-----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, UliKznFWmK2LAKfRNe9tCcnZVwEMu4N0yhi1E6ys1jkWco7A9EStvXrizKZd79VD o4F5sbVYwsPZttsg9P81dw== 0001157523-07-010101.txt : 20071023 0001157523-07-010101.hdr.sgml : 20071023 20071023160037 ACCESSION NUMBER: 0001157523-07-010101 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20071023 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20071023 DATE AS OF CHANGE: 20071023 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: 071185723 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: KS ZIP: 66105-1309 FORMER COMPANY: FORMER CONFORMED NAME: ELECTRONIC PROCESSING INC DATE OF NAME CHANGE: 19961116 8-K 1 a5525865.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 October 23, 2007 (October 23, 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 October 23, 2007, Epiq Systems, Inc. issued a press release announcing its financial results for the quarter ended September 30, 2007. 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, loan fee amortization, share-based compensation expense, non-cash mark-to-market adjustments, and acquisition-related expense, all net of tax, and the effect of tax adjustments which are outside of our anticipated effective tax rate, 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 interest/financing, taxes, depreciation, amortization, share-based compensation, non-cash mark-to-market adjustments, and acquisition-related expenses; 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; 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; 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; and -1- o Mark-to-market adjustments represent non-cash charges related to our convertible debt embedded option and our interest rate floor options, adjusted to reflect straight-line amortization of the original cash expense to purchase the interest rate floors options. Management recognizes that its use of non-GAAP net income, as with any non-GAAP financial measure, has various limitations, including the fact that the adjusted item 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 non-GAAP adjusted EBITDA as it assesses its current and prospective operating results, and for assessing anticipated operating results for acquired businesses. Management uses non-GAAP adjusted EBITDA (i) in its strategic planning for the company and its business segments 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 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 deferred 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 initial deferral and subsequent recognition of revenue from this arrangement. In the comparison of 2007 financial results to the comparable period 2006 financial results by management, the 2006 results were adjusted, as applicable, 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. 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 October 23, 2007, reporting quarter ended September 30, 2007 financial results. -3- 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: October 23, 2007 By: /s/ Tom W. Olofson ------------------------- Name: Tom W. Olofson Title: Chairman of the Board and Chief Executive Officer -4- EX-99.1 2 a5525865ex991.txt EXHIBIT 99.1 Exhibit 99.1 Epiq Systems, Inc. Announces Third Quarter 2007 Results Led By 77% Growth for Electronic Discovery KANSAS CITY, Kan.--(BUSINESS WIRE)--Oct. 23, 2007--Epiq Systems, Inc. (NASDAQ: EPIQ) today announced results of operations for the third quarter of 2007 with operating revenue (total revenue less operating revenue from reimbursed direct costs) of $39.2 million compared to $38.2 million for the second quarter of 2007 and $34.4 million for the same period last year. September 30, 2007 year-to-date operating revenue was $112.5 million compared to $161.1 million for the prior year. The third quarter of 2006 and September 30, 2006 year-to-date revenue reflects the recognition of $6.0 million and $59.7 million, respectively, of revenue which had been previously deferred from the periods in which the related services had been provided. An expanded discussion of operating revenue is provided below. Net income for the third quarter of 2007 was $2.4 million, or $0.07 per share compared to $1.8 million or $0.06 per share for the second quarter of 2007 and $2.7 million or $0.09 per share for the year ago quarter. The third quarter of 2006 reflects the recognition of $6.0 million of revenue which had been previously deferred from the periods in which the services had been provided. September 30, 2007 year-to-date net income was $4.4 million, or $0.14 per share compared to $37.2 million or $1.10 per share for the prior year. September 30, 2006 year-to-date net income reflects recognition of $59.7 million of revenue which had been previously deferred from the periods in which the related services had been provided. These items are included as adjustments for the non-GAAP financial measures provided below. Third quarter 2007 net cash provided by operating activities was $8.6 million compared to $6.0 million for the second quarter of 2007 and $5.2 million for the year ago quarter. September 30, 2007 year-to-date net cash provided by operations was $23.4 million compared to $23.6 million for the same period in the prior year. A condensed consolidated cash flow statement is provided below. 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, non-cash mark-to-market adjustments 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, non-cash mark-to-market adjustments, acquisition-related expenses, the effect of tax adjustments which are outside of our anticipated effective tax rate, capitalized loan fee amortization, and adjustments 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 financial measures are provided below. Non-GAAP operating revenue for the third quarter of 2007 was $39.2 million compared to $38.2 million for the second quarter of 2007 and $28.4 million for the same period last year. Non-GAAP operating revenue for the third quarter of 2006 excludes $6.0 million of revenue earned in previous periods but recognized during the quarter. September 30, 2007 year-to-date non-GAAP operating revenue was $112.5 million compared to $101.4 million for the prior year. September 30, 2006 year-to-date non-GAAP operating revenue excludes $59.7 million of revenue that was earned in previous periods but recognized during the year-to-date period. Third quarter 2007 non-GAAP adjusted EBITDA was $13.4 million, compared to $12.3 million for the second quarter of 2007 and increased 86% compared to $7.2 million for the year ago quarter. September 30, 2007 year-to-date non-GAAP adjusted EBITDA of $37.1 million increased 23% compared to $30.0 million for the same period in the prior year. Non-GAAP net income for the third quarter of 2007 was $4.5 million or $0.13 per share, compared to $4.2 million or $0.12 per share for the second quarter of 2007 and $1.0 million or $0.04 per share for the year ago quarter. September 30, 2007 year-to-date non-GAAP net income was $12.2 million or $0.36 per share, compared to $8.1 million or $0.26 per share for the prior year. September 30, 2007 year-to-date non-GAAP net income excludes $1.6 million in non-cash mark-to-market adjustments compared to $(0.2) million for the prior year, net of tax. Operating revenue for Electronic Discovery for the third quarter of 2007 was $13.0 million, compared to $12.2 million for the second quarter of 2007 and a 77% increase compared to $7.4 million for the year ago quarter. September 30, 2007 year-to-date operating revenue was $35.3 million, a 53% increase compared $23.0 million for the prior year. New client engagements combined with increased work for existing clients and expansion of the international business contributed to the increase in operating revenue for the third quarter of 2007. Non-GAAP adjusted EBITDA for Electronic Discovery was $6.1 million, compared to $6.5 million for the second quarter of 2007 and an 87% increase compared to $3.3 million in the year ago quarter. September 30, 2007 year-to-date non-GAAP adjusted EBITDA was $17.8 million, a 58% increase compared to $11.3 million in the prior year. Non-GAAP operating revenue for the Bankruptcy Trustee business for the third quarter of 2007 was $8.4 million, compared to $8.3 million in the second quarter of 2007 and $8.3 million for the year ago quarter. September 30, 2007 year-to-date non-GAAP operating revenue was $25.0 million, compared to $25.8 million in the prior year. Changes in revenue are related to ordinary fluctuations in total bankruptcy deposits and caseloads across all clients. Retention of existing clients remains extremely high and we closed a variety of new client engagements during the third quarter. Non-GAAP adjusted EBITDA for the Bankruptcy Trustee business was $5.5 million compared to $5.8 million in the second quarter of 2007 and $5.6 million for the year ago quarter. September 30, 2007 year-to-date non-GAAP adjusted EBITDA was $17.0 million, compared to $17.5 million in the prior year. Non-GAAP adjusted EBITDA fluctuations between the quarters are primarily related to changes in operating revenue resulting from ordinary fluctuations in deposits and caseloads across all clients. Operating revenue for Settlements & Claims (which includes Chapter 11 bankruptcy, class action and related business) for the third quarter of 2007 was $17.8 million compared to $17.6 million in the second quarter of 2007 and $12.7 million in the year ago quarter. September 30, 2007 year-to-date operating revenue was $52.1 million, compared to $52.6 million in the prior year. Non-GAAP adjusted EBITDA for Settlements & Claims was $7.1 million for the third quarter of 2007 compared to $5.0 million in the second quarter of 2007 and $2.6 million for the year ago quarter. September 30, 2007 year-to-date non-GAAP adjusted EBITDA was $17.1 million, compared to $12.9 million in the prior year. Tom W. Olofson, chairman and CEO, and Christopher E. Olofson, president and COO of Epiq Systems stated, "We are very pleased to have concluded the quarter with record monthly revenue for electronic discovery. In addition to the significant increase compared with the prior year, we achieved sequential quarterly growth in both operating revenue and non-GAAP net income despite customary summertime seasonality. "We enter the fourth quarter with optimism, as every one of our segments has strong momentum. Our trustee services unit has won new business, and our settlement & claims business has been retained on our all-time largest multi-year individual client engagement. In electronic discovery, we continue to grow our customer relationships and introduce major enhancements to our proprietary software." Recent key events include: -- A major software release of DocuMatrix(TM), our eDiscovery software, and upgrades to our TCMS(R) and TCMSWeb bankruptcy trustee case management software. -- 40% growth in the number of electronic discovery client relationships since the end of 2006. -- A top-5 ranking for eDiscovery services to corporate customers on the 2007 Socha Gelbmann 5th Annual Electronic Discovery survey. -- Win of the company's all-time largest multi-year individual client engagement in the class action market. -- Filing of a $150.0 million shelf registration statement in August with the Securities Exchange Commission to support long-term strategic business expansion. -- Total bankruptcy filings have increased each quarter for each of the past five quarters. -- The Federal Reserve reported that both corporate debt and consumer credit increased compared to the prior year, reaching $6.0 trillion and $2.5 trillion, respectively, as of June 30, 2007. 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 888-459-5609 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 November 30, 2007 beginning approximately two hours after the call ends. To access the replay, call 877-519-4471 and enter pin #9343160. 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) any material changes in our total number of client engagements and the volume associated with each engagement, (2) any material changes in our client's deposit portfolio or the services required or selected by our clients in engagements, (3) material changes in the number of bankruptcy filings, class action filings or mass tort actions each year, (4) risks associated with handling of confidential data and compliance with information privacy laws, (5) changes in pricing structures and arrangements, (6) risks associated with the integration of acquisitions into our existing business operations, (7) risks associated with our indebtedness, (8) 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, and (9) 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 INCOME (In thousands, except per share data) (Unaudited) Three months ended Nine months ended September 30, September 30, ------------------ ----------------- 2007 2006 2007 2006 --------- -------- -------- -------- REVENUE: Case management services $26,536 $16,980 $71,069 $54,064 Case management bundled products and services 6,728 12,818 20,139 80,511 Document management services 5,921 4,591 21,242 26,495 --------- -------- -------- -------- Operating revenue before reimbursed direct costs 39,185 34,389 112,450 161,070 Operating revenue from reimbursed direct costs 5,662 4,643 17,730 16,676 --------- -------- -------- -------- Total Revenue 44,847 39,032 130,180 177,746 --------- -------- -------- -------- OPERATING EXPENSES: Direct costs of services 9,355 8,299 30,101 33,427 Direct costs of services - bundled 998 961 2,782 2,976 Reimbursed direct costs 5,593 4,685 17,625 16,852 General and administrative 16,208 12,411 44,383 36,469 Depreciation and software and leasehold amortization 3,272 2,633 9,071 7,424 Amortization of identifiable intangible assets 2,352 3,027 7,228 8,672 Other operating expenses 565 - 565 250 --------- -------- -------- -------- Total Operating Expenses 38,343 32,016 111,755 106,070 --------- -------- -------- -------- INCOME FROM OPERATIONS 6,504 7,016 18,425 71,676 --------- -------- -------- -------- INTEREST EXPENSE (INCOME): Interest income (10) (23) (42) (111) Interest expense 2,168 2,523 10,615 9,215 --------- -------- -------- -------- Net Interest Expense 2,158 2,500 10,573 9,104 --------- -------- -------- -------- INCOME BEFORE INCOME TAXES 4,346 4,516 7,852 62,572 PROVISION FOR INCOME TAXES 1,922 1,835 3,485 25,348 --------- -------- -------- -------- NET INCOME $2,424 $2,681 $4,367 $37,224 ========= ======== ======== ======== NET INCOME PER SHARE INFORMATION: Net income per share - Diluted $0.07 $0.09 $0.14 $1.10 ========= ======== ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED 36,704 34,366 31,803 34,597 ========= ======== ======== ======== EPIQ SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) September 30, December 31, 2007 2006 -------------- ------------- ASSETS ASSETS: Cash and cash equivalents $2,854 $5,274 Trade accounts receivable, net 36,219 33,066 Property, equipment and leasehold improvements, net 32,147 23,153 Goodwill 260,933 260,609 Other intangibles, net 36,612 43,840 Other 15,986 16,278 -------------- ------------- Total Assets $384,751 $382,220 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable $6,819 $7,930 Indebtedness 139,484 154,361 Other liabilities 40,508 35,750 STOCKHOLDERS' EQUITY 197,940 184,179 -------------- ------------- Total Liabilities and Stockholders' Equity $384,751 $382,220 ============== ============= EPIQ SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three months ended Nine months ended September 30, September 30, ------------------ ----------------- 2007 2006 2007 2006 --------- -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $2,424 $2,681 $4,367 $37,224 Non-cash adjustments to net income: Depreciation and amortization 5,624 5,660 16,299 16,096 Other, net 728 1,981 3,597 24,670 Changes in operating assets and liabilities, net (203) (5,073) (827) (54,415) --------- -------- -------- -------- Net cash provided by operating activities 8,573 5,249 23,436 23,575 --------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for business combinations, net - (101) - (3,586) Other (8,285) (1,991) (15,348) (8,502) --------- -------- -------- -------- Net cash used in investing activities (8,285) (2,092) (15,348) (12,088) --------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net payments on indebtedness (1,902) (6,923) (19,834) (23,643) Other 692 979 9,326 2,619 --------- -------- -------- -------- Net cash used in financing activities (1,210) (5,944) (10,508) (21,024) --------- -------- -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS $(922) $(2,787) $(2,420) $(9,537) ========= ======== ======== ======== EPIQ SYSTEMS, INC. AND SUBSIDIARIES RECONCILIATION OF OPERATING REVENUE TO NON-GAAP OPERATING REVENUE (In thousands) (Unaudited) Three months ended Nine months ended ---------------------------- -------------------- September June September September September 30, 30, 30, 30, 30, 2007 2007 2006 2007 2006 ---------- ------- --------- ---------- --------- OPERATING REVENUE BEFORE REIMBURSED DIRECT COSTS $39,185 $38,171 $34,389 $112,450 $161,070 Less: Deferred revenue (SOP 97-2) - - (6,027) - (59,674) ---------- ------- --------- ---------- --------- NON-GAAP OPERATING REVENUE $39,185 $38,171 $28,362 $112,450 $101,396 ========== ======= ========= ========== ========= 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 principles 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 BANKRUPTCY TRUSTEE OPERATING REVENUE TO BANKRUPTCY TRUSTEE NON-GAAP OPERATING REVENUE (In thousands) (Unaudited) Three months ended Nine months ended -------------------------- ------------------- September June September September September 30, 30, 30, 30, 30, 2007 2007 2006 2007 2006 --------- ------ --------- --------- --------- OPERATING REVENUE BEFORE REIMBURSED DIRECT COSTS $8,417 $8,329 $14,369 $25,012 $85,459 Less: Deferred revenue (SOP 97-2) - - (6,027) - (59,674) --------- ------ --------- --------- --------- NON-GAAP OPERATING REVENUE $8,417 $8,329 $8,342 $25,012 $25,785 ========= ====== ========= ========= ========= EPIQ SYSTEMS, INC. AND SUBSIDIARIES RECONCILIATION OF NET INCOME TO NON-GAAP ADJUSTED EBITDA (In thousands) (Unaudited) Three months ended Nine months ended --------------------------- ------------------- September June September September September 30, 30, 30, 30, 30, 2007 2007 2006 2007 2006 --------- ------- --------- --------- --------- NET INCOME $2,424 $1,794 $2,681 $4,367 $37,224 Deferred revenue (SOP 97-2) - - (6,027) - (59,674) Acquisition related expense - - - - 250 Depreciation and amortization 5,624 5,189 5,660 16,299 16,096 Share-based compensation 795 703 579 1,809 1,671 Expenses related to financing, net 2,158 3,320 2,500 10,573 9,104 Mark-to-market interest rate floors 521 - - 521 - Provision for income taxes 1,922 1,328 1,835 3,485 25,348 --------- ------- --------- --------- --------- 11,020 10,540 4,547 32,687 (7,205) --------- ------- --------- --------- --------- NON-GAAP ADJUSTED EBITDA $13,444 $12,334 $7,228 $37,054 $30,019 ========= ======= ========= ========= ========= EPIQ SYSTEMS, INC. AND SUBSIDIARIES RECONCILIATION OF SEGMENT PERFORMANCE MEASURE TO BANKRUPTCY TRUSTEE NON-GAAP ADJUSTED EBITDA (In thousands) (Unaudited) Three months ended Nine months ended --------------------------- -------------------- September June September September September 30, 30, 30, 30, 30, 2007 2007 2006 2007 2006 ---------- ------ --------- ---------- --------- SEGMENT PERFORMANCE MEASURE $5,485 $5,792 $11,639 $17,013 $77,133 Deferred revenue (SOP 97-2) - - (6,027) - (59,674) ---------- ------ --------- ---------- --------- NON-GAAP ADJUSTED EBITDA $5,485 $5,792 $5,612 $17,013 $17,459 ========== ====== ========= ========== ========= EPIQ SYSTEMS, INC. AND SUBSIDIARIES RECONCILIATION OF NET INCOME TO NON-GAAP NET INCOME (In thousands) (Unaudited) Three months ended Nine months ended ---------------------------- -------------------- September June September September September 30, 30, 30, 30, 30, 2007 2007 2006 2007 2006 ---------- ------- --------- ---------- --------- NET INCOME $2,424 $1,794 $2,681 $4,367 $37,224 Plus (net of tax): Deferred revenue (SOP 97-2) - - (3,646) - (36,103) Amortization of acquisition intangibles 1,423 1,423 1,831 4,373 5,247 Share-based compensation 504 444 374 1,170 1,091 Acquisition related expense - - - - 151 Effective tax rate 67 (2) - 132 - Loan fee amortization 80 216 222 534 663 Mark-to-market adjustments 31 314 (441) 1,640 (168) ---------- ------- --------- ---------- --------- 2,105 2,395 (1,660) 7,849 (29,119) ---------- ------- --------- ---------- --------- NON-GAAP NET INCOME $4,529 $4,189 $1,021 $12,216 $8,105 ========== ======= ========= ========== ========= EPIQ SYSTEMS, INC. AND SUBSIDIARIES RECONCILIATION OF EPS TO NON-GAAP EPS (Unaudited) Three months ended Nine months ended -------------------------- -------------------- September June September September September 30, 30, 30, 30, 30, 2007 2007 2006 2007 2006 ---------- ----- --------- ---------- --------- EPS (on a diluted basis) $0.07 $0.06 $0.09 $0.14 $1.10 Plus (net of tax): Deferred revenue (SOP 97-2) - - (0.11) - (1.04) Amortization of acquisition intangibles 0.05 0.03 0.05 0.13 0.15 Share-based compensation 0.01 0.01 0.01 0.03 0.03 Acquisition related expense - - - - - Effective tax rate - - - - - Loan fee amortization - 0.01 0.01 0.01 0.02 Mark-to-market adjustments - 0.01 (0.01) 0.05 - ---------- ----- --------- ---------- --------- 0.06 0.06 (0.05) 0.22 (0.84) ---------- ----- --------- ---------- --------- NON-GAAP EPS (on a diluted basis) $0.13 $0.12 $0.04 $0.36 $0.26 ========== ===== ========= ========== ========= EPIQ SYSTEMS, INC. AND SUBSIDIARIES NON-GAAP REVENUE (In thousands) (Unaudited) Three months ended Nine months ended ------------------------------- ----------------------- September June September September September 30, 30, 30, 30, 30, 2007 2007 2006 2007 2006 ----------- ------- ----------- ----------- ----------- Electronic Discovery $13,003 $12,224 $7,354 $35,339 $23,046 Bankruptcy Trustee 8,417 8,329 8,342 25,012 25,785 Settlements & Claims 17,765 17,618 12,666 52,099 52,565 ----------- ------- ----------- ----------- ----------- NON-GAAP OPERATING REVENUE BEFORE REIMBURSED DIRECT COSTS $39,185 $38,171 $28,362 $112,450 $101,396 =========== ======= =========== =========== =========== EPIQ SYSTEMS, INC. AND SUBSIDIARIES NON-GAAP ADJUSTED EBITDA (In thousands) (Unaudited) Three months ended Nine months ended ---------------------------- ------------------- September June 30, September September September 30, 30, 30, 30, 2007 2007 2006 2007 2006 --------- -------- --------- --------- --------- Electronic Discovery $6,111 $6,454 $3,264 $17,776 $11,270 Bankruptcy Trustee 5,485 5,792 5,612 17,013 17,459 Settlements & Claims 7,108 5,033 2,580 17,125 12,891 Unallocated (5,260) (4,945) (4,228) (14,860) (11,601) --------- -------- --------- --------- --------- TOTAL NON-GAAP ADJUSTED EBITDA $13,444 $12,334 $7,228 $37,054 $30,019 ========= ======== ========= ========= ========= EPIQ SYSTEMS, INC. AND SUBSIDIARIES EPS CALCULATION (In thousands, except per share data) (Unaudited) Three months ended Nine months ended --------------------------- ------------------- September June September September September 30, 30, 30, 30, 30, 2007 2007(a) 2006 2007(a) 2006 --------- ------- --------- --------- --------- NET INCOME $2,424 $1,794 $2,681 $4,367 $37,224 Interest expense adjustment for convertible debt 305 - 305 - 904 --------- ------- --------- --------- --------- ADJUSTED FOR DILUTED CALCULATION $2,729 $1,794 $2,986 $4,367 $38,128 ========= ======= ========= ========= ========= DILUTED WEIGHTED AVERAGE SHARES 30,185 29,848 29,162 29,770 29,057 Adjustment to reflect stock options 2,233 2,132 918 2,033 1,254 Adjustment to reflect convertible debt shares 4,286 - 4,286 - 4,286 --------- ------- --------- --------- --------- ADJUSTED FOR DILUTED CALCULATION 36,704 31,980 34,366 31,803 34,597 ========= ======= ========= ========= ========= NET INCOME PER SHARE - DILUTED $0.07 $0.06 $0.09 $0.14 $1.10 ========= ======= ========= ========= ========= (a) 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-----