10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended:
December 31, 2008
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period
From to .
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Commission File Number:
001-33603
Dolan Media Company
(Exact name of registrant as
specified in its charter)
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Delaware
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43-2004527
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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222 South
Ninth Street, Suite 2300
Minneapolis, Minnesota 55402
(Address,
including zip code of registrants principal executive
offices)
(612) 317-9420
Registrants telephone
number, including area code
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on which Registered
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Common Stock, par value $0.001 per share
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The New York Stock Exchange
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Series A Junior Participating Preferred Stock Purchase Right
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The New York Stock Exchange
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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 registrants 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):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o
No
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As of June 30, 2008, the registrants 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 registrants common stock on that date on the New York
Stock Exchange).
On March 9, 2009, there were 29,951,363 shares of the
registrants 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.
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PART I
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3
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Business
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3
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Risk Factors
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19
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Unresolved Staff Comments
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34
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Properties
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34
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Legal Proceedings
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34
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Submission of Matters to a Vote of Security
Holders
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34
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PART II
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35
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Market For Registrants Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities
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35
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Selected Financial Data
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37
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Managements Discussion and Analysis of
Financial Condition and Results of Operations
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42
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Quantitative and Qualitative Disclosures about
Market Risk
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81
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Financial Statements and Supplemental Data
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81
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Report of Independent Registered Public
Accounting Firm
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82
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Consolidated Balance Sheets as of December 31,
2008 and 2007
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83
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Consolidated Statements of Operations for the
years ended December 31, 2008, 2007 and 2006
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84
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Consolidated Statements of Stockholders
Equity (Deficit) for the years ended December 31, 2008,
2007 and 2006
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85
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Consolidated Statements of Cash Flows for the
years ended December 31, 2008, 2007 and 2006
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86
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Notes to Consolidated Financial Statements
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87
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Changes in or Disagreements with Accountants on
Accounting or Financial Disclosure
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120
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Controls and Procedures
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120
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Other Information
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122
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PART III
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122
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Directors, Executive Officers and Corporate
Governance
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122
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Executive Compensation
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122
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Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
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122
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Certain Relationships and Related Party
Transactions and Director Independence
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123
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Principal Accountant Fees and Services
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123
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PART IV
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124
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Exhibits and Financial Statements Schedule
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124
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SIGNATURES
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129
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F-1
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Report of Virchow, Krause & Company, LLC, the independent
public registered accounting firm of The Detroit Legal News
Publishing, LLC for the years ended December 31, 2008 and
2007
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F-2
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Report of McGladrey & Pullen, LLP, the independent public
registered accounting firm of The Detroit Legal News Publishing,
LLC for the year ended December 31, 2006
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F-3
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Balance Sheets as of December 31, 2008, 2007 and 2006
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F-4
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Statements of Operations for the years ended December 31,
2008, 2007 and 2006
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F-5
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Statements of Cash Flows for the years ended December 31,
2008, 2007 and 2006
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F-6
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Statements of Members Equity for the years ended
December 31, 2008, 2007 and 2006
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F-7
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Notes to Financial Statements
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F-8
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EX-10.5 |
EX-10.6 |
EX-10.7 |
EX-10.8 |
EX-10.21 |
EX-10.35 |
EX-21 |
EX-23.1 |
EX-23.2 |
EX-31.1 |
EX-31.2 |
EX-32.1 |
EX-32.2 |
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 Managements 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.
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PART I
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.
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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, Michigans 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.
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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.
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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:
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Public Notices. We are experts in the complex
legal requirements associated with public notices and our focus
on and expertise with these requirements allow us to provide
high quality service while processing 305 types of public
notices. We are qualified to carry public notices in 14 of the
21 markets in which we publish and on the basis of number of
public notices published, we are the largest carrier of public
notices in twelve of those markets.
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Default Mortgage Processing Services. We have
leveraged our significant knowledge and experience with respect
to the local foreclosure, bankruptcy and eviction procedures, as
well as our proprietary technology, to become one of the leading
providers of mortgage default processing services in the United
States. Under long-term contracts, we are the exclusive provider
of mortgage default processing services for six foreclosure law
firms. These law firms primarily handle residential mortgage
defaults in California, Georgia, Indiana, Michigan, Minnesota
and Texas. We also provide these services directly to mortgage
lenders and loan servicers in California for residential
foreclosure files.
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Appellate Services. We are the nations
leading provider of appellate services to law firms, assisting
them by organizing, printing and filing appellate briefs,
records and appendices 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. In
2008, we added a web-based portal for our customers to review
pending cases and documents, submit documents to us and receive
notices about their case filings. In June 2008, we expanded into
the Chicago market with the acquisition of the assets of Midwest
Law Printing, Inc.
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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 APCs six law firm
customers, and the mortgage lenders and loan servicers we serve
directly in California, realize significant value from
APCs 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
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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 predecessors 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:
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improving the quality of products and services;
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establishing and continuously monitoring operating and financial
performance benchmarks;
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centralizing back office operations for greater cost and
operational efficiencies;
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leveraging expertise and best practices across operating
functions, including sales and marketing, technology and product
development; and
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attracting, retaining and motivating quality managers and
employees.
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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
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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:
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Customize Delivery to Meet Customer Needs. We
will continue to use media channels that allow us to efficiently
and effectively deliver our products and services to our
customers. We offer our products and services through print,
online, mobile, live events, audio/video and other media
distribution channels. 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. We believe this
enables us to maximize revenue opportunities from our
proprietary content and services and provides us with a
sustainable competitive advantage.
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Increase Market Penetration. We will continue
to use our business publishing units as a platform for the
development of additional business information products for our
targeted markets. We consistently enhance our business
information products and drive new product development by
encouraging innovation by our local management teams. We also
intend to use our proprietary case management system, other
technology-related productivity tools and efficient workflow
organizational structure as the platform for growth of our
mortgage default processing service business. We expect to
realize significant benefits from the widespread and centralized
use of this system, tools and structure because we believe they
will enable us to process an even greater number of files
efficiently and cost effectively, while providing a high
standard of customer service. In addition, we intend to grow the
businesses in our Professional Services division by expanding
into additional geographic markets to increase our presence in
additional local legal communities.
|
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.
8
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.
9
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 Managements 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
MBAs 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 lenders or loan servicers
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.
10
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
Justices 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 Managements 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
11
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 Divisions 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
12
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 Divisions 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.
13
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 APCs 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 Divisions total
revenues.
14
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 lenders or the
servicers 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 sheriffs 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 APCs 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
15
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
sheriffs 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 APCs
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. APCs sales and marketing efforts are driven
primarily by David A. Trott, APCs 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 APCs 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.
16
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 Divisions 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 courts
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 Michigans 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.
GovDeliverys clients include U.S. cities, counties
and federal agencies as well as both houses of Parliament in the
United Kingdom.
17
Competition
Business
Information Division
Our Business Information Divisions 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 advertisers
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.
18
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.
19
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, Marylands 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
Divisions revenues in 2008, 2007 and 2006, respectively,
and paid circulation constituted 15.1%, 16.0%, and 18.4% of our
Business Information Divisions 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 advertisers target
20
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 divisions
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 DLNPs 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 DLNPs 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
DLNPs 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
states 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 DLNPs 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
21
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 APCs 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 Divisions 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.
APCs 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 APCs 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.
22
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 Divisions 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 & Trotts
client relationships), the desire of the law firms 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 & Trotts or the Barrett law firms
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 APCs 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 persons 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:
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State or local bar associations, state or local prosecutors or
other persons may challenge the services provided by APC, or
Counsel Press as constituting the unauthorized practice of law.
Any such challenge could have a disruptive effect upon the
operations of our business, including the diversion of
significant time and attention of our senior management. We may
also incur significant expenses in connection with such a
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challenge, including substantial fees for attorneys and other
professional advisors. If a challenge to APCs or Counsel
Press operations were successful, we may need to
materially modify our professional services operations in a
manner that could adversely affect that divisions revenues
and profitability and we could be subject to a range of
penalties that could damage our reputation in the legal markets
we serve. In addition, any similar challenge to the operations
of APCs law firm customers could adversely impact their
mortgage default business, which would in turn adversely affect
our Professional Service Divisions revenues and
profitability; and
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The services agreements to which APC is a party could be deemed
to be unenforceable if a court were to determine that such
agreements constituted an impermissible fee sharing arrangement
between the law firm and APC.
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Applicable laws, regulations and codes of ethics, including
their interpretation and enforcement, could change in a manner
that restricts APCs 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
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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 Managements
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 Managements
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 Presss 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
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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
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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:
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diverting managements time, attention and resources from
managing our business;
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incurring additional indebtedness and assuming liabilities;
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incurring significant additional capital expenditures and
operating expenses to improve, coordinate or integrate
managerial, operational, financial and administrative systems;
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experiencing an adverse impact on our earnings from
non-recurring acquisition-related charges or the write-off or
amortization of acquired goodwill and other intangible assets;
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failing to integrate the operations and personnel of the
acquired businesses;
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facing operational difficulties in new markets or with new
product or service offerings; and
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failing to retain key personnel and customers of the acquired
businesses, including subscribers and advertisers for acquired
publications and clients of the law firm customers served by
acquired mortgage default processing businesses.
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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 NDExs 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 NDExs 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
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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
managements 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.
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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
29
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 Managements 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 Managements 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.
30
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 managements 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 APCs 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 APCs
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 members 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
31
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 managements 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:
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variations in our quarterly or annual operating results;
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changes in the legal or regulatory environment affecting our
business;
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changes in our earnings estimates or expectations as to our
future financial performance, including financial estimates by
securities analysts and investors;
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the contents of published research reports about us or our
industry or the failure of securities analysts to cover our
common stock;
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additions or departures of key management personnel;
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any increased indebtedness we may incur in the future;
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announcements by us or others and developments affecting us;
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actions by institutional stockholders;
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changes in market valuations of similar companies;
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speculation or reports by the press or investment community with
respect to us or our industry in general; and
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general economic, market and political conditions.
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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
32
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 companys 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 managements 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.
33
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.
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Item 1B.
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Unresolved
Staff Comments
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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 APCs 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.
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Item 3.
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Legal
Proceedings
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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.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
|
We did not submit any matters for a vote of our stockholders
during the fourth quarter of our fiscal year ended
December 31, 2008.
34
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
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 $14.50
per share and the initial public offering closed on
August 7, 2007. The following table sets forth, for the
periods indicated, the high and low per share sales prices of
our common stock as reported on the New York Stock Exchange.
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Period
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High
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Low
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Year ended December 31, 2008
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First Quarter
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$
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29.94
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$
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20.11
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Second Quarter
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$
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20.84
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$
|
16.08
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Third Quarter
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$
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22.51
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$
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10.09
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Fourth Quarter
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$
|
9.59
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$
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2.97
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Year ended December 31, 2007
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Third Quarter (August 2, 2007 through September 30,
2007)
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$
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25.44
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$
|
16.00
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Fourth Quarter
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$
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31.15
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$
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23.31
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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.
35
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.
36
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.
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Item 6.
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Selected
Financial Data
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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 Managements 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
37
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.
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Years Ended December 31,
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2008
|
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2007
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2006
|
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2005
|
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2004
|
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(In thousands, except per share data)
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Consolidated Statement of Operations Data:
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|
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|
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Business Information revenues
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$
|
90,450
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|
|
$
|
84,974
|
|
|
$
|
73,831
|
|
|
$
|
66,726
|
|
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$
|
51,689
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Professional Services revenues
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|
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99,496
|
|
|
|
67,015
|
|
|
|
37,812
|
|
|
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11,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total revenues
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|
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189,946
|
|
|
|
151,989
|
|
|
|
111,643
|
|
|
|
77,859
|
|
|
|
51,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses
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|
|
159,875
|
|
|
|
125,228
|
|
|
|
92,711
|
|
|
|
69,546
|
|
|
|
47,642
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Equity in earnings of Detroit Legal News
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Publishing, LLC, net of amortization
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|
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5,646
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|
|
|
5,414
|
|
|
|
2,736
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating income
|
|
|
35,717
|
|
|
|
32,175
|
|
|
|
21,668
|
|
|
|
8,600
|
|
|
|
4,047
|
|
Non-cash interest expense related to
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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redeemable preferred stock(1)
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|
|
|
|
|
|
(66,132
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)
|
|
|
(28,455
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)
|
|
|
(9,998
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)
|
|
|
(2,805
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)
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Interest expense, net
|
|
|
(8,473
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)
|
|
|
(8,521
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)
|
|
|
(6,433
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)
|
|
|
(1,874
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)
|
|
|
(1,147
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)
|
Break-up fee
and other expense, net
|
|
|
(1,467
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)
|
|
|
(8
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)
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and
minority interest
|
|
|
25,777
|
|
|
|
(42,486
|
)
|
|
|
(13,422
|
)
|
|
|
(3,272
|
)
|
|
|
95
|
|
Income tax expense
|
|
|
(9,209
|
)
|
|
|
(7,863
|
)
|
|
|
(4,974
|
)
|
|
|
(2,436
|
)
|
|
|
(889
|
)
|
Minority interest in net income of subsidiary(2)
|
|
|
(2,265
|
)
|
|
|
(3,685
|
)
|
|
|
(1,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations(3)
|
|
$
|
14,303
|
|
|
$
|
(54,034
|
)
|
|
$
|
(20,309
|
)
|
|
$
|
(5,708
|
)
|
|
$
|
(794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
per share(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.53
|
|
|
$
|
(3.41
|
)
|
|
$
|
(2.19
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.09
|
)
|
Diluted
|
|
$
|
0.53
|
|
|
$
|
(3.41
|
)
|
|
$
|
(2.19
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.09
|
)
|
Weighted average shares outstanding(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,985
|
|
|
|
15,868
|
|
|
|
9,254
|
|
|
|
8,845
|
|
|
|
8,820
|
|
Diluted
|
|
|
27,113
|
|
|
|
15,868
|
|
|
|
9,254
|
|
|
|
8,845
|
|
|
|
8,820
|
|
Non-GAAP Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(5)
|
|
$
|
55,395
|
|
|
$
|
43,108
|
|
|
$
|
28,776
|
|
|
$
|
13,353
|
|
|
$
|
6,875
|
|
Adjusted EBITDA margin(5)
|
|
|
29.2
|
%
|
|
|
28.4
|
%
|
|
|
25.8
|
%
|
|
|
17.2
|
%
|
|
|
13.3
|
%
|
Cash earnings(6)
|
|
$
|
23,234
|
|
|
$
|
18,293
|
|
|
$
|
12,397
|
|
|
$
|
6,307
|
|
|
$
|
3,003
|
|
Cash earnings per diluted share(6)
|
|
$
|
0.86
|
|
|
$
|
1.15
|
|
|
$
|
1.34
|
|
|
$
|
0.71
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,456
|
|
|
$
|
1,346
|
|
|
$
|
786
|
|
|
$
|
2,348
|
|
|
$
|
19,148
|
|
Total working capital (deficit)
|
|
|
(12,588
|
)
|
|
|
(5,460
|
)
|
|
|
(8,991
|
)
|
|
|
(6,790
|
)
|
|
|
13,886
|
|
Total assets
|
|
|
471,304
|
|
|
|
226,367
|
|
|
|
186,119
|
|
|
|
135,395
|
|
|
|
116,522
|
|
Long-term debt, less current portion
|
|
|
143,450
|
|
|
|
56,301
|
|
|
|
72,760
|
|
|
|
36,920
|
|
|
|
29,730
|
|
Redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
108,329
|
|
|
|
79,740
|
|
|
|
69,645
|
|
Total liabilities and minority interest
|
|
|
248,874
|
|
|
|
97,191
|
|
|
|
214,994
|
|
|
|
144,238
|
|
|
|
117,898
|
|
Total stockholders equity (deficit)
|
|
|
222,430
|
|
|
|
129,176
|
|
|
|
(28,875
|
)
|
|
|
(8,843
|
)
|
|
|
(1,376
|
)
|
38
|
|
|
(1) |
|
Consists of accrued but unpaid dividends on our series A
preferred stock and series C preferred stock and the change
in fair value of the shares of our series C preferred
stock, with each share of our series C preferred stock
being convertible into (1) one share of our series B
preferred stock and (2) a number of shares of our
series A preferred stock and our common stock for periods
from August 1, 2003 through August 7, 2007. The
conversion of our series C preferred stock and redemption
of our preferred stock upon the consummation of our initial
public offering in 2007 has eliminated the non-cash interest
expense we record for the change in fair value of our
series C preferred stock. |
|
(2) |
|
Consists of the following minority interest in APC: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APC
|
|
|
|
|
|
Sellers of
|
|
|
|
Trott &
|
|
|
Investments,
|
|
|
Feiwell &
|
|
|
NDEx
|
|
|
|
Trott
|
|
|
LLC
|
|
|
Hannoy
|
|
|
(as a Group)
|
|
|
March 14, 2006 January 8, 2007
|
|
|
19.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
January 9, 2007 November 30, 2007
|
|
|
18.1
|
%
|
|
|
|
|
|
|
4.5
|
%
|
|
|
|
|
December 1, 2007 January 31, 2008
|
|
|
9.1
|
%
|
|
|
|
|
|
|
2.3
|
%
|
|
|
|
|
February 1, 2008 February 21, 2008
|
|
|
|
|
|
|
9.1
|
%
|
|
|
2.3
|
%
|
|
|
|
|
February 22, 2008 September 1, 2008
|
|
|
|
|
|
|
9.1
|
%
|
|
|
2.0
|
%
|
|
|
|
|
September 2, 2008 December 31, 2008
|
|
|
|
|
|
|
7.6
|
%
|
|
|
1.7
|
%
|
|
|
6.1
|
%
|
|
|
|
|
|
On March 14, 2006, we acquired an 81% interest in American
Processing Company, LLC from Trott & Trott, P.C.
In connection with APCs acquisition of the mortgage
default processing services business of Feiwell &
Hannoy on January 9, 2007, APC issued to
Feiwell & Hannoy a 4.5% membership interest in APC. On
November 30, 2007, we purchased 9.1% and 2.2% of the
then-outstanding membership interests of each of
Trott & Trott and Feiwell & Hannoy. On
February 1, 2008, Trott & Trott assigned its
ownership interest in APC to APC Investments, LLC, an affiliate
of Trott & Trott. On February 22, 2008, APC made
a capital call to fund the acquisition of the mortgage default
processing services business of Wilford & Geske, P.A.,
in which Feiwell & Hannoy declined to participate,
thereby diluting its interest in APC. To fund in part, the
acquisition of NDEx, APC made a capital call, in which neither
APC Investments nor Feiwell & Hannoy participated,
thereby diluting their interests. The minority interests of APC
Investments and Feiwell & Hannoy were further diluted
when APC issued a 6.1% membership interest to the sellers of
NDEx (as a group) on September 2, 2008, in partial
consideration for the acquisition of NDEx. |
|
|
|
Under the terms of APCs operating agreement, we are
required to distribute, on a monthly basis, APCs earnings
before interest, taxes, depreciation and amortization, less debt
service with respect to any interest-bearing indebtedness of
APC, capital expenditures and working capital to each of
APCs members. The distributions are made pro-rata in
relation to the common membership interests each member owns. |
|
(3) |
|
Excludes income or loss from discontinued operations of our
telemarketing operation in September 2005. |
|
(4) |
|
Basic per share amounts are computed, generally, by dividing net
income (loss) by the weighted-average number of common shares
outstanding. For those periods prior to August 7, 2007, the
date on which we converted and/or redeemed all outstanding
shares of preferred stock, including the Series C preferred
stock, we used a two-class method of income allocation to
determine net-income (loss), except during periods of net
losses, because we believe that the Series C preferred
stock was a participating security because the holders of the
convertible preferred stock participated in any dividends paid
on its common stock on an as converted basis. Under this method,
net income (loss) is allocated on a pro rata basis to the common
and Series C preferred stock to the extent that each class
may share in income for the period had it been distributed.
Diluted per share amounts assume the conversion, exercise, or
issuance of all potential common stock instruments (see
Note 13 of our consolidated financial statements included
in this annual report on Form
10-K for
information on stock options) unless their effect is
anti-dilutive, thereby reducing the loss per share or increasing
the income per share. |
|
(5) |
|
The adjusted EBITDA measure presented consists of income (loss)
from continuing operations (1) before (a) non-cash
interest expense related to redeemable preferred stock;
(b) interest expense, net; (c) income tax expense;
(d) depreciation and amortization; (e) non-cash
compensation expense; (f) minority interest in net income
of subsidiary; and (g) non-recurring income and/or expense;
and (2) after minority interest distributions |
39
|
|
|
|
|
paid. Adjusted EBITDA margin is the ratio of adjusted EBITDA to
total revenues. We are providing adjusted EBITDA, a non-GAAP
financial measure, along with GAAP measures, as a measure of
profitability because adjusted EBITDA helps us evaluate and
compare our performance on a consistent basis for different
periods of time by removing from our operating results the
impact of the non-cash interest expense arising from the common
stock conversion option in our series C preferred stock
(which has had no impact on our financial performance after
August 7, 2007, the date we redeemed all outstanding shares
of preferred stock, including shares issued upon conversion of
the Series C preferred stock), as well as the impact of our
net cash or borrowing position, operating in different tax
jurisdictions and the accounting methods used to compute
depreciation and amortization, which impact has been significant
and fluctuated from time to time due to the variety of
acquisitions that we have completed since our inception.
Similarly, our presentation of adjusted EBITDA also excludes
non-cash compensation expense because this is a non-cash charge
for stock options and restricted stock grants that we have
granted. We exclude this non-cash expense from adjusted EBITDA
because we believe any amount we are required to record as
share-based compensation expense contains subjective assumptions
over which our management has no control, such as share price
and volatility. |
|
|
|
We also adjust EBITDA for minority interest in net income of
subsidiary and cash distributions paid to minority members of
APC because we believe this provides more timely and relevant
information with respect to our financial performance. We
exclude amounts with respect to minority interest in net income
of subsidiary because this is a non-cash adjustment that does
not reflect amounts actually paid to APCs minority members
because (1) distributions for any month are actually paid
by APC in the following month and (2) it does not include
adjustments for APCs debt or capital expenditures, which
are both included in the calculation of amounts actually paid to
APCs minority members. We instead include the amount of
these cash distributions in adjusted EBITDA because they include
these adjustments and reflect amounts actually paid by APC, thus
allowing for a more accurate determination of our performance
and ongoing obligations. |
|
|
|
We also adjust EBITDA for non-recurring items of income and
expense because we believe that, due to their unusual and
infrequent nature, they do not provide meaningful information
about our financial performance as they are not typically
related to our on-going operations. For purposes of this
adjustment, non-recurring items include items of income or
expense that are not reasonably likely to recur within two years
or for which there was not a similar item of income or expense
within the prior two year period. We have recently revised our
definition of adjusted EBITDA to adjust for these items. In our
calculation of adjusted EBITDA for the year ended
December 31, 2008, we excluded a $1.5 million
break-up fee
we paid in the third quarter of 2008. We have excluded this
break-up fee
because it was a one-time expense that was specific to an
agreement with the sellers of a business we intended to acquire,
but did not. We have not entered into such
break-up or
termination agreements with sellers of other acquisition targets
and do not intend to enterer into other similar agreements.
There were no items of non-recurring income or expense in
previous periods. |
|
|
|
Accordingly, we believe that adjusted EBITDA is meaningful
information about our business operations that investors should
consider along with our GAAP financial information. We use
adjusted EBITDA for planning purposes, including the preparation
of internal annual operating budgets, and to measure our
operating performance and the effectiveness of our operating
strategies. We also use a variation of adjusted EBITDA in
monitoring our compliance with certain financial covenants in
our credit agreement and are using adjusted EBITDA to determine
performance-based short-term incentive payments for our
executive officers and other key employees. |
|
|
|
Adjusted EBITDA is a non-GAAP measure that has limitations
because it does not include all items of income and expense that
affect our operations. This non-GAAP financial measure is not
prepared in accordance with, and should not be considered an
alternative to, measurements required by GAAP, such as operating
income, net income (loss), net income (loss) per share, cash
flow from continuing operating activities or any other measure
of performance or liquidity derived in accordance with GAAP. The
presentation of this additional information is not meant to be
considered in isolation or as a substitute for the most directly
comparable GAAP measures. In addition, it should be noted that
companies calculate adjusted EBITDA differently and, therefore,
adjusted EBITDA as presented for us may not be comparable to the
calculations of adjusted EBITDA reported by other companies. |
40
|
|
|
|
|
The following is a reconciliation of income (loss) from
continuing operations to adjusted EBITDA
(in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Income (loss) from continuing operations
|
|
$
|
14,303
|
|
|
$
|
(54,034
|
)
|
|
$
|
(20,309
|
)
|
|
$
|
(5,708
|
)
|
|
$
|
(794
|
)
|
Non-cash interest expense related to redeemable preferred stock
|
|
|
|
|
|
|
66,132
|
|
|
|
28,455
|
|
|
|
9,998
|
|
|
|
2,805
|
|
Interest expense, net
|
|
|
8,473
|
|
|
|
8,521
|
|
|
|
6,433
|
|
|
|
1,874
|
|
|
|
1,147
|
|
Income tax expense
|
|
|
9,209
|
|
|
|
7,863
|
|
|
|
4,974
|
|
|
|
2,436
|
|
|
|
889
|
|
Amortization expense
|
|
|
11,793
|
|
|
|
7,526
|
|
|
|
5,156
|
|
|
|
3,162
|
|
|
|
1,550
|
|
Depreciation expense
|
|
|
5,777
|
|
|
|
3,872
|
|
|
|
2,442
|
|
|
|
1,591
|
|
|
|
1,278
|
|
Amortization of DLNP intangible
|
|
|
1,508
|
|
|
|
1,459
|
|
|
|
1,503
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense
|
|
|
1,918
|
|
|
|
970
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
Non-recurring expense
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in net income of subsidiary
|
|
|
2,265
|
|
|
|
3,685
|
|
|
|
1,913
|
|
|
|
|
|
|
|
|
|
Cash distributions to minority interest
|
|
|
(1,351
|
)
|
|
|
(2,886
|
)
|
|
|
(1,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
55,395
|
|
|
$
|
43,108
|
|
|
$
|
28,776
|
|
|
$
|
13,353
|
|
|
$
|
6,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) |
|
The cash earnings measure presented consists of income (loss)
from continuing operations before (a) non-cash interest
expense related to redeemable preferred stock; (b) non-cash
interest income related to the change in fair value of interest
rate swaps; (c) amortization expense; and (d) an
adjustment to income tax expense related to the reconciling
items above at the appropriate tax rate
(then-in-effect).
We calculate the cash earnings per diluted share measure
presented by dividing cash earnings by the weighted average
number of diluted common shares outstanding during the period. |
|
|
|
We are providing cash earnings and cash earnings per diluted
share, both non-GAAP financial measures, along with GAAP
measures, as a measure of profitability because they are
commonly used by financial analysts, investors and other
interested parties in evaluating companies performance. In
addition, we are providing cash earnings per diluted share in
part because it offers investors a per-share metric, in addition
to GAAP measures, in evaluating our performance. We believe
these non-GAAP measures, as we have defined them, help us
evaluate and compare our performance on a consistent basis for
different periods of time by removing from our operating results
non-cash interest expense related to our redeemable preferred
stock (which had no impact on our financial performance for
periods after August 7, 2007 when we redeemed all
outstanding shares of preferred stock, including shares issued
upon conversion of the Series C preferred stock); non cash
interest expense related to the change in the fair value of our
interest rate swaps; amortization, which is a significant
non-cash expense that has fluctuated from time to time due to
acquisitions we have completed since our inception and income
tax expense related to these items. |
|
|
|
Although these are relatively new metrics for us (first reported
for the six months ended June 30, 2008), we believe that
they provide meaningful information about our business
operations that investors should consider along our GAAP
financial information. We have begun using these metrics to
measure our operating performance and the effectiveness of our
operating strategies. We use cash earnings and cash earnings per
diluted share for planning purposes, including the preparation
of internal annual operating budgets for the twelve months
ending December 31, 2009. |
|
|
|
Cash earnings and cash earnings per share are both non-GAAP
measures that have limitations because they do not include all
items of income and expense that affect our operations. Neither
of these non-GAAP financial measures is prepared in accordance
with, and should not be considered an alternative to,
measurements required by GAAP, such as operating income, net
income (loss), net income (loss) per diluted share, or any other
measure of performance or liquidity derived in accordance with
GAAP. The presentation of this additional information is not
meant to be considered in isolation or as a substitute for the
most directly comparable GAAP measures. In addition, it should
be noted that companies calculate cash earnings and cash
earnings per diluted |
41
|
|
|
|
|
share differently and, therefore, cash earnings and cash
earnings per diluted share as presented for us may not be
comparable to the calculations of cash earnings and cash
earnings per diluted share reported by other companies. |
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Income (loss) from continuing operations
|
|
$
|
14,303
|
|
|
$
|
(54,034
|
)
|
|
$
|
(20,309
|
)
|
|
$
|
(5,708
|
)
|
|
$
|
(794
|
)
|
Non-cash interest expense related to redeemable preferred stock
|
|
|
|
|
|
|
66,132
|
|
|
|
28,455
|
|
|
|
9,998
|
|
|
|
2,805
|
|
Non-cash interest income related to the change in fair value of
interest rate swaps
|
|
|
1,388
|
|
|
|
1,237
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
11,793
|
|
|
|
7,526
|
|
|
|
5,156
|
|
|
|
3,162
|
|
|
|
1,550
|
|
Amortization of DLNP intangible
|
|
|
1,508
|
|
|
|
1,459
|
|
|
|
1,503
|
|
|
|
|
|
|
|
|
|
Adjustment to income tax expense related to reconciling items at
effective tax rate
|
|
|
(5,758
|
)
|
|
|
(4,027
|
)
|
|
|
(2,595
|
)
|
|
|
(1,145
|
)
|
|
|
(558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash earnings
|
|
$
|
23,234
|
|
|
$
|
18,293
|
|
|
$
|
12,397
|
|
|
$
|
6,307
|
|
|
$
|
3,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per diluted share
|
|
$
|
0.53
|
|
|
$
|
(3.41
|
)
|
|
$
|
(2.19
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.09
|
)
|
Cash earnings per diluted share
|
|
$
|
0.86
|
|
|
$
|
1.15
|
|
|
$
|
1.34
|
|
|
$
|
0.71
|
|
|
$
|
0.34
|
|
Weighted average diluted shares outstanding
|
|
|
27,112,683
|
|
|
|
15,868,033
|
|
|
|
9,253,972
|
|
|
|
8,845,101
|
|
|
|
8,820,000
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
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.
42
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 Managements 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.
43
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 NDExs 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 NDExs
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.
44
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 APCs
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 & Hannoys share of the capital call and,
as a result, our interest in APC increased to 88.9% and
Feiwell & Hannoys 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 & Hannoys 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 & Hannoys, APC
Investments and our ownership interests
45
in APC were diluted. Accordingly, at September 2, 2008 and
through December 31, 2008, we, along with APCs
minority members, owned the following interests in APC:
|
|
|
|
|
|
|
Percent of Outstanding
|
|
|
|
Membership
|
|
Member
|
|
Interests of APC
|
|
|
Dolan APC, LLC (the Companys wholly-owned subsidiary)
|
|
|
84.7
|
%
|
APC Investments, LLC (an affiliate of Trott & Trott)
|
|
|
7.6
|
%
|
Feiwell & Hannoy, Professional Corporation
|
|
|
1.7
|
%
|
Sellers of NDEx (as a group)
|
|
|
6.1
|
%
|
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 APCs 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.
46
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:
|
|
|
|
|
47.6% from our Business Information Division; and
|
|
|
|
52.4% from our Professional Services Division.
|
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 Divisions 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
Divisions 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 Divisions 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 Divisions
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
47
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 Divisions 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.
APCs 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,
48
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 Divisions 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:
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Direct operating expenses, which consist primarily of the cost
of compensation and employee benefits for our editorial
personnel in our Business Information Division and the
processing staff at APC and Counsel Press, and 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 the
cost of delivery of our business information products;
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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, other office-related payments
and direct acquisition costs related to acquisitions that we are
no longer pursuing;
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Depreciation expense, which represents the cost of fixed assets
and software allocated over the estimated useful lives of these
assets, with such useful lives ranging from one to thirty
years; and
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Amortization expense, which represents the cost of finite-lived
intangibles acquired through business combinations allocated
over the estimated useful lives of these intangibles, with such
useful lives ranging from one to thirty years.
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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 DLNPs 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
49
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 DLNPs
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
members 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:
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a 9.1% membership interest in APC held by Trott &
Trott from January 1, 2008, through January 31, 2008,
and APC Investments, LLC, a limited liability company owned by
the shareholders of Trott & Trott, including APC
Chairman and Chief Executive Officer Dave Trott and APCs
two executive vice presidents in Michigan, from February 1,
2008, through September 1, 2008; and a 7.6% membership
interest in APC that APC Investments held for the period
September 2, 2008, through December 31, 2008;
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a 2.3% membership interest in APC that Feiwell &
Hannoy held for the period of January 1, 2008, through
February 21, 2008; a 2.0% membership interest in APC that
Feiwell & Hannoy held for the period of
February 22, 2008, through September 1, 2008; and a
1.7% membership interest in APC that Feiwell & Hannoy
held for the period September 2, 2008, through
December 31, 2008; and
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a 6.1% membership interest in APC held by the sellers of NDEx
(as a group) from September 2, 2008, through
December 31, 2008.
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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 APCs 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 APCs
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):
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Years Ended December 31,
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2008
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2007
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APC Investments*
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$
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1,098
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$
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2,349
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Feiwell & Hannoy
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253
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537
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Sellers of NDEx (as a group)**
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Total
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$
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1,351
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$
|
2,886
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* |
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Trott & Trott prior to February 1, 2008 |
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** |
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Members of APC since September 2, 2008. |
50
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 APCs 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,
managements 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
assets 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
51
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 units carrying value. We
52
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 units carrying amount exceeds
its fair value, an indication exists that the reporting
units goodwill may be impaired, and we must perform the
second step of the impairment test. The second step involves
allocating the reporting units fair value to all of its
recognized and unrecognized assets and liabilities in order to
determine the implied fair value of the reporting units
goodwill as of the testing date. The implied fair value of the
reporting units 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.
53
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):
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Reporting Unit
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Estimated Fair Value
|
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Carrying Value
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Excess
|
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Business Information
|
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$
|
128.9
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$
|
111.1
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16.0
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%
|
APC
|
|
$
|
329.1
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$
|
293.1
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12.3
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%
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Counsel Press
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$
|
37.8
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$
|
15.6
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142.0
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%
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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 $5.6 million. Either of those
decreases in the estimated fair value may result in a future
goodwill impairment charge.
Further, two of our reporting units, Business Information and
APC, have foreclosure-related revenues. As described in
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations Recent Developments
Regulatory Environment and Item 1A
Risk Factors earlier in this report, there has been new
and proposed legislation, along with lender-based programs,
aimed at delaying or preventing residential mortgage
foreclosures. To date, these changes have not prevented these
reporting units from operating on a profitable basis (comparing
the three months ended December 31, 2008 to the three
months ended December 31, 2007). However, we continue to
monitor proposed legislation, lender-based programs and other
changes in the regulatory environment and their impact on our
reporting units to determine whether a triggering event has
occurred.
We based our market multiple approach on the valuation multiples
as of November 30, 2008 (enterprise value divided by
EBITDA) of a selected group of peer companies in the business
information and the business process outsourcing industries. We
then used an average of these multiples to determine the fair
value for each of our reporting units. Under the market multiple
approach, the estimated fair value for each of our reporting
units, as compared, to the carrying value, was as follows
(amounts in millions):
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Reporting Unit
|
|
Estimated Fair Value
|
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|
Carrying Value
|
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Excess
|
|
|
Business Information
|
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$
|
212.4
|
|
|
$
|
111.1
|
|
|
|
91.1
|
%
|
APC
|
|
$
|
316.4
|
|
|
$
|
293.1
|
|
|
|
7.9
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%
|
Counsel Press
|
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$
|
33.6
|
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$
|
15.6
|
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|
|
115.4
|
%
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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 companys 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
54
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
55
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected volatility
|
|
|
28.0
|
%
|
|
|
28.0
|
%
|
|
|
55.0
|
%
|
Risk free interest rate
|
|
|
3.0 - 3.27
|
%
|
|
|
3.39 - 4.60
|
%
|
|
|
4.75
|
%
|
Expected term of options
|
|
|
4.75 years
|
|
|
|
4.75 years
|
|
|
|
7 years
|
|
Weighted average grant date fair value
|
|
$
|
4.89 - $5.42
|
|
|
$
|
4.76
|
|
|
$
|
1.35
|
|
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
56
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 products general availability to
customers. We amortize capitalized software development costs
over the products 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.
57
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 customers 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
58
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:
|
|
|
|
|
|
Level 1
|
|
|
Unadjusted quoted prices in active markets for identical assets
or liabilities
|
|
Level 2
|
|
|
Unadjusted quoted prices in active markets for similar assets or
liabilities, or
|
|
|
|
|
Unadjusted quoted prices for identical or similar assets or
liabilities in markets that are not active, or
|
|
|
|
|
Inputs other than quoted prices that are observable for the
asset or liability
|
|
Level 3
|
|
|
Unobservable inputs for the asset or liability
|
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
entitys 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.
59
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 parents 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 companys
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.
60
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
|
|
|
% of Revenues
|
|
|
2007
|
|
|
% of Revenues
|
|
|
2006
|
|
|
% of Revenues
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Information
|
|
$
|
90,450
|
|
|
|
47.6
|
%
|
|
$
|
84,974
|
|
|
|
55.9
|
%
|
|
$
|
73,831
|
|
|
|
66.1
|
%
|
Professional Services
|
|
|
99,496
|
|
|
|
52.4
|
%
|
|
|
67,015
|
|
|
|
44.1
|
%
|
|
|
37,812
|
|
|
|
33.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
189,946
|
|
|
|
100.0
|
%
|
|
|
151,989
|
|
|
|
100.0
|
%
|
|
|
111,643
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Information
|
|
|
74,453
|
|
|
|
39.2
|
%
|
|
|
67,813
|
|
|
|
44.6
|
%
|
|
|
61,059
|
|
|
|
54.7
|
%
|
Professional Services
|
|
|
75,255
|
|
|
|
39.6
|
%
|
|
|
47,106
|
|
|
|
31.0
|
%
|
|
|
26,865
|
|
|
|
24.1
|
%
|
Unallocated corporate operating expenses
|
|
|
10,167
|
|
|
|
5.4
|
%
|
|
|
10,309
|
|
|
|
6.8
|
%
|
|
|
4,787
|
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
159,875
|
|
|
|
84.2
|
%
|
|
|
125,228
|
|
|
|
82.4
|
%
|
|
|
92,711
|
|
|
|
83.0
|
%
|
Equity in earnings of The Detroit Legal News Publishing, LLC,
net of amortization
|
|
|
5,646
|
|
|
|
3.0
|
%
|
|
|
5,414
|
|
|
|
3.6
|
%
|
|
|
2,736
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
35,717
|
|
|
|
18.8
|
%
|
|
|
32,175
|
|
|
|
21.2
|
%
|
|
|
21,668
|
|
|
|
19.4
|
%
|
Interest expense, net
|
|
|
(7,085
|
)
|
|
|
(3.7
|
)%
|
|
|
(7,284
|
)
|
|
|
(4.8
|
)%
|
|
|
(6,246
|
)
|
|
|
(5.6
|
)%
|
Non-cash interest expense related to interest rate swaps
|
|
|
(1,388
|
)
|
|
|
(0.7
|
)%
|
|
|
(1,237
|
)
|
|
|
(0.8
|
)%
|
|
|
(187
|
)
|
|
|
(0.2
|
)%
|
Non-cash interest expense related to redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
(66,132
|
)
|
|
|
(43.5
|
)%
|
|
|
(28,455
|
)
|
|
|
(25.5
|
)%
|
Break-up fee
and other income (expense), net
|
|
|
(1,467
|
)
|
|
|
(0.8
|
)%
|
|
|
(8
|
)
|
|
|
0.0
|
%
|
|
|
(202
|
)
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest
|
|
|
25,777
|
|
|
|
13.6
|
%
|
|
|
(42,486
|
)
|
|
|
(28.0
|
)%
|
|
|
(13,422
|
)
|
|
|
(12.0
|
)%
|
Income tax expense
|
|
|
(9,209
|
)
|
|
|
(4.9
|
)%
|
|
|
(7,863
|
)
|
|
|
(5.2
|
)%
|
|
|
(4,974
|
)
|
|
|
(4.5
|
)%
|
Minority interest
|
|
|
(2,265
|
)
|
|
|
(1.2
|
)%
|
|
|
(3,685
|
)
|
|
|
(2.4
|
)%
|
|
|
(1,913
|
)
|
|
|
(1.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14,303
|
|
|
|
7.5
|
%
|
|
$
|
(54,034
|
)
|
|
|
(35.6
|
)%
|
|
$
|
(20,309
|
)
|
|
|
(18.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
(non-GAAP)*
|
|
$
|
55,395
|
|
|
|
29.2
|
%
|
|
$
|
43,108
|
|
|
|
28.4
|
%
|
|
$
|
28,776
|
|
|
|
25.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash earnings
(non-GAAP)*
|
|
$
|
23,234
|
|
|
|
12.3
|
%
|
|
$
|
18,293
|
|
|
|
12.0
|
%
|
|
|
6,307
|
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per diluted share
|
|
$
|
0.53
|
|
|
|
|
|
|
$
|
(3.41
|
)
|
|
|
|
|
|
$
|
(2.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash earnings per diluted share
(non-GAAP)*
|
|
$
|
0.86
|
|
|
|
|
|
|
$
|
1.15
|
|
|
|
|
|
|
$
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
27,113
|
|
|
|
|
|
|
|
15,868
|
|
|
|
|
|
|
|
9,254
|
|
|
|
|
|
|
|
|
* |
|
You should refer to Item 6 Selected
Financial Data for a reconciliation of these non-GAAP
measures to GAAP and why we believe they are important measures
of our performance. |
61
Year
Ended December 31, 2008
Compared to Year Ended December 31, 2007
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Total revenues
|
|
$
|
189.9
|
|
|
$
|
152.0
|
|
|
$
|
38.0
|
|
|
|
25.0
|
%
|
The increase in total revenues consists of the following:
|
|
|
|
|
$32.6 million of revenues from businesses we acquired on or
after January 1, 2007, which we refer to as acquired
businesses. These revenues consisted of:
(1) $0.7 million in revenues from the assets of
Venture Publications (including the Mississippi Business
Journal) acquired on March 30, 2007;
(2) $2.1 million in revenues from the assets of Legal
and Business Publishers (including The Mecklenburg Times)
acquired on February 13, 2008; (3) $4.6 million
in revenues from the mortgage default processing services
business of Wilford & Geske acquired on
February 22, 2008; and (4) $25.2 million in
revenues from the NDEx business acquired in September 2008.
Acquired businesses do not include fold in acquisitions, which
we define below.
|
|
|
|
$5.3 million of revenues from organic revenue growth,
primarily from an increase in public notices placed with our
Business Information products. We define organic revenue growth
as the net increase in revenue produced by: (1) businesses
we owned and operated prior to January 1, 2007, which we
refer to as existing businesses; (2) customer
lists, goodwill or other finite-life intangible assets we
purchased on or after January 1, 2007, and integrated into
our existing businesses; and (3) businesses that we account
for as acquisitions under the purchase method of accounting in
accordance with SFAS No. 141 Business
Combinations, but do not report separately for internal
financial purposes, which we refer to as fold in
acquisitions.
|
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 $8.4 million, or 25.5%,
increase in public notice revenues in our Business Information
Division.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Total operating expenses
|
|
$
|
159.9
|
|
|
$
|
125.2
|
|
|
$
|
34.6
|
|
|
|
27.7
|
%
|
Direct operating expense
|
|
|
68.0
|
|
|
|
51.7
|
|
|
|
16.3
|
|
|
|
31.5
|
%
|
Selling, general and administrative expenses
|
|
|
74.3
|
|
|
|
62.1
|
|
|
|
12.2
|
|
|
|
19.6
|
%
|
Depreciation expense
|
|
|
5.8
|
|
|
|
3.9
|
|
|
|
1.9
|
|
|
|
49.2
|
%
|
Amortization expense
|
|
|
11.8
|
|
|
|
7.5
|
|
|
|
4.3
|
|
|
|
56.7
|
%
|
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
62
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
$1.5 million of expenses we incurred in connection with
being a public company, including expenses in connection with
our Sarbanes-Oxley compliance activities (including the first
audit by our accountants of our internal controls) and increased
salary expenses for new employees. Selling, general and
administrative expense as a percentage of revenue decreased
slightly to 39.1% for 2008 from 40.9% for 2007.
Depreciation and Amortization Expense. Our
depreciation expense increased due to increased levels of
property and equipment in 2008, primarily as a result of the
acquisition of NDEx, as well as other capital spending as
discussed in Cash from Financing Activities below.
Our amortization expense increased primarily due to the
amortization of finite-life intangible assets acquired in the
February and September 2008 acquisitions, as well as the
repurchase of interests in APC from our minority members in
November 2007. We expect increased amortization in 2009 largely
due to the intangible assets we acquired in connection with the
acquisition of NDEx.
Break-up
Fee and Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Break-up fee
and other income (expense), net
|
|
$
|
(1.5
|
)
|
|
$
|
|
|
|
$
|
1.5
|
|
|
|
100.0
|
%
|
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 $1.5 million to the sellers of a business we
intended to acquire. We made this payment pursuant to our
agreement with such sellers because we were unable to obtain
debt financing on terms and timing that were satisfactory to us
to close the acquisition.
Adjusted
EBITDA (a non-GAAP measurement)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Adjusted EBITDA (in millions)
|
|
$
|
55.4
|
|
|
$
|
43.1
|
|
|
$
|
12.3
|
|
|
|
28.5
|
%
|
Adjusted EBITDA margin
|
|
|
29.2
|
%
|
|
|
28.4
|
%
|
|
|
0.8
|
%
|
|
|
2.8
|
%
|
63
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase (decrease)
|
|
|
Cash earnings (in millions)
|
|
$
|
23.2
|
|
|
$
|
18.3
|
|
|
$
|
4.9
|
|
|
|
27.0
|
%
|
Cash earnings per diluted share
|
|
$
|
0.86
|
|
|
$
|
1.15
|
|
|
$
|
(0.29
|
)
|
|
|
(25.2
|
)%
|
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 $1.15 for 2007 because of the
increase in the number of diluted weighted average shares
outstanding from 15.9 million at December 31, 2007 to
27.1 million at December 31, 2008. This increase in
diluted weighted average shares outstanding occurred as a result
of the private placement of 4 million shares of our common
stock in July 2008 and the issuance of an additional
825,528 shares of common stock to the sellers of NDEx in
connection with that acquisition.
Interest
Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase (decrease)
|
|
|
|
($s in millions)
|
|
|
Total interest expense, net
|
|
$
|
7.1
|
|
|
$
|
7.3
|
|
|
$
|
(0.2
|
)
|
|
|
(2.7
|
)%
|
Interest on bank credit facility
|
|
|
6.1
|
|
|
|
5.8
|
|
|
|
0.3
|
|
|
|
4.4
|
%
|
Cash interest expense (income) on interest rate swaps
|
|
|
0.7
|
|
|
|
(0.1
|
)
|
|
|
0.8
|
|
|
|
|
|
Amortization of deferred financing fees
|
|
|
0.2
|
|
|
|
1.2
|
|
|
|
(1.0
|
)
|
|
|
(82.2
|
)%
|
Other
|
|
|
0.1
|
|
|
|
0.4
|
|
|
|
(0.3
|
)
|
|
|
(68.4
|
)%
|
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 APCs
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 $0.4 million in connection with
the write off of the unaccreted issuance costs on series C
preferred stock. The decrease in other interest primarily
resulted from lower interest accreted on the non-interest
bearing note incurred in connection with our acquisition of the
mortgage default processing services business of
Feiwell & Hannoy in January 2007.
64
Non-Cash
Interest Expense Related to Interest Rate Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Non-cash interest expense related to interest rate swaps
|
|
$
|
1.4
|
|
|
$
|
1.2
|
|
|
$
|
0.2
|
|
|
|
12.2
|
%
|
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 $1.2 million liability at
December 31, 2007.
Non-Cash
Interest Expense Related to Redeemable Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Decrease
|
|
|
|
($s in millions)
|
|
|
Non-cash interest expense related to redeemable preferred stock
|
|
$
|
|
|
|
$
|
66.1
|
|
|
$
|
(66.1
|
)
|
|
|
(100.0
|
%)
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Income tax expense
|
|
$
|
9.2
|
|
|
$
|
7.9
|
|
|
$
|
1.3
|
|
|
|
17.1
|
%
|
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 $66.1 million was not deductible for tax
purposes.
65
Business
Information Division Results
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase (decrease)
|
|
|
|
($s in millions)
|
|
|
Total Business Information Division Revenues
|
|
$
|
90.5
|
|
|
$
|
85.0
|
|
|
$
|
5.5
|
|
|
|
6.4
|
%
|
Display and classified advertising revenues
|
|
|
33.5
|
|
|
|
35.6
|
|
|
|
(2.0
|
)
|
|
|
(5.7
|
)%
|
Public notice revenues
|
|
|
41.5
|
|
|
|
33.0
|
|
|
|
8.4
|
|
|
|
25.5
|
%
|
Circulation revenues
|
|
|
13.6
|
|
|
|
13.6
|
|
|
|
0.1
|
|
|
|
0.5
|
%
|
Other revenues
|
|
|
1.8
|
|
|
|
2.8
|
|
|
|
(1.0
|
)
|
|
|
(35.6
|
)%
|
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 Divisions 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
Divisions revenues.
66
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
|
|
|
|
($s in millions)
|
|
|
|
|
|
Total operating expenses
|
|
$
|
74.5
|
|
|
$
|
67.8
|
|
|
$
|
6.6
|
|
|
|
9.8
|
%
|
Direct operating expense
|
|
|
31.1
|
|
|
|
28.6
|
|
|
|
2.6
|
|
|
|
8.9
|
%
|
Selling, general and administrative expenses
|
|
|
38.4
|
|
|
|
34.8
|
|
|
|
3.6
|
|
|
|
10.2
|
%
|
Depreciation expense
|
|
|
1.8
|
|
|
|
1.4
|
|
|
|
0.4
|
|
|
|
30.0
|
%
|
Amortization expense
|
|
|
3.1
|
|
|
|
3.0
|
|
|
|
0.1
|
|
|
|
3.5
|
%
|
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 $1.0 million of increased
costs from businesses we acquired in 2007 and 2008. The balance
of the increase in the Business Information Division selling,
general and administrative expenses resulted from increases in
overall wage costs and costs of various marketing promotions.
Total operating expenses attributable to our Business
Information Division as a percentage of Business Information
Division revenue increased to 82.3% for the year ended
December 31, 2008 from 79.8% for the year ended
December 31, 2007. This increase is due to the cumulative
effects of the increases discussed above.
Professional
Services Division Results
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase (decrease)
|
|
|
|
($s in millions)
|
|
|
Total Professional Services Division revenues
|
|
$
|
99.5
|
|
|
$
|
67.0
|
|
|
$
|
32.5
|
|
|
|
48.5
|
%
|
Mortgage default processing and related services revenues
|
|
|
84.6
|
|
|
|
51.9
|
|
|
|
32.7
|
|
|
|
62.9
|
%
|
Appellate services revenues
|
|
|
14.9
|
|
|
|
15.1
|
|
|
|
(0.2
|
)
|
|
|
(1.1
|
)%
|
Professional Services Division revenues increased primarily due
to the acquisition of the business of NDEx on September 2,
2008. NDEx contributed $25.2 million of the increase in
mortgage default processing and related services revenues in
2008. Additionally, revenues from APCs mortgage default
processing service business that we acquired from
Wilford & Geske in February 22, 2008 added
$4.7 million in revenues during the year ended
December 31, 2008. The balance of the increase in mortgage
default processing and related services revenues is a result of
a slight increase in the number of mortgage default case files
processed in the year ended December 31, 2008 over 2007 for
our other two customers and an increase in the fee per file we
charge to Trott & Trott and Feiwell &
Hannoy. For the year ended December 31, 2008, we serviced
approximately 204,100 mortgage default case files for our
customers (approximately 70,800 of which were processed by
business we acquired in 2008 ). This is compared with
approximately 129,200 mortgage default case files that we
processed for the year ended December 31, 2007. 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 mortgage default processing and related services
revenues to decline in 2009.
The Barrett law firm, Trott & Trott and
Feiwell & Hannoy each accounted for more than 10% of
our Professional Services Division revenues in 2008. During
2007, Trott & Trott and Feiwell & Hannoy
each accounted for more than 10% of our Professional Services
Division revenues.
67
A slight decrease in the number of appellate filings in 2008 as
compared to 2007 (approximately 8,700 in 2008 compared to
approximately 8,800 in 2007) resulted in a decrease in
appellate services revenues of $0.2 million, or 1.1%. Our
entry into the Chicago market in July 2008 partially offset this
decrease in appellate filings in other markets where Counsel
Press does business.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Total operating expenses
|
|
$
|
75.3
|
|
|
$
|
47.1
|
|
|
$
|
28.1
|
|
|
|
59.8
|
%
|
Direct operating expense
|
|
|
36.9
|
|
|
|
23.2
|
|
|
|
13.8
|
|
|
|
59.3
|
%
|
Selling, general and administrative expenses
|
|
|
26.6
|
|
|
|
17.5
|
|
|
|
9.1
|
|
|
|
52.0
|
%
|
Depreciation expense
|
|
|
3.1
|
|
|
|
1.9
|
|
|
|
1.1
|
|
|
|
59.2
|
%
|
Amortization expense
|
|
|
8.7
|
|
|
|
4.5
|
|
|
|
4.2
|
|
|
|
92.4
|
%
|
Direct operating expenses increased primarily from the business
of NDEx acquired on September 2, 2008, which accounted for
$10.5 million of the total increase. Also, the mortgage
default processing business acquired from Wilford &
Geske in February 2008 added $1.3 million in direct
operating expenses. Other APC personnel expenses increased
primarily as a result of adding staff in the first and second
quarter of 2008 in connection with an increase in the number of
files processed during those quarters, and, to a lesser extent,
overall annual salary increases. Selling, general and
administrative expenses increased primarily due to the inclusion
of $7.2 million and $1.0 million of costs associated
with operating the business of NDEx and the mortgage default
processing services business of Wilford & Geske
acquired in September and February 2008, respectively, the write
off of $0.2 million in professional fees incurred in
connection with evaluating a potential acquisition that we
stopped pursuing in the first quarter of 2008, and, to a lesser
extent, increases in overall wage costs and health insurance
costs. These increases were partially offset by decreases in
bonuses paid in 2008 as compared to 2007, a decrease in bad debt
expense recorded on Counsel Press, and the reclassification of
Michigan business tax from operating expense to income tax
expense as a result of Michigan tax law changes in 2008.
Amortization expense increased due to the amortization of
finite-life intangible assets associated with the acquisition of
NDEx in September 2008 and the mortgage default processing
business of Wilford & Geske in February 2008, as well
as our purchase of membership interests in APC from its minority
members in November 2007. Total operating expenses attributable
to our Professional Services Division as a percentage of
Professional Services Division revenue increased to 75.6% for
the year ended December 31, 2008 from 70.3% for the year
ended December 31, 2007. This increase is primarily
attributable to NDEx, which has a higher mix of direct operating
expenses to revenue than our historical Professional Services
Division.
Year
Ended December 31, 2007
Compared to Year Ended December 31, 2006
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Total revenues
|
|
$
|
152.0
|
|
|
$
|
111.6
|
|
|
$
|
40.3
|
|
|
|
36.1
|
%
|
The increase in total revenues consists of the following:
|
|
|
|
|
$22.0 million of revenues from businesses we acquired on or
after January 1, 2006, which we refer to as acquired
businesses. These revenues consisted of
(1) $7.9 million of increased from our mortgage
default processing services business in Michigan, which we
acquired in March 2006; (2) $12.1 million of revenues
|
68
|
|
|
|
|
from our mortgage default processing services operations
relating to assets we acquired from Feiwell & Hannoy
in January 2007; and (3) $2.0 million of revenues from
the Mississippi Business Journal included as part of our
acquisition of the publishing assets of Venture Publications,
Inc. which we acquired in March 2007; and
|
|
|
|
|
|
$18.3 million of revenues from organic revenue growth. We
define organic revenue growth as the net increase in revenue
produced by: (1) businesses we owned and operated prior to
January 1, 2006, which we refer to as existing
businesses, (2) customer lists, goodwill or other
finite-life intangible assets we purchased on or after
January 1, 2006, and integrated into our existing
businesses; and (3) businesses that we do account for as
acquisitions under the purchase method of accounting in
accordance with SFAS No. 141 Business
Combinations, but do not report separate for internal
financial purposes, which we refer to as fold-in
acquisitions.
|
We derived 55.9% and 66.1% of our total revenues from our
Business Information Division and 44.1% and 33.9% of our total
revenues from our Professional Services Division for the years
ended December 31, 2007 and 2006, respectively. Expansion
of our Professional Services Division through the acquisition of
Feiwell & Hannoys mortgage default processing
assets drove the change in revenue mix across our divisions.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Total operating expenses
|
|
$
|
125.2
|
|
|
$
|
92.7
|
|
|
$
|
32.5
|
|
|
|
35.1
|
%
|
Direct operating expense
|
|
|
51.7
|
|
|
|
38.4
|
|
|
|
13.3
|
|
|
|
34.7
|
%
|
Selling, general and administrative expenses
|
|
|
62.1
|
|
|
|
46.7
|
|
|
|
15.4
|
|
|
|
32.9
|
%
|
Depreciation expense
|
|
|
3.9
|
|
|
|
2.4
|
|
|
|
1.4
|
|
|
|
58.5
|
%
|
Amortization expense
|
|
|
7.5
|
|
|
|
5.2
|
|
|
|
2.4
|
|
|
|
46.0
|
%
|
Operating expenses attributable to our corporate operations,
which 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, increased $5.5 million, or 115.4%, to
$10.3 million, for the year ended December 31, 2007,
from $4.8 million for the year ended December 31,
2006. Total operating expenses as a percentage of revenues
decreased slightly to 82.4% for the year ended December 31,
2007 from 83.0% for the year ended December 31, 2006. We
reclassified certain expenses for the year ended
December 31, 2007 to conform to our current year
presentation.
Direct Operating Expenses. The increase in
direct operating expenses was primarily attributable to the cost
of compensation and employee benefits for the processing staff
of the mortgage default processing service businesses that we
acquired in the first quarter of 2007 and in March 2006 and for
which we recognized a full year of operating expenses in 2007,
as well as other increased operating expenses of APC due to the
increases in the volume of files processed. Additionally, direct
operating expenses increased as a result of increased stock
compensation expense recorded in the year ended
December 31, 2007. Direct operating expenses as a
percentage of revenue decreased from 34.4% as of
December 31, 2006 to 34.0% as of December 31, 2007 due
to the increase in our higher margin revenues from our
Professional Services Division.
Selling, General and Administrative
Expenses. Our selling, general and administrative
expenses increased due to the costs of employee salaries and
benefits, and certain other expenses for the mortgage default
processing services businesses that we acquired in the first
quarter of 2007 and in March 2006 and for which we recognized a
full year of expenses in 2007, as well as the March 2007
acquisition of the Mississippi Business Journal. Selling,
general and administrative expenses also increased due to
increases in overall wage costs and costs of various marketing
promotions. Additionally, selling, general and administrative
expenses increased due to an increase in corporate insurance
costs and increased stock compensation expense recorded in 2007.
Selling, general and administrative expense as a percentage of
revenue decreased slightly to 40.9% as of December 31, 2007
from 41.8%
69
as of December 31, 2006. In 2007, we did not incur any
out-of-pocket costs, other than minimal training fees, as we
prepared to comply with Section 404 of the Sarbanes-Oxley
Act of 2002.
Depreciation and Amortization Expense. Our
depreciation expense increased due to increased levels of
property and equipment in 2007. Our amortization expense
increased due primarily to the amortization of finite-lived
intangible assets acquired in the APC acquisitions in January
2007 and March 2006.
Adjusted
EBITDA (a non-GAAP measurement)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Adjusted EBITDA (in millions)
|
|
$
|
43.1
|
|
|
$
|
28.8
|
|
|
$
|
14.3
|
|
|
|
49.8
|
%
|
Adjusted EBITDA margin
|
|
|
28.4
|
%
|
|
|
25.8
|
%
|
|
|
2.6
|
%
|
|
|
10.1
|
%
|
Adjusted EBITDA (as defined and discussed in Note 5 of
Item 6 Selected Financial Data) and
adjusted EBITDA margin increased due to the cumulative effect of
the factors described above that are applicable to the
calculation of adjusted EBITDA. Adjusted EBITDA margin,
increased to 28.4% for the year ended December 31, 2007,
from 25.8% for the year ended December 31, 2006.
Cash
Earnings and Cash Earnings per Diluted Share (non-GAAP
measurements)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase (decrease)
|
|
|
Cash earnings (in millions)
|
|
$
|
18.3
|
|
|
$
|
12.4
|
|
|
$
|
5.9
|
|
|
|
47.6
|
%
|
Cash earnings per diluted share
|
|
$
|
1.15
|
|
|
$
|
1.34
|
|
|
$
|
(0.19
|
)
|
|
|
(14.2
|
)%
|
Cash earnings (as defined and discussed in Note 6 of
Item 6 Selected Financial Data)
increased $5.9 million, or 47.6%, to $18.3 million for
the year ended December 31, 2007 from $12.4 million
for 2006 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)
decreased to $1.15 for 2007 from $1.34 for 2006 because of the
increase in the number of diluted weighted average shares
outstanding from 9.3 million at December 31, 2006 to
15.9 million at December 31, 2007. This increase in
diluted weighted average shares outstanding occurred as a result
of our initial public offering in August 2007 and our private
placement in July 2008.
Interest
Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase (decrease)
|
|
|
|
($s in millions)
|
|
|
Interest expense, net
|
|
$
|
7.3
|
|
|
$
|
6.2
|
|
|
$
|
1.0
|
|
|
|
16.6
|
%
|
Interest on bank credit facility
|
|
|
5.8
|
|
|
|
5.9
|
|
|
|
|
|
|
|
(0.6
|
)%
|
Cash interest (income) expense on interest rate swaps
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
107.8
|
%
|
Amortization of deferred financing fees
|
|
|
1.2
|
|
|
|
0.8
|
|
|
|
0.4
|
|
|
|
55.7
|
%
|
Other
|
|
|
0.4
|
|
|
|
(0.3
|
)
|
|
|
0.7
|
|
|
|
209.8
|
%
|
Interest expense on our bank credit facility remained relatively
flat in 2007 resulting from consistent levels of average
outstanding borrowings. For the year ended December 31,
2007, our average outstanding borrowings were $75.1 million
compared to $74.5 million for the year ended
December 31, 2006. An increase of $33.0 million in
outstanding borrowings to finance acquisitions in 2007 was
offset by the $30 million reduction in debt paid with
proceeds from our initial public offering and $3.0 million
of debt payments, net of debt amortization. The
70
amortization of deferred financing fees increased as a result of
$0.6 million of expense incurred related to the write off
of deferred financing fees on the previous credit facility and
$0.4 million of expense in connection with the write off of
the unaccreted issuance costs on series C preferred stock.
Other interest increased resulting from the accretion of
interest on the non-interest bearing note incurred in connection
with our acquisition of the mortgage default processing services
business of Feiwell & Hannoy in 2007, as well as lower
interest income recorded in 2008.
Non-Cash
Interest Expense Related to Interest Rate Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Non-cash interest expense related to interest rate swaps
|
|
$
|
1.2
|
|
|
$
|
0.2
|
|
|
$
|
1.1
|
|
|
|
561.5
|
%
|
Non-cash interest expense related to interest rate swaps
increased as a result of a change in the estimated fair value of
our interest rate swaps driven by a decline in interest rates in
2007. Accordingly, the estimated fair value of our fixed rate
interest rate swaps recorded on our balance sheet decreased by
$1.2 million to a $1.2 million liability at
December 31, 2007, from a $17,000 asset at
December 31, 2006.
Non-Cash
Interest Expense Related to Redeemable Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Non-cash interest expense related to redeemable preferred stock
|
|
$
|
66.1
|
|
|
$
|
28.5
|
|
|
$
|
37.7
|
|
|
|
132.4
|
%
|
Non-cash interest expense related to redeemable preferred stock
consists 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. The increase was primarily due to
the increase 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
such 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 periods after August 7,
2007.
Income
Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Income tax expense
|
|
$
|
7.9
|
|
|
$
|
5.0
|
|
|
$
|
2.9
|
|
|
|
58.1
|
%
|
Our effective tax rate differs from the statutory
U.S. federal corporate income tax rate of 35.0% due to 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 $43.1 and $28.5 million in 2007 and
2006, respectively, which was not deductible for tax purposes.
Excluding these amounts, our effective tax rate would have been
39.4% and 37.9% for 2007 and 2006, respectively.
71
Business
Information Division Results
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase (decrease)
|
|
|
|
($s in millions)
|
|
|
Total Business Information Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
85.0
|
|
|
$
|
73.8
|
|
|
$
|
11.1
|
|
|
|
15.1
|
%
|
Display and classified advertising revenues
|
|
|
35.6
|
|
|
|
31.7
|
|
|
|
3.8
|
|
|
|
12.1
|
%
|
Public notice revenues
|
|
|
33.0
|
|
|
|
25.0
|
|
|
|
8.1
|
|
|
|
32.3
|
%
|
Circulation revenues
|
|
|
13.6
|
|
|
|
13.6
|
|
|
|
|
|
|
|
|
|
Other revenues
|
|
|
2.8
|
|
|
|
3.5
|
|
|
|
(0.7
|
)
|
|
|
(21.2
|
)%
|
Our display and classified advertising revenues increased
primarily due to growth in the number of advertisements placed
in our publications. Our public notice revenues increased
primarily due to the increased number of foreclosure notices
placed in our publications.
Circulation revenues remained flat, as an increase in the
average price per paid subscription was offset by a decline in
the number of paid subscribers between December 31, 2006
and December 31, 2007. As of December 31, 2007, our
paid publications had approximately 71,700 subscribers, a
decrease of approximately 1,900, or 2.6%, from total paid
subscribers of approximately 73,600 as of December 31,
2006. This decline resulted from our termination of discounted
subscription programs. Other Business Information Division
revenues decreased primarily due to decreased commercial
printing sales.
One of our paid publications, The Daily Record in
Maryland, as well as the business information products we target
to the Missouri markets and the Massachusetts market, each
accounted for over 10% of our Business Information
Divisions revenues for the year ended December 31,
2007.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Total operating expenses
|
|
$
|
67.8
|
|
|
$
|
61.1
|
|
|
$
|
6.8
|
|
|
|
11.1
|
%
|
Direct operating expense
|
|
|
28.6
|
|
|
|
26.6
|
|
|
|
2.0
|
|
|
|
7.4
|
%
|
Selling, general and administrative expenses
|
|
|
34.8
|
|
|
|
30.7
|
|
|
|
4.1
|
|
|
|
13.4
|
%
|
Depreciation expense
|
|
|
1.4
|
|
|
|
1.2
|
|
|
|
0.2
|
|
|
|
15.1
|
%
|
Amortization expense
|
|
|
3.0
|
|
|
|
2.5
|
|
|
|
0.5
|
|
|
|
20.2
|
%
|
Direct operating expenses increased primarily due to spending on
outside software programmers working on web-related initiatives
and increased operating costs in connection with the acquisition
of Venture Publications Inc. in March 2007. Selling, general and
administrative expenses attributable increased due to increased
general, selling and administrative costs in connection with the
acquisition of Venture Publications Inc., as well as increased
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 decreased to 79.8% for the year ended
December 31, 2007 from 82.7% for the year ended
December 31, 2006. Increases in public notice revenues,
which has a higher margin than other revenue sources, primarily
contributed to this decrease.
72
Professional
Services Division Results
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Total Professional Services Division revenues
|
|
$
|
67.0
|
|
|
$
|
37.8
|
|
|
$
|
29.2
|
|
|
|
77.2
|
%
|
Mortgage default processing service revenues
|
|
|
51.9
|
|
|
|
24.7
|
|
|
|
27.2
|
|
|
|
110.3
|
%
|
Appellate services revenues
|
|
|
15.1
|
|
|
|
13.1
|
|
|
|
2.0
|
|
|
|
15.1
|
%
|
Professional Services Division revenues increased primarily due
to the increase in mortgage default processing service revenues.
This increase was attributable to the revenues from APCs
mortgage default processing service businesses that we acquired
in March 2006 (and for which we recognized a full year of
revenues in 2007) and January 2007. For the year ended
December 31, 2007, we serviced approximately 129,200
mortgage default case files for clients of our two law firm
customers in 2007, compared to approximately 62,500 mortgage
default case files that we serviced for clients of our one law
firm customer for the period March 14, 2006 through
December 31, 2006.
The increase in appellate services revenues resulted from
Counsel Press assisting with more appellate filings this past
year (approximately 8,800 in 2007 compared to approximately
7,700 in 2006).
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
|
($s in millions)
|
|
|
Total operating expenses
|
|
$
|
47.1
|
|
|
$
|
26.9
|
|
|
$
|
20.2
|
|
|
|
75.3
|
%
|
Direct operating expense
|
|
|
23.2
|
|
|
|
11.8
|
|
|
|
11.4
|
|
|
|
96.5
|
%
|
Selling, general and administrative expenses
|
|
|
17.5
|
|
|
|
11.5
|
|
|
|
6.0
|
|
|
|
51.8
|
%
|
Depreciation expense
|
|
|
1.9
|
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
113.4
|
%
|
Amortization expense
|
|
|
4.5
|
|
|
|
2.6
|
|
|
|
1.9
|
|
|
|
70.5
|
%
|
Direct operating expenses increased primarily due to the
expenses of APCs mortgage default processing service
businesses that we acquired in March 2006 (and for which we
recognized a full year of expenses in 2007) and January
2007. Selling, general and administrative expenses also
increased primarily due to our APC acquisitions in March 2006
and January 2007.
Depreciation expense increased due to the inclusion of fixed
assets from our APC mortgage default processing services
business acquisitions in March 2006 (and for which we recognized
a full year of depreciation in 2007) and January 2007.
Amortization expense increased due to the amortization of
finite-lived intangible assets associated with the March 2006
(and for which we recognized a full year of amortization in
2007) and January 2007 APC acquisitions. Additionally,
Counsel Presss amortization expense increased
$0.2 million. Total operating expenses attributable to our
Professional Services Division as a percentage of Professional
Services Division revenue decreased to 70.3% for the year ended
December 31, 2007, from 71.1% for the year ended
December 31, 2006.
OFF
BALANCE SHEET ARRANGEMENTS
We have not entered into any off balance sheet arrangements.
LIQUIDITY
AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flows from operations,
available capacity under our credit facility, distributions
received from DLNP, sales of our equity securities, and
available cash reserves. The following table
73
summarizes our cash and cash equivalents, working capital
(deficit) and long-term debt, less current portion as of
December 31, 2008 and 2007, as well as cash flows for the
years ended December 31, 2008, 2007, and 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash and cash equivalents
|
|
$
|
2,456
|
|
|
$
|
1,346
|
|
Working capital (deficit)
|
|
|
(12,588
|
)
|
|
|
(5,460
|
)
|
Long-term debt, less current portion
|
|
|
143,450
|
|
|
|
56,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net cash provided by operating activities
|
|
$
|
34,451
|
|
|
$
|
27,259
|
|
|
$
|
18,307
|
|
Net cash used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and investments
|
|
|
(182,423
|
)
|
|
|
(32,977
|
)
|
|
|
(53,461
|
)
|
Capital expenditures
|
|
|
(6,601
|
)
|
|
|
(7,281
|
)
|
|
|
(2,430
|
)
|
Net cash provided by financing activities
|
|
|
155,583
|
|
|
|
13,429
|
|
|
|
35,982
|
|
Cash
Flows Provided by Operating Activities
The most significant inflows of cash are cash receipts from our
customers. Operating cash outflows include payments to
employees, payments to vendors for services and supplies and
payments of interest and income taxes.
Net cash provided by operating activities for the year ended
December 31, 2008 increased $7.2 million, or 26.4%, to
$34.5 million from $27.3 million for the year ended
December 31, 2007. This increase was primarily the result
of improved operating results in 2008 as compared to 2007,
including those related to our acquisition of the NDEx business.
Net cash provided by operating activities for the year ended
December 31, 2007 increased $9.0 million, or 48.9%, to
$27.3 million from $18.3 million for the year ended
December 31, 2006. This increase was primarily the result
of a full year of operations of APC in 2007, which we purchased
in March 2006, and the inclusion of the results of the mortgage
default processing service business of Feiwell &
Hannoy, which we acquired in January 2007.
Working capital (deficit) increased $7.1 million, or
130.6%, to $(12.6) million at December 31, 2008, from
$(5.5) million at December 31, 2007, resulting
primarily from significant changes in current assets and current
liabilities as a result of the NDEx business. Because NDEx
provides mortgage foreclosure processing services directly to
loan processors in California, we presented approximately
$21.6 million in liabilities and $7.2 million in
unbilled receivables on our balance sheet pertaining to certain
pass-through expenses, such as trustee sale
guarantees, title policies, and post and publication charges, at
December 31, 2008. These items are shown separately on the
balance sheet. Typically, we provide these services to our law
firm customers, who, then, carry these pass-through expenses on
their books.
Working capital (deficit) decreased $3.5 million, or 39.3%,
to $(5.5) million at December 31, 2007, from
$(9.0) million at December 31, 2006. Current
liabilities increased $2.6 million, or 9.4%, to
$30.4 million at December 31, 2007 from
$27.8 million at December 31, 2006. Accounts payable
and accrued liabilities increased $4.3 million, or 42.5%,
to $14.3 million at December 31, 2007 from
$10.0 million at December 31, 2006. This increase was
primarily caused by the timing of payments on trade accounts
payable, as well as increases in accrued compensation and
accrued interest. Current deferred revenue increased
$0.6 million, or 5.9%, to $11.4 million at
December 31, 2007 from $10.8 million at
December 31, 2006. Current assets increased
$6.1 million, or 32.7%, to $24.9 million at
December 31, 2007 from $18.8 million at
December 31, 2006. This increase was due primarily to the
growth of accounts receivable by $5.0 million from
$15.7 million at December 31, 2006 to
$20.7 million at December 31, 2007, and the increase
in cash from $0.8 million at December 31, 2006 to
$1.3 million at December 31, 2007.
74
The increase in accounts receivable from December 31, 2007
to December 31, 2008, as well as from December 31,
2006 to December 31, 2007, was primarily attributable to
increased sales and accounts receivable of our acquired
companies during those periods. Our allowance for doubtful
accounts as a percentage of gross receivables and days sales
outstanding, or DSO, as of December 31, 2008 and 2007 is
set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Allowance for doubtful accounts as a percentage of gross
accounts receivable
|
|
|
3.5
|
%
|
|
|
5.8
|
%
|
Days sales outstanding
|
|
|
62.6
|
|
|
|
54.6
|
|
The decrease in allowance for doubtful accounts as a percentage
of gross accounts receivable is primarily a result of the
addition of receivables from the Barrett law firm as a result of
the acquisition of the NDEx business for which no allowance for
doubtful accounts is carried. No allowance is carried on these
accounts because, to date, we have not experienced any problems
with respect to collecting prompt payment from the Barrett law
firm, who is required to remit all amounts due to us with
respect to files we serviced in accordance with the time periods
upon which we have agreed.
We calculate DSO by dividing net receivables by average daily
revenue excluding circulation. Average daily revenue is computed
by dividing total revenue by the total number of days in the
period. In calculating our DSO for the year ended
December 31, 2008, we annualized the revenues from NDEx,
which we have only owned since September 2, 2008. Our DSO
increased significantly from December 31, 2007 to
December 31, 2008, for the following reasons: (1) we
extended the payment terms with Trott & Trott in the
first quarter of 2008 from 30 days to 45 days in
connection with an increase to the per file fee we charge
Trott & Trott, (2) unbilled revenue carried on
the books of NDEx, which we acquired on September 2, 2008;
and (3) increased public notices, which have longer payment
terms.
We own 35.0% of the membership interests in Detroit Legal
Publishing, LLC, or DLNP, the publisher of Detroit Legal News,
and received distributions of $7.0 million and
$5.6 million for the years ended December 31, 2008 and
2007, respectively. The operating agreement for DLNP provides
for us to receive quarterly distribution payments based on our
ownership percentage, which are a significant source of
operating cash flow.
Cash
Flows Used by Investing Activities
Net cash used by investing activities increased
$148.8 million, to $188.9 million in 2008 from
$40.1 million in 2007. Uses of cash in both periods
pertained to acquisitions, capital expenditures and purchases of
software. Cash paid for acquisitions totaled $182.4 million
for the year ended December 31, 2008 and $33.0 million
for the year ended December 31, 2007. Capital expenditures
and purchases of software were approximately $6.6 million
and $7.3 million in 2008 and 2007, respectively. Nearly 50%
of our total capital spending in 2008 pertained to five
projects: (1) a new voice over internet protocol telephone
system ($0.5 million); (2) spending on our proprietary
case management software in Indiana and Minnesota
($0.5 million); (3) build-out and furniture for our
new corporate offices in Minneapolis ($0.8 million);
(4) build-out and equipment for expanded NDEx office space
in Texas ($0.7 million); and (5) spending on Payment
Allocation and Claims Tracking (PACT) and our
multi-state software for NDEx ($0.7 million). The remainder
of our capital expenditure spending in 2008 was used to acquire
various equipment, software and furniture for our operating
units. We expect our capital expenditures to account for between
3.0% and 4.0% of our total revenues in 2009.
Net cash used by investing activities decreased
$15.7 million, or 28.2%, to $40.1 million in 2007 from
$55.9 million in 2006. Uses of cash in both periods
pertained to acquisitions, capital expenditures and purchases of
software. Cash paid for acquisitions totaled $33.0 million
for the year ended December 31, 2007 and $53.5 million
for the year ended December 31, 2006. Capital expenditures
and purchases of software were approximately $7.3 million
and $2.4 million in 2007 and 2006, respectively. In June
2007, we moved APC to a new office location in suburban Detroit
that we are subleasing from Trott & Trott because our
previous lease was expiring and to provide us room for
expansion. In 2007, we also completed building a new data center
to support our Business Information and Professional Services
Division at this suburban Detroit office. The cost of these
developments was $2.5 million, $1.3 million of which
was attributable to leasehold improvements, $0.4 million
for computer equipment, and $0.8 million for furniture. In
2007, we spent approximately $0.2 million to customize our
75
proprietary case management software system so that it can be
used in judicial foreclosure states as well as other
non-judicial states.
Finite-lived intangible assets increased $166.0 million, or
186.6%, to $254.9 million at December 31, 2008 from
$88.9 million at December 31, 2007. This increase
resulted from the addition of finite-life intangible assets
acquired as part of the acquisition of the assets of Legal and
Business Publishers, Inc. ($3.8 million), APCs
acquisition of the mortgage default processing services business
of Wilford & Geske ($13.6 million), and, most
notably, APCs acquisition of NDEx ($159.0 million).
These items were partially offset by increased amortization
expense. Our purchase price allocation for NDEx is still
preliminary and, when finalized, may change the amount of the
finite-life intangible assets acquired from NDEx.
Finite-lived intangible assets increased $23.1 million, or
35.0%, to $88.9 million as of December 31, 2007 from
$65.9 million as of December 31, 2006. This increase
was due to the services contract with Feiwell & Hannoy
that resulted from the acquisition of its mortgage default
processing service business, the trade names, advertiser lists
and subscriber lists acquired in connection with the Venture
Publications acquisition, and a customer list acquired as part
of our increased ownership percentage in APC. These items were
partially offset by increased amortization expense. This
increase was attributable to our services contract with
Trott & Trott, partially offset by increased
amortization expense.
Goodwill increased $39.9 million, or 50.5%, to
$119.0 million at December 31, 2008 from
$79.0 million at December 31, 2007. This increase was
due to goodwill related to an earn out paid in the second
quarter in connection with the acquisition of Venture
Publications ($0.6 million), and APCs acquisition of
NDEx ($39.3 million).
Goodwill increased $6.4 million, or 8.7%, to
$79.0 million as of December 31, 2007 from
$72.7 million as of December 31, 2006. This increase
was due to APCs acquisition of the mortgage default
processing service business of Feiwell & Hannoy, as
well as our acquisition of the Mississippi publications of
Venture Publications. The increase in goodwill was primarily
attributable to goodwill related to our acquisition of a
majority stake in APC in March 2006 and our acquisition of
substantially all of the business information assets of Happy
Sac Investment Co. (the Watchman Group in St. Louis,
Missouri) in October 2006.
Cash
Flows Provided by Financing Activities
Net cash provided by financing activities primarily includes
borrowings under our revolving credit agreement, proceeds from
the issuance of long-term debt, and net proceeds from offerings
of our stock, including our private placement offering in 2008
and our initial public offering in 2007. In 2008, net cash
provided by financing activities included $110.0 million in
proceeds from borrowings on our senior term notes and
$60.5 million in net proceeds received from the private
placement of 4,000,000 shares of our common stock. We used
all of the proceeds of the private placement to fund, in part,
the cash purchase price for the acquisition of NDEx. In 2007,
net cash provided by financing activities included
$137.5 million in net proceeds from our initial public
offering. Cash used in financing activities generally includes
the repayment of borrowings under the revolving credit agreement
and long-term debt, the redemption of any preferred stock, and
the payment of fees associated with the issuance of long-term
debt.
Net cash provided by financing activities increased
$142.2 million to $155.6 million in the year ended
December 31, 2008 from $13.4 million in the year ended
December 31, 2007, primarily resulting from an increase in
net borrowings under our senior revolving note of
$100.0 million and proceeds of $60.5 million from our
private placement of our common stock. Additionally,
year-over-year changes in net cash provided by financing
activities resulted from a decrease in payments on our senior
long-term debt in 2008 from 2007. We received approximately
$137.5 million of net proceeds from our initial public
offering in August 2007, most of which we used to redeem our
preferred stock and repay outstanding indebtedness. Long-term
debt, less current portion, increased $87.1 million, or
154.8%, to $143.5 million as of December 31, 2008 from
$56.3 million as of December 31, 2007, primarily as a
result of $99.0 million we borrowed in 2008 to fund, in
part, the acquisition of NDEx.
Net cash provided by financing activities decreased
$22.6 million to $13.4 million in 2007 from
$36.0 million in 2006. This decrease was due to the
reduction in net borrowings of senior term notes in 2007 as
compared to 2006.
76
Long-term debt, less current portion, decreased
$16.5 million, or 22.6%, to $56.3 million as of
December 31, 2007 from $72.8 million as of
December 31, 2006.
Credit Agreement. On August 8, 2007, we,
including our consolidated subsidiaries, entered into a second
amended and restated credit agreement, effective August 8,
2007, with a syndicate of bank lenders and U.S. Bank
National Association, as LC bank and lead arranger and as agent
for the lenders, for a $200 million senior secured credit
facility comprised of a term loan facility in an initial
aggregate amount of $50 million due and payable in
quarterly installments with a final maturity date of
August 8, 2014 and a revolving credit facility in an
aggregate amount of up to $150 million with a final
maturity date of August 8, 2012. At any time the
outstanding principal balance of revolving loans under the
revolving credit facility exceeds $25 million, such
revolving loans will convert to an amortizing term loan, in an
amount that we designate if we give notice, due and payable in
quarterly installments with a final maturity date of
August 8, 2014. The second amended and restated credit
agreement restated our original credit agreement in its
entirety. It also contains provisions for the issuance of
letters of credit under the revolving credit facility.
On August 7, 2007, we used $30.0 million of net
proceeds from our initial public offering to repay a portion of
the outstanding principal balance of the variable term loans
outstanding under our existing credit facility. The remaining
balance of the variable term loans and outstanding revolving
loans, plus all accrued interest and fees thereon, was converted
to $50.0 million of term loans under the term loan facility
and approximately $9.1 million of revolving loans under the
revolving credit facility. In February 2008, we drew down
$16.0 million to fund the acquisitions of the assets of
Legal and Business Publishers, including The Mecklenburg
Times, and the mortgage default processing services business
of Wilford & Geske and general working capital needs.
In March 2008, we converted $25.0 million of the revolving
loans then-outstanding under the credit facility to term loans.
In September 2008, we drew down $99.0 million to fund, in
part, the acquisition of NDEx and, in October 2008, we converted
$85.0 of the revolving loans then-outstanding under the credit
facility to term loans.
As of December 31, 2008, we had $153.8 million
outstanding under our term loan, and no outstanding balance
under our revolving variable-rate notes and available capacity
of approximately $40.0 million, after taking into account
the senior leverage ratio requirements under the credit
agreement. We expect to use the remaining availability under our
credit facility for working capital and other general corporate
purposes, including the financing of other acquisitions.
In the third quarter of 2008, 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 that approved the acquisition
of NDEx and waived the requirement that we use 50% of the
proceeds from the private placement to pay down indebtedness
under the credit facility (both described in Recent
Developments). In addition, the amendment (1) reduced
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) increased the interest rate margins charged on
the loans under the credit facility to up to 1.0%.
Our credit agreement permits us to elect whether outstanding
amounts under the term loan facility and the revolving credit
facility accrue interest based on the prime rate or LIBOR as
determined in accordance with the second amended and restated
credit agreement, in each case, plus a margin that fluctuates on
the basis of the ratio of our and our consolidated
subsidiaries total liabilities to pro forma EBITDA. Since
amending our credit facility in July 2008, the margin on the
prime rate loans may fluctuate between 0% and 1.25% and the
margin on the LIBOR loans may fluctuate between 2.0% and 3.25%.
At December 31, 2008, the weighted average interest rate on
our senior term note was 4.3%. If we elect to have interest
accrue (1) based on the prime rate, then such interest is
due and payable on the last day of each month and (2) based
on LIBOR, then such interest is due and payable at the end of
the applicable interest period that we elect, provided that if
the applicable interest period is longer than three months
interest will be due and payable in three month intervals.
Our obligations under the credit agreement are the joint and
several liabilities of us and our consolidated subsidiaries and
are secured by liens on substantially all of the assets of such
entities, including pledges of equity interests in the
consolidated subsidiaries.
77
Our credit agreement prohibits redemptions and provides that in
the event we issue any additional equity securities, 50% of the
cash proceeds of the issuance must be paid to our lenders in
satisfaction of any outstanding indebtedness. As described
above, our lenders waived this requirement in connection with
the net proceeds raised from the private placement of our common
stock in July 2008. Our credit agreement also contains a number
of negative covenants that limit us from, among other things and
with certain thresholds and exceptions:
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incurring indebtedness (including guarantee obligations) or
liens;
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entering into mergers, consolidations, liquidations or
dissolutions;
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selling assets;
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entering into certain acquisition transactions;
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forming or entering into partnerships and joint ventures;
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entering into negative pledge agreements;
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paying dividends, redeeming or repurchasing shares or making
other payments in respect of capital stock;
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entering into transactions with affiliates;
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making investments;
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entering into sale and leaseback transactions; and
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changing our line of business.
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At December 31, 2008 and as a result of the amendment to
the credit facility entered in July 2008, our credit agreement
also required that, as of the last day of any fiscal quarter, we
not permit our senior leverage ratio to be more than 3.50 to
1.00 and our fixed charge coverage ratio to be less than 1.20 to
1.00. This senior leverage ratio represents, for any particular
date, the ratio of our outstanding indebtedness (less our
subordinated debt and up to a specified amount of our cash and
cash equivalents) to our pro forma EBITDA, calculated in
accordance with our second amended and restated credit
agreement, for the four fiscal quarters ended on, or most
recently ended before, the applicable date. Our fixed charge
coverage ratio, for any particular date, is equal to the ratio
of (1) our adjusted EBITDA, calculated in accordance with
our second amended and restated credit agreement (less income
taxes paid in cash, net capital expenditures paid in cash, and
certain restricted payments paid in cash), to (2) interest
expense plus principal payments on account of the term loan
facility and our interest bearing liabilities plus all payments
made pursuant to non-competition or consulting fees paid by us
in connection with acquisitions, for the four fiscal quarters
ended on, or most recently ended before, the applicable date. If
we are required to take an impairment charge to our goodwill in
the future, we do not expect that charge to impact 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.
Future
Needs
We expect that cash flow from operations, supplemented by short
and long-term financing and the proceeds from our credit
facility, as necessary, will be adequate to fund day-to-day
operations and capital expenditure requirements. However, our
ability to generate sufficient cash flow in the future could be
adversely impacted by regulatory, lender and other responses to
the mortgage crisis, including new and proposed legislation and
lenders voluntary and required loss mitigation efforts and
moratoria, including those described in Recent
Developments Regulatory Environment above.
We plan to continue to develop and evaluate potential
acquisitions to expand our product and service offerings and
customer base and enter new geographic markets. We intend to
fund these acquisitions over the next twelve months with funds
generated from operations and borrowings under our credit
facility. We may also need to raise money to fund these
acquisitions, as we did for the acquisition of NDEx, through the
sales of our equity securities or additional debt financing.
78
Our ability to secure short-term and long-term financing in the
future will depend on several factors, including our future
profitability and cash flow from operations, the quality of our
short and long-term assets, our relative levels of debt and
equity, the financial condition and operations of acquisition
targets (in the case of acquisition financing), our stock price
and the overall condition of the credit markets (which currently
are, and may continue to be in the near future, difficult to
access).
Contractual
Obligations
The following table represents our obligations and commitments
to make future payments under contracts, such as lease
agreements, and other contingent commitments, as of
December 31, 2008. Actual payments in future periods may
vary from those reflected in the table.
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Less than
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After
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1 Year
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1-3 Years
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3-5 Years
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5 Years
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Total
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(In thousands)
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Long-term debt(1)
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$
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18,449
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$
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46,320
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$
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67,789
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$
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54,971
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$
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187,529
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Revolving note(2)
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Note payable(3)
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1,750
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1,750
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Capital leases
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2
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2
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Operating leases(4)
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5,140
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9,489
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5,363
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3,136
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23,128
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Minority interest put right in APC(5)
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1,616
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(6)
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7,620
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(6)
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5,230
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(6)
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3,654
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(6)
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18,120
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Earn out payment Wilford & Geske(7)
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2,000
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2,000
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Holdback and earn out payment Midwest
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Law Printing(8)
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150
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150
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300
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Earn out payment NDEx(9)
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13,000
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13,000
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$
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42,107
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$
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63,579
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$
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78,382
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$
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61,761
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$
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245,829
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(1) |
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Consists of principal and interest payments under our bank
credit facility and assumes the amount outstanding as of
December 31, 2008 remains outstanding until maturity and
assuming an interest rate until the maturity date equal to 5.5%
per annum. |
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(2) |
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Assumes that we will continue to have no amount outstanding on
the revolving note under our bank credit facility, with no
additional borrowings or payments. |
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(3) |
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In connection with our acquisition of the mortgage default
processing service business of Feiwell & Hannoy P.C.,
APC incurred a non-interest bearing note with a face amount of
$3.5 million payable in two equal annual installments,
payment of which we guaranteed, of which the first payment was
made in 2008, and the second and final installment was paid in
January 2009. The amount listed here includes accreted interest. |
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(4) |
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We lease office space and equipment under certain noncancelable
operating leases that expire in various years through 2017.
Lease terms generally range from 5 to 10 years with one to
two renewal options for extended terms. The amounts included in
the table above represent future minimum lease payments for
noncancelable operating leases. |
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(5) |
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Each of the minority members has the right to require APC to
repurchase all or any portion of the APC membership interest
held by them. For APC Investments and Feiwell and Hannoy, this
right is exercisable for a period of six months following
August 7, 2009. For the sellers of NDEx, each as members of
APC, this right is exercisable for a period of six months
following September 2, 2012. To the extent any minority
member of APC timely exercises this right, the purchase price
would be based upon 6.25 times APCs 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%. |
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(6) |
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The put right of the minority members of APC is only exercisable
within six months after August 7, 2009, as to APC
Investments and Feiwell & Hannoy, and six months after
September 2, 2012 as to the sellers of NDEx, and the
purchase price payable by APC would be based on 6.25 times
APCs trailing twelve month EBITDA, less |
79
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the aggregate amount of any interest-bearing indebtedness of APC
outstanding as of the repurchase date. Therefore, it is not
possible to provide the exact amount APC might be obligated to
pay if the minority members were to exercise this right at such
time. The amount we have disclosed in the table is provided as
an example of the purchase price that would be payable by APC in
the form of unsecured notes if (x) all the minority members
exercise their right in full to require APC to repurchase their
membership interest and (y) APCs pro forma EBITDA for
the twelve months ending on the repurchase date and
interest-bearing indebtedness outstanding on the repurchase date
were equal to those amounts as of December 31, 2008, which
were $44.6 million and $169.6 million, respectively.
These amounts would be payable over three years after the
exercise date and would accrue interest at a rate equal to prime
plus 2%, which (using the prime rate as of December 31,
2008) is reflected in the amounts set forth in the table.
These amounts are being provided for informational purposes only
and may not be representative of the actual amount APC may be
obligated to pay in connection with this put right of the
minority members of APC. |
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(7) |
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In connection with our acquisition of the mortgage default
processing services business of Wilford & Geske in
February 2008, we may be obligated to pay to the sellers up to
an additional $2.0 million based upon the EBITDA of this
business during the twelve month period ending on March 31,
2009. If the EBITDA for this business equals or exceeds
$3.045 million for the twelve months ending March 31,
2009, we will pay the sellers the maximum $2.0 million earn
out payment. For purposes of this table, we have assumed that
Wilford & Geske will earn the maximum earn-out payment. |
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(8) |
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In connection with our acquisition of the assets of Midwest Law
Printing Co, Inc. in June 2008, we are obligated to pay to the
sellers a holdback amount of $75,000 one year after closing, and
may be obligated to pay up to an additional $75,000 in each of
the three years subsequent to the closing date in connection
with this business achieving certain revenue targets. For
purposes of this table, we have assumed that Midwest Law
Printing Co., Inc. will earn the maximum earn-out payment. |
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(9) |
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In connection with our acquisition of NDEx in September 2008, we
may be obligated to pay the sellers of NDEx up to an additional
$13.0 million in cash based upon the adjusted EBITDA of
NDEx for 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. For purposes of this table, we have assumed
that the sellers of NDEx will earn the maximum earn-out payment.
However, the maximum earn out payment of $13.0 million will
be reduced by $7.50 for each $1.00 that NDExs adjusted
EBITDA for such four-quarter period is less than the
$28.0 million target. |
80
Item 7A. Quantitative
and Qualitative Disclosures about Market Risk
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 our business activities. Our
exposure to changes in interest rates is limited to borrowings
under our credit facility. However, as of December 31,
2008, we had swap arrangements that convert $40.0 million
of our 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 our exposure to
risk from changes in interest rates. We do not enter into
derivatives or other financial instrument transactions for
speculative purposes.
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, or
SFAS No. 133, requires us to recognize all of our
derivative instruments as either assets or liabilities in the
consolidated balance sheet at fair value. The accounting for
changes in the fair value of a derivative instrument depends on
whether it has been designated and qualifies as part of a
hedging relationship, and further, on the type of hedging
relationship. As of December 31, 2008, our interest rate
swap agreements were not designated for hedge accounting
treatment under SFAS No. 133, and as a result, the
fair value is classified within other deferred revenue and other
liabilities on our balance sheet and as a component of interest
expense in our statement of operations for the year then ended.
For the years ended December 31, 2008 and 2007, we
recognized an interest expense of $1.4 million and
$1.2 million, respectively, related to the decrease in fair
value of the interest rate swap agreements, or a
$0.2 million increase year over year.
If the future interest yield curve decreases, the fair value of
the interest rate swap agreements will decrease and interest
expense will increase. If the future interest yield curve
increases, the fair value of the interest rate swap agreements
will increase and interest expense will decrease.
Based on the variable-rate debt included in our debt portfolio,
a 75 basis point increase in interest rates would have
resulted in additional interest expense of $0.5 million
(pre-tax), $0.3 million (pre-tax), and $0.3 million
(pre-tax) in the year ended December 31, 2008, 2007, and
2006, respectively.
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Item 8.
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Financial
Statements and Supplemental Data
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DOLAN
MEDIA COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Title
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Page
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82
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83
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84
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85
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86
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87
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81
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Dolan Media Company
We have audited the accompanying consolidated balance sheets of
Dolan Media Company and Subsidiaries (the Company)
as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders equity
(deficit) and cash flows for each of the years in the three year
period ended December 31, 2008. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 2008 and
2007 financial statements of The Detroit Legal News Publishing,
LLC, an entity in which the Company has a 35% ownership
interest. Those financial statements were audited by other
auditors whose report has been furnished to us, and our opinion
for 2008 and 2007, insofar as it relates to the amounts included
for The Detroit Legal News Publishing, LLC, for 2008 and 2007,
is based solely on the report of the other auditors. The Company
has a $16.2 and $17.6 million investment in and has
recorded equity in earnings of $5.6 and $5.4 million of The
Detroit Legal News Publishing, LLC as of and for the years ended
December 31, 2008 and 2007, respectively.
We conducted our audits in accordance with standards of Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the
report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Dolan Media Company and Subsidiaries as of
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the
three year period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Dolan
Media Company and Subsidiaries internal control over
financial reporting as of December 31, 2008, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 11, 2009 expressed an unqualified opinion on
the effectiveness of the Companys internal control over
financial reporting.
/s/ McGladrey & Pullen, LLP
Minneapolis, Minnesota
March 11, 2009
82
DOLAN
MEDIA COMPANY
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,456
|
|
|
$
|
1,346
|
|
Accounts receivable, including unbilled services (net of
allowances for doubtful accounts of $1,398 and $1,283 as of
December 31, 2008 and 2007, respectively)
|
|
|
38,776
|
|
|
|
20,689
|
|
Unbilled pass-through costs
|
|
|
7,164
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
4,881
|
|
|
|
2,649
|
|
Deferred income taxes
|
|
|
397
|
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
53,674
|
|
|
|
24,943
|
|
Investments
|
|
|
17,126
|
|
|
|
18,479
|
|
Property and equipment, net
|
|
|
21,438
|
|
|
|
13,066
|
|
Finite-life intangible assets, net
|
|
|
254,917
|
|
|
|
88,946
|
|
Goodwill
|
|
|
118,983
|
|
|
|
79,044
|
|
Other assets
|
|
|
5,166
|
|
|
|
1,889
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
471,304
|
|
|
$
|
226,367
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
12,048
|
|
|
$
|
4,749
|
|
Accounts payable
|
|
|
9,116
|
|
|
|
6,068
|
|
Accrued pass-through liabilities
|
|
|
21,598
|
|
|
|
|
|
Accrued compensation
|
|
|
7,673
|
|
|
|
4,677
|
|
Accrued liabilities
|
|
|
2,738
|
|
|
|
2,922
|
|
Due to sellers of acquired businesses
|
|
|
75
|
|
|
|
600
|
|
Deferred revenue
|
|
|
13,014
|
|
|
|
11,387
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
66,262
|
|
|
|
30,403
|
|
Long-term debt, less current portion
|
|
|
143,450
|
|
|
|
56,301
|
|
Deferred income taxes
|
|
|
18,266
|
|
|
|
4,393
|
|
Deferred revenue and other liabilities
|
|
|
5,136
|
|
|
|
3,890
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
233,114
|
|
|
|
94,987
|
|
|
|
|
|
|
|
|
|
|
Minority interest in consolidated subsidiary (redemption value
of $16,764 as of December 31, 2008)
|
|
|
15,760
|
|
|
|
2,204
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; authorized:
70,000,000 shares; outstanding: 29,955,018 and
25,088,718 shares as of December 31, 2008 and 2007,
respectively
|
|
|
30
|
|
|
|
25
|
|
Preferred stock, $0.001 par value, authorized:
5,000,000 shares; no shares outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
291,310
|
|
|
|
212,364
|
|
Accumulated deficit
|
|
|
(68,910
|
)
|
|
|
(83,213
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
222,430
|
|
|
|
129,176
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
471,304
|
|
|
$
|
226,367
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
83
DOLAN
MEDIA COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Information
|
|
$
|
90,450
|
|
|
$
|
84,974
|
|
|
$
|
73,831
|
|
Professional Services
|
|
|
99,496
|
|
|
|
67,015
|
|
|
|
37,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
189,946
|
|
|
|
151,989
|
|
|
|
111,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating: Business Information
|
|
|
31,116
|
|
|
|
28,562
|
|
|
|
26,604
|
|
Direct operating: Professional Services
|
|
|
36,932
|
|
|
|
23,180
|
|
|
|
11,794
|
|
Selling, general and administrative
|
|
|
74,257
|
|
|
|
62,088
|
|
|
|
46,715
|
|
Amortization
|
|
|
11,793
|
|
|
|
7,526
|
|
|
|
5,156
|
|
Depreciation
|
|
|
5,777
|
|
|
|
3,872
|
|
|
|
2,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
159,875
|
|
|
|
125,228
|
|
|
|
92,711
|
|
Equity in earnings of Detroit Legal News Publishing, LLC
|
|
|
5,646
|
|
|
|
5,414
|
|
|
|
2,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
35,717
|
|
|
|
32,175
|
|
|
|
21,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net of interest income of $138, $175 and $383
in 2008, 2007 and 2006, respectively
|
|
|
(7,085
|
)
|
|
|
(7,284
|
)
|
|
|
(6,246
|
)
|
Non-cash interest expense related to interest rate swaps
|
|
|
(1,388
|
)
|
|
|
(1,237
|
)
|
|
|
(187
|
)
|
Non-cash interest expense related to redeemable preferred stock
|
|
|
|
|
|
|
(66,132
|
)
|
|
|
(28,455
|
)
|
Break-up fee
and other income (expense), net
|
|
|
(1,467
|
)
|
|
|
(8
|
)
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expense
|
|
|
(9,940
|
)
|
|
|
(74,661
|
)
|
|
|
(35,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest
|
|
|
25,777
|
|
|
|
(42,486
|
)
|
|
|
(13,422
|
)
|
Income tax expense
|
|
|
(9,209
|
)
|
|
|
(7,863
|
)
|
|
|
(4,974
|
)
|
Minority interest in net income of subsidiary
|
|
|
(2,265
|
)
|
|
|
(3,685
|
)
|
|
|
(1,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14,303
|
|
|
$
|
(54,034
|
)
|
|
$
|
(20,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.53
|
|
|
$
|
(3.41
|
)
|
|
$
|
(2.19
|
)
|
Diluted
|
|
$
|
0.53
|
|
|
$
|
(3.41
|
)
|
|
$
|
(2.19
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,985,345
|
|
|
|
15,868,033
|
|
|
|
9,253,972
|
|
Diluted
|
|
|
27,112,683
|
|
|
|
15,868,033
|
|
|
|
9,253,972
|
|
See Notes to Consolidated Financial Statements
84
DOLAN
MEDIA COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
(In thousands, except share data)
|
|
|
Balance (deficit) at December 31, 2005
|
|
|
8,910,000
|
|
|
$
|
1
|
|
|
$
|
26
|
|
|
$
|
(8,870
|
)
|
|
$
|
(8,843
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,309
|
)
|
|
|
(20,309
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
52
|
|
Repurchase of common stock
|
|
|
(36,000
|
)
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
(25
|
)
|
Issuance of common stock in a business acquisition
|
|
|
450,000
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance (deficit) at December 31, 2006
|
|
|
9,324,000
|
|
|
|
1
|
|
|
|
303
|
|
|
|
(29,179
|
)
|
|
|
(28,875
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,034
|
)
|
|
|
(54,034
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
970
|
|
|
|
|
|
|
|
970
|
|
Preferred stock series C conversion
|
|
|
5,093,155
|
|
|
|
5
|
|
|
|
73,844
|
|
|
|
|
|
|
|
73,849
|
|
Initial public offering proceeds, net of underwriting discount
and offering costs
|
|
|
10,500,000
|
|
|
|
11
|
|
|
|
137,255
|
|
|
|
|
|
|
|
137,266
|
|
Issuance of restricted stock, net of forfeitures
|
|
|
171,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
8
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance (deficit) at December 31, 2007
|
|
|
25,088,718
|
|
|
$
|
25
|
|
|
$
|
212,364
|
|
|
$
|
(83,213
|
)
|
|
$
|
129,176
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,303
|
|
|
|
14,303
|
|
Private placement of common stock, net of offering costs
|
|
|
4,000,000
|
|
|
|
4
|
|
|
|
60,483
|
|
|
|
|
|
|
|
60,487
|
|
Issuance of common stock in a business acquisition
|
|
|
825,528
|
|
|
|
1
|
|
|
|
16,460
|
|
|
|
|
|
|
|
16,461
|
|
Issuance of common stock pursuant to the exercise of stock
options under the 2007 incentive compensation plan
|
|
|
8,089
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
21
|
|
Stock-based compensation expense, including issuance of
restricted stock (shares are net of forfeitures)
|
|
|
32,683
|
|
|
|
|
|
|
|
1,918
|
|
|
|
|
|
|
|
1,918
|
|
Tax benefit on stock options exercised
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance (deficit) at December 31, 2008
|
|
|
29,955,018
|
|
|
$
|
30
|
|
|
$
|
291,310
|
|
|
$
|
(68,910
|
)
|
|
$
|
222,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
85
DOLAN
MEDIA COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14,303
|
|
|
$
|
(54,034
|
)
|
|
$
|
(20,309
|
)
|
Distributions received from Detroit Legal News Publishing, LLC
|
|
|
7,000
|
|
|
|
5,600
|
|
|
|
3,500
|
|
Minority interest distributions paid
|
|
|
(1,351
|
)
|
|
|
(2,886
|
)
|
|
|
(1,843
|
)
|
Non-cash operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
11,793
|
|
|
|
7,526
|
|
|
|
5,156
|
|
Depreciation
|
|
|
5,777
|
|
|
|
3,872
|
|
|
|
2,442
|
|
Equity in earnings of Detroit Legal News Publishing, LLC
|
|
|
(5,646
|
)
|
|
|
(5,414
|
)
|
|
|
(2,736
|
)
|
Minority interest
|
|
|
2,265
|
|
|
|
3,685
|
|
|
|
1,913
|
|
Stock-based compensation expense
|
|
|
1,918
|
|
|
|
970
|
|
|
|
52
|
|
Deferred income taxes
|
|
|
735
|
|
|
|
252
|
|
|
|
844
|
|
Change in value of interest rate swap and accretion of interest
on note payable
|
|
|
1,593
|
|
|
|
1,608
|
|
|
|
187
|
|
Non-cash interest related to redeemable preferred stock
|
|
|
|
|
|
|
66,611
|
|
|
|
28,589
|
|
Amortization of debt issuance costs
|
|
|
218
|
|
|
|
744
|
|
|
|
652
|
|
Change in accounting estimate related to self-insured medical
reserve
|
|
|
(470
|
)
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of effects of
business acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,313
|
)
|
|
|
(5,010
|
)
|
|
|
(2,089
|
)
|
Prepaid expenses and other current assets
|
|
|
(746
|
)
|
|
|
(857
|
)
|
|
|
(167
|
)
|
Other assets
|
|
|
226
|
|
|
|
|