Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: September 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                 to                      .

Commission File Number: 001-33603

 

 

The Dolan Company

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   43-2004527

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

222 South Ninth Street, Suite 2300,

Minneapolis, Minnesota 55402

(Address, including zip code, of registrant’s principal executive offices)

(612) 317-9420

(Registrant’s telephone number, including area code)

 

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨      Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

On October 31, 2012, there were 30,982,779 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

Table of Contents

 

PART I – FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Condensed Consolidated Balance Sheets as of September 30, 2012, (unaudited) and December 31, 2011

     1   

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011

     2   

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011

     3   

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2012

     4   

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September  30, 2012 and 2011

     5   

Notes to Unaudited Condensed Consolidated Interim Financial Statements

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     45   

Item 4. Controls and Procedures

     46   

PART II – OTHER INFORMATION

     47   

Item 1. Legal Proceedings

     47   

Item 1A. Risk Factors

     47   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     47   

Item 3. Defaults Upon Senior Securities

     47   

Item 4. Mine Safety Disclosures

     47   

Item 5. Other Information

     47   

Item 6. Exhibits

     48   

SIGNATURES

     48   


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

The Dolan Company

Condensed Consolidated Balance Sheets

(in thousands, except share data)

 

     September 30,
2012
    December 31,
2011
 
     (unaudited)        

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 15,586     $ 752  

Accounts receivable, including unbilled services (net of allowances for doubtful accounts of $1,637 and $1,416 as of September 30, 2012, and December 31, 2011, respectively)

     66,337       72,117  

Unbilled pass-through costs

     4,249       4,317  

Prepaid expenses and other current assets

     4,380       3,976  

Income tax receivable

     7,961       1,968  

Assets held for sale

     370       257  
  

 

 

   

 

 

 

Total current assets

     98,883       83,387  

Accounts receivable, long-term

     —          2,500  

Investments

     11,074       11,901  

Property and equipment, net

     17,436       19,263  

Finite-lived intangible assets, net

     166,486       212,950  

Goodwill and indefinite-lived intangible assets

     151,329       283,039  

Deferred income taxes

     25,408       —     

Other assets

     2,456       2,563  
  

 

 

   

 

 

 

Total assets

   $ 473,072     $ 615,603  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Current portion of long-term debt

   $ 15,766     $ 7,667  

Accounts payable

     17,784       18,760  

Accrued pass-through liabilities

     8,940       8,820  

Accrued compensation

     8,710       5,188  

Accrued liabilities

     5,570       5,588  

Due to sellers of acquired businesses

     5,124       20,403  

Deferred revenue

     14,141       20,290  
  

 

 

   

 

 

 

Total current liabilities

     76,035       86,716  

Long-term debt, less current portion

     174,466       168,724  

Deferred income taxes

     —          20,739  

Due to sellers of acquired businesses

     —          12,687  

Other liabilities

     6,605       7,319  
  

 

 

   

 

 

 

Total liabilities

     257,106       296,185  
  

 

 

   

 

 

 

Redeemable noncontrolling interest

     5,494       12,726  
  

 

 

   

 

 

 

Commitments and contingencies (Note 15)

    

Stockholders’ equity

    

Common stock, $0.001 par value; authorized: 70,000,000 shares; outstanding: 30,985,090 and 30,576,597 shares as of September 30, 2012, and December 31, 2011, respectively

     31       30  

Preferred stock, $0.001 par value; authorized: 5,000,000 shares; designated: 5,000 shares of Series A Junior Participating Preferred Stock; no shares outstanding

     —          —     

Other comprehensive loss, net of tax

     (1,082     (1,285

Additional paid-in capital

     303,238       294,476  

Retained earnings (accumulated deficit)

     (84,946     13,471  
  

 

 

   

 

 

 

Total The Dolan Company stockholders’ equity

     217,241       306,692  

Noncontrolling interest

     (6,769     —     
  

 

 

   

 

 

 

Total stockholders’ equity

     210,472       306,692  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 473,072     $ 615,603  
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Interim Financial Statements

 

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Table of Contents

The Dolan Company

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Revenues

        

Professional Services

   $ 49,778     $ 51,383     $ 134,818     $ 142,539  

Business Information

     18,282       18,815       56,552       58,582  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     68,060       70,198       191,370       201,121  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Direct operating: Professional Services

     23,000       23,075       63,943       65,000  

Direct operating: Business Information

     6,931       7,260       21,383       22,858  

Selling, general and administrative

     27,218       25,630       78,968       76,323  

Amortization

     4,607       4,726       14,178       13,185  

Depreciation

     1,820       1,991       5,634       5,560  

Fair value and other adjustments on earnout liabilities

     (1,655     239       (12,127     219  

Impairment of long-lived assets and goodwill

     151,614       —          151,614       —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     213,535       62,921       323,593       183,145  

Equity in earnings of affiliates

     396       383       1,420       1,572  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (145,079     7,660       (130,803     19,548  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-operating income (expense)

        

Interest expense, net of interest income

     (2,195     (1,744     (6,252     (4,717

Non-cash interest income related to interest rate swaps

     —          —          —          286  

Other (expense) income

     —          (107     —          287  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating expense

     (2,195     (1,851     (6,252     (4,144
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (147,274     5,809       (137,055     15,404  

Income tax benefit (expense)

     47,031       (2,426     42,686       (6,226
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (100,243     3,383       (94,369     9,178  

Discontinued operations, net of tax

     (13,207     (77     (13,714     562  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (113,450     3,306       (108,083     9,740  

Less: Net loss (income) attributable to noncontrolling interests

     9,946       (217     9,666       (604
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to The Dolan Company

   $ (103,504   $ 3,089     $ (98,417   $ 9,136  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share–basic and diluted:

        

(Loss) income from continuing operations attributable to The Dolan Company

   $ (2.98   $ 0.10     $ (2.80   $ 0.28  

Discontinued operations attributable to The Dolan Company

     (0.43     —          (0.45     0.02  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to The Dolan Company

     (3.41     0.10       (3.25     0.30  

Decrease in redeemable noncontrolling interest in NDeX

     —          0.09       —          0.17  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to The Dolan Company common stockholders

   $ (3.41   $ 0.19     $ (3.25   $ 0.47  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding-basic

     30,327       30,142       30,260       30,126  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding-diluted

     30,327       30,208       30,260       30,219  
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to The Dolan Company and to The Dolan Company common stockholders:

        

(Loss) income from continuing operations, net of tax, attributable to The Dolan Company

   $ (90,297   $ 3,166     $ (84,703   $ 8,574  

Discontinued operations, net of tax, attributable to The Dolan Company

     (13,207     (77     (13,714     562  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to The Dolan Company

     (103,504     3,089       (98,417     9,136  

Decrease in redeemable noncontrolling interest in NDeX, net of tax

     —          2,683       —          5,206  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to The Dolan Company common stockholders

   $ (103,504   $ 5,772     $ (98,417   $ 14,342  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Interim Financial Statements

 

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Table of Contents

The Dolan Company

Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income

(in thousands)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Net (loss) income attributable to The Dolan Company

   $ (103,504   $ 3,089     $ (98,417   $ 9,136  

Other comprehensive income (loss):

        

Unrealized gain (loss) on interest rate swap, net of tax

     69       (81     203       (129
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to The Dolan Company

   $ (103,435   $ 3,008     $ (98,214   $ 9,007  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Interim Financial Statements

 

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Table of Contents

The Dolan Company

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

 

    The Dolan Company Stockholders’ Equity              
                      Retained                    
                Additional     Earnings     Other              
    Common Stock     Paid-In     (Accumulated     Comprehensive     Noncontrolling        
    Shares     Amount     Capital     Deficit)     Loss     Interest     Total  

Balance at December 31, 2010

    30,511,408     $ 30     $ 286,148     $ (6,022   $ (1,298   $ —        $ 278,858  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The Dolan Company

    —          —          —          19,493       —          —          19,493  

Decrease in redeemable noncontrolling interest in NDeX, net of tax

    —          —          7,487       —          —          —          7,487  

Unrealized gain on interest rate swap, net of tax

    —          —          —          —          13       —          13  

Issuance of common stock pursuant to the exercise of stock options

    4,000       —          9       —          —          —          9  

Share-based compensation expense, including issuance of restricted stock (shares are net of forfeitures)

    198,689       —          3,861       —          —          —          3,861  

Repurchase of common stock

    (137,500     —          (1,691     —          —          —          (1,691

Increase in redeemable noncontrolling interest in DiscoverReady, net of tax

    —          —          (1,261     —          —          —          (1,261

Other

    —          —          (77     —          —          —          (77
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

    30,576,597     $ 30     $ 294,476     $ 13,471     $ (1,285   $ —        $ 306,692  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to The Dolan Company

    —          —          —          (98,417     —          —          (98,417

Net loss attributable to noncontrolling interest

    —          —          —          —          —          (6,769     (6,769

Change in noncontrolling interest in NDeX

    —          —          791       —          —          —          791  

Unrealized gain on interest rate swap, net of tax

    —          —          —          —          203       —          203  

Issuance of common stock pursuant to the exercise of stock options

    13,500       —          30       —          —          —          30  

Share-based compensation expense, including issuance of restricted stock (shares are net of forfeitures)

    394,993       1       2,840       —          —          —          2,841  

Decrease in redeemable noncontrolling interest in DiscoverReady, net of tax

    —          —          5,101       —          —          —          5,101  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

    30,985,090     $ 31     $ 303,238     $ (84,946   $ (1,082   $ (6,769   $ 210,472  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Interim Financial Statements

 

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The Dolan Company

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

     Nine Months Ended  
     September 30,  
     2012     2011  

Cash flows from operating activities

    

Net (loss) income

   $ (108,083   $ 9,740  

Loss (income) from discontinued operations

     13,714       (562
  

 

 

   

 

 

 

(Loss) income from continuing operations

     (94,369     9,178  

Distributions received from The Detroit Legal News Publishing, LLC

     2,247       3,500  

Distributions paid to holders of noncontrolling interests

     —          (566

Gain on sale of investment

     —          (394

Non-cash operating activities:

    

Amortization

     14,178       13,185  

Depreciation

     5,634       5,560  

Impairment of long-lived assets and goodwill

     151,614       —     

Equity in earnings of affiliates

     (1,420     (1,572

Share-based compensation expense

     2,833       3,026  

Deferred income taxes and income tax receivable

     (45,912     286  

Change in value of interest rate swap

     —          (286

Amortization of debt issuance costs

     327       280  

Non-cash fair value adjustment on earnouts recorded in connection with acquisitions

     (11,493     222  

Changes in operating assets and liabilities:

    

Accounts receivable and unbilled pass-through costs

     (5,850     (2,361

Prepaid expenses and other current assets

     814       3,995  

Other assets

     93       105  

Accounts payable and accrued liabilities

     2,744       (5,287

Deferred revenue and other liabilities

     1,204       (1,531
  

 

 

   

 

 

 

Cash provided by operating activities - continuing operations

     22,644       27,340  

Cash used in operating activities - discontinued operations

     (1,498     (3,851
  

 

 

   

 

 

 

Net cash provided by operating activities

     21,146       23,489  
  

 

 

   

 

 

 

Cash flows from investing activities

    

Acquisitions and investments

     (145     (67,065

Capital expenditures

     (5,017     (5,318

Escrow payment received on sale of investment

     —          471  
  

 

 

   

 

 

 

Cash used in investing activities - continuing operations

     (5,162     (71,912

Cash used in investing activities - discontinued operations

     143       (850
  

 

 

   

 

 

 

Net cash used in investing activities

     (5,019     (72,762
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net borrowings on senior revolving note

     19,300       54,000  

Payments on senior long-term debt

     (3,750     (3,750

Payments on unsecured notes payable

     (1,879     (1,802

Payments on capital leases

     (250     (231

Net payments of deferred acquisition costs and earnouts

     (14,401     —     

Payments for repurchase of common stock

     —          (1,691

Payments of deferred financing costs

     (313     —     
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (1,293     46,526  
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     14,834       (2,747

Cash and cash equivalents at beginning of the period

     752       4,862  
  

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 15,586     $ 2,115  
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Interim Financial Statements

 

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Notes to Unaudited Condensed Consolidated Interim Financial Statements

Note 1. Basis of Presentation

Basis of Presentation: The condensed consolidated balance sheet as of December 31, 2011, which has been derived from audited financial statements, and the unaudited condensed consolidated interim financial statements of The Dolan Company (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to the quarterly report on Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations. Accordingly, these unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2011, included in the Company’s annual report on Form 10-K filed on March 9, 2012, with the Securities and Exchange Commission.

In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments necessary for a fair presentation of the Company’s interim financial results. All such adjustments are of a normal and recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full calendar year.

The accompanying unaudited condensed consolidated interim financial statements include the accounts of the Company, its wholly-owned subsidiaries and its majority ownership interests in American Processing Company, LLC d/b/a NDeX (“NDeX”), DiscoverReady LLC (“DiscoverReady”) and Legislative Information Services of America (“LISA”). The Company accounts for the percentage interests in NDeX, DiscoverReady and LISA that it does not own as noncontrolling interest (“NCI”).

All significant intercompany accounts and transactions have been eliminated in consolidation.

In 2011, the Company committed to a plan of action to sell two of its stand-alone businesses within the Business Information segment and in 2012, the Company committed to a plan of action to sell its NDeX Florida operations within its Mortgage Default Processing Services segment. Accordingly, the Company has removed from its operating results for the three and nine months ended September 30, 2012 and 2011, the results of these businesses and presented them within discontinued operations. The assets of these operations to be sold, net of related liabilities, are included in assets held for sale. See Note 8 for further information on discontinued operations.

As a result of the carrying value of the redeemable NCI in NDeX becoming less than zero during the quarter ended September 30, 2012, the Company has presented the NDeX NCI within the stockholders’ equity section rather than in temporary equity on the balance sheet.

New Accounting Pronouncements: In June 2011, the Federal Accounting Standards Board (“FASB”) amended its accounting guidance to increase the prominence of items reported in other comprehensive income (“OCI”). The guidance requires the presentation of the components of net income, the components of OCI and total OCI either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance was effective for the Company beginning with its March 31, 2012, financial statements. The Company has elected presentation of two separate but consecutive statements.

Note 2. Basic and Diluted Income Per Share

Basic per share amounts are computed, generally, by dividing net income attributable to The Dolan Company by the weighted-average number of common shares outstanding. The Company has employed the two-class method to calculate earnings per share, as it relates to the redeemable noncontrolling interest in NDeX, based on net income attributable to its common stockholders. At September 30, 2012, and December 31, 2011, there were no shares of preferred stock issued and outstanding. Diluted per share amounts assume the conversion, exercise, or issuance of all potential common stock instruments (see Note 14 for information on stock options and restricted stock) unless their effect is anti-dilutive, thereby reducing the loss per share or increasing the income per share.

 

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Table of Contents

The following table computes basic and diluted net (loss) income attributable to The Dolan Company per share (in thousands except for per share amounts):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2012     2011      2012     2011  

Net (loss) income attributable to The Dolan Company

   $ (103,504   $ 3,089      $ (98,417   $ 9,136  

Decrease in redeemable noncontrolling interest in NDeX, net of tax

     —          2,683        —          5,206  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income attributable to The Dolan Company common stockholders

   $ (103,504   $ 5,772      $ (98,417   $ 14,342  
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic:

         

Shares used in the computation of basic net income per share

     30,327       30,142        30,260       30,126  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income attributable to The Dolan Company common stockholders per share—basic

   $ (3.41   $ 0.19      $ (3.25   $ 0.47  
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted:

         

Shares used in the computation of basic net income per share

     30,327       30,142        30,260       30,126  

Stock options and restricted stock

     —          66        —          93  
  

 

 

   

 

 

    

 

 

   

 

 

 

Shares used in the computation of dilutive net income per share

     30,327       30,208        30,260       30,219  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income attributable to The Dolan Company common stockholders per share—diluted

   $ (3.41   $ 0.19      $ (3.25   $ 0.47  
  

 

 

   

 

 

    

 

 

   

 

 

 

For the three and nine months ended September 30, 2012, options to purchase approximately 2.6 million and 2.2 million weighted shares of common stock, respectively, were excluded from the computation because their effect would have been anti-dilutive. For the three and nine months ended September 30, 2011, options to purchase approximately 2.3 million and 1.8 million weighted shares of common stock, respectively, were excluded from the computation because their effect would have been anti-dilutive.

Note 3. Business Combinations

Management is responsible for determining the fair value of the assets acquired and liabilities assumed at the acquisition date. The fair values of the assets acquired and liabilities assumed represent management’s estimate of fair values. Management determines valuations through a combination of methods, which include discounted cash flow models, outside valuations and appraisals and market conditions. The results of the business combinations are included in the accompanying consolidated statement of operations from the respective transaction dates forward.

Acquisition of ACT Litigation Services, Inc.: On July 25, 2011, the Company, through DiscoverReady, completed the acquisition of substantially all of the assets of ACT Litigation Services, Inc. (“ACT”), and as such, the results of ACT’s operations are included in the Company’s financial statements from that date forward. The acquisition included certain earnout payments, which management estimates at each reporting date. In the second quarter of 2012, the Company made net payments of $13.7 million related to earnouts. Additionally, the majority of the remaining balance of the earnout payable was converted in the second quarter of 2012 to a note payable, due in March 2013, and is subject to further adjustment based on certain revenue targets for 2012. In the third quarter of 2012, management revised its estimates relating to earnouts and now estimates that there will be no further earnouts paid, resulting in a $1.4 million reduction to the earnout liability. The Company has determined that the earnout liability is a Level 3 fair value measurement within the FASB’s fair value hierarchy, and such liability is adjusted to fair value at each reporting date, with the adjustment reflected in fair value and other adjustments on earnout liabilities. See Note 5 for information pertaining to changes in the fair value of this liability during the three and nine months ended September 30, 2012. Additionally, during the second quarter of 2012, management recorded a retrospective adjustment of $2.1 million to reduce goodwill and the initial earnout liability estimate recorded at the acquisition date.

 

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Pro Forma Information: Actual results of operations reflecting the equity interests and assets acquired in 2011 are included in the unaudited condensed consolidated interim financial statements from the dates of the applicable business combination. The unaudited pro forma condensed consolidated statement of operations of the Company, set forth below, gives effect to the Company’s 2011 acquisitions of ACT and noncontrolling interest in DiscoverReady, using the purchase method as if they occurred on January 1, 2011. These amounts are not necessarily indicative of the consolidated results of operations for future years or actual results that would have been realized had the business combinations occurred as of the beginning of each such year (in thousands, except per share data):

 

     Pro Forma  
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2011  

Total revenues

   $ 74,132      $ 223,325  

Net income attributable to The Dolan Company

     3,711        11,566  

Net income attributable to The Dolan Company per share—basic and diluted

   $ 0.12      $ 0.38  
  

 

 

    

 

 

 

Actual/Pro forma weighted average shares outstanding:

     

Basic

     30,142        30,126  
  

 

 

    

 

 

 

Diluted

     30,208        30,219  
  

 

 

    

 

 

 

Note 4. Derivative Instruments

The Company has entered into two interest rate swap agreements to manage the risk associated with a portion of its floating-rate long-term debt. The Company does not utilize derivative instruments for speculative purposes. Both interest rate swaps involve the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. The notional amount of the first interest rate swap agreement is $50 million through December 30, 2012, $35 million from December 31, 2012 through December 30, 2013, and $25 million from December 31, 2013 through June 30, 2014. The notional amount of the second interest rate swap agreement is $25 million through December 31, 2014. The Company has designated both swaps as cash flow hedges and has determined that they qualify for hedge accounting treatment. Changes in fair value of the cash flow hedge are recorded in other comprehensive loss (net of tax) until income or loss from the cash flows of the hedged item is realized. In addition to these swaps, the Company held a swap agreement with a notional amount of $25 million, which matured on March 31, 2011. This swap was not designated for hedge accounting treatment and therefore any changes in the fair value were recorded through the statement of operations.

At September 30, 2012, and December 31, 2011, the Company had $1.1 million and $1.3 million, respectively in other accumulated comprehensive loss related to unrealized losses (net of tax) on the cash flow hedges. Unrealized gains and losses are reflected in net income attributable to The Dolan Company when the related cash flows or hedged transactions occur and offset the related performance of the hedged item.

The cash flow hedges were highly effective for the nine months ended September 30, 2012. The Company does not expect to reclassify any amounts from other comprehensive income to net income attributable to The Dolan Company during 2012. The occurrence of these related cash flows and hedged transactions remains probable.

The Company had liabilities of $1.8 million and $2.1 million resulting from interest rate swaps at September 30, 2012, and December 31, 2011, respectively, which are included in other liabilities on the balance sheet. Total floating-rate borrowings not offset by the swap agreements at September 30, 2012, totaled $114.3 million.

 

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By their nature, derivative instruments are subject to market risk. Derivative instruments are also subject to credit risk associated with counterparties to the derivative contracts. Credit risk associated with derivatives is measured based on the replacement cost should the counterparty with a contract in a gain position to the Company fail to perform under the terms of the contract. The Company does not anticipate nonperformance by the counterparty.

Note 5. Fair Value of Financial Instruments

The Company’s financial assets and liabilities are measured at fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company classifies the inputs used to measure fair value into the following hierarchy:

 

Level 1    Quoted prices in active markets for identical assets or liabilities.
Level 2    Quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable or can be corroborated by observable market data for the asset or liability.
Level 3    Unobservable inputs for the asset or liability that are supported by little or no market activity. These fair values are determined using pricing models for which the assumptions utilize management’s estimates or market participant assumptions.

Assets and Liabilities Measured at Fair Value on a Recurring Basis. The fair value hierarchy requires the use of observable market data when available. In instances where inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

The fair value of interest rate swaps are determined by the counterparty based on interest rate changes. Interest rate swaps are valued based on observable interest rate yield curves for similar instruments. The fair value of the earnout liability recorded in connection with the NDeX Florida operations, the earnout liability recorded in connection with the DataStream acquisition and the earnout liability recorded in connection with the ACT acquisition are determined by management based on projected financial performance and an estimated discount rate. The fair value of the redeemable noncontrolling interest in DiscoverReady is determined by management using a market approach.

The following table summarizes the balances of liabilities measured at fair value on a recurring basis as of September 30, 2012 (in thousands):

 

     Level 1      Level 2      Level 3      Total  

Interest rate swaps

   $ —         $ 1,762      $ —         $ 1,762  

Redeemable noncontrolling interest in DiscoverReady

     —           —           5,494        5,494  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 1,762      $ 5,494      $ 7,256  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the balances of liabilities measured at fair value on a recurring basis as of December 31, 2011 (in thousands):

 

     Level 1      Level 2      Level 3      Total  

Interest rate swaps

   $ —         $ 2,093      $ —         $ 2,093  

Earnout liability recorded in connection with the NDeX Florida operations

     —           —           2,727        2,727  

Earnout liability recorded in connection with the DataStream acquisition

     —           —           250        250  

Earnout liabilities recorded in connection with the ACT acquisition

     —           —           24,563        24,563  

Redeemable noncontrolling interest in DiscoverReady

     —           —           12,685        12,685  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 2,093      $ 40,225      $ 42,318  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table summarizes the changes in fair value for all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2012 (in thousands):

 

     Earnout Liabilities in connection with
acquisitions
    Redeemable NCI in        
     NDeX Florida     DataStream     ACT     DiscoverReady     Total  

Balance at June 30, 2012

   $ 2,727     $ 141     $ 1,400     $ 5,423     $ 9,691  

Fair Value Adjustment Included in Net Loss Attributable to The Dolan Company

     (2,727     (141     (1,400     —          (4,268

Minority Partners’ Share of Earnings

     —          —          —          574       574  

Distributions to Minority Partners /

          

Fair Value Adjustment Included in Additional Paid-in Capital and Deferred Taxes

     —          —          —          (503     (503
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ —        $ —        $ —        $ 5,494     $ 5,494  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes the changes in fair value for all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2012 (in thousands):

 

     Earnout Liabilities in connection with
acquisitions
    Redeemable NCI in        
     NDeX Florida     DataStream     ACT     DiscoverReady     Total  

Balance at December 31, 2011

   $ 2,727     $ 250     $ 24,563     $ 12,685     $ 40,225  

Fair Value Adjustment Included in Net Loss Attributable to The Dolan Company

     (2,727     (551     (10,942     —          (14,220

Net Earnout Payment

     —          —          (13,654     —          (13,654

Minority Partners’ Share of Earnings

     —          —          —          1,235       1,235  

Distributions to Minority Partners / Redemptions

     —          —          —          (145     (145

Fair Value Adjustment Included in Additional Paid-in Capital and Deferred Taxes

     —          —          —          (8,281     (8,281

Other

     —          301       33       —          334  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ —        $ —        $ —        $ 5,494     $ 5,494  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment).

 

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Table of Contents

The following table summarizes the adjusted basis on non-financial assets measured at fair value on a non-recurring basis as of September 30, 2012 (in thousands):

 

     Level 1      Level 2      Level 3      Total  

Long-lived assets held and used (a)

   $ —         $ —         $ 1,120      $ 1,120  

Long-lived assets held for sale (b)

     —           —           150        150  

Goodwill (c)

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 1,270      $ 1,270  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the adjusted basis on non-financial assets measured at fair value on a non-recurring basis as of December 31, 2011 (in thousands):

 

     Level 1      Level 2      Level 3      Total  

Long-lived assets held and used (d)

   $ —         $ —         $ 110      $ 110  

Long-lived assets held for sale (e)

     —           —           460        460  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 570      $ 570  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) The Company recorded an impairment charge of $19.9 million, of which $0.3 million was property and equipment and $19.6 million was finite-lived intangible assets, during the third quarter of 2012 related to certain long-lived assets held and used in its Mortgage Default Processing Services segment. This impairment reduced the original carrying value of these assets from $21.0 million to $1.1 million. See Note 7 for additional discussion of this impairment.
(b) The Company recorded a held-for-sale impairment charge of $13.0 million during the third quarter of 2012 related to its NDeX Florida operations within its Mortgage Default Processing Services segment, reducing the original carrying value of their assets from $13.2 million to $0.2 million. See Note 8 for additional discussion of this impairment recorded within discontinued operations.
(c) The Company recorded an impairment charge of $131.7 million during the third quarter of 2012 to goodwill in its Mortgage Default Processing Services segment. This impairment reduced goodwill in the Mortgage Default Processing Services segment to a zero carrying value. See Note 7 for additional discussion of this impairment.
(d) The Company recorded an impairment charge during the fourth quarter of 2011 related to certain long-lived assets held and used in its Business Information segment, reducing the original carrying value of these assets from $1.3 million to $0.1 million.
(e) The Company recorded a held-for-sale impairment charge during 2011 related to two stand-alone businesses within its Business Information segment, reducing the carrying value of these assets from $1.2 million to $0.5 million. In 2012, the Company completed the sale of these businesses.

Fair Value of Financial Instruments: The carrying value of cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments. The carrying value of the Company’s debt is the remaining amount due to its debtors under borrowing arrangements. To estimate the fair value of its variable-rate debt issues that are not quoted on an exchange, the Company estimates an interest rate it would be required to pay if it had to refinance its debt. At September 30, 2012, the fair value of variable-rate debt under the Company’s senior credit facility was $179.4 million.

 

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Table of Contents

Note 6. Investments

Investments consisted of the following at September 30, 2012, and December 31, 2011 (in thousands):

 

     Accounting
Method
     Percent
Ownership
    September 30,
2012
     December 31,
2011
 

The Detroit Legal News Publishing, LLC

     Equity         35.0   $ 10,540      $ 11,334  

Other

     Cost         13.0     534        567  
       

 

 

    

 

 

 

Total

        $ 11,074      $ 11,901  
       

 

 

    

 

 

 

In the third quarter of 2012, the Company’s ownership in other investments decreased to 13.0% from 19.5%. Because the Company has determined that it no longer has significant influence over this investment’s activities, the Company now accounts for this investment under the cost method.

For the three and nine months ended September 30, 2012, and 2011, the equity (loss) in earnings of affiliates is as follows (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

The Detroit Legal News Publishing, LLC

   $ 401     $ 411     $ 1,452     $ 1,627  

Other

     (5     (28     (32     (55
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 396     $ 383     $ 1,420     $ 1,572  
  

 

 

   

 

 

   

 

 

   

 

 

 

The Detroit Legal News Publishing, LLC: The Company owns a 35% membership interest in The Detroit Legal News Publishing, LLC (“DLNP”). DLNP publishes ten legal newspapers, along with one quarterly magazine, all located in southern Michigan. The Company accounts for this investment using the equity method. Under DLNP’s membership operating agreement, the Company receives quarterly distributions based on its ownership percentage.

The difference between the Company’s carrying value and its 35% share of the members’ equity of DLNP relates principally to an underlying customer list at DLNP that is being amortized over its estimated economic life through 2015.

The following tables summarize certain key information relating to the Company’s investment in DLNP as of September 30, 2012, and December 31, 2011, and for the three and nine months ended September 30, 2012 and 2011 (in thousands):

 

     As of September 30,      As of December 31,  
     2012      2011  

Carrying value of investment

   $ 10,540      $ 11,334  

Underlying finite-lived customer list, net of amortization

     4,775        5,906  

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  

Equity in earnings of DLNP, net of amortization of customer list

   $ 401      $ 411      $ 1,452      $ 1,627  

Distributions received

     784        1,400        2,247        3,500  

Amortization expense

     377        377        1,131        1,131  

 

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Table of Contents

Note 7. Long-lived Assets and Goodwill

In the third quarter of 2012, due to the restructuring of NDeX’s Florida operations as discussed in Note 8 below, as well as the current depressed operating results of the Mortgage Default Processing Services segment, the Company performed impairment tests on NDeX’s asset groups’ long-lived assets and goodwill. The operations in each state were determined to be separate asset groups. As a result, the Company recorded a total of $151.6 million in non-cash impairment charges in the quarter to reduce the carrying value of these assets, of which $0.3 million was property and equipment, $19.6 million was finite-lived intangible assets (specifically long-term service contracts), and $131.7 million was goodwill. These impairment charges are exclusive of the impairment charges recorded in the NDeX Florida operations in discontinued operations (discussed in Note 8 below). Of the $151.6 million impairment charge reflected in continuing operations, an income tax benefit of $49.1 million was recorded resulting in an after-tax impairment charge of $102.5 million.

As part of the long-lived asset impairment test on property and equipment and finite-lived intangible assets, recoverability of NDeX’s long-lived assets was evaluated and this process indicated that the carrying values of certain of the asset groups were not recoverable, as the expected undiscounted future cash flows to be generated by them were less than their carrying values. The related impairment loss was measured based on the amount by which the asset group carrying value exceeded its fair value. Asset groups’ fair values were determined using a combination of discounted cash flows and market approach. During the quarter, the Company revised the remaining estimated useful lives of intangible assets in connection with the impairment recorded on these assets.

As part of the goodwill impairment test, the fair value of the reporting unit was determined using a combination of discounted cash flows and market approach. An impairment on the Mortgage Default Processing Services segment was indicated. The Company then undertook the next steps in the impairment testing process by determining the fair value of assets and liabilities for the reporting unit. The implied fair value of goodwill for the reporting unit indicated that the entire carrying value of goodwill was impaired.

Goodwill and Indefinite-Lived Intangible Assets: Indefinite-lived intangible assets consist of trademarks and domain names that the Company has determined have an indefinite life and therefore will not be amortized. The Company reviews indefinite-lived intangible assets and goodwill for impairment annually in the fourth quarter or whenever an indicator is identified which suggests an impairment may be present. As discussed above, the Company recorded an impairment charge of $131.7 million on its goodwill in its Mortgage Default Processing Services Segment as shown in the table below, resulting in no remaining goodwill in this segment.

The following table represents the balances of goodwill and indefinite-lived intangible assets (in thousands):

 

     Mortgage
Default
Processing
Services
    Litigation
Support
Services
     Business
Information
     Total  

Goodwill as of December 31, 2010

   $ 131,710     $ 23,651      $ 61,832      $ 217,193  

Acquisition of ACT Litigation Services

     —          56,621        —           56,621  

Acquisition of DataStream

     —          —           1,011        1,011  
  

 

 

   

 

 

    

 

 

    

 

 

 

Goodwill as of December 31, 2011

     131,710       80,272        62,843        274,825  

Total indefinite-lived intangible assets as of December 31, 2011

     6,537       —           1,677        8,214  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total goodwill and indefinite-lived intangible assets as of December 31, 2011

   $ 138,247     $ 80,272      $ 64,520      $ 283,039  
  

 

 

   

 

 

    

 

 

    

 

 

 

Goodwill as of December 31, 2011

   $ 131,710     $ 80,272      $ 62,843      $ 274,825  

Impairment

     (131,710     —           —           (131,710
  

 

 

   

 

 

    

 

 

    

 

 

 

Goodwill as of September 30, 2012

     —          80,272        62,843        143,115  

Total indefinite-lived intangible assets as of September 30, 2012

     6,537       —           1,677        8,214  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total goodwill and indefinite-lived intangible assets as of September 30, 2012

   $ 6,537     $ 80,272      $ 64,520      $ 151,329  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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Finite-Lived Intangible Assets: As discussed above, the Company recorded impairment charges of $19.6 million on certain NDeX long-term service contracts in the third quarter of 2012. Additionally, as discussed in Note 8 below, the Company recorded an impairment charge on finite-lived intangible assets related to its NDeX Florida operations. The following table summarizes the components of finite-lived intangible assets as of September 30, 2012 and December 31, 2011 (in thousands except amortization periods):

 

            As of September 30, 2012      As of December 31, 2011  
     Amortization      Gross      Accumulated            Gross      Accumulated        
     Period      Amount      Amortization     Net      Amount      Amortization     Net  

Mastheads

     30      $ 11,045      $ (3,109   $ 7,936      $ 11,045      $ (2,833   $ 8,212  

Customer lists/relationships

     2-15         126,000        (44,013     81,987        127,276        (36,660     90,616  

Noncompete agreements

     4-5         5,302        (4,624     678        5,302        (4,114     1,188  

Long-term service contracts

     15-25         91,841        (26,656     65,185        135,146        (33,927     101,219  

Trademark/domain names

     10         1,651        (480     1,171        1,651        (356     1,295  

Trade names

     15         6,969        (1,658     5,311        6,969        (1,036     5,933  

Technology

     5-20         4,875        (657     4,218        4,875        (388     4,487  
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total finite-lived intangibles

      $ 247,683      $ (81,197   $ 166,486      $ 292,264      $ (79,314   $ 212,950  
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total amortization expense for finite-lived intangible assets for the three months ended September 30, 2012 and 2011, was approximately $4.6 million and $4.7 million, respectively, and for the nine months ended September 30, 2012, and 2011, was approximately $14.2 million and $13.2 million, respectively. As discussed above, the Company recorded impairment charges of $19.6 million on certain NDeX long-term service contracts in the third quarter of 2012.

Note 8. Assets Held for Sale and Discontinued Operations

During the third quarter of 2012, the Company committed to a plan of action to sell its NDeX Florida operations, a stand-alone business within the Mortgage Default Processing Services segment. During the fourth quarter of 2012, the Company sold assets of the NDeX Florida operations and terminated the services agreements with Albertelli as further discussed in Note 16. The Company has classified the net assets and liabilities of these operations as assets held for sale as of September 30, 2012, and reported the results of the business in discontinued operations. As a result of the termination of the services agreement, the Company recorded a held-for-sale impairment charge of $13.0 million on long-lived assets related to its NDeX Florida operations, of which $0.8 million was property and equipment and $12.2 million was finite-lived intangible assets (specifically, long-term service contracts). In addition, due to the uncertainty of collection of amounts due from NDeX Florida’s former law firm customer, the Company recorded a charge to bad debt expense for $10.0 million. Thus, the total one-time expense related to NDeX Florida in the third quarter of 2012 was $23.0 million (before taxes), which is presented within discontinued operations in the Company’s statement of operations. Slightly offsetting these impairment charges included in discontinued operations is the reversal of the earnout liability in the amount of $2.7 million, as such amount will not be paid.

During the fourth quarter of 2011, the Company committed to sell two of its smallest-market stand-alone businesses within the Business Information segment, The Mississippi Business Journal and The Colorado Springs Business Journal. The businesses’ operations and cash flows have been eliminated from ongoing operations as a result of the sales of these businesses in 2012, and the Company will not have significant continuing involvement in the operations after the sales. The Company classified the net assets and liabilities of these operations as assets held for sale as of December 31, 2011, and reported the results of the operations, along with a de minimus pretax net loss on the sales of these businesses, in discontinued operations.

 

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The assets and liabilities of these businesses and operations classified as assets held for sale as of September 30, 2012, and December 31, 2011 are summarized as follows (in thousands):

 

     September 30,      December 31,  
     2012      2011  

Accounts receivable

   $ 220      $ —     

Property and Equipment

     150        68  

Intangibles

     —           513  
  

 

 

    

 

 

 

Total assets held for sale

     370        581  

Current liabilities

     —           265  

Noncurrent liabilities

     —           59  
  

 

 

    

 

 

 

Total liabilities held for sale

     —           324  
  

 

 

    

 

 

 

Total net assets held for sale

   $ 370      $ 257  
  

 

 

    

 

 

 

The following amounts have been segregated from continuing operations and are reflected as discontinued operations for the three and nine months ended September 30, 2012 and 2011 (in thousands):

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Total Revenue

   $ 3,083     $ 5,096     $ 11,838     $ 16,160  
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations before income taxes

   $ (21,473   $ 55     $ (22,094   $ 973  

Income tax (benefit) expense

     (8,266     132       (8,380     411  
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations, net of tax benefit

   $ (13,207   $ (77   $ (13,714   $ 562  
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 9. Long-Term Debt, Capital Lease Obligation

A summary of long-term debt is as follows (in thousands):

 

     September 30,      December 31,  
     2012      2011  

Senior secured debt (see below):

     

Senior variable-rate term note

   $ 141,250      $ 45,000  

Senior variable-rate revolving note

     48,000        128,700  
  

 

 

    

 

 

 

Total senior secured debt

     189,250        173,700  

Unsecured notes payable

     591        2,470  

Capital lease obligations

     391        221  
  

 

 

    

 

 

 
     190,232        176,391  

Less current portion

     15,766        7,667  
  

 

 

    

 

 

 

Long-term debt, less current portion

   $ 174,466      $ 168,724  
  

 

 

    

 

 

 

Senior Secured Debt: The Company and its consolidated subsidiaries have a credit agreement with a syndicate of banks for a $215.0 million senior secured credit facility comprised of a term loan facility with an outstanding balance of $141.3 million at September 30, 2012, due and payable in quarterly installments with a final maturity date of December 6, 2015, and a revolving credit facility in an aggregate amount of up to $65.0 million (of which $48.0 million was drawn at September 30, 2012), with a final maturity date of December 6, 2015. In the first quarter of 2012, the Company entered into a second amendment to the credit agreement for the Company’s senior secured credit facility that increased the maximum aggregate amount of the revolving credit facility by $10.0 million and amended certain of the credit agreement’s definitions and covenants. The Company paid fees of approximately $0.3 million in connection with the second amendment. On October 5, 2012, the Company entered into a third amendment, the terms of which are described in Note 16 below. The Company paid fees of approximately $0.9 million in connection with the third amendment.

 

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At September 30, 2012, the Company expected to fall below certain of its loan covenants. However, the October 2012 third amendment changed the covenants as of the prior quarter, and the Company is in compliance with the new covenants as of September 30, 2012. Additionally, the amendment waived any technical non-compliance as of September 30, 2012. The amounts shown in the table above reflect the terms of the third amendment, specifically the conversion of $100 million from the revolving credit facility to a term loan, as well as the current portion associated with this conversion.

Note 10. Common Stock

The Company’s stock buy-back plan permits the Company to repurchase up to two million shares of issued and outstanding common stock at prevailing market prices or negotiated prices at any time through December 31, 2013. The number of shares and the timing of the purchases will be determined at the discretion of management. No shares were repurchased during the nine months ended September 30, 2012. During the nine months ended September 30, 2011, the Company repurchased 137,500 shares under this plan at an average price of $12.27 per share, for a total expenditure of $1.7 million.

Note 11. Income Taxes

For the nine months ended September 30, 2012, the Company recorded an income tax benefit of $42.7 million, or 31.1% of loss from continuing operations before income taxes. The Company’s tax rate for 2012 differs from the federal statutory rate of 35% primarily due to non-deductible discrete items, primarily associated with the impairment charge on long-lived assets and goodwill in the Company’s Mortgage Default Processing Services segment. For the nine months ended September 30, 2011, the Company recorded income tax expense of $6.2 million, or 40.4% of income from continuing operations before income taxes. The company’s tax rate for 2011 differs from the federal statutory rate of 35% due to state income tax expense, the impact of noncontrolling interests and discrete items recorded during the period associated with stock-based compensation. The provision for income taxes during interim quarterly reporting periods is based on the Company’s estimates of the effective tax rates for the respective full fiscal year.

The impairment of long-lived assets and goodwill recorded in the third quarter of 2012, resulted in the Company moving from a net deferred tax liability to a net deferred tax asset position. In assessing the need for a valuation allowance, the Company considered both positive and negative evidence related to the likelihood of realization of deferred tax assets. During the quarter, the Company recorded a $1.4 million valuation allowance against a portion of its state net operating losses. In making the determination that no further valuation allowance against the Company’s deferred tax assets was warranted, the Company considered its most recent 12 quarters of earnings history, excluding the discrete impairment charge in the third quarter of 2012, as well as the Company’s projections of future taxable income.

Note 12. Major Customers, Related Parties and Concentration of Credit Risk

Following the October 10, 2012, restructuring of NDeX Florida, NDeX has six law firm customers and, of those customers, Trott & Trott and the Barrett law firm (both related parties) together comprised 27.1% and 30.9% of the Company’s total revenues for the three and nine months ended September 30, 2012, respectively.

Amounts due from NDeX’s six law firm customers totaled $26.6 million, or 39.9%, of the Company’s consolidated net accounts receivable balance at September 30, 2012. This includes both billed and unbilled amounts.

NDeX has entered into long-term services agreements with its law firm customers, including Trott & Trott and the Barrett law firm, that provide for the exclusive referral of mortgage default and other files for processing. These services agreements also contemplate the review and possible revision of the fees, on an annual basis, for the services NDeX provides.

 

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In the third quarter of 2012, due to uncertainty of collection, the Company recorded bad debt expense of $10.0 million on the amounts due from its former NDeX Florida law firm customer, which amount is included in discontinued operations. See Notes 8 and 16 for additional information.

Note 13. Reportable Segments

The Company has two operating divisions: Professional Services and Business Information, and three reportable segments: (1) Mortgage Default Processing Services; (2) Litigation Support Services; and (3) Business Information. The Mortgage Default Processing Services and Litigation Support Services segments are part of the Professional Services Division as these segments provide professional services supporting, primarily, attorneys and/or their clients. The Business Information segment is part of the Business Information Division. The Mortgage Default Processing Services segment generates revenue from NDeX, which provides mortgage default processing and related services to its customers. The Litigation Support Services segment generates revenue by providing discovery management and document review services through DiscoverReady and appellate services through Counsel Press. Both of these operating segments generate revenues through fee-based arrangements. The Business Information segment provides products, data and certain services through subscription-based products and a variety of media, including court and commercial newspapers, weekly business journals and the Internet. The Business Information segment also operates specialized information services covering legislative and regulatory activities and provides transcription, media monitoring and translation services. The Business Information segment generates revenues primarily from display and classified advertising (which includes events), public notices, and subscriptions and other. The Company determined its reportable segments based on the types of products sold and services performed.

The tables below reflect summarized financial information concerning the Company’s reportable segments for the three and nine months ended September 30, 2012 and 2011 (in thousands):

 

     Professional Services                    
     Mortgage                          
     Default     Litigation     Business              
     Processing     Support     Information     Corporate     Total  

Three Months Ended September 30, 2012

          

Revenues

   $ 22,828     $ 26,950     $ 18,282     $ —        $ 68,060  

Direct operating expenses

     (12,766     (10,234     (6,931     —          (29,931

Selling, general and administrative expenses

     (8,349     (7,890     (8,119     (2,860     (27,218

Amortization

     (2,149     (1,483     (975     —          (4,607

Depreciation

     (539     (700     (432     (149     (1,820

Fair value and other adjustments on earnout liabilities

     —          1,514       141       —          1,655  

Impairment of long-lived assets and goodwill

     (151,614     —          —          —          (151,614

Equity in earnings of affiliates

     —          —          396       —          396  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ (152,589   $ 8,157     $ 2,362     $ (3,009   $ (145,079
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2011

          

Revenues

   $ 27,139     $ 24,244     $ 18,815     $ —        $ 70,198  

Direct operating expenses

     (13,689     (9,386     (7,260     —          (30,335

Selling, general and administrative expenses

     (8,558     (7,196     (8,373     (1,503     (25,630

Amortization

     (2,333     (1,370     (1,023     —          (4,726

Depreciation

     (732     (631     (458     (170     (1,991

Fair value and other adjustments on earnout liabilities

     —          (209     (30     —          (239

Equity in earnings of affiliates

     —          —          383       —          383  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 1,827     $ 5,452     $ 2,054     $ (1,673   $ 7,660  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Professional Services                    
     Mortgage                          
     Default     Litigation     Business              
     Processing     Support     Information     Corporate     Total  

Nine Months Ended September 30, 2012

          

Revenues

   $ 73,253     $ 61,565     $ 56,552     $ —        $ 191,370  

Direct operating expenses

     (38,683     (25,260     (21,383     —          (85,326

Selling, general and administrative expenses

     (24,981     (22,520     (25,148     (6,319     (78,968

Amortization

     (6,781     (4,449     (2,948     —          (14,178

Depreciation

     (1,796     (2,080     (1,289     (469     (5,634

Fair value and other adjustments on earnout liabilities

     —          11,576       551       —          12,127  

Impairment of long-lived assets and goodwill

     (151,614     —          —          —          (151,614

Equity in earnings of affiliates

     —          —          1,420       —          1,420  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ (150,602   $ 18,832     $ 7,755     $ (6,788   $ (130,803
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2011

          

Revenues

   $ 88,466     $ 54,073     $ 58,582     $ —        $ 201,121  

Direct operating expenses

     (43,436     (21,564     (22,858     —          (87,858

Selling, general and administrative expenses

     (26,799     (16,838     (26,884     (5,802     (76,323

Amortization

     (7,000     (2,799     (3,386     —          (13,185

Depreciation

     (2,520     (1,144     (1,386     (510     (5,560

Fair value and other adjustments on earnout liabilities

     —          (209     (10     —          (219

Equity in earnings of affiliates

     —          —          1,572       —          1,572  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 8,711     $ 11,519     $ 5,630     $ (6,312   $ 19,548  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 14. Share-Based Compensation

The Company has reserved 4.8 million shares of its common stock for issuance under its incentive compensation plan, of which there were 1.0 million shares available for issuance as of September 30, 2012. Total share-based compensation expense related to stock options and restricted stock for the three months ended September 30, 2012 and 2011, was $0.9 million and $1.0 million, respectively, and for the nine months ended September 30, 2012 and 2011, was $2.8 million and $3.0 million, respectively.

Stock Options: Share-based compensation expense related to stock options for the three months ended September 30, 2012 and 2011, was $0.4 million and $0.6 million, respectively, and for the nine months ended September 30, 2012 and 2011, was $1.4 million and $1.7 million, respectively.

The following assumptions were used to estimate the fair value of stock options granted in 2012:

 

Dividend Yield

     0.0 

Expected volatility

     50.0 

Risk free interest rate

     0.61 - 0.75 

Expected term of options

     4.5 years   

Weighted average grant date fair value

   $ 1.97 - 3.12   

 

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The following table represents stock option activity for the nine months ended September 30, 2012:

 

                         Weighted  
           Weighted      Weighted      Average  
           Average Grant      Average      Remaining  
     Number     Date Fair      Exercise      Contractual  
     of Shares     Value      Price      Life (in years)  

Outstanding options at December 31, 2011

     2,323,091     $ 4.79      $ 12.93        4.30  

Granted

     350,758       2.55        6.15        —     

Exercised

     (13,500     1.35        2.22        —     

Canceled or forfeited

     (40,407     4.45        11.06        —     
  

 

 

         

Outstanding options at September 30, 2012

     2,619,942     $ 4.51      $ 12.10        3.94  
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable at September 30, 2012

     1,665,168     $ 4.78      $ 13.63        2.98  
  

 

 

   

 

 

    

 

 

    

 

 

 

At September 30, 2012, the aggregate intrinsic value of options outstanding and options exercisable were both $0.2 million. At September 30, 2012, there was $2.9 million of unrecognized compensation cost related to outstanding options, which is expected to be recognized over a weighted-average period of 2.2 years.

Restricted Stock Grants: Share-based compensation expense related to grants of restricted stock for the three months ended September 30, 2012 and 2011, was $0.5 million and $0.4 million, respectively, and was $1.5 million and $1.3 million for the nine months ended September 30, 2012 and 2011, respectively.

The following table represents a summary of nonvested restricted stock activity for the nine months ended September 30, 2012:

 

           Weighted Average  
     Number of Shares     Grant Date Fair Value  

Nonvested, December 31, 2011

     402,148     $ 11.40  

Granted

     405,428       6.14  

Vested

     (139,397     11.40  

Canceled or forfeited

     (10,435     9.55  
  

 

 

   

 

 

 

Nonvested, September 30, 2012

     657,744     $ 8.19  
  

 

 

   

 

 

 

Total unrecognized compensation expense for unvested restricted shares of common stock as of September 30, 2012, was $4.3 million, which is expected to be recognized over a weighted-average period of 2.4 years.

Note 15. Contingencies and Commitments

Litigation: From time to time, the Company is subject to certain claims and lawsuits that have arisen in the ordinary course of its business. Although the outcome of such existing matters cannot presently be determined, it is management’s opinion that the ultimate resolution of such existing matters will not have a material adverse effect on the Company’s results of operations or financial position.

Note 16. Subsequent Events

On October 5, 2012, the Company entered into a third amendment (the “Amendment”) to its Third Amended and Restated Credit Agreement (“Credit Agreement”). Among other changes, the Amendment relaxes the financial covenant ratios applicable to the Company, permits the issuance of up to $75 million of subordinated or convertible debt, accelerates and increases the conversion of a portion of the revolving credit facility to a term loan such that $100 million converted on October 5, 2012 (whereas $50 million had been scheduled to convert in December 2012), adds a provision requiring the Company, commencing at the end of the 2013 fiscal year, to prepay the term loans in an amount equal to 50% of Excess Cash Flow (as defined in the Amendment) if the Company’s Total Cash Flow Leverage Ratio (as defined in the Credit Agreement) is 3 to 1 or higher, and reduces the amount the Company may expend to acquire other businesses. The Amendment also adds three new pricing levels that correspond to the higher levels of the Total Cash Flow Leverage Ratio permitted by the Amendment. The Company paid fees of approximately $0.9 million in connection with this Amendment.

 

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On October 10, 2012, the Company entered into a Master Settlement Agreement with James E Albertelli, P.A. to terminate its services agreement for its NDeX Florida operations. Under the services agreement, NDeX had provided Albertelli with certain non-legal services related to processing foreclosures of residential real estate in Florida (the “Services”). Pursuant to the Master Settlement Agreement, NDeX has sold to Albertelli certain assets NDeX used to deliver the Services, and Albertelli agreed to offer employment to approximately 150 employees of NDeX who had been engaged in providing the Services. The Master Settlement Agreement also provides a payment plan for amounts owed to NDeX by Albertelli, provides for the resignation of James E. Albertelli from his position with NDeX, includes a long-term license by Albertelli of NDeX’s Veritas processing software, and terminates the services agreement with The Albertelli Firm, P.C., pursuant to which NDeX had provided certain non-legal foreclosure processing services related to residential real estate located in Georgia. The Company will not have significant continuing involvement after October 10, 2012. See Note 8 for additional information on impairment charges recorded as a result of the termination of the services agreement.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We recommend that you read the following discussion and analysis in conjunction with our unaudited condensed consolidated interim financial statements and the related notes included in this report.

In this quarterly report on Form 10-Q, unless the context requires otherwise, the terms “we,” “us,” and “our” refer to The Dolan Company and its consolidated subsidiaries. When we refer to “National Default Exchange” or “NDeX” in this report, we mean all of our mortgage default processing operations in Michigan, Indiana and Minnesota and at Barrett-NDEx. When we refer to “Barrett-NDEx” in this report, it means the entities that constitute the mortgage default processing operations serving the Texas, California and Georgia markets that NDeX acquired on September 2, 2008. The term “Barrett law firm” refers to Barrett Daffin Frappier Turner & Engel, LLP and its two law firm affiliates.

Forward-Looking Statements

This discussion and analysis contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Forward-looking statements are statements such as those contained in projections, plans, objectives, estimates, statements of future performance, and assumptions relating to any of the foregoing and can often be identified by the use of words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate,” “goal,” “continue,” and similar words or expressions. By their nature, forward-looking statements are based on information currently available to us and are subject to risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. These risks, uncertainties and other factors include:

 

  our businesses operate in highly competitive markets and depend on the economies and demographics of the legal, financial and real estate markets we serve, and changes in those sectors could have an adverse effect on our revenues, cash flows, and profitability;

 

  if the number of case files referred to us by our mortgage default processing service law firm customers (or loan servicers and mortgage lenders we serve directly for mortgage default files in California) decreases or fails to increase, or if one or more of our law firm customers fails to pay us for our mortgage default processing services, our operating results and ability to execute our growth strategy could be adversely affected;

 

  bills introduced and laws enacted to mitigate foreclosures, voluntary relief programs and voluntary halts by servicers or lenders, governmental investigations, enforcement actions, litigation, court orders, settlements, and any resulting additional procedures and longer processing times may have an adverse impact on our mortgage default processing business, including its margins, and on our public notice business;

 

  our efforts to grow our business may place a strain on our management and internal systems, processes and controls, may result in operating inefficiencies, and may negatively impact our operating margins;

 

  we intend to continue to pursue acquisition opportunities, which we may not do successfully and which may subject us to considerable business and financial risk or require us to raise additional capital or incur additional indebtedness;

 

  a failure to comply with covenants under our debt instruments could result in acceleration of debt or an inability to access availability under our credit facility;

 

  we depend on our senior management team and other key leaders of our business segments, and the operation and growth of our business may be negatively impacted if we lose any of their services;

 

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  revenues of our subsidiary NDeX and our subsidiary DiscoverReady have been very concentrated among a few customers, thus the loss of business from these customers and a failure to attract new customers could adversely affect our operating results; and

 

  certain key personnel of our subsidiary NDeX, who are also shareholders and principal attorneys of our law firm customers, may under certain circumstances have interests that differ from or conflict with our interests.

See “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2011, filed on March 9, 2012, with the Securities and Exchange Commission (“SEC”) for a description of these and other risks, uncertainties and factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, any forward-looking statements. You should not place undue reliance on any forward-looking statements. Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this report.

Overview

We are a leading provider of necessary professional services and business information to legal, financial and real estate sectors in the United States. We serve our customers through two complementary operating divisions: our Professional Services Division and our Business Information Division. Our Professional Services Division comprises two reporting segments: mortgage default processing services and litigation support services. Through our subsidiary, NDeX, we provide mortgage default processing services to six law firm customers located in California, Indiana, Michigan, Minnesota, and Texas, as well as directly to mortgage lenders and loan servicers on residential real estate located in California. Our subsidiaries DiscoverReady and Counsel Press comprise our litigation support services reporting segment. DiscoverReady provides outsourced discovery management and document review services to major United States and global companies and their counsel. Counsel Press provides appellate services to law firms and attorneys nationwide. Our Business Information Division publishes business journals, court and commercial media and other highly focused information products and services, operates web sites and produces events for targeted professional audiences in about 20 geographic markets across the United States. Our information is delivered through a variety of methods, including approximately 100 print publications and 100 web sites. Through subscription-based offerings, our Business Information Division also offers transcription services and access to our legislative databases which provide federal and state legislative and regulatory information.

Our total revenues decreased $2.1 million, or 3.0%, from $70.2 million for the three months ended September 30, 2011, to $68.1 million for the three months ended September 30, 2012, primarily as a result of a $4.3 million decrease in our mortgage default processing services revenues offset by a $2.7 million increase in our discovery services revenues. The decrease in mortgage default processing services revenues was driven primarily by a decrease in the number of new foreclosure files received for processing, as discussed below. The increase in discovery services revenues was driven by an increase in review work and technology services from both new and existing customers, along with an increase in revenues as a result of the ACT acquisition in July 2011. Income from continuing operations decreased from $3.4 million for the three months ended September 30, 2011, to a loss of $100.2 million for the current quarter. This decrease was primarily the result of the $151.6 million impairment charge on assets in mortgage default processing services discussed below.

Recent Developments

Discontinued Operations / Assets Held for Sale

In the third quarter of 2012, management committed to a plan of action to sell our NDeX Florida operations, a stand-alone business within the mortgage default processing services reporting unit. On October 10, 2012, we entered into a Master Settlement Agreement with James E Albertelli, P.A to terminate our service agreement for our NDeX Florida operations. Under the Services Agreement, NDeX had provided Albertelli with certain non-legal services related to processing foreclosures of residential real estate in Florida (the “Services”). Pursuant to the Master Settlement Agreement, NDeX has sold to Albertelli certain assets NDeX used to deliver the Services, and Albertelli agreed to offer employment to approximately 150 employees of NDeX who had been engaged in providing the Services. The Master Settlement Agreement also provides a payment plan for amounts owed to NDeX by Albertelli, provides for the resignation of James E. Albertelli from his position with NDeX, includes a long-term license by Albertelli of NDeX’s Veritas processing software, and terminates the services agreement with The Albertelli Firm, P.C., pursuant to which NDeX had provided certain non-legal foreclosure processing services related to residential real estate located in Georgia.

 

 

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As a result of the termination of the services agreement described above, NDeX Florida’s operations and cash flows have been eliminated from ongoing operations, and we will not have significant continuing involvement in the operations. As such, we have classified the net assets and liabilities of these operations as assets held for sale and reported the results of the business in discontinued operations. As a result of the termination of the services agreement, we recorded a held-for-sale impairment charge of $13.0 million in long-lived assets related to our NDeX Florida operations, of which $0.8 million was property and equipment and $12.2 million was finite-lived intangible assets (specifically, long-term service contracts). In addition, due to uncertainty of collection of amounts due from NDeX Florida’s former law firm customer, we recorded a charge to bad debt expense for $10.0 million. Thus, the total one-time expense related to NDeX Florida in the third quarter of 2012 was $23.0 million (before taxes), which is presented within discontinued operations in our statement of operations. Slightly offsetting these impairment charges included in discontinued operations is the reversal of the earnout liability in the amount of $2.7 million, as such amount will not be paid.

In the fourth quarter of 2011, management committed to a plan of action to sell two of our smallest-market operating units within the Business Information Division, The Colorado Springs Business Journal and The Mississippi Business Journal. We classified the results of these operations (net of tax benefit), including a de minimus pretax net loss on the sale of these businesses, as discontinued operations. The assets of these operations to be sold, net of related liabilities, were included in assets held for sale at December 31, 2011. Both businesses were sold in 2012.

Impairment of Long-Lived Assets and Goodwill

In the third quarter of 2012, due to the restructuring of NDeX’s Florida operations as discussed above, as well as the current depressed operating results of the Mortgage Default Processing Services segment, we performed impairment tests on NDeX’s long-lived assets and goodwill. As a result, we recorded a total of $151.6 million in non-cash impairment charges in the quarter to reduce the carrying value of these assets, of which $0.3 million was property and equipment, $19.6 million was finite-lived intangible assets (specifically long-term service contracts), and $131.7 million was goodwill. These impairment charges are exclusive of the impairment charges recorded in the NDeX Florida operations in discontinued operations discussed above.

Regulatory Environment

Beginning in 2008, federal, state and local governmental entities and leaders have increasingly focused attention on foreclosures and have proposed and enacted legislation or taken other action that may have, and some of which has had, an adverse impact on the number of mortgage default case files NDeX is asked to process, the length of time and amount of work it takes to process such files, the time over which we recognize revenue associated with the processing of those files, our margins on our processing work, and the number of foreclosure public notices placed in our Business Information products and DLNP (our equity method investment) for publication. There also have been voluntary foreclosure relief programs developed by lenders, loan servicers and the Hope Now Alliance (a consortium that includes loan servicers). We have described these programs in our annual and quarterly reports in the past few years.

 

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During the past two years, the mortgage foreclosure industry has experienced heightened scrutiny by various government agencies and individuals, leading to voluntary slowing of foreclosure referrals by servicers and lenders as they reviewed systems and provided information requested by the government, many audits of our processes, and newly mandated procedures. In the federal sector, 14 major mortgage servicers signed consent orders with the Board of Governors of The Federal Reserve System and the Office of the Comptroller of the Currency (“OCC”) in April 2011, agreeing to submit action plans detailing how they will comply with new requirements for servicing defaulted loans. The OCC consent agreements required improvements to certain internal processes and enhanced controls related to third-party vendors that provide services related to residential default or foreclosure, including the law firm customers of NDeX. In June 2011, the OCC issued guidance clarifying that, in addition to these 14 major mortgage servicers, all mortgage servicers under OCC supervision must ensure compliance with foreclosure laws, conduct foreclosures in a safe and sound manner, and establish responsible business practices that provide accountability and appropriate treatment of borrowers. This OCC bulletin provided additional expectations regarding governance of foreclosure process to include adequate staffing and training, dual-track processing, management of affidavit and notary practices, documentation, oversight of third-party service providers, and adherence to all laws and regulations related to mortgage foreclosure. The OCC required servicers to complete revisions in foreclosure processing to the satisfaction of the Federal Reserve and the OCC and to reorganize their related foreclosure operations to follow the amended procedures. In addition, all national banks were required by the end of September 2011 to conduct a self-assessment of foreclosure management practices and to correct any weaknesses identified.

At the state level, in April 2012, the U.S. District Court for the District of Columbia approved the settlement among the attorneys general of 49 states and the District of Columbia and the nation’s five largest mortgage lenders. That settlement applies to privately held mortgages issued between 2008 and 2011, not those held by government-controlled Fannie Mae or Freddie Mac. Under the settlement, the lenders committed $17 billion toward reducing the principal that certain homeowners owe on their mortgages. The lenders also committed another $3.7 billion toward refinancing mortgages for borrowers who are current on their payments, and the lenders agreed to pay an additional $5 billion in fines to the states and federal government. The lone attorney general not a part of this nationwide settlement was from Oklahoma, and he reached a $18.6 million settlement with the five lenders in February 2012.

The National Servicing Standards are the combination of requirements under the OCC consent orders and the AG settlement. Hundreds of requirements of the National Servicing Standards included compliance deadlines of October 1, 2012. These compliance deadlines resulted in reduced file referral volumes around the end of the third quarter as the various servicers changed their systems and processes to become in compliance with the new requirements.

The Consumer Financial Protection Bureau (“CFPB”) outlined its approach in July 2011 to supervising large depository institutions to ensure compliance with federal consumer protection laws. This supervisory process applies to the 111 depository institutions with total assets of more than $10 billion. The CFPB then issued Supervision and Examination guidance for all lenders, covering how the CFPB will examine lenders’ and servicers’ processes. In October 2011, the CFPB outlined its initial approach to supervising mortgage servicers to ensure they comply with federal consumer financial protection laws. It said it will focus initially on loans in default where consumers are struggling to make payments. CFPB examiners are looking to ensure that information provided to consumers about loan modifications and foreclosures is timely and transparent.

Given the OCC deadlines for reports and compliance, including the October 1, 2012, National Servicing Standards deadlines, and given the CFPB’s requirements, the attorneys general efforts and settlement, and the generally heightened scrutiny that residential mortgage foreclosure servicers experienced in the past two years, servicers have continued to react to this scrutiny by reviewing, verifying and changing their policies and procedures, applying more steps, checks, and reviews to pending foreclosures, and releasing into foreclosure only those cases that have been carefully reviewed and are in compliance with all new requirements. Many servicers also reacted to this environment of increased scrutiny by requesting additional information and process verification from law firms and other third-party vendors. These servicer actions have continued to reduce the margins on our services and the number of mortgage defaults being referred to begin foreclosure. We believe that servicers will continue to exercise an abundance of caution, examining each default referral in extreme detail, continuing the slow pace of referrals. Until new foreclosure procedures are made uniform and final, such new procedures cannot become automated as part of our proprietary workflow process management systems. We believe that the reduced level of foreclosure referrals is likely to continue until final procedures are in place, and that once final procedures are in place that different lenders will refer remaining foreclosures out with varying rates and timing.

 

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For additional information about legislation and regulatory activity impacting or potentially impacting our business, please see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Regulatory Environment” in our annual report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 9, 2012, as well as the “Regulatory Environment” discussions in our prior reports filed with the SEC on Form 10-Q and Form 10-K.

Recent Acquisitions

We have grown significantly since our predecessor company commenced operations in 1992, in large part due to acquisitions, such as the ACT acquisition in 2011:

Acquisition of ACT Litigation Services, Inc.

On July 25, 2011, we, through DiscoverReady, completed the acquisition of substantially all of the assets of ACT for (i) an upfront payment of approximately $60.0 million in cash that was paid in full at closing, plus (ii) up to $5.0 million in potential additional purchase price that will be held back for a period of 20 months (subject to partial early release) to secure certain obligations of ACT and its shareholders, plus (iii) an earnout payment based primarily upon the extent to which an agreed-upon multiple of ACT’s pro forma EBITDA for the year ended December 31, 2011, exceeds the base purchase price of $65.0 million, plus (iv) two additional earnout payments of up to a maximum of $15.0 million in the aggregate that are contingent upon reaching certain revenue milestones for the years ended December 31, 2012 and 2013. All of the earnout payments are subject to certain set-off rights under the purchase agreement. In the second quarter of 2012, net earnouts of $13.7 million were paid. Additionally, the majority of the remaining balance of the earnout payable was converted in the second quarter of 2012 to a note payable, due in March 2013, and is subject to further adjustment based on the achievement of certain revenue targets for 2012. In the third quarter of 2012, management revised its estimates relating to earnouts and now estimates that there will be no further earnouts paid, resulting in a $1.4 million reduction to the earnout liability. Such amount was recorded within operations in fair value and other adjustments on earnout liabilities. Additionally, during the second quarter, management recorded a retrospective adjustment of $2.1 million to reduce goodwill and the initial earnout liability estimate recorded at the acquisition date.

ACT specializes in providing technology and process solutions to clients with electronic discovery needs. It also provides hosting and review services. The acquired operations of ACT have been combined with DiscoverReady and are part of our Litigation Support Services segment within our Professional Services Division.

Revenues

We derive revenues from two operating divisions, our Professional Services Division and our Business Information Division, operating as three reportable segments: (1) mortgage default processing services; (2) litigation support services; and (3) business information. For the three and nine months ended September 30, 2012, our total revenues were $68.1 million and $191.4 million, respectively, and the percentage of our total revenues attributed to each of our divisions and segments was as follows:

 

  73% and 70%, respectively, from our Professional Services Division (34% and 38%, respectively, from mortgage default processing services and 40% and 32%, respectively, from litigation support services); and

 

  27% and 30%, respectively, from our Business Information Division.

Professional Services. Our Professional Services Division generates revenues primarily by providing mortgage default processing, outsourced discovery management and document review, and appellate services through fee-based arrangements. We further break down our Professional Services Division into two reportable segments, mortgage default processing services and litigation support services.

Mortgage Default Processing Services. Through NDeX, we assist six law firms in processing foreclosure, bankruptcy, eviction and, to a lesser extent, other mortgage default case files for residential mortgages that are in default. We also provide foreclosure processing services directly to mortgage lenders and loan servicers for properties located in California. In addition, NDeX provides loss mitigation support on mortgage default files to its customers and related real estate title work primarily to the Barrett law firms. We refer to revenues that NDeX derives from these sources collectively as “mortgage default processing service revenues.” Shareholders and/or principal attorneys of our law firm customers, including David A. Trott, are executive management employees of NDeX.

 

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For the three and nine months ended September 30, 2012, we received for processing approximately 51,000 and 168,400 mortgage default case files, respectively. Our mortgage default processing service revenues accounted for 34% of our total revenues and 46% of our Professional Services Division revenues for the three months ended September 30, 2012, and 38% of our total revenue and 54% of our Professional Services Division revenues for the nine months ended September 30, 2012. For the nine months ended September 30, 2012, the Barrett law firm and Trott & Trott law firm each accounted for more than 10% of our mortgage default processing services revenues, and together accounted for more than three-quarters of these revenues. We recognize mortgage default processing service revenues on a proportional performance basis over the period during which the services are provided, the calculation of which requires management to make estimates. For more information regarding how we recognize revenue, please see “Critical Accounting Policies and Estimates – Revenue Recognition” in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 9, 2012.

NDeX’s revenues are primarily driven by the number of residential mortgage defaults in each of the states in which we do business, as well as the type of files we process (e.g., foreclosures, evictions, bankruptcies or litigation) because each has a different pricing structure. Although the services agreements with our law firm customers contemplate the review and possible revision of the fees for the services we provide, price increases have not historically affected our mortgage default processing revenues materially. In some cases, our services agreements adjust the fee paid to us for the files we process on an annual basis pursuant to an agreed-upon consumer price index. In other cases, our services agreements require us to agree with our law firm customer regarding the terms and amount of any fee increase. If we are unable to negotiate fixed fee increases under these agreements that at least take into account the increases in costs associated with providing mortgage default processing services, our operating and net margins would be adversely affected. You should refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revenues in our annual report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 9, 2012, for more information about the conditions under which the fixed fee per file we charge our law firm customers may change.

In the fourth quarter of 2012, as a result of increased work and added steps required to process foreclosure files, we successfully negotiated with the majority of our law firm customers to increase the fee per file we receive on new foreclosure files received for processing. Such fee increases are effective for all new foreclosure files received for processing after October 1, 2012.

Deferred revenue includes mortgage default processing services billed in advance that we expect to recognize in future periods due to the extended period of time it takes to process certain files. At September 30, 2012, we had such deferred revenue on our balance sheet in the amount of $6.3 million.

Litigation Support Services. Our litigation support services segment generates revenues by providing discovery management and document review services through DiscoverReady and appellate services through Counsel Press. For the three and nine months ended September 30, 2012, our litigation support services revenues accounted for 40% and 32%, respectively, of our total revenues and 54% and 46%, respectively, of our Professional Services Division revenues.

DiscoverReady provides its services to major United States and global companies and their counsel and assists them in document reviews and helping them manage the discovery process. Discovery is the process by which parties use the legal system to obtain relevant information, primarily in litigation and regulatory matters. This process can be expensive and time-consuming for companies depending upon the volume of emails, electronic files and paper documents a company must review to respond to a document request. DiscoverReady also provides related technology management services. DiscoverReady bills its customers primarily based upon the number of documents reviewed and the amount of data or other information it processes in connection with those reviews. Accordingly, our discovery management and document review services revenues are largely determined by the volume of data we process, host and review.

 

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Counsel Press assists law firms and attorneys throughout the United States in organizing, preparing and filing appellate briefs, records and appendices, in paper and electronic formats that comply with the applicable rules of the U.S. Supreme Court, any of the 13 federal courts of appeals and any state appellate court or appellate division. Counsel Press charges its customers primarily on a per-page basis based on the final appellate product that is filed with the court clerk. Accordingly, our appellate service revenues are largely determined by the volume of appellate cases we handle and the number of pages in the appellate cases we file.

We recognize litigation support services revenues during the month in which the services are provided. In the case of Counsel Press, this is when our final appellate product is filed with the court. In most cases, DiscoverReady bills its customers each month for the services provided. DiscoverReady’s services consist of multiple element deliverables, and as such, revenue is assigned to each deliverable service and recognized as those services are performed. In situations where we bill our customers in advance of services performed, revenue is deferred until the month it is earned. At September 30, 2012, we recorded an aggregate $0.8 million as deferred revenues related to litigation support services on our balance sheet. You should refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critcal Accounting Policies and Estimates – Revenue Recognition in our annual report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 9, 2012, for more information about how we recognize revenue on DiscoverReady’s multiple element arrangements.

Business Information. Our Business Information Division generates revenues primarily from display and classified advertising, public notice and subscriptions. We sell commercial advertising consisting of display and classified advertising in all of our print products and on most of our web sites. We include within our display and classified advertising revenue those revenues generated by sponsorships, advertising and ticket sales generated by our local events. Our display and classified advertising revenues accounted for 8% of our total revenues and 28% of our Business Information Division revenues for both the three and nine months ended September 30, 2012, respectively. We recognize display and classified advertising revenues upon publication of an advertisement in one of our publications or on one of our web sites. Advertising revenues are driven primarily by the volume, price and mix of advertisements published as well as how many local events are held.

We publish more than 300 different types of public notices in our court and commercial newspapers, including foreclosure notices, probate notices, notices of fictitious business names, limited liability company and other business entity notices, unclaimed property notices, notices of governmental hearings and trustee sale notices. Our public notice revenues accounted for 12% and 13% of our total revenues for the three and nine months ended September 30, 2012, respectively, and 45% and 44% of our Business Information Division revenues for the three and nine months ended September 30, 2012, respectively. We recognize public notice revenues upon placement of a public notice in one of our court and commercial newspapers. Public notice revenues are driven by the volume and mix of public notices published, which can be affected by the number of residential mortgage foreclosures in the markets where we are qualified to publish public notices and the rules governing publication of public notices in such states. In many of the states in which we publish public notices, the price for public notices is statutorily regulated, with market forces determining the pricing for the remaining states.

We sell our business information products primarily through subscriptions, including our DataStream and Federal News products, which are both part of our public affairs intelligence group. Our subscription and other revenues, which consist primarily of subscriptions, single-copy sales, transcriptions and access to state and federal legislative and regulatory information, accounted for 7% and 8% of our total revenues for the three and nine months ended September 30, 2012, respectively, and 27% and 28% of our Business Information Division revenues for the three and nine months ended September 30, 2012, respectively. We recognize subscription revenues ratably over the subscription periods, which range from three months to multiple years, with the average subscription period being twelve months. Deferred revenue includes payment for subscriptions collected in advance that we expect to recognize in future periods. At September 30, 2012, we had such deferred revenue on our balance sheet in the amount of $7.1 million. Subscription and other revenues are driven primarily by the number of copies sold and the subscription rates charged to customers.

 

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Operating Expenses

Our operating expenses consist of the following:

 

  Direct operating expenses, which consist primarily of the cost of compensation and employee benefits for the operational staff at NDeX, DiscoverReady, and Counsel Press and our editorial personnel in our Business Information Division, production and distribution expenses, such as compensation (including stock-based compensation expense) and employee benefits for personnel involved in the production and distribution of our business information products, the cost of newsprint and delivery of our business information products, and packaging and data service fees in connection with our California foreclosure files;

 

  Selling, general and administrative expenses, which consist primarily of the cost of compensation (including stock-based compensation expense) and employee benefits for our sales, human resources, accounting and information technology personnel, publishers and other members of management, rent, other sales and marketing-related expenses and other office-related payments;

 

  Amortization expense, which represents the cost of finite-lived intangibles acquired through business combinations allocated over the estimated useful lives of these intangibles, with such useful lives ranging from two to thirty years;

 

  Depreciation expense, which represents the cost of fixed assets and software allocated over the estimated useful lives of these assets, with such useful lives ranging from one to thirty years;

 

  Fair value and other adjustments on earnout liabilities, which consists primarily of non-cash adjustments to estimates of earnouts to be paid to sellers of businesses we acquire, based on management’s estimated fair value of the earnout liability at each reporting date; and

 

  Impairment of long-lived assets and goodwill, which consists of non-cash impairment charges to long-lived assets and goodwill.

Total operating expenses as a percentage of revenues depends upon our mix of business from Professional Services, which is our higher margin revenue, and Business Information. This mix may continue to shift between fiscal periods.

Equity in Earnings of Affiliates

We own 35.0% of the membership interests in DLNP, the publisher of The Detroit Legal News and 10 other publications. We account for our investment in DLNP using the equity method. For the three and nine months ended September 30, 2012, our share of DLNP’s earnings was $0.4 million and $1.5 million, respectively. This is net of amortization of $0.4 million and $1.1 million, respectively. NDeX handles all public notices required to be published in connection with files it services for Trott & Trott pursuant to our services agreement with Trott & Trott and places a significant amount of these notices in The Detroit Legal News. Trott & Trott pays DLNP for these public notices. See “Liquidity and Capital Resources — Cash Flows Provided by Operating Activities” below for information regarding distributions paid to us by DLNP.

Noncontrolling Interest

Noncontrolling interest (“NCI”) at September 30, 2012, consisted of a 6.2% redeemable interest in NDeX held by the sellers of Barrett-NDEx or their transferees (as a group), a 10.0% redeemable interest in DiscoverReady held by DR Holdco LLC and a 17.9% interest in Legislative Services of America (LISA) held by Telran, Inc.

Under the terms of the NDeX operating agreement, each month we are required to distribute the excess of NDeX’s earnings before interest, depreciation and amortization less debt service with respect to any interest-bearing indebtedness of NDeX, capital expenditures and working capital reserves to NDeX’s members on the basis of common equity interest owned. No such distributions were paid during the three and nine months ended September 30, 2012.

 

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There is no similar distribution obligation under the DiscoverReady limited liability company agreement; however, we are obligated to make quarterly distributions to pay tax liabilities to DR Holdco, the minority member of DiscoverReady. No such distributions were paid during the three and nine months ended September 30, 2012.

The sellers of Barrett-NDEx, each as members of NDeX, have the right, for a period of six months following September 2, 2012, to require NDeX to repurchase all or any portion of their respective membership interest in NDeX. To the extent any minority member of NDeX timely exercises this right, the purchase price of such membership interest will be based on 6.25 times NDeX’s trailing twelve month earnings before interest, taxes, depreciation and amortization, less the aggregate amount of any interest bearing indebtedness outstanding for NDeX as of the date the repurchase occurs. The aggregate purchase price would be payable by NDeX in the form of a three-year unsecured note bearing interest at a rate equal to prime plus 2.0%. At the current time, the calculation of this put right results in a zero value.

Under the terms of DiscoverReady’s amended limited liability company agreement, DR Holdco has the right, for a period of 90 days following November 2, 2012, to require DiscoverReady to repurchase approximately 50% of DR Holdco’s equity interest in DiscoverReady, and for a period of 90 days following November 2, 2013, to require DiscoverReady to purchase DR Holdco’s remaining equity interest in DiscoverReady. In addition, for a period of 90 days following November 2, 2013, DiscoverReady also has the right to require DR Holdco to sell its entire equity interest in DiscoverReady. In each case, if either party timely exercises its right, we would pay DR Holdco an amount based on the fair market value of the equity interest. These rights may be exercised earlier under certain circumstances. The purchase price for any equity interests repurchased or sold pursuant to these rights, if exercised, will be paid in cash to the extent allowed by the terms of our then-existing credit agreement, or pursuant to a three year unsecured promissory note, bearing interest at a rate equal to prime plus 1.0%.

The NDeX NCI is adjusted to the estimated redemption amount at each reporting period based on the formula as discussed above if the result of the formula is greater than its carrying value. As a result of the carrying value of the redeemable NCI in NDeX becoming less than zero in the third quarter of 2012, we have presented the NDeX NCI within the stockholders’ equity section rather than in temporary equity on the balance sheet. The DiscoverReady NCI is adjusted to fair value each period using a market approach if the fair value is greater than its carrying value. Please see our unaudited condensed consolidated statements of stockholders’ equity, as well as Note 5 to our unaudited condensed consolidated interim financial statements, included in this report on Form 10-Q for further information regarding accounting for noncontrolling interests and its implications to our financial statements.

Critical Accounting Policies and Estimates

Please see Note 1 to our unaudited condensed consolidated interim financial statements included in this report on Form 10-Q as well as Note 1 of the Notes to Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 9, 2012. Further, we discuss our critical accounting estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our annual report on Form 10-K for the year ended December 31, 2011. There has been no significant change in our critical accounting policies or critical accounting estimates since the end of 2011.

 

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RESULTS OF OPERATIONS

The following table sets forth selected operating results, including as a percentage of total revenues, for the periods indicated below (in thousands, except per share data):

 

     Three Months Ended September 30,  
           % of           % of  
     2012     Revenues     2011     Revenues  

Revenues:

        

Professional Services

   $ 49,778       73.1   $ 51,383       73.2

Business Information

     18,282       26.9     18,815       26.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     68,060       100.0     70,198       100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Professional Services

     44,110       64.8     43,895       62.5

Business Information

     16,457       24.2     17,114       24.4

Unallocated corporate operating expenses

     3,009       4.4     1,673       2.4

Fair value and other adjustments on earnout liabilities

     (1,655     (2.4 )%      239       0.3

Impairment of long-lived assets and goodwill

     151,614       222.8     —         
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     213,535       313.7     62,921       89.6

Equity in earnings of affiliates

     396       0.6     383       0.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (145,079     (213.2 )%      7,660       10.9

Interest expense, net

     (2,195     (3.2 )%      (1,744     (2.5 )% 

Non-cash interest income related to interest

        

Other expense

     —          —       (107     (0.2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (147,274     (216.4 )%      5,809       8.3

Income tax benefit (expense)

     47,031       69.1     (2,426     (3.5 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (100,243     (147.3 )%      3,383       4.8

Discontinued operations, net of tax benefit

     (13,207     (19.4 )%      (77     (0.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (113,450     (166.7 )%      3,306       4.7

Less: Net loss (income) attributable to redeemable noncontrolling interests

     9,946       14.6     (217     (0.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to The Dolan Company

   $ (103,504     (152.1 )%    $ 3,089       4.4
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations attributable to The Dolan Company per share:

        

Basic and diluted

   $ (2.98     $ 0.10    

Weighted average shares outstanding:

        

Basic

     30,327         30,142    

Diluted

     30,327         30,208    

 

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     Nine Months Ended September 30,  
           % of           % of  
     2012     Revenues     2011     Revenues  

Revenues:

        

Professional Services

   $ 134,818       70.4   $ 142,539       70.9

Business Information

     56,552       29.6     58,582       29.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     191,370       100.0     201,121       100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Professional Services

     126,550       66.1     122,100       60.7

Business Information

     50,768       26.5     54,514       27.1

Unallocated corporate operating expenses

     6,788       3.5     6,312       3.1

Fair value and other adjustments on earnout liabilities

     (12,127     (6.3 )%      219       0.1

Impairment of long-lived assets and goodwill

     151,614       79.2     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     323,593       169.1     183,145       91.1

Equity in earnings of affiliates

     1,420       0.7     1,572       0.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (130,803     (68.4 )%      19,548       9.7

Interest expense, net

     (6,252     (3.3 )%      (4,717     (2.3 )% 

Non-cash interest income related to interest rate swaps

     —          —       286       0.1

Other income, net

     —          —       287       0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (137,055     (71.6 )%      15,404       7.7

Income tax expense (benefit)

     42,686       22.3     (6,226     (3.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (94,369     (49.3 )%      9,178       4.6

Discontinued operations, net of tax benefit

     (13,714     (7.2 )%      562       0.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (108,083     (56.5 )%      9,740       4.8

Less: Net loss (income) attributable to redeemable noncontrolling interests

     9,666       5.1     (604     (0.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to The Dolan Company

   $ (98,417     (51.4 )%    $ 9,136       4.5
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations attributable to The Dolan Company per share:

        

Basic and diluted

   $ (2.80     $ 0.28    

Weighted average shares outstanding:

        

Basic

     30,260         30,126    

Diluted

     30,260         30,219    

 

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Three Months Ended September 30, 2012

Compared to Three Months Ended September 30, 2011

Revenues

 

     Three Months Ended September 30,               
     2012      2011      Change  
     (in millions)  

Total revenues

   $ 68.1      $ 70.2      $ (2.1     (3.0 )% 

Our total revenues declined primarily as a result of a decrease in our mortgage default processing services revenues offset by an increase in litigation support services revenues. The decrease in mortgage default processing services revenues was driven largely by a decrease in the number of new foreclosure files received for processing while the increase in litigation support services was driven by an increase in review work and technology services from both new and existing customers. Our Business Information revenues decreased $0.5 million for the three months ended September 30, 2012. You should refer to the more detailed discussions in “Professional Services Division Results” and “Business Information Division Results” below for more information regarding the causes of these changes.

We derived 73.1% and 73.2% of our total revenues from our Professional Services Division and 26.9% and 26.8% of our total revenues from our Business Information Division for the three months ended September 30, 2012 and 2011, respectively. In our Professional Services Division, revenues from our mortgage default processing services segment accounted for 33.5% and 38.7% of our total revenues for the three months ended September 30, 2012 and 2011, respectively. Revenues from our litigation support services segment (also part of our Professional Services Division) accounted for 39.6% and 34.5% of our total revenues for the three months ended September 30, 2012 and 2011, respectively. We continue to expect litigation support services to be a larger percentage of total revenues as a result of ongoing investments in the DiscoverReady business.

Operating Expenses

 

     Three Months Ended September 30,               
     2012     2011      Change  
     (in millions)  

Total operating expenses

   $ 213.5     $ 62.9      $ 150.6       not meaningful   

Direct operating expenses

     29.9       30.3        (0.4     (1.3 )% 

Selling, general and administrative expenses

     27.2       25.6        1.6       6.2

Amortization expense

     4.6       4.7        (0.1     (2.5 )% 

Depreciation expense

     1.8       2.0        (0.2     (8.6 )% 

Fair value and other adjustments on earnout liabilities

     (1.7     0.2        (1.9     not meaningful   

Impairment of long-lived assets and goodwill

     151.6       —           151.6       not meaningful   

Excluding the impact of fair value and other adjustments on earnout liabilities and impairment expenses recorded, total operating expenses as a percentage of total revenues increased from 89.3% for the three months ended September 30, 2011, to 93.4% for the three months ended September 30, 2012. This was largely due to decreased revenues in our mortgage default processing services business.

Direct Operating Expenses. The change in our direct operating expenses consisted of a $0.1 million decrease in our Professional Services Division and a $0.3 million decrease in our Business Information Division. You should refer to the more detailed discussions in “Professional Services Division Results” and “Business Information Division Results” below for more information regarding the causes of these changes. Direct operating expenses as a percentage of total revenues increased slightly to 44.0% for the third quarter of 2012, from 43.2% for the same period in 2011.

 

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Selling, General and Administrative Expenses. The change in our selling, general and administrative expenses consisted primarily of a $0.5 million increase in our Professional Services Division, offset by a $0.3 million decrease in our Business Information Division. You should refer to the more detailed discussions in “Professional Services Division Results” and “Business Information Division Results” below for more information regarding the causes of changes in our selling, general and administrative expenses. Cost associated with our corporate operations increased $1.4 million, largely as a result of the timing of expenses incurred, including costs associated with the third amendment to the credit agreement and new document management systems. Selling, general and administrative expense as a percentage of revenue increased to 40.0% for the three months ended September 30, 2012, from 36.5% for the same period in 2011.

Amortization and Depreciation Expense. Our total amortization and depreciation expense was relatively flat for the current quarter compared to the same quarter one year ago.

Fair Value and Other Adjustments on Earnout Liabilities. Fair value and other adjustments on earnout liabilities consisted of $(1.5) million for the Professional Services Division and $(0.1) million for the Business Information Division. You should refer to the more detailed discussions in “Professional Services Division Results” and “Business Information Division Results” below for more information regarding these items.

Impairment of Long-Lived Assets and Goodwill. As a result of certain triggering events in the quarter, we tested certain long-lived assets and goodwill in the mortgage default processing services segment for impairment. We recorded impairment charges of $19.9 million and $131.7 million in long-lived assets and goodwill, respectively. You should refer to the more detailed discussion in “Professional Services Division Results” below for more information regarding this.

Interest Expense, Net

 

     Three Months Ended September 30,                
     2012      2011      Change  
     (in millions)  

Total interest expense, net

   $ 2.2      $ 1.7      $ 0.5        25.9

Interest on bank credit facility

     1.8        1.3        0.5        34.7

Cash interest expense on interest rate swaps

     0.3        0.3        —           —  

Amortization of deferred financing fees

     0.1        0.1        —           —  

Interest expense related to our bank credit facility increased primarily as a result of an increase in the average borrowing rate. The average interest rate on our credit facility increased to 3.9% for the three months ended September 30, 2012, from 2.9% one year ago. Our average outstanding debt was $174.2 million for the three months ended September 30, 2012, compared to $175.1 million for the same period one year ago.

Equity in Earnings of Affiliates

 

     Three Months Ended September 30,                
     2012      2011      Change  
     (in millions)  

Equity in earnings of affiliates

   $ 0.4      $ 0.4      $ —           3.4 

Equity in earnings of affiliates is consistent as a result of consistent earnings recorded from our 35% interest in DLNP.

Income Tax (Benefit) Expense

 

     Three Months Ended September 30,              
     2012     2011     Change  
     (in millions)  

Income tax (benefit) expense

   $ (47.0   $ 2.4     $ (49.5     not meaningful   

Effective tax rate

     31.9     41.8    

 

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For the quarter ended September 30, 2012, we recorded an income tax benefit of $47.0 million, or 31.9% of the loss from continuing operations before income taxes. The tax benefit differs from the federal statutory rate of 35% primarily due to non-deductible discrete items, primarily associated with the impairment of long-lived assets and goodwill in the Mortgage Default Processing Services segment. For the quarter ended September 30, 2011, we recorded income tax expense of $2.4 million, or 41.8% of income from continuing operations before taxes. Tax benefit (expense) for the quarters ended September 30, 2012 and 2011, reflects a discrete tax benefit of $48.8 million and $(0.1) million of tax expense, respectively.

The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the respective full fiscal year. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.

Discontinued Operations

 

     Three Months Ended September 30,              
     2012     2011     Change  
     (in millions)  

Discontinued operations, net of tax benefit

   $ (13.2   $ (0.1   $ (13.1     not meaningful   

Discontinued operations includes the results of two business within the Business Information Division which were sold in 2012, along with our NDeX Florida operations within mortgage default processing services.

In the third quarter of 2012, management committed to a plan of action to sell our NDeX Florida operations, a stand-alone business within the mortgage default processing services reporting unit. On October 10, 2012, we entered into a Master Settlement Agreement with James E. Albertelli, P.A., as discussed above in “Recent Developments.”

As a result of the termination of the services agreement, we have classified the net assets and liabilities of these operations as assets held for sale and reported the results of the business in discontinued operations. We recorded a held-for-sale impairment charge of $13.0 million in long-lived assets related to our NDeX Florida operations, of which $0.8 million was property and equipment and $12.2 million was finite-lived intangible assets (specifically, long-term service contracts). In addition, due to uncertainty of collection of amounts due from NDeX Florida’s former law firm customer, we recorded a charge to bad debt expense for $10.0 million. Thus, the total one-time expense related to NDeX Florida in the third quarter of 2012 was $23.0 million (before taxes), which is presented within discontinued operations in our statement of operations. Also included in discontinued operations related to NDeX Florida is the reversal of the earnout liability in the amount of $2.7 million.

During the fourth quarter of 2011, management committed to sell two of our smallest-market stand-alone businesses within the Business Information Division. We completed the sales of these businesses in 2012, and realized a de minimis pretax net loss. We have classified the net assets and liabilities of these operations as assets held for sale and reported the results of the businesses in discontinued operations.

Professional Services Division Results

Revenues

 

     Three Months Ended September 30,               
     2012      2011      Change  
     (in millions)  

Total revenues

   $ 49.8      $ 51.4      $ (1.6     (3.1 )% 

Mortgage default processing services

     22.8        27.1        (4.3     (15.9 )% 

Litigation support services revenues

     27.0        24.2        2.7       11.2 

 

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Mortgage default processing services revenues decreased primarily due to decreased file volumes in many of the markets we serve, which is a continuation of trends we experienced throughout 2011 and the first half of 2012. Our total files received for processing for the three months ended September 30, 2012, were down 27%, from 69,400 mortgage default case files for the three months ended September 30, 2011, to 51,000 mortgage default case files for the three months ended September 30, 2012. In the current quarter, foreclosure files received for processing were down about 32% compared to the third quarter of 2011. We believe these file volume decreases are due to continued marketplace and regulatory dynamics that intensified in late 2010, causing many large loan servicers to slow down and reduce the referral of defaulted files for foreclosure processing. We saw a slowdown of new file referrals by certain servicers prior to the October 1, 2012 deadline for certain National Servicing Standards compliance requirements as they changed their systems and processes to become in compliance with the new requirements.

The Barrett law firm and Trott & Trott each accounted for more than 10%, and together accounted for 80.8% of our mortgage default processing services reporting unit and 37.1% of our Professional Services Division revenues during the three months ended September 30, 2012. In the three months ended September 30, 2011, the Barrett law firm and Trott & Trott each accounted for more than 10%, and together accounted for 80.4% of our mortgage default processing services reporting unit and 42.5% of our Professional Services Division revenues.

The net increase in litigation support services revenues is primarily a result of large projects received from both new and existing customers. DiscoverReady had two customers in excess of 10% of segment revenues for the three months ended September 30, 2012, together accounting for about a quarter of such revenues. In the third quarter of 2011, DiscoverReady had two customers in excess of 10% of segment revenues, together accounting for just over half of such revenues.

Operating Expenses—Mortgage Default Processing Services

 

     Three Months Ended September 30,               
     2012      2011      Change  
     (in millions)  

Total operating expenses

   $ 175.4      $ 25.3      $ 150.1       Not meaningful   

Direct operating expenses

     12.8        13.7        (0.9     (6.7 )% 

Selling, general and administrative expenses

     8.3        8.6        (0.2     (2.4 )% 

Amortization expense

     2.1        2.3        (0.2     (7.9 )% 

Depreciation expense

     0.5        0.7        (0.2     (26.4 )% 

Impairment of long-lived assets and goodwill

     151.6        —           151.6       Not meaningful   

Direct operating expenses decreased as a result of file volume decreases as discussed above and steps taken to reduce our costs at NDeX. Selling, general and administrative expenses decreased as a result of cost control efforts in place in the quarter. For example, total headcount is down at all NDeX operations by 8.3% from the prior year.

Excluding the impact of the impairment expenses recorded, total operating expenses attributable to our mortgage default processing services reporting unit as a percentage of segment revenues increased to 104.3% for the three months ended September 30, 2012, from 93.3% for the three months ended September 30, 2011.

In the third quarter of 2012, due to the restructuring of NDeX’s Florida operations as discussed above, as well as the current depressed operating results of the Mortgage Default Processing Services segment, we performed impairment tests on NDeX’s long-lived assets and goodwill. As a result, we recorded a total of $151.6 million in non-cash impairment charges in the quarter to reduce the carrying value of these assets, of which $0.3 million was property and equipment, $19.6 million was finite-lived intangible assets (specifically long-term service contracts), and $131.7 million was goodwill. These impairment charges are exclusive of the impairment charges recorded in the NDeX Florida operations in discontinued operations (discussed in “Discontinued Operations” above).

 

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Operating Expenses—Litigation Support Services

 

     Three Months Ended September 30,               
     2012     2011      Change  
     (in millions)  

Total operating expenses

   $ 18.8     $ 18.8      $ —          —  

Direct operating expenses

     10.2       9.4        0.8       9.0

Selling, general and administrative expenses

     7.9       7.2        0.7       9.6

Amortization expense

     1.5       1.4        0.1       8.2

Depreciation expense

     0.7       0.6        0.1       10.9

Fair value and other adjustments on earnout liabilities

     (1.5     0.2        (1.7     not meaningful   

The increase in direct expenses is driven by increased operating costs associated with higher revenues. The increase in selling, general, and administrative expenses is due primarily to the increased sales costs to generate new business. The fair value adjustment of $(1.5) million was related to management’s revised estimates of earnouts to be paid related to DiscoverReady’s ACT acquisition.

Excluding the impact of the fair value adjustment on earnout liabilities, total operating expenses attributable to our litigation support services segment as a percentage of segment revenues decreased slightly to 75.4% for the three months ended September 30, 2012, from 76.6% for the same period in 2011.

Business Information Division Results

Revenues

 

     Three Months Ended September 30,               
     2012      2011      Change  
     (in millions)  

Total Business Information Revenues

   $ 18.3      $ 18.8      $ (0.5     (2.8 )% 

Display and classified advertising revenues

     5.2        5.4        (0.2     (4.0 )% 

Public notice revenues

     8.1        7.9        0.3       3.6

Subscription-based and other revenues

     4.9        5.5        (0.6     (10.8 )% 

Subscription-based and other revenues, which include project-based revenues from our public affairs intelligence group, declined in large part due to some one-time revenue generating projects that occurred in 2011.

Operating Expenses

 

     Three Months Ended September 30,               
     2012     2011      Change  
     (in millions)  

Total operating expenses

   $ 16.3     $ 17.1      $ (0.8     (4.8 )% 

Direct operating expenses

     6.9       7.3        (0.3     (4.5 )% 

Selling, general and administrative expenses

     8.1       8.4        (0.3     (3.0 )% 

Amortization expense

     1.0       1.0        —          (4.7 )% 

Depreciation expense

     0.4       0.5        —          (5.7 )% 

Fair value and other adjustments on earnout liabilities

     (0.1     —           (0.2     not meaningful   

 

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Operating expenses decreased primarily as a result of the consolidation of certain business functions among our publishing group units and other cost control efforts put in place to control discretionary spending and employee costs, as well lower direct costs due to lower revenues.

Total operating expenses attributable to our Business Information Division as a percentage of Business Information Division revenue decreased to 90.0% for the three months ended September 30, 2012, from 91.0% for the three months ended September 30, 2011, due to the cost control efforts put in place to reduce our operating expenses in this division.

 

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Table of Contents

Nine Months Ended September 30, 2012

Compared to Nine Months Ended September 30, 2011

Revenues

 

     Nine Months Ended September 30,               
     2012      2011      Change  
     (in millions)  

Total Revenues

   $ 191.4      $ 201.1      $ (9.8     (4.8 )% 

Our total year-to-date revenues declined as a result of a net $7.7 million decrease in our professional services division and a $2.0 million decrease in our business information division. The decrease in professional services revenues was driven primarily by a decrease in the number of new foreclosure files received for processing offset by an increase in our litigation support services primarily as a result of the newly acquired ACT operations, as well as increased business from new and existing customers. You should refer to the more detailed discussions in “Professional Services Division Results” and “Business Information Division Results” below for more information regarding the causes of these changes.

We derived 70.4% and 70.9% of our total revenues from our Professional Services Division and 29.6% and 29.1% of our total revenues from our Business Information Division for the nine months ended September 30, 2012 and 2011, respectively. In our Professional Services Division, revenues from our mortgage default processing services reporting unit accounted for 38.3% and 44.0% of our total revenues for the nine months ended September 30, 2012 and 2011, respectively. Revenues from our litigation support services segment (also part of our Professional Services Division) accounted for 32.2% and 26.9% of our total revenues for the nine months ended September 30, 2012 and 2011, respectively. We continue to expect litigation support services to be a larger percentage of total revenues as a result of ongoing investments in the DiscoverReady business.

Operating Expenses

 

     Nine Months Ended September 30,               
     2012     2011      Change  
     (in millions)  

Total operating expenses

   $ 323.6     $ 183.1      $ 140.4       76.7

Direct operating expenses

     85.3       87.9        (2.5     (2.9 )% 

Selling, general and administrative expenses

     79.0       76.3        2.6       3.5

Amortization expense

     14.2       13.2        1.0       7.5

Depreciation expense

     5.6       5.5        0.1       1.3

Fair value and other adjustments on earnout liabilities

     (12.1     0.2        (12.3     not meaningful   

Impairment of long-lived assets and goodwill

     151.6       —           151.6       not meaningful   

Excluding the impact of fair value and other adjustments on earnout liabilities and impairment expenses recorded, total operating expenses as a percentage of total revenues increased from 91.0% for the nine months ended September 30, 2011, to 96.2% for the nine months ended September 30, 2012.

Direct Operating Expenses. The decrease in direct operating expenses consisted of a $1.1 million decrease in our Professional Services Division and a $1.5 million decrease in our Business Information Division. You should refer to the more detailed discussions in “Professional Services Division Results” and “Business Information Division Results” below for more information regarding the causes of these changes. Direct operating expenses as a percentage of total revenues increased to 44.6% for the first nine months ended of 2012, from 43.7% for the same period in 2011.

Selling, General and Administrative Expenses. The increase in our selling, general and administrative expenses consisted of a $3.9 million increase in our Professional Services Division and a $1.7 million decrease in our Business Information Division. You should refer to the more detailed discussions in “Professional Services Division Results” and “Business Information Division Results” below for more information regarding the causes of changes in our selling, general and administrative expenses. Cost associated with our corporate operations increased $0.5 million, largely as a result of the timing of expenses incurred as discussed above. Selling, general and administrative expense as a percentage of total revenues increased to 41.3% for the first nine months ended of 2012, from 37.9% for the same period in 2011.

 

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Amortization and Depreciation Expense. Our total amortization and depreciation expense increased primarily as a result of the amortization and depreciation of the assets acquired as part of the ACT acquisition.

Fair Value and Other Adjustments on Earnout Liabilities. Fair value and other adjustments on earnout liabilities consisted of $(11.6) million for the Professional Services Division and $(0.6) million for the Business Information Division. You should refer to the more detailed discussions in “Professional Services Division Results” and “Business Information Division Results” below for more information regarding these items.

Impairment of Long-Lived Assets and Goodwill. As a result of certain triggering events in the third quarter of 2012, we tested certain long-lived assets and goodwill in the mortgage default processing services segment for impairment. We recorded impairment charges of $19.9 million and $131.7 million in long-lived assets and goodwill, respectively. You should refer to the more detailed discussion in “Professional Services Division Results” below for more information regarding this.

Interest Expense, Net

 

     Nine Months Ended September 30,               
     2012      2011      Change  
     (in millions)  

Total interest expense, net

   $ 6.3      $ 4.7      $ 1.5       32.5

Interest on bank credit facility

     4.9        3.1        1.8       57.6

Cash interest expense on interest rate swaps

     1.0        1.2        (0.3     (21.2 )% 

Amortization of deferred financing fees

     0.3        0.3        —          17.2

Other

     —           0.1        (0.1     (55.4 )% 

Interest expense related to our bank credit facility increased as a result of the increased borrowings to fund, primarily, the ACT acquisition in July 2011, as well as an increase in our borrowing rate. Our average outstanding debt was $176.1 million for the nine months ended September 30, 2012, compared to $145.6 million for the same period one year ago, and our average interest rate was 3.8% this year versus 2.7% last year.

Equity in Earnings of Affiliates

 

     Nine Months Ended September 30,               
     2012      2011      Change  
     (in millions)  

Equity in Earnings of Affiliates

   $ 1.4      $ 1.6      $ (0.2     (9.7 )% 

Equity in earnings of affiliates decreased primarily as a result of a reduction in earnings recorded from our 35% interest in DLNP.

Income Tax (Benefit) Expense

 

     Nine Months Ended September 30,               
     2012     2011     Change  
     (in millions)  

Income tax (benefit) expense

   $ (42.7   $ 6.2     $ 48.9        not meaningful   

Effective tax rate

     31.1     40.4     

 

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The provision for income taxes for the nine months ended September 30, 2012 reflects a benefit of $42.7 million, or 31.1% of loss from continuing operations before income taxes. Our tax rate for 2012 differs from the federal statutory rate of 35% primarily due to non-deductible discrete items, primarily associated with the impairment of long-lived assets and goodwill in our Mortgage Default Processing Services segment. For the nine months ended September 30, 2011, the company recorded income tax expense of $6.2 million, or 40.4% of income from continuing operations before income taxes. Our tax rate for 2011 differs from the federal statutory rate of 35% due to state income tax expense, the impact of noncontrolling interests and discrete items recorded during the period.

The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the respective full fiscal year. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.

Discontinued Operations

 

     For the Nine Months Ended September 30,               
     2012     2011      Change  
     (in millions)  

Discontinued operations, net of tax benefit

   $ (13.7   $ 0.6      $ (14.3     not meaningful   

Discontinued operations includes the results of two business within the Business Information Division which were sold in 2012, along with our NDeX Florida operations within mortgage default processing services.

As discussed in the three month section above, in the third quarter of 2012, management committed to a plan of action to sell our NDeX Florida operations, a stand-alone business within the mortgage default processing services reporting unit. On October 10, 2012, we entered into a Master Settlement Agreement with James E. Albertelli, P.A., as discussed above in “Recent Developments.”

As a result of the termination of the services agreement, we have reported the results of the business in discontinued operations. We recorded a held-for-sale impairment charge of $13.0 million in long-lived assets related to our NDeX Florida operations. See above for additional detail regarding this impairment charge. In addition, due to uncertainty of collection of amounts due from NDeX Florida’s former law firm customer, we recorded a charge to bad debt expense for $10.0 million. Thus, the total one-time expense related to NDeX Florida in 2012 was $23.0 million (before taxes), which is presented within discontinued operations in our statement of operations. Also included in discontinued operations related to NDeX Florida is the reversal of the earnout liability in the amount of $2.7 million.

During the fourth quarter of 2011, management committed to sell two of our smallest-market stand-alone businesses within the Business Information Division. We completed the sale of these businesses in 2012. We have reported the results of these businesses in discontinued operations.

Professional Services Division Results

Revenues

 

     Nine Months Ended September 30,               
     2012      2011      Change  
     (in millions)  

Total revenues

   $ 134.8      $ 142.5      $ (7.7     (5.4 )% 

Mortgage default processing revenues

     73.3        88.5        (15.2     (17.2 )% 

Litigation support services revenues

     61.6        54.1        7.5       13.9 

 

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Our revenues declined primarily as a result of decreased revenues in our mortgage default processing services reporting unit. Revenues in this segment were down primarily due to decreased file volumes in many of the markets we serve. Our total files received for processing for the nine months ended September 30, 2012, was down 24.2%, from 219,100 mortgage default case files for the nine months ended September 30, 2011, to 168,400 mortgage default case files for the nine months ended September 30, 2012.

The Barrett law firm and Trott & Trott each accounted for more than 10%, and together accounted for approximately 80.6% of our mortgage default processing services reporting unit and 43.8% of our Professional Services Division revenues during the nine months ended September 30, 2012. In the nine months ended September 30, 2011, the Barrett law firm and Trott & Trott each accounted for more than 10%, and together accounted for approximately 80.4% of our mortgage default processing services reporting unit and 49.9% of our Professional Services Division revenues.

The increase in litigation support services revenues is due to large projects received from new and existing customers, as well as the added revenues from DiscoverReady’s ACT operations acquired in July 2011. DiscoverReady had one customer in excess of 10% of segment revenues for the nine months ended September 30, 2012, accounting for about a quarter of such revenues. In the second quarter of 2011, DiscoverReady had two customers in excess of 10% of segment revenues, together accounting for nearly half of such revenues.

Operating Expenses—Mortgage Default Processing Services

 

     Nine Months Ended September 30,               
     2012      2011      Change  
     (in millions)  

Total operating expenses

   $ 223.9      $ 79.8      $ 144.1       not meaningful   

Direct operating expenses

     38.7        43.4        (4.8     (10.9 )% 

Selling, general and administrative expenses

     25.0        26.8        (1.8     (6.8 )% 

Amortization expense

     6.8        7.0        (0.2     (3.1 )% 

Depreciation expense

     1.8        2.5        (0.7     (28.7 )% 

Impairment of long-lived assets and goodwill

     151.6        —           151.6       not meaningful   

Direct operating expenses decreased as a result of decreased file volumes and steps taken to reduce our costs at NDeX. Selling, general and administrative expenses also decreased as a result of cost control efforts put in place.

Excluding the impact of the impairment expenses recorded, total operating expenses attributable to our mortgage default processing services reporting unit as a percentage of segment revenues increased to 98.6% for the nine months ended September 30, 2012, from 90.2% for the nine months ended September 30, 2011. This increase was primarily a result of a reduction in revenue.

As discussed in the three month section above, in the third quarter of 2012, we performed impairment tests on NDeX’s property and equipment, finite-lived intangible assets and goodwill. As a result, we recorded a total of $151.6 million in non-cash impairment charges in the quarter to reduce the carrying value of these assets.

Operating Expenses—Litigation Support Services

 

     Nine Months Ended September 30,               
     2012     2011      Change  
     (in millions)  

Total operating expenses

   $ 42.7     $ 42.6      $ 0.2       0.4 

Direct operating expenses

     25.3       21.6        3.7       17.1 

Selling, general and administrative expenses

     22.5       16.8        5.7       33.7 

Amortization expense

     4.4       2.8        1.7       58.9 

Depreciation expense

     2.1       1.1        0.9       81.8 

Fair value and other adjustments on earnout liabilities

     (11.6     0.2        (11.8     Not meaningful   

 

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Table of Contents

The increases in direct and selling, general, and administrative expenses are due primarily to the increased costs associated with operating DiscoverReady’s ACT business acquired in July 2011, as we have nine months of expense in 2012 for these operations compared to just two months in 2011. The fair value adjustment of $(11.6) million was related to management’s revised estimates of earnouts to be paid related to DiscoverReady’s ACT acquisition.

Excluding the impact of the fair value adjustment on earnout liabilities, total operating expenses attributable to our litigation support services segment as a percentage of segment revenues increased to 88.2% for the nine months ended September 30, 2012, from 78.3% for the same period in 2011. This increase is primarily due to negative operating leverage at DiscoverReady due to investments made by DiscoverReady to grow its business.

Business Information Division Results

Revenues

 

     Nine Months Ended September 30,               
     2012      2011      Change  
     (in millions)  

Total Business Information Division Revenues

   $ 56.6      $ 58.6      $ (2.0     (3.5 )% 

Display and classified advertising revenues

     15.8        16.5        (0.7     (4.2 )% 

Public notice revenues

     25.1        25.0        0.1       0.4 

Subscription-based and other revenues

     15.6        17.1        (1.4     (8.4 )% 

The decline in display and classified advertising revenues is due primarily to a decrease in the number of ads placed in our publications. Subscription-based and other revenues, which include project-based revenue from our public affairs intelligence group, declined in large part due to some one-time revenue generating projects that occurred in the first nine months of 2011.

Operating Expenses

 

     Nine Months Ended September 30,               
     2012     2011      Change  
     (in millions)  

Total operating expenses

   $ 50.2     $ 54.5      $ (4.3     (7.9 )% 

Direct operating expenses

     21.4       22.9        (1.5     (6.5 )% 

Selling, general and administrative expenses

     25.1       26.9        (1.7     (6.5 )% 

Amortization expense

     2.9       3.4        (0.4 )&nbs