DAILY JOURNAL CORPORATION Results of Operations
The Company continues to operate as two different businesses: (1) The Traditional Business, being the business of newspaper publishing and related services that the Company had before 1999 when it purchased a software development company, and (2)Journal Technologies, Inc. ("Journal Technologies"), a wholly-owned subsidiary which supplies case management software systems and related products to courts, prosecutor and public defender offices, probation departments and other justice agencies, including administrative law organizations, city and county governments and bar associations. These organizations use the Journal Technologies family of products to help manage cases and information electronically, to interface with other critical justice partners and to extend electronic services to the public, including efiling and a website to pay traffic citations and fees online, and bar members. These products are licensed to more than 500 organizations in 42 states and internationally.
Comparable three-month periods ended
Consolidated revenues were$11,677,000 and$10,428,000 for the three months endedDecember 31, 2019 and 2018, respectively. This increase of$1,249,000 (12%) was primarily from (i) increased Journal Technologies' license and maintenance fees of$420,000 , consulting fees of$148,000 and public service fees of$748,000 , and (ii) increased Traditional Business' government notice advertising net revenues of$40,000 and legal notice advertising net revenues of$61,000 , partially offset by a reduction in the Traditional Business' classified advertising net revenues of$16,000 , trustee sale notice advertising net revenues of$37,000 and circulation revenues of$26,000 . The Company's revenues derived from Journal Technologies' operations constituted about 65% and 60% of the Company's total revenues for the three months endedDecember 31, 2019 and 2018, respectively. Consolidated operating expenses increased by$246,000 (2%) to$13,195,000 from$12,949,000 . Total salaries and employee benefits increased by$232,000 (3%) to$8,887,000 from$8,655,000 primarily resulting from additional personnel costs for Journal Technologies. Outside services decreased by$85,000 (9%) to$860,000 from$945,000 mainly because of decreased contractor costs for Journal Technologies. Depreciation and amortization costs decreased by$25,000 to$128,000 from$153,000 . Credit card merchant discount fees, which represent fees paid to credit card service providers to process payments for the public service fee revenues, increased by$112,000 (41%) to$382,000 from$270,000 mainly resulting from increased efilings. Accounting and legal fees decreased by$147,000 (36%) to$256,000 from$403,000 primarily because of decreased legal fees to review and negotiate Journal Technologies' contracts with customers. The Company's non-operating income, net of expenses, increased to$21,008,000 from a loss of$27,329,000 primarily because of the recording of net unrealized gains on investments of$19,531,000 during the three months endedDecember 31, 2019 , as compared with net unrealized losses on investments of$28,640,000 during the prior year period. During the three months endedDecember 31, 2019 , consolidated pretax income was$19,490,000 , as compared with pretax loss of$29,850,000 in the prior year period. There was consolidated net income of$14,210,000 ($10.29 per share) after tax provisions for the three months endedDecember 31, 2019 , as compared with a net loss of$21,533,000 (-$15.60 per share) in the prior year period. 13
-------------------------------------------------------------------------------- AtDecember 31, 2019 , the aggregate fair market value of the Company's marketable securities was$214,112,000 . These securities had approximately$160,223,000 of net unrealized gains before taxes of$42,611,000 , and generated approximately$1,680,000 in dividends income during the three months endedDecember 31, 2019 , which lowers the Company's effective income tax rate because of the dividends received deduction. Most of the unrealized gains were in the common stocks of threeU.S. financial institutions and one foreign manufacturer.
Additional detail about each of the Company's reportable segments, and its corporate income and expenses, is set forth below:
Overall Financial Results (000)
For the three months ended December 31
Reportable Segments
Traditional Journal Corporate
Business Technologies income and expenses Total
2019 2018 2019 2018 2019 2018 2019 2018
Revenues
Advertising $ 2,126 $ 2,192 $ --- $ --- $ --- $ --- $ 2,126 $ 2,192
Circulation 1,312 1,338 --- --- --- --- 1,312 1,338
Advertising service
fees and other 694 669 --- --- --- --- 694 669
Licensing and
maintenance fees --- --- 5,210 4,790 --- --- 5,210 4,790
Consulting fees --- --- 689 541 --- --- 689 541
Other public service
fees --- --- 1,646 898 --- --- 1,646 898
Total revenues 4,132 4,199 7,545 6,229 --- --- 11,677 10,428
Operating expenses
Salaries and employee
benefits 2,537 2,624 6,350 6,031 --- --- 8,887 8,655
Others 1,461 1,584 2,847 2,710 --- --- 4,308 4,294
Total operating
expenses 3,998 4,208 9,197 8,741 --- --- 13,195 12,949
Income (loss) from
operations 134 (9 ) (1,652 ) (2,512 ) --- --- (1,518 ) (2,521 )
Dividends and interest
income --- --- --- --- 1,680 1,530 1,680 1,530
Other income and
capital gains --- --- --- --- 3 10 3 10
Net unrealized losses
on investments --- --- --- --- 19,531 (28,640 ) 19,531 (28,640 )
Interest expenses on
note payable
collateralized by real
estate (22 ) (23 ) --- --- --- --- (22 ) (23 )
Interest expenses on
margin loans --- --- --- ---
(184 ) (206 ) (184 ) (206 )
Pretax (loss) income
The Traditional Business
The Traditional Business had pretax income of
Advertising revenues increased by$66,000 to$2,126,000 from$2,192,000 , primarily because of increased government notice advertising net revenues of$40,000 and legal notice advertising net revenues of$61,000 , partially offset by reduced classified advertising net revenues of$16,000 and trustee sale notice advertising net revenues of$37,000 . Trustee sale notices are very much dependent on the number ofCalifornia andArizona foreclosures for which public notice advertising is required by law. The number of foreclosure notices published by the Company decreased by 13% during the three months endedDecember 31, 2019 as compared to the prior year period. Because this slowing is expected to continue, the Company expects there will be fewer foreclosure notice and other public notice advertisements and declining revenues for all of fiscal 2020. The Company's smaller newspapers, those other than theLos Angeles and San Francisco Daily Journals ("The Daily Journals"), accounted for about 87% of the total public notice advertising revenues in the three months endedDecember 31, 2019 . Public notice advertising revenues and related advertising and other service fees constituted about 19% and 21% of the Company's total revenues for the three months endedDecember 31, 2019 and 2018, respectively. Because of this concentration, the Company's revenues would be significantly adversely affected ifCalifornia andArizona eliminated the legal requirement to publish public notices in adjudicated newspapers of general circulation, as was implemented inArizona for one notice type that had represented approximately$500,000 in annual revenues for the Company. 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. 14
--------------------------------------------------------------------------------The Los Angeles Daily Journal andSan Francisco Daily Journal accounted for about 91% of The Traditional Business' total circulation revenues, which declined by$26,000 (2%) to$1,312,000 from$1,338,000 . The court rule and judicial profile services generated about 7% of the total circulation revenues, with the other newspapers and services accounting for the balance. 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 Traditional Business segment operating expenses decreased by$210,000 (5%) to$3,998,000 from$4,208,000 , primarily due to decreased personnel costs and outside contract printing and distributing costs. Journal Technologies Journal Technologies' business segment pretax loss decreased by$860,000 (34%) to$1,652,000 from$2,512,000 for the three months endedDecember 31, 2019 and 2018, respectively.
Revenues increased by
Deferred revenues on installation contracts primarily represent the fair value of advances from customers of Journal Technologies for installation services and are recognized upon final project go-lives. Deferred revenues on license and maintenance contracts represent prepayments of annual license and maintenance fees and are recognized ratably over the maintenance period. Other public service fees increased by$748,000 (83%) to$1,646,000 from$898,000 primarily due to additional efiling fee revenues.
Operating expenses increased by
Taxes For the three months endedDecember 31, 2019 , the Company recorded a provision for income taxes of$5,280,000 on pretax income of$19,490,000 . This was the net result of applying the 19% effective tax rate anticipated for fiscal 2020 to the pretax loss, before the unrealized gains on investments, for the three months endedDecember 31, 2019 . The effective tax rate was less than the statutory rate primarily due to the dividends received deduction and state tax benefits. In addition, the Company recorded taxes on its unrealized gains on investments of$19,531,000 during the three months endedDecember 31, 2019 .
The
effective tax rate for the three months ended
For the three months endedDecember 31, 2018 , the Company recorded an income tax benefit of$8,317,000 on a pretax loss of$29,850,000 . This was the net result of applying the effective tax rate anticipated for fiscal 2019 to the pretax loss for the three months endedDecember 31, 2018 . The effective tax rate was greater than the statutory rate primarily due to state tax benefits.
The Company's effective tax rate was 27% for the three months ended
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The Company files consolidated federal income tax returns in
Liquidity and Capital Resources
During the three months endedDecember 31, 2019 , the Company's cash and cash equivalents and marketable security positions increased by$16,277,000 , including unrealized gains on investments of$19,531,000 . Cash and cash equivalents were used for the purchase of capital assets of$97,000 and operating activities of$3,126,000 which included net decreases of$1,298,000 in deferred subscriptions, deferred installation contracts and deferred maintenance agreements and others. The investments in marketable securities, which had an adjusted cost basis of approximately$53,889,000 and a market value of about$214,112,000 atDecember 31, 2019 , generated approximately$1,680,000 in dividends income. These securities had approximately$160,223,000 of net unrealized gains before estimated taxes of$42,611,000 which will become due only when we sell securities in which there is unrealized appreciation. Beginning in fiscal 2019, changes in unrealized gains (losses) on investments are now included in the Company's net income (loss) and thus may have a significant impact depending on the fluctuations of the market prices of the invested securities. Cash flows from operating activities decreased by$629,000 during the three months endedDecember 31, 2019 as compared to the prior year period, primarily due to (i) decreases in accounts payable and accrued liabilities of$1,786,000 because of the timing difference in remitting efiling fees to the courts and (ii) decreases in net deferred subscriptions, deferred maintenance agreements and others and deferred installation contracts of$1,327,000 , partially offset by decreases in accounts receivable of$1,734,000 resulting from more collections.
As of
The Company believes that it will be able to fund its operations for the foreseeable future through its cash flows from operations and its current working capital and expects that any such cash flows will be invested in its businesses. The Company may or may not have the ability to borrow against its marketable securities. The Company also may entertain additional business acquisition opportunities. Any excess cash flows could be used to reduce the investment margin account liability or note payable collateralized by real estate 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 (includingU.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 ofJ.P. Guerin , the Company's vice chairman, when selecting investments, and the Company expects both of them to continue to play an important role in monitoring existing investments and selecting any future investments. 16 -------------------------------------------------------------------------------- As ofDecember 31, 2019 , the investments were 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 net income.
Critical Accounting Policies and Estimates
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 software
costs, fair value measurement and disclosures (including for the long-term
Incentive Plan liabilities), testing for goodwill impairment and income taxes
are critical accounting policies and estimates.
The Company's critical accounting policies are detailed in its Annual Report
on Form 10-K for the year ended September 30, 2019 . The above discussion and
analysis should be read in conjunction with the unaudited consolidated financial
statements and notes thereto included in this report.
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--------------------------------------------------------------------------------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 software development and implementation efforts; Journal Technologies' reliance on professional services engagements with justice agencies; 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 further decline in public notice advertising revenues because of fewer foreclosures; a further decline in subscriber and commercial advertising revenues; possible security breaches of the Company's software or websites; the Company's reliance on its president and chief executive officer, who has reduced his work schedule due to a health issue; changes in accounting guidance; material weaknesses in the Company's internal control over financial reporting; and declines in the market prices of the securities owned by the Company. In addition, such statements could be affected by general industry and market conditions, general economic conditions (particularly inCalifornia ) 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 discussed 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 theSecurities and Exchange Commission , including in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 . 18
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