DAILY JOURNAL CORP - Quarter Report: 2010 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, 2010
or
|
£
|
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)
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(I.R.S.
Employer Identification No.)
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|
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915
East First Street
|
||
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Los Angeles, California
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90012-4050
|
|
|
(Address
of principal executive offices)
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(Zip
code)
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(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: T No:
£
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: £ No:
£
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: £
|
Accelerated
Filer:
£
|
|
|
Non-accelerated Filer:
£
|
Smaller
Reporting Company: T
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes: £ No:
T
Indicate
the number of shares outstanding of each of the issuer's classes of common stock
as of the latest practicable date.
|
Class
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Outstanding at April 30,
2010
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|
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Common
Stock, par value $ .01 per share
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1,447,028
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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|||
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Item
1.
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Financial
Statements
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||
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3
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|||
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4
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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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|||
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Item
2.
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11
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||
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Item
4T.
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14
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||
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Part
II Other Information
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|||
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Item
5.
|
15
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||
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Item
6.
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16
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||
PART I
Item 1.
FINANCIAL STATEMENTS
DAILY
JOURNAL CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
March 31,
2010
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September 30,
2009
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|||||||
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(Unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 3,049,000 | $ | 1,425,000 | ||||
|
U.S.
Treasury Notes and Bills
|
9,138,000 | 6,627,000 | ||||||
|
Marketable
securities, including common stocks of $53,160,000 and bonds of $6,702,000
at March 31, 2010 and common stocks of $47,917,000 and bonds of $6,158,000
at September 30, 2009
|
59,862,000 | 54,075,000 | ||||||
|
Accounts
receivable, less allowance for doubtful accounts of $300,000 at March 31,
2010 and September 30, 2009
|
8,559,000 | 10,221,000 | ||||||
|
Inventories
|
29,000 | 19,000 | ||||||
|
Prepaid
expenses and other assets
|
260,000 | 238,000 | ||||||
|
Total
current assets
|
80,897,000 | 72,605,000 | ||||||
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Property,
plant and equipment, at cost
|
||||||||
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Land,
buildings and improvements
|
12,830,000 | 12,858,000 | ||||||
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Furniture,
office equipment and computer software
|
2,994,000 | 3,238,000 | ||||||
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Machinery
and equipment
|
2,134,000 | 2,139,000 | ||||||
| 17,958,000 | 18,235,000 | |||||||
|
Less
accumulated depreciation and amortization
|
(8,079,000 | ) | (8,086,000 | ) | ||||
| 9,879,000 | 10,149,000 | |||||||
|
Deferred
income taxes
|
2,979,000 | 1,995,000 | ||||||
| $ | 93,755,000 | $ | 84,749,000 | |||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable
|
$ | 2,871,000 | $ | 3,213,000 | ||||
|
Accrued
liabilities
|
2,656,000 | 3,548,000 | ||||||
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Income
taxes
|
723,000 | 857,000 | ||||||
|
Deferred
income taxes
|
14,986,000 | 12,112,000 | ||||||
|
Deferred
subscription and other revenues
|
4,746,000 | 5,340,000 | ||||||
|
Total
current liabilities
|
25,982,000 | 25,070,000 | ||||||
|
Long
term liabilities
|
||||||||
|
Accrued
liabilities
|
4,900,000 | 4,360,000 | ||||||
|
Commitments
and contingencies (Notes 8 and 9)
|
--- | --- | ||||||
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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;1,447,028 shares, at
March 31, 2010 and September 30, 2009, outstanding
|
14,000 | 14,000 | ||||||
|
Additional
paid-in capital
|
1,839,000 | 1,839,000 | ||||||
|
Retained
earnings
|
38,323,000 | 34,507,000 | ||||||
|
Accumulated
other comprehensive income
|
24,450,000 | 20,712,000 | ||||||
|
Less
66,282 treasury shares, at March 31, 2010 and September 30, 2009, at
cost
|
(1,753,000 | ) | (1,753,000 | ) | ||||
|
Total
shareholders' equity
|
62,873,000 | 55,319,000 | ||||||
| $ | 93,755,000 | $ | 84,749,000 | |||||
See
accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
|
Three
months ended
March 31
|
||||||||
|
2010
|
2009
|
|||||||
|
Revenues
|
||||||||
|
Advertising
|
$ | 5,530,000 | $ | 5,360,000 | ||||
|
Circulation
|
1,756,000 | 1,913,000 | ||||||
|
Advertising
service fees and other
|
926,000 | 1,012,000 | ||||||
|
Information
systems and services
|
898,000 | 1,367,000 | ||||||
| 9,110,000 | 9,652,000 | |||||||
|
Costs
and expenses
|
||||||||
|
Salaries
and employee benefits
|
4,073,000 | 4,250,000 | ||||||
|
Newsprint
and printing expenses
|
358,000 | 432,000 | ||||||
|
Other
outside services
|
704,000 | 978,000 | ||||||
|
Postage
and delivery expenses
|
357,000 | 365,000 | ||||||
|
Depreciation
and amortization
|
163,000 | 165,000 | ||||||
|
Other
general and administrative expenses
|
873,000 | 894,000 | ||||||
| 6,528,000 | 7,084,000 | |||||||
|
Income
from operations
|
2,582,000 | 2,568,000 | ||||||
|
Other
income and (expense)
|
||||||||
|
Dividends
and interest income
|
225,000 | 121,000 | ||||||
|
Gain
on sales of investments
|
--- - | 76,000 | ||||||
|
Interest
expense
|
(9,000 | ) | (10,000 | ) | ||||
|
Income
before taxes
|
2,798,000 | 2,755,000 | ||||||
|
Provision
for income taxes
|
1,070,000 | 1,060,000 | ||||||
|
Net
income
|
$ | 1,728,000 | $ | 1,695,000 | ||||
|
Weighted
average number of common shares outstanding - basic and
diluted
|
1,380,746 | 1,409,330 | ||||||
|
Basic
and diluted net income per share
|
$ | 1.25 | $ | 1.20 | ||||
See
accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
|
Six
months ended
March 31
|
||||||||
|
2010
|
2009
|
|||||||
|
Revenues
|
||||||||
|
Advertising
|
$ | 11,521,000 | $ | 11,082,000 | ||||
|
Circulation
|
3,625,000 | 4,004,000 | ||||||
|
Advertising
service fees and other
|
2,046,000 | 1,927,000 | ||||||
|
Information
systems and services
|
1,776,000 | 2,450,000 | ||||||
| 18,968,000 | 19,463,000 | |||||||
|
Costs
and expenses
|
||||||||
|
Salaries
and employee benefits
|
8,178,000 | 8,353,000 | ||||||
|
Newsprint
and printing expenses
|
760,000 | 968,000 | ||||||
|
Other
outside services
|
1,524,000 | 1,898,000 | ||||||
|
Postage
and delivery expenses
|
725,000 | 760,000 | ||||||
|
Depreciation
and amortization
|
315,000 | 380,000 | ||||||
|
Other
general and administrative expenses
|
1,727,000 | 1,837,000 | ||||||
| 13,229,000 | 14,196,000 | |||||||
|
Income
from operations
|
5,739,000 | 5,267,000 | ||||||
|
Other
income and (expense)
|
||||||||
|
Dividends
and interest income
|
445,000 | 275,000 | ||||||
|
Gain
on sales of investments
|
--- - | 76,000 | ||||||
|
Interest
expense
|
(18,000 | ) | (20,000 | ) | ||||
|
Income
before taxes
|
6,166,000 | 5,598,000 | ||||||
|
Provision
for income taxes
|
2,350,000 | 2,155,000 | ||||||
|
Net
income
|
$ | 3,816,000 | $ | 3,443,000 | ||||
|
Weighted
average number of common shares outstanding - basic and
diluted
|
1,380,746 | 1,420,263 | ||||||
|
Basic
and diluted net income per share
|
$ | 2.76 | $ | 2.42 | ||||
DAILY JOURNAL CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
Six
months ended
March 31
|
||||||||
|
2010
|
2009
|
|||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
income
|
$ | 3,816,000 | $ | 3,443,000 | ||||
|
Adjustments
to reconcile net income to net cash provided by operations
|
||||||||
|
Depreciation
and amortization
|
315,000 | 380,000 | ||||||
|
Deferred
income taxes
|
(132,000 | ) | (134,000 | ) | ||||
|
Net
premium amortized and discount earned on U.S. Treasury Notes and
Bills
|
--- | 61,000 | ||||||
|
Changes
in assets and liabilities
|
||||||||
|
(Increase)
decrease in current assets
|
||||||||
|
Accounts
receivable, net
|
1,662,000 | 1,396,000 | ||||||
|
Inventories
|
(10,000 | ) | 1,000 | |||||
|
Prepaid
expenses and other assets
|
(22,000 | ) | (20,000 | ) | ||||
|
Increase
(decrease) in current liabilities
|
||||||||
|
Accounts
payable
|
(342,000 | ) | 364,000 | |||||
|
Accrued
liabilities
|
(352,000 | ) | (540,000 | ) | ||||
|
Income
taxes
|
(134,000 | ) | 3,000 | |||||
|
Deferred
subscription and other revenues
|
(594,000 | ) | (471,000 | ) | ||||
|
Net
cash provided by operating activities
|
4,207,000 | 4,483,000 | ||||||
|
Cash
flows from investing activities
|
||||||||
|
Maturities
and sales of U.S. Treasury Notes and Bills
|
20,140,000 | 16,748,000 | ||||||
|
Purchases
of U.S. Treasury Notes and Bills
|
(22,678,000 | ) | (2,203,000 | ) | ||||
|
Purchases
of marketable securities
|
--- | (15,501,000 | ) | |||||
|
Purchases
of property, plant and equipment
|
(45,000 | ) | (124,000 | ) | ||||
|
Net
cash used in investing activities
|
(2,583,000 | ) | (1,080,000 | ) | ||||
|
Cash
flows from financing activities
|
||||||||
|
Purchase
of common stock
|
--- | (1,590,000 | ) | |||||
|
Cash
used in financing activities
|
--- | (1,590,000 | ) | |||||
|
Increase
in cash and cash equivalents
|
1,624,000 | 1,813,000 | ||||||
|
Cash
and cash equivalents
|
||||||||
|
Beginning
of period
|
1,425,000 | 994,000 | ||||||
|
End
of period
|
$ | 3,049,000 | $ | 2,807,000 | ||||
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 and NextGen magazines,
and produces several specialized information services. Sustain Technologies,
Inc. ("Sustain"), a wholly owned subsidiary, supplies case management software
systems and related products to courts and other justice agencies, including
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 and Recent Accounting Pronouncements
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, 2010, and of its results of operations and cash flows for the
three- and six-month periods ended March 31, 2010 and 2009. The results of
operations for the six months ended March 31, 2010 and 2009 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, 2009.
Recent
Accounting Pronouncements
In
February 2010, the FASB issued an amendment to previously issued guidance on
subsequent events. The amended guidance removed the requirement for SEC filers
to disclose the date through which subsequent events were evaluated in both
originally issued and reissued financial statements.
In
January 2010, the FASB issued authoritative guidance related to Fair Value
Disclosure requiring the Company to (i) disclose the amounts of transfers in and
out of Level 1 and Level 2 fair value measurements and the reasons for the
transfers and (ii) present separately information about purchases, sales,
issuances and settlements in the reconciliation of Level 3 measurements. This
guidance also provides clarification of existing disclosures requiring the
Company to determine each class of the investments based on risk and to disclose
the valuation techniques and inputs used to measure fair value for both Level 2
and Level 3 measurements. The Company adopted this guidance effective January 1,
2010, which did not have an impact on the Company's consolidated financial
statements.
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 in
accordance with ASC Topic 985-605 Software Revenue
Recognition. 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 upon acceptance
by the customers or as performed (using a percentage-of-completion method)
according to ASC Topic 985-605.
Note 5 -
Income Taxes
On a
pretax profit of $6,166,000 and $5,598,000 for the six months ended March 31,
2010 and 2009, respectively, the Company recorded a tax provision of $2,350,000
and $2,155,000, respectively, which was somewhat lower than the amount computed
using the statutory rate because of the available dividends received deduction
and the domestic production activity deduction. Consequently, the
Company's effective tax rate was 38% and 38.5% for the six months ended March
31, 2010 and 2009, respectively. The Internal Revenue Service
has examined the Company's tax returns for years 2002 to 2007 and has proposed
an assessment that, if upheld, would result in the disallowance of approximately
$700,000 of previously claimed research and development credits. The
Company is continuing to contest the issue in the United States Tax Court, and
the ultimate resolution of this dispute cannot be ascertained at this
time. At March 31, 2010 and September 30, 2009, the Company had a
reserve of approximately $700,000 primarily pertaining to these claimed research
and development tax credits. If these benefits are recognized, there
would be an impact on the effective tax rate in the period of
recognition. Interest accrued related to unrecognized tax benefits is
recorded as interest expense, and as of March 31, 2010, the Company had accrued
$232,000, including an additional $18,000 during the past six months ended March
31, 2010. The Company has not accrued any 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
- 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, 2010 and September 30 2009, an
unrealized gain of $24,450,000 and $20,712,000, respectively, net of taxes, was
recorded in "Accumulated other comprehensive income" in the accompanying
Consolidated Balance Sheets. The Company uses quoted prices in active
markets for identical assets (consistent with the Level 1 definition in the fair
value hierarchy) to measure the fair value of its investments on a recurring
basis pursuant to Accounting Standards Codification Topic
820.
|
March 31,
2010
|
September 30,
2009
|
|||||||||||||||||||||||
|
(Unaudited)
|
||||||||||||||||||||||||
|
Amortized
cost basis
|
Aggregate
fair value
|
Pretax
unrealized gains
|
Amortized
cost basis
|
Aggregate
fair value
|
Pretax
unrealized gains
|
|||||||||||||||||||
|
U.S.
Treasury Notes and Bills
|
$ | 9,138,000 | $ | 9,138,000 | $ | --- | $ | 6,601,000 | $ | 6,627,000 | $ | 26,000 | ||||||||||||
|
Marketable
securities
|
||||||||||||||||||||||||
|
Common
stocks
|
15,501,000 | 53,160,000 | 37,659,000 | 15,501,000 | 47,917,000 | 32,416,000 | ||||||||||||||||||
|
Bonds
|
4,925,000 | 6,702,000 | 1,777,000 | 4,923,000 | 6,158,000 | 1,235,000 | ||||||||||||||||||
|
Total
|
$ | 29,564,000 | $ | 69,000,000 | $ | 39,436,000 | $ | 27,025,000 | $ | 60,702,000 | $ | 33,677,000 | ||||||||||||
At March
31, 2010, the U.S. Treasury Notes and Bills had maturity dates of less than one
year, and the bonds mature in 2039. All investments are
classified as "Current assets" because they are available for sale.
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 $7,554,000 and
$9,058,000 for the six-month periods ended March 31, 2010 and 2009,
respectively. There were net unrealized gains of $3,738,000,
net of taxes, for the six month period ended March 31, 2010 as compared to
$5,615,000 in the prior comparable period.
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, 2010 and 2009 were $328,000 and $302,000, respectively.
Note 9 -
Contingencies
From time
to time, the Company is subject to litigation arising in the normal course of
its business. While it is not possible to predict the results of such
litigation, management does not believe the ultimate outcome of these matters
will 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
|
|
|||||||||||
|
Traditional Business
|
Sustain
|
Total
Results for both Segments
|
||||||||||
|
Six months ended March 31,
2010
|
||||||||||||
|
Revenues
|
$ | 17,192,000 | $ | 1,776,000 | $ | 18,968,000 | ||||||
|
Pretax
income (loss)
|
6,511,000 | (345,000 | ) | 6,166,000 | ||||||||
|
Total
assets
|
92,716,000 | 1,039,000 | 93,755,000 | |||||||||
|
Capital
expenditures
|
45,000 | --- | 45,000 | |||||||||
|
Depreciation
and amortization
|
287,000 | 28,000 | 315,000 | |||||||||
|
Income
tax benefit (expense)
|
(2,480,000 | ) | 130,000 | (2,350,000 | ) | |||||||
|
Net
income (loss)
|
4,031,000 | (215,000 | ) | 3,816,000 | ||||||||
|
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 | |||||||||
|
Three months ended March 31,
2010
|
||||||||||||
|
Revenues
|
$ | 8,212,000 | $ | 898,000 | $ | 9,110,000 | ||||||
|
Pretax
income (loss)
|
2,903,000 | (105,000 | ) | 2,798,000 | ||||||||
|
Total
assets
|
92,716,000 | 1,039,000 | 93,755,000 | |||||||||
|
Capital
expenditures
|
45,000 | --- | 45,000 | |||||||||
|
Depreciation
and amortization
|
147,000 | 16,000 | 163,000 | |||||||||
|
Income
tax benefit (expense)
|
(1,110,000 | ) | 40,000 | (1,070,000 | ) | |||||||
|
Net
income (loss)
|
1,793,000 | (65,000 | ) | 1,728,000 | ||||||||
|
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 | |||||||||
|
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
administrative law organizations.
During
the six months ended March 31, 2010, consolidated pretax income increased by
$568,000 (10%) to $6,166,000 from $5,598,000 in the prior period. The
Company's traditional business segment pretax profit increased by $930,000 (17%)
to $6,511,000 from $5,581,000 primarily because of an increase in the number of
trustee foreclosure notices that were published in the Company's newspapers or
for which the Company received a placement fee. Sustain's business
segment pretax loss increased to $345,000 from a pretax profit of $17,000
because of a decrease in consulting revenues from governmental
agencies.
|
Reportable Segments
|
||||||||||||
|
Traditional Business
|
Sustain
|
Total
Results for both Segments
|
||||||||||
|
Six months ended March 31,
2010
|
||||||||||||
|
Revenues
|
$ | 17,192,000 | $ | 1,776,000 | $ | 18,968,000 | ||||||
|
Pretax
income (loss)
|
6,511,000 | (345,000 | ) | 6,166,000 | ||||||||
|
Income
tax benefit (expense)
|
(2,480,000 | ) | 130,000 | (2,350,000 | ) | |||||||
|
Net
income (loss)
|
4,031,000 | (215,000 | ) | 3,816,000 | ||||||||
|
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 | |||||||||
Consolidated
revenues were $18,968,000 and $19,463,000 for the six months ended March 31,
2010 and 2009, respectively. This decrease of $495,000 was primarily
from decreases of $409,000 (21%) in display advertising revenues, $238,000 (21%)
in classified advertising revenues and $379,000 (9%) in circulation revenues,
partially offset by an increase in public notice advertising revenues of
$1,086,000. Sustain's information systems and services revenues
decreased by $674,000 (28%) primarily because of a decrease in consulting
revenues. The Company's revenues derived from Sustain's operations
constituted about 9% and 13% of the Company's total revenues for the six months
ended March 31, 2010 and 2009, respectively.
The
Company continued to benefit from the large number of foreclosures 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 59% of the Company's total revenues. The Daily
Journals accounted for about 81% of the Company's total circulation
revenues. The court rule and judicial profile services generated
about 13% of the total circulation revenues, with the other newspapers and
services accounting for the balance. Advertising service fees and
other increased by $119,000 (6%) due primarily to increased fees generated by
the placement of more trustee foreclosure 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. (Consolidated
revenues were $9,110,000 and $9,652,000 for the three months ended March 31,
2010 and 2009, respectively.)
Costs and
expenses decreased by $967,000 (7%) to $13,229,000 from
$14,196,000. Newsprint and printing expenses decreased by $208,000
(21%) primarily resulting from fewer subscribers and a decrease in the price of
paper. Other outside services decreased by $374,000 (20%) primarily
resulting from reduced freelance writers and computer programming
services. (Costs and expenses were $6,528,000 and $7,084,000 for the
three months ended March 31, 2010 and 2009, respectively.) The trend
of revenues and expenses was driven by the same force for the three month period
as in the six months.
The
Company's expenditures for the development of new Sustain software products are
significant and will materially impact overall results at least through fiscal
2010. 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 labor costs for both
employees and outside contractors, aggregated $1,075,000 and $1,061,000 for the
six months ended March 31, 2010 and 2009, 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.
Whether
the increase in traditional business segment pretax profit will be sustained
throughout fiscal 2010 is very much dependant on the number of California and
Arizona foreclosure notices and the offsetting effect of a continuing decline in
commercial advertising and subscriptions. At some point, the number
of foreclosures undoubtedly will slow, and because fewer advertisements will
then be required, so will the Company's traditional business segment
earnings. Sustain's 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, have declined
substantially in fiscal 2010 because many governments have reduced their budgets
for services like those provided by Sustain.
Consolidated
net income was $3,816,000 and $3,443,000 for the six months ended March 31, 2010
and 2009, respectively. On a pretax profit of $6,166,000 and
$5,598,000 for the six months ended March 31, 2010 and 2009, the Company
recorded a tax provision of $2,350,000 and $2,155,000,
respectively. The Internal Revenue Service has been examining the tax
returns for years 2002 to 2007 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, 2010, 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
in the United States Tax Court, and the ultimate resolution of this dispute
cannot be ascertained at this time. Net income per share
increased to $2.76 from $2.42.
Liquidity
and Capital Resources
During
the six months ended March 31, 2010, the Company's cash and cash equivalents,
U.S. Treasury Notes and Bills and marketable security positions increased by
$9,922,000. In February 2009, the Company took advantage of
near-panic selling in the stock market and redeployed some of its cash, which
had been invested in Treasury securities and was generating only nominal
interest, to purchase the common stock of two Fortune 200 companies and certain
bonds of a third. So far, these investments have been very
successful. As of March 31, 2010, there were unrealized gains of $39,436,000,
almost all of which were in the common stocks.
The cash
provided by operating activities of $4,207,000 included a net decrease in
deferred subscription and other revenues of $594,000. 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 decreased
by $276,000 during the six months ended March 31, 2010 as compared to the prior
period primarily resulting from the decreases in accounts payable and accrued
liabilities of $518,000, partially offset by the increases in net income of
$373,000.
As of
March 31, 2010, the Company had working capital of $54,915,000, including the
liability for deferred subscription and other revenues of $4,746,000 which are
scheduled to be earned within one year and the deferred tax liability of
$14,986,000 for the unrealized gains in its 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 and expects that any such cash flows will be invested in its two
businesses or used to repurchase its common stock. The Company also
may entertain business acquisition opportunities. Any excess cash
flows will be invested as management and the Board of Directors deem appropriate
at the time.
Such
investments may include additional securities of the companies in which the
Company has already invested, securities of other companies, government
securities (including U.S. Treasury Notes and Bills) or other
instruments. The decision as to particular investments will be
driven by the Company's belief about the risk/reward profile of the various
investment choices at the time, and it may return to government securities as a
default if attractive opportunities for a better return are not available. The
Company's Chairman of the Board, Charles Munger, is also the vice chairman of
Berkshire Hathaway Inc., which maintains a substantial investment
portfolio. The Company's Board of Directors utilized his judgment and
suggestions, as well as those of J.P. Guerin, the Company's vice chairman, when
selecting the investments that were made last year, and both of them will
continue to play an important role in monitoring those investments and selecting
any future investments.
But as
noted above, the investments are concentrated in just three companies.
Accordingly, a significant decline in the market value of one or more of the
Company's investments may not be offset by the hypothetically better performance
of other investments, and that could result in a large decrease in the Company's
stockholders' equity and, under certain circumstances, in the recognition of
losses in the Company's income statement.
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, 2009.
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; 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, 2009.
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,
2010. 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,
2010.
PART
II
Item 5. OTHER INFORMATION
The
Company's annual meeting was held on February 3, 2010. The matters
submitted to a vote of security holders were the election of directors and the
ratification of the appointment of Ernst & Young LLP as independent
accountants for the Company for the current fiscal year.
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
|
|||||||||
|
Nominee's Name
|
For
|
Withheld Authority
|
Broker Non-Votes
|
||||||
|
Charles
T. Munger
|
1,230,225 | 167,981 | 0 | ||||||
|
J.
P. Guerin
|
1,230,270 | 167,936 | 0 | ||||||
|
Gerald
L. Salzman
|
1,226,267 | 171,939 | 0 | ||||||
|
Peter
D. Kaufman
|
1,229,512 | 168,694 | 0 | ||||||
|
George
C. Good
|
1,229,527 | 168,679 | 0 | ||||||
Ernst
& Young LLP was ratified as the Company's independent accountants with
1,340,133 votes in favor, 774 votes against, 4,276 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
|
|
|
(Principal
Executive Officer and
|
|
|
Principal
Accounting Officer)
|
DATE: May
12, 2010
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