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TMCNet:  EPIQ SYSTEMS INC - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations

[August 15, 2014]

EPIQ SYSTEMS INC - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements In this report, in other filings with the SEC and in press releases and other public statements by our officers throughout the year, Epiq Systems, Inc. makes or will make statements that plan for or anticipate the future. These forward-looking statements include, but are not limited to any projection or expectation of earnings, revenue or other financial items; the plans, strategies and objectives of management for future operations; factors that may affect our operating results; new products or services; the demand for our products and services; our ability to consummate acquisitions and successfully integrate them into our operations; future capital expenditures; effects of current or future economic conditions or performance; industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These forward-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 this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this report.


Forward-looking statements may be identified by words or phrases such as "believe," "expect," "anticipate," "should," "planned," "may," "estimated," "goal," "objective," "seeks," and "potential" and variations of these words and similar expressions or negatives of these words. Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), provide a "safe harbor" for forward-looking statements. Because forward-looking statements involve future risks and uncertainties, listed below are a variety of factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. These factors include (1) failure to keep pace with technological changes and significant changes in the competitive environment, (2) risks associated with cyber-attacks, interruptions or delays in services at data centers, (3) risks of errors or failures of software or services, (4) any material changes in our total number of client engagements and the volume associated with each engagement, (5) any material changes in our clients' deposit portfolio or the services required or selected by our clients in engagements, (6) changes in or the effects of pricing structures and arrangements, (7) risks associated with the handling of confidential data and compliance with information privacy laws, (8) risks associated with developing and providing software and internet-based technology solutions to our clients, (9) ability to attract, develop and retain executives and other qualified employees, (10) risks associated with the integration of acquisitions into our existing business operations, (11) risks associated with our international operations, (12) risks associated with foreign currency fluctuations, (13) risks of litigation against us or failure to protect our intellectual property, (14) material changes in the number of bankruptcy filings, class action filings or mass tort actions each year, or changes in government legislation or court rules affecting these filings, (15) any material non-cash write-downs based on impairment of our goodwill, (16) risks associated with indebtedness and interest rate fluctuations, (17) overall strength and stability of general economic conditions, both in the United States and in the global markets, and (18) other risks detailed from time to time in our SEC filings, including our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. In addition, there may be other factors not included in our SEC filings that may cause actual results to differ materially from any forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements contained herein to reflect future events or developments, except as required by law.

This discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Overview Epiq is a leading global provider of integrated technology solutions for the legal profession. We combine proprietary software, deep subject matter expertise, highly responsive customer service delivery and a global infrastructure to assist our customers with the technology requirements for their most important and complex matters. We offer these capabilities across a variety of practice areas including bankruptcy, litigation, class action, antitrust, investigations and regulatory compliance.

Our two reportable segments are our Technology segment and our Bankruptcy and Settlement Administration segment.

Our Technology segment ("Technology") provides eDiscovery managed services and technology solutions comprised of consulting, collections and forensics, processing, search and review, production of documents and document review services to companies and law firms.

Our Bankruptcy and Settlement Administration segment ("Bankruptcy and Settlement Administration") provides managed services and technology solutions that address the needs of our customers with respect to litigation, claims and project administration, compliance matters, controlled disbursements, corporate restructuring, bankruptcy and class action proceedings.

24 -------------------------------------------------------------------------------- Table of Contents Investing in proprietary software development maximizes our competitiveness in the marketplace and distinguishes us from our competitors. Beyond our proprietary software we also incorporate various licensed third-party software products in our solution set allowing us to expand our solutions.

Because we deliver most of our software in a hosted environment and because of the high volume of client data that we manage, network infrastructure is an essential component of our technology strategy. A single large client engagement may entail over 100 million documents or 100 terabytes of information and may include complex structured data (i.e., databases) and unstructured data (e.g., email archives). We operate eDiscovery data centers in the United States, Canada, United Kingdom, Hong Kong, Shanghai and Japan that provide reliable, secure access to our software environments and to customer databases.

Information security is of paramount importance in any managed technology business, and Epiq incorporates best practices designed to protect sensitive customer data.

Our software and IT capabilities include significant in-house fulfillment capabilities. Our office locations in New York, Kansas City and Portland have internal abilities for high-speed printing and mailing, call center operations, and disbursement and tax records preparation. The combination of software, IT and fulfillment resources enables Epiq to act as a single-source solution for even the largest, most complex matters in the markets where we compete.

We work in niche, specialty areas which require deep subject matter expertise - such as litigation, bankruptcy, M&A, mass tort, investigations and class action -which have distinctive practices and requirements. Technology alone is insufficient to bring about a successful outcome on a sophisticated client matter; it is often the application of the technology and the expertise of our staff that create the most value for our client. We have a worldwide team of executives, client services specialists and technical consultants on whom clients rely for expert advice - whether delivered at the client's site or from one of our office locations. Our team includes former practicing litigators, bankruptcy attorneys, plaintiff's counsel, defense counsel, eDiscovery counsel and other professionals who are leaders in their areas of expertise. While we do not offer clients legal advice (because we are not a law firm), we draw heavily from our subject matter expertise in the legal profession to assist clients in achieving the best outcome on each project on which we are retained.

Our clients include top tier law firms, the in-house legal departments of major corporations, trustees, specialty fiduciaries and other professionals. Among corporate clients, we have substantial relationships with large, multinational companies in a variety of industries, including financial services, pharmaceuticals, insurance, technology and others. Among law firms, we work extensively with Am Law 100 firms in the U.S., Magic Circle firms in the U.K.

and leading boutique or specialty law firms in all geographies. The global nature of our business continues to grow. With full-service offices (i.e., locations having a data center, on-site technical staff, on-site project management capabilities and local consulting capacities) around the world, Epiq offers a geographic reach to support client relationships wherever we are needed.

Our financial results are primarily driven by the following facts, among others: † the number, size and complexity of customer engagements attained; † the number of documents or volume of data we processed, hosted or reviewed; † the number of hours professional services are provided; † the deposit-based fees we earn are dependent upon the balance of assets placed with our designated financial institutions by bankruptcy trustees; and † the geographic locations of our clients or locations where services are rendered.

Our financial results for the second quarter of 2014 reflect the continued impact of strategic investments directed at the global expansion of the eDiscovery franchise as well as a continued higher mix of eDiscovery document review services compared to the prior year period which have a lower margin than the company's overall margin which impacted income from operations.

During 2013 and the first half of 2014, we continued to expand our eDiscovery services internationally. We added eDiscovery offices and data centers in Tokyo, Shanghai and Toronto in 2013. Document review services and international growth were the primary contributors to Technology segment operating revenue growth in the first half of 2014 as compared to the same period in 2013, with growth occurring in both electronically stored information ("ESI") and document review services. Global ESI solutions continued as the primary service offering, representing approximately 55% of the total 2014 second quarter year-to-date Technology segment operating revenue as compared to 61% for the same period in 2013, while global document review services increased during the year to now represent approximately 45% of the total 2014 second quarter year-to-date Technology segment operating revenue as compared to 39% for the same period in 2013.

Lower bankruptcy filings due to the current cyclical downturn in bankruptcy cases, in general, and lower trustee deposit balances specifically related to our Chapter 7 services, resulted in decreases in operating revenues related to our bankruptcy service 25 -------------------------------------------------------------------------------- Table of Contents offerings. Our bankruptcy services continue to maintain market leadership during this period of declining bankruptcy filings. We expect the current cyclical downturn in bankruptcy filings to continue throughout 2014.

Operating revenues related to our settlement administration services for the quarter ended June 30, 2014 decreased as compared to the prior year period due to activity related to a large private anti-trust settlement administration engagement in the prior year period.

Results of Operations for the Three Months Ended June 30, 2014 Compared with the Three Months Ended June 30, 2013 The discussion that follows provides information which we believe is relevant to an understanding of our consolidated results of operations. Also see our discussion of segment results in the "Results of Operations by Segment" section below.

Consolidated Results Amounts in thousands $ Change Three Months Ended June 30, Increase / 2014 2013 (Decrease) % Change Operating revenue $ 115,451 $ 104,976 $ 10,475 10 % Reimbursable expenses 9,605 8,396 1,209 14 % Total Revenue 125,056 113,372 11,684 10 % Direct cost of operating revenue (exclusive of depreciation and amortization shown separately below) 57,533 49,528 8,005 16 % Reimbursed direct costs 9,434 8,072 1,362 17 % Selling, general and administrative expense 46,374 36,931 9,443 26 % Depreciation and software and leasehold amortization 9,255 7,391 1,864 25 % Amortization of identifiable intangible assets 3,166 4,736 (1,570 ) -33 % Loss on disposition of property and equipment 339 4 335 n/m Other operating expense 157 49 108 n/m Total Operating Expense 126,258 106,711 19,547 18 % Income (Loss) From Operations (1,202 ) 6,661 (7,863 ) n/m Interest Expense (Income) Interest expense 3,852 2,004 1,848 92 % Interest income (9 ) (8 ) (1 ) 13 % Net Interest Expense 3,843 1,996 1,847 93 % Income (Loss) Before Income Taxes (5,045 ) 4,665 (9,710 ) n/m Provision (Benefit) for Income Taxes (1,626 ) 1,823 (3,449 ) n/m Net Income (Loss) $ (3,419 ) $ 2,842 $ (6,261 ) n/m n/m - not meaningful 26 -------------------------------------------------------------------------------- Table of Contents Revenue The increase in operating revenue for the three months ended June 30, 2014 as compared to the same period in the prior year was driven by an $8.4 million increase in the Technology segment and a $2.1 million increase in operating revenues for the Bankruptcy and Settlement Administration segment.

Total revenue includes reimbursed expenses, such as postage related to notification services. We reflect these reimbursed expenses as a separate line item on our accompanying Condensed Consolidated Statements of Income. Although reimbursable expenses may fluctuate significantly from quarter to quarter, these fluctuations have a minimal effect on our quarter to quarter income from operations as we realize little or no margin from this revenue.

Operating Expense The $8.0 million increase in direct cost of operating revenue, exclusive of depreciation and amortization, was primarily the result of the increase in and the mix of operating revenue and includes a $10.1 million increase in direct compensation-related costs primarily in support of the continued revenue growth in our Technology segment. This increase was partially offset by a $1.0 million decrease in costs for legal notification and advertising services as compared to the three months ended June 30, 2013.

The increase in reimbursed direct costs for the three months ended June 30, 2014 as compared to the same period of 2013 corresponds to the increase in revenue from reimbursed expenses.

Selling, general and administrative expenses increased $9.4 million and included an increase of $7.6 million in compensation-related expense which is primarily related to $7.7 million in post-employment benefits related to an executive resignation agreement in addition to $1.0 million of severance benefits. These increases were offset by a $2.1 million decrease in share-based compensation expense as compared to the prior year second quarter. The increase in selling, general and administrative expenses also includes an increase of $1.0 million in outside professional services and an increase of $1.1 million in office-related expenses such as lease expense, maintenance, utilities and supplies related to the expansion of our document review centers capacity.

Depreciation and software and leasehold amortization costs increased $1.9 million as a result of increased depreciation on equipment and software related to segment investments.

Amortization of intangible assets decreased $1.6 million related to certain of our intangible assets being amortized on an accelerated amortization method which are at lower amortization stages of the estimated useful lives of the intangible assets.

Interest Expense, Net The increase in net interest expense was primarily due to an increased principal amount of debt outstanding during the second quarter of 2014 as compared to the prior year period and also due to the higher rate of interest for our term loan under the Credit Agreement as compared to the interest rate under the prior credit agreement.

Income Taxes Our effective tax rate for the three months ended June 30, 2014 was 32.2% compared to 39.1% for the comparable prior year period. The lower 2014 rate is attributable to a greater proportion of income being earned in lower tax jurisdictions compared to the prior year period.

27 -------------------------------------------------------------------------------- Table of Contents Results of Operations by Segment The following segment discussion is presented on a basis consistent with our segment disclosure contained in Note 7 of our Notes to Condensed Consolidated Financial Statements. The table below presents operating revenue, direct and administrative costs (including reimbursed costs) and segment performance measure for each of our reportable segments and a reconciliation of the segment performance measure to consolidated income before income taxes.

Amounts in thousands $ Change Three Months Ended June 30, Increase / 2014 2013 (Decrease) % Change Operating revenue Technology $ 78,523 $ 70,126 $ 8,397 12 % Bankruptcy and Settlement Administration 36,928 34,850 2,078 6 % Total operating revenue $ 115,451 $ 104,976 $ 10,475 10 % Reimbursable expenses Technology $ 850 $ 535 $ 315 59 % Bankruptcy and Settlement Administration 8,755 7,861 894 11 % Total reimbursable expenses $ 9,605 $ 8,396 $ 1,209 14 % Direct costs, selling, general and administrative costs Technology $ 59,094 $ 48,979 $ 10,115 21 % Bankruptcy and Settlement Administration 31,780 31,788 (8 ) - Intercompany eliminations (258 ) (78 ) (180 ) n/m Total direct costs, selling, general and administrative costs $ 90,616 $ 80,689 $ 9,927 12 % Segment performance measure Technology $ 20,537 $ 21,760 $ (1,223 ) -6 % Bankruptcy and Settlement Administration 13,903 10,923 2,980 27 %Total segment performance measure $ 34,440 $ 32,683 $ 1,757 5 % Segment performance measure $ 34,440 $ 32,683 $ 1,757 5 % Unallocated corporate expenses (21,988 ) (11,017 ) (10,971 ) 100 % Share-based compensation expense (737 ) (2,825 ) 2,088 -74 % Depreciation and software and leasehold amortization (9,255 ) (7,391 ) (1,864 ) 25 % Amortization of intangible assets (3,166 ) (4,736 ) 1,570 -33 % Loss on disposition of property and equipment (339 ) (4 ) (335 ) n/m Other operating expense (157 ) (49 ) (108 ) n/m Income from operations (1,202 ) 6,661 (7,863 ) -118 % Interest expense, net (3,843 ) (1,996 ) (1,847 ) 93 % Income (loss) before income taxes $ (5,045 ) $ 4,665 $ (9,710 ) -208 % n/m - not meaningful Technology Segment Operating revenue increased $8.4 million during the three months ended June 30, 2014 as compared to the prior year period primarily as a result of an increase in eDiscovery engagements as compared to the second quarter of 2013, and increased solely related to organic growth. We expect to continue to grow our global leadership position throughout the remainder of 2014. Our eDiscovery businesses in Europe and Asia showed continued combined growth with a 19% increase in operating revenue over the prior year second quarter.

Direct, selling, general and administrative costs increased $10.1 million as compared to the second quarter of 2013 primarily in support of revenue growth.

This increase included a $7.5 million increase in compensation related costs which included 28 -------------------------------------------------------------------------------- Table of Contents $0.8 million of severance benefits and an increase of $5.9 million as compared to the second quarter of 2013 related to compensation paid to project-based attorneys for document review services. This direct cost of services varies directly with the amount of document review services revenue. Information technology-related costs increased $1.7 million which is partially related to the recent data center consolidation.

The Technology segment's financial results for the three months ended June 30, 2014 reflect the impact of strategic investments primarily in support of global expansion and revenue growth of the eDiscovery franchise as well as a higher mix of eDiscovery document review services compared to the prior year which have lower operating margins than the Company's overall margin.

Bankruptcy and Settlement Administration Segment Operating revenue increased $2.1 million as compared to the prior year.

Continuing to impact this segment's results of operation is the continued current cyclical downturn in bankruptcy filings. We expect the current cyclical downturn in bankruptcy filings to continue through the remainder of 2014.

Settlement administration continues to be dependent on the timing and size of contracts awarded.

Direct, selling, general and administrative costs were consistent with the prior year second quarter. Compensation related expenses increased by $0.9 million and this increase was offset by a decrease of $1.1 million in production costs.

29 -------------------------------------------------------------------------------- Table of Contents Results of Operations for the Six Months Ended June 30, 2014 Compared with the Six Months Ended June 30, 2013 The discussion that follows provides information which we believe is relevant to an understanding of our consolidated results of operations. Also see our discussion of segment results in the "Results of Operations by Segment" section below.

Consolidated Results Amounts in thousands $ Change Six Months Ended June 30, Increase / 2014 2013 (Decrease) % Change Operating revenue $ 231,671 $ 207,884 $ 23,787 11 % Reimbursable expenses 16,656 29,078 (12,422 ) -43 % Total Revenue 248,327 236,962 11,365 5 % Direct cost of operating revenue (exclusive of depreciation and amortization shown separately below) 115,168 102,024 13,144 13 % Reimbursed direct costs 16,237 27,614 (11,377 ) -41 % Selling, general and administrative expense 90,538 69,337 21,201 31 % Depreciation and software and leasehold amortization 17,955 14,390 3,565 25 % Amortization of identifiable intangible assets 6,286 9,702 (3,416 ) -35 % Fair value adjustment to contingent consideration 1,142 - 1,142 n/m Loss on disposition of property and equipment 351 22 329 n/m Other operating expense 226 96 130 n/m Total Operating Expense 247,903 223,185 24,718 11 % Income From Operations 424 13,777 (13,353 ) -97 % Interest Expense (Income) Interest expense 8,729 3,843 4,886 127 % Interest income (13 ) (12 ) (1 ) 8 % Net Interest Expense 8,716 3,831 4,885 128 % Income (Loss) Before Income Taxes (8,292 ) 9,946 (18,238 ) n/m Provision (Benefit) for Income Taxes (2,575 ) 3,167 (5,742 ) n/m Net Income (Loss) $ (5,717 ) $ 6,779 $ (12,496 ) n/m n/m - not meaningful 30 -------------------------------------------------------------------------------- Table of Contents Revenue The increase in operating revenue for the six months ended June 30, 2014 as compared to the same period in the prior year was driven by a $34.8 million increase in the Technology segment, offset by an $11.0 million decrease in operating revenues for the Bankruptcy and Settlement Administration segment.

Total revenue includes reimbursed expenses, such as postage related to notification services. We reflect these reimbursed expenses as a separate line item on our accompanying Condensed Consolidated Statements of Income. Although reimbursable expenses may fluctuate significantly from quarter to quarter, these fluctuations have a minimal effect on our quarter to quarter income from operations as we realize little or no margin from this revenue.

Operating Expense The $13.1 million increase in direct cost of operating revenue, exclusive of depreciation and amortization, was primarily the result of the increase in and the mix of operating revenue and includes a $25.6 million increase in direct compensation-related costs primarily in support of the continued revenue growth in our Technology segment. This increase was partially offset by a $9.8 million decrease in costs for legal notification and advertising services and a $1.6 million decrease in other production costs as compared to the six months ended June 30, 2013, which included costs related to a large private anti-trust settlement engagement.

The decline in reimbursed direct costs for the six months ended June 30, 2014 as compared to the same period of 2013 corresponds to the decline in revenue from reimbursed expenses.

Selling, general and administrative expenses increased $21.2 million and included an increase of $13.1 million in compensation-related expense which includes $10.3 million in post-employment benefits related to executive resignation agreements. The increase in selling, general and administrative expenses also includes an increase of $2.4 million in outside professional services and an increase of $3.0 million in office-related expenses such as lease expense, maintenance, utilities and supplies primarily related to the expansion of our document review centers capacity.

Depreciation and software and leasehold amortization costs increased $3.6 million as a result of increased depreciation on equipment and software related to segment investments.

Amortization of intangible assets decreased $3.4 million related to certain of our intangible assets being amortized on an accelerated amortization method which are at lower amortization stages of the estimated useful lives of the intangible assets.

Operating expenses for the six months ended June 30, 2014, included a fair value adjustment to contingent consideration of $1.1 million related to our acquisition of De Novo in 2011. No fair value adjustment to contingent consideration is included in operating expenses for the six months ended June 30, 2013. See Note 3 to the Condensed Consolidated Financial Statements for further discussion of the contingent consideration.

Interest Expense, Net The increase in net interest expense was primarily due to an increased principal amount of debt outstanding during the first half of 2014 as compared to the prior year period and also due to the higher rate of interest for our term loan under the Credit Agreement as compared to the interest rate under the prior credit agreement. Interest expense for the six months ended June 30, 2014 also includes $0.8 million related to fees incurred in conjunction with the amendment to our Credit Agreement. See Note 3 to the Condensed Consolidated Financial Statements for further discussion of the Credit Agreement.

Income Taxes Our effective tax rate for the six months ended June 30, 2014 was 31.1% and was 31.8% for the comparable prior year period. Our 2014 effective tax rate is lower than the U.S. statutory rate because we earned a greater proportion of income in international jurisdictions compared to in the U.S. The reduced 2013 rate reflected a discrete benefit related to the extension of the federal research credit through tax year 2013. We recognized approximately $0.4 million of tax benefit relating to the 2012 credits and a portion of our 2013 tax credits during the first six months of 2013.

31 -------------------------------------------------------------------------------- Table of Contents Results of Operations by Segment The following segment discussion is presented on a basis consistent with our segment disclosure contained in Note 7 of our Notes to Condensed Consolidated Financial Statements. The table below presents operating revenue, direct and administrative costs (including reimbursed costs) and segment performance measure for each of our reportable segments and a reconciliation of the segment performance measure to consolidated income before income taxes.

Amounts in thousands $ Change Six Months Ended June 30, Increase / 2014 2013 (Decrease) % Change Operating revenue Technology $ 159,692 $ 124,913 $ 34,779 28 % Bankruptcy and Settlement Administration 71,979 82,971 (10,992 ) -13 % Total operating revenue $ 231,671 $ 207,884 $ 23,787 11 % Reimbursable expenses Technology $ 1,957 $ 822 $ 1,135 138 % Bankruptcy and Settlement Administration 14,699 28,256 (13,557 ) -48 % Total reimbursable expenses $ 16,656 $ 29,078 $ (12,422 ) -43 % Direct costs, selling, general and administrative costs Technology $ 119,252 $ 87,666 $ 31,586 36 % Bankruptcy and Settlement Administration 60,824 85,705 (24,881 ) -29 % Intercompany eliminations (438 ) (83 ) (355 ) n/m Total direct costs, selling, general and administrative costs $ 179,638 $ 173,288 $ 6,350 4 % Segment performance measure Technology $ 42,835 $ 38,152 $ 4,683 12 % Bankruptcy and Settlement Administration 25,854 25,522 332 1 %Total segment performance measure $ 68,689 $ 63,674 $ 5,015 8 % Segment performance measure $ 68,689 $ 63,674 $ 5,015 8 % Unallocated corporate expenses (38,029 ) (21,323 ) (16,706 ) 78 % Share-based compensation expense (4,276 ) (4,364 ) 88 -2 % Depreciation and software and leasehold amortization (17,955 ) (14,390 ) (3,565 ) 25 % Amortization of intangible assets (6,286 ) (9,702 ) 3,416 -35 % Fair value adjustment to contingent consideration (1,142 ) - (1,142 ) n/m Loss on disposition of property and equipment (351 ) (22 ) (329 ) n/m Other operating expense (226 ) (96 ) (130 ) n/m Income from operations 424 13,777 (13,353 ) -97 % Interest expense, net (8,716 ) (3,831 ) (4,885 ) 128 % Income (loss) before income taxes $ (8,292 ) $ 9,946 $ (18,238 ) n/m n/m - not meaningful Technology Segment Operating revenue increased $34.8 million during the six months ended June 30, 2014 as compared to the prior year period primarily as a result of an increase in eDiscovery engagements as compared to the same period in 2013, and was solely related to organic growth. We expect to continue to grow our global leadership position throughout the remainder of 2014.

32 -------------------------------------------------------------------------------- Table of Contents Our eDiscovery businesses in Europe and Asia showed continued combined growth with a 28% increase in year-to-date operating revenue over the prior year second quarter.

Direct, selling, general and administrative costs increased $31.6 million primarily in support of revenue growth and included a $22.5 million increase in compensation related expenses. The increase in compensation related expenses includes an increase of $19.8 million related to compensation paid to project-based attorneys for document review services for the six months ended June 30, 2014 as compared to the same period in 2013. This direct cost of services varies directly with the amount of document review services revenue.

The change in direct, selling, general and administrative costs also includes a $2.9 million increase in information technology-related costs, a $2.2 million increase in office-related expenses such as lease expense, maintenance, utilities and supplies primarily related to the expansion of our document review centers capacity and a $2.0 million increase in other production related costs.

The Technology segment's financial results for the six months ended June 30, 2014 reflect the impact of strategic investments primarily in support of global expansion and revenue growth of the eDiscovery franchise as well as a higher mix of eDiscovery document review services compared to the prior year which have lower operating margins than the Company's overall margin.

Bankruptcy and Settlement Administration Segment Operating revenue decreased $11.0 million as compared to the prior year, primarily due to a large private anti-trust engagement in the prior year period which was principally completed in the first quarter of 2013 that increased legal notification and advertising services for that period. Also impacting the first six months of 2014 was the continued current cyclical downturn in bankruptcy filings. We expect the current cyclical downturn in bankruptcy filings to continue through the remainder of 2014. Settlement administration continues to be dependent on the timing and size of contracts awarded.

Direct, selling, general and administrative costs decreased $24.9 million primarily related to a $27.1 million decrease in direct cost of services which is related to the large private anti-trust engagement which was active during the first quarter of 2013. This decrease was partially offset by a $1.4 million increase in compensation related expenses.

Liquidity and Capital Resources Cash flows from operating activities During the six months ended June 30, 2014, our operating activities provided net cash of $18.8 million. Included in net cash used by operating activities was a net loss of $5.7 million which included $30.0 million of non-cash expenses for a total contribution to cash flows of $24.3 million related to net income adjusted to exclude non-cash expenses. Cash used by operating activities also included a $5.5 million net use of cash resulting from changes in operating assets and liabilities, primarily from a $2.4 million decrease in accounts payable and other liabilities, a decrease in income taxes payable of $6.4 million and an increase of $1.8 million in prepaid expenses and other assets. These uses of cash were partially offset by a $6.9 million decrease in trade accounts receivable. Trade accounts receivable will fluctuate from period to period depending on the period to period change in revenue and the timing of revenue and collections. Accounts payable will fluctuate from period to period depending on the timing of purchases and payments.

During the six months ended June 30, 2013, our operating activities used net cash of $15.4 million. Included in net cash used by operating activities was net income of $6.8 million including non-cash expenses of $29.8 million, for a total contribution to cash flows of $36.6 million related to net income adjusted to exclude non-cash expenses. Cash used by operating activities also included a $52.0 million net use of cash resulting from changes in operating assets and liabilities, primarily from a $45.2 million increase in trade accounts receivable related to several large active matters in the first half of 2013.

Cash used by operating activities also included a decrease in customer deposits primarily related to the fourth quarter 2012 receipt of a $14.3 million customer deposit for a large settlement administration engagement and the first quarter 2013 expenditures for that matter. These uses of cash were offset by a $4.3 million increase in accounts payable and other liabilities.

Cash flows from investing activities During the six months ended June 30, 2014 and 2013, we used cash of $19.4 million and $12.2 million, respectively, for the purchase of property and equipment, including computer hardware and purchased software licenses primarily for our Technology segment and computer hardware primarily for our network infrastructure. Also included in this amount for the six months ended June 30, 2013 was approximately $5.1 million related to the expansion of our Kansas City corporate headquarters which was substantially completed in the third quarter of 2013. Software development is essential to our continued growth, and, during the six months ended June 30, 2014 and 2013, we used cash of $3.1 million and $3.2 million, respectively, to fund internal costs related to the development of software.

33 -------------------------------------------------------------------------------- Table of Contents Cash flows from financing activities During the six months ended June 30, 2014, we repaid $1.5 million under the Credit Agreement along with $2.8 million of principal payments related to other debt. During the six months ended June 30, 2014 we also paid $5.0 million of deferred acquisition consideration related to the December 28, 2011 acquisition of De Novo Legal LLC, $6.3 million in dividends and we used $3.6 million to repurchase shares required to be repurchased by the company to satisfy employee tax withholding obligations upon the vesting of restricted stock awards and the net share settlement of certain stock option exercises. Cash proceeds from the exercise of stock options were $6.8 million. See Notes 3 and 9 of our Notes to Condensed Consolidated Financial Statements for further information.

During the six months ended June 30, 2013, we borrowed $72.0 million and repaid $33.0 million under our senior revolving loan as part of our former credit facility for a net increase of $39.0 million, along with $1.8 million of principal payments related to other debt. In addition, we paid $6.5 million in dividends and used $3.5 million to repurchase shares required to be repurchased by the company to satisfy employee tax withholding obligations upon the vesting of restricted stock awards and the net share settlement of certain stock option exercises.

We believe that funds generated from operations, plus our existing cash balances and amounts available under our Credit Agreement, will be sufficient to meet our currently anticipated working capital requirements, internal software development expenditures, property, equipment and third party software expenditures, deferred acquisition price obligations, capital leases, dividend payments, common stock repurchases, interest payments due on our outstanding borrowings, and other contractual obligations.

Foreign Cash As of June 30, 2014 and December 31, 2013, our foreign subsidiaries had $4.6 million and $9.0 million, respectively, in cash located in financial institutions located outside of the United States. We consider the earnings of our non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs. Should we decide to repatriate the foreign earnings, we would have to adjust the income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States.

Off-balance Sheet Arrangements We do not utilize off-balance sheet arrangements in our operations; however, we enter into operating leases in the ordinary course of business. Our operating lease obligations are disclosed below under "Contractual Obligations".

Contractual Obligations There have been no significant developments outside the ordinary course of business with respect to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC on February 26, 2014 (the "2013 Form 10-K").

Critical Accounting Policies In our 2013 Form 10-K, we disclose accounting policies, referred to as critical accounting policies, that require management to use significant judgment or that require significant estimates. Management regularly reviews the selection and application of our critical accounting policies. There have been no updates to the critical accounting policies contained in our 2013 Form 10-K.

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