UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

 

 

Commission File Number: 001-33603

Dolan Media Company

(Exact name of registrant as specified in its charter)

 

 

 

 

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant in a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

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

 

As of June 30, 2008, the registrant’s non-affiliates owned shares of its common stock having an aggregate market value of $408,895,960.20 (based upon the closing sales price of the registrant’s common stock on that date on the New York Stock Exchange).

 

On March 9, 2009, there were 29,951,363 shares of the registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain sections of our definitive proxy statement for our 2009 Annual Meeting of Stockholders, which we expect to file with the Securities Exchange Commission on or around April 3, 2009, but will file no later than 120 days after December 31, 2008, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report on Form 10-K includes forward-looking statements that reflect our current expectations and projections about our future results, performance, prospects and opportunities. For example, under “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Application of Critical Accounting Policies — Goodwill, Intangible Assets and other Long-Lived Assets,” we have disclosed assumptions and expectations regarding our future performance that we have used in connection with evaluating whether our goodwill is impaired. We have tried to identify forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate” and similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of risks, uncertainties and other factors, including those described in “Item 1A — Risk Factors” in this annual report on Form 10-K, that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these 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 annual report on Form 10-K.

 

In this annual report on Form 10-K, unless the context requires otherwise, the terms “we,” “us,” and “our” refer to Dolan Media Company and its consolidated subsidiaries and the term “APC” refers to American Processing Company, LLC and its subsidiaries, National Default Exchange Management, Inc., National Default Exchange Holdings, LP, THP/NDEx AIV, Corp. and THP/NDEx AIV, LP (all of which we collectively refer to as “NDEx”). The term “Barrett law firm” refers to Barrett, Daffin, Frappier, Turner & Engel, LLP and its affiliates.

 

 

Overview

 

We are a leading provider of necessary business information and professional services to the legal, financial and real estate sectors in the United States. We provide companies and professionals in the markets we serve with access to timely, relevant and dependable information and services that enable them to operate effectively in highly competitive and time sensitive business environments. We serve our customers through two complementary operating divisions: Business Information and Professional Services.

 

Our Business Information Division is the second largest business journal publisher and second largest court and commercial publisher, based on revenues, in the United States. Based on volume of published public notices, we are also one of the largest carriers of public notices in the United States. We use our business publishing units as platforms to provide a broadening array of local business information products to our customers in each of the 21 markets that we serve in the United States, which are the geographic areas surrounding the cities presented in the map below.

 

 

Our Business Information portfolio consists of publications, web sites and a broad range of events that put us at the center of local and regional communities that rely upon our proprietary content. We currently publish 58 print publications consisting of 13 paid daily publications, 31 paid non-daily publications and 14 non-paid non-daily publications. Our paid publications and non-paid and controlled publications had approximately 66,800 and 131,700 subscribers, respectively, as of December 31, 2008. In addition, we provide business information electronically through our 43 online publication web sites, our 24 event and other non-publication web sites, and our email notification systems. Our 43 online publication web sites had approximately 3,841,700 unique visits in 2008 and our 24 event and other non-publication web sites had approximately 480,200 unique visits in 2008. The events we produce, including professional education seminars and awards programs, attracted approximately 42,300 attendees and 500 paying sponsors in 2008.

Our Professional Services Division consists of two operating units: American Processing Company LLC, or APC, and Counsel Press, LLC, or Counsel Press.

 

APC is one of the leading providers of mortgage default processing services in the United States. It provides these services to six law firms and also directly to mortgage lenders and loan servicers in California. APC operates primarily in the following states: California, Georgia, Indiana, Michigan, Minnesota, and Texas — all of which are in the top 15 states in terms of residential mortgage foreclosure starts for the year ended December 31, 2008 based on information from the Mortgage Bankers Association, or MBA. The MBA is a national association representing the real estate finance industry. Generally, APC assists its law firm and other customers in processing foreclosure, bankruptcy, eviction and, to a lesser extent, litigation and other mortgage default related case files, in connection with residential mortgage defaults. APC also provides real estate title services to the Barrett law firm in Texas and provides loan modification and loss mitigation support on mortgage default files to its customers. In 2008, we serviced approximately 204,100 mortgage default case files for our customers, including approximately 70,800 files serviced by businesses we acquired in 2008. We began servicing the Minnesota law firm of Wilford & Geske in February 2008 when we acquired its mortgage default processing services business. We began servicing the Barrett law firm, along with mortgage lenders and loan servicers in California, when we acquired NDEx in September 2008.

 

Counsel Press is the largest appellate service provider nationwide, providing appellate services to attorneys in connection with approximately 8,700 appellate filings in federal and state courts in 2008. Counsel Press assists law firms and attorneys in organizing, preparing and filing appellate briefs, records and appendices, in paper and electronic format, that comply with the applicable rules of the U.S. Supreme Court, any of the 13 federal courts of appeals or any state appellate court or appellate division. In 2008, the customers of Counsel Press included 85 of the 100 largest U.S. law firms listed in the most recent The American Lawyer Am Law 100 survey, including each of the 15 largest law firms and 46 of the 50 largest law firms.

 

We benefit from our comprehensive knowledge of, and high profile within, our target markets. Our breadth of business publications, web sites and events, together with our professional services, facilitates regular interaction among our customers, driving opportunities to grow revenues and improve operating margins. For example, because we handle all public notice filings for our law firm customer in Michigan, we have the unique opportunity to direct a meaningful share of public notice advertising expenditures to Detroit Legal News Publishing, LLC, or DLNP, Michigan’s largest court and commercial newspaper publisher, in which we own a 35.0% interest. Further, we regularly share proprietary content among our publications and web sites and then tailor the content to each of the markets we serve. By leveraging our content throughout our businesses, we are able to reduce editorial expenses, which helps us maintain or improve our operating margins.

 

Our business model has multiple diversified revenue streams that allow us to generate revenues and cash flow throughout all phases of the economic cycle. This diversification allows us to maintain the flexibility to capitalize on growth opportunities. In addition, our balanced business model, together with our diverse geographic mix, produces stability by mitigating the effects of economic fluctuations. The following pie chart describes the anticipated impact of economic downturns and expansions on revenues generated by our products and services, as well as the percentage of our total revenues generated by these products and services for the year ended December 31, 2008.

 

 

Revenues and cash flows from display and classified advertising and circulation tend to be cyclical in that they generally increase during economic expansions and decrease during economic downturns. A worsening economy tends to reduce, and an improving economy tends to increase, discretionary spending on items such as advertising and subscriptions to publications. In contrast, revenues and cash flows from public notices and mortgage default processing services tend to be counter-cyclical in that they generally increase during economic downturns and decrease during economic expansions. Absent governmental intervention, a worsening economy tends to lead to a higher rate of residential mortgage foreclosures and a greater number of foreclosure-related public notices being published, while an improving economy tends to have the opposite impact. Further, we consider revenues and cash flows from our appellate services to be non-cyclical in that the number of court appeals filed generally does not fluctuate significantly over the economic cycle.

 

Our History

 

Our predecessor company, also named Dolan Media Company, was formed in 1992 by James P. Dolan, our Chairman, Chief Executive Officer and President, and Cherry Tree Ventures IV, L.P. Scott J. Pollei, our Executive Vice President and Chief Financial Officer, and Mark W.C. Stodder, our Executive Vice President-Business Information, joined the company in 1994. Our current company was incorporated in Delaware in March 2003 under the name DMC II Company in connection with a restructuring whereby our predecessor company spun off its business information and other businesses to us and sold its national public records unit to a wholly-owned subsidiary of Reed Elsevier Inc. After the spin-off and sale in July 2003, we resumed operations under the name Dolan Media Company. We are a holding company that conducts all of our operating activities through various subsidiaries.

 

We have a successful history of growth through acquisitions. Since 1992, our Business Information Division has completed 39 acquisitions. We have a well-established track record of successful integration and improvements in revenues and cash flows of our acquired businesses due to our disciplined management approach that emphasizes consistent operating policies and standards, a commitment to high quality, relevant local content and centralized back office operations. In January 2005, we formed our Professional Services Division by acquiring Counsel Press, a leading provider of appellate services to the legal profession, and expanded to the Chicago market in June 2008 with the acquisition of the assets of Midwest Law Printing, Inc. In March 2006, we added a new operating unit to our Professional Services Division by acquiring an 81.0% interest in APC, which provides mortgage default processing services. Since March 2006, we have completed three additional acquisitions of mortgage default processing services businesses, including our acquisition of NDEx in September 2008. We currently own 84.7% of APC.

 

We expect that our acquisitions will continue to be a component of the growth in both of our operating divisions. We also expect to continue to identify opportunities to expand the businesses in our Professional Services Division by starting operations in markets where we have not previously provided these services.

Our Strengths

 

We intend to build on our position as a leading provider of essential business information and professional services to companies and professionals in the legal, financial and real estate sectors. We believe the following strengths will allow us to maintain a competitive advantage in the markets we serve:

 

Proprietary, Necessary and Customizable Information and Services.  We provide necessary business information and professional services on a timely basis to our customers in a format tailored to meet the needs and demands of their businesses. Our customers rely on our proprietary offerings to inform their operating strategies and decision making, develop business and practice opportunities and support key processes. We believe the high renewal rates for our business information products, which in the aggregate were 76% in 2008, and the high retention rate of the clients of our mortgage default processing service customers (according to the estimates of our law firm customers, 95% of the clients of our law firm customers in 2007 also used our law firm customers’ services in 2008) are indicative of the significant degree to which our customers and their clients rely on our businesses.

 

Dominant Market Positions.  We believe we are the largest provider of business information targeted to the legal, financial and real estate sectors in each of our 21 markets. We are also one of the leading providers of mortgage default processing services in the United States and the largest national provider of appellate services. The value and relevance of our business information products and professional services have created sustained customer loyalty and recognized brands in our markets. As a result, we have become a trusted partner with our customers. Examples of our dominant market positions include:

 

 

Superior Value Proposition for Our Customers.  Our business information customers derive superior value from our dedicated efforts to provide timely, relevant, proprietary and customized content created by employees who have experience and expertise in the industries we serve. For example, many of our local legal news reporters have a law degree and/or legal background enabling them to create more valuable content for our publications and related web sites. This approach has enabled us to achieve high renewal rates for our business information products, which we believe is greatly valued by local advertisers. In addition, the clients of APC’s six law firm customers, and the mortgage lenders and loan servicers we serve directly in California, realize significant value from APC’s ability to assist them in efficiently processing large amounts of data associated with each foreclosure, bankruptcy or eviction case file. Our services enable these law firms and our other customers to quickly address mortgage loans that are in default. This allows their clients, and our customers in California, to mitigate their losses. The flexibility, efficiency and customizable nature of our support systems enable high levels of customer service, which we believe creates a significant marketplace advantage for us. Further, our appellate service customers benefit greatly from

Counsel Press’ comprehensive knowledge of the procedurally intensive requirements of, and close relationships forged with, the appellate courts.

 

Diversified Business Model.  Our balanced business model provides diversification by industry sector, product and service offering, customer base and geographic market. This diversification provides us with the opportunity to drive revenue growth and increase operating margins over time. In addition, this diversification creates stability for our business model because we have businesses that benefit during different phases of the economic cycle and from economic conditions in the diverse geographic markets where we serve, which, together, provide us with the opportunity and flexibility to capitalize on growth opportunities. As of December 31, 2008, we provided our print publications and online publication web sites to nearly 67,000 subscribers in the legal, financial and real estate sectors in 21 U.S. markets. In 2008, we processed approximately 8,700 appellate filings for attorneys from more than 2,000 law firms, corporations, non-profit agencies and government agencies nationwide. In 2008, we serviced approximately 204,100 mortgage default files relating to over 300 mortgage loan lenders and servicers that are clients of our law firm customers or our customers in California, which market we entered in September 2008 with the acquisition of NDEx.

 

Successful Track Record of Acquiring and Integrating New Businesses.  We have demonstrated a strategic and disciplined approach to acquiring and integrating businesses. Since our predecessor’s inception in 1992, we have completed 39 acquisitions in our Business Information Division and eight acquisitions in our Professional Services Division. We have established a proven track record of improving the revenue growth, operating margins and cash flow of our acquired businesses by:

 

 

Experienced Leadership.  Our executive officers and the senior leadership at our operating units and corporate headquarters have significant applicable industry experience, and each of our top three executives has been with us for more than a decade. We benefit from our managers’ comprehensive understanding of our products and services, success in identifying and integrating acquisitions, extensive knowledge of our target communities and markets and strong relationships with current and potential business partners and customers.

 

Our Strategy

 

We intend to further enhance our leading market positions by executing the following strategies:

 

Leverage Our Portfolio of Complementary Businesses.  We have built a portfolio of complementary businesses through which we realize significant synergistic benefits. Our focus on business information and professional services for companies and other professionals in the legal, financial and real estate sectors has allowed us to develop expertise in these industries. This expertise has enabled us to establish a positive reputation and strong customer relationships in the markets we serve. We believe our prominent brand recognition among our customers will allow us to continue to expand, enhance and cross-sell the products and services we offer. In addition, as a leading provider of mortgage default processing services, we are able to control a meaningful share of public notice expenditures in the markets that APC serves. This presents an opportunity to capture public notice revenue by establishing or acquiring publications that carry public notices in those markets. We also continuously seek new opportunities to leverage our complementary businesses to increase our revenues and cash flows and maximize the impact of our cost saving measures.

 

Enhance Organic Growth.  We seek to leverage our market-leading positions by continuing to develop proprietary content and valuable services that can be delivered to our customers through a variety of media distribution channels, thereby strengthening and extending our customer relationships and providing additional

revenue generating opportunities. We also expect to demonstrate our commitment to, and extend our reach into, the markets we serve by developing and promoting professional education seminars, awards programs and other local events that are tailored to these markets. In addition, we intend to take advantage of new business opportunities and to expand the markets we serve by regularly identifying and evaluating additional demand for our products and services outside of our existing geographic market reach. Examples of this strategy include:

 

 

Continue to Pursue a Disciplined Acquisition Strategy in Existing and New Markets.  We will continue to identify and evaluate potential acquisitions that will allow us to expand our business information product and professional service offerings and customer base and enter new professional and geographic markets. We intend to pursue acquisitions that we can efficiently integrate into our organization and that we expect to be accretive to cash flow. We expect to expand our mortgage default processing services business by partnering with market-leading law firms in additional states that experience significant foreclosures as well as opening new offices in states where we have not previously conducted business. In addition, given the fragmented nature of the local business information market, we intend to continue to opportunistically pursue publications that enhance our strategic position in the markets we serve or that add attractive markets to our portfolio.

 

Realize Benefits of Centralization and Scale to Increase Cash Flows and Operating Profit Margins.  Because we typically acquire stand-alone businesses that lack the benefits of scale, we continue to realize efficiencies from centralizing our accounting, circulation, advertising production and appellate and default processing systems and will seek to obtain additional operational efficiencies through further consolidation of other management, information systems and back office operations. We expect to continue our initiative to centralize our operations and streamline costs. While the centralization of these systems has resulted in cost savings, we have also been able to adapt these systems to address the specific needs of our local operations. As a result, each of our businesses has real-time access to important local sales, marketing and operating statistical information that we believe will continue to foster improved decision-making by our local management teams. Additionally, a key aspect of our platform is providing relevant and timely local content to the professional communities we serve. To enhance a portion of such local content, we provide editorial and other proprietary content generated across our operations. By sharing content across the platform in a centralized way, we can leverage our resources while simultaneously continuing to provide customized local content. Finally, we expect our centralization initiative and other investments in infrastructure will allow us to accelerate the realization of cost synergies in connection with future acquisitions. We believe these efforts will also enable us to increase our operating profit margins and cash flows in the future.

Our Industries

 

Business Information

 

We provide business information products to companies and professionals in the legal, financial and real estate sectors primarily through print and online business journals and court and commercial newspapers, as well as other electronic media offerings. Our business journals generally rely on display and classified advertising as a significant source of revenue and provide content that is relevant to the business communities they target. Our court and commercial newspapers generally rely on public notices as their primary source of revenue and offer extensive and more focused information to the legal communities they target. All of our business journals and court and commercial newspapers also generate circulation revenue to supplement their advertising and public notice revenue base. We believe, based on data we have collected over several years, that there are more than 250 local business journals and more than 350 court and commercial newspapers nationwide, which generated approximately $1.8 billion in revenues in 2008.

 

Mainstream media outlets, such as television, radio, metropolitan and national newspapers and the Internet, generally provide broad-based information to a geographically dispersed or demographically diverse audience. By contrast, we provide proprietary content that is tailored to the legal, financial and real estate sectors of each local and regional market we serve and that is not readily obtainable elsewhere. Our business information products are often the only source of local information for our targeted business communities and compete only to a limited extent for advertising customers with other media outlets, such as television, radio, metropolitan and national newspapers, the Internet, outdoor advertising, directories and direct mail. As a result of the competitive dynamics of the market and the value created for advertisers by targeted content and community relationships, we believe that the readers of our publications are a highly desirable demographic for advertisers.

 

We are qualified to carry public notices in 14 of the 21 markets we serve. A public notice is a legally required announcement informing citizens about government or government-related activities that may affect citizens’ everyday lives. Most of these activities involve the application of governmental authority to a private event, such as a mortgage foreclosure, probate filing, listings for fictitious business names, limited liability companies and other entity notices, unclaimed property notices, notices of governmental hearings and trustee sale notices. A public notice typically possesses four primary characteristics: (1) it is published in a forum independent of the government, such as a local newspaper; (2) it is capable of being archived in a secure and publicly available format; (3) it is capable of being accessed by all segments of society; and (4) the public, as well as all interested parties, must be able to verify that the notice was published and its information disseminated to the public in the legally prescribed formats. Every jurisdiction in the United States has laws that regulate the manner in which public notices are published. Statutes specify wording, frequency of publication and other unusual characteristics that may vary according to jurisdiction and make the publication of public notices more complex than traditional advertising. These laws are designed to ensure that the public receives important information about the actions of its government from a newspaper that is accessible and already a trusted source of community information. Currently, local newspapers are the medium that is used to satisfy laws regulating the process of notifying the public. The requirements for publishing public notices serve as barriers to entry to new and existing publications that desire to carry public notices. Based on our internal estimates, we believe that the total spending on public notices in business publications in the United States was in excess of $850 million in 2008.

 

Professional Services

 

Our Professional Services Division consists of two operating units: APC, our mortgage default processing services business, and Counsel Press, our appellate service business. We provide these support services to the legal profession. In addition, APC also provides its services directly to mortgage lenders and loan servicers in California where foreclosures and certain other mortgage default processes can be undertaken by non-attorneys. We believe that attorneys and law firms are increasingly looking for opportunities to outsource non-legal functions so that they can focus their efforts on the practice of law. We believe that law firms are under intense pressure to increase efficiency and restrain costs while fulfilling the growing demands of clients. We further believe that outsourcing has become an increasingly attractive choice for law firms as they identify functions outside of their core competency of practicing law that can be performed by non-attorneys and, in turn, help manage their costs.

Mortgage Default Processing Services

 

The outsourced mortgage default processing services market is highly fragmented, and we estimate that it primarily consists of back-office operations of approximately 350 local and regional law firms throughout the United States. We believe that increasing case volumes and rising client expectations provide an opportunity for mortgage default processors that provide efficient and effective services on a timely basis.

 

We believe that residential mortgage delinquencies and defaults are increasing primarily as a result of the past increased issuance of subprime loans, the popularity of non-traditional loan structures and the increasing unemployment rate. Further compounding these trends is the slowing of demand in the residential real estate market in many regions of the United States, which makes it more difficult for borrowers in distress to sell their homes. The increased volume of delinquencies and defaults has created additional demand for mortgage default processing services and has served as a growth catalyst for the mortgage default processing market. See, however, “Item 1A — Risk Factors” and “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Environment” for a discussion of increased regulations and voluntary foreclosure relief programs that could have an adverse impact on the mortgage default processing market.

 

Based on information provided to the MBA by banks and loan servicers who report their mortgage data to the MBA, approximately 53 million residential mortgage loans were being serviced in the United States as of December 31, 2008, a 1.3% decrease from the approximately 54 million residential mortgage loans being serviced a year earlier. The MBA’s information also shows that seriously delinquent mortgages, defined as loans that are more than 90 days past due as of December 31, 2008, rose approximately 87.4% compared to December 31, 2007. In its fourth quarter industry report, the MBA estimates that 3.3% of all mortgage loans were in foreclosure at December 31, 2008. This estimate includes loans where servicing has been suspended in accordance with the lender’s or loan servicer’s foreclosure requirements and excludes loans where the foreclosure has been completed. Based on this estimated annual volume of mortgages in foreclosure and the average revenue we derived per file in 2008 (which we assume would be generally representative of rates charged for mortgage default processing services throughout the United States), we believe the U.S. market for residential mortgage default processing services was approximately $1.2 billion in 2008.

 

Subprime mortgages are provided to borrowers who represent higher credit risks. These mortgages typically bear rates at least 200 or 300 basis points above safer prime loans. According to the MBA, subprime mortgages outstanding have increased from 2.4% of all mortgages in 2001 to 11.7% of all mortgages as of December 31, 2008. As of December 31, 2007, subprime mortgages outstanding were 13.4% of all mortgages. The maturation of the prime credit mortgage market, a low interest rate environment and a robust loan securitization market in recent years encouraged lenders to sustain growth by expanding into subprime lending. Subprime borrowers are more likely to default than prime borrowers. MBA statistics indicate that for the three months ended December 31, 2008, the foreclosure starts rate for subprime mortgage loans was approximately 5.8 times greater than for prime mortgage loans, and the foreclosure starts rate for subprime adjustable rate mortgages (“ARMs”) was approximately 8.4 times greater than for prime mortgage loans for the three months ended December 31, 2007.

 

We also believe that the increasing prevalence and preference for non-traditional or so-called “Alt A” mortgages, including interest only mortgages, ARMs and option ARMs, is also contributing to mortgage delinquencies and defaults. We believe that these non-traditional mortgage products are more likely to become delinquent and carry higher risk of default than traditional 15-year or 30-year fixed-rate mortgage loans.

 

In addition, we believe the current recession and the continuing rise in unemployment will add pressure to the foreclosure crisis. According to the U.S. Bureau of Labor Statistics, the national unemployment rate rose to 8.1% in February 2009 from 7.6% in January 2009. In February 2008, the national unemployment rate was 5.2%. We expect that rising unemployment will contribute to mortgage loan defaults and, ultimately, foreclosures.

 

APC provides mortgage default processing and related services for six law firm customers and also directly to mortgage lenders and loan servicers in California. Our law firm customers handle mortgage default files primarily in California, Georgia, Indiana, Michigan, Minnesota and Texas. Last year, these states were six of the top 15 states in highest residential mortgage foreclosure starts rates. APC also provides real estate title work to the Barrett law firm in Texas and assists its customers by providing loan modification and loss mitigation support.

Appellate Services

 

The market for appellate consulting and document services is highly fragmented and we believe that it includes a large number of local and regional providers across the country. Federal appeals often are more sophisticated, more complicated and more voluminous than appeals in state courts, and thus we believe that federal appeals present more attractive business prospects for Counsel Press. For the twelve months ended March 31, 2008, the 13 circuits of the U.S. Court of Appeals accepted 59,887 cases based on information from the Administrative Office of the U.S. Courts, or AOC. This represents a decrease of 4% from the previous year, based on information from the AOC, which also reported as of September 30, 2007, that the volume of appeals was up only 1.5% from 2002. At the highest federal court level, 8,241 cases were filed in the U.S. Supreme Court in the 2007 term, according to the Chief Justice’s 2007 Year-End Report on the Federal Judiciary.

 

The National Center for State Courts in a 2007 survey reported that appellate filings in all state courts totaled just under 280,000 cases in 2006 and, with modest variations, had been at about that volume since 1995. State appellate case volume, while larger than federal case volume, we believe offers less attractive business prospects for Counsel Press because many of the state cases are simpler and have less challenging document preparation and filing needs. In addition, unlike the federal court system, eleven states and the District of Columbia have no intermediate-level appellate courts.

 

Our Products and Services

 

We provide our business information products and professional services through two operating divisions: Business Information and Professional Services. For the year ended December 31, 2008, we derived 47.6% of our revenues from our Business Information Division and 52.4% of our revenues from our Professional Services Division. For more information concerning our financial results by business segment, see “Item 7 —  Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 12 to our consolidated financial statements.

 

Business Information

 

Our business information products are important sources of necessary information for the legal, financial and real estate sectors in the 21 markets that we serve in the United States. We provide our business information products in print through our portfolio of 58 print publications, consisting of 13 paid daily publications, 31 paid non-daily publications and 14 non-paid non-daily publications. Our paid and non-paid and controlled publications had approximately 66,800 and 131,700 subscribers, respectively, as of December 31, 2008. In addition, we provide our business information products electronically through our 67 web sites and our email notification systems. Our 43 online publication web sites had approximately 3,841,700 unique visits in 2008 and our 24 event and other non-publication web sites had approximately 480,200 unique visits in 2008.

 

We believe that, based on our 2008 revenues, we are the second largest publisher of local business journals in the United States and the second largest publisher of court and commercial publications that specialize in carrying public notices. The business information products we target in the Minnesota and Missouri markets each accounted for more than 10% of our business information revenues for 2008. Our business information products contain proprietary content written and created by our staff and local expert contributors and stories from newswires and other relevant sources. Our journalists and contributors contribute, on average, over 1,000 articles and stories per week to our print titles and web sites that are tailored to the needs and preferences of our targeted markets. The newsrooms of our publications leverage this proprietary content by using internal newswires to share their stories with each other, which allows us to develop in an efficient manner content that can be customized for different local markets.

 

We strive to be the primary source of industry information to our audience, offering necessary proprietary content that enhances the daily professional activities of our readers. Our business information products offer timely news, insight and commentary that inform and educate professionals in the legal, financial and real estate sectors about current topics and issues affecting their professional communities. Specifically, our content focuses on enabling our readers to be well-informed of industry dynamics, their competitors, recent transactions in their market, and current and potential client opportunities. This critical information, delivered on a timely and regular

basis, enables the professionals we serve to operate effectively in business environments characterized by tight deadlines and intense competition. For example, we publish a number of leading titles that report on local and national legal decisions issued by state and federal courts and governmental agencies, new legislation, changes in court rules, verdicts and settlements, bar disciplinary actions and other news that is directly relevant to attorneys.

 

We also offer to legal professionals related product enhancements and auxiliary products, such as directories, local judicial and courthouse profiles, legal forms and “new attorney” kits. Additionally, several of our titles provide information regarding construction data and bidding information on hundreds of projects each day, while other publications offer comprehensive coverage of the real estate industry, including listings and foreclosure reports. Our business information portfolio also includes certain titles that provide information about regulatory agencies, legislative activities and local political news that are of interest to legislators, lobbyists and the greater political community.

 

In addition to our various print titles, we employ a digital strategy to provide our business information products electronically through our web sites and our email notification systems that offer both free and subscription-based content. We customize the delivery of our proprietary content to meet our customers’ needs. Specifically, our media neutral approach allows us to tailor our products and services to take advantage of the strengths inherent in each medium and allows our customers to choose their preferred method of delivery. Our email notification systems allow us in real-time to provide up-to-date information to customers, who can conveniently access such information, as well as other information on our web sites, from a desktop, laptop or personal digital assistant. Our digital strategy acts both as a complement to our print publications, with subscribers to a variety of our publications having access to web sites and email notifications associated with such publications, and independently, with exclusive paid subscription access to several of our web services. Our electronic content includes access to stand-alone subscription products, archives of articles and case digests containing case summaries, local verdicts and settlements and judicial profiles and email alerts containing case summaries and links to decisions in subscribers’ selected practice areas.

 

The credibility of our print products and their reputation as known and trusted sources of local information extend to our web sites and email notification systems, thereby differentiating our content from that of other web sites and electronic media. This allows us to sell packaged print and online advertising products to advertisers that desire to reach readers through different media. Dolan Media Newswires, our Internet-based, subscription newswire, is available at www.dolanmedianewswires.com for news professionals and represents the work of our journalists and contributors. We also operate three online, subscription-based legislative information services that are used by lobbyists, associations, corporations, unions, government affairs professionals, state agencies and the media in Arizona, Minnesota and Oklahoma. Through these services, we offer online bill tracking, up-to-date legislative news and other similar legislative information.

 

We primarily manage our portfolio of business information products at the local and regional level, which we believe allows for increased editorial creativity. Each of our local management teams that is responsible for our print publications and related web sites has a comprehensive understanding of its target markets. These teams are supported editorially by our Editorial Board, a group composed of our top editors throughout the company. The Editorial Board runs division-wide programs to improve our proprietary content; produces an annual workshop and conference for our editors; runs internal editorial contests and training; and leads our digital strategy. Our local management teams collaborate with our Editorial Board to create stories, insight and commentary that are best suited for the business communities served by its business information products. Further, local management teams are regularly called upon to be creative and develop new products, enhance existing products and share best practices with other managers. We believe that our local management teams’ efforts to establish new local targeted editorial products, launch new features and expand our electronic content afford us the best opportunity to maintain and improve our competitive advantage in the markets we serve.

 

Advertising.  All of our print products, as well as a large number of our electronic products, carry commercial advertising, which consists of display and classified advertising. For the year ended December 31, 2008, advertising accounted for 17.7% of our total revenues and 37.1% of our Business Information Division’s total revenues. We generate our advertising revenues from a variety of local business and individual customers in the legal, financial and real estate sectors that we serve. For example, our top 10 advertising customers only represented, in the

aggregate, approximately 2.0% of our total Business Information revenues in 2008. We believe that because our business information products rely on a diversified base of advertising clients, we are less affected by a reduction in advertising spending by any one particular advertiser. Additionally, for the year ended December 31, 2008, we derived 95.0% of our advertising revenues from local advertisers and only 5.0% of our advertising revenues from national advertisers (i.e., advertisers that place advertising in several of our publications at one time). Because spending by local advertisers is generally less volatile than that of national advertisers, we believe that our advertising revenue streams carry a greater level of stability than publications that carry primarily national advertising and therefore we are better positioned to withstand broad downturns in advertising spending.

 

Our Advertising Board, consisting of certain of our publishers and advertising directors, supervises sales training, rate card development, network sales to national advertisers, audience research and budget development. Our local management teams for our print publications and related web sites, under the direction of our Advertising Board and in consultation with our corporate management, establish advertising rates, coordinate special sections and promotional schedules and set advertising revenue targets for each year during a detailed annual budget process. In addition, corporate management facilitates the sharing of advertising resources, best practices and information across our titles and web sites, which has been effective in ensuring that we remain focused on driving advertising revenue growth in each of our target markets.

 

Public Notices.  Public notices are legal notices required by federal, state or local law to be published in qualified publications. A publication must typically satisfy several legal requirements in order to provide public notices. In general, a publication must possess a difficult-to-obtain U.S. Postal Service periodical permit, be of general and paid circulation within the relevant jurisdiction, include news content, and have been established and regularly and uninterruptedly published for one to five years immediately preceding the first publication of a public notice. Some jurisdictions also require that a public notice business be adjudicated by a governmental body. We are qualified to carry public notices in 14 of the 21 markets in which we publish business journals or court and commercial newspapers. Our court and commercial newspapers publish 305 different types of public notices, including foreclosure notices, probate notices, notices of fictitious business names, limited liability company and other entity notices, trustee sale notices, unclaimed property notices, notices of governmental hearings, notices of elections, bond issuances, zoning matters, bid solicitations and awards and governmental budgets. For the year ended December 31, 2008, public notices accounted for 21.8% of our total revenues and 45.9% of our Business Information Division’s total revenues. We believe that over 90% of our public notice customers in 2008 also published public notices with us in 2007. Our primary public notice customers include real estate-related businesses and trustees, governmental agencies, attorneys and businesses or individuals filing fictitious business name statements.

 

Subscription-Based Model.  We sell our business information products primarily through subscriptions to our publications, web sites and email notification systems. Only a small portion of our circulation revenues are derived from single-copy sales of publications, although revenues from this source are increasing. As of December 31, 2008, 2007 and 2006, our paid publications had approximately 66,800, 71,700, and 73,600 subscribers, respectively. Despite our decline in total subscribers, our revenues from circulation have remained stable at $13.6 million for each of the three years then ended. The majority of the decrease in paid subscribers over these periods was a result of non-renewals of discounted bulk subscriptions at several law firms, a decline in renewals of first-year subscribers for Lawyers USA, and, we believe, reader preference for online and web site access to our business journals, some of which we offer at discounted rates or no fees. This decrease in number of paid subscribers was offset, in 2008, by approximately 1,100 subscribers we received as a result of the acquisition of The Mecklenburg Times in February 2008. Revenues from increased subscription rates, as well as subscriptions to The Mecklenburg Times, and increased single-copy sales offset the revenues we lost from subscribers who did not renew during these periods. Our Circulation Marketing Board, consisting of certain circulation specialists from across the company, supervises campaign development and timing, list sources, development of marketing materials and circulation promotions. Our local management teams work with the Circulation Marketing Board and with our corporate executives to establish subscription rates, including discounted subscriptions programs, and implement creative and interactive local programs and promotions to increase readership and circulation. Subscription renewal rates for our business information products were 76% in the aggregate in 2008. Our high renewal rates reflect that our products are relied upon as sources of necessary information by the business communities in the markets we serve.

Seminars, Programs and Other Events.  We believe that one of our strengths is our ability to develop, organize and produce professional education seminars, awards programs and other local events to demonstrate our commitment to our targeted business communities, extend our market reach and introduce our services to potential customers. While we generally charge admission and/or sponsorship fees for these seminars, awards programs and other local events, these events also offer opportunities for cross-promotion and cross-selling of advertising with our local print products that produce the event. Our sponsored events attracted approximately 42,300 attendees and 500 paying sponsors in 2008.

 

Printing.  We print 11 of our business information publications at one of our three printing facilities located in Baltimore, Maryland; Minneapolis, Minnesota; and Oklahoma City, Oklahoma. The printing of our other 47 print publications is outsourced to printing facilities owned and operated by third parties. We purchase some of our newsprint from U.S. producers directly, but most of our newsprint is purchased indirectly through our third-party printers. Newsprint prices are volatile and fluctuate based upon factors that include both foreign and domestic production capacity and consumption. Newsprint, together with outsourced printing costs, accounted for 10.8% of operating expenses attributable to our Business Information Division in the year ended December 31, 2008.

 

Staffing.  As of December 31, 2008, our Business Information Division had 569 employees, consisting of 217 journalists and editors; 95 production personnel; 148 employees in sales, marketing and advertising; 42 employees in circulation and 67 administrative personnel.

 

Professional Services

 

Our Professional Services Division provides critical non-legal services that assist law firms and attorneys in processing mortgage defaults and court appeals. These professional services allow our customers to focus on their core competency of offering high quality legal services to their clients. We offer our professional services through two operating units, APC and Counsel Press. APC is one of the leading providers of mortgage default processing services in the United States. It primarily provides these services in California, Georgia, Indiana, Michigan, Minnesota and Texas. Counsel Press is the largest appellate services provider in the United States.

 

Mortgage Default Processing Services

 

We offer mortgage default processing and related services to our six law firm customers and, in California, to mortgage lenders and loan servicers through our majority-owned subsidiary, APC. We currently own 84.7% of the membership interests in APC. Our largest customer is the Barrett law firm (in California, Georgia and Texas), who referred more than 10% of the mortgage default files we processed last year. Trott & Trott (in Michigan) and Feiwell & Hannoy (in Indiana) also referred, individually, more than 10% of the mortgage default files we processed last year. Further, in 2008, the top 10 clients of our law firm customers accounted for 61.0% of the mortgage default case files handled by our law firm customers, with the largest client accounting for 17.2% and one other client accounting for over 10% of such files.

 

Pursuant to 15 to 25 years services agreements, APC is the sole provider of foreclosure, bankruptcy, eviction and, to a lesser extent, litigation and other mortgage default related processing services to its six law firm customers. These contracts provide for the exclusive referral to APC of work related to residential mortgage default case files handled by each law firm, although Trott & Trott and the Barrett law firm may send files elsewhere if directed by their respective clients. All of APC’s customers pay a fixed fee per file based on the type of file that APC services. The initial terms of these services agreements expire in March 2021 for Trott & Trott, January 2022 for Feiwell & Hannoy, February 2023 for Wilford & Geske and September 2033 for the Barrett law firm. These services agreements will automatically renew for up to two successive ten year periods unless either party elects to terminate the term then-in-effect with prior notice, except the services agreement with the Barrett law firm, which will automatically renew for two successive five year periods unless either party elects to terminate the term then-in effect. During the term of the Feiwell & Hannoy and Wilford & Geske services agreements, APC has agreed not to provide mortgage default processing services with respect to real estate located in Indiana and Minnesota, respectively, for any other law firm. For the year ended December 31, 2008, mortgage default processing services accounted for 44.5% of our total revenues and 85.0% of our Professional Services Division’s total revenues.

Mortgage default processing is a volume-driven business in which the mortgage lender and loan servicer clients of our law firm customers, and our mortgage lender and loan servicer customers in California, insist on the efficient and accurate processing of mortgage default files, strict compliance with applicable laws, including loss mitigation efforts, and high levels of customer service. APC assists its law firm customers by providing efficient and high-quality mortgage default processing services. These services allow our law firm customers to differentiate themselves from their competition and to focus on the practice of law, which we believe allows them to garner more business from their mortgage lender and loan servicer clients.

 

The process begins when the borrower defaults on mortgage payment obligations. At that time, the mortgage lender or mortgage servicer typically refers the case file containing the relevant information regarding the loan to one of our law firm customers (or directly to us, if it is a California file). The mortgage lender and loan servicers retain our law firm customers (and APC in California where a license to practice law is not required to handle foreclosures) to provide counsel with respect to the foreclosure, eviction, bankruptcy and, to a lesser extent, litigation and other mortgage default related case files in each of the states in which we provide these services for residential mortgage defaults. After a file is referred by the mortgage lender or loan servicer firm to our law firm customers, or directly to us in California, the lender’s or the servicer’s goal is to proceed with the foreclosure and disposition of the subject property as efficiently as possible and to make all reasonable attempts to avoid foreclosure and thereby mitigate losses.

 

The procedures surrounding the foreclosure process involve numerous steps, each of which must adhere to strict statutory guidelines and all of which are overseen by attorneys at our law firm customers, except in California. APC assists these customers with processing residential mortgage defaults, including data entry, supervised document preparation and other non-legal processes. Specific procedural steps in the foreclosure process will vary by state. An early step in the process is a letter that must be sent from the law firm to the borrower as required by the federal Fair Debt Collections Practices Act. APC then assists its customers in opening a file and ordering a title search on the mortgaged property to determine if there are any liens or encumbrances. The data received from the mortgage lender or loan servicer client of the law firm customers, and the results of the title search or commitment search, become the foundation of the foreclosure case file that APC assists its customers in building.

 

We service law firm customers in both non-judicial and judicial foreclosure states. In a judicial foreclosure state, a loan is secured by a mortgage and the foreclosing party must file a lawsuit requesting that the court order a foreclosure. The law firm, assisted by APC, must also arrange for service to defendants and other parties involved in the foreclosure legal proceedings. If successful, the mortgage lender or loan servicer in a judicial foreclosure state obtains a judgment that leads to a subsequent foreclosure sale. This is usually conducted by a sheriff in the county where the property is located. In connection with such foreclosure lawsuit, a public notice must be published the requisite number of times in a qualified local newspaper prior to the foreclosure sale.

 

In a non-judicial foreclosure state, a loan is secured by a mortgage that contains a power of sale clause, and the lender may begin the foreclosure process without a court order. Generally, foreclosing parties in non-judicial states must send multiple notices to the borrower and others obligated on the debt. In some non-judicial foreclosure states, our law firm customers must publish a public notice in a local newspaper to commence the foreclosure process; however, in Texas, there is no publication requirement. Once the public notice has been published the requisite number of times in a qualified local newspaper, APC arranges, under the direction of the law firm or, in California, its mortgage lender and loan servicer customers, for a copy of the notice to be posted on the front door of the subject property and for a digital photo to be obtained to prove compliance. After publication has been completed and all other legal steps have been taken, the sheriff’s deed and affidavits are prepared for review by the law firm prior to the public auction. APC assists its law firm and other customers with many of the non-legal tasks associated with this process.

 

In all cases, except Texas where publication is not required, a sworn affidavit of publication of the required public notice must be obtained from the newspaper publisher by the law firm using APC’s staff and entered into the case file along with proof of publication.

 

If the file proceeds to a foreclosure auction of the subject property, APC works with its law firm customers and the sheriff to coordinate the auction and to facilitate communications among interested parties. In Michigan, as an example, the foreclosing party may enter a bid in the amount of its total indebtedness for the subject property. A

decision regarding whether the foreclosing party should bid, and how much, is determined by attorneys at the law firm pursuant to instructions received from the lender or mortgage servicer. After the auction, the sale results are communicated by APC, on behalf of its customers, to interested parties. The law firm prepares the appropriate deeds, which APC then records. The six states in which we do business permit the former owner to recover the property at any time prior to the foreclosure auction by paying the default amount, plus interest and costs. Additionally, Michigan and Minnesota each have six-month redemption periods, following the foreclosure auction, during which time the former owners can pay the amount bid, plus accumulated interest, and thereby recover the property. If the redemption payment is made in full, funds are forwarded to the lender and all parties are notified by APC, on behalf of its customers, that a redemption has occurred. In that event, the sheriff’s deed is void. Neither Texas nor California has a redemption period. If, however, no redemption occurs after the statutory redemption period has passed, the law firm works with its clients to determine the next step. At this point in time, if the property is still occupied, documents are prepared by the law firm to commence an eviction.

 

At any point during this process, a borrower may file for bankruptcy, which results in a stay on mortgage default proceedings. Therefore, APC assists its customers in frequently and diligently checking bankruptcy courts to ensure that a bankruptcy filing has not been made and providing relevant documents to its law firm customers so they can review them and understand the nature and effect of the bankruptcy proceeding. Most foreclosure cases do not proceed all the way to eviction, but are ended at earlier dates by property redemption, property sale, bankruptcy of the mortgagor, or by a vacancy by the mortgagor.

 

Fees.  Government sponsored entities, including Fannie Mae and Freddie Mac, monitor and establish guidelines that are generally accepted by mortgage lending and mortgage servicing firms nationwide for the per file case fees to be paid to their counsel. Thus, our law firm customers receive a fixed fee per file from their clients and we then receive our agreed upon fixed fee per file from the applicable law firm. Under the services agreements with our law firm customers, we are entitled to receive a fee upon referral of the residential mortgage case file, regardless of whether the case proceeds all the way to foreclosure, eviction, bankruptcy or litigation. In California, we are entitled to receive the entire fixed fee per file for foreclosure files. If our customers’ client proceeds to eviction or chooses to litigate, or if the borrower files for bankruptcy, we receive additional fixed fees per case file from our law firm customers.

 

Staffing.  APC organizes its staff into specialized teams by client and by function, resulting in a team-based operating structure that, coupled with APC’s proprietary case management software systems, allows APC to efficiently service large numbers of case files. As of December 31, 2008, APC had 1,081 employees, including 511 employees who provide mortgage default processing services to the Barrett law firm and our customers in California through NDEx. APC’s sales and marketing efforts are driven primarily by David A. Trott, APC’s Chairman and Chief Executive Officer, who has developed and maintains relationships with various mortgage lenders and loan servicers through his law firm of Trott & Trott, where he is the majority shareholder and managing attorney.

 

Technology.  APC has two proprietary case management software systems that store, manage and report on the large amount of data associated with each foreclosure, bankruptcy, eviction or litigation case file serviced by APC in each of the states in which we operate. One was developed by APC for use in Michigan, the other was developed by NDEx (which we acquired in September 2008) for use in Texas. Under both systems, each case file is scanned, stored and tracked digitally through this system, thereby improving record keeping. The systems also provide APC’s management with real-time information regarding employee productivity and the status of case files. We are constantly working to improve the functionality of our proprietary case management systems and other related IT productivity tools to meet the needs of our customers’ mortgage lender and servicer clients. For example, we have developed the ability to provide our customers’ clients email notifications of case status and customized reports. We have successfully customized the system used in Michigan to service files of our law firm customers in Minnesota and Indiana. NDEx continues to use the system it developed to service our customers in Texas, California and Georgia, although we intend to eventually combine this system with the case management system developed by APC.

Appellate Consulting and Document Services

 

Counsel Press, founded in 1938 and acquired by us in January 2005, 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 or any state appellate court or appellate division. For the year ended December 31, 2008, Counsel Press’ revenues accounted for 7.9% of our total revenues and 15.0% of our Professional Services Division’s total revenues.

 

Counsel Press professionals provide clients with consulting services, including procedural and technical advice and support with respect to U.S. state and federal appellate processes. This guidance enables our customers to file high quality appellate briefs, records and appendices that comply with the highly-localized and specialized rules of each court of law in which appeals are filed. Counsel Press’ team of experienced attorneys and paralegals have forged close relationships with the courts over the years, and are keenly aware of the requirements, deadlines and nuances of each court, further improving the quality of appellate guidance provided to clients. Counsel Press also offers a full range of traditional printing services and electronic filing services. For example, Counsel Press provides the appellate bar with printing and filing services using its “Counsel Press E Brief” electronic and interactive court filing technology, which converts paper files containing case citations, transcripts, exhibits and pleadings, as well as audio and video presentations, into integrated and hyperlinked electronic media that can be delivered on CD-ROM or over the Internet. Counsel Press’ document conversion system and other electronic products are a critical component of our digital strategy that enables our customers to more efficiently manage the appeals process.

 

Our appellate services are extremely critical to our customers because their ability to satisfy the demands and needs of their appellate clients depends upon their ability to file on a timely basis appeals that comply with a particular court’s technical requirements. Using our proprietary document conversion systems, our experts at Counsel Press are able to process, on very short notice, appellate files that may exceed 50,000 pages, producing on-deadline filings meeting exacting court standards.

 

In 2008, Counsel Press assisted attorneys from more than 2,000 law firms, corporations, non-profit agencies and government agencies in organizing, printing and filing approximately 8,700 appellate filings in 17 states, all of the federal courts of appeals and the U.S. Supreme Court. In addition to its appellate services, Counsel Press provides consulting and professional services for bankruptcy management, real estate printing and experienced legal technology and litigation consulting. Counsel Press also provides case and docket tracking services, case notification services and assistance to attorneys in obtaining admissions and other credentials needed to appear before various courts.

 

Counsel Press has offices located in Los Angeles, California; Chicago, Illinois; Buffalo, New York City, Rochester, and Syracuse, New York; Iselin, New Jersey; Philadelphia, Pennsylvania; Richmond, Virginia; and Washington, D.C. As of December 31, 2008, Counsel Press had 91 total employees, consisting of 35 sales and marketing professionals, including 15 individuals with law degrees, 15 employees that process filings, 25 printing personnel and 16 general and administrative personnel.

 

Investments

 

We have strategic minority investments in private companies. We have one equity method investment, The Detroit Legal News Publishing, LLC, or DLNP, which is Michigan’s largest court and commercial newspaper publisher. DLNP also publishes several other court and commercial newspapers and operates a statewide public notice placement network. We own a 35.0% membership interest in DLNP. We also own a 15% interest in GovDelivery, Inc., which we account for using the cost method. Our Chairman, Chief Executive Officer and President, James P. Dolan, owns 50,000 shares in GovDelivery. GovDelivery sells specialized web services that help government web sites became more effective and efficient at delivering information to citizens. GovDelivery’s clients include U.S. cities, counties and federal agencies as well as both houses of Parliament in the United Kingdom.

Competition

 

Business Information Division

 

Our Business Information Division’s customers focus on the quantity and quality of necessary information, the quantity and type of advertising, timely delivery and, to a lesser extent, price. We benefit from well-established customer relationships in each of the target markets we serve. We have developed these strong customer relationships over an extended period of time by providing timely, relevant and dependable business information products that have created a solid foundation of customer loyalty and a recognized brand in each market we serve.

 

Our segment of the media industry is characterized by high barriers to entry, both economic and social. The local and regional communities we serve generally can sustain only one publication as specialized as ours. Moreover, the brand value associated with long-term reader and advertiser loyalty, and the high start-up costs associated with developing and distributing content and selling advertisements, help to limit competition. Subscription renewal rates for local business journals and court and commercial periodicals are generally high. Accordingly, it is often difficult for a new business information provider to enter a market and establish a significant subscriber base for its content.

 

We compete for display and classified advertising and circulation with at least one metropolitan daily newspaper and one local business journal in many of the markets we serve. Generally, we compete for these forms of advertising on the basis of how efficiently we can reach an advertiser’s target audience and the quality and tailored nature of our proprietary content. We compete for public notices with usually one metropolitan daily newspaper in the 14 markets in which we are qualified to publish public notices. We compete for public notices based on our expertise, focus, customer service and competitive pricing.

 

Professional Services Division

 

Some mortgage lenders and loan servicers have in-house mortgage default processing service departments, while others outsource this function to law firms that offer internal mortgage default processing services or have relationships with third-party providers of mortgage default processing services. We estimate that the outsourced mortgage default processing services market primarily consists of the back-office operations of approximately 350 local and regional law firms. Mortgage lending and mortgage loan servicing firms demand high service levels from their counsel and the providers of default mortgage processing services, with their primary concerns being the efficiency and accuracy by which counsel and the provider of processing services can complete the file and the precision with which loss mitigation efforts are pursued. Accordingly, mortgage default processing service firms compete on the basis of efficiency by which they can service files and the quality of their mortgage default processing services. We believe that increasing case volumes and rising client expectations provide us an opportunity due to our ability to leverage our proprietary case management system to provide efficient and effective services on a timely basis.

 

The market for appellate consulting and document services is highly fragmented and we believe that it includes a large number of local and regional printers across the country. We believe that most appellate service providers are low-capacity, general printing service companies that do not have the resources to assist counsel with large or complex appeals or to prepare electronic filings, including hyperlinked digital briefs, on CD-ROM that are being accepted by an increasing number of appellate courts. This presents us with an opportunity to compete on the basis of the quality and array of services we offer, as opposed to the price of such services.

 

Intellectual Property

 

We own a number of registered and unregistered trademarks for use in connection with our business, including trademarks in the mastheads of all but one of our print products, and certain of our trade names, including Counsel Press. If trademarks remain in continuous use in connection with similar goods or services, their term can be perpetual, subject, with respect to registered trademarks, to the timely renewal of their registrations with the United States Patent and Trademark Office. We have a perpetual, royalty-free license for New Orleans CityBusiness, which, except for our military newspapers, is the only one of our print titles for which we do not own a registered or unregistered trademark.

We approach copyright ownership with respect to our publications in the same manner as is generally customary within the publishing industry. Consequently, we own the copyright in all of our newspapers, journals and newsletters, as compilations, and also own the copyright in almost all of our other print products. With respect to the specific articles in our publications, with the exception of certain of our military newspapers, we own all rights, title and interest in original materials created by our full-time journalists, designers, photographers and editors. For outside contributors, we generally obtain either all rights, title and interest in the work or the exclusive “first-time publication” and non-exclusive republication rights with respect to publication in our print and electronic business information products. Judicial opinions, court schedules and docketing information are provided to us directly by the courts, on a non-exclusive basis, and are public information.

 

We license the content of certain of our products to several third-party information aggregators on a non-exclusive basis for republication and dissemination on electronic databases marketed by the licensees. These licenses all had an original term of two years or more and are subject to automatic renewal. We also license Dolan Media Newswires to various third-party publications.

 

We have copyright and trade secret rights in our proprietary case management software systems, document conversion system and other software products and information systems. In addition, we have extensive subscriber and other customer databases that we believe would be extremely difficult to replicate. We attempt to protect our software, systems and databases as trade secrets by restricting access to them and/or by the use of non-disclosure agreements. We cannot assure, however, that the means taken to protect the confidentiality of these items will be sufficient, or that others will not independently develop similar software, databases and customer lists. We own no patent registrations, but have applications pending for patents on our Payment Allocation and Claims Tracking Software, or PACT, which was developed by NDEx.

 

Employees

 

As of December 31, 2008, we employed 1,812 persons, of whom 569 were employed by our Business Information Division, 1,081 were employed by APC in our mortgage default processing services operations, 91 were employed by Counsel Press in our appellate services operations and 71 served in executive or administrative capacities. Three unions represent an aggregate of 16 employees, or 10% and 21% of our employees, at our Minneapolis, Minnesota, and Baltimore, Maryland, printing facilities, respectively. We believe we have a good relationship with our employees.

 

Other Information about Dolan Media Company

 

You may learn more about Dolan Media from our web site at www.dolanmedia.com. However, the information and other material available on our web site is not part of this annual report. We file with the SEC, and make available on our web site as soon as reasonably practicable after filing, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments of those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.

 

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks as well as the other information contained in this annual report on Form 10-K, including our consolidated financial statements and the notes to those statements, before investing in shares of our common stock. As indicated earlier in this annual report on Form 10-K under the title “Cautionary Note Regarding Forward Looking Statements,” certain information contained in this annual report are forward-looking statements. If any of the following events actually occur or risks actually materialize, our business, financial condition, results of operations or cash flow could be materially adversely affected and our actual results could differ materially from the forward-looking statements in this annual report on Form 10-K. In that event, the trading price of our common stock could decline and you may lose all or part of your investment.

Risks Relating to Our Business Information Division

 

We depend on the economies and the demographics of our targeted sectors in the local and regional markets that we serve, and changes in those factors could have an adverse impact on our revenues, cash flows and profitability.

 

Our advertising revenues and, to a lesser extent, circulation revenues depend upon a variety of factors specific to the legal, financial and real estate sectors of the 21 markets that our Business Information Division serves. These factors include, among others, the size and demographic characteristics of the population, including the number of companies and professionals in our targeted business sectors, and local economic conditions affecting these sectors. For example, if the local economy or targeted business sector in a market we serve experiences a downturn, display and classified advertising, which constituted 37.1%, 41.8%, and 43.0% of our Business Information revenues in 2008, 2007 and 2006, respectively, generally decreases for our business information products that target such market or sector. This was the case in 2008, when our display and classified advertising revenues decreased $2.0 million from 2007 due to a decrease in the number of ads placed in our publications as customers tightened discretionary spending in response to the local economic conditions in the markets we serve. Further, if the local economy in a market we serve experiences growth, public notices, which constituted 45.9%, 38.9%, and 33.8% of our Business Information revenues in 2008, 2007 and 2006, respectively, may decrease as a result of fewer foreclosure proceedings requiring the posting of public notices. If the level of advertising in our business information products or public notices in our court and commercial newspapers were to decrease, our revenues, cash flows and profitability could be adversely affected.

 

A change in the laws governing public notice requirements, as well as new or increased regulation of residential mortgage products, may delay, reduce or eliminate the amount of public notices required to be published in print, affect how newspapers are chosen for the publication of public notices or adversely change the eligibility requirements for publishing public notices, which could adversely affect our revenues, profitability and growth opportunities.

 

In various states, legislatures have considered proposals that would eliminate or reduce the number of public notices required by statute. In addition, some state legislatures have proposed that state and local governments publish official government notices themselves online. The impetus for the passage of such laws may increase as online alternatives to print sources of information become increasingly familiar and more generally accepted. Some states have also proposed, enacted or interpreted laws to alter the frequency with which public notices are required to be published, reduce the amount of information required to be disclosed in public notices or change the requirements for publications to be eligible to publish public notices. In addition, new or increased government regulation of residential mortgage defaults may result in less or delayed foreclosures and, therefore, the publication of fewer related public notices or a delay in the publication of related public notices. For example, in April 2008, Maryland’s foreclosure law changed to require lenders to wait at least 90 days after default before they can commence an action to foreclose a mortgage. In addition, this law requires lenders to give defaulting mortgagors 45 days written notice of their intent to foreclose. By delaying when we receive public notices from lenders to publish and, potentially, decreasing the number of foreclosures, this change affected public notice revenues at our Maryland operation during the second and third quarters of 2008. Further, legislation changing the public notices required to be published in print or that adversely change the eligibility requirements for publishing public notices in states where we publish or intend to publish court and commercial newspapers would adversely affect our public notice revenues and could adversely affect our ability to differentiate our business information products, which could have an adverse impact on our revenues, profitability and growth opportunities.

 

If we are unable to compete effectively with other companies in the media industry, our revenues and profitability may decline.

 

We compete for display and classified advertising and circulation with at least one metropolitan daily newspaper in all of the markets we serve and one local business journal in many of the markets we serve. Display and classified advertising constituted 37.1%, 41.8%, and 43.0% of our Business Information Division’s revenues in 2008, 2007 and 2006, respectively, and paid circulation constituted 15.1%, 16.0%, and 18.4% of our Business Information Division’s revenues in 2008, 2007 and 2006, respectively. Generally, we compete for these forms of advertising and circulation on the basis of how efficiently and effectively we can reach an advertiser’s target

audience and the quality and tailored nature of our proprietary content. Subscriptions to our paid publications have decreased over the last three years primarily due the loss of discounted bulk subscriptions at several law firms, the decline in renewals of first year subscribers for Lawyers USA and, we believe, the transition of our business journals to the Internet and online access, some of which we offer at discounted rates or no fee. If the number of subscriptions to our paid publications continues to decrease, our circulation revenues will decline to the extent we are not able to continue increasing our subscription rates or otherwise offset such decrease with increased single-copy sales. A continued decrease in our subscribers might also make it more difficult for us to attract and retain advertisers due to reduced readership. Our local and regional competitors vary from market to market and many of our competitors for advertising revenues are larger and have greater financial and distribution resources than we do. In the future, we may be required to spend more money, or to reduce our advertising or subscription rates, to attract and retain advertisers and subscribers. We may also experience a decline of circulation or print advertising revenue due to alternative media, such as the Internet. For example, as the use of the Internet has increased, we may lose some classified advertising to online advertising businesses and some subscribers to our free Internet sites that contain abbreviated versions of our publications. If we are not able to compete effectively for advertising expenditures and paid circulation, our revenues and profitability may be adversely affected.

 

If our Business Information operations in certain states where we generate a significant portion of that operating division’s revenues are not as successful in the future, our operating results could be adversely affected.

 

Revenues from our publications targeting the Minnesota and Missouri market each accounted for more than 10% of our Business Information revenues in 2008. Publications targeting the Missouri market, along with those targeting the Maryland and Massachusetts markets, each accounted for more than 10% of our Business Information revenues in 2007. As a result, our operating results could be adversely affected if our Business Information operations in any of these markets are not as successful in the future, whether as a result of a loss of subscribers to our paid publications (in particular, our Lawyers Weekly publication in Missouri, and our Finance & Commerce publication in Minnesota) that serve those markets, a decrease in public notices or advertisements placed in these publications or changes in public notice laws that delay or change the requirements for publishing public notice advertisements (as occurred in Maryland during 2008).

 

A key component of our operating income and operating cash flows has been, and may continue to be, our minority equity investment in a Michigan publishing company.

 

We own 35.0% of the membership interests in The Detroit Legal News Publishing, LLC, or DLNP, the publisher of The Detroit Legal News and ten other publications in Michigan. We account for our investment in DLNP using the equity method, and our share of DLNP’s net income of $5.6 million, $5.4 million and $2.7 million, or 15.8%, 16.8% or 12.6% of our total operating income, in the years ended December 31, 2008, 2007 and 2006, respectively. Our share of DLNP’s net income is net of amortization expense of $1.5 million in all three years. In addition, we received an aggregate of $7.0 million, $5.6 million and $3.5 million from DLNP, or 20.3%, 20.5%, and 19.1% of our net cash provided by operating activities, in the years ended December 31, 2008, 2007 and 2006, respectively. If DLNP’s operations, which we have limited rights to influence, are not as successful in the future, our operating income and cash flows may be adversely affected. For example, the Michigan legislature is considering revisions to the state’s foreclosure statutes, which could require lenders to engage in loan modification and other alternative programs. This legislation, if enacted, could result in a delay or decrease in residential mortgage foreclosures in Michigan and thus, could adversely affect DLNP’s public notice revenue, which could decrease the net income of DLNP in which we share.

 

Government regulations related to the Internet could increase our cost of doing business, affect our ability to grow or may otherwise negatively affect our business.

 

Governmental agencies and federal and state legislatures have adopted, and may continue to adopt, new laws and regulatory practices in response to the increasing popularity and use of the Internet and other online services. These new laws may be related to issues such as online privacy, copyrights, trademarks and service mark, sales taxes, fair business practices, domain name ownership and the requirement that our operating units register to do

business as foreign entities or otherwise be licensed to do business in jurisdictions where they have no physical location or other presence. In addition, these new laws, regulations or interpretations relating to doing business through the Internet could increase our costs materially and adversely affect the revenues and results of operations in our Business Information Division.

 

If we are unable to generate traffic to our online publications and other web sites and electronic services, our ability to continue to grow our Business Information Division may be negatively affected.

 

We have devoted, and expect to devote, a significant amount of resources to distributing the information we provide through the Internet, web sites, electronic mail and other online services and the growth of our Business Information Division will increasingly depend upon our ability to effectively use these methods to provide information to our customers. For these methods to be successful, we will need to attract and retain frequent visitors to our web sites or users of our other electronic services, develop and expand the content, products and other tools that we offer on our web sites and through other electronic services, attract advertisers to our web sites and other electronic services and continue to develop and upgrade our technologies. If we are not successful in our efforts, our Business Information revenues and results of operations and our ability to grow this division will be adversely affected.

 

Risks Relating to Our Professional Services Division

 

We have owned and operated the businesses with our Professional Services Division for only a short period of time.

 

Our Professional Services Division consists of APC and Counsel Press. We acquired APC, our mortgage default processing service business, in March 2006 and currently own 84.7% of the outstanding membership interests of APC. APC Investments, LLC, a limited liability company owned by the shareholders of our Michigan law firm customer, Trott & Trott, P.C., including APC’s Chairman and Chief Executive Officer, David A. Trott, owns 7.6% of the outstanding membership interests of APC; our Indiana law firm customer, Feiwell & Hannoy Professional Corporation, owns 1.7% of the outstanding membership interests of APC; and the sellers of NDEx, which we acquired in September 2008, own, collectively 6.1% of the outstanding membership interests of APC. We acquired Counsel Press, our appellate services business, in January 2005. Prior to our acquisition of these businesses, our executive officers, with the exception of Mr. Trott, had not managed or operated a mortgage default processing services business or an appellate services business or engaged in real estate title work (which we began providing with the acquisition of NDEx). Mr. Trott, in addition to being Chairman and Chief Executive Officer of APC, is also managing attorney of Trott & Trott, and accordingly does not devote his full time and effort to APC. If our executive officers cannot effectively manage and operate these businesses, our Professional Services Division’s operating results and prospects may be adversely affected and we may not be able to execute our growth strategy with respect to this division.

 

David A. Trott, the Chairman and Chief Executive Officer of APC, and certain other employees of APC or 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.

 

APC’s Chairman and Chief Executive Officer, David A. Trott, its executive vice presidents, senior executives in Indiana and certain members of senior management at NDEx, which we acquired in September 2008, are the principal attorneys and shareholders of APC’s six law firm customers. Almost all of these individuals directly or indirectly own an interest in APC. As a result of these relationships with APC and our law firm customers, Mr. Trott and these individuals may experience conflicts of interest in the execution of their duties on behalf of us. These conflicts may not be resolved in a manner favorable to us. For example, they may be precluded by their ethical obligations as attorneys or may otherwise be reluctant to take actions on behalf of us that are in our best interests, but are not or may not be in the best interests of their law firms or their clients. Further, as licensed attorneys, they may be obligated to take actions on behalf of their law firms or their respective clients that are not in our best interests. In addition, Mr. Trott has other direct and indirect relationships with DLNP and APC that could cause similar conflicts. See “Related Party Transactions and Policies — David A. Trott” in our proxy statement and Note 11 to our consolidated financial statements for a description of these relationships.

If the number of case files referred to us by our six current mortgage default processing service law firm customers decreases or fails to increase, our operating results and ability to execute our growth strategy could be adversely affected.

 

APC has six law firm customers and also provides mortgage default professing services directly to lenders and loan servicers in California. Revenues from APC constituted 85.0% and 77.4% of our Professional Services Division’s revenues in 2008 and 2007, respectively, and 44.5% and 34.1% of our total revenues in 2008 and 2007, respectively. During 2007, we had two law firm customers, Trott & Trott and Feiwell & Hannoy. In February 2008, we entered into a fifteen year exclusive services agreement with a Minnesota law firm, Wilford & Geske. In September 2008, we entered into twenty-five year exclusive services agreements with the Barrett law firm.

 

We are paid different fixed fees for each foreclosure, bankruptcy, eviction, litigation, and other mortgage default related case file referred by these six firms to us for the provision of processing services. Therefore, the success of our mortgage default processing services business is tied to the number of these case files that each of our law firm customers receives from their mortgage lending and mortgage loan servicing firm clients. In 2008, the top ten clients for our law firm customers, on an aggregated basis, accounted for 61% of the case files referred to us for mortgage default and other processing services. Our operating results and ability to execute our growth strategy could be adversely affected if (1) any of our law firm customers lose business from these clients; (2) these clients are affected by changes in the market and industry or other factors that cause them to be unable to pay for the services of our law firm customer; or (3) our law firm customers are unable to attract additional business from current or new clients for any reason, including any of the following: the provision of poor legal services, the loss of key attorneys (such as David A. Trott, who has developed and maintains a substantial amount of Trott & Trott’s client relationships), the desire of the law firm’s clients to allocate files among several law firms or a decrease in the number of residential mortgage foreclosures in the six states where we primarily do business, including due to market factors or governmental action. A failure by one or more of our law firm customers to pay us as a result of these factors could materially reduce the cash flow of our APC operation and result in losses in that operating unit. Please refer to the risk factors below for more information about governmental or other voluntary action on the part of the clients of our law firm customers that could negatively affect APC. Further, we could lose referrals from our law firm customers to the extent that Trott & Trott’s or the Barrett law firm’s clients direct either of them to use another provider of mortgage default processing services or that they conduct such services in-house, and we could lose any law firm customer if we materially breach our services agreements with such customer.

 

Regulation of the legal profession may constrain APC’s and Counsel Press’ operations, and numerous issues arising out of that regulation, its interpretation or evolution could impair our ability to provide professional services to our customer and reduce our revenues and profitability.

 

Each state has adopted laws, regulations and codes of ethics that provide for the licensure of attorneys, which grants attorneys the exclusive right to practice law and places restrictions upon the activities of licensed attorneys. The boundaries of the “practice of law,” however, are indistinct, vary from one state to another and are the product of complex interactions among state law, bar associations and constitutional law formulated by the U.S. Supreme Court. Many states define the practice of law to include the giving of advice and opinions regarding another person’s legal rights, the preparation of legal documents or the preparation of court documents for another person. In addition, all states and the American Bar Association prohibit attorneys from sharing fees for legal services with non-attorneys.

 

Pursuant to services agreements between APC and its law firm customers, we provide mortgage default processing services. Through Counsel Press, we provide procedural and technical guidance to law firms and attorneys to enable them to file appellate briefs, records and appendices on behalf of their clients that comply with court rules. Current laws, regulations and codes of ethics related to the practice of law pose the following principal risks:

 

 

 

Applicable laws, regulations and codes of ethics, including their interpretation and enforcement, could change in a manner that restricts APC’s or Counsel Press’ operations. Any such change in laws, policies or practices could increase our cost of doing business or adversely affect our revenues and profitability.

 

Regulation of sub-prime, Alt-A and other residential mortgage products, including bills introduced in states where we do business, the Hope for Homeowners Act, the Emergency Economic Stabilization Act and Homeowner Affordability and Stability Plan, and voluntary foreclosure relief programs developed by lenders, loan servicers and the Hope Now Alliance, a consortium that includes loan servicers, may have an adverse effect on or restrict our mortgage default processing services and public notice operations.

 

The prevalence of sub-prime, Alt-A and other non-traditional mortgage products, rising unemployment, and the increasing number of defaults and delinquencies in connection with those and other mortgages have and may continue to result in new or increased government regulation of residential mortgage products or the foreclosure of delinquent loans. If new or more stringent regulations are enacted, the clients of our law firm customers and our California customers would likely be subject to these regulations. As a result, these new or more stringent regulations may adversely impact the number of mortgage default files that our law firm customers receive from their clients and can then refer to us for processing or that we receive for processing from our California customers. Similarly, these new or more stringent regulations could impose new requirements on the processing of foreclosures, which could adversely affect when public notices are sent to us or DLNP (our minority investment) for publication. In the past year, the federal government has enacted the Housing and Economic Recovery Act of 2008, which provides, in part, reforms to mitigate the volume of mortgages in foreclosure, including the development of a refinance program for homeowners with sub-prime loans. This refinance program took effect on October 1, 2008. In September, the government also enacted the Economic Emergency Stabilization Act, which provides funding to purchase troubled assets from financial institutions. Most recently, the new administration announced the Homeowner Affordability and Stability Plan in an attempt to address the continuing rise in mortgage delinquencies and mortgage defaults. Under this plan, the federal government set forth detailed requirements for the “Making Home Affordable” program which offers qualified homeowners with a loan-to-value ratio above 80% the opportunity to apply for mortgage refinancing at lower interest rates. The “Making Home Affordable” program also announced loan modification guidelines that are expected to become standard industry practice in pursuing affordable and sustainable mortgage modifications. The loan modification program guidelines are expected to work in tandem with an expanded Hope for Homeowners program. If this legislation or any other bills being considered, including the proposed bankruptcy legislation that would allow bankruptcy judges in Chapter 13 cases to revise the terms of a mortgage on a primary residence, are successful, they will likely reduce the number of mortgages going into default and, thus, the number of mortgage default files that our law firm or other customers can refer to us for processing and the number of foreclosure public notices referred to us or DLNP for publication. If either of these occur, it could have a negative impact on our earnings and growth.

 

Furthermore, a number of lenders and loan servicers, including clients of us and our law firm customers, are focusing their attention toward loss mitigation, loan remodifications and other similar efforts which may delay or prevent foreclosures. For example, Bank of America, JP Morgan Chase and Citigroup, Inc. have announced programs to address certain delinquent loans they own, including moratoria on certain foreclosure sales. To the extent that these lenders, loan servicers and others over whom we have no control voluntarily, or are required to, continue these efforts, the number of files referred to us or DLNP for mortgage default processing and the number of

foreclosure public notices referred to us for publication could be adversely affected, which would have a negative impact on our earnings, growth and operations. For example, the decrease in foreclosure files referred to APC in Michigan and decreased equity in earnings of DLNP for the fourth quarter of 2008 compared to the fourth quarter of 2007, we believe, is due, in part, to various foreclosure prevention efforts on the party of mortgage lenders and loan servicers in the Michigan. You should also refer to “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments — Regulatory Environment” later in this annual report on Form 10-K and also “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments — Regulatory Environment” in our quarterly report for the third quarter 2008 on Form 10-Q, which was filed with the SEC on November 12, 2008, for more information about regulatory and similar changes that could affect our public notice and mortgage default processing services revenues.

 

Failure to effectively customize either of our proprietary case management software systems so that they can be used to serve law firm customers in new states could adversely affect our mortgage default processing service business and growth prospects.

 

We have two proprietary case management software systems, each of which stores, manages and reports on the large amount of data associated with each foreclosure, bankruptcy or eviction case file we process. One system was initially built for use in Michigan and the other for use in Texas, both of which are primarily non-judicial foreclosure states. Other states, like Indiana, are judicial foreclosures states. As a result, our law firm customers must satisfy different requirements depending on the state in which they serve their clients. When we enter a service agreement with a law firm customer in a state where we do not currently do business, we will need to customize one of our proprietary case management software systems so that it can be used to assist that customer in satisfying the foreclosure requirements of their state. If we are not, on a timely basis, able to effectively customize one of our case management software systems to serve our new law firm customers, we may not be able to realize the operational efficiencies and increased capacity to handle files that we anticipated when we entered the service agreements. At times, we base the fees we agree to receive from these law firm customers for each case file they refer to us on the assumption that we would realize those operational efficiencies. Therefore, the failure to effectively customize our case management software system could impact our profitability under our services agreement with new law firm customers.

 

Claims, even if not valid, that our case management software systems, document conversion system or other proprietary software products and information systems infringe on the intellectual property rights of others could increase our expenses or inhibit us from offering certain services.

 

Other persons could claim that they have patents and other intellectual property rights that cover or affect our use of software products and other components of information systems on which we rely to operate our business, including our two proprietary case management software systems we use to provide mortgage default processing services and our proprietary document conversion system we use to provide appellate services. Litigation may be necessary to determine the validity and scope of third-party rights or to defend against claims of infringement. Any litigation, regardless of the outcome, could result in substantial costs and diversion of resources and could have a material adverse effect on our business. If a court determines that one or more of the software products or other components of information systems we use infringes on intellectual property owned by others or we agree to settle such a dispute, we may be liable for money damages. In addition, we may be required to cease using those products and components unless we obtain licenses from the owners of the intellectual property or redesign those products and components in such a way as to avoid infringement. In any event, such situations may increase our expenses or adversely affect the marketability of our services.

 

Changes in court practices or procedures may affect the filing and service requirements for appellate case filing or may reduce or eliminate the amount of appellate case filings, either of which could adversely affect Counsel Press’s revenues, profitability and growth opportunities or adversely restrict its operations.

 

As federal courts continue to rely on, and state courts continue to consider and implement rules for, electronic filing of appellate cases, these courts may consider changes that would further simplify the filing process for

appellate cases. As an example, last year, the U.S. Court of Appeals for the Fourth Circuit modified a local rule, eliminating the requirement in most cases that parties serve paper copies of appellate briefs on other parties in the matter. The U.S. Court of Appeals for the Third Circuit adopted a similar modification to a local rule in December 2008. While these modifications have had marginal negative effect on Counsel Press’ revenues, Counsel Press does receive revenues from various stages of the filing process, including service of appellate documents to opposing parties. If we are unable to find revenue sources or change our business model to replace revenue lost from the elimination of one or more of these processes or otherwise respond to these changes, our Counsel Press operations may be adversely affected.

 

Counsel Press’ operations may also be adversely affected if courts change their practices for accepting direct or discretionary appeal cases or if courts implement mandatory pre-litigation or post-litigation settlement or alternate dispute resolution programs, any of which could reduce the number of appellate case filings available for Counsel Press to process.

 

Risks Relating to Our Business in General

 

We depend on key personnel and we may not be able to operate and grow our business effectively if we lose the services of any of our key personnel or are unable to attract qualified personnel in the future.

 

We rely heavily on our senior management team, including James P. Dolan, our founder, Chairman, Chief Executive Officer and President; Scott J. Pollei, our Executive Vice President and Chief Financial Officer; David A. Trott, Chairman and Chief Executive Officer of APC; and Mark W.C. Stodder, our Executive Vice President — Business Information, because they have a unique understanding of our diverse product and service offerings and the ability to manage an organization that has a diverse group of employees. Our ability to retain Messrs. Dolan, Pollei, Trott and Stodder and other key personnel is therefore very important to our future success. In addition, we rely on our senior management, especially Mr. Dolan, to identify growth opportunities through the development or acquisition of additional publications and professional services opportunities.

 

We have employment agreements with Messrs. Dolan, Pollei, Trott and Stodder. These employment agreements, however, do not ensure that Messrs. Dolan, Pollei, Trott and Stodder will not voluntarily terminate their employment with us. Further, we do not typically enter into employment agreements with other key personnel. In addition, our key personnel, including our other executive officers, are subject to non-competition restrictions, which generally restrict such employees from working for competing businesses for a period of one year after the end of their employment with us. These non-compete provisions, however may not be enforceable. We also do not have key man insurance for any of our current management or other key personnel. The loss of any key personnel would require the remaining key personnel to divert immediate and substantial attention to seeking a replacement. Competition for senior management personnel is intense. An inability to find a suitable replacement for any departing executive officer or key employee on a timely basis could adversely affect our ability to operate and grow our business.

 

We intend to continue to pursue acquisition opportunities, which we may not do successfully and may subject us to considerable business and financial risks.

 

We have grown, and anticipate that we will continue to grow, through opportunistic acquisitions of business information and professional services businesses. While we evaluate potential acquisitions on an ongoing basis, we may not be successful in assessing the value, strengths and weaknesses of acquisition opportunities or consummating acquisitions on acceptable terms. For example, to the extent that market studies performed by third parties are not accurate indicators of market and business trends, we may not appropriately evaluate or realize the future market growth or business opportunities in targeted geographic areas and business lines that we expect from an acquisition. Furthermore, we may not be successful in identifying acquisition opportunities and suitable acquisition opportunities may not even be made available or known to us. In addition, we may compete for certain acquisition targets with companies that have greater financial resources than we do. Our ability to pursue acquisition opportunities may also be limited by non-competition provisions to which we are subject. For example, our ability to carry public notices in Michigan and to provide mortgage default processing services in Indiana and Minnesota is limited by non-competition provisions to which we agreed when we purchased a 35.0% membership

interest in DLNP and the mortgage default processing service businesses of Feiwell & Hannoy and Wilford & Geske. We anticipate financing future acquisitions through cash provided by operating activities, borrowings under our bank credit facility and/or other debt or equity financing, which would reduce our cash available for other purposes. For example, we were required to incur additional indebtedness to close the acquisition of NDEx and this additional debt consumed a significant portion of our ability to borrow and may limit our ability to pursue other acquisitions or growth strategies.

 

We may incur significant expenses while pursuing acquisitions, which could negatively impact our financial condition and results of operations because, beginning January 1, 2009, we are required to expense these costs under SFAS No. 141R. Previously, we had included these expenses in our purchase price allocation.

 

Acquisitions that we complete may expose us to particular business and financial risks that include, but are not limited to:

 

 

We may not be able to successfully manage acquired businesses or increase our cash flow from these operations. If we are unable to successfully implement our acquisition strategy or address the risks associated with acquisitions, or if we encounter unforeseen expenses, difficulties, complications or delays frequently encountered in connection with the integration of acquired entities and the expansion of operations, our growth and ability to compete may be impaired, we may fail to achieve acquisition synergies and we may be required to focus resources on integration of operations rather than other profitable areas. For example, upon the closing of our acquisition of NDEx, which occurred in September 2008, APC began (1) operating in three new states, which may place a strain on our management and internal systems, processes and controls, and (2) providing mortgage default processing services directly to mortgage lenders and loan servicers in California and operating a real estate title company, with which we have no or limited experience. Furthermore, to the extent that our growth strategy for APC includes NDEx starting operations in new states to service offices established by the Barrett law firm or other law firms with whom we partner, as opposed to our historical focus of acquiring an existing mortgage default processing business from a law firm that serves a particular state, we will rely heavily on the ability of the Barrett law firm to successfully open offices or partner with other law firms or lawyers in such other states and on the ability of the NDEx’s senior management team to successfully execute this strategy. If we are unable to successfully address the risks associated with this acquisition, or if we encounter unforeseen expenses, difficulties, complications or delays in integrating, operating or expanding NDEx’s business, NDEx may not be accretive to our earnings per share and could negatively impact our growth.

 

We may have difficulty managing our growth, which may result in operating inefficiencies and negatively impact our operating margins.

 

Our growth may place a significant strain on our management and operations, especially as we continue to expand our product and service offerings, the number of markets we serve and the number of local offices we maintain throughout the United States, including through acquiring new businesses. We may not be able to manage our growth on a timely or cost effective basis or accurately predict the timing or rate of this growth. We believe that

our current and anticipated growth will require us to continue implementing new and enhanced systems, expanding and upgrading our data processing software and training our personnel to utilize these systems and software. Our growth has also required, and will continue to require, that we increase our investment in management personnel, financial and management systems and controls and office facilities. In particular, we are, and will continue to be, highly dependent on the effective and reliable operation of our centralized accounting, circulation and information systems. In addition, the scope of procedures for assuring compliance with applicable rules and regulations has changed as the size and complexity of our business has changed. If we fail to manage these and other growth requirements successfully or if we are unable to implement or maintain our centralized systems, or rely on their output, we may experience operating inefficiencies or not achieve anticipated efficiencies. In addition, the increased costs associated with our expected growth may not be offset by corresponding increases in our revenues, which would decrease our operating margins.

 

We rely on our proprietary case management software systems, document conversion systems, web sites and online networks, and a disruption, failure or security compromise of these systems may disrupt our business, damage our reputation and adversely affect our revenues and profitability.

 

Our proprietary case management software systems are critical to our mortgage default processing service business because they enables us to efficiently and timely service a large number of foreclosure, bankruptcy, eviction and, to a lesser extent, litigation and other mortgage default related case files. Our appellate services business relies on our proprietary document conversion systems that facilitate our efficient processing of appellate briefs, records and appendices. Similarly, we rely on our web sites and email notification systems to provide timely, relevant and dependable business information to our customers. Therefore, network or system shutdowns caused by events such as computer hacking, dissemination of computer viruses, worms and other destructive or disruptive software, denial of service attacks and other malicious activity, as well as power outages, natural disasters and similar events, could have an adverse impact on our operations, customer satisfaction and revenues due to degradation of service, service disruption or damage to equipment and data.

 

In addition to shutdowns, our systems are subject to risks caused by misappropriation, misuse, leakage, falsification and accidental release or loss of information, including sensitive case file data maintained in our proprietary case management system and credit card information for our business information customers. As a result of the increasing awareness concerning the importance of safeguarding personal information, the potential misuse of such information and legislation that has been adopted or is being considered regarding the protection and security of personal information, information-related risks are increasing, particularly for businesses like ours that handle a large amount of personal data.

 

Disruptions or security compromises of our systems could result in large expenditures to repair or replace such systems, remedy any security breaches and protect us from similar events in the future. We also could be exposed to negligence claims or other legal proceedings brought by our customers or their clients, and we could incur significant legal expenses and our management’s attention may be diverted from our operations in defending ourselves against and resolving lawsuits or claims. In addition, if we were to suffer damage to our reputation as a result of any system failure or security compromise, our customers in California and the clients of our law firm customers to which we provide mortgage default processing services could choose to send fewer foreclosure, bankruptcy or eviction case files to our customers. Any reduction in the number of case files handled by our customers would also reduce the number of mortgage default case files serviced by us. Similarly, our appellate services clients may elect to use other service providers. In addition, customers of our Business Information Division may seek out alternative sources of the business information available on our web sites and email notification systems. Further, in the event that any disruption or security compromise constituted a material breach under our services agreements, our law firm customers could terminate these agreements. In any of these cases, our revenues and profitability could be adversely affected.

We may be required to incur additional indebtedness or raise additional capital to fund our operations and acquisitions, repay our indebtedness and fund capital expenditures and this additional cash may not be available to us on satisfactory timing or terms or at all.

 

Our ability to generate cash depends to some extent on general economic, financial, legislative and regulatory conditions in the markets which we serve and as they relate to the industries in which we do business and other factors outside of our control. We derive a significant portion of our revenues from foreclosures (56.8% of our total revenues in the fourth quarter of 2008). Therefore, legislation, loss mitigation, moratoria, loan modifications and other efforts that significantly mitigate and/or delay foreclosures may adversely impact our ability to use cash flow from operations to fund day-to-day operations in our Professional Services Division, and, to a lesser extent, our Business Information Division, to repay our indebtedness, when due, to fund capital expenditures, to meet our cash flow needs and to pursue any material expansion of our business, including through acquisitions or increased capital spending. We may, therefore, need to incur additional indebtedness or raise funds from the sale of additional equity. Financing, however, may not be available to us at all, at an acceptable cost or on acceptable terms, when needed. Our existing bank credit facility may also limit our ability to raise additional funds through debt or equity financing. In addition, if we issue a significant amount of additional equity securities, the market price of our common stock could decline and our stockholders could suffer significant dilution of their interests in us.

 

Our business and reputation could suffer if third-party providers of printing and delivery services and technology and system support that we rely upon as well as newspapers, including those of The Detroit Legal News Publishing, where we place foreclosure public notices fail to perform satisfactorily.

 

We outsource a significant amount of our printing to third-party printing companies. As a result, we are unable to ensure directly that the final printed product is of a quality acceptable to our subscribers. We also outsource a significant amount of our technology and software systems support to third-party information technology vendors. Further, we rely on public notice newspapers in the markets where we process mortgage default files, including Detroit Legal News Publishing, to timely and accurately publish our foreclosure public notices. To the extent that any of these third party providers do not perform their services satisfactorily, do not have the resources to meet our needs or decide or are unable to provide these services to us on commercially reasonable terms, our ability to provide timely and dependable business information products could be adversely affected. In addition, we could face increased costs or delays if we must identify and retain other third-party providers of these services.

 

Most of our print publications are delivered to our subscribers by the U.S. Postal Service. We have experienced, and may continue to experience, delays in the delivery of our print publications by the U.S. Postal Service. To the extent we try to avoid these delays by using third-party carriers other than the U.S. Postal Service to deliver our print products, we will incur increased operating costs. In addition, timely delivery of our publications is extremely important to many of our advertisers, public notice publishers and subscribers. Any delays in delivery of our print publications to our subscribers could negatively affect our reputation, cause us to lose advertisers, public notice publishers and subscribers and limit our ability to attract new advertisers, public notice publishers and subscribers.

 

We have incurred and will continue to incur significant costs as a result of operating as a public company, and our management is required to devote substantial time and resources to various compliance issues; if we do not address these compliance issues successfully, our stock price could be adversely impacted.

 

As a result of the consummation of our initial public offering on August 7, 2007, we became subject to reporting, corporate governance and other obligations under the Securities Exchange Act of 1934, as well as the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the New York Stock Exchange. For example, Section 404 of the Sarbanes-Oxley Act requires annual management assessment of the effectiveness of our internal control over financial reporting and an attestation report by our independent auditors on our internal control over financial reporting beginning for us in the year ended December 31, 2008. These reporting and other obligations have placed, and will continue to place, significant demands on our management, administrative, operational and accounting resources, especially if we have to design and implement enhanced processes and controls to address any material weaknesses in our internal control over financial reporting that are identified by us or our independent auditors. Further, while we have completed our annual assessment of, and our auditors have

audited the effectiveness of, our internal controls for the year ended December 31, 2008, we did not assess, and our auditors did not audit, the effectiveness of the internal controls of NDEx (which we acquired in September 2008) and the mortgage default processing services business of Wilford & Geske, P.A. (which we acquired in February 2008), which accounted for, on an aggregated basis, 16.0% of our total revenues for 2008. As a result, we expect to incur additional costs to test the internal controls of those and other businesses we may acquire in the future. We have, and will continue to, incur substantial additional legal, accounting and other expenses that we did not incur as a private company to comply with these requirements. These regulations may also make it more difficult to attract and retain qualified members for our board of directors and its various committees. Any failure to comply with these regulations, including if we fail to account for transactions and report information to our investors on a timely and accurate basis, or to otherwise be able to conclude in a timely manner that our internal control over financial reporting is operating effectively, could decrease investor confidence in our public disclosure, impair our ability to obtain financing when needed or have an adverse effect on our stock price.

 

If our goodwill or finite-lived intangible assets becomes impaired, we may be required to record a significant charge to earnings.

 

In the course of our operating history, we have acquired numerous assets and businesses. Some of our acquisitions have resulted in the recording of a significant amount of goodwill and/or finite-lived intangible assets on our financial statements. At December 31, 2008, our goodwill was $119.0 million and our finite-lived intangible assets, net of accumulated amortization, were $254.9 million, both of which increased significantly in the third quarter of 2008 as a result of the acquisition of NDEx (see Note 5 to our audited consolidated financial statements included in this annual report on Form 10-K). If we acquire new assets or businesses in the future, as we intend to do, we may record additional goodwill or intangible assets.

 

We assess our goodwill for impairment on an annual basis using a measurement date of November 30 and, based on this assessment for 2008, we have determined that our goodwill is not impaired. See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Goodwill, Intangible Assets and Other Long-Life Assets” later in this report for information on our annual test of goodwill impairment. Under Generally Accepted Accounting Principles, or GAAP, we are also required to assess the impairment of our goodwill and identifiable intangible assets whenever events, circumstances or other conditions indicate that we may not recover the carrying value of the asset. If the uncertain political and regulatory environment regarding mortgage foreclosures as described in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments — Regulatory Environment” and risk factors earlier in this report, the tight credit markets, the volatility of our stock price and any resulting decline in our market capitalization, along with other uncertainties, continue, we may be required to conduct an interim assessment of our goodwill and finite-lived intangible assets. As a result of this interim assessment, we may record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or identifiable intangible assets is determined. An impairment charge, if taken, could adversely affect our business, financial position, results of operations, and future earnings and, as a result, could cause our stock price to decline.

 

We have incurred in the past, and may incur in the future, net losses.

 

We incurred net losses of $(54.0) million and $(20.3) million for the years ended December 31, 2007 and 2006, respectively. These net losses were attributable to our non-cash interest expense related to redeemable preferred stock, which we do not expect to incur for periods after August 7, 2007 because we used a portion of the net proceeds of our initial public offering to redeem our preferred stock and do not anticipate issuing preferred stock in the future on terms that would require us to record a non-cash interest expense. However, we expect our operating expenses to increase in the future as we expand our operations. If our operating expenses exceed our expectations, whether because we are unable to realize the anticipated operational efficiencies from centralization of acquired accounting, circulation, advertising, production and appellate and default processing systems in a timely manner following future expansions or for other reasons, or if our revenues do not grow to offset these increased expenses, we may again incur net losses in the future.

We are subject to risks relating to litigation due to the nature of our product and service offerings.

 

We may, from time to time, be subject to or named as a party in libel actions, negligence claims, and other legal proceedings in the ordinary course of our business given the editorial content of our business information products and the technical rules with which our appellate services and mortgage default processing businesses must comply and the strict deadlines these businesses must meet. We could incur significant legal expenses and our management’s attention may be diverted from our operations in defending ourselves against and resolving lawsuits or claims. An adverse resolution of any future lawsuits or claims against us could result in a negative perception of us and cause the market price of our common stock to decline or otherwise have an adverse effect on our operating results and growth prospects.

 

Our failure to comply with the covenants contained on our debt instruments could result in an event of default that could adversely affect our financial condition and ability to operate our business as planned.

 

We have, and will continue to have, significant debt and debt service obligations. Our credit agreement contains, and any agreements to refinance our debt likely will contain, financial and restrictive covenants that limit our ability to incur additional debt, including to finance future operations or other capital needs, and to engage in other activities that we may believe are in our long-term best interests, including to dispose of or acquire assets. Our failure to comply with these covenants may result in an event of default, which if not cured or waived, could result in the banks accelerating the maturity of our indebtedness or preventing us from accessing availability under our credit facility. If the maturity of our indebtedness is accelerated, we may not have sufficient cash resources to satisfy our debt obligations and we may not be able to continue our operations as planned. In addition, the indebtedness under our credit agreement is secured by a security interest in substantially all of our tangible and intangible assets, including the equity interests of our subsidiaries, and therefore, if we are unable to repay such indebtedness the banks could foreclose on these assets and sell the pledged equity interests, which could adversely affect our ability to operate our business.

 

We may be required to incur additional indebtedness if any of the minority members of APC exercises its put right with respect to its membership interest in APC.

 

Under the terms of APC’s operating agreement (as amended and restated), the minority members of APC have the right to require APC to repurchase all or any portion of their membership interests in APC (currently 15.3%). As of December 31, 2008, taking into account the change in ownership of APC and the additional debt incurred to finance the acquisition of NDEx in September 2008, the redemption value of the put right of the minority members of APC was $16.8 million. APC Investments and Feiwell & Hannoy (holding 9.3% in the aggregate) may exercise this right within the six month period following August 2, 2009. The remaining minority members of APC (holding 6.1% in the aggregate) may exercise this right within the six month period following September 2, 2012. We will incur additional indebtedness in the future if any minority member of APC exercises its put right because the purchase price paid by APC in connection with any such repurchase would be in the form of a three-year unsecured note. The principal amount of the note would be equal to (x) 6.25 times APC’s trailing twelve month EBITDA, less the aggregate amount of any interest-bearing indebtedness of APC as of the repurchase date, multiplied by (y) such minority member’s percentage ownership interest in APC. Such note would bear interest at a rate equal to prime plus 2%. If we are required to incur this additional indebtedness, it could decrease the amount of working capital available to fund our operations, which could impair our ability to operate and grow our business as planned.

 

We rely on exclusive proprietary rights and intellectual property that may not be adequately protected under current laws, and we encounter disputes from time to time relating to our use of intellectual property of third parties.

 

Our success depends in part on our ability to protect our proprietary rights, particularly those in our Business Information Division. We rely on a combination of copyrights, trademarks, service marks, trade secrets, domain names and agreements to protect our proprietary rights. We rely on service mark and trademark protection in the United States to protect our rights to the marks “DOLAN MEDIA COMPANY,” and “DOLAN MEDIA,” as well as distinctive logos and other marks associated with our print and on-line publications and services in our Professional Services Division. We cannot assure you that these measures will be adequate, that we have secured, or will be able

to secure, appropriate protections for all of our proprietary rights in the United States, or that third parties will not infringe upon or violate our proprietary rights. Despite our efforts to protect these rights, unauthorized third parties may attempt to use our trademarks and other proprietary rights for their similar uses. Our management’s attention may be diverted by these attempts and we may need to use funds in litigation to protect our proprietary rights against any infringement or violation.

 

We may encounter disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in these disputes. Third parties may raise a claim against us alleging an infringement or violation of the trademarks, copyright or other proprietary rights of that third party. Some third party proprietary rights may be extremely broad, and it may not be possible for us to conduct our operations in such a way as to avoid those intellectual property rights. Any such claim could subject us to costly litigation and impose a significant strain on our financial resources and management personnel regardless of whether such claim has merit. Our general liability insurance may not cover potential claims of this type adequately or at all, and we may be required to alter the content of our classes or pay monetary damages, which may be significant.

 

These risks are in addition to those risks that third parties may claim to have patents or other intellectual property rights in our proprietary case management software systems, document conversion systems and other proprietary software products that are used by the operating units in our Professional Services Division. These risks are more fully described earlier in the “Risks Relating to Business in General” section of this annual report on Form 10-K.

 

Risks Associated with Purchasing Our Common Stock

 

Our common stock has a limited trading history and, during that time, the market price of our common stock has been, and may continue to be, highly volatile. The market price of our common stock depends on a variety of factors, which could cause our common stock to trade at prices below the price you have paid.

 

Our common stock has traded on the New York Stock Exchange under the symbol “DM” since August 2, 2007. Since that time and through March 9, 2009, the closing sales price of our common stock has ranged from a high of $30.84 to a low of $2.97 per share and since September 1, 2008, from a high of $15.01 per share (on September 2, 2008) to a low of $2.97 per share (on November 25, 2008). The market price of our common stock could continue to fluctuate significantly in the future. Some of the factors that could affect our share price include, but are not limited to:

 

 

These factors could cause our common stock to trade at prices below the price you paid for our common stock, which could prevent you from selling your common stock at or above this price. In addition, the stock market in general, and the New York Stock Exchange in particular, has from time to time, and most recently since September

2008, experienced significant price and volume fluctuations that have affected the market prices of individual securities. These fluctuations often have been unrelated or disproportionate to the operating performance of publicly traded companies. In the past, following periods of volatility in the market price of a particular company’s securities, securities class-action litigation has often been brought against that company. If similar litigation were instituted against us, it could result in substantial costs and divert management’s attention and resources from our operations.

 

Future offerings of debt or equity securities by us may adversely affect the market price of our common stock or your rights as holders of our common stock.

 

In the future, we may attempt to increase our capital resources by offering debt or additional equity securities, including commercial paper, medium-term notes, senior or subordinated notes, shares of preferred stock or shares of our common stock. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other borrowings, would receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the economic and voting rights of our existing stockholders and/or reduce the market price of our common stock. At December 31, 2008, we had an aggregate of 36,657,317 shares of common stock authorized but not issued and not reserved for issuance under our incentive compensation plan or employee stock purchase plan and 5,000,000 shares of authorized but unissued preferred stock. We may issue all of these shares without any action or approval by our stockholders. We intend to continue to actively pursue acquisitions and may issue shares of common stock in connection with these acquisitions. Further, we may issue additional equity interests in APC in connection with acquisitions of mortgage default processing service businesses. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings.

 

Future sales of our common stock in the public market may adversely affect the market price of our common stock or our ability to raise additional capital.

 

Sales of a substantial number of shares of our common stock in the public market, or the perception that large sales could occur, could cause the market price of our common stock to decline or limit our future ability to raise capital through an offering of equity securities. Other than restricted shares of common stock issued to our employees under our incentive compensation plan and shares of our common stock held by our “affiliates,” all of our outstanding shares of common stock are freely tradeable. Shares held by our affiliates are subject to the volume, manner of sale, and notice restrictions of Rule 144. In addition, our certificate of incorporation permits the issuance of up to 70,000,000 shares of common stock. On July 30, 2008, we issued an aggregate of 4,000,000 shares of our common stock in connection with a private placement and, on October 3, 2008, we filed a prospectus with the Securities and Exchange Commission, covering the resale of those shares. Accordingly, these shares may be sold at any time, subject to compliance with applicable law. At December 31, 2008, we had an aggregate of approximately 37 million shares of our common stock authorized but unissued, exclusive of shares reserved for issuance under our equity compensation and employee stock purchase plan. Thus, we have the ability to issue substantial amounts of common stock in the future, which would dilute the percentage ownership held by current investors.

 

In connection with our initial public offering, we filed a registration statement on Form S-8 under the Securities Act covering 2,700,000 shares of common stock that have been issued or will be issuable pursuant to our incentive compensation plan and 900,000 shares of common stock that will be issuable pursuant to an employee stock purchase plan, to the extent we decide to implement one, which in the aggregate equals 12.0% of the aggregate number of shares of our common stock that are outstanding as of December 31, 2008. Accordingly, subject to applicable vesting requirements, the exercise of options, and the provisions of Rule 144 with respect to affiliates, shares registered under the registration statement on Form S-8 will be available for sale in the open market. In addition, we have granted most of the persons who were stockholders prior to our initial public offering registration rights with respect to their shares of our common stock.

Anti-takeover provisions in our amended and restated certificate of incorporation, amended and restated by-laws and stockholder rights plan may discourage, delay or prevent a merger or acquisition that you may consider favorable or prevent the removal of our current board of directors and management.

 

Our amended and restated certificate of incorporation, amended and restated bylaws and stockholder rights plan could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the price of our common stock and your rights as a holder of our common stock. For example, our amended and restated certificate of incorporation and amended and restated bylaws (1) permit our board of directors to issue one or more series of preferred stock with rights and preferences designated by our board, (2) stagger the terms of our board of directors into three classes and (3) impose advance notice requirements for stockholder proposals and nominations of directors to be considered at stockholders’ meetings. In addition, our stockholder rights plan, which our board adopted on January 29, 2009, entitles the holders of rights, when exercisable, to acquire, in exchange for the exercise price of each right, shares of our common stock, having a value equal to two times the exercise price of each right. These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors other than the candidates nominated by our board. We are also subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay or prevent a change of control of our company. In addition, our bank credit facility contains provisions that could limit our ability to enter into change of control transactions.

 

 

Not applicable.

 

 

Our executive offices are located in Minneapolis, Minnesota, where we sublease approximately 22,700 square feet under a sublease terminating in February 2012. We own our office facilities in Phoenix, Arizona and Baltimore, Maryland, and we lease 25 other office facilities in 15 states for our Business Information Division under leases that terminate on various dates between June 2009 and January 2019. We also own our print facility in Minneapolis, Minnesota, and we lease print facilities in Baltimore, Maryland and Oklahoma City, Oklahoma, under leases that terminate in June 2009 and July 2010, respectively. Counsel Press leases 11 offices under leases terminating on various dates between August 2009 and October 2015. APC and our Michigan Lawyers Weekly publishing unit sublease an aggregate of approximately 30,000 square feet in suburban Detroit, Michigan, from Trott & Trott, PC, a law firm in which APC’s Chairman and Chief Executive Officer, David A. Trott, owns a majority interest, at a rate of $10.50 per square foot, triple net, which subleases expire on March 31, 2012. Trott & Trott leases these spaces from NW13, LLC, a limited liability company in which Mr. Trott owns 75% of the membership interests. NDEx leases approximately 97,400 square feet of office space in Texas under four operating leases that terminate on July 31, 2013, one of which it subleases from the Barrett law firm. We consider our properties suitable and adequate for the conduct of our business. We do not believe we will have difficulty renewing the leases we currently have or in finding alternative space in the event those leases are not renewed.

 

 

We are from time to time involved in ordinary, routine litigation incidental to our normal course of business, none of which we believe to be material to our financial condition or results of operations.

 

 

We did not submit any matters for a vote of our stockholders during the fourth quarter of our fiscal year ended December 31, 2008.

 

 

Market Information and Dividends

 

Our common stock has been listed on the New York Stock Exchange under the symbol “DM” since August 2, 2007. Prior to that time, there was no public market for our common stock. The initial public offering price of our common stock was $14.50 per share and the initial public offering closed on August 7, 2007. The following table sets forth, for the periods indicated, the high and low per share sales prices of our common stock as reported on the New York Stock Exchange.

 

 

On March 9, 2009, the closing price per share of our common stock was $6.20. We urge potential investors to obtain current market quotations before making any decision to invest in our common stock. On March 9, 2009, there were 1,870 holders of record of our common stock.

 

The holders of our common stock are entitled to receive ratably such dividends as may be declared by our board of directors out of funds legally available for dividends. We have not historically declared or paid dividends on our common stock and do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future. The payment of any dividends in the future will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, earnings, capital requirements and surplus, contractual restrictions (including those in our credit agreement), outstanding indebtedness and other factors our board deems relevant.

Performance Graph

 

The following graph shows a comparison from August 2, 2007 (the date our common stock began trading on the New York Stock Exchange) through December 31, 2008, of cumulative stockholders total return for our common stock, companies we deem to be in our industry peer group for both our Business Information and Professional Services Divisions, the New York Stock Exchange Market Index and the Russell 3000 Index. The companies included in the industry peer group for Business Information consist of GateHouse Media, Inc. (GHS), Lee Enterprises Inc. (LEE), McClatchey Co. (MNI), Daily Journal Corp. (DJCO) and Journal Register Co. (JRC). Last year, the companies included in the industry peer group for Professional Services consisted of Automatic Data Processing, Inc. (ADP), Fidelity National Financial, Inc. (FNF), American Reprographics Co. (ARP), Dun & Bradstreet Corp. (DNB), Thompson-Reuters Corp (TOC) formerly Thompson Corp., and IHS, Inc. (IHS). This year, we have added Lender Processing Services, Inc. (LPS) and removed Fidelity National Financial (FNF) from our industry peer group for the Professional Services Division because Lender Processing Services is a spin-off of Fidelity National Financial that offers services to the mortgage default industry, an industry which our Professional Services Division also serves. The returns set forth on the following graph are based on historical results and are not intended to suggest future performance. The performance graph assumes $100 was invested on August 2, 2007 in our common stock, the companies in our peer group indices (weighted based on market capitalization as of such date), the NYSE Market Index and the Russell 3000 Index, at the closing per share price on that date. Data for the NYSE Market Index, Russell 3000 Index and our peer groups assume reinvestment of dividends. Since our common stock began trading on the New York Stock Exchange, we have not declared any dividends to be paid to our stockholders and do not have any present plans to declare dividends.

 

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG DOLAN MEDIA CO., NYSE MARKET INDEX,
RUSSELL 3000 INDEX AND PEER GROUP INDEXES

 

 

Source:  Morningstar, Inc.

Unregistered Sales of Securities and Issuer Purchases of Equity Securities

 

We did not repurchase any shares of our common stock nor did we have any unregistered sales of securities during the fourth quarter of 2008.

 

 

The following table presents our selected consolidated financial data for the years and as of the dates presented below. You should read the following information along with “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes, all of which are included elsewhere in this annual report on Form 10-K. We derived the historical statement of operations and balance sheet data for the years ended December 31, 2008, 2007, and 2006 and as of December 31, 2008 and 2007, from our audited consolidated financial statements, included in this annual report on Form 10-K. We derived the historical statement of operations data for the fiscal years ended December 31, 2005 and 2004 and the historical balance sheet data as of December 31, 2006, 2005 and 2004, from our audited consolidated financial statements not

included in this annual report. Historical results are not necessarily indicative of the results of operations to be expected for future periods. We derived the non-GAAP data from our historical financial data.

 

 

 

 

 

 

 

 

 

The following is a reconciliation of our income (loss) from continuing operations to cash earnings and cash earnings per diluted share (in thousands, except share and per share data):

 

 

 

Overview

 

We are a leading provider of necessary business information and professional services to legal, financial and real estate sectors in the United States. We serve our customers through two complementary operating segments: our Business Information Division and our Professional Services Division. Our Business Information Division currently publishes 58 print publications consisting of 13 paid daily publications, 31 paid non-daily publications and 14 non-paid non-daily publications. In addition, we provide business information electronically through our 43 online publication web sites, our 24 event and other non-publication web sites, and our email notification systems. Our Professional Services Division comprises two operating units: APC and Counsel Press. APC provides mortgage default processing services to six law firm customers as well as directly to mortgage lenders and loan servicers in California. It currently operates primarily in California, Georgia, Indiana, Michigan, Minnesota, and Texas. Counsel Press provides appellate services to law firms and attorneys nationwide.

 

Largely as a result of the businesses we acquired this year, including the acquisition of NDEx, our total revenues increased $38.0 million, or 25.0%, from $152.0 in 2007 to $189.9 million in 2008. Our operating income increased by $3.5 million to $35.7 million in 2008 compared to 2007. Acquisitions, including our acquisition of NDEx in September 2008, accounted for the majority of the 27.7% increase in our operating expenses last year. Further, net income increased significantly from a net loss of $54.0 million in 2007 to net income of $14.3 million in 2008. This increase is largely due to the fact that we no longer record interest on our series C preferred stock redeemed in connection with our initial public offering in August 2007. This interest expense in 2007 was $66.1 million.

Recent Developments

 

Regulatory Environment

 

Over the past year, federal, state and local governmental entities have proposed, and in some cases, enacted legislation or taken other action that may have an adverse impact on the number of mortgage defaults case files referred to APC for processing and the number of foreclosure public notices placed in our Business Information products and DLNP (our minority investment) for publication. For example, the Maryland legislature passed HB 365, which, among other things, requires a lender to wait 90 days after default to commence a foreclosure. The California legislature passed SB 1137, which requires lenders to contact homeowners at least 30 days before filing a notice of default to explore options to avoid foreclosure. The federal government enacted the Hope for Homeowners Act of 2008 and the Emergency Economic Stabilization Act to bring relief to distressed homeowners and provide funds to troubled financial institutions, respectively. The Federal Housing Finance Agency, Fannie Mae and Freddie Mac announced the Streamlined Modification Program, which is designed to make mortgage payments more affordable, and Fannie Mae announced the temporary suspension of foreclosure sales. In addition, certain state and local governments have interpreted the Emergency Economic Stabilization Act as preempting state and local foreclosure requirements. Further, various lender and mortgage servicers have voluntarily focused their attention on loss mitigation, loan modification and similar efforts, including moratoria on certain foreclosure sales, in an attempt to reduce the number of mortgage defaults.

 

Most recently, the new administration announced the Homeowner Affordability and Stability Plan in an attempt to address the continuing rise in mortgage delinquencies and mortgage defaults. Under this plan, the federal government has detailed requirements for the “Making Home Affordable” program which offers qualified homeowners with a loan-to-value ratio above 80% the opportunity to apply for mortgage refinancing at lower interest rates. The “Making Home Affordable” program also announced loan modification guidelines that are expected to become standard industry practice in pursuing affordable and sustainable mortgage modifications. The loan modification program guidelines are expected to work in tandem with an expanded Hope for Homeowners program. According to the United States Department of Treasury, the “Making Home Affordable” plan is estimated to offer assistance to between 7 and 9 million homeowners.

 

Given the uncertain regulatory environment and potential effect on businesses, we have developed a number of cost-containment plans across our divisions, including decreases in discretionary spending, staff reductions through various methods (including attrition) and the transition of some print publications to on-line. Further, should any of these regulatory changes constitute a triggering event for purposes of testing the impairment of goodwill, we may be required to take an impairment charge and such a charge, if taken, could adversely affect our business, financial position and results of operation, although we do not expect it to affect our ability to comply with the covenants under our credit agreement. See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Goodwill, Intangible Assets and other Long-Lived Assets” below for more information about events that could trigger interim impairment testing of our goodwill.

 

Adoption of Stockholder Rights Plan

 

On January 29, 2009, our board adopted a Stockholder Rights Plan, which is designed to protect our stockholders from potentially coercive takeover practices or takeover bids and to prevent an acquirer from gaining control of the company without offering a fair price to our stockholders. The plan is not intended to deter offers that are fair or otherwise in the best interests of our stockholders or us.

 

This plan is similar to plans that other public companies have adopted and our adoption of this plan was not prompted by any external actions. We have received no hostile communications or takeover approaches of any kind. We adopted the plan to give our board time to evaluate and respond to any unsolicited future attempts to acquire our company.

 

In connection with the adoption of this plan, our board declared a dividend of one junior participating preferred stock purchase right for each outstanding share of our common stock, payable to the stockholders of record on February 9, 2009. Stockholders may request a copy of this plan by writing to our corporate secretary at our principal offices, 222 South Ninth Street, Suite 2300, Minneapolis, MN 55402.

Acquisition of NDEx

 

On September 2, 2008, APC acquired all of the outstanding equity interests in NDEx. APC acquired the equity interests of NDEx for a total of $167.5 million in cash, of which $151.0 million was paid to or on behalf of the sellers of NDEx, $15.0 million was placed in escrow to secure payment of indemnification claims and an additional $1.5 million was held back pending working capital adjustments. In addition to the cash payments, APC also issued to the sellers of NDEx an aggregate 6.1% interest in APC, which had an estimated fair market value of approximately $11.6 million on July 28, 2008, the date the parties signed the equity purchase agreement. We also issued to the sellers of NDEx 825,528 shares of our common stock. In addition to the payments and issuance of APC interests and common stock described above, we may be obligated to pay the sellers of NDEx up to an additional $13.0 million in cash based upon the adjusted EBITDA for NDEx during the four complete calendar quarters following the closing of the acquisition. If the adjusted EBITDA for NDEx equals or exceeds $28.0 million during such four-quarter period, we will pay the sellers the maximum $13.0 million earn out payment. However, the maximum earn out payment of $13.0 million will be reduced by $7.50 for each $1.00 that NDEx’s adjusted EBITDA for such four-quarter period is less than the $28.0 million target. The working capital target of $2.0 million as set forth in the equity purchase agreement was not met, as there was an actual working capital (deficit) of $(1.4) million. As a result, APC recovered the $3.4 million shortfall by having the sellers of NDEx release the $1.5 million holdback payable to them and by taking receipt of $1.9 million out of the escrow.

 

In connection with this acquisition, NDEx amended and restated its services agreement with the law firm Barrett Daffin Frappier Turner & Engel, LLP. The services agreement provides for the exclusive referral of residential mortgage default files from the Barrett law firm to NDEx for servicing. This agreement has an initial term of twenty-five years, which term may be automatically extended for successive five year periods unless either party elects to terminate the term then-in-effect with prior notice. Under the services agreement, NDEx is paid a fixed fee for each residential mortgage default file referred by the Barrett law firm to NDEx for servicing, with the amount of such fixed fee being based upon the type of file. In addition, the Barrett law firm pays NDEx a monthly trustee foreclosure administration fee. The amount of such fee is based upon the number of files the Barrett law firm has referred to NDEx for processing during the month. NDEx may amend these fees on a quarterly basis during 2009 and on an annual basis beginning in 2010 upon notice to the Barrett law firm. However, if the Barrett law firm files a timely notice of objection to the proposed amended fees, NDEx and the Barrett law firm have agreed to negotiate amended fees that are agreeable to both parties or to retain the existing fees. In addition to the services agreement, NDEx also entered into noncompetition agreements with the key managers of NDEx and with the Barrett law firm. The sellers of NDEx included Michael C. Barrett, Jacqueline M. Barrett, Mary A. Daffin, Robert F. Frappier, James C. Frappier, Abbe L. Patton and Barry Tiedt, all of whom also remained employees of NDEx. Each of these individuals, except Jacqueline M. Barrett, Abbe L. Patton and Barry Tiedt, are also attorneys for the Barrett law firm. Until his death in January 2009, Michael C. Barrett, the managing partner of the Barrett law firm, served as president and chairman emeritus of NDEx. Thereafter, APC appointed James C. Frappier, the new managing partner of the Barrett law firm, to serve as NDEx’s president.

 

NDEx is a wholly-owned subsidiary of APC. Much like APC, NDEx provides mortgage default processing services, primarily for the Barrett law firm in Texas. During 2007, NDEx began providing these services in California to an affiliate of the Barrett law firm and also directly to mortgage lenders and loan servicers (instead of for a law firm that has such lenders and servicers as clients). Unlike other states, foreclosure and certain other mortgage default processes may be undertaken by non-attorneys in California. In 2008, NDEx started providing mortgage default processing services to an affiliate of the Barrett law firm for foreclosures and other related files in Georgia.

 

In addition to providing mortgage default processing services, NDEx also operates a real estate title company. This is a new line of business for us and one in which, among our key employees or executive officers, only Dave Trott, Chairman and Chief Executive Officer of APC, has any previous experience.

 

Like APC, NDEx has its own proprietary case management system. NDEx is continuing to use this system to process mortgage default files until we eventually combine this system with the case management system currently used by APC.

As a result of this acquisition, we have a number of duplicative positions between NDEx and APC and have evaluated the elimination of these positions to achieve synergies and cost saving in combining these functions. We recorded, as additional purchase price, a liability of $1.5 million in estimated severance costs in connection with the anticipated elimination of these positions, which we expect to pay out in cash within the next twelve months. The liability was included in goodwill in the preliminary allocation of the purchase price. We have not yet executed on this plan and, accordingly, have not eliminated any positions between NDEx or APC or made any severance payments as of the date of this annual report on Form 10-K. We are continuing to evaluate this plan and, as a result, the amount we have recorded as a liability may change.

 

Private Placement of Common Stock

 

On July 28, 2008, we signed a securities purchase agreement to sell an aggregate of 4,000,000 unregistered shares of our common stock for $16.00 per share. This sale closed on July 30, 2008. We received net proceeds of approximately $60.5 million from this private placement. We used all of the net proceeds from this private placement to fund, in part, the acquisition of NDEx (described above). In connection with this securities purchase agreement, we filed, and the SEC declared effective, a registration statement covering the re-sale of the privately placed shares on October 3, 2008.

 

Amendment to Credit Facility

 

In connection with the transactions described above, we amended our credit facility with the syndicate of lenders who are party to our second amended restated credit facility. Specifically, on July 28, 2008, we and our consolidated subsidiaries signed a first amendment to the credit facility. In addition to approving the acquisition of NDEx and waiving the requirement that we use 50% of the proceeds from the private placement to pay down indebtedness under the credit facility (both described above), the amendment (1) reduces the senior leverage ratio we and our consolidated subsidiaries are required to maintain as of the last day of each fiscal quarter from no more than 4.50 to 1.00 to no more than 3.50 to 1.00 and (2) increases the interest rate margins charged on the loans under the credit facility to up to 1.0%. We paid approximately $0.4 million in fees in connection with this amendment.

 

Changes in our Ownership in APC

 

On November 30, 2007, we increased our majority ownership interest in APC to 88.7% by acquiring 9.1% and 2.3% of the outstanding membership units in APC from the minority members, Trott & Trott and Feiwell & Hannoy, respectively. We paid a total of $15.6 million for these units, of which we paid $12.5 million to Trott & Trott and $3.1 million to Feiwell & Hannoy. After the acquisition of these membership interests, our minority partners, Trott & Trott and Feiwell & Hannoy, owned 9.1% and 2.3%, respectively, of APC. At the same time, the members of APC amended and restated APC’s operating agreement as it related to the right of Trott & Trott and Feiwell & Hannoy to demand that we acquire their minority interest in APC. Please refer to “Minority Interest in Net Income of Subsidiary” for more information about this right of the minority members. In connection with the acquisition of mortgage default processing services business of Wilford & Geske in February 2008, APC made a capital call. Feiwell & Hannoy declined to participate in the capital call. We contributed Feiwell & Hannoy’s share of the capital call and, as a result, our interest in APC increased to 88.9% and Feiwell & Hannoy’s decreased to 2.0% of the outstanding membership interests of APC. Also, in February 2008, Trott & Trott assigned its interest in APC to APC Investments, LLC, a limited liability company owned by the shareholders of Trott & Trott, including APC Chairman and Chief Executive Officer, David A. Trott. In connection with the closing of the acquisition of NDEx, APC made a capital call in which both APC Investments and Feiwell & Hannoy declined to participate. We contributed each of APC Investments and Feiwell & Hannoy’s portions of the capital call. Also, in connection with the acquisition, APC issued 6.1% of its outstanding membership interests to the sellers of NDEx, or their designees, as applicable. As a result of these transactions, Feiwell & Hannoy’s, APC Investments’ and our ownership interests

in APC were diluted. Accordingly, at September 2, 2008 and through December 31, 2008, we, along with APC’s minority members, owned the following interests in APC:

 

 

Recent Acquisitions

 

We have grown significantly since our predecessor company commenced operations in 1992, in large part due to acquisitions. In addition to the NDEx acquisition described above, we consummated the following significant acquisitions during 2008 and 2007:

 

Business Information

 

On February 13, 2008, we acquired the assets of Legal and Business Publishers, Inc., which include The Mecklenburg Times, an 84-year old court and commercial publication located in Charlotte, North Carolina, and electronic products, including www.mecktimes.com and www.mecklenburgtimes.com. For these assets, we paid $2.8 million in cash on the closing date and an additional $500,000 on May 13, 2008. In addition, we incurred acquisition costs of approximately $95,000. During 2008, we also paid Legal and Business Publishers, Inc. an additional aggregate $497,500 because the revenues we earned from the assets had exceeded the earn-out targets set forth in the purchase agreement for the six and twelve months period following closing.

 

On March 30, 2007, we acquired the business information assets of Venture Publications, Inc., consisting primarily of several publications serving Mississippi and an annual business trade show, for $2.8 million in cash. In addition, we paid $600,000 to Venture Publications in April 2008 in connection with the acquired assets achieving certain revenue targets set forth in the asset purchase agreement.

 

Professional Services

 

On February 22, 2008, APC acquired the mortgage default processing business of the Minnesota law firm, Wilford & Geske. APC acquired these assets for $13.5 million in cash. We may be obligated to pay up to an additional $2.0 million in purchase price depending upon the adjusted EBITDA for this business during the twelve months ending March 31, 2009. At the same time, APC also entered an exclusive service agreement with Wilford & Geske for the referral of mortgage default, foreclosure, bankruptcy, eviction, litigation and other mortgage default related files to us for processing. The agreement is for an initial term of 15 years and is subject to automatically renew for two additional ten year periods unless either party elects to terminate the term then-in-effect with prior notice.

 

On January 9, 2007, APC entered the Indiana market by acquiring the mortgage default processing service business of the law firm of Feiwell & Hannoy for $13.0 million in cash, a $3.5 million promissory note payable in two equal annual installments of $1.75 million, which has been paid in full, with no interest accruing on the note, and a 4.5% membership interest in APC. Under the terms of the asset purchase agreement with Feiwell & Hannoy, we were required to guaranty APC’s obligations under the note payable to Feiwell & Hannoy. In connection with this guaranty, Trott & Trott executed a reimbursement agreement with us, whereby Trott & Trott agreed to reimburse us for 19.0% (its then-ownership percentage) of any amounts we are required to pay to Feiwell & Hannoy pursuant to our guaranty of the note. At the same time, APC also entered an exclusive service agreement with Feiwell & Hannoy for the referral of mortgage default, foreclosure, bankruptcy, eviction and other mortgage default related files to us for processing. The agreement is for an initial term of 15 years and is subject to automatically renew for two additional ten year periods unless either party elects to terminate the term then-in-effect with prior notice.

We have accounted for each of the acquisitions described above, including the acquisition of NDEx described in “Recent Developments,” under the purchase method of accounting. We have included the results of the acquisitions of NDEx and the mortgage default processing services business of Feiwell & Hannoy and Wilford & Geske in our Professional Services segment. We have included the results of the acquired businesses of Venture Publications, Inc. and Legal and Business Publishers, Inc. in our Business Information segment. We have included each acquisition in our consolidated financial statements since the date of such acquisition.

 

Revenues

 

We derive revenues from two operating segments, our Business Information Division and our Professional Services Division. For the year ended December 31, 2008, our total revenues were $189.9 million, and the percentage of our total revenues attributed to each of our segments was as follows:

 

 

Business Information.  Our Business Information Division generates revenues primarily from display and classified advertising, public notices and subscriptions. We sell commercial advertising, which consists of display and classified advertising in our print products and 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 17.7% of our total revenues and 37.1% of our Business Information Division’s revenues for the year ended December 31, 2008. We recognize display and classified advertising revenues upon placement of an advertisement in one of our publications or on one of our web sites. We recognize display and classified advertising revenues generated by sponsorships, advertising and ticket sales from local events when those events are held. 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 305 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 entity notices, unclaimed property notices, notices of governmental hearings and trustee sale notices. Our public notice revenues accounted for 21.8% of our total revenues and 45.9% of our Business Information Division’s revenues for the year ended December 31, 2008. 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. This is primarily affected by the number of residential mortgage foreclosures in the 14 markets where we are qualified to publish public notices and the rules governing publication of public notices in such states. In six 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. For the year ended December 31, 2008, our circulation revenues, which consist of subscriptions and single-copy sales, accounted for 7.2% of our total revenues and 15.1% of our Business Information Division’s revenues. 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. Circulation revenues are driven by the number of copies sold and the subscription rates charged to customers. Our other business information revenues, comprising sales from commercial printing and database information, accounted for 0.9% of our total revenues and 2.0% of our Business Information Division’s revenues for the year ended December 31, 2008. We recognize our other Business Information revenues upon delivery of the printed or electronic product to our customers.

 

Professional Services.  Our Professional Services Division generates revenues primarily by providing mortgage default processing and appellate services through fee-based arrangements. Through APC, we assist six law firms in processing foreclosure, bankruptcy, eviction and, to a lesser extent, litigation and other mortgage default processing case files for residential mortgages that are in default. We also provide these services directly to mortgage lenders and loan servicers in California for foreclosure files. We also provide loan modification and loss mitigation support on mortgage default files to our customers. We also provide, through NDEx, related real estate

title work primarily to the Barrett law firm. Shareholders and/or principal attorneys of our law firm customers, including David A Trott, Chairman and Chief Executive Officer of APC, are executive management employees of APC or NDEx.

 

For the year ended December 31, 2008, we serviced approximately 204,100 mortgage default case files. Of these, Wilford & Geske (which we began servicing in February 2008), and the Barrett law firm and our non-law firm customers in California (which we began servicing in September 2008) referred, in the aggregate, approximately 70,800 mortgage default case files to us for processing during 2008. Our mortgage default processing service revenues accounted for 44.5% of our total revenues and 85.0% of our Professional Services Division’s revenues during 2008. We believe mortgage default file volume, and thus mortgage default processing revenues, tend to be lower in the second quarter of each year because homeowners receive income tax refunds that they can apply towards their residential mortgages during the second quarter. We recognize mortgage default processing service revenues on a ratable basis over the period during which the services are provided, the calculation of which requires management to make estimates. We consolidate the operations, including revenues, of APC and record a minority interest adjustment for the percentage of earnings that we do not own. See “Minority Interests in Net Income of Subsidiary” above for a description of the impact of the minority interests in APC on our operating results. With the exception of foreclosure files referred to us by Feiwell & Hannoy and California foreclosure files processed by NDEx, we bill our customers for services performed and record amounts billed for services not yet performed as deferred revenue. For foreclosure files referred to us by Feiwell & Hannoy, we bill Feiwell & Hannoy in two installments and record amounts for services performed but not yet billed as unbilled services and amounts billed for services not yet performed as deferred revenue. For California foreclosure files processed by us, we bill our customers for services at the time the file is complete and record amounts billed for services performed, but not yet billed, as unbilled services. In California, because we provide mortgage default processing services directly to mortgage lenders and loan servicers, we incur certain costs on behalf of our customers, such as trustee sale guarantees, title policies, and post and publication charges. We pass these costs directly through to our customers, and bill them at the time the file is complete. In accordance with EITF 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent,” we have determined that such expenses should be recorded at net and, accordingly, do not record any revenue for these pass-through costs. See “Critical Accounting Policies — Revenue Recognition” below for more information about our policies relating to these pass-through costs. We also provide title services primarily to the Barrett law firm, and we bill for these services when the title matter is completed and recognize revenue as we perform the services.

 

We have entered into long-term services agreements with each of our law firm customers. These agreements provide for the exclusive referral of files from the law firms to APC for servicing, except that Trott & Trott and the Barrett law firm may refer files elsewhere if they are otherwise directed by clients. Our agreements with Trott & Trott, Feiwell & Hannoy and Wilford & Geske have initial terms of fifteen years, which terms may be automatically extended for up to two successive ten year periods unless either party elects to terminate the term then-in-effect with prior notice. Our agreements with the Barrett law firm have initial terms of twenty-five years, which terms may be automatically extended for successive five year periods unless either party elects to terminate the term then-in-effect with prior notice. Under each services agreement, we are paid a fixed fee for each residential mortgage default file referred by the law firm to us for servicing, with the amount of such fixed fee being based upon the type of file. We receive this fixed fee upon referral of a foreclosure case file, which consists of any mortgage default case file referred to us, regardless of whether the case actually proceeds to foreclosure. If such file leads to a bankruptcy, eviction or litigation proceeding, we are entitled to an additional fixed fee in connection with handling a file for such proceedings. We also receive a fixed fee for handling files in eviction, litigation and bankruptcy matters that do not originate from mortgage foreclosure files. The Barrett law firm also pays us a monthly trustee foreclosure administration fee. The amount of this fee is based upon the number of foreclosure files the Barrett law firm refers to us for processing during the month.

 

APC’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 how many of the files we handle that actually result in evictions, bankruptcies and/or litigation. Our agreement with Trott & Trott contemplates the review and possible revision of the fees for services we provide every two years beginning on or before January 1, 2008. Under the Feiwell & Hannoy and Wilford & Geske agreements, the fixed fee per file increases on an annual basis through 2012 and 2013,

respectively, to account for inflation as measured by the consumer price index. We and such customers will review and possibly revise the fee schedule for future years. Our agreement with the Barrett law firm allows us to amend the fees the Barrett law firm pays to us on a quarterly basis during 2009 and on an annual basis beginning in 2010 upon notice to the Barrett law firm. However, if the Barrett law firm files a timely notice of objection to the proposed amended fees, we and the Barrett law firm have agreed to negotiate amended fees that are agreeable to both parties or retain the existing fees. 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. During the first quarter of 2009, we revised our fee structure with Trott & Trott and Feiwell & Hannoy, increasing the fixed per file fee paid for each file referred to us.

 

Through Counsel Press, we assist law firms and attorneys throughout the United States in organizing, preparing and filing appellate briefs, records and appendice, 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. These revenues tend to be lower in the second quarter of each year because there are typically fewer appellate filings during such quarter as a result of court recesses. For the year ended December 31, 2008, our appellate service revenues accounted for 7.9% of our total revenues and 15.0% of our Professional Services Division’s revenues. 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. For the year ended December 31, 2008, we provided appellate services to attorneys in connection with approximately 8,700 appellate filings, respectively, in federal and state courts. We recognize appellate service revenues as the services are provided, which is when our final appellate product is filed with the court.

 

Operating Expenses

 

Our operating expenses consist of the following:

 

 

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 shift between fiscal periods.

 

Equity in Earnings of The Detroit Legal News Publishing

 

We own 35.0% of the membership interests in DLNP, the publisher of The Detroit Legal News and ten other publications. We account for our investment in DLNP using the equity method. For the years ended December 31, 2008, 2007 and 2006, our percentage share of DLNP’s earnings was $5.6 million, $5.4 million, and $2.7 million, respectively, which we recognized as operating income. This is net of amortization of $1.5 million for all three periods. Michigan tax law changed in 2008, resulting in an offset to the increase in equity earnings of approximately $0.4 million for the year ended December 31, 2008, compared to the prior year. APC 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 Flow Provided by Operating Activities” below for information regarding distributions paid to us by DLNP. As lenders focus on, or are required to engage, in loss mitigation, loan modification plans and other activities that delay or prevent foreclosures, and thus, the publication of foreclosure notices, we expect the rate of growth of income earned through our percentage share of DLNP’s earnings to decline in 2009.

 

Under the terms of the amended and restated operating agreement for DLNP, on a date that is within 60 days prior to November 30, 2011, and each November 30th after that, each member of DLNP has the right, but not the obligation, to deliver a notice to the other members, declaring the value of all of the membership interests of DLNP. Upon receipt of this notice, each other member has up to 60 days to elect to either purchase his, her or its pro rata share of the initiating member’s membership interests or sell to the initiating member a pro rata portion of the membership interest of DLNP owned by the non-initiating member. Depending on the election of the other members, the member that delivered the initial notice of value to the other members will be required to either sell his or her membership interests, or purchase the membership interests of other members. The purchase price payable for the membership interests of DLNP will be based on the value set forth in the initial notice delivered by the initiating member.

 

Minority Interest in Net Income of Subsidiary

 

Minority interest in net income of subsidiary for the year ended December 31, 2008 consisted of the following:

 

 

You should refer to “Recent Developments — Changes in our Ownership in APC” earlier in this Item 7 for information about the change in our ownership in APC during the year ended December 31, 2008.

 

Under the terms of the APC operating agreement, each month, we are required to distribute the excess of APC’s earnings before interest, depreciation and amortization less debt service with respect to any interest-bearing indebtedness of APC, capital expenditures and working capital reserves to APC’s members on the basis of common equity interest owned. We paid the following distributions during the years ended December 31, 2008 and 2007 (in thousands):

 

 

 

 

During 2008, we only paid distributions to our minority partners in the first and second quarters because there was a deficit in the cash distribution calculation for the third and fourth quarters of 2008.

 

In addition, APC Investments and Feiwell & Hannoy each have the right, for a period of six months following August 7, 2009, to require APC to repurchase all or any portion of the APC membership interests held by APC Investments or Feiwell & Hannoy, as the case may be. The sellers of NDEx, each as members of APC, also have the right, for a period of six months following September 2, 2012, to require APC to repurchase all or any portion of the APC membership interests held by such seller of NDEx. To the extent any minority member of APC timely exercises this right, the purchase price of such membership interest will be based on 6.25 times APC’s trailing twelve month earnings before interest, taxes, depreciation and amortization less the aggregate amount of any interest bearing indebtedness outstanding for APC as of the date the repurchase occurs. The aggregate purchase price would be payable by APC in the form of a three-year unsecured note bearing interest at a rate equal to prime plus 2.0%.

 

Critical Accounting Policies

 

We prepare our consolidated financial statements in accordance with GAAP. The preparation of these financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.

 

We continually evaluate the policies and estimates we use to prepare our consolidated financial statements. In general, management’s estimates and assumptions are based on historical experience, information provided by third-party professionals and assumptions that management believes to be reasonable under the facts and circumstances at the time these estimates and assumptions are made. Because of the uncertainty inherent in these matters, actual results could differ significantly from the estimates, assumptions and judgments we use in applying these critical accounting policies.

 

We believe the critical accounting policies that require the most significant estimates, assumptions and judgments to be used in the preparation of our consolidated financial statements are purchase accounting, revenue recognition in connection with mortgage default processing services provided directly to mortgage lenders and loan servicers in California, impairment of goodwill, other intangible assets and other long-lived assets, share-based compensation expense, capitalization of internally developed software for internal and external use, income tax accounting and allowances for doubtful accounts.

 

Purchase Accounting

 

We have acquired a number of businesses during the last several years, and we expect to acquire additional businesses in the future. Under SFAS No. 141, Business Combinations, we are required to account for business combinations using the purchase method of accounting. The purchase method requires us to determine the fair value of all acquired assets, including identifiable intangible assets, and all assumed liabilities. The cost of the acquisition is allocated to the acquired assets and assumed liabilities in amounts equal to the fair value of each asset and liability, and any remaining acquisition cost is classified as goodwill. This allocation process requires extensive use of estimates and assumptions, including estimates of future cash flows to be generated by the acquired assets. Certain identifiable, finite-lived intangible assets, such as mastheads and trade names and advertising, subscriber and other customer lists, are amortized on a straight-line basis over the intangible asset’s estimated useful life. The estimated useful life of amortizable identifiable intangible assets ranges from one to 30 years. Goodwill is not amortized. Accordingly, the accounting for acquisitions has had, and will continue to have, a significant impact on our operating results.

 

During the year ended December 31, 2008, we applied purchase accounting to the following acquisitions: (1) the assets of Legal and Business Publishers, Inc., including The Mecklenberg Times; (2) the mortgage default processing services business of Wilford & Geske; (3) the assets of Minnesota Political Press, Inc. and Quadriga Communications, LLC; (4) the acquisition of the assets of Midwest Law Printing Co., Inc; and, (5) the acquisition of NDEx. The purchase accounting for NDEx is preliminary and may change as we complete our valuation. See Note 2 to our consolidated financial statements included in this annual report on Form 10-K for more information about the application of purchase accounting to these acquisitions. See also “New Accounting Pronouncements”

below for information about a change in SFAS No. 141R that is effective for us for acquisitions consummated after December 31, 2008.

 

Revenue Recognition

 

In connection with mortgage default processing services provided directly to mortgage lenders and loan servicers in California, we have pass-through items such as trustee sale guarantees, title policies, and post and publication charges. In determining whether such pass-through items should be recorded as revenue in the our consolidated financial statements at the gross amount billed to the customer or at a net amount, we follow the guidance of Emerging Issues Task Force 99-19 (“EITF 99-19”), “Reporting Revenue Gross as a Principal versus Net as an Agent.” Accordingly, we have concluded that such expenses should be recorded at net, and have recorded them as such in our consolidated financial statements. We have separately shown the unbilled amount of these pass-through costs and the amount accrued on the face of the balance sheet. Billed pass-through costs are included in accounts receivable, net.

 

We record revenues recognized for services performed, but not yet billed, to our customers as unbilled services. As of December 31, 2008 and 2007, we recorded an aggregate $13.6 million and $2.4 million, respectively, as unbilled services and included these amounts in accounts receivable on its balance sheet. For more information about our revenue recognition policies, please also refer to “Revenues — Professional Services” earlier in this Item 7.

 

Goodwill, Intangible Assets and Other Long-Lived Assets

 

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we test our goodwill for impairment on an annual basis using a November 30 measurement date. Our reporting units for purposes of this testing are Business Information, APC and Counsel Press. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we test all finite-lived intangible assets and other long-lived assets, such as fixed assets, for impairment only if circumstances indicate that possible impairment exists. We conduct interim impairment tests of our goodwill whenever circumstances or events indicate that it is more likely than not that the fair value of one of our reporting units is below its carrying value. Circumstances that could represent triggering events and therefore require an interim impairment test of goodwill or evaluation of our finite-lived intangible assets or other long lived assets include the following: loss of key personnel, unanticipated competition, higher or earlier than expected customer attrition, deterioration of operating performance, significant adverse industry, economic or regulatory changes or a significant decline in market capitalization.

 

We periodically evaluate the estimated economic lives and related amortization expense for our finite-lived intangible assets. To the extent actual useful lives are less than our previously estimated lives, we will increase our amortization expense on a prospective basis. We estimate useful lives of our intangible assets by reference to both contractual arrangements and current and projected cash flows in our Business Information Division and Professional Services Division, particularly our mortgage default processing services reporting unit (APC), and anticipated competitor actions. The determination of useful lives and whether long-lived assets are impaired includes the use of accounting estimates and assumptions, changes in which could materially impact our financial condition and operating performance if actual results differ from such estimates and assumptions. The amount of net income for the year ended December 31, 2008 would have been approximately $1.3 million higher if the actual useful lives of our finite-lived intangible assets were 10% longer than the estimates and approximately $1.4 million lower if the actual useful lives of our finite-lived intangible assets were 10% shorter than the estimates. During the year ended December 31, 2008, we did not any revise any of the existing lives of our finite-lived intangible assets.

 

At December 31, 2008, we had total goodwill of $119.0 million, which was allocated to our three reporting units as follows: Business Information ($59.2 million); APC ($51.9 million) and Counsel Press ($7.9 million). Our acquisition of NDEx in September 2008 accounted for $39.3 million of the $51.9 million of goodwill allocated to APC. We have completed our annual test for impairment of goodwill and have determined that there is no impairment of our goodwill for the year ended December 31, 2008.

 

Under the provisions of SFAS No. 142, the first step of our test for impairment of goodwill requires us to estimate the fair value of each reporting unit and compare the fair value to the reporting unit’s carrying value. We

determine the fair value of our reporting units using a discounted cash flow approach and a comparative market multiple approach. The discounted cash flow approach calculates the present value of projected future cash flows using appropriate discount rates. The market multiple approach provides indications of value based on market multiples for public companies involved in similar lines of business. The fair values derived from these valuation methods are then compared to the carrying value of each reporting unit to determine whether impairment exists. In determining the fair values of our reporting units as of November 30, 2008 (our measurement date), we applied a weighting of 50% to each approach. We then compared the total values for all reporting units to our market capitalization as a test of the reasonableness of each approach.

 

To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired, and we must perform the second step of the impairment test. The second step involves allocating the reporting unit’s fair value to all of its recognized and unrecognized assets and liabilities in order to determine the implied fair value of the reporting unit’s goodwill as of the testing date. The implied fair value of the reporting unit’s goodwill is then compared to the carrying amount of goodwill to quantify an impairment charge as of the assessment date. Because the carrying value for each of our reporting units did not exceed their respective fair values, we did not need to perform this second step.

 

In determining the fair values of our reporting units, we were required to make a number of assumptions. Any variance in these assumptions could have a significant effect on our determination of goodwill impairment. These assumptions included our actual operating results, future business plans, economic projections and market data as well as estimates by our management regarding future cash flows and operating results. Further, we cannot predict what future events may occur that could adversely affect the reported value of our goodwill. These events include, but are not limited to, any strategic decisions we may make in response to economic or competitive conditions affecting our reporting units and the effect of the economic and regulatory environment on our business. If we are required to take an impairment charge in the future, it could have a material effect on our consolidated financial statements because of the significance of goodwill to our consolidated balance sheet. However, any such charge, if taken, will not have any impact on our ability to comply with the covenants contained in our credit agreement because impairment charges are excluded from the calculation of EBITDA for purposes of meeting the fixed coverage and senior leverage ratios and because there is no net worth minimum covenant.

 

We prepared our discounted cash flow analysis in the same manner as we have prepared it in prior years. We further updated all significant assumptions in light of current market and regulatory conditions. The key assumptions we used in preparing our discounted cash flow analysis are (1) projected cash flows, (2) risk adjusted discount rate, and (3) expected long term growth rate. Because each of our reporting units has unique characteristics, we developed these assumptions separately. We based our projected cash flows on our actual 2008 operating results through November 30 and on budgeted operating amounts for 2009. For 2010 and future periods, we have assumed compound revenue growth rates of 6.0%, compound direct operating expense growth rates of 6.0% and compound selling, general and administrative expense growth rate of 3.0% for each reporting unit. For example, in arriving at our long term growth rate, we considered our expected price increases and future market expansions. In evaluating our expense growth rates, we assumed that direct expenses would track revenues and that selling, general and administrative expenses would track the growth in inflation. We believe our growth factors are reasonable given the balance in our revenue streams and the countercyclical nature of public notice advertising and default mortgage processing services revenues. We used risk-adjusted discount rates ranging between 14.9% to 16.0% for each reporting unit, which were calculated using our cost of debt and an estimated cost of equity.

 

We estimated the cost of equity by adding a “risk free” investment rate at November 30, 2008, to an equity risk premium for our size and then adding a risk premium for specific industry risk. The size and industry risk additions were made to account for the risks of (1) being a company with a small market capitalization, (2) the political uncertainty surrounding mortgage foreclosure volumes, and (3) being a company with leverage. We then compared the resulting rates to industry rates and found our calculated rates to exceed the comparable industry rates by 1.0% for Business Information, 3.0% for APC and 1.0% for Counsel Press. Further, we prepared our discounted cash flow analysis on a debt-free basis, as we did not assign our debt to any reporting unit. This was the only asset or liability that we did not allocate as part of our goodwill impairment test.

Under the discounted cash flow analysis, the estimated fair value for each of our reporting units, as compared to the carrying value, was as follows (amounts in millions):

 

 

Accordingly, there is no impairment under our discounted cash flow analysis. However, as we noted above, this calculation is highly sensitive and any change in our key assumptions about our reporting units or their prospects could result in a future impairment charge. For example, if the long term growth rate for APC was 25 basis points lower, its estimated fair value would have decreased by $5.7 million. If the discount rate for APC was 25 basis points higher, its estimated fair value would have decreased by $5.6 million. Either of those decreases in the estimated fair value may result in a future goodwill impairment charge.

 

Further, two of our reporting units, Business Information and APC, have foreclosure-related revenues. As described in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments — Regulatory Environment” and “Item 1A — Risk Factors” earlier in this report, there has been new and proposed legislation, along with lender-based programs, aimed at delaying or preventing residential mortgage foreclosures. To date, these changes have not prevented these reporting units from operating on a profitable basis (comparing the three months ended December 31, 2008 to the three months ended December 31, 2007). However, we continue to monitor proposed legislation, lender-based programs and other changes in the regulatory environment and their impact on our reporting units to determine whether a triggering event has occurred.

 

We based our market multiple approach on the valuation multiples as of November 30, 2008 (enterprise value divided by EBITDA) of a selected group of peer companies in the business information and the business process outsourcing industries. We then used an average of these multiples to determine the fair value for each of our reporting units. Under the market multiple approach, the estimated fair value for each of our reporting units, as compared, to the carrying value, was as follows (amounts in millions):

 

 

As a test of the reasonableness of the estimated fair values for our reporting units, as determined under both the discounted cash flow analysis and market multiple approach described above, we compared the aggregate weighted fair value for our reporting units under these approaches to the fair value of the company, as a whole. We computed the company’s fair value, as of November 30, 2008 by (1) multiplying: (a) the closing price for a share of our common stock as reported by the New York Stock Exchange ($4.31) and (b) the number of outstanding shares of our common stock, and (2) adding the fair value of our long-term debt, which was the only asset or liability that we did not allocate to a reporting unit; and (3) adding a control premium of 30%, which we refer to as the “market capitalization approach.” We have applied a control premium to our market capitalization analysis because such premiums are typically paid in acquisitions of publicly traded companies. These control premiums represent the ability of an acquirer to control the operations of the business. We based our control premium on a study of control premiums made during the period January 1998 through September 2008. Using the market capitalization approach described above, our company had an estimated fair value of $331.8 million, which is less than the fair value of our reporting units.

 

After evaluating the results of each of these analyses, we believe that the discounted cash flow and market multiple approaches provide reasonable estimates of the fair value of our reporting units because these approaches are based on our 2008 actual results and best estimates of 2009 performance, as well as peer company valuation multiples. We have consistently used these approaches in determining the value of our goodwill and these types of analyses are used by the research analysts that follow us. While the market capitalization is typically a good

indicator of the reasonableness of our primary approaches in evaluating the impairment of goodwill, we do not believe it is a meaningful or appropriate indicator of the fair value of our business at this time.

 

The value of our company, as established by the market capitalization approach, is driven by a decline in our stock price, which began in September 2008 when the legislature and presidential candidates began focusing on the mortgage industry and housing crisis. We believe this decline in our stock price is driven by speculation about the potential effects on our business from proposed and enacted legislation and lender programs aimed at mitigating or delaying foreclosures. To date, none of these conditions have prevented our Business Information and APC operating units from operating on a profitable basis. For example, during the fourth quarter of 2008 while our stock price was declining, our consolidated revenues were $59.0 million, an increase of $18.1 million over fourth quarter 2007; our adjusted EBITDA was $17.1 million, an increase of $6.4 million over fourth quarter 2007, and our cash flows from operations were $18.2 million, an increase of $11.3 million over fourth quarter 2007.

 

Further, there is very limited daily average trading volume in our stock, 1.2% of our total outstanding shares. Partly as a result of these small trading volumes, our closing price per share has fluctuated significantly since our initial public offering, ranging from a high of $30.84 per share on December 26, 2007 to a low of $2.97 per share on November 25, 2008. In many cases, our large institutional investors, including some who purchased shares in our private placement in July 2008 at $16.00 per share, have continued to maintain their positions in us. In addition, our closing price per share has significantly fluctuated since our November 30 testing date ($4.31/share at November 28, 2008) between $4.03 and $7.12 per share, and it has primarily been trading above the per share price at the November 30 measurement date. Also, during this time, we withdrew our financial guidance and anticipate that this has had an impact on both the trading price of our stock and inter-day fluctuations.

 

Finally, a large portion of the goodwill in APC ($39.3 million of $51.9 million) arose from the acquisition of NDEx, which occurred in September 2008 (just prior to the decline in our stock price). We have only operated NDEx for one quarter and, during that quarter, NDEx generated $18.6 million in revenues even amidst the regulatory and economic conditions discussed above.

 

We will continue to evaluate whether circumstances and events have changed, thereby requiring us to conduct an interim test of our goodwill and other finite-lived assets. In particular, if we continue to see an uncertain political and regulatory environment regarding mortgage foreclosures, the tight credit markets, and the volatility of our stock price with any resulting decline in our market capitalization, along with other uncertainties an interim impairment test of our goodwill and other finite-lived assets may be triggered. This could result in a future material goodwill impairment charge, which could materially adversely impact our operation results for the period in which such change is recorded.

 

Share-Based Compensation Expense

 

During 2006, we adopted the provisions of SFAS No. 123(R), Share-Based Payment concurrently with the approval and adoption of our Dolan Media Company 2006 Equity Incentive Plan. In July 2007, we amended and restated the 2006 Equity Incentive Plan in its entirety and renamed it the Dolan Media Company 2007 Incentive Compensation Plan. The 2007 Incentive Compensation Plan has reserved for issuance 2,700,000 shares of common stock and provides for awards in the form of incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights, restricted stock units, deferred shares, performance units and other stock-based awards. SFAS No. 123(R) requires that all share-based payments to employees and non-employee directors, including grants of stock options and shares of restricted stock, be recognized in the financial statements based on the estimated fair value of the equity or liability instruments issued. We estimate the fair value of share-based awards that contain performance conditions using the Black-Scholes option pricing model at the grant date, with compensation expense recognized as the requisite service is rendered. As of December 31, 2008, 2007 and 2006, we had issued no market/performance based awards.

 

Prior to our initial public offering, we made only a limited number of equity awards, consisting of incentive stock options granted in October 2006 that are exercisable for 126,000 shares of common stock at an exercise price of $2.22 per share, under the 2006 Equity Incentive Plan. In 2007, we granted stock options exercisable for 881,398 shares of common stock to our non-employee directors, executive officers and management employees at a weighted average exercise price of $14.60 per share. In 2008, we granted stock options exercisable for

440,750 shares of common stock to our non-employee directors, executive officers and management employees at a weighted average exercise price of $16.59 per share. For the years ended December 31, 2008 and 2007, options to purchase 72,336 and 14,731 shares of our common stock, respectively, were forfeited by grantees of those options.

 

In accordance with SFAS No. 123(R), we have used the Black-Scholes option pricing model to estimate the fair value on the date of grant of the stock option awards that we issued on October 11, 2006 and the option awards we made during 2007 and 2008. For our grant of 126,000 incentive stock options in October 2006, our determination of the fair value of these stock option awards was affected by the estimated fair value of our common stock on the date of grant, which was based on a third-party appraisal provided to us as of September 30, 2006 in connection with determining the fair value of the common stock conversion feature of our mandatorily redeemable preferred stock. For the stock options we granted in connection with our initial public offering in August 2007, we based our determination of the fair value of these stock option awards on the initial public offering price of $14.50, as well as assumptions regarding a number of highly complex and subjective variables that are discussed below. For stock options we granted after the initial public offering, we determined the fair value of the award by using the closing share price of our common stock on the grant date. In connection with our Black-Scholes option pricing model, we calculated the expected term of stock option awards using the “simplified method” as defined by SAB 107. SFAS No. 123(R) requires companies to estimate forfeitures of share-based awards at the time of grant and revise such estimates in subsequent periods if actual forfeitures differ from original projections. For stock options issued, we have assumed a seven percent forfeiture rate for all awards issued to non-executive management employees and non-employee directors, and a zero percent forfeiture rate for all awards issued to executive management employees. We also made assumptions with respect to expected stock price volatility based on the average historical volatility of a select peer group of similar companies. In addition, we chose to use the risk free interest rate for the U.S. Treasury zero coupon yield curve in effect at the time of grant for a bond with a maturity similar to the expected life of the options.

 

The following weighted average assumptions were used in the Black-Scholes option pricing model to estimate the fair value of the stock options we granted during 2008, 2007 and 2006:

 

 

All options granted in 2008 and 2007 are non-qualified options that vest in four equal annual installments commencing on the first anniversary of the grant date and expire seven years after the grant date. All options granted in 2006 are incentive stock options that vest in four equal annual installments commencing on the grant date and expire ten years after the grant date.

 

Our share-based compensation expense for all granted options under SFAS 123(R) for the years ended December 31, 2008, 2007 and 2006, was approximately $1.3 million, $469,000 and $52,000, respectively, before income taxes. As of December 31, 2008, our estimated aggregate unrecognized share-based compensation expense for all unvested stock options was $4.1 million, which we expect to recognize over a weighted-average period of approximately 2.9 years.

 

Our 2007 Incentive Compensation Plan allows for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. We expect that the shares of nonvested restricted stock that we grant to participants in future periods will be subject to performance or market conditions that may affect the number of shares of nonvested restricted stock that will ultimately vest at the end of the requisite service period. The share-based expense for restricted stock awards is determined based on the market price of our stock on the date of grant applied to the total number of shares that are anticipated to fully vest. For grants awarded in connection with our initial public offering, we used the initial public offering price of $14.50 per share. For grants awarded after the initial public offering, we used the closing share price of our common stock on the grant date to determine the value of our restricted stock awards. For restricted stock issued, we have assumed a ten percent forfeiture rate on all

restricted stock awards issued to non-management employees, a seven percent forfeiture rate on all restricted stock awards issued to non-executive management employees, and a zero percent forfeiture rate on restricted stock awards issued to a limited number of executive employees. Compensation expense is amortized over the vesting period. We issued 54,139 and 196,519 restricted shares of common stock, respectively, during the years ended December 31, 2008 and 2007. Of these shares of restricted stock, 21,456 and 24,956 shares were forfeited by the grantees during 2008 and 2007, respectively. The forfeited shares of restricted stock are deemed to be issued but not outstanding. The restricted shares that have been issued to non-executive management employees, as well as a limited number of executive employees, will vest in four equal annual installments commencing on the first anniversary of the grant date and the restricted shares issued to non-management employees vest in five equal installments commencing on the grant date and each of the first four anniversaries of the grant date.

 

Our share-based compensation expense for all restricted shares under SFAS 123(R) for the years ended December 31, 2008, 2007 and 2006 was approximately $613,000, $501,000 and $0, respectively, before income taxes. As of December 31, 2008, our estimated aggregate unrecognized share-based compensation expense for all unvested restricted shares was $1.7 million, which we expect to recognize over a weighted-average period of approximately 2.8 years.

 

In the future, we intend to grant additional equity awards to executive officers, employees and non-employee directors. Therefore, we expect to record increased share-based compensation expense in the future, which expense for future equity awards will be reflected in our selling, general and administrative expenses and/or direct operating expenses for future periods, depending on to whom we grant an award. The actual amount of share-based compensation expense we record in any fiscal period will depend on a number of factors, including the number of shares and vesting period of equity awards, the fair value of our common stock at the time of issuance, the expected volatility of our stock price over time and the estimated forfeiture rate. Accordingly, we expect that the estimates, assumptions and judgments required to account for share-based compensation expense under SFAS No. 123(R) will continue to have significance.

 

If we implement our employee stock purchase plan, we will also record share-based compensation expenses in the future under the terms of our employee stock purchase plan because our eligible employees that participate will have three-month options to purchase our common stock through payroll deductions at a price equal to 85% of the lower of (1) our stock price on the date the option is granted and (2) our stock price on the date the option expires.

 

Capitalization of Internally Developed Software for Internal and External Use

 

We amortize purchased software and capitalized costs related to internally developed software for internal use over their useful lives of three to five years. We capitalize costs incurred during the application development stage related to internally developed software in accordance with American Institute of Certified Public Accountants Statement of Position 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). Pursuant to SOP 98-1, we expense costs as incurred during the preliminary project stage and post implementation stage. Once the capitalization criteria of SOP 98-1 has been met, we capitalize internal payroll and payroll-related costs for employees who are directly associated with the internal-use computer software project (to the extent those employees devoted time directly to the project), as well as external direct costs incurred for services used in developing or obtaining internal-use computer software. Amortization of capitalized costs begins when the software is ready for its intended use.

 

We account for costs of internally developed software for external use in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed” (“SFAS No. 86”). We expense these costs until the technological feasibility of the software product has been established, and then, to the extent that management expects such costs to be recoverable against future revenues, are capitalized until the product’s general availability to customers. We amortize capitalized software development costs over the product’s estimated economic life, beginning at the date of general availability of the product to customers.

 

Capitalized software for internal use is included in property and equipment, net in our consolidated balance sheet, and capitalized software for external use is included in other assets in our consolidated balance sheet.

Income Taxes

 

We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, income taxes are recognized for the following: (1) amount of taxes payable for the current year and (2) deferred tax assets and liabilities for the future tax consequence of events that have been recognized differently in the financial statements than for tax purposes. Deferred tax assets and liabilities are established using statutory tax rates and are adjusted for tax rate changes. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

We consider accounting for income taxes critical to our operations because management is required to make significant subjective judgments in developing our provision for income taxes, including the determination of deferred tax assets and liabilities, and any valuation allowances that may be required against deferred tax assets. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which could require an extended period of time to resolve. The completion of these audits could result in an increase to amounts previously paid to the taxing jurisdictions. Although we are not currently under any audits, we do not expect the completion of any such future audits to have a material effect on our consolidated financial statements. During 2008, the IRS audited our federal tax returns for the years ended December 31, 2006 and 2005, resulting in the recording additional income tax expense of $122,000 for the year ended December 31, 2008. Also, the Minnesota Department of Revenue completed their examination of our state tax returns for the years ended December 31, 2006, 2005 and 2004, resulting in additional income tax expense of $32,000 for 2008.

 

Accounts Receivable Allowances

 

We extend credit to our advertisers, public notice publishers, commercial printing customers and professional service customers based upon an evaluation of each customer’s financial condition, and collateral is generally not required. We establish allowances for doubtful accounts based on estimates of losses related to customer receivable balances. Specifically, we use prior credit losses as a percentage of credit sales, the aging of accounts receivable and specific identification of potential losses to establish reserves for credit losses on accounts receivable. We believe that no significant concentration of credit risk exists with respect to our Business Information Division. We had a significant concentration of credit risk with respect to our Professional Services Division as of December 31, 2008 because the amount due from Trott & Trott was $4.1 million, or 10.5% of our consolidated net accounts receivable balance, the amount due from Feiwell & Hannoy was $4.2 million, or 10.8% of our consolidated net receivable balance, and the amount due from the Barrett law firm and its affiliates was $6.4 million, or 16.5% of our consolidated net accounts receivable balance. However, to date, we have not experienced any problems with respect to collecting prompt payment from our law firm customers, each of whom are required to remit all amounts due to us with respect to files we serviced in accordance with the time periods to which we have agreed.

 

We consider accounting for our allowance for doubtful accounts critical to both of our operating segments because of the significance of accounts receivable to our current assets and operating cash flows. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required, which could have a material effect on our financial statements. See “Liquidity and Capital Resources” below for information regarding our receivables, allowance for doubtful accounts and day sales outstanding.

 

New Accounting Pronouncements

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a common definition for fair value to be applied to U.S. generally accepted accounting principles requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. Issued in February 2008, FSP 157-1 “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” removed leasing transactions accounted for under Statement 13 and related guidance from the scope of SFAS No. 157. FSP 157-2 “Partial Deferral of the

Effective Date of Statement 157” (“FSP. 157-2”), deferred the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.

 

The implementation of SFAS No. 157 for financial assets and financial liabilities, effective January 1, 2008, did not have a material impact on our consolidated financial position and results of operations. We are currently assessing the impact of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities on our consolidated financial position and results of operations.

 

SFAS No. 157 defines 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). SFAS No. 157 classifies the inputs used to measure fair value into the following hierarchy:

 

 

We endeavor to use the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. As of December 31, 2008, our only financial liabilities accounted for at fair value on a recurring basis were our interest rate swaps, included in deferred revenue and other long-term liabilities at $2.6 million. We have determined that the fair values of the interest rate swaps falls within Level 2 in the fair value hierarchy.

 

We are exposed to market risks related to interest rates. Other types of market risk, such as foreign currency risk, do not arise in the normal course of its business activities. Our exposure to changes in interest rates is limited to borrowings under its credit facility. However, as of December 31, 2008, we had swap arrangements that convert $40.0 million of its variable rate term loan into a fixed rate obligation. Under our bank credit facility, we are required to enter into derivative financial instrument transactions, such as swaps or interest rate caps, in order to manage or reduce its exposure to risk from changes in interest rates. We do not enter into derivatives or other financial instrument transactions for speculative purposes. The interest rate swaps are valued using market interest rates. As such, these derivative instruments are classified within level 2.

 

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS No. 141R”), which changes how we will account for business acquisitions. SFAS No. 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. For us, SFAS No. 141R is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008. Upon implementation of SFAS No. 141R, we will be required to expense, in the period incurred, acquisition-related costs, rather than including such costs in the purchase price allocation. We have grown our business, in large part, through acquisitions and expect to continue to identify and acquire complementary businesses in the future. As a result, we expect the recording of transaction costs associated with these acquisitions as expenses will cause periodic fluctuations in our net income or loss. For example, had SFAS No. 141R been in effect for the years ended December 31, 2008, 2007 and 2006, we would have been required, among other things, to expense $2.2 million (including $0.6 million in expenses we wrote off in connection with acquisitions we are no longer pursuing), $0.7 million and $0.8 million, respectively. However, we cannot quantify the impact of this standard on our future financial statements because the amount of these transaction costs will vary based on the size and complexity of each acquisition.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling interests in consolidated financial statements, an amendment of ARB No. 51” (“SFAS No. 160”), which establishes new standards governing the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests), in most cases, be treated as a separate component of equity, not as a liability; that increases and decrease in the parent’s ownership interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also requires changes to certain presentation and disclosure requirements. For us, SFAS No. 160 is effective beginning January 1, 2009. The provisions of the standard are to be applied to all NCIs prospectively, except for the presentation and disclosure requirements, which are to be applied retrospectively to all periods presented. Upon implementation of SFAS No. 160, we will be required to adjust our minority interest in consolidated subsidiary (renamed as noncontrolling interest as a result of SFAS No. 160) recorded on the balance sheet to the amount of our redemption value, resulting in an adjustment to our statement of operations. Because the noncontrolling interests have a redeemable feature, we will continue to report them in the mezzanine section of our balance sheet between “Liabilities” and “Stockholders’ Equity,” rather than as a separate component of equity. If SFAS No. 160 was effective at December 31, 2008, the carrying amount of the minority interest of $15.8 million would have been adjusted to reflect the redemption value of $16.8 million, resulting in a $1.0 million charge (pre-tax) to our statement of operations for the year ended December 31, 2008.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS No. 161”). The Statement requires companies to provide enhanced disclosures regarding derivative instruments and hedging activities. It requires companies to better convey the purpose of derivative use in terms of the risks that they are intending to manage. Disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows are required. This Statement retains the same scope as SFAS No. 133 and is effective beginning January 1, 2009 for us. We do not expect the implementation of this standard to have a material impact on our consolidated financial statements.

 

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” The intent of FSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007), and GAAP principles. FSP 142-3 is effective for us beginning January 1, 2009. We do not expect the implementation of this standard to have a material impact on our consolidated financial statements.

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):

 

 

 

 

Year Ended December 31, 2008
Compared to Year Ended December 31, 2007

 

Revenues

 

 

The increase in total revenues consists of the following:

 

 

We derived 47.6% and 55.9% of our total revenues from our Business Information Division and 52.4% and 44.1% of our total revenues from our Professional Services Division for the years ended December 31, 2008 and 2007, respectively. This change in mix resulted from an increase in our Professional Services Division revenues, including a $32.7 million, or 62.9%, increase in mortgage default processing services and related revenues, the majority of which resulted from the acquisition of NDEx, partially offset by an $8.4 million, or 25.5%, increase in public notice revenues in our Business Information Division.

 

Operating Expenses

 

 

Operating expenses attributable to our corporate operations decreased slightly to $10.2 million for the year ended December 31, 2008 from $10.3 million for the year ended December 31, 2007. These expenses consist primarily of the cost of compensation and employee benefits for our human resources, accounting and information technology personnel, executive officers and other members of management, as well as unallocated portions of corporate insurance costs and costs associated with being a public company. An increase in operating expenses attributable to corporate operations due to increased stock-based compensation costs, insurance costs, professional

services (including $0.4 million of professional fees written off in 2008 pertaining to costs incurred in connection with two acquisitions we are no longer pursuing included in corporate selling, general and administrative), and being a public company was offset by a $0.5 million adjustment to our self-insurance medical accrual booked in June 2008, the June 2007 write-off of split dollar life insurance that we cancelled for certain of our executive officers in connection with our initial public offering, and lower corporate executive bonus expense recorded in 2008 as compared to 2007. Total operating expenses as a percentage of revenues increased to 84.2% for the year ended December 31, 2008 from 82.4% for the year ended December 31, 2007.

 

Direct Operating Expenses.  The increase in direct operating expenses consisted of a $2.6 million increase in our Business Information Division and a $13.8 million increase in our Professional Services Division, which were largely due to increased operating costs due to acquisitions, particularly the acquisition of NDEx, increased volumes in both divisions, and annual salary increases and other increased personnel costs recorded in the year ended December 31, 2008. You should refer to the more detailed discussions in “Business Information Division Results” and “Professional Services Division Results” below for more information regarding the causes of this increase. Direct operating expenses as a percentage of revenue increased to 35.8% for 2008, from 34.0% for 2007.

 

Selling, General and Administrative Expenses.  The increase in our selling, general and administrative expenses consisted of a $3.6 million increase in our Business Information Division and a $9.1 million increase in our Professional Services Division, which are discussed in more detail below under “Business Information Division Results” and “Professional Services Division Results.” These increases primarily relate to increased costs of operating acquired businesses and other increased personnel costs, including $1.0 million of additional stock-based compensation expense recorded in 2008. Selling, general and administrative expenses also increased in 2008 as a result of $1.5 million of expenses we incurred in connection with being a public company, including expenses in connection with our Sarbanes-Oxley compliance activities (including the first audit by our accountants of our internal controls) and increased salary expenses for new employees. Selling, general and administrative expense as a percentage of revenue decreased slightly to 39.1% for 2008 from 40.9% for 2007.

 

Depreciation and Amortization Expense.  Our depreciation expense increased due to increased levels of property and equipment in 2008, primarily as a result of the acquisition of NDEx, as well as other capital spending as discussed in “Cash from Financing Activities” below. Our amortization expense increased primarily due to the amortization of finite-life intangible assets acquired in the February and September 2008 acquisitions, as well as the repurchase of interests in APC from our minority members in November 2007. We expect increased amortization in 2009 largely due to the intangible assets we acquired in connection with the acquisition of NDEx.

 

Break-up Fee and Other Income (Expense), Net

 

 

Break-up fee and other income (expense), net increased by $1.5 million during the year ended December 31, 2008, as a result of a payment of $1.5 million to the sellers of a business we intended to acquire. We made this payment pursuant to our agreement with such sellers because we were unable to obtain debt financing on terms and timing that were satisfactory to us to close the acquisition.

 

Adjusted EBITDA (a non-GAAP measurement)

 

Adjusted EBITDA (as defined and discussed in Note 5 of “Item 6 — Selected Financial Data” of this annual report on Form 10-K) and adjusted EBITDA margin increased due to the cumulative effect of the factors described in this Management Discussion and Analysis that are applicable to the calculation of adjusted EBITDA, including, in particular, the fact that we did not make any distributions to our minority partners in APC during the fourth quarter of 2008.

 

Cash Earnings and Cash Earnings per Diluted Share (non-GAAP measurements)

 

 

Cash earnings (as defined and discussed in Note 6 of “Item 6 — Selected Financial Data” of this annual report on Form 10-K) increased $4.9 million because of the cumulative effect of the factors described in this Management Discussion and Analysis that are applicable to the calculation of cash earnings. Cash earnings per diluted share (as defined and discussed in Note 6 of “Item 6 — Selected Financial Data” of this annual report on Form 10-K) decreased to $0.86 for 2008 from $1.15 for 2007 because of the increase in the number of diluted weighted average shares outstanding from 15.9 million at December 31, 2007 to 27.1 million at December 31, 2008. This increase in diluted weighted average shares outstanding occurred as a result of the private placement of 4 million shares of our common stock in July 2008 and the issuance of an additional 825,528 shares of common stock to the sellers of NDEx in connection with that acquisition.

 

Interest Expense, Net

 

 

Interest expense related to our bank credit facility increased in 2008 due to increased average outstanding borrowings. For 2008, our average outstanding borrowings were $101.8 million compared to $75.1 million for 2007. Debt was reduced in 2007 by $30 million in proceeds from our initial public offering. In 2008, outstanding borrowings increased to finance acquisitions, most notably APC’s acquisition of NDEx in September. Cash interest incurred on our interest rate swaps increased $0.8 million resulting from declining interest rates in 2008. These increases were offset by a decrease of $1.0 million in interest expense related to the amortization of deferred financing fees. In 2007, we incurred an expense of $0.6 million related to the write-off of deferred financing fees in connection with the former credit facility, and $0.4 million in connection with the write off of the unaccreted issuance costs on series C preferred stock. The decrease in other interest primarily resulted from lower interest accreted on the non-interest bearing note incurred in connection with our acquisition of the mortgage default processing services business of Feiwell & Hannoy in January 2007.

Non-Cash Interest Expense Related to Interest Rate Swaps

 

 

Non-cash interest expense related to interest rate swaps increased slightly as a result of a change in the estimated fair value of our interest rate swaps driven by a decline in interest rates in 2008. Accordingly, the estimated fair value of our fixed rate interest rate swaps recorded on our balance sheet decreased by $1.4 million to a $2.6 million liability at December 31, 2008, from a $1.2 million liability at December 31, 2007.

 

Non-Cash Interest Expense Related to Redeemable Preferred Stock

 

 

Non-cash interest expense related to redeemable preferred stock consisted of non-cash interest expense related to the dividend accretion on our Series A preferred stock and Series C preferred stock and the change in the fair value of our Series C preferred stock. In connection with our initial public offering, we converted the series C preferred stock into shares of Series A preferred stock, Series B preferred stock and common stock. We then used a portion of the net proceeds of the offering to redeem the Series A preferred stock and Series B preferred stock, including shares of Series A preferred stock and series B preferred stock issued upon conversion of the Series C preferred stock. As a result of this redemption, there are currently no shares of preferred stock issued and outstanding. Therefore, we have not recorded, and do not expect to record, any non-cash interest expense related to our preferred stock for other periods after August 7, 2007, including the year ended December 31, 2008.

 

Income Tax Expense

 

 

Our income tax expense increased because of greater taxable income recorded in 2008. Our effective tax rates for 2008 and 2007 of 39.2% and 39.4%, respectively, differ from the U.S. federal corporate income tax rate of 35.0% primarily due to the effects of state income taxes. Additionally, in 2007, the non-cash interest expense that we recorded for dividend accretion and the change in the fair value of our series C preferred stock of $66.1 million was not deductible for tax purposes.

Business Information Division Results

 

Revenues

 

 

Our display and classified advertising revenues decreased primarily due to a decrease in the number of ads placed in our publications. We expect our display and classified advertising revenues to continue to decline as our customers continue to tighten discretionary spending in light of local economic conditions in the markets we serve. Our public notice revenues increased year-over-year primarily due to the increased number of foreclosure notices placed in our publications, including revenues of $2.0 million from our acquisition of the assets of Legal and Business Publishers, Inc. in February 2008. As lenders focus on, or are required to engage in, loss mitigation, loan modification plans and other activities that delay or prevent foreclosures (see “Recent Developments — Regulatory Environment” above), we expect the rate of growth in our public notice revenues to decline in 2009. In 2008, a moratorium of public notice placements in Maryland resulted in a $0.2 million reduction in public notice revenues for our publication, The Daily Record. Other revenues declined in part as a result of our decision to reduce the commercial printing services provided by our press operations so that we can focus on the printing of our own publications.

 

Circulation revenues increased slightly despite a decline in the number of paid subscribers between December 31, 2007, and December 31, 2008. As of December 31, 2008, our paid publications had approximately 66,800 subscribers (including approximately 1,100 paid subscribers from the acquisition of The Mecklenburg Times from Legal and Business Publishers, Inc. in February 2008), a decrease of approximately 4,900, or 6.8%, from total paid subscribers of approximately 71,700 as of December 31, 2007. The majority of this decrease in paid subscribers over these periods continues to be a result of: (1) non-renewals of discounted bulk subscriptions at several law firms and (2) a decline in Lawyers USA renewals of first-year subscribers. We believe reader preference for on-line and web site access to our business journals, some of which we offer at discounted rates or no fee, has also contributed to a decline in paid subscribers to our publications and thus negatively impacted the number of paid subscribers and circulation revenues. Revenues we lost from the decline in paid subscribers were offset by bulk subscriptions converting to lower paid subscriber numbers at higher rates, increased single-copy sales and an increase in the average price per paid subscription.

 

The business information products we target to the Missouri markets and the Minnesota market each accounted for over 10% of our Business Information Division’s revenues for the year ended December 31, 2008. During 2007, publications targeted to the Maryland, Massachusetts and Missouri markets also each accounted for over 10% of our Business Information Division’s revenues.

Operating Expenses

 

 

Direct operating expenses increased as a result of new hires in the editorial and production departments of our Business Information units to respond to increases in public notice placements and editorial content in our publications ($0.8 million), increased event costs ($0.5 million), as well as an increase in other operating costs such as postage and printing ($0.4 million), including $0.4 million of increased operating costs of the acquired businesses of Venture Publications and Legal and Business Publishers. Selling, general and administrative expenses increased primarily due to a $1.5 million of information technology costs related to improving and maintaining our publication web sites, $0.4 million in bad debt expense and $0.2 million in stock compensation expenses. Selling, general and administrative expenses also increased due to $1.0 million of increased costs from businesses we acquired in 2007 and 2008. The balance of the increase in the Business Information Division selling, general and administrative expenses resulted from increases in overall wage costs and costs of various marketing promotions. Total operating expenses attributable to our Business Information Division as a percentage of Business Information Division revenue increased to 82.3% for the year ended December 31, 2008 from 79.8% for the year ended December 31, 2007. This increase is due to the cumulative effects of the increases discussed above.

 

Professional Services Division Results