djco20130630_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No.1)

(Mark One)

 

☑          QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

          For the quarterly period ended June 30, 2013

 

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    

 

(I.R.S. Employer

incorporation or organization)     

 

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 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 (§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:      X                  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: 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 July 31, 2013

Common Stock, par value $ .01 per share    

 

1,380,746 shares

 

 
Page 1 of 18

 

 

 

Explanatory Note

 

This Form 10-Q/A for the fiscal quarter ended June 30, 2013 is being filed by Daily Journal Corporation (the “Company”) solely to correct an error in the allocation of the Company’s net income (loss) between its traditional business and that of its Sustain Technologies, Inc. (“Sustain”) and New Dawn Technologies, Inc. (“New Dawn”) subsidiaries. Specifically, the net income of the traditional business segment was $5,369,000 in the nine months ended June 30, 2013 and $1,861,000 in the three months ended June 30, 2013, and the net loss of the Sustain and New Dawn segment was $2,558,000 in the nine month period and $1,035,000 in the three month period. The correction affects only Note 12 – Operating Segments, appearing on page 11 of the 10-Q/A, and the “reportable segments” chart, appearing on page 14 of the 10-Q/A.

 

This amendment does not reflect events occurring after the original filing of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2013, or modify or update the disclosures in the original Form 10-Q in any way, other than to reflect the correction described above.

 

 

DAILY JOURNAL CORPORATION

 

 

INDEX

 

 

      Page Nos.

PART I  Financial Information

 
       
 

Item 1. Financial Statements

 
       
   

Consolidated Balance Sheets - June 30, 2013 and September 30, 2012

3
       
   

Consolidated Statements of Comprehensive Income (Loss) - Three months ended June 30, 2013 and 2012

4
       
   

Consolidated Statements of Comprehensive Income - Nine months ended June 30, 2013 and 2012

5

       
   

Consolidated Statements of Cash Flows - Nine months ended June 30, 2013 and 2012

6
       
 

Notes to Consolidated Financial Statements

7

 

     
 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

13
       
 

Item 4. Controls and Procedures

17
       

Part II  Other Information

 
       
 

Item 6. Exhibits

19

 

 

 
Page 2 of 18

 

 

PART I
Item 1. FINANCIAL STATEMENTS
DAILY JOURNAL CORPORATION
CONSOLIDATED BALANCE SHEETS 

   

June 30

2013

   

September 30

2012

 
   

(Unaudited)

         

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 6,283,000     $ 985,000  

U.S. Treasury Bills

    ---       800,000  

Marketable securities, including common stocks of $121,104,000 and bonds of $7,317,000 at June 30, 2013 and common stocks of $94,061,000 and bonds of $8,095,000 at September 30, 2012

    128,421,000       102,156,000  

Accounts receivable, less allowance for doubtful accounts of $250,000 and$200,000 at June 30, 2013 and September 30, 2012, respectively

    4,813,000       5,709,000  

Inventories

    47,000       43,000  

Prepaid expenses and other assets

    545,000       241,000  

Income tax receivable

    952,000       196,000  

Total current assets

    141,061,000       110,130,000  
                 

Property, plant and equipment, at cost

               

Land, buildings and improvements

    12,846,000       12,819,000  

Furniture, office equipment and computer software

    2,692,000       2,263,000  

Machinery and equipment

    2,014,000       2,072,000  
      17,552,000       17,154,000  

Less accumulated depreciation

    (8,341,000 )     (7,911,000 )
      9,211,000       9,243,000  

Other assets

               

Intangibles (net)

    8,411,000       ---  

Goodwill

    14,000,000       ---  

Deferred income taxes

    1,068,000       1,591,000  
      23,479,000       1,591,000  
    $ 173,751,000     $ 120,964,000  

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable

  $ 1,665,000     $ 2,201,000  

Accrued liabilities

    4,217,000       2,738,000  

Deferred subscriptions

    3,239,000       3,649,000  

Deferred installation contracts

    7,915,000       ---  

Deferred maintenance agreements and others

    4,099,000       1,805,000  

Deferred income taxes

    29,728,000       19,146,000  

Total current liabilities

    50,863,000       29,539,000  
                 

Long term liabilities

               

Investment margin account borrowing

    14,000,000       ---  

Accrued liabilities

    3,050,000       4,200,000  

Total long term liabilities

    17,050,000       4,200,000  
                 

Commitments and contingencies (Notes 10 and 11)

    ---       ---  
                 

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; 1,380,746 at June 30, 2013 and September 30, 2012, outstanding

    14,000       14,000  

Additional paid-in capital

    1,755,000       1,755,000  

Retained earnings

    56,702,000       53,891,000  

Accumulated other comprehensive income

    47,367,000       31,565,000  

Total shareholders' equity

    105,838,000       87,225,000  
    $ 173,751,000     $ 120,964,000  

 

 

See accompanying Notes to Consolidated Financial Statements

 

 
Page 3 of 18

 

 

DAILY JOURNAL CORPORATION 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

   

Three months

ended June 30

 
   

2013

   

2012

 

Revenues

               

Advertising

  $ 3,617,000     $ 4,897,000  

Circulation

    1,574,000       1,630,000  

Advertising service fees and other

    685,000       769,000  

Information systems and services

    3,328,000       835,000  
      9,204,000       8,131,000  
                 

Costs and expenses

               

Salaries and employee benefits

    5,023,000       3,466,000  

Other outside services

    914,000       755,000  

Postage and delivery expenses

    346,000       360,000  

Newsprint and printing expenses

    379,000       360,000  

Depreciation and amortization

    635,000       126,000  

Other general and administrative expenses

    1,446,000       830,000  
      8,743,000       5,897,000  

Income from operations

    461,000       2,234,000  

Other income (expense)

               

Dividends and interest income

    726,000       608,000  

Interest expense

    (27,000 )     (4,000 )

Gain on sale of capital assets

    1,000       ---  

Other-than-temporary impairment losses on investments

 

---

      (2,855,000 )

Income before taxes

    1,161,000       (17,000 )

Provision for (benefit of) income taxes

    335,000       (225,000 )

Net income

  $ 826,000     $ 208,000  
                 

Weighted average number of common shares outstanding - basic and diluted

    1,380,746       1,380,746  

Basic and diluted net income per share

  $ .60     $ .15  
                 
                 

Comprehensive income (loss)

               

Net income

  $ 826,000     $ 208,000  

Net change in unrealized appreciation (depreciation) of investments (net of taxes)

    4,887,000       (3,410,000 )

Other-than-temporary impairment losses recognized in net income (net of taxes)

    ---       1,720,000  

Comprehensive income (loss)

  $ 5,713,000     $ (1,482,000 )

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 
Page 4 of 18

 

 

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

   

Nine months

ended June 30

 
   

2013

   

2012

 

Revenues

               

Advertising

  $ 11,299,000     $ 14,605,000  

Circulation

    4,792,000       4,931,000  

Advertising service fees and other

    2,224,000       2,288,000  

Information systems and services

    8,335,000       2,293,000  
      26,650,000       24,117,000  
                 

Costs and expenses

               

Salaries and employee benefits

    14,169,000       10,316,000  

Other outside services

    2,604,000       2,218,000  

Postage and delivery expenses

    1,006,000       1,040,000  

Newsprint and printing expenses

    1,000,000       1,023,000  

Depreciation and amortization

    1,544,000       371,000  

Other general and administrative expenses

    4,008,000       2,471,000  
      24,331,000       17,439,000  

Income from operations

    2,319,000       6,678,000  

Other income (expense)

               

Dividends and interest income

    1,832,000       1,451,000  

Interest expense reversal (expense)

    (66,000 )     62,000  

Gain on sale of capital assets

    1,000       7,000  

Other-than-temporary impairment losses on investments

 

---

      (2,855,000 )

Income before taxes

    4,086,000       5,343,000  

Provision for income taxes

    1,275,000       1,385,000  

Net income

  $ 2,811,000     $ 3,958,000  
                 

Weighted average number of common shares outstanding - basic and diluted

    1,380,746       1,380,746  

Basic and diluted net income per share

  $ 2.04     $ 2.87  
                 
                 

Comprehensive income

               

Net income

  $ 2,811,000     $ 3,958,000  

Net change in unrealized appreciation of investments (net of taxes)

    15,802,000       13,430,000  

Other-than-temporary impairment losses recognized in net income (net of taxes)

 

---

      1,720,000  

Comprehensive income

  $ 18,613,000     $ 19,108,000  

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 
Page 5 of 18

 

  

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Nine months

ended June 30

 
   

2013

   

2012

 

Cash flows from operating activities

               

Net income

  $ 2,811,000     $ 3,958,000  

Adjustments to reconcile net income to net cash provided by operations

               

Depreciation and amortization

    1,544,000       371,000  

Deferred income taxes

    644,000       (851,000 )

Net premium amortized and discount earned on bonds and U.S. Treasury Bills

    (2,000 )     (3,000 )

Other-than-temporary impairment losses on investments ($1,720,000 net of taxes)

    ---       2,855,000  

Changes in assets and liabilities

               

Decrease (increase) in current assets (net of acquisition)

               

Accounts receivable, net

    1,556,000       1,236,000  

Inventories

    (7,000 )     6,000  

Prepaid expenses and other assets

    (184,000 )     (12,000 )

Increase (decrease) in current liabilities (net of acquisition)

               

Accounts payable

    (753,000 )     (347,000 )

Accrued liabilities

    (2,347,000 )     (913,000 )

Income taxes

    (756,000 )     (178,000 )

Deferred subscriptions

    (410,000 )     53,000  

Deferred maintenance agreements and others

    95,000       207,000  

Deferred installation contracts

    443,000       ---  

Net cash provided by operating activities

    2,634,000       6,382,000  
                 

Cash flows from investing activities

               

Maturities and sales of U.S. Treasury Bills

    800,000       14,600,000  

Purchases of U.S. Treasury Bills

    ---       (4,299,000 )

Acquisition of New Dawn Technologies, Inc. (net of cash acquired)

    (11,878,000 )     ---  

Purchases of marketable securities

    ---       (16,390,000 )

Purchases of property, plant and equipment

    (258,000 )     (352,000 )

Net cash used in investing activities

    (11,336,000 )     (6,441,000 )
                 

Cash flows from financing activities

               

Investment margin account borrowing

    14,000,000       ---  

Cash provided by financing activities

    14,000,000       ---  
                 

Increase (decrease) in cash and cash equivalents

    5,298,000       (59,000 )
                 

Cash and cash equivalents

               

Beginning of period

    985,000       3,058,000  

End of period

  $ 6,283,000     $ 2,999,000  

 

See accompanying Notes to Consolidated Financial Statements.

 

 
Page 6 of 18

 

 

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 magazine, and produces several specialized information services. It also serves as a newspaper representative specializing in public notice advertising. 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 calendaring and accounting, report and notice generation, the implementation of standards and business rules and other corollary functions, and to enable justice agencies to extend electronic services to the public and bar members.

 

     In December 2012, the Company purchased all of the outstanding stock of New Dawn Technologies, Inc. (“New Dawn”) based in Logan, Utah, which provides products and services similar to those of Sustain to more than 350 justice agencies in 39 states, three U.S. territories and two other countries. The acquisition expands the Company’s position in the case management software marketplace. Essentially all of the Company’s operations are based in California, Arizona and Utah.

 

Note 2 - Basis of Presentation

 

     In the opinion of the Company, the accompanying interim unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of its financial position as of June 30, 2013, and of its results of operations and cash flows for the three- and nine- month periods ended June 30, 2013 and 2012. The results of operations for the nine months ended June 30, 2013 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, 2012.

 

     Certain reclassifications of previously reported amounts have been made to conform to the current year’s presentation.

 

Note 3 - New Accounting Pronouncements

 

     In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, requiring entities to disclose additional information with respect to changes in accumulated other comprehensive income (AOCI) balances by component and significant items reclassified out of AOCI. This ASU will be effective beginning October 1, 2013 for the Company, and the adoption will have no impact on the Company’s consolidated results of operations or financial positions because it only represents a change to the presentation and the disclosure requirements.

 

 

 
Page 7 of 18

 

 

Note 4 - 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 5 – Acquisition of New Dawn Technologies, Inc.

 

On December 4, 2012 the Company purchased all of the outstanding stock of New Dawn for $14 million in cash.  The New Dawn acquisition was accounted for using the purchase method of accounting in accordance with the Statement of FASB’s ASC 805 Business Combinations. The Company incurred legal and tax fees of about $93,000 associated with this acquisition. These costs were included in “Other general and administrative expenses” on the Company’s Consolidated Statements of Comprehensive Income. New Dawn’s results of operations from December 5, 2012 through June 30, 2013 have been included in the Company’s Consolidated Financial Statements: revenues were $6,430,000, expenses were $7,148,000 (including intangible amortization expenses of $1,111,000), and the pretax loss was $718,000.

 

   The Company preliminarily allocated the purchase price to the tangible assets ($3.1 million including cash of $2.2 million; accounts receivable, net, of $.66 million, and net fixed assets of $.14 million) and identifiable intangible assets (purchased software and customer relationships of $9.5 million) and liabilities ($12.6 million including accounts payable and accrued expenses of $2.8 million, deferred maintenance agreements of $2.2 million and deferred installation contracts of $7.5 million) based on their fair values with the remaining balance in excess of the net assets allocated to goodwill ($14 million).  Deferred revenues on installation contracts primarily represent advances from customers for software licenses and installation services in various stages of completion; after customer’s acceptance of the completed project, the advances would become no longer at risk of refund and earned.

 

Note 6 - Intangible Assets

 

     At June 30, 2013, New Dawn’s purchased software and customer relationships costs of $8,411,000 (net of the accumulated amortization expenses of $1,111,000) are being amortized over five years based on their estimated useful lives.    

 

      The Company accounts for goodwill in accordance with ASC 350 Intangibles — Goodwill and Other. Goodwill is not amortized for financial statement purposes but evaluated for impairment annually as of September 30th, or whenever events or changes in circumstances indicate that the value may not be recoverable.

 

Note 7 - 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 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.

 

 

 
Page 8 of 18

 

 

Note 8 - Income Taxes

 

On a pretax profit of $4,086,000 and $5,343,000 for the nine months ended June 30, 2013 and 2012, respectively, the Company recorded a tax provision of $1,275,000 and $1,385,000 respectively, which was lower in each case 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 31% and 26% for the nine months ended June 30, 2013 and 2012, respectively. The acquisition of New Dawn was structured as a stock acquisition with an Internal Revenue Code Section 338 (h)(10) election, which results in the acquisition being treated similarly to an acquisition of assets for income tax purposes. As such, the amounts allocated to purchased software and customer relationships as well as goodwill are amortized over a 15-year period on a straight-line basis for tax purposes. Differences in the amortization period and methods between book and tax useful lives will result in deferred tax assets or liabilities. 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 2010 with regard to federal income taxes.

 

Note 9 - Investments in U.S. Treasury Notes and Bills and Marketable Securities

 

     Investments in U.S. Treasury 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”. As of June 30, 2013 and September 30, 2012, an unrealized gain of $78,727,000 (consisting of gross unrealized gains of $80,999,000 and gross unrealized losses of $2,272,000) and $52,464,000 (consisting of gross unrealized gains of $54,653,000 and gross unrealized losses of $2,189,000), 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 ASC 820 Fair Value Measurement.

 

     Investments in equity securities and securities with fixed maturity as of June 30, 2013 and September 30, 2012 are summarized by type below.

 

   

June 30, 2013

   

September 30, 2012

 
   

(Unaudited)

                         
   

Aggregate

fair value

   

Amortized/Adjusted

cost basis

   

Pretax unrealized gains

   

Aggregate

fair value

   

Amortized/Adjusted

cost basis

   

Pretax unrealized gains

 

U.S. Treasury Bills

  $ ---     $ ---     $ ---     $ 800,000     $ 800,000     $ ---  

Marketable securities

                                               

Common stocks

    121,104,000       44,761,000       76,343,000       94,061,000       44,761,000       49,300,000  

Bonds

    7,317,000       4,933,000       2,384,000       8,095,000       4,931,000       3,164,000  

Total

  $ 128,421,000     $ 49,694,000     $ 78,727,000     $ 102,956,000     $ 50,492,000     $ 52,464,000  

 

     At June 30, 2013, all investments are classified as “Current assets” because they are available for sale at any time. The bonds mature in 2039.  

 

     As of June 30, 2013, the Company performed separate evaluations for impaired equity securities to determine if the unrealized losses were other-than-temporary. This evaluation considers a number of factors including, but not limited to, the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer and the Company’s ability and intent to hold the securities until fair value recovers. The assessment of the ability and intent to hold these securities to recovery focuses on liquidity needs, asset/liability management objectives and securities portfolio objectives. Based on the results of the evaluations, the Company concluded that as of June 30, 2013, all unrealized losses related to equity securities were temporary.

 

 

 
Page 9 of 18

 

 

Note 10 - Debt and Commitments

 

     On December 4, 2012, the Company borrowed the purchase price of $14 million for the New Dawn acquisition and pledged its marketable securities as collateral. The interest rate for this investment margin account borrowing will fluctuate based on the Federal Funds Rate plus 50 basis points with interest only payable monthly. This investment margin account borrowing does not mature.

 

     The Company owns its facilities in Los Angeles and leases space for its other offices under operating leases which expire at various dates through 2015. New Dawn’s Logan, Utah office lease requires a monthly rent of $41,500, with short-term sub-leases of approximately $5,000 per month, and will expire in 2015, subject to certain extension options. The Company is responsible for a portion of maintenance, insurance and property tax expenses relating to certain leased property. Rental expenses for comparable nine-month periods ended June 30, 2013 and 2012 were $600,000 and $349,000, respectively.

 

Note 11 - 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 material effect on the Company’s financial position or results of operations.

 

 

 
Page 10 of 18

 

 

Note 12 - Operating Segments

 

     The Company has two segments of business. The Company’s reportable segments are (i) the traditional business and (ii) Sustain and New Dawn. Summarized financial information for the Company’s reportable segments is shown in the following table:

 

   

Reportable segments

         
   

Traditional

business

   

Sustain and

New Dawn*

   

 

Total

 

Nine months ended June 30, 2013

                       

Revenues

  $ 18,315,000     $ 8,335,000     $ 26,650,000  

Pretax income (loss)

    7,869,000       (3,783,000 )     4,086,000  

Income tax (expense) benefit

    (2,500,000 )     1,225,000       (1,275,000 )

Net income (loss)

    5,369,000       (2,558,000 )     2,811,000  

Total assets

    146,902,000       26,849,000       173,751,000  

Capital expenditures

    96,000       162,000       258,000  

Depreciation and amortization

    340,000       1,204,000       1,544,000  

 

   

Traditional

business

   

 

Sustain

   

 

Total

 

Nine months ended June 30, 2012

                       

Revenues

  $ 21,824,000     $ 2,293,000     $ 24,117,000  

Income (loss) from operations

    8,133,000       (1,455,000 )     6,678,000  

Other-than-temporary impairment losses on investments

    2,855,000       ---       2,855,000  

Pretax income (loss)

    6,791,000       (1,448,000 )     5,343,000  

Income tax (expense) benefit

    (2,135,000 )     750,000       (1,385,000 )

Net income (loss)

    4,656,000       (698,000 )     3,958,000  

Total assets

    116,344,000       1,312,000       117,656,000  

Capital expenditures

    312,000       40,000       352,000  

Depreciation and amortization

    349,000       22,000       371,000  

 

   

Traditional

business

   

Sustain and

New Dawn**

   

 

Total

 

Three months ended June 30, 2013

                       

Revenues

  $ 5,876,000     $ 3,328,000     $ 9,204,000  

Pretax income (loss)

    2,701,000       (1,540,000 )     1,161,000  

Income tax (expense) benefit

    (840,000 )     505,000       (335,000 )

Net income (loss)

    1,861,000       (1,035,000 )     826,000  

Total assets

    146,902,000       26,849,000       173,751,000  

Capital expenditures

    5,000       97,000       102,000  

Depreciation and amortization

    109,000       526,000       635,000  

 

   

Traditional

business

   

 

Sustain

   

 

Total

 

Three months ended June 30, 2012

                       

Revenues

  $ 7,296,000     $ 835,000     $ 8,131,000  

Income (loss) from operations

    2,709,000       (475,000 )     2,234,000  

Other-than-temporary impairment losses on investments

    2,855,000       ---       2,855,000  

Pretax income (loss)

    458,000       (475,000 )     (17,000 )

Income tax benefit

    100,000       125,000       225,000  

Net income (loss)

    558,000       (350,000 )     208,000  

Total assets

    116,344,000       1,312,000       117,656,000  

Capital expenditures

    21,000       31,000       52,000  

Depreciation and amortization

    118,000       8,000       126,000  

 

*

Includes New Dawn’s financial results from December 5, 2012 through June 30, 2013 with revenues of $6,430,000, expenses of $7,148,000 (including intangible amortization expenses of $1,111,000), and inter-company income tax benefits of $230,000.

 

 

**

Includes New Dawn’s financial results from April 1, 2013 through June 30, 2013 with revenues of $2,740,000, expenses of $3,102,000 (including intangible amortization expenses of $476,000), and income tax expenses of $115,000.

 

 

 
Page 11 of 18

 

 

Note 13 - Subsequent Events

 

     The Company has completed an evaluation of all subsequent events through the issuance date of these financial statements and concluded that no subsequent events occurred that required recognition to the financial statements or disclosures in the Notes to Consolidated Financial Statements.

 

 
Page 12 of 18

 

 

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 and New Dawn software businesses, which supply case management software systems and related products to courts and other justice agencies, including administrative law organizations.

 

      On December 4, 2012 the Company purchased all of the outstanding stock of New Dawn for $14 million in cash.  New Dawn provides products and services to more than 350 justice agencies in 39 states, three U.S. territories and two other countries.  The acquisition expands the Company’s position in the case management software marketplace.  The results of operations of New Dawn from December 5, 2012 through June 30, 2013 have been included in the Company’s Consolidated Financial Statements: revenues were $6,430,000; expenses were $7,148,000 (including intangible amortization expenses of $1,111,000), and its pretax loss was $718,000. The acquisition was accounted for using the purchase method of accounting; accordingly, the Company preliminarily allocated the purchase price to tangible assets ($3.1 million including cash of $2.2 million; accounts receivable, net, of $.66 million, and net fixed assets of $.14 million) and identifiable intangible assets (purchased software and customer relationships of $9.5 million) and liabilities ($12.6 million including accounts payable and accrued expenses of $2.8 million, deferred maintenance agreements of $2.2 million and deferred installation contracts of $7.5 million) based on their fair values with the remaining balance in excess of the net assets allocated to goodwill ($14 million). The purchased software and customer relationships costs are being amortized over five years. Goodwill is not amortized for financial statement purposes but evaluated for impairment annually, or whenever events or changes in circumstances indicate that the value may not be recoverable. Deferred revenues on installation contracts primarily represent advances from customers for software licenses and installation services in various stages of completion; after customer’s acceptance of the completed project, the advances would become no longer at risk of refund and earned.

 

      The Company’s traditional business segment pretax income increased by $1,078,000 (16%) to $7,869,000 in the nine months ended June 30, 2013 from $6,791,000 in the prior year period when the Company incurred impairment losses on investments of $2,855,000. This year there was a reduction in trustee sale notice and related service fee revenues of $3,055,000, partially offset by a reduction in operating costs and expenses of $144,000 and an increase in dividends and interest income of $381,000. Sustain’s and New Dawn’s business segment had a pretax loss of $3,783,000 compared to $1,455,000 in the prior year period primarily due to (i) the addition of New Dawn’s pretax loss of $718,000 and (ii) an increase in Sustain’s implementation and development personnel costs of $1,191,000 during the nine months ended June 30, 2013.

 

During the nine months ended June 30, 2013, consolidated pretax income decreased by $1,257,000 (24%) to $4,086,000 from $5,343,000 in the comparable prior year period.

 

    Comprehensive income includes net income and unrealized net gains on investments, net of taxes.

 

Comprehensive Income

 
   

Nine months ended June 30

 
   

2013

   

2012

 
                 

Net income

  $ 2,811,000     $ 3,958,000  

Net change in unrealized appreciation of investments (net of taxes)

    15,802,000       13,430,000  

Other-than-temporary impairment losses recognized in net income (net of taxes)

 

---

      1,720,000  

Comprehensive income

  $ 18,613,000     $ 19,108,000  

 

* * * * * * * * * * * *

 

 

 
Page 13 of 18

 

 

   

Reportable segments

         
   

Traditional

business

   

Sustain and

New Dawn*

   

 

Total

 
                         

Nine months ended June 30, 2013

                       

Revenues

  $ 18,315,000     $ 8,335,000     $ 26,650,000  

Pretax income (loss)

    7,869,000       (3,783,000 )     4,086,000  

Income tax benefit (expense)

    (2,500,000 )     1,225,000       (1,275,000 )

Net income (loss)

    5,369,000       (2,558,000 )     2,811,000  

Amortization of intangible assets*

    ---       1,111,000       1,111,000  

 

   

Traditional

business

   

 

Sustain

   

 

Total

 

Nine months ended June 30, 2012

                       

Revenues

  $ 21,824,000     $ 2,293,000     $ 24,117,000  

Income (loss) from operations

    8,133,000       (1,455,000 )     6,678,000  

Other-than-temporary impairment losses on investments

    2,855,000       ---       2,855,000  

Pretax income (loss)

    6,791,000       (1,448,000 )     5,343,000  

Income tax (expense) benefit

    (2,135,000 )     750,000       (1,385,000 )

Net income (loss)

    4,656,000       (698,000 )     3,958,000  

 

 *

Includes New Dawn’s financial results from December 5, 2012 through June 30, 2013 with revenues of $6,430,000, expenses of $7,148,000 (including intangible amortization expenses of $1,111,000), and inter-company income tax benefits of $230,000.

           

      Consolidated revenues were $26,650,000 and $24,117,000 for the nine months ended June 30, 2013 and 2012, respectively. This increase of $2,533,000 (11%) was primarily from the additional New Dawn revenues of $6,430,000, partially offset by the reduction in trustee sale notice and related service fee revenues of $3,055,000. The Company’s revenues derived from Sustain’s and New Dawn’s operations constituted about 31% (Sustain and New Dawn) and 10% (Sustain only) of the Company’s total revenues for the nine months ended June 30, 2013 and 2012, respectively. (Consolidated revenues were $9,204,000 and $8,131,000 for the three months ended June 30, 2013 and 2012, respectively.)

 

      Consolidated operating costs and expenses increased by $6,892,000 (40%) to $24,331,000 from $17,439,000, primarily for New Dawn and Sustain. Total personnel costs increased by $3,853,000 (37%) to $14,169,000 from $10,316,000 primarily due to New Dawn’s additional personnel costs of $4,551,000, Sustain’s implementation and development personnel cost increases of $1,191,000 and annual salary adjustments, partially offset by a $730,000 decrease in the expenses related to the Company’s Management Incentive Plan (“Incentive Plan”). The decrease in Incentive Plan expense consisted of a reduction of $1,400,000 in the Incentive Plan accrual during the nine months ended June 30, 2013 due to reduced estimated current and future consolidated pretax profits before this accrual versus a reduction of $670,000 in the prior comparable period. Depreciation and amortization costs increased by $1,173,000 (316%) to $1,544,000 mainly resulting from the amortization of New Dawn’s purchased software and customer relationships costs of $1,111,000. Other general and administrative expenses also increased by $1,537,000 (62%) primarily resulting from increased professional fees and additional rent, sales and marketing expenses for New Dawn. (Consolidated operating costs and expenses were $8,743,000 and $5,897,000 for the three months ended June 30, 2013 and 2012, respectively.)

 

 

 
Page 14 of 18

 

 

     The traditional business segment revenues are very much dependant on the number of California and Arizona foreclosure notices. The number of foreclosure notices published by the Company decreased by 49% during the nine months ended June 30, 2013 as compared to the prior comparable period. Although public notice advertising revenues were down compared to the prior year period, the Company still continued to benefit from a relatively large number of foreclosures in California and Arizona for which public notice advertising is required by law. Effective January 1, 2013, the California Homeowner’s Bill of Rights imposed new requirements that have contributed to the slowdown in the foreclosure process. Because this slowing is expected to continue, we anticipate there will be fewer foreclosure notice advertisements and declining revenues in fiscal 2013, and the Company’s print-based earnings will also grossly decline because it will be impractical for the Company to offset all revenue loss by expense reduction. The Company's smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals ("The Daily Journals"), accounted for about 95% of the total public notice advertising revenues in the nine-month period. Public notice advertising revenues and related advertising and other service fees constituted about 39% of the Company's total revenues during this period. Because of this concentration, the Company’s revenues would be significantly affected if California (and to a lesser extent Arizona) eliminated the legal requirement to publish public notices in adjudicated newspapers of general circulation, as has been proposed from time to time. Also, if the adjudication of one or more of the Company’s newspapers was challenged and revoked, those newspapers would no longer be eligible to publish public notice advertising, and it could have a material adverse effect on the Company’s revenues. We do not expect to experience an offsetting increase in commercial advertising as a result of this trend because of the continuing challenges in the commercial advertising business. 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. The Daily Journals accounted for about 85% 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.

 

     Sustain’s and New Dawn’s consulting, licensing and maintenance revenues are subject to uncertainty because they depend on (i) the timing of the acceptance of the completed installations, (ii) the unpredictable needs of their existing customers, and (iii) their ability to secure new customers. In most cases, revenues from their new installation projects will only be recognized, if at all, upon completion and acceptance of their services by the various customers. The Company’s expenses for the development of software products are significant and will materially impact overall results at least through the foreseeable future. These costs are expensed as incurred due to the uncertainties concerning recoverability.

 

     On a pretax profit of $4,086,000 and $5,343,000 for the nine months ended June 30, 2013 and 2012, respectively, the Company recorded a tax provision of $1,275,000 and $1,385,000 respectively, which was lower in each case 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 31% and 26% for the nine months ended June 30, 2013 and 2012, respectively. The acquisition of New Dawn was structured as a stock acquisition with an Internal Revenue Code Section 338 (h)(10) election, which  results in the acquisition being treated similarly to an acquisition of assets for income tax purposes. As such, the amounts allocated to purchased software and customer relationships as well as goodwill are amortized over a 15-year period on a straight line basis for tax purposes. Differences in the amortization period and methods between book and tax useful lives will result in deferred tax assets or liabilities. 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 2010 with regard to federal income taxes. Net income per share decreased to $2.04 from $2.87.

 

Liquidity and Capital Resources

 

     During the nine months ended June 30, 2013, the Company's cash and cash equivalents, and marketable security positions increased by $30,763,000. Cash and cash equivalents were used primarily for the purchase of capital assets of $258,000 (mostly computer software and office equipment). During the first quarter of fiscal 2013, the Company borrowed $14 million from its investment margin account to purchase all of the outstanding stock of New Dawn and pledged its marketable securities to obtain favorable financing. During the first quarter of fiscal 2012, the Company bought shares of common stock of a Fortune 200 company, and during the third quarter of fiscal 2012, it bought additional shares of common stock of one of the foreign manufacturing companies in which it had previously invested. There have been no additional purchases in fiscal 2013. The investments in marketable securities, which cost approximately $49,694,000 and had a market value of about $128,421,000 at June 30, 2013, generated approximately $1,832,000 in dividends and interest income, which lowers the effective income tax rate because of the dividends received deduction. As of June 30, 2013, there were unrealized pretax gains of $78,727,000 as compared to $52,464,000 at September 30, 2012. Most of the unrealized gains were in the common stocks.

 

 

 
Page 15 of 18

 

 

     The cash provided by operating activities of $2,634,000 included net increases in deferred maintenance agreements and installation contracts of $538,000, partially offset by a net decreases in deferred subscriptions of $410,000. 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 and accepted. Cash flows from operating activities decreased by $3,748,000 during the nine months ended June 30, 2013 as compared to the prior comparable period primarily resulting from the decreases in accounts payable and accrued liabilities of $1,840,000, deferred subscriptions of $463,000 and net income of $1,147,000.

 

     As of June 30, 2013, the Company had working capital of $90,198,000, including the liabilities for deferred subscriptions and deferred maintenance agreements of $7,338,000, which are scheduled to be earned within one year, and the deferred tax liability of $31,360,000 for the unrealized gains described above.

 

     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 businesses. The Company continues to have the ability to borrow against its marketable securities on favorable terms as it did for the New Dawn acquisition. The Company also may entertain business acquisition opportunities, as it did in acquiring New Dawn. Any excess cash flows could be used to reduce the investment margin account liability or 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 utilize 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 has utilized his judgment and suggestions, as well as those of J.P. Guerin, the Company’s vice chairman, when selecting investments, and both of them will continue to play an important role in monitoring existing investments and selecting any future investments.

 

     As noted above, however, the investments are concentrated in just six 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 shareholders’ equity and, under certain circumstances, in the recognition of impairment 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.

 

 

 
Page 16 of 18

 

 

 The Company’s critical accounting policies are detailed in its Annual Report on Form 10-K for the year ended September 30, 2012. 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 and New Dawn’s reliance on professional services engagements with justice agencies, including California courts, for a substantial portion of their revenues; 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; possible loss of the adjudicated status of the Company’s newspapers and their legal authority to publish public notice advertising; a decline in public notice advertising revenues because of fewer foreclosures; a further decline in subscriber and commercial advertising revenues; collectibility of accounts receivable; the Company’s reliance on its president and chief executive officer; changes in accounting guidance; and declines in the market prices of the Company’s investments. 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, 2012.

 

Item 4. CONTROLS AND PROCEDURES

 

     An evaluation was performed under the supervision and with the participation of the Company’s management, including Gerald L. Salzman, its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2013. Based on that evaluation, Mr. Salzman concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports it files or submits under the Securities Exchange Act of 1934, as amended, is (1) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities Exchange Commission and (2) accumulated and communicated to the Company’s management, including Mr. Salzman, in such a way as to allow timely decisions regarding required disclosure. There have been no material changes in the Company’s internal control over financial reporting or in other factors reasonably likely to affect its internal control over financial reporting during the quarter ended June 30, 2013.

 

 
Page 17 of 18

 

 

PART II

 

 

Item 6. EXHIBITS

 

 

 

31 

Certification by Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

32 

Certification by Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

101.INS**  

XBRL Instance

 

 

 

 

101.SCH**

XBRL Taxonomy Extension Schema

 

 

 

 

101.CAL**

XBRL Taxonomy Extension Calculation

 

 

 

 

101.DEF**  

XBRL Taxonomy Extension Definition

 

 

 

 

101.LAB**

XBRL Taxonomy Extension Labels

     
  101.PRE** XBRL Taxonomy Extension Presentation
     
  ** XBRL    information is furnished and not filed as a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

                    

 

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,
 

Principal Financial Officer and

  Principal Accounting Officer) 

 

DATE: August 20, 2013

 

 

 

 Page 18 of 18