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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/x/ |
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended June 30, 2000
Commission File Number 0-22081
EPIQ SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Missouri (State or other jurisdiction of incorporation or organization) |
48-1056429 (IRS Employer Identification No.) |
501 Kansas Avenue, Kansas City, Kansas 66105-1300
(Address of principal executive offices)
913-621-9500
(Registrant's telephone number)
ELECTRONIC PROCESSING, INC.
(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes /x/ No / /
The number of shares outstanding of registrant's common stock at June 30, 2000:
Class |
Outstanding |
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Common Stock, $.01 par value | 4,646,068 |
EPIQ SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2000
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Page |
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PART IFINANCIAL INFORMATION | ||||
Item 1. | Financial Statements | 2 | ||
Statements of IncomeThree months and six months ended June 30, 2000 and 1999 | 2 | |||
Balance SheetsJune 30, 2000 and December 31, 1999 | 3 | |||
Statements of Cash FlowsSix months ended June 30, 2000 and 1999 | 5 | |||
Notes to Financial StatementsDecember 31, 1999 and June 30, 2000 and 1999 | 6 | |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 10 | ||
PART IIOTHER INFORMATION |
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Item 4. | Submission of Matters to a Vote of Security Holders | 14 | ||
Item 6. | Exhibits and Reports on Form 8-K | 14 | ||
Signatures |
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15 |
1
ITEM 1. Financial Statements.
EPIQ SYSTEMS, INC.
STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
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Six months ended June 30 |
Three months ended June 30 |
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2000 |
1999 |
2000 |
1999 |
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OPERATING REVENUES | $ | 10,752,772 | $ | 7,059,149 | $ | 5,764,795 | $ | 3,629,239 | |||||||
COST OF GOODS SOLD AND DIRECT COSTS |
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Processing costs | 2,701,211 | 2,397,902 | 1,456,956 | 1,257,764 | |||||||||||
Depreciation and amortization | 1,455,913 | 982,289 | 783,589 | 518,828 | |||||||||||
4,157,124 | 3,380,191 | 2,240,545 | 1,776,592 | ||||||||||||
GROSS PROFIT |
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6,595,648 |
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3,678,958 |
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3,524,250 |
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1,852,647 |
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OPERATING EXPENSES |
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General and administrative | 3,798,648 | 2,394,116 | 2,013,116 | 1,143,916 | |||||||||||
Depreciation | 106,394 | 72,573 | 55,452 | 38,011 | |||||||||||
Amortizationgoodwill/intangibles | 543,457 | 1,007 | 334,089 | 503 | |||||||||||
Acquisition related | 436,157 | 0 | 78,501 | 0 | |||||||||||
Purchased in-process research & development | 363,738 | 0 | 0 | 0 | |||||||||||
5,248,394 | 2,467,696 | 2,481,158 | 1,182,430 | ||||||||||||
INCOME FROM OPERATIONS |
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1,347,254 |
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1,211,262 |
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1,043,092 |
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670,217 |
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OTHER INCOME (EXPENSE) |
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Interest income | 98,109 | 263,478 | 31,445 | 128,147 | |||||||||||
Interest expense | (137,061 | ) | (12,114 | ) | (105,994 | ) | (5,063 | ) | |||||||
Other | (28,307 | ) | (15,371 | ) | (35,919 | ) | (15,443 | ) | |||||||
(67,259 | ) | 235,993 | (110,468 | ) | 107,641 | ||||||||||
INCOME BEFORE TAXES |
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1,279,995 |
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1,447,255 |
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932,624 |
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777,858 |
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PROVISION FOR INCOME TAXES |
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503,955 |
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557,951 |
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363,563 |
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300,146 |
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NET INCOME |
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$ |
776,040 |
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$ |
889,304 |
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$ |
569,061 |
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$ |
477,712 |
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NET INCOME PER SHARE INFORMATION |
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Basic | $ | 0.17 | $ | 0.19 | $ | 0.12 | $ | 0.10 | |||||||
Diluted | $ | 0.16 | $ | 0.19 | $ | 0.12 | $ | 0.10 | |||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING |
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Basic | 4,644,399 | 4,634,748 | 4,645,984 | 4,635,371 | |||||||||||
Diluted | 4,806,845 | 4,805,047 | 4,797,143 | 4,793,086 |
See Notes to Financial Statements.
2
EPIQ SYSTEMS, INC.
BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
(Unaudited)
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June 30, 2000 |
December 31, 1999 |
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CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 2,058,702 | $ | 1,642,848 | ||||
Short-term investments | 0 | 3,850,000 | ||||||
Accounts receivable, trade, less allowance for doubtful accounts of $30,560 and $5,000 | 3,265,591 | 1,954,806 | ||||||
Prepaid expenses and other | 131,611 | 167,990 | ||||||
Deferred income taxes | 126,100 | 85,700 | ||||||
Refundable income taxes | 164,629 | 107,063 | ||||||
Total Current Assets | 5,746,633 | 7,808,407 | ||||||
PROPERTY AND EQUIPMENT, At cost |
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Furniture and fixtures | 602,831 | 667,905 | ||||||
Computer equipment | 9,255,354 | 7,753,615 | ||||||
Office equipment | 292,683 | 269,961 | ||||||
Leasehold improvements | 972,457 | 941,393 | ||||||
Transportation equipment | 14,969 | 14,969 | ||||||
11,138,294 | 9,647,843 | |||||||
Less accumulated depreciation | 4,210,393 | 3,338,323 | ||||||
6,927,901 | 6,309,520 | |||||||
SOFTWARE DEVELOPMENT COSTS, Net | 2,654,596 | 2,252,917 | ||||||
OTHER ASSETS |
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Excess of cost over fair value of net assets acquired, net | 14,946,675 | 9,599,893 | ||||||
Intangibles, net | 267,188 | 245,833 | ||||||
Other | 18,076 | 5,584 | ||||||
15,231,939 | 9,851,310 | |||||||
$ | 30,561,069 | $ | 26,222,154 | |||||
See Notes to Financial Statements.
3
EPIQ SYSTEMS, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
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June 30, 2000 |
December 31, 1999 |
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CURRENT LIABILITIES | ||||||||
Current maturities of capital lease obligations | $ | 53,973 | $ | 42,406 | ||||
Current credit line | 3,500,000 | 0 | ||||||
Current maturity of obligation under purchase agreement | 168,674 | 0 | ||||||
Deferred revenue | 1,504,477 | 2,067,566 | ||||||
Accounts payable | 1,093,324 | 762,958 | ||||||
Accrued expenses | 473,594 | 588,189 | ||||||
Total Current Liabilities | 6,794,042 | 3,461,119 | ||||||
DEFERRED REVENUE | 939,924 | 1,176,458 | ||||||
CAPITAL LEASE OBLIGATIONS | 64,726 | 66,894 | ||||||
PRESENT VALUE OF OBLIGATION INCURRED UNDER PURCHASE AGREEMENT | 628,555 | 0 | ||||||
DEFERRED INCOME TAXES | 418,000 | 592,700 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Common stock, $.01 par value; authorized 20,000,000 Shares at June 30, 2000 and 10,000,000 at December 31, 1999; issued and outstanding4,646,068 and 4,642,068 shares at 2000 and 1999, respectively | 46,461 | 46,421 | ||||||
Additional paid-in capital | 17,713,725 | 17,698,965 | ||||||
Retained earnings | 3,955,636 | 3,179,597 | ||||||
Total Stockholders' Equity | 21,715,822 | 20,924,983 | ||||||
$ | 30,561,069 | $ | 26,222,154 | |||||
See Notes to Financial Statements.
4
EPIQ SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
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2000 |
1999 |
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CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
Net income (loss) | $ | 776,040 | $ | 889,304 | |||||||
Items not requiring (providing) cash: | |||||||||||
Provision deferred income taxes | (215,100 | ) | 72,860 | ||||||||
Depreciation | 1,185,278 | 826,411 | |||||||||
Amortization of software development costs | 377,029 | 228,451 | |||||||||
Amortization of intangible assets | 543,457 | 1,007 | |||||||||
In-process research and development acquired | 363,738 | 0 | |||||||||
(Gain) on disposal of equipment | 28,308 | 15,503 | |||||||||
Changes in: | |||||||||||
Accounts receivable | (1,072,547 | ) | (1,102,896 | ) | |||||||
Prepaid expenses and other assets | 45,959 | 75,187 | |||||||||
Accounts payable and accrued expenses | 110,573 | (322,549 | ) | ||||||||
Decrease in deferred revenue | (1,508,505 | ) | 0 | ||||||||
Income taxes payable/refundable | (57,566 | ) | 23,437 | ||||||||
Net cash provided (used) by operating activities | 576,664 | 706,715 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
Purchase of property and equipment | (1,821,866 | ) | (1,433,178 | ) | |||||||
Software development costs | (417,013 | ) | (325,657 | ) | |||||||
Cash paid for acquisition of business, net of cash acquired | (5,310,388 | ) | 0 | ||||||||
Proceeds from sale of property and equipment | 50,787 | 11,292 | |||||||||
Proceeds from sale of investments | 3,850,000 | 1,100,000 | |||||||||
Net cash (used) in investing activities | (3,648,480 | ) | (647,543 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
Proceeds from borrowings on line-of-credit | 3,500,000 | 0 | |||||||||
Principal payments under capital lease obligations | (27,130 | ) | (114,501 | ) | |||||||
Principal payments on long-term debt | 0 | (6,718 | ) | ||||||||
Proceeds from stock issuance | 14,800 | 10,575 | |||||||||
Net cash provided (used) in financing activities | 3,487,670 | (110,644 | ) | ||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 415,854 | (51,472 | ) | ||||||||
CASH AND CASH EQUIVALENTS, BEGINNING PERIOD | 1,642,848 | 820,256 | |||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 2,058,702 | $ | 768,784 | |||||||
See Notes to Financial Statements.
5
EPIQ SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
AND JUNE 30, 2000 AND 1999
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Operations
EPIQ Systems, Inc. develops, markets and licenses proprietary software products and provides support services for e-Workflow, e-Banking and e-Commerce that are directed to a variety of markets including bankruptcy management and financial services. The Company serves a national client base with specialty products developed in current technologies that streamline the internal business operations of its customers. The products are accompanied by a high level of coordinated support including network integration, post-installation support and value added services.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are depreciated on a straight-line basis over the estimated useful life of each asset as follows:
Furniture and fixtures | 5-10 years | |
Computer equipment | 3-5 years | |
Office equipment | 3-10 years | |
Transportation equipment | 3-5 years |
Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful lives (5-10 years) of the improvements.
Software Development Costs
Certain internal software development costs incurred in the creation of computer software products are capitalized once technological feasibility has been established. Prior to the completion of a detailed program design, development costs are expensed. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product, not to exceed five years.
Intangible Assets
The excess of cost over fair value of net assets acquired in the PHiTECH, Inc. and DCI Chapter 7 Solutions, Inc., acquisitions are being amortized on a straight-line basis over 10 years and 14 years, respectively. The agreements not to compete for PHiTECH and DCI are amortized over 4 and 5 years, respectively.
6
Revenue Recognition
For the Company's Chapter 7 bankruptcy software product, monthly fees are received from a national financial institution after the product is installed and deposits are transferred based on the level of trustees' deposits with that institution. Revenues for Chapter 13 processing and noticing are recorded monthly at the completion of the services based on the trustees' month-end caseloads. All ancillary fees are recognized as the services are provided.
With the purchase of assets from PHiTECH, Inc., the Company recorded $708,882 of deferred revenue related to maintenance services provided. The revenue will be recognized on a straight-line basis over the maintenance period, generally one year.
At the time of the acquisition of the assets of DCI Chapter 7 Solutions, Inc., the Company received $4,500,000 from a national financial institution for various technology and general integration services. The Company has accounted for this payment as a multiple element project with the revenues being recorded as such elements are completed and delivered.
At June 30, 2000, deferred revenues totaled $2,444,401 with $939,924 being classified as long-term.
Income Taxes
Deferred tax liabilities and assets are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less (primarily money market accounts) to be cash equivalents.
Interim Financial Statements
The balance sheet as of June 30, 2000, and the statements of income, shareholders' equity and cash flows for the six-month periods ended June 30, 2000 and 1999, have been prepared by the Company without audit. In the opinion of management, all adjustments (which included only normal, recurring adjustments) necessary for fair presentation have been made. The results for these periods are not necessarily indicative of the results to be expected for the full year. The balance sheet as of December 31, 1999 has been derived from the audited balance sheet of the Company as of that date.
Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K annual report for 1999 filed with the Securities and Exchange Commission.
7
NOTE 2: ADDITIONAL CASH FLOW INFORMATION
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Six Months Ended June 30, |
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December 31, 1999 |
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2000 |
1999 |
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(Unaudited) |
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Noncash Investing and Financing Activities | |||||||||||
Capital lease obligation and notes payable incurred for equipment | $ | 0 | $ | 0 | $ | 66,926 | |||||
The Company acquired substantially all business assets of PHiTECH, Inc. (See Note 3). In conjunction with the acquisition, liabilities were assumed as follows: | |||||||||||
Fair value of assets acquired (including cash of $3,968) | 6,596,007 | ||||||||||
Cash paid, net of In-Process Research and Development | (4,950,618 | ) | |||||||||
1,645,389 | |||||||||||
Deferred obligation incurred in purchase transaction | (797,229 | ) | |||||||||
Liabilities Assumed |
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$ |
848,160 |
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Additional Cash Information |
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Interest paid | 18,167 | 137,061 | 12,114 | ||||||||
Income taxes paid | $ | 1,034,899 | $ | 755,276 | $ | 430,000 |
NOTE 3: BUSINESS ACQUISITION
On March 17, 2000, the Company acquired substantially all business assets of PHiTECH, a California corporation that provided software-based solutions that enable corporate customers to route, secure and format business-critical data over the Internet and private networks using a wide variety of web-based and legacy communications protocols. The Company plans to further develop the next-generation software product.
The acquisition has been accounted for using the purchase method of accounting with the operating results of PHiTECH included in the Company's statement of earnings since the date of acquisition. Of the purchase price, $363,738 was treated as a one-time charge to earnings related to purchased research and development, reducing after tax income for the first quarter of 2000 by $216,788 or $.045 per share on a diluted basis.
The purchase price of this acquisition totaled $6,111,585, of which $5,314,356 was paid in cash and $797,229 is deferred and will be paid over four years, beginning one year after the date of acquisition. The purchase price was allocated to net tangible assets of $322,719, software $361,694, other intangible assets $50,000 and the Company assumed liabilities of $848,160, of which approximately $709,000 relates to deferred revenue. The remainder of the purchase price, $5,861,594, was allocated to excess of cost over fair value of the net assets acquired. The acquired in-process research and development related to PHiTECH's
8
next-generation, platform-independent product (jDX), which will be available in 2000. jDX was approximately 80% complete at the time of the acquisition.
The operations of the Company include the operations of the acquired business from the acquisition date. Unaudited Pro Forma operations assuming the purchase was made at the beginning of each period are shown below:
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Six Months Ended June 30, 2000 |
Six Months Ended June 30, 1999 |
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Operating Revenues | $ | 11,046,463 | $ | 8,135,555 | |||
Net Income | 608,799 | 643,485 | |||||
Net Income Per Share: | |||||||
Basic | $ | 0.13 | $ | 0.14 | |||
Diluted | $ | 0.13 | $ | 0.13 |
The Pro Forma information is not necessarily indicative of what would have occurred had the acquisition been completed on those dates, nor is it necessarily indicative of future operations.
Pro Forma data reflect the difference in amortization expense between the two companies as well as a reduction in interest income based on the utilization of interest-bearing investments to purchase the acquiree and interest expense related to additional borrowings to finance the acquisition.
9
ITEM 2. Management Discussion and Analysis of Financial Condition and Results of Operations.
Six Months Ended June 30, 2000 Compared With Six Months Ended June 30, 1999
Operating revenues increased 52.3%, or $3,693,623 to $10,752,772 in the six-month period ended June 30, 2000, compared to $7,059,149 in the six-month period ended June 30, 1999. The growth in operating revenues was attributable to revenues generated by Chapter 7 bankruptcy services and from the new revenues generated from the e-commerce services (March 17, 2000 acquisition of PHiTECH). Chapter 7 revenues increased 85.1%, or $3,476,695 to $7,560,073 in the six-month period ended June 30, 2000, compared to $4,083,377 in the six-month period ended June 30, 1999. The increase in Chapter 7 revenue was due in part to the fees generated from growth in new Chapter 7 trustee business as a result of the November 1999 DCI Chapter 7 Solutions, Inc. (DCI) acquisition, additional new customer growth, fees originating from technology integration relating to former DCI customers and upgrade fees from the release of the TCMS 2000. Of this increase, 33.2% relates to technology integration fees. Chapter 13 revenue decreased 20.2%, or $600,616 to $2,375,156 in the six-month period ended June 30, 2000, compared to $2,975,156 in the six-month period ended June 30, 1999. The decrease in Chapter 13 was mainly a result of non-recurring hardware sales in the first half of 1999 that related to Chapter 13 Trustees upgrading to CasePower from a legacy product.
Total cost of goods sold and direct costs increased 23.0%, or $776,932 to $4,157,123 in the six-month period ended June 30, 2000, compared to $3,380,191 in the six-month period ended June 30, 2000. Total cost of goods sold and direct costs as a percentage of operating revenues decreased to 38.7% in the six-month period ended June 30, 2000 compared to 47.9% in the six-month period ended June 30, 1999 mainly due to the receipt of the one-time technology integration fee noted above. Processing costs increased 12.6%, or $303,308 to $2,701,210 in the six-month period ended June 30, 2000, compared to $2,397,902 in three-month period ended June 30, 1999. The increase in 2000 resulted principally from an increase in operational wages and contract labor to support the growth in Chapter 7 sales and services and the recently acquired e-commerce business. Processing costs, as a percentage of operating revenues were 25.1% in the six-month period ended June 30, 2000 compared to 33.4% in the six-month period ended June 30, 1999. Depreciation and amortization increased 48.2%, or $473,624, to $1,455,913 in the six-month period ended June 30, 2000, compared to $982,289 in the six-month period ended June 30, 1999, primarily due to the additional equipment acquired with the DCI acquisition and the purchase of computer equipment as new trustees were added for the Company's Chapter 7 product and to a lesser extent additional depreciation related to the recently acquired e-commerce business.
Operating expenses increased 112.7%, or $2,780,699 to $5,248,394 in the six-month period ended June 30, 2000, compared to $2,467,696 in the six-month period ended June 30, 1999. Operating expenses, as a percentage of operating revenues were 48.8% in the six-month period ended June 30, 2000 compared to 35% in the six-month period ended June 30, 1999. The dollar increase in operating expenses was due to increases in general and administrative infrastructure necessary to support a higher level of revenues, including additional sales and marketing expenses related to growth of the Company's Chapter 7 product and e-commerce products and acquisition related expenses and the purchased in-process research and development. Sales and marketing expenses include sales and marketing salaries, trade shows costs, travel associated with Chapter 7 installations, and advertising costs. Sales and marketing expenses increased 70.0%, or $356,628 to $821,827 in the six-month period ended June 30, 2000, compared to $483,659 in the six-month period ended June 30, 1999. Included in operating expenses in the six-months ending June 30, 2000 were acquisition related expenses of $436,157 and a one-time write-off for acquired in-process research and development of $363,738; the two one-time charges represent 28.8% of the increase.
Other income (expense) which includes interest income and interest expense, was ($67,259) in the six-month period ended June 30, 2000 compared to $235,993 in the six-month period ended June 30, 1999. This decrease resulted in part from a reduction in interest income for the quarter ending June 30, 2000 due to the use of cash to expand the business through the DCI and PHiTECH acquisitions. The decrease was
10
also due to an increase in interest expense as a result of using the Company's $3,500,000 line of credit, to finance a portion of the PHiTECH acquisition cost.
The Company's effective tax rate was 39.4% for the six-month period ended June 30, 2000, compared to 38.6% for the six-month period ended June 30, 1999.
Net income as a percentage of operating revenues decreased to 7.2% in the six-month period ended June 30, 2000 from 12.6% in the six-month period ended June 30, 1999. The decrease in net income was largely due to the acquisition related charges and the purchased in-process research and development. Excluding those items, net income for the six-month period ended June 30, 2000 would have been $1,253,777. Excluding the acquisition related charges and the purchased in-process R&D, net income increased $364,473 or 41% in the six-month period ended June 30, 2000, compared to the six-month period ended June 30, 1999. Excluding the acquisition related charges and the purchased in-process R&D, net income as a percentage of operating revenues, was 11.7% for the six-month period ended June 30, 2000 compared to 12.6% at June 30, 1999.
Three Months Ended June 30, 2000 Compared With Three Months Ended June 30, 1999
Operating revenues increased 58.9%, or $2,138,556 to $5,764,795 in the three-month period ended June 30, 2000, compared to $3,629,239 in the three-month period ended June 30, 1999. The growth in operating revenues was attributable to revenues generated by Chapter 7 bankruptcy services and the recently acquired e-commerce services. Chapter 7 revenues increased 92.1%, or $1,847,594 to $3,854,726 in the three-month period ended June 30, 2000, compared to $2,007,132 in the three-month period ended June 30, 1999. The increase in Chapter 7 revenue was due in part to the fees generated from growth in new Chapter 7 trustee business as a result of the DCI Chapter 7 Solutions, Inc. (DCI) acquisition, additional new customer growth, fees originating from technology integration relating to former DCI customers and upgrade fees from the release of TCMS 2000. Of this increase, 26.4% relates to the technology integration fees. Chapter 13 revenue decreased 29.7%, or $481,380 to $1,140,727 in the three-month period ended June 30, 2000, compared to $1,622,106 in the three-month period ended June 30, 1999. The decrease in Chapter 13 was mainly a result of non-recurring hardware sales and conversion fees in the second quarter of 2000 that related to Chapter 13 trustees upgrading to CasePower from a legacy product.
Total cost of goods sold and direct costs increased 26.1%, or $463,953 to $2,240,545 in the three-month period ended June 30, 2000, compared to $1,776,592 in the three-month period ended June 30, 1999. Total cost of goods sold and direct costs as a percentage of operating revenues decreased to 38.9% in the three-month period ended June 30, 2000 compared to 49.0% in the three-month period ended June 30, 1999 due in-part to the receipt of the one-time technology integration fee noted above. Processing costs increased 15.8%, or $199,192 to $1,457,956 in the three-month period ended June 30, 2000, compared to $1,257,764 in three-month period ended June 30, 1999. The increase in the second quarter of 2000 resulted principally from an increase in operational wages and contract labor resulting from the acquisition of PHiTECH and to support the growth in Chapter 7 sales and services. Processing costs, as a percentage of operating revenues were 25.3% in the three-month period ended June 30, 2000 compared to 34.7% in the three-month period ended June 30, 1999. Depreciation and amortization increased 51.0%, or $264,761, to $783,589 in the three-month period ended June 30, 2000, compared to $518,828 in the three-month period ended June 30, 1999, primarily due to the additional equipment and software acquired with the DCI and PHiTECH acquisition and the purchase of computer equipment as new trustees were added for the Company's Chapter 7 product.
Operating expenses increased 109.9%, or $1,298,728 to $2,481,158 in the three-month period ended June 30, 2000, compared to $1,182,430 in the three-month period ended June 30, 1999. Operating expenses, as a percentage of operating revenues were 43.0% in the three-month period ended June 30, 2000 compared to 32.6% in the three-month period ended June 30, 1999. The dollar increase in operating expenses was due to increases in general and administrative infrastructure necessary to support a higher
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level of revenues, including additional sales and marketing expenses related to the recent acquisition of PHiTECH, growth of the Company's Chapter 7 product, and acquisition related expenses. Sales and marketing expenses include sales and marketing salaries, trade shows costs, travel associated with Chapter 7 installations, and advertising costs. Sales and marketing expenses increased 104.8%, or $224,550 to $438,842 in the three-month period ended June 30, 2000, compared to $214,292 in the three-month period ended June 30, 1999. Included in operating expenses in the quarter ending June 30, 2000 were acquisition related expenses of $78,501.
Other income (expense) which includes interest income and interest expense, was ($110,468) in the three-month period ended June 30, 2000 compared to $107,641 in the three-month period ended June 30, 1999. This decrease resulted in part from a reduction in interest income for the quarter ending June 30, 2000 due to the use of cash to expand the business through the DCI and PHiTECH acquisitions. The decrease was also due to an increase in interest expense as result of using the Company's $3,500,000 line of credit, to finance a portion of the PHiTECH acquisition cost.
The Company's effective tax rate was 39.0% for the three-month period ended June 30, 2000, compared to 38.6% for the three-month period ended June 30, 1999.
Net income as a percentage of operating revenues decreased to 9.9% in the three-month period ended June 30, 2000 from 13.2% in the three-month period ended June 30, 1999. The decrease in net income was due in part to the acquisition related charges, increased interest expense and reduction of interest income.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments decreased to $2,058,702 as of June 30, 2000 compared to $5,492,848 as of December 31, 1999. The decrease in cash was mainly attributable to the PHiTECH acquisition in March 2000 and to a lesser extent the purchase of computer equipment and software.
The Company generated cash of $576,664 and $706,715 from operations for the six months ended June 30, 2000 and 1999, respectively. The cash flow generated from operations in the six months ending June 30, 2000, primarily consisted of revenues generated from net income plus depreciation and amortization which were offset by the increase in accounts receivable and decrease in deferred revenue. The cash flow generated from operations in the six months ended June 30, 1999, consisted of net income plus depreciation and amortization less an increase in accounts receivable and a decrease in accounts payable.
The Company invested in property and equipment totaling $1,821,866 and $1,433,178 for the six-month periods ended June 30, 2000, and June 30, 1999, respectively, which related principally to the installation of computer equipment for the Company's Chapter 7 product.
The Company incurred expenditures for software costs totaling $417,013 and $325,657 for the six-months ended June 30, 2000, and June 30, 1999, respectively. In addition, on March 17, 2000 with the purchase of PHiTECH, the Company acquired a software product to support the e-commerce business, which is not reflected in the 2000 software expenditures. This expenditure is capitalized and is being amortized on a straight-line basis over a three-year period. Internal software costs incurred in the creation of computer software products are capitalized as soon as technological feasibility has been established. Prior to the completion of a detailed program design, development costs are expensed. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to straight-line amortization over the remaining estimated economic life of the product, not to exceed five years. Additionally, the Company anticipates future investments in software development will be at or above levels in previous periods.
On March 17, 2000, the Company completed the acquisition of PHiTECH Inc., of San Francisco, California, a provider of software and servicing for B2B e-commerce and enterprise open file delivery (see
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Note 3). The Company paid the purchase price from available cash and $3,500,000 of borrowings under the Company's previously unused line of credit. The maximum borrowing under the line of credit is $3,500,000, all of which is currently outstanding. No amounts were borrowed under this line of credit in 1999. The line of credit was renewed on June 20, 2000 and expires on June 20, 2001, unless renewed, and principal on the line is due upon demand, and if no demand is made at maturity of the line.
The Company also maintains a $2,500,000 credit agreement to finance certain computer equipment purchases, which also matures on June 20, 2001. There have been no borrowings under this equipment line of credit.
The Company believes that the funds generated from operations plus amounts available under the Company's equipment line of credit will be sufficient to finance the Company's currently anticipated working capital and property and equipment expenditures for the foreseeable future.
Forward-Looking Statements
In this report, the Company makes statements that plan for or anticipate the future. These forward-looking statements include statements about EPI's future business plans and strategies, and other statements that are not historical in nature. These forward-looking statements are based on the Company's current expectations.
Forward-looking statements may be identified by words or phrases such as "believe," "expect," "anticipate," "should," "planned," "may," "estimated" and "potential." Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, provide a "safe harbor" for forward-looking statements. In order to comply with the terms of the safe harbor, and because forward-looking statements involve future risks and uncertainties, listed below are a variety of factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. These factors include, but are not limited to, (1) any material changes in the total number of Chapter 7 Trustees or Chapter 7 deposits served by the Company, (2) any material changes in the number of Chapter 13 Trustees or material changes in the number of cases processed by Chapter 13 Trustees of the Company, (3) changes in the number of bankruptcy filings each year, (4) changes in bankruptcy legislation, (5) the Company's reliance on its marketing arrangement of Chapter 7 revenue, (6) the Company's ability to achieve or maintain technological advantages, (7) uncertainties related to the recently completed PHiTECH acquisition and the future operations and planned expansions of that business by the Company, and (8) other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-KSB for the year ended December 31, 1999. In addition, there may be other factors not included in the Company's Securities and Exchange Commission filings that may cause actual results to differ materially from any forward-looking statements. The Company undertakes no obligations to update any forward-looking statements contained herein to reflect future events or developments.
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EPIQ SYSTEMS, INC.
JUNE 30, 2000 FORM 10-Q
ITEM 4: Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Shareholders of the Company was held on June 7, 2000, to consider the election of directors, a proposal to amend the Company's Articles of Incorporation to increase the authorized shares of common stock from 10,000,000 to 20,000,000, a proposal to change the Company's name to EPIQ Systems, Inc., and a proposal to amend the 1995 Stock Option Plan to increase the number of shares of common stock available for issuance under the plan from 500,000 to 800,000. The results of the voting at the Annual Meeting were as follows:
|
For |
Against |
Abstain |
||||
---|---|---|---|---|---|---|---|
Election of Directors | |||||||
Tom W. Olofson | 4,357,069 | 19,900 | 0 | ||||
Christopher E. Olofson | 4,372,069 | 4,900 | 0 | ||||
W. Bryan Satterlee | 4,371,769 | 5,200 | 0 | ||||
Robert C. Levy | 4,371,569 | 5,400 | 0 | ||||
Amend the Company's Articles of Incorporation to increase the number of authorized shares of common stock to 20,000,000 | 4,322,919 | 51,247 | 2,803 | ||||
Amend the Company's Articles of Incorporation to change the Company's name to EPIQ Systems, Inc. | 4,354,446 | 17,500 | 5,023 | ||||
Amend the Company's 1995 Stock Option Plan to increase the number of shares of common stock available for issuance under the Plan | 3,017,372 | 86,848 | 6,553 |
No other matters were submitted to a vote of the shareholders at the Annual Meeting.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following Exhibits are filed with this Form 10-Q:
Exhibit Number |
Description of Exhibit |
|
---|---|---|
3.1 | Articles of Incorporation, as amended. | |
27 | Financial Data Schedule |
(b) Reports on Form 8-K.
The registrant filed the following reports on Form 8-K during the quarter ended June 30, 2000:
Date |
Description |
|
---|---|---|
May 26, 2000 | Amendment to the Form 8-K filed March 30, 2000, announcing the completion of the PHiTECH acquisition, which amendment included certain financial statements and pro forma financial statements relating to the PHiTECH acquisition. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EPIQ SYSTEMS, INC. | |
Date: August 9, 2000 |
/s/ TOM W. OLOFSON Tom W. Olofson Chairman of the Board Chief Executive Officer Director (Principal Executive Officer) |
Date: August 9, 2000 |
/s/ JANICE E. KATTERHENRY Janice Katterhenry Vice President, Chief Financial Officer and Corporate Secretary |
Date: August 9, 2000 |
/s/ MICHAEL A. RIDER Michael A. Rider Controller (Principal Accounting Officer) |
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