form10q.htm
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 December 31, 2007
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)
|
|
(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:
¨
Indicate
by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or
a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
|
Large Accelerated Filer ¨:
|
Accelerated Filer: ¨
|
Non-accelerated Filer: x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes: ¨ 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 January 31,
2008
|
|
Common
Stock, par value $ .01 per share
|
|
1,500,299
shares
|
DAILY JOURNAL CORPORATION
INDEX
PART
I
Item 1.
FINANCIAL STATEMENTS
DAILY JOURNAL CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
|
December
31
|
|
|
September
30
|
|
|
|
|
2007
|
|
|
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
909,000 |
|
|
$ |
1,069,000 |
|
|
U.S.
Treasury Notes and Bills
|
|
|
16,389,000 |
|
|
|
15,396,000 |
|
|
Accounts
receivable, less allowance for doubtful accounts of $200,000 at December
31, 2007 and September 30, 2007
|
|
|
5,785,000 |
|
|
|
5,537,000 |
|
|
Inventories
|
|
|
32,000 |
|
|
|
23,000 |
|
|
Prepaid
expenses and other assets
|
|
|
260,000 |
|
|
|
187,000 |
|
|
Deferred
income taxes
|
|
|
545,000 |
|
|
|
582,000 |
|
|
Total
current assets
|
|
|
23,920,000 |
|
|
|
22,794,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, at cost
|
|
|
|
|
|
|
|
|
|
Land,
buildings and improvements
|
|
|
12,953,000 |
|
|
|
12,953,000 |
|
|
Furniture,
office equipment and computer software
|
|
|
3,739,000 |
|
|
|
3,637,000 |
|
|
Machinery
and equipment
|
|
|
1,972,000 |
|
|
|
1,942,000 |
|
|
|
|
|
18,664,000 |
|
|
|
18,532,000 |
|
|
Less
accumulated depreciation
|
|
|
(7,432,000 |
) |
|
|
(7,211,000 |
) |
|
|
|
|
11,232,000 |
|
|
|
11,321,000 |
|
|
U.S.
Treasury Notes
|
|
|
4,727,000 |
|
|
|
4,596,000 |
|
|
Deferred
income taxes
|
|
|
1,183,000 |
|
|
|
1,211,000 |
|
|
|
|
$ |
41,062,000 |
|
|
$ |
39,922,000 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,831,000 |
|
|
$ |
1,625,000 |
|
|
Accrued
liabilities
|
|
|
1,956,000 |
|
|
|
3,120,000 |
|
|
Income
taxes
|
|
|
1,513,000 |
|
|
|
662,000 |
|
|
Notes
payable – current portion
|
|
|
3,961,000 |
|
|
|
209,000 |
|
|
Deferred
subscription revenue and other revenues
|
|
|
5,989,000 |
|
|
|
6,218,000 |
|
|
Total
current liabilities
|
|
|
15,250,000 |
|
|
|
11,834,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Long
term liabilities
|
|
|
|
|
|
|
|
|
|
Accrued
liabilities
|
|
|
2,120,000 |
|
|
|
2,000,000 |
|
|
Notes
payable
|
|
---
|
|
|
|
3,803,000 |
|
|
Total
long term liabilities
|
|
|
2,120,000 |
|
|
|
5,803,000 |
|
|
Commitments
and contingencies (Notes 7 and 8)
|
|
|
--- |
|
|
|
--- |
|
|
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
December 31, 2007 and September 30, 2007,
outstanding
|
|
|
15,000 |
|
|
|
15,000 |
|
|
Additional
paid-in capital
|
|
|
1,907,000 |
|
|
|
1,907,000 |
|
|
Retained
earnings
|
|
|
22,544,000 |
|
|
|
21,269,000 |
|
|
Accumulated
other comprehensive income
|
|
|
132,000 |
|
|
|
--- |
|
|
Less
47,445 treasury shares, at December 31, 2007 and September 30, 2007, at
cost
|
|
|
(906,000 |
) |
|
|
(906,000 |
) |
|
Total
shareholders' equity
|
|
|
23,692,000 |
|
|
|
22,285,000 |
|
|
|
|
$ |
41,062,000 |
|
|
$ |
39,922,000 |
|
See
accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
|
|
|
Three
months
ended December 31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
|
|
|
|
|
|
Advertising
|
|
$ |
5,133,000 |
|
|
$ |
4,097,000 |
|
|
Circulation
|
|
|
2,218,000 |
|
|
|
2,210,000 |
|
|
Information
systems and services
|
|
|
900,000 |
|
|
|
879,000 |
|
|
Advertising
service fees and other
|
|
|
735,000 |
|
|
|
826,000 |
|
|
|
|
|
8,986,000 |
|
|
|
8,012,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
4,146,000 |
|
|
|
4,222,000 |
|
|
Newsprint
and printing expenses
|
|
|
528,000 |
|
|
|
559,000 |
|
|
Other
outside services
|
|
|
805,000 |
|
|
|
821,000 |
|
|
Postage
and delivery expenses
|
|
|
448,000 |
|
|
|
393,000 |
|
|
Depreciation
and amortization
|
|
|
230,000 |
|
|
|
239,000 |
|
|
Other
general and administrative expenses
|
|
|
870,000 |
|
|
|
858,000 |
|
|
|
|
|
7,027,000 |
|
|
|
7,092,000 |
|
|
Income
from operations
|
|
|
1,959,000 |
|
|
|
920,000 |
|
|
Other
income and (expense)
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
257,000 |
|
|
|
193,000 |
|
|
Interest
expense
|
|
|
(91,000 |
) |
|
|
(73,000 |
) |
|
Income
before taxes
|
|
|
2,125,000 |
|
|
|
1,040,000 |
|
|
Provision
for income taxes
|
|
|
850,000 |
|
|
|
410,000 |
|
|
Net
income
|
|
$ |
1,275,000 |
|
|
$ |
630,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding - basic and
diluted
|
|
|
1,452,854 |
|
|
|
1,453,009 |
|
|
Basic
and diluted net income per share
|
|
$ |
.88 |
|
|
$ |
.43 |
|
See
accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Three
months
ended December 31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,275,000 |
|
|
$ |
630,000 |
|
|
Adjustments
to reconcile net income to net cash provided by operations
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
230,000 |
|
|
|
239,000 |
|
|
Deferred
income taxes
|
|
|
(25,000 |
) |
|
|
45,000 |
|
|
Discount
earned on U.S. Treasury Bills
|
|
|
(10,000 |
) |
|
|
(28,000 |
) |
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in current assets
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(248,000 |
) |
|
|
(241,000 |
) |
|
Inventories
|
|
|
(9,000 |
) |
|
|
3,000 |
|
|
Prepaid
expenses and other assets
|
|
|
(73,000 |
) |
|
|
(116,000 |
) |
|
Increase
(decrease) in current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
206,000 |
|
|
|
35,000 |
|
|
Accrued
liabilities
|
|
|
(1,044,000 |
) |
|
|
(581,000 |
) |
|
Income
taxes
|
|
|
851,000 |
|
|
|
159,000 |
|
|
Deferred
subscription and other revenues
|
|
|
(229,000 |
) |
|
|
(37,000 |
) |
|
Cash
provided by operating activities
|
|
|
924,000 |
|
|
|
108,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
Purchases
of U.S. Treasury Notes and Bills
|
|
|
(1,992,000 |
) |
|
|
(1,468,000 |
) |
|
Maturities
and sales of U.S. Treasury Notes and Bills
|
|
|
1,100,000 |
|
|
|
1,500,000 |
|
|
Purchases
of property, plant and equipment, net
|
|
|
(141,000 |
) |
|
|
(94,000 |
) |
|
Net
cash used for investing activities
|
|
|
(1,033,000 |
) |
|
|
(62,000 |
) |
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
Payment
of loan principals
|
|
|
(51,000 |
) |
|
|
(48,000 |
) |
|
Purchase
of common stock
|
|
-
|
|
|
|
(2,000 |
) |
|
Cash
used for financing activities
|
|
|
(51,000 |
) |
|
|
(50,000 |
) |
|
Decrease
in cash and cash equivalents
|
|
|
(160,000 |
) |
|
|
(4,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
1,069,000 |
|
|
|
617,000 |
|
|
End
of period
|
|
$ |
909,000 |
|
|
$ |
613,000 |
|
|
Interest
paid during period
|
|
$ |
69,000 |
|
|
$ |
73,000 |
|
Supplemental non-cash
investment activities:
The
transfer of U.S. Treasury Notes and Bills to “available-for-sale” category at
December 31, 2007 resulted in an increase in U.S. Treasury Notes and Bills of
$222,000 and a decrease in Deferred income taxes of $90,000.
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 93% owned subsidiary as of December 31, 2007,
has been consolidated since it was acquired in 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 December 31, 2007, the results of operations for the three-month periods
ended December 31, 2007 and 2006 and its cash flows for the three months ended
December 31, 2007 and 2006. The results of operations for the three months ended
December 31, 2007 and 2006 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 -
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
8,086,000 |
|
|
$ |
900,000 |
|
|
$ |
8,986,000 |
|
|
Income
(loss) before taxes
|
|
|
2,294,000 |
|
|
|
(169,000 |
) |
|
|
2,125,000 |
|
|
Total
assets
|
|
|
39,710,000 |
|
|
|
1,352,000 |
|
|
|
41,062,000 |
|
|
Capital
expenditures
|
|
|
130,000 |
|
|
|
11,000 |
|
|
|
141,000 |
|
|
Depreciation
and amortization
|
|
|
215,000 |
|
|
|
15,000 |
|
|
|
230,000 |
|
|
Income
tax benefit (expense)
|
|
|
(925,000 |
) |
|
|
75,000 |
|
|
|
(850,000 |
) |
|
Net
income (loss)
|
|
|
1,369,000 |
|
|
|
(94,000 |
) |
|
|
1,275,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
7,133,000 |
|
|
$ |
879,000 |
|
|
$ |
8,012,000 |
|
|
Income
(loss) before taxes
|
|
|
1,265,000 |
|
|
|
(225,000 |
) |
|
|
1,040,000 |
|
|
Total
assets
|
|
|
33,383,000 |
|
|
|
2,477,000 |
|
|
|
35,860,000 |
|
|
Capital
expenditures
|
|
|
94,000 |
|
|
|
-- |
|
|
|
94,000 |
|
|
Depreciation
and amortization
|
|
|
231,000 |
|
|
|
8,000 |
|
|
|
239,000 |
|
|
Income
tax benefit (expense)
|
|
|
(500,000 |
) |
|
|
90,000 |
|
|
|
(410,000 |
) |
|
Net
income (loss)
|
|
|
765,000 |
|
|
|
(135,000 |
) |
|
|
630,000 |
|
Note 5 -
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 or lease 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 6 -
Income Taxes
On a
pretax profit of $1,040,000 for the three months ended December 31, 2006 and
$2,125,000 for the three months ended December 31, 2007, the Company recorded a
tax provision of $410,000 and $850,000, respectively, using approximately the
statutory rate. The Internal Revenue Service is currently
auditing the research and development tax credits claimed by the Company in
prior year tax filings, and their proposed assessment, if upheld, would result
in disallowance of $700,000 of previously claimed credits for which a reserve
was established during the second quarter of last fiscal year. The
Internal Revenue Service examination commenced in 2005 for tax years 2002 to
2006. 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 December 31, 2007, 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 December 31, 2007, the Company has accrued $150,000, including an
additional $21,000 during this quarter. 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 states
jurisdictions and is no longer subject to examinations for years before
2002.
Note 7 –
Debt, Commitments and Subsequent Event
The Company owns its facilities in Los Angeles and leases space for its other
offices under operating leases, which expire at various dates through
2010. The Company is responsible for a portion of maintenance,
insurance and property tax expenses relating to certain leased
property. Rental expenses for comparable three-month periods ended
December 31, 2007 and 2006 were $151,000 and $152,000,
respectively.
As of December 31, 2007, the Company had two real estate loans, and both were
paid off in January 2008, after the close of the first quarter. One
of $1,359,000, which bore a fixed interest rate of 6.84%, was repayable in equal
monthly installments of about $18,000 through 2016. Another of
$2,602,000, which also bore a fixed interest rate of 6.84%, was repayable in
equal monthly installments of about $22,000 through 2024. Both real
estate loans were included in current liabilities at December 31, 2007 in the
accompanying Consolidated Balance Sheet.
Note 8 -
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 the software product that was
to be developed by the outside service provider referred to
above. 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.
Note 9
- Investment of U.S. Treasury Notes and Bills
At
December 31, 2007, it was determined that investments in U.S.
Treasury Notes and Bills should be transferred from “held-to-maturity” category
to “available-for-sale” category and stated at fair value, with the unrealized
gains and losses, net of taxes, reported in accumulated other comprehensive
income. As a result of this reclassification, an unrealized gain of
$132,000, net of taxes, was recorded in accumulated other comprehensive income
in the accompanying Consolidated Balance Sheet as of December 31,
2007.
Note 10 –
Comprehensive Income
Comprehensive
income, which includes net income plus unrealized gains (losses) on U.S.
Treasury Notes and Bills classified as “available-for-sale” securities, was
$1,407,000 for the three months ended December 31,
2007. Comprehensive income for the three months ended December 31,
2006 was $630,000 and was equal to net income because there were no unrealized
gains (losses) on such investments.
|
Item
2
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
Revenues
were $8,986,000 and $8,012,000 for the three months ended December 2007 and
2006, respectively. This increase of $974,000 (12%) was primarily
attributed to an increase in public notice advertising revenues.
Public
notice advertising revenues increased by $1,150,000 primarily because of an
increase in trustee foreclosure sales in California and Arizona. The
Company's smaller newspapers, those other than the Los Angeles and San Francisco
Daily Journals ("The Daily Journals"), accounted for about 94% of the total
public notice advertising revenues. Public notice advertising
revenues and related advertising and other service fees constituted about 41% of
the Company's total revenues. Display advertising revenues decreased
by $15,000, and classified advertising revenues decreased by
$109,000.
Total
circulation revenues increased by $8,000. The Daily Journals
accounted for about 76% 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 $21,000 (2%) primarily because of increases in Sustain’s
license and maintenance fees, mainly from California courts. The Company’s
revenues derived from Sustain’s operations constituted about 10% and 11% of the
Company’s total revenues for the three months ended December 2007 and 2006,
respectively. Other revenues decreased primarily because of fewer
small print jobs for governmental agencies.
Costs and
expenses decreased by $65,000 (1%) to $7,027,000 from
$7,092,000. Total personnel costs decreased by $76,000 (2%) to
$4,146,000. Newsprint and printing expenses declined by $31,000 (6%)
primarily because of a decrease in the price of paper and decreased outside
printing costs for the magazines. Postage and delivery expenses
increased by $55,000 (14%) mainly because of postal rate increases and
pallet/sack/tray fees recently imposed by the Post Office.
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 $418,000 and $362,000 for the three months ended
December 31, 2007 and 2006, 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 $1,029,000
(81%) from $1,265,000 to $2,294,000 primarily resulting from an increase in
trustee foreclosure sale notices, partially offset by a decrease in commercial
advertising revenues. Sustain’s business segment pretax loss
decreased $56,000 (25%) from $225,000 to $169,000, primarily because of
increased license and maintenance fees, partially offset by a slight decrease in
consulting revenues. Future consulting revenues are subject to
uncertainty because they depend on (i) the timing of the acceptance of the
completed consulting tasks and (ii) the unpredictable needs of Sustain’s
existing customers and its ability to secure new customers.
Consolidated
net income was $1,275,000 and $630,000 for the three months ended December 31,
2007 and 2006, respectively. On a pretax profit of $1,040,000
for the three months ended December 31, 2006 and $2,125,000 for the three months
ended December 31, 2007, the Company recorded a tax provision of $410,000 and
$850,000, respectively, using approximately the statutory rate. The Internal
Revenue Service is currently auditing the research and development tax credits
claimed by the Company in prior year tax filings, and their proposed assessment,
if upheld, would result in disallowance of $700,000 of previously claimed
credits for which a reserve was established during the second quarter of last
fiscal year. The Internal Revenue Service examination commenced in
2005 for tax years 2002 to 2006. 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 $.88 from
$.43.
Liquidity
and Capital Resources
During
the three months ended December 31, 2007, the Company's cash and cash
equivalents and U.S. Treasury Note and Bill positions increased by
$964,000. Cash and cash equivalents were used for the purchase of
capital assets of $141,000, primarily for computer software and office
equipment. The cash provided by operating activities of $924,000
included a net decrease in prepayments for subscriptions and other revenues of
$229,000. 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 $816,000 for the three months ended
December 31, 2007 as compared to the prior comparable period primarily due to
the increases in net income of $645,000. As of December 31, 2007, the
Company had working capital of $14,659,000 before deducting the liability for
deferred subscription revenues and other revenues of $5,989,000, which are
scheduled to be earned within one year. In addition, the Company had
long-term U.S. Treasury Notes of about $4,727,000 at December 31,
2007.
As of
December 31, 2007, the Company had two real estate loans, and both were paid off
in January 2008, after the close of the first quarter. One of
$1,359,000, which bore a fixed interest rate of 6.84%, was repayable in equal
monthly installments of about $18,000 through 2016. Another of
$2,602,000, which also bore a fixed interest rate of 6.84%, was repayable in
equal monthly installments of about $22,000 through 2024.
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 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. 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 or lease
term. Advertising revenues are recognized when advertisements are
published and are net of commissions.
Pursuant
to Statement of Financial Accounting Standards No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed, costs related to
the research and development of a new software product are to be expensed as
incurred until the technological feasibility of the product is
established. Accordingly, costs related to the development of new
Sustain software products are expensed as incurred until technological
feasibility has been established, at which time such costs are capitalized,
subject to expected recoverability. In general, “technological feasibility” is
achieved when the developer has established the necessary skills, hardware and
technology to produce a product and a detailed program design has been (a)
completed, (b) traced to the product specifications and (c) reviewed for
high-risk development issues.
Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes,
establishes financial accounting and reporting standards for the effect of
income taxes. The objectives of accounting for income taxes are to
recognize the amount of taxes payable or refundable for the current year and the
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the financial statements or tax
returns. Judgment is required in assessing the future tax
consequences of events that have been recognized in the Company’s financial
statements or tax returns. Fluctuations in the actual outcome of
these future tax consequences could materially impact the Company’s financial
position or its results of operations.
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 December 31, 2007, the Company had approximately $700,000 of unrecognized
tax benefits, all of which would have an effective rate impact if
recognized.
During
September 2006, FASB issued FAS No. 157, Fair Value Measurements (“FAS 157”).
FAS 157 establishes a common definition for fair value under accounting
principles generally accepted in the United States of America (“GAAP”), provides
a framework for measuring fair value and expands disclosure requirements about
such fair value measurements. FAS 157 is effective for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
impact of adopting FAS 157 on its financial statements.
In
February 2007, FASB issued Statement of Financial Accounting Standards (“FAS”)
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement No. 115 (“FAS 159”). FAS 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. FAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently
evaluating the impact of adopting FAS 159 on its financial
statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS
No. 160”). SFAS No. 160 changes the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests
and classified as a component of equity. This new consolidation method
significantly changes the accounting for transactions with minority interest
holders. SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008. The Company is currently evaluating what effects,
if any, the adoption of SFAS No. 160 will have on the Company’s future
results of operations and financial condition.
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
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The
Company does not use derivative financial instruments. The Company
does maintain a portfolio of cash equivalents maturing in three months or less
and a portfolio of U.S. Treasury Bills and Notes maturing within three
years. Given the nature of the investments and the fact that the
Company had no outstanding borrowing except for the two real estate loans, which
bore a fixed interest rate, the Company was not subject to significant interest
rate risk. As of December 31, 2007, the Company had two real estate
loans, and both were paid off in January 2008, after the close of the first
quarter. One of $1,359,000, which bore a fixed interest rate of
6.84%, was repayable in equal monthly installments of about $18,000 through
2016. Another of $2,602,000, which also bore a fixed interest rate of
6.84%, was repayable in equal monthly installments of about $22,000 through
2024.
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 December 31,
2007. 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 December 31,
2007.
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
|
|
10/1/07
- 10/31/07
|
|
|
- |
|
|
$ |
- |
|
(a)
|
Not
applicable
|
|
11/1/07
- 11/30/07
|
|
|
- |
|
|
|
- |
|
(a)
|
Not
applicable
|
|
12/1/07
- 12/31/07
|
|
|
- |
|
|
|
- |
|
(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 this
quarter. 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).
|
|
|
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: February
13, 2008
16 of 16