DAILY JOURNAL CORP - Quarter Report: 2009 March (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
þ
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
1934
|
For the
quarterly period ended March 31, 2009
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes: o No:
o
Indicate
by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See 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 April 30,
2009
|
|
|
Common
Stock, par value $ .01 per share
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1,456,006
shares
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1 of
17
DAILY JOURNAL CORPORATION
INDEX
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Page
Nos.
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|||
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PART
I
|
Financial
Information
|
||
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Item
1.
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|||
|
3
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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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|||
|
7
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|||
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Item
2.
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12
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||
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Item
4T.
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15
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||
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Part
II
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Other
Information
|
||
|
Item
2.
|
16
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||
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Item
4.
|
16
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||
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Item
6.
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17
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PART I
Item 1.
FINANCIAL STATEMENTS
DAILY
JOURNAL CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
March
31
|
September
30
|
|||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 2,807,000 | $ | 994,000 | ||||
|
U.S.
Treasury Notes and Bills
|
7,705,000 | 20,726,000 | ||||||
|
Marketable
securities, all common stocks
|
24,713,000 | --- | ||||||
|
Accounts
receivable, less allowance for doubtful accounts of
$300,000
|
8,038,000 | 9,434,000 | ||||||
|
Inventories
|
25,000 | 26,000 | ||||||
|
Prepaid
expenses and other assets
|
214,000 | 194,000 | ||||||
|
Deferred
income taxes
|
---
|
779,000 | ||||||
|
Total
current assets
|
43,502,000 | 32,153,000 | ||||||
|
Property,
plant and equipment, at cost
|
||||||||
|
Land,
buildings and improvements
|
12,945,000 | 12,938,000 | ||||||
|
Furniture,
office equipment and computer software
|
3,649,000 | 3,718,000 | ||||||
|
Machinery
and equipment
|
2,093,000 | 2,041,000 | ||||||
| 18,687,000 | 18,697,000 | |||||||
|
Less
accumulated depreciation
|
(8,235,000 | ) | (7,989,000 | ) | ||||
| 10,452,000 | 10,708,000 | |||||||
|
U.S.
Treasury Notes
|
--- | 1,663,000 | ||||||
|
Deferred
income taxes
|
1,747,000 | 1,573,000 | ||||||
| $ | 55,701,000 | $ | 46,097,000 | |||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable
|
$ | 3,192,000 | $ | 2,828,000 | ||||
|
Accrued
liabilities
|
2,728,000 | 3,668,000 | ||||||
|
Income
taxes
|
1,054,000 | 1,051,000 | ||||||
|
Deferred
income taxes
|
2,780,000 | --- | ||||||
|
Deferred
subscription and other revenues
|
5,376,000 | 5,847,000 | ||||||
|
Total
current liabilities
|
15,130,000 | 13,394,000 | ||||||
|
Long
term liabilities
|
||||||||
|
Accrued
liabilities
|
3,600,000 | 3,200,000 | ||||||
|
Total
long term liabilities
|
3,600,000 | 3,200,000 | ||||||
|
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; 1,456,006 and
1,500,299 shares, at March 31, 2009 and September 30, 2008, respectively,
outstanding
|
15,000 | 15,000 | ||||||
|
Additional
paid-in capital
|
1,851,000 | 1,907,000 | ||||||
|
Retained
earnings
|
30,291,000 | 28,382,000 | ||||||
|
Accumulated
other comprehensive income
|
5,720,000 | 105,000 | ||||||
|
Less
47,445 treasury shares, at cost
|
(906,000 | ) | (906,000 | ) | ||||
|
Total
shareholders' equity
|
36,971,000 | 29,503,000 | ||||||
| $ | 55,701,000 | $ | 46,097,000 | |||||
See
accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
|
Three
months
ended March 31
|
||||||||
|
2009
|
2008
|
|||||||
|
Revenues
|
||||||||
|
Advertising
|
$ | 5,360,000 | $ | 5,701,000 | ||||
|
Circulation
|
1,913,000 | 2,148,000 | ||||||
|
Advertising
service fees and other
|
1,012,000 | 794,000 | ||||||
|
Information
systems and services
|
1,367,000 | 1,295,000 | ||||||
| 9,652,000 | 9,938,000 | |||||||
|
Costs
and expenses
|
||||||||
|
Salaries
and employee benefits
|
4,250,000 | 4,628,000 | ||||||
|
Newsprint
and printing expenses
|
432,000 | 474,000 | ||||||
|
Other
outside services
|
978,000 | 878,000 | ||||||
|
Postage
and delivery expenses
|
365,000 | 403,000 | ||||||
|
Depreciation
and amortization
|
165,000 | 228,000 | ||||||
|
Other
general and administrative expenses
|
894,000 | 882,000 | ||||||
| 7,084,000 | 7,493,000 | |||||||
|
Income
from operations
|
2,568,000 | 2,445,000 | ||||||
|
Other
income and (expense)
|
||||||||
|
Interest
income
|
121,000 | 246,000 | ||||||
|
Gain
on sales of investments
|
76,000 | - | ||||||
|
Interest
expense
|
(10,000 | ) | (18,000 | ) | ||||
|
Income
before taxes
|
2,755,000 | 2,673,000 | ||||||
|
Provision
for income taxes
|
1,060,000 | 1,020,000 | ||||||
|
Net
income
|
$ | 1,695,000 | $ | 1,653,000 | ||||
|
Weighted
average number of common shares outstanding - basic and
diluted
|
1,409,330 | 1,452,854 | ||||||
|
Basic
and diluted net income per share
|
$ | 1.20 | $ | 1.14 | ||||
See
accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
|
Six
months
ended March 31
|
||||||||
|
2009
|
2008
|
|||||||
|
Revenues
|
||||||||
|
Advertising
|
$ | 11,082,000 | $ | 10,834,000 | ||||
|
Circulation
|
4,004,000 | 4,366,000 | ||||||
|
Advertising
service fees and other
|
1,927,000 | 1,529,000 | ||||||
|
Information
systems and services
|
2,450,000 | 2,195,000 | ||||||
| 19,463,000 | 18,924,000 | |||||||
|
Costs
and expenses
|
||||||||
|
Salaries
and employee benefits
|
8,353,000 | 8,774,000 | ||||||
|
Newsprint
and printing expenses
|
968,000 | 1,002,000 | ||||||
|
Other
outside services
|
1,898,000 | 1,683,000 | ||||||
|
Postage
and delivery expenses
|
760,000 | 851,000 | ||||||
|
Depreciation
and amortization
|
380,000 | 458,000 | ||||||
|
Other
general and administrative expenses
|
1,837,000 | 1,752,000 | ||||||
| 14,196,000 | 14,520,000 | |||||||
|
Income
from operations
|
5,267,000 | 4,404,000 | ||||||
|
Other
income and (expense)
|
||||||||
|
Interest
income
|
275,000 | 503,000 | ||||||
|
Gain
on sales of investments
|
76,000 | - | ||||||
|
Interest
expense
|
(20,000 | ) | (109,000 | ) | ||||
|
Income
before taxes
|
5,598,000 | 4,798,000 | ||||||
|
Provision
for income taxes
|
2,155,000 | 1,870,000 | ||||||
|
Net
income
|
$ | 3,443,000 | $ | 2,928,000 | ||||
|
Weighted
average number of common shares outstanding - basic and
diluted
|
1,420,263 | 1,452,854 | ||||||
|
Basic
and diluted net income per share
|
$ | 2.42 | $ | 2.02 | ||||
See
accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
Six months ended March 31
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
income
|
$ | 3,443,000 | $ | 2,928,000 | ||||
|
Adjustments
to reconcile net income to net cash provided by operations
|
||||||||
|
Depreciation
and amortization
|
380,000 | 458,000 | ||||||
|
Deferred
income taxes
|
(134,000 | ) | (138,000 | ) | ||||
|
Premium
amortized (discount earned) on U.S. Treasury Bills
|
61,000 | (37,000 | ) | |||||
|
Changes
in assets and liabilities
|
||||||||
|
(Increase)
decrease in current assets
|
||||||||
|
Accounts
receivable, net
|
1,396,000 | (401,000 | ) | |||||
|
Inventories
|
1,000 | (2,000 | ) | |||||
|
Prepaid
expenses and other assets
|
(20,000 | ) | (75,000 | ) | ||||
|
Increase
(decrease) in current liabilities
|
||||||||
|
Accounts
payable
|
364,000 | 368,000 | ||||||
|
Accrued
liabilities
|
(540,000 | ) | (146,000 | ) | ||||
|
Income
taxes
|
3,000 | 239,000 | ||||||
|
Deferred
subscription and other revenues
|
(471,000 | ) | (436,000 | ) | ||||
|
Cash
provided by operating activities
|
4,483,000 | 2,758,000 | ||||||
|
Cash
flows from investing activities
|
||||||||
|
Maturities
and sales of U.S. Treasury Notes and Bills
|
16,748,000 | (3,130,000 | ) | |||||
|
Purchases
of U.S. Treasury Notes and Bills
|
(2,203,000 | ) | 4,819,000 | |||||
|
Purchases
of marketable securities
|
(15,501,000 | ) | - | |||||
|
Purchases
of property, plant and equipment, net
|
(124,000 | ) | (251,000 | ) | ||||
|
Net
cash provided by (used in) investing activities
|
(1,080,000 | ) | 1,438,000 | |||||
|
Cash
flows from financing activities
|
||||||||
|
Payment
of loan principals
|
-
|
(4,012,000 | ) | |||||
|
Purchase
of common stock
|
(1,590,000 | ) |
-
|
|||||
|
Cash
used in financing activities
|
(1,590,000 | ) | (4,012,000 | ) | ||||
|
Increase
in cash and cash equivalents
|
1,813,000 | 184,000 | ||||||
|
Cash
and cash equivalents
|
||||||||
|
Beginning
of period
|
994,000 | 1,069,000 | ||||||
|
End
of period
|
$ | 2,807,000 | $ | 1,253,000 | ||||
|
Interest
paid during period
|
$ | - | $ | 77,000 | ||||
See
accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
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 and Arizona, as well as the California Lawyer, 8-K and NextGen
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 and
Colorado.
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 March 31, 2009, and of its results of operations for the three- and six-month
periods ended March 31, 2009 and 2008 and its cash flows for the six months
ended March 31, 2009 and 2008. The results of operations for the six
months ended March 31, 2009 and 2008 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, 2008. Certain reclassifications of previously reported
amounts have been made to conform to the current year’s
presentation.
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
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. 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. The
Internal Revenue Service has been examining the Company’s 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 research and development
credits. The Company is continuing to contest the issue, and the
ultimate resolution of this dispute cannot be ascertained at this
time. As of March 31, 2009, 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 March 31, 2009, the Company had accrued
$200,000, including an additional $20,000 during this six-month period. The
Company has not accrued the penalties related to any potential
assessment.
Note 6
- Investments in U.S. Treasury Notes and Bills and Marketable
Securities
Investments
in U.S. Treasury Notes and Bills and marketable securities categorized as
“available-for-sale” are stated at fair value, with the unrealized gains and
losses, net of taxes, reported in accumulated other comprehensive
income. Consequently, as of March 31, 2009, an unrealized gain of
$5,720,000, net of taxes, had been recorded in “Accumulated other comprehensive
income” in the accompanying Consolidated Balance Sheet. The Company
uses quoted prices in active markets to measure the fair value of its
investments on a recurring basis pursuant to SFAS 157.
Note 7 -
Comprehensive Income
Comprehensive
income, which includes net income plus net unrealized gains (losses) on U.S.
Treasury Notes and Bills and marketable securities, was $9,058,000 and
$3,117,000 for the six-month periods ended March 31, 2009 and 2008,
respectively.
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 six-month periods ended
March 31, 2009 and 2008 were $302,000 and $308,000, respectively.
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
|
|||||||||||
|
|
Traditional Business
|
Sustain
|
for
both Segments
|
|||||||||
|
Six months ended March 31,
2009
|
||||||||||||
|
Revenues
|
$ | 17,013,000 | $ | 2,450,000 | $ | 19,463,000 | ||||||
|
Pretax
income
|
5,581,000 | 17,000 | 5,598,000 | |||||||||
|
Total
assets
|
54,413,000 | 1,288,000 | 55,701,000 | |||||||||
|
Capital
expenditures
|
104,000 | 20,000 | 124,000 | |||||||||
|
Depreciation
and amortization
|
352,000 | 28,000 | 380,000 | |||||||||
|
Income
tax expense
|
(2,150,000 | ) | (5,000 | ) | (2,155,000 | ) | ||||||
|
Net
income
|
3,431,000 | 12,000 | 3,443,000 | |||||||||
|
Six months ended March 31,
2008
|
||||||||||||
|
Revenues
|
$ | 16,729,000 | $ | 2,195,000 | $ | 18,924,000 | ||||||
|
Pretax
income (loss)
|
4,890,000 | (92,000 | ) | 4,798,000 | ||||||||
|
Total
assets
|
37,711,000 | 1,341,000 | 39,052,000 | |||||||||
|
Capital
expenditures
|
240,000 | 11,000 | 251,000 | |||||||||
|
Depreciation
and amortization
|
429,000 | 29,000 | 458,000 | |||||||||
|
Income
tax benefit (expense)
|
(1,905,000 | ) | 35,000 | (1,870,000 | ) | |||||||
|
Net
income (loss)
|
2,985,000 | (57,000 | ) | 2,928,000 | ||||||||
|
Three months ended March 31,
2009
|
||||||||||||
|
Revenues
|
$ | 8,285,000 | $ | 1,367,000 | $ | 9,652,000 | ||||||
|
Pretax
income
|
2,674,000 | 81,000 | 2,755,000 | |||||||||
|
Total
assets
|
54,413,000 | 1,288,000 | 55,701,000 | |||||||||
|
Capital
expenditures
|
21,000 | 10,000 | 31,000 | |||||||||
|
Depreciation
and amortization
|
152,000 | 13,000 | 165,000 | |||||||||
|
Income
tax expense
|
(1,030,000 | ) | (30,000 | ) | (1,060,000 | ) | ||||||
|
Net
income
|
1,644,000 | 51,000 | 1,695,000 | |||||||||
|
Three months ended March 31,
2008
|
||||||||||||
|
Revenues
|
$ | 8,643,000 | $ | 1,295,000 | $ | 9,938,000 | ||||||
|
Pretax
income
|
2,596,000 | 77,000 | 2,673,000 | |||||||||
|
Total
assets
|
37,711,000 | 1,341,000 | 39,052,000 | |||||||||
|
Capital
expenditures
|
110,000 | --- | 110,000 | |||||||||
|
Depreciation
and amortization
|
214,000 | 14,000 | 228,000 | |||||||||
|
Income
tax expense
|
(980,000 | ) | (40,000 | ) | (1,020,000 | ) | ||||||
|
Net
income
|
1,616,000 | 37,000 | 1,653,000 | |||||||||
Note 11 - Recent Accounting
Pronouncements
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
(“SFAS 157”), which provides guidance for using fair value to measure assets and
liabilities, defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. The Company adopted all provisions of SFAS 157 in
October 2008 and recognized no material adjustments to its assets and
liabilities.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-including an amendment of FASB
Statement No. 115” (“SFAS 159”). The Company adopted SFAS 159 in October
2008 and did not elect the fair value option. It continues to record
the unrealized market gain (loss) as “Other comprehensive income” on its
Consolidated Balance Sheets.
|
Item 2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
Company continues to operate as two different
businesses: (1) The “traditional business”, being the
business of newspaper and magazine publishing and related services that the
Company had before 1999 when it purchased Sustain, and (2) the Sustain software
business, which supplies case management software systems and related products
to courts and other justice agencies, including district attorney offices and
administrative law organizations.
During
the six months ended March 31, 2009, consolidated pretax income increased by
$800,000 (17%) to $5,598,000 from $4,798,000 in the six months ended March 31,
2008. The Company’s traditional business segment pretax profit increased by
$691,000 (14%) to $5,581,000 from $4,890,000 primarily because of an increase in
trustee foreclosure sale notices, partially offset by a decrease in commercial
advertising revenues. Sustain’s business segment pretax income
increased $109,000 (118%) to $17,000 from a loss of $92,000,
primarily because of increased consulting revenues.
|
Reportable
Segments
|
Total
Results
|
|||||||||||
|
|
Traditional
Business
|
Sustain
|
for both Segments
|
|||||||||
|
Six months ended March 31,
2009
|
||||||||||||
|
Revenues
|
$ | 17,013,000 | $ | 2,450,000 | $ | 19,463,000 | ||||||
|
Pretax
income
|
5,581,000 | 17,000 | 5,598,000 | |||||||||
|
Income
tax expense
|
(2,150,000 | ) | (5,000 | ) | (2,155,000 | ) | ||||||
|
Net
income
|
3,431,000 | 12,000 | 3,443,000 | |||||||||
|
Six months ended March 31,
2008
|
||||||||||||
|
Revenues
|
$ | 16,729,000 | $ | 2,195,000 | $ | 18,924,000 | ||||||
|
Pretax
income (loss)
|
4,890,000 | (92,000 | ) | 4,798,000 | ||||||||
|
Income
tax benefit (expense)
|
(1,905,000 | ) | 35,000 | (1,870,000 | ) | |||||||
|
Net
income (loss)
|
2,985,000 | (57,000 | ) | 2,928,000 | ||||||||
Consolidated
revenues were $19,436,000 and $18,924,000 for the six months ended March 31,
2009 and 2008, respectively. This increase of $512,000 (3%) was
primarily from an increase in public notice advertising revenues of $1,612,000.
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. The Company's smaller newspapers, those other than the Los
Angeles and San Francisco Daily Journals ("The Daily Journals"), accounted for
about 96% of the total public notice advertising revenues. Public
notice advertising revenues and related advertising and other service fees
constituted about 51% of the Company's total revenues. Display
advertising revenues decreased by $380,000 (16%). Classified advertising
revenues decreased by $984,000 (46%) primarily due to a downturn in the
employment advertising marketplace. (Consolidated revenues were
$9,652,000 and $9,938,000 for the three months ended March 31, 2009 and 2008,
respectively.)
Total
circulation revenues decreased by $362,000 (8%). The Daily Journals
accounted for about 79% 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. Advertising service fees and
other increased by $398,000 (26%) due primarily to increased fees generated by
the placement of more trustee foreclosure sale notices in publications not owned
by the Company. Advertising service fees and other are traditional
business segment revenues, which include primarily (i) agency commissions
received from outside newspapers in which the advertising is placed and (ii)
fees generated when filing notices with government
agencies. Sustain’s information system and service revenues increased
by $255,000 (12%) primarily because of increases in consulting revenues. The
Company’s revenues derived from Sustain’s operations constituted about 13% and
12% of the Company’s total revenues for the six months ended March 31, 2009 and
2008, respectively.
Costs and
expenses decreased by $324,000 (2%) to $14,196,000 from
$14,520,000. Total personnel costs decreased by $421,000 (5%) to
$8,353,000 primarily due to savings from departmental reorganizations, partially
offset by an annual salary adjustment. Postage and delivery expenses
decreased by $91,000 (11%) mainly because there were fewer
subscribers. Other general and administrative expenses increased by
$85,000 (5%) primarily due to increased accounting and legal
fees. (Costs and expenses were $7,084,000 and $7,493,000 for the
three months ended March 31, 2009 and 2008, 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 $1,061,000 and $878,000 for the six months ended
March 31, 2009 and 2008, 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. To date, three courts have
contracted to install the new Web-based version of Sustain’s
software.
Whether
the large increase in traditional business segment pretax profit will be
sustained throughout fiscal 2009 is very much dependant on the number of
California and Arizona foreclosure sales and the offsetting effect of a
continuing decline in display and classified advertising. At some
point, the number of foreclosure sales undoubtedly will slow, and because fewer
advertisements will then be required, so will the Company’s traditional business
segment earnings. Whether Sustain generates a profit or loss in
fiscal 2009 likely will be determined based on its consulting revenues, which
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 $3,443,000 and $2,928,000 for the six months ended March 31, 2009
and 2008, respectively. On a pretax profit of $5,598,000 and
$4,798,000 for the six months ended March 31, 2009 and 2008, the Company
recorded a tax provision of $2,155,000 and $1,870,000,
respectively. 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 research
and development credits. As of March 31, 2009, the Company had approximately
$700,000 of unrecognized tax benefits, all of which would have an effective rate
impact if recognized. 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 $2.42 from
$2.02.
Liquidity
and Capital Resources
During
the six months ended March 31, 2009, the Company's cash and cash equivalents,
U.S. Treasury Note and Bill and marketable security positions increased by
$11,842,000, including an unrealized gain on the investments of
$9,302,000. Cash and cash equivalents and U.S. Treasury Notes and
Bills were used primarily for the purchase of marketable securities of
$15,501,000, capital assets of $124,000 (mostly computer software and office
equipment) and the Company’s common shares for an aggregate amount of
$1,590,000. All the marketable securities are common stocks, and almost all of
the unrealized appreciation was in common stocks. The cash provided
by operating activities of $4,483,000 included a net decrease in deferred
subscription and other revenues of $471,000. 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
$1,725,000 during the six months ended March 31, 2009 as compared to the prior
period primarily due to the decreases in accounts receivable of
$1,797,000.
As of
March 31, 2009, the Company had working capital of $28,372,000, including the
liability for deferred subscription and other revenues of $5,376,000 which are
scheduled to be earned within one year and the deferred tax liability of
$3,582,000 for the unrealized gain on the investments. The Company
believes that it will be able to fund its operations for the foreseeable future
through its cash flows from operating activities and its current working
capital.
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, 2008.
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; possible changes in the law, particularly changes
limiting or eliminating the requirements for public notice advertising; 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 the Company’s Annual Report
on Form 10-K for the fiscal year ended September 30, 2008.
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 March 31,
2009. 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 March 31,
2009.
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
|
|||||||
|
1/1/09-1/31/09
|
- | - |
(a)
|
Not
applicable
|
|||||||
|
2/1/09-2/28/09
|
500 | $ | 34.45 |
(a)
|
Not
applicable
|
||||||
|
3/1/09-3/31/09
|
677 | $ | 34.40 |
(a)
|
Not
applicable
|
||||||
|
Total
|
1,177 | $ | 34.42 |
(a)
|
Not
applicable
|
||||||
(a) The
Company’s common stock repurchase program was implemented in 1987 in combination
with the Company’s Management Incentive Plan, and therefore the Company’s per
share earnings have not been diluted by grants of “units” under the 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. All shares purchased were made in open-market
transactions. 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 Management Incentive Plan).
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
The
Company’s annual meeting was held on February 4, 2009. The matters
submitted to a vote of security holders were the election of directors, the
ratification of the appointment of Ernst & Young LLP as independent
accountants for the Company for the current fiscal year and the ratification of
the Company’s Management Incentive Plan as modified.
Each of
the nominees to the board of directors was elected. The following
votes were received as to the election of the board of directors:
|
Votes
|
|||||||||
|
Withheld
|
Broker
|
||||||||
|
Nominee's Name
|
For
|
Authority
|
Non-Votes
|
||||||
|
Charles
T. Munger
|
1,245,780
|
4,520
|
0
|
||||||
|
J.
P. Guerin
|
1,249,080
|
1,220
|
0
|
||||||
|
Gerald
L. Salzman
|
1,246,123
|
4,177
|
0
|
||||||
|
Peter
D. Kaufman
|
1,247,691
|
2,609
|
0
|
||||||
|
George
C. Good
|
1,247,691
|
2,609
|
0
|
||||||
Ernst
& Young LLP was ratified as the Company’s independent accountants with
1,247,845 votes in favor, 3,212 votes against, 1,315 abstentions and no broker
non-votes. The ratification of the Company’s Management Incentive
Plan was also approved with 1,236,690 votes in favor, 9,812 votes against, 5,870
abstentions and no broker non-votes.
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: May
8, 2009
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