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8-K/A - 8-K/A - EPIQ SYSTEMS INCa12-5882_18ka.htm
EX-23.1 - EX-23.1 - EPIQ SYSTEMS INCa12-5882_1ex23d1.htm
EX-99.2 - EX-99.2 - EPIQ SYSTEMS INCa12-5882_1ex99d2.htm
EX-99.3 - EX-99.3 - EPIQ SYSTEMS INCa12-5882_1ex99d3.htm

Exhibit 99.1

 

Cornick Garber Sandler

Certified Public Accountants & Advisors

 

DE NOVO LEGAL, LLC
AND SUBSIDIARY

 

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010

 



 

Cornick Garber Sandler

Certified Public Accountants & Advisors

 

Independent Auditors’ Report

 

De Novo Legal, LLC

New York, New York

 

We have audited the accompanying consolidated balance sheet of DE NOVO LEGAL, LLC AND SUBSIDIARY as at December 31, 2010 and the related consolidated statements of operations and members’ capital and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of De Novo Legal, LLC and Subsidiary as at December 31, 2010 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles in the United States.

 

 

/s/ Cornick, Garber & Sandler, LLP

 

CERTIFIED PUBLIC ACCOUNTANTS

 

New York, New York

March 29, 2011

 

Cornick, Garber & Sandler, LLP

 

 

825 Third Avenue, New York, NY 10022-9524 T 212.557.3900 F 212.557.3936

 

 

50 Charles Lindbergh Blvd., Uniondale, NY 11553-3600 T 516.542.9030 F 516.542.9035

 

cgscpa.com

 



 

Cornick Garber Sandler

Certified Public Accountants & Advisors

 

DE NOVO LEGAL, LLC AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEET

 

AS AT DECEMBER 31, 2010

 

ASSETS

 

 

 

Current assets:

 

Cash and cash equivalents

$

316,989

Accounts receivable

11,627,017

Prepaid taxes

188,613

Prepaid expenses and other current assets

910,635

 

 

Total current assets

13,043,254

 

 

Equipment, furniture and improvements, net of accumulated depreciation

2,773,657

Due from members

7,363,281

Other assets

228,509

 

 

TOTAL

$

23,408,701

 

 

LIABILITIES

 

 

 

Current liabilities:

 

Accounts payable and accrued expenses

$

1,451,952

Notes payable bank

5,845,000

Equipment leases payable (current portion)

829,189

Deferred income taxes

487,000

 

 

Total current liabilities

8,613,141

 

 

Deferred rent payable

58,556

Deferred income taxes

45,000

Equipment leases payable (less current portion included above)

723,918

 

 

Total liabilities

9,440,615

 

 

Commitments and contingencies

 

 

 

MEMBERS’ CAPITAL

 

 

 

De Novo Legal, LLC

12,927,397

 

 

Noncontrolling interest in subsidiary

1,040,689

 

 

Total members’ capital

13,968,086

 

 

TOTAL

$

23,408,701

 

The notes to financial statements are made a part hereof.

 



 

Cornick Garber Sandler

Certified Public Accountants & Advisors

 

DE NOVO LEGAL, LLC AND SUBSIDIARY

CONSOLIDATED STATEMENT OF MEMBERS’ CAPITAL

FOR THE YEAR ENDED DECEMBER 31, 2010

 

 

 

 

 

 

 

Noncontrolling

 

 

 

 

 

De Novo

 

Interest in

 

 

 

Combined

 

Legal, LLC

 

Subsidiary

 

 

 

 

 

 

 

 

 

Members’ capital - January 1, 2010

 

$

9,359,126

 

$

8,915,496

 

$

443,630

 

 

 

 

 

 

 

 

 

Net income

 

5,808,960

 

5,211,901

 

597,059

 

 

 

 

 

 

 

 

 

Less: Distributions

 

(1,200,000

)

(1,200,000

)

 

 

 

 

 

 

 

 

 

 

MEMBERS’ CAPITAL - DECEMBER 31, 2010

 

$

13,968,086

 

$

12,927,397

 

$

1,040,689

 

 

The notes to financial statements are made a part hereof.

 



Cornick Garber Sandler

Certified Public Accountants & Advisors

 

DE NOVO LEGAL, LLC AND SUBSIDIARY

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2010

 

Net service revenues

 

 

 

$

41,814,905

 

 

 

 

 

 

 

Direct cost of services

 

 

 

24,878,283

 

 

 

 

 

 

 

Gross profit

 

 

 

16,936,622

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Salaries

 

$

4,761,425

 

 

 

Payroll taxes

 

388,988

 

 

 

Payroll processing

 

39,851

 

 

 

Professional fees

 

719,657

 

 

 

Rent and utilities

 

1,760,165

 

 

 

Repairs and maintenance

 

25,838

 

 

 

Depreciation

 

882,060

 

 

 

Insurance

 

553,390

 

 

 

Advertising

 

101,751

 

 

 

Telephone

 

248,591

 

 

 

Computer expense

 

201,621

 

 

 

Bad debt expense

 

293,061

 

 

 

Office expense

 

143,606

 

 

 

Postage and messenger

 

16,841

 

 

 

Travel and entertainment

 

330,546

 

 

 

Bank fees

 

25,918

 

 

 

Interest

 

318,626

 

 

 

Contributions

 

37,890

 

 

 

Dues and subscriptions

 

10,678

 

 

 

Miscellaneous

 

11,359

 

 

 

 

 

 

 

 

 

Total expenses

 

 

 

10,871,862

 

 

 

 

 

 

 

Income before income taxes and noncontrolling interest in subsidiary

 

 

 

6,064,760

 

 

 

 

 

 

 

Income tax expense

 

 

 

255,800

 

 

 

 

 

 

 

INCOME BEFORE NONCONTROLLING INTEREST IN SUBSIDIARY

 

 

 

5,808,960

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest in subsidiary

 

 

 

(597,059

)

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO DE NOVO LEGAL, LLC

 

 

 

$

5,211,901

 

 

The notes to financial statements are made a part hereof.

 



 

Cornick Garber Sandler

Certified Public Accountants & Advisors

 

DE NOVO LEGAL, LLC AND SUBSIDIARY

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

FOR THE YEAR ENDED DECEMBER 31, 2010

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

Cash flows from operating activities:

 

 

 

Income before noncontrolling interest in subsidiary

 

$

5,808,960

 

 

 

 

 

Adjustments to reconcile results of operations to net cash effect of operating activities:

 

 

 

Depreciation expense

 

882,060

 

Deferred income taxes

 

170,000

 

Bad debt expense

 

293,061

 

Net change in asset and liability accounts:

 

 

 

Accounts receivable

 

(3,561,390

)

Prepaid expenses and other current assets

 

(67,751

)

Security deposits

 

(17,896

)

Accounts payable and accrued expenses

 

875,949

 

Deferred rent payable

 

(44,609

)

Prepaid taxes

 

(293,888

)

 

 

 

 

Net cash provided by operating activities

 

4,044,496

 

 

 

 

 

Cash flows from investing activities:

 

 

 

Purchase of fixed assets

 

(423,281

)

Loans to members

 

(3,875,092

)

 

 

 

 

Net cash used for investing activities

 

(4,298,373

)

 

 

 

 

Cash flows from financing activities:

 

 

 

Repayments - capital leases payable

 

(876,629

)

Distributions to members

 

(1,200,000

)

Proceeds from bank note payable, net

 

2,565,000

 

 

 

 

 

Net cash provided by financing activities

 

488,371

 

 

 

 

 

NET INCREASE IN CASH

 

234,494

 

 

 

 

 

Cash and cash equivalents - January 1, 2010

 

82,495

 

 

 

 

 

CASH AND CASH EQUIVALENTS - DECEMBER 31, 2010

 

$

316,989

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

Cash paid during the year for:

 

 

 

Interest

 

$

320,477

 

 

 

 

 

Income taxes

 

$

342,088

 

 

 

 

 

Fixed assets acquired through capital leases

 

$

676,494

 

 

The notes to financial statements are made a part hereof.

 



 

Cornick Garber Sandler

Certified Public Accountants & Advisors

 

DE NOVO LEGAL, LLC AND SUBSIDIARY

 

NOTES TO FINANCIAL STATEMENTS

 

NOTE A -  Summary of Significant Accounting Policies

 

Operations

 

The consolidated financial statements include the accounts of De Novo Legal, LLC and De Novo Legal Electronic Discovery, LLC, which is 85% owned by De Novo Legal, LLC and 15% owned by an individual member of De Novo Legal, LLC. All significant intercompany transactions and balances have been eliminated in combination.

 

De Novo Legal, LLC is in the business of providing temporary legal staffing to local and regional law firms and corporations in New York, Atlanta, Houston, San Francisco, Los Angeles, Boston and the District of Columbia.

 

De Novo Electronic Discovery, LLC is in the business of providing electronic discovery services which include processing and hosting legal data from two co-locations in Hawthorne, New York and San Jose, California.

 

Three clients represented approximately 50% of revenues and approximately 24% of accounts receivable at December 31, 2010, with the largest client representing approximately 21% and 12% of the respective totals.

 

Noncontrolling Interest in Subsidiary

 

The Company presents the 15% interest in De Novo Electronic Discovery, LLC., which is not directly owned by De Novo Legal LLC, in accordance with the provisions of the Financial Accounting Standards Board standard on “Noncontrolling Interests in Consolidated Financial Statements” which requires that the portion of net income attributable to noncontrolling interests for subsidiaries be presented separately as net income (loss) applicable to noncontrolling interests on the consolidated statement of operations, and the portion of the members’ equity of such subsidiaries be presented as noncontrolling interests on the consolidated balance sheet.

 

Revenue Recognition

 

Revenue is recognized when the services are performed and there are no significant uncertainties concerning collection of the related receivables. At December 31, 2010, the Company has not recorded revenues of approximately $177,000 related to services performed but whose collectability is contingent on the successful outcome of certain litigation related to a client of one of the Company’s customers which is not scheduled to commence until the Fall of 2011.

 

(Continued)

 



 

Cornick Garber Sandler

Certified Public Accountants & Advisors

 

DE NOVO LEGAL, LLC AND SUBSIDIARY

 

NOTES TO FINANCIAL STATEMENTS

 

NOTE A -  Summary of Significant Accounting Policies (Continued)

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents. The Company maintains its cash balances at one financial institution.

 

Accounts Receivable

 

The Company extends credit based on a valuation of its clients’ financial condition. Management believes that all accounts at December 31, 2010 are fully collectable. Therefore, no allowance for doubtful accounts is deemed required at December 31, 2010.

 

Depreciation

 

Depreciation of equipment, furniture and leasehold improvements is computed on a straight-line basis for financial accounting purposes. Leasehold improvements are amortized over the remaining life of the lease and equipment and furniture are depreciated over their estimated useful life. For income tax purposes, depreciation is computed by accelerated methods.

 

Advertising

 

Advertising costs are expensed as incurred. For the year ended December 31, 2010, advertising expense approximated $96,000.

 

Use of Estimates and Subsequent Events

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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. The Company has considered subsequent events occurring through March 29, 2011, the date the financial statements became available for distribution, in evaluating its estimates and in the preparation of its financial statements.

 

(Continued)

 

2



 

Cornick Garber Sandler

Certified Public Accountants & Advisors

 

DE NOVO LEGAL, LLC AND SUBSIDIARY

 

NOTES TO FINANCIAL STATEMENTS

 

NOTE B -  Equipment, Furniture and Improvements

 

At December 31, 2010, equipment, furniture, computer software and improvements consist of the following:

 

 

 

 

 

Estimated

 

 

 

 

 

Useful Lives

 

 

 

 

 

(Years)

 

 

 

 

 

 

 

Equipment

 

$

4,274,392

 

5

 

Furniture

 

66,428

 

7

 

Leasehold improvements

 

259,517

 

2-4

 

Computer software

 

67,563

 

3

 

 

 

 

 

 

 

Total

 

4,667,900

 

 

 

 

 

 

 

 

 

Accumulated depreciation

 

(1,894,243

)

 

 

 

 

 

 

 

 

Net equipment, furniture and improvements

 

$

2,773,657

 

 

 

 

The above includes equipment under capital leases with a cost of approximately $3,182,000 (Note F).

 

NOTE C -  Income Taxes

 

The Company is treated in the same manner as a partnership for federal and state income tax purposes but reports its operations on a cash basis for income tax purposes. Under this election, the cash basis taxable earnings or losses of the Company are reportable on the personal income tax returns of the members and any federal and state income taxes thereon are payable by them. However, the Company is subject to New York City, West Virginia, Texas, Georgia and Washington, D.C. unincorporated business taxes and, therefore, records deferred taxes on the difference between accrual basis and cash basis earnings in these jurisdictions. Accordingly, the Company has recorded the following income tax expense for the year ended December 31, 2010:

 

Currently payable

 

$

146,800

 

Net increase in deferred tax assets

 

170,000

 

 

 

 

 

Total

 

316,800

 

 

 

 

 

Less: Prior years’ net overaccruals

 

(61,000

)

 

 

 

 

Total

 

$

255,800

 

 

(Continued)

 

3



 

Cornick Garber Sandler

Certified Public Accountants & Advisors

 

DE NOVO LEGAL, LLC AND SUBSIDIARY

 

NOTES TO FINANCIAL STATEMENTS

 

NOTE C -  Income Taxes (Continued)

 

The Company’s federal income tax returns have not been examined by the Treasury Department or local jurisdictions in recent years.

 

NOTE D -  Commitments and Contingencies

 

Rent

 

The Company’s principal premises are sublet from an unrelated party to October 31, 2011 at an annual rental of approximately $392,000 plus overtime charges.

 

In addition, the Company sublets or leases space from unrelated parties in various other locations (Note A).

 

Certain of the above-mentioned leases have rentals which increase over their term. The rentals under these leases are recorded for financial accounting purposes on a straight-line basis. At December, 31, 2010, future rentals of approximately $59,000 have been reflected as a noncurrent liability in the attached balance sheet. This noncurrent liability for rent payable will be reduced in future years to the extent that the minimum rentals payable in those years exceeds the average net expense recorded on a straight-line basis.

 

The aggregate minimum rental commitments for premises under lease agreements with noncancelable terms at December 31, 2010 are as follows:

 

Year ending December 31:

 

 

2011

 

$

1,493,126

2012

 

843,978

2013

 

77,181

 

 

 

Total

 

$

2,414,285

 

Rent expense was approximately $1,760,000 for the year ended December 31, 2010.

 

Guaranteed Payments

 

An employment agreement with the Company’s chief executive officer, who is also a 20% member, provides for a guaranteed minimum annual compensation of $300,000.

 

(Continued)

 

4



 

Cornick Garber Sandler

Certified Public Accountants & Advisors

 

DE NOVO LEGAL, LLC AND SUBSIDIARY

 

NOTES TO FINANCIAL STATEMENTS

 

NOTE D -  Commitments and Contingencies (Continued)

 

Guaranteed Payments (Continued)

 

In addition, an employment agreement with a managing director of the Company, who is also a 5% member, and holds the minority interest in De Novo Electronic Discovery, LLC provides for a guaranteed minimum annual compensation of $200,000 and a bonus based on certain results of De Novo Legal, LLC.

 

Software License Agreement

 

In December 2010, the Company entered into a software license agreement for a period of three years, commencing January 1, 2011, requiring a minimum annual payment of $680,000 plus monthly fees for usage in excess of stipulated amounts. As at December 31, 2010, the Company has prepaid approximately $535,000 of the fee due under the license agreement.

 

NOTE E -  Bank Loans Payable

 

Outstanding loans at December 31, 2010 are comprised of borrowings under a $7,000,000 revolving credit agreement which expires on June 30, 2011. Borrowings are limited to eligible accounts receivable and bear interest at various interest rates pegged to either the prime rate or LIBOR as defined at the dates of the various borrowings. The interest rate at December 31, 2010 was 4.25%. The advances are collateralized by the Company’s assets not otherwise pledged. The loans contain a subjective acceleration clause, which allows the bank to call the loans if a material adverse change occurs.

 

NOTE FEquipment Leases Payable

 

The Company leases certain equipment under capital leases, with interest at rates ranging from approximately 1.3 % to 20.6% a year, payable in monthly installments through November 2014. The remaining payments at December 31, 2010 are due as follows:

 

Year ending December 31:

 

 

 

2011

 

$

933,343

 

2012

 

574,402

 

2013

 

160,840

 

2014

 

36,986

 

 

 

 

 

Total

 

1,705,571

 

 

 

 

 

Less amount representing interest

 

152,464

 

 

 

 

 

Net

 

$

1,553,107

 

 

(Continued)

 

5



 

Cornick Garber Sandler

Certified Public Accountants & Advisors

 

DE NOVO LEGAL, LLC AND SUBSIDIARY

 

NOTES TO FINANCIAL STATEMENTS

 

NOTE G -  Due From Members

 

Interest on outstanding loans is being charged at a rate based on the applicable “federal rate” for the year. Interest income for the year ended December 31, 2010 was $22,122. The loans are due not later than December 30, 2013.

 

6