DAILY JOURNAL CORP - Quarter Report: 2008 June (Form 10-Q)
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended June 30, 2008
or
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from _______________ to _____________________
Commission
File Number 0-14665
DAILY
JOURNAL CORPORATION
(Exact
name of registrant as specified in its charter)
|
South
Carolina
|
95-4133299
|
|
(State or other
jurisdiction of incorporation
or organization)
|
(I.R.S. Employer
Identification
No.)
|
|
915
East First Street
|
|
|
Los
Angeles,
California
|
90012-4050
|
|
(Address
of principal executive offices)
|
(Zip
code)
|
(213)
229-5300
(Registrant's
telephone number, including area code)
None
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes: x No:
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.
|
Large
Accelerated Filer: o
|
Accelerated
Filer: o
|
|
|
Non-accelerated
Filer: o
|
Smaller
Reporting Company: x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes: o No:
x
Indicate
the number of shares outstanding of each of the issuer's classes of common stock
as of the latest practicable date.
|
Class
|
Outstanding at July 31, 2008
|
|
|
Common
Stock, par value $ .01 per share
|
1,500,299
shares
|
1 of
15
INDEX
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Page
Nos.
|
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PART
I Financial Information
|
||
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Item
1. Financial Statements
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||
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3
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||
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||
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4
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||
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5
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||
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6
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||
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7
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11
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||
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13
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Part
II Other Information
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14
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15
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Item 1.
FINANCIAL STATEMENTS
DAILY
JOURNAL CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
June 30
2008
|
September 30
2007
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 2,484,000 | $ | 1,069,000 | ||||
|
U.S.
Treasury Notes and Bills
|
16,931,000 | 15,396,000 | ||||||
|
Accounts
receivable, less allowance for doubtful accounts of $300,000 and $200,000
at June 30, 2008 and September 30, 2007, respectively
|
8,435,000 | 5,537,000 | ||||||
|
Inventories
|
39,000 | 23,000 | ||||||
|
Prepaid
expenses and other assets
|
210,000 | 187,000 | ||||||
|
Deferred
income taxes
|
614,000 | 582,000 | ||||||
|
Total
current assets
|
28,713,000 | 22,794,000 | ||||||
|
Property,
plant and equipment, at cost
|
||||||||
|
Land,
buildings and improvements
|
12,961,000 | 12,953,000 | ||||||
|
Furniture,
office equipment and computer software
|
3,843,000 | 3,637,000 | ||||||
|
Machinery
and equipment
|
2,044,000 | 1,942,000 | ||||||
| 18,848,000 | 18,532,000 | |||||||
|
Less
accumulated depreciation
|
(7,878,000 | ) | (7,211,000 | ) | ||||
| 10,970,000 | 11,321,000 | |||||||
|
U.S.
Treasury Notes
|
1,658,000 | 4,596,000 | ||||||
|
Deferred
income taxes
|
1,450,000 | 1,211,000 | ||||||
| $ | 42,791,000 | $ | 39,922,000 | |||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable
|
$ | 2,819,000 | $ | 1,625,000 | ||||
|
Accrued
liabilities
|
3,269,000 | 3,120,000 | ||||||
|
Income
taxes
|
1,044,000 | 662,000 | ||||||
|
Notes
payable – current portion
|
--- | 209,000 | ||||||
|
Deferred
subscription and other revenues
|
5,395,000 | 6,218,000 | ||||||
|
Total
current liabilities
|
12,527,000 | 11,834,000 | ||||||
|
Long
term liabilities
|
||||||||
|
Accrued
liabilities
|
2,750,000 | 2,000,000 | ||||||
|
Notes
payable
|
---
|
3,803,000 | ||||||
|
Total
long term liabilities
|
2,750,000 | 5,803,000 | ||||||
|
Commitments
and contingencies (Notes 8 and 9)
|
--- | --- | ||||||
|
Shareholders'
equity
|
||||||||
|
Preferred
stock, $.01 par value, 5,000,000 shares authorized and no shares
issued
|
--- | --- | ||||||
|
Common
stock, $.01 par value, 5,000,000 shares authorized; 1,500,299 shares, at
June 30, 2008 and September 30, 2007, outstanding
|
15,000 | 15,000 | ||||||
|
Additional
paid-in capital
|
1,907,000 | 1,907,000 | ||||||
|
Retained
earnings
|
26,418,000 | 21,269,000 | ||||||
|
Accumulated
other comprehensive income
|
80,000 | --- | ||||||
|
Less
47,445 treasury shares, at June 30, 2008 and September 30, 2007, at
cost
|
(906,000 | ) | (906,000 | ) | ||||
|
Total
shareholders' equity
|
27,514,000 | 22,285,000 | ||||||
| $ | 42,791,000 | $ | 39,922,000 | |||||
See
accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
|
Three
months
ended June 30
|
||||||||
|
2008
|
2007
|
|||||||
|
Revenues
|
||||||||
|
Advertising
|
$ | 6,608,000 | $ | 5,162,000 | ||||
|
Circulation
|
2,133,000 | 2,245,000 | ||||||
|
Information
systems and services
|
1,283,000 | 904,000 | ||||||
|
Advertising
service fees and other
|
1,130,000 | 844,000 | ||||||
| 11,154,000 | 9,155,000 | |||||||
|
Costs
and expenses
|
||||||||
|
Salaries
and employee benefits
|
4,611,000 | 4,368,000 | ||||||
|
Newsprint
and printing expenses
|
619,000 | 560,000 | ||||||
|
Other
outside services
|
912,000 | 843,000 | ||||||
|
Postage
and delivery expenses
|
458,000 | 424,000 | ||||||
|
Depreciation
and amortization
|
234,000 | 268,000 | ||||||
|
Other
general and administrative expenses
|
993,000 | 861,000 | ||||||
| 7,827,000 | 7,324,000 | |||||||
|
Income
from operations
|
3,327,000 | 1,831,000 | ||||||
|
Other
income and (expense)
|
||||||||
|
Interest
income
|
184,000 | 223,000 | ||||||
|
Interest
expense
|
(10,000 | ) | (90,000 | ) | ||||
|
Income
before taxes
|
3,501,000 | 1,964,000 | ||||||
|
Provision
for income taxes
|
1,280,000 | 790,000 | ||||||
|
Net
income
|
$ | 2,221,000 | $ | 1,174,000 | ||||
|
Weighted
average number of common shares outstanding - basic and
diluted
|
1,452,854 | 1,452,862 | ||||||
|
Basic
and diluted net income per share
|
$ | 1.53 | $ | .81 | ||||
See
accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
|
Nine
months
ended June 30
|
||||||||
|
2008
|
2007
|
|||||||
|
Revenues
|
||||||||
|
Advertising
|
$ | 17,339,000 | $ | 14,024,000 | ||||
|
Circulation
|
6,499,000 | 6,752,000 | ||||||
|
Information
systems and services
|
3,478,000 | 2,777,000 | ||||||
|
Advertising
service fees and other
|
2,762,000 | 2,505,000 | ||||||
| 30,078,000 | 26,058,000 | |||||||
|
Costs
and expenses
|
||||||||
|
Salaries
and employee benefits
|
13,385,000 | 13,077,000 | ||||||
|
Newsprint
and printing expenses
|
1,621,000 | 1,602,000 | ||||||
|
Other
outside services
|
2,595,000 | 2,503,000 | ||||||
|
Postage
and delivery expenses
|
1,309,000 | 1,200,000 | ||||||
|
Depreciation
and amortization
|
692,000 | 741,000 | ||||||
|
Other
general and administrative expenses
|
2,745,000 | 2,544,000 | ||||||
| 22,347,000 | 21,667,000 | |||||||
|
Income
from operations
|
7,731,000 | 4,391,000 | ||||||
|
Other
income and (expense)
|
||||||||
|
Interest
income
|
687,000 | 623,000 | ||||||
|
Interest
expense
|
(119,000 | ) | (334,000 | ) | ||||
|
Income
before taxes
|
8,299,000 | 4,680,000 | ||||||
|
Provision
for income taxes
|
3,150,000 | 2,470,000 | ||||||
|
Net
income
|
$ | 5,149,000 | $ | 2,210,000 | ||||
|
Weighted
average number of common shares outstanding - basic and
diluted
|
1,452,854 | 1,452,934 | ||||||
|
Basic
and diluted net income per share
|
$ | 3.54 | $ | 1.52 | ||||
See
accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
Nine
months
ended June 30
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
income
|
$ | 5,149,000 | $ | 2,210,000 | ||||
|
Adjustments
to reconcile net income to net cash provided by operations
|
||||||||
|
Depreciation
and amortization
|
692,000 | 741,000 | ||||||
|
Deferred
income taxes
|
(321,000 | ) | (177,000 | ) | ||||
|
Discount
earned on U.S. Treasury Bills
|
(28,000 | ) | (80,000 | ) | ||||
|
Changes
in assets and liabilities
|
||||||||
|
(Increase)
decrease in current assets
|
||||||||
|
Accounts
receivable, net
|
(2,898,000 | ) | (598,000 | ) | ||||
|
Inventories
|
(16,000 | ) | 15,000 | |||||
|
Prepaid
expenses and other assets
|
(23,000 | ) | (84,000 | ) | ||||
|
Increase
(decrease) in current liabilities
|
||||||||
|
Accounts
payable
|
1,194,000 | 177,000 | ||||||
|
Accrued
liabilities
|
899,000 | 954,000 | ||||||
|
Income
taxes
|
382,000 | 795,000 | ||||||
|
Deferred
subscription and other revenues
|
(823,000 | ) | (66,000 | ) | ||||
|
Cash
provided by operating activities
|
4,207,000 | 3,887,000 | ||||||
|
Cash
flows from investing activities
|
||||||||
|
Maturities
and sales of U.S. Treasury Notes and Bills
|
11,119,000 | 6,493,000 | ||||||
|
Purchases
of U.S. Treasury Notes and Bills
|
(9,558,000 | ) | (9,851,000 | ) | ||||
|
Purchases
of property, plant and equipment, net
|
(341,000 | ) | (232,000 | ) | ||||
|
Net
cash received (used) for investing activities
|
1,220,000 | (3,590,000 | ) | |||||
|
Cash
flows from financing activities
|
||||||||
|
Payment
of loan principals
|
(4,012,000 | ) | (146,000 | ) | ||||
|
Purchase
of common stock
|
-
|
(7,000 | ) | |||||
|
Cash
used for financing activities
|
(4,012,000 | ) | (153,000 | ) | ||||
|
Increase
in cash and cash equivalents
|
1,415,000 | 144,000 | ||||||
|
Cash
and cash equivalents
|
||||||||
|
Beginning
of period
|
1,069,000 | 617,000 | ||||||
|
End
of period
|
$ | 2,484,000 | $ | 761,000 | ||||
|
Interest
paid during period
|
$ | 77,000 | $ | 215,000 | ||||
Supplemental non-cash
investment activities:
U.S.
Treasury Notes and Bills are categorized as "available-for-sale" with the
unrealized gains and losses, net of taxes, reported in accumulated other
comprehensive income. This non-cash activity for the nine months
ended June 30, 2008 included an increase in U.S. Treasury Notes and Bills of
$130,000 and a decrease in Deferred income taxes of $50,000. There
was no such non-cash activity for the nine months ended June 30, 2007 because
the above-mentioned investments were categorized as
"held-to-maturity".
See
accompanying Notes to Consolidated Financial Statements.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 -
The Corporation and Operations
The Daily
Journal Corporation (the “Company”) publishes newspapers and web sites covering
California, Arizona and Nevada, as well as the California Lawyer and 8-K
magazines, and produces several specialized information services. Sustain
Technologies, Inc. (“Sustain”), a wholly owned subsidiary, has been consolidated
since January 1999. Sustain supplies case management software systems
and related products to courts and other justice agencies, including district
attorney offices and administrative law organizations. These courts
and agencies use the Sustain family of products to help manage cases and
information electronically and to interface with other critical justice
partners. Sustain’s products are designed to help users manage
electronic case files from inception to disposition, including all aspects of
calendaring and accounting, report and notice generation, the implementation of
standards and business rules and other corollary functions. Essentially all of
the Company’s operations are based in California, Arizona, Colorado and
Nevada.
Note 2 -
Basis of Presentation
In the
opinion of the Company, the accompanying interim unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals) considered necessary for a fair statement of its financial position as
of June 30, 2008, the results of operations for the three- and nine-month
periods ended June 30, 2008 and 2007 and its cash flows for the nine months
ended June 30, 2008 and 2007. The results of operations for the nine
months ended June 30, 2008 and 2007 are not necessarily indicative of the
results to be expected for the full year.
The
consolidated financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2007.
Note 3 -
Basic and Diluted Income Per Share
The
Company does not have any common stock equivalents, and therefore the basic and
diluted income per share are the same.
Note 4 -
Revenue Recognition
Proceeds
from the sale of subscriptions for newspapers, court rule books and other
publications and other services are recorded as deferred revenue and are
included in earned revenue only when the services are provided, generally over
the subscription term. Advertising revenues are recognized when
advertisements are published and are net of commissions.
The
Company recognizes revenues from both the lease and sale of software
products. Revenues from leases of software products are recognized
over the life of the lease while revenues from software product sales are
recognized normally upon delivery, installation or acceptance pursuant to a
signed agreement. Revenues from annual maintenance contracts
generally call for the Company to provide software updates and upgrades to
customers and are recognized ratably over the maintenance
period. Consulting and other services are recognized as performed or
upon acceptance by the customers.
Note 5 -
Income Taxes
On a
pretax profit of $8,299,000 for the nine months ended June 30, 2008, the Company
recorded a tax provision of $3,150,000 using approximately the statutory
rate. On a pretax profit of $4,680,000 for the nine months ended June
30, 2007, the Company recorded a tax provision of $2,470,000 which included a
reserve for research and development tax credits claimed by the Company in prior
years. The Internal Revenue Service has been examining the tax
returns for years 2002 to 2006 and has proposed an assessment that, if upheld,
would result in disallowance of about $700,000 of previously claimed
credits. The Company is continuing to contest the issue, and the
ultimate resolution of this dispute cannot be ascertained at this
time.
In July
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (an interpretation of FASB Statement No. 109), which was effective
for fiscal years beginning after December 15, 2006 with earlier adoption
encouraged. This Interpretation was issued to clarify the accounting for
uncertainty in income taxes recognized in the financial statements by
prescribing a recognition threshold and measurement attribute for the financial
statements recognition and measurement of a tax position taken or expected to be
taken in a tax return. The Company adopted this Interpretation on
October 1, 2007 and recognized no material adjustment to the liability for
unrecognized tax benefits. At October 1, 2007 and at the quarter
ended June 30, 2008, the Company had approximately $700,000 of unrecognized tax
benefits, all of which would have an effective rate impact if
recognized.
Interest
accrued related to unrecognized tax benefits is recorded as interest expense,
and as of June 30, 2008, the Company has accrued $170,000, including an
additional $41,000 during this nine-month period. The Company has not accrued
the penalties related to any potential assessment. The Company files
federal income tax returns in the United States and with various state
jurisdictions and is no longer subject to examinations for years before
2002.
Note 6 -
Investment of U.S. Treasury Notes and Bills
Investments
in U.S. Treasury Notes and Bills for the nine-month period are categorized as
“available-for-sale” in lieu of “held-to-maturity” and stated at fair value,
with the unrealized gains and losses, net of taxes, reported in accumulated
other comprehensive income. Consequently, as of June 30, 2008, an
unrealized gain of $80,000, net of taxes, has been recorded in accumulated other
comprehensive income in the accompanying Consolidated Balance
Sheet.
Note 7 -
Comprehensive Income
Comprehensive
income, which includes net income plus net unrealized gains (losses) on U.S.
Treasury Notes and Bills classified as “available-for-sale” securities, was
$5,229,000 for the nine-month period ended June 30,
2008. Comprehensive income for the nine-month period ended June 30,
2007 was $2,210,000 and was equal to net income because there were no unrealized
gains (losses) on such investments.
Note 8 -
Commitments
The
Company owns its facilities in Los Angeles and leases space for its other
offices under operating leases, which expire at various dates through
2012. The Company is responsible for a portion of maintenance,
insurance and property tax expenses relating to certain leased
property. Rental expenses for comparable nine-month periods ended
June 30, 2008 and 2007 were $443,000 and $460,000, respectively. In January
2008, the Company paid off the balance of two real estate loans aggregating
$3,961,000 that were secured by the facilities in Los Angeles.
Note 9 -
Contingencies
Sustain
received a letter in April 2003 from counsel to the Ontario, Canada Ministry of
the Solicitor General, Ministry of Public Safety and Security and Ministry of
the Attorney General (collectively, the “Ministries”). The Ministries
had entered into a contract with Sustain, dated as of April 22, 1999 (the
“Contract”), pursuant to which the Ministries sought to license a software
product that was to be developed by an outside service provider engaged by
Sustain. The Contract was formally terminated in June
2002. The letter from counsel purported to invoke the dispute
resolution process set forth in the Contract and claimed damages in the amount
of $20 million. Counsel for Sustain and counsel for the Ministries
engaged in preliminary discussions with respect to this matter, and the dispute
resolution process set forth in the Contract was not
utilized. Counsel for Sustain last communicated with counsel for the
Ministries by a letter sent in April 2003. Management is unable to
determine whether this matter will have a material adverse effect on Sustain and
the Company.
From time
to time, the Company is involved in other litigation incidental to its
business. The Company believes that any provisions or reserves made
for potential losses arising out of currently pending litigation are adequate,
and that any such losses should not have a materially adverse effect on the
Company's financial position or results of operations.
Note 10 -
Operating Segments
Summarized
financial information for the Company’s reportable segments is shown in the
following table:
|
Reportable Segments
|
Total Results for both Segments | |||||||||||
|
Traditional Business
|
Sustain
|
|||||||||||
|
Nine months ended June
30, 2008
|
||||||||||||
|
Revenues
|
$ | 26,600,000 | $ | 3,478,000 | $ | 30,078,000 | ||||||
|
Income
(loss) before taxes
|
8,324,000 | (25,000 | ) | 8,299,000 | ||||||||
|
Total
assets
|
41,401,000 | 1,390,000 | 42,791,000 | |||||||||
|
Capital
expenditures
|
330,000 | 11,000 | 341,000 | |||||||||
|
Depreciation
and amortization
|
650,000 | 42,000 | 692,000 | |||||||||
|
Income
tax benefit (provision)
|
(3,160,000 | ) | 10,000 | (3,150,000 | ) | |||||||
|
Net
income (loss)
|
5,164,000 | (15,000 | ) | 5,149,000 | ||||||||
|
Nine months ended June
30, 2007
|
||||||||||||
|
Revenues
|
$ | 23,281,000 | $ | 2,777,000 | $ | 26,058,000 | ||||||
|
Income
(loss) before taxes
|
5,168,000 | (488,000 | ) | 4,680,000 | ||||||||
|
Total
assets
|
36,918,000 | 2,702,000 | 39,620,000 | |||||||||
|
Capital
expenditures
|
211,000 | 21,000 | 232,000 | |||||||||
|
Depreciation
and amortization
|
715,000 | 26,000 | 741,000 | |||||||||
|
Income
tax benefit (provision)
|
(2,665,000 | ) | 195,000 | (2,470,000 | ) | |||||||
|
Net
income (loss)
|
2,503,000 | (293,000 | ) | 2,210,000 | ||||||||
|
Three months ended
June 30, 2008
|
||||||||||||
|
Revenues
|
$ | 9,871,000 | $ | 1,283,000 | $ | 11,154,000 | ||||||
|
Income
before taxes
|
3,434,000 | 67,000 | 3,501,000 | |||||||||
|
Total
assets
|
41,401,000 | 1,390,000 | 42,791,000 | |||||||||
|
Capital
expenditures
|
90,000 | --- | 90,000 | |||||||||
|
Depreciation
and amortization
|
221,000 | 13,000 | 234,000 | |||||||||
|
Income
tax provision
|
(1,255,000 | ) | (25,000 | ) | (1,280,000 | ) | ||||||
|
Net
income
|
2,179,000 | 42,000 | 2,221,000 | |||||||||
|
Three months ended
June 30, 2007
|
||||||||||||
|
Revenues
|
$ | 8,251,000 | $ | 904,000 | $ | 9,155,000 | ||||||
|
Income
(loss) before taxes
|
2,173,000 | (209,000 | ) | 1,964,000 | ||||||||
|
Total
assets
|
36,918,000 | 2,702,000 | 39,620,000 | |||||||||
|
Capital
expenditures
|
- | 12,000 | 12,000 | |||||||||
|
Depreciation
and amortization
|
258,000 | 10,000 | 268,000 | |||||||||
|
Income
tax benefit (provision)
|
(875,000 | ) | 85,000 | (790,000 | ) | |||||||
|
Net
income (loss)
|
1,298,000 | (124,000 | ) | 1,174,000 | ||||||||
|
Item 2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Revenues
were $30,078,000 and $26,058,000 for the nine months ended June 30, 2008 and
2007, respectively. This increase of $4,020,000 (15%) was primarily
the result of an increase in public notice advertising
revenues. (Revenues were $11,154,000 and $9,155,000 for the three
months ended June 30, 2008 and 2007, respectively.)
During
the nine months ended June 30, 2008, the Company continued to benefit from the
large number of foreclosure sales in California and Arizona, for which public
notice advertising is required by law. Public notice advertising
revenues increased by $4,527,000 over the same period last year. The
Company's smaller newspapers, those other than the Los Angeles and San Francisco
Daily Journals ("The Daily Journals"), accounted for about 95% of the total
public notice advertising revenues. Public notice advertising
revenues and related advertising and other service fees constituted about 45% of
the Company's total revenues. Display advertising revenues decreased
by $114,000 (3%). Classified advertising revenues decreased by
$1,098,000 (27%) primarily due to a downturn in the employment advertising
marketplace.
Total
circulation revenues decreased by $253,000 (4%). The Daily Journals
accounted for about 77% of the Company's total circulation
revenues. The court rule and judicial profile services generated
about 14% of the total circulation revenues, with the other newspapers and
services accounting for the balance. Information system and service
revenues increased by $701,000 (25%) primarily because of increases in Sustain’s
consulting revenues. The Company’s revenues derived from Sustain’s operations
constituted about 12% and 11% of the Company’s total revenues for the nine
months ended June 30, 2008 and 2007, respectively.
Costs and
expenses increased by $680,000 (3%) to $22,347,000 from
$21,667,000. Total personnel costs increased by $308,000 (2%) to
$13,385,000. Postage and delivery expenses increased by $109,000 (9%)
mainly because of postal rate increases and pallet/sack/tray fees recently
imposed by the Post Office. Other general and administrative expenses increased
by $201,000 (8%) primarily due to increased bad debt exposure in the trustee
sale marketplace. (Costs and expenses were $7,827,000 and $7,324,000
for the three months ended June 30, 2008 and 2007, respectively.)
The
Company’s expenditures for the development of new Sustain software products are
highly significant and will materially impact overall results at least through
fiscal 2009. These costs are expensed as incurred until technological
feasibility of the product has been established, at which time such costs are
capitalized, subject to expected recovery. Sustain’s internal
development costs, which are primarily incremental costs for both employees and
outside contractors, aggregated $1,332,000 and $991,000 for the nine months
ended June 30, 2008 and 2007, respectively. If Sustain’s internal
development programs are not successful, they will significantly and adversely
impact the Company’s ability to maximize its existing investment in the Sustain
software, to service its existing customers and to compete for new opportunities
in the case management software business.
The
Company’s traditional business segment pretax profit increased by $3,156,000
(61%) from $5,168,000 to $8,324,000 primarily because of the increase in trustee
foreclosure sale notices, partially offset by the decrease in commercial
advertising revenues. Sustain’s business segment pretax loss
decreased $463,000 (95%) from $488,000 to $25,000, primarily because of the
increased consulting revenues. Future consulting revenues are subject
to uncertainty because they depend on (i) the timing of the acceptance of the
completed consulting tasks, (ii) the unpredictable needs of Sustain’s existing
customers, and (iii) Sustain’s ability to secure new customers.
Consolidated
net income was $5,149,000 and $2,210,000 for the nine months ended June 30, 2008
and 2007, respectively. On a pretax profit of $8,299,000 for the nine
months ended June 30, 2008, the Company recorded a tax provision of $3,150,000
using approximately the statutory rate. On a pretax profit of
$4,680,000 for the nine months ended June 30, 2007, the Company recorded a tax
provision of $2,470,000 which included a reserve for research and development
tax credits claimed by the Company in prior years. The Internal Revenue Service
has been examining the tax returns for years 2002 to 2006 and has proposed an
assessment that, if upheld, would result in disallowance of about $700,000 of
previously claimed credits. The Company is continuing to contest the
issue, and the ultimate resolution of this dispute cannot be ascertained at this
time. Net income per share increased to $3.54 from
$1.52.
Liquidity
and Capital Resources
During
the nine months ended June 30, 2008, the Company's cash and cash equivalents and
U.S. Treasury Note and Bill positions increased by $12,000. Cash and
cash equivalents were used primarily for paying off two real estate loans of
$4,012,000, including $3,961,000 in January 2008, and for the purchase of
capital assets of $341,000, primarily for computer software and office
equipment. The cash provided by operating activities of $4,207,000
included a net decrease in deferred subscription and other revenues of
$823,000. Proceeds from the sale of subscriptions from newspapers,
court rule books and other publications and for software licenses and
maintenance and other services are recorded as deferred revenue and are included
in earned revenue only when the services are rendered. Cash flows
from operating activities increased by $320,000 for the nine months ended June
30, 2008 as compared to the prior comparable period primarily due to the
increases in net income of $2,939,000 and accounts payable of $1,017,000,
partially offset by increases in accounts receivable of $2,300,000 and decreases
in deferred subscription and other revenues of $757,000. As of June
30, 2008, the Company had working capital of $21,581,000 before deducting the
liability for deferred subscription and other revenues of $5,395,000, which are
scheduled to be earned within one year. In addition, the Company had
long-term U.S. Treasury Notes of about $1,658,000 at June 30, 2008.
Critical
Accounting Policies
The
Company’s financial statements and accompanying notes are prepared in accordance
with U.S. generally accepted accounting principles. Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses. These
estimates and assumptions are affected by management’s application of accounting
policies. Management believes that revenue recognition, accounting for
capitalized software costs and income taxes are critical accounting
policies.
The
Company’s critical accounting policies are detailed in its Annual Report on Form
10-K for the year ended September 30, 2007. As of June 30, 2008,
there were no material changes to these disclosures, except for the accounting
pronouncement related to Accounting for Uncertainty in Income Taxes that was
adopted by the Company on October 1, 2007.
In July
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (an interpretation of FASB Statement No. 109), which was effective
for fiscal years beginning after December 15, 2006 with earlier adoption
encouraged. This Interpretation was issued to clarify the accounting
for uncertainty in income taxes recognized in the financial statements by
prescribing a recognition threshold and measurement attribute for the financial
statements recognition and measurement of a tax position taken or expected to be
taken in a tax return. The Company recognized no material
adjustment to the liability for unrecognized tax benefits upon adoption of this
interpretation. At October 1, 2007 and at the quarter ended June 30,
2008, the Company had approximately $700,000 of unrecognized tax benefits, all
of which would have an effective rate impact if recognized.
The above
discussion and analysis should be read in conjunction with the unaudited
consolidated financial statements and the notes thereto included in this
report.
Disclosure
Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q includes “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Certain statements
contained in this document, including but not limited to those in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”, are
“forward-looking” statements that involve risks and uncertainties that may cause
actual future events or results to differ materially from those described in the
forward-looking statements. Words such as “expects,” “intends,”
“anticipates,” “should,” “believes,” “will,” “plans,” “estimates,” “may,”
variations of such words and similar expressions are intended to identify such
forward-looking statements. We disclaim any intention or obligation
to revise any forward-looking statements whether as a result of new information,
future developments, or otherwise. There are many factors that could
cause actual results to differ materially from those contained in the
forward-looking statements. These factors include, among others:
risks associated with Sustain’s internal software development efforts; Sustain’s
reliance on the time and materials professional services engagement with the
California Administrative Office of the Courts for a substantial portion of its
consulting revenues; the ultimate resolution, if any, of the dispute with the
Ontario, Canada Ministries; an adverse outcome of the Internal Revenue Service’s
audit of our past research and development tax credits; material changes in the
costs of postage and paper; a further decline in subscriber and commercial
advertising revenues; collectibility of accounts receivable; the Company’s
reliance on its president and chief executive officer; and changes in accounting
guidance. In addition, such statements could be affected by general
industry and market conditions, general economic conditions (particularly in
California) and other factors. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been
correct. Important factors that could cause actual results to differ
materially from those in the forward-looking statements are disclosed in this
Form 10-Q, including in conjunction with the forward-looking statements
themselves. Additional information concerning factors that could cause actual
results to differ materially from those in the forward-looking statements is
contained from time to time in documents filed by the Company with the
Securities and Exchange Commission, including in Item 1A – “Risk Factors” in the
Company’s Annual Report on Form 10-K for the fiscal year ended September 30,
2007.
Item 4T. CONTROLS AND PROCEDURES
An
evaluation was performed under the supervision and with the participation of the
Company’s management, including Gerald L. Salzman, its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company’s disclosure controls and procedures as of June 30,
2008. Based on that evaluation, Mr. Salzman concluded that the
Company’s disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the Company in reports it files or
submits under the Securities Exchange Act of 1934, as amended, is (1) recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities Exchange Commission and (2) accumulated and
communicated to the Company’s management, including Mr. Salzman, in such a way
as to allow timely decisions regarding required disclosure. There
have been no material changes in the Company’s internal control over financial
reporting or in other factors reasonably likely to affect its internal control
over financial reporting during the quarter ended June 30,
2008.
PART
II
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
ISSUER
PURCHASES OF EQUITY SECURITIES
|
Period
|
Total
Number
of
Shares
Purchased
|
Average
Price Paid
per
Share
|
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plans or Programs
|
Maximum
Number
of
Shares that May
Yet
Be Purchased
Under
the Plans
or
Programs
|
|
4/1/08-4/30/08
|
-
|
-
|
(a)
|
Not
applicable
|
|
5/1/08-5/31/08
|
-
|
-
|
(a)
|
Not
applicable
|
|
6/1/08-6/30/08
|
-
|
-
|
(a)
|
Not
applicable
|
|
Total
|
-
|
-
|
(a)
|
Not
applicable
|
(a) The
Company’s common stock repurchase program was implemented in 1987 in combination
with the Company’s Deferred Management Incentive Plan, and therefore the
Company’s per share earnings have not been diluted by grants of “units” under
the Deferred Management Incentive Plan. Each unit entitles the
recipient to a designated share of the pre-tax earnings of the Company on a
consolidated basis, or a designated share of the pre-tax earnings attributable
to only Sustain or the Company's traditional business, depending on the
recipient’s responsibilities. There were no shares purchased during
the third quarter of fiscal 2008. The Company’s stock repurchase program remains
in effect, and the Company plans to repurchase shares from time to time as it
deems appropriate (including, if necessary, to prevent any additional dilution
that may be caused by the Deferred Management Incentive Plan).
Item 6. EXHIBITS
|
|
Certification
by Chief Executive Officer and Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of
2002.
|
|
|
Certification
by Chief Executive Officer and Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
DAILY
JOURNAL CORPORATION
|
|
|
(Registrant)
|
|
|
/s/
Gerald L. Salzman
|
|
|
Gerald
L. Salzman
|
|
|
Chief
Executive Officer
|
|
|
President
|
|
|
Chief
Financial Officer
|
|
|
Treasurer
|
DATE: August
12, 2008
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