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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D. C. 20549**

 

**FORM 10-Q**

 

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

**of theSecurities Exchange Act of 1934**

 

**x****  For the Quarterly Period Ended March 31, 2009**

 

**OR**

 

**o**** Transition Report Pursuant to Section 13 or 15(d)**

**of theSecurities Exchange Act of 1934**

 

**For thetransition period from                    to                    **

 

**CommissionFile Number 0-22081**

 

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**EPIQSYSTEMS, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Missouri**                     | ** ** | **48-1056429**                        |
|----------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of |       | (IRS Employer  Identification Number) |
| incorporation or  organization)  |       |                                  |

 

**501Kansas Avenue, Kansas City, Kansas 66105-1300**

(Address ofprincipal executive office)

 

**913-621-9500**

(Registrant’stelephone 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  **x** No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.   See the definition of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 
| Large Accelerated Filer   o |   | Accelerated Filer  **x** |   | Non-Accelerated Filer  o                   |   | Smaller Reporting  Company  o |
|----------------------------------|--------|-------------------------------|--------|-------------------------------------------------|--------|------------------------------------|
|                             |   |                          |   | (Do  not check if a smaller

reporting company) |   |                               |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes  o  No  **x**

 

The number of sharesoutstanding of registrant’s common stock at April 24, 2009:

 

| **Class**                      | ** ** | **Outstanding** |
|--------------------------------|------------|-----------------|
| Common Stock,  $0.01 par value |       | 36,049,071      |

 

 

 

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**EPIQ SYSTEMS, INC.**

**FORM 10-Q**

**QUARTER ENDED MARCH 31, 2009**

 

**CONTENTS**

 

 
| ** **                                                                                                                                                    | **Page**   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **PART I -  FINANCIAL INFORMATION**                                                                                                                      | ** ** | ** ** |
|                                                                                                                                                          |       |   |
| Item 1.  Condensed Consolidated Financial Statements                                                                                                          |       |   |
|                                                                                                                                                          |       |   |
| Condensed Consolidated  Statements of Income —  Three months ended March 31, 2009 and 2008 (Unaudited)                                              | 1          |   |
|                                                                                                                                                          |       |   |
| Condensed Consolidated  Balance Sheets —  March 31, 2009 (Unaudited) and December 31, 2008                                                     | 2          |   |
|                                                                                                                                                          |       |   |
| Condensed Consolidated  Statement of Changes in Stockholders’ Equity and Comprehensive Income —  Three months ended March 31, 2009 (Unaudited) | 3          |   |
|                                                                                                                                                          |       |   |
| Condensed Consolidated  Statements of Cash Flows —  Three months ended March 31, 2009 and 2008 (Unaudited)                                          | 4          |   |
|                                                                                                                                                          |       |   |
| Notes to Condensed Consolidated Financial Statements  (Unaudited)                                                                                             | 5          |   |
|                                                                                                                                                          |       |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                                          | 17         |   |
|                                                                                                                                                          |       |   |
| Item 3. Quantitative and Qualitative Disclosures about  Market Risk                                                                                           | 25         |   |
|                                                                                                                                                          |       |   |
| Item 4. Controls and Procedures                                                                                                                               | 25         |   |
|                                                                                                                                                          |       |   |
| **PART II  - OTHER INFORMATION**                                                                                                                         |       |   |
|                                                                                                                                                          |       |   |
| Item  1.      Legal Proceedings                                                                                                      | 26         |   |
|                                                                                                                                                          |       |   |
| Item  1A.   Risk Factors                                                                                                                            | 26         |   |
|                                                                                                                                                          |       |   |
| Item 6.       Exhibits                                                                                                               | 26         |   |
|                                                                                                                                                          |       |   |
| Signatures                                                                                                                                                    | 27         |   |

 

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**PART I- FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

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

##### **CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

##### **(UNAUDITED)**

**(inthousands, except per share data)**

 
| ** **                                                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                                                                                                              |       |                                             |       |   |   |
| **REVENUE:**                                                                                                      |       |                                             |       |   |   |
| Case management  services                                                                                         |       | $                                                | 34,534     |   | $ | 28,796 |   |
| Case management  bundled products and services                                                                    |       | 3,327                                            |       | 5,291 |   |
| Document  management services                                                                                     |       | 14,752                                           |       | 9,814 |   |
| Operating  revenue before reimbursed direct costs                                                                 |       | 52,613                                           |       | 43,901 |   |
| Operating  revenue from reimbursed direct costs                                                                   |       | 8,215                                            |       | 5,109 |   |
| Total Revenue                                                                                                     |       | 60,828                                           |       | 49,010 |   |
|                                                                                                              |       |                                             |       |   |   |
| **OPERATING  EXPENSE:**                                                                                           |       |                                             |       |   |   |
| Direct cost of  services (exclusive of depreciation and amortization shown separately below)                      |       | 19,670                                           |       | 18,827 |   |
| Direct cost of bundled products and services (exclusive of depreciation  and amortization shown separately below) |       | 855                                              |       | 947 |   |
| Reimbursed  direct costs                                                                                          |       | 8,047                                            |       | 5,121 |   |
| General and  administrative                                                                                       |       | 18,307                                           |       | 15,080 |   |
| Depreciation and  software and leasehold amortization                                                             |       | 4,514                                            |       | 3,710 |   |
| Amortization of  identifiable intangible assets                                                                   |       | 1,936                                            |       | 2,278 |   |
| Other operating  expense (income)                                                                                 |       | 471                                              |       | (2,371 | ) |
| Total Operating  Expense                                                                                          |       | 53,800                                           |       | 43,592 |   |
|                                                                                                              |       |                                             |       |   |   |
| **INCOME  FROM OPERATIONS**                                                                                       |       | 7,028                                            |       | 5,418 |   |
|                                                                                                              |       |                                             |       |   |   |
| **INTEREST  EXPENSE (INCOME):**                                                                                   |       |                                             |       |   |   |
| Interest expense                                                                                                  |       | 373                                              |       | 490 |   |
| Interest income                                                                                                   |       | (35                                              | )          | (143 | ) |
| Net Interest  Expense                                                                                             |       | 338                                              |       | 347 |   |
|                                                                                                              |       |                                             |       |   |   |
| **INCOME  BEFORE INCOME TAXES**                                                                                   |       | 6,690                                            |       | 5,071 |   |
|                                                                                                              |       |                                             |       |   |   |
| **PROVISION  FOR INCOME TAXES**                                                                                   |       | 3,412                                            |       | 2,415 |   |
|                                                                                                              |       |                                             |       |   |   |
| **NET  INCOME**                                                                                                   |       | $                                                | 3,278      |   | $ | 2,656 |   |
|                                                                                                              |       |                                             |       |   |   |
| **NET  INCOME PER SHARE INFORMATION:**                                                                            |       |                                             |       |   |   |
| Basic                                                                                                             |       | $                                                | 0.09       |   | $ | 0.08 |   |
| Diluted                                                                                                           |       | $                                                | 0.09       |   | $ | 0.07 |   |
|                                                                                                              |       |                                             |       |   |   |
| **WEIGHTED  AVERAGE COMMON SHARES OUTSTANDING:**                                                                  |       |                                             |       |   |   |
| Basic                                                                                                             |       | 35,686                                           |       | 35,291 |   |
| Diluted                                                                                                           |       | 41,936                                           |       | 41,375 |   |

 

**Seeaccompanying Notes to Condensed Consolidated Financial Statements.**

 

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**EPIQ SYSTEMS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(in thousands, except sharedata)**

 
| ** **                                                                                                                     | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                     | ** ** | **(Unaudited)**              | ** ** | ** **                      | ** ** |
| **ASSETS**                                                                                                                     |       |                         |       |                            |       |
| **CURRENT ASSETS:**                                                                                                            |       |                         |       |                            |       |
| Cash and cash equivalents                                                                                                      |       | $                            | 14,298     |                            | $          | 19,006 |   |
| Trade accounts receivable, less allowance for doubtful accounts  of $2,460 and $2,600, respectively                            |       | 62,305                       |       | 48,540                          |       |
| Prepaid expenses                                                                                                               |       | 5,824                        |       | 6,015                           |       |
| Other current assets                                                                                                           |       | 756                          |       | 2,552                           |       |
| Total Current Assets                                                                                                           |       | 83,183                       |       | 76,113                          |       |
|                                                                                                                           |       |                         |       |                            |       |
| **LONG-TERM ASSETS:**                                                                                                          |       |                         |       |                            |       |
| Property and equipment, net                                                                                                    |       | 39,915                       |       | 39,951                          |       |
| Internally developed software costs, net                                                                                       |       | 12,117                       |       | 11,024                          |       |
| Goodwill                                                                                                                       |       | 263,758                      |       | 263,871                         |       |
| Other intangibles, net of accumulated amortization of $43,632  and $41,714, respectively                                       |       | 24,887                       |       | 26,851                          |       |
| Other                                                                                                                          |       | 1,064                        |       | 1,136                           |       |
| Total Long-term Assets, net                                                                                                    |       | 341,741                      |       | 342,833                         |       |
| **Total Assets**                                                                                                               |       | $                            | 424,924    |                            | $          | 418,946 |   |
|                                                                                                                           |       |                         |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                 |       |                         |       |                            |       |
| **CURRENT LIABILITIES:**                                                                                                       |       |                         |       |                            |       |
| Accounts payable                                                                                                               |       | $                            | 13,423     |                            | $          | 12,781 |   |
| Accrued compensation                                                                                                           |       | 2,187                        |       | 7,525                           |       |
| Deposits                                                                                                                       |       | 4,670                        |       | 2,150                           |       |
| Deferred revenue                                                                                                               |       | 3,774                        |       | 2,363                           |       |
| Other accrued expenses                                                                                                         |       | 4,491                        |       | 2,628                           |       |
| Current maturities of long-term obligations                                                                                    |       | 5,057                        |       | 5,912                           |       |
| Total Current Liabilities                                                                                                      |       | 33,602                       |       | 33,359                          |       |
|                                                                                                                           |       |                         |       |                            |       |
| **LONG-TERM LIABILITIES:**                                                                                                     |       |                         |       |                            |       |
| Deferred income taxes                                                                                                          |       | 20,966                       |       | 20,988                          |       |
| Other long-term liabilities                                                                                                    |       | 9,789                        |       | 8,794                           |       |
| Long-term obligations (excluding current maturities)                                                                           |       | 54,869                       |       | 55,310                          |       |
| Total Long-term Liabilities                                                                                                    |       | 85,624                       |       | 85,092                          |       |
|                                                                                                                           |       |                         |       |                            |       |
| **COMMITMENTS AND CONTINGENCIES**                                                                                              |       |                         |       |                            |       |
|                                                                                                                           |       |                         |       |                            |       |
| **STOCKHOLDERS’ EQUITY:**                                                                                                 |       |                         |       |                            |       |
| Preferred stock - $1 par value; 2,000,000 shares authorized;  none issued and outstanding                                      |       | —                       |       | —                          |       |
| Common stock - $0.01 par value; 100,000,000 shares authorized; issued  and outstanding — 36,027,918 and 35,657,823 shares |       | 360                          |       | 357                             |       |
| Additional paid-in capital                                                                                                     |       | 239,825                      |       | 237,644                         |       |
| Accumulated other comprehensive loss                                                                                           |       | (2,942                       | )          | (2,683                          | )          |
| Retained earnings                                                                                                              |       | 68,455                       |       | 65,177                          |       |
| Total Stockholders’ Equity                                                                                                |       | 305,698                      |       | 300,495                         |       |
| **Total Liabilities and Stockholders’ Equity**                                                                            |       | $                            | 424,924    |                            | $          | 418,946 |   |

 

**See accompanying Notes to Condensed ConsolidatedFinancial Statements.**

 

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**EPIQ SYSTEMS, INC.**

**CONDENSED CONSOLIDATEDSTATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**

**AND COMPREHENSIVE INCOME(UNAUDITED)**

**(in thousands)**

 
| ** **                               | ** ** | **Number of  Outstanding  Shares** | ** ** | **Common  Shares** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other**

**Comprehensive  Loss** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|-----------------------------------------|------------|--------------------|------------|----------------------------------|------------|------------------------|------------|-------------------------------------------------|------------|-----------|------------|
| Balance at  December 31, 2008       |       | 35,658                                  |       | $                  | 357        |                             | $          | 237,644                |       | $                                               | 65,177     |      | $          | (2,683 | ) | $ | 300,495 |   |
| Comprehensive  income:                   |       |                                    |       |               |       |                             |       |                   |       |                                            |       |      |       |
| Net income                               |       | —                                  |       | —             |       | —                           |       | 3,278                  |       | —                                          |       | 3,278     |       |
| Foreign currency  translation adjustment |       | —                                  |       | —             |       | —                           |       | —                 |       | (259                                            | )          | (259      | )          |
| Total  comprehensive income              |       | —                                  |       | —             |       | —                           |       | —                 |       | —                                          |       | 3,019     |       |
| Share-based  compensation plans          |       | 370                                     |       | 3                  |       | 2,181                            |       | —                 |       | —                                          |       | 2,184     |       |
| Balance at  March 31, 2009          |       | 36,028                                  |       | $                  | 360        |                             | $          | 239,825                |       | $                                               | 68,455     |      | $          | (2,942 | ) | $ | 305,698 |   |

 

**See accompanying Notes to CondensedConsolidated Financial Statements.**

 

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**EPIQSYSTEMS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**(In thousands)**

** **
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
|                                                                               |       |                                                 |       |   |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                         |       |                                                 |       |   |   |
| Net income                                                                         |       | $                                                    | 3,278      |   | $ | 2,656 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                 |       |   |   |
| Share-based  compensation expense                                                  |       | 1,472                                                |       | 524 |   |
| Expense for  deferred income taxes                                                 |       | 235                                                  |       | 980 |   |
| Depreciation and  software amortization                                            |       | 4,514                                                |       | 3,710 |   |
| Expense related  to embedded option                                                |       | (403                                                 | )          | (403 | ) |
| Amortization of  intangible assets                                                 |       | 1,936                                                |       | 2,278 |   |
| Other, net                                                                         |       | 298                                                  |       | 124 |   |
| Changes in  operating assets and liabilities:                                      |       |                                                 |       |   |   |
| Trade accounts  receivable                                                         |       | (14,002                                              | )          | (6,248 | ) |
| Prepaid expenses  and other assets                                                 |       | 198                                                  |       | 134 |   |
| Accounts payable  and other liabilities                                            |       | 5,092                                                |       | 4,150 |   |
| Excess tax  benefit related to share-based compensation                            |       | (107                                                 | )          | (39 | ) |
| Other                                                                              |       | (11                                                  | )          | (49 | ) |
| Net cash  provided by operating activities                                         |       | 2,500                                                |       | 7,817 |   |
|                                                                               |       |                                                 |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                         |       |                                                 |       |   |   |
| Purchase of  property and equipment                                                |       | (4,703                                               | )          | (6,072 | ) |
| Internally  developed software costs                                               |       | (2,300                                               | )          | (1,263 | ) |
| Other investing  activities, net                                                   |       | 52                                                   |       | 4 |   |
| Net cash used in  investing activities                                             |       | (6,951                                               | )          | (7,331 | ) |
|                                                                               |       |                                                 |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                         |       |                                                 |       |   |   |
| Payments under  long-term debt                                                     |       | (910                                                 | )          | (606 | ) |
| Excess tax  benefit related to share-based compensation                            |       | 107                                                  |       | 39 |   |
| Proceeds from  exercise of stock options                                           |       | 557                                                  |       | 449 |   |
| Net cash used in  financing activities                                             |       | (246                                                 | )          | (118 | ) |
|                                                                               |       |                                                 |       |   |   |
| Effect of  exchange rate changes on cash                                           |       | (11                                                  | )          | — |   |
|                                                                               |       |                                                 |       |   |   |
| **NET  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS**                          |       | (4,708                                               | )          | 368 |   |
| **CASH  AND CASH EQUIVALENTS, BEGINNING OF YEAR**                                  |       | 19,006                                               |       | 13,415 |   |
| **CASH  AND CASH EQUIVALENTS, END OF PERIOD**                                      |       | $                                                    | 14,298     |   | $ | 13,783 |   |

 

**Seeaccompanying Notes to Condensed Consolidated Financial Statements.**

 

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**EPIQSYSTEMS, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**NOTE 1:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESAND NATURE OF OPERATIONS**

 

The accompanyingCondensed Consolidated Financial Statements have been prepared in accordancewith accounting principles generally accepted in the United States of America,and with the rules and regulations for reporting on Form 10-Q forinterim financial statements. Accordingly, the financial statements do notinclude certain disclosures required for comprehensive annual financialstatements.

 

The unauditedfinancial information reflects all adjustments, which are, in the opinion ofmanagement, necessary to present fairly our results of operations, financialposition, and cash flows for the periods presented. The adjustments consistsolely of normal recurring adjustments. These Condensed Consolidated FinancialStatements should be read in conjunction with the Consolidated FinancialStatements and related Notes included in the Epiq Systems, Inc. (“Epiq,” “we,”“us,” or “our”) Annual Report on Form 10-K for the year ended December 31,2008, filed with the Securities and Exchange Commission on March 4, 2009.

 

The results of operationsfor any quarter or a partial fiscal year period are not necessarily indicativeof the results to be expected for other periods or the entire year.

 

***Principlesof Consolidation***

 

The CondensedConsolidated Financial Statements include the accounts of Epiq and itswholly-owned subsidiaries. Intercompany transactions and balances have beeneliminated in consolidation.

 

***Natureof Operations***

 

We are a provider ofintegrated technology solutions for the legal profession.  Our solutions streamline the administrationof bankruptcy, litigation, financial transactions and regulatory compliancematters.  We offer innovative technologysolutions for electronic discovery, document review, legal notification, claimsadministration and controlled disbursement of funds.  Our clients include law firms, corporatelegal departments, bankruptcy trustees and other professional advisors whorequire innovative technology, responsive service and deep subject-matter expertise.

 

***Revenue Recognition***

 

We have agreements with clients pursuant to which wedeliver various services each month.

 

Following is a description of significant sources ofrevenue.

 

·                  Fees contingent upon themonth-to-month delivery of case management services defined by clientcontracts, such as claims processing, claims reconciliation, professionalservices, call center support, and conversion of data into an organized,searchable electronic database. The amount we earn varies based primarily onthe size and complexity of the engagement.

 

·                  Hostingfees based on the amount of data stored.

 

·                  Deposit-basedfees, earned primarily based on a percentage of Chapter 7 total liquidated assetsplaced on deposit with a designated financial institution by our trusteeclients, to whom we provide, at no charge, software licenses, limited hardwareand hardware maintenance, and postcontract customer support services. The feeswe earn are based on total liquidated assets placed on deposit by our trusteeclients and may vary based on fluctuations in short-term interest rates.Interest rate fluctuations are somewhat mitigated by pricing arrangements witheach financial institution that set ceilings and floors on the interest ratesthat we earn.

 

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·                  Legalnoticing services to parties of interest in bankruptcy and class actionmatters, including direct notification, media campaign, and advertisingmanagement in which we coordinate notification through various media outlets,such as print, radio and television, to potential parties of interest for aparticular client engagement.

 

·                  Reimbursementfor costs incurred, primarily related to postage on mailing services.

 

*Non-Software Arrangements*

 

Servicesrelated to electronic discovery and settlement administration are billed basedon volume and are evaluated pursuant to Emerging Issues Task Force (“EITF”)00-21, *Revenue Arrangements with MultipleDeliverables* (“EITF 00-21”). For these contractual arrangements, we have identified each deliverableservice element.  Based on our evaluationof each element, we have determined that each element delivered has standalonevalue to our customers because we or other vendors sell such servicesseparately from any other services/deliverables.  We have also obtained objective and reliableevidence of the fair value of each element based either on the price we chargewhen we sell an element on a standalone basis or based on third-party evidenceof fair value of such similar services. Lastly, our arrangements do not include general rights of return.  Accordingly, each of the service elements inour multiple element case and document management arrangements qualifies as aseparate unit of accounting under EITF 00-21. We allocate revenue to the various units of accounting in ourarrangements based on the fair value of each unit of accounting, which is generallyconsistent with the stated prices in our arrangements. As we have evidence ofan arrangement, revenue for each separate unit of accounting is recognized eachperiod in accordance with Staff Accounting Bulletin Topic 13, *Revenue Recognition* (“SAB Topic 13”).  Revenue is recognized as the services arerendered, our fee becomes fixed and determinable, and collectability isreasonably assured.  Payments received inadvance of satisfaction of the related revenue recognition criteria arerecognized as a customer deposit until all revenue recognition criteria havebeen satisfied.

 

*SoftwareArrangements*

 

For our Chapter 7 bankruptcy trustee arrangements, weprovide our trustee clients with a software license, hardware lease, hardwaremaintenance, and postcontract customer support services, all at no charge tothe trustee.  The trustees place theirliquidated estate deposits with a financial institution with which we have anarrangement.  We earn contingent monthlyfees from the financial institutions based on the dollar level of averagemonthly deposits held by the trustees with that financial institution relatedto the software license, hardware lease, hardware maintenance, and postcontractcustomer support services.  We accountfor the software license and postcontract customer support elements inaccordance with Statement of Position 97-2, *Software RevenueRecognition* (“SOP 97-2”). Since we have not established vendor specific objective evidence (“VSOE”)of the fair value of the software license, we do not recognize any revenue ondelivery of the software.  The softwareelement is deferred and included with the remaining undelivered element, whichare postcontract customer support services. This revenue, when recognized, is included as a component of “casemanagement services revenue”.  Revenuerelated to postcontract customer support is entirely contingent on theplacement of liquidated estate deposits by the trustee with the financialinstitution.  Accordingly, we recognizethis contingent usage based revenue consistent with the guidance provided bythe American Institute of Certified Public Accountants’ Technical Practice Aid5100.76, *Fair Value in Multiple-Element Arrangements ThatInclude Contingent Usage-Based Fees and Software Revenue Recognition*as the fee becomes fixed or determinable at the time actual usage occurs andcollectibility is probable.  This occursmonthly as a result of the computation, billing and collection of monthlydeposit fees contractually agreed to.  Atthat time, we have also satisfied the other revenue recognition criteriacontained in SOP 97-2 since we have persuasive evidence that an arrangementexists, services have been rendered, the price is fixed and determinable, andcollectability is reasonably assured.

 

We also provide our trusteeclients with certain hardware, such as desktop computers, monitors, andprinters; and hardware maintenance.  Weretain ownership of all hardware provided and, based on guidance provided inEITF 01-8, *Determining Whether anArrangement Contains a Lease*, we account for this hardware as alease.  As the hardware maintenancearrangement is an executory contract similar to an operating lease, we useguidance related to contingent rentals in operating lease arrangements forhardware maintenance as well as for the hardware lease.  Since the payments under all of ourarrangements are contingent upon the level of trustee deposits and the deliveryof upgrades and other services, and there remain important uncertaintiesregarding the amount of unreimbursable costs yet to be incurred by us, weaccount for the hardware lease as an operating lease in accordance withStatement of Financial Accounting Standards (“SFAS”) 13, *Accounting for Leases*.  Therefore, all lease payments, based on theestimated fair value of hardware provided, were accounted for as contingentrentals under EITF Issue No. 98-9, *Accountingfor Contingent Rent* and** SAB Topic 13, which requires that we recognizerental income when the changes in the factor on which the contingent leasepayment is based 

 

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actually occur.  This occurs at the end of each period as weachieve our target when deposits are held at the depository financialinstitution as, at that time, evidence of an arrangement exists, delivery hasoccurred, the amount has become fixed and determinable, and collection isreasonably assured.  This revenue, whichis less than ten percent of our total revenue, is included in the CondensedConsolidated Statements of Income as a component of “case management services”revenue.

 

*Reimbursements*

 

We haverevenue related to the reimbursement of certain costs, primarily postage.  Consistent with guidance provided by EITF No. 01-14,*Income Statement Characterization of ReimbursementsReceived for “Out-of-Pocket” Expenses Incurred*, reimbursed postageand other reimbursable direct costs are recorded gross in the CondensedConsolidated Statements of Income as “Operating revenue from reimbursed direct costs” and as “Reimbursed direct costs”,respectively.

 

***Recently Adopted AccountingPronouncements***

 

In December 2007,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(revised 2007), *Business Combinations* (“SFAS141(R)”). SFAS 141(R) establishes guidelines for the recognition andmeasurement of assets, liabilities and equity in business combinations. Theprovisions of SFAS 141(R) were effective for us as of January 1,2009. Due to the adoption of SFAS 141(R) we now expense, as incurred,acquisition-related costs for potential and completed acquisitions.Acquisition-related costs expensed in the first quarter of 2009 wereapproximately $0.5 million. These costs are included in “Other operating expense(income)” in our Condensed Consolidated Statements of Income. SFAS 141(R) alsoamends SFAS No. 109, *Accounting for IncomeTaxes*, and now requires the recognition of changes in an acquirer’sincome tax valuation allowance on deferred taxes and acquired tax contingenciesassociated with acquisitions that closed prior to the effective date of SFAS141(R) to apply the provisions of SFAS 141(R). The provisions of SFAS 141(R) willprimarily apply to all future acquisitions.

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interest in Consolidated FinancialStatements* (“SFAS 160”).  SFAS160 changes the way in which noncontrolling interests in subsidiaries aremeasured and classified on the balance sheet. The provisions of SFAS 160 were effective for us as of January 1,2009. The adoption of SFAS 160 had no impact on our consolidated financialposition or results of operations.

 

In February 2008, the FASB issued FASB StaffPosition (“FSP”) No. FAS 157-2, *Effective Date of FASBStatement No. 157*, (“FSP FAS 157-2”) which, as of February 12,2008, indefinitely delayed the effective date of SFAS No. 157, *Fair Value Measurements,*for nonfinancial assets andnonfinancial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on a recurring basis.  The provisions of FSP FAS 157-2 wereeffective for us as of January 1, 2009. The adoption of FSP FAS 157-2 didnot have a material impact on our financial position, results of operations, orcash flows.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities — an amendment of FASB Statement No. 133*(“SFAS161”). SFAS 161 changes the disclosure requirements for derivative instrumentsand hedging activities.  The provisionsof SFAS 161 were effective for us as of January 1, 2009.  The adoption of SFAS 161 had no impact on ourconsolidated financial position or results of operations. Disclosures requiredby this statement are included in Note 3.

 

In April 2008, theFASB issued FSP No. FAS 142-3, *Determination of theUseful Life of Intangible Assets* (“FSP FAS 142-3”).  FSP FAS 142-3 provides guidance ondetermining the useful life of a recognized intangible asset.  The provisions of FSP No. FAS 142-3 wereeffective for us as of January 1, 2009. The provisions of FSP FAS 142-3had no impact on our consolidated financial position or results of operationsduring the quarter ended March 31, 2009 as we did not renew or extend theuseful lives of any of our intangible assets.

 

In June 2008, theFASB issued FSP No. EITF 03-6-1, *Determining WhetherInstruments Granted in Share-Based Payment Transactions Are ParticipatingSecurities*(“FSP EITF 03-6-1”). FSP EITF 03-6-1 clarifies thatshare-based payment awards that entitle their holders to receivenon-forfeitable dividends or dividend equivalents before vesting should beconsidered participating securities, and requires them to be included in thecomputation of earnings per share pursuant to the two-class method described inSFAS No. 128, *Earnings per Share*(“SFAS 128”). The provisions of FSP EITF 03-6-1 were effective for us as of January 1,2009, and require all prior period income per share data presented to beadjusted retroactively. We have determined that nonvested share awards thatwere granted in the first quarter of 2009 are participating securities as 

 

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defined by FSP EITF 03-6-1because they have equivalent common stock dividend rights.  Accordingly, we have included these shares inour basic and diluted share calculations as appropriate.  There is no prior period impact of thisguidance as there were no participating securities outstanding prior to thefirst quarter of 2009. Details of the income per share calculation aredescribed in Note 4.

 

In June 2008, the FASB ratified the consensusreached by the EITF on three issues discussed at its June 12, 2008 meetingpertaining to EITF Issue No. 07-5, *Determining Whether anInstrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock*(“EITF 07-5”). The issues include how an entity should evaluate whether anequity-linked financial instrument (or embedded feature) is indexed to its ownstock, including evaluating the instrument’s contingent exercise and settlementprovisions; how the currency in which the strike price of an equity-linkedfinancial instrument (or embedded feature) is denominated affects thedetermination of whether the instrument is indexed to an entity’s own stock;and how the issuer should account for market-based employee stock optionvaluation. The adoption of EITF 07-5 did not have an impact on our consolidatedfinancial position.

 

In April 2009, the FASB issued FSP No. FAS141(R)-1, *Accounting for Assets Acquired and LiabilitiesAssumed in a Business Combination That Arise from Contingencies* (“FSPFAS 141(R)-1”). FSP FAS 141(R)-1 amends and clarifies FASB No. 141(revised 2007), *Business Combinations*, to addressapplication issues raised by preparers, auditors, and members of the legalprofession on initial recognition and measurement, subsequent measurement andaccounting, and disclosure of assets and liabilities arising from contingenciesin a business combination. FSP FAS 141(R)-1 is effective for us for businesscombinations completed on or after January 1, 2009.

 

***Recently Issued AccountingPronouncements***

 

In April 2009, the FASB issued FSP No. FAS107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments*(“FSP FAS 107-1 and APB 28-1”).FSP FAS 107-1 and APB 28-1, amends FASB Statement No. 107, *Disclosures about Fair Value of Financial Instruments*, torequire disclosures about the fair value of financial instruments in interim aswell as in annual financial statements. This FSP also amends APB Opinion No. 28,*Interim Financial Reporting*, to requirethose disclosures in summarized financial information at interim reportingperiods. These standards are effective for periods ending after June 15,2009.  We do not expect the adoption ofFSP FAS 107-1 and APB 28-1 to have a material effect on our condensedconsolidated financial statements and related disclosures.

 

#### **NOTE2:   GOODWILL AND INTANGIBLE ASSETS**

#### ** **

The change in the carryingamount of goodwill for the first quarter of 2009 was as follows (in thousands):

 
| ** **                              | ** ** | **Electronic  Discovery** | ** ** | **Bankruptcy** | ** ** | **Settlement  Administration** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|----------------|------------|--------------------------------|------------|-----------|------------|
| Balance as of  December 31, 2008   |       | 79,586                    |       | 151,438        |       | 32,847                         |       | 263,871   |       |
| Foreign currency  translation and other |       | (113                      | )          | —         |       | —                         |       | (113      | )          |
| Balance as of  March 31, 2009      |       | 79,473                    |       | 151,438        |       | 32,847                         |       | 263,758   |       |

 

Amortizing identifiableintangible assets as of March 31, 2009 and December 31, 2008consisted of the following (in thousands):

 
| ** **              | ** ** | **March 31, 2009**    | ** ** | **December 31, 2008** | ** ** |
|-------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer  relationships |       | $                               | 39,964     |                            | $          | 23,004 |   | $ | 39,986 |   | $ | 22,039 |   |
| Trade names             |       | 745                             |       | 745                             |       | 745 |   | 745 |   |
| Non-compete  agreements |       | 27,810                          |       | 19,883                          |       | 27,834 |   | 18,930 |   |
|                    |       | $                               | 68,519     |                            | $          | 43,632 |   | $ | 68,565 |   | $ | 41,714 |   |

 

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Customer relationships andnon-compete agreements both carry a weighted average life of eight years.Aggregate amortization expense related to identifiable intangible assets was$1.9 million and $2.3 million for the three month period ended March 31,2009 and 2008, respectively. Amortization expense related to identifiable intangible assets forfiscal year 2009 and the following five years is estimated as follows (inthousands):

 
| **Year Ending  December 31,** | ** ** | **Estimated  Amortization  Expense** | ** **   |
|------------------------------------|------------|--------------------------------------|--------------|
| 2009                               |       | $                                    |  7,601  |   |
| 2010                               |       | 6,692                                |         |
| 2011                               |       | 4,832                                |         |
| 2012                               |       | 4,652                                |         |
| 2013                               |       | 3,070                                |         |
| 2014                               |       | 192                                  |         |
|                               |       | $                                    |  27,039 |   |

 

### **NOTE3:   LONG-TERM OBLIGATIONS**

### ** **

The following is asummary of long-term obligations outstanding (in thousands):

 
| ** **                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Contingent  convertible subordinated debt, including embedded option |       | $                  | 51,946     |                  | $          | 52,348 |   |
| Capital leases                                                       |       | 3,771              |       | 4,682                 |       |
| Deferred  acquisition price                                          |       | 4,209              |       | 4,192                 |       |
| Total long-term  obligations, including current portion              |       | $                  | 59,926     |                  | $          | 61,222 |   |

 

***CreditFacilities***

 

During July 2008, weamended and restated our credit facility. The amended credit facility, with KeyBank National Association asadministrative agent, consists of a $100.0 million senior revolving loan.  The facility matures in July 2011.  During the term of the credit facility, wehave the right, subject to compliance with our covenants, to increase thesenior revolving loan to $175.0 million. The amended credit facility is secured by liens on our real property anda significant portion of our personal property. Interest on the amended credit facility is generally based on a spread,not to exceed 325 basis points, over the LIBOR rate.  There were no amounts due under the seniorrevolving credit loan as of March 31, 2009 or December 31, 2008. Todetermine the amount that we may borrow, the $100.0 million available under therevolving loan is reduced by $1.8 million in outstanding letters of credit.

 

Our amended creditfacility contains financial covenants related to earnings before interest,provision for income taxes, depreciation, amortization and other adjustments asdefined in the agreements (“EBITDA”) and total debt.  In addition, our credit facility alsocontains financial covenants related to senior debt, fixed charges, and workingcapital.  As of March 31, 2009, wewere in compliance with all financial covenants.

 

***ContingentConvertible Subordinated Notes***

 

During June 2004, weissued $50.0 million of contingent convertible subordinated notes (“convertiblenotes”) with a fixed 4% per annum interest rate and an original maturity of June 15,2007.  The holders of the convertiblenotes had the right to extend the maturity date by up to three years.  In April 2007, the holders exercisedthis right and the maturity date of the convertible notes was extended to June 15,2010.  If we change our capital structure(for example, through a stock dividend or stock split) while the convertiblenotes are outstanding, the conversion price would be adjusted on a consistentbasis and, accordingly, the number of shares of common stock we would issue onconversion would be adjusted.  Theconvertible notes are convertible into 4.3 million shares of our common stockat a price of approximately $11.67 per share, and do not contain the rights toany dividends. We have the right to require that the holders of the convertiblenotes convert to equity if our share price exceeds $23.33 on a weighted averagebasis for 20 consecutive trading days.

 

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Under SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*(“SFAS 133”), the right to extend the maturity of the convertible notes wasaccounted for as an embedded option subject to bifurcation.  The embedded option was initially valued at$1.2 million and the convertible notes balance was reduced by the sameamount.  During April 2007, theholders of the convertible notes exercised their right to extend and weperformed a final valuation to estimate the fair value of the embedded optionas of the approximate date of the extension. The estimated fair value of the embedded option at this date, includedas a component of the convertible notes, was approximately $4.8 million. The$4.8 million estimated fair value of the embedded option is amortized as acredit to “Interest expense” on the Condensed Consolidated Statements of Incomeover the period to the extended maturity, which is June 15, 2010. Thebalance of this embedded option is included as a component of “Long-term obligations”on the Condensed Consolidated Balance Sheets. If any convertible notes areconverted into shares of our common stock prior to June 15, 2010, theunamortized embedded option value related to those shares will be recognized asa gain in the period the conversion occurs. The above changes related to the carrying value of the convertiblenotes, the estimated fair value of the embedded option, and the amortization ofthe fair value of the embedded option do not affect our cash flow.

 

***CapitalLeases***

 

We lease certain propertyand software under capital leases that expire during various years through2011.

 

***ScheduledPrincipal Payments***

 

Ourlong-term obligations, consisting of convertible notes (including the carryingvalue of the embedded option), deferred acquisition price, and capitalizedleases, mature as follows for each twelve-month period ending March 31 (inthousands):

 
| 2010  |   | $      | 5,057  |   |
|-------|--------|--------|--------|--------|
| 2011  |   | 54,317 |   |
| 2012  |   | 552    |   |
| 2013  |   | — |   |
| 2014  |   | — |   |
| Total |   | $      | 59,926 |   |

 

**NOTE 4:   NET INCOME PER SHARE**

 

Basic net income pershare is computed on the basis of weighted average outstanding commonshares.  Diluted net income per share iscomputed on the basis of basic weighted average outstanding common sharesadjusted for the dilutive effect of stock options and convertible debt, ifdilutive. The numerator of the diluted net income per share calculation isincreased by the amount of interest expense, net of tax, related to outstandingconvertible debt, and the allocation of net income to nonvested shares, if thenet impact is dilutive.

 

As prescribed in FSP EITF03-6-1, which we adopted in the first quarter of 2009, we have determined thatthe nonvested share awards (also referred to as restricted stock awards) thatwere issued during the quarter are participating securities because they havenon-forfeitable rights to dividends. Accordingly, the basic net income pershare calculation below is calculated under the two-class method calculation,which is discussed in SFAS No. 128, *Earnings per Share*(“SFAS128”). In determining the number of diluted shares outstanding, we are requiredto disclose the more dilutive earnings per share result between the treasurystock method calculation and the two-class method calculation. For the threemonths ended March 31, 2009, the two-class method calculation was moredilutive; therefore, the diluted net income per share information below ispresented following the two-class method. While FSP EITF 03-6-1 requiresretrospective application, there is no impact to our prior year calculation aswe did not have any participating securities outstanding during the prior year.

 

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The computation of basic anddiluted net income per share for the three months ended March 31, 2009 isas follows (in thousands, except per share data):

 
| ** **                                               | ** ** | **Three months ended March 31, 2009** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                               | ** ** | **Net Income  (Numerator)**                               | ** ** | **Weighted Average  Common  Shares  Outstanding  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|                                                     |       |                                                           |       |   |   |   |   |
| Net income                                               |       | $                                                              | 3,278      |   |   |   |   |   |
| Less: net income  allocated to nonvested shares (1)      |       | (11                                                            | )          |   |   |   |   |
|                                                     |       |                                                           |       |   |   |   |   |
| **Basic  net income available to common stockholders**   |       | 3,267                                                          |       | 35,686 |   | $ | 0.09 |   |
|                                                     |       |                                                           |       |   |   |   |   |
| Effect of  dilutive securities:                          |       |                                                           |       |   |   |   |   |
| Stock options                                            |       | —                                                         |       | 1,964 |   |   |   |
| Convertible debt                                         |       | 298                                                            |       | 4,286 |   |   |   |
| Add-back: net  income allocated to nonvested shares(1)   |       | 11                                                             |       | — |   |   |   |
| Less: net income  re-allocated to nonvested shares       |       | (10                                                            | )          | — |   |   |   |
|                                                     |       |                                                           |       |   |   |   |   |
| **Diluted  net income available to common stockholders** |       | $                                                              | 3,566      |   | 41,936 |   | $ | 0.09 |   |

 

----

(1)             Net income allocated to holders of nonvestedshares is calculated based upon a weighted average percentage of nonvestedshares in relation to total shares outstanding.

 

The computation ofbasic and diluted net income per share for the three months ended March 31,2008, is as follows (in thousands, except per share data):

 
| ** **                         | ** ** | **Three months ended March 31, 2008** | ** ** |
|------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                         | ** ** | **Net Income**                                            | ** ** | **Weighted  Average  Common  Shares  Outstanding** | ** ** | **Per Share  Amount** | ** ** |
|                               |       |                                                           |       |   |   |   |   |
| Basic net income  per common share |       | $                                                              | 2,656      |   | 35,291 |   | $ | 0.08 |   |
| Effect of  dilutive securities:    |       |                                                           |       |   |   |   |   |
| Stock options                      |       | —                                                         |       | 1,798 |   |   |   |
| Convertible debt                   |       | 301                                                            |       | 4,286 |   |   |   |
| Diluted net  income per share      |       | $                                                              | 2,957      |   | 41,375 |   | $ | 0.07 |   |

 

#### **For the three month period ended March 31,2009 and 2008, weighted-average outstanding stock options totalingapproximately 1.8 million and 1.4 million shares of common stock, respectively,were antidilutive and therefore not included in the computation of diluted netincome per share.**

#### ** **

**NOTE 5:   SHARE-BASED COMPENSATION**

 

The 2004 Equity Incentive Plan, as amended (the “2004Plan”), limits the combined grant of options to acquire shares of common stock,stock appreciation rights, and nonvested share awards under the 2004 Plan to7,500,000 shares.  Any grant under the2004 Plan that expires or terminates unexercised, becomes unexercisable, or isforfeited will generally be available for future grants. At March 31,2009, there were approximately 1,471,000 shares of common stock available forfuture equity-related grants under the 2004 Plan.

 

During the three monthsended March 31, 2009 we granted 285,000 nonvested share awards at aweighted-average grant date price of $14.49 per share, which vest six monthsafter the date of grant, and 40,000 stock options with a weighted-averageexercise price of $14.49 per share, which vest 20% per year over five years.

 

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The weighted-averagegrant date fair value of stock options granted during the three months ended March 31,2009 and 2008 was $7.46 per option and $5.66 per option, respectively. Theweighted-average assumptions used for the calculation of these values,utilizing the Black-Scholes methodology, were as follows:

 
| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **March 31, 2009**     | ** ** | **March 31, 2008** | ** ** |
| Expected  volatility (%)               |       | 52.0                             |       | 42.0 |   |
| Dividend yield (%)                     |       | —                           |       | — |   |
| Risk-free  interest rate (%)           |       | 2.0                              |       | 2.4 |   |
| Expected life of  stock option (years) |       | 6.2                              |       | 5.0 |   |

 

During the three monthsended March 31, 2009 and 2008, we recognized share-based compensationexpense, which is a non-cash charge, for stock option and nonvested share awardsof approximately $1.5 million and $0.5 million, respectively, of which $0.2million and $0.2 million, respectively, is included under the caption “Directcost of services” and $1.3 million and $0.3 million, respectively, is includedunder the caption “General and administrative” on the accompanying CondensedConsolidated Statements of Income.

 

During the three monthsended March 31, 2009 and 2008, we recognized a net tax benefit ofapproximately $0.4 million and $0.2 million, respectively, related to aggregateshare-based compensation expense recognized during the same period. As of March 31,2009, there was $12.9 million of total unrecognized compensation cost relatedto nonvested share-based awards, which will be recognized over aweighted-average period of 2.4 years.

 

**NOTE6:   SEGMENT REPORTING**

 

We have three reportingsegments: electronic discovery, bankruptcy, and settlement administration.  Our electronic discovery business providescollections and forensics, processing, and search and review services tocompanies and the litigation departments of law firms.  Produced documents are made availableprimarily through a hosted environment, and our DocuMatrixTM software allows forefficient attorney review and data requests. Our bankruptcy segment provides solutions that address the needs oftrustees to administer bankruptcy proceedings and of debtor corporations thatfile a plan of reorganization.  Oursettlement administration segment provides managed services including legalnotification, claims administration and controlled disbursement.

 

The segment performancemeasure is based on earnings before interest, taxes, depreciation andamortization, other operating expense (income), and share-based compensationexpense.  In management’s evaluation ofperformance, certain costs, such as compensation for administrative staff andexecutive management, are not allocated by segment and, accordingly, thefollowing reporting segment results do not include such unallocated costs.

 

Assets reported within asegment are those assets that can be identified to a segment and primarilyconsist of trade receivables, property, equipment and leasehold improvements,software, identifiable intangible assets and goodwill.  Cash, tax-related assets, and certainprepaids and other assets are not allocated to our segments.  Although we can and do identify long-lived assetssuch as property, equipment and leasehold improvements, software, andidentifiable intangible assets to reporting segments, we do not allocate therelated depreciation and amortization to the segment as management evaluatessegment performance exclusive of these non-cash charges.

 

Following is a summary ofsegment information for the threemonths ended March 31, 2009. The intersegment revenues in the threemonths ended March 31, 2009 related primarily to call center servicesperformed by the settlement administration segment for the bankruptcy segment.

 

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| ** **                                                                | ** ** | **Three Months Ended March 31, 2009** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **Electronic  Discovery**                                      | ** ** | **Bankruptcy** | ** ** | **Settlement  Administration** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| ** **                                                                | ** ** | **(in thousands)**                                        | ** ** |
| Revenue:                                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |
| Operating  revenue from external customers before reimbursed direct costs |       | $                                                              | 14,049     |   | $ | 17,328 |   | $ | 21,236 |   | $ | — |   | $ | 52,613 |   |
| Intersegment  revenue                                                     |       | —                                                         |       | — |   | 513 |   | (513 | ) | — |   |
|                                                                      |       |                                                           |       |   |   |   |   |   |   |   |   |
| Operating  revenue before reimbursed direct costs                         |       | 14,049                                                         |       | 17,328 |   | 21,749 |   | (513 | ) | 52,613 |   |
| Operating  revenue from reimbursed direct costs                           |       | 25                                                             |       | 1,523 |   | 6,667 |   | — |   | 8,215 |   |
| Total revenue                                                             |       | 14,074                                                         |       | 18,851 |   | 28,416 |   | (513 | ) | 60,828 |   |
|                                                                      |       |                                                           |       |   |   |   |   |   |   |   |   |
| Direct costs,  general and administrative costs                           |       | 9,126                                                          |       | 10,430 |   | 21,614 |   | (513 | ) | 40,657 |   |
| Segment  performance measure                                              |       | $                                                              | 4,948      |   | $ | 8,421 |   | $ | 6,802 |   | $ | — |   | $ | 20,171 |   |

 

Following is a summary ofsegment information for the threemonths ended March 31, 2008. Intersegment revenues for this periodwere not considered material to the segment reporting information.

 
|                                                                      |   | **Three Months Ended March 31, 2008** |   |
|---------------------------------------------------------------------------|--------|----------------------------------------------------------------|--------|
|                                                                      |   | **Electronic  Discovery**                                      |   | **Bankruptcy** |   | **Settlement  Administration** |   | **Total** |   |
|                                                                      |   | **(in thousands)**                                        |   |
| Revenue:                                                                  |   |                                                           |   |   |   |   |   |   |   |
| Operating  revenue from external customers before reimbursed direct costs |   | $                                                              | 13,238 |   | $ | 13,365 |   | $ | 17,298 |   | $ | 43,901 |   |
| Operating  revenue from reimbursed direct costs                           |   | 102                                                            |   | 832 |   | 4,175 |   | 5,109 |   |
| Total revenue                                                             |   | 13,340                                                         |   | 14,197 |   | 21,473 |   | 49,010 |   |
|                                                                      |   |                                                           |   |   |   |   |   |   |   |
| Direct costs,  general and administrative costs                           |   | 6,947                                                          |   | 6,898 |   | 20,764 |   | 34,609 |   |
| Segment  performance measure                                              |   | $                                                              | 6,393  |   | $ | 7,299 |   | $ | 709 |   | $ | 14,401 |   |

 

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Following is areconciliation of our segment performance measure to income before income taxes(in thousands):

 
| ** **                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                            | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
|                                                  |       |                                                 |       |   |   |
| Segment  performance measure                          |       | $                                                    | 20,171     |   | $ | 14,401 |   |
| Corporate and  unallocated expenses                   |       | (4,750                                               | )          | (4,842 | ) |
| Share-based  compensation expense                     |       | (1,472                                               | )          | (524 | ) |
| Depreciation and  software and leasehold amortization |       | (4,514                                               | )          | (3,710 | ) |
| Amortization of  intangible assets                    |       | (1,936                                               | )          | (2,278 | ) |
| Other operating  (expense) income                     |       | (471                                                 | )          | 2,371 |   |
| Interest  expense, net                                |       | (338                                                 | )          | (347 | ) |
| Income before  income taxes                           |       | $                                                    | 6,690      |   | $ | 5,071 |   |

 

Following are totalassets by segment (in thousands):

 
| ** **                 | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Assets**                 |       |                     |       |                        |       |
| Electronic  Discovery      |       | $                        | 139,141    |                        | $          | 139,216 |   |
| Bankruptcy                 |       | 187,848                  |       | 184,906                     |       |
| Settlement  Administration |       | 70,065                   |       | 60,146                      |       |
| Corporate and  unallocated |       | 27,870                   |       | 34,678                      |       |
| Total  consolidated assets |       | $                        | 424,924    |                        | $          | 418,946 |   |

 

### **NOTE7:**                        DERIVATIVES

### ** **

***InterestRate Floors***

 

A portion of ourbankruptcy trustee revenue is subject to variability based on fluctuations inshort-term interest rates.  During 2007,in order to limit our economic exposure to market fluctuations in interestrates, we purchased one-month LIBOR based interest rate floor options with atotal notional amount of $800 million and initial contractual maturity of threeyears. We accounted for this transaction pursuant to the guidance contained inSFAS 133 which requires that all derivative instruments be recorded on thebalance sheet at fair value.  As theinterest rate floor options were not designated as an accounting hedge, changesin the fair value of the derivatives were recorded each period in currentearnings. In February 2008, we sold the interest rate floor options andrealized a $3.5 million gain.  The $2.4million difference between the realized gain of $3.5 million and the previouslyunrealized gain of $1.1 million was included as a component of “Other operatingexpense (income)” for the three months ended March 31, 2008 on theaccompanying Condensed Consolidated Statements of Income.  As of March 31, 2009 we did not hold anyinterest rate floor options, other derivatives, or auction rate securities.

 

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**NOTE 8:****                       ****FAIR VALUE MEASUREMENTS**

 

SFAS No. 157establishes a three-level fair value hierarchy based upon the assumptions(inputs) used to price assets or liabilities. The hierarchy requires us tomaximize the use of observable inputs and minimize the use of unobservableinputs. The three levels of inputs used to measure fair value are listed below.

 

Level 1 — Unadjustedquoted prices in active markets for identical assets or liabilities.

 

Level 2 — Observableinputs other than those included in Level 1, such as quoted market prices forsimilar assets and liabilities in active markets or quoted prices for identicalassets in inactive markets.

 

Level 3 — Unobservableinputs reflecting our own assumptions and best estimate of what inputs marketparticipants would use in pricing and asset or liability.

 

The carrying value andestimated fair value of our financial instruments, which are comprised ofshort-term money market funds, are presented in the following table at March 31,2009 and December 31, 2008.

 
| ** **                                                                                | ** ** | ** **          | ** ** | **Estimated Fair Value Measurements** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                | ** ** | ** **          | ** ** | **Quoted  Prices in  Active  Markets**          | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| **Items Measured at Fair Value on a  Recurring Basis** | ** ** | **Carrying  Value** | ** ** | **(Level 1)**                                   | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| **March 31,  2009:**                                                                 |       |                |       |                                                 |       |   |   |   |   |
| *Financial  Assets:*                                                                      |       |                |       |                                                 |       |   |   |   |   |
| Money market  funds                                                                       |       | $                   | 11,393     |                                                 | $          | 11,393 |   | $ | — |   | $ | — |   |
|                                                                                      |       |                |       |                                                 |       |   |   |   |   |
| **December 31,  2008:**                                                              |       |                |       |                                                 |       |   |   |   |   |
| *Financial  Assets:*                                                                      |       |                |       |                                                 |       |   |   |   |   |
| Money market  funds                                                                       |       | $                   | 19,340     |                                                 | $          | 19,340 |   | $ | — |   | $ | — |   |

 

**NOTE 9:****                       ****SUPPLEMENTAL CASH FLOWINFORMATION**

 

Supplemental cashflow information is as follows (in thousands):

 
| ** **                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                                                                         |       |                                             |       |   |   |
| **Cash  paid for:**                                                          |       |                                             |       |   |   |
| Interest                                                                     |       | $                                                | 608        |   | $ | 625 |   |
| Income taxes  paid, net                                                      |       | 6                                                |       | 1,484 |   |
| **Non-cash  investing and financing transactions:**                          |       |                                             |       |   |   |
| Property,  equipment, and leasehold improvements accrued in accounts payable |       | 472                                              |       | 1,139 |   |
|                                                                              |            |                                                  |            |  |  |  |  |

 

**NOTE 10:****                ****ACQUISITIONS**

 

On April 4, 2008,our wholly-owned subsidiary, Epiq Systems Holding B.V., acquired all of theequity of Uberdevelopments Limited and its wholly-owned operating subsidiary,Pinpoint Global Limited (collectively, “Pinpoint”), an electronic discoverybusiness with operations in the United Kingdom. The value of the transactionwas $7.1 million, consisting of $4.9 million of cash, $1.7 million of deferredpayments and $0.5 million of capitalized transaction costs. Certain revenuetargets were satisfied as of September 30, 2008, which required anadditional payment of $0.6 million in the fourth quarter of 2008; and theaccrual of an additional payment of approximately £545,000 (as of March 31,2009 approximately $0.8 million) due in 2010. These additional payments wererecorded as purchase price adjustments. If certain other revenue targets aresatisfied prior to the second and third anniversary dates of the agreement, weare required to make additional payments. We have 

 

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determined that it isprobable that these targets will be satisfied and have been accruing aliability for total payments of approximately £400,000 (as of March 31,2009 approximately $0.6 million). These amounts are recorded as compensationexpense over the contingency period.

 

The preliminaryallocation of the purchase price is as follows: $0.3 million to net assets,$1.1 million to customer contracts, $1.1 million to non-compete agreements,$0.7 million to establish a deferred tax liability related to the acquiredintangible assets, and $5.3 million to goodwill. The allocation of the purchaseprice to the assets and liabilities acquired will be finalized, as necessary,up to one year after the acquisition closing date, when information that isknown to be available or obtainable is obtained. The purchase price in excessof the value of the acquired identifiable net assets reflects the strategicvalue we placed on Pinpoint as this acquisition facilitated the expansion ofour electronic discovery business in the United Kingdom.

 

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. The operating results of the acquired entities are included within ourelectronic discovery segment.  The proforma results of the acquired entities for the period January 1, 2008through the date of acquisition were not material to our consolidated results ofoperations.

 

**NOTE 11:****                ****LEGAL PROCEEDINGS**

 

On July 29, 2008,the Alaska Electrical Pension Fund filed a putative shareholder derivativeaction in the U.S. District Court for the District of Kansas (Civil Action No. 08-CV-2344CM/JPO), alleging on behalf of Epiq Systems that each of our current directorsand certain current and former executive officers and directors engaged inmisconduct regarding stock option grants.

 

The plaintiff complaintasserts, among other things, that the company backdated certain stock optionsfrom July 1997 through January 2006, and that the individualdefendants either participated in the backdating or permitted it to occur,violations of generally accepted accounting principles as a result of thealleged backdating of options, related claims of false and misleading proxystatements and annual reports filed by the company under the SecuritiesExchange Act of 1934, also as a result of the alleged backdating of options,and various violations of state law, breaches of fiduciary duty of loyalty andinsider trading in company stock.  Theplaintiff is seeking among other things, unspecified money damages, anaccounting for profits obtained from the alleged backdating of options,specified changes in our corporate governance policies, punitive damages andrescission of the allegedly backdated options.

 

On October 7, 2008,the company and the individual defendants filed a motion to dismiss theplaintiff’s complaint on the following grounds: (i) the plaintiff lacksstanding to assert claims regarding any backdating prior to July 31, 2001,i.e., the date on which the plaintiff first claims to have acquired companyshares, (ii) application of the statutes of limitation that govern theplaintiff’s claims reduces the plaintiff’s case to a single alleged instance ofbackdating involving the grant of an option to a single non-defendant employeeon January 3, 2006, (iii) the complaint fails to plead sufficientfacts to state any plausible claim that the defendants backdated any stockoptions and thus fails to meet the minimum pleading requirements establishedunder the Private Securities Litigation Reform Act of 1995 or the applicableFederal Rules of Civil Procedure, which failure mandates dismissal of allof the plaintiff’s claims, and (iv) the complaint fails to meet thepleading standards that apply to any of its individual federal and state-lawclaims, which separately mandate dismissal of the entire case.  On November 10, 2008, the plaintifffiled a memorandum in opposition to the dismissal motion, and on December 16,2008, the company and the individual defendants filed their reply to theplaintiff’s opposition memorandum.  Thedismissal motion has not yet been ruled upon by the Court.

 

We believe the plaintiff’sclaims are without merit and will continue to defend against themvigorously.  No amounts have beenrecorded in the accompanying Condensed Consolidated Financial Statementsassociated with this matter.

 

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| **ITEM 2.** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

 

This discussion andanalysis should be read in conjunction with the Condensed ConsolidatedFinancial Statements and the accompanying Notes to the Condensed ConsolidatedFinancial Statements included in this Form 10-Q.

 

### **Overview**

### ** **

We are a provider ofintegrated technology solutions for the legal profession.  Our solutions streamline the administrationof bankruptcy, litigation, financial transactions and regulatory compliancematters.  We offer innovative technologysolutions for electronic discovery, document review, legal notification, claimsadministration and controlled disbursement of funds.  Our clients include law firms, corporatelegal departments, bankruptcy trustees and other professional advisors whorequire innovative technology, responsive service and deep subject-matterexpertise.

 

We have three reportingsegments: electronic discovery, bankruptcy, and settlement administration.

 

***Electronic Discovery***

 

Our electronic discoverybusiness provides collections and forensics, processing, and search and reviewservices to companies and the litigation departments of law firms.  Our eDataMatrixTM software analyzes, filters,deduplicates and produces documents for review. Produced documents are made available primarily through a hostedenvironment, and our DocuMatrixTM software allows for efficient attorney reviewand data requests.

 

Our customers are typicallylarge corporations that use our products and services cooperatively with theirlegal counsel to manage the electronic discovery process for complex litigationmatters.

 

The substantial increaseof electronic documents by businesses has changed the dynamics of how attorneyssupport discovery in complex litigation matters.  According to the 2008 Socha-GelbmannElectronic Discovery Survey, 2007 domestic commercial electronic discoveryrevenues were estimated at $2.8 billion, an approximate 43% increase from2006.  According to this same source, themarket is expected to continue to grow at year over year annual rates of 20% in2009 and 15% for 2010.  Due to thecomplexity of cases, the volume of data that are maintained electronically, andthe volume of documents that are produced in all types of litigation, weanticipate that law firms will become increasingly reliant on electronicevidence management systems to organize and manage the litigation discoveryprocess.

 

Following is a description of the significant sourcesof revenue in our electronic discovery business.

 

·                  Fees related to the conversion of datainto an organized, searchable electronic database. The amount we earn variesprimarily on the size (number of documents) and complexity of the engagement.

 

·                  Hosting fees based on the amount of datastored.

 

***Bankruptcy***

 

Our bankruptcy businessprovides solutions that address the needs of Chapter 7, Chapter 11, and Chapter13 bankruptcy trustees to administer bankruptcy proceedings and of debtorcorporations that file a plan of reorganization.

 

·                  Chapter 7 is a liquidation bankruptcy forindividuals or businesses that, as measured by the number of new cases filed inthe fiscal year ended September 30, 2008, accounted for approximately 65%of all bankruptcy filings.  In a Chapter7 case, the debtor’s assets are liquidated and the resulting cash proceeds areused by the Chapter 7 bankruptcy trustee to pay creditors.  Chapter 7 cases typically last several years.

 

·                  Chapter 11 is a reorganization model ofbankruptcy for corporations that, as measured by the number of new cases filedin the fiscal year ended September 30, 2008, accounted for approximately1% of all bankruptcy filings.  Chapter 11generally allows a company, often referred to as the debtor-in-possession, tocontinue operating under a plan of reorganization to restructure its businessand to modify payment terms of both secured and unsecured obligations.  Chapter 11 cases generally last severalyears.

 

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·                  Chapter 13 is a reorganization model ofbankruptcy for individuals that, as measured by the number of new cases filedin the fiscal year ended September 30, 2008, accounted for approximately34% of all bankruptcy filings.  In aChapter 13 case, debtors make periodic cash payments into a reorganization planand a Chapter 13 bankruptcy trustee uses these cash payments to make monthlydistributions to creditors.  Chapter 13cases typically last between three and five years.

 

The end-user customers ofour bankruptcy business are debtor corporations that file a plan ofreorganization and professional bankruptcy trustees.  The Executive Officefor United States Trustees, a division of the U.S. Department of Justice,appoints all bankruptcy trustees.  AUnited States Trustee is appointed in most federal court districts andgenerally has responsibility for overseeing the integrity of the bankruptcysystem.  The bankruptcy trustee’s primaryresponsibilities include liquidating the debtor’s assets or collecting fundsfrom the debtor, distributing the collected funds to creditors pursuant to theorders of the bankruptcy court and preparing regular status reports for the ExecutiveOffice for United States Trustees and for the bankruptcy court.  Trustees manage an entire caseload ofbankruptcy cases simultaneously.

 

Following is a description of the significant sourcesof revenue in our bankruptcy business.

 

·                  Data hosting fees and volume-based fees.

 

·                  Case management professional service feesand other support service fees related to the administration of cases,including data conversion, claims processing, claims reconciliation,professional consulting services, and settlement administration.

 

·                  Deposit-based fees, earned primarily on apercentage of Chapter 7 total liquidated assets placed on deposit with adesignated financial institution by our trustee clients, to whom we provide, atno charge, software licenses, limited hardware and hardware maintenance, andpostcontract customer support services. The fees we earn based on total liquidated assets placed on deposit byour trustee clients may vary based on fluctuations in short-term interestrates. Interest rate fluctuations are somewhat mitigated by pricingarrangements with each financial institution that set ceilings and floors onthe fees that those financial institutions pay us.

 

·                  Legal noticing services to parties ofinterest in bankruptcy matters, including direct notification and mediacampaign and advertising management in which we coordinate notification,primarily through print media outlets, to potential parties of interest for aparticular client engagement.

 

·                  Reimbursement for costs incurred,primarily related to postage on mailing services.

 

***SettlementAdministration***

 

Our settlementadministration segment provides managed services, including legal notification,claims administration, project administration and controlled disbursement.

 

Class action andmass tort refer to litigation in which class representatives bring a lawsuitagainst a defendant company or other persons on behalf of a large group ofsimilarly affected persons.  Mass tortrefers to class action cases that are particularly large or prominent.  The class action and mass tort marketplace issignificant, with estimated annual tort claim costs of approximately $250billion in 2007, according to a study issued in 2008 by Towers Perrin.  Administrative costs, which include costs,other than defense costs, incurred by either the insurance company orself-insured entity in the administration of claims, comprise approximately 24%of this total.

 

Key participants in thismarketplace include law firms that specialize in representing class action andmass tort plaintiffs and other law firms that specialize in representingdefendants.  Class action and masstort litigation is often complex and the cases, including administration of anysettlement, may last several years.

 

The customers of our settlement administration segmentare companies that are administering the settlement or resolution of classaction cases or are administering projects. We sell our services directly to those customers and other interestedparties, including legal counsel, which often provide access to thesecustomers.

 

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Following is a description of significant sources ofrevenue in our settlement administration business.

 

·                  Fees contingent upon the month-to-monthdelivery of case management services such as claims processing, claimsreconciliation, project management, professional services, call center support,and controlled disbursements.  The amountwe earn varies primarily on the size and complexity of the engagement.

 

·                  Legal noticing services to parties ofinterest in class action matters, including media campaign and advertisingmanagement, in which we coordinate notification through various media outlets,such as print, radio and television, to potential parties of interest for aparticular client engagement.

 

·                Reimbursement for costs incurredrelated to postage on mailing services.

 

**Results of Operations for the Three Months Ended March 31,2009 Compared with the Three Months Ended March 31, 2008**

 

### **ConsolidatedResults**

### ** **

### ***Revenue***

### ** **

Total revenue was $60.8million for the three months ended March 31, 2009, an increase of $11.8million, or 24%, as compared to the prior year. A portion of our total revenueconsists of reimbursement for direct costs we incur, such as postage related todocument management services.  We reflectthe operating revenue from these reimbursed direct costs as a separate lineitem on our accompanying Condensed Consolidated Statements of Income.  Operating revenue from reimbursed directcosts was $8.2 million, an increase of $3.1 million, or 61%, from $5.1 millionin the period year. Although operating revenue from reimbursed direct costs mayfluctuate significantly from quarter to quarter, these fluctuations have aminimal effect on our income from operations as we realize little or no marginfrom this revenue.

 

Operating revenue exclusiveof operating revenue from reimbursed direct costs, which we refer to asoperating revenue before reimbursed direct costs, was $52.6 million in thethree months ended March 31, 2009, an increase of $8.7 million, or 20%, ascompared to the prior year. The increase consists of a $3.9 million increase inthe settlement administration segment, a $4.0 million increase in thebankruptcy segment, and a $0.8 million increase in the electronic discoverysegment. Changes by segment are discussed below.

 

### ***Operating Expense***

### ** **

The direct cost ofservices, exclusive of depreciation and amortization, was $19.7 million for thethree months ended March 31, 2009, an increase of $0.9 million, or 4%, ascompared to $18.8 million in the prior year. Contributing to this increase wasa $1.3 million increase in compensation related expense; a $1.5 millionincrease in production supplies; a $0.8 million increase in the cost of outsideservices, primarily related to temporary help and mailing; and a $0.3 millionincrease in software maintenance costs related to client service capabilities.These increases were partially offset by a $3.1 million decrease in legalnoticing costs. Changes by segment are discussed below.

 

The direct cost ofbundled products and services, exclusive of depreciation and amortization, was$0.9 million for the three months ended March 31, 2009, a decrease of $0.1million, or 10%, compared to the prior year. Changes by segment are discussedbelow.

 

Reimbursed direct costsincreased $2.9 million, or 57%, to $8.0 million for the three months ended March 31,2009, compared with $5.1 million during the prior year.  This increase directly corresponds to theincrease in operating revenue from reimbursed direct costs.  Changes by segment are discussed below.

 

General andadministrative costs increased $3.2 million, or 21%, to $18.3 million for thethree months ended March 31, 2009. Contributing to this increase was a$2.3 million increase in compensation, commission and benefits expense,primarily resulting from expanded staffing to meet client demands, and a $1.0million increase in share-based compensation expense. The increase inshare-based compensation expense was due to nonvested share awards granted in February 2009,for which expense will be recognized over a six-month vesting period. Changesby segment are discussed below.

 

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Depreciation and softwareand leasehold amortization costs for the three months ended March 31, 2009were $4.5 million, an increase of $0.8 million, or 22%, compared to the prioryear. This increase was primarily the result of increased software amortizationexpense and increased hardware depreciation related to investments in ourbusiness segments.

 

Amortization ofidentifiable intangible assets for the three months ended March 31, 2009was $1.9 million, a decrease of $0.3 million, or 15%, compared to the prioryear. This decrease was the result of certain non-compete and customer contractintangible assets that are fully amortized in the current quarter, partlyoffset by an increase in non-compete amortization resulting from our 2008acquisition of an electronic discovery business in the United Kingdom.

 

Other operating expenseof $0.5 million for the three months ended March 31, 2009 primarilyconsists of expenses related to potential acquisitions. For the three monthsended March 31, 2008, we had other operating income of $2.4 million whichrepresented a gain we recognized related to interest rate floor optionspurchased during 2007.

 

***InterestExpense***

 

We recognized interestexpense of $0.4 million for the three months ended March 31, 2009 comparedwith $0.5 million for the same period in the prior year.  The $0.1 million decrease in interest expenseresulted from a decrease in loan fee amortization.

 

***EffectiveTax Rate***

 

Our effective tax ratefor the three months ended March 31, 2009 was 51.0% compared with aneffective rate of 47.6% for the prior year. The increase compared to the priorperiod is primarily due to non-deductible equity compensation granted in thefirst quarter of 2009.  State taxes andnon-deductible equity compensation are the primary reasons our tax rate ishigher than the statutory federal rate of 35%. We have significant operations located in New York City that are subjectto state and local tax rates that are higher than the tax rates assessed byother jurisdictions where we operate.

 

It is reasonably possiblethat we will recognize approximately $1.0 million of previously unrecognizedtax benefits as a result of anticipated lapses in the statute of limitationsduring 2009 within twelve months of our reporting date.  If recognized, the $1.0 million of taxbenefits would affect the effective tax rate in 2009.

 

***NetIncome***

 

Our net income was$3.3 million for the three months ended March 31, 2009 compared to $2.7million for the prior year, an increase of $0.6 million, or 23%. Growth in ourbankruptcy segment, resulting primarily from an increase in corporaterestructuring engagements, as well as growth in our settlement administrationsegment, contributed to the increase in net income. The increase was offset inpart by increased expenses in the electronic discovery segment in support ofthe growth and expansion of the business, a decline in other operating incomedue to the gain on the interest rate floor options recognized in the prior yearquarter, as well as an increase in our 2009 effective tax rate, resulting inhigher tax expense.

 

**Resultsof Operations by Segment**

 

Thefollowing segment discussion is presented on a basis consistent with oursegment disclosure contained in Note 6 of our Notes to Condensed ConsolidatedFinancial Statements.

 

***ElectronicDiscovery Segment***

 

Electronic discoveryoperating revenue from external customers before reimbursed direct costsincreased $0.8 million, or 6%, to $14.0 million for the three months ended March 31,2009, compared to $13.2 million in the prior year.  This increase is primarily attributable toadditional projects from existing clients, as well as the expansion of ourclient base which resulted in an increase in processing revenue.

 

Electronic discoverydirect and administrative expenses increased $2.2 million, or 31%, to $9.1million for the three months ended March 31, 2009, compared with $6.9million in the prior year.  This increaseis primarily a result of a $1.4 million increase in compensation, commissionand benefits expense resulting from expanded staffing to generate and supportthe continued growth and expansion of our business; a $0.3 million increase insoftware maintenance costs related to client 

 

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service capabilities; a$0.2 million increase in building and equipment lease expense, primarilyrelated to data center expansion; and a $0.1 million increase in travelexpense.

 

***BankruptcySegment***

 

Bankruptcy operatingrevenue from external customers before reimbursed direct costs for the threemonths ended March 31, 2009 was $17.3 million, an increase of $3.9million, or 30%, compared to $13.4 million in the prior year. This increase isprimarily attributable to an increase in corporate restructuring engagements.Partially offsetting this increase was a decline in bankruptcy trustee fees,due to lower interest rates in the first three months of 2009 compared to thesame 2008 period. Revenue from our Chapter 7 trustee business is expected to continueto be lower than comparable prior periods if short-term interest rates do notincrease from current levels.

 

Bankruptcy direct andadministrative expenses increased $3.5 million, or 51%, to $10.4 million forthe three months ended March 31, 2009, compared to $6.9 million in prioryear.  The increase is primarilyattributable to a $1.1 million increase in compensation costs, due toadditional staffing in support of new client retentions; a $1.0 millionincrease in outside services expense, resulting from several large noticingengagements; a $0.7 million increase in reimbursed direct costs, which directlycorresponds to the increase in operating revenue from reimbursed direct costs;and a $0.5 million increase in intercompany expense related to call centerservices performed by the settlement administration segment for the bankruptcysegment. The intercompany expense is eliminated in consolidation.

 

***SettlementAdministration Segment***

 

Settlement administrationoperating revenue from external customers before reimbursed direct costs was$21.2 million in the three months ended March 31, 2009, an increase of$3.9 million, or 23%, compared to the prior year. This increase was due to a$2.0 million increase in revenue primarily related to a large contract, and a$5.7 million increase in professional services revenue related to severalclients. These increases were partially offset by a $3.7 million decrease inlegal notification revenue.

 

Settlementadministration direct and administrative expenses, including reimbursed directcosts, for the three months ended March 31, 2009 were $21.6 million, anincrease of $0.8 million, or 4%, compared to $20.8 million in the prior year.The increase in expense is the result of an increase in call center, outsideservices, and mailing supplies costs of $1.3 million, which supported the largecontract referenced above; and a $2.4 million increase in reimbursableexpenses. These increases were partially offset by a decrease of $3.1 millionin the cost of legal noticing which is directly related to the decrease inlegal notification revenue.

 

**Liquidity and Capital Resources**

 

***OperatingActivities***

 

During the three monthsended March 31, 2009, our operating activities provided net cash of $2.5million. Contributing to net cash provided by operating activities was netincome of $3.3 million and increased non-cash expenses, such as depreciationand amortization and share-based compensation expense, of $7.9 million. Theseitems were partially offset by an $8.8 million net use of cash resulting fromchanges in operating assets and liabilities. The most significant change in operating assets and liabilities was a$14.0 million increase in trade accounts receivable, related to a large matterin settlement administration and several large matters in the bankruptcysegment. Trade accounts receivable will fluctuate from period to perioddepending on the timing of sales and collections. Partially offsetting theincrease in accounts receivable was an increase in accounts payable and otherliabilities of $5.1 million. Accounts payable will fluctuate from period toperiod depending on timing of purchases and payments.

 

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***InvestingActivities***

 

During the three monthsended March 31, 2009, we used cash of $4.7 million for the purchase ofproperty and equipment, including computer hardware, purchased softwarelicenses, and purchased computer hardware. Enhancements to our existingsoftware and the development of new software is essential to client retentionand continued growth, and during the three months ended March 31, 2009, weused cash of $2.3 million to fund internal costs related to the development ofsoftware for which technological feasibility had been established. Weanticipate that cash generated from operations will be adequate to fund ouranticipated property, equipment, and software spending for the foreseeablefuture.

 

***FinancingActivities***

 

During the three monthsended March 31, 2009, we used cash to pay approximately $0.9 million forcapital lease payments. This financing use of cash was partially offset by $0.6million of net proceeds from stock issued in connection with the exercise of employeestock options. We also recognized a portion of the tax benefit related to theexercise of stock options as a financing source of cash.

 

As of March 31,2009, our borrowings consisted of $51.9 million (including the fair value ofthe embedded option) from the contingent convertible subordinated notes, whichbears interest at 4% per annum based on the $50.0 million principal amount, andapproximately $8.0 million of obligations related to capital leases anddeferred acquisition price payments. During 2007, the term of our contingent convertible subordinated noteswas extended to June 2010.  Thenotes will require the use of $50.0 million of cash at the extended maturitydate if the note holders do not convert the notes into shares of our commonstock.  The holders of the contingentconvertible subordinated notes have the right to convert at a price ofapproximately $11.67 per share.  If anyor all notes are converted into shares of our common stock prior to thescheduled maturity of those notes, then there will be no cash requirementsassociated with those converted notes, other than the regular payment ofinterest earned prior to the conversion date.

 

As of March 31,2009 we did not have any borrowings outstanding under our $100.0 million seniorrevolving loan.  During the term of thecredit facility, we have the right, subject to compliance with our covenants,to increase the senior revolving loan to $175.0 million. Interest on the creditfacility is generally based on a spread, not to exceed 325 basis points overthe LIBOR rate.  As of March 31,2009, significant financial covenants, all as defined within our creditfacility agreement, include a leverage ratio not to exceed 3.00 to 1.00, afixed charge coverage ratio of not less than 1.25 to 1.00, and a current ratioof not less than 1.50 to 1.00.  As of March 31,2009, we were in compliance with all financial covenants.

 

Covenants contained inour credit facility and in our contingent convertible subordinated notesinclude limitations on acquisitions, should we pursue acquisitions in thefuture. Pursuant to the terms of our credit facility, we generally cannot incurindebtedness outside the credit facility, with the exceptions of capital leasesand subordinated debt, with a limit of $100.0 million of aggregate subordinateddebt. Furthermore, for any acquisition we must be able to demonstrate that, ona pro forma basis, we would be in compliance with our covenants during the fourquarters prior to the acquisition and bank permission must be obtained for anacquisition for which cash consideration exceeds $80.0 million or totalconsideration exceeds $125.0 million.

 

We believe that fundsgenerated from operations, plus our existing cash resources and amountsavailable under our credit facility, will be sufficient over the next 12months, and for the foreseeable future thereafter, to finance currentlyanticipated working capital requirements, internal software developmentexpenditures, property, equipment and third party software expenditures,deferred acquisition price agreements and capital leases, interest payments dueon our outstanding borrowings, and payments for other contractual obligations.

 

**Off-balance Sheet Arrangements**

 

We generally do not utilize off-balance sheetarrangements in our operations; however, we enter into operating leases in thenormal course of business.  Our operatinglease obligations are disclosed in Note 6 of the Notes to ConsolidatedFinancial Statements contained in our Annual Report on Form 10-K for theyear ended December 31, 2008.

 

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**CriticalAccounting Policies**

 

In our Annual Report on Form 10-Kfor the year ended December 31, 2008, we disclose accounting policies,referred to as critical accounting policies, that require management to usesignificant judgment or that require significant estimates.  Management regularly reviews the selectionand application of our critical accounting policies.  There have been no updates to the criticalaccounting policies contained in our Annual Report on Form 10-K for theyear ended December 31, 2008.

 

***Recently Adopted AccountingPronouncements***

 

In December 2007,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(revised 2007), *Business Combinations* (“SFAS141(R)”). SFAS 141(R) establishes guidelines for the recognition andmeasurement of assets, liabilities and equity in business combinations. Theprovisions of SFAS 141 (R) were effective for us as of January 1,2009. Due to the adoption of SFAS 141(R) we now expense, as incurred,acquisition-related costs for potential and completed acquisitions.Acquisition-related costs expensed in the first quarter of 2009 wereapproximately $0.5 million. These costs are included in “Other operating expense(income)” in our Condensed Consolidated Statements of Income. SFAS 141(R) alsoamends SFAS No. 109, *Accounting for Income*Taxes,and now requires the recognition of changes in an acquirer’s income taxvaluation allowance on deferred taxes and acquired tax contingencies associatedwith acquisitions that closed prior to the effective date of SFAS 141(R) toapply the provisions of SFAS 141(R). The provisions of SFAS 141(R) willprimarily apply to all future acquisitions.

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interest in Consolidated FinancialStatements* (“SFAS 160”).  SFAS160 changes the way in which noncontrolling interests in subsidiaries aremeasured and classified on the balance sheet. The provisions of SFAS 160 were effective for us as of January 1,2009. The adoption of SFAS 160 had no impact on our consolidated financialposition or results of operations.

 

In February 2008, the FASB issued FASB StaffPosition (“FSP”) No. FAS 157-2, *Effective Date of FASBStatement No. 157*, (“FSP FAS 157-2”) which, as of February 12,2008, indefinitely delayed the effective date of SFAS No. 157, *Fair Value Measurements,*for nonfinancial assets andnonfinancial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on a recurring basis.  The provisions of FSP FAS 157-2 wereeffective for us as of January 1, 2009. The adoption of FSP FAS 157-2 didnot have a material impact on our financial position, results of operations, orcash flows.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities — an amendment of FASB Statement No. 133*(“SFAS161”). SFAS 161 changes the disclosure requirements for derivative instrumentsand hedging activities.  The provisionsof SFAS 161 were effective for us as of January 1, 2009.  The adoption of SFAS 161 had no impact on ourconsolidated financial position or results of operations. Disclosures requiredby this statement are included in Note 3.

 

In April 2008, theFASB issued FSP No. FAS 142-3, *Determination of theUseful Life of Intangible Assets* (“FSP FAS 142-3”).  FSP FAS 142-3 provides guidance ondetermining the useful life of a recognized intangible asset.  The provisions of FSP No. FAS 142-3 wereeffective for us as of January 1, 2009. The provisions of FSP FAS 142-3had no impact on our consolidated financial position or results of operationsduring the quarter ended March 31, 2009 as we did not renew or extend theuseful lives of any of our intangible assets.

 

In June 2008, theFASB issued FSP No. EITF 03-6-1, *Determining WhetherInstruments Granted in Share-Based Payment Transactions Are ParticipatingSecurities*(“FSP EITF 03-6-1”). FSP EITF 03-6-1 clarifies thatshare-based payment awards that entitle their holders to receivenon-forfeitable dividends or dividend equivalents before vesting should beconsidered participating securities, and requires them to be included in thecomputation of earnings per share pursuant to the two-class method described inSFAS No. 128, *Earnings per Share*(“SFAS 128”). The provisions of FSP EITF 03-6-1 were effective for us as of January 1,2009, and requires all prior period income per share data presented to beadjusted retroactively. We have determined that the nonvested share awards thatwere granted in the first quarter of 2009 are participating securities asdefined by FSP EITF 03-6-1 because they have equivalent common stock dividendrights.  Accordingly we have includedthese shares in our basic and diluted share calculations as appropriate.  There is no prior period impact of thisguidance as there were no participating securities outstanding prior to thefirst quarter of 2009. Details of the income per share calculation are describedin Note 4.

 

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In June 2008, the FASB ratified the consensusreached by the EITF on three issues discussed at its June 12, 2008 meetingpertaining to EITF Issue No. 07-5, *Determining Whether anInstrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock*(“EITF 07-5”). The issues include how an entity should evaluate whether anequity-linked financial instrument (or embedded feature) is indexed to its ownstock, including evaluating the instrument’s contingent exercise and settlementprovisions; how the currency in which the strike price of an equity-linkedfinancial instrument (or embedded feature) is denominated affects thedetermination of whether the instrument is indexed to an entity’s own stock;and how the issuer should account for market-based employee stock optionvaluation. The adoption of EITF 07-5 did not have an impact on our consolidatedfinancial position.

 

In April 2009, the FASB issued FSP No. FAS141(R)-1, *Accounting for Assets Acquired and LiabilitiesAssumed in a Business Combination That Arise from Contingencies* (“FSPFAS 141(R)-1”). FSP FAS 141(R)-1 amends and clarifies FASB No. 141(revised 2007), *Business Combinations*, to addressapplication issues raised by preparers, auditors, and members of the legalprofession on initial recognition and measurement, subsequent measurement andaccounting, and disclosure of assets and liabilities arising from contingenciesin a business combination. FSP FAS 141(R)-1 is effective for us for businesscombinations completed on or after January 1, 2009.

 

***Recently Issued AccountingPronouncements***

 

In April 2009, the FASB issued FSP No. FAS107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments*(“FSP FAS 107-1 and APB 28-1”).FSP FAS 107-1 and APB 28-1, amends FASB Statement No. 107, *Disclosures about Fair Value of Financial Instruments*, torequire disclosures about the fair value of financial instruments in interim aswell as in annual financial statements. This FSP also amends APB Opinion No. 28,*Interim Financial Reporting*, to requirethose disclosures in summarized financial information at interim reportingperiods. These standards are effective for periods ending after June 15,2009.  We do not expect the adoption ofFSP FAS 107-1 and APB 28-1 to have a material effect on our condensedconsolidated financial statements and related disclosures.

 

**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’sDiscussion and Analysis of Financial Condition and Results 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 client’sdeposit portfolio or the services required or selected by our clients inengagements, (3) material changes in the number of bankruptcy filings,class action filings or mass tort actions each year, (4) risks associatedwith handling of confidential data and compliance with information privacylaws, (5) changes in or the effects of pricing structures andarrangements, (6) risks associated with the integration of acquisitionsinto our existing business operations, (7) risks associated with ourindebtedness, (8) risks associated with foreign currency fluctuations, (9) risksassociated with developing and providing software and internet-based technologysolutions to our clients, and (10) other risks detailed from time to timein our SEC filings, including our annual report on Form 10-K. In addition,there may be other factors not included in our SEC filings that may causeactual results to differ materially from any forward-looking statements. Weundertake no obligation to update publicly or revise any forward-lookingstatements contained herein to reflect future events or developments.

 

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**ITEM 3.          QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The principal marketrisks to which we are exposed include interest rates under our senior revolvingcredit facility, foreign exchange rates giving rise to translation, andfluctuations in short-term interest rates on a portion of our bankruptcytrustee revenue.

 

Interest on our seniorrevolving credit facility is generally based on a spread, not to exceed 325basis points over the LIBOR rate. There were no amounts due under our seniorrevolving credit facility as of March 31, 2009; thereby we had no marketrisk exposure.

 

We have limitedoperations outside of the United States, therefore, a portion of our revenuesand expenses are incurred in a currency other than U.S. dollars.   Wedo not utilize hedge instruments to manage the exposures associated withfluctuating currency exchange rates.  Thecompany’s operating results are exposed to changes in exchange rates betweenthe U.S. dollar and the functional currency of the country where we haveoperations. When the U.S. dollar weakens against foreign currencies, the dollarvalue of revenues and expenses denominated in foreign currenciesincreases.  When the U.S. dollarstrengthens, the opposite situation occurs.

 

We currently do not holdany interest rate floor options or other derivatives.

 

**ITEM 4.          CONTROLSAND PROCEDURES**

 

***DisclosureControls and Procedures***

 

Anevaluation was carried out by the Epiq Systems, Inc.’s Chief ExecutiveOfficer and Chief Financial Officer of the effectiveness of the design andoperations of the company’s disclosure controls and procedures as defined inExchange Act Rule 13a-15(e).  Basedon this evaluation, our management, including the CEO and CFO, concluded thatour disclosure controls and procedures are effective.  Disclosure controls and procedures aredesigned to ensure that information required to be disclosed by the company inits periodic filings with the SEC is recorded, processed, summarized andreported, within the time periods specified in the SEC’s rules andforms.  Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by the company in the reportsthat it files or submits to the SEC is accumulated and communicated to company’smanagement, including its principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure.

 

***Changes inInternal Control Over Financial Reporting***

 

Therehave been no changes in our internal controls over financial reporting duringthe quarter ended March 31, 2009, that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

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**PART II- OTHER INFORMATION.**

 

**ITEM 1**.          **LEGAL PROCEEDINGS**

 

There have been nomaterial changes in the litigation summarized in our Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

**ITEM 1A**.       **RISK FACTORS**

 

There have been nomaterial changes in our Risk Factors from those disclosed in our Annual Reporton Form 10-K for the year ended December 31, 2008.

 

**ITEM 6**.          **EXHIBITS**

 

31.1         Certifications of Chief Executive Officerof the Company under Rule 13a-14(a), as adopted pursuant to Section 302of the Sarbanes-Oxley Act of 2002.

 

31.2         Certifications of Chief Financial Officerof the Company under Rule 13a-14(a), as adopted pursuant to Section 302of the Sarbanes-Oxley Act of 2002.

 

32.1         Certifications of CEO and CFO pursuant to18 U.S.C. Section 1350.

 

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##### **SIGNATURES**

##### ** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, the registrant has caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
| ** ** |                | **Epiq Systems, Inc.**                          |
|------------|---------------------|------------------------------------------------------|
|       |                |                                                 |
| Date:      | April 29, 2009 | /s/ Tom W. Olofson                                   |
|       |                | Tom W. Olofson                                       |
|       |                | Chairman of the Board                                |
|       |                | Chief Executive Officer                              |
|       |                | Director                                             |
|       |                | (Principal Executive  Officer)                       |
|       |                |                                                 |
|       |                |                                                 |
| Date:      | April 29, 2009 | /s/ Elizabeth M. Braham                              |
|       |                | Elizabeth M. Braham                                  |
|       |                | Executive Vice  President, Chief Financial Officer   |
|       |                | (Principal  Financial & Accounting Officer) |

 

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