NOTE 2: ACQUISITIONS

On April 30, 2015, Epiq and two of its wholly-owned subsidiaries completed the acquisition of all of the capital stock of Iris Data Services, Inc., a Texas corporation (“Iris”) pursuant to a Stock Purchase Agreement, dated April 7, 2015 (the “Purchase Agreement”).

Under the terms of the Purchase Agreement, the aggregate purchase consideration was $133.7 million (the “Purchase Consideration”), consisting of $124.6 million in cash consideration (“Cash Consideration”) and $9.1 million of assumed capital lease obligations of the seller. The Cash Consideration was funded with existing cash and borrowings under our Credit Agreement (defined in Note 4 to the Condensed Consolidated Financial Statements). Of the Cash Consideration, $68.6 million was paid to the seller at closing and $55.2 million was paid to and then distributed by Iris to participants in the Amended and Restated Iris Data Services, Inc. Participation Plan (the “Plan”), in accordance with the terms of the Plan and the Purchase Agreement. The remaining Cash Consideration of $0.8 million, consisting of $0.6 million due to Plan participants and $0.2 million related to a post-closing working capital adjustment was paid during the three months ended September 30, 2015. The aggregate distributions to Plan participants are expected to result in post-closing tax benefits to Epiq of approximately $23.0 million. In addition, approximately $13.0 million of the Cash Consideration was placed in escrow for fifteen months after the closing as security for potential future indemnification claims.

Iris is a leading provider of managed services for the legal profession including electronic discovery and document review. The Iris acquisition significantly accelerates Epiq’s strategic plan to offer managed services solutions to its existing global client base, while bringing Epiq’s eDiscovery and document review resources to a new client base.

The results of operations of Iris have been included in Epiq’s Condensed Consolidated Statement of Operations subsequent to the April 30, 2015 acquisition date. Iris’s revenue and net loss included in our results of operations for the three months and nine months ended September 30, 2015 were $11.0 million and $2.8 million, and $18.7 million and $4.2 million, respectively.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. The Purchase Consideration was allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the date of acquisition. This allocation resulted in goodwill of $74.9 million, all of which has been assigned to Epiq’s Technology segment. The recognized goodwill is primarily attributable to expected long-term growth in Iris’s operating results. Approximately $5.3 million of the goodwill is deductible for income tax purposes. The initial accounting for the acquisition of Iris is currently incomplete. We are in the process of obtaining information relative to the fair value of working capital accounts, including the income tax receivable, deferred income taxes and the valuation of the acquired intangible assets. The valuations will consist of appraisal reports, discounted cash flow analyses, or other appropriate valuation techniques to determine the fair value of the assets acquired or liabilities assumed. A majority of the deferred income taxes recognized as a component of the purchase price allocation is a result of the difference between the book and tax basis of the amortizable intangible assets recognized. The amount allocated to the deferred income tax liability is subject to change as a result of the final allocation of the purchase price to amortizable intangibles and property and equipment.

	(in thousands)
Cash and cash equivalents	$	197
Accounts receivable	15,623
Income tax receivable	1,033
Other current assets	1,484
Deferred income tax assets	21,041
Property and equipment	10,642
Other long-term assets	246
Intangible assets	34,694
Goodwill	74,852

Total assets acquired	159,812


Accounts payable	4,407
Accrued liabilities	4,868
Deferred revenue	1,580
Deferred income tax liabilities	15,149
Capital lease obligations	9,061

Total liabilities assumed	35,065


Net assets acquired	$	124,747

The fair values of intangible assets acquired have been initially estimated by utilizing a discounted cash flow approach, with the assistance of an independent appraisal firm. The intangible assets acquired as part of the Iris acquisition are being amortized over their expected estimated economic benefit period, and the preliminary fair values consist of the following:

(in thousands)	Fair Value		Useful Life
Customer relationships	$	15,400	8 years
Technology	8,400		3 years
Trade name	7,000		10 years
Non-compete agreements	3,894		2 – 5 years

Total	$	34,694

Pro Forma Results of Operations

The following table presents the unaudited pro forma combined results of operations of Epiq and Iris for the three and nine months ended September 30, 2015 and 2014, after giving effect to certain pro forma adjustments including: (i) amortization of acquired intangible assets, (ii) the impact of acquisition-related expenses, and (iii) interest expense adjustment for historical long-term debt of Iris that was repaid and interest expense on additional borrowings by Epiq to fund the acquisition.

	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2015			2014		2015			2014
Total revenues	$	142,535		$	119,524	$	416,795		$	387,054
Net income (loss)	$	(18,596	)	$	2,278	$	(19,940	)	$	(8,153	)

The unaudited pro forma financial results assume that the Iris acquisition occurred on January 1, 2014 and are not necessarily indicative of the actual results that would have occurred had those transactions been completed on that date. Furthermore, they do not reflect the impacts of any potential operating efficiencies, savings from expected synergies, or costs to integrate the operations. The unaudited pro forma financial results are not necessarily indicative of the future results to be expected for the consolidated operations.

Acquisition-related expenses were $2.5 million for the nine months ended September 30, 2015 and are included in “Other operating expense” in the Condensed Consolidated Statement of Operations. Debt financing costs associated with the Iris acquisition were $1.0 million for the nine months ended September 30, 2015. Approximately $0.3 million of the debt financing costs were capitalized and included in “Other long-term assets” in the Condensed Consolidated Balance Sheets. The remaining $0.7 million of costs were expensed and included in “Interest expense” in the Condensed Consolidated Statements of Operations. These expenses were included in the unaudited pro forma combined results of operations of Epiq and Iris in fiscal 2014.