**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D. C. 20549**

 

**FORM 10-Q**

 

**Quarterly Report Under Section 13or 15(d)of the Securities Exchange Act of 1934**

 

**For the Quarterly Period Ended March 31, 2005**

 

**OR**

 

**Transition Report Pursuant to Section 13or 15(d)of the Securities Exchange Act of 1934**

 

**For the transition period from                 to                **

 

**Commission File Number 0-22081**

 

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**EPIQ SYSTEMS, INC.**

(Exact name of registrant as specified in its charter)

 
| **Missouri**                                          | ** ** | **48-1056429**                       |
|-------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of                       |       | (IRS Employer Identification Number) |
| incorporation or organization)                        |       |                                 |
|                                                  |       |                                 |
| **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 by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days  Yes  ý  No  o

 

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

 

The number of sharesoutstanding of registrant’s common stock at April 20, 2005:

 
| **Class**                    | ** ** | **Outstanding** |
|------------------------------|------------|-----------------|
| Common Stock, $.01 par value |       | 17,895,654      |

 

 

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**EPIQ SYSTEMS, INC. AND SUBSIDIARIES**

**FORM 10-Q**

**QUARTER ENDED MARCH 31, 2005**

 

**CONTENTS**

 
| ** **                               | ** **                                                                                  | **Page** |
|------------------------------------------|---------------------------------------------------------------------------------------------|----------|
|                                     |                                                                                        |     |
| **PART I -  FINANCIAL INFORMATION** |                                                                                        |
|                                     |                                                                                        |     |
| Item  1.                                 | Condensed  Consolidated Financial Statements                                                |     |
|                                     |                                                                                        |     |
|                                     | Condensed  Consolidated Statements of Income –                                         |     |
|                                     | Three months  ended March 31, 2005 and 2004 (Unaudited)                                | 1        |
|                                     |                                                                                        |     |
|                                     | Condensed Consolidated  Balance Sheets –                                               |     |
|                                     | March 31, 2005 and December 31,  2004 (Unaudited)                                 | 2        |
|                                     |                                                                                        |     |
|                                     | Condensed  Consolidated Statements of Cash Flows –                                     |     |
|                                     | Three months  ended March 31, 2005 and 2004 (Unaudited)                                | 3        |
|                                     |                                                                                        |     |
|                                     | Notes  to Condensed Consolidated Financial Statements (Unaudited)                           | 4        |
|                                     |                                                                                        |     |
| Item  2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 14       |
|                                     |                                                                                        |     |
| Item  3.                                 | Quantitative  and Qualitative Disclosures about Market Risk                                 | 21       |
|                                     |                                                                                        |     |
| Item 4.                                  | Controls  and Procedures                                                                    | 21       |
|                                     |                                                                                        |     |
|                                     |                                                                                        |     |
| **PART II -  OTHER INFORMATION**    |                                                                                        |
|                                     |                                                                                        |     |
| Item 5.                                  | Other Information                                                                           | 22       |
|                                     |                                                                                        |     |
| Item 6.                                  | Exhibits                                                                                    | 27       |
|                                     |                                                                                        |     |
| Signatures                               | 28                                                                                          |

 

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**PART I****- FINANCIAL INFORMATION**

 

**ITEM 1.****      Condensed ConsolidatedFinancial Statements.**

 

##### **EPIQ SYSTEMS, INC. ANDSUBSIDIARIES**

##### **CONDENSED CONSOLIDATED STATEMENTS OF INC**OME

**(In Thousands, Except Per Share Data)**

**(Unaudited)**

 
| ** **                                                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                               | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                                                     |       |                                  |       |   |   |
| **REVENUE:**                                                                             |       |                                  |       |   |   |
| Case management                                                                          |       | $                                     | 19,885     |   | $ | 16,926 |   |
| Document management                                                                      |       | 6,081                                 |       | 6,067 |   |
| Operating revenue                                                                        |       | 25,966                                |       | 22,993 |   |
| Reimbursed expenses                                                                      |       | 5,495                                 |       | 3,019 |   |
| Total Revenue                                                                            |       | 31,461                                |       | 26,012 |   |
|                                                                                     |       |                                  |       |   |   |
| **COSTS AND EXPENSES:**                                                                  |       |                                  |       |   |   |
| Direct costs                                                                             |       | 13,736                                |       | 10,305 |   |
| General and administrative                                                               |       | 7,992                                 |       | 5,638 |   |
| Depreciation and software amortization                                                   |       | 1,774                                 |       | 1,381 |   |
| Amortization of identifiable intangible assets                                           |       | 1,623                                 |       | 1,680 |   |
| Acquisition related                                                                      |       | —                                |       | 2,181 |   |
| Total Operating Expenses                                                                 |       | 25,125                                |       | 21,185 |   |
|                                                                                     |       |                                  |       |   |   |
| **INCOME FROM OPERATIONS**                                                               |       | 6,336                                 |       | 4,827 |   |
|                                                                                     |       |                                  |       |   |   |
| **EXPENSES RELATED TO FINANCING:**                                                       |       |                                  |       |   |   |
| Interest income                                                                          |       | 39                                    |       | 34 |   |
| Interest expense                                                                         |       | (801                                  | )          | (1,522 | ) |
| Net Expenses Related To Financing                                                        |       | (762                                  | )          | (1,488 | ) |
|                                                                                     |       |                                  |       |   |   |
| **INCOME FROM CONTINUING OPERATIONS  BEFORE INCOME TAXES**                               |       | 5,574                                 |       | 3,339 |   |
|                                                                                     |       |                                  |       |   |   |
| **PROVISION FOR INCOME TAXES**                                                           |       | 2,324                                 |       | 1,338 |   |
|                                                                                     |       |                                  |       |   |   |
| **NET INCOME FROM CONTINUING  OPERATIONS**                                               |       | 3,250                                 |       | 2,001 |   |
|                                                                                     |       |                                  |       |   |   |
| **DISCONTINUED  OPERATIONS:**                                                            |       |                                  |       |   |   |
| Loss from operations of  discontinued infrastructure software  segment              |       | —                                |       | (436 | ) |
| Income tax benefit from  operations of discontinued infrastructure software segment |       | —                                |       | 172 |   |
| **TOTAL  DISCONTINUED OPERATIONS**                                                       |       | —                                |       | (264 | ) |
|                                                                                     |       |                                  |       |   |   |
| **NET INCOME**                                                                           |       | $                                     | 3,250      |   | $ | 1,737 |   |
|                                                                                     |       |                                  |       |   |   |
| **NET INCOME PER SHARE INFORMATION:**                                                    |       |                                  |       |   |   |
| Income  per share – Basic                                                           |       |                                  |       |   |   |
| Income from continuing  operations                                                       |       | $                                     | 0.18       |   | $ | 0.11 |   |
| Loss from discontinued  operations                                                       |       | —                                |       | (0.01 | ) |
| Net income per share – Basic                                                        |       | $                                     | 0.18       |   | $ | 0.10 |   |
|                                                                                     |       |                                  |       |   |   |
| Income per share – Diluted                                                          |       |                                  |       |   |   |
| Income from continuing  operations                                                       |       | $                                     | 0.17       |   | $ | 0.11 |   |
| Loss from discontinued  operations                                                       |       | —                                |       | (0.01 | ) |
| Net income per share – Diluted                                                      |       | $                                     | 0.17       |   | $ | 0.10 |   |
|                                                                                     |       |                                  |       |   |   |
| **WEIGHTED AVERAGE COMMON SHARES  OUTSTANDING:**                                         |       |                                  |       |   |   |
| Basic                                                                                    |       | 17,887                                |       | 17,813 |   |
| Diluted                                                                                  |       | 21,112                                |       | 18,237 |   |

 

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

 

1

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**EPIQ SYSTEMS, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATEDBALANCE****SHEETS**

**(In Thousands)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                 | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                 |       |                     |       |                        |       |
| **CURRENT ASSETS:**                                                                                                                                                                                        |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                  |       | $                        | 8,507      |                        | $          | 13,330 |   |
| Short-term investments                                                                                                                                                                                     |       | 3,850                    |       | —                      |       |
| Trade accounts receivable,  less allowance for doubtful accounts of $1,345 and $1,069, respectively                                                                                                        |       | 24,644                   |       | 18,690                      |       |
| Prepaid expenses                                                                                                                                                                                           |       | 2,540                    |       | 2,052                       |       |
| Income taxes refundable                                                                                                                                                                                    |       | 1,460                    |       | 3,477                       |       |
| Deferred income taxes                                                                                                                                                                                      |       | 608                      |       | 754                         |       |
| Other current assets                                                                                                                                                                                       |       | 268                      |       | 736                         |       |
| Total Current Assets                                                                                                                                                                                       |       | 41,877                   |       | 39,039                      |       |
|                                                                                                                                                                                                       |       |                     |       |                        |       |
| **LONG-TERM  ASSETS:**                                                                                                                                                                                     |       |                     |       |                        |       |
| Property and equipment, net                                                                                                                                                                                |       | 19,512                   |       | 20,431                      |       |
| Software development costs,  net                                                                                                                                                                           |       | 5,805                    |       | 5,838                       |       |
| Goodwill                                                                                                                                                                                                   |       | 147,728                  |       | 147,728                     |       |
| Other intangibles, net of  accumulated amortization of $8,630 and  $11,707, respectively                                                                                                              |       | 22,434                   |       | 24,057                      |       |
| Other                                                                                                                                                                                                      |       | 3,226                    |       | 2,995                       |       |
| Total Long-term Assets, net                                                                                                                                                                                |       | 198,705                  |       | 201,049                     |       |
| **Total Assets**                                                                                                                                                                                           |       | $                        | 240,582    |                        | $          | 240,088 |   |
|                                                                                                                                                                                                       |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                             |       |                     |       |                        |       |
| **CURRENT  LIABILITIES:**                                                                                                                                                                                  |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                                                           |       | $                        | 3,350      |                        | $          | 4,263 |   |
| Customer deposits                                                                                                                                                                                          |       | 2,320                    |       | 2,375                       |       |
| Accrued compensation                                                                                                                                                                                       |       | 1,018                    |       | 873                         |       |
| Other accrued expenses                                                                                                                                                                                     |       | 1,263                    |       | 899                         |       |
| Current maturities of  long-term obligations                                                                                                                                                               |       | 8,698                    |       | 7,650                       |       |
| Total Current Liabilities                                                                                                                                                                                  |       | 16,649                   |       | 16,060                      |       |
|                                                                                                                                                                                                       |       |                     |       |                        |       |
| **LONG-TERM  LIABILITIES:**                                                                                                                                                                                |       |                     |       |                        |       |
| Deferred income taxes                                                                                                                                                                                      |       | 9,793                    |       | 9,696                       |       |
| Long-term obligations  (excluding current maturities)                                                                                                                                                      |       | 70,990                   |       | 74,499                      |       |
| Total Long-term Liabilities                                                                                                                                                                                |       | 80,783                   |       | 84,195                      |       |
|                                                                                                                                                                                                       |       |                     |       |                        |       |
| **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 – 17,892,233 and 17,883,917  shares at March 31, 2005 and December 31,  2004, respectively |       | 179                      |       | 179                         |       |
| Additional paid-in capital                                                                                                                                                                                 |       | 102,805                  |       | 102,738                     |       |
| Retained earnings                                                                                                                                                                                          |       | 40,166                   |       | 36,916                      |       |
| Total Stockholders’ Equity                                                                                                                                                                            |       | 143,150                  |       | 139,833                     |       |
| **Total Liabilities  and Stockholders’ Equity**                                                                                                                                                       |       | $                        | 240,582    |                        | $          | 240,088 |   |

 

**See accompanying notes to condensed consolidatedfinancial statements.**

 

2

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**EPIQ SYSTEMS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CAS****H FLOWS**

**(In Thousands)**

**(Unaudited)**

 
| ** **                                                                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                           |       |                                  |       |   |   |
| Net income                                                                                          |       | $                                     | 3,250      |   | $ | 1,737 |   |
| Adjustments to reconcile net income to net cash from  operating activities:                         |       |                                  |       |   |   |
| Provision for deferred income taxes                                                                 |       | 243                                   |       | 227 |   |
| Depreciation and software amortization                                                              |       | 1,774                                 |       | 1,381 |   |
| Loan fee amortization                                                                               |       | 284                                   |       | 615 |   |
| Amortization of other intangible assets                                                             |       | 1,623                                 |       | 1,680 |   |
| Other                                                                                               |       | (57                                   | )          | 54 |   |
| Changes in operating assets and liabilities, net of  effects from business acquisition:             |       |                                  |       |   |   |
| Trade accounts receivable                                                                           |       | (6,230                                | )          | 203 |   |
| Prepaid expenses and other assets                                                                   |       | (757                                  | )          | (281 | ) |
| Accounts payable and accrued expenses                                                               |       | (458                                  | )          | (449 | ) |
| Withholding and related liabilities assumed in the  acquisition of a business and subsequently paid |       | —                                |       | (7,973 | ) |
| Deferred revenue                                                                                    |       | —                                |       | 4 |   |
| Income taxes, including tax benefit from exercise of  stock options                                 |       | 2,035                                 |       | 194 |   |
| Net cash provided by (used in) operating activities                                                 |       | 1,707                                 |       | (2,608 | ) |
|                                                                                                |       |                                  |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                           |       |                                  |       |   |   |
| Purchase of property and equipment                                                                  |       | (404                                  | )          | (1,251 | ) |
| Software development costs                                                                          |       | (437                                  | )          | (479 | ) |
| Cash paid for acquisition of business, net of cash  acquired                                        |       | —                                |       | (113,193 | ) |
| Purchase of short-term investments                                                                  |       | (4,000                                | )          | — |   |
| Sale of short-term investments                                                                      |       | 2,150                                 |       | — |   |
| Other                                                                                               |       | (1,767                                | )          | 19 |   |
| Net cash used in investing activities                                                               |       | (4,458                                | )          | (114,904 | ) |
|                                                                                                |       |                                  |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                           |       |                                  |       |   |   |
| Proceeds from long-term debt borrowings                                                             |       | 5,000                                 |       | 92,000 |   |
| Debt issuance costs                                                                                 |       | —                                |       | (2,473 | ) |
| Principal payments under long-term debt obligations                                                 |       | (7,118                                | )          | (579 | ) |
| Proceeds from exercise of stock options and warrants                                                |       | 46                                    |       | 287 |   |
| Net cash provided by (used in) financing activities                                                 |       | (2,072                                | )          | 89,235 |   |
|                                                                                                |       |                                  |       |   |   |
| **NET DECREASE IN CASH AND CASH EQUIVALENTS**                                                       |       | (4,823                                | )          | (28,277 | ) |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD**                                                  |       | 13,330                                |       | 30,347 |   |
| Decrease in cash classified as held for sale                                                        |       | —                                |       | 18 |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                                        |       | $                                     | 8,507      |   | $ | 2,088 |   |
|                                                                                                |       |                                  |       |   |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:**                                             |       |                                  |       |   |   |
| Interest paid                                                                                       |       | $                                     | 834        |   | $ | 540 |   |
| Income taxes paid                                                                                   |       | $                                     | 46         |   | $ | 745 |   |

 

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

 

3

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**EPIQ SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIA****L STATEMENTS**

**(Unaudited)**

 

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

 

***Natureof Operations***

 

EPIQ Systems, Inc. is a national provider ofintegrated technology-based products and services for fiduciary management andclaims administration applications used by attorneys, trustees, andcorporations primarily engaged in bankruptcy, class action, mass tort, andother similarly complex legal proceedings. Our solutions combine advanced technology with in-depth subject matterexpertise to offer customers an efficient environment in which tocomprehensively manage the complexities of case administration and documentmanagement.

 

***Short-term Investments***

 

Short-term investments consist of auction ratesecurities issued by various governmental agencies throughout the UnitedStates.  These investments are classifiedas available for sale securities and are recorded at fair value.  The securities are long-term instruments;however, the interest rates are reset approximately every week, at which timewe can sell the securities.  Due to thisshort time period between the reset dates of the interest rates, there are nounrealized gains or losses associated with these securities.

 

***ComprehensiveIncome***

 

We do not have any components of other comprehensiveincome; therefore comprehensive income equals net income.

 

***Stock-BasedCompensation***

 

We account for stock-based compensation awards underthe intrinsic method of Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees,*which requirescompensation cost to be recognized based on the excess, if any, between thequoted market price at the date of grant and the amount an employee must pay toacquire stock. Options awarded under our option plans are granted with anexercise price equal to the fair market value on the date of the grant. Had thecompensation cost been determined based on the fair value at the grant datesbased on the guidance provided by Statement of Financial Accounting Standard (“SFAS”)No. 123, *Accounting for Stock-Based Compensation,*our net income and net income per share for the three months ended March 31,2005 and 2004 would have been adjusted to the following pro forma amounts (inthousands, except per share data):

 

| ** **                                                                                              | ** ** | ** **  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------|------------|---------------------------------------|------------|
| ** **                                                                                              | ** ** | ** **  | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                                                                    |       |        |       |                                  |       |   |   |
| Net income, as reported                                                                                 |       |        |       | $                                     | 3,250      |   | $ | 1,737 |   |
| Add: stock-based employee compensation included in  reported net earnings, net of tax                   |       |        |       | —                                |       | — |   |
| Deduct: stock-based employee compensation expense  determined under fair value based method, net of tax |       |        |       | (3,066                                | )          | (1,155 | ) |
| Net income, pro forma                                                                                   |       |        |       | $                                     | 184        |   | $ | 582 |   |
|                                                                                                    |       |        |       |                                  |       |   |   |
| Net income per share – Basic                                                                       |       | As reported |       | $                                     | 0.18       |   | $ | 0.10 |   |
|                                                                                                    |       | Pro forma   |       | $                                     | 0.01       |   | $ | 0.03 |   |
|                                                                                                    |       |        |       |                                  |       |   |   |
| Net income per share – Diluted                                                                     |       | As reported |       | $                                     | 0.17       |   | $ | 0.10 |   |
|                                                                                                    |       | Pro forma   |       | $                                     | 0.01       |   | $ | 0.03 |   |

 

Pro forma amounts presented here are based on actualearnings and consider only the effects of estimated fair values of stockoptions.  For the three months ended March 31,2005, we did not assume conversion of the convertible notes as the effect wasantidilutive.

 

4

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***Recent Accounting Pronouncements***

 

In December 2004,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 153, *Exchanges of NonmonetaryAssets, an amendment of APB Opinion No. 29.*  SFAS 153 expanded the scope of APB Opinion No. 29to require that the nonmonetary exchange of similar productive assets should be measured based on thefair value of the assets exchanged.  Weare required to adopt the provisions of SFAS 153 for our quarter ending September 30,2005.  We do not anticipate that adoptionof this statement will have a material impact on our consolidated financialstatements.

 

In December 2004, the FASB issued SFAS No. 123(revised 2004) (SFAS 123R), *Share-Based Payment*.  SFAS 123R establishes standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods and services or incurs liabilities in exchange for goods or servicesthat are based on the fair value of the entity’s equity instruments or that maybe settled by the issuance of those equity instruments.  SFAS 123R requires a public entity to measurethe cost of employee services received in exchange for an award of equityinstruments based on the grant-date fair value of the award and to recognizethat cost over the period during which an employee is required to provideservice in exchange for the award.  SFAS123R is effective for fiscal years beginning after June 15, 2005.  Accordingly, we will adopt SFAS 123R, likelyusing the modified version of prospective application, beginning with ourquarter ending March 31, 2006. Under the modified version of prospective application, compensationcosts related to share-based compensation will be recognized in our financialstatements for all periods beginning after December 31, 2005.  For comparative periods ending on or before December 31,2005 which are presented in our 2006 and subsequent financial statements,share-based compensation costs will continue to be excluded from the financialstatements but we will disclose these share-based compensation costs on a proforma basis in a note to the financial statements.  Adoption of SFAS 123R will materiallyincrease our recognized compensation expense and will have a material impact onour consolidated income statement and balance sheet.  We are unable to estimate the impact ofadoption of this statement on our consolidated financial statements as theimpact will depend, in part, on future stock awards and stock option awardsmade prior to the adoption date, whether any such awards granted are qualifiedor non-qualified, the vesting period of those awards, and forfeitures relatedto both existing awards and new awards. Subsequent to December 31, 2004, our Compensation Committeeapproved acceleration of the vesting of certain unvested options for employees,including an executive officer, and non-employee directors.  The decision to accelerate the vesting ofthese options and eliminate future compensation expense was based primarily ona review of our long-term incentive programs considering the effect on ourfinancial statements of changes in accounting rules that we must adopt inthe future.  This action, which had animmaterial affect on our financial statements for the three months ended March 31,2005, will reduce the impact of adoption of SFAS 123R on our consolidatedfinancial statements. If, subsequent to March 31, 2005, no new awards wereissued and no existing awards were forfeited, we estimate that adoption of SFAS123R would increase our pre-tax compensation expense for the year ending December 31,2006 by approximately $1.0 million.  Wedo not anticipate that adoption of SFAS 123R will have a material impact on ourconsolidated statement of cash flows.

 

**NOTE2:   INTERIM FINANCIAL STATEMENTS**

 

The accompanyingcondensed consolidated financial statements have been prepared in accordancewith the instructions to Form 10-Q of the Securities and ExchangeCommission and in accordance with accounting principles generally accepted inthe United States of America (“GAAP”) applicable to interim financialstatements, and do not include all the information and notes required by GAAPfor complete financial statements.  Thefinancial statements should be read in conjunction with our audited financialstatements and accompanying notes, which are included in our Form 10-K forthe year ended December 31, 2004.

 

In the opinion of ourmanagement, the accompanying financial statements reflect all adjustmentsnecessary (consisting solely of normal recurring adjustments) to present fairlyour financial position as of March 31, 2005 and the results of operationsand cash flows for the three months ended March 31, 2005 and 2004.

 

The results of operationsfor the period ended March 31, 2005 are not necessarily indicative of theresults to be expected for the entire year.

 

5

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**NOTE3:   NET INCOME PER SHARE**

 

Basic net income pershare is computed by dividing net income available to common shareholders bythe weighted average number of common shares outstanding for the period.  Diluted net income per share is computed by dividingnet income available to common shareholders, increased by the amount ofinterest expense, net of tax, related to outstanding convertible debt, by theweighted average number of outstanding common shares and shares that may beissued in future periods relating to outstanding stock options and convertibledebt, if dilutive.

 

The computation of basicand diluted net income per share from continuing operations are as follows (inthousands, except per share data):

 

| ** **                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                               | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | **Net Income**                        | ** ** | **Weighted  Average  Shares  Outstanding** | ** ** | **Per  Share  Amount** | ** ** | **Net Income** | ** ** | **Weighted  Average  Shares  Outstanding** | ** ** | **Per  Share  Amount** | ** ** |
| Basic net income per share from continuing  operations   |       | $                                     | 3,250      |   | 17,887 |   | $ | 0.18 |   | $ | 2,001 |   | 17,813 |   | $ | 0.11 |   |
|                                                     |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Effect of dilutive securities:                           |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Stock options                                            |       |                                  |       | 368 |   |   |   |   |   | 424 |   |   |   |
| Convertible debt                                         |       | 288                                   |       | 2,857 |   |   |   | — |   | — |   |   |   |
|                                                     |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Diluted net income per share from continuing  operations |       | $                                     | 3,538      |   | 21,112 |   | $ | 0.17 |   | $ | 2,001 |   | 18,237 |   | $ | 0.11 |   |

 

Options to purchaseapproximately 2,823,000 and 324,000 shares of common stock for the three-monthperiods ended March 31, 2005 and 2004, respectively, were antidilutive andtherefore not included in the computation of diluted net income per share fromcontinuing operations.

 

6

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#### **NOTE 4:   GOODWILL AND INTANGIBLE ASSETS**

 

Amortizingidentifiable intangible assets at March 31, 2005 and December 31,2004 consisted of the following (in thousands):

 
| ** **             | ** ** | **March 31, 2005**    | ** ** | **December 31, 2004**    | ** ** |
|------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer contracts     |       | $                          | 11,860     |                          | $          | 3,794 |   | $ | 16,560 |   | $ | 7,656 |   |
| Trade names            |       | 1,574                      |       | 918                           |       | 1,574 |   | 721 |   |
| Non-compete agreements |       | 17,630                     |       | 3,918                         |       | 17,630 |   | 3,330 |   |
|                   |       | $                          | 31,064     |                          | $          | 8,630 |   | $ | 35,764 |   | $ | 11,707 |   |

 

Duringthe three months ended March 31, 2005, $4.7 million of identifiableintangible assets related to Bankruptcy Services LLC (“BSI”) customer contractsbecame fully amortized.  Accordingly, wewrote off both the identifiable intangible assets and the related accumulatedamortization.

 

Aggregateamortization expense related to identifiable intangible assets was $1.6 millionand $1.7 million for the three-month periods ended March 31, 2005 and2004, respectively.  Amortization expenserelated to identifiable intangible assets for 2005 and the following five yearsis estimated as follows (in thousands):

 

| **Year Ended  December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2005                              |       | $          | 5,904      |   |
| 2006                              |       | 4,987      |       |
| 2007                              |       | 3,027      |       |
| 2008                              |       | 2,855      |       |
| 2009                              |       | 1,773      |       |
| 2010                              |       | 1,675      |       |
|                              |       |       |       |
|                              |       | $          | 20,221     |   |

 

Atboth March 31, 2005 and December 31, 2004, intangible assets notsubject to amortization, consisting solely of goodwill, had a carrying value of$147.7 million.

 

7

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

 

OnJanuary 30, 2004, we acquired for cash 100% of the equity of P-D HoldingCorp. and its wholly-owned subsidiary, Poorman-Douglas Corporation(collectively, “Poorman-Douglas”).  Webelieve this acquisition provides complementary diversification to our existinglegal services business as Poorman-Douglas is a provider of technology-basedproducts and services for class action, mass tort and bankruptcy caseadministration.  The total value of thetransaction, including capitalized acquisition costs, was approximately $115.9million.  Based on our valuation, thepurchase price has been allocated as follows (in thousands):

 

| Current assets           |   | $       | 21,870  |   |
|--------------------------|--------|---------|---------|--------|
| Deferred tax assets      |   | 6,620   |    |
| Property and software    |   | 8,391   |    |
| Trade names              |   | 1,100   |    |
| Customer backlog         |   | 6,200   |    |
| Customer relationships   |   | 2,300   |    |
| Non-compete agreements   |   | 5,900   |    |
| Goodwill                 |   | 83,540  |    |
| Current liabilities      |   | (12,920 | )       |
| Deferred tax liabilities |   | (7,125  | )       |
|                     |   |    |    |
| Total purchase price     |   | $       | 115,876 |   |

 

Allacquired identifiable intangible assets will be amortized on a straight-linebasis as follows:  the trade names overtwo years, the customer backlog over three years, the customer relationshipsover twelve years, and the non-compete agreements over five years.  The excess purchase price of $83.5 millionwas allocated to goodwill and, in accordance with SFAS No. 142 *Goodwill and Other Intangible Assets,* is not being amortizedbut will be reviewed for impairment annually and between annual tests if eventsor changes in circumstances indicate that the asset might be impaired.  The purchase price in excess of the tax basisof the assets, primarily allocated to identifiable intangible assets andgoodwill, is not expected to be deductible for tax purposes.

 

The acquisition wasaccounted for using the purchase method of accounting with the operatingresults included in the accompanying condensed consolidated financialstatements from the date of acquisition.

 

Unaudited pro forma resultsof operations assuming the purchase acquisition was made at the beginning of2004 are shown below (in thousands, except per share data):

 
| ** **                                       | ** ** | **Three Months Ended  March 31, 2004** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|
|                                             |       |                                        |       |
| Revenue                                          |       | $                                           | 32,695     |   |
|                                             |       |                                        |       |
| Net income from continuing operations            |       | $                                           | 1,809      |   |
| Net income per share from continuing operations: |       |                                        |       |
| Basic                                            |       | $                                           | 0.10       |   |
| Diluted                                          |       | $                                           | 0.10       |   |

 

The pro forma financialinformation is not necessarily indicative of what would have occurred had theacquisition been completed on that date nor is it necessarily indicative offuture operations.

 

8

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**NOTE6:   SEGMENT REPORTING**

 

We have two operatingsegments: (i) case management and (ii) document management.  Case management solutions provide clientswith integrated technology-based products and services for the automation ofadministrative tasks to address their business requirements.  Document management solutions includeproprietary technology and production services to ensure timely, accurate andcomplete execution of documents related to a case.

 

Each segment’sperformance is assessed based on segment revenues less costs directlyattributable to each segment.  Inmanagement’s evaluation of performance, certain costs, such as shared services,administrative staff, and executive management, are not allocated by segmentand, accordingly, the following operating segment results do not include suchunallocated costs.  Assets reportedwithin a segment are those assets used by the segment in its operations andconsist of property and equipment, software, identifiable intangible assets andgoodwill.  All other assets areclassified as unallocated. Infrastructure software was held for sale and is presented as adiscontinued operation.  Consistent withguidance provided related to SFAS No. 131, we have not presented segmentinformation related to our discontinued operation.

 

Duringthe current year, we determined that certain revenues from reimbursed expensesand certain expenses, including reimbursed expenses, related to ourPoorman-Douglas subsidiary acquired in January 2004 had not been recordedin the correct segment.  Theseclassification errors did not affect our Consolidated Statements of Income,Balance Sheets, Statements of Cash Flows, or Statement of Changes in Stockholders’Equity for any period previously reported. Additionally, these errors do not affect historical or future net cashflows or compliance with any debt covenants. However, the classification errors did affect our previously reportedsegment information disclosed in our 2004 quarterly reports filed on Form 10-Qand on our annual report filed on Form 10-K for the year ended December 31,2004.  We will not amend our previouslyfiled 2004 quarterly reports filed on Form 10-Q or our 2004 annual reportfiled on Form 10-K, but will restate our comparative 2004 quarterlysegment information to correct these classification errors prospectively in our2005 quarterly reports filed on Form 10-Q and our 2005 annual report filedon Form 10-K.  See Item 5contained in Part II of this quarterly report on Form 10-Q foradditional information regarding this restatement.

 

Following is a summary ofsegment information (in thousands):

 
| ** **                                                                  | ** ** | **Three Months Ended March 31,  2005** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                  | ** ** | **Case  Management**                        | ** ** | **Document  Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
| Revenue:                                                                    |       |                                        |       |   |   |   |   |   |   |
| Operating revenue                                                           |       | $                                           | 19,885     |   | $ | 6,081 |   | $ | — |   | $ | 25,966 |   |
| Reimbursed expenses                                                         |       | 896                                         |       | 4,599 |   | — |   | 5,495 |   |
| Total revenue                                                               |       | 20,781                                      |       | 10,680 |   | — |   | 31,461 |   |
|                                                                        |       |                                        |       |   |   |   |   |   |   |
| Costs and expenses:                                                         |       |                                        |       |   |   |   |   |   |   |
| Direct and administrative costs and depreciation and  software amortization |       | 8,094                                       |       | 8,144 |   | 7,264 |   | 23,502 |   |
| Amortization of identifiable intangible assets                              |       | 1,157                                       |       | 466 |   | — |   | 1,623 |   |
| Acquisition related                                                         |       | —                                      |       | — |   | — |   | — |   |
| Total operating expenses                                                    |       | 9,251                                       |       | 8,610 |   | 7,264 |   | 25,125 |   |
|                                                                        |       |                                        |       |   |   |   |   |   |   |
| Operating income                                                            |       | $                                           | 11,530     |   | $ | 2,070 |   | $ | (7,264 | ) | 6,336 |   |
| Interest expense, net                                                       |       |                                        |       |   |   |   |   | 762 |   |
| Income from continuing operations before income  taxes                      |       |                                        |       |   |   |   |   | 5,574 |   |
| Provision for income taxes                                                  |       |                                        |       |   |   |   |   | 2,324 |   |
|                                                                        |       |                                        |       |   |   |   |   |   |   |
| Net income from continuing operations                                       |       |                                        |       |   |   |   |   | $ | 3,250 |   |
|                                                                        |       |                                        |       |   |   |   |   |   |   |
| Total assets                                                                |       | $                                           | 129,917    |   | $ | 50,807 |   | $ | 59,858 |   | $ | 240,582 |   |
| Provisions for depreciation and amortization                                |       | $                                           | 2,244      |   | $ | 592 |   | $ | 561 |   | $ | 3,397 |   |

 

9

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| ** **                                                                  | ** ** | **Three Months Ended March 31,  2004** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                  | ** ** | **(as restated)**                           | ** ** |
| ** **                                                                  | ** ** | **Case  Management**                        | ** ** | **Document  Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
| Revenue:                                                                    |       |                                        |       |   |   |   |   |   |   |
| Operating revenue                                                           |       | $                                           | 16,926     |   | $ | 6,067 |   | $ | — |   | $ | 22,993 |   |
| Reimbursed expenses                                                         |       | 655                                         |       | 2,364 |   | — |   | 3,019 |   |
| Total revenue                                                               |       | 17,581                                      |       | 8,431 |   | — |   | 26,012 |   |
|                                                                        |       |                                        |       |   |   |   |   |   |   |
| Costs and expenses:                                                         |       |                                        |       |   |   |   |   |   |   |
| Direct and administrative costs and depreciation and  software amortization |       | 6,053                                       |       | 6,161 |   | 5,110 |   | 17,324 |   |
| Amortization of identifiable intangible assets                              |       | 1,109                                       |       | 571 |   | — |   | 1,680 |   |
| Acquisition related                                                         |       | —                                      |       | — |   | 2,181 |   | 2,181 |   |
| Total operating expenses                                                    |       | 7,162                                       |       | 6,732 |   | 7,291 |   | 21,185 |   |
|                                                                        |       |                                        |       |   |   |   |   |   |   |
| Operating income                                                            |       | $                                           | 10,419     |   | $ | 1,699 |   | $ | (7,291 | ) | 4,827 |   |
| Interest expense, net                                                       |       |                                        |       |   |   |   |   | 1,488 |   |
|                                                                        |       |                                        |       |   |   |   |   |   |   |
| Income from continuing operations before income  taxes                      |       |                                        |       |   |   |   |   | 3,339 |   |
| Provision for income taxes                                                  |       |                                        |       |   |   |   |   | 1,338 |   |
|                                                                        |       |                                        |       |   |   |   |   |   |   |
| Net income from continuing operations                                       |       |                                        |       |   |   |   |   | $ | 2,001 |   |
|                                                                        |       |                                        |       |   |   |   |   |   |   |
| Total assets                                                                |       | $                                           | 135,741    |   | $ | 53,796 |   | $ | 57,602 |   | $ | 247,139 |   |
| Provisions for depreciation and amortization                                |       | $                                           | 2,084      |   | $ | 709 |   | $ | 268 |   | $ | 3,061 |   |

 

10

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#### **NOTE 7:   LONG-TERM OBLIGATIONS**

 

The following is asummary of indebtedness outstanding (in thousands):

 
| ** **                                                           | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Senior term loan                                                     |       | $                        | 20,313     |                        | $          | 21,875 |   |
| Senior revolving loan                                                |       | 5,000                    |       | 5,000                       |       |
| Contingent convertible subordinated debt, including  embedded option |       | 49,913                   |       | 50,292                      |       |
| Capital leases                                                       |       | 1,772                    |       | 1,773                       |       |
| Deferred acquisition price                                           |       | 2,690                    |       | 3,209                       |       |
| Total indebtedness                                                   |       | $                        | 79,688     |                        | $          | 82,149 |   |

 

***CreditFacilities***

Wehave a credit facility with KeyBank National Association as administrativeagent.  This facility consists of a$25.0 million senior term loan, with amortizing quarterly principal payments of$1.6 million, and a $50.0 million senior revolving loan.  Both the senior term loan and the seniorrevolving loan mature June 30, 2008. During the term of the loan we have the right, subject to compliancewith our covenants, to increase the senior revolving loan to $75.0 million.

 

The credit facility issecured by liens on our real property and a significant portion of our personalproperty and contains financial covenants related to earnings before interest,provision for income taxes, depreciation and amortization (“EBITDA”), totaldebt, senior debt, fixed charges and working capital.  We were in compliance with all financialcovenants as of March 31, 2005.  Ascalculated at March 31, 2005, additional availability under the seniorrevolving loan was approximately $31.0 million. As of March 31, 2005, our borrowings under the credit facilitytotaled $25.3 million, consisting of $20.3 million borrowed under the seniorterm loan and $5.0 million borrowed under the senior revolving loan.  Interest on the credit facility is generallybased on a spread over the LIBOR rate. As of March 31, 2005, the interest rate charged on outstandingborrowings ranged from 5.6% to 6.5%.

 

***ContingentConvertible Subordinated Debt***

During June 2004, weissued $50.0 million of contingent convertible subordinated notes.  These contingent convertible subordinatednotes:

 

•      bearinterest at a fixed rate of 4%, payable quarterly;

•      undercertain circumstances are convertible into shares of our common stock at aprice of $17.50 per share; and

•      matureon June 15, 2007, subject to extension of maturity to June 15, 2010at the option of the note holders.

 

The note holders’ rightto convert the notes is contingent on the market price of our commonstock.  The shares are convertible onlyif the weighted average of the price of our common stock equals or exceeds$19.25 on any five consecutive trading days or if the weighted average price ofour common stock is less than $10.75 on any five consecutive trading days.

 

The contingency has notbeen satisfied and, accordingly, the notes are not currently convertible.  If the contingency were satisfied and allshares were converted, the notes would convert into approximately 2,857,000shares of our common stock.  If we changeour capital structure (for example, through a stock dividend or stock split)while the notes are outstanding, the conversion price will be adjusted on aconsistent basis and, accordingly, the number of shares of common stock we wouldissue on conversion would be adjusted.

 

The Emerging Issues TaskForce (EITF) reached a consensus regarding Issue No. 04-08, *The Effect of Contingently Convertible Debt on EPS,*that thedilutive effect of contingently convertible debt instruments should be includedin the diluted earnings per share calculations in all periods, regardless ofwhether the contingency is met, unless the effect of such inclusion would beantidilutive.  This consensus waseffective for reporting periods ending on or after December 15, 2004.  Accordingly, the shares issuable onconversion have been included in our diluted shares calculation for the threemonths ended March 31, 2005.

 

11

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The note holders have theright to extend the maturity of the contingent convertible subordinated notesfor a period not to exceed three years. Under SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, the right to extend the maturityof the notes represents an embedded option subject to bifurcation.  The embedded option was initially valued at$1.2 million and the convertible debt balance was reduced by the sameamount.  The convertible debt is accretedapproximately $0.1 million each quarter such that, at the end of three years,the convertible debt balance will total $50.0 million.  On our accompanying Condensed ConsolidatedStatements of Income, this accretion is a component of interest expense.  The embedded option must be revalued at eachperiod end based on the probability weighted discounted cash flows related tothe additional 4% interest rate payments that will be made if the convertibledebt maturity is extended an additional three years.  Under this methodology, the embedded optionhas a current value of approximately $0.8 million.  On our accompanying Condensed ConsolidatedBalance Sheet, our obligation related to the embedded option has been includedas a component of the convertible note payable. During the three months ended March 31, 2005, the value of the embeddedoption decreased by approximately $0.5 million and this decrease is included asa reduction of interest expense on our accompanying Condensed ConsolidatedStatements of Income for the three months ended March 31, 2005.  The changes in carrying value of theconvertible debt and fair value of the embedded option do not affect our cashflow and, if the embedded option is exercised, the value assigned to theembedded option will be amortized as a reduction to our 4% convertible debtinterest expense over the periods payments are made.  If the option is not exercised by some or allnote holders, any remaining related value assigned to the embedded option willbe recognized as a gain during that period.

 

The notes evidencing thecontingent convertible subordinated debt contains financial covenants relatedto EBITDA, total debt, and senior debt. We were in compliance with all financial covenants as of March 31,2005.

 

***CapitalLease***

OnJune 30, 2004, we entered into a capital lease to finance the purchase ofoperating software.  At inception of thecapital lease, we recorded this transaction as a debt obligation in the amountof $2.7 million and as purchased software, also in the amount of $2.7 million,included on the balance sheet as a component of property and equipment.  As this was a non-cash investing andfinancing activity, these initial amounts were not included on our CondensedConsolidated Statement of Cash Flows. Subsequent payments on the capital lease are included in our statementof cash flows during the period in which they are made.  As of March 31, 2005, our debtobligation related to this capital lease was approximately $1.8 million, ofwhich approximately $0.9 million was classified as a current liability.

 

***Deferred Acquisition Price***

OnJanuary 31, 2003, we acquired 100% of the membership interests of BSI, aprovider of technology-based case management, consulting and administrativeservices for Chapter 11 restructurings, for a purchase price of $67.0million.  A portion of the purchase pricewas deferred which consists of a $4.0 million non-interest bearing note,payable in five annual installments, discounted using an imputed interest rateof 5% per annum.  At March 31, 2005,the discounted value of the remaining note payments was approximately $2.7million of which approximately $1.6 million was classified as a currentliability.

 

***Scheduled Principal Payments***

Ourlong-term obligations, including credit facility debt, convertible debt(including embedded option), deferred acquisition costs, and capitalizedleases, mature as follows for each twelve month period ending March 31 (inthousands):

 
| 2006  |   | $      | 8,698  |   |
|-------|--------|--------|--------|--------|
| 2007  |   | 7,729  |   |
| 2008  |   | 56,699 |   |
| 2009  |   | 6,562  |   |
| Total |   | $      | 79,688 |   |

 

12

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**NOTE8:   DISCONTINUED OPERATIONS**

 

The primary offering ofour former infrastructure software business was *DataExpress®*, a software product line that automates theexchange of data files between a company’s customers and their businesspartners.  During November 2003 (the“Measurement Date”), we determined that the infrastructure software segment wasno longer aligned with our long-term strategic objectives.  Accordingly, we developed a plan to sell,within one year, the infrastructure software business.

 

On April 30, 2004,we sold our infrastructure software business to a private investor group withexpertise in file transfer technology. As consideration, we received $0.5 million in cash and a $1.1 millionnote receivable bearing 6.5% interest and due July 31, 2005.  The buyer also acquired certain assets andassumed certain liabilities related to our infrastructure business.

 

The disposal of theinfrastructure business represents a discontinued operation.  Accordingly, for the three months ended March 31,2004, revenues, cost of sales, and operating expenses related to this segmenthave been presented on the accompanying Condensed Consolidated Statements ofIncome under the caption “Discontinued Operations.”

 

The following tablesummarizes financial information for discontinued operations (in thousands):

 

**Netrevenue and pre-tax loss from discontinued operations:**

 
| ** **                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|
| ** **                                | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                      |       |                                  |       |   |   |
| Net revenue from discontinued operations  |       | $                                     | —     |   | $ | 380 |   |
|                                      |       |                                  |       |   |   |
| Pre-tax loss from discontinued operations |       | $                                     | —     |   | $ | (436 | ) |

 

13

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### **ITEM 2.**          Management’s Discussion andAnalysis of Financial Condition and Results of Operations.

 

### **Overview**

 

We providetechnology-based products and services for fiduciary management and claimsadministration applications. Our solutions enable clients to optimize theadministration of large and complex bankruptcy, class action, mass tort, andother similar legal proceedings.  Ourclients include corporations, attorneys, bankruptcy trustees and administrativeprofessionals who require sophisticated case administration and documentmanagement capabilities, extensive subject matter expertise and a high servicecapacity. We provide clients with an integrated offering of both proprietarytechnology and value-added services that comprehensively address theirextensive business requirements.

 

We have two operatingsegments: case management and document management.

 

***Case ManagementSegment***

 

Case management supportfor client engagements generally lasts several years and has a revenue profilethat typically includes a recurring component. Our case management segment generates revenue primarily through thefollowing integrated technology-based products and services.

 

•      Anintegrated solution of a proprietary technology platform and relatedprofessional services that facilitates case administration of class action,mass tort and Chapter 11 client engagements.

 

•      Comprehensivesupport for the balloting and voting activities that accompany Chapter 11bankruptcy restructurings.

 

•      *TCMS*®, an integrated solution comprised ofa proprietary software product, computer hardware, and support services,installed in Chapter 7 bankruptcy trustee offices to facilitate the efficientmanagement of asset liquidations, creditor distributions, and governmentreporting.

 

•      *CasePowe*r®, proprietary software designedto enable Chapter 13 bankruptcy trustees to manage efficiently debtor payments,creditor distributions and government reporting.

 

•      Databaseconversions, maintenance and processing.

 

•      Professionaland support services, including case management, claims processing, claimsreconciliation, and customized programming and technology services.

 

•      Callcenter support.

 

***DocumentManagement Segment***

 

Document managementrevenue is generally non-recurring due to the unpredictable nature of thefrequency, timing and magnitude of the clients’ business requirements.  Our document management segment generatesrevenue primarily through the following services.

 

•      Legalnoticing services to parties of interest in bankruptcy and class action andmass tort matters.

 

•      Reimbursementfor costs incurred related to postage on mailing services.

 

•      Mediacampaign and advertising management.

 

•      Documentcustody services.

 

14

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**CriticalAccounting Policies**

 

We consider ouraccounting policies related to revenue recognition, business combinations,goodwill, and identifiable intangible assets to be critical policies inunderstanding our historical and future performance.

 

***Revenue recognition***.  We have agreements with customers obligatingus to deliver various products and services each month.  Case management fees paid are contingent uponthe month-to-month delivery of the products and services defined by thecontracts and are related primarily to the size and complexity of the ongoingengagement.  The formula-based feesearned each month become fixed and determinable on a monthly basis as a resultof our completion of all contractually required performance obligations relatedto products delivered and services rendered by us during the month.  Document management revenues are recognizedin the period the services are provided. Significant sources of revenue include:

 

•      amonthly fee from financial institutions based on a percentage of totalliquidated assets on deposit and on the number of trustees;

 

•      feesfor database conversions, database processing, maintenance and softwareupgrades;

 

•      monthlyrevenue based on the number of cases in a database;

 

•      feesbased on the number of claims in a case; and

 

•      feesfor services, including technology services, claims reconciliation, documentprinting, noticing, balloting, voting tabulation and other professionalservices; and

 

•      reimbursementfor costs incurred related to postage on mailing services.

 

***Business combination**accounting****. *We have acquired anumber of businesses during the last several years, and we may acquireadditional businesses in the future. Business combination accounting, often referred to as purchaseaccounting, requires us to determine the fair value of all assets acquired,including identifiable intangible assets, and liabilities assumed.  The cost of the acquisition is allocated tothe assets acquired and liabilities assumed in amounts equal to the fair valueof each asset and liability, and any remaining acquisition cost is classifiedas goodwill.  This allocation processrequires extensive use of estimates and assumptions, including estimates offuture cash flows to be generated by the acquired assets.  Certain identifiable intangible assets, suchas customer lists and covenants not to compete, are amortized on astraight-line basis over the intangible asset’s estimated useful life.  The estimated useful life of amortizableidentifiable intangible assets range from two to 14 years.  Goodwill and certain other identifiableintangible assets are not amortized. Accordingly, the acquisition cost allocation has had, and will continueto have, a significant impact on our current operating results.

 

***Goodwill****.*  We assess goodwill,which is not subject to amortization, for impairment as of each July 31and also at any other date when events or changes in circumstances indicatethat the carrying value of these assets may exceed their fair value.  This assessment is performed at a reportingunit level.  A reporting unit is acomponent of a segment that constitutes a business, for which discretefinancial information is available, and for which the operating results areregularly reviewed by management.

 

A change in events orcircumstances, including a decision to hold an asset or group of assets forsale, a change in strategic direction, or a change in the competitiveenvironment could adversely affect the fair value of one or more reportingunits.  The estimate of fair value ishighly subjective and requires significant judgment.  If we determine that the fair value of anyreporting unit is less than the reporting unit’s carrying value, then we willrecognize an impairment charge.  Ifgoodwill on our balance sheet becomes impaired during a future period, theresulting impairment charge could have a material impact on our results ofoperations and financial condition.  Ourgoodwill totaled $147.7 million as of March 31, 2005 and $148.5 million asof March 31, 2004.

 

***Identifiableintangible assets****.** ***Each period we evaluatewhether events and circumstances warrant a revision to the remaining estimateduseful life of each identifiable intangible asset.  If events and circumstances warrant a changeto the estimate of an identifiable intangible asset’s remaining useful life,then the remaining carrying amount of the identifiable intangible asset wouldbe amortized prospectively over that revised remaining useful life.  Furthermore, information developed during ourannual assessment, or other events and circumstances, may indicate that thecarrying value of one or more identifiable intangible assets is not recoverableand its fair value is less than the identifiable intangible asset’s carryingvalue and would result in recognition of an impairment charge.

 

15

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A change in the estimateof the remaining life of one or more identifiable intangible assets or theimpairment of one or more identifiable intangible assets could have a materialimpact on our results of operations and financial condition.  Our identifiable intangible assets’ carryingvalue, net of amortization, was $22.4 million as of March 31, 2005 and$30.1 million as of March 31, 2004.

 

**Resultsof Operations for the Three Months Ended March 31, 2005 Compared with theThree Months Ended March 31, 2004**

 

### **Management Overview**

 

Our operations consistprimarily of integrated technology-based products and services for fiduciarymanagement and claims administration applications. Our solutions enable clientsto optimize the administration of large and complex bankruptcy, class action,mass tort, and other similar legal proceedings. We have two operating segments: case management and document management.

 

Our case managementsegment generates revenue primarily through integrated technology-basedproducts and services for class action, mass tort and bankruptcy proceedingsthat support client engagements that generally last several years and has arevenue profile that typically includes a recurring component.  Our document management segment generatesrevenue primarily through legal noticing services, reimbursement for costsincurred related to postage on mailing services, media campaign and advertisingmanagement and document custody services. Document management revenue is generally less recurring due to theunpredictable nature of the frequency, timing and magnitude of the clients’business requirements.

 

The number of newbankruptcy filings each year may vary based on the level of consumer andbusiness debt, the general economy, interest rate levels and otherfactors.  We believe the level ofconsumer and business debt is among the most important indicators of futurebankruptcy filings.  The most recentavailable Federal Reserve *Flow of Funds Accounts ofthe United States*, dated March 10, 2005, reported increases inboth consumer and business debt outstanding as compared with the same period ofthe prior year.

 

In February 2005,new federal class action and tort reform legislation was passed and signed byPresident Bush.  The primary impact ofthe new federal legislation is to require that certain types of class actionlawsuits be brought in federal court rather than state courts.  We believe the new federal legislation will likelyresult in fewer class action lawsuits in state courts.  The slower processing of class actionlawsuits in federal courts could delay the ultimate settlement of those cases,which could adversely affect the timing of services we provide in those cases.  Similar to this recent federal experience,there have been various efforts at the state level to modify and reform thelaws and procedures related to class action and mass tort.  We cannot predict the effect, if any, thatstate legislative action would have on the number or size of class action andmass tort lawsuits filed, or on the claims administration process.

 

In April 2005, newfederal bankruptcy legislation was passed and signed by President Bush.  The intent of this legislation, which iseffective October 2005, is to move certain individual bankruptcy filingsfrom Chapter 7, which liquidates most of the assets of the debtor anddischarges most of the debtor’s liabilities, to Chapter 13, which does notliquidate the debtor’s assets but which requires partial repayment of thedebtor’s liabilities.  We believe it isunlikely that this legislation will have a material impact on our business.

 

We have acquired a numberof businesses during the past several years. In January 2003, we acquired BSI to expand our offerings to includean integrated solution of a proprietary technology platform and professionalservices for Chapter 11 restructurings. In January 2004, we acquiredPoorman-Douglas and expanded our product and service offerings to include classaction, mass tort, and other similar legal proceedings.

 

### **Consolidated Results**

 

### ***Revenue***

Total revenue of $31.5million for the three months ended March 31, 2005 represents anapproximate 21% increase compared to $26.0 million of revenue for the sameperiod in the prior year.  A significantpart of our total revenue consists of reimbursement for certain expenses weincur, such as postage related to document management services.  We reflect the revenue from these reimbursedexpenses as a separate line item on our accompanying Condensed ConsolidatedStatements of Income.  Althoughreimbursed revenue and expenses may fluctuate significantly from quarter toquarter, these fluctuations have a minimal effect on our operating income as werealize little or no margin from this revenue. Revenue exclusive of

 

16

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reimbursed expenses,which we refer to as operating revenue, increased $3.0 million, orapproximately 13%, to $26.0 million for the three months ended March 31, 2005compared to $23.0 million for the same period in the prior year.  All revenue is directly related to a segment,and changes in revenue by segment are discussed below.

 

### ***Costs and Expenses***

Direct and administrativecosts, including depreciation and software amortization, increased $6.2million, or approximately 36%, to $23.5 million for the three months ended March 31,2005 compared with $17.3 million for the same period in the prior year.

 

Direct and administrativecosts, including depreciation and software amortization, not allocated to asegment increased $2.2 million, or 42%, to $7.3 million for the three monthsended March 31, 2005 compared with $5.1 million for the three months endedMarch 31, 2004.  Unallocated directand administrative costs, including depreciation and software amortization,increased due to a combination of factors, including the inclusion of threemonths of Poorman-Douglas’s operating expenses during the three months ended March 31,2005 compared to two months of Poorman-Douglas’s unallocated expenses includedin the three months ended March 31, 2004, an increase in estimated expenserelated to annual bonuses, increased professional fees, increased bad debtcharges, and an increase in operating software amortization expense.

 

Amortization ofidentifiable intangible assets decreased $0.1 million to $1.6 million for thethree months ended March 31, 2005 compared with $1.7 million for the sameperiod in the prior year.  Allidentifiable intangible assets are directly related to a segment, and changesin amortization of identifiable intangible assets by segment are discussedbelow.

 

During the three monthsended March 31, 2005, we did not have any acquisition relatedexpenses.  Acquisition related expensesof $2.2 million for the three months ended March 31, 2004, resulted fromnon-capitalizable expenses consisting of executive bonuses, legal, accountingand valuation services, and travel incurred in connection with potential andcompleted transactions.

 

***Interest***

We incurred net interest expenseof $0.8 million for the three months ended March 31, 2005 compared withnet interest expense of $1.5 million for the three months ended March 31,2004.  The decrease in interest expenseresulted primarily from a decrease in the value of the embedded option relatedto the outstanding convertible debt, which resulted in a credit to interestexpense, combined with a decrease in amortized loan fee expenses.

 

***EffectiveTax Rate***

Our effective tax raterelated to income from continuing operations increased from 40.1% for the threemonths ended March 31, 2004 to 41.7% for the three months ended March 31,2005.  Our tax rate is higher than thestatutory federal rate of 35% primarily due to state taxes, including taxesrelated to our New York operations which are subject to relatively high stateand local New York tax rates, which have a combined 17.88% tax rate.

 

**BusinessSegments**

 

***Revenue***

Case management operatingrevenue increased $3.0 million, or approximately 17%, to $19.9 million for thethree months ended March 31, 2005 compared to $16.9 million for the threemonths ended March 31, 2004.  Thisincrease primarily results from the inclusion of three months ofPoorman-Douglas’s operating revenue during the three months ended March 31,2005 compared to two months of Poorman-Douglas’s operating revenue during thethree months ended March 31, 2004. The remainder of the increase in our case management operating revenueis primarily attributable to an increase in class action operating revenues,partly offset by a decrease in bankruptcy professional fees.

 

Document managementoperating revenue was approximately $6.1 million for both the three monthsended March 31, 2005 and the three months ended March 31, 2004.  Poorman-Douglas, for which we recorded threemonths of revenue during the three months ended March 31, 2005 comparedwith two months revenue recorded for the three months ended March 31,2004, had only a small increase in operating revenue primarily due to a declinein class action advertising-related revenue and bankruptcy noticing and relatedprofessional services.

 

***Operating Expense***

Case management directand administrative expenses, including depreciation and software amortization,of $8.1 million increased $2.0 million, or approximately 34%, for the threemonths ended March 31, 2005 compared with $6.1 million for the same periodin the prior year.  This increaseprimarily results from the inclusion of three months of Poorman-Douglas’s

 

17

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expenses during the threemonths ended March 31, 2005 compared to the inclusion of two months ofPoorman-Douglas’s expenses for the three months ended March 31, 2004, aswell as increased reimbursed costs and additional costs, primarily temporarylabor and outside services, to support the increase in class action operatingrevenues.  We also had an increase inamortization costs related to operating system software.

 

Document managementdirect and administrative expenses, including depreciation and softwareamortization, of $8.1 million increased $1.9 million, or approximately 32%, forthe three months ended March 31, 2005 compared with $6.2 million for thesame period in the prior year.  Thisincrease primarily results from the inclusion of three months ofPoorman-Douglas’s expenses, including reimbursed expenses, for the three monthsended March 31, 2005 compared to the inclusion of two months ofPoorman-Douglas’s expenses, including reimbursed expenses, for the three monthsended March 31, 2004.  Otherdocument management expenses declined slightly, primarily due to decreasedcosts related to advertising-related revenue and decreased print costs relatedto the decrease in document management noticing and related professionalfees.  Document management directexpenses include reimbursed expenses and other operating expenses which aremore variable in nature than case management direct expenses.  Document management expenses will fluctuatefrom quarter to quarter based on document management business requirementsdelivered during each quarter.

 

Both the case managementand document management segments have identifiable intangible assets.  Amortization of case management’sidentifiable intangible assets increased $0.1 million to $1.2 million for thethree months ended March 31, 2005 compared with $1.1 million for the sameperiod in the prior year.  This increaseis primarily the result of amortization of intangible assets resulting fromPoorman-Douglas for three months for the three month period ended March 31,2005 compared with only two months of amortization for these intangible assetsduring the three month period ended March 31, 2004.  Amortization of document management’sidentifiable intangible assets decreased $0.1 million to $0.5 million for thethree months ended March 31, 2005 compared with $0.6 million for the sameperiod in the prior year.  This decreaseis primarily attributable to the fact that certain document managementintangible assets related to prior acquisitions became fully amortized duringthe three months ended March 31, 2005. Note 5 of the Notes to Condensed Consolidated Financial Statements section ofthis report provides a summary of the total identified intangible assets, thescheduled amortization expense and the scheduled amortization periods for thePoorman-Douglas acquisition.

 

**Liquidity and Capital Resources**

 

***Operating Activities***

During the three monthsended March 31, 2005, the primary sources of cash from operatingactivities were net income of $3.3 million and $3.9 million of adjustments fornon-cash charges and credits, primarily depreciation and amortization.  These operating sources of cash were largelyoffset by a $6.2 million use of cash related to an increase in trade accountsreceivable.  Trade accounts receivableincreased primarily as the result of the timing of collections.  As a result, our operating activitiesgenerated net cash of $1.7 million for the three months ended March 31,2005.

 

***Investing Activities***

During the three monthsended March 31, 2005, we used approximately $1.9 million of net cash toacquire short-term investments, $0.4 million of cash to purchase property andequipment, and $0.4 million of cash to fund internal costs related todevelopment of computer software for which technological feasibility has beenestablished.

 

***Financing Activities***

During the three monthsended March 31, 2005, we paid approximately $1.6 million related to oursenior term loan and $0.6 million related to the BSI deferred acquisitionprice.  We also had $5.0 million of bothborrowings and repayments related to our senior revolving loan.

 

As of March 31,2005, our borrowings consisted of $49.9 million from the contingent convertiblesubordinated notes (including the fair value of the embedded option), $20.3million under our senior term loan, $5.0 million under our senior revolvingloan, and approximately $4.5 million of obligations related to capitalizedleases and deferred acquisition price.

 

We believe that the funds generated from operationsplus amounts available under our senior revolving loan will be sufficient overthe next year to finance currently anticipated working capital requirements,software expenditures, property and equipment expenditures, payments forcontractual obligations, interest payments due on our credit facility borrowings,and the required quarterly principal payments of $1.6 million on our seniorterm loan.

 

We may pursue an acquisition in the future and we mayuse the availability under our revolving loan and cash on hand to finance afuture acquisition.  If the acquisitionprice exceeds the capacity of these sources of financing, we may decide to

 

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issue equity, restructure our credit facility, partlyfinance the acquisition with a note payable, or some combination of thepreceding.  Covenants contained in ourcredit facility may limit our ability to consummate an acquisition.

 

**Recent Accounting Pronouncements**

 

In December 2004,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 153, *Exchanges of NonmonetaryAssets, an amendment of APB Opinion No. 29.*  SFAS 153 expanded the scope of APB Opinion No. 29to require that the nonmonetary exchange of similar productive assets should be measured based on thefair value of the assets exchanged.  Weare required to adopt the provisions of SFAS 153 for our quarter ending September 30,2005.  We do not anticipate that adoptionof this statement will have a material impact on our consolidated financialstatements.

 

In December 2004, the FASB issued SFAS No. 123(revised 2004) (“SFAS 123R”), *Share-Based Payment*.  SFAS 123R establishes standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods and services or incurs liabilities in exchange for goods or servicesthat are based on the fair value of the entity’s equity instruments or that maybe settled by the issuance of those equity instruments.  SFAS 123R requires a public entity to measurethe cost of employee services received in exchange for an award of equityinstruments based on the grant-date fair value of the award and to recognizethat cost over the period during which an employee is required to provideservice in exchange for the award.  SFAS123R is effective for fiscal years beginning after June 15, 2005.  Accordingly, we will adopt SFAS 123R, likelyusing the modified version of prospective application, beginning with ourquarter ending March 31, 2006. Under the modified version of prospective application, compensation costsrelated to share-based compensation will be recognized in our financialstatements for all periods beginning after December 31, 2005.  For comparative periods ending on or before December 31,2005 which are presented in our 2006 and subsequent financial statements,share-based compensation costs will continue to be excluded from the financialstatements but we will disclose these share-based compensation costs on a proforma basis in a note to the financial statements.  Adoption of SFAS 123R will materiallyincrease our recognized compensation expense and will have a material impact onour consolidated income statement and balance sheet.  We are unable to estimate the impact ofadoption of this statement on our consolidated financial statements as the impactwill depend, in part, on stock awards and stock option awards made prior to theadoption date, whether awards granted were qualified or non-qualified, thevesting period of those awards, and forfeitures related to both existing awardsand new awards.  Subsequent to December 31,2004, our Compensation Committee approved acceleration of the vesting ofcertain unvested options for employees, including an executive officer andnon-employee directors.  The decision toaccelerate the vesting of these options and eliminate future compensationexpense was based primarily on a review of our long-term incentive programsconsidering the effect on our financial statements of changes in accounting rules thatwe must adopt in the future.  Thisaction, which had an immaterial affect on our financial statements for thethree months ended March 31, 2005, will reduce the impact of adoption ofSFAS 123R on our consolidated financial statements. If, subsequent to March 31,2005, no new awards were issued and no existing awards were forfeited, weestimate that adoption of SFAS 123R would increase our pre-tax compensationexpense for the year ending December 31, 2006 by approximately $1.0million.  We do not anticipate thatadoption of SFAS 123R will have a material impact on our consolidated statementof cash flows.

 

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**Forward-Looking Statements**

 

In this report, in otherfilings with the SEC and in press releases and other public statements by ourofficers throughout the year, EPIQ Systems, Inc. makes or will makestatements that plan for or anticipate the future.  These forward-looking statements includestatements about our future business plans and strategies, and other statementsthat are not historical in nature.  Theseforward-looking statements are based on our current expectations.  In this Quarterly Report on Form 10-Q,we make statements that plan for or anticipate the future.  Many of these statements are found in the **“Management’s Discussion and Analysis of Financial Condition andResults of Operations”** section of this report.

 

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 the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended, provide a “safe harbor” for forward-looking statements.  Because forward-looking statements involvefuture risks and uncertainties, listed below are a variety of factors thatcould cause actual results and experience to differ materially from theanticipated results or other expectations expressed in our forward-lookingstatements.  These factors include (1) anymaterial changes in our total number of client engagements and the volumeassociated with each engagement, (2) any material changes in our Chapter 7deposit portfolio, the services required or selected by our Chapter 11, Chapter13, class action or mass tort engagements, or the number of cases processed byour Chapter 13 bankruptcy trustee clients, (3) material changes in thenumber of bankruptcy filings, class action filings or mass tort actions eachyear, (4) our reliance on and future changes in our marketing arrangementand pricing arrangements with Bank of America for Chapter 7 revenue, (5) themarketing and pricing arrangements with other Chapter 7 depository banks,  (6) the impact of recently enacted tortreform and bankruptcy reform legislation on the volume and timing of dispositionof client engagements, (7) risks associated with the integration ofacquisitions into our existing business operations, (8) risks associatedwith our indebtedness, and (9) other risks detailed from time to time inour SEC filings, including our annual report on Form 10-K for the yearended December 31, 2004.  Inaddition, there may be other factors not included in our SEC filings that maycause actual results to differ materially from any forward-lookingstatements.  We undertake no obligationsto update any forward-looking statements contained herein to reflect futureevents or developments.

 

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**ITEM 3.****                  Quantitative and QualitativeDisclosures About Market Risk.**

 

Marketrisk refers to the risk that a change in the level of one or more marketprices, interest rates, indices, volatilities, correlations or other marketfactors, such as liquidity, will result in losses for a certain financialinstrument or group of financial instruments. Our exposure to market risk has not changed significantly since December 31,2004.

 

**ITEM 4.****                  Controlsand Procedures.**

 

An evaluation was carriedout by the Company’s Chief Executive Officer and Chief Financial Officer of theeffectiveness of the design and operations of the Company’s disclosure controlsand procedures (as defined in Exchange Act Rule 13a-15(e)).  Based upon that evaluation as of the end ofthe period covered by this report, the CEO and the CFO concluded that theCompany’s disclosure controls and procedures are effective in timely alertingthem to material information relating to the Company (including ourconsolidated subsidiaries) required to be included in the Company’s periodicfilings with the SEC.  There have been nochanges in the Company’s internal controls over financial reporting during thequarter ended March 31, 2005, that have materially affected, or arereasonably likely to materially affect, the Company’s internal controls overfinancial reporting.

 

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**PART II****- OTHER INFORMATION**

 

**ITEM5****.****                  Other Information.**

 

Duringthe current year we determined that certain revenues from reimbursed expensesand certain expenses, including reimbursed expenses, related to ourPoorman-Douglas subsidiary acquired in January 2004 had not been recordedin the correct segment.

 

Theseclassification errors did not affect our Consolidated Statements of Income,Balance Sheets, Statements of Cash Flows, or Statement of Changes inStockholders’ Equity for any period previously reported.  Additionally, these errors do not affecthistorical or future net cash flows or compliance with any debt covenants.  However, the classification errors did affectour previously reported segment information disclosed in our 2004 quarterlyreports filed on Form 10-Q and on our annual report filed on Form 10-Kfor the year ended December 31, 2004. We will not amend our previously filed 2004 quarterly reports filed on Form 10-Qor our 2004 annual report filed on Form 10-K, but will restate ourcomparative 2004 quarterly segment information to correct these classificationerrors prospectively in our 2005 quarterly reports filed on Form 10-Q andour 2005 annual report filed on Form 10-K. Following is a summary of the effects of the corrections to the segmentdisclosures for each of the 2004 quarters and for the fiscal year ended December 31,2004.

 

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| ** **                                                                  | ** ** | **Three Months Ended March 31, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **(as previously reported)**               | ** ** |
| ** **                                                                  | ** ** | **Case**                                   | ** ** | **Document** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **Management**                             | ** ** | **Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
|                                                                        |       |                                       |       |   |   |   |   |   |   |
| Revenue:                                                                    |       |                                       |       |   |   |   |   |   |   |
| Operating  revenue                                                          |       | $                                          | 16,926     |   | $ | 6,067 |   | $ | — |   | $ | 22,993 |   |
| Reimbursed  expenses                                                        |       | 104                                        |       | 2,915 |   | — |   | 3,019 |   |
| Total revenue                                                               |       | 17,030                                     |       | 8,982 |   | — |   | 26,012 |   |
|                                                                        |       |                                       |       |   |   |   |   |   |   |
| Costs and expenses:                                                         |       |                                       |       |   |   |   |   |   |   |
| Direct and  administrative costs and depreciation and software amortization |       | 5,568                                      |       | 6,771 |   | 4,985 |   | 17,324 |   |
| Amortization of  identifiable intangible assets                             |       | 1,109                                      |       | 571 |   | — |   | 1,680 |   |
| Acquisition  related                                                        |       | —                                     |       | — |   | 2,181 |   | 2,181 |   |
| Total operating  expenses                                                   |       | 6,677                                      |       | 7,342 |   | 7,166 |   | 21,185 |   |
|                                                                        |       |                                       |       |   |   |   |   |   |   |
| Operating income                                                            |       | $                                          | 10,353     |   | $ | 1,640 |   | $ | (7,166 | ) | 4,827 |   |
| Interest  expense, net                                                      |       |                                       |       |   |   |   |   | 1,488 |   |
| Income from  continuing operations before income taxes                      |       |                                       |       |   |   |   |   | 3,339 |   |
| Provision for income  taxes                                                 |       |                                       |       |   |   |   |   | 1,338 |   |
| Net income from  continuing operations                                      |       |                                       |       |   |   |   |   | $ | 2,001 |   |

 
| ** **                                                                  | ** ** | **Three Months Ended March 31, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **(as restated)**                          | ** ** |
| ** **                                                                  | ** ** | **Case**                                   | ** ** | **Document** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **Management**                             | ** ** | **Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
|                                                                        |       |                                       |       |   |   |   |   |   |   |
| Revenue:                                                                    |       |                                       |       |   |   |   |   |   |   |
| Operating  revenue                                                          |       | $                                          | 16,926     |   | $ | 6,067 |   | $ | — |   | $ | 22,993 |   |
| Reimbursed  expenses                                                        |       | 655                                        |       | 2,364 |   | — |   | 3,019 |   |
| Total revenue                                                               |       | 17,581                                     |       | 8,431 |   | — |   | 26,012 |   |
|                                                                        |       |                                       |       |   |   |   |   |   |   |
| Costs and  expenses:                                                        |       |                                       |       |   |   |   |   |   |   |
| Direct and  administrative costs and depreciation and software amortization |       | 6,053                                      |       | 6,161 |   | 5,110 |   | 17,324 |   |
| Amortization of  identifiable intangible assets                             |       | 1,109                                      |       | 571 |   | — |   | 1,680 |   |
| Acquisition  related                                                        |       | —                                     |       | — |   | 2,181 |   | 2,181 |   |
| Total operating  expenses                                                   |       | 7,162                                      |       | 6,732 |   | 7,291 |   | 21,185 |   |
|                                                                        |       |                                       |       |   |   |   |   |   |   |
| Operating income                                                            |       | $                                          | 10,419     |   | $ | 1,699 |   | $ | (7,291 | ) | 4,827 |   |
| Interest  expense, net                                                      | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** |   | 1,488 |   |
| Income from  continuing operations before income taxes                      |       |                                       |       |   |   |   |   | 3,339 |   |
| Provision for  income taxes                                                 |       |                                       |       |   |   |   |   | 1,338 |   |
| Net income from  continuing operations                                      |       |                                       |       |   |   |   |   | $ | 2,001 |   |

 

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| ** **                                                                  | ** ** | **Three Months Ended June 30, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                  | ** ** | **(as previously reported)**              | ** ** |
| ** **                                                                  | ** ** | **Case**                                  | ** ** | **Document** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **Management**                            | ** ** | **Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
|                                                                        |       |                                      |       |   |   |   |   |   |   |
| Revenue:                                                                    |       |                                      |       |   |   |   |   |   |   |
| Operating  revenue                                                          |       | $                                         | 17,372     |   | $ | 12,224 |   | $ | — |   | $ | 29,596 |   |
| Reimbursed  expenses                                                        |       | 1,226                                     |       | 4,086 |   | — |   | 5,312 |   |
| Total revenue                                                               |       | 18,598                                    |       | 16,310 |   | — |   | 34,908 |   |
|                                                                        |       |                                      |       |   |   |   |   |   |   |
| Costs and  expenses:                                                        |       |                                      |       |   |   |   |   |   |   |
| Direct and  administrative costs and depreciation and software amortization |       | 6,919                                     |       | 12,986 |   | 5,918 |   | 25,823 |   |
| Amortization of  identifiable intangible assets                             |       | 1,381                                     |       | 651 |   | — |   | 2,032 |   |
| Total operating  expenses                                                   |       | 8,300                                     |       | 13,637 |   | 5,918 |   | 27,855 |   |
|                                                                        |       |                                      |       |   |   |   |   |   |   |
| Operating income                                                            |       | $                                         | 10,298     |   | $ | 2,673 |   | $ | (5,918 | ) | 7,053 |   |
| Interest  expense, net                                                      |       |                                      |       |   |   |   |   | 1,975 |   |
| Income from  continuing operations before income taxes                      |       |                                      |       |   |   |   |   | 5,078 |   |
| Provision for  income taxes                                                 |       |                                      |       |   |   |   |   | 2,095 |   |
| Net income from  continuing operations                                      |       |                                      |       |   |   |   |   | $ | 2,983 |   |

 
| ** **                                                                  | ** ** | **Three Months Ended June 30, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                  | ** ** | **(as restated)**                         | ** ** |
| ** **                                                                  | ** ** | **Case**                                  | ** ** | **Document** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **Management**                            | ** ** | **Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
|                                                                        |       |                                      |       |   |   |   |   |   |   |
| Revenue:                                                                    |       |                                      |       |   |   |   |   |   |   |
| Operating  revenue                                                          |       | $                                         | 17,372     |   | $ | 12,224 |   | $ | — |   | $ | 29,596 |   |
| Reimbursed  expenses                                                        |       | 675                                       |       | 4,637 |   | — |   | 5,312 |   |
| Total revenue                                                               |       | 18,047                                    |       | 16,861 |   | — |   | 34,908 |   |
|                                                                        |       |                                      |       |   |   |   |   |   |   |
| Costs and  expenses:                                                        |       |                                      |       |   |   |   |   |   |   |
| Direct and  administrative costs and depreciation and software amortization |       | 7,527                                     |       | 12,503 |   | 5,793 |   | 25,823 |   |
| Amortization of  identifiable intangible assets                             |       | 1,381                                     |       | 651 |   | — |   | 2,032 |   |
| Total operating  expenses                                                   |       | 8,908                                     |       | 13,154 |   | 5,793 |   | 27,855 |   |
|                                                                        |       |                                      |       |   |   |   |   |   |   |
| Operating income                                                            |       | $                                         | 9,139      |   | $ | 3,707 |   | $ | (5,793 | ) | 7,053 |   |
| Interest  expense, net                                                      |       |                                      |       |   |   |   |   | 1,975 |   |
| Income from  continuing operations before income taxes                      |       |                                      |       |   |   |   |   | 5,078 |   |
| Provision for  income taxes                                                 |       |                                      |       |   |   |   |   | 2,095 |   |
| Net income from  continuing operations                                      |       |                                      |       |   |   |   |   | $ | 2,983 |   |

 

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| ** **                                                                  | ** ** | **Three Months Ended September 30, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                  | ** ** | **(as previously reported)**                   | ** ** |
| ** **                                                                  | ** ** | **Case**                                       | ** ** | **Document** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **Management**                                 | ** ** | **Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
|                                                                        |       |                                           |       |   |   |   |   |   |   |
| Revenue:                                                                    |       |                                           |       |   |   |   |   |   |   |
| Operating  revenue                                                          |       | $                                              | 16,980     |   | $ | 11,671 |   | $ | — |   | $ | 28,651 |   |
| Reimbursed  expenses                                                        |       | 569                                            |       | 6,474 |   | — |   | 7,043 |   |
| Total revenue                                                               |       | 17,549                                         |       | 18,145 |   | — |   | 35,694 |   |
|                                                                        |       |                                           |       |   |   |   |   |   |   |
| Costs and  expenses:                                                        |       |                                           |       |   |   |   |   |   |   |
| Direct and  administrative costs and depreciation and software amortization |       | 7,421                                          |       | 13,806 |   | 6,108 |   | 27,335 |   |
| Amortization of  identifiable intangible assets                             |       | 1,381                                          |       | 651 |   | — |   | 2,032 |   |
| Acquisition  related                                                        |       | —                                         |       | — |   | 16 |   | 16 |   |
| Total operating  expenses                                                   |       | 8,802                                          |       | 14,457 |   | 6,124 |   | 29,383 |   |
|                                                                        |       |                                           |       |   |   |   |   |   |   |
| Operating income                                                            |       | $                                              | 8,747      |   | $ | 3,688 |   | $ | (6,124 | ) | 6,311 |   |
| Interest  expense, net                                                      |       |                                           |       |   |   |   |   | 1,621 |   |
| Debt  extinguishment expense                                                |       |                                           |       |   |   |   |   | 995 |   |
| Income from  continuing operations before income taxes                      |       |                                           |       |   |   |   |   | 3,695 |   |
| Provision for  income taxes                                                 |       |                                           |       |   |   |   |   | 1,534 |   |
| Net income from  continuing operations                                      |       |                                           |       |   |   |   |   | $ | 2,161 |   |

 
| ** **                                                                  | ** ** | **Three Months Ended September 30, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                  | ** ** | **(as restated)**                              | ** ** |
| ** **                                                                  | ** ** | **Case**                                       | ** ** | **Document** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **Management**                                 | ** ** | **Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
|                                                                        |       |                                           |       |   |   |   |   |   |   |
| Revenue:                                                                    |       |                                           |       |   |   |   |   |   |   |
| Operating  revenue                                                          |       | $                                              | 16,980     |   | $ | 11,671 |   | $ | — |   | $ | 28,651 |   |
| Reimbursed  expenses                                                        |       | 569                                            |       | 6,474 |   | — |   | 7,043 |   |
| Total revenue                                                               |       | 17,549                                         |       | 18,145 |   | — |   | 35,694 |   |
|                                                                        |       |                                           |       |   |   |   |   |   |   |
| Costs and expenses:                                                         |       |                                           |       |   |   |   |   |   |   |
| Direct and  administrative costs and depreciation and software amortization |       | 7,513                                          |       | 13,714 |   | 6,108 |   | 27,335 |   |
| Amortization of  identifiable intangible assets                             |       | 1,381                                          |       | 651 |   | — |   | 2,032 |   |
| Acquisition  related                                                        |       | —                                         |       | — |   | 16 |   | 16 |   |
| Total operating  expenses                                                   |       | 8,894                                          |       | 14,365 |   | 6,124 |   | 29,383 |   |
|                                                                        |       |                                           |       |   |   |   |   |   |   |
| Operating income                                                            |       | $                                              | 8,655      |   | $ | 3,780 |   | $ | (6,124 | ) | 6,311 |   |
| Interest  expense, net                                                      |       |                                           |       |   |   |   |   | 1,621 |   |
| Debt  extinguishment expense                                                |       |                                           |       |   |   |   |   | 995 |   |
| Income from  continuing operations before income taxes                      |       |                                           |       |   |   |   |   | 3,695 |   |
| Provision for  income taxes                                                 |       |                                           |       |   |   |   |   | 1,534 |   |
| Net income from  continuing operations                                      |       |                                           |       |   |   |   |   | $ | 2,161 |   |

 

25

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| ** **                                                                  | ** ** | **Year Ended December 31, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                  | ** ** | **(as previously reported)**          | ** ** |
| ** **                                                                  | ** ** | **Case**                              | ** ** | **Document** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **Management**                        | ** ** | **Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
|                                                                        |       |                                  |       |   |   |   |   |   |   |
| Revenue:                                                                    |       |                                  |       |   |   |   |   |   |   |
| Operating  revenue                                                          |       | $                                     | 68,526     |   | $ | 36,549 |   | $ | — |   | $ | 105,075 |   |
| Reimbursed  expenses                                                        |       | 2,465                                 |       | 17,880 |   | — |   | 20,345 |   |
| Total revenue                                                               |       | 70,991                                |       | 54,429 |   | — |   | 125,420 |   |
|                                                                        |       |                                  |       |   |   |   |   |   |   |
| Costs and  expenses:                                                        |       |                                  |       |   |   |   |   |   |   |
| Direct and  administrative costs and depreciation and software amortization |       | 28,204                                |       | 41,507 |   | 23,086 |   | 92,797 |   |
| Amortization of  identifiable intangible assets                             |       | 5,243                                 |       | 2,524 |   | — |   | 7,767 |   |
| Acquisition related                                                         |       | —                                |       | — |   | 2,197 |   | 2,197 |   |
| Total operating  expenses                                                   |       | 33,447                                |       | 44,031 |   | 25,283 |   | 102,761 |   |
|                                                                        |       |                                  |       |   |   |   |   |   |   |
| Operating income                                                            |       | $                                     | 37,544     |   | $ | 10,398 |   | $ | (25,283 | ) | 22,659 |   |
| Net expenses  related to financing                                          |       |                                  |       |   |   |   |   | 7,210 |   |
| Income from  continuing operations before income taxes                      |       |                                  |       |   |   |   |   | 15,449 |   |
| Provision for  income taxes                                                 |       |                                  |       |   |   |   |   | 6,386 |   |
| Net income from  continuing operations                                      |       |                                  |       |   |   |   |   | $ | 9,063 |   |

 
| ** **                                                                  | ** ** | **Year Ended December 31, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                  | ** ** | **(as restated)**                     | ** ** |
| ** **                                                                  | ** ** | **Case**                              | ** ** | **Document** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **Management**                        | ** ** | **Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
|                                                                        |       |                                  |       |   |   |   |   |   |   |
| Revenue:                                                                    |       |                                  |       |   |   |   |   |   |   |
| Operating  revenue                                                          |       | $                                     | 68,526     |   | $ | 36,549 |   | $ | — |   | $ | 105,075 |   |
| Reimbursed  expenses                                                        |       | 2,465                                 |       | 17,880 |   | — |   | 20,345 |   |
| Total revenue                                                               |       | 70,991                                |       | 54,429 |   | — |   | 125,420 |   |
|                                                                        |       |                                  |       |   |   |   |   |   |   |
| Costs and  expenses:                                                        |       |                                  |       |   |   |   |   |   |   |
| Direct and  administrative costs and depreciation and software amortization |       | 29,107                                |       | 40,604 |   | 23,086 |   | 92,797 |   |
| Amortization of  identifiable intangible assets                             |       | 5,243                                 |       | 2,524 |   | — |   | 7,767 |   |
| Acquisition  related                                                        |       | —                                |       | — |   | 2,197 |   | 2,197 |   |
| Total operating  expenses                                                   |       | 34,350                                |       | 43,128 |   | 25,283 |   | 102,761 |   |
|                                                                        |       |                                  |       |   |   |   |   |   |   |
| Operating income                                                            |       | $                                     | 36,641     |   | $ | 11,301 |   | $ | (25,283 | ) | 22,659 |   |
| Net expenses  related to financing                                          |       |                                  |       |   |   |   |   | 7,210 |   |
| Income from  continuing operations before income taxes                      |       |                                  |       |   |   |   |   | 15,449 |   |
| Provision for  income taxes                                                 |       |                                  |       |   |   |   |   | 6,386 |   |
| Net income from  continuing operations                                      |       |                                  |       |   |   |   |   | $ | 9,063 |   |

 

26

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**ITEM 6**.                  **Exhibits.**

 

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

 

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

 

32.1         Certificationsof CEO and CFO pursuant to 18 U.S.C. Section 1350.

 

27

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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:  | May 10, 2005                               | /s/ Tom W. Olofson |   |
|   | Tom W. Olofson                                  |
|   | Chairman of the Board                           |
|   | Chief Executive Officer                         |
|   | Director                                        |
|   | (Principal Executive  Officer)                  |
|   |                                            |
|   |                                            |
| Date:  | May 10, 2005                               | /s/ Elizabeth M. Braham |   |
|   | Elizabeth M. Braham                             |
|   | Senior Vice President,  Chief Financial Officer |
|   | (Principal Financial  Officer)                  |
|   |                                            |
|   |                                            |
| Date:  | May 10, 2005                               | /s/ Douglas W. Fleming |   |
|   | Douglas W. Fleming                              |
|   | Director of Finance                             |
|   | (Principal Accounting  Officer)                 |
|        |                                                 |  |  |  |  |

 

28

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