**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D. C. 20549**

 

**FORM10-Q**

 

**QuarterlyReport Under Section 13 or 15(d)**

**ofthe Securities Exchange Act of 1934**

** **

**For the Quarterly Period Ended June 30, 2003**

 

**OR**

 

**TransitionReport Pursuant to Section 13 or 15(d)**

**ofthe Securities Exchange Act of 1934**

 

**For the transition period from                   to**

 

**CommissionFile Number 0-22081**

 

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**EPIQSYSTEMS, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Missouri**                                                     |   | **48-1056429**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction  of  incorporation or organization) |   | (IRS Employer  Identification Number) |
|                                                             |   |                                  |
| **501  Kansas Avenue, Kansas City, Kansas 66105-1300**           |
| (Address of  principal executive office)                         |
|                                                             |   |                                  |
| **913-621-9500**                                                 |
| (Registrant’s  telephone number)                            |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days  Yes  ýNo  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct). Yes ý  No o

 

The number of sharesoutstanding of registrant’s common stock at July 22, 2003:

 

 

| **Class**                     |   | **Outstanding** |
|-------------------------------|--------|-----------------|
| Common Stock,  $.01 par value |   | 17,753,047      |

 

 

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**EPIQ SYSTEMS, INC. AND SUBSIDIARY**

**FORM 10-Q**

**QUARTER ENDED JUNE 30, 2003**

 

 

**CONTENTS**

 
| **PART I - FINANCIAL  INFORMATION** |                                                                                                                       |
|-------------------------------------|----------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                       | **Pages** |
| Item 1.                             | Financial Statements                                                                                                       |   |
|                                |                                                                                                                       |   |
|                                | Condensed  Consolidated Statements of Income –   Three months and six months ended June 30, 2003 and 2002 (Unaudited) | 2 |
|                                |                                                                                                                       |   |
|                                | Condensed Consolidated  Balance Sheets –   June 30, 2003 (Unaudited) and December 31, 2002                            | 3 |
|                                |                                                                                                                       |   |
|                                | Condensed  Consolidated Statements of Cash Flows –  Six months ended June 30, 2003 and 2002 (Unaudited)               | 4 |
|                                |                                                                                                                       |   |
|                                | Notes  to Condensed Consolidated Financial Statements (Unaudited)                                                          | 5 |
|                                |                                                                                                                       |   |
| Item  2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                | 12 |
|                                |                                                                                                                       |   |
| Item  3.                            | Quantitative  and Qualitative Disclosures About Market Risk                                                                | 16 |
|                                |                                                                                                                       |   |
| Item 4.                             | Controls and Procedures                                                                                                    | 16 |
|                                |                                                                                                                       |   |
| **PART II - OTHER INFORMATION**     |                                                                                                                       |
|                                |                                                                                                                       |   |
| Item  4.                            | Submission  of Matters to a Vote of Security Holders                                                                       | 17 |
|                                |                                                                                                                       |   |
| Item 6.                             | Exhibits and  Reports on Form 8-K                                                                                          | 17 |
|                                |                                                                                                                       |   |
| Signatures                          |                                                                                                                       | 18 |
|                                     |                                                                                                                            |  |  |

 

1

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**PART I -FINANCIAL INFORMATION**

 

**ITEM 1. Financial Statements.**

 

##### **EPIQ SYSTEMS, INC. AND SUBSIDIARY**

##### **CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

**(InThousands, Except Per Share Data)**

**(Unaudited)**

** **
|                                            |   | **Three  months ended   June 30,** |   | **Six  months ended   June 30,** |   |
|-------------------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                                            |   | **2003**                           |   | **2002**                         |   | **2003** |   | **2002** |   |
|                                            |   |                               |   |                             |   |   |   |   |   |
| **OPERATING REVENUES:**                         |   |                               |   |                             |   |   |   |   |   |
| Bankruptcy  case management fees                |   | $                                  | 10,235 |                             | $      | 7,067 |   | $ | 20,214 |   | $ | 14,725 |   |
| Bankruptcy  professional services               |   | 6,849                              |   | 1,554                            |   | 10,945 |   | 2,404 |   |
| Infrastructure  software and other              |   | 478                                |   | 455                              |   | 1,038 |   | 943 |   |
| Total  Operating Revenues                       |   | 17,562                             |   | 9,076                            |   | 32,197 |   | 18,072 |   |
|                                            |   |                               |   |                             |   |   |   |   |   |
| **COST OF SALES:**                              |   |                               |   |                             |   |   |   |   |   |
| Cost  of products and services                  |   | 4,283                              |   | 1,797                            |   | 7,464 |   | 3,591 |   |
| Depreciation  and amortization                  |   | 1,210                              |   | 1,190                            |   | 2,504 |   | 2,320 |   |
| Total  Cost of Sales                            |   | 5,493                              |   | 2,987                            |   | 9,968 |   | 5,911 |   |
|                                            |   |                               |   |                             |   |   |   |   |   |
| **GROSS PROFIT**                                |   | 12,069                             |   | 6,089                            |   | 22,229 |   | 12,161 |   |
|                                            |   |                               |   |                             |   |   |   |   |   |
| **OPERATING EXPENSES:**                         |   |                               |   |                             |   |   |   |   |   |
| General  and administrative                     |   | 4,697                              |   | 2,917                            |   | 8,737 |   | 5,880 |   |
| Depreciation                                    |   | 202                                |   | 136                              |   | 371 |   | 257 |   |
| Amortization—intangibles                   |   | 1,013                              |   | 116                              |   | 1,732 |   | 233 |   |
| Acquisition  related                            |   | —                             |   | —                           |   | 1,485 |   | — |   |
| Total  Operating Expenses                       |   | 5,912                              |   | 3,169                            |   | 12,325 |   | 6,370 |   |
|                                            |   |                               |   |                             |   |   |   |   |   |
| **INCOME FROM OPERATIONS**                      |   | 6,157                              |   | 2,920                            |   | 9,904 |   | 5,791 |   |
|                                            |   |                               |   |                             |   |   |   |   |   |
| **INTEREST INCOME (EXPENSE):**                  |   |                               |   |                             |   |   |   |   |   |
| Interest  income                                |   | 57                                 |   | 115                              |   | 170 |   | 250 |   |
| Interest  expense                               |   | (54                                | )      | (18                              | )      | (97 | ) | (40 | ) |
| Net  Interest Income                            |   | 3                                  |   | 97                               |   | 73 |   | 210 |   |
|                                            |   |                               |   |                             |   |   |   |   |   |
| **INCOME BEFORE INCOME TAXES**                  |   | 6,160                              |   | 3,017                            |   | 9,977 |   | 6,001 |   |
|                                            |   |                               |   |                             |   |   |   |   |   |
| **PROVISION FOR INCOME TAXES**                  |   | 2,552                              |   | 1,141                            |   | 4,057 |   | 2,272 |   |
|                                            |   |                               |   |                             |   |   |   |   |   |
| **NET INCOME**                                  |   | $                                  | 3,608  |                             | $      | 1,876 |   | $ | 5,920 |   | $ | 3,729 |   |
|                                            |   |                               |   |                             |   |   |   |   |   |
| **NET INCOME PER SHARE INFORMATION:**           |   |                               |   |                             |   |   |   |   |   |
| Basic                                           |   | $                                  | 0.20   |                             | $      | 0.13 |   | $ | 0.34 |   | $ | 0.26 |   |
| Diluted                                         |   | $                                  | 0.20   |                             | $      | 0.13 |   | $ | 0.33 |   | $ | 0.25 |   |
|                                            |   |                               |   |                             |   |   |   |   |   |
| **WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:** |   |                               |   |                             |   |   |   |   |   |
| Basic                                           |   | 17,687                             |   | 14,446                           |   | 17,470 |   | 14,428 |   |
| Diluted                                         |   | 18,204                             |   | 14,951                           |   | 17,987 |   | 14,974 |   |

 

**Seeaccompanying notes to condensed consolidated financial statements.**

 

2

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**EPIQSYSTEMS, INC. AND SUBSIDIARY**

##### **CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(InThousands, Except Share Data)**

**(Unaudited)**

** **
|                                                                                                                                                                                  |   | **June  30,   2003** |    | **December  31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|---------|-------------------------|--------|
| **ASSETS:**                                                                                                                                                                           |   |                 |    |                    |   |
| **CURRENT ASSETS:**                                                                                                                                                                   |   |                 |    |                    |   |
| Cash  and cash equivalents                                                                                                                                                            |   | $                    | 20,818  |                    | $      | 59,827 |   |
| Accounts  receivable, trade, less allowance for doubtful accounts of $244 and $31,  respectively                                                                                      |   | 10,772               |    | 5,647                   |   |
| Prepaid  expenses and other                                                                                                                                                           |   | 744                  |    | 962                     |   |
| Refundable  income taxes                                                                                                                                                              |   | 407                  |    | —                  |   |
| Total  Current Assets                                                                                                                                                                 |   | 32,741               |    | 66,436                  |   |
|                                                                                                                                                                                  |   |                 |    |                    |   |
| **PROPERTY AND EQUIPMENT, net**                                                                                                                                                       |   | 12,685               |    | 11,886                  |   |
| **SOFTWARE DEVELOPMENT COSTS, net**                                                                                                                                                   |   | 5,003                |    | 4,336                   |   |
|                                                                                                                                                                                  |   |                 |    |                    |   |
| **OTHER ASSETS:**                                                                                                                                                                     |   |                 |    |                    |   |
| Goodwill                                                                                                                                                                              |   | 68,014               |    | 21,275                  |   |
| Other  intangibles, net of accumulated amortization of $2,783 and $1,051,  respectively                                                                                               |   | 19,191               |    | 4,019                   |   |
| Other                                                                                                                                                                                 |   | 67                   |    | 85                      |   |
| Total  Other Assets, net                                                                                                                                                              |   | 87,272               |    | 25,379                  |   |
| **Total Assets**                                                                                                                                                                      |   | $                    | 137,701 |                    | $      | 108,037 |   |
|                                                                                                                                                                                  |   |                 |    |                    |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY:**                                                                                                                                       |   |                 |    |                    |   |
| **CURRENT LIABILITIES:**                                                                                                                                                              |   |                 |    |                    |   |
| Accounts  payable                                                                                                                                                                     |   | $                    | 1,753   |                    | $      | 1,076 |   |
| Accrued  expenses                                                                                                                                                                     |   | 2,396                |    | 663                     |   |
| Income  taxes payable                                                                                                                                                                 |   | —               |    | 290                     |   |
| Deferred  revenue                                                                                                                                                                     |   | 881                  |    | 868                     |   |
| Deferred  income tax                                                                                                                                                                  |   | 62                   |    | 106                     |   |
| Current  portion of deferred acquisition price                                                                                                                                        |   | 684                  |    | 241                     |   |
| Current  maturities of long-term obligations                                                                                                                                          |   | 95                   |    | 97                      |   |
| Total  Current Liabilities                                                                                                                                                            |   | 5,871                |    | 3,341                   |   |
|                                                                                                                                                                                  |   |                 |    |                    |   |
| **DEFERRED REVENUE**                                                                                                                                                                  |   | 44                   |    | 52                      |   |
| **LONG-TERM OBLIGATIONS (less current portion)**                                                                                                                                      |   | 17                   |    | 66                      |   |
| **DEFERRED ACQUISITION PRICE (less current portion)**                                                                                                                                 |   | 3,066                |    | 223                     |   |
| **DEFERRED INCOME TAXES**                                                                                                                                                             |   | 2,487                |    | 1,980                   |   |
| Total  Liabilities                                                                                                                                                                    |   | 11,485               |    | 5,662                   |   |
|                                                                                                                                                                                  |   |                 |    |                    |   |
| **STOCKHOLDERS’ EQUITY:**                                                                                                                                                        |   |                 |    |                    |   |
| Preferred  stock—$1 par value; 2,000,000 shares authorized; none issued and outstanding                                                                                          |   | —               |    | —                  |   |
| Common  stock—$0.01 par value; 50,000,000 shares authorized; issued and  outstanding—17,749,389 and 16,538,287 shares at June 30, 2003 and December  31, 2002, respectively |   | 177                  |    | 165                     |   |
| Additional  paid-in capital                                                                                                                                                           |   | 101,640              |    | 83,730                  |   |
| Retained  earnings                                                                                                                                                                    |   | 24,399               |    | 18,480                  |   |
| Total  Stockholders’ Equity                                                                                                                                                      |   | 126,216              |    | 102,375                 |   |
| **Total Liabilities and Stockholders’ Equity**                                                                                                                                   |   | $                    | 137,701 |                    | $      | 108,037 |   |

 

**Seeaccompanying notes to condensed consolidated financial statements.**

 

3

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**EPIQSYSTEMS, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(InThousands)**

**(Unaudited)**

 
|                                                                                     |   | **Six Months  Ended June 30,** |   |
|------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                     |   | **2003**                       |   | **2002** |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                |   |                           |   |   |   |
| Net  income                                                                              |   | $                              | 5,920  |   | $ | 3,729 |   |
| Adjustments  to reconcile net income to net cash from operating activities:              |   |                           |   |   |   |
| Provision  for deferred income taxes                                                     |   | 463                            |   | 390 |   |
| Depreciation  and amortization                                                           |   | 1,883                          |   | 1,768 |   |
| Amortization  of software development costs                                              |   | 992                            |   | 809 |   |
| Amortization  of other intangible assets                                                 |   | 1,732                          |   | 233 |   |
| Loss  on disposal or sale of equipment                                                   |   | 24                             |   | 80 |   |
| Accretion  of discount on deferred acquisition price                                     |   | 90                             |   | 27 |   |
| Changes  in operating assets and liabilities, net of effects from business  acquisition: |   |                           |   |   |   |
| Accounts  receivable                                                                     |   | (5,125                         | )      | (3,112 | ) |
| Prepaid  expenses and other assets                                                       |   | 297                            |   | (149 | ) |
| Accounts  payable and accrued expenses                                                   |   | 1,160                          |   | (625 | ) |
| Deferred  revenue                                                                        |   | 6                              |   | 191 |   |
| Income  taxes, including tax benefit from exercise of stock options                      |   | (12                            | )      | 588 |   |
| Net  cash from operating activities                                                      |   | 7,430                          |   | 3,929 |   |
|                                                                                     |   |                           |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                |   |                           |   |   |   |
| Purchase  of property and equipment                                                      |   | (2,313                         | )      | (3,277 | ) |
| Proceeds  from sale of property and equipment                                            |   | 20                             |   | 60 |   |
| Software  development costs                                                              |   | (1,318                         | )      | (961 | ) |
| Settlement  of contingencies from previous acquisition                                   |   | —                         |   | 170 |   |
| Cash  paid for acquisition of business, net of cash acquired                             |   | (43,263                        | )      | — |   |
| Net  cash from investing activities                                                      |   | (46,874                        | )      | (4,008 | ) |
|                                                                                     |   |                           |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                |   |                           |   |   |   |
| Principal  payments under capital lease obligations                                      |   | (51                            | )      | (55 | ) |
| Principal  payments on long-term debt                                                    |   | (250                           | )      | (250 | ) |
| Direct  costs associated with stock offering                                             |   | (114                           | )      | — |   |
| Proceeds  from exercise of stock options and warrants                                    |   | 850                            |   | 254 |   |
| Net  cash from financing activities                                                      |   | 435                            |   | (51 | ) |
|                                                                                     |   |                           |   |   |   |
| **NET DECREASE IN CASH AND CASH EQUIVALENTS**                                            |   | (39,009                        | )      | (130 | ) |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD**                                       |   | 59,827                         |   | 25,306 |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                             |   | $                              | 20,818 |   | $ | 25,176 |   |
|                                                                                     |   |                           |   |   |   |
| Supplemental  disclosures of cash flow information:                                      |   |                           |   |   |   |
| Interest  paid                                                                           |   | $                              | 8      |   | $ | 13 |   |
| Income  taxes paid                                                                       |   | $                              | 3,605  |   | $ | 1,293 |   |

 

**Seeaccompanying notes to condensed consolidated financial statements.**

 

4

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**EPIQSYSTEMS, INC. AND SUBSIDIARY**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**NOTE1:   NATURE OF OPERATIONS AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

***Nature of Operations***

 

EPIQ Systems, Inc.and subsidiary (the “Company”) is a national provider of technology-basedsolutions to law firms and attorneys who work in the federal bankruptcy systemand to companies that have filed for bankruptcy reorganization.  The Company’s products provide a singleenvironment in which its customers administer cases, automating variousadministrative tasks pertaining to bankruptcy claims, assets, financial recordsand other data associated with liquidations and reorganizations.  In addition to the Company’s bankruptcymanagement business, the infrastructure software division develops filetransfer software used by companies in various industries.

 

***Comprehensive Income***

 

The Company has no components of other comprehensiveincome; therefore comprehensive income equals net income.

 

***Stock-BasedCompensation***

 

The Company has adopted the disclosure provisions ofStatement of Financial Accounting Standards (SFAS) No. 148, *Accounting for Stock-Based Compensation-Transitionand Disclosure, an amendment of FASB Statement No. 123*. TheStatement requires prominent disclosures in both annual and interim financialstatements regarding the method of accounting for stock-based employeecompensation and the effect of the method used on reported results. The Companyaccounts for stock compensation awards under the intrinsic method of AccountingPrinciples Board Opinion No. 25, which requires compensation cost to berecognized based on the excess, if any, between the quoted market price at thedate of grant and the amount an employee must pay to acquire stock. Optionsawarded under the Company’s plan are granted with an exercise price equal tothe fair market value on the date of the grant. Had the compensation cost beendetermined based on the fair value at the grant dates using SFAS No. 123, theCompany’s net income and net income per share for the three and six monthsended June 30, 2003 and 2002 would have been adjusted to the following proforma amounts:

 
|                                                                                                                |   |            |       | **(In Thousands, Except Per Share Data)** |       |
|---------------------------------------------------------------------------------------------------------------------|--------|-----------------|------------|-------------------------------------------|------------|
|                                                                                                                |   |            |       | **Three Months Ended****June 30,**        |       | **Six Months Ended****June 30,** |   |
|                                                                                                                |   |            |       | **2003**                                  |       | **2002** |   | **2003** |   | **2002** |   |
|                                                                                                                |   |            |       |                                      |       |   |   |   |   |   |   |
| **Net income, as reported**                                                                                         |   |            |       | **$**                                     | **3,608**  | ** ** | **$** | **1,876** | ** ** | **$** | **5,920** | ** ** | **$** | **3,729** | ** ** |
|                                                                                                                |   |            |       |                                      |       |   |   |   |   |   |   |
| Deduct:  Total stock-based employee compensation  expense determined under fair value based method, net of tax |   |            |       | (983                                      | )          | (261 | ) | (1,576 | ) | (433 | ) |
| Net income, pro forma                                                                                               |   | $               | 2,625      |                                      | $          | 1,615 |   | $ | 4,344 |   | $ | 3,296 |   |
|                                                                                                                |   |            | ** ** |                                      | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Net  income per share – Basic**                                                                              |   | **As reported** | ** ** | **$**                                     | **0.20**   | ** ** | **$** | **0.13** | ** ** | **$** | **0.34** | ** ** | **$** | **0.26** | ** ** |
|                                                                                                                |   | **Pro forma**   |       | **$**                                     | **0.15**   | ** ** | **$** | **0.11** | ** ** | **$** | **0.25** | ** ** | **$** | **0.23** | ** ** |
|                                                                                                                |   |            | ** ** |                                      | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Net  income per share – Diluted**                                                                            |   | **As reported** | ** ** | **$**                                     | **0.20**   | ** ** | **$** | **0.13** | ** ** | **$** | **0.33** | ** ** | **$** | **0.25** | ** ** |
|                                                                                                                |   | **Pro forma**   |       | **$**                                     | **0.14**   | ** ** | **$** | **0.11** | ** ** | **$** | **0.24** | ** ** | **$** | **0.22** | ** ** |

 

Pro forma amounts presented here are based on actualearnings and consider only the effects of estimated fair values of stockoptions.

 

5

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***Recent Accounting Pronouncements***

 

In August 2001, theFinancial Accounting Standards Board (FASB) issued SFAS No. 143, *Accounting for Asset Retirement Obligations*.  SFAS No. 143 requires the recognition of aliability if a company has a legal or contractual financial obligation inconnection with the retirement of a tangible long-lived asset.  The Company’s adoption of this standard asof January 1, 2003 did not have a material effect on its financial position,results of operations or cash flows.

 

In April 2002, the FASBissued SFAS No. 145, *Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections* principally to eliminate an inconsistency between therequired accounting for sale-leaseback transactions and the required accountingfor certain lease modifications that have economic effects that are similar tosale-leaseback transactions.  TheCompany’s adoption of this standard as of January 1, 2003 did not have amaterial effect on its financial position, results of operations or cash flows.

 

In June 2002, the FASBissued SFAS No. 146, *Accounting for CostsAssociated With Exit or Disposal Activities*, which is effective forany activity initiated after December 31, 2002.  This SFAS modifies the timing and measurement of the recognitionof costs associated with an exit or disposal activity and nullifies EITF IssueNo. 94-3, *Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring)*.  The Company’s adoption of this standard asof January 1, 2003 did not have a material effect on its financialposition, results of operations or cash flows.

 

In April 2003, the FASBissued SFAS No. 149, *Amendment of Statement133 on Derivative Instruments and Hedging Activities*.  SFAS No. 149 amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts and for hedging activitiesunder SFAS No. 133.  SFAS No. 149 iseffective for contracts entered into or modified after June 30, 2003.  The Company is currently assessing theimpact that adoption of this statement will have on its consolidated financialstatements, but does not expect the impact to be material.

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity*. SFAS No. 150 revises the accounting for certain financial instrumentsthat, under previous guidance, issuers could account for as equity.  SFAS No. 150 requires that those instrumentsbe classified as liabilities in statements of financial position.  SFAS No. 150 is effective for all financialinstruments entered into or modified after May 31, 2003 and is otherwise effectiveat the beginning of the first interim period beginning after June 15,2003.  The Company is currentlyassessing the impact that adoption of this statement will have on itsconsolidated financial statements, but does not expect the impact to be material.

 

In November 2002, the FASB issued InterpretationNo. 45 (FIN 45), *Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others*. FIN 45 elaborates on the existing disclosure requirements for mostguarantees.  FIN 45 requires that atthe time a company issues certain guarantees, the company must recognize aninitial liability for the fair value or market value of the obligations itassumes under that guarantee and must disclose that information in its interimand annual financial statements.  Theinitial recognition and initial measurement provisions of FIN 45 areapplicable on a prospective basis to guarantees issued or modified afterDecember 31, 2002.  FIN 45’sdisclosure requirements are effective for financial statements of interim orannual periods ending after December 15, 2002 and are applicable to allguarantees issued by the guarantor subject to FIN 45’s scope, includingguarantees issued prior to the issuance of FIN 45.  The adoption of FIN 45 on January 1, 2003did not have a material effect on the Company’s financial position, results ofoperations or financial statement disclosure.

 

In January2003, the FASB issued Interpretation No. 46 (FIN 46), *Consolidation of Variable Interest Entities*.  FIN 46 clarifies the application ofAccounting Research Bulletin No. 51, “Consolidated Financial Statements,” tocertain entities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties.  FIN 46applies immediately to variable interest entities (VIE’s) created afterJanuary 31, 2003, and to VIE’s in which an enterprise obtains an interestafter that date.  It applies in thefirst fiscal year or interim period beginning after June 15, 2003 to VIE’sin which an enterprise holds a variable interest that it acquired beforeFebruary 1, 2003.  FIN 46 appliesto public enterprises as of the beginning of the applicable interim or annualperiod.  The Company is currentlyassessing the impact that adoption of this statement will have on itsconsolidated financial statements, but does not expect the impact to bematerial.

 

6

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***Reclassification***

 

Certain reclassificationshave been made to the prior periods’ interim financial statements to conformwith the current period’s financial statement presentation.

 

**NOTE2:  INTERIM FINANCIAL STATEMENTS**

 

The accompanying financialstatements have been prepared in accordance with the instructions toForm 10-Q of the SEC and in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) applicable tointerim financial statements, and do not include all of the information andfootnotes required by GAAP for complete financial statements.  In the opinion of management of the Company,all adjustments, consisting only of normal recurring adjustments, considerednecessary for a fair presentation have been included.  The financial statements should be read in conjunction with theCompany’s audited financial statements and accompanying notes, which areincluded in its Form 10-K for the year ended December 31, 2002.

 

The results of operationsfor the period ended June 30, 2003 are not necessarily indicative of theresults to be expected for the entire year.

 

**NOTE3:  NET INCOME PER SHARE**

 

Basic net income pershare is computed based on the weighted average number of common sharesoutstanding during each period.  Dilutednet income per share is computed using the weighted average common shares andall potentially dilutive common share equivalents outstanding during theperiod.  The computation of earnings pershare for the three and six months ended June 30, 2003 and 2002 is as follows:

 
|                                                                    |   | **(In Thousands, Except Per Share Data)** |       |
|-------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                    |   | **Three Months Ended****June 30,**        |       | **Six Months Ended****June 30,** |   |
|                                                                    |   | **2003**                                  |       | **2002** |   | **2003** |   | **2002** |   |
|                                                                    |   |                                      |       |   |   |   |   |   |   |
| **Net  Income**                                                         |   | **$**                                     | **3,608**  | ** ** | **$** | **1,876** | ** ** | **$** | **5,920** | ** ** | **$** | **3,729** | ** ** |
|                                                                    |   |                                      |       |   |   |   |   |   |   |
| Weighted  average common shares outstanding                             |   | 17,687                                    |       | 14,446 |   | 17,470 |   | 14,428 |   |
| Weighted  average common share equivalents (stock options and warrants) |   | 517                                       |       | 505 |   | 517 |   | 546 |   |
| Weighted  average diluted common shares outstanding                     |   | 18,204                                    |       | 14,951 |   | 17,987 |   | 14,974 |   |
|                                                                    |   |                                      |       |   |   |   |   |   |   |
| **Net Income per share:**                                               |   |                                      | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Basic**                                                               |   | **$**                                     | **0.20**   | ** ** | **$** | **0.13** | ** ** | **$** | **0.34** | ** ** | **$** | **0.26** | ** ** |
| **Diluted**                                                             |   | **$**                                     | **0.20**   | ** ** | **$** | **0.13** | ** ** | **$** | **0.33** | ** ** | **$** | **0.25** | ** ** |

#### ** **

#### **Options to purchase 94,000 and87,000 shares of common stock for the three-month period ending June 30,2002 and six-month period ended June 30, 2002, respectively were notincluded in the computation of diluted earnings per share because the exerciseprice exceeded the average market price. For both the three-month period and the six-month period endedJune 30, 2003, the Company had 3,000 options that were anti-dilutive and,therefore, were not included in the computation.**

#### ** **

7

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**NOTE4:  GOODWILL AND INTANGIBLE ASSETS**

 

Goodwill and intangibleassets at June 30, 2003 and December 31, 2002 consisted of the following:

 
|                                         |   | **(In  Thousands)**          |   |
|----------------------------------------------|--------|------------------------------|--------|
|                                         |   | **June 30,  2003**           |   | **December  31, 2002** |   |
|                                         |   | **Gross  Carrying   Amount** |   | **Accumulated    Amortization** |   | **Gross  Carrying   Amount** |   | **Accumulated    Amortization** |   |
| Amortized intangible assets:                 |   |                         |   |   |   |   |   |   |   |
| Customer  contracts                          |   | $                            | 8,760  |   | $ | 1,825 |   | $ | 4,060 |   | $ | 656 |   |
| Trade  names                                 |   | 710                          |   | 249 |   | 710 |   | 206 |   |
| Non-compete  agreements                      |   | 12,030                       |   | 709 |   | 300 |   | 189 |   |
|                                         |   | $                            | 21,500 |   | $ | 2,783 |   | $ | 5,070 |   | $ | 1,051 |   |
|                                         |   |                         |   |   |   |   |   |   |   |
| Goodwill  and unamortized intangible assets: |   |                         |   |   |   |   |   |   |   |
| Goodwill                                     |   | $                            | 68,014 |   | $ | — |   | $ | 21,275 |   | $ | — |   |
| Trade  names                                 |   | 474                          |   | — |   | — |   | — |   |
|                                         |   | $                            | 68,488 |   | $ | — |   | $ | 21,275 |   | $ | — |   |

 

Aggregate amortizationexpense was $1,013,000 and $116,000 for the three-month periods, and $1,732,000and $233,000 for the six-month periods ended June 30, 2003 and 2002,respectively. Amortization expense related to intangible assets is estimated tobe $3,757,000 in 2003, $4,032,000 in 2004, $1,814,000 in 2005 and $1,618,000 in2006 and 2007.

 

The changes in thecarrying amount of goodwill for the six-month period ended June 30, 2003and year ended December 31, 2002 are as follows:

 
|                                                   |   | **(In  Thousands)**                 |   |
|--------------------------------------------------------|--------|-------------------------------------|--------|
|                                                   |   | **Six Months  Ended June 30, 2003** |   | **Year Ended  December 31, 2002** |   |
|                                                   |   | **Bankruptcy    Segment**           |   | **Infrastructure  Software   Segment** |   | **Total** |   | **Bankruptcy    Segment** |   | **Infrastructure  Software   Segment** |   | **Total** |   |
|                                                   |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Balance,  beginning of period                          |   | $                                   | 17,449 |   | $ | 3,826 |   | $ | 21,275 |   | $ | 17,398 |   | $ | 3,826 |   | $ | 21,224 |   |
| Goodwill  acquired during the period                   |   | 46,739                              |   | — |   | 46,739 |   | 221 |   | — |   | 221 |   |
| Settlement  of contingencies from previous acquisition |   | —                              |   | — |   | — |   | (170 | ) | — |   | (170 | ) |
| Balance,  end of period                                |   | $                                   | 64,188 |   | $ | 3,826 |   | $ | 68,014 |   | $ | 17,449 |   | $ | 3,826 |   | $ | 21,275 |   |

### ** **

### **NOTE 5: BUSINESS ACQUISITION**

 

On January 31, 2003, the Company, through its wholly-owned subsidiary,EPIQ Systems Acquisition Inc., acquired 100% of the membership interest ofBankruptcy Services LLC (“BSI”), a provider of technology-based casemanagement, consulting and administrative services for Chapter 11 cases.  The total value of the transaction was$67,014,000, of which $45,500,000 was paid in cash, $16,500,000 (1,054,000shares) was paid in restricted stock of the Company and $3,445,000 was deferredin the form of a non-interest bearing note with a face value of $4,000,000discounted using an implied rate of 5% per annum, $1,250,000 represents assumedliabilities and $319,000 was paid in acquisition costs.  The note is payable in five annualinstallments and is presented as deferred acquisition price on the balance sheet.  The purchase price was allocated preliminarilyto net tangible assets of $3,030,000, software of $341,000, trade name of$474,000, customer backlog of $4,700,000 and non-compete agreements of$11,730,000 subject to finalization of valuation procedures and analysis ofcosts.  The software is being amortizedover three years, the customer backlog over two years and the non-competeagreements over 10 years, all using the straight-line method.  The trade name is not being amortized butwill be reviewed for impairment annually and between annual tests if events orchanges in circumstances indicate that the asset might be impaired.

 

8

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The excesspurchase price of $46,739,000 was allocated to goodwill and, in accordance withSFAS No. 142, is not being amortized.

 

The acquisition wasaccounted for using the purchase method of accounting, with the operatingresults included in the Company’s statement of income since the date ofacquisition.

 

Unaudited pro formaoperations assuming the purchase acquisition was made at the beginning of theyear preceding the acquisition are shown below:

 
|                    |   | **(In Thousands, Except Per Share Data)** |       |
|-------------------------|--------|-------------------------------------------|------------|
|                    |   | **Three Months Ended****June 30,**        |       | **Six Months Ended****June 30,** |   |
|                    |   | **2003**                                  |       | **2002** |   | **2003** |   | **2002** |   |
|                    |   |                                      |       |   |   |   |   |   |   |
| **Operating  Revenues** |   | **$**                                     | **17,562** | ** ** | **$** | **13,250** | ** ** | **$** | **34,174** | ** ** | **$** | **26,501** | ** ** |
| Net  Income             |   | $                                         | 3,608      |   | $ | 2,693 |   | $ | 6,211 |   | $ | 5,379 |   |
| Net  Income Per Share:  |   |                                      | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Basic**               |   | **$**                                     | **0.20**   | ** ** | **$** | **0.15** | ** ** | **$** | **0.35** | ** ** | **$** | **0.31** | ** ** |
| **Diluted**             |   | **$**                                     | **0.20**   | ** ** | **$** | **0.15** | ** ** | **$** | **0.34** | ** ** | **$** | **0.30** | ** ** |

 

The pro forma informationis not necessarily indicative of what would have occurred had the acquisitionbeen completed on that date nor is it necessarily indicative of futureoperations.

 

Pro forma data reflectsthe difference in amortization expense between the Company and the acquiredcompany as well as other adjustments including income taxes, managementcompensation and other.

 

On July 10, 2002, the Company acquired the Chapter 7 trustee businessof CPT Group, Inc. in Orange County, California.  The purchase price totaled $852,000, including acquisition costsof $52,000.  The net purchase price of$800,000 was paid entirely in cash.  Thepurchase price was allocated to software of $11,000 and customer contracts of $620,000.  The software is being amortized on astraight-line basis over 12 months while the customer contracts are beingamortized on a straight-line basis over 10 years.  The remainder of the purchase price was allocated to goodwill andtotaled $221,000.  In accordance withSFAS No. 142, the goodwill is not being amortized.

 

The acquisition was accounted for using the purchase method ofaccounting with the operating results included in the Company’s statement ofincome since the date of acquisition.

 

The operating revenues,expenses and net income associated with the Chapter 7 trustee business of CPTGroup, Inc. prior to its acquisition were not significant.

 

**NOTE6:  SEGMENT REPORTING**

 

The Company has twooperating segments to which it allocates resources and assesses performance:bankruptcy and related services and infrastructure software.

 

Previously the Companyhad three operating segments to which it allocated resources and assessedperformance: Chapter 7 and related bankruptcy services, Chapter 13 services andinfrastructure software. The individual bankruptcy segments were previouslypresented as one aggregated reportable segment due to similar operating andeconomic characteristics.

 

With the acquisition ofBankruptcy Services LLC, the Company’s bankruptcy operating model is now basedon providing comprehensive bankruptcy case management solutions supported by abankruptcy shared services organization. The products of the Company automate various administrative taskspertaining to bankruptcy claims, assets, financial records and other dataassociated with liquidations and reorganizations, and the services assistcustomers in organizing and managing their databases of case information, inpreparing notices and mailings, and in fulfilling their variousresponsibilities.

 

The Company’s reportingsystem derives segment information by specifically attributing revenues for thebankruptcy segment to bankruptcy trustees (Chapters 7 and 13) and debtors inpossession (Chapter 11). A significant portion of costs and assets are sharedand are not charged directly or by allocation within the bankruptcy segment.

 

9

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The infrastructuresoftware segment develops file transfer software used by companies in variousindustries.

 

Information concerningoperations in these reportable segments of business is as follows:

 
|                                          |   | **(In  Thousands)**              |   |
|-----------------------------------------------|--------|----------------------------------|--------|
|                                          |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|                                          |   | **2003**                         |   | **2002** |   | **2003** |   | **2002** |   |
| Operating  revenues:                          |   |                             |   |   |   |   |   |   |   |
| Bankruptcy  and related services:             |   |                             |   |   |   |   |   |   |   |
| Bankruptcy  trustees – Chapters 7 and 13 |   | $                                | 9,778  |   | $ | 8,621 |   | $ | 19,989 |   | $ | 17,129 |   |
| Debtors  in possession – Chapter 11      |   | 7,306                            |   | — |   | 11,170 |   | — |   |
| Total  Bankruptcy and related services        |   | 17,084                           |   | 8,621 |   | 31,159 |   | 17,129 |   |
| Infrastructure  software                      |   | 478                              |   | 455 |   | 1,038 |   | 943 |   |
| Total  operating revenues                     |   | $                                | 17,562 |   | $ | 9,076 |   | $ | 32,197 |   | $ | 18,072 |   |
|                                          |   |                             |   |   |   |   |   |   |   |
| Cost  of Sales:                               |   |                             |   |   |   |   |   |   |   |
| Cost  of products and services:               |   |                             |   |   |   |   |   |   |   |
| Bankruptcy  and related services              |   | $                                | 4,117  |   | $ | 1,566 |   | $ | 7,076 |   | $ | 3,111 |   |
| Infrastructure  software                      |   | 166                              |   | 231 |   | 388 |   | 480 |   |
| Depreciation  and amortization:               |   |                             |   |   |   |   |   |   |   |
| Bankruptcy  and related services              |   | 904                              |   | 921 |   | 1,865 |   | 1,814 |   |
| Infrastructure  software                      |   | 306                              |   | 269 |   | 639 |   | 506 |   |
| Total  cost of sales                          |   | 5,493                            |   | 2,987 |   | 9,968 |   | 5,911 |   |
| Gross  profit:                                |   |                             |   |   |   |   |   |   |   |
| Bankruptcy  and related services              |   | 12,063                           |   | 6,134 |   | 22,218 |   | 12,204 |   |
| Infrastructure  software                      |   | 6                                |   | (45 | ) | 11 |   | (43 | ) |
| Total  gross profit                           |   | $                                | 12,069 |   | $ | 6,089 |   | $ | 22,229 |   | $ | 12,161 |   |

 

 
|                             |   | **June 30,   2003** |   | **December  31,   2002** |   |
|----------------------------------|--------|---------------------|--------|--------------------------|--------|
| Accounts  Receivable, net        |   |                |   |                     |   |
| Bankruptcy  and related services |   | $                   | 10,237 |                     | $      | 5,086 |   |
| Infrastructure  software         |   | 530                 |   | 538                      |   |
| Other                            |   | 5                   |   | 23                       |   |
|                             |   | $                   | 10,772 |                     | $      | 5,647 |   |
|                             |   |                |   |                     |   |
| Property  and Equipment, net     |   |                |   |                     |   |
| Bankruptcy  and related services |   | $                   | 3,208  |                     | $      | 3,074 |   |
| Infrastructure  software         |   | 219                 |   | 210                      |   |
| Other                            |   | 9,258               |   | 8,602                    |   |
| Total                            |   | $                   | 12,685 |                     | $      | 11,886 |   |
|                             |   |                |   |                     |   |
| Software  Development Costs, net |   |                |   |                     |   |
| Bankruptcy  and related services |   | $                   | 2,502  |                     | $      | 1,468 |   |
| Infrastructure  software         |   | 2,501               |   | 2,868                    |   |
| Other                            |   | —              |   | —                   |   |
| Total                            |   | $                   | 5,003  |                     | $      | 4,336 |   |
|                             |   |                |   |                     |   |
| Goodwill,  net                   |   |                |   |                     |   |
| Bankruptcy  and related services |   | $                   | 64,188 |                     | $      | 17,449 |   |
| Infrastructure  software         |   | 3,826               |   | 3,826                    |   |
| Other                            |   | —              |   | —                   |   |
| Total                            |   | $                   | 68,014 |                     | $      | 21,275 |   |
|                             |   |                |   |                     |   |
| Other  Intangibles, net          |   |                |   |                     |   |
| Bankruptcy  and related services |   | $                   | 18,276 |                     | $      | 3,030 |   |
| Infrastructure  software         |   | 915                 |   | 989                      |   |
| Other                            |   | —              |   | —                   |   |
| Total                            |   | $                   | 19,191 |                     | $      | 4,019 |   |

 

10

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TheCompany has not disclosed any additional asset information or net income bysegment, as the information is not reviewed by the chief operating decisionmaker, is not produced internally and its preparation is impracticable.

 

#### **NOTE 7:  LINESOF CREDIT**

 

During the quarter endedJune 30, 2003, the Company entered into a new $25,000,000 revolving line ofcredit, which matures on May 31, 2006. The borrowings on the line of credit accrue interest at the Prime Rateas published in the Wall Street Journal or LIBOR plus 200 basis points, at theoption of the Company.  The line ofcredit is unsecured, however, the line contains certain financial covenantspertaining to the maintenance of minimum earnings before interest, taxes,depreciation and amortization (“EBITDA”) and maximum total debt to EBITDA.  The $25,000,000 revolving line of creditreplaced two existing lines of credit that aggregated $15,000,000.  The Company was in compliance with all thefinancial covenants under the new line and the two prior lines of credit forthe periods ended June 30, 2003 and December 31, 2002.

 

There were no borrowingsoutstanding under the new line of credit or the two prior lines of credit as ofJune 30, 2003 or December 31, 2002.

 

11

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### **ITEM 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

### ** **

### **Overview**

 

The Companydevelops, markets and licenses proprietary software solutions for workflowmanagement and data communications infrastructure for the bankruptcy and thefinancial services markets.  TheCompany’s specialized products streamline its customers’ internal business operationsand external communications and enable them to minimize operating costs throughautomation.  In combination with itssoftware products, the Company also provides a high level of coordinatedsupport, including network integration, post-installation support andindustry-specific value-added services.

 

For the bankruptcymarket, the Company provides technology-based solutions to law firms andattorneys who work in the federal bankruptcy system and to companies that havefiled for bankruptcy reorganization. Customers implement the Company’ssolutions to administer personal and corporate bankruptcy cases of allsizes.  The Company’s products automatevarious administrative tasks pertaining to bankruptcy claims, assets, financialrecords and other data associated with liquidations and reorganizations.  The Company’s services assist customers inorganizing and managing their databases of case information, preparing noticesand mailings, and in fulfilling their additional responsibilities.  Customers implementing the Company’sbankruptcy management solution have a single environment in which to administertheir cases.

 

**Bankruptcy and RelatedServices:**

 

Bankruptcy Trustees

Chapter 7:

 

The Company’s primaryoffering for Chapter 7 is *TCMS®*,a package of computer hardware, support services and a proprietary softwareproduct installed in a trustee’s office to manage asset liquidations, creditordistributions, and government reporting. The Company promotes its Chapter 7software related products and services through a national marketing arrangementwith Bank of America. Under this arrangement:

 

•                  trustee customers agree to depositthe cash proceeds from liquidations of debtors’ assets with Bank of America.

 

•                  the Company licenses its proprietarysoftware to the trustee and furnishes hardware, customization of reports,software training, remote diagnostics and customer support, all at no cost tothe trustee;

 

•                  the Company collects from Bank ofAmerica monthly revenues based upon a percentage of the total liquidated assetson deposit and on the number of trustees.

 

Revenues are alsoderived from conversions and software upgrades provided to Chapter 7 trustees,as well as from customized software, technology services and marketing andstrategic consulting services that the Company provides directly to Bank ofAmerica in support of their national marketing arrangement.

 

Chapter 13:

 

*CasePower®,* the Company’s primaryChapter 13 offering, provides a proprietary software package and relatedsupport services designed to manage debtor payments, creditor distributions andgovernment reporting.  The Companycollects an initial implementation fee, as well as monthly revenues directlyfrom each trustee based on the number of cases in the trustee’s database andthe number of printed documents generated for the trustee.

 

12

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Debtors in Possession - Chapter 11:

 

The Company offers a packaged solution of professional services and itsproprietary technology platform, which is used by companies in Chapter 11reorganization and their counsel. Services include claims reconciliation,noticing, balloting and technology consulting. The Company’s Chapter 11technology platform provides web-enabled access to case information and managesthe database from which services are provided. The Company collects a monthlyrecurring fee from its customers based on the number of claims in each case,and bills for professional services on a time and materials basis or afixed-fee basis.

 

On January 31, 2003, the Company acquired 100% of the membershipinterests in Bankruptcy Services LLC (“BSI”). BSI provides technology-basedcase management, consulting and administrative services for Chapter 11 cases.The acquisition was accounted for using the purchase method of accounting, andas such, results of operations for the period ended June 30, 2003 includethe results of operations of the BSI acquisition subsequent to January 31,2003.

 

InfrastructureSoftware Market:

 

For the infrastructure software market, the Company’s *DataExpress®* product line providescross-platform, software-based communications infrastructure that enablescorporate customers to format and securely route business-critical data overthe Internet and private networks, using a variety of communicationprotocols.  The Company’s productsautomate the electronic transmission of business data and are designed todeliver the data to the right recipient, at the right time, in the right formatand with the appropriate security, while reducing labor and informationtechnology infrastructure costs to customers. The *DataExpres*s® productline includes modules for data transmission, system monitoring, datareformatting and security that are designed for large companies with complexrequirements.

 

**CriticalAccounting Policies**

 

The Company considers itsaccounting policies related to revenue recognition and software capitalizationto be critical policies in understanding the Company’s historical and futureperformance.

 

The Company recognizesrevenue from the two segments of its business: bankruptcy and related services,and infrastructure software.  Within thebankruptcy and related services segment, the Company’s revenues are derivedfrom bankruptcy case management fees and bankruptcy professional services.  The Company has agreements with each of itsbankruptcy trustee or debtors in possession customers obligating the Company todeliver software products and services each month.  The fees paid are contingent upon the month-to-month delivery ofthe products and services and are based on formulas, as defined by thecontracts, on the number of trustees and cash balances in a trustee’s bankaccount, the number of cases in a trustee’s portfolio or the number of claimstracked in each case. The formula based fees earned each month become fixed anddeterminable on a monthly basis as a result of all contractually requiredproducts and services being delivered by the Company.  Professional services revenues are recognized as the services areprovided.

 

For its infrastructure softwarebusiness, the Company recognizes revenues for software licensing followingdelivery and acceptance by the customer. Revenues are deferred for the fair value of professional services andmaintenance fees.  Deferred consultingrevenue is recognized as services are provided and maintenance fees arecollected and recognized as revenue on a straight-line basis over the life ofthe maintenance contract, which is typically one year.  Revenues on multiple-elements are allocatedbased on the actual amount the Company charges when that element is soldseparately.

 

Certain internal softwaredevelopment costs incurred in the creation of computer software products arecapitalized once technological feasibility has been established.  Prior to the completion of detailed programdesign, development costs are expensed and shown as general and administrativeexpenses on the statements of income. Capitalized costs are amortized based on the ratio of current revenue tocurrent and estimated future revenue for each product with an annual minimumequal to the straight-line amortization over the remaining estimated economiclife 

 

13

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of the product, not toexceed five years.  Managementperiodically reevaluates its previous estimated future revenue for each productand the remaining estimated economic life of the product.

 

**Resultsof Operations**

 

### ***ThreeMonths Ended June 30, 2003 Compared With Three Months Ended June 30, 2002***

 

Operating revenuesincreased by $8,486,000, or 93.5%, to $17,562,000 for the quarter ended June30, 2003 compared to $9,076,000 during the same period of the prior year.  Substantially all of this increase wasattributable to an $8,463,000, or 98.2%, increase in operating revenues fromthe bankruptcy and related services business. These operating revenues were $17,084,000 for the quarter ended June 30,2003 compared to $8,621,000 during the same period of the prior year.  Bankruptcy case management fees increased$3,168,000, partly as a result of the acquisition of BSI and partly due togrowth in the value of bankruptcy estate deposits, which increased deposit feesreceived by the Company by 31.5%. Bankruptcy professional services revenue increased by $5,295,000 largelydue to the acquisition of BSI.  As aresult of increased revenues subsequent to the acquisition of BSI, fees fromBank of America for marketing and strategic consulting and technology serviceswere reduced to 3.8% of bankruptcy and related services operating revenuescompared to 8.6% in the same period of the prior year.

 

Total cost of salesincreased 83.9% to $5,493,000, or 31.3% of operating revenues, for the quarterended June 30, 2003 compared to $2,987,000, or 32.9% of operating revenues, forthe same period of the prior year.  Significantcomponents of total cost of sales include cost of products and services, anddepreciation and amortization expense. Cost of products and services increased 138% to $4,283,000 during thequarter ended June 30, 2003 compared to $1,797,000 during the same period ofthe prior year.  Cost of products andservices increased to 24.4% of operating revenues in the second quarter of 2003compared to 19.8% of operating revenues in the second quarter of 2002.  This increase was primarily due to increasednoticing and printing services as a result of the BSI acquisition.  The increase in cost of products andservices as a percent of operating revenues was partially offset by an increasein deposit balances, which generate fees without significant increases in the costof products and services.  As a percentof operating revenues, depreciation and amortization expense included in costof sales was 6.9% for the second quarter 2003 compared to 13.1% for 2002,primarily due to lower hardware and software investments for BSI compared tohistorical Company expenditures.

 

Operating expensesincreased 86.6% to $5,912,000 for the quarter ended June 30, 2003 compared to$3,169,000 during the same period in the prior year.  Operating expenses, as a percentage of operating revenues, were33.7% and 34.9% for the quarters ended June 30, 2003 and 2002,respectively.  General andadministrative expenses increased 61.0% over the prior year due mainly to theBSI acquisition.  Amortization ofintangibles increased $897,000 due to the BSI acquisition related intangiblesconsisting of customer contracts and non-compete agreements.

 

The Company had aneffective tax rate of 41.4% for the quarter ended June 30, 2003 compared to37.8% for the second quarter of 2002 due to higher tax rates in New York Cityand State, BSI’s local jurisdictions.

 

Net income as apercentage of operating revenues was 20.5% for the quarter ended June 30, 2003compared to 20.7% in 2002.  The decreasein net income as a percent of operating revenues was largely due to increasedamortization expense and a higher effective tax rate, partially offset byimproved gross margin as a percent of operating revenues.

 

***Six Months Ended June 30, 2003 Compared With Six MonthsEnded June 30, 2002***

 

Operating revenuesincreased by $14,125,000, or 78.2%, to $32,197,000 for the six-month periodended June 30, 2003 compared to $18,072,000 during the same period of the prioryear.  Substantially all of thisincrease was attributable to a $14,030,000, or 81.9%, increase in operatingrevenues from the bankruptcy and related services business.  These operating revenues were $31,159,000for the six-month period ended June 30, 2003 compared to $17,129,000 during thesame period of the prior year. Bankruptcy case management fees increased $5,489,000, partly as a resultof the acquisition of BSI and partly due to growth in the value of bankruptcyestate deposits, which increased deposit fees received by the Company by32.3%.  Bankruptcy professional servicesrevenue increased by 

 

14

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$8,541,000 largely due tothe acquisition of BSI.  As a result ofincreased revenues subsequent to the acquisition of BSI, fees from Bank ofAmerica for marketing and strategic consulting and technology services accountedfor 3.8% of bankruptcy and related services operating revenues compared to 4.6%in the same period of the prior year.

 

Total cost of salesincreased 68.6% to $9,968,000, or 31.0% of operating revenues, for thesix-month period ended June 30, 2003 compared to $5,911,000, or 32.7% ofoperating revenues, for the same period in the prior year.  Significant components of total cost ofsales include cost of products and services, and depreciation and amortizationexpense.  Cost of products and servicesincreased $3,873,000, or 108%, to 7,464,000 during the six-month period endedJune 30, 2003 compared to $3,591,000 during the same period in 2002.  Cost of products and services, as apercentage of revenues, increased to 23.2% of operating revenues during thefirst six months of 2003 compared to 19.9% of operating revenues during thefirst six months of 2002, primarily due to increased noticing and printingservices as a result of the BSI acquisition. The increase in cost of products and services as a percent of operatingrevenues was partially mitigated by an increase in deposit balances, whichgenerate fees without significant increases in the cost of products andservices.  As a percent of operatingrevenues, depreciation and amortization expense included in cost of sales was7.8% during the first six months of 2003 compared to 12.8% during the sameperiod in 2002, primarily due to lower hardware and software investments forBSI compared to historical Company expenditures.

 

Operating expensesincreased 93.5% to $12,325,000 for the six-month period ended June 30, 2003compared to $6,370,000 for the same period in the prior year.  Operating expenses, as a percentage ofoperating revenues, were 38.3% and 35.2% for the six-month periods ended June30, 2003 and 2002, respectively. General and administrative expenses increased 48.6% over the prior yeardue mainly to the BSI acquisition. Acquisition related expenses, consisting of executive bonuses, legal,accounting and valuation services, and travel, were $1,485,000 for thesix-month period ended June 30, 2003 due to the investigation of potential andcompleted acquisitions.  Amortization ofintangibles increased $1,499,000 due to the BSI acquisition related intangiblesconsisting of customer contracts and non-compete agreements.

 

The Company had aneffective tax rate of 40.7% for the six-month period ended June 30, 2003compared to 37.9% for the first six months of 2002 due to higher tax rates inNew York City and State, the location of BSI.

 

Net income as apercentage of operating revenues was 18.4% for the quarter ended June 30, 2003compared to 20.6% in 2002.  The decreasein net income as a percent of operating revenues was largely due to increasedacquisition related expenses, increased amortization expense and a highereffective tax rate, partially offset by improved gross margin as a percent ofoperating revenues.

 

***Liquidity and Capital Resources***

 

During the six monthsended June 30, 2003, the Company generated $11,104,000 of cash and cashequivalents from earnings, after adjustment for non-cash items such asdepreciation and amortization.  Duringthe six months ended June 30, 2003, however, the Company’s cash and cashequivalents decreased by $39,009,000, from $59,827,000 at January 1, 2003 to$20,818,000 at June 30, 2003.  The cashand cash equivalents generated during this period and the $39,009,000 decreasein cash and cash equivalents since the beginning of the year were primarilyused as follows:

 

•                  $43,263,000 was paid as partialconsideration for the purchase of BSI;

 

•                  $5,125,000 was used to financeadditional accounts receivable, which increased as a result of increased sales,the acquisition of BSI, and the timing of billing and collections;

 

•                  $2,313,000 was used to purchaseproperty and equipment, primarily related to the expansion of the Company’sheadquarters facility and the installation of computer equipment at varioustrustee locations; and

 

•                  $1,318,000 was used to fund internalcosts related to development of computer software for which technologicalfeasibility has been established.

 

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The Company maintains a working capital line of creditof $25,000,000, maturing on May 31, 2006. No amounts were outstanding under this line of credit at June 30, 2003.

 

The Company believes that the funds generated fromoperations plus amounts available under its lines of credit will be sufficientto finance the Company’s currently anticipated working capital and property andequipment expenditures for the foreseeable future.

 

***Forward-Looking Statements***

 

In this report, theCompany makes statements that plan for or anticipate the future.  These forward-looking statements includestatements about the Company’s future business plans and strategies, and otherstatements that are not historical in nature. These forward-looking statements are based on the Company’s currentexpectations.

 

Forward-lookingstatements may be identified by words or phrases such as “believe,” “expect,”“anticipate,” “should,” “planned,” “may,” “estimated,” “goal,” “objective” and“potential.”  Section 27A of theSecurities Act of 1933, as amended and Section 21E of the Securities ExchangeAct of 1934, as amended, provide a “safe harbor” for forward-lookingstatements. Because forward-looking statements involve future risks anduncertainties, listed below are a variety of factors that could cause actualresults and experience to differ materially from the anticipated results orother expectations expressed in the Company’s forward-looking statements.  These factors include, but are not limitedto, (1) any material changes in the Company’s total number of bankruptcytrustees and bankruptcy cases, (2) any material changes in the Company’sChapter 7 deposits, the services required by the Company’s Chapter 11 orChapter 13 cases, or the number of cases processed by the Company’s Chapter 13bankruptcy trustee customers, (3) changes in the number of bankruptcy filingseach year, (4) reliance on the Company’s marketing arrangement and pricingarrangements with Bank of America for Chapter 7 revenues (5) changes inbankruptcy legislation, (6) risks associated with the integration ofacquisitions into the Company’s existing business operations, including the BSIacquisition and (7) other risks detailed from time to time in the Company’sfilings with the SEC, including the **“RiskFactors”** discussed in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2002.  TheCompany undertakes no obligations to update any forward-looking statementscontained herein to reflect future events or developments.

 

**ITEM 3:  Quantitative and Qualitative Disclosures About Market Risk.**

 

Market risk refers to therisk that a change in the level of one or more market prices, interest rates,indices, volatilities, correlations or other market factors such as liquidity,will result in losses for a certain financial instrument or group of financialinstruments.  The Company is currentlyexposed to credit risk on credit extended to customers and interest risk oncapital lease obligations and the line of credit borrowings, the deferredacquisition price note and cash equivalents. The Company actively monitors these risks through a variety ofcontrolled procedures involving senior management.  The Company does not currently use any derivative financialinstruments. Based on the controls in place, credit worthiness of the customerbase and the relative size of these financial instruments, the Company believesthe risk associated with these instruments will not have a material adverseaffect on its business, financial position, results of operations and cashflows.

 

**ITEM 4.  Controls and Procedures.**

 

The Company’s Chief Executive Officer and ChiefFinancial Officer, based on their evaluation within 90 days prior to the dateof this report of the Company’s disclosure controls and procedures (as definedin Exchange Act Rule 13a–15(e)), have concluded that the Company’s disclosurecontrols and procedures are adequate and effective for purposes of Rule13a–15(e) in timely alerting them to material information relating to theCompany required to be included in the Company’s filings with the SEC under theSecurities Exchange Act of 1934.

 

There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of theirevaluation.

 

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**EPIQSYSTEMS, INC.**

**JUNE30, 2003 FORM 10-Q**

 

**PART II - OTHER INFORMATION**

 

### **ITEM 4:  Submission of Matters to a Vote of SecurityHolders**

 

The Annual Meeting of theShareholders of the Company was held on June 4, 2003, at which the shareholderselected the directors named below and approved a proposal to amend theCompany’s 1995 Stock Option Plan to increase the number of shares of commonstock available for issuance under the plan from 3,000,000 to 4,500,000.  The results of the voting at the AnnualMeeting were as follows:

 
| **Election of Directors** |   | **For**    |   | **Withhold   Authority** |   |
|---------------------------|--------|------------|--------|--------------------------|--------|
|                      |   |       |   |                     |   |
| Tom  W. Olofson           |   | 12,990,648 |   | 2,852,605                |   |
| Christopher  E. Olofson   |   | 12,990,113 |   | 2,853,140                |   |
| W.  Bryan Satterlee       |   | 15,316,114 |   | 527,139                  |   |
| Edward  M. Connolly, Jr.  |   | 15,317,014 |   | 526,239                  |   |
| James  A. Byrnes          |   | 15,316,203 |   | 527,050                  |   |

 
|                              |   | **For**    |   | **Against** |   | **Abstain** |   | **Broker  Non-Votes** |   |
|-----------------------------------|--------|------------|--------|-------------|--------|-------------|--------|-----------------------|--------|
| Amend  the 1995 Stock Option Plan |   | 14,356,077 |   | 1,469,517   |   | 17,659      |   | 0                     |   |

 

No other matters weresubmitted to a vote of the shareholders at the Annual Meeting.

 

**ITEM 6**.  **Exhibitsand Reports on Form 8-K.**

 

**(a)****           Exhibits.**

 

10.1                           LoanAgreement dated June 11, 2003, between LaSalle Bank National Association andthe Company.

 

31.1                           Certificationsof Chief Executive Officer of the Company under Rule 13a-14(a), asadopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                           Certificationsof Chief Financial Officer of the Company under Rule 13a-14(a), asadopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1                           Certificationsof Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.Section 1350.

 

 

**(b)****           Reports on Form 8-K.**

 

1.                                       Areport on Form 8-K was filed on April 28, 2003, reporting the use of non-GAAPfinancial measures in the Company’s earnings release for the first quarter of2003.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   |           |   | **EPIQ  Systems, Inc**.                       |
|--------|----------------|--------|-----------------------------------------------|
|   |           |   |                                          |
| Date:  | August 8, 2003 |   | /s/  Tom W. Olofson                      |   |
|   |           |   | Tom W. Olofson                                |
|   |           |   | Chairman of the Board                         |
|   |           |   | Chief Executive Officer                       |
|   |           |   | Director                                      |
|   |           |   | (Principal Executive  Officer)                |
|   |           |   |                                          |
|   |           |   |                                          |
| Date:  | August 8, 2003 |   | /s/  Elizabeth M. Braham                 |   |
|   |           |   | Elizabeth M. Braham                           |
|   |           |   | Vice President, Chief  Financial Officer      |
|   |           |   | (Principal Financial  and Accounting Officer) |

 

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