UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

Commission File Number: 001-33603

The Dolan Company

(Exact name of registrant as specified in its charter)

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

222 South Ninth Street, Suite 2300,
Minneapolis, Minnesota 55402
(Address, including zip code, of registrant’s principal executive offices)

(612) 317-9420
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

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

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

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

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

On May 6, 2011, there were 30,369,011 shares of the registrant’s common stock outstanding.

 

 

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2011, (unaudited) and December 31, 2010			1
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011, and 2010			2
Unaudited Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Three Months Ended March 31, 2011			3
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011, and 2010			4
Notes to Unaudited Condensed Consolidated Interim Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. Quantitative and Qualitative Disclosures about Market Risk			27
Item 4. Controls and Procedures			27
PART II — OTHER INFORMATION			28
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 3. Defaults Upon Senior Securities			28
Item 4. Reserved			28
Item 5. Other Information			28
Item 6. Exhibits			28
SIGNATURES			29
Section 302 Certification of James P. Dolan
Section 302 Certification of Vicki J. Duncomb
Section 906 Certification of James P. Dolan
Section 906 Certification of Vicki J. Duncomb

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The Dolan Company

		March 31,				December 31,
		2011				2010
		(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	2,724			$	4,862
Accounts receivable, including unbilled services (net of allowances for doubtful accounts of $1,415 and $1,578 as of March 31, 2011, and December 31, 2010, respectively)			64,901				59,801
Unbilled pass-through costs			6,018				7,140
Prepaid expenses and other current assets			3,949				4,186
Income tax receivable			2,119				4,183
Total current assets			79,711				80,172
Investments			13,157				13,808
Property and equipment, net			17,649				17,333
Finite-life intangible assets, net			190,347				195,959
Indefinite-lived intangible assets			226,418				225,373
Other assets			2,920				3,143
Total assets		$	530,202			$	535,788
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt		$	8,783			$	7,578
Accounts payable			14,870				15,589
Accrued pass-through liabilities			14,331				18,271
Accrued compensation			7,634				5,409
Accrued liabilities			4,814				5,537
Due to sellers of acquired businesses			5,732				3,943
Deferred revenue			21,837				21,689
Total current liabilities			78,001				78,016
Long-term debt, less current portion			124,665				131,568
Deferred income taxes			8,381				7,794
Other liabilities			11,174				12,972
Total liabilities			222,221				230,350
Redeemable noncontrolling interest			25,564				26,580
Commitments and contingencies (Note 14)
Stockholders’ equity
Common stock, $0.001 par value; authorized: 70,000,000 shares; outstanding: 30,370,410 and 30,511,408 shares as of March 31, 2011, and December 31, 2010, respectively			30				30
Preferred stock, $0.001 par value; authorized: 5,000,000 shares; designated: 5,000 shares of Series A Junior Participating Preferred Stock; no shares outstanding			—				—
Other comprehensive loss (net of tax)			(1,097	)			(1,298	)
Additional paid-in capital			286,031				286,148
Accumulated deficit			(2,547	)			(6,022	)
Total stockholders’ equity			282,417				278,858
Total liabilities and stockholders’ equity		$	530,202			$	535,788

See Notes to Unaudited Condensed Consolidated Interim Financial Statements

The Dolan Company

		Three Months Ended
		March 31,
		2011				2010
Revenues
Professional Services		$	51,957			$	56,026
Business Information			20,591				20,952
Total revenues			72,548				76,978
Operating expenses
Direct operating: Professional Services			23,502				22,190
Direct operating: Business Information			8,338				6,916
Selling, general and administrative			27,774				25,188
Amortization			4,523				3,993
Depreciation			1,934				2,736
Total operating expenses			66,071				61,023
Equity in earnings of affiliates			748				1,428
Operating income			7,225				17,383
Non-operating income (expense)
Interest expense, net of interest income			(1,608	)			(1,736	)
Non-cash interest income related to interest rate swaps			286				363
Total non-operating expense			(1,322	)			(1,373	)
Income before income taxes			5,903				16,010
Income tax expense			(2,209	)			(5,990	)
Net income			3,694				10,020
Less: Net income attributable to redeemable noncontrolling interest			(219	)			(863	)
Net income attributable to The Dolan Company		$	3,475			$	9,157
Earnings per share — basic:
Net income attributable to The Dolan Company		$	0.12			$	0.30
Decrease in redeemable noncontrolling interest in NDeX			0.03				—
Net income attributable to The Dolan Company common stockholders		$	0.15			$	0.30
Weighted average shares outstanding — basic			30,128,944				30,106,932
Earnings per share — diluted:
Net income attributable to The Dolan Company		$	0.11			$	0.30
Decrease in redeemable noncontrolling interest in NDeX			0.03				—
Net income attributable to The Dolan Company common stockholders		$	0.14			$	0.30
Weighted average shares outstanding — diluted			30,364,917				30,194,842

See Notes to Unaudited Condensed Consolidated Interim Financial Statements

The Dolan Company

										Additional								Other
		Common Stock								Paid-In				Accumulated				Comprehensive
		Shares				Amount				Capital				Deficit				Loss				Total
Balance (deficit) at December 31, 2009			30,326,437			$	30			$	287,210			$	(38,377	)		$	—			$	248,863
Net income attributable to The Dolan Company			—				—				—				32,355				—				32,355
Decrease in redeemable noncontrolling interest in NDeX			—				—				217				—				—				217
Net income attributable to The Dolan Company common stockholders			—				—				—				—				—				32,572
Unrealized loss on interest rate swap, net of tax			—				—				—				—				(1,298	)			(1,298	)
Total comprehensive income																							31,274
Issuance of common stock pursuant to the exercise of stock options			13,848				—				26				—				—				26
Share-based compensation expense, including issuance of restricted stock (shares are net of forfeitures)			171,123				—				3,242				—				—				3,242
Increase in redeemable noncontrolling interest in DiscoverReady, net of tax							—				(4,560	)			—				—				(4,560	)
Other			—				—				13				—				—				13
Balance (deficit) at December 31, 2010			30,511,408			$	30			$	286,148			$	(6,022	)		$	(1,298	)		$	278,858
Net income attributable to The Dolan Company			—				—				—				3,475				—				3,475
Decrease in redeemable noncontrolling interest in NDeX			—				—				964				—				—				964
Net income attributable to The Dolan Company common stockholders			—				—				—				—				—				4,439
Unrealized gain on interest rate swap, net of tax			—				—				—				—				201				201
Total comprehensive income																							4,640
Share-based compensation expense, including issuance of restricted stock (shares are net of forfeitures)			(3,498	)			—				838				—				—				838
Repurchase of common stock			(137,500	)			—				(1,691	)			—				—				(1,691	)
Increase in redeemable noncontrolling interest in DiscoverReady			—				—				(228	)			—				—				(228	)
Balance (deficit) at March 31, 2011			30,370,410			$	30			$	286,031			$	(2,547	)		$	(1,097	)		$	282,417

See Notes to Unaudited Condensed Consolidated Interim Financial Statements

The Dolan Company

		Three Months Ended
		March 31,
		2011				2010
Cash flows from operating activities
Net income		$	3,694			$	10,020
Distributions received from The Detroit Legal News Publishing, LLC			1,400				2,100
Distributions paid to holders of noncontrolling interests			(36	)			(624	)
Non-cash operating activities:
Amortization			4,523				3,993
Depreciation			1,934				2,736
Equity in earnings of affiliates			(748	)			(1,428	)
Stock-based compensation expense			838				606
Change in value of interest rate swap			(286	)			(363	)
Amortization of debt issuance costs			88				83
Non-cash fair value adjustment on earnouts recorded in connection with acquisitions			329				294
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable and unbilled pass-through costs			(3,933	)			(1,365	)
Prepaid expenses and other current assets			2,359				(125	)
Other assets			34				36
Accounts payable and accrued liabilities			(3,123	)			2,735
Deferred revenue and other liabilities			505				2,456
Net cash provided by operating activities			7,578				21,154
Cash flows from investing activities
Acquisitions and investments			(85	)			—
Capital expenditures			(2,247	)			(1,884	)
Net cash used in investing activities			(2,332	)			(1,884	)
Cash flows from financing activities
Net payments on senior revolving note			(3,800	)			(8,000	)
Payments on senior long-term debt			(1,250	)			(3,050	)
Payments on unsecured notes payable			(590	)			(7,308	)
Payments for repurchase of common stock			(1,691	)			—
Other			(53	)			(50	)
Net cash used in financing activities			(7,384	)			(18,408	)
Net change in cash and cash equivalents			(2,138	)			862
Cash and cash equivalents at beginning of the period			4,862				2,894
Cash and cash equivalents at end of the period		$	2,724			$	3,756

See Notes to Unaudited Condensed Consolidated Interim Financial Statements

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Note 1. Basis of Presentation

Basis of Presentation: The condensed consolidated balance sheet as of December 31, 2010, which has been derived from audited financial statements, and the unaudited condensed consolidated interim financial statements of The Dolan Company (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to the quarterly report on Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations. Accordingly, these unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2010, included in the Company’s annual report on Form 10-K filed on March 11, 2011, with the Securities and Exchange Commission (SEC).

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

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

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

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

Note 2. Basic and Diluted Income Per Share

Basic per share amounts are computed, generally, by dividing net income attributable to The Dolan Company by the weighted-average number of common shares outstanding. The Company has employed the two-class method to calculate earnings per share, as it relates to the redeemable noncontrolling interest in NDeX, based on net income attributable to its common stockholders. At March 31, 2011, and December 31, 2010, there were no shares of preferred stock issued and outstanding. Diluted per share amounts assume the conversion, exercise, or issuance of all potential common stock instruments (see Note 13 for information on stock options and restricted stock) unless their effect is anti-dilutive, thereby reducing the loss per share or increasing the income per share.

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

		Three Months Ended
		March 31,
		2011				2010
Net income attributable to The Dolan Company		$	3,475			$	9,157
(Increase) decrease in redeemable noncontrolling interest in NDeX, net of tax			964				(79	)
Net income attributable to The Dolan Company common stockholders		$	4,439			$	9,078
Basic:
Weighted average common shares outstanding			30,455				30,321
Weighted average common shares of unvested restricted stock			(326	)			(214	)
Shares used in the computation of basic net income per share			30,129				30,107
Net income attributable to The Dolan Company common stockholders per share — basic		$	0.15			$	0.30

		Three Months Ended
		March 31,
		2011				2010
Diluted:
Shares used in the computation of basic net income per share			30,129				30,107
Stock options and restricted stock			236				88
Shares used in the computation of dilutive net income per share			30,365				30,195
Net income attributable to The Dolan Company common stockholders per share — diluted		$	0.14			$	0.30

For the three months ended March 31, 2011 and 2010, options to purchase approximately 1.1 million and 1.5 million weighted shares of common stock, respectively, were excluded from the computation because their effect would have been anti-dilutive.

Note 3. Business Combinations

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

2010 Acquisition:

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

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

In connection with this acquisition, the Company determined that the earnouts of $4.0 million, in the aggregate, were likely to be achieved and has therefore included the present value of these payments, or $3.2 million, in its determination of consideration transferred. The Company has determined that this liability is a Level 3 fair value measurement within the Financial Accounting Standards Board’s (“FASB”) fair value hierarchy, and such liability is adjusted to fair value at each reporting date, with the adjustment reflected in selling, general and administrative expenses. See Note 5 for information pertaining to changes in the fair value of this liability during the three months ended March 31, 2011.

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

Pro Forma Information: Actual results of operations reflecting the equity interests and assets acquired in 2010 are included in the unaudited condensed consolidated interim financial statements from the dates of the applicable business combination. The unaudited pro forma condensed consolidated statement of operations of the Company, set forth below, gives effect to the Company’s 2010 acquisitions using the purchase method as if they occurred on January 1, 2010. These amounts are not necessarily indicative of the consolidated results of operations for future years or actual results that would have been realized had the business combinations occurred as of the beginning of each such year (in thousands, except per share data):

		Pro Forma
		Three Months Ended
		March 31, 2010
Total revenues		$	79,386
Net income attributable to The Dolan Company			9,114
Net income attributable to The Dolan Company per share:
Basic		$	0.30
Diluted		$	0.30
Actual/Pro forma weighted average shares outstanding:
Basic			30,129
Diluted			30,365

Note 4. Derivative Instruments

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

As of March 31, 2011, and December 31, 2010, the Company had $1.1 million and $1.3 million, respectively in other comprehensive loss related to unrealized losses (net of tax) on the cash flow hedge. Unrealized gains and losses are reflected in net income attributable to The Dolan Company when the related cash flows or hedged transactions occur and offset the related performance of the hedged item.

This cash flow hedge was highly effective for the three months ended March 31, 2011, and is expected to remain highly effective in future periods. The occurrence of these related cash flows and hedged transaction remains probable.

The Company had liabilities of $1.8 million and $2.4 million resulting from interest rate swaps at March 31, 2011, and December 31, 2010, respectively, which are included in accrued liabilities or other liabilities on the balance sheet, depending on the time of the expiration of the swap agreement. Total floating-rate borrowings not offset by the swap agreements at March 31, 2011, totaled $79.0 million.

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

Note 5. Fair Value of Financial Instruments

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

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

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

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

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

		Level 1				Level 2				Level 3				Total
Interest rate swaps		$	—			$	1,789			$	—			$	1,789
Earnout liability recorded in connection with the NDeX Florida operations acquired from the Albertelli sellers			—				—				5,258				5,258
Earnout liability recorded in connection with the DataStream acquisition			—				—				3,312				3,312
Redeemable noncontrolling interest in DiscoverReady			—				—				14,160				14,160
Total		$	—			$	1,789			$	22,730			$	24,519

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

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

The following table summarizes the changes in fair value for all Level 3 liabilities measured at fair value on a recurring basis using significant unobservable inputs for the three months ended March 31, 2011 (in thousands):

						Fair Value								Fair Value
						Adjustment								Adjustment
						Included in Net								Included in
						Income				Minority				Additional
						Attributable to				Partners’				Paid-in Capital				Balance at
		Balance at				The Dolan				Share of				and Deferred				March 31,
		December 31, 2010				Company				Earnings				Taxes				2011
Earnout liability recorded in connection with the NDeX Florida operations acquired from the Albertelli sellers		$	5,069			$	189			$	—			$	—			$	5,258
Earnout liability recorded in connection with the DataStream Acquisition			3,171				141				—				—				3,312
Redeemable noncontrolling interest in DiscoverReady			13,652				—				137				371				14,160
Total		$	21,892			$	330			$	137			$	371			$	22,730

Non-Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). No such fair value adjustments were required during the quarter.

Fair Value of Financial Instruments: The carrying value of cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments. The carrying value of the Company’s debt is the remaining amount due to its debtors under borrowing arrangements. To estimate the fair value of its variable-rate debt issues that are not quoted on an exchange, the Company estimates an interest rate it would be required to pay if it had to refinance its debt. The Company noted no significant changes in interest rates between December 31, 2010, and March 31, 2011, and as such, the carrying value of variable-rate debt under the Company’s senior credit facility of $129.0 million approximates its estimated fair value.

Note 6. Investments

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

		Accounting		Percent				March 31,				December 31,
		Method		Ownership				2011				2010
The Detroit Legal News Publishing, LLC		Equity			35			$	12,512			$	13,154
Other		Equity			19.5				645				654
Total								$	13,157			$	13,808

For the three months ended March 31, 2011, and 2010 , the equity (loss) in earnings of affiliates is as follows (in thousands):

		Three Months Ended
		March 31,
		2011				2010
The Detroit Legal News Publishing, LLC		$	757			$	1,428
Other			(9	)			—
Total		$	748			$	1,428

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

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

The following table summarizes certain key information relating to the Company’s investment in DLNP as of March 31, 2011, and December 31, 2010, and for the three months ended March 31, 2011, and 2010 (in thousands):

		As of March 31,				As of December 31,
		2011				2010
Carrying value of investment		$	12,512			$	13,154
Underlying finite-lived customer list, net of amortization			7,036				7,413

		Three Months Ended
		March 31,
		2011				2010
Equity in earnings of DLNP, net of amortization of customer list		$	757			$	1,428
Distributions received			1,400				2,100
Amortization expense			377				377

Note 7. Intangible Assets

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

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

		March 31,				December 31,
		2011				2010
Goodwill
Mortgage Default Processing Services		$	131,709			$	131,709
Litigation Support Services			23,651				23,651
Business Information			62,844				61,833
Total goodwill			218,204				217,193
Tradenames
Mortgage Default Processing Services			6,537				6,537
Business Information			1,677				1,643
Total tradenames			8,214				8,180
Total indefinite-lived intangbile assets		$	226,418			$	225,373

The change in goodwill and tradenames in the Business Information segment resulted from the Company’s finalization in the first quarter of 2011 of its estimate of fair value of the December 2010 Datastream acquisition.

Finite-Life Intangible Assets: Total amortization expense for finite-lived intangible assets for the three months ended March 31, 2011, and 2010, was approximately $4.5 million and $4.0 million, respectively.

Note 8. Long-Term Debt, Capital Lease Obligation

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

		March 31,				December 31,
		2011				2010
Senior secured debt (see below):
Senior variable-rate term note, payable in quarterly installments with a balloon		$	48,750			$	50,000
Senior variable-rate revolving note			80,200				84,000
Total senior secured debt			128,950				134,000
Unsecured notes payable			4,296				4,886
Capital lease obligations			202				260
			133,448				139,146
Less current portion			8,783				7,578
Long-term debt, less current portion		$	124,665			$	131,568

Senior Secured Debt: As of March 31, 2011, the Company and its consolidated subsidiaries have a credit agreement with a syndicate of banks for a $205.0 million senior secured credit facility comprised of a term loan facility in an initial aggregate amount of $50.0 million due and payable in quarterly installments with a final maturity date of December 6, 2015, and a revolving credit facility in an aggregate amount of up to $155.0 million, which may be increased pursuant to an “accordion” feature to up to $200.0 million, with a final maturity date of December 6, 2015.

At March 31, 2011, the Company had net unused available capacity of approximately $74.8 million on its revolving credit facility, after taking into account the senior leverage ratio requirements under the credit facility. The Company expects to use the remaining availability under this credit facility, if needed, for working capital, potential acquisitions, stock buy-backs and other general corporate purposes.

Note 9. Common and Preferred Stock

In December 2010, the Company’s board of directors approved a stock buy-back plan. This plan allows the Company to repurchase shares of issued and outstanding common stock at prevailing market prices or negotiated prices at any time through December 31, 2013. The number of shares and the timing of the purchases will be determined at the discretion of management. In the first quarter of 2011, the Company repurchased 137,500 shares under this plan at an average price of $12.27 per share, for a total investment of $1.7 million.

On January 29, 2009, the Company’s board of directors designated 5,000 shares of Series A Junior Participating Preferred Stock, which are issuable upon the exercise of rights as described in the Stockholder Rights Plan adopted by the Company on the same date. The rights to purchase 1/10,000 of a share of the Series A Junior Participating Preferred Stock were issued to the Company’s stockholders of record on February 9, 2009. All other authorized shares of preferred stock are undesignated.

Note 10. Income Taxes

The provision for income taxes for the three months ended March 31, 2011, and 2010, was $2.2 million and $6.0 million, respectively, or 37.4% of income before income taxes. The provision for income taxes during the three months ended March 31, 2011 and 2010 is comprised of federal, state and local taxes. The primary difference between the Company’s effective tax rate and the statutory federal rate is state income taxes. This difference is partially offset by earnings of the Company’s noncontrolling interests, which are not subject to federal income tax payable by the Company.

Note 11. Major Customers and Related Parties

NDeX has eight law firm customers and, of those customers, Trott & Trott and the Barrett law firm (both related parties) comprised 13.1% and 24.1%, respectively, of the Company’s total revenues for the three months ended March 31, 2011.

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

Note 12. Reportable Segments

The Company has two operating divisions: Professional Services and Business Information. Its Professional Services Division, which provides professional services supporting primarily attorneys and/or their clients, comprises two reporting segments: Mortgage Default Processing Services and Litigation Support Services. The Mortgage Default Processing Services segment generates revenue from NDeX, which provides mortgage default processing and related services to its customers. The Litigation Support Services segment generates revenue by providing discovery management and document review services through DiscoverReady and appellate services through Counsel Press, LLC. Both of these operating segments generate revenues through fee-based arrangements. The Business Information segment provides products, data and certain services through subscription-based products and a variety of media, including court and commercial newspapers, weekly business journals and the Internet. The Business Information segment generates revenues primarily from display and classified advertising (including events), public notices, and subscriptions and other. The Company determined its reportable segments based on the types of products sold and services performed.

The tables below reflect summarized financial information concerning the Company’s reportable segments for the three months ended March 31, 2011, and 2010 (in thousands):

		Professional Services
		Mortgage
		Default				Litigation				Business
		Processing				Support				Information				Corporate				Total
Three Months Ended March 31, 2011
Revenues		$	37,856			$	14,101			$	20,591			$	—			$	72,548
Direct operating expenses			17,676				5,826				8,338				—				31,840
Selling, general and administrative expenses			10,331				4,997				10,340				2,106				27,774
Amortization and depreciation			3,543				944				1,798				172				6,457
Equity in earnings of affiliates			—				—				748				—				748
Operating income (loss)		$	6,306			$	2,334			$	863			$	(2,278	)		$	7,225
Three Months Ended March 31, 2010
Revenues		$	42,435			$	13,591			$	20,952			$	—			$	76,978
Direct operating expenses			16,975				5,215				6,916				—				29,106
Selling, general and administrative expenses			10,289				3,999				8,856				2,044				25,188
Amortization and depreciation			4,442				825				1,288				174				6,729
Equity in earnings of affiliates			—				—				1,428				—				1,428
Operating income (loss)		$	10,729			$	3,552			$	5,320			$	(2,218	)		$	17,383

Note 13. Share-Based Compensation

Total share-based compensation expense for the three months ended March 31, 2011, and 2010, was approximately $0.8 million and $0.6 million, respectively, before income taxes.

The Company has reserved 4.8 million shares of its common stock for issuance under its incentive compensative plan of which there were 2.4 million shares available for issuance as of March 31, 2011.

Stock Options: Share-based compensation expense related to stock options for the three months ended March 31, 2011, and 2010, was approximately $0.5 million and $0.4 million, respectively, before income taxes.

The following table represents stock option activity for the three months ended March 31, 2011:

														Weighted
						Weighted				Weighted				Average
						Average Grant				Average				Remaining
		Number				Date Fair				Exercise				Contractual
		of Shares				Value				Price				Life (in years)
Outstanding options at December 31, 2010			1,945,770			$	4.83			$	13.50				4.82
Granted			5,836				5.39				12.74				—
Canceled or forfeited			(41,967	)			5.04				13.84				—
Outstanding options at March 31, 2011			1,909,639			$	4.83			$	13.49				4.57
Options exercisable at March 31, 2011			862,230			$	4.53			$	13.60				3.92

At March 31, 2011, the aggregate intrinsic value of options outstanding and options exercisable was approximately $0.9 million and $0.8 million, respectively. At March 31, 2011, there was approximately $3.2 million of unrecognized compensation cost related to outstanding options, which is expected to be recognized over a weighted-average period of 2.4 years.

Restricted Stock Grants: The following table represents a summary of nonvested restricted stock activity for the three months ended March 31, 2011:

						Weighted Average
		Number of Shares				Grant Date Fair Value
Nonvested, December 31, 2010			324,906			$	12.62
Granted			3,204				12.74
Canceled or forfeited			(6,702	)		$	12.90
Nonvested, March 31, 2011			321,408			$	12.61

Share-based compensation expense related to grants of restricted stock for the three months ended March 31, 2011, and 2010, was approximately $0.3 million and $0.2 million, respectively, before income taxes. Total unrecognized compensation expense for unvested restricted shares of common stock as of March 31, 2011, was approximately $2.5 million, which is expected to be recognized over a weighted-average period of 2.6 years.

Note 14. Contingencies and Commitments

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

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

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

In this quarterly report on Form 10-Q, unless the context requires otherwise, the terms “we,” “us,” and “our” refer to The Dolan Company and its consolidated subsidiaries. When we refer to “National Default Exchange” or “NDeX” in this report, we mean all of our mortgage default processing operations in Michigan, Indiana and Minnesota and at Barrett-NDEx (collectively referred to as the “existing NDeX business”), as well as the Florida mortgage default and related title operations acquired from the Albertelli sellers in October 2009. When we refer to “Barrett-NDEx” in this report, it means the entities that constitute the mortgage default processing operations serving the Texas, California and Georgia markets that NDeX acquired on September 2, 2008. The term “Barrett law firm” refers to Barrett Daffin Frappier Turner & Engel, LLP and its two law firm affiliates. When we refer to the “Albertelli sellers” in this report, it means James E. Albertelli, P.A., The Albertelli Firm, P.C., Albertelli Title, Inc. and James E. Albertelli, as a group. We also refer to James E. Albertelli, P.A. and The Albertelli Firm, P.C., together, as the “Albertelli law firm.” The term “Trott sellers” in this report means David A. Trott, Ellen Coon, Trustee of the Ellen Coon Living Trust u/a/d 9/9/98, Marcy J. Ford, Trustee of the Marcy Ford Revocable Trust u/a/d 7/12/04, William D. Meagher, Trustee of the William D. Meagher Trust u/a/d 8/24/07, and Jeanne M. Kivi, Trustee of the Jeanne M. Kivi Trust u/a/d 8/24/07, as a group.

Forward-Looking Statements

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

	•		our businesses operate in highly competitive markets and depend on the economies and demographics of the legal, financial and real estate markets we serve, and changes in those sectors could have an adverse effect on our revenues, cash flows, and profitability;
	•		growing our business may place a strain on our management and internal systems, processes and controls, may result in operating inefficiencies, and may negatively impact our operating margins;
	•		we intend to continue to pursue acquisition opportunities, which we may not do successfully and which may subject us to considerable business and financial risk or require us to raise additional capital or incur additional indebtedness;
	•		we depend on our senior management team and other key leaders of our business segments, and the operation and growth of our business may be negatively impacted if we lose any of their services;
	•		if the number of case files referred to us by our mortgage default processing service law firm customers (or loan servicers and mortgage lenders we serve directly for mortgage default files in California) decreases or fails to increase, our operating results and ability to execute our growth strategy could be adversely affected;
	•		bills introduced and laws enacted to mitigate foreclosures, voluntary relief programs and voluntary halts or moratoria by servicers or lenders, as well as governmental investigations, enforcement actions, litigation and court orders, may have an adverse affect on our mortgage default processing services and public notice operations;
	•		revenues of our subsidiary NDeX and our subsidiary DiscoverReady are each very concentrated among a few customers, thus the loss of business from these customers and a failure to attract new customers could adversely affect our operating results; and
	•		certain key personnel of our subsidiary NDeX, who are also shareholders and principal attorneys of our law firm customers, may under certain circumstances have interests that differ from or conflict with our interests.

See “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2010, filed on March 11, 2011, with the SEC for a description of these and other risks, uncertainties and factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, any forward-looking statements. You should not place undue reliance on any forward-looking statements. Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this report.

Overview

We are a leading provider of necessary professional services and business information to legal, financial and real estate sectors in the United States. We serve our customers through two complementary operating divisions: our Professional Services Division and our Business Information Division. Our Professional Services Division comprises two reporting segments: mortgage default processing services and litigation support services. Through our subsidiary, NDeX, we provide mortgage default processing services to eight law firm customers located in Florida, Georgia, Indiana, Michigan, Minnesota, and Texas, as well as directly to mortgage lenders and loan servicers on residential real estate located in California. Our subsidiaries DiscoverReady and Counsel Press comprise our litigation support services reporting segment. DiscoverReady provides outsourced discovery management and document review services to major United States companies and their counsel. Counsel Press provides appellate services to law firms and attorneys nationwide. Our Business Information Division publishes business journals, court and commercial media and other highly focused information products and services, operates web sites and produces events for targeted professional audiences in 21 geographic markets across the United States. Our information is delivered through a variety of methods, including more than 60 print publications and more than 80 web sites. Through subscription-based offerings, our Business Information Division also offers transcription services and access to our legislative databases which provide federal and state legislative and regulatory information.

Our total revenues decreased $4.4 million, or 5.8%, from $77.0 million for the three months ended March 31, 2010, to $72.5 million for the three months ended March 31, 2011, primarily as a result of a $4.6 million decrease in our mortgage default processing services revenues. Slightly offsetting this decrease was an increase in litigation support services revenues of $0.5 million. The decrease in mortgage default processing services revenues was driven primarily by a decrease in the number of files received for processing, and change in the mix of types of files, as discussed below. The litigation support services revenue growth was driven primarily by our DiscoverReady business. Revenues in our Business Information Division were down $0.4 million for the three months ended March 31, 2011. Net income attributable to The Dolan Company decreased to $3.5 million for the first quarter of 2011 from $9.2 million for the same period in 2010.

Recent Developments

Stock Buy-Back Plan

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

Regulatory Environment

On March 3, 2011, the state attorneys general, in collaboration with the newly created Consumer Financial Protection Bureau and other banking regulators, sent a 27-page proposal to the five largest mortgage servicers outlining the proposed terms for a settlement of their investigation. While the investigators have said they found no indications of unlawful foreclosures by the servicers, they have suggested that they found flaws in foreclosure procedures and practices by at least some in the mortgage servicing industry. The proposed settlement terms included a focus on borrowers having a single point of contact throughout loss mitigation talks and eliminating dual-tracking foreclosures while loan modifications are under consideration, among other terms. Some of the state attorneys general have voiced opposition to the proposed terms. The mortgage servicers have not agreed to the proposed settlement terms and discussions continue.

On April 13, 2011, the Board of Governors of The Federal Reserve System and the Office of the Comptroller of the Currency announced formal enforcement actions against eight national bank mortgage servicers and two third-party service providers regarding practices related to residential mortgage loan servicing and foreclosure processing. In general, the enforcement actions require the servicers to take certain corrective actions, to make process improvements, and to establish controls related to third-party vendors that provide services related to residential default or foreclosure. These enforcement actions add to the heightened governmental scrutiny that residential mortgage foreclosure servicers have been experiencing in recent months. Many servicers have reacted to this heightened scrutiny by verifying their policies and procedures, applying more scrutiny to their pending foreclosures, and then releasing into foreclosure only those cases that have been reviewed more carefully. Many servicers have also reacted to this environment of increased scrutiny by requesting additional information and process verification from law firms and other third-party vendors. These actions have sharply reduced, though not completely stopped, the number of mortgage defaults being referred to begin foreclosure.

The Federal Reserve and OCC actions took the form of consent agreements which were signed by the eight bank mortgage servicers which, collectively, account for 65% of the nation’s mortgage processing activity. The agreement requires the servicers to complete revisions in foreclosure processing by approximately June 15, 2011, to the satisfaction of the Federal Reserve and the OCC, and by approximately August 15, 2011, to reorganize their related foreclosure operations to follow the amended procedures.

We believe that the recent reduction in foreclosure referrals is likely to continue until the new procedures are in place, but that a large number of pre-foreclosures and pending foreclosures remain to be undertaken and completed.

For more detailed summaries of legislation and regulatory activity impacting or potentially impacting our business, please see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Regulatory Environment” in our annual report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 11, 2011, as well as the “Regulatory Environment” discussions in our prior reports filed with the SEC on Form 10-Q and Form 10-K.

Recent Acquisitions

We have grown significantly since our predecessor company commenced operations in 1992, in large part due to acquisitions, such as the following two acquisitions that occurred in 2010:

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

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

Revenues

We derive revenues from two operating divisions, our Professional Services Division and our Business Information Division, operating as three reportable segments: (1) mortgage default processing services; (2) litigation support services; and (3) business information. For the three months ended March 31, 2011, and 2010, our total revenues were $72.5 million and $77.0 million, respectively, and the percentage of our total revenues attributed to each of our divisions and segments was as follows:

	•		72% and 73%, respectively, from our Professional Services Division (52% and 55%, respectively, from mortgage default processing services and 19% and 18%, respectively, from litigation support services); and
	•		28% and 27%, respectively, from our Business Information Division.

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

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

For the three months ended March 31, 2011, and 2010, we received for processing approximately 92,300 and 95,700 mortgage default case files, respectively. The mix of types of files received for processing changed as more fully described below in Professional Services Division Results, resulting in a shift from higher revenue files to lower revenue files. Our mortgage default processing service revenues accounted for 52% and 55%, respectively, of our total revenues and 73% and 76%, respectively, of our Professional Services Division revenues during the three months ended March 31, 2011, and 2010. During the first quarter of 2011, each of the Barrett Law Firm, Trott & Trott and Albertelli law firm accounted for more than 10% of our mortgage default processing services revenues, with the Barrett Law Firm accounting for 46%, Trott & Trott accounting for 25%, and Albertelli law firm accounting for 12% of these revenues. We recognize mortgage default processing service revenues on a proportional basis over the period during which the services are provided, the calculation of which requires management to make estimates. For more information regarding how we recognize revenue, please see “Critical Accounting Policies and Estimates — Revenue Recognition” in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 11, 2011.

NDeX’s revenues are primarily driven by the number of residential mortgage defaults in each of the states in which we do business, as well as the type of files we process (e.g., foreclosures, evictions, bankruptcies or litigation) because each has a different pricing structure. Although the services agreements with our law firm customers contemplate the review and possible revision of the fees for the services we provide, price increases have not historically affected our mortgage default processing revenues materially. In some cases, our services agreements adjust the fee paid to us for the files we process on an annual basis pursuant to an agreed-upon consumer price index. In other cases, our services agreements require us to agree with our law firm customer regarding the terms and amount of any fee increase. If we are unable to negotiate fixed fee increases under these agreements that at least take into account the increases in costs associated with providing mortgage default processing services, our operating and net margins could be adversely affected. You should refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revenues in our annual report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 11, 2011, for more information about the conditions when the fixed fee per file we charge our law firm customers may change.

Deferred revenue includes payments for mortgage default processing services collected in advance that we expect to recognize in future periods due to the extended period of time it takes to process certain files. At March 31, 2011, we had such deferred revenue on our balance sheet in the amount of $14.2 million.

Litigation Support Services. Our litigation support services segment generates revenues by providing discovery management and document review services through DiscoverReady and appellate services through Counsel Press. For the three months ended March 31, 2011, our litigation support services revenues accounted for 19% and 18%, respectively, of our total revenues and 27% and 24%, respectively, of our Professional Services Division revenues. We recognize litigation support services revenues during the month in which the services are provided. In the case of Counsel Press, this is when our final appellate product is filed with the court.

DiscoverReady provides its services to major United States companies and their counsel and assists them in document reviews and helping them manage the discovery process. Discovery is the process by which parties use the legal system to obtain relevant information, primarily in litigation and regulatory matters. This process can be expensive and time-consuming for companies depending upon the volume of emails, electronic files and paper documents a company must review to respond to a document request. DiscoverReady also provides related technology management services. DiscoverReady bills its customers primarily based upon the number of documents reviewed and the amount of data or other information it processes in connection with those reviews. Accordingly, our discovery management and document review services revenues are largely determined by the volume of data we review. Our discovery management and document review services revenues accounted for 14% and 13%, respectively, of our total revenues, 72% for both periods of our litigation support services segment revenues, and 20% and 17%, respectively, of our total Professional Services Division revenues for the three months ended March 31, 2011, and 2010.

Counsel Press assists law firms and attorneys throughout the United States in organizing, preparing and filing appellate briefs, records and appendices, in paper and electronic formats, that comply with the applicable rules of the U.S. Supreme Court, any of the 13 federal courts of appeals and any state appellate court or appellate division. Counsel Press charges its customers primarily on a per-page basis based on the final appellate product that is filed with the court clerk. Accordingly, our appellate service revenues are largely determined by the volume of appellate cases we handle and the number of pages in the appellate cases we file. For the three months ended March 31, 2011, and 2010, our appellate services revenues accounted for 6% and 5%, respectively, of our total revenues, 28% for both periods of our litigation support services revenues, and 8% and 7%, respectively, of our total Professional Services Division revenues.

Business Information. Our Business Information Division generates revenues primarily from display and classified advertising, public notice and subscriptions. We sell commercial advertising consisting of display and classified advertising in all of our print products and on most of our web sites. We include within our display and classified advertising revenue those revenues generated by sponsorships, advertising and ticket sales generated by our local events. Our display and classified advertising revenues accounted for 8% and 7%, respectively, of our total revenues and 28% and 26%, respectively, of our Business Information Division revenues for the three months ended March 31, 2011. We recognize display and classified advertising revenues upon publication of an advertisement in one of our publications or on one of our web sites. Advertising revenues are driven primarily by the volume, price and mix of advertisements published as well as how many local events are held.

We publish more than 300 different types of public notices in our court and commercial newspapers, including foreclosure notices, probate notices, notices of fictitious business names, limited liability company and other business entity notices, unclaimed property notices, notices of governmental hearings and trustee sale notices. Our public notice revenues accounted for 12% and 15%, respectively, of our total revenues and 43% and 56%, respectively, of our Business Information Division revenues for the three months ended March 31, 2011, and 2010. We recognize public notice revenues upon placement of a public notice in one of our court and commercial newspapers. Public notice revenues are driven by the volume and mix of public notices published, which can be affected by the number of residential mortgage foreclosures in the markets where we are qualified to publish public notices and the rules governing publication of public notices in such states. In many of the states in which we publish public notices, the price for public notices is statutorily regulated, with market forces determining the pricing for the remaining states.

We sell our business information products, including our DataStream and Federal News products, primarily through subscriptions. For the three months ended March 31, 2011, and 2010, our subscription and other revenues, which consist primarily of subscriptions, single-copy sales, transcriptions and access to state and federal legislative information, accounted for 8% and 5%, respectively, of our total revenues and 29% and 18%, respectively, of our Business Information Division 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. At March 31, 2011, we had such deferred revenue on our balance sheet in the amount of $8.2 million. Subscription and other revenues are driven primarily by the number of copies sold and the subscription rates charged to customers.

Operating Expenses

Our operating expenses consist of the following:

	•		Direct operating expenses, which consist primarily of the cost of compensation and employee benefits for the processing staff at NDeX, DiscoverReady, and Counsel Press and our editorial personnel in our Business Information Division, production and distribution expenses, such as compensation (including stock-based compensation expense) and employee benefits for personnel involved in the production and distribution of our business information products, the cost of newsprint and delivery of our business information products, and file-specific data services and technology fees in connection with our California foreclosure files;
	•		Selling, general and administrative expenses, which consist primarily of the cost of compensation (including stock-based compensation expense) and employee benefits for our sales, human resources, accounting and information technology personnel, publishers and other members of management, rent, other sales and marketing related expenses and other office-related payments;
	•		Depreciation expense, which represents the cost of fixed assets and software allocated over the estimated useful lives of these assets, with such useful lives ranging from two to thirty years; and
	•		Amortization expense, which represents the cost of finite-life intangible assets acquired through business combinations allocated over the estimated useful lives of these intangibles, with such useful lives ranging from two to thirty years.

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

Equity in Earnings of Affiliates

We own 35.0% of the membership interests in DLNP, the publisher of The Detroit Legal News and 10 other publications. We account for our investment in DLNP using the equity method. For the three months ended March 31, 2011, and 2010, our percentage share of DLNP’s earnings was $0.8 million and $1.4 million, respectively, which we recognized as operating income. This is net of amortization of $0.4 million for each period. NDeX handles all public notices required to be published in connection with files it services for Trott & Trott pursuant to our services agreement with Trott & Trott and places a significant amount of these notices in The Detroit Legal News. Trott & Trott pays DLNP for these public notices. See “Liquidity and Capital Resources — Cash Flow Provided by Operating Activities” below for information regarding distributions paid to us by DLNP.

Redeemable Noncontrolling Interest

Redeemable noncontrolling interest at March 31, 2011, consisted of a 6.2% noncontrolling interest in NDeX held by the sellers of Barrett-NDEx or their transferees (as a group), a 14.7% noncontrolling interest in DiscoverReady held by DR Holdco LLC and a 50% interest in Legislative Services of America (LISA) held by Telran, Inc.

Under the terms of the NDeX operating agreement, each month we are required to distribute the excess of NDeX’s earnings before interest, depreciation and amortization less debt service with respect to any interest-bearing indebtedness of NDeX, capital expenditures and working capital reserves to NDeX’s members on the basis of common equity interest owned. We paid the following distributions during the three months ended March 31, 2011, and 2010 (in thousands):

		Three Months Ended March 31,
		2011				2010
Trott sellers		$	—			$	114
Feiwell & Hannoy			—				48
Sellers of Barrett-NDEx or their transferees (as a group)			36				170
Total		$	36			$	332

There is no similar distribution obligation under the DiscoverReady limited liability company agreement; however, we are obligated to make quarterly distributions to pay tax liabilities to DR Holdco, the minority member of DiscoverReady. During the three months ended March 31, 2011, no such distributions were made.

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

Under the terms of the DiscoverReady limited liability company agreement, DR Holdco has the right, for a period of ninety days following November 2, 2012, to require DiscoverReady to repurchase all or any portion of its equity interest in DiscoverReady. To the extent that DR Holdco timely exercises this right, the purchase price of such equity interest will be based on the fair market value of such interest. During that same period, we also have the right to require DR Holdco to sell its entire equity interest in DiscoverReady to us. If we timely exercise our right, we would pay DR Holdco an amount based on the fair market value of the equity interest. These rights may be exercised earlier under the following circumstances: An individual seller of DiscoverReady may require DiscoverReady to repurchase the portion of DR Holdco’s interest in DiscoverReady that he beneficially owns if he is terminated without cause or quits for good reason prior to the expiration of his employment agreement. If we terminate any individual seller of DiscoverReady for cause or if such seller quits without good reason, we can require DR Holdco to sell to us the portion of its interest in DiscoverReady that reflects such seller’s beneficial interest in us. The purchase price for that portion of the equity interest repurchased or sold if these rights are exercised is based on the interest’s fair market value.

DiscoverReady may engage an independent third-party valuation firm to assist it in determining the fair market value of the equity interest being repurchased by DiscoverReady or sold to us if any of the above-described rights are exercised. The purchase price for any equity interests repurchased or sold pursuant to these rights, if exercised, will be paid in cash to the extent allowed by the terms of our then-existing credit agreement, or pursuant to a three year unsecured promissory note, bearing interest at a rate equal to prime plus 1.0%.

We are required to record the redeemable noncontrolling interests (NCI) in NDeX and DiscoverReady to their redemption amounts at each reporting period. The NDeX NCI is adjusted to the estimated redemption amount at each reporting period based on the formula as discussed above. The DiscoverReady NCI is adjusted to fair value each period using a market approach. During the three months ended March 31, 2011, we recorded a reduction to the NCI for NDeX of $1.6 million ($1.0 million net of tax) and an increase to the NCI for DiscoverReady of $0.4 million ($0.2 million net of tax). Please see our unaudited condensed consolidated statements of stockholders’ equity and comprehensive income, as well as Note 5 to our unaudited condensed consolidated interim financial statements, included in this report on Form 10-Q for further information regarding accounting for noncontrolling interests and its implications to our financial statements.

Critical Accounting Policies and Estimates

We describe our accounting policies in Note 1 of the Notes to Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 11, 2011. Further, we discuss our critical accounting estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our annual report on Form 10-K for the year ended December 31, 2010. There has been no significant change in our critical accounting policies or critical accounting estimates since the end of 2010.

RESULTS OF OPERATIONS

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

		Three Months Ended March 31,
						% of								% of
		2011				Revenues				2010				Revenues
Revenues:
Professional Services		$	51,957				71.6	%		$	56,026				72.8	%
Business Information			20,591				28.4	%			20,952				27.2	%
Total revenues			72,548				100.0	%			76,978				100.0	%
Professional Services			43,317				59.7	%			41,745				54.2	%
Business Information			20,476				28.2	%			17,060				22.2	%
Unallocated corporate operating expenses			2,278				3.1	%			2,218				2.9	%
Total operating expenses			66,071				91.1	%			61,023				79.3	%
Equity in earnings of affiliates			748				1.0	%			1,428				1.9	%
Operating income			7,225				10.0	%			17,383				22.6	%
Interest expense, net			(1,608	)			(2.2	)%			(1,736	)			(2.3	)%
Non-cash interest income related to interest rate swaps			286				0.4	%			363				0.5	%
Income before income taxes			5,903				8.1	%			16,010				20.8	%
Income tax expense			(2,209	)			(3.0	)%			(5,990	)			(7.8	)%
Net income			3,694				5.1	%			10,020				13.0	%
Less: Net income attributable to redeemable noncontrolling interest			(219	)			(0.3	)%			(863	)			(1.1	)%
Net income attributable to The Dolan Company		$	3,475				4.8	%		$	9,157				11.9	%
Net income attributable to The Dolan Company per share — basic		$	0.12							$	0.30
Decrease in redeemable noncontrolling interest in NDeX			0.03								—
Net income attributable to The Dolan Company common stockholders per diluted share — basic		$	0.15							$	0.30
Weighted average shares outstanding — basic			30,129								30,107
Net income attributable to The Dolan Company per share — diluted		$	0.11							$	0.30
Decrease in redeemable noncontrolling interest in NDeX			0.03								—
Net income attributable to The Dolan Company common stockholders per diluted share — diluted		$	0.14							$	0.30
Weighted average shares outstanding — diluted			30,365								30,195

Three Months Ended March 31, 2011
Compared to Three Months Ended March 31, 2010

Revenues

		Three Months Ended March 31,
		2011				2010				Decrease
		(in millions)
Total revenues		$	72.5			$	77.0			$	(4.4	)			(5.8	)%

Our total revenues decreased primarily as a result of a $4.6 million decrease in our default mortgage processing revenues. Slightly offsetting this decrease was an increase in litigation support services revenues of $0.5 million. The decrease in mortgage default processing services revenues was driven by a decrease in the number of files received for processing as well as a change in the mix of the types of files received for processing. The litigation support services revenue growth was primarily driven by our DiscoverReady business. Revenues in our Business Information Division were down $0.4 million for the three months ended March 31, 2011. You should refer to the more detailed discussions in “Professional Services Division Results” and “Business Information Division Results” below for more information regarding the causes of these changes.

We derived 71.6% and 72.8% of our total revenues from our Professional Services Division and 28.4% and 27.2% of our total revenues from our Business Information Division for the three months ended March 31, 2011, and 2010, respectively. In our Professional Services Division, revenues from our mortgage default processing services segment accounted for 72.9% and 75.7% of our total revenues for the three months ended March 31, 2011 and 2010, respectively. Revenues from our litigation support services segment (also part of our Professional Services Division) accounted for 27.1% and 24.3% of our total revenues for the three months ended March 31, 2011, and 2010, respectively.

Operating Expenses

		Three Months Ended March 31,
		2011				2010				Increase (Decrease)
		(in millions)
Total operating expenses		$	66.1			$	61.0			$	5.0				8.3	%
Direct operating expenses			31.8				29.1				2.7				9.4	%
Selling, general and administrative expenses			27.8				25.2				2.6				10.3	%
Depreciation expense			1.9				2.7				(0.8	)			(29.3	)%
Amortization expense			4.5				4.0				0.5				13.3	%

Total operating expenses as a percentage of total revenues increased from 79.3% for the three months ended March 31, 2010, to 91.1% for the three months ended March 31, 2011, largely as a result of decreased revenues in our mortgage default processing services business and decreased public notice revenues in our business information division. Additionally, costs to operate DiscoverReady are a higher percentage of revenue than some of our other businesses, largely as a result of increased investments being made as we grow this business.

Direct Operating Expenses. The increase in direct operating expenses consisted of a $1.3 million increase in our Professional Services Division and a $1.4 million increase in our Business Information Division. You should refer to the more detailed discussions in “Professional Services Division Results” and “Business Information Division Results” below for more information regarding the causes of these changes. Direct operating expenses as a percentage of total revenues increased to 43.9% for the first quarter of 2011, from 37.8% for the same period in 2010.

Selling, General and Administrative Expenses. The increase in our selling, general and administrative expenses consisted of a $1.0 million increase in our Professional Services Division and a $1.5 million increase in our Business Information Division, both of which are discussed below. Selling, general and administrative expense as a percentage of revenue increased to 38.3% for the three months ended March 31, 2011, from 32.7% for the same period in 2010.

Depreciation and Amortization Expense. Our depreciation expense decreased primarily as a result of software in connection with the Barrett-NDeX acquisition, a large portion of which fully depreciated in 2010. Our amortization expense increased primarily because of the intangible assets associated with the DataStream acquisition.

Interest Expense, Net

		Three Months Ended March 31,
		2011				2010				Increase (Decrease)
		(in millions)
Total interest expense, net		$	1.6			$	1.7			$	(0.1	)			(7.4	)%
Interest on bank credit facility			0.9				0.9				—				(1.9	)%
Cash interest expense on interest rate swaps			0.6				0.7				(0.1	)			(16.3	)%
Amortization of deferred financing fees			0.1				0.1				—				6.4	%
Other			—				0.1				(0.1	)			(16.2	)%

Interest expense related to our bank credit facility remained consistent for the three months ended March 31, 2011, and March 31, 2010. Our average outstanding debt was $130.6 million for the three months ended March 31, 2011, compared to $151.5 million for the same period one year ago, but our average interest rate was 2.6% this year versus 2.3% last year.

Non-Cash Interest Income Related to Interest Rate Swaps

		Three Months Ended March 31,
		2011				2010				Decrease
		(in millions)
Non-cash interest income related to interest rate swaps		$	0.3			$	0.4			$	(0.1	)			(21.2	)%

Non-cash interest related to interest rate swaps, for which we do not apply hedge accounting, remained relatively constant for the three months ended March 31, 2011, as compared to the same period in 2010. The estimated fair value of our fixed rate interest rate swaps, including the swap for which we apply hedge accounting, recorded on our balance sheet was a liability of $1.8 million and $2.2 million, respectively, at March 31, 2011, and 2010.

Income Tax Expense

		Three Months Ended March 31,
		2011				2010				Decrease
		(in millions)
Income tax expense		$	2.2			$	6.0			$	(3.8	)			(63.1	)%
Effective tax rate			37.4	%			37.4	%

The provision for income taxes for the three months ended March 31, 2011, and 2010, was 37.4% of income before income taxes.

Professional Services Division Results

Revenues

		Three Months Ended March 31,
		2011				2010				Increase (Decrease)
		(in millions)
Total revenues		$	52.0			$	56.0			$	(4.1	)			(7.3	)%
Mortgage default processing services			37.9				42.4				(4.6	)			(10.8	)%
Litigation support services revenues			14.1				13.6				0.5				3.8	%

Our revenues decreased primarily as a result of decreased revenues in our mortgage default processing services segment. Revenues in this segment decreased primarily due to decreased file volumes in many of the markets we serve as well as a significant change in the mix of types of files received for processing. While our total files received for processing for the three months ended March 31, 2011, was down only 3.5%, from 95,700 mortgage default case files for the three months ended March 31, 2010, to 92,300 mortgage default case files for the three months ended March 31, 2011, we experienced a change in the mix of the types of files. Higher revenue files, such as foreclosure files, were down over 20% from the first quarter of 2010. This was offset by a greater number of lower revenue files, such as reposts, mediations, evictions, and transfer files. The increase in transfer files was in our NDeX Florida operations, where files were moved by servicers after initiation of foreclosure activities but before they were completed by other law firms. NDeX accepted the transfer work because it benefitted our Albertelli law firm affiliate and the law firm’s clients, and because NDeX believes the transfer work is a leading indicator of future volume growth from the transferring clients. Additionally, in the first quarter of 2010, we recorded revenues of $1.5 million related to loan modifications, but have no such revenue in the first quarter of 2011. We believe these file volume decreases and mix changes are attributed to continued marketplace and regulatory dynamics that began in 2010 that have caused many large loan servicers to temporarily slow down and reduce the referral of defaulted files for foreclosure processing while they review their processes and practices. We expect the number of mortgage default processing files which are received by us for processing to increase in the second half of 2011, and continue at higher levels into 2012.

The Barrett law firm, Albertelli law firm and Trott & Trott each accounted for more than 10%, and together accounted for approximately 83% of our mortgage default processing services segment and 60% of our Professional Services Division revenues during the three months ended March 31, 2011. In the three months ended March 31, 2010, The Barrett law firm and Trott & Trott each accounted for more than 10%, and together accounted for approximately 72% of our mortgage default processing services segment and 51% of our Professional Services Division revenues.

The increase in litigation support services revenues resulted primarily from an increase in DiscoverReady’s revenues. As DiscoverReady’s revenues increase, we continue our efforts to diversify our customer base. In fact, revenue from DiscoverReady’s new clients represented nearly one-third of DiscoverReady’s total revenues in the quarter. Although DiscoverReady continues to have two customers that each accounted for more than 10% of litigation support services revenues, one of the top two customers in the first quarter of 2011 was not a top two customer in the first quarter of 2010. In the first quarter of 2011, DiscoverReady’s top two customers accounted for 49% of litigation support services revenues, while in the first quarter or 2010, its top two customers accounted for 60% of such revenues.

Operating Expenses—Mortgage Default Processing Services

		Three Months Ended March 31,
		2011				2010				Increase (Decrease)
		(in millions)
Total operating expenses		$	31.5			$	31.7			$	(0.2	)			(0.5	)%
Direct operating expenses			17.7				17.0				0.7				4.1	%
Selling, general and administrative expenses			10.3				10.3				—				0.4	%
Depreciation expense			1.0				1.9				(0.9	)			(46.6	)%
Amortization expense			2.5				2.5				—				—	%

Total operating expenses decreased slightly as a result of decreased file volumes as discussed above, but did not decrease in proportion to the volume decline. Even with the lower file volumes, processing costs in some of our locations have increased as a result of increased demands, additional tasks, time spent attending to servicer audits, and process changes required by the customers of our law firm customers, requiring additional processing work for our employees. We are taking steps to reduce our costs at NDeX and plan to adjust staffing in a way that does not impair our commitment to deliver high-quality service to our law firm customers and their servicer clients.

Depreciation expense decreased primarily as a result of software associated with the Barrett-NDeX acquisition, a large portion of which fully depreciated in 2010.

Total operating expenses attributable to our mortgage default processing services segment as a percentage of segment revenues increased to 83.3% for the three months ended March 31, 2011, from 74.7% for the three months ended March 31, 2010. This increase was primarily a result of a reduction in revenues.

Operating Expenses—Litigation Support Services

		Three Months Ended March 31,
		2011				2010				Increase
		(in millions)
Total operating expenses		$	11.8			$	10.0			$	1.7				17.2	%
Direct operating expenses			5.8				5.2				0.6				11.7	%
Selling, general and administrative expenses			5.0				4.0				1.0				25.0	%
Depreciation expense			0.2				0.1				0.1				69.9	%
Amortization expense			0.7				0.7				—				3.5	%