UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

Commission File Number: 001-33603

The Dolan Company

(Exact name of registrant as specified in its charter)

Delaware		43-2004527
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		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 þ No o

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 þ No o

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 o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

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

On October 31, 2011, there were 30,577,191 shares of the registrant’s common stock outstanding.

 

 

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2011, (unaudited) and December 31, 2010			1
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011, and 2010			2
Unaudited Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Nine Months Ended September 30, 2011			3
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011, and 2010			4
Notes to Unaudited Condensed Consolidated Interim Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures about Market Risk			40
Item 4. Controls and Procedures			41
PART II — OTHER INFORMATION			41
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 3. Defaults Upon Senior Securities			41
Item 4. Reserved			41
Item 5. Other Information			42
Item 6. Exhibits			42
SIGNATURES			43
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The Dolan Company

Condensed Consolidated Balance Sheets

(in thousands, except share data)

		September 30,				December 31,
		2011				2010
		(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	2,115			$	4,862
Accounts receivable, current, including unbilled services (net of allowances for doubtful accounts of $1,190 and $1,578 as of September 30, 2011, and December 31, 2010, respectively)			80,788				59,801
Unbilled pass-through costs			5,197				7,140
Prepaid expenses and other current assets			4,943				4,186
Income tax receivable			—				4,183
Total current assets			93,043				80,172
Accounts receivable, long-term			2,729				—
Investments			11,881				13,808
Property and equipment, net			19,948				17,333
Finite-life intangible assets, net			220,463				195,959
Indefinite-lived intangible assets			287,696				225,373
Other assets			2,702				3,143
Total assets		$	638,462			$	535,788
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt		$	7,834			$	7,578
Accounts payable			20,027				15,589
Accrued pass-through liabilities			9,557				18,271
Accrued compensation			7,640				5,409
Accrued liabilities			5,780				5,537
Due to sellers of acquired businesses			29,450				3,943
Deferred revenue			20,882				21,689
Total current liabilities			101,170				78,016
Long-term debt, less current portion			179,890				131,568
Deferred income taxes			10,866				7,794
Other liabilities			6,159				5,939
Due to sellers of acquired businesses			32,383				7,033
Total liabilities			330,468				230,350
Redeemable noncontrolling interest			14,232				26,580
Commitments and contingencies (Note 14)
Stockholders’ equity
Common stock, $0.001 par value; authorized: 70,000,000 shares; outstanding: 30,578,999 and 30,511,408 shares as of September 30, 2011, and December 31, 2010, respectively			30				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)			(1,427	)			(1,298	)
Additional paid-in capital			292,045				286,148
Retained earnings (accumulated deficit)			3,114				(6,022	)
Total stockholders’ equity			293,762				278,858
Total liabilities and stockholders’ equity		$	638,462			$	535,788

See Notes to Unaudited Condensed Consolidated Interim Financial Statements

The Dolan Company

Unaudited Condensed Consolidated Statements of Operations

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Revenues
Professional Services		$	55,402			$	56,337			$	155,775			$	168,817
Business Information			19,892				22,122				61,507				65,829
Total revenues			75,294				78,459				217,282				234,646
Operating expenses
Direct operating: Professional Services			25,416				22,790				71,854				68,841
Direct operating: Business Information			7,832				7,229				24,543				21,769
Selling, general and administrative			27,671				26,758				82,273				77,585
Amortization			4,939				3,981				13,822				11,947
Depreciation			2,104				2,413				5,841				7,872
Total operating expenses			67,962				63,171				198,333				188,014
Equity in earnings of affiliates			383				1,142				1,572				3,654
Operating income			7,715				16,430				20,521				50,286
Non-operating income (expense)
Interest expense, net of interest income			(1,744	)			(1,589	)			(4,717	)			(4,939	)
Non-cash interest income related to interest rate swaps			—				228				286				893
Other (expense) income			(107	)			197				287				197
Total non-operating expense			(1,851	)			(1,164	)			(4,144	)			(3,849	)
Income before income taxes			5,864				15,266				16,377				46,437
Income tax expense			(2,558	)			(5,545	)			(6,637	)			(17,208	)
Net income			3,306				9,721				9,740				29,229
Less: Net income attributable to redeemable noncontrolling interests			(217	)			(681	)			(604	)			(2,400	)
Net income attributable to The Dolan Company		$	3,089			$	9,040			$	9,136			$	26,829
Earnings per share — basic and diluted:
Net income attributable to The Dolan Company		$	0.10			$	0.30			$	0.30			$	0.89
Decrease (increase) in redeemable noncontrolling interest in NDeX			0.09				(0.01	)			0.17				0.03
Net income attributable to The Dolan Company common stockholders		$	0.19			$	0.29			$	0.47			$	0.92
Weighted average shares outstanding:
Basic			30,141,832				30,174,798				30,125,979				30,139,681
Diluted			30,208,472				30,316,660				30,218,680				30,296,544

See Notes to Unaudited Condensed Consolidated Interim Financial Statements

The Dolan Company

														Retained
										Additional				Earnings				Other
		Common Stock								Paid-In				(Accumulated				Comprehensive
		Shares				Amount				Capital				Deficit)				Loss				Total
Balance at December 31, 2009			30,326,437			$	30			$	287,210			$	(38,377	)		$	—			$	248,863
Net income attributable to The Dolan Company			—				—				—				32,355				—				32,355
Decrease in redeemable noncontrolling interest in NDeX, net of tax			—				—				217				—				—				217
Net income attributable to The Dolan Company common stockholders			—				—				—				—				—				32,572
Unrealized loss on interest rate swap, net of tax			—				—				—				—				(1,298	)			(1,298	)
Total comprehensive income																							31,274
Issuance of common stock pursuant to the exercise of stock options			13,848				—				26				—				—				26
Share-based compensation expense, including issuance of restricted stock (shares are net of forfeitures)			171,123				—				3,242				—				—				3,242
Increase in redeemable noncontrolling interest in DiscoverReady, net of tax			—				—				(4,560	)			—				—				(4,560	)
Other			—				—				13				—				—				13
Balance at December 31, 2010			30,511,408			$	30			$	286,148			$	(6,022	)		$	(1,298	)		$	278,858
Net income attributable to The Dolan Company			—				—				—				9,136				—				9,136
Decrease in redeemable noncontrolling interest in NDeX , net of tax			—				—				5,206				—				—				5,206
Net income attributable to The Dolan Company common stockholders			—				—				—				—				—				14,342
Unrealized loss on interest rate swap, net of tax			—				—				—				—				(129	)			(129	)
Total comprehensive income																							14,213
Share-based compensation expense, including issuance of restricted stock (shares are net of forfeitures)			205,091				—				3,041				—				—				3,041
Repurchase of common stock			(137,500	)			—				(1,691	)			—				—				(1,691	)
Increase in redeemable noncontrolling interest in DiscoverReady, net of tax			—				—				(659	)			—				—				(659	)
Balance at September 30, 2011			30,578,999			$	30			$	292,045			$	3,114			$	(1,427	)		$	293,762

See Notes to Unaudited Condensed Consolidated Interim Financial Statements

The Dolan Company

		Nine Months Ended
		September 30,
		2011				2010
Cash flows from operating activities
Net income		$	9,740			$	29,229
Distributions received from The Detroit Legal News Publishing, LLC			3,500				4,900
Distributions paid to holders of noncontrolling interests			(566	)			(1,374	)
Gain on sale of investment			(394	)			(197	)
Non-cash operating activities:
Amortization			13,822				11,947
Depreciation			5,841				7,872
Equity in earnings of affiliates			(1,572	)			(3,654	)
Stock-based compensation expense			3,041				2,330
Deferred income taxes			286				(463	)
Change in value of interest rate swap			(286	)			(893	)
Amortization of debt issuance costs			280				244
Non-cash fair value adjustment on earnouts recorded in connection with acquisitions			610				882
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable and unbilled pass-through costs			(9,494	)			(6,958	)
Prepaid expenses and other current assets			3,995				(1,271	)
Other assets			97				360
Accounts payable and accrued liabilities			(4,751	)			(816	)
Deferred revenue and other liabilities			(660	)			1,884
Net cash provided by operating activities			23,489				44,022
Cash flows from investing activities
Acquisitions and investments			(67,065	)			(2,587	)
Capital expenditures			(6,168	)			(6,011	)
Escrow payment received on sale of investment			394				197
Other			77				—
Net cash used in investing activities			(72,762	)			(8,401	)
Cash flows from financing activities
Net borrowings (payments) on senior revolving note			54,000				(8,000	)
Payments on senior long-term debt			(3,750	)			(9,775	)
Payments on unsecured notes payable			(1,802	)			(10,986	)
Payments for repurchase of common stock			(1,691	)			—
Proceeds from stock option exercises			—				20
Other			(231	)			(202	)
Net cash provided by (used in) financing activities			46,526				(28,943	)
Net change in cash and cash equivalents			(2,747	)			6,678
Cash and cash equivalents at beginning of the period			4,862				2,894
Cash and cash equivalents at end of the period		$	2,115			$	9,572

See Notes to Unaudited Condensed Consolidated Interim Financial Statements

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, 2010, 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, 2010, included in the Company’s annual report on Form 10-K filed on March 11, 2011, with the Securities and Exchange Commission (“SEC”).

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.

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

When the Company refers to “Albertelli sellers” in these notes, it means James E. Albertelli, P.A., The Albertelli Firm, P.C., Albertelli Title, Inc. and James E. Albertelli, as a group.

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 is effective for the Company beginning with its March 31, 2012, financial statements. The Company plans to elect presentation of a single continuous statement.

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, 2011, and December 31, 2010, 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 13 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.

The following table computes basic and diluted net 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,
		2011				2010				2011				2010
Net income attributable to The Dolan Company		$	3,089			$	9,040			$	9,136			$	26,829
Decrease (increase) in redeemable noncontrolling interest in NDeX, net of tax			2,683				(251	)			5,206				843
Net income attributable to The Dolan Company common stockholders		$	5,772			$	8,789			$	14,342			$	27,672
Basic:
Weighted average common shares outstanding			30,578				30,504				30,515				30,419
Weighted average common shares of unvested restricted stock			(436	)			(329	)			(389	)			(279	)
Shares used in the computation of basic net income per share			30,142				30,175				30,126				30,140
Net income attributable to The Dolan Company common stockholders per share — basic		$	0.19			$	0.29			$	0.47			$	0.92
Diluted:
Shares used in the computation of basic net income per share			30,142				30,175				30,126				30,140
Stock options and restricted stock			66				142				93				157
Shares used in the computation of dilutive net income per share			30,208				30,317				30,219				30,297
Net income attributable to The Dolan Company common stockholders per share — diluted		$	0.19			$	0.29			$	0.46			$	0.92

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. For the three and nine months ended September 30, 2010, options to purchase approximately 1.9 million and 1.7 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.

2011 Acquitions/Equity Transaction:

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”) 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 by the Company 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 of the Company under the purchase agreement. The Company paid approximately $0.6 million in deal costs associated with this transaction.

In connection with this acquisition, the Company estimated the earnouts payable and recorded the estimated fair value for such earnouts, or $41.9 million in the aggregate, on its balance sheet. The Company has determined that this 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 selling, general and administrative expenses. See Note 5 for information pertaining to changes in the fair value of this liability during the nine months ended September 30, 2011.

ACT specializes in providing technology and process solutions to clients with electronic discovery needs, and also provides hosting and review services. The Company completed this acquisition because it is a strategic fit with DiscoverReady. ACT generated revenues of $19.9 million for the year ended December 31, 2010, and on a trailing 12 month basis for the 12 months ended June 30, 2011, generated $30.5 million in revenues.

Management estimated the fair value of the assets acquired and liabilities assumed and was assisted by a business valuation done by an independent third-party valuation firm. The fair value of acquired intangible assets and consideration transferred is not yet finalized as management is completing the fair value estimation due to the timing of the acquisition. The total provisional fair value of $106.5 million was estimated using a discounted cash flow analysis (income approach). Fair values of acquired assets and liabilities include: $2.3 million to fixed assets; $1.1 million to trade names; $38.3 million to customer lists; and $60.8 million to goodwill. The actual working capital acquired was $9.7 million, and consisted primarily of $12.1 million of accounts receivable and $3.0 million of accounts payable and accrued liabilities. The excess working capital of $5.7 million over the target of $4.0 million is being paid to the sellers in regular installments through November 30, 2011.

The Company paid a premium over the fair value of the net tangible and identified intangible assets acquired in the acquisition (i.e., goodwill) because the Company anticipates revenue synergies and operational efficiencies through combined general and administrative and corporate functions. Such goodwill is deductible for tax purposes, and has been allocated to the Litigation Support Services segment.

Acquisition of Noncontrolling Interest in DiscoverReady: In May 2011, the Company purchased approximately one-third of the outstanding membership units of DiscoverReady held by its minority partner, DR Holdco LLC, for approximately $5.0 million in cash. The Company accounted for this acquisition as an equity transaction by reducing redeemable noncontrolling interest on the Company’s balance sheet by $5.0 million. No deal costs were incurred on this transaction. As a result of this transaction, the Company’s ownership percentage in DiscoverReady increased from 85.3% to 90.0%, and the noncontrolling interest decreased from 14.7% to 10.0%.

In connection with this purchase, the terms of the DiscoverReady limited liability company agreement were amended. Under the terms of the amended 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, DiscoverReady 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.

2010 Acquisition:

Acquisition of DataStream Content Solutions, LLC: On December 1, 2010, the Company acquired DataStream Content Solutions, LLC (“DataStream”). In connection with this acquisition, the Company paid the sellers $15.0 million in cash at closing, held back $1.5 million payable 18 months after closing to secure indemnification claims, and is obligated to pay up to an additional $4.0 million in earnouts in two annual installments. The amount of the two annual earnout payments is based upon the acquired business achieving certain EBITDA targets during the years ended December 31, 2011, and 2012. These assets are part of the Company’s Business Information segment. The Company paid approximately $0.3 million in deal costs associated with this transaction.

Management estimated the fair value of the assets acquired and liabilities assumed and was assisted by a business valuation done by an independent third-party valuation firm. The total fair value of $19.8 million was estimated using a discounted cash flow analysis (income approach) using a discount rate of 16.0% and a compound annual growth rate through 2030 of 6.1%. The Company finalized its estimation of fair value in the first quarter of 2011. The fair value of assets acquired was estimated as follows: $0.2 million to fixed assets; $0.4 million to various working capital items; $5.6 million to various technology, including both existing technology and technology in process, to be amortized over five to 15 years; $8.0 million to customer relationships (preliminary allocation at December 31, 2010, was $9.2 million), to be amortized over 12 years; $0.2 million to a license agreement, to be amortized over six months; $1.7 million to trademarks (preliminary allocation at December 31, 2010, was $1.6 million); and $3.6 million to goodwill (preliminary allocation at December 31, 2010, was $2.6 million). The trademarks were determined to have an indefinite life and therefore will not be amortized, but rather will be reviewed annually for impairment. The December 31, 2010, balance sheet and statement of operations were not retroactively adjusted for this measurement period adjustment as the amount of the change was not significant to the 2010 financial statements.

At the time of the acquisition, the Company determined that the earnouts of $4.0 million, in the aggregate, were likely to be achieved through the end of 2012, and therefore included the present value of these payments in its determination of consideration transferred. The Company has determined that this 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 selling, general and administrative expenses. See Note 5 for information pertaining to changes in the fair value of this liability during the nine months ended September 30, 2011.

The Company paid a premium over the fair value of the net tangible and identified intangible assets acquired in the acquisition (i.e., goodwill) because the Company anticipates revenue synergies and operational efficiencies through combined general and administrative and corporate functions. Such goodwill is deductible for tax purposes, and has been allocated to the Business Information segment.

Pro Forma Information: Actual results of operations reflecting the equity interests and assets acquired in 2011 and 2010 are included in the unaudited condensed consolidated interim financial statements from the dates of the applicable business combination, including revenues from ACT in the amount of $8.7 million for the three and nine months ended September 30, 2011. 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 and its 2010 acquisitions of noncontrolling interest in NDeX, as well as its acquisitions of DataStream and Federal News Service, using the purchase method as if they occurred on January 1, 2010. 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								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Total revenues		$	79,228			$	86,245			$	239,486			$	253,388
Net income attributable to The Dolan Company			2,765				8,922				10,620				26,107
Net income attributable to The Dolan Company per share:
Basic		$	0.09			$	0.30			$	0.35			$	0.87
Diluted		$	0.09			$	0.29			$	0.35			$	0.86
Actual/Pro forma weighted average shares outstanding:
Basic			30,142				30,175				30,126				30,140
Diluted			30,208				30,317				30,219				30,297

Note 4. Derivative Instruments

The Company has entered into an interest rate swap agreement 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. The interest rate swap involves 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 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 Company has designated this swap as a cash flow hedge and has determined that it qualifies 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 this swap, 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.

As of September 30, 2011, and December 31, 2010, the Company had $1.4 million and 1.3 million, respectively, in other comprehensive loss related to unrealized losses (net of tax) on the cash flow hedge for both periods. 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.

This cash flow hedge was highly effective for the nine months ended September 30, 2011, and is expected to remain highly effective in future periods. The occurrence of these related cash flows and hedged transaction remains probable.

The Company had liabilities of $2.3 million and $2.4 million resulting from interest rate swaps at September 30, 2011, and December 31, 2010, respectively, which are included in accrued liabilities or other liabilities on the balance sheet, depending on the time of the expiration of the swap agreement. Total floating-rate borrowings not offset by the swap agreements at September 30, 2011, totaled $134.3 million.

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 acquired from the Albertelli sellers, 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, 2011 (in thousands):

		Level 1				Level 2				Level 3				Total
Interest rate swaps		$	—			$	2,316			$	—			$	2,316
Earnout liability recorded in connection with the NDeX Florida operations acquired from the Albertelli sellers			—				—				5,461				5,461
Earnout liability recorded in connection with the DataStream acquisition			—				—				3,293				3,293
Earnout liability recorded in connection with the ACT acquisition			—				—				42,144				42,144
Redeemable noncontrolling interest in DiscoverReady			—				—				10,257				10,257
Total		$	—			$	2,316			$	61,155			$	63,471

The following table summarizes the balances of liabilities measured at fair value on a recurring basis as of December 31, 2010 (in thousands):

		Level 1				Level 2				Level 3				Total
Interest rate swaps		$	—			$	2,400			$	—			$	2,400
Earnout liability recorded in connection with the NDeX Florida operations acquired from the Albertelli sellers			—				—				5,069				5,069
Earnout liability recorded in connection with the DataStream acquisition			—				—				3,171				3,171
Redeemable noncontrolling interest in DiscoverReady			—				—				13,652				13,652
Total		$	—			$	2,400			$	21,892			$	24,292

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, 2011 (in thousands):

		Earnout liability
		recorded in
		connection with				Earnout liability				Earnout liability
		the NDeX Florida				recorded in				recorded in				Redeemable
		operations				connection with				connection with				noncontrolling
		acquired from the				the DataStream				the ACT				interest in
		Albertelli sellers				acquisition				acquisition				DiscoverReady				Total
Balance at June 30, 2011		$	5,447			$	3,152			$	—			$	9,014			$	17,613
Provisional Acquisition Fair Value			—				—				41,935				—				41,935
Fair Value Adjustment Included in Net Income Attributable to The Dolan Company			14				141				209				—				364
Minority Partners’ Share of Earnings			—				—				—				395				395
Distributions to Minority Partners / Redemptions			—				—				—				(91	)			(91	)
Fair Value Adjustment Included in Additional Paid-in Capital and Deferred Taxes			—				—				—				949				949
Balance at September 30, 2011		$	5,461			$	3,293			$	42,144			$	10,267			$	61,165

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, 2011 (in thousands):

		Earnout liability
		recorded in
		connection with				Earnout liability				Earnout liability
		the NDeX Florida				recorded in				recorded in				Redeemable
		operations				connection with				connection with				noncontrolling
		acquired from the				the DataStream				the ACT				interest in
		Albertelli sellers				acquisition				acquisition				DiscoverReady				Total
Balance at December 31, 2010		$	5,069			$	3,171			$	—			$	13,652			$	21,892
Provisional Acquisition Fair Value			—				—				41,935				—				41,935
Fair Value Adjustment Included in Net Income Attributable to The Dolan Company			392				122				209				—				723
Minority Partners’ Share of Earnings			—				—				—				841				841
Distributions to Minority Partners / Redemptions			—				—				—				(5,299	)			(5,299	)
Fair Value Adjustment Included in Additional Paid-in Capital and Deferred Taxes			—				—				—				1,073				1,073
Balance at September 30, 2011		$	5,461			$	3,293			$	42,144			$	10,267			$	61,165

In May 2011, the Company repurchased approximately one-third of the outstanding membership units in DiscoveryReady from DR Holdco (see Note 3 for more information on this transaction). The Company paid approximately $5.0 million for the membership units in DiscoverReady, which is included in Distributions to Minority Partners/Redemptions in the tables above, along with $0.3 million in distributions to minority partners.

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). No such fair value adjustments were required during the quarter.

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. The Company noted no significant changes in interest rates between December 31, 2010, and September 30, 2011, and as such, the carrying value of variable-rate debt under the Company’s senior credit facility of $184.3 million approximates its estimated fair value.

Note 6. Investments

Investments consisted of the following at September 30, 2011, and December 31, 2010 (in thousands):

		Accounting				Percent				September 30,				December 31,
		Method				Ownership				2011				2010
The Detroit Legal News Publishing, LLC		Equity					35.0	%		$	11,282			$	13,154
Other		Equity					19.5	%			599				654
Total										$	11,881			$	13,808

For the three and nine months ended September 30, 2011, and 2010 , the equity (loss) in earnings of affiliates is as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
The Detroit Legal News Publishing, LLC		$	411			$	1,154			$	1,627			$	3,666
Other			(28	)			(12	)			(55	)			(12	)
Total		$	383			$	1,142			$	1,572			$	3,654

The Detroit Legal News Publishing, LLC: The Company owns a 35% membership interest in The Detroit Legal News Publishing, LLC, or (“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, 2011, and December 31, 2010, and for the three and nine months ended September 30, 2011 and 2010 (in thousands):

		As of September 30,				As of December 31,
		2011				2010
Carrying value of investment		$	11,282			$	13,154
Underlying finite-lived customer list, net of amortization			6,283				7,143

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Equity in earnings of DLNP, net of amortization of customer list		$	411			$	1,154			$	1,627			$	3,666
Distributions received			1,400				1,400				3,500				4,900
Amortization expense			377				377				1,131				1,131

Note 7. Intangible Assets

Indefinite-Lived Intangible Assets: Indefinite-lived intangible assets consist of trade names and goodwill. The Company has determined that these assets have an indefinite life and therefore will not be amortized. The Company reviews indefinite-lived intangible assets annually on November 30 for impairment or whenever an indicator is identified which suggests an impairment may be present.

The following table represents the balances of indefinite-lived intangible assets by segment as of September 30, 2011, and December 31, 2010 (in thousands):

		September 30,				December 31,
Goodwill		2011				2010
Mortgage Default Processing Services		$	131,709			$	131,709
Litigation Support Services			84,929				23,651
Business Information			62,844				61,833
Total goodwill			279,482				217,193
Tradenames
Mortgage Default Processing Services			6,537				6,537
Business Information			1,677				1,643
Total tradenames			8,214				8,180
Total indefinite-lived intangible assets		$	287,696			$	225,373

The change in goodwill in the Litigation Support Services segment resulted from the Company’s acquisition of ACT in the third quarter of 2011, which valuation is preliminary as management’s estimate of fair value is not yet complete. The change in goodwill and tradenames in the Business Information segment resulted from the Company’s finalization in the first quarter of 2011 of its estimate of fair value of the December 2010 Datastream acquisition. The December 31, 2010, balance sheet was not retroactively adjusted as the change was not significant.

Finite-Life Intangible Assets: Total amortization expense for finite-lived intangible assets for the three months ended September 30, 2011, and 2010, was approximately $4.9 million and $4.0 million, respectively, and for the nine months ended September 30, 2011, and 2010, was approximately $13.8 million and $11.9 million, respectively.

Note 8. Long-Term Debt, Capital Lease Obligation

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

		September 30,				December 31,
		2011				2010
Senior secured debt (see below):
Senior variable-rate term note		$	46,250			$	50,000
Senior variable-rate revolving note			138,000				84,000
Total senior secured debt			184,250				134,000
Unsecured notes payable			3,084				4,886
Capital lease obligations			390				260
			187,724				139,146
Less current portion			7,834				7,578
Long-term debt, less current portion		$	179,890			$	131,568

Senior Secured Debt: As of September 30, 2011, the Company and its consolidated subsidiaries have a credit agreement with a syndicate of banks for a $205.0 million senior secured credit facility comprised of a term loan facility in an initial aggregate amount of $50.0 million 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 $155.0 million, which may be increased pursuant to an “accordion” feature to up to $200.0 million, with a final maturity date of December 6, 2015. In the third quarter of 2011, the company borrowed $60.0 million to fund, in part, the acquisition of ACT.

At September 30, 2011, the Company had net unused available capacity of approximately $17.0 million on its revolving credit facility, after taking into account the senior leverage ratio requirements under the credit facility. The Company expects to use the remaining availability under this credit facility, if needed, for working capital, potential acquisitions, stock buy-backs and other general corporate purposes.

Note 9. Common Stock

In December 2010, the Company’s board of directors approved a stock buy-back plan. This plan allows the Company to repurchase up to 2 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. 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 of $1.7 million, all of which were repurchased in the first quarter.

Note 10. Income Taxes

The provision for income taxes for the nine months ended September 30, 2011, and 2010, was $6.6 million and $17.2 million, respectively, or 40.3% and 37.1% of income before income taxes. 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.

Note 11. Major Customers, Related Parties and Concentration of Credit Risk

NDeX has eight law firm customers and, of those customers, Trott & Trott and the Barrett law firms (both related parties) both comprised greater than 10% the Company’s total revenues for the three and nine months ended September 30, 2011, and together comprised approximately 29% and 33%, respectively, of such revenues.

Amounts due from NDeX’s eight law firm customers totaled $43.0 million, or 51.4%, of the Company’s consolidated net accounts receivable balance at September 30, 2011. This includes both billed and unbilled amounts. One of those customers comprised 19.4% of the total consolidated net accounts receivable balance.

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, and provide for the possibility of annual increases in the fixed fee per file that NDeX charges its law firm customers.

Note 12. Reportable Segments

The Company has two operating divisions: Professional Services and Business Information. Its Professional Services Division, which provides professional services supporting primarily attorneys and/or their clients, comprises two reporting segments: Mortgage Default Processing Services and Litigation Support Services. 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 (including newly acquired ACT) and appellate services through Counsel Press, LLC. 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 generates revenues primarily from display and classified advertising (including 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, 2011, and 2010 (in thousands):

		Professional Services
		Mortgage
		Default				Litigation				Business
		Processing				Support				Information				Corporate				Total
Three Months Ended September 30, 2011
Revenues		$	31,158			$	24,244			$	19,892			$	—			$	75,294
Direct operating expenses			16,030				9,386				7,832				—				33,248
Selling, general and administrative expenses			9,795				7,405				8,968				1,503				27,671
Amortization and depreciation			3,339				2,001				1,533				170				7,043
Equity in earnings of affiliates			—				—				383				—				383
Operating income (loss)		$	1,994			$	5,452			$	1,942			$	(1,673	)		$	7,715
Three Months Ended September 30, 2010
Revenues		$	41,201			$	15,136			$	22,122			$	—			$	78,459
Direct operating expenses			17,383				5,407				7,229				—				30,019
Selling, general and administrative expenses			10,117				5,124				8,943				2,574				26,758
Amortization and depreciation			4,139				864				1,222				169				6,394
Equity in earnings of affiliates			—				—				1,142				—				1,142
Operating income (loss)		$	9,562			$	3,741			$	5,870			$	(2,743	)		$	16,430
		Professional Services
		Mortgage
		Default				Litigation				Business
		Processing				Support				Information				Corporate				Total
Nine Months Ended September 30, 2011
Revenues		$	101,702			$	54,073			$	61,507			$	—			$	217,282
Direct operating expenses			50,290				21,564				24,543				—				96,397
Selling, general and administrative expenses			30,719				17,047				28,705				5,802				82,273
Amortization and depreciation			10,283				3,943				4,927				510				19,663
Equity in earnings of affiliates			—				—				1,572				—				1,572
Operating income (loss)		$	10,410			$	11,519			$	4,904			$	(6,312	)		$	20,521
Nine Months Ended September 30, 2010
Revenues		$	123,342			$	45,475			$	65,829			$	—			$	234,646
Direct operating expenses			51,188				17,653				21,769				—				90,610
Selling, general and administrative expenses			29,920				13,543				27,197				6,925				77,585
Amortization and depreciation			13,016				2,549				3,739				515				19,819
Equity in earnings of affiliates			—				—				3,654				—				3,654
Operating income (loss)		$	29,218			$	11,730			$	16,778			$	(7,440	)		$	50,286

Note 13. Share-Based Compensation

Total share-based compensation expense for both the three months ended September 30, 2011, and 2010, was approximately $1.0 million before income taxes. Total share-based compensation expense for the nine months ended September 30, 2011, and 2010, was approximately $3.0 million and $2.3 million, respectively, before income taxes.

The Company has reserved 4.8 million shares of its common stock for issuance under its incentive compensation plan of which there were 1.7 million shares available for issuance as of September 30, 2011.

Stock Options: Share-based compensation expense related to stock options for both the three months ended September 30, 2011, and 2010, was approximately $0.6 million and for the nine months ended September 30, 2011, and 2010, was approximately $1.7 million and $1.5 million, respectively.

The following assumptions were used to estimate the fair value of stock options granted in 2011:

Dividend yield			0.0	%
Expected volatility			47-50	%
Risk free interest rate			1.25 - 2.1	%
Expected term of options			4.25 - 5.5 years
Grant date fair value		$	3.73 - 5.15

The following table represents stock option activity for the nine months ended September 30, 2011:

														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, 2010			1,945,770			$	4.83			$	13.50				4.82
Granted			457,987				4.60				10.46				—
Canceled or forfeited			(57,706	)			4.98				13.36				—
Outstanding options at September 30, 2011			2,346,051			$	4.78			$	12.91				4.56
Options exercisable at September 30, 2011			1,319,550			$	4.69			$	13.72				3.60

At September 30, 2011, the aggregate intrinsic value of both options outstanding and options exercisable was approximately $0.6 million. At September 30, 2011, there was approximately $3.9 million of unrecognized compensation cost related to outstanding options, which is expected to be recognized over a weighted-average period of 2.8 years.

Restricted Stock Grants: Share-based compensation expense related to grants of restricted stock for both the three months ended September 30, 2011, and 2010, was approximately $0.4 million, and for the nine months ended September 30, 2011, and 2010, was approximately $1.3 million and $0.8 million, respectively.

The following table represents a summary of nonvested restricted stock activity for the nine months ended September 30, 2011:

						Weighted Average
		Number of Shares				Grant Date Fair Value
Nonvested, December 31, 2010			324,906			$	12.62
Granted			214,849				10.46
Vested			(121,235	)			12.83
Canceled or forfeited			(9,758	)		$	12.84
Nonvested, September 30, 2011			408,762			$	11.42

Total unrecognized compensation expense for unvested restricted shares of common stock as of September 30, 2011, was approximately $3.7 million, which is expected to be recognized over a weighted-average period of 3.0 years.

Note 14. 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.

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 (collectively referred to as the “existing NDeX business”), as well as the Florida mortgage default and related title operations acquired from the Albertelli sellers in October 2009. 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. When we refer to the “Albertelli sellers” in this report, it means James E. Albertelli, P.A., The Albertelli Firm, P.C., Albertelli Title, Inc. and James E. Albertelli, as a group. We also refer to James E. Albertelli, P.A. and The Albertelli Firm, P.C., together, as the “Albertelli law firm.” The term “Trott sellers” in this report means David A. Trott, Ellen Coon, Trustee of the Ellen Coon Living Trust u/a/d 9/9/98, Marcy J. Ford, Trustee of the Marcy Ford Revocable Trust u/a/d 7/12/04, William D. Meagher, Trustee of the William D. Meagher Trust u/a/d 8/24/07, and Jeanne M. Kivi, Trustee of the Jeanne M. Kivi Trust u/a/d 8/24/07, as a group.

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 or moratoria by servicers or lenders, as well as governmental investigations, enforcement actions, litigation and court orders, may have an adverse impact on our mortgage default processing services and public notice operations;

•

growing 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;

•

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;

	•		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, 2010, filed on March 11, 2011, with the 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 eight law firm customers located in Florida, Georgia, 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 21 geographic markets across the United States. Our information is delivered through a variety of methods, including more than 60 print publications and more than 80 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 $3.2 million, or 4.0%, from $78.5 million for the three months ended September 30, 2010, to $75.3 million for the three months ended September 30, 2011, primarily as a result of a $10.0 million decrease in our mortgage default processing services revenues and a $2.2 million decrease in our Business Information Division revenues, largely offset by a $9.1 million increase in our litigation support services revenues as a result of the ACT Litigation Services, Inc. (“ACT”) acquisition. The decrease in mortgage default processing services revenues was driven primarily by a decrease in the number of foreclosure files received for processing and change in the mix of types of files, as discussed below. Net income attributable to The Dolan Company decreased to $3.1 million for the third quarter of 2011, from $9.0 million for the same period in 2010.

Recent Developments

Acquisition of ACT Litigation Services, Inc.

On July 25, 2011, we, through DiscoverReady, completed the acquisition of substantially all of the assets of ACT Litigation Services, Inc. (“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. Management has estimated the fair value of the earnouts to be paid, in the aggregate, to be $41.9 million at acquisition date.

We used funds available under our revolving line of credit to fund the closing payments in connection with this acquisition. The acquired operations of ACT are part of our Litigation Support Services segment within our Professional Services Division.

ACT specializes in providing technology and process solutions to clients with electronic discovery needs. It also provides hosting and review services.

Increase in Our Ownership in DiscoverReady

In May 2011, we purchased approximately one-third of the outstanding membership units in DiscoverReady held by DR Holdco for approximately $5.0 million in cash. As a result, our ownership percentage in DiscoverReady increased from 85.3% to 90.0%, and the noncontrolling interest decreased from 14.7% to 10.0%.

Stock Buy-Back Plan

Our board of directors approved a stock buy-back plan effective as of the closing of our new credit agreement on December 6, 2010. This plan allows us to repurchase up to 2 million shares of issued and outstanding common stock at prevailing market prices or negotiated prices through December 31, 2013. The number of shares and the timing of the purchases will be determined at the discretion of management. During the first nine months of 2011, we repurchased 137,500 shares under this plan for an aggregate of $1.7 million, all of which were purchased in the first quarter.

Regulatory Environment

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. In June, the OCC issued guidance clarifying that, in addition to these 14 major mortgage servicers, all mortgage servicers under OCC supervision must assure compliance with all appropriate foreclosure management standards. The OCC’s deadlines for the 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 have now passed, as has the September 30 deadline for all national banks to conduct a self-assessment of foreclosure management practices and to correct any weaknesses identified. The OCC continues to review the plans and information the banks submitted. The OCC has indicated that it may require changes to the plans provided and that it is working with the United States Department of Justice and other federal and state authorities to finalize and synchronize the plans into a consistent set of servicing requirements.

At the state level, the attorneys general of all 50 states have continued to investigate the mortgage servicing industry and to negotiate with mortgage servicers in hopes of achieving changes in the foreclosure process as well as possible payment of financial penalties and an increased level of mortgage loan modifications. While these officials in most states lack direct regulatory authority over mortgage servicers, the attorneys general have indicated a willingness to act in the courts if necessary to enforce their positions. Their discussions with the mortgage servicers have not resulted in agreements although a majority of the attorneys general continue active negotiations with the servicers in hopes of reaching a settlement.

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. Given the OCC deadlines for reports and compliance, the attorneys general efforts, and the generally heightened scrutiny that residential mortgage foreclosure servicers have been experiencing for the past year, servicers have continued to react to this heightened scrutiny by reviewing and verifying their policies and procedures, applying more scrutiny to pending foreclosures, and then releasing into foreclosure only those cases that have been carefully reviewed. Many servicers have 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 sharply reduce the number of mortgage defaults being referred to begin foreclosure. The OCC, along with the attorneys general, has not reached an agreement with the servicers on how the consent orders will be handled going forward. Until there is an agreement, servicers are reluctant to process foreclosures. Until any new 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 the new procedures are in place, but that a large number of defaulted loans in pre-foreclosure status and pending foreclosures remain to be undertaken and completed.

In July 2011, the Consumer Financial Protection Bureau (“CFPB”) outlined its approach to supervising large depository institutions to ensure compliance with federal consumer protection laws. This supervisory process, which applies to the 111 depository institutions with total assets of more than $10 billion, began on July 21. More recently, the Consumer Financial Protection Bureau issued the Supervision and Examination guidance for all lenders. This guidance covers lending and servicing principals and how the CFPB will examine the lenders and servicers processes going forward. We do not see a direct impact of this process upon our operations except that it further complicates operations of the mortgage servicers, making them more concerned about compliance issues and potentially extending their current slowdown in foreclosure referrals.

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, 2010, filed with the SEC on March 11, 2011, 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 discussed in “Recent Developments” above and the following two acquisitions that occurred in 2010:

DataStream Content Solutions, LLC: On December 1, 2010, we acquired DataStream Content Solutions, LLC (“DataStream”). In connection with this acquisition, we paid the sellers $15.0 million in cash at closing, held back $1.5 million payable 18 months after closing to secure indemnification claims, and are obligated to pay up to an additional $4.0 million in earnouts in two annual installments. The amount of the two annual earnout payments is based upon the acquired business achieving certain EBITDA targets during the calendar years ending December 31, 2011, and 2012.

Federal News Service, Inc.: On August 9, 2010, we acquired certain assets of Federal News Service, Inc. (“Federal News”) for approximately $1.7 million in cash.

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, 2011, our total revenues were $75.3 million and $217.3 million, respectively, and the percentage of our total revenues attributed to each of our divisions and segments was as follows:

	•		74% and 72%, respectively, from our Professional Services Division (42% and 47%, respectively, from mortgage default processing services and 32% and 25%, respectively, from litigation support services); and
	•		26% and 28%, 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 eight 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 and Albertelli 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, chairman and chief executive officer of NDeX, are executive management employees of NDeX.

For the three and nine months ended September 30, 2011, we received for processing approximately 77,200 and 250,300 mortgage default case files, respectively. The mix of types of files received for processing changed as more fully described below in Professional Services Division Results, resulting in a shift from higher revenue files to lower revenue files. Our mortgage default processing service revenues accounted for 42% and 47%, respectively, of our total revenues and 56% and 65%, respectively, of our Professional Services Division revenues during the three and nine months ended September 30, 2011. For the nine months ended September 30, 2011, each of the Barrett Law Firm, Trott & Trott and Albertelli law firm 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 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, 2010, filed with the SEC on March 11, 2011.

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 could 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, 2010, filed with the SEC on March 11, 2011, for more information about the conditions under which the fixed fee per file we charge our law firm customers may change.

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, 2011, we had such deferred revenue on our balance sheet in the amount of $13.8 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, 2011, our litigation support services revenues accounted for 32% and 25%, respectively, of our total revenues and 44% and 35%, respectively, of our Professional Services Division revenues. 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.

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.