the prior year. A reconciliation statement is attached with additional details. The fourth quarter 2006 net loss of $2.1 million or ($0.11) per share compared to a net loss of $4.0 million or ($0.22) per share for the year ago quarter. Net income for 2006 was $35.1 million or $1.58 per share compared to a net loss of $3.8 million or ($0.21) per share for the prior year. As a result of our adoption of SFAS No.123R, "Share-Based Payment," effective January 1, 2006, during the fourth quarter 2006 we recognized $3.7 million and for the full year 2006 we recognized $5.4 million of share-based compensation expense compared to no expense during 2005. Fourth quarter 2006 net cash provided by operating activities was $10.8 million compared to $13.5 million for the year ago quarter. Net cash provided by operating activities for 2006 was $34.4 million, a 26% increase compared to $27.2 million for the prior year. A condensed consolidated cash flow statement is attached. Epiq Systems' management also evaluates the following non-GAAP financial measures: (i) non-GAAP operating revenue (operating revenue before reimbursed direct costs adjusted to include deferred revenue accounted for under SOP 97-2, "Software Revenue Recognition," in the period in which the services were provided and to exclude the revenue in the later period in which the deferred revenue is recognized, (ii) non-GAAP adjusted EBITDA (net income before interest/financing, taxes, depreciation, amortization, share-based compensation, and acquisition related expenses, adjusted to include deferred revenue accounted for under SOP 97-2 in the period in which the services were provided and to exclude the revenue in the later period in which it is recognized) and (iii) non-GAAP net income (net income before amortization of acquisition related intangibles, share-based compensation, acquisition-related expenses, capitalized loan fee amortization, and embedded option mark-to-market expense/convertible debt accretion, adjusted to include deferred revenue accounted for under SOP 97-2 in the period in which the services were provided and to exclude the revenue in the later period in which it is recognized, all net of tax). Reconciliation statements for non-GAAP operating revenue, non-GAAP adjusted EBITDA, non-GAAP net income and non-GAAP earnings per share are attached. Fourth quarter 2006 non-GAAP adjusted EBITDA was $8.9 million, compared to $12.0 million for the year ago quarter. Non-GAAP adjusted EBITDA for 2006 was $38.9 million, compared to $41.9 million for the prior year. Non-GAAP net income for the fourth quarter of 2006 was $2.8 million or $0.15 per share, compared to $5.2 million or $0.25 per share for the year ago quarter. Non-GAAP net income for 2006 was $10.9 million or $0.53 per share compared to $18.2 million or $0.90 per share for the prior year. Non-GAAP net income includes net interest expense, which increased $1.7 million in the fourth quarter of 2006 and $6.6 million for the full year of 2006 compared to last year. The increase in interest expense is primarily attributable to bank debt utilized to finance the November 15, 2005 acquisition of the Company's electronic discovery business. As of December 31, 2006 the Company has reduced its bank borrowings by $25.0 million since the electronic discovery acquisition. Tom W. Olofson, chairman and CEO, and Christopher E. Olofson, president and COO of Epiq Systems, stated, "As anticipated, 2006 was an important transitional year of significant investment and integration. By year's end, we had appointed new managing directors in our electronic discovery, class action and legal settlements, and corporate restructuring businesses to strengthen our senior management organization. In addition, we augmented the sales and leadership teams in each of these areas. During 2006, our electronic discovery business experienced significant growth and is now ranked among the top national providers of electronic discovery services. Operating revenue for our bankruptcy businesses also met or exceeded internal objectives. Although our class action and legal settlements business experienced a sales shortfall for new client engagements in 2006, its fourth quarter revenue was the strongest quarter of the year. Entering 2007, the company has an attractive opportunity to harvest the benefits of its recent investments and stands as a market leader in integrated technology solutions for electronic discovery, bankruptcy, class action and legal settlements." Key events in 2006 include: -- Epiq Systems appeared on the top 20 Electronic Discovery Service Providers list in the 2006 Socha Gelbmann Survey. The survey indicates the electronic discovery market has a 2-year projected 55% CAGR, with 2005 revenue of $0.8 billion projected to reach $2.0 billion in 2007. -- In 2006 the company further established its technology leadership in the legal market with major software releases for DocuMatrix(TM), the company's electronic discovery and document review platform and TCMS(R), the company's Chapter 7 case management software. -- New managing directors were appointed during the third quarter to assume leadership for electronic discovery, corporate restructuring and class action/legal settlements. -- During 2006, the company recruited new sales and client relationship executives in New York, London, Chicago, Los Angeles, and northern California. -- The company opened a full-service office (including sales, client services and technology support) for its electronic discovery business in Los Angeles. -- 1.11 million bankruptcies were filed in the U.S. Court's annual period ended September 30, 2006. -- The Federal Reserve reported that both corporate debt and consumer credit increased compared to the prior year, reaching $5.6 trillion and $2.4 trillion, respectively, as of September 30, 2006. Conference Call The Company will host a conference call today at 3:30 p.m. central time to discuss these results. The Internet broadcast of the call can be accessed at www.epiqsystems.com. To listen by phone, call 800-322-9079 before 3:30 p.m. central time. The archive of the Internet broadcast will be available on the company's website until the next earnings update. A recording of the call will be available through March 31, 2007 beginning approximately two hours after the call ends. To access the replay, call 877-519-4471 and enter pin #8442362. Company Description Epiq Systems is a leading provider of integrated technology solutions for the legal profession. Our solutions streamline the administration of bankruptcy, litigation, financial transactions and regulatory compliance matters. We offer innovative technology solutions for electronic discovery, document review, legal notification, claims administration and controlled disbursement. Our clients include leading law firms, corporate legal departments, bankruptcy trustees and other professional advisors who require innovative technology, responsive service and deep subject-matter expertise. For more information, visit us online at www.epiqsystems.com. Forward-Looking and Cautionary Statements This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act, including those relating to the possible or assumed future results of our operations and financial condition. These forward-looking statements are based on our current expectations and may be identified by terms such as "believe," "expect," "anticipate," "should," "planned," "may," "goal," "objective" and "potential." Because forward-looking statements involve future risks and uncertainties, listed below are a variety of factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. These factors include (1) risks associated with the application of complex accounting rules to unique transactions, including the risk that good faith application of those rules and audits of those results may be later reversed by new interpretations of those rules or new views regarding the application of those rules, (2) any material changes in our total number of client engagements and the volume associated with each engagement, (3) any material changes in our client's deposit portfolio or the services required or selected by our clients in engagements, (4) material changes in the number of bankruptcy filings, class action filings or mass tort actions each year, (5) changes in the marketing and pricing arrangements with our partner depository banks, (6) risks associated with the integration of acquisitions into our existing business operations, (7) risks associated with our indebtedness, and (8) other risks detailed from time to time in our SEC filings, including our annual report on Form 10-K. In addition, there may be other factors not included in our SEC filings that may cause actual results to differ materially from any forward-looking statements. We undertake no obligations to update any forward-looking statements contained herein to reflect future events or developments. EPIQ SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three months ended Twelve months ended December 31, December 31, --------------------- --------------------- 2006 2005 2006 2005 ---------- ---------- ---------- ---------- REVENUE: Case management services $22,471 $14,910 $76,534 $53,042 Case management bundled software license, software upgrade and postcontract customer support services 7,203 625 87,716 1,771 Document management services 8,977 7,979 35,472 27,874 ---------- ---------- ---------- ---------- Operating revenue before reimbursed direct costs 38,651 23,514 199,722 82,687 Operating revenue from reimbursed direct costs 7,772 6,526 24,448 23,643 ---------- ---------- ---------- ---------- Total Revenue 46,423 30,040 224,170 106,330 ---------- ---------- ---------- ---------- OPERATING EXPENSES: Direct costs of services 14,919 8,282 48,345 30,225 Direct costs of services - bundled 944 972 3,921 3,809 Reimbursed direct costs 7,731 6,461 24,583 23,756 General and administrative 17,602 8,001 54,071 31,072 Depreciation and software and leasehold amortization 2,688 2,007 10,113 7,288 Amortization of identifiable intangible assets 2,957 2,259 11,629 6,751 Acquisition related 33 2,870 283 2,984 ---------- ---------- ---------- ---------- Total Operating Expenses 46,874 30,852 152,945 105,885 ---------- ---------- ---------- ---------- INCOME (LOSS) FROM OPERATIONS (451) (812) 71,225 445 ---------- ---------- ---------- ---------- INTEREST EXPENSE (INCOME): Interest income (97) (15) (208) (122) Interest expense 4,253 2,501 13,468 6,809 ---------- ---------- ---------- ---------- Net Interest Expense 4,156 2,486 13,260 6,687 ---------- ---------- ---------- ---------- INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES (4,607) (3,298) 57,965 (6,242) INCOME TAX PROVISION (BENEFIT) (2,514) 747 22,834 (2,400) ---------- ---------- ---------- ---------- NET INCOME (LOSS) $(2,093) $(4,045) $35,131 $(3,842) ========== ========== ========== ========== NET INCOME (LOSS) PER SHARE INFORMATION: Net income (loss) per share - Diluted $(0.11) $(0.22) $1.58 $(0.21) ========== ========== ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED 19,477 18,627 23,048 18,092 ========== ========== ========== ========== EPIQ SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) December 31, December 31, 2006 2005 -------------- -------------- ASSETS ASSETS: Cash and cash equivalents $5,274 $13,563 Trade accounts receivable, net 33,066 33,504 Property, equipment and leasehold improvements, net 23,153 23,751 Goodwill 260,609 249,427 Other intangibles, net 43,840 53,399 Other 16,278 44,827 -------------- -------------- Total Assets $382,220 $418,471 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable $7,930 $7,954 Deferred revenue 1,073 60,224 Indebtedness 154,361 173,548 Other liabilities 34,677 36,277 STOCKHOLDERS' EQUITY 184,179 140,468 -------------- -------------- Total Liabilities and Stockholders' Equity $382,220 $418,471 ============== ============== EPIQ SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three months ended Twelve months ended December 31, December 31, --------------------- --------------------- 2006 2005 2006 2005 ---------- ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(2,093) $(4,045) $35,131 $(3,842) Non-cash adjustments to net income (loss): Depreciation and amortization 5,645 4,266 21,742 14,039 Other, net 2,353 (1,808) 27,023 (6,668) Changes in operating assets and liabilities, net 4,895 15,088 (49,521) 23,709 ---------- ---------- ---------- ---------- Net cash provided by operating activities 10,800 13,501 34,375 27,238 ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for business combinations, net - (109,883) (3,586) (110,533) Other (2,500) (2,284) (11,002) (6,297) ---------- ---------- ---------- ---------- Net cash used in investing activities (2,500) (112,167) (14,588) (116,830) ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (payments) borrowings on indebtedness (7,013) 99,836 (30,656) 89,732 Other (39) (810) 2,580 93 ---------- ---------- ---------- ---------- Net cash (used in) provided by financing activities (7,052) 99,026 (28,076) 89,825 ---------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $1,248 $360 $(8,289) $233 ========== ========== ========== ========== EPIQ SYSTEMS, INC. AND SUBSIDIARIES RECONCILIATION OF OPERATING REVENUE TO NON-GAAP OPERATING REVENUE (In thousands) (Unaudited) Three months ended Twelve months ended --------------------- --------------------- Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2006 2005 2006 2005 ---------- ---------- ---------- ---------- OPERATING REVENUE BEFORE REIMBURSED DIRECT COSTS $38,651 $23,514 $199,722 $82,687 Less: Deferred revenue (SOP 97-2) - 5,644 (59,674) 24,466 ---------- ---------- ---------- ---------- NON-GAAP OPERATING REVENUE $38,651 $29,158 $140,048 $107,153 ========== ========== ========== ========== Note: The adjustment reverses the effect of deferred revenue related to a specific 36 month Chapter 7 bankruptcy arrangement spanning October 2003 - September 2006. Throughout the 36 month fixed term of the arrangement the company provided services to clients and received ordinary course cash payments each month. However, based on the structure of this arrangement, SOP 97-2 required the deferral of substantially all revenue from the arrangement to the final two quarterly periods. A deferral of $66.1 million of revenue was reported through the first quarter of 2006, of which $60.1 million was recognized in the second quarter of 2006 and $6.0 million was recognized in the third quarter of 2006. Although revenue from the arrangement was deferred, under generally accepted accounting principals the related costs were not deferred but rather recognized as incurred. Revenue for arrangements in periods prior to October 2003 and for the current arrangement, which began October 1, 2006, are recognized in the period the services are provided. EPIQ SYSTEMS, INC. AND SUBSIDIARIES RECONCILIATION OF NET INCOME (LOSS) TO NON-GAAP ADJUSTED EBITDA (In thousands) (Unaudited) Three months ended Twelve months ended --------------------- --------------------- Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2006 2005 2006 2005 ---------- ---------- ---------- ---------- NET INCOME (LOSS) $(2,093) $(4,045) $35,131 $(3,842) Deferred revenue (SOP 97-2) - 5,644 (59,674) 24,466 Acquisition related expense 33 2,870 283 2,984 Depreciation and amortization 5,645 4,266 21,742 14,039 Share-based compensation 3,689 - 5,359 - Expenses related to financing, net 4,156 2,486 13,260 6,687 Provision for (benefit from) income taxes (2,514) 747 22,834 (2,400) ---------- ---------- ---------- ---------- 11,009 16,013 3,804 45,776 ---------- ---------- ---------- ---------- NON-GAAP ADJUSTED EBITDA $8,916 $11,968 $38,935 $41,934 ========== ========== ========== ========== EPIQ SYSTEMS, INC. AND SUBSIDIARIES RECONCILIATION OF NET INCOME (LOSS) TO NON-GAAP NET INCOME (In thousands) (Unaudited) Three months ended Twelve months ended --------------------- --------------------- Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2006 2005 2006 2005 ---------- ---------- ---------- ---------- NET INCOME (LOSS) $(2,093) $(4,045) $35,131 $(3,842) Plus (net of tax): Deferred revenue (SOP 97-2) - 5,752 (36,103) 14,790 Amortization of acquisition intangibles 1,789 1,367 7,036 4,084 Share-based compensation 2,215 - 3,306 - Acquisition related expense 20 1,736 171 1,805 Loan fee amortization 224 201 888 708 Non-cash embedded option charges 678 164 511 626 ---------- ---------- ---------- ---------- 4,926 9,220 (24,191) 22,013 ---------- ---------- ---------- ---------- NON-GAAP NET INCOME $2,833 $5,175 $10,940 $18,171 ========== ========== ========== ========== EPIQ SYSTEMS, INC. AND SUBSIDIARIES RECONCILIATION OF EPS TO NON-GAAP EPS (Unaudited) Three months ended Twelve months ended --------------------- --------------------- Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2006 (a) 2005 2006 2005 ---------- ---------- ---------- ---------- EPS (on a diluted basis) $(0.11) $(0.22) $1.58 $(0.21) Plus (net of tax): Deferred revenue (SOP 97-2) - 0.31 (1.57) 0.77 Amortization of acquisition intangibles 0.09 0.06 0.31 0.19 Share-based compensation 0.12 - 0.14 - Acquisition related expense - 0.08 0.01 0.08 Loan fee amortization 0.01 0.01 0.04 0.04 Non-cash embedded option charges 0.04 0.01 0.02 0.03 ---------- ---------- ---------- ---------- 0.26 0.47 (1.05) 1.11 ---------- ---------- ---------- ---------- NON-GAAP EPS (on a diluted basis) $0.15 $0.25 $0.53 $0.90 ========== ========== ========== ========== (a) The Non-GAAP EPS calculation excludes adjustments related to convertible debt as such adjustments are antidilutive. EPIQ SYSTEMS, INC. AND SUBSIDIARIES EPS CALCULATION (In thousands, except per share data) (Unaudited) Three months ended Twelve months ended --------------------- --------------------- Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2006 (b) 2005 (b) 2006 2005 (b) ---------- ---------- ---------- ---------- NET INCOME (LOSS) $(2,093) $(4,045) $35,131 $(3,842) Interest expense adjustment for convertible debt - - 1,209 - ---------- ---------- ---------- ---------- ADJUSTED FOR DILUTED CALCULATION $(2,093) $(4,045) $36,340 $(3,842) ========== ========== ========== ========== DILUTED WEIGHTED AVERAGE SHARES 19,477 18,627 19,399 18,092 Adjustment to reflect stock options - - 792 - Adjustment to reflect convertible debt shares - - 2,857 - ---------- ---------- ---------- ---------- ADJUSTED FOR DILUTED CALCULATION 19,477 18,627 23,048 18,092 ========== ========== ========== ========== NET INCOME (LOSS) PER SHARE - DILUTED $(0.11) $(0.22) $1.58 $(0.21) ========== ========== ========== ========== (b) Convertible debt is antidilutive and therefore excluded from EPS calculation. CONTACT: Epiq Systems, Inc. Mary Ellen Berthold, 913-621-9500 ir@epiqsystems.com -----END PRIVACY-ENHANCED MESSAGE-----